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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, 1999.
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:
Name of Each Exchange
Title of Each Class on Which Registered
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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 New York Stock Exchange
one-fourth interest in a share of
5.72% Cumulative Preferred Stock,
Series F
Depositary Shares, each representing a New York Stock Exchange
one-fourth interest in a share of
5.49% Cumulative Preferred Stock,
Series G
9-3/8% Senior Notes Due 2001 New York Stock Exchange
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. [X]
At September 8, 1999, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was approximately
$4,762,903,000. 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 8, 1999, the registrant had outstanding 117,453,197 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 1999 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 28,
1999, 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, 1999.
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PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
The Bear Stearns Companies Inc. (the "Company") was incorporated under the
laws of the State of Delaware on August 21, 1985. The Company is a holding
company that through its subsidiaries, principally Bear, Stearns & Co. Inc.
("Bear Stearns"); Bear, Stearns Securities Corp. ("BSSC"); and Bear, Stearns
International Limited ("BSIL") is a leading investment banking, securities
trading and brokerage firm serving corporations, governments, institutional and
individual investors worldwide. BSSC, a 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 is primarily engaged in business as a securities broker and
dealer operating in three principal segments: Capital Markets, Execution
Services and Wealth Management. These segments are strategic business units
analyzed separately due to the distinct nature of the products they provide and
the clients they serve. Certain Capital Markets products are distributed by the
Wealth Management and Execution Services distribution network with related
revenue of such intersegment services allocated to the respective segments
through transfer pricing policies.
The Capital Markets segment is comprised of the Equities, Fixed Income and
Investment Banking areas with over 2,600 directly attributable employees.
Equities combines the efforts of sales, trading and research professionals to
offer in-depth expertise in areas such as block trading, convertible bonds,
over-the-counter ("OTC") equities, equity derivatives and risk arbitrage. Fixed
Income provides distribution power for issuers in the primary market, liquidity
for investors in the secondary market, research for institutional clients and
offers expertise in products such as mortgage-backed and asset-backed
securities, corporate and government bonds, municipal and high yield securities,
foreign exchange and derivatives. Investment Banking provides a variety of
services to our clients, including capital raising, strategic advisory, mergers
and acquisitions and merchant banking capabilities. Capital raising encompasses
the Company's underwriting of equity, investment grade debt and high yield debt
securities.
The Execution Services segment is comprised of clearance and predominately
commission-related areas, including institutional equity sales, institutional
futures sales and specialists activities. At June 30, 1999, approximately 2,700
dedicated employees serve these business areas.
Institutional equity sales involves the execution of transactions in US
equity securities for domestic and foreign institutional customers and providing
these customers with liquidity, trading expertise, trade execution, research and
investment advice. The Company provides transaction services for institutional
customers who trade in futures and futures-related instruments. The Company is
also involved in specialist activities on both the New York Stock Exchange
("NYSE") and the American Stock Exchange ("AMEX").
The Company also provides clearing, margin lending and securities
borrowing to facilitate customer short sales to over 2,700 clearing clients
worldwide. Such clients include approximately 2,300 prime brokerage clients
including hedge fund managers, money managers, short sellers, arbitrageurs and
other professional investors and approximately 400 fully disclosed clients, who
engage in either the retail or institutional brokerage business. The Company
processes trades in over 70 countries and accounts for approximately 10% of the
average daily NYSE volume, processing an average of in excess of 175,000 trades
per day.
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Wealth Management provides fee-based products and services through the
Private Client Services ("PCS") and Asset Management areas to both individual
and institutional investors.
PCS provides high-net-worth individuals with an institutional level of
service, including access to the Company's resources and professionals. PCS
maintains a select team of approximately 500 account executives in seven
regional offices. These account executives averaged approximately $1.0 million
in production in fiscal 1999. PCS had over $39 billion in client assets at June
30, 1999.
The Asset Management area, through Bear Stearns Asset Management Inc., had
$12.2 billion in assets under management at June 30, 1999 which reflected a
greater than 24% increase over the prior year. The largest component of the
increase was attributable to equities and alternative investments. Asset
Management serves the diverse investment needs of corporations, municipal
governments, multi-employer plans, foundations, endowments, family groups and
high-net-worth individuals. Innovation in products and services enables Asset
Management to serve clients in an increasingly competitive financial
marketplace.
Financial information regarding the Company's industry segments and
foreign operations for the three successive fiscal years ended June 30, 1999 is
set forth under the Notes to the Consolidated Financial Statements in Footnote
13, entitled "Segment and Geographic Area Data," in the registrant's 1999 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 business of the Company includes: market-making and trading in US
government, government agency, corporate debt and equity, mortgage-related,
asset-backed and municipal securities: trading in options, futures, foreign
currencies, interest rate swaps and other derivative products; securities,
options and futures brokerage; providing securities clearance services; managing
equity and fixed income assets for institutional and individual clients;
financing customer activities; securities lending; securities and futures
arbitrage; acting as specialist on the floor of the NYSE and the AMEX;
underwriting and distributing securities; arranging for the private placement of
securities; assisting in mergers, acquisitions, restructurings and leveraged
transactions; making principal investments in leveraged acquisitions; engaging
in commercial real estate activities; investment management and advisory;
fiduciary, custody, agency and securities research services.
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, Hong Kong,
and Shanghai; through international offices in Buenos Aires, Dublin, London,
Lugano, Sao Paulo, Singapore and Tokyo; and through joint ventures with other
firms in Belgium, Greece, and Madrid. The Company's international offices
provide services and engage in investment activities involving foreign clients
and international transactions. Additionally, certain of these foreign offices
provide services to US clients. The Company provides trust company services
through its subsidiary, Custodial Trust Company ("CTC"), which is located in
Princeton, New Jersey.
Bear Stearns and BSSC are broker-dealers registered with the Securities
and Exchange Commission (the "SEC"). Additionally, Bear Stearns is registered as
an investment adviser with the SEC. Bear Stearns and BSSC are also members of
the NYSE, all other principal US securities and futures exchanges, the National
Association of Securities Dealers ("NASD"), the Commodity Futures Trading
Commission ("CFTC") and the National Futures Association ("NFA"). Bear Stearns
is a "primary dealer" in US government securities as designated by the Federal
Reserve Bank of New York.
BSIL is a full service broker-dealer based in London and is a member of
Eurex (formerly the Deutsche Terminborse), the International Petroleum Exchange
("IPE"), the London Commodity Exchange ("LCE"), the London International
Financial Futures and Options Exchange ("LIFFE"), OMLX, The London Securities &
Derivatives Exchange ("OMLX"), Marche a Terme International de France, SA
("MATIF") and the London Clearing House ("LCH"). BSIL is supervised by and
regulated in accordance with the rules of the Securities and Futures Authority
("SFA").
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As of June 30, 1999, the Company had 9,808 employees.
The following areas are included in the three industry segments mentioned
above in Item 1(b).
INSTITUTIONAL EQUITIES
General. The Company provides customers with liquidity, trading expertise,
equity research and extensive expertise in products such as domestic and
international equities and convertible securities.
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.
Arbitrage. The Company engages for its own account in both "classic" and
"risk" securities-arbitrage. The Company's risk arbitrage activities generally
involve the purchase of securities at a discount from a value that 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.
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 traversing a wide spectrum of equity
and futures products including listed and OTC options and swaps.
OTC 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 OTC 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.
Equity Research. The Equity Research Department provides in-depth research
including economic forecasts, industry and company analyses, overall strategic
guidance and recommendations. The department provides comprehensive industry and
company coverage on approximately 1,200 stocks in over 100 industries, or 57% of
the stocks in the S&P 500. Ninety-three equity analysts provide coverage and
recommendations on domestic stocks as well as European, Latin American and Asian
stocks, complemented by the output of the Company's economists and strategists.
Some of the Company's larger global research teams are concentrated in the
health care, media, technology and telecommunications sectors.
FIXED INCOME
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, US and foreign government securities, government agency securities,
mortgages and mortgage-backed securities, other asset-backed securities,
municipal and other tax-exempt securities, interest rate swaps and other
derivative products. Bear Stearns is one of the largest dealers in the US in
fixed income securities, including US government and agency securities,
mortgage-backed securities, and corporate and municipal securities. Inventories
of fixed income securities are generally carried to facilitate sales to
customers and other dealers.
US Government and Agency Obligations. The Company is recognized by the
Federal Reserve Bank of New York as a primary dealer in US government
obligations. The Company participates in the auction of, and maintains
proprietary positions in, US 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 US government-agency and
sponsored-corporation securities and maintains proprietary positions in such
securities. In connection with these
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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
US 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. 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 rates.
Corporate Fixed Income Securities. The Company acts as a dealer in
sovereign and corporate fixed income securities and preferred stocks in New
York, London 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 of high yield, non-investment grade securities and the securities
and bank loans of companies, sovereigns and sovereign agencies.
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
(i.e., 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.
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
vehicles 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
portfolio. 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
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subsequent to securitizing and selling the deal, but does have exposure to the
performance of the underlying real estate after the closing of the loan and
prior to securitization.
Asset-Backed Securities. The Company acts as underwriter and placement
agent with respect to investment grade 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, non-investment grade securities and
related varieties thereof 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 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-term and short-term
municipal securities, mainly to facilitate transactions with institutional and
individual customers, as well as other dealers. As agent for issuers, the
Company earns fees by remarketing 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.
Derivatives. The Company offers to customers, and trades for its own
account, a variety of exchange-traded and OTC derivative products, including
fixed income, credit, and equity derivatives. These products are transacted, as
principal, with customers for hedging, risk management, asset/liability
management, investment, financing and other purposes. These transactions are in
the form of swaps, options, swaptions, asset swaps, and structured notes, as
well as more complex, structured trades which are customized to meet customers'
specific needs. The Company also enters into derivative transactions for various
purposes and to manage risks to which the Company is exposed in its businesses
and funding activities. The Company manages its market and counterparty
derivatives risks in a manner consistent with its overall risk-management
policies.
Foreign Exchange. The Company trades foreign exchange products with
clients as principal; for its own account; and to hedge its securities positions
or other assets and liabilities. Foreign exchange products include major and
minor currencies on a spot and forward basis, listed and OTC foreign currency
options, and foreign exchange futures contracts. Foreign exchange trading desks
are maintained in New York and London and clients can trade or leave orders 24
hours per day. The Company serves a select list of funds, major corporations,
and mid-size commercial banks. Currency option strategies are made available to
customers to help them meet their specific risk management objectives.
Fixed Income Research. The Company is a leader in the distribution,
trading and underwriting of corporate, government, high yield, emerging markets,
municipal debt, and mortgage-backed and asset-backed securities. The Fixed
Income Research Department is comprised of economists, industry analysts and
strategists covering the full range of research disciplines: quantitative,
economic, strategic, credit portfolio, relative value and market-specific
analysis. The Fixed Income Research Department provides ongoing support for the
Company's sales and trading efforts, producing reports, studies, and technical
market analyses. Fixed Income Research is comprised of the following three
units:
(i) Financial Analytics and Structured Transactions Group ("F.A.S.T."),
a unique firm-wide resource, has developed innovative fixed income
strategies through the application of its advanced and fully
integrated technology. Through F.A.S.T., the Company affords its
clients financial engineering and securitization capabilities,
investment research, fixed income portfolio management and
analytical systems and trading technology for mortgage-related and
fixed income
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securities. F.A.S.T. offers the means to create and implement
financial strategies designed to maximize portfolio returns.
(ii) High grade research consists of approximately 18 analysts and
researchers, and provides coverage for over 30 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, providing coverage for over 600 corporate and sovereign
issuers whose fixed income securities are non-investment grade.
EMERGING MARKETS
The Company provides financial services in various emerging markets
worldwide including: securities brokerage, equity and fixed income trading and
sales, and securities research; besides offering 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.
EQUITY SALES
The Company is one of the leading firms in the US in providing brokerage
services to institutional investors. Institutional equity sales involves the
execution of transactions in US equity securities for domestic and foreign
institutional customers and providing these customers with liquidity, trading
expertise, trade execution, research and investment advice. The Company provides
transaction services for institutional customers who trade in futures and
futures-related instruments. The Company is also involved in specialist
activities on both the NYSE and the AMEX.
CLEARANCE ACTIVITIES
The Company provides a full range of 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 client 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 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.
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, specialists, arbitrageurs 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,
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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
broker-dealer and prime broker clients. In addition to performing
administrative, operational and settlement functions, the Company also advises
clients on communications systems and provides a variety of non-brokerage
products and services on favorable terms, enabling them to benefit from the
Company's centralized purchasing power.
FUTURES
The Company, through BSSC and other subsidiaries, provides, directly or
through third-party brokers, futures commission merchant services for customers
and other Bear Stearns affiliates who trade contracts in futures on financial
instruments and physical commodities, including options on futures.
Exchange-traded futures and options derive their values from the values of
selected stock indices, fixed income securities, currencies, agricultural and
energy products and precious metals.
Domestic futures and options trading is subject to extensive regulation by
the CFTC pursuant to the Commodity Exchange Act and the Commodity Futures
Trading Commission Act of 1974. International futures and options trading
activities are subject to regulation by the respective regulatory authorities in
the locations where futures exchanges reside, including the SFA in the United
Kingdom.
Margin requirements (good faith deposits) covering substantially all
transactions in futures and options contracts are subject to each particular
exchange's regulations in addition to other regulations. In the US, 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 IPE, the LCE,
the LIFFE and OMLX. The Company also has non-clearing memberships with MATIF and
Eurex in Europe. In Japan memberships are held with the Tokyo Stock Exchange,
the Osaka Stock Exchange and the Tokyo International Financial Futures Exchange
("TIFFE") for clearing Japanese government bond futures, for clearing Japanese
stock index products, and for executing financial futures, respectively.
BLOCK TRADING
The Company effects transactions in large blocks of securities, generally
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.
SPECIALIST ACTIVITIES
The Company is a participant in specialist units on the NYSE and the AMEX
that as of September 1999 perform specialist functions in approximately 180
NYSE-listed stocks in addition to approximately 100 stocks and 80 options on the
AMEX. These market-making operations are conducted through joint ventures with a
member organization pursuant to joint-account agreements. The market-making
functions of a specialist involve 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.
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; clearance of government securities for institutions
and dealers; processing of mortgage and mortgage-related products, including
derivatives and collateralized mortgage obligations products; and margin
lending. At
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June 30, 1999, CTC held approximately $140 billion of assets for clients such as
pension funds, mutual funds, endowment funds, religious organizations and
insurance companies.
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, general
industrial services and products, health care/pharmaceuticals,
media/entertainment, merchandising, natural resources, real estate, gaming and
lodging, technology and telecommunications. The Company also has a group that
focuses on financial sponsors. 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, syndicated bank loans, 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 often assists with the origination, but is primarily
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 Loan Origination and Syndication. This area of the Company
integrates the origination, structuring, underwriting, distribution and trading
of bank loans. Such loans include both funded and unfunded and investment grade
and non-investment grade loans.
Leveraged Acquisitions. As part of its investment banking activities, the
Company 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.
PCS
PCS provides high-net-worth individuals with an institutional level of
service, including access to the Company's resources and professionals. PCS
maintains a select team of approximately 500 account executives in seven
regional offices. These account executives averaged approximately $1.0 million
in production in fiscal 1999. PCS had over $39 billion in client assets at June
30, 1999.
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ASSET MANAGEMENT
The Company's asset management department manages equity and fixed income
assets for some of the leading domestic corporate pension plans, public systems,
endowments, foundations, multi-employer plans, insurance companies,
corporations, families and high net-worth individuals in the US. With over $12
billion under management, the asset management department provides its clients
with diverse products, expertise and experience for enhancing investment returns
by identifying, and capitalizing on, investment opportunities in the financial
markets. Institutional and high-net-worth products include: large and small cap
value equity and growth 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 department 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.
OTHER
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 that is collateralized
by securities and cash in the customer's account, in accordance with regulatory
and internal requirements. 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, broker's call rate or LIBOR.
Securities Lending Activities. In connection with both its trading and
brokerage activities, the Company borrows and lends securities to broker-dealers
and other trading entities to cover short sales and to complete transactions in
which customers have failed to deliver securities by settlement date.
ADMINISTRATION AND OPERATIONS
Administration and operations personnel are responsible for processing of
securities transactions; receipt, identification and delivery of funds and
securities; internal financial controls; accounting functions; office services;
custody of customer securities; and overseeing the 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 5,000 employees located in separate operations offices in New York
City and Whippany, New Jersey and, to a lesser extent, in the Company's offices
worldwide.
The Company executes its own and correspondent transactions on US
exchanges and in the OTC 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, other broker-dealers, and through memberships in
various clearing corporations.
There can be significant 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.
INTERNATIONAL
Outside the US, the Company, through its international subsidiaries,
provides various services including investment banking, securities trading and
brokerage and clearance activities to corporations, governments,
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institutions and individuals throughout the world. These international
subsidiaries have memberships on various foreign securities and futures
exchanges.
BSIL is based in London and provides investors and issuers with a full
range of products and services in both international and US equities, fixed
income, exchange-traded futures and options, and foreign exchange. In addition,
BSIL is a major sales and trading center within the Company's global fixed
income and equity-related derivative businesses. BSIL has a growing investment
banking capability and is also enhancing its service to the Company's growing
clearance business in Europe.
Bear Stearns Japan Limited ("BSJL"), based in Tokyo, serves the diverse
needs of Japanese corporations, financial institutions and government agencies
by offering a range of international fixed income and equity products as well as
listed futures. BSJL also offers a range of derivative products within Japan
with special focus on credit and equity derivatives. Mergers and acquisitions,
corporate finance and restructuring services are also available for local and
cross-border business. Over the past year, BSJL became active in the local
mortgage-backed securities and distressed debt markets.
Bear Stearns Asia Limited ("BSAL"), based in Hong Kong, acts as the
regional headquarters for the Company's activities in the Asia-Pacific region,
excluding Japan. This office provides equity and fixed income sales and trading,
international equity and fixed income research, and investment banking services
to institutional and individual clients in Asia. The representative offices of
Bear Stearns located in Beijing and Shanghai support the efforts of BSAL.
Bear Stearns Bank plc (the "Bank") based in Dublin, allows the Company's
existing and prospective clients the choice of dealing with a banking
counterparty. The Bank also serves as a platform from which the Company directs
its international banking activities, gaining easier access to worldwide
markets, and thereby expanding its client base and product range.
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 ability of professional personnel,
the relative price of the service and products being offered, and the quality of
service.
REGULATIONS AND OTHER FACTORS AFFECTING THE COMPANY AND THE SECURITIES
INDUSTRY
The securities industry in the US is subject to extensive regulation under
both federal and state laws. Moreover, 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,
that 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 where they conduct business.
US 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
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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 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 (the "Market Reform Act") was adopted to
strengthen the SEC's regulatory oversight of the national securities markets and
to increase the efficacy and stability of such markets by, among other things:
(i) providing the SEC with discretion to halt securities trading on any national
exchange for the protection of investors; (ii) requiring broker-dealers and
other registrants to regularly provide information to the SEC regarding holding
companies and other affiliated entities whose activities can impact their
financial condition; (iii) requiring broker-dealers and other registrants who
execute large-trade orders to provide information to the SEC regarding such
transactions; and (iv) allowing the SEC to prosecute market participants who
violate SEC rules and regulations designed to maintain fair and orderly markets.
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. The Risk Assessment Rules require that broker-dealers: (i) have an
organizational chart; (ii) maintain risk-management procedures or standards for
monitoring and controlling risks; (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 was
adopted to strengthen the SEC's ability to deter, detect, and punish insider
trading by, among other things: (i) increasing civil penalties that can be
assessed against controlling persons who purposefully or recklessly fail to take
adequate measures to prevent insider trading; (ii) allowing the SEC to provide
cash rewards to individuals who provide evidence of insider trading; (iii)
affirming the government's ability to obtain criminal sanctions against those
found guilty of insider trading; and (iv) requiring broker-dealers and
investment advisors to establish and enforce written procedures reasonably
designed to prevent the misuse of material, non-public information.
The Government Securities Act of 1986 (the "Government Securities Act")
was adopted to decrease volatility and increase investor confidence and
liquidity in the government securities market by creating a coordinated and
comprehensive regulatory structure for the market where none had previously
existed. In particular, the Government Securities Act: (i) requires
broker-dealers solely involved in government securities to register with SEC;
(ii) allows the Secretary of the Treasury to adopt rules regarding the custody,
use, transfer, and control of government securities; and (iii) bestows upon the
SEC the authority to enforce such rules as to broker-dealers and other SEC
registrants.
The futures industry in the US 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 futures exchanges. Bear Stearns' and BSSC's 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 assets be kept in relatively liquid form.
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Bear Stearns and BSSC are also subject to the net capital requirements of
the CFTC and various futures exchanges, which generally require Bear Stearns and
BSSC to maintain 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 ("SIPC"), 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, all customer accounts are fully protected by an
excess securities bond, issued by the Travelers Casualty and Surety Company, up
to the amount of total net equity (both cash and securities) in excess of the
underlying SIPC protection.
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. The Competitive Banking
Act 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.
BSIL is a full service broker-dealer based in London and is a member of
the Eurex, IPE, LCE, LIFFE, OMLX, MATIF and LCH. Another London subsidiary,
Bear, Stearns International Trading Limited ("BSIT"), is a market-maker in
various non-dollar denominated equity securities and is a member of the London
Stock Exchange. 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 supervised by and are regulated in
accordance with the rules of the SFA.
BSJL is a Tokyo broker-dealer registered with the Japanese Ministry of
Finance. BSJL sells equity and fixed income securities to Japanese institutional
customers. BSJL has a membership on the Tokyo Stock Exchange, TIFFE and the
Osaka Stock Exchange. Bear Stearns Hong Kong Ltd. is a member of the Securities
and Futures Commission and sells US futures to retail customers. BSAL is a
member of the Shanghai Stock Exchange and 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.
Bear Stearns Bank plc is an Dublin-based bank incorporated in 1996 and
subsequently granted a banking license under 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 derivatives products.
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
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national and international financial and business communities, fluctuating
currency values, the level and volatility of interest rates, and fluctuations in
the volume and the price levels in the securities and futures markets. These and
other factors can affect the Company's volume of security new issues, mergers
and acquisitions, and business restructurings; the stability and liquidity of
securities and futures markets; and the ability of issuers, other securities
firms and counterparties to perform on their obligations. Decrease in the volume
of security new issues, mergers and 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 futures
transactions, and reduced market liquidity, generally results 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.
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 Disclosures 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, accounting and clearance operations.
Additionally, the Company leases approximately 43,000, 140,000, 13,000 and
59,000 square feet of space at four locations in New York City under leases
expiring in 2001, 2004, 2007 and 2009, respectively. The Company's regional
offices in Atlanta, Boston, Chicago, Dallas, Houston, Irving (Texas), Los
Angeles, Philadelphia, Princeton (New Jersey) and San Francisco occupy an
aggregate of approximately 511,000 square feet, while its ten foreign offices
occupy a total of approximately 136,000 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 five buildings comprising an aggregate of approximately 493,000 square
feet. The Company is currently using the existing facilities on the property to
house its data processing facility and other operations 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
excess land and development rights to others.
The Company is a party to a ground lease with respect to 383 Madison
Avenue, New York, New York which provides for the development of this site as
its new world headquarters. The office tower under construction will contain 1.2
million square feet and 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 have been named as defendants in lawsuits in
the normal course of business which involve claims for substantial amounts.
Although the ultimate outcome of these matters cannot be ascertained at this
time, it is the opinion of management, after consultation with counsel, that the
resolution of such matters will not have a material adverse effect on the
results of operations or the financial condition of the Company, taken as a
whole.
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
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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.
On July 3, 1998, 276 of the 277 original plaintiffs filed an amended
complaint against Lehman and Bear Stearns. As amended, the complaint alleges,
among other things, that the defendants committed breach of fiduciary duty,
fraud, constructive fraud, breach of contract, negligent hiring, retention and
supervision, aided and abetted fraud and aided and abetted breach of fiduciary
duty in connection with alleged improper trading activities in the accounts of
Daouk's customers. Plaintiffs seek 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 May 8, 1998, Bear Stearns and Lehman jointly filed counterclaims
against certain plaintiffs for unjust enrichment, monies had and received, and
for return of funds fraudulently conveyed and filed a third party claim for
contribution against Sigma International Limited S.A.R.L.
On August 12, 1998, Bear Stearns and Lehman filed an answer to the amended
complaint denying liability.
On January 28, 1999, the court dismissed with prejudice all counterclaims
asserted by Lehman Brothers and Bear Stearns against certain of the plaintiffs,
other than the counterclaim seeking contribution from plaintiff Monhem
Nassereddine, which was dismissed with leave to replead.
On May 5, 1999, the court granted permission to 21 moving plaintiffs to
dismiss their cases with prejudice on the condition that each provides a
covenant not to sue and a release.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this litigation 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, a purported class action
was commenced in the United States District Court for the Southern District of
California on behalf of a class consisting of all persons who purchased
Weintraub Entertainment Group ("WEG") debentures and warrants during the period
January 23, 1987 through October 1, 1990. Named as defendants are 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 the defendants violated
Sections 12(2) and 15 of the Securities Act of 1933 (the "Securities Act"),
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 promulgated thereunder, the Racketeer Influenced and
Corrupt Organizations Act ("RICO"), California state statutes, and common law
duties allegedly owed to the plaintiffs in connection with allegedly 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 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 approving a settlement among plaintiffs and the WEG director
and officer defendants. 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.
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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.
On May 12, 1999, the court: (i) granted Bear Stearns' motion for
reconsideration of the denial of Bear Stearns' motion for a new trial and
ordered a new trial with respect to the issue of reliance with respect to the
named plaintiffs and the intervenor plaintiff, the Pension Reserve Investment
Trust; (ii) granted Bear Stearns' motion for summary judgment against certain
absent class members; (iii) granted plaintiffs' motion for summary judgment as
to liability with respect to certain absent class members (Kugler and Columbia
Savings); and (iv) granted plaintiffs' motion for a summary adjudication that
causation is established for all of the absent class members.
On August 5, 1999, the court granted plaintiffs' motion as to Kugler and
Columbia Savings' damages and determined that their damages are approximately
$350,000 and $5.5 million, respectively. The court also invited Bear Stearns to
move for a new trial with respect to the issue of damages suffered by Kugler and
Columbia Savings or, in the alternative, for remittitur. On September 13, 1999,
Bear Stearns moved for a new trial.
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 violations of the Sherman Antitrust Act and the Donnelly Act.
Claimants seek compensatory damages in excess of $40 million, and punitive and
treble damages in unspecified amounts.
On May 14, 1997, Bear Stearns filed an answer denying liability and
asserting affirmative defenses, counterclaims and third-party claims that allege
that certain trustees of the plans and registered investment advisors hired by
the plans are solely responsible for any losses suffered by the funds, and
seeking, among other things, indemnification and contribution.
On May 2, 1997, three additional former Bear Stearns brokerage customers
commenced an NASD arbitration proceeding 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.
The parties have reached an agreement to settle the Amalgamated and Alico
proceedings without any admission of wrongdoing by the Bear Stearns defendants.
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.
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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 the defendants 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 Exchange Act and Rule 10b-5 promulgated thereunder. Plaintiffs
purport to represent a class consisting of all persons who acquired Baron
securities from Baron between July 20, 1995 and June 28, 1996. Damages in an
unspecified amount are sought.
On December 1, 1998, defendants filed an answer to the complaint in which
they denied liability and asserted affirmative defenses.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this litigation 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 and BSSC.
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 and BSSC, 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 action.
On October 8, 1998, plaintiff filed a notice of appeal.
(iii) Fezanni, et al. v. Bear, Stearns & Co. Inc., et al. On February 2,
1999, an action was commenced in the United States District Court for the
Southern District of New York by eleven individuals or entities that allegedly
purchased certain securities underwritten by Baron. Named as defendants are Bear
Stearns, BSSC, an officer of BSSC, thirteen former officers and employees of
Baron, and 33 other individuals and entities that allegedly participated in
alleged misconduct by Baron involving attempts to manipulate the market for
securities underwritten by Baron. The complaint alleges that the Bear Stearns
defendants violated Sections 9 and 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder and RICO, aided and abetted breach of fiduciary duty and
committed common law fraud in connection with providing clearing services and
financing for Baron. The complaint seeks to recover compensatory damages in
excess of $6.5 million, treble damages in excess $19.5 million, punitive damages
of $6.5 million from each defendant other than Bear Stearns and BSSC, and
punitive damages in the aggregate of $130 million from Bear Stearns and BSSC.
On July 30, 1999, the Bear Stearns defendants moved to dismiss the
complaint.
(iv) 110958 Ontario Inc. v. Bear, Stearns & Co. Inc., 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 defendants violated Sections 10(b) and 20(a) of the
Exchange Act 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.
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Bear Stearns has denied all allegations of wrongdoing asserted against it
in this arbitration proceeding and believes that it has substantial defenses to
these claims.
(v) On August 5, 1999, the SEC instituted, and simultaneously agreed with
BSSC, to settle an administrative proceeding against BSSC relating to BSSC's
role as a clearing broker for Baron. Under the terms of the agreement, BSSC,
without admitting or denying any wrongdoing, consented to the issuance of a
cease and desist order with respect to allegations that BSSC was a cause of
Baron's violations of Section 17(a) of the Securities Act and Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder, that BSSC aided and
abetted Baron's violations of Sections 15(c)(2) and 15(c)(3) of the Exchange
Act, and that BSSC violated Sections 7 and 17(a) of the Exchange Act and Federal
Reserve Board Regulation T in connection with providing clearing services for
Baron. BSSC also agreed to the appointment of an independent consultant to be
selected by the SEC to conduct a review of various BSSC supervisory and
compliance procedures, the payment of a fine of $5 million, and the
establishment of a restitution fund of $30 million which will be used to settle
certain private claims. Separately, BSSC entered into an agreement with the New
York County District Attorney's Office ("NYDAO"), in which it has agreed to pay
$1.5 million to the NYDAO for the costs of its investigation. BSSC's payment of
$30 million to the restitution fund described above to satisfy the claims of
customers will also fulfill BSSC's restitution obligation in the agreement
entered into by BSSC and the NYDAO. BSSC has further agreed to make payments of
$1 million to the State of New York and $1 million to the City of New York. BSSC
has been informed that the District Attorney has stated that no criminal or
other charges will be filed against BSSC or Bear Stearns.
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 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 Exchange Act
and Rule 10b-5 promulgated thereunder, and committed common law fraud. On April
2, 1997, the court dismissed plaintiffs' 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.
On May 11, 1999, the court certified the following sub-classes: (i) all
persons who traded Blech Securities in the "primary market" between October 21,
1991 and September 21, 1994; (ii) all persons who traded Blech Securities in the
"secondary market" between October 21, 1991 and September 21, 1994; and (iii)
all persons who traded Blech Securities in the secondary market between
September 27, 1993, the date on which Bear Stearns became a clearing broker for
D. Blech & Co., Inc., and September 21, 1994.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this litigation and believes that it has substantial defenses to these
claims.
Crescent Porter Hale Foundation, et al. v. Bob K. Pryt, et al. On October
19, 1998, an action was commenced in the Superior Court of the State of
California, San Francisco County, by limited partners of BKP Partners, L.P.
("BKP"), an investment fund that allegedly engaged in a fraudulent scheme
involving unsuitable and excessively risky investments. Named as defendants are
BKP, an individual who allegedly acted as the general partner of BKP, BKP
Capital Management LLC, Bear Stearns, BSSC, Deloitte & Touche and a certified
public accountant who reviewed certain of BKP's financial statements. The
complaint alleges, among other things, that the Bear Stearns defendants
committed common law fraud, negligent misrepresentation and civil conspiracy,
breached a
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fiduciary duty and the covenant of good faith and fair dealing, and aided and
abetted a breach of fiduciary duty and a breach of the covenant of good faith
and fair dealing, in connection with BSSC acting as BKP's prime broker, engaging
in securities transaction with or on behalf of BKP, and making margin loans to
BKP. Compensatory damages in excess of $100 million are sought.
On January 8, 1999, the court granted defendants' motion to compel the
plaintiffs to arbitrate the claims asserted in this action.
On April 28, 1999, the California Court of Appeals denied plaintiffs'
petition seeking reversal of the lower court order compelling arbitration, and
on June 30, 1999, the California Supreme Court denied review of the order
compelling arbitration.
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, and 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 unspecified amounts.
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. The jury also found that Bear Stearns had not breached any
fiduciary duties. On August 7, 1998, the court issued an order denying Bear
Stearns' motion for judgment as a matter of law and, at plaintiffs' option,
either granting Bear Stearns' motion for remittitur in the amount of
approximately $36,000,000 or granting Bear Stearns' motion for a new trial.
On or around December 2, 1998, plaintiffs accepted remittitur, and on
December 3, 1998, judgment was entered against Bear Stearns in the amount of
$36,073,196 plus costs of $138,826.63.
On December 29, 1998, Bear Stearns filed a notice of appeal. On
February 11, 1999, plaintiffs filed a notice of cross-appeal.
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.
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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 has denied all allegations of wrongdoing asserted against it
in the Del Rosario proceeding and believes that it has substantial defenses to
the claims in this proceeding.
In March 1997, a related NASD arbitration proceeding captioned Parvus
Co. Ltd. v. Bear, Stearns & Co. Inc., et al. was commenced by a former Bear
Stearns' customer against Bear Stearns and a former Bear Stearns account
executive.
The claimant alleges, among other things, that the respondents committed
breach of fiduciary duty, negligence, breach of contract and failure to
supervise, and violated NASD, SEC and New York Stock Exchange 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.
The parties have reached an agreement in principle to settle this
proceeding.
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 the
Company, Bear Stearns, 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.
On August 9, 1999, the court granted the Bear Stearns defendants' motion
to dismiss the claims asserted against them in this action.
Bernard H. Glatzer v. Bear, Stearns & Co. Inc. On May 11, 1993, Bernard H.
Glatzer commenced an action in the District Court of Harris County, Texas,
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 it provided to
another corporate entity.
Plaintiff alleges, among other things, theft and misuse of trade secrets,
misappropriation, breach of fiduciary duty, tortious interference with
contractual opportunity, prospective business relationship, business
opportunity, contractual advantage and/or contractual relations, unjust
enrichment, quantum meruit/quasi-contract, fraud and conspiracy. Plaintiff seeks
damages in the amount of $200 million 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.
On October 28, 1998, the parties reached an agreement to settle this
action.
Goldberger v. Bear, Stearns & Co. Inc., et al./ Bier, et al. v. Bear,
Stearns & Co. Inc., et al./ On December 8, 1998 and February 8, 1999, two
purported class actions were commenced in the United States District Court for
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the Southern District of New York on behalf of all persons who purchased
securities through certain retail brokerage firms for which BSSC provided
clearing services and financing during the period from December 8, 1992 through
December 8, 1998. On April 5, 1999, the Goldberger and Bier actions were
consolidated for all purposes, and on August 27, 1999, an amended consolidated
complaint was filed on behalf of the same purported class as in the original
complaints. Named as defendants are Bear Stearns, BSSC and an officer of BSSC.
The complaint alleges, among other things, that the defendants violated Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder and
committed breach of contract, common law fraud and negligent misrepresentation
in connection with providing clearing services and financing for the brokerage
firms named in the complaint. Compensatory and punitive damages in unspecified
amounts are sought.
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. Seven
actions involving Bear Stearns relating to the Funds are pending. Six 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 seventh 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 Uniform Commercial Code
provisions and Sections 10(b) and 20(a) of the Exchange Act 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 pre-trial purposes.
On March 19, 1998, plaintiff's motion for class certification was denied.
On February 12, 1999, this action was consolidated with the Bambou and AIG
actions (described below) for pre-trial purposes.
(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
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Dealer Defendants aided and abetted fraud, aided and abetted an alleged breach
of fiduciary duty by ACM, were unjustly enriched and violated RICO.
On January 24, 1997, the court dismissed all claims other than plaintiffs'
claim that the Dealer Defendants aided and abetted an alleged fraud by ACM.
Plaintiffs seek to recover 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, and 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.
On February 12, 1999, this action was consolidated with the Bambou and AIG
actions (described below) for pre-trial purposes.
(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) and
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.
On February 12, 1999, this action was consolidated with the Bambou and AIG
actions (described below) for pre-trial purposes.
(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.
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On February 12, 1999, this action was consolidated with the Bambou and AIG
actions (described below) for pre-trial purposes.
(v) Bambou Inc., et al. v. David J. Askin, et al. On September 4, 1998,
an action was commenced in the United States District 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.
On September 24, 1998, Bear Stearns filed an answer to the complaint
denying liability and asserting affirmative defenses.
On February 12, 1999, this action was consolidated with the Primavera,
ABF Capital, Montpellier and Johnston actions (described above) and the AIG
action (described below) for pre-trial purposes.
(vi) AIG Managed Market Neutral Fund, et al. v. Askin Capital
Management, L.P., et al. On October 22, 1998, ten purported investors in the
Funds commenced an action in the United States District Court for the Southern
District of New York against Askin, ACM and the Dealer Defendants. Plaintiffs
allege, among other things, that the Dealer Defendants aided and abetted an
alleged fraud committed by the Askin Defendants and aided and abetted a breach
of fiduciary duty by ACM. Plaintiffs seek to recover their investments in the
Funds (alleged to have been approximately $39.5 million) and punitive damages in
excess of $1 billion from each Dealer Defendant.
On February 12, 1999, this action was consolidated with the Primavera, ABF
Capital, Montpellier, Johnston and Bambou actions (described above) for
pre-trial purposes.
(vii) 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, which was dismissed on August 25, 1998, and on October 16, 1998 the
LAB filed a second 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 second amended complaint alleges, among other things, that one or more
defendants induced and participated in breaches of fiduciary duty by Askin and
ACM, tortiously interfered with contracts between the Funds and ACM, breached
their contracts with and duty to the Funds through improper margin calls and
liquidations, violated the Sherman Act and the Donnelly Act in connection with
allegedly collusive liquidations, tortiously interfered with contracts between
the Funds and other dealers, committed common law fraud, negligent
misrepresentation and innocent misrepresentation, and unjustly enriched
themselves. The complaint seeks compensatory 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 price
paid by the Funds for certain securities, treble damages for the antitrust
claims, and restitution of certain profits and compensation earned by the
defendants in connection with the Funds.
On December 22, 1998, defendants moved to dismiss the second amended
complaint except for claims alleging breach of contract in connection with
improper margin calls and liquidations.
Bear Stearns has reached an agreement in principle to resolve these
litigations, subject to certain approvals, and is in the process of attempting
to conclude these settlements.
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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, and on October 22, 1998, a second amended complaint
was filed against the same individual and entities that were named as defendants
in the original complaint. As amended, the complaint alleges, among other
things, claims for breach of fiduciary duty and negligence and violations of
Section 4(0) of the Commodity Exchange Act. Plaintiff seeks to recover at least
$300 million in losses and at least $100 million in punitive damages.
On November 5, 1998, defendants filed an answer to the second amended
complaint in which they denied liability and asserted affirmative defenses.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this litigation and believes that it has substantial defenses to these
claims.
In re Lady Luck Gaming Corporation Securities Litigation. Beginning in
March 1995, a series of actions were commenced in the United States District
Court for the District of Nevada involving an initial public offering ("IPO") of
4,500,000 shares of Lady Luck Corporation ("Lady Luck") on September 29, 1993. A
consolidated class action complaint was filed on August 14, 1995 and a second
amended class action complaint was filed on October 31, 1996. The defendants are
Bear Stearns, Oppenheimer & Co., Inc. ("Oppenheimer"), Lady Luck and several
directors and officers of Lady Luck. Bear Stearns and Oppenheimer are sued in
their capacities as co-lead underwriters of the IPO.
Plaintiffs' second amended complaint alleges, among other things, that the
prospectus issued in connection with the IPO (the "Prospectus") 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 and Sections 10(b) and 20(a) of the Exchange
Act 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 Exchange Act, and dismissed with
prejudice plaintiffs' claims under Sections 11, 12(2), and 15 of the Securities
Act with respect to eleven of sixteen alleged misrepresentations or omissions in
the Prospectus. Plaintiffs' claims with respect to the remaining five alleged
misrepresentations or omissions were dismissed without prejudice.
On November 6, 1997, plaintiffs filed a third amended complaint alleging
claims under Sections 11, 12(2) and 15 of the Securities Act 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.
On November 4, 1998, the court granted defendants' motion to dismiss
plaintiffs' third amended complaint with respect to three of the alleged
misrepresentations and omissions on which plaintiffs' claims are based, and
denied the motion with respect to the remaining allegations in the complaint.
On November 15, 1998, plaintiffs filed a fourth amended complaint alleging
claims under Sections 11, 12(2) and 15 of the Securities Act on behalf of the
same purported class and against the same defendants as in the third amended
complaint. Compensatory damages in an unspecified amount are sought.
On February 5, 1999, defendants filed an answer to the fourth amended
complaint in which they denied liability and asserted affirmative defenses.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this litigation and believes that it has substantial defenses to these
claims.
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MCKESSON HBOC, INC.
The following matters arise out of a merger between McKesson Corporation
("McKesson") and HBOC, Inc. ("HBOC")
(i) Mitchell v. McCall, et al. On June 23, 1999, a shareholder of
McKesson HBOC, Inc. ("McKesson HBOC") commenced a purported derivative action on
behalf of McKesson HBOC in the Superior Court of the State of California, County
of San Francisco, against Bear Stearns, Arthur Anderson LLP, and certain present
and former directors and/or officers of McKesson HBOC, McKesson and/or HBOC. The
complaint alleges, among other things, that Bear Stearns committed breach of
fiduciary duty and negligence in connection with acting as a financial advisor
to McKesson with respect to a merger between McKesson and HBOC. Damages in an
unspecified amount are sought.
(ii) The Jack Cooper Investment Corp. v. McKesson HBOC, Inc., et al. On
June 29, 1999, a purported class action was commenced in the United States
District Court for the Northern District of California on behalf of all persons
who owned McKesson shares from November 27, 1998 through January 12, 1999 or who
held McKesson stock on January 12, 1999. Named as defendants are McKesson HBOC,
certain present and former directors and/or officers of McKesson HBOC, McKesson
and/or HBOC, Salomon Smith Barney, Inc., Bear Stearns, and Arthur Anderson LLP.
The complaint alleges, among other things, that defendants violated Section
14(a) of the Exchange Act in connection with allegedly false and misleading
disclosure contained in a joint proxy statement/prospectus that was issued with
respect to the McKesson/HBOC merger. Compensatory damages in an unspecified
amount are sought.
(iii) John B. Kelly, III, et al. v. McKesson HBOC, Inc., et al. On July
6, 1999, a purported class action was commenced in the Chancery Court of the
State of Delaware, New Castle County, on behalf of all persons who held McKesson
common stock on January 12, 1999. Named as defendants are McKesson HBOC, certain
present and former directors and/or officers of McKesson HBOC, McKesson and/or
HBOC, Salomon Smith Barney, Inc., Bear Stearns, and Arthur Anderson LLP. The
complaint alleges, among other things, that Bear Stearns aided and abetted a
breach of fiduciary duty in connection with allegedly false and misleading
disclosure contained in a joint proxy statement/prospectus that was issued with
respect to the McKesson/HBOC merger. Compensatory damages in an unspecified
amount are sought.
STERLING FOSTER & CO., INC.
The following matters arise out of Bear Stearns' role as clearing broker
for Sterling Foster & Co., Inc. ("Sterling Foster").
(i) Rogers v. Sterling Foster & Co., Inc. On February 16, 1999, Bear
Stearns, BSSC and an officer of BSSC were added as defendants in a purported
class action pending in the United States District Court for the Eastern
District of New York. The action is brought on behalf of a purported class
consisting of all persons who purchased or otherwise acquired certain securities
that were underwritten by Sterling Foster & Co., Inc. ("Sterling Foster"). Named
as defendants, in addition to the Bear Stearns defendants set forth above, are
Sterling Foster, seven individuals alleged to have had an employment
relationship with, or exercised control over, Sterling Foster, six companies
that issued securities underwritten by Sterling Foster, eight individuals who
were directors, officers and/or employees of these issuers, and Bernstein &
Wasserman LLP and two of its partners. The second amended complaint alleges,
among other things, that the Bear Stearns defendants violated Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated thereunder and Section 349 of the
New York General Business Law and committed common law fraud in connection with
providing clearing services to Sterling Foster. Compensatory damages in an
unspecified amount are sought.
On August 5, 1999, the Bear Stearns defendants filed a motion to dismiss
all claims asserted against them in the complaint in this action.
- 24 -
<PAGE>
(ii) Greenberg v. Bear, Stearns & Co. Inc., et al. On January 19, 1999,
a purported class action was commenced in the United States District Court for
the Southern District of New York on behalf of all persons who purchased ML
Direct, Inc. common stock or warrants through Sterling Foster & Co., Inc.
between September 4, 1996 and December 31, 1996. Named as defendants are Bear
Stearns and BSSC. The complaint alleges, among other things, that the defendants
violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder and committed common law fraud in connection with providing clearing
services to Sterling Foster with respect to certain transactions by customers of
Sterling Foster in ML Direct common stock and warrants. Compensatory damages of
$50 million and punitive damages of approximately $100 million are sought.
On March 15, 1999, this action was transferred by the Judicial Panel on
Multi-District Litigation to the United States District Court for the Eastern
District of New York.
On July 22, 1999, defendants filed a motion to dismiss the complaint.
(iii) Levitt, et al. v. Bear, Stearns & Co. Inc., et al. On February 16,
1999, a purported class action was commenced in the United States District Court
for the Southern District of New York on behalf of all persons who purchased ML
Direct, Inc. common stock or warrants through Sterling Foster between September
4, 1996 and December 31, 1996. Named as defendants are Bear Stearns and BSSC.
The complaint alleges, among other things, that the defendants violated Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder and
committed common law fraud in connection with providing clearing services to
Sterling Foster with respect to certain transactions by customers of Sterling
Foster in ML Direct common stock and warrants. Compensatory damages of $50
million and punitive damages of approximately $100 million are sought.
On March 15, 1999, this action was transferred by the Judicial Panel on
Multi-District Litigation to the United States District Court for the Eastern
District of New York.
On July 22, 1999, defendants filed a motion to dismiss the complaint.
(iv) Mihalevich v. Bear, Stearns & Co. Inc. On February 5, 1999, a
purported class action was commenced in the United States District Court for the
Western District of Missouri on behalf of all persons who, "within or from the
State of Missouri," purchased ML Direct, Inc. common stock or warrants through
Sterling Foster between September 4, 1996 and February 13, 1997. Named as
defendants are Bear Stearns and BSSC. The complaint alleges, among other things,
that the defendants violated the Missouri Securities Act and committed common
law fraud, constructive fraud, negligence and made negligent misrepresentations
in connection with providing clearing services to Sterling Foster with respect
to certain transactions by customers of Sterling Foster in ML Direct common
stock and warrants. Compensatory damages of approximately $287,758 and punitive
damages in an unspecified amount are sought.
On July 28, 1999, this action was transferred by the Judicial Panel on
Multi-District Litigation to the United States District Court for the Eastern
District of New York.
In re Twinlab Securities Litigation. On March 16, 1999, two previously
filed purported class actions commenced in the United States District Court for
the Eastern District of New York were consolidated into a single action. On May
14, 1999, an amended consolidated complaint was filed. As amended, the action
purports to be brought on behalf of all persons who purchased Twinlab Corp.
("Twinlab") common stock between April 8, 1998 and February 24, 1999. Named as
defendants are four directors of Twinlab, an officer of Twinlab, two
stockholders of Twinlab, Donaldson, Lufkin & Jenrette, Inc., and Bear Stearns.
The complaint alleges, among other things, that the defendants violated Sections
11 and 12(a)(2) of the Securities Act in connection with disclosure contained in
offering documents with respect to a public offering of Twinlab common stock.
Compensatory damages in an unspecified amount are sought.
On August 9, 1999, defendants filed a motion to dismiss the complaint.
* * *
- 25 -
<PAGE>
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. Although
the ultimate outcome of these matters cannot be ascertained at this time, it is
the opinion of management, after consultation with counsel, that the resolution
of such matters will not have a material adverse effect on the results of
operations or the financial condition of the Company, taken as a whole.
Periodically, the Company also is involved in investigations and
proceedings by governmental, regulatory and self-regulatory agencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
- 26 -
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information as of September 15,
1999 concerning executive officers of the Company as of July 1, 1999.
Age as of
September 15, Principal Occupation
Name 1999 and Directorships Held
- ---- ---- ----------------------
Alan C. Greenberg.......... 72 Chairman of the Board of the Company
and Bear Stearns and Chairman of the
Executive Committee of the Company
(the "Executive Committee")
James E. Cayne............. 65 President and Chief Executive
Officer of the Company and Bear
Stearns, member of the Executive
Committee
Mark E. Lehman............. 48 Executive Vice President and General
Counsel of the Company and Bear
Stearns and member of the Executive
Committee
Samuel L. Molinaro Jr...... 41 Senior Vice President - Finance and
Chief Financial Officer of the
Company and Bear Stearns
Marshall J Levinson........ 57 Controller of the Company
Michael Minikes............ 56 Treasurer of the Company and Bear
Stearns
- 27 -
<PAGE>
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 Compan'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. 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 for more than the past five years.
Mr. Levinson has been Controller of the Company since October 1998. Prior
thereto, Mr. Levinson was Chief Financial Officer and Chief Administrative
Officer of BSIL in London. Mr. Levinson was also in charge of the Company's
internal audit function and was a Senior Managing Director prior to September
1996.
Mr. Minikes has been Treasurer of the Company and Bear Stearns for more
than the past five years.
Officers serve at the discretion of the Board of Directors.
- 28 -
<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 "Risk Management" in the Annual Report, which is
incorporated herein by reference to Exhibit No. 13 of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required to be furnished pursuant to this item is
contained in the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements in the Annual Report. Such information and
the Independent Auditors' Report in the Annual Report are incorporated herein
by reference to Exhibit No. 13 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
- 29 -
<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 1999 Annual
Meeting of Stockholders to be held on October 28, 1999, 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.
- 30 -
<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) 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)(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 April 20, 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 June 18, 1998).
(3)(b) Amended and Restated By-laws of the registrant as amended through
July 21, 1999 (incorporated by reference to Exhibit No. 4(b) to
post-effective amendment no. 1 to the registrant's registration
statement on Form S-8 (File No. 333-81901)).
(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)).
- 31 -
<PAGE>
(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 October 29, 1998 (the "CAP Plan") (incorporated
by reference to Exhibit (10)(a)(4) to the registrant's Quarterly
Report on Form 10-Q for its fiscal quarter ended December 31,
1998).*
(10)(a)(5) Performance Compensation Plan, as restated as of October 29, 1998
(incorporated by reference to Exhibit 10(a)(5) to the registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended December
31, 1998).*
(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).
- 32 -
<PAGE>
(11) Statement re: computation of per share earnings.
(12) Statement re: computation of ratio of earnings to fixed charges.
(13) 1999 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 covered by this report:
A Current Report on Form 8-K, dated April 12, 1999 and filed April
15, 1999, pertaining to the registrant's results of operations for the
three months and nine months ended March 26, 1999.
A Current Report on Form 8-K, dated April 14, 1999 and filed April
15, 1999, pertaining to the declaration of dividends.
A Current Report on Form 8-K, dated June 28, 1999 and filed June 28,
1999, pertaining to an agreement-in-principle reached by Bear, Stearns
Securities Corp. with the Staff of the Securities and Exchange Commission.
- 33 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
September 1999.
THE BEAR STEARNS COMPANIES INC.
(Registrant)
By: /s/ SAMUEL L. MOLINARO JR.
--------------------------
Samuel L. Molinaro Jr.
Senior Vice President-Finance and
Chief Financial 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 1999.
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
/s/ CARL D. GLICKMAN 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
/s/ FREDERIC V. SALERNO Director
---------------------------
Frederic V. Salerno
- 34 -
<PAGE>
/s/ VINCENT TESE Director
---------------------------
Vincent Tese
/s/ FRED WILPON Director
---------------------------
Fred Wilpon
- 35 -
<PAGE>
/s/ SAMUEL L. MOLINARO JR Senior Vice President-Finance and
--------------------------- Chief Financial Officer (Principal
Samuel L. Molinaro Jr. Financial Officer)
/s/ MARSHALL J LEVINSON Controller of The Bear Stearns
--------------------------- Companies Inc. (Principal
Marshal J Levinson Accounting Officer)
- 36 -
<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 75
THE BEAR STEARNS COMPANIES, INC.
- --------------------------------
(i) Consolidated Statements of Income--
fiscal years ended June 30, 1999, 1998 and 1997 55
(ii) Consolidated Statements of Financial Condition at
June 30, 1999, 1998 and 1997 56
(iii) Consolidated Statements of Cash Flows--
fiscal years ended June 30, 1999, 1998 and 1997 57
(iv) Consolidated Statements of Changes in
Stockholders' Equity--
fiscal years ended June 30, 1999, 1998 and 1997 58-59
(v) Notes to Consolidated Financial Statements 60-74
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 1999 Annual
Report to Stockholders.
All other schedules are omitted because they are not applicable or the
requested information is included in the consolidated financial
statements or notes thereto.
F-1
<PAGE>
DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders of
The Bear Stearns Companies Inc.:
We have audited the consolidated financial statements of The Bear Stearns
Companies Inc. and Subsidiaries as of June 30, 1999 and 1998, and for each of
the three years in the period ended June 30, 1999, and have issued our report
thereon dated August 23, 1999; 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 23, 1999
F-2
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(In thousands)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, June 30, June 30,
1999 1998 1997
----------- ----------- -----------
Revenues
Interest
Intercompany..................... $1,264,041 $1,300,087 $979,757
Coupon........................... - - 744
Other............................. 178,904 103,344 82,682
----------- ----------- -----------
1,442,945 1,403,431 1,063,183
----------- ----------- -----------
Expenses
Interest.......................... 1,500,137 1,471,042 1,039,461
Other............................. 91,620 98,872 86,844
----------- ----------- -----------
1,591,757 1,569,914 1,126,305
----------- ----------- -----------
Loss before benefit from income taxes
and equity in earnings of
subsidiaries (148,812) (166,483) (63,122)
Benefit from income taxes........... 34,823 62,467 23,206
----------- ----------- -----------
Loss before equity in earnings of
subsidiaries...................... (113,989) (104,016) (39,916)
Equity in earnings of subsidiaries.. 787,037 764,445 653,246
----------- ----------- -----------
Net income.......................... $ 673,048 $660,429 $613,330
=========== =========== ===========
Earnings per Share.................. $4.48 $4.38(1) $4.00(1)
=========== =========== ===========
(1) Adjusted for the 5% stock dividend declared on January 20, 1999.
See Notes to Condensed Financial Information.
F-3
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, June 30,
1999 1998
------------ ------------
ASSETS
Cash ........................................... $ 19,277 $ 4
Receivables from subsidiaries................... 28,162,003 27,671,471
Investment in subsidiaries, at equity........... 5,148,922 4,351,399
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization of
$588,730 in 1999 and $463,336 in
1998, respectively ........................... 373,414 382,749
Other Assets.................................... 1,046,431 877,418
------------ ------------
Total Assets ................................... $ 34,750,047 $ 33,283,041
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings........................... $13,510,102 $14,442,235
Payables to subsidiaries........................ 240,632 102,385
Other liabilities............................... 881,112 754,972
------------ -------------
14,631,846 15,299,592
------------ -------------
Long-term borrrowings........................... 14,626,673 13,295,952
------------ -------------
Long-term borrowings from subsidiaries.......... 536,019 395,964
------------ -------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value;
10,000,000 shares authorized ................... 800,000 800,000
Common stock, $1.00 par value; 200,000,000
shares authorized; 176,011,113 and
167,784,941 shares issued in 1999
and 1998, respectively....................... 176,011 167,785
Paid-in capital................................. 2,269,927 1,963,788
Retained earnings............................... 1,931,957 1,590,574
Capital Accumulation Plan....................... 1,144,329 833,427
Treasury stock, at cost -
Adjustable Rate Cumulative Preferred Stock,
Series A; 2,520,750 shares at June 30,
1999 and 1998, respectively.................. (103,421) (103,421)
Common stock; 56,333,508 and 50,639,294
shares at June 30, 1999 and 1998,
respectively................................. (1,263,294) (953,506)
Note receivable from ESOP Trust ................ -- (7,114)
------------ -------------
Total Stockholders' Equity...................... 4,955,509 4,291,533
============ =============
Total Liabilities and Stockholders' Equity...... $ 34,750,047 $ 33,283,041
============ =============
See Notes to Condensed Financial Information.
F-4
<PAGE>
<TABLE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
June 30, June 30, June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 673,048 $ 660,429 $ 613,330
Adjustments to reconcile net income to
cash used in operating activities:
Equity in earnings of subsidiaries, net
of dividends received ......................... (656,715) (448,805) (279,147)
Other ........................................... 136,896 109,735 84,658
Increases (decreases) in assets:
Receivables from subsidiaries ................. (490,532) (6,306,236) (6,058,415)
Investments in subsidiaries, net .............. (140,808) (266,080) (398,930)
Other assets .................................. (145,849) 44,578 (513,631)
Increases (decreases) in liabilities:
Payables to subsidiaries ...................... 138,247 53,466 24,564
Other liabilities ............................. 122,121 (154,168) 542,957
----------- ----------- -----------
Cash Used in Operating Activities ............... (363,592) (6,307,081) (5,984,614)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from
short-term borrowings ......................... (932,133) 946,029 3,965,003
Net proceeds from issuance of long-term
borrowings ...................................... 4,179,637 7,045,745 3,129,439
Increase in long-term borrowings from
subsidiaries .................................... 140,055 6,122 198,973
Issuance of Preferred Stock ..................... - 650,000 -
Redemption of Preferred Stock ................... - (287,500) -
Capital Accumulation Plan ....................... 483,260 259,816 196,114
Tax Benefit of Common Stock
distributions ................................... 92,893 86,968 4,006
Note repayment from ESOP Trust .................. 7,114 6,587 6,099
Payments for:
Retirement of long-term borrowings............. (2,846,752) (1,881,841) (1,062,844)
Treasury Stock purchases ...................... (482,818) (258,036) (202,296)
Cash dividends paid ............................. (107,666) (97,990) (93,784)
----------- ----------- -----------
Cash provided by financing activities ........... 533,590 6,475,900 6,140,710
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and
leasehold improvement ......................... (127,561) (169,527) (124,590)
Purchases of investment securities and
other assets .................................... (26,290) (4,769) (46,706)
Proceeds from sale of investment
securities and other assets ................... 3,126 5,402 12,496
----------- ----------- -----------
Cash used in investing activities ............... (150,725) (168,894) (158,800)
----------- ----------- -----------
Net increase (decrease) in cash ................. 19,273 (75) (2,704)
Cash, beginning of year ......................... 4 79 2,783
----------- ----------- -----------
Cash, end of year ............................... $ 19,277 $ 4 $ 79
=========== =========== ===========
See Notes to Condensed Financial Information.
</TABLE>
F-5
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. General
The condensed financial information of the Company (Parent Company Only)
should be read in conjunction with the consolidated financial statements
of The Bear Stearns Companies Inc. and the notes thereto incorporated by
reference in this report.
2. Dividends Received from Subsidiaries
The Company received from its consolidated subsidiaries cash dividends of
$132.3 million, $315.6 million, and $374.1 million for the fiscal years
ended June 30, 1999, 1998 and 1997, respectively.
3. Statement of Cash Flows
Income taxes paid (consolidated) totaled $223.2 million, $459.7 million,
and $478.4 million in the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Cash payments for interest approximated interest expense for
the fiscal years ended June 30, 1999, 1998 and 1997, respectively.
4. Preferred Stock
The Company has issued several series of preferred stock. Preferred stock
outstanding as of June 30, 1999 and 1998 were as follows:
In thousands, except share data
JUNE 30, 1999 JUNE 30, 1998
Adjustable Rate Cumulative
Preferred Stock, Series A; $50
liquidation preference; 3,000,000
shares issued....................... $ 150,000 $ 150,000
Cumulative Preferred Stock, Series
E; $200 liquidation preference;
1,250,000 shares issued and
outstanding......................... 250,000 250,000
Cumulative Preferred Stock, Series
F; $200 liquidation preference;
1,000,000 shares issued and
outstanding......................... 200,000 200,000
Cumulative Preferred Stock, Series
G; $200 liquidation preference;
1,000,000 shares issued and
outstanding......................... 200,000 200,000
--------- ---------
Total Preferred Stock $ 800,000 $ 800,000
========= =========
F-6
<PAGE>
SCHEDULE II
THE BEAR STEARNS COMPANIES INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
(In thousands)
Balance at Balance at
Beginning of End of
Description Period Increases Deductions Period
- ----------- ------ --------- ---------- ------
Allowance for Doubtful Accounts:
Year ended June 30, 1999 ...... $ 53,361 $ 12,198 $(30,041) $ 35,518
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
F-7
<PAGE>
EXHIBITS 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) 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)(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 April 20, 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 June 18, 1998).
(3)(b) Amended and Restated By-laws of the registrant as amended through
July 21, 1999 (incorporated by reference to Exhibit No. 4(b) to
post-effective amendment no. 1 to the registrant's registration
statement on Form S-8 (File No. 333-81901)).
(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)).
<PAGE>
(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 October 29, 1998 (the "CAP Plan") (incorporated
by reference to Exhibit (10)(a)(4) to the registrant's Quarterly
Report on Form 10-Q for its fiscal quarter ended December 31,
1998).*
(10)(a)(5) Performance Compensation Plan, as restated as of October 29, 1998
(incorporated by reference to Exhibit 10(a)(5) to the registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended December
31, 1998).*
(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).
<PAGE>
(11) Statement re: computation of per share earnings.
(12) Statement re: computation of ratio of earnings to fixed charges.
(13) 1999 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
EXHIBIT 11
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE
EARNINGS
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, June 30, June 30,
1999 1998 1997
=============================================
(In thousands, except share data)
Weighted average common and
common equivalent shares
outstanding(1):
Average Common Stock outstanding 125,515 126,479 126,983
Average Common Stock equivalents:
Common Stock issuable assuming
conversion of CAP units 31,635 31,568 27,798
Common Stock issuable under
employee benefit plans 453 483 459
=============================================
Total weighted average common and
common equivalent shares
outstanding 157,603 158,530 155,240
=============================================
Net income $ 673,048 $ 660,429 $ 613,330
Preferred Stock dividend
requirements (39,430) (31,012) (23,833)
Income adjustment (net of tax)
applicable to deferred
compensation arrans 71,728 64,951 31,800
---------------------------------------------
Adjusted net income $ 705,346 $ 694,368 $ 621,297
=============================================
Earnings per share(1) $ 4.48 $ 4.38 $ 4.00
=============================================
(1) For the fiscal years ended June 30, 1999 and June 30, 1998, adjusted for the
5% stock dividend declared on January 20, 1999
<TABLE>
EXHIBIT 12
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except for ratio)
<CAPTION>
Fiscal Fiscal Fiscal Fiscal Fiscal
Year Year Year Year Year
Ended Ended Ended Ended Ended
June 30, June 30, June 30, June 30, June 30
1999 1998 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings before
taxes on income $1,064,108 $1,063,492 $1,013,690 $ 834,926 $ 388,082
----------------------------------------------------------------------
Add: Fixed Charges
Interest 3,379,914 3,638,513 2,551,364 1,981,171 1,678,515
Interest factor
in rents 31,363 30,130 26,516 25,672 24,594
----------------------------------------------------------------------
Total fixed charges 3,411,277 3,668,643 2,577,880 2,006,843 1,703,109
----------------------------------------------------------------------
Earnings before fixed
charges and taxes on
income 4,475,385 4,732,135 3,591,570 2,841,769 2,091,191
======================================================================
Ratio of earnings
to fixed charges 1.3 1.3 1.4 1.4 1.2
======================================================================
</TABLE>
The Bear Stearns Companies Inc.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
In thousands, expert share
and employee data
FISCAL YEARS ENDED JUNE 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 7,882,038 $ 7,979,936 $ 6,077,278 $ 4,963,863 $ 3,753,572
Internet expense 3,379,914 3,638,513 2,551,364 1,981,171 1,678,515
Revenues, net of interest expense 4,502,124 4,341,423 3,525,914 2,982,692 2,075,057
Non-interest expenses
Employee compensation
and benefits 2,285,594 2,111,741 1,726,931 1,469,448 1,080,487
Other 1,152,422 1,166,190 785,293 678,318 606,488
Total non-interest expenses 3,438,016 3,277,931 2,512,224 2,147,766 1,686,975
Income before provision for
income taxes 1,064,108 1,063,492 1,013,690 834,926 388,082
Provision for income taxes 391,060 403,063 400,360 334,288 147,471
Net income $ 673,048 $ 660,429 $ 613,330 $ 490,638 $ 240,611
Net income applicable to
common shares $ 633,618 $ 629,417 $ 589,497 $ 466,145 $ 215,474
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 153,894,340 $154,495,895 $ 121,433,535 $ 92,085,157 $ 74,597,160
Long-term borrowings $ 14,647,092 $ 13,295,952 $ 8,120,328 $ 6,043,614 $ 4,059,944
Stockholders' equity[1] $ 5,455,509 $ 4,641,533 $ 3,626,371 $ 2,895,414 $ 2,502,461
Common shares and common share
equivalents outstanding[2] 159,300,949 159,213,168 159,139,538 158,838,449 159,039,264
- ------------------------------------------------------------------------------------------------------------------------------------
PERSONAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share[2,3] $ 4.48 $ 4.38 $ 4.00 $ 3.11 $ 1.47
Cash dividends declared per
common share[2] $ 0.59 $ 0.57 $ 0.55 $ 0.52 $ 0.49
Book value per common share[2] $ 26.88 $ 22.72 $ 18.63 $ 15.27 $ 12.70
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average common equity 18.8% 21.7% 27.9% 25.6% 13.5%
Profit margin[4] 23.6% 24.5% 28.7% 28.0% 18.7%
Employees 9,808 9,180 8,309 7,749 7,481
</TABLE>
- -----------------------------
1. For the fiscal year ended June 30, 1999, stockholders' equity includes $500
million of Guaranteed Preferred Beneficial Interests in Company
Subordinated Debt Securities, which were issued by one of our subsidiaries.
For the fiscal years ended June 30, 1998 and 1997, stockholders equity
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 fiscal year
ended June 30, 1996 and 1995, stockholders' equity includes $150 million of
Exchangeable Preferred Income Cumulative Shares, which were issued by one
of our subsidiaries. See Note 8 of Notes to Consolidated Financial
Statements.
2. Adjusted to reflect all stock dividends prior to June 30, 1999.
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 REPORT
----------------
CONTENTS
41
Management's Discussion and Analysis
49
Risk Management
55
Consolidated Statements
of Income
56
Consolidated Statements
of Financial Condition
57
Consolidated Statements
of Cash Flows
58
Consolidated Statements
of Changes in Stockholders' Equity
60
Notes to Consolidated
Financial Statements
75
Independent Auditors' Report
<PAGE>
[PHOTO OF SAMUEL L. MOLINARO JR.]
SAMUEL L. MOLINARO JR.
Chief Financial Officer
Senior Vice President -- Finance
[PHOTO OF MICHAEL MINIKES]
MICHAEL MINIKES
Treasurer
<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
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.
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
- --------------------------------------------------------------------------------
Global and domestic equity markets were volatile during fiscal 1999 with major
equity market indices suffering sharp declines between the months of July and
October. However, for the full fiscal year, domestic equity markets were
characterized by record volume, with the New York Stock Exchange and Nasdaq(R)
average daily trading volume rising over 30% and 25%, respectively. The Dow
Jones Industrial Average and the Standard & Poor's 500 Index ("S&P 500") again
reached record levels, fueled, in part, by strong investor interest in internet
and technology stocks. The Dow Jones Industrial Average increased by 1,922
points reaching 10,971 by the end of the fiscal year, while the S&P 500 climbed
19.5% during the fiscal year.
During the first half of fiscal 1999, economic turmoil in both Far East and
emerging market nations and the default by Russia on its debt obligations
triggered the flight to quality by investors who sought safer, less risky
investments. This caused yield spreads between US Treasury securities and
lower-rated issues to widen dramatically, resulting in a decline in liquidity in
the global bond markets. In an effort to restore confidence in US financial
markets, the Federal Reserve reduced the Federal Funds rate on three occasions
between September 1998 and November 1998. The reduction in the Federal Funds
rate by a total of 75 basis points, coupled with the US economy's resilience,
prompted the recovery of US financial markets in the second quarter, which
continued into the second half of fiscal 1999. Improved financial markets in the
second half of fiscal 1999 resulted in increased customer order flows and higher
levels of new securities issuance. These conditions contributed to the Company's
strong commissions, principal transactions, and investment banking revenues in
the second half of fiscal 1999.
The business environment during fiscal 1998 was generally characterized by
a strong 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 New
York Stock Exchange average daily trading volume rose 28% in fiscal 1998, while
major stock indices reached record levels. Concern over the economic and
financial problems in Asia led to volatile global markets, which contributed in
part to the record level of domestic volume, as investors sought refuge in the
US marketplace. The demand for US investments contributed to the high level of
corporate finance activity.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Company reported net income of $673.0 million, or $4.48 per share, in fiscal
1999, which represented an increase of 1.9% from $660.4 million, or $4.38 per
share, in fiscal 1998. The Company reported net income of $613.3 million, or
$4.00 per share, in fiscal 1997.
Revenues, net of interest expense ("net revenues"), increased 3.7% to $4.5
billion in fiscal 1999 from $4.3 billion in fiscal 1998, primarily reflecting
increases in principal transactions and commission revenues, partially offset by
a decrease in investment banking revenues. Net revenues in fiscal 1997 amounted
to $3.5 billion.
<PAGE>
Commission revenues in fiscal 1999 increased 12.3% to $1.0 billion from
$902.7 million in fiscal 1998. 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 1998 commission revenues improved 23.3% from $732.3 million
in fiscal 1997, reflecting heightened investor activity and growth of the
Company's securities clearance client base.
Revenues from principal transactions in fiscal 1999 increased 11.7% to $1.9
billion from $1.7 billion in fiscal 1998. The Company's principal transactions
revenues by reporting categories for the fiscal years ended June 30, were as
follows:
IN MILLIONS 1999 1998 1997
-----------------------------------------------------------------
Fixed income $ 994.7 $ 905.7 $ 919.6
Equity 558.7 472.4 393.9
Foreign exchange and
other derivative
financial instruments 375.7 348.9 257.8
-----------------------------------------------------------------
Total principal
transactions $ 1,929.1 $ 1,727.0 $ 1,571.3
=================================================================
The increase in principal transactions revenues derived from the Company's
fixed income activities was primarily from the mortgage-backed securities area,
reflecting strong customer order flows, partially offset by decreases in the
corporate bonds, emerging markets and bankruptcy areas. Increased principal
transactions revenues derived from the Company's equity activities were
primarily from the over-the-counter stock area as well as the international
equity trading and risk arbitrage areas. Foreign exchange and other derivative
financial instruments revenues also increased, primarily in the equity
derivatives area, reflecting generally favorable market conditions.
Fiscal 1998 principal transactions revenues increased 9.9% from $1.6
billion in fiscal 1997, reflecting increases in revenues from the Company's
equity activities, primarily the risk arbitrage and international areas as well
as foreign exchange and derivative activities.
Investment banking revenues in fiscal 1999 decreased 16.2% to $839.3
million from $1.0 billion in fiscal 1998. Underwriting revenues decreased due to
decreases in volume, most notably from high yield and equity issuances. Major
equity market indices experienced sharp declines in the first half of fiscal
1999, which resulted in a slowdown in new issue activity. Fiscal 1998 investment
banking revenues increased 51.0% from $663.2 million in fiscal 1997, reflecting
increases in underwriting revenues due to higher new issue volume and increases
in mergers and acquisitions fees.
Net interest and dividends (revenues from interest and net dividends less
interest expense) in fiscal 1999 decreased 2.9% to $628.7 million from $647.1
million in fiscal 1998, principally due to decreased levels of margin debt.
Average interest-bearing margin debt balances were $40.6 billion during fiscal
1999 compared to $45.8 billion during fiscal 1998. Margin debt balances
rebounded to $44.1 billion by the end of the fiscal year, up from an October
1998 low of $33.1 billion that reflected market declines in the fall of 1998.
Average free credit balances were $12.3 billion during fiscal 1999 and totaled
$11.6 billion at June 30, 1999, slightly increased from $11.0 billion at June
30, 1998. Average customer short account balances were $60.7 billion during
fiscal 1999 compared to $59.4 billion during fiscal 1998 and totaled $58.3
billion at June 30, 1999, down from $68.3 billion at June 30, 1998. Net interest
and dividends in fiscal 1998 increased 27.6% from $507.1 million in fiscal 1997,
principally due to record levels of margin debt and customer short account
balances.
Employee compensation and benefits in fiscal 1999 increased 8.2% to $2.3
billion from $2.1 billion in fiscal 1998. The increase was principally
attributable to increased incentive and discretionary bonuses associated with
the increase in net revenues and earnings in fiscal 1999, an increase in the
number of employees and an increase in sales commissions. Employee compensation
and benefits, as a percentage of net revenues, increased to 50.8% in fiscal 1999
from 48.6% in fiscal 1998. Employees increased to 9,808 at June 30, 1999 from
9,180 at June 30, 1998. The increase in headcount is attributable to domestic
and international strategic growth and business expansion. Employee compensation
and benefits in fiscal 1998 increased 22.3% from $1.7 billion or 49.0% of net
revenues in fiscal 1997, reflecting increased incentive and discretionary
bonuses associated with the increase in net revenues and earnings in fiscal 1998
and an increase in sales commissions.
Aggregate expenses related to communications, occupancy, data processing
and depreciation and amortization increased by 15.4%, reflecting the Company's
growth. Floor brokerage, exchange and clearance fees decreased 4.3% in fiscal
1999 due primarily to decreased fees associated with electronic exchanges. The
decrease in other expenses of 15.0% is largely attributable to a decrease in
litigation expenses, compared to those incurred during fiscal 1998.
Other expenses also include expenses associated with the Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan"), which were
$121.1 million in fiscal 1999, $115.2 million in fiscal 1998 and $56.4 million
in fiscal 1997. The increase during fiscal 1999 and fiscal 1998 when compared to
the prior years was attributable to both increased earnings and growth in the
number of participants. The Company's results of operations do not reflect the
income tax benefits derived from the distribution of stock related to the CAP
Plan. These tax benefits totaled $89.6 million in fiscal 1999 and $84.8 million
in fiscal 1998 and have been credited directly to additional paid-in capital.
Non-interest expenses, excluding employee compensation and benefits, in
fiscal 1998 increased 48.5% from $785.3 million in fiscal 1997, due principally
to increased litigation and CAP Plan costs. The increase also reflects expansion
of the Company's business activities.
The Company's profit margin for fiscal 1999 was 23.6%, a decrease from
24.5% in fiscal 1998. The decrease was related to increased information
technology costs which reflect the Company's continued investment in
technological upgrades including Year 2000 costs, offset by decreased litigation
expenses. The Company's profit margin in fiscal 1997 was 28.7%. The decline in
profit margin from fiscal 1997 to fiscal 1998 reflected increases in both
litigation expenses and the cost associated with the CAP Plan.
The decrease in the Company's effective tax rate to 36.8% in fiscal 1999,
from 37.9% in fiscal 1998, was principally attributable to higher levels of tax
preference items. The effective tax rate in fiscal 1998 decreased from 39.5% in
fiscal 1997 due to higher levels of tax preference items.
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
The Company is primarily engaged in business as a securities broker and dealer
operating in three principal segments: Capital Markets, Execution Services and
Wealth Management. These segments are strategic business units analyzed
separately due to the distinct nature of the products they provide and the
clients they serve. Certain Capital Markets products are distributed by the
Wealth Management and Execution Services distribution network with the related
revenues of such intersegment services allocated to the respective segments
through transfer pricing policies.
The following segment operating results exclude certain corporate items.
See Note 13 of Notes to Consolidated Financial Statements.
CAPITAL MARKETS
IN THOUSANDS 1999 1998 1997
-----------------------------------------------------------------
Net revenues $2,470,337 $2,370,085 $1,989,277
Pre-tax income 727,660 693,106 621,733
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The Capital Markets segment is comprised of the Equities, Fixed Income and
Investment Banking areas with over 2,600 directly attributable employees.
Equities combines the efforts of sales, trading and research professionals to
offer in-depth expertise in areas such as block trading, convertible bonds,
over-the-counter equities, equity derivatives and risk arbitrage. Fixed Income
provides distribution power for issuers in the primary market, liquidity for
investors in the secondary market, research for institutional clients and offers
expertise in products such as mortgage-backed and asset-backed securities,
corporate and government bonds, municipal and high yield securities, foreign
exchange and derivatives. Investment Banking provides a variety of services to
our clients, including capital raising, strategic advisory, mergers and
acquisitions and merchant banking capabilities. Capital raising encompasses the
Company's underwriting of equity, investment-grade debt and high yield debt
securities.
Net revenues for Capital Markets approximated $2.5 billion in fiscal 1999,
up 4.2% from $2.4 billion in fiscal 1998. Pre-tax income for Capital Markets was
$727.7 million in fiscal 1999, up 5.0% from $693.1 million in fiscal 1998.
Despite difficult global fixed income markets in the first half of fiscal 1999,
fixed income results improved over 1998 due to performances from the Company's
mortgage-backed, asset-backed and government bond operations which were
partially offset by a decline in the high yield area. In addition, equity
results also improved as active markets and deal flow resulted in improved
performances from over-the-counter equities, risk arbitrage and equity
derivatives. Sharp declines in major equity market indices experienced in the
first half of fiscal 1999 resulted in a slowdown of new issue activity and lower
volumes in mergers and acquisitions.
Net revenues in fiscal 1998 were up 19.1% from $2.0 billion in fiscal 1997
and pre-tax income was up 11.5% from $621.7 million in fiscal 1997. Net revenues
for the Equities, Fixed Income and Investment Banking areas increased in fiscal
1998 as a result of favorable domestic equity markets and the resulting increase
in underwriting volume and merger and acquisition activity.
EXECUTION SERVICES
IN THOUSANDS 1999 1998 1997
-----------------------------------------------------------------
Net revenues $1,271,321 $1,202,648 $967,491
Pre-tax income 486,723 527,751 427,896
-----------------------------------------------------------------
The Execution Services segment is comprised of clearance and predominantly
commission-related areas including institutional equity sales, institutional
futures sales and specialist activities. At June 30, 1999, approximately 2,700
dedicated employees serve these business areas.
Institutional equity sales involves the execution of transactions in US
equity securities for domestic and foreign institutional customers and providing
these customers with liquidity, trading expertise, trade execution, research and
investment advice. The Company provides transaction services for institutional
customers who trade in futures and futures-related instruments. The Company is
also involved in specialist activities on both the New York Stock Exchange and
the American Stock Exchange.
The Company also provides clearing, margin lending and securities borrowing
to facilitate customer short sales to over 2,700 clearing clients worldwide.
Such clients include approximately 2,300 prime brokerage clients including hedge
fund managers, money managers, short sellers, arbitrageurs and other
professional investors and approximately 400 fully disclosed clients, who engage
in either the retail or institutional brokerage business. The Company processes
trades in over 70 countries and accounts for approximately 10% of the average
daily New York Stock Exchange volume, processing an average of in excess of
175,000 trades per day.
Net revenues for Execution Services approximated $1.3 billion in 1999, up
5.7% from $1.2 billion in fiscal 1998. Pre-tax income for Execution Services was
$486.7 million in 1999, down 7.8% from $527.8 million in 1998. Commission
revenues from both institutional and clearance customers increased, reflecting
increased customer demand and growth in the client base. Partially offsetting
these increases were declines in net interest revenues reflecting lower average
margin balances in fiscal 1999.
Net revenues in fiscal 1998 were up 24.3% from $967.5 million in 1997.
Pre-tax income in fiscal 1998 was up 23.3% from $427.9 million in 1997. The
growth in net revenues and pre-tax income in fiscal 1998 was due to heightened
investor activity and growth in the securities clearance client base.
WEALTH MANAGEMENT
IN THOUSANDS 1999 1998 1997
-----------------------------------------------------------------
Net revenues $575,698 $531,746 $412,731
Pre-tax income 99,406 84,297 58,136
-----------------------------------------------------------------
Wealth Management provides fee-based products and services through the
Private Client Services ("PCS") and Asset Management areas to both individual
and institutional investors.
PCS provides high-net-worth individuals with an institutional level of
service, including access to the Company's resources and professionals. PCS
maintains a select team of approximately 500 account executives in seven
regional offices. These account executives averaged approximately $1.0 million
in production in fiscal 1999. PCS had over $39.0 billion in client assets at
June 30, 1999.
The Asset Management area, through Bear Stearns Asset Management Inc.
("BSAM"), had $12.2 billion in assets under management at June 30, 1999 which
reflected a greater than 24% increase over the prior year. The largest component
of the increase was attributable to equities and alternative investments. Asset
Management serves the diverse investment needs of corporations, municipal
governments, multi-employer plans, foundations, endowments, family groups and
high-net-worth individuals. Innovation in products and services enables Asset
Management to serve clients in an increasingly competitive financial
marketplace.
Net revenues for Wealth Management were $575.7 million in fiscal 1999, up
8.3% from $531.7 million in fiscal 1998. Pre-tax income for Wealth Management
was $99.4 million in fiscal 1999, up 17.9% from $84.3 million in fiscal 1998. In
fiscal 1998, net revenues increased 28.8% from $412.7 million in fiscal 1997.
Pre-tax income in 1998 was up 45.0% from $58.1 million in fiscal 1997. Active
equity markets and strong customer volumes resulted in increased commission and
fee-based income in both fiscal 1999 and 1998.
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 and
customer demand.
The Company's total assets at June 30, 1999 decreased to $153.9 billion
from $154.5 billion at June 30, 1998. The decrease was primarily attributable to
a decrease in financial instruments owned and securities borrowed, partially
offset by an increase in securities purchased under agreements to resell.
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, measured as 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, 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. 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
the Company sells securities with a commitment for repurchase at a future date,
represent the dominant component of secured short-term funding. 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 each asset category 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 capital 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 $2.9 billion, which permits borrowing on a secured basis by
Bear, Stearns & Co. Inc. ("Bear Stearns"), BSSC and certain other affiliates.
The facility provides that the Company may borrow up to $1.45 billion of the
$2.9 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 1999 with all loans outstanding
at that date payable no later than October 2000. The Company currently expects
to renew such facility upon expiration. There were no borrowings outstanding
under the facility at June 30, 1999.
CAPITAL RESOURCES
The Company conducts a substantial portion of its operating activities within
its regulated subsidiaries Bear Stearns, BSSC, Bear, Stearns International
Limited ("BSIL"), Bear, Stearns International Trading Limited ("BSIT") and Bear
Stearns Bank Plc ("BSB"). 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 regulated subsidiaries. The Company regularly monitors
the nature and significance of assets or activities conducted outside the
regulated 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 1999, the Company expanded its long-term borrowing base to
$14.6 billion through the issuance of $4.2 billion of long-term debt. In an
effort to capitalize on the favorable interest rate environment, the Company
also issued $300.0 million of 7.5% Guaranteed Preferred Beneficial Interests in
Company Subordinated Debt Securities ("Preferred Securities") and redeemed
$150.0 million of 8% Exchangeable Preferred Income Cumulative Shares, Series A
("Series A Shares"). See Note 8 of Notes to Consolidated Financial Statements
for a more complete description. The increase in long-term borrowings along with
the growth in retained earnings and issuance of Preferred Securities increased
total capital to $20.1 billion from $17.9 billion at June 30, 1998. The
increases in the Company's long-term borrowings and equity capital base reflect
the growth in the Company's liquidity needs. Long-term debt totaling $11.9
billion and $11.6 billion had maturities beyond one year at June 30, 1999 and
June 30, 1998, respectively.
At June 30, 1999, 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+
----------------------------------------------------------
Japan Bond Research Institute A+
<PAGE>
The Company's CAP Plan allows participants to defer portions of their
annual compensation in exchange for the future receipt of shares of the
Company's Common Stock. In connection with the CAP Plan, during fiscal year
ended June 30, 1999, the Company repurchased a total of 11,943,110 shares of
Common Stock through open market transactions at a cost of approximately $483.3
million. The Company intends, subject to market conditions and plan limitations,
to continue to purchase 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 3, 1999, there have been no purchases under the
Repurchase Plan.
CASH FLOWS
Cash and cash equivalents increased to $2.1 billion at the end of fiscal
1999 from $1.1 billion at the end of fiscal 1998, an increase of $1.0 billion.
Fiscal 1998 year-end cash and cash equivalents decreased $175.3 million from
$1.2 billion at the end of fiscal 1997. Fiscal 1997 year-end cash and cash
equivalents increased $1.1 billion from $127.8 million at the end of fiscal
1996. Cash provided from financing activities was primarily used to support the
growth in operating activities in each of the last three fiscal years.
Cash provided by operating activities in fiscal 1999 was $234.8 million,
primarily due to an increase in securities sold under agreements to repurchase
of $5.3 billion and a decrease in securities borrowed of $2.7 billion. This
increase of cash was partially offset by an increase in securities purchased
under agreements to resell of $3.1 billion, a decrease in payables to brokers,
dealers and others of $2.9 billion and a decrease in payables to customers of
$1.3 billion.
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 provided by financing activities in each of the three fiscal years
ended June 30, 1999, 1998 and 1997 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 1999, the Company also issued the Preferred Securities for aggregate
proceeds of $300.0 million and redeemed the Series A shares for $150.0 million.
Investing activities in fiscal 1999 used $177.6 million primarily for
purchases of property, equipment and leasehold improvements of $171.8 million,
and net purchases of investment securities and other assets of $5.8 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.
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, BSB is subject to the regulatory capital requirements of
the Central Bank of Ireland. At June 30, 1999, Bear Stearns, BSSC, BSIL, BSIT
and BSB were in compliance with their respective 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 of Notes to 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, equity-related investments or
subordinated loans and have not historically required significant levels of
capital investment. At June 30, 1999, the Company held direct equity investments
in thirteen leveraged transactions with an aggregate carrying value of
approximately $121.5 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 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, 1999 and 1998, the Company held high yield securities of $1.4
billion and $1.8 billion, respectively, in long inventory, and $0.2 billion and
$0.3 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 increased
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. The Company's 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.
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 index 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 can 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 an AAA-rated counterparty offering a wide range of global fixed income and
equity derivative products. Additionally, the Company is able to provide
customers with the choice of either a termination or continuation structure.
As of June 30, 1999 and 1998, the Company had notional/contract amounts of
$551.0 billion and $493.7 billion, respectively, of derivative financial
instruments outstanding, of which $104.0 billion and $78.4 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 outstanding, which either are used to hedge trading
positions or are part of its derivative dealer activities, are marked to fair
value.
Unrealized gains and losses on derivative financial instruments used to
hedge the Company's long-term debt issuances are generally 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 $48.1
million, $23.5 million and $29.4 million during fiscal 1999, 1998 and 1997,
respectively.
<PAGE>
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, unless corrected, may not be able to accurately process
dates ending in the Year 2000 and thereafter.
Over four 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
tested compatibility with such systems. The Company also participates actively
in various industry-wide tests.
Through June 30, 1999, the amounts incurred related to the assessment of,
and efforts in connection with, the Year 2000 and the development and execution
of a remediation plan have approximated $63.1 million of which approximately
$8.9 million in hardware and software has been capitalized. The Company's total
projected Year 2000 project cost, 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 $11.9 million, which will be funded through operating
cash flows and primarily expensed as incurred.
The Company presently 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 completed the reprogramming
and replacement phase of the project. Additional testing will continue through
the end of the calendar year as deemed appropriate. 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. The Company has developed an action plan
and a formal contingency plan designed to safeguard the interests of the Company
and its customers. The Company believes that these plans significantly reduce
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.
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>
The Bear Stearns Companies Inc.
RISK MANAGEMENT
- --------------------------------------------------------------------------------
OVERALL
- --------------------------------------------------------------------------------
The Company's principal business activities by their nature engender significant
market and credit risks. Managing these risks is critical to the success and
stability of the Company. As a result, comprehensive risk management policies
and procedures have been established to identify, control and monitor each of
these major risks. Additionally, the Company's diverse portfolio of business
activities helps to reduce the impact that volatility in any particular market
may have on its net revenues. In addition to market risk, the Company is also
subject to credit risk, operating risk and funding risk. Funding risk is
discussed in the Liquidity and Capital Resources section of Management's
Discussion and Analysis.
Managing risk at the Company begins first and foremost with the expertise
and experience of trading department management. Senior Managing Directors in
each 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 the Company's Risk Committee (the "Risk Committee"). The Risk Committee,
comprised of Senior Managing Directors from each of the various trading
departments as well as the Risk Management Department, 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 its entire 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 Executive Committee. The goals of
the department are to understand the risk profile of each trading area, to
consolidate risk at the firm-wide level, 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.
The Company's 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 periodically 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.
<PAGE>
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 futures prices,
changes in the implied volatility of interest rate, foreign exchange rate,
equity and futures 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 includes 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, 1999 and 1998, 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. 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.
<PAGE>
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 is 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 been 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 properties 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 combination
of historical and Monte Carlo value at risk approaches. Equity derivatives were
treated as correlated with various indices, of which the Company used
approximately fifty at June 30, 1999 and approximately forty at June 30, 1998.
Parameter estimates, such as volatilities and correlations, were based on daily
tests through June 30, 1999. 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, 1999 and 1998:
IN MILLIONS 1999 1998
-------------------------------------------------------------
MARKET RISK
Interest rate $ 9.3 $11.1
Currency 1.3 0.9
Equity 11.3 8.9
Diversification benefit (7.2) (6.6)
-------------------------------------------------------------
Total $14.7 $14.3
=============================================================
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>
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, 1999 and 1998. 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 $7.7 million and $6.9 million for fiscal years 1999 and 1998,
respectively. Daily trading losses exceeded the reported value at risk amounts
less than 1% of the total trading days during fiscal years 1999 and 1998. The
range of daily trading profit volatility reflects the Company's historical
ability to manage its exposure to market risk and the diversified nature of its
trading activities.
DAILY TRADING PROFIT FREQUENCY DISTRIBUTION
- --------------------------------------------------------------------------------
[Vertical bar graphs of Frequency (y-axis) versus Daily Trading Profit
Volatility (x-axis) representing the following information appear here in paper
format]
Fiscal Year 1999
Daily Trading Frequency
Profit Volatility (Number of
($ in millions) Trading Days)
--------------- -------------
(30+) 1
(29) 1
(13) 1
(12) 1
(11) 1
(10) 3
(9) 1
(8) 1
(6) 2
(5) 2
(4) 3
(3) 5
(2) 2
(1) 2
0 10
1 6
2 10
3 14
4 8
5 17
6 15
7 15
8 17
9 12
10 19
11 15
12 9
13 15
14 8
15 6
16 6
17 4
19 2
20 4
21 5
24 1
27 1
28 2
29 1
30+ 4
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
<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 US 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, 1999 and 1998 was $1.2 billion and $1.3 billion,
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, indices, 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 and BSIL, 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 200 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 are designed to
better 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 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 to better 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, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Commissions $ 1,013,909 $ 902,692 $ 732,343
Principal transactions 1,929,137 1,726,982 1,571,332
Investment banking 839,301 1,001,494 663,249
Interest and dividends 4,008,566 4,285,595 3,058,452
Other income 91,125 63,173 51,902
- --------------------------------------------------------------------------------------------------
Total revenues 7,882,038 7,979,936 6,077,278
Interest expense 3,379,914 3,638,513 2,551,364
- --------------------------------------------------------------------------------------------------
Revenues, net of interest expense 4,502,124 4,341,423 3,525,914
- --------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Employee compensation and benefits 2,285,594 2,111,741 1,726,931
Floor brokerage, exchange and clearance fees 159,609 166,733 141,211
Communications 143,458 122,973 102,926
Depreciation and amortization 133,115 115,141 89,719
Occupancy 108,521 100,559 88,419
Advertising and market development 95,739 82,499 69,765
Data processing and equipment 61,017 47,785 36,620
Other expenses 450,963 530,500 256,633
- --------------------------------------------------------------------------------------------------
Total non-interest expenses 3,438,016 3,277,931 2,512,224
- --------------------------------------------------------------------------------------------------
Income before provision for income taxes 1,064,108 1,063,492 1,013,690
Provision for income taxes 391,060 403,063 400,360
- --------------------------------------------------------------------------------------------------
Net income $ 673,048 $ 660,429 $ 613,330
==================================================================================================
Net income applicable to common shares $ 633,618 $ 629,417 $ 589,497
==================================================================================================
Earnings per share $ 4.48 $ 4.38 $ 4.00
==================================================================================================
Weighted average common and
common equivalent shares outstanding 157,602,889 158,529,866 155,240,279
==================================================================================================
</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, 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,129,080 $ 1,073,821
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations 2,891,397 2,282,729
Securities purchased under agreements to resell 32,996,226 29,846,716
Receivable for securities provided as collateral 1,735,293 2,041,546
Securities borrowed 54,173,726 56,844,009
Receivables:
Customers 14,510,628 14,228,678
Brokers, dealers and others 1,452,590 1,337,146
Interest and dividends 366,110 467,456
Financial instruments owned, at fair value 41,942,878 44,619,672
Property, equipment and leasehold improvements, net of accumulated depreciation
and amortization of $622,784 and $517,575 in 1999 and 1998, respectively 486,735 448,044
Other assets 1,209,677 1,306,078
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $ 153,894,340 $ 154,495,895
=========================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Short-term borrowings $ 14,145,410 $ 14,613,565
Securities sold under agreements to repurchase 50,673,644 45,346,472
Obligation to return securities received as collateral 1,944,286 5,257,279
Payables:
Customers 40,822,913 42,119,042
Brokers, dealers and others 2,195,691 5,055,988
Interest and dividends 542,478 636,021
Financial instruments sold, but not yet purchased, at fair value 21,506,372 21,070,596
Accrued employee compensation and benefits 1,306,357 1,217,337
Other liabilities and accrued expenses 654,588 1,242,110
- -------------------------------------------------------------------------------------------------------------------------
133,791,739 136,558,410
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
Long-term borrowings 14,647,092 13,295,952
- -------------------------------------------------------------------------------------------------------------------------
Guaranteed Preferred Beneficial Interests in Company Subordinated Debt Securities 500,000 200,000
Preferred Stock issued by subsidiary 150,000
- -------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock 800,000 800,000
Common Stock, $1.00 par value; 200,000,000 shares authorized;
176,011,113 and 167,784,941 shares issued in 1999 and 1998, respectively 176,011 167,785
Paid-in capital 2,269,927 1,963,788
Retained earnings 1,931,957 1,590,574
Capital Accumulation Plan 1,144,329 833,427
Treasury stock, at cost--
Adjustable Rate Cumulative Preferred Stock Series A:
2,520,750 shares at June 30, 1999 and 1998 (103,421) (103,421)
Common Stock: 56,333,508 and 50,639,294 shares at June 30, 1999
and 1998, respectively (1,263,294) (953,506)
Note receivable from ESOP Trust (7,114)
- -------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 4,955,509 4,291,533
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 153,894,340 $ 154,495,895
=========================================================================================================================
</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, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 673,048 $ 660,429 $ 613,330
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 133,115 115,141 89,719
Deferred income taxes (191,146) (204,814) (101,859)
Other 132,893 117,954 73,699
Decreases (increases) in operating receivables:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations (608,668) (833,915) 253,310
Securities purchased under agreements to resell (3,149,510) (1,506,117) (3,823,324)
Securities borrowed 2,670,283 (16,132,729) (11,100,073)
Receivables:
Customers (281,950) (5,656,157) (596,148)
Brokers, dealers and others (115,444) (109,199) (416,556)
Financial instruments owned (329,946) (2,966,659) (12,215,146)
Other assets 418,885 (215,865) (80,975)
Increases (decreases) in operating payables:
Securities sold under agreements to repurchase 5,327,172 5,915,256 6,077,317
Payables:
Customers (1,296,129) 12,197,656 8,016,371
Brokers, dealers and others (2,860,297) 2,246,118 968,282
Financial instruments sold, but not yet purchased 435,776 285,800 6,868,215
Accrued employee compensation and benefits (32,080) 195,000 137,967
Other liabilities and accrued expenses (691,198) 446,152 (138,288)
- -------------------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 234,804 (5,445,949) (5,374,159)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments) proceeds from short-term borrowings (468,155) 196,894 4,549,052
Net proceeds from issuance of long-term borrowings 4,179,637 7,045,745 3,129,439
Net proceeds from issuance of subsidiary securities 290,550 199,884
Issuance of Preferred Stock 650,000
Redemption of Preferred Stock (150,000) (287,500)
Capital Accumulation Plan 483,260 259,816 196,114
Tax benefit of Common Stock distributions 92,893 86,968 4,006
Note repayment from ESOP Trust 7,114 6,587 6,099
Payments for:
Retirement of long-term borrowings (2,846,752) (1,881,841) (1,062,844)
Treasury Stock purchases (482,818) (258,036) (202,296)
Cash dividends paid (107,666) (97,990) (93,784)
- -------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 998,063 5,720,643 6,725,670
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (171,806) (183,652) (137,328)
Purchases of investment securities and other assets (68,732) (273,956) (108,480)
Proceeds from sale of investment securities and other assets 62,930 7,603 15,582
- -------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (177,608) (450,005) (230,226)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,055,259 (175,311) 1,121,285
Cash and cash equivalents, beginning of year 1,073,821 1,249,132 127,847
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,129,080 $ 1,073,821 $ 1,249,132
=========================================================================================================================
</TABLE>
Statement of Financial Accounting Standards No. 125 requires balance sheet
recognition of collateral related to certain secured financing transactions,
which is a non-cash activity, and did not impact the Consolidated Statements of
Cash Flows.
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
Stock, Note
Common Capital Series A-$50 Common Receivable
IN THOUSANDS, Preferred Stock Paid-In Retained Accumulation Liquidation Stock from ESOP
EXCEPT SHARE DATA Stock $1 Par Value Capital Earnings Plan Preference $1 Par Value Trust
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 $ 437,500 $ 159,804 $1,696,217 $ 694,108 $ 471,191 $ (95,389) $ (598,217) $ (19,800)
Net income 613,330
Cash dividends declared--
Common ($0.55 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)
Net income 660,429
Cash dividends declared--
Common ($0.57 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>
<TABLE>
<CAPTION>
Treasury Stock
-------------------------
Adjustable
Rate
Cumulative
Preferred
Stock, Note
Common Capital Series A-$50 Common Receivable
IN THOUSANDS, Preferred Stock Paid-In Retained Accumulation Liquidation Stock from ESOP
EXCEPT SHARE DATA Stock $1 Par Value Capital Earnings Plan Preference $1 Par Value Trust
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $ 800,000 $ 167,785 $1,963,788 $1,590,574 $ 833,427 $ (103,421) $ (953,506) $ (7,114)
Net income 673,048
Cash dividends declared--
Common ($0.59 per share) (68,796)
Preferred (39,113)
Purchase of treasury stock--
Common Stock
(11,943,110 shares) (482,818)
Common Stock issued
out of treasury
(8,623,436 shares) 919 (172,358) 173,030
Income tax benefits
attributable to Common
Stock issued out
of treasury 91,302
5% Stock dividend
(8,226,172 shares) 8,226 215,530 (223,756)
Note repayment from
ESOP Trust 7,114
Amortization of Preferred
Stock issue costs (1,612)
Allocation under Capital
Accumulation Plan 483,260
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ 800,000 $ 176,011 $2,269,927 $1,931,957 $1,144,329 $ (103,421) $(1,263,294) $ 0
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
The Bear Stearns Companies Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT
1 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. Share data for all years
included in the consolidated financial statements are presented after giving
retroactive effect to the 5% stock dividend declared by the Company in each of
January 1999 and January 1997. 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 business as a securities
broker-dealer and operates in three principal segments: Capital Markets,
Execution Services and Wealth Management. Capital Markets is comprised of the
Equities, Fixed Income and Investment Banking areas. Execution Services is
comprised of clearance and predominantly commission-related areas that
concentrate on the execution of trades for customers. Wealth Management is
comprised of the Private Client Services ("PCS") and Asset Management areas. See
Note 13 of Notes to Consolidated Financial Statements.
FINANCIAL INSTRUMENTS
Proprietary securities, futures and derivatives 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 are expected to be in
effect when the related temporary differences are expected to be reversed.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income applicable to common
shares by the weighted average number of common shares outstanding during each
period presented. Common shares include the assumed distribution of shares of
common stock issuable under various employee benefit plans including certain of
the Company's deferred compensation arrangements, with appropriate adjustments
made to net income for expenses 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,
1999, 1998 and 1997. Income taxes paid totaled $223.2 million, $459.7 million
and $478.4 million for the fiscal years 1999, 1998 and 1997, respectively.
ACCOUNTING CHANGES AND DEVELOPMENTS
The Company adopted SFAS 130, "Reporting Comprehensive Income," in fiscal 1999.
Under SFAS 130, the Company is required to disclose comprehensive income, which
combines net income and certain items that directly affect stockholders' equity,
in a prominent position on the face of the financial statements. The standard is
limited to matters of reporting and presentation and does not address
recognition or measurement. The adoption of the standard had no impact on the
Company's net income or stockholders' equity.
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information," in fiscal 1999. SFAS 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. See Note 13 of
Notes to Consolidated Financial Statements.
The Company adopted SFAS 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in fiscal 1999. SFAS 132 revised and
standardized pension and other postretirement benefit plan disclosures. The
adoption of the standard was not material to the Company's financial statement
disclosures.
In October 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," which is effective for the first fiscal quarter beginning after
December 15, 1998. SFAS 134 amends SFAS 65, "Accounting for Certain Mortgage
Banking Activities," to require that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. The Company adopted this
standard when required in fiscal 1999. Adoption of this standard did not impact
the Company's financial position or results of operations.
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 was effective upon issuance and deferred the
effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," to fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS 133 establishes standards for accounting and reporting of derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The Company expects to adopt this standard
when required in the first quarter of fiscal 2001 and is currently evaluating
the potential impact on the Company's accounting for such activities.
<PAGE>
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." This SOP provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company will adopt this standard when required in fiscal
2000 and is currently in the process of accumulating such costs incurred since
July 1, 1999.
In September 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires the costs of certain start-up
activities, which includes organizational costs, to be expensed as incurred. The
Company adopted SOP 98-5 effective July 1, 1999 with no material impact.
FAIR VALUE OF
2 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, 1999 for debt
obligations of similar maturity, was approximately $14.5 billion, which is less
than the aggregate carrying value by approximately $101.2 million. However, the
Company generally 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
or losses on interest rate swaps and other transactions hedging the Company's
long-term borrowings generally 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.
- --------------------------------------------------------------------------------
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:
IN THOUSANDS 1999 1998
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS OWNED:
US government and agency $ 8,211,944 $ 9,388,387
Other sovereign governments 2,742,486 2,955,515
Corporate equity and convertible debt 14,578,501 12,255,749
Corporate debt 4,972,621 4,938,541
Derivative financial instruments 3,035,278 3,545,236
Mortgages and other mortgage-backed securities 7,869,884 10,582,090
Other 532,164 954,154
- --------------------------------------------------------------------------------
$41,942,878 $44,619,672
================================================================================
FINANCIAL INSTRUMENTS SOLD, BUT NOT YET PURCHASED:
US government and agency $ 5,250,633 $ 6,327,074
Other sovereign governments 2,639,952 3,107,789
Corporate equity 6,134,317 4,336,280
Corporate debt 1,707,998 1,398,025
Derivative financial instruments 5,687,296 5,835,491
Other 86,176 65,937
- --------------------------------------------------------------------------------
$21,506,372 $21,070,596
================================================================================
<PAGE>
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
market rates of interest or rebates at the time of the transactions.
Borrowings made under the Company's commercial paper programs were $8.5
billion and $7.3 billion at June 30, 1999 and 1998, respectively. During the
fiscal years 1999 and 1998, the weighted average interest rates on such
borrowings were 5.22% and 5.66%, respectively. The weighted average rates at
June 30, 1999 and 1998 were 4.93% and 5.51%, respectively.
At June 30, 1999 and 1998, the Company had outstanding $3.8 billion and
$6.2 billion, respectively, in 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 1999 and 1998,
the weighted average interest rates on the Medium-Term Notes were 5.55% and
5.77%, respectively. The weighted average rates at June 30, 1999 and 1998 were
5.18% and 5.81%, respectively.
At June 30, 1999 and 1998, the Company had outstanding $50.7 billion and
$45.3 billion of repurchase agreements. During the fiscal years 1999 and 1998,
the weighted average interest rates on the repurchase agreements were 4.97% and
5.55%, respectively. The weighted average rates at June 30, 1999 and 1998 were
4.69% and 5.54%, respectively.
Short-term borrowings at June 30, 1999 and 1998 included $1.8 billion and
$1.1 billion, respectively, of bank loans. During the fiscal years 1999 and
1998, the weighted average interest rates on such bank loans were 5.24% and
5.54%, respectively. The weighted average rates at June 30, 1999 and 1998 were
5.66% and 5.23%, respectively.
- --------------------------------------------------------------------------------
5 LONG-TERM BORROWINGS
- --------------------------------------------------------------------------------
Long-term borrowings at June 30 consisted of the following:
IN THOUSANDS 1999 1998
- --------------------------------------------------------------------------------
Floating-Rate Notes due 2001 to 2005 $ 1,470,175 $ 1,788,779
Fixed-Rate Senior Notes due 1999 to 2007;
interest rates ranging from 5 3/4% to 9 3/8% 6,297,760 5,306,600
Medium-Term Notes and other borrowings 6,879,157 6,200,573
- --------------------------------------------------------------------------------
Total long-term borrowings $14,647,092 $13,295,952
================================================================================
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, 1999 and 1998, the weighted average effective interest rates on
the Floating-Rate Notes were 5.92% and 6.01%, respectively. The weighted average
effective interest rates on the Floating-Rate Notes at June 30, 1999 and 1998
were 5.41% and 5.99%, 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 1999 and 1998 were 5.79% and 6.26%, respectively. The weighted average
effective interest rates on the Company's Fixed-Rate Senior Notes at June 30,
1999 and 1998 were 5.39% and 6.05%, respectively.
<PAGE>
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 1999
and 1998, the weighted average interest rates on the Medium-Term Notes were
5.44% and 5.85%, respectively. The weighted average interest rates on the
Company's Medium-Term Notes at June 30, 1999 and 1998 were 5.29% and 6.03%,
respectively.
Maturities of long-term borrowings at June 30, 1999 consisted of the
following:
IN THOUSANDS
- --------------------------------------------------------------------------------
FISCAL YEAR AMOUNT
2000 $ 2,723,499
2001 4,065,730
2002 894,875
2003 2,177,032
2004 1,888,901
Thereafter 2,897,055
- --------------------------------------------------------------------------------
$14,647,092
================================================================================
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,
1999, 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 1999 1998 1997
- --------------------------------------------------------------------------------
CURRENT:
Federal $ 362,046 $ 398,205 $ 326,359
State and local 172,908 163,353 139,676
Foreign 47,252 46,319 36,184
- --------------------------------------------------------------------------------
Total current 582,206 607,877 502,219
- --------------------------------------------------------------------------------
DEFERRED:
Federal (133,569) (143,656) (74,346)
State and local (57,577) (61,158) (27,513)
- --------------------------------------------------------------------------------
Total deferred (191,146) (204,814) (101,859)
- --------------------------------------------------------------------------------
Total Provision for Income Taxes $ 391,060 $ 403,063 $ 400,360
================================================================================
<PAGE>
Significant components of the Company's deferred tax assets (liabilities)
as of June 30 were as follows:
IN THOUSANDS 1999 1998 1997
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Deferred compensation $ 531,263 $ 430,123 $ 304,238
Liability reserves 146,785 139,426 93,631
Valuation reserves 16,442 14,852 15,304
Partnerships 15,433
Other 8,247 15,006 25,398
- --------------------------------------------------------------------------------
Total deferred tax assets 718,170 599,407 438,571
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Unrealized appreciation (105,829) (162,365) (117,616)
Depreciation (9,799) (15,457) (15,261)
Partnerships (12,127) (106,379)
Other (14,734) (12,796) (7,467)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (130,362) (202,745) (246,723)
- --------------------------------------------------------------------------------
Net Deferred Tax Asset $ 587,808 $ 396,662 $ 191,848
================================================================================
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:
IN THOUSANDS 1999 1998 1997
- --------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal benefit 7.0 6.2 6.9
Dividend exclusion (1.9) (1.9) (1.8)
Domestic tax credits (3.4) (1.7) (0.9)
Other, net 0.1 0.3 0.3
- --------------------------------------------------------------------------------
Effective tax rate 36.8% 37.9% 39.5%
================================================================================
Not included in the reconciliation table reflected above are approximately
$91.3 million, $85.8 million and $3.5 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
years 1999, 1998 and 1997, respectively.
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, 1999, Bear Stearns' net
capital, as defined, of $2.30 billion exceeded the minimum requirement by $2.24
billion.
BSIL and Bear, Stearns International Trading Limited ("BSIT"), London-based
broker-dealer subsidiaries, which are wholly owned by the Company, 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.
Bear Stearns Bank Plc ("BSB"), a wholly owned subsidiary of Bear Stearns
Irish Holdings Inc., which is wholly owned by the Company, is incorporated in
Dublin, Ireland and is subject to the regulatory capital requirements of the
Central Bank of Ireland.
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, 1999, approximately $1.9 billion of net
assets of consolidated subsidiaries were restricted as to the payment of cash
dividends and advances to the Company.
<PAGE>
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, 1999. The
Company did not repurchase any shares during the year ended June 30, 1999. At
June 30, 1999, the Company held 2,520,750 shares of Preferred Stock in treasury.
The Company has outstanding 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.
The Company has outstanding 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.
The Company has outstanding 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.
PREFERRED STOCK ISSUED BY SUBSIDIARIES
On April 15, 1999 the Company redeemed $150.0 million (6,000,000 shares) of the
8% Exchangeable Preferred Income Cumulative Shares, Series A ("Series A Shares")
issued by Bear Stearns Finance LLC, a wholly owned subsidiary of the Company, at
a redemption price of $25 per Series A Share plus accrued and unpaid dividends
to the redemption date.
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, 2027. 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.
In December 1998, Bear Stearns Capital Trust II ("Capital Trust II"), a
wholly owned subsidiary of the Company, issued $300.0 million (12,000,000
shares) of Guaranteed Preferred Beneficial Interests in Company Subordinated
Debt Securities (the "Preferred Securities"). The Preferred Securities are
fixed-rate securities, which have a liquidation value of $25 per security.
Holders of the Preferred Securities are entitled to receive quarterly
preferential cash distributions at an annual rate of 7.5% through December 15,
2028. The proceeds of the issuance of the Preferred Securities were used to
purchase junior subordinated deferrable interest debentures (the "Debentures")
issued by the Company. The Debentures have terms that correspond to the terms of
the Preferred Securities and are the sole assets of Capital Trust II. The
Preferred Securities will mature on December 15, 2028. The Company, at its
option, may redeem the Preferred Securities at their principal amount plus
accrued distributions beginning December 15, 2003. The Company's guarantee of
the Preferred Securities, considered together with other obligations of the
Company with respect to the Preferred Securities, constitute a full and
unconditional guarantee by the Company of Capital Trust II's obligation under
the Preferred Securities issued by Capital Trust II.
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, 1999, 1998 and 1997 was $14.2 million, $12.8
million and $12.5 million, respectively.
The Company maintains a non-qualified defined contribution retirement plan
covering substantially all account executives. The plan provides for retirement
benefits to be paid based upon a percentage of each participant's compensation
and the performance of certain participant-selected investment options for
benefits accrued. The Company's expense for this plan for the years ended June
30, 1999, 1998 and 1997 was $9.9 million, $11.3 million and $9.4 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 have been fully repaid through a combination of
contributions by the Company and dividends on the shares of Common Stock held by
the ESOP trust. The Company's expense related to the ESOP for the year ending
June 30, 1999 was approximately $3.0 million and approximately $6.0 million in
each of 1998 and 1997.
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, 1999, 1998 and 1997, participants deferred
compensation of approximately $278.8 million, $247.4 million and $191.8 million,
respectively. During the years ended June 30, 1999, 1998 and 1997, the Company
recognized expense of approximately $121.1 million, $115.2 million and $56.4
million, respectively, attributable to CAP Units or cash credited to
participants' deferred compensation accounts with respect to the earnings
adjustment. As of July 1, 1999, pursuant to the terms of the CAP Plan, 7,991,873
CAP Units were credited to participants' deferred compensation accounts with
respect to the earnings and deferrals made during fiscal year 1999. In addition,
$70.4 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, 1999, 1998 and 1997 was approximately 39.6 million, 34.5
million and 34.0 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.
FINANCIAL INSTRUMENTS
11 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.
<PAGE>
The Company's principal transactions revenues by reporting categories,
including derivatives, for the fiscal years ended June 30, were as follows:
IN THOUSANDS 1999 1998 1997
- --------------------------------------------------------------------------------
Fixed income $ 994,692 $ 905,665 $ 919,604
Equity 558,683 472,435 393,875
Foreign exchange and other derivative
financial instruments 375,762 348,882 257,853
- --------------------------------------------------------------------------------
Total principal transactions $1,929,137 $1,726,982 $1,571,332
================================================================================
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 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, futures and derivatives
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:
IN BILLIONS 1999 1998
- --------------------------------------------------------------------------------
INTEREST RATE:
Swap agreements, including options,
swaptions, caps, collars and floors $339.1 $277.5
Futures contracts 52.5 49.8
Options held 24.0 4.0
Options written 3.9 1.6
FOREIGN EXCHANGE:
Futures contracts 19.3 20.8
Forward contracts 15.6 29.6
Options held 2.6 9.9
Options written 3.1 7.7
MORTGAGE-BACKED SECURITIES:
Forward contracts 63.4 70.2
EQUITY:
Swap agreements 11.9 11.6
Futures contracts 0.8 1.1
Options held 7.5 5.3
Options written 7.3 4.6
- --------------------------------------------------------------------------------
<PAGE>
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 Statements of Financial
Condition and the related income or loss reflected in revenues derived from
principal transactions.
The fair values of derivative financial instruments held or issued for
trading and hedging purposes as of June 30 were as follows:
1999 1998
- --------------------------------------------------------------------------------
IN MILLIONS Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Swap agreements $1,375 $2,290 $1,872 $2,100
Futures and forward contracts 278 259 450 551
Options held 1,397 1,279
Options written 3,164 3,189
- --------------------------------------------------------------------------------
The monthly average fair values of the derivative financial instruments for
the fiscal years ended June 30 were as follows:
1999 1998
- --------------------------------------------------------------------------------
IN MILLIONS Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------
Swap agreements $2,227 $2,317 $1,154 $1,494
Futures and forward contracts 334 368 318 329
Options held 1,154 2,207
Options written 3,156 3,709
- --------------------------------------------------------------------------------
The majority of the Company's transactions with off-balance-sheet risk are
shorter-term in duration with a weighted average maturity of approximately 3.3
years and 2.8 years at June 30, 1999 and 1998, respectively. The maturities for
notional/contract amounts outstanding for derivative financial instruments as of
June 30, 1999 were as follows:
Less than 1 to 3 3 to 5 Greater than
IN BILLIONS 1 Year Years Years 5 Years Total
- --------------------------------------------------------------------------------
Swap agreements $ 73.1 $ 105.9 $ 74.8 $ 97.2 $ 351.0
Futures contracts 49.8 18.0 4.6 0.2 72.6
Forward contracts 79.0 79.0
Options held 21.6 9.8 0.1 2.6 34.1
Options written 9.7 2.6 0.1 1.9 14.3
- --------------------------------------------------------------------------------
Total $ 233.2 $ 136.3 $ 79.6 $ 101.9 $ 551.0
================================================================================
Percent of total 42.3% 24.7% 14.5% 18.5% 100.0%
================================================================================
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, which are recognized as assets 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.
<PAGE>
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 $1.7 billion and $832.4
million of collateral, respectively, at June 30, 1999 and 1998:
IN MILLIONS 1999 1998
- --------------------------------------------------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $140.0 $187.7
AA 627.1 607.9
A 303.4 371.0
BBB 56.6 68.1
BB and Lower 39.7 70.8
Non-rated 3.4 27.2
(1) Internal designations of counterparty credit quality are based on actual
ratings made by external rating agencies or equivalent ratings established
and utilized by the Company's Credit Department.
CUSTOMER ACTIVITIES
The Company's clearance activities for both clearing clients and customers
involve the execution, settlement and financing of various 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 those activities by
requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company monitors required margin levels
daily and, pursuant to such guidelines, may require customers to deposit
additional cash or collateral, or to reduce positions, when deemed necessary.
The Company also establishes credit limits for customers engaged in commodity
activities, that are monitored daily. Additionally, with respect to the
Company's correspondent clearing activities, introducing correspondent firms are
required to guarantee the contractual obligations of their customers.
The Company's customer financing and securities settlement activities may
require the Company to pledge 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, 1999 and 1998, the Company had outstanding non-trading related
interest rate and currency swap agreements with a notional principal amount of
$10.9 billion and $11.6 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 $48.1 million, $23.5 million and $29.4 million
for the fiscal years ended June 30, 1999, 1998 and 1997, respectively. The
difference to be received or paid on the swap agreements is included in interest
expense as incurred, and any related receivable or payable is reflected
accordingly as an asset or liability.
12 COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
LEASES
The Company occupies office space under leases which expire at various dates
through 2016. The lease commitments include the lease of the Company's
headquarters at 245 Park Avenue, New York City, which expires on December 31,
2002. In September 1997, the Company entered into a 99-year ground lease at 383
Madison Avenue, New York City, upon which an office tower will be developed and
built. The site will serve as the new worldwide headquarters and is scheduled to
be completed by the expiration date of the current lease. At June 30, 1999, the
future minimum rentals payable relating to this transaction are not currently
determinable and are not included in the amounts below. At June 30, 1999, future
minimum aggregate annual rentals payable under these noncancelable leases (net
of subleases), for fiscal years 2000 through 2004 and the aggregate amount
thereafter, are as follows:
IN THOUSANDS
- --------------------------------------------------------------------------------
FISCAL YEAR
2000 $ 65,039
2001 62,420
2002 60,532
2003 42,847
2004 25,402
Aggregate amount thereafter 100,803
- --------------------------------------------------------------------------------
<PAGE>
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 $94.1 million, $90.4 million and $79.5
million, for the years ended June 30, 1999, 1998 and 1997, respectively.
LETTERS OF CREDIT/GUARANTEES
At June 30, 1999, the Company was contingently liable for unsecured letters of
credit of $1.9 billion and letters of credit of $22.1 million secured by
financial instruments, which are principally used as collateral for securities
borrowed and to satisfy margin requirements at option and commodity exchanges.
The Company had various other commitments aggregating $0.7 billion at June
30, 1999.
BORROW VERSUS PLEDGE
At June 30, 1999, US government and agency securities with a market value of
approximately $5.2 billion had been pledged against borrowed securities with an
approximate market value of $5.6 billion.
LITIGATION
In the normal course of business, the Company has been named as a defendant in
several lawsuits which involve claims for substantial amounts. Although the
ultimate outcome of these matters cannot be ascertained at this time, it is the
opinion of management, after consultation with counsel, that the resolution of
such matters will not have a material adverse effect on the results of
operations or the financial condition of the Company, taken as a whole.
Subsequent to June 30, 1999, the Company's subsidiary, BSSC, settled an
administrative proceeding filed by the United States Securities and Exchange
Commission (the "SEC") resolving all allegations relating to the firm's role as
clearing broker for A.R. Baron & Co. Under the terms of the agreement, BSSC,
without admitting or denying any wrongdoing, agreed to the payment of a fine of
$5 million and to the establishment of a restitution fund of $30 million which
will be used to settle certain private claims. Separately, BSSC has entered into
an agreement with the New York County District Attorney's Office (the "NYDAO"),
in which it has agreed to pay $1.5 million to the NYDAO for the costs of the
investigation. BSSC's payment of the $30 million to the restitution fund
described above to satisfy claims of customers will also fulfill BSSC's
restitution obligation in the agreement entered into by BSSC and the NYDAO. BSSC
has further agreed with the NYDAO to payments of $1 million to the State of New
York and $1 million to the City of New York. Accruals for such amounts are
included in the accompanying Consolidated Statements of Financial Condition.
SEGMENT AND
13 GEOGRAPHIC AREA DATA
- --------------------------------------------------------------------------------
The Company operates in three principal segments: Capital Markets, Execution
Services and Wealth Management. These segments are strategic business units that
offer different products and services. They are managed separately as different
levels and types of expertise are required to effectively manage the segments'
transactions.
The Capital Markets segment is comprised of Equities, Fixed Income and
Investment Banking areas. Equities combines the efforts of sales, trading and
research professionals to offer in-depth expertise in areas such as block
trading, convertible bonds, over-the-counter equities, equity derivatives and
risk arbitrage. Fixed Income provides distribution power for issuers in the
primary market, liquidity for investors in the secondary market, research for
institutional clients and offers expertise in products such as mortgage-backed
and asset-backed securities, corporate and government bonds, municipal and high
yield securities, foreign exchange and derivatives. Investment Banking provides
in-depth capabilities in capital raising, strategic advisory, mergers and
acquisitions and merchant banking.
The Execution Services segment is comprised of clearance and predominantly
commission-related areas including institutional equity sales, institutional
futures sales and specialist activities. Clearance provides clearing, margin
lending and securities borrowing to facilitate customer short sales to over
2,700 clearing clients worldwide. The commission-related areas provide research
and execution capabilities in US equity securities and financial futures to our
institutional clients.
The Wealth Management segment is comprised of PCS and Asset Management
areas. PCS provides high-net-worth individuals with an institutional level of
service. Asset Management serves the diverse investment needs of corporations,
municipal governments, multi-employer plans, foundations, endowments, family
groups and high-net-worth individuals.
<PAGE>
The accounting policies of the segments are the same as those described in
Note 1 of Notes to Consolidated Financial Statements. The only variations are
due to the allocation of revenues and expenses between the segments. The three
business segments are comprised of the many business areas with interactions
among each as they serve the needs of similar clients. Revenues and expenses
reflected below include those which are directly related to each segment.
Revenues from inter-segment transactions are credited based upon specific
criteria or agreed upon rates with such amounts eliminated in consolidation.
They also include revenues and expenses which are the result of the Company's
allocations for items such as interest, which is allocated primarily based on
capital utilization and corporate overhead, which is generally allocated based
on levels of expenses. The Company evaluates performance of the segments based
on net revenues and profit or loss before provision for income taxes.
For the fiscal year ended June 30, 1999:
IN THOUSANDS Net Revenues Pre-Tax Income Segment Assets
- --------------------------------------------------------------------------------
Capital Markets $ 2,470,337 $ 727,660 $ 103,487,668
Execution Services 1,271,321 486,723 45,077,356
Wealth Management 575,698 99,406 3,211,319
Other(a) 184,768 (249,681) 2,117,997
- --------------------------------------------------------------------------------
Total $ 4,502,124 $ 1,064,108 $ 153,894,340
================================================================================
For the fiscal year ended June 30, 1998:
IN THOUSANDS Net Revenues Pre-Tax Income Segment Assets
- --------------------------------------------------------------------------------
Capital Markets $ 2,370,085 $ 693,106 $ 101,040,822
Execution Services 1,202,648 527,751 50,393,148
Wealth Management 531,746 84,297 3,093,527
Other(a) 236,944 (241,662) (31,602)
- --------------------------------------------------------------------------------
Total $ 4,341,423 $ 1,063,492 $ 154,495,895
================================================================================
For the fiscal year ended June 30, 1997:
IN THOUSANDS Net Revenues Pre-Tax Income Segment Assets
- --------------------------------------------------------------------------------
Capital Markets $ 1,989,277 $ 621,733 $ 89,006,647
Execution Services 967,491 427,896 32,834,307
Wealth Management 412,731 58,136 2,899,205
Other(a) 156,415 (94,075) (3,306,624)
- --------------------------------------------------------------------------------
Total $ 3,525,914 $ 1,013,690 $ 121,433,535
================================================================================
(a) Other is comprised of consolidation/elimination entries as well as
corporate administrative functions, including costs related to the CAP Plan
which were $121.1 million, $115.2 million and $56.4 million in fiscal 1999,
1998 and 1997, respectively.
The operations of the Company are conducted primarily in the United States.
The Company also maintains offices in Europe, Asia and Latin America. The
following are gross revenues, income before provision for income taxes and
assets by geographic region, for the fiscal years ended June 30:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
US gross revenues $ 7,080,297 $ 7,127,247 $ 5,542,003
Non-US gross revenues 801,741 852,689 535,275
- ---------------------------------------------------------------------------------------------------------
Consolidated gross revenues $ 7,882,038 $ 7,979,936 $ 6,077,278
=========================================================================================================
US income before provision for income taxes $ 898,499 $ 932,722 $ 984,900
Non-US income before provision for income taxes 165,609 130,770 28,790
- ---------------------------------------------------------------------------------------------------------
Consolidated income before provision for income taxes $ 1,064,108 $ 1,063,492 $ 1,013,690
=========================================================================================================
US assets $121,405,224 $128,043,117 $ 99,284,880
Non-US assets 32,489,116 26,452,778 22,148,655
- ---------------------------------------------------------------------------------------------------------
Consolidated assets $153,894,340 $154,495,895 $121,433,535
=========================================================================================================
</TABLE>
<PAGE>
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.
14 QUARTERLY INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IN THOUSANDS, First Second Third Fourth
EXCEPT SHARE DATA Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1999
Revenues $1,723,604 $2,002,727 $1,804,887 $2,350,820 $7,882,038
Interest expense 982,703 981,935 574,764 840,512 3,379,914
- -------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 740,901 1,020,792 1,230,123 1,510,308 4,502,124
- -------------------------------------------------------------------------------------------------------------------------
Non-interest expenses
Employee compensation and benefits 405,881 552,344 594,694 732,675 2,285,594
Other 241,711 260,970 302,498 347,243 1,152,422
- -------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 647,592 813,314 897,192 1,079,918 3,438,016
- -------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 93,309 207,478 332,931 430,390 1,064,108
Provision for income taxes 29,206 71,558 128,959 161,337 391,060
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 64,103 $ 135,920 $ 203,972 $ 269,053 $ 673,048
=========================================================================================================================
Earnings per share(1) $ 0.38 $ 0.84 $ 1.42 $ 1.85 $ 4.48
=========================================================================================================================
Cash dividends declared per common share(2) $ 0.14 $ 0.14 $ 0.15 $ 0.15 $ 0.59
=========================================================================================================================
<CAPTION>
IN THOUSANDS, First Second Third Fourth
EXCEPT 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(2) $ 1.06 $ 1.06 $ 1.09 $ 1.18 $ 4.38
=========================================================================================================================
Cash dividends declared per common share(2) $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.57
=========================================================================================================================
</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.
(2) The sum of the quarters' earnings per share amounts and cash dividends
declared per common share amounts do not equal the full fiscal year amounts
due to rounding.
<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, 1999 and
1998, 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,
1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1999 in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
August 23, 1999
<PAGE>
THE BEAR STEARNS COMPANIES INC.
CORPORATE INFORMATION
PRICE RANGE OF
COMMON STOCK AND DIVIDENDS
- --------------------------------------------------------------------------------
The Common Stock of the Company is traded on the NYSE under the symbol BSC. The
following table sets forth for the periods indicated the 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 January 20, 1999.
As of September 3, 1999, there were 2,744 holders of record of the
Company's Common Stock. On September 3, 1999, the last reported sales price of
the Company's Common Stock was 44 9/16.
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, 1999
First Quarter (through September 25, 1998) $57 31/32 $30 27/64 $0.14
Second Quarter (through December 31, 1998) 41 29/32 26 35/64 0.14
Third Quarter (through March 26, 1999) 49 3/4 35 23/32 0.15
Fourth Quarter (through June 30, 1999) 52 1/8 41 0.15
<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) $41 3/8 $32 9/16 $0.14
Second Quarter (through December 31, 1997) 46 1/64 36 39/64 0.14
Third Quarter (through March 27, 1998) 50 15/32 37 31/32 0.14
Fourth Quarter (through June 30, 1998) 58 11/16 48 11/16 0.14
</TABLE>
EXHIBIT 21
SUBSIDIARIES (DIRECT AND INDIRECT) OF THE BEAR
STEARNS COMPANIES, INC.
JURISDICTION OF
INCORPORATION
ENTITY OR ORGANIZATION
- ------ ---------------
ABC Gestion France
ALIMAX Corp. New York
AMC Real Estate Inc. Texas
Ashdla Holdings LLC Delaware
Ashdla LLC Delaware
Battery Park Capital Corp. New York
BBT 1995-I Corp. Delaware
Bear Hunter L. L. C. New York
Bear Specialist, Inc. New York
Bear Stearns Realty Partners Apartment Fund I LP Delaware
Bear Stearns (Israel), Inc. Delaware
Bear Stearns (Japan), Ltd. Delaware
Bear Stearns Acquisition V, Inc. Delaware
Bear Stearns Acquisition XII, Inc. 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 (Ireland), Limited Dublin
Bear Stearns Asset Management Inc. New York
Bear Stearns Bank plc Ireland
Bear Stearns Benefits Planning Group New York
Bear Stearns Bridge Management I Inc. Delaware
Bear Stearns Canada Holdings Corp. Delaware
Bear Stearns Capital Markets Inc. Delaware
Bear Stearns Commercial Mortgage, Inc. New York
Bear Stearns Corporate Lending Inc. Delaware
Bear Stearns do Brasil Ltda. Brazil
Bear Stearns Dublin Development Centre Limited Dublin
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 Ltd. Delaware
Bear Stearns FLLC Corp. Delaware
Bear Stearns Forex Inc. Delaware
Bear Stearns Funds Management Inc. Delaware
<PAGE>
Bear Stearns Global Asset Holdings, Ltd. Cayman Islands
Bear Stearns Global Asset Trading, Ltd. Cayman Islands
Bear Stearns Global Convertible Fund, LLC Delaware
Bear Stearns Global Convertible Offshore
Fund, Ltd. Cayman Islands
Bear Stearns Global Equity Derivatives Inc. Cayman Islands
Bear Stearns Global Investors Inc. Delaware
Bear Stearns Global Lending Limited Cayman Islands
Bear Stearns Global Securitization Limited United Kingdom
Bear Stearns GmbH Germany
Bear Stearns Government Products Corp. Delaware
Bear Stearns Holdings Fund Corp. Delaware
Bear Stearns Holdings Limited United Kingdom
Bear Stearns Home Equity Trust New York
Bear Stearns Hong Kong Limited Hong Kong
Bear Stearns Insurance Agency of California,
Incorporated California
Bear Stearns International Trading Limited United Kingdom
Bear Stearns Investment Advisors Inc. Delaware
Bear Stearns Investments Products Inc. New York
Bear Stearns Ireland Limited Ireland
Bear Stearns Irish Holdings Inc. Delaware
Bear Stearns Merchant Fund Corp. Delaware
Bear Stearns Mortgage Capital Corporation Delaware
Bear Stearns N. Y., Inc. New York
Bear Stearns Oil Trading Limited United Kingdom
Bear Stearns Overseas Ltd. Cayman Islands
Bear Stearns Philippines Ltd. Delaware
Bear Stearns Real Estate Group Inc. New York
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 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 Trading Risk Management Inc. Delaware
Bear Stearns U.K. United Kingdom
Bear, Stearns & Co. Inc. Delaware
Bear, Stearns & Co., L.P. New York
Bear, Stearns Benefits Planning Group Inc. Delaware
Bear, Stearns Commercial Mortgage
Securities Inc. Delaware
Bear, Stearns Funding, Inc. Delaware
Bear, Stearns Insurance Agency Incorporated Massachusetts
Bear, Stearns International Holdings Inc. New York
Bear, Stearns International Limited United Kingdom
Bear, Stearns Netherlands Holding B.V. Netherlands & Delaware
Bear, Stearns Realty Investors, Inc. Delaware
Bear, Stearns Securities Corp. Delaware
Broadway Funding IV Inc. Delaware
Broadway Funding IV L.P. 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
BSCGP Inc. Delaware
BSCP Cayman, Inc. Cayman Islands
BSMB Corp. Delaware
Commercial Asset Structured Securities Inc. Delaware
Commercial Principal Guaranteed Investors Inc. Delaware
Commercial Resecuritization Corporation Delaware
Constellation Venture Capital Offshore, L.P. Cayman Islands
Constellation Ventures (BVI) Inc. British Virgin Islands
Constellation Ventures Capital, L. P. Cayman Islands
Constellation Ventures Management LLC New York
<PAGE>
Cosa Inc. Delaware
CRC Guarantor Corporation Delaware
CTC Services, Inc. New York
Custodial Trust Company New Jersey
Custrust New Jersey
Daley Capital, LLC Delaware
DHYNO 1998-1 LLC Delaware
Disco Inc. 1999-1 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
FFI Acquisition Corp. Delaware
Final Four LLC Delaware
Fitz Acquisition Corp. Delaware
Fund America Structured Transactions, Inc. Delaware
Fund America Structured Transactions, L.P. Delaware
Genesis Acquisition Corp. Delaware
Gregory Properties Inc. Delaware
Gregory/Madison Avenue Inc. Delaware
Gregory/Madison Avenue LLC Delaware
HI&G Acquisition Corp. Delaware
Hill Street Funding III Inc. Delaware
Hill Street Funding III L.P. Delaware
ICST Acquisition Corp. Delaware
ISB Real Estate Corporation Delaware
KGB I Inc. Delaware
LIBOR Asset Securities, Inc. Delaware
Managed Securities Plus Fund, Inc. Delaware
MAX Flow Corp. Delaware
MAX Recovery Inc. Delaware
MAX Recovery Inc. II Delaware
MBS Cayman Funding Limited Cayman Islands
Motor City Four L.L.C. Delaware
MSS Acquisition Corp. II Delaware
New Castle Holding, Inc. Delaware
New Castle Millennium, L.P. Delaware
New Castle Partners LLC Cayman Islands
New York Inter-Funding Corp. Delaware
Next Capital Management, LLC Delaware
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 II LLC Delaware
Quatro Finale LLC Delaware
Rare Medium Acquisition LLC Delaware
RC Acquisition Corp. Delaware
Research Conversion Corp. Delaware
RSD Hanover Company Inc. Delaware
SACO I Inc. Delaware
Safety Acquisition Corp. Delaware
SAMCO Mortgage Securities Corp. Delaware
Standard Acquisition Corp. Delaware
Status Securities Inc. New York
Street Pricing Service Withdrawn 12/31/98 New York
Strike Technologies LLC Delaware
Structured Asset Mortgage Investments Inc. Delaware
Structured Commercial Principal Guaranteed
Securities Inc. Delaware
Structured Mortgage Asset Corp. Delaware
Sun Apparel Acquisition Corp. Delaware
Thanksgiving Properties, Inc. Delaware
Thanksgiving Tower Partners Texas
The Bear Stearns Funds Massachusetts
The BSC Employee Fund, L.P. Delaware
The Mayer Fund Delaware
Tony Roma Acquisition Corp. Delaware
TPIR Inc. Delaware
Uniscribe Acquisition Corp. Delaware
Ursa Oil Corporation Delaware
VHC Acquisition Corp. Delaware
White River Global Fund Management, Inc. Delaware
White River Offshore, Ltd. Cayman Islands
White River Securities, LLC New York
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, 333-42295,
333-43565, 333-57083, 333-61437, 333-66861, 333-79417 and 333-83049 and Form
S-8, Files Nos. 33-49979, 33-50012, 33-55804, 33-56103, 333-16041, 333-57661,
333-58007, 333-66353 and 333-81901 of our reports dated August 23, 1999,
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, 1999.
/s/ Deloitte & Touche LLP
September 28, 1999
New York, New York
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
<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>
<CIK> 0000777001
<NAME> Bear Stearns Companies Inc.
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 2,129,080
<RECEIVABLES> 16,329,328
<SECURITIES-RESALE> 32,996,226
<SECURITIES-BORROWED> 54,173,726
<INSTRUMENTS-OWNED> 41,942,878
<PP&E> 486,735
<TOTAL-ASSETS> 153,894,340
<SHORT-TERM> 0
<PAYABLES> 43,561,082
<REPOS-SOLD> 50,673,644
<SECURITIES-LOANED> 1,190,808
<INSTRUMENTS-SOLD> 21,506,372
<LONG-TERM> 14,647,092
0
800,000
<COMMON> 176,011
<OTHER-SE> 3,979,498
<TOTAL-LIABILITY-AND-EQUITY> 153,894,340
<TRADING-REVENUE> 1,929,137
<INTEREST-DIVIDENDS> 4,008,566
<COMMISSIONS> 1,013,909
<INVESTMENT-BANKING-REVENUES> 839,301
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 3,379,914
<COMPENSATION> 2,285,594
<INCOME-PRETAX> 1,064,108
<INCOME-PRE-EXTRAORDINARY> 1,064,108
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 673,048
<EPS-BASIC> 4.48
<EPS-DILUTED> 4.48
</TABLE>
