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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended June 30, 1998.
Or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 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:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
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<S> <C>
Common Stock, par value $1.00 per share New York Stock Exchange
Adjustable Rate Cumulative New York Stock Exchange
Preferred Stock, Series A
Depositary Shares, each representing New York Stock Exchange
a one-fourth interest in a share of
6.15% Cumulative Preferred Stock,
Series E
Depositary Shares, each representing a one-fourth interest in New York Stock Exchange
a share of 5.72% Cumulative Preferred Stock,
Series F
Depositary Shares, each representing a one-fourth interest in New York Stock Exchange
a share of 5.49% Cumulative Preferred Stock, Series G
9-3/8% Senior Notes Due 2001 New York Stock Exchange
Customized Upside Basket Securities American Stock Exchange
Due 1998
S&P Linked Notes Due 2003 Chicago Board Options Exchange
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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 [_]
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 3, 1998, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was approximately
$3,980,847,763. 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 3, 1998, the registrant had outstanding 115,249,599 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 1998 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 29,
1998, 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, 1998.
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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 ended
June 30, 1998, classes of similar products or services 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 1998 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
("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.
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, 1998, the Company had approximately 9,200 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 engages in matched book activities, which involve acting
as an intermediary between borrowers and lenders of short-term funds, mainly via
repurchase agreements, reverse repurchase agreements and securities borrowed.
The objective of this matched book activity is to earn a positive spread between
interest rate differentials.
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. 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 that 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.
The Company also operates a commercial mortgage conduit that originates and
accumulates commercial mortgage loans for the purpose of securitizing its
production. After receipt of loan applications, extensive credit underwriting
reviews are conducted. After completing pricing analysis and successful
negotiations, the loan will "close" and be included in an ensuing
securitization. The Company does not retain any exposure to real estate risk
subsequent to securitizing and selling the deal, but does have exposure to the
performance of the underlying real estate after closing and prior to
securitization.
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. 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 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. The
Company also provides customers execution capabilities for baskets of equity
securities using sophisticated computer systems. 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 ("OTC") 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 runs a customer driven business that 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 that 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
customer 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 the
private placement of debt and equity securities with institutional investors.
The markets currently covered by the Company include Latin America, Asia, and
Europe.
Specialist Activities. The Company is a participant in a specialist unit on
the NYSE that performs specialist functions in 144 NYSE-listed stocks. This
market-making operation is conducted through a joint 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, hedge 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 on
servicing 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 commodities, including
options on futures, and physical products. 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 locations where the futures or commodity exchanges
reside, including the Securities and Futures Authority ("SFA") in the United
Kingdom.
The margin requirements covering substantially all transactions in futures
and options 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, the New York Mercantile Exchange and
other principal futures exchanges. In the United Kingdom, the Company is a
member of the International Petroleum Exchange ("IPE"), the London Commodity
Exchange ("LCE"), the London International Financial Futures Exchange ("LIFFE")
and OMLX, The London Securities & Derivatives Exchange ("OMLX"). The Company
also has memberships with Marche a Terme International de France, SA ("MATIF")
and the Deutsche Terminborse in Europe. In Japan, memberships are held with the
Tokyo Stock Exchange, the Osaka Stock Exchange and the Tokyo International
Financial Futures Exchange for clearing Japanese Government bond futures, for
clearing Japanese stock index products and for executing currency futures,
respectively.
International. Bear Stearns International Limited ("BSIL") is a securities
broker dealer based in London. Its principal activities are dealing on both a
principal and agency basis in bonds, equities and derivatives, along with
underwriting and investment banking. BSIL is regulated by the SFA, and is a
member of LIFFE, OLMX, the IPE and the LCE. Another London subsidiary, Bear
Stearns International Trading Limited ("BSIT"), is a market-maker in various
non-dollar-denominated equity securities. BSIT is a member of the London Stock
Exchange and Stock Exchange Automated Quotations International ("SEAQ"). BSIT is
also regulated by the SFA.
The Company's French subsidiary is Bear Stearns Finance S.A. ("BSFSA").
BSFSA is a "Societe Financiere" regulated by Banque de France and Commission
Bancaire. BSFSA is a clearing member of the MATIF and is primarily engaged in
equity sales and bond underwriting.
Bear Stearns Bank plc (the "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. The Bank engages in capital markets
activities with particular focus on the trading and sales of OTC interest rate
derivative products.
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 and is a regular member of the Osaka 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,
including derivatives, to institutional investors in Singapore, Southeast Asia,
Australia and New Zealand.
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 financial services, health care,
media/entertainment, merchandising, natural resources, pharmaceuticals, real
estate, gaming and lodging, technology and telecommunications. 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.
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 leveraged 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 "professional clearing clients" such as: hedge funds,
market-makers, specialists, arbitrageurs, money managers, and other professional
investors trading at multiple securities firms.
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 customer
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 guarantees 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 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. 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 a margin transaction, the Company extends
credit to a customer for a portion of the purchase price, subject to various
regulatory and internal requirements, which is collateralized by securities and
cash in the customer's account. 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, brokers call rate or
LIBOR. By allowing a customer 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 and other trading entities 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 nearly
$10 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 and high-net-worth products include: Large, Mid
and Small Cap Value Equity; Global and Emerging Markets Fixed Income; Cash
Management; Alternative Investment Strategies, including Hedge Funds, Private
Equity, Venture Capital and Collateralized Bond Obligations; and Wrap Accounts.
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, Focus
List, International Equity, Balanced, Total Return Bond, High Yield Total
Return, and The Emerging Markets Debt Portfolios.
Equity Research. The Equity Research Department provides comprehensive
industry and company coverage on over 1,100 stocks in more than 100 industries.
The focus of the Department's 90 analysts is fundamental research on domestic
and international stocks.
Fixed Income Research is comprised of the following three units:
(i) 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.
(ii) High grade research consists of approximately 15 analysts and
researchers and provides coverage of over 28 industries and 700
companies.
(iii) High yield research consists of 28 analysts and researchers for
domestic issues and 15 analysts and researchers for
international issues, provides coverage on over 600 corporate
and sovereign issuers of below investment grade fixed income
securities.
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, 1998, CTC held over $100 billion of assets for
clients, including institutional clients such as pension funds, mutual funds,
endowment funds, religious organizations and insurance companies.
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 3,900 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.
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
annual aggregate, 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: recordkeeping; 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 that can result in censures, fines, the issuance 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, 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:
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) (the "Net
Capital Rule") 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 broker dealers and requires that at least a
minimal portion of its assets be kept in relatively liquid form.
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 that 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, which provides insurance protection for customer accounts held by
these entities 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, BSSC maintains $99.5 million of additional
security-positions coverage from a private insurer for each of 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 Insurance and the Federal
Deposit Insurance Corporation ("FDIC"). FDIC regulations applicable to CTC limit
the extent to which CTC and Bear Stearns may have common 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 cross-marketing of
certain services with its affiliates and (iii) 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 the United Kingdom Financial Services
Act 1986, which governs all aspects of the investment business in the United
Kingdom including: regulatory capital, sales and trading practices, use and
safekeeping of customer funds, securities recordkeeping, margin practices and
procedures, registration standards for individuals, 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 and the LCE. BSIT is a member of the London Stock Exchange
and SEAQ International.
Bear Stearns Bank plc 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. The Bank engages in capital markets activities with
particular focus on the trading and sales of OTC interest rate derivative
products.
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 and is a
regular member of the Osaka 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, including
derivatives, to institutional investors in Singapore, Southeast Asia, Australia
and New Zealand.
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 287,000 square feet, while its eleven foreign offices occupy a
total of approximately 120,000 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 and accounting
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.
The Company is a party to a lease with respect to 383 Madison Avenue, New
York, New York which provides for the development of this site as its new world
corporate headquarters. The office tower is scheduled to be completed by the
expiration of the current lease at 245 Park Avenue in 2002.
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
outside 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 ("Daouk") commenced an
action in the United States District Court for the Southern District of New York
against Lehman Brothers, Inc. ("Lehman") and Bear Stearns. Plaintiffs alleged
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 in 1992.
The complaint alleged, 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
depleting, 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 statements created
by Daouk.
Bear Stearns was 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 asserted 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 sought compensatory damages in unspecified amounts
and imposition of constructive trusts with respect to any property that
"belongs, or may belong" to plaintiffs in Lehman's or Bear Stearns' possession.
On March 27, 1998, the court dismissed plaintiffs' claims for negligence
and negligent misrepresentation with prejudice and dismissed plaintiffs' claims
for fraud, constructive fraud, aiding and abetting fraud, breach of fiduciary
duty and aiding and abetting breach of fiduciary duty with leave to replead. On
May 8, 1998, Bear Stearns and Lehman each served an answer to the complaint
denying liability. Also on May 8, 1998, Bear Stearns and Lehman jointly filed a
third-party complaint and counterclaim asserting counterclaims against certain
plaintiffs for unjust enrichment, monies had and received, and for return of
funds fraudulently conveyed and asserting a third-party claim for contribution
against Sigma International Limited S.A.R.L.
On July 3, 1998, an amended complaint was filed against the same defendants
and seeking the same relief as in the original complaint, and asserting the same
claims against Bear Stearns other than the claims that the court dismissed with
prejudice. In addition, one plaintiff is no longer named, leaving 276
plaintiffs. On August 12, 1998, Bear Stearns and Lehman filed an answer to the
amended complaint denying liability.
Bear Stearns has denied 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.
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 of debentures and 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 allege, 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(a) 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 compensatory, punitive and treble damages in
unspecified amounts.
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.
On August 21, 1998, a jury returned a verdict against Bear Stearns finding
that statements in the offering materials relating to the timing of payment of
guaranteed advances to WEG were false and misleading. The jury awarded damages
to one of the three named plaintiffs in the amount of approximately $6.5
million. The jury's finding also will have the effect of entitling the two other
named plaintiffs to damages in the aggregate of approximately $1 to $1.5
million, and may entitle certain class members to damages in amounts that have
not yet been determined.
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 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 the Sherman Antitrust Act and the Donnelly Act. Claimants seek
compensatory damages in an unspecified amount, but in a range of $30 to $40
million or more, and punitive and treble damages in unspecified amounts.
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.
One June 16, 1997 and October 17, 1997, respectively, the Trustees and one
of the individual investment advisers commenced two actions in the Supreme Court
of the State of New York for the County of New York seeking to stay the
arbitration as to the third-party claims asserted against them.
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 the Alico proceeding 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 has denied all allegations of wrongdoing asserted against it
in the Amalgamated and Alico arbitration proceedings, intends to defend against
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, BSSC and a managing director
of Bear Stearns (collectively, "Bear Stearns").
On January 13, 1998, the Berwecky and Perry cases were consolidated for all
purposes and lead plaintiffs and lead counsel for plaintiffs were appointed. On
April 1, 1998, an amended consolidated class action complaint was filed. As
amended, the complaint alleges, 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 consisting of all persons who acquired
securities from Baron between July 20, 1995 through June 28, 1996. Damages in an
unspecified amount are sought.
Bear Stearns has denied 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.
(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 BSSC (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 consisting of all persons who were customers of Baron from
July 20, 1995 through July 3, 1996. Plaintiff seeks damages in an unspecified
amount.
On August 24, 1998, the court dismissed this case.
(iii) In connection with investigations concerning the A.R. Baron brokerage
firm and other correspondent firms, Bear Stearns and BSSC have received formal
and informal inquiries from various regulatory and governmental agencies.
(iv) 110958 Ontario Inc. v. Bear Stearns, et al. On February 19, 1997, a
brokerage customer of Baron commenced an NASD arbitration proceeding against
Bear Stearns, BSSC and three Bear Stearns directors and/or officers. On
September 9, 1997, an amended Statement of Claim was filed. Claimant alleges,
among other things, that the defendants violated Section 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
committed common law fraud, breach of contract, and negligence, in connection
with alleged misconduct by Baron (for whom Bear Stearns acted as clearing
broker), Baron's principal and Baron's parent corporation, The Baron Group Inc.
(BGI), including engaging in unauthorized trading in claimant's brokerage
account and fraudulently inducing claimant to give Baron a secured demand note
and to invest in BGI. Claimant seeks compensatory damages of $22 million and
punitive damages of $75 million.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this arbitration proceeding, intends to defend against these claims
vigorously, and believes that it has substantial defenses to these claims.
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 dismissed, with leave to replead, all claims in the first amended
complaint asserted against Bear Stearns. 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. On April 2, 1997, the court dismissed plaintiff's Section 20(a)
claim. 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 damages in an
unspecified amount.
On May 16, 1997, Bear Stearns filed an answer denying liability and
asserting affirmative defenses. Bear Stearns intends to defend against these
claims vigorously, and believes that it has substantial defenses to these
claims.
In re Donna Karan International Inc. Securities Litigation. Beginning on
June 19, 1997, two actions, captioned Spencer C. Busby, et al. v. Donna Karan
International, Inc., et al. and Salvatore Portannese, et al. v. Donna Karan
International, Inc., et al., were commenced in the United States District Court
for the Eastern District of New York involving an initial public offering on
June 27, 1996 of 10,750,000 shares of common stock of Donna Karan International,
Inc. at a price of $24 per share (the "Offering"). 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. Incorporated,
Bear Stearns, Merrill Lynch & Co. and Smith Barney Inc. (the "Underwriters").
On August 22, 1997, the Busby and Portannese actions were consolidated with
Steinmetz v. Donna Karan International, Inc., et al., a related class action
which does not assert claims against the Underwriters. On September 9, 1997, the
court appointed plaintiffs in the Busby, Portannese and Steinmetz cases co-lead
plaintiffs and approved their selection of counsel. On November 10, 1997,
plaintiffs filed an amended consolidated complaint.
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 and the company's
ability to implement expansion plans. Plaintiffs allege violations by all
defendants, including the Underwriters, of Sections 11 and 12(a)(2) of the
Securities Act of 1933. With respect to the claims asserted against the
Underwriters, including Bear Stearns, plaintiffs purport to represent a class
consisting of all persons who purchased shares of Donna Karan common stock
during the period June 27, 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 and rescissory relief.
On August 14, 1998, the court dismissed this action but allowed plaintiffs
until September 18, 1998 to seek the Court's permission to file an amended
complaint.
Bear Stearns has denied 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.
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, County of Los Angeles, against Bear Stearns and three present or
former Bear Stearns officers. The case involved 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 alleged 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' complaint alleged, among other things, fraud, intentional
interference with prospective economic advantage, misappropriation of trade
secrets and breach of implied and oral contract. Plaintiffs seek compensatory
damages in excess of $25 million and punitive damages in an unspecified amount.
On March 26, 1996, Bear Stearns filed an answer denying liability and
asserting affirmative 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 were found to have breached a
contract with plaintiffs, the contract was induced by fraud and thus voidable.
On October 17, 1997, the court, ruling on summary judgment motions,
dismissed all claims against a former Bear Stearns officer named as a defendant,
dismissed all claims other than fraud against two Bear Stearns officers named as
defendants, and dismissed plaintiffs' claim for intentional interference with
prospective economic advantage against Bear Stearns.
The case has been settled.
County of Orange v. Bear, Stearns & Co., Inc., et al. On December 5, 1996,
the County of Orange, California ("Orange County") and John Moorlach, Orange
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
BSSC (collectively, "Bear Stearns"). The action arises in connection with a
bankruptcy petition Orange County filed in the Bankruptcy Court on December 6,
1994. On May 17, 1996, the Bankruptcy Court confirmed a plan pursuant to which
Orange 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 Orange County that the
transactions were unsuitable and failing to obtain the informed consent of
Orange County's Board of Supervisors for these securities transactions. Orange
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 had entered into a stipulation staying the
proceeding pending the completion of other litigation, not involving Bear
Stearns. The stay terminated effective August 21, 1998.
Bear Stearns has denied 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 for the
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 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, 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
subrogated to the claims of all other claimants in the bankruptcy. The Trustee
seeks compensatory and punitive damages in an unspecified amount.
On May 13, 1993, Bear Stearns filed an answer 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.
On May 15, 1998, a jury returned a verdict finding that Bear Stearns had
committed professional negligence and awarded damages in the amount of
$108,000,000, which represented 39% of the claimed damages. The jury also found
that Bear Stearns had not breached any fiduciary duties. Judgment was entered on
May 19, 1998. On June 2, 1998, Bear Stearns filed a motion for judgment as a
matter of law, or in the alternative, for a new trial or for remittitur. On
August 7, 1998, the court issued an order denying judgment as a matter of law
and, at plaintiffs' option, either granting remittitur in the amount of
approximately $36,000,000 or granting Bear Stearns a new trial.
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 fiduciary duty, negligence, breach
of contract, failure to supervise the claimants' accounts and conspiracy. The
claimants seek compensatory damages in excess of $20 million and punitive
damages in an unspecified amount.
On June 27, 1997, Bear Stearns filed an answer denying liability and
asserting affirmative defenses. Bear Stearns intends to defend these claims
vigorously and believes that it has substantial defenses to these claims.
Deutch v. Silverman, et al. On April 27, 1998, a shareholder of Cendant
Corp. ("Cendant") commenced a purported derivative action on behalf of Cendant
in the United States District Court for the District of New Jersey against Bear
Stearns Companies Inc., Bear, Stearns & Co., Inc., and certain present and
former directors and/or officers of Cendant, CUC International, Inc. ("CUC")
and/or HFS, Inc. ("HFS"). The complaint alleges, among other things, that the
Bear Stearns defendants committed gross negligence in connection with acting as
a financial advisor to HFS with respect to a merger between CUC and HFS. Damages
in an unspecified amount are sought.
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 those claims.
Bernard H. Glazier v. Bear, Stearns & Co., Inc. On May 11, 1993, Bernard H.
Glazier commenced an action in the District Court of Harris County, Texas,
against, among others, Bear Stearns. 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 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 to
another corporate entity.
Plaintiff alleges, among other things, theft and misuse of trade secrets,
misappropriation, breach of fiduciary duty, tortuous 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 and punitive damages in an unspecified
amount.
On July 21, 1997, Bear Stearns filed an answer denying liability and
asserting affirmative defenses. On June 10, 1998, the District Court granted
summary judgment in favor of Bear Stearns on all of plaintiff's claims. On June
23, 1998, plaintiff filed a notice of appeal.
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. Six
actions involving Bear Stearns relating to the Funds are pending. Five 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 sixth 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 filed action in the United States District
Court for the Northern District of California to include for the first time
claims against the Dealer Defendants. Also named as defendants are Askin and ACM
(the "Askin Defendants"). The complaint alleges, among other things, that the
Dealer Defendants aided and abetted an alleged fraud, committed common law
fraud, aided and abetted a breach of fiduciary duty by the Askin Defendants,
committed breach of contract, and violated the Uniform Commercial Code
provisions and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Plaintiff seeks to recover the amount it
paid for its interest in the Funds (alleged to be approximately $1 million) and
punitive damages in an unspecified amount.
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, the
court dismissed all claims, but granted plaintiff leave to replead its claim
that the Dealer Defendants aided and abetted an alleged fraud by the Askin
Defendants. On November 8, 1996, a third amended complaint was filed.
On July 11, 1997, Bear Stearns filed an answer to the complaint denying
liability and asserting affirmative defenses.
On October 27, 1997, this action was consolidated with the ABF Capital,
Montpellier and Johnston actions (described below) for pretrial purposes.
On March 19, 1998, plaintiff's motion for class certification was denied.
(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 commenced
an action 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 allege, among other things, that the Dealer Defendants aided and
abetted fraud, aided and abetted an alleged breach of fiduciary duty by ACM,
were unjustly enriched and violated the Racketeer Influenced and Corrupt
Organizations Act.
On January 24, 1997, the court dismissed all claims other than the
plaintiffs' claim that the Dealer Defendants aided and abetted an alleged fraud
by ACM. Plaintiffs seek to recovery 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.
On February 28, 1997, Bear Stearns filed an answer to the complaint denying
liability and asserting affirmative defenses.
On October 27, 1997, this action was consolidated with the Primavera action
(described above) and the Montpellier and Johnston actions (described below) for
pretrial purposes.
On March 19, 1998, plaintiffs' motion for class certification was denied.
(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 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.
On July 7, 1997, Bear Stearns filed an answer to the complaint denying
liability and asserting affirmative defenses.
On October 27, 1997, this action was consolidated with the ABF Capital and
Primavera actions (described above) and the Johnston action (described below)
for pretrial purposes.
On March 19, 1998, plaintiffs' motion for class certification was denied.
(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) and punitive damages
in excess of $100 million from each defendant.
On August 18, 1997, Bear Stearns filed an answer to the complaint denying
liability and asserting affirmative defenses.
On October 27, 1997, this action was consolidated with the Primavera, ABF
Capital and Montpellier actions (described above) for pretrial purposes.
(v) Bambou Inc., et al. V. David Askin. et al. On September 4, 1998, an
action was commenced in the United States Court for the Southern District of New
York by four purported investors in the Funds against Askin, ACM and the Dealer
Defendants. Plaintiffs allege, among other things, that the Askin Defendants
committed fraud and that the Dealer Defendants aided and abetted fraud.
Plaintiffs seek to recover their investments in the Funds (alleged to have been
approximately $9 million) and punitive damages in unspecified amounts.
(vi) 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 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 with
the contracts between the Funds and other dealers, committed common law fraud,
negligent misrepresentation and innocent misrepresentation, breached warranties
and unjustly enriched themselves. The complaint 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.
On August 25, 1998, the court dismissed, with leave to replead, all claims
other than the Trustee's claims for breach of contact through improper margin
calls and liquidations.
Bear Stearns has denied 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, BSSC, 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.
On October 16, 1997. Bear Stearns filed an answer to the complaint denying
liability and asserting affirmative defenses. Bear Stearns 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, 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, 12(2) and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Act of
1934 against Bear Stearns and Oppenheimer. Plaintiffs purport to represent a
class consisting of all persons who purchased shares of Lady Luck from September
29, 1993 to October 11, 1994.
On October 8, 1997, the court dismissed with prejudice all of plaintiffs'
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
The court also dismissed with prejudice plaintiffs' claims under Sections 11,
12(2), and 15 of the Securities Act of 1933, with respect to eleven of sixteen
alleged misrepresentations or omissions in the Lady Luck prospectus underlying
the litigation. Plaintiffs' claims with respect to the remaining five alleged
misrepresentations or omissions were dismissed without prejudice, pending the
filing of an amended complaint limited only to those claims.
On November 6, 1997, plaintiffs filed a third amended complaint alleging
claims under Sections 11, 12(2) and 15 of the Securities Act of 1933 on behalf
of the same purported class and against the same defendants as in the second
amended complaint. Compensatory damages in an unspecified amount are sought.
Bear Stearns has denied 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.
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.
On December 23, 1997, plaintiffs and all but one of the defendants who
previously had not agreed to settle litigation, including Bear Stearns, agreed
to a proposed settlement that is subject to court approval. That settlement
requires, among other things, that Bear Stearns (1) pay, on or before January 7,
1998, approximately $1.1 million to a settlement fund; and (2) pay, on or before
September 30, 1998, to the settlement fund U.S. Treasury securities which shall
mature on or before July 30, 1999, and shall have a value at maturity of
approximately $40.6 million. On December 31, 1997, the court issued an order
expanding the Class Period to May 1, 1989 through July, 17, 1996. Also on
December 31, 1997, the court preliminarily approved the proposed settlement on
behalf of the expanded class. The settlement is subject to final approval by the
court following notice to class members and a hearing on the fairness of the
settlement.
On March 23, 1998, plaintiffs and the class agreed to a proposed settlement
with the one defendant that had not settled previously, and on March 30, 1998,
the court preliminarily approved the settlement. The settlement is subject to
final approval by the court following notice to class members, which was sent in
May, 1998 and a hearing on the fairness of the settlement.
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.
The claimant alleges, among other things, that the respondents committed
breach of the fiduciary duty, negligence, breach of contract and failure to
supervise, and violated NASD, SEC and NYSE Rules, in connection with
unauthorized wire transfers from its account. The claimant seeks damages in
excess of $15 million.
On June 13, 1997, Bear Stearns filed an answer denying liability and
asserting affirmative defenses. Bear Stearns 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.
<PAGE>
Executive Officers of the Company
The following table sets forth certain information as of September 15, 1998
concerning executive officers of the Company as of July 1, 1998.
<TABLE>
<CAPTION>
Age as of
September 15,
Name 1998 Principal Occupation and Directorships Held
- ---- ---- -------------------------------------------
<S> <C> <C>
Alan C. Greenberg...................... 71 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......................... 64 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......................... 47 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee
Alan D. Schwartz....................... 48 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...................... 40 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee and the
Management and Compensation Committee
William J. Montgoris................... 51 Chief Operating Officer of the Company and Bear
Stearns and member of the Management and Compensation
Committee; Member of the Executive Board of St.
John's University
Samuel L. Molinaro Jr.................. 40 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.
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.
<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 Operations.
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 "Market Risk" 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.
<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 1998 Annual Meeting of Stockholders
to be held on October 29, 1998, 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.
<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
(incorporated by reference to Exhibit No. (4)(a)(1) to the
registrant's registration statement on Form S-3 (File No.
333-57083)).
(3)(a)(2) 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)(3) 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)(4) 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)(5) 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)(6) 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)(a)(7) Certificate of Stock Designations to the Restated Certificate of
Incorporation of the registrant (incorporated by reference to
Exhibit No. 1.4 to the registrant's registration statement on
Form 8-A filed on January 14, 1998).
(3)(a)(8) Certificate of Stock Designations to the Restated Certificate of
Incorporation of the registrant (incorporated by reference to
Exhibit No. 1.4 to the registrant's registration statement on
Form 8-A filed on April 20, 1998).
(3)(a)(9) Certificate of Stock Designations to the Restated Certificate of
Incorporation of the registrant (incorporated by reference to
Exhibit No. 1.4 to the registrant's registration statement on
Form 8-A filed on June 18, 1998).
(3)(b) Amended and Restated By-laws of the registrant as restated as of
January 21, 1998 (incorporated by reference to Exhibit No. (3)(b)
to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1997).
(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
The Chase Manhattan Bank (formerly known as Chemical Bank and
successor by merger to 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) Supplemental Indenture, dated as of January 29, 1998, between the
registrant and The Chase Manhattan Bank, as trustee (incorporated
by reference to Exhibit 4(a)(2) to the registrant's Current
Report on Form 8-K filed with the Commission on February 2,
1998).
(4)(d) Except as set forth in (4)(a), (4)(b), and 4(c) 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)(e) 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) 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)(2) 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).*
(10)(a)(3) Amendment to the Management Compensation Plan, adopted September
18, 1997 (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, 1997).*
(10)(a)(4) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of January 21, 1998 (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, 1997).*
(10)(a)(5) Performance Compensation Plan, as restated as of January 21, 1998
(incorporated by reference to Exhibit 10(a)(8) to the
registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended December 31, 1997).*
(10)(a)(6) 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)(7) 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) 1998 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) Subsidiaries of the registrant.
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedule.
* Executive Compensation Plans and Arrangements
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K during the last
quarter of the period covering this report:
A Current Report on Form 8-K dated April 1, 1998 and Amendment No. 1
thereto dated April 1, 1998, pertaining to the registrant's redemption of
Cumulative Preferred Stock, Series B.
A Current Report on Form 8-K dated April 6, 1998, pertaining to certain
exhibits filed relating to a Global Note offering.
A Current Report on Form 8-K dated April 15, 1998, pertaining to the
registrant's results of operations for the three months and nine months ended
March 27, 1998 and to the declaration of dividends.
A Current Report on Form 8-K dated June 10, 1998, pertaining to the
registrant's redemption of Cumulative Preferred Stock, Series C.
A Current Report on Form 8-K dated June 19, 1998, pertaining to the
registrant's declaration of a cash dividend on Cumulative Preferred Stock,
Series G.
<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 28th day of
September 1998.
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 28th day of September 1998.
NAME TITLE
/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
Director
- ---------------------------------
Carl D. Glickman
/s/ DONALD J. HARRINGTON Director
- ---------------------------------
Donald J. Harrington
/s/ WILLIAM L. MACK Director
- ---------------------------------
William L. Mack
/s/ FRANK T. NICKELL Director
- ---------------------------------
Frank T. Nickell
Director
- ---------------------------------
Frederic V. Salerno
/s/ VINCENT TESE Director
- ---------------------------------
Vincent Tese
/s/ FRED WILPON Director
- ---------------------------------
Fred Wilpon
/s/ SAMUEL L. MOLINARO JR. Senior Vice President-Finance and Chief
- --------------------------------- Financial Officer (Principal Accounting
Samuel L. Molinaro Jr. Officer and Principal Financial Officer)
/s/ MICHAEL J. ABATEMARCO Controller
- ---------------------------------
Michael J. Abatemarco
<PAGE>
THE BEAR STEARNS COMPANIES INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS 14 (a) (1) AND 14 (a) (2)
Page Reference
Annual
Financial Statements Form 10-K Report*
- -------------------- --------- -------
Independent Auditor's Report 73
The Bear Stearns Companies, Inc.
- --------------------------------
(i) Consolidated Statements of Income-
fiscal years ended June 30, 1998, 1997
and 1996 53
(ii) Consolidated Statements of Financial
Condition at June 30, 1998 and 1997 54
(iii) Consolidated Statements of Cash Flows-
fiscal years ended June 30, 1998,
1997 and 1996 55
(iv) Consolidated Statements of Changes in
Stockholders' Equity fiscal years
ended June 30, 1998, 1997 and 1996 56-7
(v) Notes to Consolidated Financial Statements 58-72
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
* Incorporated by reference from the indicated pages of the 1998 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.
<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, 1998 and 1997, and for each of
the three years in the period ended June 30, 1998, and have issued our report
thereon dated August 21, 1998; such consolidated financial statements and report
are included in the Annual Report to Stockholders and are incorporated herein by
reference. Our audit 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.
DELOITTE & TOUCHE LLP
August 21, 1998
<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, 1998 June 30, 1997 June 30, 1996
----------------- ----------------- -------------------
<S> <C> <C> <C>
Revenues
Interest
Intercompany.................................... $1,300,087 $ 979,757 $ 869,127
Coupon.......................................... - 744 -
Other............................................. 103,344 82,682 59,811
----------------- ----------------- -------------------
1,403,431 1,063,183 928,938
----------------- ----------------- -------------------
Expenses
Interest.......................................... 1,471,042 1,039,461 876,536
Other............................................. 98,872 86,844 66,502
----------------- ----------------- -------------------
1,569,914 1,126,305 943,038
----------------- ----------------- -------------------
Loss before (benefit from) provision for income taxes and
equity in earnings of subsidiaries................ (166,483) (63,122) (14,100)
(Benefit from) provision for income taxes............ (62,467) (23,206) 5,689
----------------- ----------------- -------------------
Loss before equity in earnings of subsidiaries....... (104,016) (39,916) (19,789)
Equity in earnings of subsidiaries................... 764,445 653,246 510,427
================= ================= ===================
Net income........................................... $ 660,429 $ 613,330 $ 490,638
================= ================= ===================
</TABLE>
See Notes to Condensed Financial Information.
<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, 1998 June 30, 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Cash....................................................................... $ 4 $ 79
Receivables from subsidiaries.............................................. 27,671,471 21,365,235
Investment in subsidiaries, at equity...................................... 4,351,399 3,636,514
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization of $463,336 in 1998 and $375,021 in 1997..... 382,749 311,405
Other assets............................................................... 877,418 922,459
----------------- ----------------
Total Assets...................................................... $ 33,283,041 $ 26,235,692
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings...................................................... 14,442,235 13,496,206
Payables to subsidiaries................................................... 102,385 48,919
Other liabilities.......................................................... 754,972 904,026
----------------- ----------------
15,299,592 14,449,151
Long-term borrowings....................................................... 13,295,952 8,120,328
----------------- ----------------
Long-term borrowings from subsidiaries..................................... 395,964 389,842
----------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 10,000,000 shares authorized: 800,000 437,500
Common stock, $1.00 par value; 200,000,000 shares authorized; 167,784,941
shares issued in 1998 and 1997.......................................... 167,785 167,785
Paid-in capital 1,963,788 1,874,016
Retained earnings 1,590,574 1,031,736
Capital Accumulation Plan 833,427 655,007
Treasury stock, at cost -
Adjustable Rate Cumulative Preferred Stock, Series A; 2,520,750 shares
at June 30, 1998 and 1997............................................... (103,421) (103,421)
Common stock; 50,639,294 shares and 50,191,531 shares at June 30, 1998
and 1997, respectively................................................ (953,506) (772,551)
Note receivable from ESOP Trust............................................ (7,114) (13,701)
----------------- ----------------
Total Stockholders' Equity................................................. 4,291,533 3,276,371
----------------- ----------------
Total Liabilities and Stockholders' Equity................................. $ 33,283,041 $ 26,235,692
================= ================
</TABLE>
See Notes to Condensed Financial Information.
<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, 1998 June 30, 1997 June 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 660,429 $ 613,330 $ 490,638
Adjustments to reconcile net income to cash used in
operating activities:
Equity in earnings of subsidiaries, net of dividends
received.................................................. (448,805) (279,147) (300,043)
Other..................................................... 109,735 84,658 66,081
(Increases) decreases in assets:
Receivables from subsidiaries.......................... (6,306,236) (6,058,415) (3,187,678)
Investments in subsidiaries, net....................... (266,080) (398,930) (236,437)
Other assets........................................... 44,578 (513,631) 1,490
Increases (decreases) in liabilities:
Payables to subsidiaries............................... 53,466 24,564 (6,383)
Other liabilities...................................... (154,168) 542,957 174,542
--------------- ---------------- ----------------
Cash used in operating activities............................ (6,307,081) (5,984,614) (2,997,790)
--------------- ---------------- ----------------
Cash flows from financing activities:
Net proceeds from short-term borrowings...................... 946,029 3,965,003 1,306,746
Net proceeds from issuance of long-term borrowings........... 7,045,745 3,129,439 2,654,134
Increase in long-term borrowings from subsidiaries........... 6,122 198,973 -
Issuance of Preferred Stock.................................. 650,000 - -
Redemption of Preferred Stock................................ (287,500) - -
Capital Accumulation Plan.................................... 259,816 196,114 181,702
Tax Benefit of Common Stock distributions.................... 86,968 4,006 6,497
Note repayment from ESOP Trust............................... 6,587 6,099 5,647
Payments for:
Retirement of Senior Notes................................ (1,881,841) (1,062,844) (674,000)
Treasury Stock purchases.................................. (258,036) (202,296) (191,474)
Cash dividends paid.......................................... (97,990) (93,784) (95,001)
--------------- ---------------- ----------------
Cash provided by financing activities........................ 6,475,900 6,140,710 3,194,251
--------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property, equipment and leasehold improvements.. (169,527) (124,590) (77,510)
Purchases of investment securities and other assets.......... (4,769) (46,706) (118,938)
Proceeds from sale of investment securities and other assets. 5,402 12,496 742
--------------- ---------------- ----------------
Cash used in investing activities............................ (168,894) (158,800) (195,706)
--------------- ---------------- ----------------
Net (decrease) increase in cash.............................. (75) (2,704) 755
Cash, beginning of year...................................... 79 2,783 2,028
=============== ================ ================
Cash, end of year............................................ $ 4 $ 79 $ 2,783
=============== ================ ================
</TABLE>
See Notes to Condensed Financial Information.
<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
$315.6 million, $374.1 million, and $210.4 million for the fiscal years
ended June 30, 1998, 1997 and 1996, respectively.
3. Statement of Cash Flows
Income taxes paid (consolidated) totaled $459.7 million, $478.4 million,
and $279.0 million in the fiscal years ended June 30, 1998, 1997 and 1996,
respectively. Cash payments for interest approximated interest expense for
the fiscal years ended June 30, 1998, 1997 and 1996, respectively.
4. Preferred Stock
The Company has issued several series of preferred stock. Preferred stock
issuances as of June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
In thousands, except share data June 30, 1998 June 30, 1997
<S> <C> <C>
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
Cumulative Preferred Stock, Series C; $200
liquidation preference; 500,000 shares issued and
outstanding........................................ 100,000
Cumulative Preferred Stock, Series E; $200
liquidation preference; 1,250,000 shares issued
and outstanding.................................... 250,000
Cumulative Preferred Stock, Series F; $200
liquidation preference; 1,000,000 shares issued
and outstanding.................................... 200,000
Cumulative Preferred Stock, Series G; $200
liquidation preference; 1,000,000 shares issued
and outstanding.................................... 200,000
--------- ---------
Total preferred stock $ 800,000 $ 437,500
========= =========
</TABLE>
<PAGE>
SCHEDULE II
THE BEAR STEARNS COMPANIES INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
Charged to
Balance at Costs and Balance at
Description Beginning of Period Expenses Deductions End of Period
- ----------- ------------------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended June 30, 1998............. $51,399 $2,619 $(657) $53,361
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
</TABLE>
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION
(3)(a)(1) Restated Certificate of Incorporation of the registrant
(incorporated by reference to Exhibit No. (4)(a)(1) to the
registrant's registration statement on Form S-3 (File No.
333-57083)).
(3)(a)(2) 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)(3) 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)(4) 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)(5) 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)(6) 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)(a)(7) Certificate of Stock Designations to the Restated Certificate of
Incorporation of the registrant (incorporated by reference to
Exhibit No. 1.4 to the registrant's registration statement on
Form 8-A filed on January 14, 1998).
(3)(a)(8) Certificate of Stock Designations to the Restated Certificate of
Incorporation of the registrant (incorporated by reference to
Exhibit No. 1.4 to the registrant's registration statement on
Form 8-A filed on April 20, 1998).
(3)(a)(9) Certificate of Stock Designations to the Restated Certificate of
Incorporation of the registrant (incorporated by reference to
Exhibit No. 1.4 to the registrant's registration statement on
Form 8-A filed on June 18, 1998).
(3)(b) Amended and Restated By-laws of the registrant as restated as of
January 21, 1998 (incorporated by reference to Exhibit No. (3)(b)
to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1997).
(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
The Chase Manhattan Bank (formerly known as Chemical Bank and
successor by merger to 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) Supplemental Indenture, dated as of January 29, 1998, between the
registrant and The Chase Manhattan Bank, as trustee (incorporated
by reference to Exhibit 4(a)(2) to the registrant's Current
Report on Form 8-K filed with the Commission on February 2,
1998).
(4)(d) Except as set forth in (4)(a), (4)(b), and 4(c) 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)(e) 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) 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)(2) 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).*
(10)(a)(3) Amendment to the Management Compensation Plan, adopted September
18, 1997 (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, 1997).*
(10)(a)(4) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of January 21, 1998 (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, 1997).*
(10)(a)(5) Performance Compensation Plan, as restated as of January 21, 1998
(incorporated by reference to Exhibit 10(a)(8) to the
registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended December 31, 1997).*
(10)(a)(6) 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)(7) 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) 1998 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) Subsidiaries of the registrant.
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedule.
EXHIBIT 11
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE
EARNINGS
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1996
--------------------------------------------------------------
(In Thousands, except per share data)
<S> <C> <C> <C>
Weighted average common and common equivalent
shares outstanding (1):
Average Common Stock outstanding 120,456 120,937 129,636
Average Common Stock equivalents:
Common Stock issuable assuming conversion of CAP
units 30,065 26,474 18,800
Common Stock issuable under employee benefit plans 460 437 419
----------------------------------------------------------
Total weighted average common and common
equivalent shares outstanding 150,981 147,848 148,855
==========================================================
Net income $ 660,429 $ 613,330 $ 490,638
Preferred Stock dividend requirements (31,012) (23,833) (24,493)
Income adjustment (net of tax) applicable
to deferred compensation arrangements 64,951 31,800 20,205
==========================================================
Adjusted net income $ 694,368 $ 621,297 $ 486,350
==========================================================
Earnings per share $ 4.60 $ 4.20 $ 3.27
==========================================================
</TABLE>
- ----------
1. Adjusted to reflect stock dividends.
EXHIBIT 12
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except for ratio)
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings before taxes
on income $ 1,063,492 $ 1,013,690 $ 834,926 $ 388,082 $ 642,799
----------------------------------------------------------------------------------------
Add: Fixed Charges
Interest 3,638,513 2,551,364 1,981,171 1,678,515 1,023,866
Interest factor
in rents 30,130 26,516 25,672 24,594 21,772
----------------------------------------------------------------------------------------
Total fixed charges 3,668,643 2,577,880 2,006,843 1,703,109 1,045,638
----------------------------------------------------------------------------------------
Earnings before fixed
charges and taxes on
income $ 4,732,135 $ 3,591,570 $ 2,841,769 $ 2,091,191 $ 1,688,437
========================================================================================
Ratio of earnings to
fixed charges 1.3 1.4 1.4 1.2 1.6
========================================================================================
</TABLE>
Exhibit 13
Selected Financial Data
In thousands, except share and employee data
<TABLE>
<CAPTION>
Fiscal Years Ended June 30, 1998 1997 1996 1995 1994
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Revenues $ 7,979,936 $ 6,077,278 $ 4,963,863 $ 3,753,572 $ 3,440,638
Interest expense 3,638,513 2,551,364 1,981,171 1,678,515 1,023,866
------------ ------------ ------------ ------------ ------------
Revenues, net of interest expense 4,341,423 3,525,914 2,982,692 2,075,057 2,416,772
------------ ------------ ------------ ------------ ------------
Non-interest expenses
Employee compensation and
benefits 2,111,741 1,726,931 1,469,448 1,080,487 1,227,061
Other 1,166,190 785,293 678,318 606,488 546,912
------------ ------------ ------------ ------------ ------------
Total non-interest expenses 3,277,931 2,512,224 2,147,766 1,686,975 1,773,973
------------ ------------ ------------ ------------ ------------
Income before provision for
income taxes 1,063,492 1,013,690 834,926 388,082 642,799
Provision for income taxes 403,063 400,360 344,288 147,471 255,834
------------ ------------ ------------ ------------ ------------
Net income $ 660,429 $ 613,330 $ 490,638 $ 240,611 $ 386,965
------------ ------------ ------------ ------------ ------------
Net income applicable to common
shares $ 629,417 $ 589,497 $ 466,145 $ 215,474 $ 362,592
------------ ------------ ------------ ------------ ------------
FINANCIAL POSITION
Total assets $154,495,895 $121,433,535 $ 92,085,157 $ 74,597,160 $ 67,392,018
Long-term borrowings $ 13,295,952 $ 8,120,328 $ 6,043,614 $ 4,059,944 $ 3,408,096
Stockholders' equity(1) $ 4,641,533 $ 3,626,371 $ 2,895,414 $ 2,502,461 $ 2,316,566
Common shares and common share
equivalents outstanding(2) 151,631,589 151,561,465 151,274,714 151,465,966 149,208,420
PER SHARE DATA
Earnings per share(2,3) $ 4.60 $ 4.20 $ 3.27 $ 1.54 $ 2.50
Cash dividends declared per $ 0.60 $ 0.58 $ 0.54 $ 0.52 $ 0.49
common share(2)
Book value per common share(2) $ 23.86 $ 19.56 $ 16.03 $ 13.34 $ 12.31
OTHER DATA
Return on average common equity 21.7% 27.9% 25.6% 13.5% 23.3%
Profit margin(4) 24.5% 28.7% 28.0% 18.7% 26.6%
Employees 9,180 8,309 7,749 7,481 7,321
</TABLE>
1 Includes $350 million of Preferred Stock issued by subsidiaries of the
Company which consists of $150 million of Exchangeable Preferred Income
Cumulative Shares and $200 million of Guaranteed Preferred Beneficial
Interests in Company Subordinated Debt Securities for the years ended June
30, 1998 and 1997. See Note 8 of Notes to Consolidated Financial
Statements.
2 Adjusted to reflect all stock dividends prior to June 30, 1998.
3 See Note 1 of Notes to Consolidated Financial Statements.
4 Represents the ratio of income before provision for income taxes to
revenues, net of interest expense.
<PAGE>
FINANCIAL CONTENTS
Management's Discussion and Analysis
Risk Management
Consolidated Statements of Income
Consolidated Statements of Financial Condition
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
Independent Auditors' Report
<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,
liquidity of global markets, international and regional political events,
regulatory developments and the size and timing of transactions.
In fact, the domestic and international securities markets have experienced
significant price and volume volatility in the period subsequent to June 30,
1998, creating uncertainty in trading and investment banking activity in the
marketplace. Marketplace volatility has and may continue to have a negative
impact on a number of transactions and business activities in which the Company
is involved. Industry earnings are likely to be adversely affected during any
prolonged period of market instability.
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 ARE SUBJECT TO RISKS AND UNCERTAINTIES,
INCLUDING THOSE PREVIOUSLY MENTIONED, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
Business Environment
The business environment during fiscal 1998 was generally characterized by a
strong US economy with low inflation and stable interest rates. This created
heightened investor activity with rising domestic equity and fixed income
markets and increased underwriting and merger and acquisition activity. The
results of these conditions were reflected in the Company's record-level
commissions, principal transactions and investment banking revenues.
Domestic equity markets were characterized by record flows, with the New
York Stock Exchange average daily trading volume rising over 28%, while the
major indexes, such as the Dow Jones Industrial Average and the Standard &
Poor's 500 Index, again reached record levels. The Dow Jones Industrial Average
increased by 1,279 points reaching 8,952 by the end of the fiscal year, while
the Standard & Poor's 500 Index climbed 28% during the year.
The weakening and devaluation of certain Asian currencies caused
significant volatility and overall declines in global markets, particularly in
Asia. These events led to reduced liquidity in emerging markets. With increasing
concern over the economic and financial problems in Asia, the global market
environment experienced heavy volatility during fiscal 1998. Concern over such
volatility contributed in part to the record level of domestic volume, as
investors sought refuge in the more stable US marketplace. The demand for US
investments also contributed to the high level of corporate finance activity,
which was reflected in the continued strength in mergers and acquisitions as
well as significant increases in equity and high yield underwriting volumes.
<PAGE>
The business environment during fiscal 1997 was generally characterized by
a stable economy and low levels of inflation, which resulted in improved
financial market conditions and heightened investor activity. Bond prices rose
steadily for most of the year, and interest rates at the time fell to their
lowest levels of the previous three years. The New York Stock Exchange and the
NASDAQ average daily trading volumes reached new levels in fiscal year 1997,
while major stock indexes climbed into new territory. These improved financial
conditions led to increased investor activity, resulting in strong commissions
and trading revenues. Additionally, the favorable environment created by stock
prices and falling interest rates provided a strong investment banking backdrop.
Results of Operations
The Company reported net income of $660.4 million, or $4.60 per share, in fiscal
1998, which represented an increase of 7.7% from $613.3 million, or $4.20 per
share, in fiscal 1997. The results for fiscal 1998 reflect a $108.0 million
charge attributable to an increase in litigation reserves during the Company's
fourth fiscal quarter. Excluding this charge, net income from operations would
have been $727.5 million or $5.04 per share. The Company reported net income of
$490.6 million, or $3.27 per share, in fiscal 1996.
Revenues, net of interest expense ("net revenues"), increased 23.1% to $4.3
billion in fiscal 1998 from $3.5 billion in fiscal 1997, reflecting increases in
all revenue categories. Net revenues in fiscal 1996 amounted to $3.0 billion.
Commission revenues in fiscal 1998 increased 23.3% to $902.7 million from
$732.3 million in fiscal 1997. Commission revenues derived from institutional
investors and private client services increased, reflecting higher levels of
activity throughout the period. Securities clearance revenues also increased,
reflecting higher levels of activity and continued growth in the Company's
client base. Fiscal 1997 commission revenues improved 6.7% from $686.5 million
in fiscal 1996, reflecting heightened investor activity and growth of the
Company's securities clearance client base.
Revenues from principal transactions in fiscal 1998 increased 9.9% to $1.7
billion from $1.6 billion in fiscal 1997. The Company's principal transactions
revenues by reporting categories for the fiscal years ended June 30, were as
follows:
In millions 1998 1997 1996
- ----------------------- ---------- ---------- ---------
Fixed income $ 905.7 $ 919.6 $ 677.5
Equity 472.4 393.9 389.9
Foreign exchange
and other
derivative
financial
instruments 348.9 257.8 172.3
.......................................................
Total principal
transactions $ 1,727.0 $ 1,571.3 $ 1,239.7
............................................. .........
The increase in principal transactions revenues derived from the Company's
equity activities were primarily from the risk arbitrage area, reflecting
favorable domestic markets and the increased level of merger and acquisition
activity, and from the international area. Foreign exchange and other derivative
financial instruments revenues increased, reflecting favorable market conditions
and continued growth in the Company's franchise. Unfavorable residential
mortgage-backed securities markets contributed to a decline in fixed income
principal transactions revenues which was partially offset by increases in
revenues derived from the Company's other collateralized securities activities.
Fiscal 1997 principal transactions revenues increased 26.8% from $1.2
billion in fiscal 1996, reflecting increases in revenues from the Company's
fixed income and foreign exchange and derivative activities.
Investment banking revenues in fiscal 1998 increased 51.0% to $1.0 billion
from $663.2 million in fiscal 1997. Underwriting revenues increased due to
increases in volume most notably from equity and high yield issuances. Merger
and acquisition fees also increased, reflecting increased activity. Fiscal 1997
investment banking revenues increased 9.2% from $607.3 million in fiscal 1996,
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 1998 increased 27.6% to $647.1 million from $507.1
million in fiscal 1997, principally due to record levels of margin debt and
customer short account balances. Average interest-bearing margin debt balances
were $45.8 billion during fiscal 1998 and totaled $49.8 billion at June 30,
1998, up from $38.1 billion at June 30, 1997. Average free credit balances were
$10.1 billion during fiscal 1998 and totaled $11.0 billion at June 30, 1998, up
from $8.9 billion at June 30, 1997. The Company also experienced significant
growth in its customer securities lending activities attributable to increased
customer short selling. Average customer short account balances were $59.4
billion during fiscal 1998 and reached $68.3 billion at June 30, 1998, up from
$51.3 billion at June 30, 1997. Net interest and dividends in fiscal 1997
increased 23.1% from $412.1 million in fiscal 1996, principally due to the large
increase in customer margin debt, customer short account balances and growth in
securities lending activities associated with the Company's securities clearance
client base.
Employee compensation and benefits in fiscal 1998 increased 22.3% to $2.1
billion from $1.7 billion in fiscal 1997. The increase was principally
attributable to increased incentive and discretionary bonuses associated with
the increase in net revenues and earnings in fiscal 1998 and an increase in
sales commissions. Employee compensation and benefits, as a percentage of net
revenues, decreased to 48.6% for fiscal 1998 from 49.0% in fiscal 1997.
Full-time employees increased to 9,180 at June 30, 1998 from 8,309 at June 30,
1997. The increase in headcount is attributable to domestic as well as
international strategic growth and business expansion. Employee compensation and
benefits in fiscal 1997 increased 17.5%, from $1.5 billion or 49.3% of net
revenues in fiscal 1996, reflecting increased incentive and discretionary
bonuses associated with the increase in net revenues and earnings in fiscal
1997.
Floor brokerage, exchange and clearance fees increased 18.1% in fiscal
1998, reflecting the increase in the volume of securities transactions processed
during the fiscal year. Expenses related to communications, occupancy, data
processing and depreciation and amortization increased by 21.6%, reflecting the
Company's growth. The increase in other expenses is largely attributable to
litigation expenses incurred during fiscal 1998, which included a $108.0 million
litigation reserve related to a lawsuit filed by the Trustee for Daisy Systems
Corporation (See Footnote 12 of Notes to Consolidated Financial Statements for
further discussion). In addition, litigation expenses were impacted by the
Company's settlement of the NASDAQ Antitrust litigation for approximately $40.6
million. Other expenses also include expenses associated with the Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan"), which
increased from $56.4 million in fiscal 1997 to $115.2 million in fiscal 1998.
The remaining increase in other expenses reflects increased electronic data
processing ("EDP") professional fees and other legal fees. EDP professional fees
increased primarily due to the Company's continued investment in technological
upgrades, including Year 2000 and the European Economic Monetary Union ("euro")
costs.
The increases in other expenses related to both litigation and the costs of
the CAP Plan were primarily responsible for the decline in the Company's profit
margin from 28.7% in fiscal 1997 to 24.5% in fiscal 1998.
Other non-interest expenses in fiscal 1997 increased 15.8% from $678.3
million in fiscal 1996, principally reflecting expansion of the Company's
business activities.
The decrease in the Company's effective tax rate to 37.9% in fiscal 1998,
from 39.5% in fiscal 1997, was principally attributable to higher levels of tax
preference items. The effective tax rate in fiscal 1997 decreased from 41.2% in
fiscal 1996, due to decreases in state and local taxes.
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, 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, 1998 increased to $154.5 billion
from $121.4 billion at June 30, 1997. The increase was primarily attributable to
the growth in securities borrowed, receivables from customers and financial
instruments owned. Approximately $5.3 billion of the increase in total assets
was related to the Company's adoption of Statement of Financial Accounting
Standards ("SFAS") 127, "Deferral of the Effective Date of Certain Provisions of
SFAS Statement No. 125." The adoption of SFAS 127 increased both total assets
and total liabilities by the same amount and did not require any additional
funding. The Company funded the remaining increase with secured borrowings
(principally repurchase agreements), 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 in the form of long-term borrowings and equity,
which together form its capital base. 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 1998 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.
The Company also maintains a committed revolving-credit facility (the
"facility") totaling $3.7 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 the Company may
borrow up to $1.85 billion of the $3.7 billion 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. The facility
terminates in October 1998. The Company currently expects to renew such facility
upon expiration. There were no borrowings outstanding under the facility at June
30, 1998.
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 1998, the Company took advantage of favorable long-term
financing opportunities and strong investor demand and completed several
capital-related transactions. The Company expanded its long-term borrowing base
to $13.3 billion through the issuance of $7.0 billion of long-term debt. In an
effort to capitalize on the favorable interest rate environment, the Company
also issued $650.0 million of Cumulative Preferred Stock and redeemed $287.5
million in higher coupon Cumulative Preferred Stock (See Note 8 to the
Consolidated Financial Statements for a more complete description of the
preferred stock issued and redeemed). The increase in long-term borrowings along
with the growth in retained earnings and issuance of Preferred Stock increased
total capital to $17.9 billion from $11.7 billion at June 30, 1997. The
increases in the Company's long-term borrowings and equity capital base reflect
the growth in the Company's balance sheet and liquidity needs. Long-term debt
totaling $11.6 billion and $6.5 billion had maturities beyond one year at June
30, 1998 and June 30, 1997, respectively.
At June 30, 1998, the Company's long-term debt ratings were as follows:
Moody's Investors Service A2
Standard & Poor's A
Fitch IBCA A+
Thomson BankWatch AA-
Duff & Phelps Credit Rating A+
The Company's CAP Plan allows participants to defer portions of their
annual compensation and in exchange to ultimately receive shares of the
Company's Common Stock. In connection with the CAP Plan, during the fiscal year
ended June 30, 1998, the Company repurchased a total of 5,654,124 shares of
Common Stock through open market transactions at a cost of approximately $259.8
million. Included in the shares purchased during fiscal 1998 were 1,230,023
shares with a cost of $51.0 million which were credited to participants'
deferred compensation accounts with respect to deferrals made during fiscal
1997. The remaining 4,424,101 shares purchased during fiscal 1998 at a cost of
approximately $208.8 million were credited to the participants' CAP Plan
accounts in the form of CAP Units which represented the $115.2 million of fiscal
1998 earnings on prior years' deferrals and approximately $93.6 million of the
$247.4 million of fiscal 1998 deferrals. The remaining $153.8 million of fiscal
1998 deferrals was credited to the participants' CAP Plan cash accounts. The
Company intends, subject to market conditions and plan limitations, 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, including any amounts credited to CAP Plan cash accounts,
and any additional amounts allocated to participants under the CAP Plan.
The Company's Stock 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 10, 1998, there have been no purchases under the
Repurchase Plan.
CASH FLOWS
Cash and cash equivalents decreased to $1.1 billion at the end of fiscal 1998
from $1.2 billion at the end of fiscal 1997, a decrease of $175.3 million.
Fiscal 1997 year-end cash and cash equivalents increased $1.1 billion from
$127.8 million at the end of fiscal 1996. Fiscal 1996 year-end cash and cash
equivalents decreased $572.7 million from $700.5 million at the end of fiscal
1995. 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 1998 was $5.4 billion. The
usage was primarily attributable to increases in securities borrowed of $16.1
billion, customer receivables of $5.7 billion and financial instruments owned of
$3.0 billion. This increase was partially offset by increases in customer
payables of $12.2 billion and securities sold under agreements to repurchase of
$5.9 billion.
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 provided by financing activities in each of the three fiscal years
ended June 30, 1998, 1997 and 1996 was primarily attributable to increased net
borrowings that were used to support the Company's growth over the same periods
while taking advantage of favorable long-term financing opportunities. During
fiscal 1998, the Company also issued Cumulative Preferred Stock for aggregate
proceeds of $650.0 million and redeemed higher coupon Cumulative Preferred Stock
for $287.5 million.
Investing activities in fiscal 1998 used $450.0 million primarily for net
purchases of investment securities and other assets of $266.3 million and
purchases of property, equipment and leasehold improvements of $183.7 million.
Investing activities in fiscal 1997 used $230.2 million primarily for
purchases of property, equipment and leasehold improvements of $137.3 million
and net purchases of investment securities and other assets of $92.9 million.
Investing activities in fiscal 1996 used $203.5 million primarily for net
purchases of $114.6 million of investment securities and other assets, as well
as purchases of $88.9 million of property, equipment and leasehold improvements.
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 and the Commodity Futures Trading Commission, which are designed to
measure the general financial soundness and liquidity of broker dealers. 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. Additionally, Bear Stearns Bank Plc ("BSB") is subject to the
regulatory capital requirements of the Central Bank of Ireland. At June 30,
1998, Bear Stearns, BSSC, BSIL, BSIT and BSB were in compliance with regulatory
requirements.
The Company's broker-dealer subsidiaries are subject to certain
restrictions on the payment of dividends which could limit the Company's ability
to withdraw capital from such regulated subsidiaries, which in turn could limit
the Company's ability to pay dividends. See Note 7 to the Consolidated Financial
Statements for a more complete description of such limitations.
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 historically required significant levels of capital investment. At June 30,
1998, the Company held direct equity investments in twelve leveraged
transactions with an aggregate carrying value of approximately $102.1 million.
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, 1998 and 1997, the Company held high yield securities of $2.4
billion and $1.6 billion, respectively, in long inventory, and $.3 billion and
$.3 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 such activities upon the Company's results of
operations, can fluctuate from period to period as a result of customer demand
and economic and market considerations. Bear Stearns' Risk Committee 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.
In connection with its merchant banking and high yield securities
activities, the Company formed The Mayer Fund I (the "Trust"), for the purpose
of making, acquiring, holding, selling and otherwise conducting transactions in
bridge loans/commitments made in connection with leveraged buyouts,
recapitalizations and refinancings of existing debt/commitments. The Trust has
capital commitments aggregating $1.5 billion from seventeen financial
institutions, which includes a capital commitment of $300 million from a
subsidiary of the Company. There were no amounts invested in the Trust at June
30, 1998.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments represent contractual commitments between
counterparties that derive their value from changes in an 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 implications
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 either
a termination or continuation structure.
As of June 30, 1998 and 1997, the Company had notional/contract amounts of
$493.7 billion and $353.0 billion of derivative financial instruments, of which
$78.4 billion and $62.0 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 is recorded on an accrual basis, together with the interest expense
incurred on the related debt instrument. The Company hedges its long-term debt
issuances principally by converting fixed-rate instruments to floating-rate
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 $23.5 million, $29.4
million and $15.9 million during fiscal years 1998, 1997 and 1996, respectively.
YEAR 2000 ISSUE
The Year 2000 issue is the result of legacy computer programs having been
written using two digits rather than four digits to define the applicable year
and therefore without consideration of the impact of the upcoming change in the
century. Such programs may not be able to accurately process dates ending in the
year 2000 and thereafter. The Company has determined that it needs to modify or
replace portions of its software and hardware so that its computer systems will
properly utilize dates beyond December 31, 1999.
Over three years ago, the Company established a task force to review and
develop an action plan to address the Year 2000 issue. The Company's action plan
addresses both information technology and non-information technology system
compliance issues. Since then, the ongoing assessment and monitoring phase has
continued and includes assessment of the degree of compliance of its significant
vendors, facility operators, custodial banks and fiduciary agents to determine
the extent to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company has contacted all significant
external vendors in an effort to confirm their readiness for the Year 2000 and
plans to test compatibility with such converted systems. The Company also
participates actively in various industry-wide tests.
The Company has and will continue to utilize both internal and external
resources to reprogram, or replace, and test its software and hardware for Year
2000 modifications. To date, the amounts incurred and expensed related to the
assessment of, and efforts in connection with, the Year 2000 and the development
of a remediation plan have approximated $22.0 million. The Company's total
projected Year 2000 project costs, including the estimated costs and time
associated with the impact of third-party Year 2000 issues, are based on
currently available information. The total remaining Year 2000 project cost is
estimated at approximately $38.0 million, which will be funded through operating
cash flows and expensed as incurred.
The Company believes that the activities it is undertaking in the Year 2000
project should satisfactorily resolve Year 2000 compliance exposures within its
own systems worldwide. The Company has substantially completed the reprogramming
and replacement phase of the project. Testing has commenced and will proceed
through calendar 1999. However, if such modifications and conversions are not
operationally effective on a timely basis, the Year 2000 issue could have a
material impact on the operations of the Company. Additionally, there can be no
assurance that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company. While the Company does not have a
specific, formal contingency plan, the Company's action plan is designed to
safeguard the interests of the Company and its customers. The Company believes
that this action plan significantly reduces the risk of a Year 2000 issue
serious enough to cause a business disruption. With regard to Year 2000
compliance of other external entities, the Company is monitoring developments
closely. Should it appear that a major utility, such as a stock exchange, would
not be ready, the Company will work with other firms in the industry to plan an
appropriate course of action.
THE EURO CONVERSION
On January 1, 1999, eleven member countries of the European Union are scheduled
to establish fixed conversion rates between their national currencies and the
"euro," which will ultimately result in the replacement of the currencies of
these participating countries with the euro (the "Euro Conversion"). The Company
is currently assessing the potential impact of the Euro Conversion on the
Company and has initiated an internal analysis to plan for the conversion and
implement remediation measures. The Company's analysis will encompass the costs
and consequences of incomplete or untimely resolution of any required systems
modifications, various technical and operational challenges and other risks
including possible effects on the Company's financial position, results of
operations and exchange rate risk exposures, legal and tax exposures, as well as
other possible exposures. Costs associated with the Euro Conversion are being
expensed by the Company during the period in which they are incurred and are not
currently anticipated to be material. The Company presently believes that with
remediation measures planned to be completed in the fourth quarter of calendar
1998, any risks associated with the Euro Conversion can be mitigated.
EFFECTS OF STATEMENTS OF
FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130,
"Reporting Comprehensive Income," which is effective for fiscal years beginning
after December 15, 1997. SFAS 130 requires businesses to disclose comprehensive
income and its components in a prominent position on the face of the financial
statements. The Company is currently determining the potential impact on the
Company's financial statement disclosure.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises and standardizes
pensions and other postretirement benefit plan disclosures. The Statement is
effective for fiscal years beginning after December 15, 1997. The effect of SFAS
132 is not expected to be material to the Company's financial statement
disclosures.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes standards for
accounting and reporting of derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS 133 is
effective for fiscal quarters of fiscal years beginning after June 15, 1999. The
Company expects to adopt this standard when required in fiscal year 2000 and is
currently evaluating the potential impact on the Company's accounting for such
activities.
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.
<PAGE>
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 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 daily profit and loss statements to senior management covering all
trading departments. The Controller's Department and Operations monitor position
and balance sheet information through both reconciliation and price verification
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 better 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, review the age and composition of each department's proprietary
accounts and the profits and losses of each portfolio on a daily basis. This is
to better 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 composed of
Senior Managing Directors who are generally not involved in the operations of
the departments seeking credit approval for customers. The Credit Policy
Committee meets 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.
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, equity and commodity
prices, changes in the implied volatility of interest rate, foreign exchange
rate, equity and commodity prices and also changes in the credit ratings of
either the issuer or its related country of origin. 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, emerging markets debt obligations, mortgages and mortgage-backed
securities, other collateralized securities, and municipal bonds. The Company is
also an active market-maker and conducts block trading activities in 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 interest rates and 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, 1998 and 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 fixed income 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 could 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 primarily through the use of 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. At June 30, 1998 and 1997, the principal
currencies creating foreign currency risk for the Company were the German
deutsche mark and the Japanese yen. The Company attempts to hedge 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 of equity securities by entering into
hedging transactions, including equity options, designed to mitigate the
Company's market risk profile.
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 that
seek to predict risk of loss based on historical price and volatility patterns.
The output of such statistical models are commonly referred to 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 rising above or falling
below a specified amount. The calculation utilizes the standard deviation of
historical changes in value (i.e., volatility) of the market risk sensitive
financial instruments 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, in some cases, have features that 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 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 is not reported
separately because the amounts were not material. The calculation is based on a
methodology that 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.
Monte Carlo simulation involves the generation of price movements in a portfolio
using a random number generator. The generation of random numbers is based on
the statistical probabilities of the securities in the portfolio. For interest
rates, each country's yield curve has five factors that describe possible curve
movements. These were generated from principal component analysis. In addition,
volatility and spread risk factors were used, where appropriate. Intercountry
correlations were also used. Equity price risk was measured using a historical
value at risk for June 30, 1997 and a combination of historical and Monte Carlo
value at risk approaches for June 30, 1998. The effect of this change in
approach was not material. Equity derivatives were treated as correlated with
various indexes, of which the Company used approximately forty. Parameter
estimates, such as volatilities and correlations, were based on daily tests
through June 30, 1998. The total value at risk presented below is less than the
sum of the individual components (i.e., Interest Rate Risk, Foreign Exchange
Rate Risk, Equity Risk) due to the benefit of diversification among the risks.
This table illustrates the value at risk for each component of market risk
as of June 30, 1998 and 1997:
In millions 1998 1997
MARKET RISK
Interest rate $ 11.1 $ 11.6
Currency 0.9 3.2
Equity 8.9 8.9
Diversification benefit (6.6) (8.7)
Total $ 14.3 $ 15.0
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
inventory pricing. Additionally, management of each trading department 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.
<PAGE>
Risk Management
The charts below represent a summary of the daily revenues generated by the
Company's trading departments and reflect a combination of trading revenues, net
interest revenues for certain trading areas and other revenues for the fiscal
years ended June 30, 1998 and 1997. These charts represent 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 $6.9 million and $6.2 million for fiscal 1998 and 1997, respectively.
The range of daily trading profit volatility reflects the Company's historical
ability to manage its exposure to market risk and the diversified nature of its
trading activities.
- --------------------------------------------------------------------------------
DAILY TRADING PROFIT FREQUENCY DISTRIBUTION
- --------------------------------------------------------------------------------
[Vertical bar graphs of Frequency (y-axis) versus Daily Trading Profit
Volatility (x-axis) representing the following information appear here in paper
format]
Fiscal Year 1998
Daily Trading Frequency
Profit Volatility (Number of
($ in millions) Trading Days)
(26) 1
(9) 1
(6) 1
(4) 2
(3) 4
(1) 3
0 2
1 5
2 11
3 11
4 13
5 15
6 17
7 13
8 21
9 17
10 12
11 26
12 12
13 11
14 7
15 7
16 6
17 3
18 3
19 7
20 3
21 2
22 2
23 2
24 2
25 1
27 1
28 1
29 1
30+ 6
Fiscal Year 1997
Daily Trading Frequency
Profit Volatility (Number of
($ in millions) Trading Days)
(3) 1
(1) 2
0 6
1 2
2 13
3 16
4 21
5 30
6 20
7 18
8 28
9 22
10 15
11 9
12 13
13 7
14 5
15 6
16 7
17 5
20+ 7
<PAGE>
CREDIT RISK
Credit risk arises from potential nonperformance by counterparties, customers,
borrowers, or debt security issuers. The Company is exposed to credit risk as
trading counterparty to dealers and customers, as direct lender, as holder of
securities, and as member of exchanges and clearing organizations. The Company
has established policies and procedures to manage credit risk.
The Credit Policy Committee delegates credit approval authority to the
Global Credit Committee, approves exposure measurement standards, reviews
concentrations of credit risk, and sets documentation and credit support
standards. The Global Credit Committee, which includes several members of the
Credit Policy Committee, implements policy through its review and approval of
large counterparty credit limits and consideration of new or unusual
credit-related transactions. 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 monitors and controls extensions of credit to
counterparties of the Company. The department's professionals assess the
creditworthiness of the Company's counterparties and assign or recommend credit
limits and requirements. In addition, credit and quantitative analysts assess
the quality and acceptability of collateral, measure potential credit exposure
associated with certain transactions, monitor compliance with credit limits,
obtain appropriate legal documentation and provide comprehensive credit risk
reporting for senior management.
Credit analysts and managers are based in Company offices in New York,
London, Dublin, Tokyo and Hong Kong and specialize by industry within the U.S.
and otherwise by country or region. Each analyst provides rating and limit
recommendations to senior credit officers who either take action or refer
recommendations to the Global Credit Committee as required by policy. Each
regional manager is a member of the Global Credit Committee. All counterparties
are assigned internal credit ratings reflecting the Department's quantitative
and qualitative assessment of the counterparty's relative probability of
default. The internal rating process may include review of audited financial
statements, review of surveys performed by major statistical rating agencies,
assessment of industry or sovereign factors, review of market developments,
meetings with management and analysis of the risk of transactions with the
counterparty.
The Company measures its actual credit exposure--the replacement cost of
counterparty contracts--on a daily basis. 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, 1998 and 1997 was $1.3 billion and $540.8
million, respectively. Exchange-traded financial instruments are guaranteed by
the clearing organization and have minimal credit risk due to margin
requirements.
The Company establishes potential exposure limits across a variety of
financing and trading products for all counterparties on a group and individual
entity basis. Potential exposure is the statistically estimated net credit
exposure associated with adverse market moves over the life of contracts at a
97.7% confidence interval. For over-the-counter derivative and foreign exchange
contracts, the potential exposure is estimated daily using sophisticated
internally developed risk models that employ Monte Carlo simulations. Potential
exposure estimates consider the size and maturity of contracts; the volatility
of, and correlations among, the underlying assets, indexes, and currencies;
settlement mechanisms; rights to demand additional collateral, and other legally
enforceable credit mitigants, such as third-party guarantees or insurance. For
other credit-sensitive fixed income products, potential exposure limits are
converted to notional amounts using appropriate risk factors.
The Company establishes country concentration limits and monitors actual
and potential exposures, including both position and counterparty exposures, in
emerging markets. The Sovereign Risk unit evaluates international macroeconomic
conditions and recommends country concentration limits. The Company limits and
monitors its exposure to sovereign default, devaluation and inconvertibility of
local currencies.
The Margin Department is responsible for evaluating the risk of extending
to the Company's customers loans secured by certain marketable securities. The
department evaluates the creditworthiness of the borrower as well as the
acceptability of collateral, and actively monitors to ensure that collateral
received meets regulatory and internal requirements.
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.
The Company, through BSSC, maintains a professional client base which
consists of entities such as Floor Traders and Specialists, Arbitrageurs,
Broker/Dealers, Hedge Funds and Fund of Funds groups. These clients employ a
wide variety of trading styles ranging from Option Hedging, Market Neutral
Statistical Arbitrage, M & A Arbitrage and Hedged Convertible Strategies to
multiple Fixed Income strategies. Trading strategies are employed in both
domestic and international markets. The extension of leverage (margin debt) for
a given customer is determined by the systematic analysis of the securities held
and trading strategy that such customer employs. The Department has established
a risk-based margin lending policy under which the minimum capital requirement
may be greater than the applicable regulatory capital requirements. In other
words, customers can only achieve maximum regulatory leverage if their
portfolios satisfy the internal risk parameters.
Client portfolios are analyzed and evaluated daily through extensive
simulation analysis designed to estimate market-related risk. Using its
internally developed risk management system known as RACS (Risk Analytic Control
System), the Department is able to analyze every professional client's portfolio
prior to each market open as well as on an intra-day basis. RACS uses scenario
analysis to estimate market risk through extensive stress testing. All client
positions are simulated across two hundred different scenarios resulting in a
wide variety of potential profit and loss possibilities. Some basic assumptions
used in the analysis are minimum portfolio moves of 20% as well as minimum moves
in individual securities of 25% or more. Other scenarios include price movement
tests of 1 and 2 standard deviations, fixed percentage moves, beta-weighted and
market-capitalization-driven extreme price moves. Scenarios are constructed in
such a way as to assess position and portfolio sensitivities to changes in
underlying prices, volatilities, interest rates, credit spreads, currency cross
rates and forward time horizons. In addition to client-level security and
portfolio analysis, the system produces over 40 various reports that provide
multi-dimensional views that include industry exposures, country/region
exposures, and security concentration and liquidity risk. The system hardware is
redundant, staffed 24 hours a day and supported by a dedicated staff of
programmers and financial engineers.
The policies and procedures of the Risk Department of the Specialist
Clearance function are developed under the oversight of and reported to
Professional Clearance Senior Management. The Department also coordinates with
the Margin, Treasury and Global Credit Departments.
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 Financial and Accounting,
Operations, Legal and Internal Audit. These control mechanisms 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, the
Company's investment in technology allows us to communicate information
efficiently and securely to 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.
OTHER RISKS
Other risks encountered by the Company include political, regulatory and tax
risks. These risks reflect the potential impact that changes in local laws,
regulatory requirements or tax statutes have on the economics and viability of
current or future transactions. In an effort to mitigate these risks, the
Company seeks to continuously review new and pending regulations and legislation
and participates in various special interest groups.
<PAGE>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF
Income
<TABLE>
<CAPTION>
In thousands, except share data
Fiscal Years Ended June 30, 1998 1997 1996
- ------------------------------------------------------------- ---------------- ------------------- ------------------
<S> <C> <C> <C>
REVENUES
Commissions $ 902,692 $ 732,343 $ 686,548
Principal transactions 1,726,982 1,571,332 1,239,697
Investment banking 1,001,494 663,249 607,338
Interest and dividends 4,285,595 3,058,452 2,393,266
Other income 63,173 51,902 37,014
............................................................. ---------------- ------------------- -------------------
Total revenues 7,979,936 6,077,278 4,963,863
Interest expense 3,638,513 2,551,364 1,981,171
............................................................. ---------------- ------------------- -------------------
Revenues, net of interest expense 4,341,423 3,525,914 2,982,692
............................................................. ---------------- ------------------- -------------------
- ------------------------------------------------------------- ---------------- ------------------- ------------------
NON-INTEREST EXPENSES
Employee compensation and benefits 2,111,741 1,726,931 1,469,448
Floor brokerage, exchange and clearance fees 166,733 141,211 129,509
Communications 122,973 102,926 92,827
Depreciation and amortization 115,141 89,719 69,878
Occupancy 100,559 88,419 85,899
Advertising and market development 82,499 69,765 56,797
Data processing and equipment 47,785 36,620 34,305
Other expenses 530,500 256,633 209,103
............................................................. ---------------- ------------------- -------------------
Total non-interest expenses 3,277,931 2,512,224 2,147,766
............................................................. ---------------- ------------------- -------------------
Income before provision for income taxes 1,063,492 1,013,690 834,926
Provision for income taxes 403,063 400,360 344,288
............................................................. ---------------- ------------------- -------------------
Net income $ 660,429 $ 613,330 $ 490,638
............................................................. ---------------- ------------------- -------------------
Net income applicable to common shares $ 629,417 $ 589,497 $ 466,145
............................................................. ---------------- ------------------- -------------------
Earnings per share $ 4.60 $ 4.20 $ 3.27
............................................................. ---------------- ------------------- -------------------
Weighted average common and common equivalent shares
outstanding 150,980,825 147,847,885 148,855,048
............................................................. ---------------- ------------------- -------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF
Financial Condition
<TABLE>
<CAPTION>
In thousands, except share data
June 30, 1998 1997
- ---------------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,073,821 $ 1,249,132
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations 2,282,729 1,448,814
Securities purchased under agreements to resell 29,846,716 28,340,599
Receivable for securities provided as collateral 2,041,546
Securities borrowed 56,844,009 40,711,280
Receivables:
Customers 14,228,678 8,572,521
Brokers, dealers and others 1,337,146 1,227,947
Interest and dividends 467,456 405,892
Financial instruments owned, at fair value 44,619,672 38,437,280
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization of $517,575 in 1998 and $415,681 in
1997, respectively 448,044 379,533
Other assets 1,306,078 660,537
............................................................................ -------------------- --------------------
Total Assets $ 154,495,895 $ 121,433,535
............................................................................ -------------------- --------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Short-term borrowings $ 14,613,565 $ 14,416,671
Securities sold under agreements to repurchase 45,346,472 39,431,216
Obligation to return securities received as collateral 5,257,279
Payables:
Customers 42,119,042 29,921,386
Brokers, dealers and others 5,055,988 2,808,359
Interest and dividends 636,021 452,662
Financial instruments sold, but not yet purchased, at fair value 21,070,596 20,784,796
Accrued employee compensation and benefits 1,217,337 907,337
Other liabilities and accrued expenses 1,242,110 964,409
............................................................................ -------------------- --------------------
136,558,410 109,686,836
............................................................................ -------------------- --------------------
Commitments and contingencies (Note 12)
Long-term borrowings 13,295,952 8,120,328
............................................................................ -------------------- --------------------
Guaranteed Preferred Beneficial Interests in Company Subordinated
Debt Securities 200,000 200,000
-------------------- --------------------
............................................................................
Preferred Stock issued by subsidiary 150,000 150,000
............................................................................ -------------------- --------------------
STOCKHOLDERS' EQUITY
Preferred Stock 800,000 437,500
Common Stock, $1.00 par value; 200,000,000 shares authorized;
167,784,941 shares issued in 1998 and 1997 167,785 167,785
Paid-in capital 1,963,788 1,874,016
Retained earnings 1,590,574 1,031,736
Capital Accumulation Plan 833,427 655,007
Treasury stock, at cost--
Adjustable Rate Cumulative Preferred Stock Series A:
2,520,750 shares at June 30, 1998 and 1997 (103,421) (103,421)
Common Stock: 50,639,294 and 50,191,531 shares at June 30, 1998 and
1997, respectively (953,506) (772,551)
Note receivable from ESOP Trust (7,114) (13,701)
............................................................................ -------------------- --------------------
Total Stockholders' Equity 4,291,533 3,276,371
............................................................................ -------------------- --------------------
Total Liabilities and Stockholders' Equity $ 154,495,895 $ 121,433,535
............................................................................ -------------------- --------------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF
Cash Flows
<TABLE>
<CAPTION>
In thousands
Fiscal Years Ended June 30, 1998 1997 1996
- ------------------------------------------------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 660,429 $ 613,330 $490,638
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization 115,141 89,719 69,878
Deferred income taxes (204,814) (101,859) (189)
Other 117,954 73,699 61,474
(Increases) Decreases in operating receivables:
Cash and securities deposited with clearing
organizations or segregated in compliance with
federal regulations (833,915) 253,310 (392,551)
Securities purchased under agreements to resell (1,506,117) (3,823,324) (5,576,531)
Securities borrowed (16,132,729) (11,100,073) (4,979,119)
Receivables:
Customers (5,656,157) (596,148) (1,982,601)
Brokers, dealers and others (109,199) (416,556) (232,715)
Financial instruments owned (2,966,659) (12,215,146) (4,712,636)
Other assets (215,865) (80,975) (67,439)
Increases (decreases) in operating payables:
Securities sold under agreements to repurchase 5,915,256 6,077,317 3,769,175
Payables:
Customers 12,197,656 8,016,371 5,668,404
Brokers, dealers and others 2,246,118 968,282 675,016
Financial instruments sold, but not yet purchased 285,800 6,868,215 2,675,463
Accrued employee compensation and benefits 195,000 137,967 207,023
Other liabilities and accrued expenses 446,152 (138,288) 773,208
.............................................................. ---------------- ----------------- -----------------
Cash used in operating activities (5,445,949) (5,374,159) (3,553,502)
.............................................................. ---------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 196,894 4,549,052 1,296,842
Net proceeds from issuance of long-term borrowings 7,045,745 3,129,439 2,654,134
Net proceeds from issuance of subsidiary securities 199,884
Issuance of Preferred Stock 650,000
Redemption of Preferred Stock (287,500)
Capital Accumulation Plan 259,816 196,114 181,702
Tax benefit of Common Stock distributions 86,968 4,006 6,497
Note repayment from ESOP Trust 6,587 6,099 5,647
Payments for:
Retirement of Senior Notes (1,881,841) (1,062,844) (674,000)
Treasury Stock purchases (258,036) (202,296) (191,474)
Cash dividends paid (97,990) (93,784) (95,001)
.............................................................. ---------------- ----------------- -----------------
Cash provided by financing activities 5,720,643 6,725,670 3,184,347
.............................................................. ---------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (183,652) (137,328) (88,935)
Purchases of investment securities and other assets (273,956) (108,480) (134,321)
Proceeds from sale of investment securities and other
assets 7,603 15,582 19,757
.............................................................. ---------------- ----------------- -----------------
Cash used in investing activities (450,005) (230,226) (203,499)
.............................................................. ---------------- ----------------- -----------------
Net (decrease) increase in cash and cash equivalents (175,311) 1,121,285 (572,654)
Cash and cash equivalents, beginning of year 1,249,132 127,847 700,501
.............................................................. ---------------- ----------------- -----------------
Cash and cash equivalents, end of year $ 1,073,821 $ 1,249,132 $ 127,847
</TABLE>
Non-cash financing activities totaled $1,511, $0 and $7,522 for the years
ended June 30, 1998, 1997 and 1996, respectively. See Notes to Consolidated
Financial Statements.
<PAGE>
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN
Stockholders' Equity
<TABLE>
<CAPTION>
Treasury Stock
---------------------
Adjustable
Rate
Cumulative
Preferred
Common Stock, Common Note
Stock Capital Series Stock Receivable
Preferred $1 Par Paid-In Retained Accumulation A-$50 $1 Par from ESOP
In thousands, except share data Stock Value Capital Earnings Plan Liquidation Value Trust
- ------------------------------ ----------- ----------- ------------ ------------- ------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 ($0.54 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
Allocations 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)
Net income 613,330
Cash dividends declared--
Common ($0.58 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.
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock
----------------------
Adjustable
Rate
Cumulative
Preferred
Common Stock, Common Note
Stock Capital Series Stock Receivable
Preferred $1 Par Paid-In Retained Accumulation A-$50 $1 Par from ESOP
In thousands, except share data Stock Value Capital Earnings Plan Liquidation Value Trust
- ------------------------------ ----------- ----------- ------------ ------------- ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ 437,500 $ 167,785 $ 1,874,016 $ 1,031,736 $ 655,007 $ (103,421) $ (772,551) $ (13,701)
Net income 660,429
Cash dividends declared--
Common ($0.60 per share) (69,621)
Preferred (31,970)
Issuance of Cumulative
Preferred Stock,
Series E, F and G 650,000
Redemption of Cumulative
Preferred Stock,
Series B and C (287,500)
Purchase of treasury stock--
Common Stock
(5,654,124 shares) (259,547)
Common Stock issued out of
treasury (5,206,362
shares) 3,938 (81,396) 78,592
Income tax benefits
attributable
to Common Stock issued
out of treasury 85,834
Note repayment from
ESOP Trust 6,587
Allocation under Capital
Accumulation Plan 259,816
- ------------------------------ ----------- ----------- ------------ ------------- ------------- ------------ ------------ ----------
Balance, June 30, 1998 $ 800,000 $ 167,785 $ 1,963,788 $ 1,590,574 $ 833,427 $ (103,421) $ (953,506) $ (7,114)
- ------------------------------ ----------- ----------- ------------ ------------- ------------- ------------ ------------ ----------
</TABLE>
See Notes to Consolidated Financial Statements.
<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 generally 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.
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") No. 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
The Company adopted SFAS 128, "Earnings Per Share," in fiscal 1998. SFAS 128
simplifies the standards for computing and presenting earnings per share ("EPS")
previously found in APB Opinion No. 15, "Earnings Per Share," and makes them
comparable to international EPS standards. As the Company has a simple capital
structure and makes a single presentation of earnings per share on the income
statement, the adoption of this standard did not affect the reported amounts of
EPS for the current or comparable periods. EPS is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding during each period presented. Common shares include the
assumed distribution of shares of common stock issued or issuable under various
employee benefit plans including certain of the Company's deferred compensation
arrangements, with appropriate adjustments made to net income for expense
accruals related thereto.
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,
1998, 1997 and 1996. Income taxes paid totaled $459.7 million, $478.4 million
and $279.0 million for the fiscal years 1998, 1997 and 1996, 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.
Substantially all of the Company's assets and 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, 1998 for debt
obligations of similar maturity, was approximately $13.4 billion, which is
greater than the aggregate carrying value by approximately $125.3 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.
<PAGE>
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 1998 1997
- --------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
FINANCIAL INSTRUMENTS OWNED:
US government and agency $ 9,388,387 $ 9,163,407
Other sovereign governments 2,955,515 1,847,691
Corporate equity and convertible debt 12,255,749 11,280,199
Corporate debt 4,938,541 4,961,737
Derivative financial instruments 3,545,236 2,780,231
Mortgages and other mortgage-backed securities 10,582,090 7,858,200
Other 954,154 545,815
........................................................................... -------------------- --------------------
$ 44,619,672 $ 38,437,280
........................................................................... -------------------- --------------------
FINANCIAL INSTRUMENTS SOLD, BUT NOT YET PURCHASED:
US government and agency $ 6,327,074 $ 8,687,884
Other sovereign governments 3,107,789 1,479,278
Corporate equity 4,336,280 4,985,396
Corporate debt 1,398,025 1,099,700
Derivative financial instruments 5,835,491 4,412,986
Other 65,937 119,552
........................................................................... -------------------- --------------------
$ 21,070,596 $ 20,784,796
........................................................................... -------------------- --------------------
</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.
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 $7.3
billion and $7.8 billion at June 30, 1998 and 1997, respectively. During the
fiscal years 1998 and 1997, the weighted average interest rates on such
borrowings were 5.66% and 5.47%, respectively. The weighted average rates at
June 30, 1998 and 1997 were 5.51% and 5.59%, respectively.
At June 30, 1998 and 1997, the Company had outstanding $6.2 billion and
$5.7 billion, respectively, principal amount of Medium-Term Notes having initial
maturities ranging 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 1998 and 1997, the weighted
average interest rates on the Medium-Term Notes were 5.77% and 5.63%,
respectively. The weighted average rates at June 30, 1998 and 1997 were 5.81%
and 5.84%, respectively.
At June 30, 1998 and 1997, the Company had outstanding $45.3 billion and
$39.4 billion of repurchase agreements. During the fiscal years 1998 and 1997,
the weighted average interest rates on the repurchase agreements were 5.55% and
5.30%, respectively. The weighted average rates at June 30, 1998 and 1997 were
5.54% and 5.44%, respectively.
Short-term borrowings at June 30, 1998 and 1997 included $1.1 billion and
$920.5 million, respectively, of bank loans. During the fiscal years 1998 and
1997, the weighted average interest rates on such bank loans were 5.54% and
5.36%, respectively. The weighted average rates at June 30, 1998 and 1997 were
5.23% and 4.56%, respectively.
5 Long-term Borrowings
Long-term borrowings at June 30 consisted of the following:
In thousands 1998 1997
- -------------------------------------------------- ------------ -----------
Floating Rate Notes due 1999 to 2005 $ 1,788,779 $ 1,122,461
Fixed-Rate Senior Notes due 1999 to 2007;
interest rates ranging from 5 3/4% to 9 3/8% 5,306,600 3,068,453
Medium-Term Notes & Other 6,200,573 3,929,414
.................................................. ------------ -----------
Total long-term borrowings $ 13,295,952 $ 8,120,328
.................................................. ------------ -----------
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, 1998 and 1997, the weighted average effective interest rates on
the Floating Rate Notes were 6.01% and 5.88%, respectively. The weighted average
effective interest rates on the Floating Rate Notes at June 30, 1998 and 1997
were 5.99% and 6.06%, respectively.
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, after giving effect to the swaps, during the fiscal
years 1998 and 1997 were 6.26% and 6.21%, respectively. The weighted average
effective interest rates on the Company's Fixed-Rate Senior Notes at June 30,
1998 and 1997 were 6.05% and 6.22%, respectively.
The Company's Medium-Term Notes have initial 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 1998
and 1997, the weighted average interest rates on the Medium-Term Notes were
5.85% and 5.85%, respectively. The weighted average interest rates on the
Company's Medium-Term Notes at June 30, 1998 and 1997 were 6.03% and 6.02%,
respectively.
Maturities of long-term borrowings at June 30, 1998 consisted of the
following:
<PAGE>
In thousands
- -----------------------------------------------------------------------------
FISCAL YEAR AMOUNT
1999 $ 1,663,521
2000 2,763,765
2001 3,215,884
2002 536,275
2003 1,949,250
Thereafter 3,167,257
.............................................................................
$ 13,295,952
.............................................................................
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,
1998, 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:
In thousands 1998 1997 1996
- ------------------------------------- ----------- ----------- ----------
CURRENT:
Federal $ 398,205 $ 326,359 $ 212,686
State and local 163,353 139,676 108,652
Foreign 46,319 36,184 23,139
..................................... ----------- ----------- ----------
Total current $ 607,877 $ 502,219 $ 344,477
..................................... ----------- ----------- ----------
DEFERRED:
Federal $ (143,656) $ (74,346) $ 2,596
State and local (61,158) (27,513) (2,785)
..................................... ----------- ----------- ----------
Total deferred $ (204,814) $ (101,859) $(189)
..................................... ----------- ----------- ----------
Total provision for income taxes $ 403,063 $ 400,360 $ 344,288
..................................... ----------- ----------- ----------
Significant components of the Company's deferred tax assets (liabilities)
as of June 30 were as follows:
In thousands 1998 1997 1996
- ---------------------------------- ----------- ----------- ----------
DEFERRED TAX ASSETS:
Deferred compensation $ 430,123 $ 304,238 $ 214,484
Valuation reserves 14,852 15,304 19,848
Liability reserves 139,426 93,631 57,199
Other 15,006 25,398 13,264
.................................. ----------- ----------- ----------
Total deferred tax assets $ 599,407 $ 438,571 $ 304,795
.................................. ----------- ----------- ----------
DEFERRED TAX LIABILITIES:
Partnerships $ (12,127) $ (106,379) $ (82,314)
Unrealized appreciation (162,365) (117,616) (98,787)
Depreciation (15,457) (15,261) (19,026)
Other (12,796) (7,467) (14,679)
.................................. ----------- ----------- ----------
Total deferred tax liabilities $ (202,745) $ (246,723) $(214,806)
.................................. ----------- ----------- ----------
Net deferred tax asset $ 396,662 $ 191,848 $ 89,989
.................................. ----------- ----------- ----------
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>
1998 1997 1996
- ---------------------------------------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal benefit 6.2 6.9 8.5
Dividend exclusion (1.9) (1.8) (1.9)
Other, net (1.4) (0.6) (0.4)
.......................................................... ----------------- ----------------- -------------------
Effective tax rate 37.9% 39.5% 41.2%
.......................................................... ----------------- ----------------- -------------------
</TABLE>
Not included in the reconciliation table reflected above are approximately
$85.8 million, $3.5 million and $5.3 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"), and other deferred
compensation plans, credited directly to paid-in capital, for fiscal 1998, 1997
and 1996, respectively.
<PAGE>
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. 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, 1998, 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, 1998, approximately $2.1 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 5.50% during the year ended June 30, 1998. The
Company did not repurchase any shares during the year ended June 30, 1998. At
June 30, 1998, the Company held 2,520,750 shares of Preferred Stock in treasury.
On January 15, 1998, the Company issued 5.0 million depositary shares
representing 1.25 million shares of Cumulative Preferred Stock, Series E
("Series E Preferred Stock"), having an aggregate liquidation preference of
$250.0 million. Each depositary share represents a one-fourth interest in a
share of Series E Preferred Stock. Dividends on the Series E Preferred Stock are
payable at an annual rate of 6.15%. Series E Preferred Stock is redeemable at
the option of the Company at any time on or after January 15, 2008, in whole or
in part, at a redemption price of $200 per share (equivalent to $50 per
depositary share), plus accrued but unpaid dividends to the redemption date.
On April 21, 1998, the Company issued 4.0 million depositary shares
representing 1.0 million shares of Cumulative Preferred Stock, Series F ("Series
F Preferred Stock"), having an aggregate liquidation preference of $200.0
million. Each depositary share represents a one-fourth interest in a share of
Series F Preferred Stock. Dividends on the Series F Preferred Stock are payable
at an annual rate of 5.72%. Series F Preferred Stock is redeemable at the option
of the Company at any time on or after April 15, 2008, in whole or in part, at a
redemption price of $200 per share (equivalent to $50 per depositary share),
plus accrued but unpaid dividends to the redemption date.
On June 19, 1998, the Company issued 4.0 million depositary shares
representing 1.0 million shares of Cumulative Preferred Stock, Series G ("Series
G Preferred Stock"), having an aggregate liquidation preference of $200.0
million. Each depositary share represents a one-fourth interest in a share of
Series G Preferred Stock. Dividends on the Series G Preferred Stock are payable
at an annual rate of 5.49%. Series G Preferred Stock is redeemable at the option
of the Company at any time on or after July 15, 2008, in whole or in part, at a
redemption price of $200 per share (equivalent to $50 per depositary share),
plus accrued but unpaid dividends to the redemption date.
On April 1, 1998, the Company announced the redemption of all 7.5 million
outstanding depositary shares representing 937,500 shares of 7.88% Cumulative
Preferred Stock, Series B for a redemption price of $25 per depositary share
plus accrued and unpaid dividends. These shares were redeemed on May 5, 1998.
On June 10, 1998, the Company announced the redemption of all 4.0 million
outstanding depositary shares representing 500,000 shares of 7.60% Cumulative
Preferred Stock, Series C for a redemption price of $25 per depositary share.
These shares were redeemed on July 15, 1998.
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, depository
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.
Bear Stearns Capital Trust I (the "Trust"), a wholly owned subsidiary of
the Company, has outstanding $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 7.00% through January 2002. Thereafter, the
distributions will be at a variable rate based on the 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.
<PAGE>
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, 1998, 1997 and 1996 was $12.8 million, $12.5
million and $11.1 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, 1998, 1997 and 1996 was $11.3 million, $9.4 million and $7.2 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 each of the years ended June 30, 1998, 1997 and
1996 was approximately $6.0 million.
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, 1998, 1997 and 1996, participants deferred
compensation of approximately $247.4 million, $191.8 million and $139.7 million,
respectively. During the years ended June 30, 1998, 1997 and 1996, the Company
recognized expense of approximately $115.2 million, $56.4 million and $36.7
million, respectively, attributable to CAP Units or cash credited to
participants' deferred compensation accounts with respect to earnings
adjustments. As of July 1, 1998, pursuant to the terms of the CAP Plan,
4,424,101 CAP Units were credited to participants' deferred compensation
accounts with respect to the deferrals and earnings made during fiscal year
1998. In addition, $153.8 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, 1998, 1997 and 1996 was
approximately 34.5 million, 34.0 million and 27.2 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.
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 specified 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 1998 1997 1996
- --------------------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
Fixed income $ 905,665 $ 919,604 $ 677,475
Equity 472,435 393,875 389,898
Foreign exchange and other derivative financial
instruments 348,882 257,853 172,324
................................................... ------------- ------------ ------------
Total principal transactions $ 1,726,982 $ 1,571,332 $ 1,239,697
................................................... ------------- ------------ ------------
</TABLE>
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 statistical 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 are generally 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 at June 30:
<TABLE>
<CAPTION>
In billions 1998 1997
- ------------------------------------------------------------------------------------------ ------------- -------------
<S> <C> <C>
INTEREST RATE:
Swap agreements, including options, swaptions, caps, collars and floors $277.5 $208.3
Futures contracts 49.8 34.3
Options held 4.0 4.0
Options written 1.6 0.7
FOREIGN EXCHANGE:
Futures contracts 20.8 19.9
Forward contracts 29.6 13.6
Options held 9.9 10.0
Options written 7.7 9.4
MORTGAGE-BACKED SECURITIES:
Forward contracts 70.2 40.5
EQUITY:
Swap agreements 11.6 6.0
Futures contracts 1.1 0.6
Options held 5.3 2.8
Options written 4.6 2.9
</TABLE>
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 with the resulting
unrealized gains or losses recorded in the Consolidated Statement 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:
1998 1997
------------------- --------------------
In millions Assets Liabilities Assets Liabilities
- ----------------------------------- ------- ----------- ------- -----------
Swap agreements $1,872 $2,100 $ 730 $1,250
Futures and forward contracts 450 551 172 248
Options held 1,279 1,880
Options written 3,189 2,927
<PAGE>
The average monthly fair values of the derivative financial instruments for
the fiscal years ended June 30 were as follows:
1998 1997
------------------- ---------------------
In millions Assets Liabilities Assets Liabilities
- ----------------------------------- ------ ----------- -------- -----------
Swap agreements $1,154 $1,494 $ 734 $1,029
Futures and forward contracts 318 329 245 218
Options held 2,207 1,120
Options written 3,709 1,657
The majority of the Company's transactions with off-balance-sheet risk are
short-term in duration with a weighted average maturity of approximately 2.8
years and 3.0 years at June 30, 1998 and 1997, respectively. The maturities for
notional/contract amounts outstanding for derivative financial instruments as of
June 30, 1998 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 $ 75.8 $ 81.0 $ 62.6 $ 69.7 $ 289.1
Futures contracts 51.5 16.7 3.5 71.7
Forward contracts 99.8 99.8
Options held 16.1 2.8 0.1 0.2 19.2
Options written 11.6 2.3 13.9
.................................. -------------- --------------- --------------- ------------------ ---------------
Total $ 254.8 $ 102.8 $ 66.2 $ 69.9 $ 493.7
.................................. -------------- --------------- --------------- ------------------ ---------------
Percent of total 51.6% 20.8% 13.4% 14.2% 100.0%
</TABLE>
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 generally 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 $832.4 million and
$462.1 million of collateral, respectively, at June 30, 1998 and 1997:
<PAGE>
In millions 1998 1997
- ------------------------------ ----------- ------------
RATING(1) NET REPLACEMENT COST
AAA $ 187.7 $ 92.4
AA 607.9 201.7
A 371.0 152.9
BBB 68.1 40.6
BB and Lower 70.8 16.5
Non-rated 27.2 36.7
1 Rating Agency Equivalent
CUSTOMER ACTIVITIES
The Company's clearance activities for both clearing clients and customers
involve the execution, settlement and financing of various customer securities
and commodities transactions. Customers' securities activities are transacted on
either a cash or margin basis, while customer commodity transactions are
generally transacted on a margin basis subject to individual exchange
regulations. In connection with these activities, the Company executes and
clears customer 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
customer's obligations.
The Company seeks to control the risks associated with its customer
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 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 customer 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 customer 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 exposure.
Moreover, the Company establishes credit limits for such activities and monitors
compliance daily.
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 and partnerships, 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 customer credit exposure and collateral values on
a daily basis and 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 significant levels 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 the customer's sensitivity to major market movements. The
Company will require the customer to deposit additional margin collateral, or
reduce positions, if it is determined that the customer's 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, 1998 and 1997, the Company had outstanding interest rate and
currency swap agreements with a notional principal amount of $11.6 billion and
$7.9 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 $23.5 million, $29.4 million and $15.9 million for the fiscal
years ended June 30, 1998, 1997 and 1996, 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. At June 30, 1998, future minimum aggregate annual rentals payable under
these noncancelable leases (net of subleases), for years 1999 through 2003 and
the aggregate amount thereafter, are as follows:
In thousands
- --------------------------------------- --------------
FISCAL YEAR
1999 $ 63,754
2000 59,508
2001 57,449
2002 55,458
2003 38,370
Aggregate amount thereafter 96,176
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 $90.4 million, $79.5 million and $77.0
million, for the years ended June 30, 1998, 1997 and 1996, respectively.
LETTERS OF CREDIT/GUARANTEES
At June 30, 1998, the Company was contingently liable for unsecured letters of
credit of $2.4 billion and letters of credit of $125.9 million secured by
financial instruments which are principally used as deposits for securities
borrowed and for satisfying margin deposits at option and commodity exchanges.
The Company is contingently liable pursuant to an unconditional guaranty of
participations in the right to the return of cash collateral posted by third
parties in securities lending transactions. At June 30, 1998, $5.3 billion in
such participations were outstanding under the program. The Company had various
other commitments aggregating $0.5 billion at June 30, 1998.
BORROW VERSUS PLEDGE
At June 30, 1998, US government and agency securities with a market value of
approximately $13.8 billion had been pledged against borrowed securities with an
approximate market value of $13.6 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. Included among
these lawsuits is an action that is pending in the United States District Court
for the Northern District of California filed by the Trustee for Daisy Systems
Corporation ("Daisy"). The litigation arose out of Daisy's retention of Bear
Stearns in 1988 to provide investment banking services to Daisy with respect to
a potential merger of Daisy and Cadnetix, Inc. On May 15, 1998, a jury found for
the Trustee and awarded a $108.0 million judgment against the Company. The
Company believes that the verdict is inappropriate and has filed post-trial
motions seeking to set aside the verdict or to substantially reduce the damages
awarded. The financial statements reflect a charge of $108.0 million to increase
litigation reserves in light of the jury verdict. On August 11, 1998 the judge
presiding over this case entered an order providing for a new trial on the issue
of damages only, or an acceptance by the Trustee of a reduction of the judgment
to approximately $36.0 million. As of this date, the Trustee has not chosen
which alternative he will accept. The Company will consider all of its options
related to the litigation, including the possibility of an appeal.
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 consolidated financial condition of the Company, taken
as a whole.
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, "Financial Reporting for Segments of a Business Enterprise."
Information regarding the Company's operations for the fiscal years ended June
30 is as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ------------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Foreign revenues $ 852,689 $ 535,275 $ 460,055
Domestic revenues 7,127,247 5,542,003 4,503,808
....................................................... ------------------- ------------------- -------------------
Consolidated revenues $ 7,979,936 $ 6,077,278 $ 4,963,863
....................................................... ------------------- ------------------- -------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Foreign income before provision for income taxes $ 130,770 $ 28,790 $ 53,470
Domestic income before provision for income taxes 932,722 984,900 781,456
....................................................... ------------------- ------------------- -------------------
Consolidated income before provision for income
taxes $ 1,063,492 $ 1,013,690 $ 834,926
....................................................... ------------------- ------------------- -------------------
Foreign assets $ 26,452,778 $ 22,148,655 $ 17,219,879
Domestic assets 128,043,117 99,284,880 74,865,278
....................................................... ------------------- ------------------- -------------------
Consolidated assets $ 154,495,895 $ 121,433,535 $ 92,085,157
....................................................... ------------------- ------------------- -------------------
</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.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which will be effective for the Company in
fiscal year 1999. 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. The Company
has not yet determined the impact of this statement on the Company's financial
statement disclosure.
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, 1998
Revenues $ 1,813,005 $ 1,993,067 $ 1,927,621 $ 2,246,243 $ 7,979,936
Interest expense 816,915 919,304 877,392 1,024,902 3,638,513
.......................................... ------------- ------------- ------------- ------------- --------------
Revenues, net of interest expense 996,090 1,073,763 1,050,229 1,221,341 4,341,423
.......................................... ------------- ------------- ------------- ------------- --------------
Non-interest expenses
Employee compensation and benefits 499,197 535,793 513,254 563,497 2,111,741
Other 229,755 278,365 271,252 386,818 1,166,190
.......................................... ------------- ------------- ------------- ------------- --------------
Total non-interest expenses 728,952 814,158 784,506 950,315 3,277,931
.......................................... ------------- ------------- ------------- ------------- --------------
Income before provision for income
taxes 267,138 259,605 265,723 271,026 1,063,492
Provision for income taxes 105,520 99,383 99,404 98,756 403,063
.......................................... ------------- ------------- ------------- ------------- --------------
Net income $ 161,618 $ 160,222 $ 166,319 $ 172,270 $ 660,429
.......................................... ------------- ------------- ------------- ------------- --------------
Earnings per share $ 1.11 $ 1.11 $ 1.15 $ 1.23 $ 4.60
.......................................... ------------- ------------- ------------- ------------- --------------
Cash dividends declared per common
share $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.60
</TABLE>
<PAGE>
<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(1) $ 0.72 $ 1.21 $ 1.14 $ 1.15 $ 4.20
.......................................... ------------- ------------- ------------- ------------- --------------
Cash dividends declared per common
share $ 0.14 $ 0.14 $ 0.15 $ 0.15 $ 0.58
</TABLE>
1 The sum of the quarters' earnings per share amounts does not equal the full
fiscal year amount due to the effect of averaging the number of shares of Common
Stock and common stock equivalents throughout the year.
<PAGE>
INDEPENDENT
Auditors' Report
[Deloitte & Touche Logo]
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, 1998 and
1997, 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,
1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
August 21, 1998
<PAGE>
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 closing high and low
sales prices for the Common Stock and the cash dividends declared on the Common
Stock, as adjusted to reflect the 5% stock dividend distributed on the Common
Stock on February 28, 1997.
As of September 3, 1998, there were 2,896 holders of record of the
Company's Common Stock. On September 3, 1998, the last reported sales price of
the Company's Common Stock was $36 1/4.
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 E; Cumulative Preferred
Stock, Series F; and Cumulative Preferred Stock, Series G (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" and Management's Discussion and Analysis of
Financial Condition and Results of Operations under the caption "Regulated
Subsidiaries" for a further description of the restrictions on dividends.
<TABLE>
<CAPTION>
Cash Dividends
Declared Per
High Low Common Share
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter (through September 26, 1997) $ 43 7/16 $ 34 3/16 $ 0.15
Second Quarter (through December 31, 1997) 48 5/16 38 7/16 0.15
Third Quarter (through March 27, 1998) 53 39 7/8 0.15
Fourth Quarter (through June 30, 1998) 61 5/8 51 1/8 0.15
<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 5/16 $ 19 3/4 $ 0.14
Second Quarter (through December 31, 1996) 26 7/8 22 0.14
Third Quarter (through March 27, 1997) 32 3/8 25 11/16 0.15
Fourth Quarter (through June 30, 1997) 35 5/8 26 1/4 0.15
</TABLE>
Exhibit 21
Subsidiaries (direct and indirect) of The Bear Stearns Companies Inc.
---------------------------------------------------------------------
<TABLE>
<CAPTION>
Jurisdiction of
Incorporation
or Organization
---------------
<S> <C>
ABC Gestion France
ALIMAX Corp. New York
AMC Real Estate Inc. Texas
AURA Partners, L.P. Delaware
Ashdla Holdings LLC Delaware
Ashdla LLC Delaware
BBT 1995-I Corp. 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
BSC Thanksgiving Partners, Ltd. Texas
BSCP Cayman Cayman Islands
BSCGP Inc. Delaware
BSMSI 1993-12 Reserve Fund Corp. Delaware
Battery Park Capital Corp. New York
Bear Hunter L. L. C. New York
Bear Specialist, Inc. New York
Bear, Stearns & Co. Inc. Delaware
Bear, Stearns & Co. L.P. New York
Bear Stearns Acquisition V, Inc. Delaware
Bear Stearns Acquisition XII, Inc. Delaware
Bear Stearns Acquisition XIV Delaware
Bear Stearns Acquisition XV Delaware
Bear Stearns Acquisition XVI Delaware
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
Bear Stearns Asset Management Inc. New York
Bear Stearns Asset Management (Ireland) Limited Dublin
Bear Stearns Bank plc Ireland
Bear Stearns Benefits Planning Group New York
Bear, Stearns Benefits Planning Group Inc. Delaware
Bear Stearns Bridge Management Inc. Delaware
Bear Stearns Canada Holdings Corp. Delaware
Bear Stearns Capital Markets Inc. Delaware
Bear Stearns Commercial Mortgage, Inc. New York
Bear, Stearns Commercial Mortgage Securities Inc. Delaware
Bear Stearns do Brasil Ltda. Brazil
Bear Stearns Dublin Development Centre Limited Dublin
Bear Stearns FLLC Corp. Delaware
Bear Stearns Far East Limited Hong Kong
Bear Stearns Finance LLC Cayman Islands
Bear Stearns Finance S.A. France
Bear Stearns Financial Products Inc. Delaware
Bear Stearns Financial Technologies Inc. Delaware
Bear Stearns Forex Inc. Delaware
Bear, Stearns Funding, Inc. Delaware
Bear Stearns Funds Management Inc. Delaware
Bear Stearns GMBH Germany
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 Lending Limited Cayman Islands
Bear Stearns Global Securitisation Limited United Kingdom
Bear Stearns Government Products Corp. Delaware
Bear Stearns Holdings Fund Limited Delaware
Bear Stearns Holdings Limited United Kingdom
Bear Stearns Hong Kong Limited Hong Kong
Bear, Stearns Insurance Agency Incorporated Massachusetts
Bear Stearns Insurance Agency of California, California Incorporated California
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 Investments Products Inc. New York
Bear Stearns Irish Holdings Inc. Delaware
Bear Stearns (Israel), Inc. Delaware
Bear Stearns (Japan), Ltd. Delaware
Bear Stearns Merchant Fund Corp. Delaware
Bear Stearns Mortgage Capital Corporation Delaware
Bear Stearns N. Y., Inc. New York
Bear, Stearns Netherlands Holding B.V. Netherlands & Delaware
Bear Stearns Oil Trading Limited United Kingdom
Bear Stearns Overseas Ltd. Cayman Islands
Bear Stearns Partners Apartment Fund I LP Delaware
Bear Stearns Philippines Ltd. Delaware
Bear Stearns Real Estate Group Inc. New York
Bear, Stearns Realty Investors, Inc. Delaware
Bear, Stearns Realty Partners Apt. Fund Delaware
Bear Stearns Realty Partners Corporation Delaware
Bear Stearns S. A. 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
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
Bear Stearns Structured Securities Inc. Delaware
Bear Stearns Trading Risk Management Inc. Delaware
Bear Stearns U.K. United Kingdom
Bear TEL Corp. Delaware
Blaylock & Partners, L.P. Delaware
CTC Services, Inc. New York
Commercial Asset Structured Securities Inc. Delaware
Commercial Principal Guaranteed Investors Inc. Delaware
Constellation Venture Capital Offshore, L.P. Cayman Islands
Constellation Ventures, L. P. Cayman Islands
Constellation Ventures Management LLC New York
Custodial Trust Company New Jersey
Custrust New Jersey
DHYNO 1998-1 LLC Delaware
EMC Funding Corporation Delaware
EMC Funding Corporation Two Delaware
EMC GP Capital Inc. Delaware
EMC Mortgage Corporation Delaware
EMC Residential Mortgage Corporation Delaware
FAST 1996-2 GP, Inc. Delaware
FAST 1996-2, L.P. Delaware
Final Four LLC Delaware
Fund America Structured Transactions, Inc. Delaware
Fund America Structured Transactions, L.P. Delaware
Genesis Acquisition Corp. Delaware
Gregory/Madison Avenue Inc. Delaware
Gregory/Madison Avenue LLC Delaware
Gregory Properties Inc. Delaware
HI&G Acquisition Corp. Delaware
Hill Street Funding III Inc. Delaware
Hill Street Funding III L.P. Delaware
ISB Real Estate Corporation Delaware
LIBOR Asset Securities, Inc. Delaware
MAX Flow Corp. Delaware
MAX Recovery Inc. Delaware
MAX Recovery Inc. II Delaware
MSS Acquisition Corp. II Delaware
Managed Income Securities Plus Fund, Inc. Delaware
Motor City Four L.L.C. Delaware
New Castle Holding, Inc. Delaware
New Castle Partners LLC Cayman Islands
Nice-Pak Acquisition Corp. Delaware
Oxford Acquisition Corp. Delaware
Principal Guaranteed Investors Inc. Delaware
Priton Capital, L.P. Delaware
Priton Holding, Inc. Delaware
Prometheus Funding Corp. Delaware
Quatro Finale L L C Delaware
Quatro Finale II LLC Delaware
RC Acquisition Corp. Delaware
Research Conversion Corp. Delaware
RSD Hanover Company Inc. Delaware
SACO I Inc. Delaware
Safety Acquisition Corp. Delaware
Standard Acquisition Corp. Delaware
Status Securities Inc. New York
Street Pricing Service New York
Strike Technologies LLC Delaware
Structured Asset Mortgage Investments Inc. Delaware
Structured Mortgage Asset Corp. Delaware
Sun Apparel Acquisition Corp. Delaware
Thanksgiving Properties, Inc. Delaware
Thanksgiving Tower Partners Texas
Uniscribe Acquisition Corp. Delaware
VHC Acquisition Corp. Delaware
White River Securities Corp. New York
</TABLE>
Exhibit 23
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. 33-56009, 333-43565,
333-61437 and 333-57083 and Form S-8, Files Nos. 33-50012, 33-55804, 33-49979,
33-56103, 333-16041, 333-58007 and 333-57661 of our reports dated August 21,
1998, 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, 1998.
September 28, 1998
New York, New York
<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 10-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-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.00
<CASH> 1,073,821
<RECEIVABLES> 16,033,280
<SECURITIES-RESALE> 29,846,716
<SECURITIES-BORROWED> 56,844,009
<INSTRUMENTS-OWNED> 44,619,672
<PP&E> 448,044
<TOTAL-ASSETS> 154,495,895
<SHORT-TERM> 0
<PAYABLES> 47,811,051
<REPOS-SOLD> 45,346,472
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 21,070,596
<LONG-TERM> 13,295,952
0
800,000
<COMMON> 167,785
<OTHER-SE> 3,323,748
<TOTAL-LIABILITY-AND-EQUITY> 154,495,895
<TRADING-REVENUE> 1,726,982
<INTEREST-DIVIDENDS> 4,285,595
<COMMISSIONS> 902,692
<INVESTMENT-BANKING-REVENUES> 1,001,494
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 3,638,513
<COMPENSATION> 2,111,741
<INCOME-PRETAX> 1,063,492
<INCOME-PRE-EXTRAORDINARY> 1,063,492
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 660,429
<EPS-PRIMARY> 4.60
<EPS-DILUTED> 4.60
</TABLE>