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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) For the fiscal year ended June 30, 1997.
Or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transition period from
___________ to ___________
COMMISSION FILE NUMBER: 1-8989
THE BEAR STEARNS COMPANIES INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3286161
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
245 PARK AVENUE, NEW YORK, NEW YORK 10167
(212) 272-2000
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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COMMON STOCK, PAR VALUE $1.00 PER NEW YORK STOCK EXCHANGE
SHARE
ADJUSTABLE RATE CUMULATIVE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, SERIES A
DEPOSITARY SHARES, EACH REPRESENTING A NEW YORK STOCK EXCHANGE
ONE-EIGHTH INTEREST IN A SHARE OF
7.88% CUMULATIVE PREFERRED STOCK,
SERIES B
DEPOSITARY SHARES, EACH REPRESENTING A NEW YORK STOCK EXCHANGE
ONE-EIGHTH INTEREST IN A SHARE OF
7.60% CUMULATIVE PREFERRED STOCK,
SERIES C
DEPOSITARY SHARES, EACH REPRESENTING NEW YORK STOCK EXCHANGE
A ONE-EIGHTH INTEREST IN A SHARE OF
8% CUMULATIVE PREFERRED STOCK,
SERIES D (NOT PRESENTLY OUTSTANDING)
9-1/8% SENIOR NOTES DUE 1998 NEW YORK STOCK EXCHANGE
9-3/8% SENIOR NOTES DUE 2001 NEW YORK STOCK EXCHANGE
CUSTOMIZED UPSIDE BASKET SECURITIES AMERICAN STOCK EXCHANGE
DUE 1998
S&P 500 LINKED NOTES DUE 2003 CHICAGO BOARD OPTIONS EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
At September 2, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $4,450,610,484. For purposes
of this information, the outstanding shares of Common Stock owned by directors
and executive officers of the registrant were deemed to be shares of Common
Stock held by affiliates.
On September 2, 1997, the registrant had outstanding 117,703,804 shares of
Common Stock, par value $1.00 per share, which is the registrant's only class of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts II and IV of this Form 10-K incorporate information by reference from
certain portions of the registrant's 1997 Annual Report to Stockholders. The
information required to be furnished pursuant to Part III of this Form 10-K will
be set forth in, and incorporated by reference from, the registrant's definitive
proxy statement for the annual meeting of stockholders to be held October 27,
1997, which definitive proxy statement will be filed by the registrant with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year ended June 30, 1997.
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PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
The Bear Stearns Companies Inc. (the "Company") was incorporated under
the laws of the State of Delaware on August 21, 1985. The Company is a holding
company that through its subsidiaries, principally Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear, Stearns Securities Corp. ("BSSC"), is a leading
United States investment banking, securities trading and brokerage firm serving
corporations, governments, institutional and individual investors worldwide.
BSSC, a wholly owned subsidiary of Bear Stearns, provides professional and
correspondent clearing services, in addition to clearing and settling the
Company's proprietary and customer transactions. The Company succeeded on
October 29, 1985, to the business of Bear, Stearns & Co., a New York limited
partnership (the "Partnership"). As used in this report, the "Company" refers
(unless the context requires otherwise) to The Bear Stearns Companies Inc., its
subsidiaries and the prior business activities of the Partnership.
(b) Financial Information About Industry Segments
The Company's business activities are highly integrated and constitute a
single industry segment. During each of the three successive fiscal years ending
June 30, 1997, classes of similar products or services outside this industry
segment represented less than 10% of consolidated revenues, operating-profit,
and assets. Financial information regarding the Company's foreign operations for
each of these fiscal years is set forth under the Notes to the Consolidated
Financial Statements in Footnote 13, entitled "Segment and Geographic Area
Data," in the registrant's 1997 Annual Report to Stockholders (the "Annual
Report"), which is incorporated herein by reference to Exhibit No. (13) of this
report.
(c) Narrative Description of Business
The Company is a holding company which through its principal
subsidiaries, Bear Stearns and BSSC, is a leading United States investment
banking, securities trading and brokerage firm serving corporations,
governments, institutional and individual investors worldwide. The business of
the Company includes: market-making and trading in corporate, United States
government, government-agency, mortgage-related, asset-backed and municipal
securities; trading in options, futures, foreign currencies, interest-rate swaps
and other derivative products; securities and commodities arbitrage; securities,
options and commodities brokerage; underwriting and distributing securities;
providing securities clearance services; financing customer activities;
securities lending; arranging for the private placement of securities; assisting
in mergers, acquisitions, restructurings and leveraged transactions; providing
other financial advisory services; making principal investments in leveraged
acquisitions; acting as specialist on the floor of the New York Stock Exchange,
Inc. ("NYSE"); providing fiduciary and other services, such as real estate
brokerage, investment management and investment advisory; and, securities
research.
The Company's business is conducted from its principal offices in New
York City; from domestic regional offices in Atlanta, Boston, Chicago, Dallas,
Los Angeles and San Francisco; from representative offices in Beijing, Geneva,
Hong Kong, Lugano and Shanghai; through international subsidiaries in Buenos
Aires, Dublin, Hong Kong, London, Paris, Sao Paulo, Singapore and Tokyo; and
through joint ventures with other firms in Belgium, Madrid, Paris and the
Philippines. The Company's foreign offices provide services and engage in
investment activities involving foreign clients and international transactions.
The Company provides trust-company services through its subsidiary, Custodial
Trust Company ("CTC"), located in Princeton, New Jersey.
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Bear Stearns and BSSC are broker dealers registered with the Securities
and Exchange Commission (the "SEC"). They are also members of the NYSE, all
other principal United States securities and commodities exchanges, the National
Association of Securities Dealers, Inc. ("NASD") and the National Futures
Association ("NFA"). Bear Stearns is a "primary dealer" in United States
government securities, as designated by the Federal Reserve Bank of New York.
As of June 30, 1997, the Company had 8,309 employees.
SECURITIES TRADING ACTIVITIES
General. The Company makes inter-dealer markets and trades on a
principal basis in a wide range of instruments including: corporate debt and
equity securities; United States and foreign-government securities;
government-agency securities; mortgages and mortgage-backed securities; other
asset-backed securities; municipal and other tax-exempt securities; and
interest-rate swaps and other derivative products. Bear Stearns is one of the
largest dealers in the United States in fixed income securities, including
United States government and agency securities, mortgage-backed securities, and
corporate and municipal securities. Inventories of fixed income, listed-equity,
and over-the-counter equity securities are carried to facilitate sales to
customers and other dealers.
United States Government and Agency Obligations. The Company is
recognized by the Federal Reserve Bank of New York as a primary dealer in United
States Government, government-guaranteed and agency obligations, and similar
instruments. The Company participates in the auction of, and maintains
proprietary positions in, United States Treasury bills, notes, bonds, and
stripped-coupon securities. The Company also participates as a selling group
member and/or underwriter in the distribution of various United States
government-agency and sponsored-corporation securities and maintains proprietary
positions in such securities. In connection with these activities, the Company
enters into transactions in options, futures and forward contracts to hedge its
proprietary positions. As a primary dealer, Bear Stearns furnishes weekly
reports of its inventory positions and market transactions in United States
government securities to the Federal Reserve Bank of New York. Bear Stearns also
buys and sells government securities directly with the Federal Reserve Bank of
New York as part of the Bank's open-market activities. The Company's daily
trading inventory in United States government, government-guaranteed and agency
obligations is mainly financed through the use of repurchase agreements. In
addition, the Company serves as an intermediary between borrowers and lenders of
short-term funds, mainly via repurchase and reverse-repurchase agreements.
Corporate Fixed Income Securities. The Company acts as a dealer in
sovereign and corporate fixed income securities and preferred stocks in New
York, London, Hong Kong and Tokyo. It buys and sells these securities for its
own account in principal transactions with institutional and individual
customers, as well as other dealers. The Company conducts trading in the full
spectrum of dollar and non-dollar debt securities. The Company offers hedging
and arbitrage services to domestic and foreign institutional and individual
customers utilizing financial futures and other instruments. Moreover, the
Company offers quantitative, strategic, and research services relating to fixed
income securities to its domestic and international clients. The Company
participates in the trading and sales of high yield, non-investment-grade
securities and the securities and bank loans of companies subject to pending
bankruptcy proceedings.
Mortgage-Related Securities and Products. The Company trades and makes
markets in the following mortgage-related securities and products: Government
National Mortgage Association ("GNMA") securities; Federal Home Loan Mortgage
Corporation ("FHLMC") Participation Certificates; Federal National Mortgage
Association ("FNMA") mortgage-backed securities; Small Business Administration
loans; loans guaranteed by the Farmers Home Loan Administration; Federal Housing
Authority insured multi-family loans; real estate mortgage investment conduit
("REMIC") and non-REMIC collateralized mortgage obligations, including residual
interests; and other derivative mortgage-backed securities and products. The
Company also trades real estate mortgage loans originated by unaffiliated
mortgage lenders, both on a securitized and non-securitized basis.
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The Company acts as underwriter and placement agent in transactions involving
rated and unrated mortgage-related securities issued by affiliated and
unaffiliated parties. The Company enters into significant commitments -- such as
forward contracts -- on GNMA, FNMA, and FHLMC securities, and on other rated and
unrated mortgage-related securities. Certain rated and unrated mortgage-related
securities are considered to be liquid, while other such securities, and
non-securitized mortgage loans, are considered to be less readily marketable.
The Company trades GNMA, FNMA and FHLMC "to be announced" securities --
securities having a stated coupon and the original term to maturity, although
the issuer and/or the specific pool of mortgage loans is not known at the time
of the transaction. The Company buys and sells such securities for its own
account in transactions with institutional and individual customers, as well as
with other dealers. Under the Company's trading agreements, the Company
generally has the right to request margin from its counterparty.
The Company, through various special-purpose subsidiaries, purchases,
sells, and services entire loan portfolios of varying quality. These portfolios
are generally purchased from financial institutions and other secondary
mortgage-market sellers. Prior to bidding on a portfolio of loans, an analysis
of the portfolio is performed by experienced mortgage-loan underwriters. Upon
acquisition of a loan portfolio, the loans are classified as either
investment-grade or non-investment-grade. Loan collection is emphasized for the
non- investment-grade segment of the loan portfolio. A collection department
employs a staff of workout specialists and loan counselors who assist delinquent
borrowers. If collection efforts are unsuccessful, the foreclosure unit will
commence and monitor the foreclosure process until either the borrower makes the
loan current, or the property securing the loan is foreclosed or otherwise
acquired. The portfolio may include real estate which has been foreclosed or was
in the process of foreclosure at the time of its acquisition. The foreclosure
unit maintains and markets properties through regional real estate brokers.
Investment-grade mortgage loans are sold to other institutional investors in
either securitized or non-securitized form. In addition, special-purpose
subsidiaries issue REMIC and non-REMIC collateralized mortgage obligations
directly or through trusts that are established for this purpose.
Asset-Backed Securities. The Company acts as underwriter and placement
agent with respect to investment- and non-investment-grade, asset-backed
securities issued by unaffiliated third parties. These asset- backed securities
include: securities backed by consumer automobile receivables originated by the
captive finance subsidiaries of automobile manufacturers, commercial banks and
finance companies; credit card receivables; and home-equity lines of credit or
second mortgages. The Company also trades and makes markets in these
asset-backed securities. The market for asset-backed securities is of relatively
recent origin. While there are ready markets for the investment-grade,
asset-backed securities described above, other varieties may lack liquidity.
Municipal Securities and Related Products. The Company is a dealer in
tax-exempt and taxable municipal securities and instruments including: general
obligation and revenue bonds; notes; leases; and variable-rate obligations
issued by states, counties, cities, and state and local governmental
authorities. The Company is active as a managing underwriter of negotiated and
competitive new security issuances and on a select basis, provides financial
advisory services. The Company makes markets in a broad spectrum of long- and
short-term municipal securities, mainly to facilitate transactions with
institutional and individual customers, as well as other dealers. As agent for
issuers and for a fee, the Company remarkets short-term debt instruments
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to investors in the variable rate, demand bond market. The Company periodically
uses both municipal and treasury bond futures to hedge its cash-market bond
inventory. In addition, the Company maintains a municipal arbitrage portfolio
for its own account consisting of municipal futures and cash bond positions. The
Company's underwriting, trading and sales activities are supported by a
municipal research group.
Arbitrage. The Company engages for its own account in both "classic" and
"risk" securities-arbitrage. The Company's risk arbitrage activity generally
involves the purchase of a security at a discount from a value which is expected
to be realized if a proposed or anticipated merger, recapitalization, tender or
exchange offer is consummated. In classic arbitrage the Company seeks to profit
from temporary discrepancies (i) between the price of a security in two or more
markets, (ii) between the price of a convertible security and its underlying
security, (iii) between securities that are, or will be, exchangeable at a later
date, and (iv) between the prices of securities with contracts settling on
differing dates.
Block Trading. The Company effects transactions in large blocks of
securities exceeding 50,000 shares, mainly with institutional customers.
Transactions are handled on an agency basis whenever possible, but the Company
may be required to take a long or short position in a security to the extent
that an offsetting purchaser or seller is not immediately available.
Strategic Structuring and Transactions (SST). The Company targets
mispriced assets using sophisticated models and proprietary quantitative
methods. The Company maintains substantial proprietary trading and investment
positions in domestic and foreign markets across a wide spectrum of equity and
commodity securities including listed and over the counter options, futures and
swaps.
Foreign Exchange. The Company trades in foreign exchange, including:
major and minor currencies on a spot and forward basis; listed and
over-the-counter foreign-currency options; and foreign-currency futures.
Currency option strategies are made available to customers to help them meet
their specific risk management objectives.
Derivatives. The Company manages a customer-driven business which
focuses on individually- negotiated derivative instruments across the fixed
income, currency, credit, and equity markets. Among the products in which the
Company is most active are interest rate swaps and options, equity swaps and
options, currency swaps and options, credit derivatives, and tax exempt
derivatives. The Company also structures products which combine derivatives
having both privately- and publicly-placed debt and/or equity components. By
tailoring products across the spectrum of derivatives markets, the Company
designs solutions to meet customers' asset-liability management, investment, and
capital market needs.
Over-the-Counter Equity Securities. The Company makes markets on a
principal basis in common and preferred stocks, warrants, and other securities
traded on the NASD's Automated Quotation System and otherwise in the
over-the-counter market. Principal transactions with customers are effected at a
net price equal to the prevailing inter-dealer price, plus or minus a mark-up or
mark-down.
Emerging Markets. The Company provides financial services in various
emerging markets worldwide including: securities brokerage; equity and fixed
income trading and sales; securities research; and a full range of investment
banking, capital formation and advisory services. As part of these activities,
the Company manages and participates in public offerings and arranges with
institutional investors the private placement of debt and equity securities. The
markets currently covered by the Company include Latin America, Asia, and
Eastern Europe.
Specialist Activities. The Company is a participant in a specialist unit
on the NYSE which performs specialist functions in 135 NYSE-listed stocks. This
market-making operation is conducted through a joint
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venture with a member organization pursuant to a joint-account agreement. The
market-making function of the specialist involves risk of loss during periods of
market fluctuation, since specialists are obliged to take positions in their
issues counter to the direction of the market in order to minimize short-term
imbalances in the auction market.
BROKERAGE ACTIVITIES
A major portion of the Company's revenues is derived from customer
commissions on brokerage transactions in equity and debt securities. The Company
is one of the leading firms in the United States in providing brokerage services
to institutional investors. The Company's brokerage clients include United
States and foreign institutional investors such as investment advisors, mutual
funds, commercial banks, insurance companies, pension and profit-sharing funds,
and high-net-worth individuals. A significant portion of the Company's
commission business is generated by institutional clients -- often in block
trades requiring special marketing and trading expertise -- and from
transactions originated by the correspondent organizations for whom the Company
provides securities-clearance services. The largest portion of the Company's
commission revenue is derived from brokerage transactions in listed securities.
Institutional. A substantial portion of the Company's commission
business involves the execution of transactions in corporate securities for
domestic and foreign institutional investors. The primary source of revenue from
equity activities is negotiated-commission revenue earned from providing
customers with liquidity, trading expertise, trade-processing capability, and
investment advice. Investment advice includes economic forecasts, industry and
company analyses, overall strategic guidance and Company recommendations.
Individual Investors. The Company's individual-investor sales force
concentrates on servicing individual clients possessing a high net-worth and
corporations engaging in securities transactions of a size sufficient to benefit
from the Company's full range of institutional-caliber services.
Option and Index Products. The Company provides an array of equity and
index option-related execution services to institutional and individual clients.
The Company utilizes sophisticated research and computer modeling to formulate
for clients specific recommendations relating to options and index trading.
Futures. The Company provides transaction services for customers who
trade contracts in futures, financial instruments and physical products,
including options on futures and physical commodities. These products are based
on selected stock indices, fixed income securities, currencies, agricultural and
energy products and precious metals. Domestic trading is subject to extensive
regulation by the Commodity Futures Trading Commission ("CFTC") pursuant to the
Commodity Exchange Act and the Commodity Futures Trading Commission Act of 1974.
International trading activities are subject to regulation by the respective
regulatory authorities in the location where the futures or commodity exchange
resides, including the Securities and Futures Authority ("SFA") in the United
Kingdom.
The margin requirements covering substantially all transactions in
futures contracts are subject to the particular exchange's regulations. In the
United States, the Company is a clearing member of the Chicago Board of Trade,
the Chicago Mercantile Exchange, Inc., the New York Mercantile Exchange and
other principal futures exchanges. The Company is a member of the International
Petroleum Exchange ("IPE"), the London Commodity Exchange ("LCE"), the London
International Financial Futures Exchange ("LIFFE"), Marche a Terme International
de France ("MATIF") in Europe; and a "special" member of the Tokyo Stock
Exchange for clearing Japanese government bond futures.
International. Bear Stearns International Limited ("BSIL") is a London
based securities broker dealer and engages in several types of activities
including principal and agency transactions, underwriting, and investment
banking. BSIL is a member of the SFA, the IPE, the LIFFE, the International
Securities Market Association ("ISMA") and the London Securities & Derivatives
Exchange Limited ("OMLX"). Another
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London subsidiary, Bear Stearns International Trading ("BSIT"), is a
market-maker in various non-dollar denominated equity securities and engages in
index and derivative arbitrage. BSIT is a member of the London Stock Exchange
and the Stock Exchange Automated Quotations International ("SEAQ").
The Company's French subsidiary is Bear Stearns S.A. ("BSFSA"). BSFSA is
a regulated French broker dealer and is a member of the MATIF.
Bear Stearns Bank plc ("Bank") is an Irish based bank, which was
incorporated in 1996 and subsequently granted a banking license under Section 9
of the Irish Central Bank Act, 1971.
Bear Stearns (Japan) Ltd. ("BSJL") is a broker dealer registered with
the Japanese Ministry of Finance. BSJL sells equity and fixed income securities
to Japanese institutional customers. BSJL has a special membership on the Tokyo
Stock Exchange. Bear Stearns Hong Kong Ltd. is a member of the Securities and
Futures Commission and sells U.S. commodities to retail customers. Bear Stearns
Asia Ltd. is a member of the Stock Exchange of Hong Kong and sells equity and
fixed income securities and derivative products to institutional and retail
customers in Asia (excluding Japan) and also provides investment banking
services to institutional clients. Bear Stearns Singapore Pte. Limited is a
broker dealer registered with the Monetary Authority of Singapore and sells
fixed income and equity securities to institutional investors in Singapore and
Southeast Asia.
INVESTMENT BANKING
The Company is a major global investment banking firm providing a full
range of capital formation and advisory services to a broad spectrum of clients.
The Company manages and participates in public offerings and arranges the
private placement of debt and equity securities directly with institutional
investors. The Company provides advisory services to clients on a wide range of
financial matters and assists with mergers, acquisitions, leveraged buyouts,
divestitures, corporate reorganizations, and recapitalizations.
The Company's strategy is to concentrate a major portion of its
corporate finance business development efforts within those industries in which
the Company has established a leadership position in providing investment
banking services. Industry specialty groups include chemicals, energy,
entertainment, financial services, forest products, gaming, health care,
industrial, insurance, lodging, merchandising, media/communications, oil and
gas, pharmaceuticals, real estate, retailing, satellite, technology, and
utilities. These groups are responsible for initiating, developing and
maintaining client relationships, and for executing transactions involving these
clients. The Company has focused primarily on those industries in which the
Company also has a strong research capability.
In addition to being structured according to distinct industry groups,
the Company has a number of professionals who specialize in specific types of
transactions. These include mergers and acquisitions ("M&A"), equity offerings,
high yield securities, and other transaction specialties.
Mergers and Acquisitions. The Company is active in arranging various M&A
transactions for its clients. The Company participates in a broad range of
domestic and international assignments including acquisitions, divestitures,
strategic restructurings, proxy contests, leveraged buyouts, and defenses
against unsolicited takeovers.
Equity Offerings. The equity capital markets group focuses on providing
financing for issuers of equity and convertible equity securities in the public
markets. The group assists in the origination, and is responsible for the
structuring and execution, of transactions for a broad range of clients.
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High Yield Securities. The high yield securities group focuses on
providing financing in the public and private capital markets. The group is
responsible for originating, structuring, and executing high yield transactions
across a wide range of companies and industries, as well as managing client
relationships with both high yield corporate issuers and financial sponsors of
leveraged transactions.
Leveraged Acquisitions. As part of its investment banking activities,
the Company occasionally makes investments as principal in leverage acquisitions
and in leveraged buy-out funds as a limited partner. The Company's investments
generally take the form of equity securities, either common or preferred stock.
Equity securities purchased in these transactions generally are held for
appreciation and are not readily marketable. While the Company believes that the
current carrying value of these instruments is at least equal to their eventual
realizable value, it is not possible to determine whether, or when, the Company
will realize the value of these investments.
Commercial Real Estate. The Company is engaged in a variety of real
estate activities on a nationwide basis. It provides comprehensive real
estate-related investment banking, capital markets and financial advisory
services.
SECURITIES CLEARANCE ACTIVITIES
The Company provides a full range of securities clearing services to
clients. Organizations that are engaged in the retail or institutional brokerage
business and are members of the NYSE and/or NASD comprise one category of
correspondent clearing clients called "fully-disclosed correspondents." In
addition, the Company has extensive involvement in the clearing of securities
transactions for other types of clients such as: hedge funds, market-makers,
specialists, arbitrageurs, money managers, and other professional investors
trading at multiple securities firms called "professional clearing clients".
Besides commissions and service charges realized from securities
clearing activities, the Company also earns substantial amounts of interest
income. The Company extends credit directly to the customers of correspondent
firms in order to facilitate the conduct of customer securities transactions on
a margin basis. The correspondents indemnify the Company against margin losses
on their customers' accounts. The Company also extends margin credit directly to
correspondents to the extent that such firms pledge proprietary assets as
collateral. Since the Company must rely on the guaranties and general credit of
the correspondents, the Company may be exposed to significant risk of loss if
correspondents are unable to meet their financial commitments should there be a
substantial adverse change in the value of margined securities. The
correspondent clearing business for hedge funds, market-makers, arbitrageurs,
specialists, and other professional traders can require a substantial commitment
of the Company's capital involving varying degrees of risk. The Company has
developed computerized control systems to monitor and analyze risk on a daily
basis.
In addition to clearing trades, the Company provides other products and
services to its correspondents such as recordkeeping, trading reports,
accounting, general back-office support, securities lending, reorganization and
custody of securities. The Company's Prime Broker Plus system provides
consolidated reporting and securities processing for professional investors
executing trades at more than one securities firm.
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The financial responsibilities arising from the Company's clearing relationships
are allocated in accordance with agreements with correspondents. To the extent
that the correspondent has available resources, the Company is protected against
claims by customers of the correspondent when the latter has been allocated
responsibility for a function giving rise to a claim. However, if the
correspondent is unable to meet its obligations, dissatisfied customers may
attempt to seek recovery from the Company.
The Company attempts to broaden, wherever possible, its relationships
with correspondent clearing clients. In addition to performing administrative,
operational and settlement functions, the Company also advises correspondents on
communications systems and makes available to them a variety of non-brokerage
products and services on favorable terms enabling them to benefit from the
Company's centralized purchasing power.
INTEREST
The Company derives substantial net interest income from customer margin
loans and securities lending.
Customer Financing. Securities transactions are effected for customers
on either a cash or margin basis. In margin transactions, the Company extends
credit to the customer, subject to various regulatory and internal requirements,
which is collateralized by securities and cash in the customer's account, for a
portion of the purchase price. The Company receives income from interest charged
on the extension of credit; the rate of interest charged to customers for margin
financing is based upon the Federal funds rate or brokers-call rate. By allowing
customers to purchase securities on margin, the Company assumes the risk of loss
if an adverse market movement reduces the value of the collateral below the
amount of a customer's indebtedness. The Company's net interest income is
impacted by the volume of customer borrowings and by the prevailing levels of
interest rates.
Securities Lending Activities. In connection with both its trading and
brokerage activities, the Company borrows and lends securities to brokers and
dealers to cover short sales and to complete transactions in which customers
have failed to deliver securities by settlement date. The borrower of securities
is required to deposit cash or other collateral or to post a letter of credit
with the lender. The borrower of securities generally receives a rebate (based
on the amount of cash deposited) or pays a fee calculated to yield a negotiated
rate-of- return for the lender. Stock borrow and stock loan transactions are
generally executed pursuant to written agreements with counterparties which
require that (i) securities borrowed and loaned be marked-to-market on a daily
basis, (ii) excess collateral be refunded, and (iii) deficit collateral be
furnished. Mark-to-market adjustments are usually made on a daily basis through
the facilities of various clearing houses to reflect changes in the market value
of loaned securities.
OTHER ACTIVITIES
Asset Management. The Company's asset management division manages equity
and fixed income assets for some of the United States' leading corporate pension
plans, public systems, endowments, foundations, multi-employer plans, insurance
companies, corporations, families and high net-worth individuals. With more than
$8 billion under management, the asset management division provides its clients
with diverse products, expertise and experience for enhancing investment returns
by identifying, and taking advantage of, investment opportunities in the
financial markets. Institutional products include: Large, Mid and Small Cap
Value Equity; Global and Emerging Markets Fixed Income; and Alternative
Investment Strategies.
In addition, the asset management division serves individual investors
through its management of The Bear Stearns Funds, a family of mutual funds which
include: S&P Stars; Large Cap Value; Small Cap Value; The Insiders Select; Total
Return Bond; and The Emerging Markets Debt.
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Equities Research. The equity research department analyzes and provides
timely information and opinions on over 100 industries and more than 850
companies, both domestic and international. In addition to more than 80
analysts, its staff includes a market strategist, an economics team, and
accounting specialists, all of whom analyze the impact of broader economic
factors and regulatory changes on the market and individual stocks.
Fixed Income Research. A fixed income research unit contained within the
Company's Financial Analytics and Structured Transactions Group (F.A.S.T.)
provides financial engineering and securitization capabilities, investment
research, fixed income portfolio management and analytical systems and trading
technology for mortgage-related and fixed income securities. This unit also
performs original research on valuation techniques and provides consulting
services.
Other Research. A high-grade, fixed income research unit, consisting of
approximately 15 analysts and researchers, provides similar services in respect
of high-grade, fixed income securities. A high yield, fixed income research unit
consisting of approximately 15 analysts and researchers, provides similar
services in respect of high yield, fixed income securities. The Company derives
revenues for its research activities principally from securities transactions in
an agency or dealer capacity; from its consulting services; and, from offering
some of its research products for a fee.
Custodial Trust Company. The Company offers a range of trust company and
securities-clearance services through its wholly owned subsidiary CTC. CTC
provides the Company with banking powers, such as access to the securities and
funds-wire services of the Federal Reserve System. CTC provides fiduciary,
custody and agency services for institutional accounts; the clearance of
government securities for institutions and dealers; the processing of mortgage
and mortgage-related products, including derivatives and CMO products; and
commercial lending. At June 30, 1997, CTC held over $38.6 billion of assets for
non-affiliated institutional clients such as pension funds, mutual funds,
endowment funds, religious organizations and insurance companies.
Fiduciary Services. The Company is an investment consultant which
assists pension and welfare funds, other institutional investors and
high-net-worth individual clients in structuring and executing their investment
affairs.
ADMINISTRATION AND OPERATIONS
Administration and operations personnel are responsible for the
processing of securities transactions; the receipt, identification and delivery
of funds and securities; internal financial controls; accounting functions;
office services; the custody of customer securities; and the overseeing of
margin accounts of the Company and correspondent organizations. The processing,
settlement, and accounting for transactions for the Company, correspondent
organizations, and the customers of correspondent organizations is handled by a
staff of approximately 3,500 employees located in separate operations offices in
New York City and Whippany, New Jersey and, to a lesser extent, the Company's
offices worldwide.
The Company executes its own and correspondent transactions on all
United States exchanges and in the over-the-counter market. The Company clears
all of its domestic and international transactions (i.e., delivery of securities
sold, receipt of securities purchased, and transfer of related funds) through
its own facilities, unaffiliated commercial banks and through memberships in
various clearing corporations. However, certain government, government-agency
and mortgage-related securities transactions are cleared through CTC.
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There is considerable fluctuation in the volume of transactions the
Company processes, clears and settles. Operations personnel monitor day-to-day
operations to assure compliance with applicable laws, rules and regulations. The
Company records transactions and posts its books on a daily basis. Failure to
keep current and accurate books and records can render the Company liable to
disciplinary action by governmental and self-regulatory organizations.
The Company maintains its own data processing facilities, which have
been expanded significantly in recent years.
The Company believes its internal controls and safeguards are adequate,
but recognizes that fraud and misconduct by customers and employees, including
the possible theft of securities, are risks inherent in the securities industry.
As required by the NYSE and certain other authorities, the Company carries a
broker's blanket-bond insurance covering the loss or theft of securities, check-
and draft-forgery, embezzlement, and the misplacement of securities. This
blanket-bond policy provides fidelity coverage and coverage for loss or theft of
securities, fraudulent trading, and securities forgery of up to $200 million
subject to a deductible of $2.5 million per occurrence.
COMPETITION
The Company encounters intense competition in all aspects of the
securities business and competes directly with other securities firms -- both
domestic and foreign -- many having substantially greater capital and resources
and offering a wider range of financial services than does the Company. Besides
competition from firms in the securities business, in recent years the Company
has experienced increasing competition from other sources, such as commercial
banks and insurance companies. The Company believes that the principal factors
affecting competition involve the caliber and abilities of professional
personnel, the relative prices of the services and products being offered, and
the quality of its services.
REGULATIONS AND OTHER FACTORS AFFECTING THE COMPANY AND THE SECURITIES INDUSTRY
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. Bear Stearns
and BSSC are registered as broker dealers with the SEC and are registered as
broker dealers in all 50 states and the District of Columbia. Additionally, Bear
Stearns is registered as an investment adviser with the SEC. Much of the
regulation of broker dealers has been delegated to self-regulatory
organizations, principally the NASD, the Municipal Securities Rulemaking Board,
and national securities exchanges such as the NYSE, which has been designated by
the SEC as the primary regulator of certain of the Company's subsidiaries,
including Bear Stearns and BSSC. These self-regulatory organizations (i) adopt
rules, subject to approval by the SEC, which govern the industry and (ii)
conduct periodic examinations of the Company's operations. Securities firms are
also subject to regulation by state securities administrators in those states in
which they conduct business.
Broker dealers are subject to regulations which cover all aspects of the
securities business including: sales methods; trade practices; use and
safekeeping of customer funds and securities; capital structures; recordkeeping;
and, the conduct of directors, officers and employees. The types of regulations
to which investment advisers are subject include: record keeping; fee
arrangements; client disclosure; and, the conduct of directors, officers and
employees. The mode of operation and profitability of broker dealers or
investment advisers may be directly affected by new legislation; changes in
rules promulgated by the SEC and self-regulatory organizations; and, changes in
the interpretation or enforcement of existing laws and rules. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings which can result in censures, fines, the issuances of
cease-and-desist orders, and the suspension or expulsion of a broker dealer or
an investment adviser, its officers or employees. The principal purpose of
regulation and discipline of broker dealers and investment advisers is the
protection of customers and the securities markets,
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rather than the protection of creditors and stockholders of broker dealers or
investment advisers. On occasion the Company's subsidiaries have been subject to
routine investigations and proceedings, and sanctions have been imposed for
infractions of various regulations, none of which, to date, has had a material
adverse effect on the Company or its business.
The Market Reform Act of 1990 was adopted for the following reasons: (i)
to strengthen regulatory oversight of the securities markets, (ii) to improve
the financial condition of market participants, and (iii) to improve the safety
and efficiency of market mechanisms by creating a system for providing
information and oversight for the parents and other affiliates of broker
dealers. The SEC has adopted the Risk Assessment Reporting Requirements for
Brokers and Dealers (the "Risk Assessment Rules") to implement the provisions of
the Market Reform Act of 1990. The Risk Assessment Rules require that
broker-dealers: (i) develop an organizational chart; (ii) maintain risk
management procedures or standards for monitoring and controlling the risks
resulting from activities of material associated persons; (iii) maintain and
preserve records and other information; and (iv) file quarterly reports covering
the risk-management procedures and the financial and securities activities of
the holding companies of broker dealers, or broker dealer affiliates or
subsidiaries that are reasonably likely to have a material impact on the
financial and operational condition of the broker dealer.
The Insider Trading and Securities Fraud Enforcement Act of 1988
augments enforcement of the securities laws through a variety of measures
designed to provide greater deterrence, detection, and punishment of
insider-trading violations. Among other things, the law (i) expands the scope of
civil penalties to controlling persons who fail to take adequate steps to
prevent insider trading, (ii) initiates a bounty program by giving the SEC
discretion to reward informants who provide assistance to the agency and (iii)
requires broker dealers and investment advisors to establish and enforce written
policies and procedures reasonably designed to prevent the misuse of inside
information.
The Government Securities Act of 1986 (the "Government Securities Act")
established a comprehensive and coordinated pattern for the regulation of
brokers, dealers and financial institutions who trade in government securities,
which includes Bear Stearns. Under the Government Securities Act, Bear Stearns
is subject to Department of Treasury regulations covering among other things:
capital adequacy; custody and use of government securities; and, transfers and
control of government securities subject to repurchase transactions.
The commodities industry in the United States is subject to regulation
under the Commodity Exchange Act, as amended. The CFTC is the federal agency
charged with the administration of the Commodity Exchange Act and the
regulations thereunder. Bear Stearns and BSSC are registered with the CFTC as
futures commission merchants and are subject to regulation as such by the CFTC
and various domestic boards of trade and other commodity exchanges. Bear
Stearns' and BSSC's commodity-futures business is also regulated by the NFA, a
not-for-profit membership corporation, which has been designated a registered
futures association by the CFTC.
As registered broker dealers and member firms of the NYSE, both Bear
Stearns and BSSC are subject to the Net Capital Rule (Rule 15c3-1) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which has been
adopted through incorporation by reference in NYSE Rule 325. The Net Capital
Rule, which specifies minimum net capital requirements for registered broker
dealers, is designed to measure the general financial integrity and liquidity of
a broker dealer and requires that at least a minimal portion of its assets be
kept in relatively liquid form.
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Bear Stearns and BSSC are also subject to the net capital requirements
of the CFTC and various commodity exchanges which generally require that Bear
Stearns and BSSC maintain a minimum net capital equal to the greater of the
alternative net capital requirement provided for under the Exchange Act or 4% of
the funds required to be segregated under the Commodity Exchange Act and the
regulations promulgated thereunder.
Compliance with the Net Capital Rule could limit those operations of
Bear Stearns and/or BSSC which require significant capital usage, such as
underwriting, trading and the financing of customer margin-account debit
balances. The Net Capital Rule could also restrict the Company's ability to
withdraw capital from Bear Stearns or BSSC, which in turn could limit the
Company's ability to pay dividends, pay interest, repay debt, or redeem or
purchase shares of its outstanding capital stock. Additional information
regarding net-capital requirements is set forth in the Annual Report, Notes to
Consolidated Financial Statements, Footnote 7, entitled "Regulatory
Requirements," which is incorporated herein by reference to Exhibit No. (13) of
this report.
Bear Stearns and BSSC are members of the Securities Investor Protection
Corporation ("SIPC") which provides insurance protection for customer accounts
held by the firm of up to $500,000 for each customer, subject to a limitation of
$100,000 for cash balance claims in the event of the liquidation of a broker
dealer. In addition, the BSSC purchased $24.5 million of additional
security-positions coverage from a private insurer for each of the BSSC's
customers.
The activities of the Company's bank and trust company subsidiary, CTC,
are regulated by the New Jersey Department of Banking and the Federal Deposit
Insurance Corporation ("FDIC"). FDIC regulations applicable to CTC limit the
extent to which CTC and Bear Stearns may have common officers and directors or
may share physical facilities. FDIC regulations require certain disclosures in
connection with joint advertising or promotional activities conducted by Bear
Stearns and CTC. Such regulations also restrict certain activities of CTC in
connection with the securities business of Bear Stearns. Federal legislation
limits (i) an expansion in the scope of the activities of CTC, (ii) the annual
rate of increase in its assets, (iii) the cross-marketing of certain services
with its affiliates and (iv) the use of overdrafts at Federal Reserve banks on
behalf of affiliates.
The Company does a substantial volume of business in the international
fixed income and equity markets through BSIL and is a market-maker in certain
non-dollar-denominated securities and engages in index and derivative arbitrage
through BSIT. BSIL and BSIT are subject to both the United Kingdom Financial
Services Act 1986, which governs all aspects of the investment business in the
United Kingdom, and the regulations of the SFA which includes: regulatory
capital; sales and trading practices; use and safekeeping of customer funds;
securities recordkeeping; margin practices and procedures; registration
standards for individuals; and periodic reporting and settlement procedures.
BSIL and BSIT are subject to supervision by and are regulated in accordance with
the rules of the SFA. BSIL is a member of the IPE, the LIFFE, the ISMA, the OMLX
and the LCE. BSIT is a member of the London Stock Exchange and SEAQ
International.
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The Company, like other securities firms, is directly affected by such
things as: national and international economic and political conditions; broad
trends in business and finance; legislation and regulations affecting the
national and international financial and business communities; currency values;
the level and volatility of interest rates; and fluctuations in the volume and
the price levels in the securities and commodities markets. These and other
factors can affect the Company's volume of security new-issues, mergers,
acquisitions, and business restructurings; the stability and liquidity of
securities and commodities markets; and, the ability of issuers, other
securities firms and counterparties to perform on their obligations. Decreases
in the volume of security new-issues, mergers, acquisitions or restructurings
generally results in lower revenues from investment banking and, to a lesser
extent, reduced principal transactions. A reduced volume of securities and
commodities transactions and reduced market liquidity generally result in lower
revenues from principal transactions and commissions. Lower price levels for
securities may result in a reduced volume of transactions, and may also result
in losses from declines in the market value of securities held in proprietary
trading and underwriting accounts. In periods of reduced sales and trading or
investment banking activity, profitability may be adversely affected because
certain expenses remain relatively fixed. Sudden and sharp declines in the
market values of securities and/or the failure of issuers and counterparties to
perform on their obligations can result in illiquid markets. In such markets,
the Company may not be able to sell securities and/or may have difficulty in
hedging its securities positions. Such market conditions, if prolonged, may also
lower the Company's revenues from investment banking and principal transactions.
The Company's securities trading, derivatives, arbitrage, market-making,
specialist, leveraged-buyout and underwriting activities are conducted by the
Company on a principal basis and expose the Company to significant risk of loss.
Such risks include market, counterparty credit, and liquidity risks. See "Item
7A. Quantitative and Qualitative Disclosure about Market Risk."
ITEM 2. PROPERTIES.
The Company's executive offices and principal administrative offices
occupy approximately 753,000 square feet of space at 245 Park Avenue, New York,
New York under leases expiring through 2002.
The Company also leases approximately 297,000 square feet of office
space at One MetroTech Center, Brooklyn, New York pursuant to a lease expiring
in 2004 for its securities processing and clearance operations. Additionally,
the Company leases approximately 43,000, 140,000 ,27,000 and 13,000 square feet
of space at four locations in New York City under leases expiring in 2001, 2004,
2007 and 2007, respectively. The Company's regional offices in Atlanta, Boston,
Chicago, Dallas, Los Angeles and San Francisco occupy an aggregate of
approximately 276,000 square feet, while its eleven foreign offices occupy a
total of approximately 115,000 square feet under leases expiring on various
dates through the year 2016.
The Company owns approximately 65 acres of land in Whippany, New Jersey,
including four buildings comprising an aggregate of approximately 300,000 square
feet. The Company is currently using the existing facilities on the property to
house its data processing facility and other operational functions. Because the
Whippany property includes land in excess of current needs, the Company has
received approval to construct two additional buildings, one of which it is
currently developing for itself; conversely, it may sell the land and
development rights to others.
In September 1997, the Company entered into a 99-year ground lease at
383 Madison Avenue, New York City. The Company expects to develop this site as
its new world headquarters by building an office tower. The new facility will be
completed by the expiration of the current lease at 245 Park Avenue in 2002.
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The new facility will allow the Company to consolidate its New York City real
estate requirements into one facility and will allow expansion related to future
growth.
ITEM 3. LEGAL PROCEEDINGS.
The Company and Bear Stearns are parties to the legal proceedings
discussed below, which have arisen in the normal course of business. In view of
the inherent difficulty of predicting the outcome of litigation and other legal
proceedings, the Company cannot state what the eventual outcome of these pending
proceedings will be. It is the opinion of management, after consultation with
independent counsel, that the legal proceedings referred to below will not,
individually or in the aggregate, have a material adverse effect on the
Company's financial position.
A.I.A. Holding, S.A., et al. v. Lehman Brothers, Inc., et al. On
July 8, 1997, 277 alleged customers of Ahmad Ihsan El-Daouk commenced an action
in the United States District Court for the Southern District of New York
against Lehman Brothers, Inc. and Bear Stearns. Plaintiffs allege that Daouk,
acting through corporations he controlled, entered into introducing broker
agreements with Lehman and then Bear Stearns, and that he arranged for each of
the plaintiffs to invest funds with Lehman and/or Bear Stearns. Lehman exited
the business during the summer of 1992. Certain accounts opened at Lehman were
transferred to Bear Stearns sometime in 1992, and certain accounts were opened
at Bear Stearns beginning sometime in 1992.
The Complaint alleges, among other things, that for more than
seven years Daouk defrauded plaintiffs by misleading plaintiffs into believing
that the accounts Daouk managed on their behalf were earning substantial
profits, when in fact he was churning the accounts, incurring trading losses and
otherwise dissipating, stealing or converting their funds. This allegedly was
accomplished, in part, by Daouk intercepting account statements and other
information sent by Lehman and Bear Stearns to Daouk's customers and
substituting forged statements created by Daouk.
Bear Stearns is alleged to be liable to Daouk's customers on
numerous grounds, including claims that the Bear Stearns broker responsible for
the Daouk accounts allegedly was aware of the scheme, substantially assisted
Daouk in the commission of the fraud and received illegal payments for having
done so, Daouk held himself out to be a Bear Stearns agent with Bear Stearns'
knowledge and acquiescence, and Bear Stearns failed to perform properly its role
as Daouk's clearing broker by, among other things, failing to properly supervise
Daouk, failing to detect Daouk's fraud, permitting Daouk to commingle accounts
and allowing him to churn accounts.
The Complaint asserts 12 causes of action against Lehman and 12
causes of action against Bear Stearns, including, among other things, claims
alleging breach of fiduciary duty, negligence, negligent misrepresentation,
fraud, constructive fraud, breach of contract, negligent hiring, retention and
supervision, aiding and abetting fraud and aiding and abetting breach of
fiduciary duty. Plaintiffs allege that "the plaintiffs' losses appear to have
exceeded $100 million." Plaintiffs seek compensatory damages in unspecified
amounts, imposition of constructive trusts with respect to any property that
"belongs, or may belong," to plaintiffs in Lehman's or Bear Stearns' possession,
interest, attorneys' fees and costs.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Alpha Group Consultants, et al. v. Weintraub, et al./In re
Weintraub Entertainment Group Litigation. On January 31, 1991, Alpha Group
Consultants Ltd. and the Allan D. Simon & Stefani R. Simon Living Trust
commenced an action in the United States District Court for the Southern
District of California involving a private placement by Weintraub Entertainment
Group ("WEG") of $81 million debentures and
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warrants in 1987. On April 2, 1992 and February 4, 1993 the court allowed
additional plaintiffs to intervene. The original defendants in the case were WEG
(a debtor in bankruptcy, named as a defendant only to the extent permitted by
federal bankruptcy law), certain directors and officers of WEG and Bear Stearns,
which acted as the placement agent in WEG's private placement.
Plaintiffs' current pleading alleges, among other things, that at
the time of the offering and after the offering, the defendants made false and
misleading statements concerning WEG's financial condition, the experience of
certain WEG officers, the intended use of proceeds from the sale of the WEG
securities, the prospects for a public market for WEG securities, WEG's business
plans, and certain terms of WEG's contracts with distributors. Plaintiffs allege
violations of Sections 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, the Racketeer Influenced and Corrupt Organizations Act ("RICO"),
California state statutes, and common law duties allegedly owed by the
defendants to the plaintiffs. Plaintiffs purport to represent a class consisting
of purchasers of WEG debentures and warrants during the period January 23, 1987
through October 1, 1990. Plaintiffs seek unspecified compensatory and punitive
damages, treble damages under RICO, attorneys' fees and expenses.
On May 12, 1993, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
On May 10, 1993, the court entered a final judgment and order
(the "Settlement Order") approving a settlement among plaintiffs and the WEG
director and officer defendants and barring Bear Stearns from seeking
contribution, indemnity, or reimbursement from the WEG director and officer
defendants. The Settlement Order also provided that Bear Stearns' liability, if
plaintiffs succeed in establishing liability on the part of Bear Stearns, would
be limited to Bear Stearns' proportional share of the total damages awarded. On
September 15, 1993, the court entered an order granting class certification.
On April 22, 1994, the court granted summary judgment in favor of
Bear Stearns on all claims.
On July 15, 1997, the United States Court of Appeals for the
Ninth Circuit reversed the district court's grant of summary judgment in
connection with a statement in the offering materials provided to investors
concerning the timing of the payment of guaranteed advances by certain motion
picture distributors to WEG. The Ninth Circuit affirmed the district court's
dismissal of all other claims in the litigation.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Amalgamated Insurance Fund-Insurance Fund, et al. v. Bear Stearns
& Co., Inc., et al./Alico Services Corp., Alico Resources Corp. and Pension Plan
for Employees of Amalgamated Life Insurance Company v. Bear Stearns & Co., Inc.,
et al. On January 9, 1997, five former Bear Stearns brokerage customers who are
employee welfare benefit plans or employee pension benefit plans under the
Employee Retirement Income Security Act ("ERISA") commenced a National
Association of Securities Dealers ("NASD") arbitration proceeding against Bear
Stearns, a former Bear Stearns account executive and two current Bear Stearns
employees (the "Amalgamated proceeding").
The claimants allege, among other things, unauthorized and
unsuitable trading and churning in their accounts involving derivative
securities. The claimants assert claims based upon breach of fiduciary duty,
breach of fiduciary duty under ERISA, participation in breach of fiduciary duty,
breach of contract, common law fraud, securities fraud, negligent
misrepresentation, negligence, investing in unsuitable securities, failure to
supervise and churning, unjust enrichment, and Sherman Antitrust Act and the
Donnelly Act. Claimants seek, among other relief, compensatory damages in an
unspecified amount, but in a range of $30 to $40 million or
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more. Claimants also seek punitive damages in an unspecified amount and trebled
damages under the Sherman Antitrust Act and New York's Donnelly Act.
On May 14, 1997, Bear Stearns filed an answer denying liability,
asserting affirmative defenses, counterclaims and third party claims that allege
that certain trustees of the plans and registered investment advisors hired by
the plans are solely responsible for any losses suffered by the funds, and
seeking, among other things, indemnification and contribution.
On May 2, 1997, three additional former Bear Stearns brokerage
customers commenced an NASD arbitration case against the same Respondents,
including Bear Stearns, alleging essentially the same claims, based upon
essentially the same facts and circumstances and, once again, seeking damages
including unspecified compensatory, punitive and treble damages (the "Alico
proceeding"). One of the three Claimants in this second arbitration purports to
assert claims as assignee of claims purportedly assigned to it by 17 other
pension and benefits funds that formerly were brokerage customers of Bear
Stearns.
Bear Stearns denies all allegations of wrongdoing asserted
against it in the Amalgamated and Alico arbitration proceedings, intends to
defend these claims vigorously and believes that it has substantial defenses to
these claims.
A.R. Baron & Company, Inc. The following matters arise out of
Bear Stearns' role as clearing broker for A.R. Baron & Company, Inc. ("Baron")
from July 20, 1995 through June 28, 1996.
(i) John Berwecky, et al. v. Bear Stearns & Co. Inc., et al./Jack
Perry v. Bear Stearns & Co., Inc., et al. On July 21 and August 22, 1997,
shareholders of companies whose securities were underwritten by, or that
otherwise had some relationship with Baron (these securities are referred to
below as "Baron securities") commenced two actions in the United States District
Court for the Southern District of New York against Bear Stearns, Bear Stearns
Securities Corp. and a managing director of Bear Stearns (collectively "Bear
Stearns").
The complaints allege, among other things, that Bear Stearns and
Baron engaged in a scheme to manipulate the market for and to inflate the prices
of the Baron securities. Plaintiffs allege violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Plaintiffs purport to represent a class of all persons who acquired
Baron securities from July 20, 1995 through June 28, 1996. Plaintiffs seek
unspecified damages, attorneys fees and costs.
Bear Stearns denies all allegations of wrongdoing asserted
against it in these litigations, intends to defend against these claims
vigorously, and believes that it has substantial defenses to these claims.
(ii) Richard Schwarz v. Bear Stearns & Co. Inc., et al. On July
22, 1997, a customer of Baron commenced an action in the Supreme Court of the
State of New York, New York County, against Bear, Stearns & Co. Inc. and Bear
Stearns Securities Corp. (collectively "Bear Stearns").
The complaint alleges, among other things, that Baron engaged in
a scheme to manipulate the market for and to inflate the prices of Baron
securities, and that Bear Stearns, as clearing broker, wrongfully permitted
Baron to continue in business. Plaintiff alleges violations of the New York
Consumer Protection Act, common law negligence and negligent misrepresentation.
Plaintiff purports to represent a class of all persons who were customers of
Baron from July 20, 1995 through July 3, 1996. Plaintiff seeks unspecified
damages, attorneys fees and costs.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend against these claims
vigorously, and believes that it has substantial defenses to these claims.
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(iii) In connection with investigations concerning the A.R. Baron
brokerage firm, Bear Stearns and Bear Stearns Securities Corp. have received
formal and informal inquiries from various regulatory and governmental agencies.
Bear Stearns is cooperating with these inquiries.
In re Blech Securities Litigation. On October 24, 1994, a
shareholder of certain biotechnology companies whose securities were
underwritten by, or that otherwise had some relationship with, D. Blech & Co.
("Blech Securities"), commenced an action in the United States District Court
for the Southern District of New York against D. Blech & Co., David Blech,
certain money managers and investment advisors, and Bear Stearns, which had been
a clearing broker for D. Blech & Co. from September 1993 through September 1994.
On December 14, 1994, the action was consolidated with three related actions. On
March 27, 1995, an Amended Consolidated Class Action Complaint was filed. On
June 6, 1996, the court granted Bear Stearns' motion to dismiss all allegations
in the First Amended Complaint asserted against Bear Stearns, and granted
plaintiffs leave to replead. On July 26, 1996, a Second Amended Consolidated
Class Action Complaint was filed.
Plaintiffs' current pleading alleges, among other things, a
scheme to manipulate the market for and to inflate the prices of Blech
Securities, and alleges that Bear Stearns violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
committed common law fraud. Previously asserted and dismissed claims under the
Racketeer Influenced and Corrupt Organizations Act ("RICO") are not re-asserted
in plaintiffs' current pleading. On April 2, 1997, the court dismissed
plaintiff's Section 20(a) allegations. Plaintiffs purport to represent a class
consisting of persons who purchased Blech Securities from July 1, 1991 through
September 21, 1994, in a public offering or in the public market.
Plaintiffs seek unspecified damages.
On May 16, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend against these claims
vigorously, and believes that it has substantial defenses to these claims.
Spencer C. Busby, et al. v. Donna Karan International, Inc., et
al./Salvatore Portannese, et al. v. Donna Karan International, Inc., et al.
Beginning on June 19, 1997, two actions were commenced in the United States
District Court for the Eastern District of New York involving an initial public
offering on June 28, 1996 of 10,750,000 shares of common stock of Donna Karan
International, Inc. at a price of $24 per share. The defendants in these cases
are Donna Karan International, Inc., certain directors and officers of Donna
Karan, and the underwriters of the offering, Morgan Stanley & Co., Bear Stearns,
Merrill Lynch & Co. and Smith Barney Inc. (the "Underwriter Defendants").
Plaintiffs allege, among other things, that defendants made false
and misleading statements in the prospectus and registration statement utilized
in the offering concerning Donna Karan's prospects for growth, inability to
implement expansion plans, and risks affecting Donna Karan's business expansion
plans. Plaintiffs allege violations by all defendants, including the Underwriter
Defendants of Sections 11 and 12(a)(2) of the Securities Act of 1933. Other
defendants are alleged to have violated Section 15 of the Securities Act and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. With respect to the claims asserted against the
Underwriter-Defendants, including Bear Stearns, plaintiffs purport to represent
a class consisting of all persons who purchased Donna Karan common stock during
the period June 28, 1996 through May 7, 1997 pursuant or traceable to the
registration statement and prospectus issued in connection with the offering.
Plaintiffs seek damages in an unspecified amount, interest, rescissory relief,
and attorneys' fees and expenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
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Gregory P. Christofferson, et al. v. Bear Stearns & Co., Inc., et
al. On May 3, 1995, plaintiffs commenced an action in the Superior Court of the
State of California in and for the County of Los Angeles against Bear Stearns
and three Bear Stearns officers. The case involves an approach by plaintiffs to
Bear Stearns in 1993, seeking Bear Stearns' participation as an investment
partner or investment banker in acquiring a commercial real estate property
portfolio. Plaintiffs allege that Bear Stearns reviewed plaintiffs' written
portfolio evaluation materials and met with plaintiffs, and later advised
plaintiffs that Bear Stearns was not interested in pursuing the proposed
transaction. Bear Stearns subsequently represented the United States Postal
Service in an attempt by the United States Postal Service to acquire this
portfolio. Plaintiffs and the United States Postal Service, the latter advised
by Bear Stearns, ultimately negotiated a joint bid, which resulted in each group
acquiring a portion of the portfolio.
Plaintiffs current complaint alleges, among other things, fraud,
intentional interference with prospective economic advantage, misappropriation
of trade secrets and breach of implied and oral contract. Plaintiffs seeks
damages in excess of $25 million, plus punitive damages, attorneys' fees and
interest.
On March 26, 1996, Bear Stearns filed an answer denying liability
and assenting affirmation defenses. On March 3, 1997, Bear Stearns filed a
cross-complaint, alleging, among other things, that plaintiffs engaged in unfair
competition by threatening to sue and suing Bear Stearns and others to prevent
competition, and alleging that, if defendants are found to have breached a
contract with plaintiffs, the contract was induced by fraud and thus voidable.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
County of Orange v. Bear Stearns & Co., Inc., et al. On December
5, 1996, the County of Orange, California ("Orange County") and John Moorlach,
the County's Treasurer-Tax Collector, commenced an adversary proceeding in the
United States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court") against twenty-six defendants, including Bear Stearns and
Bear, Stearns Securities Corp. (collectively, "Bear Stearns"). The action arises
in connection with a bankruptcy petition the County filed in the Bankruptcy
Court on December 6, 1994. On May 17, 1996, the Bankruptcy Court confirmed a
plan pursuant to which the County emerged from bankruptcy.
With respect to Bear Stearns the complaint alleges, among other
things, that certain securities transactions entered into between Orange County
(through its former Treasurer-Tax Collector, Robert Citron) and Bear Stearns
entitle Orange County to relief under Sections 502 and 510 of the Bankruptcy
Code, violated the Constitution and laws of California and are null and void,
and that Bear Stearns committed negligence by failing to inform the County that
the transactions were unsuitable and failing to obtain the informed consent of
Orange County's Board of Supervisors for these securities transactions. The
County seeks damages in an unspecified amount, declaratory relief and an order
disallowing any claims asserted against Orange County in its bankruptcy case by
Bear Stearns.
The parties in this action have entered into a stipulation
staying the proceeding pending the completion of other litigation, not involving
Bear Stearns.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
In re Daisy Systems Corporation, Debtor. On May 30, 1991, a
Trustee for Daisy Systems Corporation ("Daisy"), a debtor in bankruptcy, and
Daisy/Cadnetix, Inc. ("DCI") filed a complaint in the United States District
Court, Northern District of California, on behalf of Daisy and DCI against Bear
Stearns and six former directors of Cadnetix, Inc. ("Cadnetix") and/or a
Cadnetix subsidiary. The litigation arises out of Daisy's retention of Bear
Stearns in 1988 to provide investment banking services to Daisy with respect to
a
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<PAGE>
potential merger of Daisy with Cadnetix. On March 20, 1992, a First Amended
Complaint was filed. On July 24, 1992, a Second Amended Complaint was filed.
The Second Amended Complaint alleges, among other things, that
Bear Stearns was negligent in performing its due diligence with respect to the
merger, and in advising Daisy that it was "highly confident" that financing
could be obtained to fund the merger. The Trustee alleges that Bear Stearns
breached fiduciary duties to Daisy, committed professional malpractice in its
efforts on Daisy's behalf, and made negligent representations upon which Daisy
relied, breached a covenant of good faith and fair dealing implied in its
contracts with Daisy, and should have its unsecured claim in the Daisy
bankruptcy proceeding equitably subro- gated to the claims of all other
claimants in the bankruptcy. The Trustee seeks monetary damages and exemplary
damages in an unspecified amount, as well as costs and expenses.
On May 13, 1993, Bear Stearns answered the Complaint, denying
liability and asserting affirmative defenses.
On February 3, 1993, the court dismissed plaintiffs' breach of
fiduciary duty and equitable subrogation claims. On August 12, 1994, the court
granted summary judgment dismissing all remaining claims against Bear Stearns,
and denying a motion by the Trustee to file a Third Amended Complaint.
On September 24, 1996, the United States Court of Appeals for the
Ninth Circuit affirmed the dismissal of the negligent misrepresentation claim,
reinstated the Trustee's negligence claim and reversed the denial of the motion
for leave to amend the breach of fiduciary duty claim, and remanded the case to
the district court for further proceedings.
On August 15, 1997, Bear Stearns filed an answer denying
liability and asserting affirmative defenses. The district court has set a trial
date of April 6, 1998.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Del Rosario, et al. v. Bear Stearns & Co., Inc., et al. On March
7, 1997, three former Bear Stearns brokerage customers commenced an NASD
arbitration proceeding against Bear Stearns, a former Bear Stearns account
executive and Smith Barney, Inc.
The claimants allege, among other things, unauthorized wire
transfers and unauthorized and unsuitable trading in their accounts. The
claimants assert claims based upon fraud, churning, breach of the fiduciary duty
of care and good faith, negligence, breach of contract, failure to supervise the
claimants' accounts and conspiracy. The claimants seek damages in an unspecified
amount, but at least $20 million plus punitive damages.
On June 27, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses, and moved to dismiss certain damage claims.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this arbitration proceeding, intends to defend these claims
vigorously and believes that it has substantial defenses to these claims.
Bernard H. Glatzer v. Bear, Stearns & Co., Inc. On May 11, 1993,
Bernard H. Glatzer commenced an action in the District Court of Harris County,
Texas. On October 11, 1993, the case was removed to the United States District
Court for the Southern District of Texas, and on January 23, 1995 the case was
transferred to the United States District Court for the Southern District of New
York. Plaintiff alleges that he devised and presented "a novel, elegant,
original and unique business plan" for financing independent oil
19
<PAGE>
and gas production by independent oil and gas companies and presented this plan
to Bear Stearns on a confidential basis, and that Bear Stearns utilized
plaintiff's business plan as part of services provided by the Company to another
corporate entity.
Plaintiff's current pleading alleges, among other things, theft
and misuse of trade secrets, misappropriation, breach of fiduciary duty,
tortious interference with contractual opportunity, prospective business
relationship, business opportunity, contractual advantage and/or contractual
relations, unjust enrichment, quantum meruit/quasi-contract, fraud and
conspiracy. Plaintiff seeks damages in the amount of $200 million, as well as
exemplary or punitive damages, and attorneys' fees and expenses.
On July 21, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
In re Granite Partners, L.P., Granite Corporation and Quartz
Hedge Fund. On April 7, 1994, Granite Partners, L.P., Granite Corporation, and
Quartz Hedge Fund (the "Funds"), three investment funds managed by Askin Capital
Management L.P. ("ACM") and David J. Askin ("Askin"), commenced a bankruptcy
proceeding in the United States Bankruptcy Court for the Southern District of
New York after suffering losses in mortgage-backed securities and related
instruments. Five actions involving Bear Stearns relating to the Funds are
pending. Four of these actions involve allegations that, among other things,
Bear Stearns, Kidder, Peabody & Co., Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation (the "Dealer Defendants") misrepresented, and/or
encouraged ACM to purchase, certain securities despite the alleged
inappropriateness of those securities for the investment funds ACM was managing,
that the Dealer Defendants allegedly provided inflated performance marks, that
the Dealer Defendants allegedly provided excessive financing to the Funds, and
that the Dealer Defendants otherwise departed from the standards of ordinary
care. The fifth of these actions also involves allegations that Bear Stearns,
among other things, made improper margin calls and wrongfully liquidated the
Funds' positions after the Funds defaulted on their obligations.
(i) Primavera Familienstiftung v. David J. Askin, et al. On
September 20, 1995, Primavera Familienstiftung, a purported investor in Granite
Corporation, amended its complaint in a previously commenced action in the
United States District Court for the Northern District of California to include
claims against the Dealer Defendants. On October 18, 1996, the action was
transferred to the United States District Court for the Southern District of New
York. On August 22, 1996 a motion to dismiss by the Dealer Defendants was
granted, with leave to replead. On November 8, 1996, a third amended complaint
was filed.
Plaintiff's current pleading alleges, among other things, that
the Dealer Defendants aided and abetted an alleged fraud by Askin and ACM (the
"Askin Defendants"). Previously alleged and dismissed claims include allegations
that the Dealer Defendants violated Section 10(b) of the Securities Exchange
Act, Rule 10b-5 promulgated thereunder and Section 20(a) of the Securities
Exchange Act, committed common law fraud, aided and abetted a breach of
fiduciary duty by the Askin Defendants, committed breach of contract and
violated Uniform Commercial Code provisions. Plaintiff purports to represent a
class consisting of all investors who purchased interests in the Funds between
January 26, 1993 and April 7, 1994. Plaintiff seeks compensatory and punitive
damages in unspecified amounts (the named plaintiff allegedly invested $1
million in the Funds), together with the costs and expenses of the action.
On June 9, 1997, this litigation was consolidated with the ABF
Capital action (described below) for pre-trial purposes.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
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<PAGE>
(ii) ABF Capital Management, et al. v. Askin Capital Management,
L.P., et al. On March 27, 1996, certain other purported investors in the Funds
filed a lawsuit in the Supreme Court of the State of New York, County of New
York, against ACM and the Dealer Defendants. On April 24, 1996, the case was
removed to the United States District Court for the Southern District of New
York.
Plaintiffs' current pleading alleges, among other things, that
the Dealer Defendants aided and abetted an alleged fraud by ACM. Previously
alleged and dismissed claims include allegations that the Dealer Defendants
aided and abetted an alleged breach of fiduciary duty by ACM, were unjustly
enriched and violated the Racketeer Influenced and Corrupt Organizations Act
("RICO"). The suit seeks recovery of the amounts the plaintiffs paid for their
interests in the Funds (alleged to be approximately $230 million), an
unspecified amount of allegedly unjust enrichment, treble damages, punitive
damages of not less than $1 billion from each defendant, plus interest, costs,
attorneys fees and other unspecified damages.
On June 9, 1997, this action was consolidated with the Primavera
action (described above) for pretrial purposes.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
(iii) Montpellier Resources, Ltd., et al. v. Bear Stearns, et al.
On March 14, 1997, three purported investors in the Funds commenced an action
against ACM and the Dealer Defendants in the United States District Court for
the Southern District of New York. On June 2, 1997, the complaint was amended to
add sixteen additional plaintiffs.
Plaintiffs' allegations are substantially similar to those in the
ABF Capital action (as modified by the Court's ruling on the Dealer Defendants'
motion to dismiss in that action). Plaintiffs purport to represent a class
consisting of all investors who purchased interests in the Funds between January
1, 1991 and April 7, 1994. Plaintiffs seek recovery of their investments
(alleged to have been approximately $34 million for the named plaintiffs),
punitive damages of not less than $1 billion from each defendant, plus interest,
costs, attor- neys' fees and other unspecified damages.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
(iv) Richard Johnston, et al. v. Askin Capital Management, L.P.,
et al. On June 9, 1997, three purported investors in the Funds commenced an
action in the United States District Court for the Southern District of New York
against ACM and the Dealer Defendants. Plaintiffs' allegations are substantially
similar to those in the ABF Capital action (as modified by the Court's ruling on
the Dealer Defendants' motion to dismiss in that action). Plaintiffs seek
recovery of their investments (alleged to have been approximately $6 million),
punitive damages alleged to be no less than $100 million from each defendant,
plus interest, costs, attorneys' fees and other unspecified damages.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
(v) Granite Partners, L.P., et al. v. Bear, Stearns & Co. Inc.,
et al. On September 12, 1996, a Trustee appointed by the Bankruptcy Court filed
an adversary proceeding on behalf of the Funds against Bear Stearns and Bear
Stearns Capital Markets in the United States Bankruptcy Court for the Southern
District of New York.
On December 2, 1996, the reference of this case to the Bankruptcy
Court was withdrawn, and the case now is pending in the United States District
Court for the Southern District of New York. On March
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<PAGE>
3, 1997, the Bankruptcy Court ordered that control of the litigation be
transferred from the Trustee to a Litigation Advisory Board (the "LAB")
consisting of seven members, including five purported investors in the Funds. On
August 4, 1997, LAB filed an amended complaint against Bear Stearns, Bear
Stearns Capital Markets, a Senior Managing Director of Bear Stearns, Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), a senior vice president of
DLJ, and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The amended complaint alleges, among other things, that one or
more of the defendants induced and participated in breaches of fiduciary duty by
Askin and ACM, tortiously interfered with contracts between the Funds and ACM,
accepted payment for trades they knew ACM was not authorized to execute,
breached their contracts with and duty to the Funds through improper margin
calls and liquidations, and in other ways converted the Funds' property,
violated the Sherman Act and the Donnelly Act in connection with allegedly
collusive liquidations, improperly destroyed tape recordings, tortiously
interfered the contracts between the Funds and other dealers, committed common
law fraud, negligent misrepresentation and innocent misrepresentation, breached
warranties and unjustly enriched themselves. The suit now seeks, among other
things, actual and punitive damages in unspecified amounts (there is alleged to
have been approximately $400 million in equity invested in the Funds prior to
liquidation), rescission of the purchase prices paid by the Funds for certain
securities, treble damages for the antitrust claims, restitution for certain
profits and compensation made by the defendants in connection with the Funds,
plus interest, costs, attorneys fees and other damages.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Henryk de Kwiatkowski v. Bear Stearns & Co., Inc. et al. On June
25, 1996, a Complaint was filed in the United States District Court for the
Southern District of New York by a former customer against Bear Stearns, Bear
Stearns Securities Corp., Bear Stearns Forex, Inc. and a registered
representative. On November 4, 1996, an Amended Complaint was filed.
Plaintiff's current pleading alleges, among other things, breach
of contract, breach of fiduciary duty, fraud, negligent misrepresentation,
negligence and violations of the Commodity Exchange Act. Plaintiff seeks to
recover at least $300 million in losses and at least $100 million in punitive
damages.
On August 28, 1997, the district court dismissed plaintiff's
breach of contract, fraud and negligent misrepresentation claims, and all but
one of plaintiff's Commodity Exchange Act claims. The court did not dismiss
claims for breach of fiduciary duty, negligence and violation of Section 40 of
the Commodity Exchange Act.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
In re Lady Luck Gaming Corporation Securities Litigation.
Beginning in March 1995, a series of actions were commenced in the United States
District Court for the District of Nevada involving an initial public offering
("IPO") of 4,500,000 shares of Lady Luck Corporation ("Lady Luck") on September
29, 1993. A Consolidated Class Action Complaint was filed on August 14, 1995,
and a Second Amended Class Action Complaint was filed on October 31, 1996. The
defendants are Bear Stearns, Oppenheimer & Co., Inc., Lady Luck and several
directors and officers of Lady Luck. Bear Stearns and Oppenheimer are sued in
their capacity as co-lead underwriters of the IPO.
Plaintiffs' current pleading alleges, among other things, that
the prospectus issued in connection with the IPO contained certain false or
misleading statements concerning Lady Luck and the casino- gaming industry as a
whole. Plaintiffs allege violations of Sections 11 and 12 of the Securities Act
and Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder against Bear Stearns and Oppenheimer. Plaintiffs purport to represent
a class consisting of all persons who purchased shares of Lady
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<PAGE>
Luck from September 29, 1993 to October 11, 1994. Plaintiffs seek unspecified
compensatory damages and any appropriate equitable relief.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
NASDAQ Antitrust Litigation. On December 16, 1994, a class action
complaint consolidating a series of previously filed actions was filed in the
United States District Court for the Southern District of New York. On August
22, 1995, plaintiffs filed a complaint entitled "refiled consolidated
complaint," which was further amended on July 21, 1997, in a complaint entitled
"amended refiled consolidated complaint." As amended, the complaint alleges that
over 30 market-makers, including Bear Stearns, engaged in a conspiracy with
respect to the "spread" between bid prices in so-called "odd-eighths". The
complaint alleges violations of antitrust laws and seeks damages in an
unspecified amount, treble damages, and declaratory and injunctive relief. On
November 27, 1996, the court certified a class consisting of certain persons who
purchased or sold certain securities on NASDAQ during specified time periods for
each security during the period from May 1, 1989 to May 27, 1994. On June 30 and
August 27, 1997, plaintiffs filed motions seeking court approval of settlements
totaling nearly $100 million entered into by plaintiffs and three of the
defendants in this action. The settling defendants do not include Bear Stearns.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
On July 17, 1996, the Antitrust Division of the United States
Department of Justice filed a civil antitrust complaint in the United States
District Court for the Southern District of New York against 24 firms that make
markets in NASDAQ securities, including Bear Stearns. The complaint alleges,
among other things, that these market maker defendants violated Section 1 of the
Sherman Act through a "common understanding" to follow a "quoting convention"
that the complaint asserts had inflated the "inside spread" (the difference
between the best quoted buying price and the best quoted selling price on
NASDAQ) in certain NASDAQ stocks. This allegedly resulted in investors having to
pay higher transaction costs for buying and selling stocks than they otherwise
would have paid. At the same time the complaint was filed, a proposed settlement
of the action was announced, pursuant to which the defendants in the action,
while admitting none of the charges, agreed not to engage in certain conduct.
The settlement provides, among other things, for the monitoring and
tape-recording by each of the defendants of not less than 3.5 percent, or a
maximum of 70 hours per week, of telephone conversations by its over-the-counter
desk traders, the provision to the Department of Justice of any taped
conversation that may violate the terms of the settlement, and for Department of
Justice representatives to have access, unannounced in advance, during regular
business hours, for the purpose of monitoring trader conversations as the
conversations occur.
On April 23, 1997, the district court approved the proposed
settlement.
On May 20, 1997, the plaintiffs in the class action filed in
connection with the NASDAQ Antitrust Litigation, who previously had intervened
in the civil antitrust action filed by the Antitrust Division of the United
States Department of Justice in order to object to the settlement of that
action, filed an appeal of the district court's approval of the settlement. On
May 21, 1997, the district court granted a stay, pending the outcome of the
appeal, of the portion of the district court's order approving the settlement
that provided for the tape recording of telephone conversations by defendants'
over-the-counter desk traders.
Parvus Co. Ltd. v. Bear Stearns & Co., Inc., et al. In March
1997, a former Bear Stearns account holder commenced an NASD arbitration
proceeding against Bear Stearns and a former Bear Stearns account executive.
23
<PAGE>
The claimant alleges, among other things, unauthorized wire
transfers from its account. The claimant alleges claims based upon breach of the
fiduciary duty of care and good faith, negligence, violation of NASD Rules, SEC
Rules and New York Stock Exchange Rules, breach of contract and failure to
supervise.
The claimant seeks damages in an unspecified amount, but at least $15 million.
On June 13, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this arbitration proceeding, intends to defend these claims
vigorously and believes that it has substantial defenses to these claims.
* * *
The Company or a subsidiary of the Company also has been named as
a defendant in numerous other civil actions arising out of its activities as a
broker and dealer in securities, as an underwriter, as an investment banker, as
an employer or arising out of alleged employee misconduct. Several of these
actions allege damages in large or indeterminate amounts, and some of these
actions are class actions. With respect to claims involving the Partnership,
Bear Stearns has assumed from the Partnership, and has agreed to indemnify the
Partnership against, the Partnership's liability, if any, arising out of all
legal proceedings to which the Partnership is or was named as a party. In view
of the number and diversity of all of the claims referred to in this paragraph
and above, the number of jurisdictions in which these claims are pending and the
inherent difficulty of predicting the outcome of these claims, the Company
cannot state what the eventual outcome of these claims will be. The Company is
contesting the allegations in these lawsuits, and believes that there are
substantial defenses in these lawsuits.
The Company also is involved from time to time in investigations
and proceedings by governmental and self-regulatory agencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information as of September 15,
1997 concerning executive officers of the Company as of July 1, 1997.
24
<PAGE>
<TABLE>
<CAPTION>
AGE AS OF
SEPTEMBER 15,
NAME 1997 PRINCIPAL OCCUPATION AND DIRECTORSHIPS HELD
- ---- ------ -------------------------------------------
<S> <C> <C>
Alan C. Greenberg..................... 70 Chairman of the Board of the Company and Bear
Stearns and Chairman of the Executive
Committee of the Company's Board of Directors
(the "Executive Committee")
James E. Cayne........................ 63 President and Chief Executive Officer of the
Company and Bear Stearns, member of the
Executive Committee and Chairman of the
Management and Compensation Committee of the
Company's Board of Directors (the "Management
and Compensation Committee")
Mark E. Lehman........................ 46 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee
Alan D. Schwartz...................... 47 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee
and the Management and Compensation
Committee; Director, DAKA International,Inc.
Warren J. Spector..................... 39 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee
and the Management and Compensation
Committee
William J. Montgoris.................. 50 Chief Operating Officer of the Company and Bear
Stearns and member of the Management and
Compensation Committee; Member of the
Board of Trustees of St. John's University
Samuel L. Molinaro Jr................. 39 Senior Vice President - Finance and Chief
Financial Officer of the Company
</TABLE>
Except as indicated below, each of the executive officers of the Company
has been a Senior Managing Director of Bear Stearns for more than the past five
years.
Mr. Greenberg has been Chairman of the Board of the Company for more
than the past five years. Mr. Greenberg was Chief Executive Officer of the
Company and Bear Stearns from the Company's inception until July 1993.
Mr. Cayne has been Chief Executive Officer of the Company and Bear
Stearns since July 1993. Mr. Cayne has been President of the Company for more
than the past five years.
Mr. Lehman became an Executive Vice President of the Company in
September 1995. Prior thereto, Mr. Lehman was Senior Vice President - General
Counsel of Bear Stearns for more than five years. Mr. Lehman is General Counsel
of the Company and Bear Stearns.
Mr. Schwartz has been an Executive Vice President of the Company for
more than the past five years. Mr. Schwartz is responsible for all of the
investment banking activities of Bear Stearns.
Mr. Spector became an Executive Vice President of the Company in
November 1992. Prior thereto, Mr. Spector was involved in the management of Bear
Stearns' Mortgage Department for more than five years. Mr. Spector is
responsible for all fixed income activities of Bear Stearns.
25
<PAGE>
Mr. Montgoris has been Chief Operating Officer of the Company and Bear
Stearns since August 1993. From April 1987 until October 1996, Mr. Montgoris was
also Chief Financial Officer of the Company.
Mr. Molinaro has been Chief Financial Officer of the Company since
October 1996. Prior thereto, Mr. Molinaro was the Senior Vice President-Finance
of the Company and Bear Stearns, and a Senior Managing Director of Bear Stearns
from September 1993. Mr. Molinaro served as Assistant Controller of Bear Stearns
and was a Managing Director of Bear Stearns prior to September 1993.
Officers serve at the discretion of the Board of Directors.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required to be furnished pursuant to this item is set
forth under the caption "Price Range of Common Stock and Dividends" in the
Annual Report, which is incorporated herein by reference to Exhibit No. (13) of
this report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required to be furnished pursuant to this item is set
forth under the caption "Selected Financial Data" in the Annual Report, which is
incorporated herein by reference to Exhibit No. (13) of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The information required to be furnished pursuant to this item is set
forth under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report, which is incorporated
herein by reference to Exhibit No. (13) of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required to be furnished pursuant to this item is set
forth under the caption "Risk Management" in the Annual Report, which is
incorporated herein by reference to Exhibit No. (13) of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required to be furnished pursuant to this item is
contained in the Consolidated Financial Statements and the Notes to Consolidated
Financial Statements in the Annual Report. Such information and the Independent
Auditors' Report in the Annual Report are incorporated herein by reference to
Exhibit No. (13) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be furnished pursuant to this item with
respect to Directors of the Company will be set forth under the caption
"Election of Directors" in the registrant's proxy statement (the "Proxy
Statement") to be furnished to stockholders in connection with the solicitation
of proxies by the Company's Board of Directors for use at the 1997 Annual
Meeting of Stockholders to be held on October 27, 1997, and is incorporated
herein by reference, and the information with respect to Executive Officers is
set forth, pursuant to General Instruction G of Form 10-K, under Part I of this
Report.
The information required to be furnished pursuant to this item with
respect to compliance with Section 16(a) of the Exchange Act will be set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this item will be
set forth under the caption "Executive Compensation" of the Proxy Statement, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required to be furnished pursuant to this item will be
set forth under the captions "Voting Securities" and "Security Ownership of
Management" of the Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be furnished pursuant to this item will be
set forth under the caption "Certain Relationships and Related Party
Transactions" of the Proxy Statement, and is incorporated herein by reference.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
EXHIBITS:
FINANCIAL STATEMENTS:
The financial statements required to be filed hereunder are listed on
page F-1 hereof.
FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules required to be filed hereunder are
listed on page F-1 hereof.
EXHIBITS:
(3)(a)(1) Restated Certificate of Incorporation of the registrant, filed
September 11, 1985 (incorporated by reference to Exhibit No.
(4)(a)(1) to the registrant's registration statement on Form S-8
(File No.
33-49979)).
(3)(a)(2) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(2) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(3) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(3) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(4) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
February 14, 1986 (incorporated by reference to Exhibit No.
(4)(a)(4) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(5) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed September 18, 1986
(incorporated by reference to Exhibit No. (4)(a)(5) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(6) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed February 19, 1987
(incorporated by reference to Exhibit No. (4)(a)(6) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(7) Certificate of Correction to the Restated Certificate of
Incorporation of the registrant, filed February 25, 1987
(incorporated by reference to Exhibit No. (4)(a)(7) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(8) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
October 27, 1988 (incorporated by reference to Exhibit No.
(4)(a)(8) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(9) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 6, 1989
(incorporated by reference to Exhibit No. (4)(a)(9) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(10) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 7, 1990
(incorporated by reference to Exhibit No. (4)(a)(10) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
29
<PAGE>
EXHIBITS:
(3)(a)(11) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 10, 1992
(incorporated by reference to Exhibit No. (4)(a)(11) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(12) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed March 23, 1993
(incorporated by reference to Exhibit No. (4)(a)(12) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(13) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed July 22, 1993 (incorporated
by reference to Exhibit No. (4)(a)(13) to the registrant's
registration statement on Form S-8 (File No. 33-49979)).
(3)(a)(14) Form of Certificate of Stock Designations to the Restated
Certificate of Incorporation of the registrant (incorporated by
reference to Exhibit No. 4.4 to the registrant's registration
statement on Form 8-A filed on February 23, 1994).
(3)(b) Amended and Restated By-laws of the registrant (incorporated by
reference to Exhibit No. (3)(b) to registrant's Annual Report on
Form 10-K for its fiscal year ended June 30, 1991 and Exhibit No.
(3)(b) to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1992).
(4)(a) Indenture, dated as of April 13, 1989, between the registrant and
Citibank, N.A., as trustee (incorporated by reference to the
identically numbered exhibit to the registrant's registration
statement on Form S-3 (File No. 33-27713)).
(4)(b) Indenture, dated as of May 31, 1991, between the registrant and
Manufacturers Hanover Trust Company, as trustee (incorporated by
reference to Exhibit No. (4)(a) to registrant's registration
statement on Form S-3 (File No. 33-40933)).
(4)(c) Except as set forth in (4)(a) and 4(b) above, the instruments
defining the rights of holders of long-term debt securities of the
registrant and its subsidiaries are omitted pursuant to Section
(b)(4)(iii) of Item 601 of Regulation S-K. Registrant hereby
agrees to furnish copies of these instruments to the SEC upon
request.
(4)(d) Form of Deposit Agreement (incorporated by reference to Exhibit
(4)(d) to the registrant's registration statement on Form S-3
(File No. 33-59140)).
(10)(a)(1) Employee Convertible Debenture Purchase Plan (incorporated by
reference to Exhibit A to the registrant's proxy statement
furnished to stockholders in connection with the solicitation of
proxies for the registrant's Annual Meeting of Stockholders held
on September 21, 1987).*
(10)(a)(2) 1989 Deferred Compensation Plan for Executive Officers
(incorporated by reference to Exhibit B to the registrant's proxy
statement furnished to stockholders in connection with the
solicitation of proxies for the registrant's Annual Meeting of
Stockholders held on October 29, 1990).*
(10)(a)(3) Management Compensation Plan, as amended and restated as of July
1, 1994 (incorporated by reference to Exhibit 10(a)(4) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1994).*
(10)(a)(4) Amendment to the Management Compensation Plan, adopted September
10, 1996 (incorporated by reference to Exhibit 10(a)(5) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
30
<PAGE>
EXHIBITS:
(10)(a)(5) Amendment to the Management Compensation Plan, adopted September
18, 1997, subject to approval of Stockholders at the 1997 Annual
Meeting.*
(10)(a)(6) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of January 22, 1997 (the "CAP Plan")
(incorporated by reference to Exhibit 10(a)(6) to the registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended
December 31. 1996, certain provisions of which are subject to
approval of Stockholders at the 1997 Annual Meeting).*
(10)(a)(7) Amendment to the CAP Plan, adopted September 10, 1997 subject to
the approval of Stockholders at the 1997 Annual Meeting.*
(10)(a)(8) Performance Compensation Plan, adopted September 10, 1996 (filed
as Exhibit A to the registrant's proxy statement furnished to
Stockholders in connection with the solicitation of proxies for
the registrant's Annual Meeting of Stockholders to be held on
October 28, 1996).*
(10)(a)(9) Amendment to the Performance Compensation Plan, adopted September
10, 1997, subject to approval of stockholders at the 1997 Annual
Meeting.*
(10)(a)(10) The Bear Stearns Companies Inc. AE Investment and Deferred
Compensation Plan, effective January 1, 1989 (the "AE Investment
and Deferred Compensation Plan") (incorporated by reference to
Exhibit 10(a)(14) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1996).*
(10)(a)(11) Amendment to the AE Investment and Deferred Compensation Plan,
adopted April 29, 1996 and effective as of January 1, 1995
(incorporated by reference to Exhibit 10(a)(15) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
(10)(b)(1) Lease, dated as of November 1, 1991, between Forest City Jay
Street Associates and The Bear Stearns Companies Inc. with respect
to the premises located at One Metrotech Center, Brooklyn, New
York (incorporated by reference to Exhibit (10)(b)(1) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1992).
(10)(b)(2) Lease, dated as of March 6, 1987, among Olympia & York 245 Lease
Company, 245 Park Avenue Company and The Bear Stearns Companies
Inc. (incorporated by reference to Exhibit (10)(c)(2) to the
registrant's registration statement on Form S-1 (File No.
33-15948)).
(10)(b)(3) Lease, dated as of August 26, 1994, between Tenth City Associates
and The Bear Stearns Companies Inc. (incorporated by reference to
Exhibit 10(b)(3) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1994).
(11) Statement re: computation of per share earnings.
(12) Statement re: computation of ratio of earnings to fixed charges.
(13) 1997 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) Subsidiaries of the registrant.
31
<PAGE>
EXHIBITS:
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedule.
- ---------------------------------
* Executive Compensation Plans and Arrangements
32
<PAGE>
(B) REPORTS ON FORM 8-K.
The Company filed the following Current Report on Form 8-K during
the last quarter of the period covering this report:
A Current Report on Form 8-K dated April 16, 1997, pertaining to
the registrant's results of operations for the three months and nine
months ended March 27, 1997 and to the declaration of dividends.
A Current Report on Form 8-K dated May 16, 1997 pertaining to a
tax opinion in connection with the issuance of S&P Linked Notes.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
September, 1997.
THE BEAR STEARNS COMPANIES INC.
(Registrant)
By: /s/ William J. Montgoris
------------------------------
William J. Montgoris
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of September, 1997.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ Alan C. Greenberg Chairman of the Board; Director
- ----------------------------------
Alan C. Greenberg
/s/ James E. Cayne President and Chief Executive Officer (Principal
- ---------------------------------- Executive Officer); Director
James E. Cayne
/s/ William J. Montgoris Chief Operating Officer; Director
- ----------------------------------
William J. Montgoris
/s/ Mark E. Lehman Executive Vice President; Director
- ----------------------------------
Mark E. Lehman
/s/ Alan D. Schwartz Executive Vice President; Director
- ----------------------------------
Alan D. Schwartz
/s/ Warren J. Spector Executive Vice President; Director
- ----------------------------------
Warren J. Spector
34
<PAGE>
Treasurer; Director
- ----------------------------------
Michael Minikes
/s/ E. Garrett Bewkes III Director
- ----------------------------------
E. Garrett Bewkes III
/s/ Denis A. Bovin Director
- ----------------------------------
Denis A. Bovin
/s/ Peter D. Cherasia Director
- ----------------------------------
Peter D. Cherasia
/s/ Ralph R. Cioffi Director
- ----------------------------------
Ralph R. Cioffi
/s/ Barry J. Cohen Director
- ----------------------------------
Barry J. Cohen
Director
- ----------------------------------
Wendy L. de Monchaux
Director
- ----------------------------------
Bruce E. Geismar
/s/ Carl D. Glickman Director
- ----------------------------------
Carl D. Glickman
Director
- ----------------------------------
Thomas R. Green
Director
- ----------------------------------
Donald J. Harrington
Director
- ----------------------------------
Richard Harriton
Director
- ----------------------------------
Daniel L. Keating
35
<PAGE>
/s/ David A. Liebowitz Director
- ----------------------------------
David A. Liebowitz
Director
- ----------------------------------
Bruce M. Lisman
Director
- ----------------------------------
Roland N. Livney
/s/ Donald R. Mullen Jr. Director
- ----------------------------------
Donald R. Mullen Jr.
Director
- ----------------------------------
Frank T. Nickell
Director
- ----------------------------------
Craig M. Overlander
/s/ Stephen E. Raphael Director
- ----------------------------------
Stephen E. Raphael
/s/ E. John Rosenwald Jr. Vice Chairman of the Board; Director
- ----------------------------------
E. John Rosenwald Jr.
Director
- ----------------------------------
Lewis A. Sachs
/s/ Richard Sachs Director
- ----------------------------------
Richard Sachs
/s/ Frederic V. Salerno Director
- ----------------------------------
Frederic V. Salerno
Director
- ----------------------------------
David M. Solomon
/s/ Robert M. Steinberg Director
- ----------------------------------
Robert M. Steinberg
36
<PAGE>
Vice Chairman of the Board; Director
- ----------------------------------
Michael L. Tarnopol
/s/ Vincent Tese Director
- ----------------------------------
Vincent Tese
/s/ Michael J. Urfirer Director
- ----------------------------------
Michael J. Urfirer
Director
- ----------------------------------
Fred Wilpon
Director
- ----------------------------------
Uzi Zucker
/s/ Michael J. Abatemarco Controller
- ----------------------------------
Michael J. Abatemarco
/s/ Samuel L. Molinaro Jr. Senior Vice President-Finance and Chief Financial
- ---------------------------------- Officer (Principal Accounting Officer and Principal
Samuel L. Molinaro Jr. Financial Officer)
</TABLE>
37
<PAGE>
THE BEAR STEARNS COMPANIES INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS 14 (A) (1) AND 14 (A) (2)
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE REFERENCE
ANNUAL
FORM 10-K REPORT *
<S> <C> <C>
Independent Auditors' Report 68
THE BEAR STEARNS COMPANIES INC.
(i) Consolidated Statements of Income-
fiscal years ended June 30, 1997, 1996 and 1995 48
(ii) Consolidated Statements of Financial Condition at
June 30, 1997 and 1996 49
(iii) Consolidated Statements of Changes in Stockholders' Equity -
fiscal years ended June 30, 1995, 1996 and 1997 50-51
(iv) Consolidated Statements of Cash Flows-
fiscal years ended June 30, 1997, 1996 and 1995 52
(v) Notes to Consolidated Financial Statements 53-67
FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report F-2
I Condensed financial information of registrant F-3 - F-6
II Valuation and qualifying accounts F-7
</TABLE>
* Incorporated by reference from the indicated pages of the 1997 Annual
Report to Stockholders.
All other schedules are omitted because they are not applicable or the
requested information is included in the consolidated financial
statements or notes thereto.
F-1
<PAGE>
DELOITTE &
TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Bear Stearns Companies Inc.:
We have audited the consolidated financial statements of The Bear Stearns
Companies Inc. and Subsidiaries as of June 30, 1997 and 1996, and for each of
the three years in the period ended June 30, 1997, and have issued our report
thereon dated September 2, 1997; such consolidated financial statements and
report are included in the Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included the financial statement schedules
of The Bear Stearns Companies Inc. and Subsidiaries, listed in Item 14. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
September 2, 1997
F-2
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1995
----------- ---------- ----------
<S> <C> <C> <C>
Revenues
Interest
Coupon.................................. $ 744 $ - $ 8,397
Intercompany............................ 979,757 869,127 711,701
Other..................................... 82,682 59,811 52,444
----------- ---------- ----------
1,063,183 928,938 772,542
----------- ---------- ----------
Expenses
Interest.................................. 1,039,461 876,536 743,730
Other..................................... 86,844 66,502 51,788
----------- ---------- ----------
1,126,305 943,038 795,518
----------- ---------- ----------
Loss before benefit from provision
for income taxes and equity in earnings
of subsidiaries............................. (63,122) (14,100) (22,976)
Benefit from provision for income taxes..... (23,206) 5,689 2,427
----------- ---------- ----------
Loss before equity in earnings of
subsidiaries................................ (39,916) (19,789) (25,403)
Equity in earnings of subsidiaries.......... 653,246 510,427 266,014
----------- ---------- ----------
Net income.................................. $ 613,330 $ 490,638 $ 240,611
=========== ========== ==========
</TABLE>
See Notes to Condensed Financial Information.
F-3
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash .......................................................... $ 79 $ 2,783
Receivables from subsidiaries.................................. 21,365,235 15,306,820
Investment in subsidiaries, at equity.......................... 3,636,514 2,958,437
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $375,021
in 1997 and $274,319 in 1996................................... 311,405 263,916
Other assets................................................... 922,459 372,055
------------ ------------
Total Assets........................................... $ 26,235,692 $ 18,904,011
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.......................................... $ 13,496,206 $ 9,531,203
Payables to subsidiaries....................................... 48,919 24,355
Other liabilities.............................................. 904,026 368,556
------------ ------------
14,449,151 9,924,114
------------ ------------
Long-term borrowings........................................... 8,120,328 6,043,614
------------ ------------
Long-term borrowings from subsidiaries......................... 389,842 190,869
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 10,000,000 shares authorized:
Adjustable Rate Cumulative Preferred Stock, Series A; $50
liquidation preference; 3,000,000 shares issued............. 150,000 150,000
Cumulative Preferred Stock, Series B; $200 liquidation
preference; 937,500 shares issued and outstanding........... 187,500 187,500
Cumulative Preferred Stock, Series C; $200 liquidation
preference; 500,000 shares issued and outstanding.......... 100,000 100,000
Common stock, $1.00 par value; 200,000,000 shares authorized;
167,784,941 shares and 159,803,764 shares issued in 1997
and 1996, respectively......................................
Paid-in capital................................................ 167,785 159,804
Retained earnings.............................................. 1,874,016 1,696,217
Capital Accumulation Plan...................................... 1,031,736 694,108
Treasury stock, at cost - 655,007 471,191
Adjustable Rate Cumulative Preferred Stock, Series A;
2,520,750 shares and 2,341,350 shares in 1997 and
1996, respectively........................................ (103,421) (95,389)
Common stock; 50,191,531 shares and 41,664,729 shares
in 1997 and 1996, respectively............................ (772,551) (598,217)
Note receivable from ESOP Trust................................ (13,701) (19,800)
------------ ------------
Total Stockholders' Equity..................................... 3,276,371 2,745,414
------------ ------------
Total Liabilities and Stockholders' Equity..................... $ 26,235,692 $ 18,904,011
============ ============
</TABLE>
See Notes to Condensed Financial Information.
F-4
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 613,330 $ 490,638 $ 240,611
Adjustments to reconcile net income to cash
used in operating activities:
Equity in earnings of subsidiaries, net
of dividends received........................ (279,147) (300,043) (193,724)
Other........................................ 84,658 66,081 65,118
(Increases) decreases in assets:
Receivables from subsidiaries................ (6,058,415) (3,187,678) (1,313,631)
Investments in subsidiaries, net............. (398,930) (236,437) 10,025
Other assets................................. (513,631) 1,490 (18,744)
Increases (decreases) in liabilities:
Payables to subsidiaries..................... 24,564 (6,383) (477)
Other liabilities............................ 542,957 174,542 48,042
----------- ----------- -----------
Cash used in operating activities................ (5,984,614) (2,997,790) (1,162,780)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from short-term borrowings.......... 3,965,003 1,306,746 648,360
Issuance of long-term borrowings................. 3,129,439 2,654,134 1,040,090
Increase in long-term borrowings
from subsidiaries.............................. 198,973 -- --
Capital Accumulation Plan........................ 196,114 181,702 87,560
Common Stock distributions....................... 4,006 6,497 18,088
Note repayment from ESOP Trust................... 6,099 5,647 5,229
Payments for:
Retirement of Senior Notes................... (1,062,844) (674,000) (400,300)
Treasury stock purchases..................... (202,296) (191,474) (70,373)
Cash dividends paid.............................. (93,784) (95,001) (92,642)
----------- ----------- -----------
Cash provided by financing activities............ 6,140,710 3,194,251 1,236,012
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, equipment and leasehold
improvements..................................... (124,590) (77,510) (81,282)
Purchases of investment securities and
other assets................................... (46,706) (118,938) -
Proceeds from sale of investment securities
and other...................................... 12,496 742 9,217
----------- ----------- -----------
Cash used in investing activities................ (158,800) (195,706) (72,065)
----------- ----------- -----------
Net (decrease) increase in cash.................. (2,704) 755 1,167
Cash, beginning of year.......................... 2,783 2,028 861
----------- ----------- -----------
Cash, end of year................................ $ 79 $ 2,783 $ 2,028
=========== =========== ===========
</TABLE>
See Notes to Condensed Financial Information.
F-5
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. GENERAL
The condensed financial information of the Company (Parent Company Only)
should be read in conjunction with the consolidated financial statements
of The Bear Stearns Companies Inc. and the notes thereto incorporated by
reference in this report.
2. DIVIDENDS RECEIVED FROM SUBSIDIARIES
The Company received from its consolidated subsidiaries cash dividends
of $374.1 million, $210.4 million, and $72.2 million for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively.
3. STATEMENT OF CASH FLOWS
Income taxes paid (consolidated) totaled $478.4 million, $279.0 million,
and $125.6 million in the fiscal years ended June 30, 1997, 1996 and
1995, respectively. Cash payments for interest approximated interest
expense for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively.
F-6
<PAGE>
SCHEDULE II
THE BEAR STEARNS COMPANIES INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION EGINNING OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------------ -------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended June 30, 1997... $50,649 $ 4,916 $(4,166) $51,399
Year ended June 30, 1996... 54,175 4,892 (8,418) 50,649
Year ended June 30, 1995... 42,053 16,479 (4,357) 54,175
</TABLE>
F-7
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(a)(1) Restated Certificate of Incorporation of the registrant, filed
September 11, 1985 (incorporated by reference to Exhibit No.
(4)(a)(1) to the registrant's registration statement on Form S-8
(File No.
33-49979)).
(3)(a)(2) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(2) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(3) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(3) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(4) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
February 14, 1986 (incorporated by reference to Exhibit No.
(4)(a)(4) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(5) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed September 18, 1986
(incorporated by reference to Exhibit No. (4)(a)(5) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(6) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed February 19, 1987
(incorporated by reference to Exhibit No. (4)(a)(6) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(7) Certificate of Correction to the Restated Certificate of
Incorporation of the registrant, filed February 25, 1987
(incorporated by reference to Exhibit No. (4)(a)(7) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(8) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
October 27, 1988 (incorporated by reference to Exhibit No.
(4)(a)(8) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(9) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 6, 1989
(incorporated by reference to Exhibit No. (4)(a)(9) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(10) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 7, 1990
(incorporated by reference to Exhibit No. (4)(a)(10) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
<PAGE>
(3)(a)(11) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 10, 1992
(incorporated by reference to Exhibit No. (4)(a)(11) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(12) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed March 23, 1993
(incorporated by reference to Exhibit No. (4)(a)(12) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(13) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed July 22, 1993 (incorporated
by reference to Exhibit No. (4)(a)(13) to the registrant's
registration statement on Form S-8 (File No. 33-49979)).
(3)(a)(14) Form of Certificate of Stock Designations to the Restated
Certificate of Incorporation of the registrant (incorporated by
reference to Exhibit No. 4.4 to the registrant's registration
statement on Form 8-A filed on February 23, 1994).
(3)(b) Amended and Restated By-laws of the registrant (incorporated by
reference to Exhibit No. (3)(b) to registrant's Annual Report on
Form 10-K for its fiscal year ended June 30, 1991 and Exhibit No.
(3)(b) to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1992).
(4)(a) Indenture, dated as of April 13, 1989, between the registrant and
Citibank, N.A., as trustee (incorporated by reference to the
identically numbered exhibit to the registrant's registration
statement on Form S-3 (File No. 33-27713)).
(4)(b) Indenture, dated as of May 31, 1991, between the registrant and
Manufacturers Hanover Trust Company, as trustee (incorporated by
reference to Exhibit No. (4)(a) to registrant's registration
statement on Form S-3 (File No. 33-40933)).
(4)(c) Except as set forth in (4)(a) and 4(b) above, the instruments
defining the rights of holders of long-term debt securities of the
registrant and its subsidiaries are omitted pursuant to Section
(b)(4)(iii) of Item 601 of Regulation S-K. Registrant hereby
agrees to furnish copies of these instruments to the SEC upon
request.
(4)(d) Form of Deposit Agreement (incorporated by reference to Exhibit
(4)(d) to the registrant's registration statement on Form S-3
(File No. 33-59140)).
(10)(a)(1) Employee Convertible Debenture Purchase Plan (incorporated by
reference to Exhibit A to the registrant's proxy statement
furnished to stockholders in connection with the solicitation of
proxies for the registrant's Annual Meeting of Stockholders held
on September 21, 1987).*
(10)(a)(2) 1989 Deferred Compensation Plan for Executive Officers
(incorporated by reference to Exhibit B to the registrant's proxy
statement furnished to stockholders in connection with the
solicitation of proxies for the registrant's Annual Meeting of
Stockholders held on October 29, 1990).*
(10)(a)(3) Management Compensation Plan, as amended and restated as of July
1, 1994 (incorporated by reference to Exhibit 10(a)(4) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1994).*
(10)(a)(4) Amendment to the Management Compensation Plan, adopted September
10, 1996 (incorporated by reference to Exhibit 10(a)(5) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
<PAGE>
(10)(a)(5) Amendment to the Management Compensation Plan, adopted September
18, 1997, subject to approval of Stockholders at the 1997 Annual
Meeting.*
(10)(a)(6) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of January 22, 1997 (the "CAP Plan")
(incorporated by reference to Exhibit 10(a)(6) to the registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended
December 31. 1996, certain provisions of which are subject to
approval of Stockholders at the 1997 Annual Meeting).*
(10)(a)(7) Amendment to the CAP Plan, adopted September 10, 1997 subject to
the approval of Stockholders at the 1997 Annual Meeting.*
(10)(a)(8) Performance Compensation Plan, adopted September 10, 1996 (filed
as Exhibit A to the registrant's proxy statement furnished to
Stockholders in connection with the solicitation of proxies for
the registrant's Annual Meeting of Stockholders to be held on
October 28, 1996).*
(10)(a)(9) Amendment to the Performance Compensation Plan, adopted September
10, 1997, subject to approval of stockholders at the 1997 Annual
Meeting.*
(10)(a)(10) The Bear Stearns Companies Inc. AE Investment and Deferred
Compensation Plan, effective January 1, 1989 (the "AE Investment
and Deferred Compensation Plan") (incorporated by reference to
Exhibit 10(a)(14) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1996).*
(10)(a)(11) Amendment to the AE Investment and Deferred Compensation Plan,
adopted April 29, 1996 and effective as of January 1, 1995
(incorporated by reference to Exhibit 10(a)(15) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
(10)(b)(1) Lease, dated as of November 1, 1991, between Forest City Jay
Street Associates and The Bear Stearns Companies Inc. with respect
to the premises located at One Metrotech Center, Brooklyn, New
York (incorporated by reference to Exhibit (10)(b)(1) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1992).
(10)(b)(2) Lease, dated as of March 6, 1987, among Olympia & York 245 Lease
Company, 245 Park Avenue Company and The Bear Stearns Companies
Inc. (incorporated by reference to Exhibit (10)(c)(2) to the
registrant's registration statement on Form S-1 (File No.
33-15948)).
(10)(b)(3) Lease, dated as of August 26, 1994, between Tenth City Associates
and The Bear Stearns Companies Inc. (incorporated by reference to
Exhibit 10(b)(3) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1994).
(11) Statement re: computation of per share earnings.
(12) Statement re: computation of ratio of earnings to fixed charges.
(13) 1997 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) Subsidiaries of the registrant.
<PAGE>
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedule.
- ---------------------------------
* Executive Compensation Plans and Arrangements
EXHIBIT 10(a)(5)
THE BEAR STEARNS COMPANIES INC.
AMENDMENT TO THE MANAGEMENT COMPENSATION PLAN
RESOLVED, that the Bear Stearns Companies Inc. Management
Compensation Plan (as amended and restated as of July 1, 1994) (the "Plan"), be,
and hereby is, amended as follows:
1. Section 1 shall be amended to read as follows:
"Section 1 Purpose. The purposes of The Bear Stearns Companies Inc.
Management Compensation Plan as amended and restated hereby (the
"Plan") are (i) to compensate voting members of the Executive
Committee (the "Executive Committee") of The Bear Stearns Companies
Inc. (the "Company") on an individual basis for significant
contributions to the Company and its subsidiaries and (ii) to
stimulate the efforts of such persons by giving them a direct
interest in the performance of the Company."
EXHIBIT 10(a)(7)
THE BEAR STEARNS COMPANIES INC.
AMENDMENTS TO THE CAPITAL ACCUMULATION PLAN
RESOLVED, that The Bear Stearns Companies Inc. Capital Accumulation Plan
for Senior Managing Directors, as amended and restated (the "Plan"), be, and
hereby is, amended as follows:
1. Section 5.3 shall be amended to read as follows:
"5.3 Quarterly Credits in Respect of Cash Balances. If there shall
exist a Cash Balance in the Cash Balance Account of any Participant
on the last day of any fiscal quarter of the Company, including the
last day of a Plan Year (a "Quarter End Date"), the Company shall
credit the Capital Accumulation Account of each such Participant, as
of such Quarter End Date, with a number of additional CAP Units
determined by dividing such Cash Balance by the Average Cost Per
Share of the Available Shares acquired by the Company and designated
by the Board Committee as being allocated to such period. If the
aggregate number of CAP Units required to be credited to the Capital
Accumulation Accounts of all such Participants pursuant to the
preceding sentence would exceed the number of Available Shares, then
the aggregate number of CAP Units to be credited shall be limited to
the number of Available Shares and such CAP Units shall be allocated
on a pro rata basis, based on the respective Cash Balances of each
Participant. In connection with any crediting of CAP Units pursuant
to this Section 5.3, the Cash Balance of each such Participant shall
be reduced by debiting to his Cash Balance Account an amount equal
to the product of the number of CAP Units credited to his Capital
Accumulation Account and the Average Cost Per Share of the Available
Shares acquired by the Company during the annual or quarterly period
specified by the Board Committee."
<PAGE>
2. The definition of "Available Shares" shall be amended to read as
follows:
"`Available Shares' means, with respect to any Fiscal Year or
portion thereof, the sum of (a) the number of shares of Common Stock
purchased by the Company in the open market or in private
transactions or otherwise during such period that have not been
previously allocated under the Plan and designated by the Board
Committee at the time of purchase as having been purchased for
issuance under the Plan with respect to the Fiscal Year or portion
thereof specified by the Board Committee and (b) shares of Common
Stock purchased prior to such period that were designated as
Available Shares but were not allocated under the Plan which the
Company makes available to the Plan subsequent to the period in
which such shares were purchased and the Board Committee thereafter
designates as Available Shares for issuance under the Plan with
respect to the Fiscal Year or portion thereof specified by the Board
Committee."
3. Section 5.5 shall be amended to read as follows:
"5.5 Book Value Adjustment. For purposes of calculating the Net
Earnings Adjustment with respect to any Deferral Year pursuant to
Section 5.10, the Book Value Adjustment shall equal the sum of (1)
the amount maintained in the Book Value Adjustment Carry Forward
Account pursuant to Section 5.10(a), if any, and (2) the product of
(a) the total number of CAP Units credited to the Capital
Accumulation Account of each Participant as of the last day of such
Deferral Year but without including any CAP Units credited on such
date pursuant to Sections 5.1, 5.3 and 5.10 multiplied by (b) the
difference between Adjusted Book Value Per Share as of the last day
of the Deferral Year and Adjusted Book Value Per Share as of the
last day of the preceding Deferral Year."
4. Section 5.4(g) shall be amended to read as follows:
"(g) finally, (i) if the sum (or net amount) of the amounts
determined for a Participant in
<PAGE>
subparagraphs (a), (b) and (c) above is a positive number and such
sum (or net amount) exceeds the aggregate of the charges, if any,
determined for such Participant pursuant to subparagraphs (d), (e)
and (f) above, then the Earnings Adjustment shall equal such sum (or
net amount), as determined for purposes of this Section 5.4, or (ii)
if the net amount of the amounts determined for a Participant in
subparagraphs (a), (b) and (c) less the aggregate of the charges, if
any, determined pursuant to subparagraphs (d), (e) and (f) is a
negative number (an "Earnings Charge") and such Participant has a
positive Cash Balance, then (A) such Cash Balance first shall be
reduced by an amount equal to such Earnings Charge (provided that no
such reduction shall be made to the extent the Earnings Charge
relates to a negative result from sub-paragraph (b) or (c)) and (B)
if, after reducing such Cash Balance to zero, any amount determined
in accordance with the preceding clause (ii) (A) remains unapplied,
or if such Participant has no Cash Balance, then the Earnings
Adjustment shall be zero."
5. Section 5.10(a) shall be amended to read as follows:
"(a) After making any credits to the Capital Accumulation Accounts
of the Participants in respect of the fourth fiscal quarter of such
Deferral Year pursuant to Section 5.3, each Participant's Account
shall be adjusted, effective as of the last day of such Deferral
Year, as provided in this Section 5.10(a). The Company shall credit
the Capital Accumulation Account of each Participant with an
additional number of CAP Units (a "Net Earnings Adjustment") equal
to the quotient of (i) the difference between the Earnings
Adjustment calculated in accordance with Section 5.4 and the Book
Value Adjustment calculated in accordance with Section 5.5 for such
Deferral Year, divided by (ii) the Average Cost Per Share of the
Available Shares acquired by the Company and designated by the Board
Committee as being allocated to such period. Notwithstanding the
foregoing, however, if (i) the Earnings Adjustment is a negative
number or (ii) the Book Value Adjustment exceeds the Earnings
Adjustment
<PAGE>
then no CAP Units shall be credited to the Accounts of any
Participants and the amounts of each of such Book Value Adjustment
and Earnings Adjustment shall be disregarded and shall not be taken
into account for purposes of the Plan in any subsequent Deferral
Year."
EXHIBIT 10(a)(9)
THE BEAR STEARNS COMPANIES INC.
AMENDMENTS TO THE PERFORMANCE COMPENSATION PLAN
RESOLVED, that the Bear Stearns Companies Inc. Performance
Compensation Plan (the "Plan"), be, and hereby is, amended as follows:
2. Section 1 shall be amended to read as follows:
"Section 1. Purpose. The purposes of The Bear Stearns Companies Inc.
Performance Compensation Plan (the "Plan") are (i) to compensate
certain Senior Managing Directors (other than participants in the
Management Compensation Plan) of The Bear Stearns Companies Inc. and
its subsidiaries (the "Company") on an individual basis for
significant contributions to the Company and (ii) to stimulate the
efforts of such persons by giving them a direct interest in the
performance of the Company."
3. Section 3 shall be amended to read as follows:
"Section 3. Coverage. For purposes of the Plan, the term
"Participant" shall include for each fiscal year each Senior
Managing Director so designated by the Compensation Committee within
90 days following the first day of such fiscal year. As used herein,
the term "Company" includes both the Company and its subsidiaries,
unless the context otherwise requires."
4. Sections 4.2, 5.1, 6.2 and 6.3 shall be amended by changing all
references to "an executive officer" to "a Senior Managing Director" and the
reference to "executive officers" to "Senior Managing Directors".
EXHIBIT 11
<TABLE>
<CAPTION>
BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE
EARNINGS
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1995
------------------------------------------------------
------------------------------------------------------
(In Thousands, except per share data)
<S> <C> <C> <C>
Weighted average common and common equivalent shares
outstanding (1):
Average Common Stock outstanding 120,937 129,636 130,353
Average Common Stock equivalents:
Common Stock issuable assuming conversion of CAP 26,474 18,800 16,623
units
Common Stock issuable under employee benefit plans 437 419 780
------------------------------------------------------
Total Weighted Average common and common
equivalent shares outstanding 147,848 148,855 147,756
======================================================
Net income $ 613,330 $ 490,638 $ 240,611
Preferred Stock Dividend requirements (23,833) (24,493) (25,137)
Income adjustment (net of tax) applicable
to deferred compensation arrangements 31,800 20,205 12,153
------------------------------------------------------
Adjusted net income $ 621,297 $ 486,350 $ 227,627
======================================================
Earnings per share $ 4.20 $ 3.27 $ 1.54
======================================================
</TABLE>
(1) Adjusted to reflect stock Dividends
EXHIBIT 12
<TABLE>
<CAPTION>
THE BEAR STEARNS COMPANIES INC.
STATEMENT RECOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except for ratio)
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
------------------ ----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Earnings before taxes
on income $ 1,013,690 $ 834,926 $ 388,082 $ 642,799 $ 614,398
------------------ ----------------- ------------------ ------------------ ------------------
Add: Fixed Charges
Interest 2,551,364 1,981,171 1,678,515 1,023,866 710,086
Interest factor in rents 26,516 25,672 24,594 21,772 20,084
------------------ ----------------- ------------------ ------------------ ------------------
Total fixed charges 2,577,880 2,006,843 1,703,109 1,045,638 730,170
------------------ ----------------- ------------------ ------------------ ------------------
Earnings before fixed charges,
and provision for
income taxes $ 3,591,570 $ 2,841,769 $ 2,091,191 $ 1,688,437 $ 1,344,568
================== ================= ================== ================== ==================
Ratio of Earnings to Fixed
Charges 1.4 1.4 1.2 1.6 1.8
================== ================= ================== ================== ==================
</TABLE>
EXHIBIT 13
<TABLE>
<CAPTION>
The Bear Stearns Companies Inc.
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
June 30, June 30, June 30, June 30, June 30,
In thousands, except share and employee data 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $ 6,077,278 $ 4,963,863 $ 3,753,572 $ 3,440,638 $ 2,853,185
Interest expense 2,551,364 1,981,171 1,678,515 1,023,866 710,086
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,525,914 2,982,692 2,075,057 2,416,772 2,143,099
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses
Employee compensation and benefits 1,726,931 1,469,448 1,080,487 1,227,061 1,037,099
Other 785,293 678,318 606,488 546,912 491,602
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,512,224 2,147,766 1,686,975 1,773,973 1,528,701
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,013,690 834,926 388,082 642,799 614,398
Provision for income taxes 400,360 344,288 147,471 255,834 251,951
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 613,330 $ 490,638 $ 240,611 $ 386,965 $ 362,447
====================================================================================================================================
Net income applicable to common shares $ 589,497 $ 466,145 $ 215,474 $ 362,592 $ 355,696
====================================================================================================================================
FINANCIAL POSITION
Total assets $121,433,535 $92,085,157 $ 74,597,160 $ 67,392,018 $ 57,439,505
Long-term borrowings $ 8,120,328 $ 6,043,614 $ 4,059,944 $ 3,408,096 $ 1,883,123
Stockholders' equity $ 3,626,371(1,2) $ 2,895,414(1) $ 2,502,461(1) $ 2,316,566(1) $ 1,776,530
Common shares outstanding (3) 151,561,465 151,274,714 151,465,966 149,208,420 149,353,528
====================================================================================================================================
PER SHARE DATA
Earnings per share (3,4) $ 4.20 $ 3.27 $ 1.54 $ 2.50 $ 2.47
Cash dividends declared per common share $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Book value per common share (3) $ 19.56 $ 16.03 $ 13.34 $ 12.31 $ 10.32
====================================================================================================================================
OTHER DATA
Return on average common equity 27.9% 25.6% 13.5% 23.3% 28.8%
Profit margin (5) 28.7% 28.0% 18.7% 26.6% 28.7%
Employees 8,309 7,749 7,481 7,321 6,306
====================================================================================================================================
<FN>
- -----------------
1. Includes $150 million of Exchangeable Preferred Income Cumulative Shares
which were issued by a subsidiary of the Company. See Note 8 of Notes to
Consolidated Financial Statements.
2. Includes $200 million of Guaranteed Preferred Beneficial Interests in Company
Subordinated Debt Securities which were issued by a subsidiary of the
Company. See Note 8 of Notes to Consolidated Financial Statements.
3. Adjusted to reflect stock dividends.
4. See Note 1 of Notes to Consolidated Financial Statements.
5. Represents the ratio of income before provision for income taxes to revenues,
net of interest expense.
</FN>
</TABLE>
6
<PAGE>
The Bear Stearns Companies Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's principal business activities, investment banking, securities
trading and brokerage are by their nature, highly competitive and subject to
various risks, in particular, volatile trading markets and fluctuations in the
volume of market activity. Consequently, the Company's net income and revenues
in the past have been, and are likely to continue to be, subject to wide
fluctuations, reflecting the impact of many factors, including securities market
conditions, the level and volatility of interest rates, competitive conditions,
and the size and timing of transactions. Certain statements contained in this
discussion are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks and uncertainties, including those previously
mentioned.
BUSINESS ENVIRONMENT
The business environment during fiscal 1997 was generally characterized by a
stable economy and low levels of inflation. This economic backdrop resulted in
improved financial market conditions and heightened investor activity. The
financial markets were characterized by rising domestic equity markets on strong
investor volume, active fixed income markets and increased underwriting and
merger and acquisition activity. The result of these conditions was reflected in
the Company's improved commissions, principal transactions and investment
banking revenues.
US bond markets experienced volatility throughout fiscal 1997. A
strong rally in the US bond market during the first six months of the year was
characterized by heavy trading and decreasing interest rates which resulted from
moderate economic growth and benign inflation levels. At the outset of the third
quarter, the market experienced a general rise in interest rates due to
inflationary concerns.
Equity markets were characterized by record flows of capital into
equity funds, with the major indices reaching record levels. The Dow Jones
Industrial Average surged over 2,000 points, reaching 7,672 by the end of the
fiscal year. The Standard & Poor's 500 Index climbed 32% and the New York Stock
Exchange average daily trading volume rose 21%.
The global market environment during fiscal 1997 reflected improved
conditions over the prior year. The Company continued to develop global
distribution in equity and fixed income areas, resulting in significant
increases in international commissions for fiscal year 1997 versus fiscal year
1996. The Company also increased its international base by expanding its
securities lending expertise to Europe and Asia.
The business environment during fiscal 1996 was generally
characterized by moderate economic growth and declining interest rates, which
contributed to strong domestic equity and fixed income markets, and robust
underwriting and merger and acquisition activity. Bond prices rose steadily for
most of the year, and interest rates fell to their lowest levels of the last
three years. The New York Stock Exchange and the NASDAQ average daily trading
volumes reached new levels in fiscal year 1996. Additionally, major stock
indices, such as the Dow Jones Industrial Average, the Standard & Poor's 500
Index, and the NASDAQ Composite, climbed into new territory, each setting an
impressive series of records. Additionally, the favorable environment created by
rising stock prices and falling interest rates provided a strong investment
banking backdrop. These improved financial conditions led to increased investor
activity, resulting in strong commissions and trading revenues.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The Company reported net income of $613.3 million, or $4.20 per
share, in fiscal 1997, which represented an increase of 25.0% from $490.6
million, or $3.27 per share, in fiscal 1996. The Company reported net income of
$240.6 million, or $1.54 per share, in fiscal 1995.
Revenues, net of interest expense ("net revenues"), increased 18.2% to
$3.5 billion in fiscal 1997 from $3.0 billion in fiscal 1996, reflecting
increases in all revenue categories. Net revenues in fiscal 1995 amounted to
$2.1 billion.
Commission revenues in fiscal 1997 increased 6.7% to $732.3 million,
from $686.5 million in fiscal 1996. Commission revenues derived from retail and
institutional investors increased, reflecting higher levels of activity
throughout the period. Securities clearance revenues increased, reflecting
higher levels of activity and continued growth in the Company's client base.
Fiscal 1996 commission revenues improved 25.5% from $546.9 million in fiscal
1995, reflecting higher levels of activity and continued growth of the
Company's securities clearance client base.
Revenues from principal transactions in fiscal 1997 increased 26.8% to
$1.6 billion from $1.2 billion in fiscal 1996, reflecting increases in revenues
from the Company's fixed income activities, particularly in the mortgage-backed
securities, high yield and corporate bond areas. These increases reflected a
favorable interest rate environment and increased customer demand. Increases
were also noted in the Company's equity trading activities, particularly in the
international equity trading and over-the-counter market-making areas.
Additionally, revenues from the Company's derivatives activities increased as
the number of transactions increased from the prior year. Fiscal 1996 principal
transaction revenues increased 47.1% from $842.6 million in fiscal 1995,
reflecting increases in revenues from the Company's fixed income and equity
trading activities.
Investment banking revenues in fiscal 1997 increased 9.2% to $663.2
million from $607.3 million in fiscal 1996. Underwriting revenues increased due
to increases in volume, most notably from emerging markets, investment-grade
debt and common equity issuances. Merger and acquisition fees also increased,
reflecting increased activity. Fiscal 1996 investment banking revenues increased
74.1% from $348.9 million in fiscal 1995, reflecting increases in underwriting
revenues due to higher new issue volume and increases in merger and acquisition
fees.
Net interest and dividends (revenues from interest and net dividends
less interest expense) in fiscal 1997 increased 23.1% to $507.1 million, from
$412.1 million in fiscal 1996, principally due to record levels of customer
margin debt and short account balances. Average interest-bearing margin debt
balances were $30.6 billion and reached $38.1 billion at June 30, 1997, up from
$25.6 billion at June 30, 1996. Average free-credit balances were $7.6 billion
and reached $8.9 billion at June 30, 1997, up from $6.8 billion at June 30,
1996. The Company also experienced significant growth in its customer securities
lending activities attributable to increased customer short selling. Average
customer short account balances were $40.3 billion and reached $51.3 billion at
June 30, 1997, up from $32.3 billion at June 30, 1996. Net interest and
dividends in fiscal 1996 increased 33.5% from $308.8 million in fiscal 1995,
principally due to the large increase in customer margin debt and growth in
securities lending activities associated with the Company's securities clearance
client base.
Employee compensation and benefits in fiscal 1997 increased 17.5% to
$1.7 billion, from $1.5 billion in fiscal 1996. The increase was principally
attributable to increased incentive and discretionary bonuses associated with
the increase in net revenues and earnings in fiscal 1997. Employee compensation
and benefits, as a percentage of net revenues, decreased to 49.0% for fiscal
1997, from 49.3% in fiscal 1996. Employee compensation and benefits in fiscal
1996 increased 36.0%, from $1.1 billion in fiscal 1995, reflecting increased
incentive and discretionary bonuses associated with the increase in net revenues
and earnings in fiscal 1996.
Other non-interest expenses in fiscal 1997 increased 15.8% to $785.3
million, from $678.3 million in fiscal 1996. Floor brokerage, exchange and
clearance fees increased 9.0% in fiscal 1997, reflecting the increase in the
volume of securities transactions processed during the fiscal year. The balance
of other non-interest expenses increased 17.4% in fiscal 1997, reflecting
increases in depreciation and amortization, communications expense and
professional fees. These increases are primarily the result of the Company's
continued investment in technological upgrades. Other non-interest expenses in
fiscal 1996 increased 11.8% from $606.5 million in fiscal 1995, principally
reflecting expansion of the Company's business activities.
The decrease in the Company's effective tax rate to 39.5% in fiscal
1997, from 41.2% in fiscal 1996, was principally attributable to higher levels
of tax preference items. The effective tax rate in fiscal 1996 increased from
38.0% in fiscal 1995, due to increases in state and local taxes.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
Financial Leverage
The Company maintains a highly liquid balance sheet with a majority of the
Company's assets consisting of marketable securities inventories, which are
marked-to-market daily, and collateralized receivables arising from
customer-related and proprietary securities transactions. Collateralized
receivables consist of resale agreements secured predominantly by US government
and agency securities, and customer margin loans and securities borrowed, which
are typically secured by marketable corporate debt and equity securities. The
nature of the Company's business as a securities dealer requires it to carry
significant levels of securities inventories in order to meet its customer and
proprietary trading needs. Additionally, the Company's role as a financial
intermediary for customer activities which it conducts on a principal basis,
together with its customer-related activities attributable to its clearance
business, results in significant levels of customer-related balances, including
customer margin debt, securities lending and repurchase activity. Accordingly,
the Company's total assets and financial leverage can fluctuate significantly,
depending largely upon economic and market conditions, volume of activity,
customer demand, and underwriting commitments.
The Company's total assets at June 30, 1997 increased to $121.4
billion, from $92.1 billion at June 30, 1996. The increase was primarily
attributable to the growth in financial instruments owned, securities borrowed,
and securities purchased under agreements to resell. The Company funded this
increase with secured borrowings (principally repurchase agreements), unsecured
commercial paper and medium-term notes, and an increase in the Company's
capital, including long-term borrowings and stockholders' equity.
The Company's ability to support increases in total assets is a
function of its ability to obtain short-term secured and unsecured funding and
its access to sources of long-term capital. The Company continuously monitors
the adequacy of its capital base which is a function of asset quality and
liquidity. Highly liquid assets such as US government and agency securities
typically are funded by the use of repurchase agreements and securities lending
arrangements, which require very low levels of margin. In contrast, assets of
lower quality or liquidity require higher levels of margin or
overcollateralization, and consequently increased levels of capital, in order to
obtain secured financing. Accordingly, the mix of assets being held by the
Company significantly influences the amount of leverage the Company can employ
and the adequacy of its capital base.
Funding Strategy
The Company's general funding strategy provides for the diversification of its
short-term funding sources in order to maximize liquidity. Sources of short-term
funding consist principally of collateralized borrowings, including repurchase
transactions and securities lending arrangements, customer free-credit balances,
unsecured commercial paper, medium-term notes, and bank borrowings generally
having maturities from overnight to one year. Repurchase transactions, whereby
securities are sold with a commitment for repurchase by the Company at a future
date, represent the dominant component of secured short-term funding. The
Company continued to increase its utilization of medium-term note financing
during fiscal 1997 in order to extend maturities and achieve additional
diversification of its funding sources.
In addition to short-term funding sources, the Company utilizes
long-term senior debt and medium-term notes as a longer-term source of unsecured
financing.
The Company maintains an alternative funding strategy focused on the
liquidity and self-funding ability of the underlying assets. The objective of
the strategy is to maintain sufficient sources of alternative funding to enable
the Company to fund debt obligations maturing within one year without issuing
any new unsecured debt, including commercial paper. The most significant source
of alternative funding is the Company's ability to hypothecate or pledge its
unencumbered assets as collateral for short-term funding.
As part of the Company's alternative funding strategy, the Company
regularly monitors and analyzes the size, composition and liquidity
characteristics of the assets being financed and evaluates its liquidity needs
in light of current market conditions and available funding alternatives. A key
factor in this analysis is determining margin levels for each asset category
that may be required by a lender in providing secured financing in accordance
with legal and regulatory guidelines and market practices. The next component of
the analysis is the determination of the estimated length of time that would be
required to convert the asset into cash, based upon the depth of the market in
which the asset is traded versus the size of the position, assuming conventional
settlement periods. For each class of assets, the Company categorizes the margin
requirement by maturity from overnight to in excess of one year. The Company
attempts to match the schedule of its liabilities with its prospective funding
needs in terms of timing and amount.
Through the use of this analysis, the Company can continuously
evaluate the adequacy of its equity base and the schedule of maturing term-debt
supporting its present asset levels. The Company can then seek to adjust its
maturity schedule, as necessary, in light of market conditions and funding
alternatives.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company also maintains a committed revolving-credit facility (the
"facility") totaling $2.0 billion which permits borrowing on a secured basis by
Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp.
("BSSC") and certain affiliates. The facility provides that up to $1.0 billion
of the total facility may be borrowed by the Company on an unsecured basis.
Secured borrowings can be collateralized by both investment-grade and
non-investment-grade financial instruments. In addition, the facility provides
for defined margin levels on a wide range of eligible financial instruments that
may be pledged under the secured portion of the facility. There were no
borrowings outstanding under the facility at June 30, 1997.
Capital Resources
The Company conducts a substantial portion of its operating activities within
its regulated broker dealer subsidiaries Bear Stearns, BSSC, Bear, Stearns
International Limited ("BSIL") and Bear Stearns International Trading Limited
("BSIT"). In connection therewith, a substantial portion of the Company's
long-term borrowings and equity has been used to fund investments in and
advances to these broker dealer subsidiaries. The Company regularly monitors the
nature and significance of assets or activities conducted outside the broker
dealer subsidiaries and attempts to fund such assets with either capital or
borrowings having maturities consistent with the nature and liquidity of the
assets being financed.
During fiscal 1997, the Company expanded its long-term borrowing base
to $8.1 billion through the issuance of $3.1 billion of long-term debt, which
along with the growth in retained earnings and the issuance of $200 million of
Guaranteed Preferred Beneficial Interests in Company Subordinated Debt
Securities, increased total capital to $11.7 billion from $8.9 billion in fiscal
1996. The increases in the Company's long-term borrowings and equity capital
base reflect both the availability of long-term financing opportunities and the
growth in the Company's balance sheet and liquidity needs. Long-term debt of
$6.5 billion and $5.1 billion had maturities beyond one year at June 30, 1997
and June 30, 1996, respectively.
At June 30, 1997, the Company's long-term debt ratings were as
follows:
- --------------------------------------------------------------------------------
Moody's Investors Service A2
Standard & Poor's Rating Group A
IBCA Inc. A+
Thomson BankWatch AA-
- --------------------------------------------------------------------------------
In September 1997, the Company entered into a 99-year ground lease at 383
Madison Avenue, New York City. The Company expects to develop and build an
office tower on this site which will serve as its new world headquarters. The
new facility will be completed by the expiration of the current lease at 245
Park Avenue in 2002. The Company expects to fund the construction of the new
building through a combination of internally generated funds and long-term debt.
The new facility will allow the Company to consolidate its New York City real
estate requirements into one facility and will allow expansion related to future
growth.
The Company's Capital Accumulation Plan for Senior Managing Directors
(the "CAP Plan") allows participants to defer portions of their annual
compensation and ultimately to receive shares of the Company's Common Stock in
satisfaction thereof. In connection with the CAP Plan, during the fiscal year
ended June 30, 1997, the Company repurchased a total of 7,230,103 shares of
Common Stock through open market transactions at a cost of approximately $187.1
million. During the year ended June 30, 1997, the participants of the CAP Plan
had approximately $246.9 million of fiscal 1997 compensation deferrals and
earnings on previous deferrals. This amount was credited to participants'
deferred compensation accounts in the form of 7,494,518 shares at a cost of
approximately $196.1 million, and the remaining balance of $50.8 million was
credited to the participants' deferred compensation cash accounts. The Company
intends, subject to market conditions, to continue to purchase in future periods
a sufficient number of shares of Common Stock in the open market to enable the
Company to issue shares with respect to all compensation deferred and any
additional amounts allocated to participants under the CAP Plan.
During the fiscal year ended June 30, 1997, the Company adopted a
Stock Repurchase Plan (the "Repurchase Plan"). The Repurchase Plan allows for
the purchase of up to $250.0 million of Common Stock from time to time, in the
open market or otherwise, at prices then prevailing. Purchases of shares under
the Repurchase Plan will be in addition to any shares regularly purchased under
the CAP Plan. As of September 3, 1997, there have been no purchases under the
Repurchase Plan.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cash Flows
Cash and cash equivalents increased to $1.2 billion at the end of fiscal 1997,
from $127.8 million at the end of fiscal 1996, an increase of $1.1 billion.
Fiscal 1996 year-end cash and cash equivalents decreased $572.7 million from
$700.5 million at the end of fiscal 1995. Fiscal 1995 year-end cash and cash
equivalents increased $405.9 million from $294.6 million at the end of fiscal
1994. Cash provided from financing activities was primarily used to support the
growth in operating activities in each of the last three fiscal years.
Cash used in operating activities in fiscal 1997 was $5.4 billion. The
usage was primarily attributable to increases in financial instruments owned of
$12.2 billion, securities borrowed of $11.1 billion and securities purchased
under agreements to resell of $3.8 billion. This increase was partially offset
by increases in customer payables of $8.0 billion, financial instruments sold,
but not yet purchased of $6.9 billion, and securities sold under agreements to
repurchase of $6.1 billion.
Cash used in operating activities in fiscal 1996 was $3.6 billion. The
usage was primarily attributable to increases in securities purchased under
agreements to resell of $5.6 billion, securities borrowed of $5.0 billion and
financial instruments owned of $4.7 billion. This increase was partially offset
by increases in customer payables of $5.7 billion and securities sold under
agreements to repurchase of $3.8 billion.
Cash used in operating activities in fiscal 1995 was $823.1 million.
The usage was primarily attributable to increases in financial instruments owned
of $7.1 billion and securities borrowed of $3.6 billion, partially offset by
increases in financial instruments sold, but not yet purchased of $2.9 billion
and securities sold under agreements to repurchase of $2.7 billion, and
decreases in cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations of $1.7 billion and customer
receivables of $1.3 billion.
Cash provided by financing activities in each of the three fiscal
years ended June 30, 1997, 1996 and 1995 was primarily attributable to increased
net borrowings which were used to support the Company's growth over the same
periods while taking advantage of favorable long-term financing opportunities.
Investing activities in fiscal 1997 used $230.2 million primarily for
purchases of property, equipment and leasehold improvements of $137.3 million
and purchases of investment securities and other assets of $108.5 million.
Investing activities in fiscal 1996 used $203.5 million primarily for
purchases of $134.3 million of investment securities and other assets, as well
as purchases of $88.9 million of property, equipment and leasehold improvements.
Investing activities in fiscal 1995 used $69.2 million of cash
primarily for purchases of $100.3 million of property, equipment and leasehold
improvements, partially offset by proceeds of $32.3 million from the sale of
investment securities and other assets.
Regulated Subsidiaries
As registered broker dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Securities Exchange Act of 1934, the New York Stock
Exchange, Inc. and the Commodity Futures Trading Commission, which are designed
to measure the general financial soundness and liquidity of broker dealers.
Bear Stearns and BSSC have consistently operated in excess of the minimum net
capital requirements imposed. BSIL and BSIT, London-based broker dealer
subsidiaries, are subject to the regulatory capital requirements of the
Securities and Futures Authority, a self-regulatory organization established
pursuant to the United Kingdom Financial Services Act of 1986.
Merchant Banking and High Yield Securities
As part of the Company's merchant banking activities, it participates from time
to time in principal investments in leveraged acquisitions. As part of these
activities, the Company originates, structures and invests in merger,
acquisition, restructuring and leveraged capital transactions, including
leveraged buyouts. The Company's principal investments in these transactions are
generally made in the form of equity investments or subordinated loans and have
not required significant levels of capital investment. At June 30, 1997, the
Company held direct equity investments in ten leveraged transactions with an
aggregate carrying value of approximately $36.2 million. The Company did not
make any significant direct investments in leveraged acquisitions during fiscal
1997.
As part of the Company's fixed income securities activities, the
Company participates in the trading and sale of high yield, non-investment-grade
debt securities, non-investment-grade mortgage loans and the securities of
companies that are the subject of pending bankruptcy proceedings (collectively
"high yield securities"). Non-investment-grade mortgage loans are principally
secured by residential properties and include both non-performing loans and real
estate owned. At June 30, 1997 and 1996, the Company held high yield securities
of $1.6 billion and $1.1 billion, respectively, in long inventory, and $0.3
billion and $0.1 billion, respectively, in short inventory. These investments
generally involve greater risk than investment-grade debt securities due to
credit considerations, liquidity of secondary trading markets, and vulnerability
to general economic conditions. The level of the Company's high yield securities
inventories, and the impact of
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
such activities upon the Company's results of operations, can fluctuate from
period to period as a result of customer demands and economic and market
considerations. Bear Stearns' Risk Committee continuously monitors exposure to
market and credit risk with respect to high yield securities inventories and
establishes limits with respect to overall market exposure and concentrations of
risk by both individual issuer and industry group.
Derivative Financial Instruments
Derivative financial instruments represent contractual commitments between
counterparties which derive their value from changes in the underlying interest
rate, currency exchange rate, index (e.g., S&P 500), reference rate (e.g.,
LIBOR), or asset value referenced in the related contract. Some derivatives,
such as futures contracts, certain options and indexed referenced warrants can
be traded on an exchange. Other derivatives, such as interest rate and currency
swaps, caps, floors, collars and swaptions, equity swaps and options, structured
notes and forward contracts are negotiated in the over-the-counter markets.
Derivatives generate both on- and off-balance-sheet considerations depending on
the nature of the contract.
The Company is engaged as a dealer in over-the-counter derivatives
and, accordingly, enters into transactions involving derivative instruments as
part of its customer-related and proprietary trading activities. The Company's
dealer activities require it to make markets and trade a variety of derivative
instruments. In connection with these activities, the Company attempts to
mitigate its exposure to market risk by entering into essentially offsetting
hedging transactions which may include over-the-counter derivative contracts or
the purchase or sale of interest-bearing securities, equity securities,
financial futures and forward contracts. The Company also utilizes derivative
instruments in order to hedge proprietary market-making and trading activities.
In this regard, the utilization of derivative instruments is designed to reduce
or mitigate market risks associated with holding dealer inventories or in
connection with arbitrage-related trading activities. The Company also utilizes
interest rate and currency swaps to hedge its fixed-rate debt issuances as part
of its asset and liability management.
In connection with the Company's dealer activities, the Company
formed Bear Stearns Financial Products Inc. ("BSFP") and Bear Stearns Trading
Risk Management Inc. ("BSTRM"). BSFP and BSTRM were established to provide
clients with a AAA-rated counterparty offering a wide range of global fixed
income and equity derivative products. Additionally, the Company is able to
provide counterparties with the choice of either a termination or
continuation structure.
As of June 30, 1997 and 1996, the Company had notional/ contract
amounts of $353.0 billion and $288.2 billion, respectively, of derivative
financial instruments, of which $62.0 billion and $69.2 billion, respectively,
were listed futures and option contracts. The aggregate notional/contract value
of derivative contracts is a reflection of the level of activity and does not
represent the amounts that are recorded in the Consolidated Statements of
Financial Condition. The Company's derivative financial instruments, which
either are used to hedge trading positions or are part of its derivative dealer
activities, are marked to fair value. Fair value on exchange-traded derivative
financial instruments is based upon quoted market values, while over-the-counter
derivative financial instruments are generally valued at mid-market, based upon
dealer price quotations and valuation pricing models. Valuation pricing models
consider time value and volatility factors underlying each of the financial
instruments, as well as other relevant economic factors such as market, credit
and liquidity risk. The unrealized gains or losses are recorded in net income.
Unrealized gains and losses on derivative financial instruments used
to hedge the Company's long-term debt issuances are deferred, and related income
and expense are recorded on an accrual basis, together with the interest expense
incurred on the underlying debt instrument. The Company hedges its long-term
debt issuances principally by converting fixed-rate instruments to floating-rate
debt, using interest rate swaps, generally based on LIBOR. This strategy allows
the Company to manage interest rate exposure on its assets and liabilities, and
has enabled the Company to reduce its interest expense by $29.4 million, $15.9
million and $21.1 million during fiscal years 1997, 1996 and 1995, respectively.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
EFFECTS OF INFLATION
Since the Company's assets are primarily recorded at their current market value,
they are not significantly affected by inflation. However, the rate of inflation
affects the Company's expenses, such as employee compensation, office leasing
costs and communications charges, which may not be readily recoverable in the
price of services offered by the Company. To the extent that inflation causes
interest rates to rise and has other effects on the securities markets and on
the value of securities held in inventory, it may adversely affect the Company's
financial position and results of operations.
EFFECTS OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," effective for
transactions occurring after December 31, 1996. Certain provisions of this
statement relating to repurchase agreements, securities lending transactions and
similar transactions have been deferred by SFAS 127 and will become effective
after December 31, 1997.
SFAS 125 introduces the financial-components approach which results in
the recognition of financial assets based upon control and the derecognition of
financial assets when control has been surrendered. SFAS 125 requires that, in
cases where the secured party has taken control, debtors reclassify financial
assets that are pledged as collateral and that secured parties recognize those
assets and their obligation to return them. If the secured party is permitted to
sell or repledge such collateral on reverse repurchase agreements where the
debtor does not have the right to redeem the collateral on short notice, the
secured party shall recognize the collateral as its assets and also the
obligation to return it. Based on this approach, SFAS 125 will affect the
current accounting for reverse repurchase and repurchase agreements and
securities lending transactions. The effective provisions of SFAS 125 have not
had a material impact on the financial condition or operations of the
Company; however, the Company has not yet determined the effect upon the
financial condition or operations of the Company relating to the deferred
provisions.
In February 1997, the FASB issued SFAS 128, "Earnings Per Share,"
which will be effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Under this standard, the Company
will replace its disclosure of "primary" earnings per share with "basic"
earnings per share. Basic earnings per share excludes dilution and is computed
by dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Prior period amounts must be
restated. The impact on previously reported primary earnings per share will be
immaterial. Diluted earnings per share, as required under the new standard, is
computed similarly to fully diluted earnings per share under existing accounting
principles.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income," which requires businesses to disclose comprehensive income and its
components in a prominent position on the face of the financial statements. The
effect of SFAS 130 will not be material to the Company's financial statement
disclosure.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," which will be effective for the Company
beginning January 1, 1998. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company believes that the
segment information required to be disclosed under SFAS 131 will be more
comprehensive than previously provided, including expanded disclosure of income
statement and balance sheet items for each of its reportable operating segments.
However, the Company has not yet determined the impact of this statement on the
Company's financial statement disclosure.
41
<PAGE>
The Bear Stearns Companies Inc.
RISK MANAGEMENT
Overall
The Company's principal business activities by their nature engender significant
market and credit risks. Managing these risks is critical to the success and
stability of the Company. As a result, comprehensive risk management policies
and procedures have been established to identify, control and monitor each of
these major risks. Additionally, the Company's diverse portfolio of business
activities helps to reduce the impact that volatility in any particular market
may have on its net revenues. In addition to market risk, the Company is also
subject to credit risk, operating risk and funding risk. Funding risk is
discussed in the Liquidity and Capital Resources section of Management's
Discussion and Analysis.
Managing risk at the Company begins first and foremost with the
expertise and experience of trading department management. Senior Managing
Directors in each trading department have extensive knowledge of the markets and
activities in which they do business. Their experience and insight are
supplemented by risk management policies and procedures intended to monitor and
evaluate the Company's risk profile.
The cornerstone of the Company's risk management practices is constant
communication between trading department management and senior management
concerning inventory positions and market risk profile. This process, which
occurs on a daily basis, culminates each week with the trading departments
making formal reports of positions, profits and losses and trading strategies to
Bear Stearns' Risk Committee (the "Risk Committee"). The Risk Committee,
comprised of Senior Managing Directors from each of the various trading
departments, is chaired by Alan C. Greenberg, Chairman of the Board of the
Company and of Bear Stearns. The Risk Committee meets weekly and has overall
responsibility for oversight of the trading departments and their related
trading strategies.
The risk management process encompasses many units, including the
Controller's Department, Operations and the Risk Management Department, and is
intended to support and enforce the Company's policies and procedures with
respect to market risk. As part of its daily risk management procedures the
Company marks all of its inventory to market and the Controller's Department
provides to senior management daily profit and loss statements covering all
trading departments. The Controller's Department and Operations monitor position
and balance sheet information through reconciliation procedures.
The Risk Management Department, which was formed in 1988, is
independent of all trading areas and reports directly to the Risk Committee. The
goals of the department are to understand the risk profile of each trading area,
to articulate large trading or position risks to senior management, to provide
traders with perspectives on their positions and to ensure accurate
mark-to-market pricing. The department's staffing and responsibilities have
grown with the Company's trading activities.
The Risk Management Department, together with trading department
management, reviews the age and composition of the departments' proprietary
accounts and the profits and losses of each portfolio on a daily basis. This is
to ensure that trading strategies are being adhered to within acceptable risk
parameters.
Bear Stearns' Credit Policy Committee and its subcommittee, the Global
Credit Committee, establish and review appropriate credit limits for
institutional customers. The Credit Policy Committee is primarily comprised of
Senior Managing Directors who are generally not involved in the operations of
the departments seeking credit approval for customers. The Credit Policy
Committee is scheduled to meet weekly and establishes policies and guidelines,
which the Global Credit Committee enforces by setting credit limits and by
monitoring exposure of customers seeking repurchase and resale agreement
facilities, derivative financial instruments and other forms of secured and
unsecured credit.
42
<PAGE>
RISK MANAGEMENT
Market Risk
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Market risk is inherent to both derivative and non-derivative financial
instruments, and accordingly, the scope of the Company's market risk management
procedures extends beyond derivatives to include all market risk sensitive
financial instruments. The Company's exposure to market risk is directly related
to its role as a financial intermediary in customer-related transactions and to
its proprietary trading and arbitrage activities.
The Company makes dealer markets in investment-grade corporate debt,
non-investment-grade corporate ("high yield") debt, US government securities,
sovereign debt, mortgages and mortgage-backed securities, and municipal bonds.
The Company is also an active market-maker and conducts block trading activities
in both the listed and over-the-counter equity markets. In connection with these
activities, the Company may be required to maintain significant inventories in
order to ensure availability and to facilitate customer order flow. The Company
is also engaged as a dealer in over-the-counter derivatives, and accordingly
enters into transactions such as interest rate and cross-currency swaps,
over-the-counter swaps and options on foreign currencies and equity swaps and
options as part of its customer and proprietary trading activities. In
connection with these activities the Company attempts to mitigate its exposure
to such market risk by entering into hedging transactions which may include
over-the-counter derivative contracts or the purchase or sale of securities,
financial futures, options on futures or forward contracts.
The Company's arbitrage activities are designed to take advantage of
market price discrepancies between securities trading in different markets or
between related products or derivative securities. Arbitrage activities involve
maintaining offsetting positions in other financial instruments. In many
instances, the Company may be required to purchase or sell derivative financial
instruments as part of the arbitrage of a cash market security. These
transactions may involve forward-settling transactions such as forwards or
futures, where the objective may be to capture differences in the time value of
money, or options transactions, which seek to capture differences between the
expected and actual volatility of the underlying instrument. The Company
attempts to mitigate its exposure to market risk with respect to these
activities by entering into hedging transactions.
Following is a discussion of the Company's primary market risk
exposures as of June 30, 1997, including a discussion of how those exposures are
currently managed.
Interest Rate Risk
Interest rate risk is a consequence of maintaining inventory positions and
trading in interest rate sensitive financial instruments. In connection with the
Company's dealer and arbitrage activities, including market-making in
over-the-counter derivative contracts, the Company exposes itself to interest
rate risk, arising from changes in the level or volatility of interest rates,
mortgage prepayment speeds or the shape and slope of the yield curve. The
Company's corporate bond activities also expose it to the risk of loss related
to changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating or credit perception affect the value of
financial instruments. Credit risk resulting from default on counterparty
obligations is discussed in the credit risk section. The Company attempts to
hedge its exposure to interest rate risk by entering into transactions such as
interest rate swaps, options, eurodollar and US government securities and
futures and forward contracts designed to reduce the Company's risk profile.
Foreign Exchange Rate Risk
Foreign exchange rate risk arises from the possibility that changes in foreign
exchange rates will impact the value of financial instruments. When the Company
buys or sells a foreign currency or a financial instrument denominated in a
currency other than US dollars, exposure exists from a net open currency
position. Until the position is covered by selling or buying an equivalent
amount of the same currency or by entering into a financing arrangement
denominated in the same currency, the Company is exposed to a risk that the
exchange rate may move against it. The principal currencies creating foreign
currency risk for the Company were the German deutsche mark and the Japanese
yen. The Company hedges the risk arising from its foreign exchange activities
primarily through the use of currency swaps, options, forwards and futures.
Equity Price Risk
The Company is exposed to equity price risk as a consequence of making markets
in equity securities and equity derivatives. Equity price risk results from
changes in the level or volatility of equity prices which affect the value of
equity securities or instruments that derive their value from a particular
stock, a basket of stocks or a stock index. The Company attempts to reduce the
risk of loss inherent in its inventory in equity securities by entering into
hedging transactions, including equity options, designed to mitigate the
Company's market risk profile.
43
<PAGE>
RISK MANAGEMENT
Value at Risk
The estimation of potential losses that could arise from changes in market
conditions is typically accomplished through the use of statistical models which
seek to predict risk of loss based on historical price and volatility patterns.
Such statistical models are commonly known as value at risk. Value at risk is
used to describe a probabilistic approach to measuring the exposure to market
risk. This approach utilizes statistical concepts to estimate the probability of
the value of a financial instrument falling above or below a specified amount.
The calculation utilizes the standard deviation of historical changes in value
of the market risk sensitive financial instruments (i.e., volatility) to
estimate the amount of change in the current value that could occur at a
specified probability level.
Measuring market risk using statistical risk management models has
recently become the main focus of risk management efforts by many companies
whose earnings are significantly exposed to changes in the fair value of
financial instruments. The Company believes that statistical models alone do not
provide a reliable method of monitoring and controlling risk. While value at
risk models are relatively sophisticated, the quantitative risk information
generated is limited by the parameters established in creating the related
models. The financial instruments being evaluated may have features which may
trigger a potential loss in excess of the amounts previously disclosed if the
changes in market rates or prices exceed the confidence level of the model used.
Therefore, such models do not substitute for the experience or judgment of
senior management and traders, who have extensive knowledge of the markets and
adjust positions and revise strategies as they deem necessary. The Company uses
these models only as a supplement to other risk management tools.
For purposes of new Securities and Exchange Commission disclosure
requirements, the Company has performed an entity-wide value at risk analysis of
virtually all of the Company's financial assets and liabilities, including all
reported financial instruments owned and sold, repurchase and resale agreements,
and funding assets and liabilities. The value at risk related to non-trading
financial instruments has been included in this analysis and not reported
separately because the amounts were not material. The calculation is based on a
methodology which uses a one-day interval and a 95% confidence level. Interest
rate and foreign exchange rate risk use a Monte Carlo value at risk approach.
For interest rates, each country's yield curve has five factors which describe
possible curve movements. These were generated from principal component
analysis. In addition, volatility and spread risk factors were used, where
appropriate. Inter-country correlations were also used. Equity price risk was
measured using a historical value at risk. Equity derivatives were treated as
correlated with various indices, of which the Company used forty. Parameter
estimates, such as volatilities and correlations, were based on daily tests
through June 30, 1997.
This table illustrates the value at risk for each component of market
risk as of June 30, 1997:
In millions
-------------------------------------------------------
Market Risk
Interest rate $ 11.6
Currency 3.2
Equity 8.9
-------------------------------------------------------
44
<PAGE>
RISK MANAGEMENT
As previously discussed, the Company utilizes a wide variety of market risk
management methods, including: limits for each trading activity; marking all
positions to market on a daily basis; daily profit and loss statements; position
reports; aged inventory position reports; and independent verification of all
inventory pricing. Additionally, trading department management reports
positions, profits and losses, and trading strategies to the Risk Committee on a
weekly basis. The Company believes that these procedures, which stress timely
communication between trading department management and senior management, are
the most important elements of the risk management process.
Efforts to further strengthen the Company's management of market risk
are continuous, and the enhancement of risk management systems is a priority of
the Company. This includes the development of quantitative methods, profit and
loss and variance reports, and the review and approval of pricing models.
The chart below represents a summary of the daily revenues generated
by the Company's trading departments and reflects a combination of trading
revenues, net interest revenues for certain trading areas and other revenues for
the year ended June 30, 1997. This chart represents a historical summary of the
results generated by the Company's trading departments, as opposed to the
probability approach used by the value at risk model. The average daily trading
profit was $6.2 million for fiscal 1997. The range of daily trading profit
volatility reflects the Company's historical ability to manage its exposure to
market risk and the diversified nature of its trading activities.
DAILY TRADING PROFIT FREQUENCY DISTRIBUTION
[The following is a tabular version of a bar graph included in the
paper version of the Annual Report]
FREQUENCY INTERVALS
(Number of Days) (Daily Trading Profit Volatility)
---------------- ---------------------------------
0 (5,000,000)
0 (4,000,000)
1 (3,000,000)
0 (2,000,000)
2 (1,000,000)
6 0
2 1,000,000
13 2,000,000
16 3,000,000
21 4,000,000
30 5,000,000
20 6,000,000
18 7,000,000
28 8,000,000
22 9,000,000
15 10,000,000
9 11,000,000
13 12,000,000
7 13,000,000
5 14,000,000
6 15,000,000
7 16,000,000
5 17,000,000
0 18,000,000
0 19,000,000
7 greater than or equal to 20,000,000
45
<PAGE>
RISK MANAGEMENT
Credit Risk
Credit risk arises from the potential inability of counterparties to perform on
an obligation in accordance with the terms of the contract. The Company is
exposed to credit risk in various capacities: as counterparty in financial
contracts; as direct lender; as holder of securities; and as member of exchanges
and clearing organizations. The Company accepts credit risk whenever a
counterparty is obligated to perform under a contract. As a lender, the Company
is exposed to the risk of nonpayment of interest or principal by the borrower.
As a holder of securities, the Company is exposed to default by the issuer or to
the possibility of market price deterioration. The Company has established
policies and procedures to manage credit risk.
The Credit Policy Committee has full authority to rule on all credit
issues. The Credit Policy Committee establishes credit limits for the Global
Credit Committee and Global Credit Department, approves exposure measurement
standards and sets documentation and credit support policies. The Global Credit
Committee implements the policies established by the Credit Policy Committee on
an individual counterparty level. The credit risk management functions of the
Company are administered in four departments: Global Credit; Margin; Risk
Management and Correspondent Clearing (Specialist Clearance).
The Global Credit Department is responsible for approving, monitoring
and controlling extensions of credit to counterparties of the Company. The
department's function is to assess the creditworthiness of the Company's
counterparties, to assign credit limits and credit requirements, to assess the
quality and acceptability of collateral, to monitor compliance with these credit
limits, to obtain adequate legal documentation and to carry out the directives
of the Global Credit Committee.
The Company measures and monitors credit risk depending upon the
nature of the financial instrument creating the credit exposure. For products
other than derivatives, credit risk is controlled by the Global Credit
Department on the basis of notional amounts and the terms of the contract. The
Global Credit Department's oversight of the credit risk associated with
derivative products includes the measurement of the replacement cost of the
position in addition to any estimates of potential future exposure as a result
of market changes. The gross replacement cost of a derivative position is the
positive mark-to-market value of the transaction without taking into account the
effects of netting or collateralized arrangements.
Master netting agreements and various enhancements such as collateral
are used to reduce counterparty credit risk. The credit exposures reflect these
risk-reducing features to the extent they are legally enforceable. The Company's
net replacement cost of derivative contracts in a gain position at June 30, 1997
and 1996 was $540.8 million and $276.8 million, respectively. Exchange-traded
financial instruments are guaranteed by the clearing organization and have
minimal credit risk due to margin requirements.
The Global Credit Department establishes three classes of derivatives
credit limits: unsecured, mark-to-market and initial margin. Derivatives
operations monitors the counterparty's designated credit requirements.
Unsecured credit limits are available to certain investment-grade
quality clients who will post no collateral to support their derivatives
contracts. The Company measures credit risk arising from derivative contracts
with unsecured counterparties using a value at risk approach. A statistical
estimate of potential exposure is applied against unsecured derivatives credit
limits. The statistical models used by the Company project the highest
replacement cost during the life of the contracts all but 2.3% of the time. The
Global Credit Department's determination of the size and tenor of a
counterparty's credit line includes an assessment of credit ratings and tangible
equity amounts. The Global Credit Department establishes internal ratings for
unrated counterparties based on the quality and size of the counterparty as well
as the countries in which they operate, among other criteria.
46
<PAGE>
RISK MANAGEMENT
Mark-to-market derivatives credit limits are for clients posting no
initial margin but posting collateral once the replacement cost of the contract
reaches a specified threshold of either potential exposure estimates or
replacement costs which trigger calls for collateral by the Company. Exposure
thresholds are based on the investment grade of the counterparty.
Initial margin credit limits are for those posting collateral at the
onset of the contract in addition to marking-to-market as the replacement cost
changes, subject to a minimum call level. Since potential exposures net of
posted collateral are minimal, the Company monitors risk based on the amount of
collateral required from the counterparty.
The Margin Department is responsible for evaluating the risk of
extending to the Company's customers loans secured by certain marketable
securities. The Margin Department evaluates the creditworthiness of the borrower
as well as the acceptability of collateral.
The Risk Management Department is responsible for monitoring the
market risk of the Company's proprietary positions. As part of its duties, the
group evaluates the credit quality of securities positions held in inventory in
order to quantify and limit the risk to the Company of issuer default or changes
in credit spreads.
The Risk Department of the Specialist Clearance function is
responsible for extensions of credit to correspondents (broker dealers and other
professional investors) and their customers. The department uses sophisticated
computer simulations to project adverse moves in the value of certain
correspondents' or their customers' assets held by the Company on an individual
security basis and portfolio basis. These daily simulations value the positions
assuming a minimum adverse move for portfolios of 20% and individual securities
of 25%. In some cases, these percentages are considerably higher depending on a
portfolio's or instrument's market value, volatility and liquidity.
Operating Risk
Operating risk is the potential for loss arising from limitations in the
Company's financial systems and controls, deficiencies in legal documentation
and the execution of legal and fiduciary responsibilities, deficiencies in
technology and the risk of loss attributable to operational problems. These
risks are less direct than credit and market risk, but managing them is
critical, particularly in a rapidly changing environment with increasing
transaction volumes. In order to reduce or mitigate these risks, the Company has
established and maintains an effective internal control environment which
incorporates various control mechanisms at different levels throughout the
organization and within such departments as Finance and Accounting, Operations,
Legal and Internal Audit. These control mechanisms are designed to ensure that
operational policies and procedures are being followed and that the Company's
various businesses are operating within established corporate policies and
limits.
Management has established and maintains an effective internal control
structure over financial reporting, the primary goal of which is to ensure that
policies and procedures have been established regarding authorization, access to
assets and asset accountability. This provides a high degree of assurance that
assets are acquired and safeguarded, and that liabilities are incurred and
discharged, in accordance with management's decisions. In addition, an effective
internal control structure ensures that financial information is accurately
maintained on the books. The Company also has effective risk controls in place
to ensure that operational functions such as transaction initiation, transaction
processing and settlement/clearance are functioning properly.
The Company has invested heavily in technology over the years in order
to have the ability to gather and process information efficiently and to handle
the wide variety of products and services the Company offers. In addition, our
investment in technology allows us to communicate information efficiently and
securely to our customers and to groups within the Company.
The Company has policies and procedures in place related to contract
administration, which includes ensuring that contract files are properly
maintained and that International Swap Dealers Association master netting
agreements, which provide protection in the event of counterparty default, are
obtained.
The Operations Committee, together with the Management and
Compensation Committee, has oversight responsibilities for all operational and
other matters that affect the Company's day-to-day activities. These committees
also review new products/businesses and ensure that policies and procedures are
established and in place prior to doing business.
47
<PAGE>
<TABLE>
<CAPTION>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
June 30, June 30, June 30,
In thousands, except share data 1997 1996 1995
===========================================================================================================================
<S> <C> <C> <C>
REVENUES
Commissions $ 732,343 $ 686,548 $ 546,939
Principal transactions 1,571,332 1,239,697 842,575
Investment banking 663,249 607,338 348,886
Interest and dividends 3,058,452 2,393,266 1,987,297
Other income 51,902 37,014 27,875
-------------------------------------------------------------------------------------------------------------------
Total revenues 6,077,278 4,963,863 3,753,572
Interest expense 2,551,364 1,981,171 1,678,515
-------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 3,525,914 2,982,692 2,075,057
-------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Employee compensation and benefits 1,726,931 1,469,448 1,080,487
Floor brokerage, exchange and clearance fees 141,211 129,509 109,040
Communications 102,926 92,827 85,711
Occupancy 88,419 85,899 83,247
Depreciation and amortization 89,719 69,878 59,274
Advertising and market development 69,765 56,797 57,036
Data processing 36,620 34,305 33,650
Other expenses 256,633 209,103 178,530
-------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,512,224 2,147,766 1,686,975
-------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,013,690 834,926 388,082
Provision for income taxes 400,360 344,288 147,471
-------------------------------------------------------------------------------------------------------------------
Net income $ 613,330 $ 490,638 $ 240,611
===================================================================================================================
Net income applicable to common shares $ 589,497 $ 466,145 $ 215,474
===================================================================================================================
Earnings per share $ 4.20 $ 3.27 $ 1.54
===================================================================================================================
Weighted average common and
common equivalent shares outstanding 147,847,885 148,855,048 147,755,982
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
48
<PAGE>
<TABLE>
<CAPTION>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, June 30,
In thousands, except share data 1997 1996
===========================================================================================================================
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,249,132 $ 127,847
Cash and securities deposited with clearing organizations
or segregated in compliance with federal regulations 1,448,814 1,702,124
Securities purchased under agreements to resell 28,340,599 24,517,275
Securities borrowed 40,711,280 29,611,207
Receivables:
Customers 8,572,521 7,976,373
Brokers, dealers and others 1,227,947 811,391
Interest and dividends 405,892 305,725
Financial instruments owned, at fair value 38,437,280 26,222,134
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization of $415,681 and $318,657
in 1997 and 1996, respectively 379,533 331,924
Other assets 660,537 479,157
-------------------------------------------------------------------------------------------------------------------
Total Assets $ 121,433,535 $ 92,085,157
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 14,416,671 $ 9,867,619
Securities sold under agreements to repurchase 39,431,216 33,353,899
Payables:
Customers 29,921,386 21,905,015
Brokers, dealers and others 2,808,359 1,847,599
Interest and dividends 452,662 448,121
Financial instruments sold, but not yet purchased, at fair value 20,784,796 13,916,581
Accrued employee compensation and benefits 907,337 712,962
Other liabilities and accrued expenses 964,409 1,094,333
-------------------------------------------------------------------------------------------------------------------
109,686,836 83,146,129
-------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Long-term borrowings 8,120,328 6,043,614
-------------------------------------------------------------------------------------------------------------------
Guaranteed Preferred Beneficial Interests in Company Subordinated
Debt Securities 200,000
Preferred Stock issued by subsidiary 150,000 150,000
-------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 437,500 437,500
-------------------------------------------------------------------------------------------------------------------
Common Stock, $1.00 par value; 200,000,000 shares authorized;
167,784,941 shares and 159,803,764 shares issued in 1997 and 1996,
respectively 167,785 159,804
Paid-in capital 1,874,016 1,696,217
Retained earnings 1,031,736 694,108
Capital Accumulation Plan 655,007 471,191
Treasury Stock, at cost
Adjustable Rate Cumulative Preferred Stock, Series A:
2,520,750 shares and 2,341,350 shares in 1997 and 1996,
respectively (103,421) (95,389)
Common Stock: 50,191,531 shares and 41,664,729 shares in 1997
and 1996, respectively (772,551) (598,217)
Note receivable from ESOP trust (13,701) (19,800)
-------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 3,276,371 2,745,414
-------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 121,433,535 $ 92,085,157
===================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
49
<PAGE>
<TABLE>
<CAPTION>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Treasury Stock
--------------------------
Adjustable Rate
Cumulative
Preferred Stock, Note
Common Capital Series A-$50 Common Receivable
In thousands, Preferred Stock Paid-In Retained Accumulation Liquidation Stock from ESOP
except share data Stock $1 Par Value Capital Earnings Plan Preference $1 Par Value Trust
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $ 437,500 $ 144,965 $1,447,066 $ 388,685 $ 275,415 $ (85,507) $(410,882) $ (30,676)
Net income 240,611
Cash dividends declared
Common ($0.60 per share) (67,475)
Preferred (25,137)
Purchase of Treasury Stock
Common Stock
(4,293,726 shares) (72,915)
Common Stock issued out of
treasury (2,561,732 shares) 6,475 (18,637) 25,604
Income tax benefits attributable
to Common Stock issued
out of treasury 4,674
5% stock dividend
(7,237,630 shares) 7,238 99,022 (106,354)
Note repayment from ESOP Trust 5,229
Allocation under Capital
Accumulation Plan 87,560
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 437,500 152,203 1,557,237 430,330 344,338 (85,507) (458,193) (25,447)
Net income 490,638
Cash dividends declared
Common ($0.60 per share) (70,293)
Preferred (24,493)
Purchase of Treasury Stock
Adjustable Rate Cumulative
Preferred Stock, Series A
(222,800 shares) (9,882)
Common Stock
(8,513,944 shares) (186,863)
Common Stock issued out
of treasury (3,289,549 shares) 9,213 (54,849) 46,839
Income tax benefits attributable
to Common Stock issued
out of treasury 5,294
5% stock dividend
(7,601,040 shares) 7,601 124,473 (132,074)
Note repayment from ESOP Trust 5,647
Allocation under Capital
Accumulation Plan 181,702
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $ 437,500 $ 159,804 $1,696,217 $ 694,108 $ 471,191 $ (95,389) $ (598,217) $ (19,800)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
50
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock
--------------------------
Adjustable Rate
Cumulative
Preferred Stock, Note
Common Capital Series A-$50 Common Receivable
In thousands, Preferred Stock Paid-In Retained Accumulation Liquidation Stock from ESOP
except share data Stock $1 Par Value Capital Earnings Plan Preference $1 Par Value Trust
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 437,500 $ 159,804 $1,696,217 $694,108 $ 471,191 $ (95,389) $(598,217) $ (19,800)
Net income 613,330
Cash dividends declared
Common ($0.60 per share) (69,928)
Preferred (23,890)
Purchase of Treasury Stock
Adjustable Rate Cumulative
Preferred Stock, Series A
(179,400 shares) (8,032)
Common Stock
(7,230,103 shares) (186,742)
Common Stock issued out
of treasury (745,399 shares) 350 (12,298) 12,408
Income tax benefits attributable
to Common Stock issued
out of treasury 3,546
5% stock dividend
(7,981,177 shares) 7,981 173,903 (181,884)
Note repayment from ESOP Trust 6,099
Allocation under Capital
Accumulation Plan 196,114
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $ 437,500 $ 167,785 $1,874,016 $1,031,736 $ 655,007 $(103,421) $(772,551) $ (13,701)
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
51
<PAGE>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
June 30, June 30, June 30,
In thousands 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 613,330 $ 490,638 $ 240,611
Adjustments to reconcile net income to cash used in operating
activities:
Depreciation and amortization 89,719 69,878 59,274
Deferred income taxes (101,859) (189) (11,488)
Other 73,699 61,474 28,351
Decreases (increases) in operating receivables:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations 253,310 (392,551) 1,680,375
Securities purchased under agreements to resell (3,823,324) (5,576,531) 575,020
Securities borrowed (11,100,073) (4,979,119) (3,558,880)
Receivables:
Customers (596,148) (1,982,601) 1,272,837
Brokers, dealers and others (416,556) (232,715) 401,776
Financial instruments owned (12,215,146) (4,712,636) (7,065,580)
Other assets (80,975) (67,439) (85,858)
Increases (decreases) in operating payables:
Securities sold under agreements to repurchase 6,077,317 3,769,175 2,721,602
Payables:
Customers 8,016,371 5,668,404 (151,321)
Brokers, dealers and others 968,282 675,016 330,678
Financial instruments sold, but not yet purchased 6,868,215 2,675,463 2,889,860
Accrued employee compensation and benefits 137,967 207,023 (146,346)
Other liabilities and accrued expenses (138,288) 773,208 (3,964)
-------------------------------------------------------------------------------------------------------------------
Cash used in operating activities (5,374,159) (3,553,502) (823,053)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 4,549,052 1,296,842 710,466
Issuance of long-term borrowings 3,129,439 2,654,134 1,040,090
Net proceeds from issuance of subsidiary securities 199,884
Capital Accumulation Plan 196,114 181,702 87,560
Common Stock distributions 4,006 6,497 18,088
Note repayment from ESOP trust 6,099 5,647 5,229
Payments for:
Retirement of Senior Notes (1,062,844) (674,000) (400,300)
Treasury Stock purchases (202,296) (191,474) (70,373)
Cash dividends paid (93,784) (95,001) (92,642)
-------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 6,725,670 3,184,347 1,298,118
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (137,328) (88,935) (100,334)
Purchases of investment securities and other assets (108,480) (134,321) (1,172)
Proceeds from sale of investment securities and other assets 15,582 19,757 32,338
-------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (230,226) (203,499) (69,168)
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,121,285 (572,654) 405,897
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 127,847 700,501 294,604
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,249,132 $ 127,847 $ 700,501
===================================================================================================================
</TABLE>
Non-cash financing activities totaled $0, $7,522 and $2,250, for the
years ended June 30, 1997, 1996 and 1995, respectively.
See Notes to Consolidated Financial Statements.
52
<PAGE>
The Bear Stearns Companies Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of The Bear Stearns
Companies Inc. and its subsidiaries (the "Company"). All material intercompany
transactions and balances have been eliminated. Certain prior year amounts have
been reclassified to conform with the current year's presentation or restated
for the effects of stock dividends. The consolidated financial statements are
prepared in conformity with generally accepted accounting principles which
require management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from these estimates.
The Company, through its principal subsidiaries, Bear, Stearns &
Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC") and Bear,
Stearns International Limited ("BSIL"), is primarily engaged in a single line
of business as a securities broker and dealer, which comprises several
classes of services, such as principal transactions, agency transactions and
underwriting and investment banking.
Financial Instruments
Proprietary securities and commodities transactions, commission revenues and
related expenses are recorded on a trade date basis. Financial instruments owned
and financial instruments sold, but not yet purchased, including contractual
commitments arising pursuant to futures, forward and option contracts, interest
rate swaps and other derivative contracts are recorded at fair value with the
resulting net unrealized gains and losses reflected in net income.
Fair value is generally based on quoted market prices. If quoted
market prices are not available, or if liquidating the Company's position is
reasonably expected to impact market prices, fair value is determined based on
other relevant factors, including dealer price quotations, price activity for
equivalent instruments and valuation pricing models. Valuation pricing models
consider time value and volatility factors underlying financial instruments as
well as other relevant economic measurements.
Equity securities acquired as a result of leveraged acquisition
transactions are reflected in the consolidated financial statements at their
initial cost until such time as significant transactions or developments
indicate that a change in the carrying value of the securities is appropriate.
Generally the carrying values of these securities will be increased only in
those instances where market values are readily ascertainable by reference to
substantial transactions occurring in the marketplace. Reductions to the
carrying value of these securities are made in the event that the Company's
estimate of net realizable value has declined below the carrying value.
Securities Transactions
Customer transactions are recorded on a settlement date basis, which is
generally three business days after trade date, while the related commission
revenues and expenses are recorded on a trade date basis.
Collateralized Securities Transactions
Transactions involving purchases of securities under agreements to resell
("reverse repurchase agreements") or sales of securities under agreements to
repurchase ("repurchase agreements") are treated as collateralized financing
transactions and are recorded at their contracted resale or repurchase amounts
plus accrued interest. It is the Company's policy to take possession of
securities with a market value in excess of the principal amount loaned plus the
accrued interest thereon in order to collateralize reverse repurchase
agreements. Similarly, the Company is required to provide securities to
counterparties in order to collateralize repurchase agreements. The Company's
agreements with counterparties generally contain contractual provisions allowing
for additional collateral to be obtained, or excess collateral returned, when
necessary. It is the Company's policy to value collateral daily and to obtain
additional collateral, or to retrieve excess collateral from counterparties,
when deemed appropriate.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Securities borrowed and securities loaned are recorded based upon the
amount of cash collateral advanced or received. Securities borrowed transactions
facilitate the settlement process and require the Company to deposit cash,
letters of credit or other collateral with the lender. With respect to
securities loaned, the Company receives collateral in the form of cash or other
collateral. The amount of collateral required to be deposited for securities
borrowed, or received for securities loaned, is an amount generally in excess of
the market value of the applicable securities borrowed or loaned. The Company
monitors the market value of securities borrowed and loaned on a daily basis,
with additional collateral obtained, or excess collateral refunded as necessary.
Fixed Assets
Depreciation of property and equipment is provided by the Company on a
straight-line basis over the estimated useful life of the asset. Amortization of
leasehold improvements is provided on a straight-line basis over the lesser of
the estimated useful life of the asset or the remaining life of the lease.
Translation of Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated at
year-end rates of exchange, while income statement items are translated at
average rates of exchange for the year. Gains or losses resulting from foreign
currency transactions are included in net income.
Income Taxes
The Company and certain of its subsidiaries file a consolidated federal income
tax return. The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") 109, "Accounting for Income
Taxes." Under SFAS 109, deferred income taxes are provided based upon the net
tax effects of temporary differences between the financial reporting and tax
bases of assets and liabilities. In addition, deferred income taxes are
determined using the enacted tax rates and laws which will be in effect when the
related temporary differences are expected to be reversed.
Earnings Per Share
Earnings per share is computed by dividing net income applicable to Common and
Common Equivalent Shares by the weighted average number of Common Stock and
Common Stock Equivalents outstanding during each period presented. Common Stock
Equivalents include the assumed distribution of shares of Common Stock issuable
under certain of the Company's deferred compensation arrangements, with
appropriate adjustments made to net income for expense accruals related thereto.
Additionally, shares of Common Stock issued or issuable under various employee
benefit plans are included as Common Stock Equivalent Shares.
Statement of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company has
defined cash equivalents as liquid investments not held for sale in the ordinary
course of business with original maturities of three months or less. Cash
payments for interest approximated interest expense for the years ended June 30,
1997, 1996 and 1995. Income taxes paid totaled $478.4 million, $279.0 million
and $125.6 million for the fiscal years 1997, 1996 and 1995, respectively.
2 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of
Financial Instruments," requires the Company to report the fair value of
financial instruments, as defined. Approximately 99.1% of the Company's assets
and 99.5% of the Company's liabilities are carried at fair value or contracted
amounts which approximate fair value.
Financial instruments owned and financial instruments sold, but not
yet purchased are carried at fair value. Assets which are recorded at contracted
amounts approximating fair value consist largely of short-term secured
receivables, and include reverse repurchase agreements, securities borrowed and
certain other receivables. Similarly, the Company's short-term liabilities such
as bank loans, commercial paper, medium-term notes, repurchase agreements,
securities loaned and certain other payables are recorded at contracted amounts
approximating fair value. These instruments generally have variable interest
rates and short-term maturities, in many cases overnight, and, accordingly, are
not materially affected by changes in interest rates.
The estimated fair value of the Company's long-term borrowings, based
upon market rates of interest available to the Company at June 30, 1997 for debt
obligations of similar maturity, was approximately $8.1 billion, which was less
than the aggregate carrying value by approximately $7.7 million. However, the
Company enters into interest rate swaps and other transactions designed to
either convert its fixed rate debt into floating rates or otherwise
hedge its exposure to interest rate movements. Accordingly, unrecognized gains
on interest rate swaps and other transactions hedging the Company's long-term
borrowings substantially offset the effect of changes in interest rates on the
fair value of the Company's long-term borrowings. For discussion of the
Company's financial instruments with off-balance-sheet risk see Note 11.
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 - FINANCIAL INSTRUMENTS
Financial instruments owned and financial instruments sold, but not yet
purchased consisting of the Company's proprietary trading and investment
accounts, at fair value, as of June 30, were as follows:
<TABLE>
<CAPTION>
In thousands 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL INSTRUMENTS OWNED:
US government and agency $ 13,275,828 $ 8,258,074
Other sovereign governments 1,847,691 656,699
Corporate equity 8,351,399 5,225,171
Convertible debt 2,928,800 3,267,399
Corporate debt 4,961,737 4,739,512
Derivative financial instruments 2,780,231 1,855,617
Mortgages and other mortgage-backed securities 3,745,779 1,796,322
Other 545,815 423,340
---------------------------------------------------------------------------------------------------------------
$ 38,437,280 $ 26,222,134
===============================================================================================================
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS SOLD, BUT NOT YET PURCHASED:
US government and agency $ 8,695,621 $ 5,502,459
Other sovereign governments 1,479,278 964,808
Corporate equity 4,976,169 4,469,425
Corporate debt 1,099,700 877,576
Derivative financial instruments 4,412,986 2,088,621
Other 121,042 13,692
---------------------------------------------------------------------------------------------------------------
$ 20,784,796 $ 13,916,581
===============================================================================================================
</TABLE>
Financial instruments sold, but not yet purchased represent
obligations of the Company to deliver the specified financial instrument at the
contracted price, and thereby create a liability to repurchase the financial
instrument in the market at prevailing prices. Accordingly, these transactions
result in off-balance-sheet risk as the Company's ultimate obligation to satisfy
the sale of financial instruments sold, but not yet purchased may exceed the
amount recognized in the Consolidated Statements of Financial Condition.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 - SHORT-TERM FINANCING
The Company's short-term financing is generally obtained on a secured basis
through the use of repurchase agreements and securities lending arrangements.
Additionally, the Company obtains short-term financing on an unsecured basis
through the issuance of commercial paper, medium-term notes and bank loans.
Repurchase agreements are collateralized principally by US government and agency
securities. Securities lending arrangements are typically secured by corporate
equity and debt securities, utilizing both securities owned by the Company and
customers' securities. The interest rates on such short-term borrowings reflect
money market rates of interest at the time of the transactions.
Borrowings made under the Company's commercial paper programs were
$7.8 billion and $4.3 billion at June 30, 1997 and 1996, respectively. During
the fiscal years 1997 and 1996, the weighted average interest rates on such
borrowings were 5.47% and 5.66%, respectively. The weighted average rates at
June 30, 1997 and 1996 were 5.59% and 5.33%, respectively.
At June 30, 1997 and 1996, the Company had outstanding $5.7 billion
and $4.9 billion, respectively, principal amount of Medium-Term Notes maturing
from six to 18 months from the date of issue. The Medium-Term Notes generally
bear interest at variable rates based upon the London Interbank Offered Rate
("LIBOR"). During the fiscal years 1997 and 1996, the weighted average interest
rates on the Medium-Term Notes were 5.63% and 5.85%, respectively. The weighted
average rates at June 30, 1997 and 1996 were 5.84% and 5.55%, respectively.
At June 30, 1997 and 1996, the Company had outstanding $39.4 billion
and $33.4 billion of repurchase agreements. During the fiscal years 1997 and
1996, the weighted average interest rates on the repurchase agreements were
5.30% and 5.41%, respectively. The weighted average rates at June 30, 1997 and
1996 were 5.44% and 5.15%, respectively.
Short-term borrowings at June 30, 1997 and 1996 included $920.5
million and $651.1 million, respectively, of bank loans. During the fiscal years
1997 and 1996, the weighted average interest rates on such bank loans were 5.36%
and 5.40%, respectively. The weighted average rates at June 30, 1997 and 1996
were 4.56 % and 5.33%, respectively.
5 - LONG-TERM BORROWINGS
Long-term borrowings at June 30 consisted of the following:
<TABLE>
<CAPTION>
In thousands 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Floating-Rate Notes due 1998 to 2030 $ 1,122,461 $ 924,129
Fixed-Rate Senior Notes due 1998 to 2005;
interest rates ranging from 53\4% to 93\8% 3,068,453 2,568,696
Medium-Term Notes & Other 3,929,414 2,550,789
----------------------------------------------------------------------------------------------------------
Total long-term borrowings $ 8,120,328 $ 6,043,614
==========================================================================================================
</TABLE>
The Floating-Rate Notes are unsecured and bear interest at rates
primarily related to LIBOR. For those Floating-Rate Notes which are not based
upon LIBOR, the Company has entered into interest rate swaps and certain other
transactions in order to convert them into floating rates based upon LIBOR.
During the years ended June 30, 1997 and 1996, the weighted average effective
interest rates on the Floating-Rate Notes were 5.88% and 6.29%, respectively.
The weighted average effective interest rates on the Floating-Rate Notes at June
30, 1997 and 1996 were 6.06% and 5.85%, respectively.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into interest rate swaps and certain other
transactions in order to convert its Fixed-Rate Senior Notes into floating rates
based upon LIBOR. The weighted average effective interest rates on the Company's
Fixed-Rate Senior Notes during the fiscal years 1997 and 1996 were 6.21% and
6.45%, respectively. The weighted average effective interest rates on the
Company's Senior Notes at June 30, 1997 and 1996 were 6.22% and 6.01%,
respectively.
The Company's Medium-Term Notes have maturities ranging from 18 months
to 30 years from the date of issue and bear interest at either a fixed rate or a
variable rate primarily based upon LIBOR. During the fiscal years 1997 and 1996,
the weighted average interest rates on the Medium-Term Notes were 5.85% and
6.11%, respectively. The weighted average interest rates on the Company's
Medium-Term Notes at June 30, 1997 and 1996 were 6.02% and 5.81%, respectively.
Maturities of long-term borrowings at June 30, 1997 consisted of the following:
In thousands
- --------------------------------------------------------
FISCAL YEAR AMOUNT
----------- ------
1998 $1,576,734
1999 1,532,869
2000 1,059,431
2001 1,336,409
2002 532,074
Thereafter 2,082,811
---------------------------------------------
$8,120,328
========================================================
Instruments governing certain indebtedness of the Company contain
various covenants, the most restrictive of which require the maintenance of
minimum levels of stockholders' equity by the Company and Bear Stearns. At June
30, 1997, the Company and Bear Stearns were in compliance with all covenants
contained in these various debt agreements.
6 - INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended June 30
consisted of the following:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 326,359 $ 212,686 $ 103,944
State and local 139,676 108,652 40,681
Foreign 36,184 23,139 14,334
---------------------------------------------------------------------------------------------------------------
Total current $ 502,219 $ 344,477 $ 158,959
---------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal $ (74,346) $ 2,596 $ (8,322)
State and local (27,513) (2,785) (3,166)
Total deferred (101,859) (189) (11,488)
---------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 400,360 $ 344,288 $ 147,471
===============================================================================================================
</TABLE>
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company's deferred tax assets (liabilities) as of
June 30 were as follows:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation $ 304,238 $ 214,484 $ 153,564
Valuation reserves 15,304 19,848 14,491
Liability reserves 93,631 57,199 23,663
Other 25,398 13,264 5,833
--------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 438,571 $ 304,795 $ 197,551
--------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Partnerships $(106,379) $ (82,314) $ (60,893)
Unrealized appreciation (117,616) (98,787) (4,864)
Depreciation (15,261) (19,026) (19,266)
Other (7,467) (14,679) (22,728)
--------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $(246,723) $(214,806) $(107,751)
--------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 191,848 $ 89,989 $ 89,800
========================================================================================================
</TABLE>
A reconciliation of the statutory federal income tax rates and the Company's
effective tax rates for the fiscal years ended June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal benefit 6.9 8.5 6.3
Dividend exclusion (1.8) (1.9) (3.6)
Other, net (0.6) (0.4) 0.3
----------------------------------------------------------------------------------------------------------------------------
Effective tax rate 39.5% 41.2% 38.0%
============================================================================================================================
</TABLE>
Not included in the reconciliation table reflected above are
approximately $3.5 million, $5.3 million and $4.7 million of income tax benefits
attributable to the distribution of Common Stock under the Capital Accumulation
Plan for Senior Managing Directors, as amended (the "CAP Plan"), other deferred
compensation plans and the exercise of stock options, credited directly to
paid-in capital, for fiscal 1997, 1996 and 1995, respectively.
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7 - REGULATORY REQUIREMENTS
Bear Stearns and BSSC, a subsidiary of Bear Stearns, are registered broker
dealers and, accordingly, are subject to Rule 15c3-1 under the Securities
Exchange Act of 1934 (the "Net Capital Rule") and the capital rules of the New
York Stock Exchange, Inc. ("NYSE") and other principal exchanges of which Bear
Stearns and BSSC are members. Bear Stearns and BSSC have consistently operated
in excess of the minimum net capital requirements imposed by the capital rules.
Included in the computation of net capital of Bear Stearns is net capital of
BSSC in excess of 5% of aggregate debit items arising from customer
transactions, as defined. At June 30, 1997, Bear Stearns' net capital, as
defined, of $1.43 billion exceeded the minimum requirement by $1.40 billion.
BSIL and certain other wholly owned London-based subsidiaries are
subject to regulatory capital requirements of the Securities and Futures
Authority, a self-regulatory organization established pursuant to the United
Kingdom Financial Services Act of 1986.
The regulatory rules referred to above, and certain covenants
contained in various instruments governing indebtedness of the Company, Bear
Stearns and other regulated subsidiaries, may restrict the Company's ability to
withdraw capital from its regulated subsidiaries, which in turn could limit the
Company's ability to pay dividends. At June 30, 1997, approximately $1.9 billion
of net assets of consolidated subsidiaries were restricted as to the payment of
cash dividends and advances to the Company.
8 - PREFERRED STOCK
Preferred Stock Issued by The Bear Stearns Companies Inc.
The Company issued 3.0 million shares of Adjustable Rate Cumulative Preferred
Stock, Series A (the "Preferred Stock"). The Preferred Stock has a liquidation
preference of $50 per share and is entitled to dividends, on a cumulative basis,
at a rate equal to 135 basis points below the highest of the Treasury Bill Rate,
the Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity Rate,
as defined; however, the dividend rate for any dividend period may not be less
than 5.50% per annum, nor greater than 11.00% per annum. The Company may redeem
the Preferred Stock, either in whole or in part, at a redemption price of $50
per share plus accumulated and unpaid dividends. The weighted average dividend
rate on the Preferred Stock was 5.63% during the year ended June 30, 1997.
During the year ended June 30, 1997, the Company repurchased 179,400 shares at a
cost of approximately $8.0 million. At June 30, 1997, the Company held 2,520,750
shares of Preferred Stock in treasury.
The Company has outstanding 7.5 million depositary shares representing
937,500 shares of Cumulative Preferred Stock, Series B ("Series B Preferred
Stock"), having an aggregate liquidation preference of $187.5 million. Each
depositary share represents a one-eighth interest in a share of Series B
Preferred Stock. Dividends on the Series B Preferred Stock are payable at an
annual rate of 7.88%. Series B Preferred Stock is redeemable at the option of
the Company at any time on or after April 15, 1998, in whole or in part, at a
redemption price of $200 per share (equivalent to $25 per depositary share),
plus accrued and unpaid dividends.
The Company has outstanding 4.0 million depositary shares representing
500,000 shares of Cumulative Preferred Stock, Series C ("Series C Preferred
Stock"), having an aggregate liquidation preference of $100.0 million. Each
depositary share represents a one-eighth interest in a share of Series C
Preferred Stock. Dividends on the Series C Preferred Stock are payable at an
annual rate of 7.60%. Series C Preferred Stock is redeemable at the option of
the Company at any time on or after July 15, 1998, in whole or in part, at a
redemption price of $200 per share (equivalent to $25 per depositary share),
plus accrued and unpaid dividends.
Preferred Stock Issued by Subsidiaries
Bear Stearns Finance LLC ("BSF"), a wholly owned subsidiary of the Company, has
outstanding $150.0 million Exchangeable Preferred Income Cumulative Shares
("EPICS"), Series A, which have a liquidation value of $25 per share, and an
annual dividend rate of 8.00%. The EPICS are callable at the option of BSF, in
whole or in part, at any time on or after February 28, 1999, at their
stated liquidation value.
The proceeds of the EPICS issuance were loaned by BSF to the Company
under the terms of a 30-year subordinated loan agreement. This agreement allows
the Company to extend the maturity of the loan through two 30-year renewal
options. On any given monthly dividend date, the Company has the right, subject
to certain conditions, to issue to BSF, in exchange for such note, depositary
shares evidencing Preferred Stock of the Company. In the event of such exchange,
BSF is required to redeem the EPICS, in their entirety, solely in exchange for
such depositary shares.
In January 1997, Bear Stearns Capital Trust I (the "Trust"), a wholly
owned subsidiary of the Company, issued $200.0 million of Guaranteed Preferred
Beneficial Interests in Company Subordinated Debt Securities (the "Capital
Securities"). The Capital Securities are fixed/adjustable rate capital
securities which have a liquidation value of $1,000 per capital security.
Holders of the Capital Securities are entitled to receive semi-annual
preferential cumulative cash distributions at an annual rate of 7% through
January 2002. Thereafter the distributions will be at a variable rate
59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on three-month LIBOR plus a margin of 1.75%. The proceeds of the issuance
of the Capital Securities were used to purchase fixed/adjustable rate junior
subordinated deferrable interest debentures (the "Subordinated Debentures")
issued by the Company. The Subordinated Debentures are the sole assets of the
Trust. The Subordinated Debentures will mature on January 15, 2007. The interest
rate on the Subordinated Debentures is the same as the rate on the Capital
Securities. The Company's guarantee of the Capital Securities, considered
together with the other obligations of the Company with respect to Capital
Securities, constitutes a full and unconditional guarantee by the Company of the
Trust's obligation under the Capital Securities issued by the Trust.
9 - EMPLOYEE BENEFIT PLANS
The Company has a qualified non-contributory profit sharing plan covering
substantially all employees. Contributions are made at the discretion of
management in amounts that relate to the Company's level of income before
provision for income taxes. The Company's expense related to the profit sharing
plan for the years ended June 30, 1997, 1996 and 1995 was $12.5 million, $11.1
million, and $4.5 million, respectively.
The Company maintains a non-qualified defined contribution retirement
plan covering substantially all account executives. The plan provides for
retirement benefits to be paid based upon a percentage of each participant's
compensation and the performance of certain participant selected investment
options for benefits accrued. The Company's expense for this plan for the years
ended June 30, 1997, 1996 and 1995 was $9.4 million, $7.2 million and $4.5
million, respectively.
The Company maintains a $40 million leveraged employee stock ownership
plan (the "ESOP") covering substantially all full time employees. Pursuant to
the terms of a Brokerage and Loan Agreement, the Company advanced funds to the
ESOP trust to acquire shares of Common Stock in open market transactions.
Advances made under the ESOP Note (the "Note") bear interest at a rate of 8.00%
per annum. The Note is repayable in seven annual principal installments which
commenced December 31, 1992. The Note is expected to be repaid through a
combination of contributions by the Company and dividends on the shares of
Common Stock held by the ESOP trust. The note receivable from the ESOP trust is
reflected as a reduction in the Company's stockholders' equity. The Company's
expense related to the ESOP for the years ended June 30, 1997, 1996 and 1995 was
$5.9 million, $6.2 million and $6.0 million, respectively.
10 - EMPLOYEE STOCK PLANS
Capital Accumulation Plan
The CAP Plan allows participants to defer a defined minimum percentage of their
total annual compensation. Participants' compensation generally must be deferred
for a minimum of five years from the date it was otherwise payable and is
credited to participants' deferred compensation accounts in the form of CAP
Units. The number of CAP Units credited is a function of the amount deferred by
each participant and the average per share cost of Common Stock acquired by the
Company in the open market on behalf of the CAP Plan. The aggregate number of
CAP Units that may be credited to participants in any fiscal year may not exceed
the number of shares of Common Stock acquired by the Company.
Each CAP Unit gives the participant an unsecured right to receive, on
an annual basis, an amount equal to the Company's pre-tax income or loss per
share, as defined by the CAP Plan, less the value of changes in the Company's
book value per Common Share during such fiscal year resulting from increases or
decreases in the Company's consolidated retained earnings (the "earnings
adjustment"). The earnings adjustment will be credited to each participant's
deferred compensation account in the form of additional CAP Units, subject to
the limitations discussed above, based on the number of CAP Units in such
account at the end of each fiscal year. Upon completion of the deferral period,
participants are entitled to receive shares of Common Stock equal to the number
of CAP Units then credited to their respective deferred compensation accounts.
During the years ended June 30, 1997, 1996 and 1995, participants
deferred compensation of approximately $191.8 million, $139.7 million and $71.8
million, respectively. During the years ended June 30, 1997, 1996 and 1995, the
Company recognized expense of approximately $56.4 million, $36.7 million and
$20.9 million, respectively, attributable to CAP Units or cash credited to
participants' deferred compensation accounts with respect to earnings
adjustments. As of July 1, 1997, pursuant to the terms of the CAP Plan,
7,494,518 CAP Units were credited to participants' deferred compensation
accounts with respect to the deferrals and earnings made during fiscal year
1997. In addition, $50.8 million which represented the balance of the deferral
was credited to the participants' deferred compensation cash accounts. The
aggregate number of shares of Common Stock distributable pursuant to the
Company's obligation for CAP Units at June 30, 1997, 1996 and 1995 was
approximately 34.0 million, 27.2 million and 22.2 million, respectively.
Compensation deferred pursuant to the CAP Plan and allocated to participants'
deferred compensation accounts in the form of CAP Units is shown as a separate
component of the Company's stockholders' equity.
60
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter derivative
financial instruments and in connection with its proprietary market-making and
trading activities, enters into transactions in a variety of cash and derivative
financial instruments in order to reduce its exposure to market risk, which
includes interest rate, exchange rate, equity price and commodity price risk.
SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," defines a derivative as a future, forward, swap or
option contract, or other financial instrument with similar characteristics such
as caps, floors and collars. Generally these financial instruments represent
future commitments to exchange interest payment streams or currencies or to
purchase or to sell other financial instruments at specific terms at specified
future dates. Option contracts provide the holder with the right, but not the
obligation, to purchase or sell a financial instrument at a specific price
before or on an established date. These financial instruments may have market
and/or credit risk in excess of amounts recorded in the Consolidated Statements
of Financial Condition.
The Company's principal transactions revenues by reporting categories, including
derivatives, for the fiscal years ended June 30, were as follows:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed income $ 919,604 $ 677,475 $ 473,704
Equity 393,875 389,898 306,326
Foreign exchange and other derivative
financial instruments 257,853 172,324 62,545
---------------------------------------------------------------------------------------------------------------
Total principal transactions $ 1,571,332 $ 1,239,697 $ 842,575
===============================================================================================================
</TABLE>
61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Market Risk
Derivative financial instruments involve varying degrees of off-balance-sheet
market risk whereby changes in the level or volatility of interest rates,
foreign currency exchange rates or market values of the underlying financial
instruments or commodities may result in changes in the value of the financial
instrument in excess of the amounts currently reflected in the Consolidated
Statements of Financial Condition. The Company's exposure to market risk is
influenced by a number of factors, including the relationships among financial
instruments with off-balance-sheet risk and between financial instruments with
off-balance-sheet risk and the Company's proprietary securities and commodities
inventories as well as the volatility and liquidity in the markets in which the
financial instruments are traded. In many cases, the use of financial
instruments serves to modify or offset market risk associated with other
transactions and, accordingly, serves to decrease the Company's overall exposure
to market risk. The Company attempts to control its exposure to market risk
arising from the use of these financial instruments through the use of hedging
strategies and various analytical monitoring techniques. In order to measure
derivative activity, notional or contract amounts are frequently utilized.
Notional/contract amounts, which are not included on the balance sheet, are used
to calculate contractual cash flows to be exchanged and generally are not
actually paid or received, with the exception of currency swaps and foreign
exchange and mortgage-backed securities forwards. The notional/contract amounts
of financial instruments that give rise to off-balance-sheet market risk are
indicative only of the extent of involvement in the particular class of
financial instrument and are not necessarily an indication of overall market
risk.
The following table represents the notional/contract amounts of the Company's
outstanding derivative financial instruments as of June 30:
<TABLE>
<CAPTION>
In billions 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Rate:
-----------------------------------------------------------------------------------------------------------
Swap agreements, including options, swaptions, caps, collars and floors $ 208.3 $ 175.2
Futures contracts 34.3 60.5
Options held 4.0 3.0
Options written 0.7 3.1
Foreign Exchange:
Futures contracts 19.9 2.3
Forward contracts 13.6 7.9
Options held 10.0 3.2
Options written 9.4 3.3
Mortgage-Backed Securities:
Forward contracts 40.5 23.0
Equity:
Swap agreements 6.0 3.8
Futures contracts 0.6 0.5
Options held 2.8 1.1
Options written 2.9 1.3
-----------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
The derivative instruments used in the Company's trading and dealer activities,
as described further in Note 1, are recorded at fair value on a daily basis with
the resulting unrealized gains or losses recorded in the Consolidated Statements
of Financial Condition and the related income or loss reflected in revenues
derived from principal transactions.
The fair values of derivative financial instruments held or issued for trading
purposes as of June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- -------------------------------
In millions Assets Liabilities Assets Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swap agreements $ 730 $ 1,250 $ 678 $ 846
Futures and forward contracts 172 248 280 307
Options held 1,880 897
Options written 2,927 968
</TABLE>
The average monthly fair values of the derivative financial instruments for the
fiscal years ended June 30 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- --------------------------------
In millions Assets Liabilities Assets Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swap agreements $ 734 $ 1,029 $ 611 $ 698
Futures and forward contracts 245 218 286 275
Options held 1,120 704
Options written 1,657 795
</TABLE>
The majority of the Company's transactions with off-balance-sheet risk are
short-term in duration with a weighted average maturity of approximately 2.99
years and 2.22 years at June 30, 1997 and 1996, respectively. The maturities for
notional/contract amounts outstanding for derivative financial instruments as of
June 30, 1997 were as follows:
<TABLE>
<CAPTION>
Less than 1 to 3 3 to 5 Greater than
In billions 1 Year Years Years 5 Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Swap agreements $ 43.3 $ 65.4 $ 53.4 $ 52.2 $ 214.3
Futures contracts 42.7 10.3 1.7 0.1 54.8
Forward contracts 54.1 54.1
Options held 14.6 0.2 1.7 0.3 16.8
Options written 10.9 0.1 1.7 0.3 13.0
-------------------------------------------------------------------------------------------------------------------
Total $ 165.6 $ 76.0 $ 58.5 $ 52.9 $ 353.0
Percent of total 46.9% 21.5% 16.6% 15.0% 100%
===================================================================================================================
</TABLE>
63
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk
The notional/contract amounts of these instruments do not represent the
Company's potential risk of loss due to counterparty nonperformance. Credit risk
arises from the potential inability of counterparties to perform in accordance
with the terms of the contract. The Company's exposure to credit risk associated
with counterparty nonperformance is limited to the net replacement cost of
over-the-counter contracts in a gain position which are recognized in the
Company's Consolidated Statements of Financial Condition. Exchange traded
financial instruments, such as futures and options, generally do not give rise
to significant counterparty exposure due to the margin requirements of the
individual exchanges. Options written generally do not give rise to counterparty
credit risk since they obligate the Company (not its counterparty) to perform.
The Company has controls in place to monitor credit exposures by
limiting transactions with specific counterparties and assessing the future
creditworthiness of counterparties. The Company also seeks to control credit
risk by following an established credit approval process, monitoring credit
limits, and requiring collateral where appropriate.
The following table summarizes the credit quality of the Company's
trading-related derivatives by showing counterparty credit ratings for the
replacement cost of contracts in a gain position, net of $462.1 million and
$414.8 million of collateral, respectively, at June 30, 1997 and 1996:
In millions 1997 1996
- ---------------------------------------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $ 92.4 $ 48.0
AA 201.7 86.1
A 152.9 93.2
BBB 40.6 25.6
BB and Lower 16.5 2.6
Non-rated 36.7 21.3
- ---------------------------------------------------------------------
(1) Rating Agency Equivalent
Customer Activities
The Company's clearance activities for both clearing clients and customers
involve the execution, settlement and financing of customers' securities and
commodities transactions. Customers' securities activities are transacted on
either a cash or margin basis, while customers' commodities transactions are
generally transacted on a margin basis subject to individual exchange
regulations. In connection with these activities, the Company executes and
clears customers' transactions involving the sale of borrowed securities
("short sales") and the writing of option contracts. These transactions may
expose the Company to off-balance-sheet risk in the event that customers are
unable to fulfill their contractual obligations and customers' margin deposits
are insufficient to fully cover their losses. In the event the customers fail to
satisfy their obligations, the Company may be required to purchase or sell
financial instruments at prevailing market prices in order to fulfill the
customers' obligations.
The Company seeks to control the risks associated with its customers'
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company monitors required
margin levels daily and, pursuant to such guidelines, may require customers to
deposit additional cash or collateral, or to reduce positions, when deemed
necessary. The Company also establishes credit limits for customers engaged in
commodity activities that are monitored daily. Additionally, with respect to
the Company's correspondent clearing activities, introducing correspondent firms
are required to guarantee the contractual obligations of their customers.
The Company's customer-financing and securities-settlement activities
may require the Company to pledge customers' securities as collateral to satisfy
exchange margin deposit requirements or to support various secured-financing
sources such as bank loans, securities loaned and repurchase agreements. In the
event the counterparties are unable to meet their contractual obligations to
return customer securities pledged as collateral, the Company may be exposed to
the risk of acquiring the securities at prevailing market prices in order to
satisfy its customers' obligations. The Company seeks to control this risk by
monitoring the market value of securities pledged on a daily basis and by
requiring adjustments of collateral levels in the event of excess market
exposure. Moreover, the Company establishes credit limits for such activities
and monitors credit compliance daily.
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Credit Risk
The Company is engaged in various securities underwriting, brokerage and trading
activities. These services are provided to a diverse group of domestic and
foreign corporations, governments and individual and institutional investors. A
substantial portion of the Company's transactions are collateralized and are
executed with, or made on behalf of, institutional investors, including other
brokers and dealers, commercial banks, insurance companies, pension plans and
mutual funds and other financial institutions. The Company's exposure to credit
risk, associated with the nonperformance of customers in fulfilling their
contractual obligations, pursuant to securities and commodities transactions,
can be directly impacted by volatile or illiquid trading markets which may
impair customers' ability to satisfy their obligations to the Company. The
Company attempts to minimize credit risk associated with these activities by
monitoring customers' credit exposure and collateral values on a daily basis and
by requiring additional collateral to be deposited with or returned to the
Company. A significant portion of the Company's securities processing activities
includes clearing transactions for hedge funds, specialists, market-makers, risk
arbitrageurs and other professional traders. Due to the nature of their
operations, which may include a significant level of margin activity, short
selling and option writing, the Company may have significant credit exposure
should these customers be unable to meet their commitments. The Company seeks to
control this risk by monitoring margin collateral levels on a daily basis for
compliance with both regulatory and internal guidelines. Additional collateral
is requested when necessary. To further control this risk, the Company has
developed computerized risk control systems which analyze customers' sensitivity
to major market movements. When deemed necessary, the Company will require the
customers to deposit additional margin collateral, or reduce positions, if it is
determined that the customers' activities may be subject to above-normal market
risks.
Non-Trading Derivatives Activity
In order to modify the interest rate characteristics of its long- and short-term
debt, the Company also engages in non-trading derivatives activities. The
Company has issued dollar and foreign currency-denominated debt with both
variable and fixed-rate interest payment obligations. The Company has entered
into interest rate swaps primarily based on LIBOR, in order to convert
fixed-rate interest payments on its debt obligations into variable-rate
payments. Interest payment obligations on variable-rate debt obligations may
also be modified through interest rate swaps which may change the underlying
basis or reset frequency. In addition, for foreign currency debt obligations
which are not used to fund assets in the same currency, the Company has entered
into currency swap agreements which effectively convert the debt into dollar
obligations.
These financial instruments with off-balance-sheet risk are subject to
the same market and credit risks as those which are traded in connection with
the Company's market-making and trading activities. The Company has the same
controls in place to monitor these risks.
At June 30, 1997 and 1996, the Company had outstanding interest rate
and currency swap agreements with a notional principal amount of $7.9 billion
and $6.0 billion, respectively. The interest rate swap agreements entered into
reduced net interest expense on the Company's long-term and short-term debt
obligations by $29.4 million, $15.9 million and $21.1 million for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively. The difference to be
received or paid on the swap agreements is included in interest expense as
incurred, and any related receivable or payable is reflected accordingly as an
asset or liability.
12 - COMMITMENTS AND CONTINGENCIES
Leases
The Company occupies office space under leases which expire at various dates
through 2016. The lease commitments include the lease of the Company's
headquarters at 245 Park Avenue, New York City which expires on December 31,
2002. In addition, in September 1997, the Company entered into a 99-year ground
lease at 383 Madison Avenue, New York City, pursuant to which an office tower
will be developed and built. The site will serve as the new worldwide
headquarters and will be completed by the expiration of the current lease at 245
Park Avenue. At June 30, 1997, future minimum aggregate annual rentals payable
under these noncancelable leases (net of subleases), including 383 Madison
Avenue, were as follows:
In thousands
-----------------------------------------------------
FISCAL YEAR
-----------
1998 65,069
1999 62,519
2000 143,823
2001 54,477
2002 52,162
Aggregate amount thereafter 238,615
-----------------------------------------------------
65
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The various leases contain provisions for periodic escalations to the
extent of increased operating and other costs. Rental expense, including
escalations, under these leases was $79.5 million, $77.0 million, and $73.8
million, for the years ended June 30, 1997, 1996 and 1995, respectively.
Letters of Credit
At June 30, 1997, the Company was contingently liable for unsecured letters of
credit of $2.5 billion and letters of credit of $78.0 million secured by
financial instruments which are principally used as deposits for securities
borrowed and for satisfying margin deposits at option and commodity exchanges.
Borrow Versus Pledge
At June 30, 1997, US government and agency securities with a market value of
approximately $5.7 billion had been pledged against borrowed securities with an
approximate market value of $5.6 billion.
Litigation
In the normal course of business, the Company has been named as a defendant in
several lawsuits which involve claims for substantial amounts. Although the
ultimate outcome of these suits cannot be ascertained at this time, it is the
opinion of management, after consultation with counsel, that the resolution of
such lawsuits will not have a material adverse effect on the results of
operations or the financial condition of the Company.
13 - SEGMENT AND GEOGRAPHIC AREA DATA
The Company is primarily engaged in a single line of business as a securities
broker and dealer, which comprises several classes of services, such as
principal transactions, agency transactions, and underwriting and investment
banking. These activities constitute a single industry segment for purposes of
SFAS 14. Information regarding the Company's operations for the fiscal years
ended June 30 is as follows:
<TABLE>
<CAPTION>
In thousands 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign revenues $ 535,275 $ 460,055 $ 252,825
Domestic revenues 5,542,003 4,503,808 3,500,747
------------------------------------------------------------------------------------------------------------------
Consolidated revenues $ 6,077,278 $ 4,963,863 $ 3,753,572
==================================================================================================================
Foreign income before provision for income taxes $ 28,790 $ 53,470 $ 3,147
Domestic income before provision for income taxes 984,900 781,456 384,935
------------------------------------------------------------------------------------------------------------------
Consolidated income before provision for income taxes $ 1,013,690 $ 834,926 $ 388,082
==================================================================================================================
Foreign assets $ 22,148,655 $ 17,219,879 $ 10,428,506
Domestic assets 99,284,880 74,865,278 64,168,654
------------------------------------------------------------------------------------------------------------------
Consolidated assets $ 121,433,535 $ 92,085,157 $ 74,597,160
==================================================================================================================
</TABLE>
Because of the international nature of the financial markets and the resultant
integration of US and non-US services, it is difficult to precisely separate
foreign operations. The Company conducts and manages these activities with a
view toward the profitability of the Company as a whole. Accordingly, the
foreign operations information is, of necessity, based upon management judgments
and internal allocations.
66
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 - QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
In thousands, except per share data Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1997
Revenues $ 1,236,153 $ 1,556,530 $ 1,511,301 $ 1,773,294 $ 6,077,278
------------------------------------------------------------------------------------------------------------------
Interest expense 547,469 616,396 576,836 810,663 2,551,364
------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 688,684 940,134 934,465 962,631 3,525,914
Non-interest expenses
Employee compensation and benefits 344,372 456,825 464,596 461,138 1,726,931
Other 165,795 192,754 194,094 232,650 785,293
------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 510,167 649,579 658,690 693,788 2,512,224
------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 178,517 290,555 275,775 268,843 1,013,690
Provision for income taxes 70,068 114,043 110,294 105,955 400,360
------------------------------------------------------------------------------------------------------------------
Net income $ 108,449 $ 176,512 $ 165,481 $ 162,888 $ 613,330
==================================================================================================================
Earnings per share $ 0.70 $ 1.21 $ 1.14 $ 1.15 $ 4.20
==================================================================================================================
Cash dividends declared per common share $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.60
==================================================================================================================
First Second Third Fourth
In thousands, except per share data Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1996
Revenues $ 1,074,434 $ 1,190,063 $ 1,295,996 $ 1,403,370 $ 4,963,863
------------------------------------------------------------------------------------------------------------------
Interest expense 456,945 502,403 503,754 518,069 1,981,171
------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 617,489 687,660 792,242 885,301 2,982,692
------------------------------------------------------------------------------------------------------------------
Non-interest expenses
Employee compensation and benefits 306,997 345,427 392,442 424,582 1,469,448
Other 154,082 161,352 177,985 184,899 678,318
------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 461,079 506,779 570,427 609,481 2,147,766
Income before provision for income taxes 156,410 180,881 221,815 275,820 834,926
Provision for income taxes 62,564 75,725 92,944 113,055 344,288
------------------------------------------------------------------------------------------------------------------
Net income $ 93,846 $ 105,156 $ 128,871 $ 162,765 $ 490,638
==================================================================================================================
Earnings per share $ 0.60 $ 0.69 $ 0.86 $ 1.12 $ 3.27
==================================================================================================================
Cash dividends declared per common share $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.60
==================================================================================================================
</TABLE>
67
<PAGE>
Independent Auditors' Report
Deloitte &
Touche LLP
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF THE BEAR STEARNS COMPANIES INC.
We have audited the accompanying consolidated statements of financial condition
of The Bear Stearns Companies Inc. and Subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of income, cash flows and changes
in stockholders' equity for each of the three years in the period ended June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of The Bear Stearns Companies
Inc. and Subsidiaries at June 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1997 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
SEPTEMBER 2, 1997
68
<PAGE>
The Bear Stearns Companies Inc.
CORPORATE INFORMATION
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock of the Company is traded on the NYSE under the symbol BSC.
The following table sets forth for the periods indicated the high and low
sales prices for the Common Stock, as adjusted to reflect the 5% stock
dividend distributed on the Common Stock on February 28, 1997, and the cash
dividends declared on the Common Stock.
As of September 3, 1997, there were 3,085 holders of record of the
Company's Common Stock. On September 3, 1997, the last reported sales price
of the Company's Common Stock was $42 1\8.
Dividends are payable on January 15, April 15, July 15, and October
15 in each year on the Company's outstanding Adjustable Rate Cumulative
Preferred Stock, Series A; Cumulative Preferred Stock, Series B; and
Cumulative Preferred Stock, Series C (collectively, the "Preferred Stock").
The terms of the Preferred Stock require that all accrued dividends in
arrears be paid prior to the payment of any dividend on the Common Stock.
Since the Company is a holding company, its ability to pay
dividends is limited by the ability of its subsidiaries to pay dividends and
to make advances to the Company. See the Notes to Consolidated Financial
Statements under the caption "Regulatory Requirements" for a further
description.
<TABLE>
<CAPTION>
Cash Dividends
Declared Per
High Low Common Share
====================================================================================================================
<S> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1997
First Quarter (through September 27, 1996) $ 23 1\4 $ 19 3\4 $ 0.15
Second Quarter (through December 31, 1996) 26 7\8 22 0.15
Third Quarter (through March 27, 1997) 32 3\8 25 5\8 0.15
Fourth Quarter (through June 30, 1997) 35 5\8 26 1\4 0.15
----------------------------------------------------------------------------------------------------
Cash Dividends
Declared Per
High Low Common Share
====================================================================================================================
FISCAL YEAR ENDED JUNE 30, 1996
First Quarter (through September 29, 1995) $ 20 7\8 $ 17 3\4 $ 0.15
Second Quarter (through December 31, 1995) 19 7\8 17 1\2 0.15
Third Quarter (through March 29, 1996) 23 17 1\4 0.15
Fourth Quarter (through June 30, 1996) 23 3\8 20 3\4 0.15
----------------------------------------------------------------------------------------------------
</TABLE>
71
EXHIBIT 21
Subsidiaries of The Bear Stearns Companies Inc.
-----------------------------------------------
Jurisdiction of
Incorporation
or Organization
---------------
Bear Stearns Acquisition Corp. Delaware
Bear Stearns Acquisition II, Inc. Delaware
Bear Stearns Acquisition Corporation IV Delaware
Bear Stearns Acquisition V, Inc. Delaware
Bear Stearns Acquisition Corporation VII Delaware
Bear Stearns Acquisition XII, Inc. Delaware
Bear Stearns Acquisition XIV, Inc. Delaware
Bear Stearns Acquisition XV Corp. Delaware
ALIMAX Corp. New York
AMC Real Estate Inc. Texas
Bear Stearns Argentina Inc. Delaware
Bear Stearns Asia Limited Hong Kong
Bear Stearns Asset Backed Investors Corp. Delaware
Bear Stearns Asset Backed Securities, Inc. Delaware
AURA Partners, L.P. Delaware
Bear Stearns Bank plc Ireland
Battery Park Capital Corp. New York
BBT 1995-I Corp. Delaware
Bear Hunter L.L.C. New York
Bear Specialist, Inc. New York
Bear TEL Corp. Delaware
Bear, Stearns Benefits Planning Group Inc. Delaware
Bear Stearns Benefits Planning Group New York
Bear Stearns Bridge Management I Inc. Delaware
BS Agency GP Capital Inc. Delaware
BS Fund America 1993-C GP Capital Inc. Delaware
BS Fund America 1993-D GP Capital Inc. Delaware
BSC Hotel Capital Corporation New York
BSC Securities Corp. New York
<PAGE>
BSC Service Corp. Delaware
BSC Thanksgiving Partners, Ltd. Texas
BSCGP Inc. Delaware
BSCP Cayman, Inc. Cayman Islands
BSMSI 1993-12 Reserve Fund Corp. Delaware
Bear Stearns Capital Markets Inc. Delaware
Bear Stearns China Direct Investment Cayman Islands
Fund, L.P.
Bear Stearns China, L.P. Cayman Island
Bear Stearns China SPC, Inc. Delaware
CLBS Titrisation S.A. France
Bear Stearns S.A. France
Safety Acquisition Corp. Delaware
Bear Stearns Secured Investors Inc. Delaware
Bear Stearns Secured Investors Inc. II Delaware
Bear Stearns Securities Administration Corporation Delaware
Bear, Stearns Securities Corp. New York
Short Term Asset Corp. Delaware
Bear Stearns Singapore Asset Holdings Pte Ltd Singapore
Bear Stearns Singapore Pte. Limited Singapore
Bear Stearns Spanish Securitization Corp. Delaware
Bear Stearns State Asia, Inc. Philippines
Status Securities Inc. New York
Street Pricing Service New York
Bear Stearns Structured Products Corp. Delaware
Bear Stearns Structured Securities Inc. Delaware
Thanksgiving Properties, Inc. Delaware
Thanksgiving Tower Partners Texas
The Bear Stearns Charitable Foundation, Inc. New York
The BSC Employee Fund, L.P. Delaware
Bear Stearns Trading Risk Management Inc. Delaware
2
<PAGE>
Bear Stearns U.K. United Kingdom
Ursa Oil Corporation Delaware
U.S. Leather Holdings, Inc. Delaware
VHC Acquisition Corp. Delaware
White River Securities Corp. New York
Yorktown Creole Corp. Texas
Yorktown Realty Corp. Texas
Bear, Stearns Insurance Agency Incorporated Massachusetts
Bear Stearns Insurance Agency of California, California
Incorporated
Bear, Stearns International Holdings Inc. New York
Bear, Stearns International Limited United Kingdom
Bear Stearns International Trading Limited United Kingdom
Bear Stearns Investment Advisors Inc. Delaware
Bear Stearns Investment Partnership 1987-II New York
Bear Stearns Investments Products Inc. New York
Bear Stearns Irish Holdings Inc. Delaware
ISB Real Estate Corporation Delaware
Bear Stearns (Israel), Inc. Delaware
Bear Stearns (Japan), Ltd. Delaware
LIBOR Asset Securities, Inc. Delaware
Managed Income Securities Fund, Inc. Delaware
MAX Flow Corp. Delaware
MAX Recovery Inc. Delaware
Monterey Fund, Inc. New York
Bear Stearns Mortgage Capital Corporation Delaware
Bear Stearns Mortgage Securities Inc. Delaware
Motor City Four L.L.C. Delaware
Bear Stearns Municipal Capital Markets Inc. Delaware
Bear, Stearns Netherlands Holding B.V. Netherlands &
Delaware
3
<PAGE>
New Castle Holdings, Inc. Delaware
New Castle Partners LLC Cayman Islands
Bear Stearns N.Y., Inc. New York
Bear Stearns Oil Trading Limited United Kingdom
Bear Stearns Overseas Ltd. Cayman Islands
Bear Stearns Park Avenue Trading Corporation Delaware
Bear Stearns Philippines Ltd. Delaware
Priton Holding, Inc. Delaware
Priton Capital, L.P. Delaware
Quatro Finale LLC Delaware
Bear Stearns Real Estate Group Inc. New York
Bear, Stearns Realty Investors, Inc. Delaware
Bear Stearns Realty Partners Apartment Fund I, Delaware
L.P.
Bear Stearns Realty Partners Corporation Delaware
Research Conversion Corp. Delaware
RSD Hanover Company Inc. Delaware
Bear, Stearns & Co. Inc. Delaware
Bear, Stearns & Co., L.P. New York
Bear Stearns Commercial Mortgage, Inc. New York
Bear, Stearns Commercial Mortgage Securities Inc. Delaware
Bear Stearns Computer Network Inc. Delaware
CTC Services, Inc. New York
Custodial Trust Company New Jersey
Custrust New Jersey
Danbury River Properties, Inc. Connecticut
Bear Stearns do Brasil Ltda. Brazil
EMC Funding Corporation Delaware
EMC Funding Corporation Two Delaware
EMC GP Capital Inc. Delaware
EMC Mortgage Corporation Delaware
4
<PAGE>
EMC Residential Mortgage Corporation Delaware
Experimental Data Corporation New York
Bear Stearns Far East Limited Hong Kong
FAST 1996-2 GP, Inc. Delaware
FAST 1996-2 L.P. Delaware
Final Four LLC Delaware
Bear Stearns Finance LLC Cayman Islands
Bear Stearns Financial Products Inc. Delaware
Bear Stearns Finance S.A. France
Bear Stearns Financial Technologies Ltd. Delaware
Bear Stearns FLLC Corp. Delaware
Bear Stearns Forex Inc. Delaware
Fund America Structured Transactions, Inc. Delaware
Fund America Structured Transactions, L.P. Delaware
Bear, Stearns Funding, Inc. Delaware
Bear Stearns Funds Management Inc. New York
Bear Stearns Global Asset Holdings, Ltd. Cayman Islands
Bear Stearns Global Asset Trading, Ltd. Cayman Islands
Bear Stearns Global Equity Derivatives Inc. Delaware
Bear Stearns Global Investors Inc. New York
Bear Stearns Global Securitisation Limited United Kingdom
Bear Stearns GmbH Germany
Bear Stearns Government Products Corp. Delaware
Gregory Properties Inc. Delaware
Bear Stearns Holdings Limited United Kingdom
Bear Stearns Hong Kong Limited Hong Kong
5
EXHIBIT 23
DELOITTE &
TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statements of The
Bear Stearns Companies Inc. on Form S-3, File Nos. 33-59140, 33-56009,
333-17985, and 333-31277 and Form S-8, File Nos. 33-50012, 33-55804, 33-49979,
33-56103 and 333-16041 of our reports dated September 2, 1997, appearing in and
incorporated by reference in the Annual Report on Form 10-K of The Bear Stearns
Companies Inc. for the year ended June 30, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
September 29, 1997
New York, New York
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This Schedule contains summary financial information extracted from the
financial statements contained in the body of the accompanying Form 8-K and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,249,132
<RECEIVABLES> 10,206,360
<SECURITIES-RESALE> 28,340,599
<SECURITIES-BORROWED> 40,711,280
<INSTRUMENTS-OWNED> 38,437,280
<PP&E> 379,533
<TOTAL-ASSETS> 121,433,535
<SHORT-TERM> 14,416,671
<PAYABLES> 33,182,407
<REPOS-SOLD> 39,431,216
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 20,784,796
<LONG-TERM> 8,120,328
0
437,500
<COMMON> 167,785
<OTHER-SE> 2,671,086
<TOTAL-LIABILITY-AND-EQUITY> 121,433,535
<TRADING-REVENUE> 1,571,332
<INTEREST-DIVIDENDS> 3,058,452
<COMMISSIONS> 732,343
<INVESTMENT-BANKING-REVENUES> 663,249
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 2,551,364
<COMPENSATION> 1,726,931
<INCOME-PRETAX> 1,013,690
<INCOME-PRE-EXTRAORDINARY> 1,013,690
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 613,330
<EPS-PRIMARY> 4.20
<EPS-DILUTED> 4.20
</TABLE>
