SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Pursuant to Section 13 or 15 (d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 28, 2000
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THE BEAR STEARNS COMPANIES INC.
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Exact name of registrant as specified in its charter
DELAWARE File No. 1-8989 13-3286161
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(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation) Number)
245 Park Avenue, New York, New York 10167
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (212) 272-2000
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Not Applicable
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(former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
This Form 8-K is filed by The Bear Stearns Companies Inc. (the "Company") to
update certain information for the five-month transition period July 1, 1999
through November 26, 1999 (the "Transition Period") as a result of the Company's
change of its fiscal year-end to November 30 from June 30, effective with the
year beginning November 27, 1999.
SUBMISSION OF STOCKHOLDER PROPOSALS.
As a result of the Company's change to a November 30 fiscal year-end, it is
anticipated that the next Annual Meeting of Stockholders will be held on
March 29, 2001 (the "2001 Annual Meeting"). In accordance with rules
promulgated by the Securities and Exchange Commission, any stockholder who
wishes to submit a proposal for inclusion in the proxy material to be
distributed by the Company in connection with the 2001 Annual Meeting must do
so no later than October 27, 2000.
In addition, in accordance with Article VI, Section 2 of the Certificate of
Incorporation, in order to be properly brought before the 2001 Annual
Meeting, a matter must have been (i) specified in a written notice of such
meeting (or any supplement thereto) given to the stockholders by or at the
direction of the Board of Directors (which would be accomplished if a
stockholder proposal were received by the Secretary of the Company as set
forth in the preceding paragraph), (ii) brought before such meeting at the
direction of the Board of Directors or the Chairman of the meeting, or (iii)
specified in a written notice given by or on behalf of a stockholder of
record on the record date for such meeting or a duly authorized proxy for
such stockholder, which conforms to the requirements of Article VI, Section 2
of the Certificate of Incorporation and is delivered personally to, or mailed
to and received by, the Secretary of the Company not less than 10 days prior
to the anticipated mailing date of the Proxy Statement for the 2001 Annual
Meeting; provided, however, that such notice need not be given more than 75
days prior to the 2001 Annual Meeting. Accordingly, any written notice given
by or on behalf of a stockholder pursuant to the foregoing clause (iii) in
connection with the 2001 Annual Meeting must be received no later than
February 16, 2001. Stockholder proposals should be submitted to: The Bear
Stearns Companies Inc., 245 Park Avenue, New York, New York 10167,
Attention: Secretary.
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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"); Bear, Stearns
International Limited ("BSIL") and Bear Stearns Bank plc ("BSB") 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) 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.
The Capital Markets segment is comprised of the Equities, Fixed Income and
Investment Banking areas. Equities combines the efforts of sales, trading and
research in such areas as block trading, convertible bonds, over-the-counter
("OTC") equities, equity derivatives and risk arbitrage. Fixed Income includes
the efforts of sales, trading and research for institutional clients in a
variety of products such as mortgage-backed and asset-backed securities,
corporate and government bonds, municipal and high yield instruments, foreign
exchange and derivatives. Investment Banking offers a variety of services to our
clients that include capital raising, strategic advice, mergers and acquisitions
and merchant banking. Capital raising encompasses the Company's underwriting of
equity, investment grade and high yield debt securities.
The Execution Services segment is comprised of clearance and commission-related
areas, including institutional equity sales, institutional futures sales and
specialists' activities.
The Company provides clearing, operational and administrative services to
approximately 2,800 clients worldwide at November 26, 1999. These clients
include approximately 2,400 prime brokerage clients including hedge funds,
clients of money managers, short sellers, arbitrageurs and other professional
investors. In addition, there are approximately 400 fully disclosed introducing
brokers who engage in either the retail or the institutional brokerage business.
The Company processed an average of in excess of 192,000 trades per day during
the five-months ended November 26, 1999.
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Institutional equity sales involves the execution of transactions in US equity
securities for domestic and foreign institutional customers and the providing of
these customers with liquidity, trading expertise, trade-processing capability
and investment advice. The Company also provides transaction services for
institutional customers who trade in futures and futures-related instruments and
is involved in specialist activities on both the New York Stock Exchange
("NYSE") and the American Stock Exchange ("AMEX").
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 its principal office and
six regional offices.
The Asset Management area, through Bear Stearns Asset Management, had
approximately $13 billion in assets under management at November 26, 1999, which
reflected a 7.0% increase over June 30, 1999. The largest components of the
increase were attributable to alternative investments and mutual funds. Asset
Management serves the diverse investment needs of corporations, municipal
governments, multi-employer plans, foundations, endowments, family groups and
high-net-worth individuals.
Financial information regarding the Company's business segments and foreign
operations as of November 26, 1999 and June 30, 1999 and for the five-month
periods ended November 26, 1999 and November 27, 1998 is set forth under Item 8.
Financial Statements and Supplementary Data in Footnote 13 of Notes to
Consolidated Financial Statements, entitled "Segment and Geographic Area Data,"
included herein.
(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; involvement in specialist activity on both 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.
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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,
San Francisco and San Juan; from representative offices in Beijing, Sao Paulo,
Seoul and Shanghai; through international offices in Buenos Aires, Dublin, Hong
Kong, London, Lugano, 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 and clearance
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/or 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"), the National Futures Association ("NFA") and the
International Stock Exchange ("ISE"). 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"), 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 is
regulated in accordance with the rules of the Securities and Futures Authority
("SFA").
BSB is an Irish-based bank, which was incorporated in 1996 and subsequently
granted a banking license under the Irish Central Bank Act, 1971. BSB allows the
Company's existing and prospective clients the choice of dealing with a banking
counterparty.
As of November 26, 1999, the Company had 10,081 employees.
The following areas are included in the three business segments mentioned above
in Item 1(b).
INSTITUTIONAL EQUITIES
General. The Company provides customers with liquidity, trading expertise and
equity research in products such as domestic and international equities and
convertible securities.
Options 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
specific recommendations relating to options and index trading.
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Arbitrage. The Company engages for its own account in both "classic" and "risk"
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
future date, and (iv) between the prices of securities with contracts settling
on different 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 covering 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.
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 of approximately 1,250 stocks in over 100 industries including
54% of the stocks in the S&P 500. Ninety-eight equity analysts provide coverage
and recommendations relating to 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, 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 such fixed income 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 designated 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 principal and 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 activities, the Company enters into transactions in options, futures
and forward contracts to hedge such positions.
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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 and reverse
repurchase agreements. 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.
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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.
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 state
and local governments and authorities, as well as not-for-profit institutions.
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.
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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 the risks to which the Company is exposed in its various
businesses and through its 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 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 one of the leaders 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 securities.
F.A.S.T. offers the means to create and implement financial
strategies designed to maximize portfolio returns.
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(ii) High grade research consists of approximately 14 analysts and
researchers and provides coverage of over 30 industries and 700
companies.
(iii) High yield research consists of 26 analysts and researchers for
domestic issues and 10 analysts and researchers for international
issues, providing coverage for over 600 corporate and sovereign
issuers whose fixed income securities are non-investment grade.
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, leveraged and syndicated bank loans, leveraged
acquisitions, commercial real estate and other transaction specialties.
Mergers and Acquisitions. The Company is active in arranging various M&A
transactions for its clients. The Company participates in a broad range of
domestic and international assignments including acquisitions, divestitures,
strategic restructurings, proxy contests, leveraged buyouts, and defenses
against unsolicited takeovers.
Equity Offerings. The equity capital markets group focuses on providing
financing for issuers of equity and convertible equity securities in the public
markets. The group assists in the origination, and is responsible for the
structuring and execution of transactions for a broad range of clients.
High Yield Securities. The high yield securities group focuses on providing
financing in the public and private capital markets. The group is responsible
for originating, structuring, and executing high yield transactions across a
wide range of companies and industries, as well as managing client relationships
with both high yield corporate issuers and financial sponsors of leveraged
transactions.
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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.
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.
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.
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.
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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, 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 makes available to them a variety of
non-brokerage products and services on favorable terms enabling them to benefit
from the Company's centralized purchasing power.
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.
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CUSTOMER FINANCING AND SECURITIES LENDING ACTIVITIES
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, brokers call rate or LIBOR.
Securities Lending Activities. In connection with both its trading and brokerage
activities, the Company borrows and lends securities to brokers and dealers and
other trading entities to cover short sales and to complete transactions in
which customers have failed to deliver securities by settlement date.
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 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.
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SPECIALIST ACTIVITIES
The Company is a participant in a specialist unit on the NYSE and the AMEX that
as of November 26, 1999 performed specialist functions in approximately 172
NYSE-listed stocks as well as approximately 99 stocks and 52 options traded 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; the clearance of government securities for institutions
and dealers; the processing of mortgage and mortgage-related products, including
derivatives and collateralized mortgage obligations products; and margin
lending. At November 26, 1999, CTC held approximately $147.1 billion of assets
for clients, including institutional clients such as pension funds, mutual
funds, endowment funds, religious organizations and insurance companies.
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.
ASSET MANAGEMENT
The Company's asset management department manages equity and fixed income assets
for some of the leading corporate pension plans, public systems, endowments,
foundations, multi-employer plans, insurance companies, corporations, families
and high-net-worth individuals in the US. With over $13 billion in assets under
management at November 26, 1999, 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; emerging markets fixed income; cash
management; alternative investment strategies, including hedge funds, private
equity, venture capital and collateralized bond obligations; and wrap accounts.
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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, Income, High Yield Total Return, and
Emerging Markets Debt Portfolios.
ADMINISTRATION AND OPERATIONS
Administration and operations personnel, besides performing other functions, are
responsible for the processing of securities transactions; receipt,
identification and delivery of funds and securities; internal financial
controls; accounting functions; office services; the custody of customer
securities; and the overseeing of margin accounts of the Company and
correspondent organizations. The processing, settlement, and accounting for
transactions for the Company, correspondent organizations, and the customers of
correspondent organizations is handled by employees located in separate
operations offices in New York City and Whippany, New Jersey and, to a lesser
extent, the Company's offices worldwide.
The Company executes its own and correspondent transactions on 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 clearing activities to corporations, governments, institutions and
individual clients throughout the world. These international subsidiaries of the
Company 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. BSJL is also active in the local mortgage-backed
securities and distressed debt markets.
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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 sales and trading, international equity
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.
BSB, based in Dublin, allows the Company's existing and prospective clients the
choice of dealing with a banking counterparty. BSB also serves as a platform
from which the Company directs its international banking activities, gaining
easier access to worldwide markets, and thereby expanding its capacity to
increase its client base and product range. BSB engages in capital market
activities with particular focus on the trading and sales of OTC interest rate
derivative products.
COMPETITION
The Company encounters intense competition in all aspects of the securities
business and competes directly with other securities firms -- both domestic and
foreign -- many having substantially greater capital and resources and offering
a wider range of financial services than does the Company. Besides competition
from firms in the securities business, in recent years the Company has
experienced increasing competition from other sources, such as commercial banks
and insurance companies. The Company believes that the principal factors
affecting competition involve the caliber and abilities of professional
personnel, the relative 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.
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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 changes in
the interpretation or enforcement of existing laws and rules. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings that can result in censures, fines, the issuance of
cease-and-desist orders, and the suspension or expulsion of a broker-dealer or
an investment adviser, its officers or employees. The principal purpose of
regulation and discipline of broker-dealers and investment advisers is the
protection of customers and the securities markets, rather than the protection
of creditors and stockholders of broker-dealers or investment advisers. On
occasion, the Company's subsidiaries have been subject to routine investigations
and proceedings, and sanctions have been imposed for infractions of various
regulations, none of which, to date, has had a material adverse effect on the
Company or its business.
The Market Reform Act of 1990 (the "Market Reform Act") was adopted to
strengthen the SEC's regulatory oversight of the national securities markets and
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, nonpublic information.
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The Government Securities Act of 1986 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 the 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 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 its assets be kept in relatively liquid form.
Bear Stearns and BSSC are also subject to the net capital requirements of the
CFTC and various futures exchanges, which generally require that Bear Stearns
and BSSC maintain a minimum net capital equal to the greater of the alternative
net capital requirement provided for under the Exchange Act or 4% of the funds
required to be segregated under the Commodity Exchange Act and the regulations
promulgated thereunder.
Compliance with the Net Capital Rule could limit those operations of Bear
Stearns and/or BSSC that require significant capital usage, such as
underwriting, trading and the financing of customer margin-account debit
balances. The Net Capital Rule could also restrict the Company's ability to
withdraw capital from Bear Stearns or BSSC, which in turn could limit the
Company's ability to pay dividends, pay interest, repay debt, or redeem or
purchase shares of its outstanding capital stock. Additional information
regarding net-capital requirements is set forth under Item 8. Financial
Statements and Supplementary Data in Notes to Consolidated Financial Statements,
Footnote 7, entitled "Regulatory Requirements".
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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 accounts are fully protected by an excess
securities bond issued by the Travelers Casualty and Surety Company, up to the
amount of their 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 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. 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.
BSB is an Irish-based bank, which was incorporated in 1996 and subsequently
granted a banking license under the Irish Central Bank Act, 1971.
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The Company, like other securities firms, is directly affected by such things
as: national and international economic and political conditions, broad trends
in business and finance, legislation and regulations affecting the national and
international financial and business communities, currency values, the level and
volatility of interest rates, fluctuations in the volume and the price levels in
the securities and futures markets, competitive conditions, liquidity of global
markets and the size and timing of transactions. 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 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.
All information is as of November 26, 1999 unless otherwise noted.
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 320,000 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 offices in Atlanta, Boston, Chicago,
Dallas, Houston, Irving, Los Angeles, Philadelphia, Princeton and San Francisco
occupy an aggregate of approximately 593,000 square feet, while its ten foreign
offices occupy a total of approximately 164,000 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, compliance, personnel
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.
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The Company has entered into a lease arrangement with respect to the development
and building of an office tower at 383 Madison Avenue, New York, New York. This
tower will serve as its new world headquarters. The office tower under
construction will contain 1.2 million square feet and is scheduled to be
completed in advance of 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 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 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 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 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.
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Bear Stearns has denied all allegations of wrongdoing asserted against it in
this litigation and believes that it has substantial defenses to these claims.
A.R. Baron & Company, Inc. The following matters arise out of Bear Stearns' role
as clearing broker for A.R. Baron & Company, Inc. ("Baron") from July 20, 1995
through June 28, 1996.
(i) John Berwecky, et al. v. Bear, Stearns & Co. Inc., et al./Jack Perry
v. Bear, Stearns & Co. Inc., et al. On July 21 and August 22, 1997, shareholders
of companies whose securities were underwritten by, or that otherwise had some
relationship with Baron (these securities are referred to below as "Baron
securities") commenced two actions in the United States District Court for the
Southern District of New York against Bear Stearns, BSSC and a managing director
of Bear Stearns.
On January 13, 1998, the Berwecky and Perry cases were consolidated for all
purposes and lead plaintiffs and lead counsel for plaintiffs were appointed. On
April 1, 1998, an amended consolidated class action complaint was filed. As
amended, the complaint alleges, among other things, that Bear Stearns, BSSC, a
managing director of Bear Stearns and Baron engaged in a scheme to manipulate
the market for and to inflate the prices of the Baron securities. Plaintiffs
allege violations of Sections 10(b) and 20(a) of the 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.
On September 18, 2000, the court certified a class consisting of all persons who
acquired Baron securities from Baron between July 20, 1995 and June 28, 1996.
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) 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 of $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.
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Bear Stearns has denied all allegations of wrongdoing asserted against it in
these litigations, and believes that it has substantial defenses to these
claims.
(iii) 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.
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.
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.
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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.
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.
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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.
On July 11, 2000, the court approved an agreement among the parties to settle
this action.
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 Company's and Bear Stearns' motion to
dismiss the claims asserted against them in 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 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.
Named as defendants in each of these actions are Bear Stearns, BSSC and an
officer of BSSC. The complaints in these actions allege, 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.
25
<PAGE>
On April 5, 1999, the Goldberger and Bier actions were consolidated for all
purposes.
On October 22, 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.
Bear Stearns has denied all allegations of wrongdoing asserted against it in
this litigation, and believes that it has substantial defenses to these claims.
Kennilworth Partners LP, et al. v. Bear, Stearns Securities Corp., et al.
-------------------------------------------------------------------------
On May 2, 2000, Kennilworth Partners LP and Kennilworth Partners II LP commenced
a National Association of Securities Dealers ("NASD") arbitration proceeding
against Bear, Stearns Securities Corp. ("BSSC") and Bear, Stearns & Co. Inc.
Claimants allege that respondents committed breach of contract, breach of the
covenant of good faith and fair dealing, breach of fiduciary duty, common law
fraud and tortious interference with contract in connection with the provision
of clearing services to the claimants. Compensatory and punitive damages in
excess of $50 million are sought.
Bear Stearns and BSSC have denied all allegations of wrongdoing asserted against
them in this NASD arbitration proceeding, and believe that they have substantial
defenses to these claims.
Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc., et al.
---------------------------------------------------------
On June 25, 1996, a complaint was filed in the United States District Court for
the Southern District of New York by a former customer against Bear Stearns,
BSSC, Bear Stearns Forex Inc. and a registered representative. On November 4,
1996, an amended complaint was filed, 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.
On May 17, 2000, a jury returned a verdict finding that Bear Stearns, BSSC and
Bear Stearns Forex Inc. ("Forex") were liable to plaintiff for negligence and
awarded damages in the amount of $111,500,000. The jury also found that
defendants had not breached any fiduciary duties. On June 2, 2000, the court
also awarded pre-judgement interest of $52.3 million. Bear Stearns, BSSC and
Forex have filed appropriate motions to overturn the verdict in the district
court and if such motions are unsuccessful, plan to appeal the verdict.
26
<PAGE>
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 of 1933, as amended (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.
27
<PAGE>
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 Andersen LLP, and
certain present and former directors and/or officers of McKesson HBOC,
McKesson and/or HBOC. On March 31, 2000, plaintiffs filed an amended
complaint against the same defendants as were named in the original
complaint. As amended, 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. Compensatory and punitive damages in unspecified amounts
are sought.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
(ii) In re McKesson HBOC, Inc. Securities Litigation. Beginning on June
29, 1999, 53 purported class actions were commenced in the United States
District Court for the Northern District of California. On November 2, 1999,
these actions were consolidated, and on February 25, 2000, an amended
consolidated complaint was filed. Plaintiffs purport to represent a class
consisting of all persons who either (i) acquired publicly traded securities of
HBOC between January 20, 1997 and January 12, 1999, or (ii) acquired publicly
traded securities of McKesson or McKesson HBOC between October 18, 1998 and
April 27, 1999, and who held McKesson securities on November 27, 1998 and
January 22, 1999. Named as defendants are McKesson HBOC, certain present and
former directors and/or officers of McKesson HBOC, McKesson and/or HBOC, Bear
Stearns, and Arthur Andersen LLP. The complaint alleges, among other things,
that Bear Stearns 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.
On September 15, 2000, the court issued a tentative ruling granting defendants'
motion to dismiss the complaint. The court has not yet issued a final ruling.
Manhattan Investment Fund Limited
---------------------------------
The following matters arise out of the failure and subsequent bankruptcy filing
of Manhattan Investment Fund Limited ("MIFL").
28
<PAGE>
(i) Scotia Nominees, as nominees for L.C.O. Investments, Ltd. v. Michael
Berger, et al. On January 25, 2000, an action was commenced in the Supreme Court
of the State of New York, County of New York, by Scotia Nominees, a shareholder
of MIFL. On March 27, 2000, plaintiff filed an amended complaint. Named as
defendants in the amended complaint are MIFL, three directors of MIFL, Manhattan
Capital Management, Inc., Bear, Stearns Securities Corp. ("BSSC"), Deloitte &
Touche, and Fund Administration Services (Bermuda) Ltd. ("FASB"). The complaint
alleges, among other things, that BSSC committed breach of duty and aided and
abetted a breach of fiduciary duty by failing to alert the shareholders of MIFL
about false and misleading statements made by certain of the other defendants
related to the financial condition of MIFL. Compensatory damages in excess of $5
million are sought from Bear Stearns.
(ii) Cromer Finance Ltd. v. Michael Berger, et al. On March 24, 2000, a
purported class action was commenced in the United States District Court for the
Southern District of New York by Cromer Finance, Ltd., a shareholder of MIFL, on
behalf of a purported class consisting of all persons who purchased securities
of MIFL and suffered damages between September 1, 1996 through January 18, 2000.
On September 8, 2000, plaintiff filed an amended complaint. Named as defendants
are a director of MIFL, Deloitte & Touche, FASB, Ernst & Young LLP, and BSSC.
The complaint alleges, among other things, that BSSC aided and abetted common
law fraud in connection with providing clearing services for MIFL. Compensatory
and punitive damages in unspecified amounts are sought.
(iii) Argos, et al. v. Michael Berger, et al. On March 31, 2000, an action
was commenced in the United States District Court for the Southern District of
New York by 17 shareholders of MIFL. Named as defendants are a director of MIFL,
Financial Asset Management, Inc., FASB, Ernst & Young International, Deloitte &
Touche, Bear Stearns and BSSC. The complaint alleges, among other things, that
the Bear Stearns defendants aided and abetted a breach of fiduciary duty in
connection with BSSC providing clearing services and financing for MIFL.
Compensatory damages in excess of $53 million, and $1 billion in punitive
damages from each defendant, are sought.
On June 21, 2000, an amended complaint was filed adding nine shareholders of
Manhattan Investment Fund Limited as plaintiffs and asserting the same claims
against the same defendants as were named in the original complaint.
Compensatory damages in excess of $93.5 million, and $1 billion in punitive
damages from each defendant, are sought.
Bear Stearns denies all allegations of wrongdoing asserted against it in these
litigations, and believes that it has substantial defenses to these claims.
29
<PAGE>
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.
(ii) Levitt, et al. v. Bear Stearns, 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.
Bear Stearns denies all allegations of wrongdoing asserted against it in these
litigations, and believes that it has substantial defenses to these claims.
30
<PAGE>
In re Stewart Enterprises, Inc. Securities Litigation. Beginning on August 25,
1999, a series of purported class actions were commenced in the United States
District Court for the Eastern District of Louisiana, later consolidated under
the above caption. On December 13, 1999, a consolidated amended class action
complaint was filed. Named as defendants are Stewart Enterprises, Inc.
("Stewart"), three officers of Stewart, Bear Stearns, Merrill Lynch & Co. and
Johnson Rice & Company L.L.C. The complaint alleges, among other things, that
the defendants violated Sections 11 and 12(a)(2) of the Securities Act in
connection with certain allegedly false and misleading statements regarding
Stewart's business prospects contained in a prospectus for a public offering of
Stewart common stock. Plaintiffs purport to represent a class of all persons who
purchased Stewart stock pursuant to the offering. Plaintiffs seek compensatory
damages in an unspecified amount.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
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 June 30, 2000, Bear Stearns filed an answer to the complaint in which it
denied liability and asserted affirmative defenses.
Bear Stearns denies all allegations of wrong doing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
* * *
The Company or a subsidiary of the Company also has been named as a defendant in
numerous other civil actions arising out of its activities as a broker and
dealer in securities, as an underwriter, as an investment banker, as an employer
or arising out of alleged employee misconduct. Several of these actions allege
damages in large or indeterminate amounts, and some of these actions are class
actions. With respect to claims involving the Partnership, Bear Stearns has
assumed from the Partnership, and has agreed to indemnify the Partnership
against, the Partnership's liability, if any, arising out of all legal
proceedings to which the Partnership is or was named as a party. 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 affect on the results of
operations or the financial condition of the Company, taken as a whole.
Periodically, the Company also is involved from time to time in investigations
and proceedings by governmental and self-regulatory agencies.
31
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company held on October 28, 1999, the stockholders
of the Company approved amendments to the Capital Accumulation Plan for Senior
Managing Directors, an amendment to the Performance Compensation Plan, and the
adoption of the Stock Award Plan. In addition, at the Annual Meeting the
stockholders of the Company elected eleven directors to serve until the next
Annual Meeting of Stockholders or until successors are duly elected and
qualified.
The voting results for each of these matters was previously disclosed in the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 dividends declared on the Common
Stock in January 1999 and October 1999.
As of September 15, 2000, there were 2,511 holders of record of the Company's
Common Stock. On September 15, 2000, the last reported sales price of the
Company's Common Stock was $64 7/8.
Dividends are payable on January 15, April 15, July 15 and October 15 in each
year on the Company's outstanding Adjustable Rate Cumulative Preferred Stock,
Series A; Cumulative Preferred Stock, Series 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 Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations under the caption "Regulated Subsidiaries" and Item 8.
Financial Statements and Supplementary Data in Footnote 7 of Notes to
Consolidated Financial Statements, entitled "Regulatory Requirements" included
herein for a further description of the restrictions on dividends.
Cash
Dividends
Declared Per
Common Share
High Low
FOR THE PERIOD
July 1, 1999 through November 26, 1999 45 21/32 33 17/64 $0.29
July 1, 1998 through November 27, 1998 55 13/64 25 18/64 $0.27
32
<PAGE>
ITEM 6.
<TABLE>
The Bear Stearns Companies Inc.
SELECTED FINANCIAL DATA
<CAPTION>
FIVE-MONTHS ENDED
----------------- FISCAL YEARS
(UNAUDITED) ENDED JUNE 30,
in thousands, except share and employee data NOVEMBER 26, 1999 NOVEMBER 27, 1998 1999
----------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 3,470,290 $ 2,975,181 $ 7,882,038
Interest expense 1,531,787 1,650,885 3,379,914
Revenues, net of interest expense 1,938,503 1,324,296 4,502,124
Non-interest expenses
Employee compensation
and benefits 973,990 732,884 2,285,594
Other 510,921 401,684 1,152,422
Total non-interest expenses 1,484,911 1,134,568 3,438,016
Income before provision for
income taxes 453,592 189,728 1,064,108
Provision for income taxes 167,778 59,460 391,060
Net income $ 285,814 $ 130,268 $ 673,048
Net income applicable to
common shares $ 269,517 $ 113,654 $ 633,618
----------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
----------------------------------------------------------------------------------------------------------------
Total assets $162,037,962 $165,838,863 $153,894,340
Long-term borrowings $ 15,911,392 $ 13,761,425 $ 14,647,092
Stockholders' equity (1) $ 5,441,947 $ 4,309,672 $ 5,455,509
Common shares and common share
equivalents outstanding (2) 165,956,810 167,183,025 167,265,996
----------------------------------------------------------------------------------------------------------------
PER SHARE DATA
----------------------------------------------------------------------------------------------------------------
Earnings per share (2) (3) $ 1.78 $ 0.73 $ 4.26
Cash dividends declared per
common share (2) $ 0.29 $ 0.27 $ 0.56
Book value per common share (2) $ 26.93 $ 22.10 $ 25.60
----------------------------------------------------------------------------------------------------------------
OTHER DATA
----------------------------------------------------------------------------------------------------------------
Return on average common equity 16.6% 8.1% 18.8%
Profit margin (4) 23.4% 14.3% 23.6%
Employees 10,081 9,416 9,808
(continued)
33
<PAGE>
FISCAL YEARS ENDED JUNE 30,
in thousands, except share and employee data 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 7,979,936 $ 6,077,278 $ 4,963,863 $ 3,753,572
Interest expense 3,638,513 2,551,364 1,981,171 1,678,515
Revenues, net of interest expense 4,341,423 3,525,914 2,982,692 2,075,057
Non-interest expenses
Employee compensation
and benefits 2,111,741 1,726,931 1,469,448 1,080,487
Other 1,166,190 785,293 678,318 606,488
Total non-interest expenses 3,277,931 2,512,224 2,147,766 1,686,975
Income before provision for
income taxes 1,063,492 1,013,690 834,926 388,082
Provision for income taxes 403,063 400,360 344,288 147,471
Net income $ 660,429 $ 613,330 $ 490,638 $ 240,611
Net income applicable to
common shares $ 629,417 $ 589,497 $ 466,145 $ 215,474
----------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
----------------------------------------------------------------------------------------------------------------
Total assets $154,495,895 $121,433,535 $ 92,085,157 $ 74,597,160
Long-term borrowings $ 13,295,952 $ 8,120,328 $ 6,043,614 $ 4,059,944
Stockholders' equity (1) $ 4,641,533 $ 3,626,371 $ 2,895,414 $ 2,502,461
Common shares and common share
equivalents outstanding (2) 167,173,826 167,096,515 166,780,371 166,991,227
----------------------------------------------------------------------------------------------------------------
PER SHARE DATA
----------------------------------------------------------------------------------------------------------------
Earnings per share (2) (3) $ 4.17 $ 3.81 $ 2.96 $ 1.40
Cash dividends declared per
common share (2) $ 0.54 $ 0.52 $ 0.49 $ 0.47
Book value per common share (2) $ 21.64 $ 17.74 $ 14.54 $ 12.10
----------------------------------------------------------------------------------------------------------------
OTHER DATA
----------------------------------------------------------------------------------------------------------------
Return on average common equity 21.7% 27.9% 25.6% 13.5%
Profit margin (4) 24.4% 28.7% 28.0% 18.7%
Employees 9,180 8,309 7,749 7,481
</TABLE>
(1) As of November 26, 1999 and June 30, 1999, stockholders' equity includes
$500 million of Guaranteed Preferred Beneficial Interests in Company
Subordinated Debt Securities, which reflects preferred securities of Bear
Stearns Capital Trust I and Bear Stearns Capital Trust II. As of November
27, 1998, 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 ("EPICS") and $200 million of Guaranteed Preferred Beneficial
Interests in Company Subordinated Debt Securities. As of June 30, 1996 and
1995, stockholders' equity includes $150 million of EPICS, which were
issued by one of our subsidiaries.
(2) Adjusted to reflect all stock dividends declared through October 29, 1999.
(3) See Item 8. Financial Statements and Supplementary Data, 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.
34
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, which could
cause actual results to differ materially from those discussed in the
forward-looking statements.
The Company's principal business activities, investment banking, securities
trading and brokerage, are, by their nature, highly competitive and subject to
various risks, in particular volatile trading markets and fluctuations in the
volume of market activity. Consequently, the Company's net income and revenues
in the past have been, and are likely to continue to be, subject to wide
fluctuations, reflecting the impact of many factors, including securities market
conditions, the level and volatility of interest rates, competitive conditions,
liquidity of global markets, international and regional political events,
regulatory developments and the size and timing of transactions.
For a description of the Company's business, including its trading in cash
instruments and derivative products, its underwriting and trading policies, and
their respective risks, and the Company's risk management policies and
procedures, see Item 1. Business and Item 7A. Quantitative and Qualitative
Disclosures About Market Risk included herein.
BUSINESS ENVIRONMENT
The business environment during the Company's five-month period ended November
26, 1999 was characterized by strong US economic growth and low inflation, which
resulted in robust domestic equity markets and growth in both New York Stock
Exchange ("NYSE") and NASDAQ trading volume. In an effort to slow the nation's
economic growth and mitigate the risk of rising inflationary pressures, the
Federal Reserve raised the Federal Funds rate twice during the period by a total
of 50 basis points. For the five-months ended November 26, 1999, the Dow Jones
Industrial Average, Standard and Poor's 500 Index and NASDAQ Composite Index
increased 0.2%, 3.2% and 28.4%, respectively. These factors contributed to
strong equity underwriting and mergers and acquisitions activities. The fixed
income markets improved over the comparable prior year period, which had
reflected the impact of difficult market conditions in the Far East and emerging
markets. However, the fixed income markets in the 1999 period were characterized
by rising interest rates and reduced trading volume predominantly as a result of
uncertainty surrounding the Year 2000, which led to lower investor and issuer
activity.
35
<PAGE>
The first three months of the comparable 1998 period were marked by extreme
fixed income market volatility attributed to economic turmoil in the Far East
and emerging markets nations and the default by Russia on its debt obligations,
which 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 and resulted in a decline in liquidity
in the global markets. As a result, the Federal Reserve reduced the Federal
Funds rate on three occasions during the months of September, October and
November. The reduction in the Federal Funds rate by a total of 75 basis points,
coupled with the US economy's resilience, resulted in the recovery of US
financial markets in October 1998 and November 1998. Credit spreads tightened,
which led to improved, but still weak, conditions in both the primary and
secondary domestic fixed income markets. Rising domestic equity markets during
October 1998 and November 1998 reflected strong investor interest in the
internet and technology sectors.
RESULTS OF OPERATIONS
Five-Months Ended November 26, 1999 (Audited)
Compared to Five-Months Ended November 27, 1998 (Unaudited)
-----------------------------------------------------------
On January 18, 2000, the Company's Board of Directors approved a change in the
Company's fiscal year-end to November 30 from June 30, effective with the year
beginning November 27, 1999. The discussion that follows compares the results of
operations for the five-months ended November 26, 1999 (audited) to the
five-months ended November 27, 1998 (unaudited).
Net income for the five-months ended November 26, 1999 was $285.8 million, an
increase of 119.4% from $130.3 million for the comparable 1998 period. Net
revenues increased 46.4% to $1.9 billion in the 1999 period from $1.3 billion in
the 1998 period. The increase was primarily attributable to increased principal
transactions and investment banking revenues, as further discussed below.
Earnings per share were $1.78 for the 1999 period versus $0.73 for the
comparable 1998 period. Earnings per share amounts for all periods reflect the
adjustment for stock dividends declared by the Company in January 1999 and
October 1999.
Commission revenues increased 2.0% in the 1999 period to $419.6 million from
$411.2 million in the comparable 1998 period. This increase was primarily
attributable to higher commissions earned in the clearance area due to higher
customer activity and increases in average daily volume in the 1999 period when
compared to the 1998 period. The increase was also attributable to increased
revenues from the institutional area, partially offset by a decrease in futures
commissions in the 1999 period when compared to the 1998 period.
36
<PAGE>
The Company's principal transactions revenues by reporting categories, including
derivatives, are as follows (in thousands):
Five-Months Ended Five-Months Ended
November 26, 1999 November 27, 1998
-------------------- -----------------
(UNAUDITED)
Fixed Income $366,359 $171,245
Equity 223,266 151,036
Foreign Exchange & Other
Derivative Financial 156,054 74,764
Instruments ------- ------
$745,679 $397,045
======== ========
Revenues from principal transactions increased 87.8% in the 1999 period to
$745.7 million from $397.0 million in the comparable 1998 period. This increase
reflects increased revenues derived from each of the Company's reporting
categories. Revenues derived from fixed income activities increased as a result
of increases in revenues in the high yield, mortgage-backed securities,
corporate bonds and emerging markets areas. The 1998 period reflects decreased
activities due to the volatility experienced in the equity and fixed income
markets and the widening of credit spreads during the early months of the
period. These conditions led to the declines in revenues derived from several
business areas including the high yield, emerging markets and corporate bonds
areas. Revenues derived from both equity and fixed income derivatives increased
due to strong market conditions and customer flow. Revenues derived from equity
activities also increased in the 1999 period as a result of increases in
revenues in the arbitrage and over-the-counter stock areas.
Investment banking revenues increased 99.5% to $434.4 million in the 1999 period
from $217.7 million in the comparable 1998 period. The increase is principally
attributable to higher equity underwriting revenues reflecting a strong domestic
equity underwriting calendar and mergers and acquisitions revenues earned during
the 1999 period compared to the weak levels and relative inactivity in the
comparable 1998 period. Equity underwriting revenues increased 279.3%, due to a
strong volume of technology-related IPOs. Revenues from merchant banking
activities also increased reflecting gains realized from certain of the
Company's investments.
Net interest and dividends increased 4.9% to $278.8 million in the 1999 period
from $265.9 million in the comparable 1998 period. The increase was primarily
attributable to increased levels of customer margin debt. The increase in net
interest profit was partially offset by generally higher funding costs incurred
by the Company as debt maturities were extended into the Year 2000. Customer
margin debt at November 26, 1999 approximated $51.4 billion compared to $40.2
billion at November 27, 1998. Average customer margin debt increased to $43.8
billion in the 1999 period from $41.6 billion in the comparable 1998 period.
Average customer shorts decreased to $57.6 billion in the 1999 period from $62.9
billion in the comparable 1998 period. Average free credit balances increased to
$13.0 billion in the 1999 period from $12.8 billion in the comparable 1998
period.
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Employee compensation and benefits increased 32.9% to $974.0 million in the 1999
period from $732.9 million in the comparable 1998 period. The increase in
employee compensation and benefits was primarily attributable to an increase in
incentive and discretionary bonus accruals related to increased net revenues and
earnings in the 1999 period as well as an increase in headcount. Employee
compensation and benefits, as a percentage of net revenues, decreased to 50.2%
in the 1999 period from 55.3% in the comparable 1998 period primarily due to
improved five-month net revenue performance.
All other expenses increased 27.2% to $510.9 million in the 1999 period from
$401.7 million in the comparable 1998 period. CAP Plan expense increased by
$31.8 million in the 1999 period from the comparable 1998 period, reflecting
higher pre-tax earnings. Data processing, communications and depreciation
increased $36.5 million or 27.7% as a result of both increased usage and the
upgrading of existing communication and computer systems. EDP professional fees
increased by $11.8 million in the 1999 period due to various technology
initiatives, including the Year 2000 issue, which accounted for $5.0 million of
the increase in the 1999 period.
The Company's effective tax rate increased to 37.0% in the 1999 period compared
to 31.3% in the comparable 1998 period due to higher levels of earnings and a
lower level of tax preference items in the 1999 period.
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.
The following segment operating results exclude certain corporate items. See
Item 8. Financial Statements and Supplementary Data, Note 13, footnote (a) of
Notes to Consolidated Financial Statements.
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Five-Months Ended November 26, 1999
Compared to Five-Months Ended November 27, 1998
-----------------------------------------------
CAPITAL MARKETS
------------------------------------------------------------------
Five-Months End
Five-Months Ended November 27, 1998
In thousands November 26, 1999 (Unaudited)
------------------------------------------------------------------
Net revenues $ 1,017,482 $ 519,661
Pre-tax income (loss) 322,155 (49,539)
------------------------------------------------------------------
Net revenues for Capital Markets approximated $1.0 billion in the 1999 period,
up 95.8% from $519.7 million in the comparable 1998 period. Pre-tax income for
Capital Markets was $322.2 million in the 1999 period, up from a loss of $49.5
million in the comparable 1998 period. Fixed income results in the 1999 period
improved over the 1998 period due to improved results in the Company's high
yield, derivatives, mortgage-backed securities and corporate bonds operations.
Fixed income results in the 1998 period were adversely impacted as a result of
market volatility resulting from the dislocation in the emerging markets areas.
The default by Russia in its sovereign debt resulted in dramatic spread widening
across the various fixed income asset classes and dramatically reduced levels of
customer activity. Equity results improved in the 1999 period as active markets
and strong deal flow resulted in improved performances from equity derivatives,
risk arbitrage and block trading. Investment banking revenues increased sharply
in the 1999 period reflecting strong levels of equity underwriting activity, as
well as increases in merchant banking and mergers and acquisitions activities.
Investment banking revenues in the 1998 period were significantly lower than the
1999 period reflecting the weakness in the fixed income and equity markets
during the period which resulted in a substantial decline in new issue and
mergers and acquisitions activity.
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EXECUTION SERVICES
---------------------------------------------------------------
Five-Months Ended Five-Months Ended
In thousands November 26, 1999 November 27, 1998
(Unaudited)
----------------------------------------------------------------
Net revenues $ 566,995 $ 499,857
Pre-tax income 210,704 203,635
----------------------------------------------------------------
At November 26, 1999, the Company provided clearing, margin lending and
securities borrowing to facilitate customer short sales to approximately 2,800
clearing clients worldwide. Such clients include approximately 2,400 prime
brokerage clients including hedge funds and clients of 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 processed an average of in excess of 192,000
trades per day during the 1999 period versus approximately 160,000 trades per
day in the comparable 1998 period.
Net revenues for Execution Services approximated $567.0 million in the 1999
period, up 13.4% from $499.9 million in the comparable 1998 period. Pre-tax
income for Execution Services was $210.7 million in the 1999 period, up 3.5%
from $203.6 million in the comparable 1998 period. Results reflect improved
domestic and European sales volume which benefited the Company's institutional
equity business. In addition, increased levels of customer margin debt and
transaction volumes benefited the Company's clearance revenues. Partially
offsetting these revenue increases were increased data processing expenses
corresponding to systems development initiated in the clearance area.
WEALTH MANAGEMENT
--------------------------------------------------------------
Five-Months Ended Five-Months Ended
November 26, 1999 November 27, 1998
In thousands
(Unaudited)
--------------------------------------------------------------
Net revenues $ 269,028 $ 212,144
Pre-tax income 52,340 31,247
--------------------------------------------------------------
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.
PCS held approximately $41.0 billion in client assets at November 26, 1999, an
increase of 16.8% compared to November 27, 1998.
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The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"),
had approximately $13.0 billion in assets under management at November 26, 1999
which reflected a 29.4% increase over November 27, 1998. The largest components
of the increase were attributable to alternative investments and mutual funds.
Alternative investments include mortgage hedge funds which increased 454.6% from
the 1998 period, and equity hedge funds which increased 74.9% from the 1998
period, as well as real estate and venture capital investments. Asset Management
serves the diverse investment needs of corporations, municipal governments,
multi-employer plans, foundations, endowments, family groups and high-net-worth
individuals.
Net revenues for Wealth Management were $269.0 million in the 1999 period, up
26.8% from $212.1 million in the comparable 1998 period. Pre-tax income for
Wealth Management was $52.3 million in the 1999 period, up 67.5% from $31.2
million in the comparable 1998 period. Growth in assets under management, active
equity markets and strong customer volumes resulted in the increase in
management fees and commissions in the 1999 period. Strong performances by
certain of the Company's managed funds led to sharp increases in incentive-based
fees during the period.
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. The
Company's total assets and financial leverage can fluctuate significantly,
depending largely upon economic and market conditions, volume of activity,
customer demand and underwriting commitments.
The Company's total assets at November 26, 1999 increased to $162.0 billion from
$153.9 billion at June 30, 1999. The increase is primarily attributable to an
increase in securities borrowed, securities purchased under agreements to resell
and receivables from customers.
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The Company's ability to support increases in total assets is a function of its
ability to obtain short-term secured and unsecured funding and its access to
sources of long-term capital in the form of long-term borrowings and equity,
which together form its capital base. The Company continuously monitors the
adequacy of its capital base, which is a function of asset quality and
liquidity. Highly liquid assets, such as US government and agency securities,
typically are funded by the use of repurchase agreements, 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 an agreement
to 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 debt,
including medium-term notes, as a longer-term source of unsecured financing.
During the five-months ended November 26, 1999, the Company received proceeds
approximating $1.9 billion from the issuance of long-term debt which, net of
retirements, served to increase long-term debt to $15.9 billion at November 26,
1999 from $14.6 billion at June 30, 1999.
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 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.
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Through this analysis, the Company can continuously evaluate the adequacy of its
equity base and the schedule of maturing term-debt supporting its present asset
levels. The Company can then seek to adjust its maturity schedule, in light of
market conditions and funding alternatives.
The Company has in place a committed revolving-credit facility (the "facility")
totaling $3.225 billion, which permits borrowing on a secured basis by Bear,
Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC") and
certain affiliates. The facility also provides that the Company may borrow up to
$1.6125 billion of the facility 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 2000 with
all loans outstanding at that date payable no later than October 2001. The
Company expects to renew such facility upon expiration. There were no borrowings
outstanding under the facility at November 26, 1999.
In August 2000, the Company established a $1.25 billion committed revolving
securities repo facility (the "repo facility") which permits borrowings, under a
repurchase arrangement, by Bear, Stearns International Limited ("BSIL"), Bear
Stearns International Trading Limited ("BSIT") and Bear Stearns Bank plc
("BSB"). The repo facility terminates in August 2001 with all repos outstanding
at that date payable no later than August 2002.
CAPITAL RESOURCES
The Company conducts a substantial portion of all of its operating activities
within its regulated subsidiaries Bear Stearns, BSSC, BSIL, BSIT and BSB. In
connection therewith, a substantial portion of the Company's long-term
borrowings and equity have 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.
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<PAGE>
Long-term debt totaling $12.3 billion and $11.9 billion had remaining maturities
beyond one year at November 26, 1999 and June 30, 1999, respectively.
At November 26, 1999, the Company's long-term/short-term debt ratings were as
follows:
Moody's Investors Service A2/P-1
Standard & Poor's A/A-1
Fitch IBCA A+/F1
Thomson BankWatch AA-/TBW-1
Duff & Phelps Credit Rating A+/D-1+
Japan Bond Research Institute A+
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. During the five-months ended November 26, 1999, the Company
repurchased a total of 6,936,936 shares of Common Stock through open market
transactions in connection with the CAP Plan at a cost of approximately $272.0
million. The Company intends, subject to market conditions, to continue to
purchase, in future periods, a sufficient number of shares of Common Stock in
the open market to enable the Company to issue shares with respect to all
compensation deferred, including any amounts credited to CAP Plan cash accounts,
and any additional amounts allocated to participants under the CAP Plan.
On October 28, 1999, the stockholders of the Company approved the Company's
Stock Award Plan (the "Stock Award Plan"). The purpose of the Stock Award Plan
is to secure for the Company and its stockholders the benefits of the additional
incentive, inherent in the ownership of the Company's stock, by selected key
employees of the Company who are important to the success and growth of the
business. See Item 8. Financial Statements and Supplementary Data, Note 10 of
Notes to Consolidated Financial Statements.
Separately, on January 18, 2000, the Board of Directors of the Company approved
an amendment to the Stock Repurchase Program (the "Repurchase Program") to allow
the Company to purchase (in addition to any shares purchased under a previous
repurchase authorization) up to $500 million in aggregate cost of Common Stock.
Purchases under the Repurchase Program may be made periodically in fiscal year
2000 or beyond either in the open market or through privately negotiated
transactions. During the five-months ended November 26, 1999, the Company
purchased, under the previous repurchase program authorization, a total of
1,312,500 shares of Common Stock through open market transactions at a cost of
approximately $45.6 million. Purchases of Common Stock pursuant to the CAP Plan
are not made pursuant to the Repurchase Program and are not included in
calculating the remaining number of shares of Common Stock that the Company may
purchase under such program.
44
<PAGE>
CASH FLOWS
Cash and cash equivalents decreased by $558.6 million during the five-months
ended November 26, 1999. Cash used in operating activities during the
five-months ended November 26, 1999 was $794.6 million, primarily due to
increases in securities borrowed, securities purchased under agreements to
resell and customer receivables. Financing activities provided cash of $246.3
million, primarily derived from proceeds from the issuance of long-term
borrowings, partially offset by payments for the retirement of short-term and
long-term borrowings, as well as purchases of treasury stock. Cash used in
investing activities of $10.3 million was primarily attributable to purchases of
property, equipment and leasehold improvements, offset by net proceeds from
sales of investment securities and other assets.
REGULATED SUBSIDIARIES
As registered broker-dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Exchange Act, the NYSE, 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 1986.
Additionally, BSB is subject to the regulatory capital requirements of the
Central Bank of Ireland. At November 26, 1999 Bear Stearns, BSSC, BSIL, BSIT,
and BSB were in compliance with their respective regulatory capital
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 Item 8. Financial Statements and
Supplementary Data, Note 7 of Notes to Consolidated Financial Statements.
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 November 26, 1999, the Company's aggregate investments in
leveraged transactions and its exposure related to any one transaction was not
material to the Company's consolidated financial position.
45
<PAGE>
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, non-investment-grade commercial
loans and securities of companies that are the subject of pending bankruptcy
proceedings (collectively "high yield investments"). Non-investment-grade
mortgage loans are principally secured by residential properties and include
both non-performing loans and real estate owned. At November 26, 1999 the
Company held high yield instruments of $1.5 billion owned and $0.3 billion sold
short, as compared to $1.4 billion owned and $0.2 billion sold short as of June
30, 1999.
These investments generally involve greater risk than investment-grade debt
securities due to credit considerations, illiquidity of secondary trading
markets, and increased vulnerability to general economic conditions.
The level of the Company's high yield investment 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 investment 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 indexed referenced warrants, can
be traded on an exchange. Other derivatives, such as interest rate and currency
swaps, caps, floors, collars, and swaptions, equity swaps and options,
structured notes, and forward contracts, are negotiated in the over-the-counter
markets. Derivatives generate both on-balance-sheet 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.
46
<PAGE>
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 either
a termination or continuation structure.
As of November 26, 1999 and June 30, 1999, the Company had notional/contract
amounts of $622.3 billion and $551.0 billion, respectively, of derivative
financial instruments, of which $121.1 billion and $104.0 billion, respectively,
were listed futures and option contracts. The aggregate notional/contract value
of derivative contracts is a reflection of the level of activity and does not
represent the amounts that are recorded in the Consolidated Statements of
Financial Condition. The Company's derivative financial instruments 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 $22.4
million and $9.9 million during the five-months ended November 26, 1999 and
November 27, 1998, respectively.
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, information technology 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.
47
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
OVERALL
The Company's principal business activities by their nature engender significant
market and credit risks. In addition, the Company is also subject to operating
risk and funding risk. 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 Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the caption "Liquidity and Capital Resources," included herein.
Managing risk at the Company begins first and foremost with the expertise and
experience of trading department management. Senior Managing Directors in each
department have extensive knowledge of the markets and activities in which they
do business. Their experience and insight are supplemented by risk management
policies and procedures intended to monitor and evaluate the Company's risk
profile.
The cornerstone of the Company's risk management practices is constant
communication between trading department management and senior management
concerning inventory positions and market risk profile. This process, which
occurs on a daily basis, culminates each week with the trading departments
making formal reports of positions, profits and losses, and trading strategies
to Bear Stearns' Risk Committee (the "Risk Committee"). The Risk Committee,
comprised of Senior Managing Directors from each of the various trading
departments 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.
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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.
Bear Stearns' Credit Policy Committee and its subcommittee, the Global Credit
Committee, establish and review appropriate credit limits for institutional
customers. The Credit Policy Committee is primarily composed of Senior Managing
Directors who are generally not involved in the operations of the departments
seeking credit approval for customers. The Credit Policy Committee meets
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.
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, investment 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.
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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
November 26, 1999, 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 borrowing, swaps, options, forwards and futures.
50
<PAGE>
EQUITY PRICE RISK
The Company is exposed to equity price risk as a consequence of making markets
in equity securities and equity derivatives. Equity price risk results from
changes in the level or volatility of equity prices, which affect the value of
equity securities or instruments that derive their value from a particular
stock, a basket of stocks or a stock index. The Company attempts to reduce the
risk of loss inherent in its inventory of equity securities by entering into
hedging transactions, including equity options, designed to mitigate the
Company's market risk profile.
VALUE AT RISK
The estimation of potential losses that could arise from changes in market
conditions is typically accomplished through the use of statistical models,
which 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 which may trigger a
potential loss in excess of the amounts previously disclosed if the changes in
market rates or prices exceed the confidence level of the model used. Therefore,
such models do not substitute for the experience or judgment of senior
management and traders, who have extensive knowledge of the markets and adjust
positions and revise strategies, as they deem necessary. The Company uses these
models only as a supplement to other risk management tools. Additionally, the
Company continuously evaluates and enhances such value at risk models in an
effort to more accurately measure risk of loss based on historical price and
volatility patterns.
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 not reported separately because the
amounts were not material. The calculation is based on a methodology, which uses
a one-day interval and a 95% confidence level. Interest rate and foreign
exchange rate risk use a "Monte Carlo" value at risk approach. 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.
51
<PAGE>
Equity derivatives were treated as correlated with various indexes, of which the
Company used approximately fifty. Parameter estimates, such as volatilities and
correlations, were based on daily tests through November 26, 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.
The following table illustrates the Company's value at risk for each component
of market risk as of November 26, 1999 and June 30, 1999 and the average value
at risk for the five-month period ended November 26, 1999 calculated on a
monthly basis:
Average
November 26, June 30, Five-Months Ended
In millions 1999 1999 November 26,1999
----------- ---- ---- -----------------
MARKET RISK
Interest $ 11.9 $ 9.3 $ 10.8
Currency 1.2 1.3 1.4
Equity 12.6 11.3 12.3
Diversification benefit (8.4) (7.2) (8.0)
------- ------- ---------
Total $ 17.3 $ 14.7 $ 16.5
======== ======= =========
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.
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
five-months ended November 26, 1999 and November 27, 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 $7.2 million and $3.7 million for
the five-months ended November 26, 1999 and November 27, 1998, respectively.
Daily trading losses exceeded the reported value at risk amounts less than 5% of
the total trading days during the five-months ended November 26, 1999 and
November 27, 1998. The range of daily trading profit volatility reflects the
Company's historical ability to manage its exposure to market risk and the
diversified nature of its trading activities.
52
<PAGE>
------------------------------------------------------------------------------
DAILY TRADING PROFIT FREQUENCY DISTRIBUTION
------------------------------------------------------------------------------
[Vertical bar graphs of Frequency (y-axis) versus Daily Trading Profit (Loss)
(x-axis) representing the following information appear here in paper format]
Five-Months Ended November 26, 1999
Daily Trading Frequency
Profit (Loss) (Number of
($ in millions) Trading Days)
(5) 1
(3) 2
(2) 2
(1) 2
0 7
1 1
2 4
3 9
4 6
5 9
6 10
7 8
8 5
9 6
10 5
11 4
12 4
13 2
14 5
15 2
16 5
17 1
18 1
20 1
21 1
23 1
53
<PAGE>
Five-Months Ended November 27, 1998
Daily Trading Frequency
Profit (Loss) (Number of
($ in millions) Trading Days)
(47) 1
(29) 1
(25) 2
(13) 1
(12) 1
(11) 1
(10) 3
(9) 1
(8) 1
(6) 2
(5) 2
(4) 2
(3) 5
(2) 1
(1) 2
0 5
1 4
2 5
3 7
4 3
5 7
6 7
7 6
8 7
9 3
10 8
11 1
12 3
13 5
14 2
15 3
16 2
17 1
20 1
24 1
54
<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 firm's Principal Activities Committee,
consisting of senior investment banking, capital markets, credit and risk
management professionals, reviews and approves loan underwriting proposals.
Certain leveraged loan commitments, as well as large or unusual credit
extensions, are referred for approval to the firm's Executive Committee. 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, San
Francisco, 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 November 26, 1999 and June 30, 1999 was $1.5 billion and
$1.2 billion, respectively. Exchange-traded financial instruments are guaranteed
by the clearing organization and have minimal credit risk due to margin
requirements.
55
<PAGE>
The Company establishes potential exposure limits across a variety of financing
and trading products for all counterparties on a group and individual entity
basis. Potential exposure is the statistically estimated net credit exposure
associated with adverse market moves over the life of contracts at a 97.7%
confidence interval. For over-the-counter derivative and foreign exchange
contracts, the potential exposure is estimated daily using sophisticated
internally developed risk models that employ Monte Carlo simulations. Potential
exposure estimates consider the size and maturity of contracts; the volatility
of, and correlations among, the underlying assets, indexes, and currencies;
settlement mechanisms; rights to demand additional collateral, and other legally
enforceable credit mitigants, such as third-party guarantees or insurance. For
other credit-sensitive fixed income products, potential exposure limits are
converted to notional amounts using appropriate risk factors.
The Company establishes country concentration limits and monitors actual and
potential exposures, including both position and counterparty exposures, in
emerging markets. The Sovereign Risk unit evaluates international macroeconomic
conditions and recommends country concentration limits. The Company limits and
monitors its exposure to sovereign default, devaluation and inconvertibility of
local currencies.
The Margin Department is responsible for evaluating the risk of extending to the
Company's customers loans secured by certain marketable securities. The
department evaluates the creditworthiness of the borrower as well as the
acceptability of collateral and actively monitors to ensure that collateral
received meets regulatory and internal requirements. The Special Credit Services
unit evaluates and sets terms for loans secured by restricted or control stock,
emerging markets securities, and concentrated or less-liquid securities.
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.
56
<PAGE>
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 leverage if their portfolios satisfy
the internal risk parameters.
Client portfolios are analyzed and evaluated daily through extensive simulation
analysis designed to estimate market-related risk. Using its internally
developed risk management system known as RACS (Risk Analytic Control System),
the Department is able to analyze every professional client's portfolio prior to
each market open as well as on an intra-day basis. RACS uses scenario analysis
to estimate market risk through extensive stress testing. All client positions
are simulated across two hundred different scenarios resulting in a wide variety
of potential profit and loss possibilities. Some basic assumptions used in the
analysis are minimum portfolio moves of 20% as well as minimum moves in
individual securities of 25% or more. Other scenarios include price movement
tests of 1 and 2 standard deviations, fixed percentage moves, beta-weighted and
market-capitalization-driven extreme price moves. Scenarios are constructed in
such a way as to assess position and portfolio sensitivities to changes in
underlying prices, volatilities, interest rates, credit spreads, currency cross
rates and forward time horizons. In addition to client-level security and
portfolio analysis, the system produces over 40 various reports that provide
multi-dimensional views that include industry exposures, country/region
exposures, and security concentration and liquidity risk. The system hardware is
redundant, staffed 24 hours a day and supported by a dedicated staff of
programmers and financial engineers.
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.
57
<PAGE>
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 and 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.
58
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished pursuant to this item includes the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements which appear on pages 60-86 hereof.
THE BEAR STEARNS COMPANIES INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS 14(A)(1) AND 14(A)(2)
FINANCIAL STATEMENTS PAGE REFERENCE
--------------------
Independent Auditors' Report 87
THE BEAR STEARNS COMPANIES, INC.
--------------------------------
(i) Consolidated Statements of Income- five-months ended 62
November 26, 1999 and November 27, 1998
(ii) Consolidated Statements of Financial Condition at
November 26, 1999 and June 30, 1999 60-61
(iii) Consolidated Statements of Cash Flows- five-months 63
ended November 26, 1999 and November 27, 1998
(iv) Consolidated Statements of Changes in 64
Stockholders' Equity- five-months ended November
26, 1999
(v) Notes to Consolidated Financial Statements 65-86
FINANCIAL STATEMENT SCHEDULES
-----------------------------
Independent Auditors' Report 110
I Condensed financial information of registrant 111-114
All other schedules are omitted because they are not applicable or the
requested information is included in the consolidated financial statements
or notes thereto.
59
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
ASSETS
NOVEMBER 26, JUNE 30,
1999 1999
------------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents $ 1,570,483 $ 2,129,080
Cash and securities deposited with clearing organizations
or segregated in compliance with federal regulations 1,188,788 2,891,397
Securities purchased under agreements to resell 35,999,998 32,996,226
Receivable for securities provided as collateral 2,571,404 1,735,293
Securities borrowed 60,429,297 54,173,726
Receivables:
Customers 16,839,040 14,510,628
Brokers, dealers and others 542,038 1,452,590
Interest and dividends 422,402 366,110
Financial instruments owned, at fair value 40,764,802 41,942,878
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization 504,040 486,735
Other assets 1,205,670 1,209,677
------------------------- -------------------
Total Assets $162,037,962 $ 153,894,340
========================= ===================
See Notes to Consolidated Financial Statements.
</TABLE>
60
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
NOVEMBER 26, JUNE 30,
1999 1999
------------------ -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Short-term borrowings $ 13,424,201 $ 14,145,410
Securities sold under agreements to repurchase 53,323,109 50,673,644
Obligation to return securities received as collateral 3,999,229 1,944,286
Payables:
Customers 42,843,757 40,822,913
Brokers, dealers and others 5,596,577 2,195,691
Interest and dividends 532,023 542,478
Financial instruments sold, but not
yet purchased, at fair value 19,704,921 21,506,372
Accrued employee compensation and benefits 733,241 1,306,357
Other liabilities and accrued expenses 527,565 654,588
------------------ -----------------
140,684,623 133,791,739
------------------ -----------------
Commitments and contingencies
Long-term borrowings 15,911,392 14,647,092
------------------ -----------------
Guaranteed Preferred Beneficial Interests in Company
Subordinated Debt Securities 500,000 500,000
------------------ -----------------
Stockholders' Equity
Preferred Stock 800,000 800,000
Common Stock, $1.00 par value;
200,000,000 shares authorized;
184,805,848 and 176,011,113 shares issued at
November 26, 1999 and June 30, 1999, respectively 184,806 176,011
Paid-in capital 2,509,801 2,269,927
Retained earnings 1,916,516 1,931,957
Capital Accumulation Plan 1,179,101 1,144,329
Treasury stock, at cost;
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,520,750 shares (103,421) (103,421)
Common Stock - 66,367,276 shares and 56,333,508
shares at November 26, 1999 and June 30, 1999, respectively (1,544,856) (1,263,294)
------------------ -----------------
Total Stockholders' Equity 4,941,947 4,955,509
------------------ -----------------
Total Liabilities and Stockholders' Equity $162,037,962 $ 153,894,340
================== =================
See Notes to Consolidated Financial Statements.
</TABLE>
61
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
FIVE-MONTHS ENDED
---------------------------------------------
NOVEMBER 26, NOVEMBER 27,
1999 1998
------------------ -----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues
<S> <C> <C>
Commissions $ 419,619 $ 411,204
Principal transactions 745,679 397,045
Investment banking 434,410 217,711
Interest and dividends 1,810,598 1,916,799
Other income 59,984 32,422
------------------ -----------------
Total Revenues 3,470,290 2,975,181
Interest expense 1,531,787 1,650,885
------------------ -----------------
Revenues, net of interest expense 1,938,503 1,324,296
------------------ -----------------
Non-interest expenses
Employee compensation and benefits 973,990 732,884
Floor brokerage, exchange
and clearance fees 63,088 71,335
Communications 65,445 57,440
Depreciation and amortization 62,714 54,281
Occupancy 45,414 43,372
Advertising and market development 39,927 38,234
Data processing and equipment 39,709 19,683
Other expenses 194,624 117,339
------------------ -----------------
Total non-interest expenses 1,484,911 1,134,568
------------------ -----------------
Income before provision for income taxes 453,592 189,728
Provision for income taxes 167,778 59,460
------------------ -----------------
Net income $ 285,814 $ 130,268
================== =================
Net income applicable to common shares $ 269,517 $ 113,654
================== =================
Earnings per share (1) $ 1.78 $ 0.73
================== =================
Weighted average common and common
equivalent shares outstanding (1) 165,584,457 167,240,877
================== =================
Cash dividends declared per common share (1) $ 0.29 $ 0.27
================== =================
(1) Reflects all stock dividends declared through October 29, 1999.
See Notes to Consolidated Financial Statements.
</TABLE>
62
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
FIVE-MONTHS ENDED
------------------------------------------
NOVEMBER 26, NOVEMBER 27,
1999 1998
-------------------- -----------------
(UNAUDITED)
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 285,814 $ 130,268
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization 62,714 54,281
Deferred income taxes (91,209) (15,719)
Other 22,506 26,179
Decreases (increases) in operating assets:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations 1,702,609 (1,745,518)
Securities purchased under agreements to resell (3,003,772) (6,881,984)
Securities borrowed (6,255,571) (4,003,150)
Receivables:
Customers (2,328,412) 3,446,752
Brokers, dealers and others 910,552 195,373
Financial instruments owned 2,396,908 (849,513)
Other assets (2) 330,658
Increases (decreases) in operating liabilities:
Securities sold under agreements to repurchase 2,649,465 16,621,746
Payables:
Customers 2,020,844 4,140,575
Brokers, dealers and others 3,394,914 (2,800,058)
Financial instruments sold, but not yet purchased (1,801,451) (3,567,784)
Accrued employee compensation and benefits (618,866) (742,307)
Other liabilities and accrued expenses (141,618) 499,260
-------------------- -----------------
Cash (used in) provided by operating activities (794,575) 4,839,059
-------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term borrowings (721,209) (2,689,879)
Net proceeds from issuance of long-term borrowings 1,942,107 1,481,606
Capital Accumulation Plan 70,406 153,785
Tax benefit of Common Stock distributions 2,568 1,053
Payments for:
Retirement of long-term borrowings (681,751) (1,042,180)
Treasury stock purchases (311,289) (209,057)
Cash dividends paid (54,548) (53,691)
-------------------- -----------------
Cash provided by (used in) financing activities 246,284 (2,358,363)
-------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (80,019) (69,206)
Purchases of investment securities and other assets (24,546) (19,870)
Proceeds from sales of investment securities and other assets 94,259 30,459
-------------------- -----------------
Cash used in investing activities (10,306) (58,617)
-------------------- -----------------
Net (decrease) increase in cash and cash equivalents (558,597) 2,422,079
Cash and cash equivalents, beginning of period 2,129,080 1,073,821
-------------------- -----------------
Cash and cash equivalents, end of period $ 1,570,483 $ 3,495,900
==================== =================
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.
</TABLE>
63
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Common
Stock Capital
Preferred $1 Par Paid-In Retained Accumulation
In thousands, except share data Stock Value Capital Earnings Plan
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1999 $ 800,000 $ 176,011 $ 2,269,927 $ 1,931,957 $ 1,144,329
Net income 285,814
Cash dividends declared--
Common ($0.29 per share) (34,992)
Preferred (19,556)
Purchase of treasury stock--
Common Stock
(8,249,436 shares)
Common Stock issued out of
treasury (1,032,382 shares) 89 (35,634)
Income tax benefits attributable
to Common Stock issued out of treasury 2,415
5% Stock dividend (8,794,735
shares) 8,795 237,912 (246,707)
Allocation under Capital
Accumulation Plan 70,406
Amortization of preferred
stock issue costs (542)
-------------- ------------ --------------- --------------- --------------
BALANCE, NOVEMBER 26, 1999 $ 800,000 $ 184,806 $ 2,509,801 $ 1,916,516 $ 1,179,101
============== ============ =============== =============== ==============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(continued)
<CAPTION>
Treasury Stock
-----------------------------
Adjustable
Rate
Cumulative
Preferred
Stock, Series
A-$50 Common
Liquidation Stock
In thousands, except share data Preference $1 Par Value
<S> <C> <C>
BALANCE, JUNE 30, 1999 $ (103,421) $ (1,263,294)
Net income
Cash dividends declared--
Common ($0.29 per share)
Preferred
Purchase of treasury stock--
Common Stock
(8,249,436 shares) (317,261)
Common Stock issued out of
treasury (1,032,382 shares) 35,699
Income tax benefits attributable
to Common Stock issued
out of treasury
5% Stock dividend (8,794,735
shares)
Allocation under Capital
Accumulation Plan
Amortization of preferred
stock issue costs
--------------- ---------------
BALANCE, NOVEMBER 26, 1999 $ (103,421) $ (1,544,856)
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
64
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 26, 1999 (AUDITED) AND NOVEMBER 27, 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Bear Stearns
Companies Inc. and its subsidiaries (the "Company"). All material intercompany
transactions and balances have been eliminated. Certain prior period amounts
have been reclassified to conform to the current period's presentation. 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 October 1999. 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.
On January 18, 2000, the Company's Board of Directors elected to change its
fiscal year-end to November 30 from June 30, effective with the year beginning
November 27, 1999, as announced in its Form 8-K filed on January 21, 2000. The
five-month period ended November 26, 1999 is the Company's "Transition Period".
These financial statements prepared for inclusion in the Current Report on Form
8-K present the results of the Company's operations for the five-month periods
ended November 26, 1999 (audited) and November 27, 1998 (unaudited).
The Company, through its principal subsidiaries, Bear, Stearns & Co. Inc. ("Bear
Stearns"), Bear, Stearns Securities Corp. ("BSSC"), Bear, Stearns International
Limited ("BSIL") and Bear Stearns Bank plc ("BSB"), 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 Institutional Equities, Fixed Income and Investment Banking
divisions. Execution Services is comprised of clearance and 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 divisions. (See Note 13 of Notes to Consolidated Financial
Statements.)
FINANCIAL INSTRUMENTS
Proprietary securities and 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.
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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 or exchange traded quoted market prices. 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.
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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
period-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 (adjusted as described below) by the weighted average number of common
shares and common share equivalents outstanding during each period presented.
Weighted average shares used to calculate diluted earnings per share include the
effect of stock options. 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 five-month periods
ended November 26, 1999 and November 27, 1998. Income taxes paid totaled $57.8
million and $17.9 million for the five-month periods ended November 26, 1999 and
November 27, 1998, respectively.
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ACCOUNTING CHANGES AND DEVELOPMENTS
In June 1999, the Financial Accounting Standards Board ("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.
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 adopted SOP 98-1 effective July 1, 1999 with no material
impact.
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.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the
Company to report the fair value of financial instruments, as defined.
Substantially all of the Company's assets and liabilities are carried at fair
value or contracted amounts which approximate fair value.
Financial instruments owned and financial instruments sold, but not yet
purchased are carried at fair value. Assets which are recorded at contracted
amounts approximating fair value consist largely of short-term secured
receivables, and include reverse repurchase agreements, securities borrowed and
certain other receivables. Similarly, the Company's short-term liabilities such
as bank loans, commercial paper, medium-term notes, repurchase agreements,
securities loaned and certain other payables are recorded at contracted amounts
approximating fair value. These instruments generally have variable interest
rates and short-term maturities, in many cases overnight, and, accordingly, are
not materially affected by changes in interest rates.
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The estimated fair value of the Company's long-term borrowings, based upon
market rates of interest available to the Company at November 26, 1999 for debt
obligations of similar maturity, was approximately $15.8 billion, which is less
than the aggregate carrying value by approximately $109.1 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
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. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments owned and financial instruments sold, but not yet
purchased consist of the Company's proprietary trading and investment accounts,
at fair value, as follows:
NOVEMBER 26, June 30,
In thousands 1999 1999
------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 7,662,482 $ 8,211,944
Other sovereign governments 2,785,025 2,742,486
Corporate equity and convertible debt 9,421,251 14,578,501
Corporate debt 4,835,056 4,972,621
Derivative financial instruments 4,734,149 3,035,278
Mortgages and other 10,911,528 7,869,884
mortgage-backed securities
Other 415,311 532,164
----------- -----------
$40,764,802 $41,942,878
=========== ===========
Financial instruments sold, but not yet
purchased:
US government and agency $ 4,074,379 $ 5,250,633
Other sovereign governments 2,116,448 2,639,952
Corporate equity 7,665,516 6,134,317
Corporate debt 1,228,338 1,707,998
Derivative financial instruments 4,599,592 5,687,296
Other 20,648 86,176
----------- -----------
$19,704,921 $21,506,372
=========== ===========
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.
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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 ("MTNs") 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 at the time of the transactions.
Borrowings made under the Company's commercial paper programs were $7.9 billion
and $8.5 billion at November 26, 1999 and June 30, 1999, respectively. During
the five-month periods ended November 26, 1999 and November 27, 1998, the
weighted average interest rates on such borrowings were 5.50% and 5.60%,
respectively. The weighted average rates on commercial paper outstanding at
November 26, 1999 and June 30, 1999 were 5.78% and 4.93%, respectively.
At November 26, 1999 and June 30, 1999, the Company had outstanding $3.7 billion
and $3.8 billion, respectively, in principal amount of MTNs having initial
maturities ranging from 6 to 18 months from the date of issue. The MTNs
generally bear interest at variable rates based upon the London Interbank
Offered Rate ("LIBOR"). During the five-month periods ended November 26, 1999
and November 27, 1998, the weighted average interest rates on the MTNs were
5.62% and 5.70%, respectively. The weighted average rates on MTNs outstanding at
November 26, 1999 and June 30, 1999 were 5.21% and 5.18%, respectively.
At November 26, and June 30, 1999, the Company had outstanding $53.3 billion and
$50.7 billion of repurchase agreements. During the five-month periods ended
November 26, 1999 and November 27, 1998, the weighted average interest rates on
the repurchase agreements were 4.92% and 5.23%, respectively. The weighted
average rates on repurchase agreements outstanding at November 26, 1999 and June
30, 1999 were 4.81% and 4.69%, respectively.
Short-term borrowings at November 26, 1999 and June 30, 1999 included $1.8
billion of bank loans. During the five-month periods ended November 26, 1999 and
November 27, 1998, the weighted average interest rates on such bank loans were
5.63% and 5.23%, respectively. The weighted average rates on bank loans
outstanding at November 26, 1999 and June 30, 1999 were 5.88% and 5.66%,
respectively.
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5. LONG-TERM BORROWINGS
Long-term borrowings (which have original maturities of greater than 18 months)
at November 26, 1999 and June 30, 1999 consisted of the following:
In thousands NOVEMBER 26, 1999 June 30, 1999
--------------------------------------------------------------------------------
Floating Rate Notes due 2001 to 2005 $ 2,314,316 $ 1,470,175
Fixed-Rate Senior Notes due 2000 to 2007;
interest rates ranging from 5 3/4% to 9 3/8% 6,597,577 6,297,760
Medium-Term Notes & other borrowings 6,999,499 6,879,157
--------- ---------
Total long-term borrowings $ 15,911,392 $14,647,092
============ ===========
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
five-month periods ended November 26, 1999 and November 27, 1998, the weighted
average effective interest rates on the Floating Rate Notes were 5.73% and
5.75%, respectively. The weighted average effective interest rates on the
Floating Rate Notes outstanding at November 26, 1999 and June 30, 1999 were
5.81% and 5.41%, 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 five-month periods
ended November 26, 1999 and November 27, 1998 were 5.86% and 6.15%,
respectively. The weighted average effective interest rates on the Company's
Fixed-Rate Senior Notes outstanding at November 26, 1999 and June 30, 1999 were
6.06% and 5.39%, respectively.
The Company's MTNs 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 five-month periods ended November
26, 1999 and November 27, 1998, the weighted average interest rates on the MTNs
were 5.64% and 5.85%, respectively. The weighted average interest rates on the
Company's MTNs outstanding at November 26, 1999 and June 30, 1999 were 5.60% and
5.29%, respectively.
Long-term borrowings at November 26, 1999 based on their contractual terms,
mature as follows:
In thousands
--------------------------------------------------------------------------
FISCAL YEAR AMOUNT
2000 $ 3,573,246
2001 3,126,167
2002 2,385,083
2003 2,081,644
2004 2,020,879
Thereafter 2,724,373
--------------------
$ 15,911,392
====================
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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 November 26,
1999, the Company and Bear Stearns were in compliance with all covenants
contained in these various debt agreements.
6. INCOME TAXES
The provision for income taxes for the five-months ended November 26, 1999 and
November 27, 1998 consisted of the following:
In thousands 1999 1998
(Unaudited)
--------------------------------------------------------------------------------
CURRENT:
Federal $ 174,457 $ 46,098
State and local 73,861 31,829
Foreign 10,669 (2,748)
---------------------------------------
Total current $ 258,987 $ 75,179
=======================================
--------------------------------------------------------------------------------
DEFERRED:
Federal $ (68,582) $ (10,984)
State and local (22,627) (4,735)
---------------------------------------
Total deferred (91,209) (15,719)
---------------------------------------
Total Provision for Income Taxes $ 167,778 $ 59,460
=======================================
Significant components of the Company's deferred tax assets (liabilities) as of
November 26, 1999 and June 30, 1999 were as follows:
In thousands NOVEMBER 26,1999 June 30,1999
--------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Deferred compensation $ 532,666 $ 531,263
Liability reserves 153,366 146,785
Valuation reserves 5,167 16,442
Partnerships 1,930 15,433
Other 23,909 8,247
-------------- -------------
Total deferred tax assets $ 717,038 $ 718,170
-------------- -------------
DEFERRED TAX LIABILITIES:
Unrealized appreciation $ (20,842) $ (105,829)
Depreciation (7,673) (9,799)
Other (9,507) (14,734)
-------------- -------------
Total deferred tax liabilities (38,022) (130,362)
-------------- -------------
Net Deferred Tax Asset $ 679,016 $ 587,808
============== =============
No valuation allowance has been established against deferred tax assets since it
is more likely than not that the deferred tax asset will be realized.
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A reconciliation of the statutory federal income tax rates and the Company's
effective tax rates for the five-months ended November 26, 1999 and November 27,
1998 were as follows:
1999 1998
(UNAUDITED)
---------------------------
Statutory rate 35.0% 35.0%
State and local income taxes, net of 7.7 9.3
federal benefit
Dividend exclusion (1.5) (4.3)
Domestic tax credits (3.4) (8.2)
Other, net (0.8) (0.5)
---------------------------
Effective tax rate 37.0% 31.3%
===========================
Not included in the reconciliation table reflected above are approximately $2.4
million, and $0.9 million, respectively, 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 the five-months ended November
26, 1999 and November 27, 1998.
7. REGULATORY REQUIREMENTS
The Company's principal operating subsidiaries, Bear Stearns and BSSC, 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 $1.1 billion which is net capital of BSSC in excess
of 5% of aggregate debit items arising from customer transactions, as defined.
At November 26, 1999, Bear Stearns' net capital, as defined, of $1.83 billion
exceeded the minimum requirement by $1.78 billion.
BSIL and Bear Stearns International Trading Limited ("BSIT"), London-based
broker-dealer subsidiaries, which are indirectly 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.
BSB, which is indirectly wholly owned by the Company, is incorporated in Dublin
and is subject to the regulatory capital requirements of the Central Bank of
Ireland.
At November 26, 1999, Bear Stearns, BSSC, BSIL, BSIT and BSB were in compliance
with their respective regulatory capital requirements.
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 November 26, 1999, approximately $2.2 billion of
net assets of consolidated subsidiaries were restricted as to the payment of
cash dividends and advances to the Company.
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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 five-months ended November 26,
1999 and November 27, 1998. The Company did not repurchase any shares during the
five-months ended November 26, 1999. At November 26, 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.
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PREFERRED STOCK ISSUED BY SUBSIDIARIES
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 Company, at its option, may
redeem the Capital Securities at their principal amount plus accrued
distributions beginning January 15, 2002. 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.
Bear Stearns Capital Trust II ("Capital Trust II"), a wholly owned subsidiary of
the Company, has outstanding $300.0 million 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.
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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 five-months ended November 26, 1999 and November 27, 1998 was $7.5
million and $3.5 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 related to the defined contribution
retirement plan for the five-months ended November 26, 1999 and November 27,
1998 was $1.5 million and $3.0 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. At November 26,
1999, 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.
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.
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During the five-months ended November 26, 1999, the Company repurchased a total
of 6,936,936 shares of Common Stock through open market transactions in
connection with the CAP Plan at a cost of approximately $272.0 million. During
the five-months ended November 26, 1999, the Company recognized expense of
approximately $45.8 million attributable to CAP Units or cash credited to
participants' deferred compensation accounts with respect to the earnings
adjustment. The aggregate number of shares of Common Stock distributable
pursuant to the Company's obligation for CAP Units at November 26, 1999 was
approximately 42.3 million. 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.
STOCK AWARD PLAN
On October 28, 1999, the stockholders of the Company approved the Company's
Stock Award Plan (the "Stock Award Plan"). The purpose of the Stock Award Plan
is to secure for the Company and its stockholders the benefits of the additional
incentive, inherent in the ownership of the Company's stock, by selected key
employees of the Company who are important to the success and growth of the
business. Pursuant to the Stock Award Plan, such employees may be offered the
opportunity to acquire common stock through the grant of options and stock
appreciation rights in tandem with such options. In January 2000, the Company
granted 3,886,334 options under such plan. The stock options were issued with an
exercise price equal to the market price of the common stock on the date of the
grant. These options vest after three years and have a ten-year expiration.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND PRINCIPAL
TRANSACTIONS REVENUES
The Company's principal transactions revenues by reporting categories, including
derivatives, for the five-months ended November 26, 1999 and November 27, 1998
were as follows:
In thousands 1999 1998
(UNAUDITED)
-------------------------------------------------------------------------
Fixed income $ 366,359 $ 171,245
Equity 223,266 151,036
Foreign exchange and other derivative
financial instruments 156,054 74,764
--------------------------------
Total principal transactions $ 745,679 $ 397,045
================================
77
<PAGE>
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 and equity price risk. SFAS No. 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 sell other financial instruments at specific terms at specified
future dates. Option contracts provide the holder with the right, but not the
obligation, to purchase or sell a financial instrument at a specific price on or
before 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.
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 and 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 used. 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 forwards 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.
78
<PAGE>
The following table represents the notional/contract amounts of the Company's
outstanding derivative financial instruments as of November 26, 1999 and June
30, 1999:
NOVEMBER 26, June 30,
In billions 1999 1999
--------------------------------------------------------------------------------
Interest Rate:
Swap agreements, including
options, swaptions,
caps, collars, and floors $371.4 $339.1
Futures contracts 47.3 52.5
Options held 43.8 24.0
Options written 18.4 3.9
Foreign Exchange:
Futures contracts 39.9 19.3
Forward contracts 10.0 15.6
Options held 5.5 2.6
Options written 4.1 3.1
Mortgage-Backed Securities-
Forward Contracts 51.9 63.4
Equity:
Swap agreements 15.1 11.9
Futures contracts 2.1 0.8
Options held 6.5 7.5
Options written 6.3 7.3
FAIR VALUE
The derivative financial instruments used in the Company's trading and dealer
activities 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 November 26, 1999 and June 30, 1999, were
as follows:
NOVEMBER 26, June 30,
1999 1999
-----------------------------------------
In millions ASSETS LIABILITIES Assets Liabilities
---------------------------------------------------------------
Swap agreements $3,016 $2,952 $1,375 $2,290
Futures and forward
contracts 264 158 278 259
Options held 1,454 1,397
Options written 1,490 3,164
79
<PAGE>
The average monthly fair values of the derivative financial instruments for
the five-months ended November 26, 1999 and the fiscal year ended June 30,
1999 were as follows:
NOVEMBER 26, June 30,
1999 1999
------------------------------------------
In millions ASSETS LIABILITIES Assets Liabilities
----------------------------------------------------------------
Swap agreements $2,421 $2,625 $2,227 $2,317
Futures and forward
contracts 244 287 334 368
Options held 1,178 1,154
Options written 1,577 3,156
The majority of the Company's transactions with off-balance-sheet risk are
shorter-term in duration with a weighted average maturity of approximately 3.1
years and 3.3 years at November 26, 1999 and June 30, 1999, respectively. The
maturities for notional/contract amounts outstanding for derivative financial
instruments as of November 26, 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 $112.2 $101.1 $79.0 $94.2 $386.5
Futures contracts 69.8 14.4 5.0 0.2 89.4
Forward contracts 61.9 61.9
Options held 42.6 10.4 0.2 2.5 55.7
Options written 25.6 1.2 0.2 1.8 28.8
-----------------------------------------------------
Total $312.1 $127.1 $84.4 $98.7 $622.3
======================================================
Percent of total 50.1% 20.4% 13.6% 15.9% 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.
80
<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 of
collateral at both November 26, 1999 and June 30, 1999:
NOVEMBER June 30,
In millions 26, 1999 1999
---------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $192.3 $140.0
AA 597.1 627.1
A 600.7 303.4
BBB 79.8 56.6
BB and
lower 56.9 39.7
Non-rated - 3.4
(1)Internal designations of counterparty credit quality are based on
actual ratings made by external ratings agencies or comparable 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 customer securities
and commodities transactions. Customers' securities activities are transacted on
either a cash or margin basis, while customer commodity transactions are
generally transacted on a margin basis subject to individual exchange
regulations. In connection with these activities, the Company executes and
clears customer transactions involving the sale of borrowed securities ("short
sales") and the writing of option contracts. These transactions may expose the
Company to off-balance-sheet risk in the event that customers are unable to
fulfill their contractual obligations and customers' margin deposits are
insufficient to fully cover their losses. In the event the customers fail to
satisfy their obligations, the Company may be required to purchase or sell
financial instruments at prevailing market prices in order to fulfill the
customer's obligations.
The Company seeks to control the risks associated with its customer activities
by requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company monitors required margin levels
daily and, pursuant to such guidelines, may require customers to deposit
additional cash or collateral, or reduce positions, when deemed necessary. The
Company also establishes credit limits that are monitored daily for customers
engaged in commodity activities. 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.
81
<PAGE>
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.
82
<PAGE>
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 November 26, 1999 and June 30, 1999, the Company had outstanding non-trading
related interest rate and currency swap agreements with a notional principal
amount of $15.7 billion and $10.9 billion, respectively. The interest rate swap
agreements entered into reduced net interest expense on the Company's long-term
and short-term debt obligations by $22.4 million and $9.9 million for the
five-months ended November 26, 1999 and November 27, 1998, respectively. The
difference to be received or paid on the swap agreements is included in interest
expense as accrued, 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. The Company has also entered into a lease arrangement with respect to the
development and building of an office tower at 383 Madison Avenue, New York,
New York. This tower will serve as the new worldwide headquarters and is
scheduled to be completed by the expiration date of the current 245 Park Avenue
lease. At November 26, 1999, the future minimum rentals payable relating to this
arrangement are not currently determinable and are not included in the amounts
below. At November 26, 1999, future minimum aggregate annual rentals payable
under noncancelable leases (net of subleases), for fiscal years 2000 through
2004 and the aggregate amount thereafter, are as follows:
In thousands
--------------------------------------------------------------------------------
FISCAL YEAR AMOUNT
2000 $ 72,114
2001 70,622
2002 69,853
2003 34,604
2004 27,936
Thereafter 117,611
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 $38.4 million and $38.6 million, for the five-months
ended November 26, 1999 and November 27, 1998.
83
<PAGE>
LETTERS OF CREDIT/GUARANTEES
At November 26, 1999, the Company was contingently liable for unsecured letters
of credit of approximately $1.8 billion and letters of credit secured by
financial instruments of approximately $23.9 million, both of which are
principally used as deposits for securities borrowed or to satisfy margin
deposits at option and commodity exchanges.
The Company had various other commitments aggregating $1.1 billion at November
26, 1999.
BORROW VERSUS PLEDGE
At November 26, 1999, US government and agency securities with a market value of
approximately $4.6 billion had been pledged against borrowed securities with an
approximate market value of $4.5 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. Additionally,
the Company is involved from time to time in investigations and proceedings by
governmental and self-regulatory agencies. Included among these matters is an
action that is pending in the United States District Court for the Southern
District of New York filed by Henryk de Kwiatkowski, a former customer of Bear
Stearns. The amended complaint in this action alleges claims for breach of
fiduciary duty and negligence. On May 17, 2000, a jury returned a verdict
finding that Bear Stearns, BSSC and Bear Stearns Forex Inc. ("Forex"), a wholly
owned subsidiary of the Company, were liable to Mr. de Kwiatkowski for
negligence and awarded damages in the amount of $111.5 million. The jury also
found that the defendants had not breached any fiduciary duties. On June 2,
2000, the court also awarded pre-judgement interest of $52.3 million. Bear
Stearns, BSSC and Forex have filed appropriate motions to overturn the verdict
in the district court and if such motions are unsuccessful, plan to appeal the
verdict. During May 2000, the Company recorded an after-tax charge of $96
million in light of such verdict.
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 the foregoing matters will not have a material adverse effect on
the results of operations or the financial condition of the Company, taken as a
whole.
84
<PAGE>
13. SEGMENT AND 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 in such areas as block trading, convertible bonds, over-the-counter
equities, equity derivatives and risk arbitrage. Fixed Income includes the
efforts of sales, trading and research for institutional clients in a variety of
products such as mortgage-backed and asset-backed securities, corporate and
government bonds, municipal and high yield securities and foreign exchange and
derivatives. Investment Banking provides capabilities in capital raising,
strategic advisory, mergers and acquisitions and merchant banking.
The Execution Services segment is comprised of clearance and commission-related
areas, including institutional equity sales, institutional futures sales and
specialists activities. Clearance provides clearing, margin lending and
securities borrowing to facilitate customer short sales to approximately 2,800
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 the Private Client Services
("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.
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. Revenue from inter-segment transactions are credited based upon
specific criteria or agreed upon rates with such amounts eliminated in
consolidation. Individual segments also include revenues and expenses relating
to various items including corporate overhead and interest which are internally
allocated by the Company primarily based on balance sheet usage or expense
levels. The Company generally evaluates performance of the segments based on net
revenues and profit or loss before provision for income taxes.
85
<PAGE>
For the five-months ended November 26, 1999:
(IN THOUSANDS) NET REVENUES PRE-TAX INCOME (LOSS) SEGMENT ASSETS
--------------------------------------------------------------------------------
CAPITAL MARKETS $ 1,017,482 $322,155 $105,441,874
EXECUTION SERVICES 566,995 210,704 54,401,790
WEALTH MANAGEMENT 269,028 52,340 2,982,637
OTHER (A) 84,998 (131,607) (788,339)
--------------------------------------------------------------------------------
TOTAL $ 1,938,503 $ 453,592 $162,037,962
================================================================================
For the five-months ended November 27, 1998 (Unaudited):
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
-------------- ------------ --------------------- --------------
Capital Markets $ 519,661 $(49,539) $111,856,697
Execution Services 499,857 203,635 49,881,166
Wealth Management 212,144 31,247 3,191,443
Other (a) 92,634 4,385 909,557
--------------------------------------------------------------------------------
Total $1,324,296 $ 189,728 $165,838,863
================================================================================
(a) Other is comprised of consolidation/elimination entries, unallocated
revenues (predominantly interest) and corporate administrative functions,
including costs related to the CAP Plan which were $45.8 million and $14.0
million for the five-months ended November 26, 1999 and November 27, 1998,
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 and income before provision for income taxes by geographic
region for the five-months ended November 26, 1999 and November 27, 1998 and
assets by geographic region as of November 26, 1999 and June 30, 1999:
<TABLE>
<CAPTION>
(in thousands) NOVEMBER 26, 1999 November 27, 1998 June 30, 1999
(UNAUDITED)
<S> <C> <C>
US gross revenues $ 3,085,866 $ 2,789,334
Non-US gross revenues 384,424 185,847
-------------------- ----------------
Consolidated gross revenues $ 3,470,290 $ 2,975,181
==================== ================
US income before provision for income taxes $ 435,508 $ 208,412
Non-US income (loss) before provision for
income taxes 18,084 (18,684)
-------------------- ----------------
Consolidated income before provision for income
taxes $ 453,592 $ 189,728
==================== ================
US assets $ 128,422,520 $ 121,405,224
Non-US assets 33,615,442 32,489,116
-------------------- ----------------
Consolidated assets $ 162,037,962 $ 153,894,340
==================== ================
</TABLE>
Because of the international nature of the financial markets and the resultant
integration of US and non-US services, it is difficult to precisely separate
foreign operations. The Company conducts and manages these activities with a
view toward the profitability of the Company as a whole. Accordingly, the
foreign operations information is, of necessity, based upon management
judgements and internal allocations.
86
<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 statements of financial condition of The Bear
Stearns Companies Inc. and Subsidiaries as of November 26, 1999 and June 30,
1999, and the related consolidated statements of income, cash flows and changes
in stockholders' equity for the five-months ended November 26, 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. The consolidated statements of income and cash flows for the
five-months ended November 27, 1998, which are included for comparative
purposes, were not audited by us.
We conducted our audits in accordance with accounting standards generally
accepted in the United States of America. 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 November 26, 1999 and June 30, 1999, and the results of their
operations and their cash flows for the five-months ended November 26, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
June 16, 2000
87
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS
The Board of Directors listed below were elected at the 1999 Annual Meeting of
Stockholders and will continue to serve on the board until the next Annual
Meeting of Stockholders or until his or her successor is duly elected and
qualified, in accordance with the By-laws of the Company.
YEAR FIRST
ELECTED TO
AGE AS OF SERVE AS
SEPTEMBER PRINCIPAL OCCUPATION DIRECTOR OF
NAME 25, 2000 AND DIRECTORSHIPS HELD THE COMPANY
---- -------- ---------------------- -----------
James E. Cayne....... 66 President and Chief 1985
Executive Officer of the
Company and Bear Stearns,
member of the Executive
Committee (as hereinafter
defined)
Carl D. Glickman..... 74 Private Investor; In the 1985
United States, Trustee,
Lexington Corporate
Property Trust; Director,
Office Max Inc.
Alan C. Greenberg.... 73 Chairman of the Board of 1985
the Company and Bear
Stearns and Chairman of
the Executive Committee
Donald J. Harrington 54 President, St. John's 1993
University; Director, The
Reserve Fund, Reserve
Institutional Trust,
Reserve Tax-Exempt Trust,
Reserve New York
Tax-Exempt Trust and
Reserve Special Portfolios
Trust
88
<PAGE>
YEAR FIRST
ELECTED TO
AGE AS OF SERVE AS
SEPTEMBER PRINCIPAL OCCUPATION DIRECTOR OF
NAME 25, 2000 AND DIRECTORSHIPS HELD THE COMPANY
---- -------- ---------------------- -----------
William L. Mack....... 60 Founder and Managing 1997
Partner, The Apollo Real
Estate Investment Funds;
President and Senior
Managing Partner, The Mack
Organization; Chairman of
the Board of Mack-Cali
Realty Corporation and
Metropolis Realty Trust,
Inc.; Director, Koger
Equity, Inc. and Vail
Resorts, Inc.
Frank T. Nickell...... 53 President and Chief 1993
Executive Officer of Kelso
& Company; Director,
Blackrock Inc., Earle M.
Jorgensen Company and
Peebles Inc.
Frederic V. Salerno... 57 Vice Chairman and CFO of 1992
Verizon Communications;
Director, Avnet, Inc.,
Orion Power Holdings and
Viacom, Inc.
Alan D. Schwartz...... 50 Executive Vice President 1987 (1)
and Head of the Investment
Banking Group of Bear
Stearns; Director, Unique
Casual Restaurants, Inc.
and Young & Rubicam, Inc.
Warren J. Spector..... 42 Executive Vice President 1990 (1)
and Head of the Fixed
Income Group of Bear
Stearns
89
<PAGE>
YEAR FIRST
ELECTED TO
AGE AS OF SERVE AS
SEPTEMBER PRINCIPAL OCCUPATION DIRECTOR OF
NAME 25, 2000 AND DIRECTORSHIPS HELD THE COMPANY
---- -------- ---------------------- -----------
Vincent Tese......... 57 Chairman and Director of 1994
Wireless Cable
International Inc.;
Director, Allied Waste
Industries Inc., Bowne &
Co., Inc., Cablevision,
Inc., Mack-Cali Realty
Corp., KeySpan Energy
Corp., National Wireless
Holdings Inc. and Lynch
Interactive Corp.
Fred Wilpon.......... 63 Chairman of the Board of 1993
Directors of Sterling
Equities, Inc.; Chairman
of Executive Committee and
Director of Pathogenesis
Corporation; Director,
Loews Corporation;
President and Chief
Executive Officer of the
New York Mets
(1) Did not serve as director during 1997 and 1998.
90
<PAGE>
Mr. Cayne has been Chief Executive Officer and President of the Company and Bear
Stearns for more than the past five years.
Mr. Glickman has been a private investor for more than the past five years. Mr.
Glickman is also currently Chairman of the Compensation Committee of the Board
of Directors of the Company.
Mr. Greenberg has been Chairman of the Board of the Company for more than the
past five years.
Father Harrington has been the President of St. John's University for more than
the past five years.
Mr. Mack has been Managing Partner of the Apollo Real Estate Investment Funds
and President and Senior Managing Partner of The Mack Organization (a national
owner, developer and investor in office and industrial buildings and other real
estate) for more than the past five years. Mr. Mack is Chairman of the Board of
Mack-Cali Realty Corporation (a publicly traded real estate investment trust).
He is also Chairman of the Board of Metropolis Realty Trust, Inc. (the owner of
high rise office buildings).
Mr. Nickell has been President of Kelso & Company, a privately-held merchant
banking firm, for more than the past five years. Mr. Nickell was appointed Chief
Executive Officer of Kelso & Company in 1998.
Mr. Salerno is the Vice Chairman and CFO of Verizon Communications (formerly
Bell Atlantic Corporation). Prior to June 2000, Mr. Salerno was the Senior
Executive Vice President and CFO/Strategy and Business Development of Bell
Atlantic Corporation. Prior to the merger of NYNEX Corp. ("NYNEX") and Bell
Atlantic Corporation, Mr. Salerno was the Vice Chairman of the Board of NYNEX
for more than the past five years. Mr. Salerno served as Chairman of the Board
of the State University of New York from 1990 to 1996.
Mr. Schwartz has been an Executive Vice President of Bear Stearns for more than
the past five years. Prior to June 30, 1999, Mr. Schwartz was an Executive Vice
President of the Company and a member of the Executive Committee for more than
the past five years. Mr. Schwartz is responsible for all of the investment
banking activities of Bear Stearns.
Mr. Spector has been an Executive Vice President of Bear Stearns for more than
the past five years. Prior to June 30, 1999, Mr. Spector was an Executive Vice
President of the Company and a member of the Executive Committee for more than
the past five years. Mr. Spector is responsible for all of the fixed income
activities of Bear Stearns.
Mr. Tese has been Chairman of Wireless Cable International Inc. since April
1995. Mr. Tese was Chairman of Cross Country Wireless Inc. from October 1994 to
July 1995 and was a corporate officer and a general partner of Cross Country
Wireless Inc.'s predecessors, Cross Country Wireless Cable - I, L.P. and Cross
Country Wireless Cable West, L.P., from 1990 until October 1994. Mr. Tese was
the Director of Economic Development for the State of New York from June 1987 to
December 1994. Mr. Tese is currently Chairman of the Audit Committee of the
Board of Directors of the Company.
91
<PAGE>
Mr. Wilpon has been Chairman of the Board of Directors of Sterling Equities,
Inc., a privately held entity, and certain affiliates thereof, which are
primarily real estate development/owner management companies, for more than the
past five years. Mr. Wilpon has also been President and Chief Executive Officer
of the New York Mets baseball team for more than the past five years. Mr. Wilpon
has been a Director of Pathogenesis Corporation, a publicly held
bio-pharmaceutical company, for more than the past five years and currently
serves as Chairman of its Executive Committee.
There is no family relationship among any of the directors or executive officers
of the Company.
EXECUTIVE OFFICERS
The following table sets forth certain information as of September 25, 2000
concerning executive officers of the Company as of November 26, 1999.
AGE AS OF
SEPTEMBER
NAME 25,2000 PRINCIPAL OCCUPATION AND DIRECTORSHIPS HELD
---- ------- -------------------------------------------
Alan C. Greenberg..... 73 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........ 66 President and Chief Executive Officer of
the Company and Bear Stearns, member of
the Executive Committee
Mark E. Lehman........ 49 Executive Vice President and General
Counsel of the Company and Bear Stearns
and member of the Executive Committee
Marshall J Levinson 58 Controller of the Company
Michael Minikes....... 57 Treasurer of the Company and Bear
Stearns, member of the Executive Committee
Samuel L. Molinaro Jr. 42 Senior Vice President - Finance and Chief
Financial Officer of the Company and Bear
Stearns, member of the Executive Committee
Each of the executive officers of the Company has been a Senior Managing
Director of Bear Stearns for more than the past five years.
Mr. Greenberg has been Chairman of the Board of the Company for more than the
past five years. Mr. Greenberg was Chief Executive Officer of the Company
and Bear Stearns from the Company's inception until July 1993.
92
<PAGE>
Mr. Cayne has been Chief Executive Officer and President of the Company and Bear
Stearns 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. Levinson has been Controller of the Company since October 1998. Prior
thereto, Mr. Levinson was Chief Financial Officer and Chief Administrative
Officer of Bear, Stearns International Limited in London. Prior to September
1996, Mr. Levinson was in charge of the Company's internal audit function.
Mr. Minikes has been Treasurer of the Company and Bear Stearns for more than the
past five years.
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.
Officers serve at the discretion of the Board of Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's officers and directors, and any persons who own more than ten percent
of the Company's Common Stock, to file reports of initial ownership of the
Company's Common Stock and subsequent changes in that ownership with the
Securities and Exchange Commission and furnish the Company with copies of all
forms they file pursuant to Section 16(a). Based solely upon a review of the
copies of the forms furnished to the Company, or written representations from
certain reporting persons that no other reports were required, the Company
believes that during the Transition Period all Section 16(a) filing requirements
were complied with.
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the Chief
Executive Officer and the four most highly compensated executive officers of the
Company (other than the Chief Executive Officer) for the three fiscal years
ended June 30, 1997, 1998 and 1999 and the Transition Period ("Transition"):
<TABLE>
<CAPTION>
Long-Term
Compensation
Compensation Awards
------------ ------
Restricted
Name and Fiscal Stock Stock All Other
Principal Position Year Salary Bonus(1) Awards(2)(3) Options(5) Compensation(4)
------------------ ---- ------ -------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
James E. Cayne Transition $ 92,308 $ 4,216,771 $ 3,181,359 72,427 $ 0
Chief Executive 1999 200,000 10,871,700 10,311,700 8,639,708
Officer and 1998 200,000 10,171,830 9,611,830 7,192,766
President 1997 200,000 10,175,750 9,616,250 3,223,209
Alan C. Greenberg Transition $ 92,308 $ 3,735,562 $ 753,638 44,240 $ 0
Chairman of the 1999 200,000 9,648,512 3,212,838 4,434,095
Board 1998 200,000 13,698,880 4,562,960 3,716,754
1997 200,000 14,132,375 4,707,625 1,685,120
Mark E. Lehman Transition $ 92,308 $ 1,034,750 $ 544,531 16,052 $ 0
Executive Vice 1999 200,000 2,544,650 1,994,650 869,158
President 1998 200,000 2,177,275 1,627,275 674,445
1997 200,000 1,892,500 1,342,500 278,866
Michael Minikes Transition $ 92,308 $ 940,125 $ 829,064 14,903 $ 0
Treasurer 1999 200,000 1,880,000 2,320,000 1,678,984
1998 200,000 1,880,000 2,320,000 1,999,114
1997 200,000 1,780,000 2,220,000 911,978
Samuel L. Molinaro Transition $ 92,308 $ 385,600 $ 231,434 5,571 $ 0
Jr. 1999 200,000 671,000 779,000 129,892
Chief Financial 1998 200,000 789,800 360,200 92,314
Officer 1997 200,000 578,531 221,469 35,084
---------------------------------------
</TABLE>
(Footnotes on following page)
94
<PAGE>
For each of the above-named officers, compensation information is provided
for the full fiscal years during which he served as an executive officer of the
Company. Transition represents the five month period July 1, 1999 to November
26, 1999.
(1) Represents amounts related to the Performance Compensation Plan.
(2) Represents the portion of the named executive officer's bonus deferred
pursuant to the Capital Accumulation Plan. CAP Units will be allocated at
the end of the 17 month period ending November 30, 2000, therefore no
actual units have been allocated as of November 26, 1999.
(3) As of November 26, 1999, the value and the aggregate number of CAP Units
credited to the accounts of each named person (based on the closing price
of the Common Stock on the Consolidated Transaction Reporting System on
such date) was: Mr. Cayne-- $113,165,185 (2,824,716 units); Mr. Greenberg--
$55,798,850 (1,392,795 units); Mr. Lehman-- $13,011,018 (324,768 units);
Mr. Minikes-- $20,440,208 (510,208 units) and Mr. Molinaro-- $2,338,729
(58,377 units).
(4) Represents preferential earnings paid in the form of CAP Units pursuant to
the Capital Accumulation Plan that exceed cash dividends paid on the
equivalent shares of Common Stock. Preferential earnings for the Transition
Period are not currently determinable and will be credited to the
Participants in conjunction with the final determination of earnings for
the 17 month period ending November 30, 2000.
(5) Represents the number of stock options awarded in January 2000 for service
rendered during the Transition Period. The dollar amounts by which the
restricted stock awards were reduced to offset the award of stock options
and the number of related stock options were: Mr. Cayne-- $801,870
(72,427 options); Mr. Greenberg-- $489,800 (44,240 options); Mr. Lehman--
$177,719 (16,052 options); Mr. Minikes-- $164,998 (14,903 options) and Mr.
Molinaro $61,679 (5,571 options). The stock options have a strike price of
$38.75, which was the closing market price at the date of grant, vest over
three years and expire on January 18, 2010. The percentage of total
options granted was: Mr. Cayne-- 1.86%; Mr. Greenberg-- 1.14%; Mr. Lehman--
0.41%; Mr. Minikes-- 0.38% and Mr. Molinaro-- 0.14%.
95
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Glickman, Harrington, Nickell and Tese, none of whom is or has been an officer
or an employee of the Company. There were no "Compensation Committee Interlocks"
during the Transition Period.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives an annual retainer
of $35,000, plus $800 for each meeting of the Board of Directors attended, and
reasonable expenses relating to attendance at such meetings. Directors who are
members of the Audit Committee and directors who are members of the Compensation
Committee receive additional compensation at the rate of $1,500 for each meeting
of the Audit Committee or Compensation Committee attended, with the exception of
telephone conference committee meetings (where a quorum consists of directors
attending via telephone conference call) as to which the compensation paid for
participation is $200.
COMPENSATION COMMITTEE REPORT
COMPENSATION OVERVIEW
The Compensation Committee establishes the compensation policies applicable to
all executive officers and other Senior Managing Directors. The salary and bonus
compensation of members of the Executive Committee and certain other Senior
Managing Directors (who may also be executive officers) is determined by the
operation of the Performance Compensation Plan, which plan has been adopted and
is administered by the Compensation Committee and has been approved by the
stockholders. The Transition Period salaries and bonuses of Senior Managing
Directors, to the extent not determined by the Performance Compensation Plan,
were approved by the Compensation Committee based upon recommendations by the
Executive Committee and the Management and Compensation Committee, which
committees based their recommendations on criteria established by the
Compensation Committee.
COMPENSATION POLICIES
From the time of the Company's initial public offering after succession on
October 29, 1985, to the business of the Partnership, compensation for senior
executives of the Company has been strongly influenced by the principle that the
compensation of senior executives should be structured to directly link the
executives' financial reward to Company performance. Thus, senior executives
would both share in the success of the Company as a whole and be adversely
affected by poor Company performance, thereby aligning their interests with the
interests of the Company's stockholders. The Performance Compensation Plan,
which was adopted in 1996, is designed to implement the foregoing philosophy.
Under the Performance Compensation Plan, certain Senior Managing Directors
(including executive officers) of the Company designated by the Compensation
Committee receive a base salary of $200,000 per annum ($92,308 for the
Transition Period) and a share of a performance-based bonus fund.
96
<PAGE>
The Company's compensation practice with respect to other Senior Managing
Directors has been designed to link individual compensation with performance.
Accordingly, the base salary of most other Senior Managing Directors has been
limited to $200,000 per annum ($92,308 for the Transition Period), with the
preponderance of total compensation being in the form of a bonus determined on
the basis of the following criteria: (a) the overall annual performance of the
Company; (b) the performance of any business unit or units in which the employee
participates; (c) the need to maintain compensation levels comparable to those
of competing financial services companies, including those in the Company's peer
groups; and (d) the individual performance of the employee in question from the
viewpoints of (i) managerial responsibilities, (ii) direct production of
revenue, (iii) recruiting and the development and maintenance of the Company's
franchise, (iv) controlling costs, and (v) promoting cooperation within and
between business units.
The Compensation Committee believes that the establishment of the Capital
Accumulation Plan during fiscal year 1991 and the Stock Award Plan during the
Transition Period, represented important additional steps in the Company's goal
to further strengthen the alignment of management and stockholder interests, by
increasing management ownership of the Company's Common Stock.
PERFORMANCE COMPENSATION PLAN
The Compensation Committee is also responsible for administering the Performance
Compensation Plan (the "Plan"). All of the Company's Senior Managing Directors,
including executive officers, are eligible to participate in the Plan. The
Compensation Committee is required to designate those Senior Managing Directors
who are participating in the Plan (the "Participants") within 90 days after the
beginning of each fiscal year. Under the terms of the Plan, each of the
Participants receives a base salary of $200,000 per annum ($92,308 for the
Transition Period) and also shares in a performance-based bonus pool. The
Compensation Committee determines the formula for calculating one or more bonus
pools within 90 days after the beginning of each fiscal year based upon one or
more of the following criteria, individually or in combination, adjusted in such
manner as the Compensation Committee shall determine: (a) pre-tax or after-tax
return on equity; (b) earnings per share; (c) pre-tax or after-tax net income;
(d) business unit or departmental pre-tax or after-tax income; (e) book value
per share; (f) market price per share; (g) relative performance versus peer
group companies; (h) expense management; and (i) total return to stockholders.
The share of one or more of the bonus pools to be allocated to each Participant
in any fiscal year will be determined by the Compensation Committee, in its sole
discretion. However, under no circumstance may the aggregate amount of the
bonuses paid under the Plan exceed 100% of the bonus pools computed under the
formula designated by the Compensation Committee, as previously described above.
The maximum bonus that may be allocated to a Participant who is not a member of
the Executive Committee in any fiscal year is $15,000,000.
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<PAGE>
In fiscal year 1999, the Compensation Committee created two separate
performance-based pools. One pool consisted of five Participants, which included
three members of the Company's Executive Committee (the "Executive Committee
Pool"), while the other pool consisted of six members, including two members of
the Executive Committee and one executive officer. The Compensation Committee
established a formula for calculating the Executive Committee Pool based on the
Company's adjusted after-tax return on common equity. The maximum amount
allocable to the Executive Committee Pool was $150,000,000, of which the maximum
percentage of any individual Participant was 30% of such pool. The total bonus
pool resulting from this formula for the Transition Period was $29,286,000 as
compared to the $75,655,000 paid in fiscal 1999 under the terms of the Plan.
The Compensation Committee also established the formulas for calculating the
other bonus pool for the Transition Period and the share for each Participant
based upon a combination of factors including departmental pre-tax profits and
adjusted pre-tax return on equity of the Company. The total bonus pool resulting
from the application of these formulas for the Transition Period was $26,037,540
of which the Compensation Committee, based on the recommendation of the
Management and Compensation Committee, and concurrence of the Executive
Committee, determined that bonuses aggregating $9,125,000 would be paid to
Participants in the other bonus pools.
Section 162(m) of the Internal Revenue Code limits deductibility for federal
income tax purposes of compensation in excess of $1,000,000 paid to individual
executive officers named in the Summary Compensation Table per taxable year
unless certain exceptions, including compensation based on performance goals,
are satisfied. The Plan has been established and maintained in an effort to
comply with the performance-based exception to limits on deductibility of
executive officer compensation.
STOCK AWARD PLAN
The Stock Award Plan was adopted by the Board of Directors on September 28, 1999
and was ratified by the stockholders at the 1999 Annual Meeting. The purpose of
the Stock Award Plan is to provide the Company with greater flexibility in the
composition of incentive awards and to secure for the Company and its
stockholders the continued services of key employees who are important to the
success and growth of the business of the Company and its subsidiaries.
The determination of employee recipients of options and awards, their terms and
conditions within the parameters of the Stock Award Plan and the number of
shares covered by each option or award is determined and administered by the
Compensation Committee.
98
<PAGE>
Key employees of the Company or any of its subsidiaries, including executive
officers and directors, to the extent that they are key employees of the Company
or any of its subsidiaries, are eligible to participate in the Stock Award Plan
based upon its terms and conditions. Pursuant to the Stock Award Plan, such
employees will be offered the opportunity to acquire Common Stock through the
grant of options (incentive stock options or nonqualified stock options) and
stock appreciation rights ("SAR"s) in tandem with such options. Additionally,
Participants may be granted units representing the right to receive shares of
Common Stock at the end of a specified deferral period. For each calendar year,
during any part of which the Stock Award Plan is in effect, no participant may
be granted awards relating in the aggregate to more than 1,000,000 shares of
Common Stock, as adjusted to reflect certain changes to the outstanding Common
Stock pursuant to the Stock Award Plan.
An aggregate of 16,000,000 shares of Common Stock (subject to adjustment as
described below and provided in the Stock Award Plan) will be subject to the
Stock Award Plan. Shares subject to options which terminate or expire
unexercised will become available for future option grants. During the
Transition Period there were no options or awards granted to eligible
participants.
In the event of certain changes to the outstanding Common Stock such as stock
splits, stock dividends, reclassifications or recapitalizations, the Board of
Directors shall appropriately adjust the character and number of shares
available under the Stock Award Plan and the Compensation Committee shall
appropriately adjust the character, number and price of shares subject to
outstanding options to reflect such changes.
The Stock Award Plan will terminate upon the earlier of (i) the adoption of a
resolution of the Company's Board of Directors to terminate the Stock Award
Plan, (ii) the date all shares of Common Stock subject to the Stock Award Plan
are purchased, or (iii) ten years from the effective date of the Stock Award
Plan.
Under Section 162(m) of the Internal Revenue Code, certain compensation payments
in excess of $1,000,000 are subject to a limitation on deductibility by the
Company. This limitation on deductibility applies with respect to that portion
of compensation in excess of $1,000,000 paid to individual executive officers
named in the Summary Compensation Table per taxable year. However, certain
"performance-based compensation" the material terms of which are disclosed to
and approved by stockholders is not subject to this limitation on deductibility.
The Company has structured the Stock Award Plan with the intention that
compensation resulting therefrom would be such performance-based compensation
and would be deductible.
Under certain circumstances, accelerated vesting or exercise of options or stock
appreciation rights, in connection with a Change in Control of the Company might
be deemed an "excess parachute payment" for purposes of the golden parachute tax
provisions of Section 280G of the Internal Revenue Code. To the extent it is so
considered, the optionee or grantee may be subject to an excise tax equal to 20%
of the amount of the excess parachute payment and the Company may be denied a
tax deduction.
99
<PAGE>
EQUITY OWNERSHIP AND CAPITAL ACCUMULATION PLAN
A focus on performance and growth and the direct alignment of employee and
stockholder interests flows from the substantial ownership of Common Stock and
CAP Units by senior executives of the Company. The five current members of the
Executive Committee beneficially own 6.94% of the outstanding Common Stock and
CAP Units combined, while all directors and executive officers as a group
beneficially own 11.81% of the outstanding Common Stock and CAP Units combined
as of September 18, 2000.
The Capital Accumulation Plan has been and will continue to be a major
contributor to equity ownership by senior executives. During the Transition
Period, 94.98 % of the more than 438 eligible Senior Managing Directors of Bear
Stearns (including all executive officers of the Company) participated in the
Capital Accumulation Plan.
Under the Capital Accumulation Plan, all Senior Managing Directors of Bear
Stearns (including executive officers of the Company) who are Accredited
Investors as defined by Rule 501 under the Securities Act are eligible to
participate on an elective basis. Participants in the Capital Accumulation Plan
generally defer a portion of their annual compensation for a period (a "Deferral
Period") up to five years after the end of the fiscal year for which it was
otherwise payable.
A participant's compensation deferred pursuant to the Capital Accumulation Plan
will be credited to such participant's deferred compensation account (the
"Capital Accumulation Account") in the form of units ("CAP Units"). Upon the
termination of a participant's Deferral Period under the Capital Accumulation
Plan, the participant will be entitled to receive from the Company a number of
freely transferable shares of Common Stock equal to the number of CAP Units then
credited to such participant's Capital Accumulation Account plus cash in the
amount, if any, of the participant's cash balance account at the end of such
period.
For fiscal years 1997, 1998 and 1999 and the Transition Period, participants in
the Capital Accumulation Plan have deferred a total of approximately
$808,300,000 in compensation. Furthermore, for the Transition Period, 35.81% of
the compensation (including amounts deferred pursuant to the Capital
Accumulation Plan) of the current members of the Executive Committee was
deferred in the Capital Accumulation Plan while 38.57% of such compensation was
deferred by all executive officers and employee directors. As of November 26,
1999, a total of 42,261,696 CAP Units were credited to the accounts of
participants, representing 26.30% of the outstanding Common Stock and CAP Units
combined.
Pursuant to the terms of the Capital Accumulation Plan, participants will only
receive CAP Units to the extent shares are purchased from existing stockholders.
Accordingly, employee stock ownership is increased without substantial dilution
to earnings per common share or book value per common share. Such shares may be
purchased in the open market or from participants who have received shares of
Common Stock pursuant to the Capital Accumulation Plan.
100
<PAGE>
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The total compensation of Mr. Cayne, the Company's Chief Executive Officer,
along with other members of the Executive Committee, is determined in all
material respects by the Performance Compensation Plan. Pursuant to the terms of
the Performance Compensation Plan, for the Transition Period Mr. Cayne received
a base salary of $92,308 and shared in a bonus fund based on the Company's
Transition Period after-tax return on equity. Mr. Cayne's proportionate share of
the Transition Period bonus fund (as well as that of the other members of the
Executive Committee) was determined by the Compensation Committee in September
1999, based on the recommendation of the Executive Committee as to how the bonus
fund should be allocated among the members of the Executive Committee. The
Executive Committee's recommendations were based on the same criteria
established by the Compensation Committee for determining the total compensation
of Senior Managing Directors who were not members of the Executive Committee for
the Transition Period.
Mr. Cayne's total salary and bonus compensation for the Transition Period was
$7,490,438 which is based on the Company's financial performance and the
allocation of the bonus fund. Mr. Cayne deferred 42.47% of eligible Transition
Period compensation under the Capital Accumulation Plan. Consequently, the
ultimate realization of a substantial portion of Mr. Cayne's benefit from his
current bonus will depend on the future performance of the Company and its
Common Stock. In the five year period from July 1, 1994 through June 30, 1999,
Mr. Cayne deferred $41,423,857 into the Capital Accumulation Plan.
The Compensation Committee believes that the Performance Compensation Plan, the
Stock Award Plan and the Capital Accumulation Plan provide appropriate
incentives to senior management of the Company and are fair and reasonable
methods for determining the compensation of such employees. Collectively, these
plans provide flexibility in structuring the compensation package for key
employees, while the Stock Award Plan and the Capital Accumulation Plan serves
to align employee and stockholder interests.
COMPENSATION COMMITTEE
Carl D. Glickman, Chairman
Donald J. Harrington
Frank T. Nickell
Vincent Tese
101
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PERFORMANCE GRAPH
The following performance graph compares the performance of an investment in the
Company's Common Stock over the last five years as if the Company's fiscal years
had ended on the last Friday in November of each such year, with the S&P 500
Index, the S&P Financial Diversified Index and its Peer Group. The entities
included in the Company's current peer group (the "Peer Group") consist of
Merrill Lynch & Co., Inc., Morgan Stanley, Dean Witter & Co., PaineWebber Group
Inc., Donaldson, Lufkin & Jenrette, Inc. and Lehman Brothers Holdings, Inc. The
performance graph assumes the value of the investment in the Company's Common
Stock and each index was $100 on November 24, 1994, and that all dividends have
been reinvested. There can be no assurance that the Company's future stock
performance will correlate with past stock performance.
["Comparison of Five-Year Cumulative Total Return" graph appears here in paper
format]
Assumes $100 invested on November 24, 1994 in the Company's Common Stock; S&P
500 Index; S&P Financial Diversified Index; the Peer Group and that all
dividends have been reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
The Bear Stearns Companies Inc. $100.00 $151.30 $229.07 $386.49 $415.71 $465.10
Peer Group (1) $100.00 $150.08 $202.05 $348.05 $434.87 $617.05
S & P Financial Diversified Index $100.00 $149.07 $204.74 $286.31 $403.88 $508.71
S & P 500 Index $100.00 $132.65 $167.37 $211.24 $263.61 $313.21
</TABLE>
(1) Peer Group calculation assumes conversion of Morgan Stanley Group
Inc. shares into newly formed company, Morgan Stanley, Dean Witter & Co., in
June 1997. Donaldson, Lufkin & Jenrette, Inc.'s performance is not included
in results for 1994 and 1995.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Company is not aware of any person or group of persons who are the
beneficial owners of more than 5% of the Company's outstanding Common Stock as
of August 14, 2000.
SECURITY OWNERSHIP OF MANAGEMENT
The following information with respect to the outstanding shares of Common Stock
beneficially owned by each director of the Company, each executive officer named
in the Summary Compensation Table under Item 11. Executive Compensation and all
directors and executive officers of the Company as a group, is furnished as of
September 18, 2000. Also set forth below as of such date is certain information
with respect to the number of shares of Common Stock represented by CAP Units
credited to the accounts of such persons pursuant to the Capital Accumulation
Plan (notwithstanding that shares underlying CAP Units generally are not deemed
to be beneficially owned for this purpose because the named persons have neither
the present ability to direct the vote nor the ability to dispose of such shares
and will not have such rights within the next 60 days).
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE OF
AND NATURE OF PERCENT OF OUTSTANDING
COMMON STOCK COMMON STOCK COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY REPRESENTED AND CAP UNITS
NAME AND ADDRESS (1) OWNED (2)(3) OWNED BY CAP UNITS COMBINED
-------------------- ------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
James E. Cayne (5)............. 4,393,784 4.12% 2,824,716 4.90%
Carl D. Glickman (6)........... 373,645 (4) - (4)
Alan C. Greenberg.............. 200,000 (4) 1,392,795 1.08%
Donald J. Harrington, C.M. 266 (4) - (4)
Mark E. Lehman (7)............. 111,836 (4) 324,768 (4)
Marshall J Levinson (8) ....... 1,430 (4) 23,216 (4)
William L. Mack................ 22,050 (4) - (4)
Michael Minikes (9) ........... 400,945 (4) 510,208 (4)
Samuel L. Molinaro, Jr......... 7,672 (4) 58,377 (4)
Frank T. Nickell............... 33,501 (4) - (4)
Frederic V. Salerno............ 412 (4) - (4)
Alan D. Schwartz............... 950,206 (4) 1,970,527 1.98%
Warren J. Spector (10)......... 145,146 (4) 3,657,221 2.58%
Vincent Tese................... 1,102 (4) - (4)
Fred Wilpon.................... 1,337 (4) - (4)
All directors and
executive officers as a
group (15 individuals)......... 6,643,332 6.22% 10,761,828 11.81%
</TABLE>
(Footnotes on following page)
103
<PAGE>
(1) The address in each case is 245 Park Avenue, New York, New York 10167.
(2) Nature of Common Stock beneficially owned is sole voting and investment
power, except as indicated in subsequent notes. Includes an aggregate of
3,359 shares of Common Stock owned by directors and executive officers
through The Bear Stearns Companies Inc. Employee Stock Ownership Plan (the
"ESOP"). Shares owned by the ESOP that are allocated to employees'
accounts are voted on a "pass through" basis by the employees to whose
accounts such shares are allocated. Shares not allocated to employees'
accounts, and allocated shares for which voting directions have not been
received, are voted by the trustee of the ESOP in proportion to the manner
in which allocated shares are directed to be voted by the employees.
(3) Does not include shares underlying CAP Units credited under the Capital
Accumulation Plan.
(4) Less than one percent.
(5) Does not include 45,669 shares of Common Stock owned by Mr. Cayne's wife,
as to which shares Mr. Cayne disclaims beneficial ownership. Does not
include 238,654 shares of Common Stock held by trusts established for Mr.
Cayne's children, as to which shares Mr. Cayne disclaims beneficial
ownership. Does not include 8,048 shares of Common Stock owned by a child
of Mr. Cayne, as to which shares Mr. Cayne disclaims beneficial ownership.
(6) Does not include 3,427 shares of Common Stock owned by Mr. Glickman's
wife, as to which shares Mr. Glickman disclaims beneficial ownership.
(7) Does not include 31,763 shares of Common Stock held in a trust established
for Mr. Lehman's wife, as to which shares Mr. Lehman disclaims beneficial
ownership.
(8) Does not include 77 shares of Common Stock held in a trust established for
Mr. Levinson's daughter, as to which shares Mr. Levinson disclaims
beneficial ownership.
(9) Does not include 1,780 shares of Common Stock owned by Mr. Minikes' wife,
as to which shares Mr. Minikes disclaims beneficial ownership.
(10) Does not include 636 shares of Common Stock owned by Mr. Spector's wife,
as to which shares Mr. Spector disclaims beneficial ownership.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CERTAIN TRANSACTIONS
The Company, in the ordinary course of business, has extended credit to certain
of its directors, officers and employees in connection with their purchase of
securities. Such extensions of credit have been made on substantially the same
terms, including interest rates and collateral requirements, as those prevailing
at the time for comparable transactions with non-affiliated persons, and did not
involve more than the normal risk of collectability or have unusual terms or
conditions which are disadvantageous to the Company. To the extent officers and
employees of the Company and members of their immediate families wish to
purchase securities in brokerage transactions, they ordinarily are required to
do so through Bear Stearns, which offers them a discount from its standard
commission rates that could be substantial depending on various factors,
including the size of the transaction. Bear Stearns periodically in the ordinary
course of its business, enters into transactions, as principal, involving the
purchase or sale of securities and commercial paper (including different forms
of repurchase transactions) with directors, officers, employees of the Company
and members of their immediate families. Such purchases and sales of securities
or commercial paper on a principal basis are effected on substantially the same
terms as similar transactions with unaffiliated third parties.
The Company, from time to time, has made loans to its officers and other
employees against commissions and other compensation which would otherwise be
payable to them in the ordinary course of business. Interest is generally
charged by the Company on such loans at the same rate of interest charged by
BSSC on loans to purchase securities. The Company currently requires that any
such loan in excess of $7,500 made to officers and other employees against
commissions or other compensation be approved by the Management and Compensation
Committee. During the Transition Period, the maximum aggregate amount of
month-end loans outstanding against commissions and other compensation was
approximately $2,966,792.
The Company has formed a limited partnership, The BSC Employee Fund, L.P. (the
"Fund"), which provides an investment opportunity for the Company's Senior
Managing Directors and Managing Directors. The Fund has committed to invest
$62,000,000 in a diversified group of closed-end acquisition and leveraged
buyout funds that are managed by highly regarded private equity firms. As of
November 26, 1999, 336 participants in the Fund have purchased a total of 1,201
limited partnership interests. Each limited partnership interest represents a
commitment by the participant to invest $50,000, of which $25,000 is funded by
the participant and $25,000 is in the form of a nonrecourse, interest-bearing
loan from the Company to the Fund participant. The loans bear interest at the
London Interbank Offered Rate plus 1.0%. Capital calls since June 12, 1997 have
totaled 77.74% of each participant's equity commitment. The total amount loaned
to the participants in the Fund at November 26, 1999 was $12,694,308. At such
date, loans in excess of $60,000 were outstanding to the following directors or
executive officers in the aggregate dollar amount set forth after each of their
respective names: James E. Cayne ($242,721), Alan D. Schwartz ($242,721), and
Warren J. Spector ($970,884). The aggregate amount of the loans outstanding to
all directors and executive officers as a group on such date was $1,529,142.
105
<PAGE>
Other than as described in Item 13, no director or executive officer of the
Company was indebted to the Company during the Transition Period for any amount
in excess of $60,000.
Sterling BSC Inc. ("Sterling BSC") and Hines Interests Limited Partnership
("Hines"), as a joint venture (the "Joint Venture"), are acting as a consultant
to the Company on certain real estate matters. The Company entered into an
agreement with Bradick 383 Associates LLC (the "Developer"), of which Sterling
BSC owns a 60% interest and Hines owns a 40% interest. Under the terms of this
agreement, relating to the development of the Company's new world headquarters
being developed at 383 Madison Avenue, the Company has agreed to pay a
development fee of $12 million and has also agreed to reimburse the Developer
for any direct administrative costs associated with the project. During the
Transition Period, the Company paid the Developer $1,983,059 related to this
agreement. Fred Wilpon, a director of the Company, is Chairman, Chief Executive
Officer and a 33.75% stockholder of Sterling BSC. Mr. Wilpon and members of his
family own approximately 85% of the outstanding stock of Sterling BSC.
106
<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 consolidated financial statements including the notes to the
consolidated financial statements required to be filed hereunder are
listed on pages 60-86 hereof.
FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules required to be filed hereunder are
listed on pages 110-114 hereof.
EXHIBITS:
(11) Statement Re Computation of Per Share Earnings
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges
(23) Independent Auditors' Consent
(27) Financial Data Schedule
(B) REPORTS ON FORM 8-K
During the five-month period ended November 26, 1999, the Company
filed the following Current Reports on Form 8-K.
(i) A Current Report on Form 8-K dated and filed on July 21,
1999, pertaining to the Company's results of operations for
the three-months and fiscal year ended June 30, 1999.
(ii) A Current Report on Form 8-K dated July 22, 1999 and filed
on July 28, 1999, pertaining to an opinion of Cadwalader,
Wickersham & Taft as to the legality of Global Notes due
2001 and 2002 ("Global Notes") issued by the Company and an
opinion of Cadwalader, Wickersham & Taft as to certain
federal income tax consequences in connection with the
offering of the Global Notes.
107
<PAGE>
(iii) A Current Report on Form 8-K dated August 5, 1999 and filed
on August 6, 1999, pertaining to Bear, Stearns Securities
Corp.'s settlement of an administrative proceeding filed by
the United States Securities and Exchange Commission
resolving allegations related to the firm's role as
clearing broker for A.R. Baron & Co.
(iv) A Current Report on Form 8-K dated August 9, 1999 and filed
on August 11, 1999, pertaining to an opinion of Cadwalader,
Wickersham & Taft as to certain federal income tax
consequences related to the Company's Medium Term Note
Program.
(v) A Current Report on Form 8-K dated October 13, 1999 and
filed on October 14, 1999, pertaining to the Company's
results of operations for the quarter ended September 24,
1999.
(vi) A Current Report on Form 8-K dated October 29, 1999 and
filed on November 3, 1999, announcing its declaration of
quarterly cash dividends and a 5% stock dividend on its
outstanding shares of common stock.
108
<PAGE>
Signature
Pursuant to the requirements 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.
THE BEAR STEARNS COMPANIES INC.
By: /s/ Marshall J Levinson
--------------------------------
Marshall J Levinson
Controller
(Principal Accounting Officer)
Dated: September 27, 2000
109
<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 November 26, 1999 and June 30, 1999, and
for the five-months ended November 26, 1999, and have issued our report thereon
dated June 16, 2000. Our audit also included the financial statement schedules
of The Bear Stearns Companies Inc. and Subsidiaries listed in Item 14, except
for the five-month period ended November 27, 1998 which is unaudited. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
New York, New York
June 16, 2000
110
<PAGE>
SCHEDULE I
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
NOVEMBER 26, 1999 JUNE 30, 1999
----------------- -------------
ASSETS
<S> <C> <C>
Cash $ 202,154 $ 19,277
Receivables from subsidiaries 28,108,951 28,162,003
Investment in subsidiaries, at equity 5,116,151 5,148,922
Property, equipment and leasehold improvements,
net of accumulated depreciation
and amortization of $636,919 and
$588,730 at November 26, 1999 and June 30, 1999, respectively 383,921 373,414
Other assets 979,118 1,046,431
--------------- -------------
Total Assets $ 34,790,295 $ 34,750,047
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 12,179,280 $ 13,510,102
Payables to subsidiaries 571,227 240,632
Other liabilities 826,355 881,112
--------------- -------------
13,576,862 14,631,846
--------------- -------------
Long-term borrowings 15,738,508 14,626,673
--------------- -------------
Long-term borrowings from subsidiaries 532,978 536,019
--------------- -------------
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;
184,805,848 and 176,011,113 shares issued at November 26, 1999
and June 30, 1999, respectively 184,806 176,011
Paid-in capital 2,509,801 2,269,927
Retained earnings 1,916,516 1,931,957
Capital Accumulation Plan 1,179,101 1,144,329
Treasury stock, at cost -
Adjustable Rate Cumulative Preferred Stock, Series A;
2,520,750 shares at November 26, 1999 and June 30, 1999 (103,421) (103,421)
Common stock; 66,367,276 shares and 56,333,508 shares at
November 26, 1999 and June 30, 1999, respectively (1,544,856) (1,263,294)
--------------- -------------
Total Stockholders' Equity 4,941,947 4,955,509
--------------- -------------
Total Liabilities and Stockholders' Equity $ 34,790,295 $ 34,750,047
=============== =============
See Notes to Condensed financial Information.
</TABLE>
111
<PAGE>
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(In thousands)
<CAPTION>
FIVE-MONTHS FIVE-MONTHS
ENDED ENDED
NOVEMBER 26, 1999 NOVEMBER 27, 1998
----------------- -----------------
(Unaudited)
Revenues
<S> <C> <C>
Intercompany Interest $ 522,973 $ 572,848
Other 67,300 57,144
----------------- -----------------
590,273 629,992
----------------- -----------------
Expenses
Interest 711,874 640,073
Other 43,986 22,691
----------------- -----------------
755,860 662,764
----------------- -----------------
Loss before benefit from income taxes and
equity in earnings of subsidiaries (165,587) (32,772)
Benefit from income taxes 31,005 13,349
----------------- -----------------
Loss before equity in earnings of subsidiaries (134,582) (19,423)
Equity in earnings of subsidiaries 420,396 149,691
----------------- -----------------
Net Income $ 285,814 $ 130,268
================= =================
Earnings Per Share (1) $ 1.78 $ 0.73
================= =================
(1) Reflects all stock dividends declared through October 29,1999.
See Notes to Condensed Financial Information.
</TABLE>
112
<PAGE>
<TABLE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
FIVE-MONTHS FIVE-MONTHS
ENDED ENDED
NOVEMBER 26, 1999 NOVEMBER 26, 1998
----------------- -----------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 285,814 $ 130,268
Adjustments to reconcile net income to cash provided by operating activities:
Equity in earnings of subsidiaries, net of dividends received (365,319) (95,757)
Depreciation and Amortization 56,285 45,845
Other 3,575 4,761
Decreases (increases) in assets:
Receivables from subsidiaries 53,052 6,227,872
Investment in subsidiaries, net 398,090 3,514
Other assets 75,166 (151,561)
Increases (decreases) in liabilities:
Payable to subsidiaries 324,623 1,831
Other liabilities (58,897) 200,627
------------ -----------
Cash provided by operating activities 772,389 6,367,400
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments from short-term borrowings (1,330,822) (3,761,424)
Net proceeds from issuance of long-term borrowings 1,776,547 1,481,606
(Decrease) increase in long-term borrowings from subsidiaries (3,041) 6,009
Capital Accumulation Plan 70,406 153,785
Tax Benefit of Common Stock Distribution 2,568 1,053
Payments for:
Retirement of long-term borrowings (668,656) (1,042,180)
Treasury Stock purchases (311,289) (209,057)
Cash dividends paid (54,548) (53,691)
------------ -----------
Cash used in financing activities (518,835) (3,423,899)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant & equipment (66,792) (54,923)
Purchase of investment securities and other assets (4,031) (6,469)
Proceeds from sale of investment securities and other assets 146 --
------------ -----------
Cash used in investing activities (70,677) (61,392)
------------ -----------
Net increase in cash 182,877 2,882,109
Cash, beginning of period 19,277 4
------------ -----------
Cash, end of period $ 202,154 $ 2,882,113
============ ===========
See Notes to Condensed Financial Information.
</TABLE>
113
<PAGE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
NOVEMBER 26, 1999 (AUDITED) AND
NOVEMBER 27, 1998 (UNAUDITED)
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 included in this
report.
2. DIVIDENDS RECEIVED FROM SUBSIDIARIES
The Company received from its consolidated subsidiaries cash dividends of
$55.1 million and $53.5 million for the five-months ended November 26,
1999 and November 27, 1998, respectively.
3. STATEMENT OF CASH FLOWS
Income taxes paid (consolidated) totaled $57.8 million and $17.9 million
in the five-months ended November 26, 1999 and November 27, 1998,
respectively. Cash payments for interest approximated interest expense for
the five-months ended November 26, 1999 and November 27, 1998.
4. PREFERRED STOCK
The Company has issued several series of preferred stock. Preferred stock
as of November 26, 1999 and June 30, 1999 was as follows:
In thousands, except share data NOVEMBER 26, 1999 JUNE 30, 1999
----------------- -------------
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
========= =========
114
