SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended February 25, 2000
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission File Number 1-8989
The Bear Stearns Companies Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3286161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Park Avenue, New York, New York 10167
(Address of principal executive offices) (Zip Code)
(212)272-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of April 6, 2000, the latest practicable date, there were
110,609,487 shares of Common Stock, $1 par value, outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) at February
25, 2000 and November 26, 1999
Consolidated Statements of Income (Unaudited) for the three-month
periods ended February 25, 2000 and February 26, 1999
Consolidated Statements of Cash Flows (Unaudited) for the three-month
periods ended February 25, 2000 and February 26, 1999
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
Assets
February 25, November 26,
<CAPTION> 2000 1999
-------------- ---------------
(In thousands)
<S> <C> <C>
Cash and cash equivalents $ 465,513 $ 1,570,483
Cash and securities deposited with clearing organizations
or segregated in compliance with federal regulation 1,216,328 1,188,788
Securities purchased under agreements to resell 33,755,084 35,999,998
Receivable for securities provided as collateral 3,062,515 2,571,404
Securities borrowed 67,870,635 60,429,297
Receivables:
Customers 22,264,873 16,839,040
Brokers, dealers and others 1,903,967 542,038
Interest and dividends 440,793 422,402
Financial instruments owned, at fair value 42,301,001 40,764,802
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization 504,235 504,040
Other assets 1,224,919 1,205,670
-------------- --------------
Total Assets $ 175,009,863 $ 162,037,962
============== ==============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
Liabilities and Stockholders' Equity
February 25, November 26,
<CAPTION> 2000 1999
--------------- -----------------
(In thousands, except share data)
<S> <C> <C>
Short-term borrowings $ 21,342,578 $ 13,424,201
Securities sold under agreements
to repurchase 56,042,251 53,323,109
Obligation to return securities received as
collateral 3,601,839 3,999,229
Payables:
Customers 39,517,939 42,843,757
Brokers, dealers and others 6,145,307 5,596,577
Interest and dividends 562,910 532,023
Financial instruments sold, but not
yet purchased, at fair value 23,234,482 19,704,921
Accrued employee compensation and benefits 869,069 733,241
Other liabilities and accrued expenses 507,718 527,565
--------------- -----------------
151,824,093 140,684,623
--------------- -----------------
Commitments and contingencies
Long-term borrowings 17,748,479 15,911,392
--------------- -----------------
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 shares issued at
February 25, 2000 and November 26, 1999 184,806 184,806
Paid-in capital 2,511,462 2,509,801
Retained earnings 2,167,875 1,916,516
Capital Accumulation Plan 1,164,903 1,179,101
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,520,750 shares (103,421) (103,421)
Common Stock - 72,244,413 shares and 66,367,276
shares at February 25, 2000 and
November 26, 1999, respectively (1,788,334) (1,544,856)
--------------- -----------------
Total Stockholders' Equity 4,937,291 4,941,947
--------------- -----------------
Total Liabilities and Stockholders' Equity $ 175,009,863 $ 162,037,962
=============== =================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION> Three-Months Ended
------------------------------------
February 25, February 26,
2000 1999
---------------- -----------------
(In thousands, except share data)
<S> <C> <C>
Revenues
Commissions $ 310,411 $ 246,519
Principal transactions 647,591 620,297
Investment banking 308,219 235,932
Interest and dividends 1,369,759 987,758
Other income 52,045 22,003
---------------- -----------------
Total Revenues 2,688,025 2,112,509
Interest expense 1,181,959 828,943
---------------- -----------------
Revenues, net of interest expense 1,506,066 1,283,566
---------------- -----------------
Non-interest expenses
Employee compensation and benefits 718,655 627,511
Floor brokerage, exchange
and clearance fees 36,634 35,130
Communications 42,116 36,537
Depreciation and amortization 37,934 33,319
Occupancy 24,985 28,199
Advertising and market development 27,374 23,361
Data processing and equipment 25,810 16,688
Other expenses 138,755 112,991
---------------- -----------------
Total non-interest expenses 1,052,263 913,736
---------------- -----------------
Income before provision for
income taxes 453,803 369,830
Provision for income taxes 175,622 139,164
---------------- -----------------
Net income $ 278,181 $ 230,666
================ =================
Net income applicable to
common shares $ 268,403 $ 220,888
================ =================
Basic and diluted earnings per share (1) $ 1.89 $ 1.45
================ =================
Weighted average common and common
equivalent shares outstanding (1):
Basic 157,641,253 165,086,729
================ =================
Diluted 157,685,693 165,086,729
================ =================
Cash dividends declared
per common share (1) $ 0.15 $ 0.14
================ =================
(1) Reflects all stock dividends declared through October 29, 1999.
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three-Months Ended
<CAPTION> ------------------------------------
February 25, February 26,
2000 1999
----------------- ---------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 278,181 $ 230,666
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization 37,934 33,319
Deferred income taxes (54,064) (68,022)
Other (8,262) 38,646
(Increases) decreases in operating assets:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations (27,540) 2,612,458
Securities purchased under agreements to resell 2,244,914 (5,691,818)
Securities borrowed (7,441,338) 561,210
Receivables:
Customers (5,425,833) (3,133,212)
Brokers, dealers and others (1,361,929) (54,391)
Financial instruments owned (2,424,700) (3,906,799)
Other assets 105,915 175,457
Increases (decreases) in operating liabilities:
Securities sold under agreements to repurchase 2,719,142 582,783
Payables:
Customers (3,325,818) (5,947,787)
Brokers, dealers and others 538,172 1,649,075
Financial instruments sold, but not yet purchased 3,529,561 9,551,228
Accrued employee compensation and benefits 85,128 358,998
Other liabilities and accrued expenses 1,265 (768,118)
----------------- ---------------
Cash used in operating activities (10,529,272) (3,776,307)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of short-term borrowings 7,918,377 1,193,670
Net proceeds from issuance of long-term borrowings 2,516,070 874,263
Net proceeds from issuance of subsidiary securities - 290,550
Tax benefit of Common Stock distributions 2,340 4,171
Note repayment from ESOP Trust - 7,114
Payments for:
Retirement of long-term borrowings (674,361) (791,512)
Treasury stock purchases (247,472) (54,998)
Cash dividends paid (26,822) (26,490)
----------------- ---------------
Cash provided by financing activities 9,488,132 1,496,768
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (38,129) (44,710)
Purchases of investment securities and other assets (28,582) (1,442)
Proceeds from sales of investment securities and other assets 2,881 22,169
----------------- ---------------
Cash used in investing activities (63,830) (23,983)
----------------- ---------------
Net decrease in cash and cash equivalents (1,104,970) (2,303,522)
Cash and cash equivalents, beginning of period 1,570,483 3,495,900
----------------- ---------------
Cash and cash equivalents, end of period $ 465,513 $ 1,192,378
================= ===============
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>
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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. The Board of Directors declared 5% stock dividends on the
Company's Common Stock in January 1999 and October 1999. Earnings per share
data for all periods included in the unaudited consolidated financial
statements reflect such 5% stock dividends.
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. This Quarterly Report on Form 10-Q presents the unaudited results
of the Company's operations for the first fiscal quarter ended February 25,
2000 and for the three-month period covering November 28, 1998 through
February 26, 1999.
The unaudited consolidated financial statements reflect all adjustments
which, in the opinion of management, are normal and recurring and are
necessary for a fair statement of the results for the interim periods
presented. The unaudited 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 unaudited consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. The
nature of the Company's business is such that the results of any interim
period may not be indicative of the results to be expected for an entire
fiscal year.
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. 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:
<CAPTION> February 25, November 26,
In thousands 2000 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments owned:
US government and agency $ 7,179,139 $ 7,662,482
Other sovereign governments 2,827,577 2,785,025
Corporate equity and convertible debt 8,863,167 9,421,251
Corporate debt 5,536,269 4,835,056
Derivative financial instruments 5,991,456 4,734,149
Mortgages and other mortgage-backed securities 11,566,299 10,911,528
Other 337,094 415,311
------------ -----------
$ 42,301,001 $40,764,802
============ ===========
Financial instruments sold, but not yet purchased:
US government and agency $ 5,199,734 $ 4,074,379
Other sovereign governments 1,687,143 2,116,448
Corporate equity 9,275,113 7,665,516
Corporate debt 1,761,560 1,228,338
Derivative financial instruments 5,309,315 4,599,592
Other 1,617 20,648
------------ ------------
$ 23,234,482 $ 19,704,921
============ ============
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
At February 25, 2000, the Company was contingently liable for unsecured
letters of credit of approximately $2.0 billion and letters of credit
secured by financial instruments of approximately $28.8 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 approximately $900 million at
February 25, 2000.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES (continued)
In the normal course of business, the Company has been named as a defendant
in several lawsuits, which involve claims for substantial amounts. Although
the ultimate outcome of these matters cannot be ascertained at this time,
it is the opinion of management, after consultation with counsel, that the
resolution of such matters will not have a material adverse effect on the
results of operations or the financial condition of the Company.
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns
Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly,
are subject to Rule 15c3-1 of the Securities Exchange Act of 1934 (the "Net
Capital Rule") and the capital rules of the New York Stock Exchange, Inc.
("NYSE") and other principal exchanges of which Bear Stearns and BSSC are
members. Included in the computation of net capital of Bear Stearns is net
capital of BSSC in excess of 5% of aggregate debit items arising from
customer transactions, as defined. At February 25, 2000, Bear Stearns' net
capital, as defined, of $1.54 billion exceeded the minimum requirement by
$1.49 billion.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NET CAPITAL REQUIREMENTS (continued)
Bear, Stearns International Limited ("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.
Bear Stearns Bank plc ("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 February 25, 2000, Bear Stearns, BSSC, BSIL, BSIT and BSB were in
compliance with their respective regulatory capital requirements.
5. EARNINGS PER SHARE
Earnings per share ("EPS") is computed by dividing net income applicable to
common shares by the weighted average number of common shares outstanding
during each period presented. Weighted average shares used to calculate
diluted EPS include the effect of stock options. Common shares include
common stock outstanding as well as the assumed distribution of shares of
common stock issuable under certain employee benefit plans, including
certain of the Company's deferred compensation arrangements, with
appropriate adjustments made to net income for expense accruals related
thereto.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the
three-months ended February 25, 2000 and February 26, 1999. Income taxes
paid totaled $114.0 million and $26.6 million for the three-months ended
February 25, 2000 and February 26, 1999, respectively.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter derivative
financial instruments and in connection with its proprietary market-making
and trading activities, enters into transactions in a variety of cash and
derivative financial instruments in order to reduce its exposure to market
risk, which includes interest rate, exchange rate and equity price risk.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
Statement of Financial Accounting Standards ("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.
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.
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
The following table represents the notional/contract amounts of the
Company's outstanding derivative financial instruments as of February 25,
2000 and November 26, 1999:
<CAPTION>
February 25, November 26,
In billions 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Rate:
Swap agreements, including options, swaptions,
Caps, collars, and floors $389.0 $371.4
Futures contracts 31.7 47.3
Options held 23.7 43.8
Options written 3.5 18.4
Foreign Exchange:
Futures contracts 32.3 39.9
Forward contracts 13.0 10.0
Options held 4.6 5.5
Options written 4.9 4.1
Mortgage-Backed Securities:
Forward Contracts 60.5 51.9
Equity:
Swap agreements 17.4 15.1
Futures contracts 3.4 2.1
Options held 5.2 6.5
Options written 4.7 6.3
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.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
The fair values of derivative financial instruments held or issued for
trading and hedging purposes as of February 25, 2000 and November 26, 1999,
were as follows:
<CAPTION> February 25, November 26,
2000 1999
---------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swap agreements $3,845 $3,603 $3,016 $2,952
Futures and forward
Contracts 405 497 264 158
Options held 1,742 1,454
Options written 1,209 1,490
The average monthly fair values of the derivative financial instruments for
the three-months ended February 25, 2000 and November 26, 1999 were as
follows:
February 25, November 26,
2000 1999
-------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
----------------------------------------------------------------------------------------------
Swap agreements $3,620 $3,414 $2,421 $2,625
Futures and forward
Contracts 373 307 244 287
Options held 1,548 1,178
Options written 1,253 1,577
The notional/contract amounts of these instruments do not represent the
Company's potential risk of loss due to counterparty nonperformance. Credit
risk arises from the potential inability of counterparties to perform in
accordance with the terms of the contract. The Company's exposure to credit
risk associated with counterparty nonperformance is limited to the net
replacement cost of over-the-counter contracts, 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. Generally, options written
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 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.
</TABLE>
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
The following table summarizes the credit quality of the Company's
over-the-counter derivatives by showing counterparty credit ratings for the
replacement cost of contracts in a gain position, net of $2.5 billion and
$1.7 billion of collateral as of February 25, 2000 and November 26, 1999,
respectively:
February 25, November 26,
In millions 2000 1999
---------------------------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $ 151.2 $ 192.2
AA 810.3 597.1
A 688.6 600.7
BBB 65.7 79.8
BB and Lower 76.9 56.9
(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.
8. SEGMENT 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.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT DATA (continued)
The Execution Services segment is comprised of clearance and
predominantly commission-related areas, including institutional equity
sales, institutional futures sales and specialist activities. Clearance
provides clearing, margin lending and securities borrowing to
facilitate customer short sales to approximately 2,900 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. Revenues 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.
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT DATA (continued)
For the three-months ended February 25, 2000:
<CAPTION>
<S> <C> <C> <C>
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ----------------------------------- ---------------------- -------------------------- -------------------------
Capital Markets $ 815,683 $ 272,289 $111,395,212
Execution Services 403,736 155,349 63,922,620
Wealth Management 226,625 58,765 3,024,660
Other (a) 60,022 (32,600) (3,332,629)
- ---------------------------------------------------------------------------------------------------------------
Total $ 1,506,066 $ 453,803 $175,009,863
===============================================================================================================
For the three-months ended February 26, 1999:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ----------------------------------- ---------------------- -------------------------- -------------------------
Capital Markets $ 783,432 $ 308,402 $128,074,751
Execution Services 307,697 114,308 51,136,175
Wealth Management 145,179 25,830 2,939,018
Other (a) 47,258 (78,710) (10,000,944)
- ---------------------------------------------------------------------------------------------------------------
Total $1,283,566 $ 369,830 $172,149,000
===============================================================================================================
(a) Other is comprised of consolidation/elimination entries, unallocated
revenues (predominantly interest) and corporate administrative functions,
including costs related to the Capital Accumulation Plan for Senior
Managing Directors (the "CAP Plan") which were $50.7 million and $34.0
million for the three-months ended February 25, 2000 and February 26, 1999,
respectively.
</TABLE>
9. 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. 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.
<PAGE>
Item 2 - 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 the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999.
Business Environment
The business environment during the quarter ended February 25, 2000 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. The Federal Reserve Board (the "Fed") raised
the federal funds rate 25 basis points on February 2, 2000 to 5.75% in an effort
to slow the momentum of the consumer-led US economy and prevent inflationary
pressures from taking hold. It was the fourth such rate increase in less than a
year. The Fed also took an inflationary bias, leading market participants to
anticipate further rate hikes. This and other factors caused the Dow Jones
Industrial Average and the Standard and Poor's 500 Index to decrease 10.3% and
5.9%, respectively for the quarter ended February 25, 2000. The Fed's
tightening, however, did little to suppress investors' appetite for technology
issues. The technology-heavy NASDAQ Composite Index increased 33.1% during the
three-months ended February 25, 2000 as capital continued to move into
technology issues. These factors contributed to strong performances in the
Company's equity businesses resulting in record levels in commission and equity
underwriting revenues. Heightened customer order flow and trading volumes in the
equity markets contributed to strong equity trading revenues. The fixed income
markets were generally weaker as rising interest rates and reduced customer
activity resulted in a decrease in fixed income trading and fixed income
underwriting revenues.
<PAGE>
A strong US economy and a stable interest rate environment characterized the
business environment during the three-months ended February 26, 1999. The
financial markets during this period benefited from the recovery of the bond
market crisis triggered by the default of Russia on its debt obligations which
occurred during the latter part of calendar year 1998. Improved financial
markets resulted in increased customer order flow and new securities issuances.
Equity markets were fueled by strong investor interest in internet and
technology stocks. The primary and secondary fixed income markets were also
strong which benefited the Company's underwriting and trading activities.
Results of Operations
Three-Months Ended February 25, 2000
Compared to Three-Months Ended February 26, 1999
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 quarter ended February 25, 2000 to the three-month period
ended February 26, 1999.
Net income for the quarter ended February 25, 2000 was $278.2 million, an
increase of 20.6% from $230.7 million for the comparable prior year period. Net
revenues increased 17.3% to $1.5 billion in the 2000 quarter from $1.3 billion
in the comparable 1999 period. The results reflect increases across the board in
commissions, investment banking and principal transactions revenues as well as
net interest revenues and other income. Earnings per share were $1.89 for the
2000 quarter versus $1.45 for the comparable 1999 period. Earnings per share
amounts for both periods reflect the stock dividends declared by the Company in
January 1999 and October 1999.
Commission revenues increased 25.9% in the 2000 quarter to $310.4 million from
$246.5 million in the comparable 1999 period. This increase was attributable to
strong performances in the clearance, institutional and private client services
areas driven by higher equity transaction volumes. The NYSE average daily volume
increased by greater than 30% in the 2000 quarter over the 1999 period.
The Company's principal transactions revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
February 25, 2000 February 26, 1999
-------------------- -----------------
Fixed Income $ 238,094 $ 384,199
Equity 227,329 148,872
Foreign Exchange & Other
Derivative Financial Instruments 182,168 87,226
--------- --------
$ 647,591 $620,297
========= ========
<PAGE>
Revenues from principal transactions increased 4.4% in the 2000 quarter to
$647.6 million from $620.3 million in the comparable 1999 period. This increase
reflects strong performances from the Company's equity derivatives activities
and equity market making activities, particularly in the over-the-counter
international equity and risk arbitrage areas. These increases were driven by
increased trading volumes in the technology and telecommunications sectors as
well as an increase in merger and acquisitions activity. Revenues derived from
fixed income activities decreased as a result of weaker performances in the
mortgage-backed securities and European sovereign debt areas. The secondary
fixed income markets were generally weaker due to rising interest rates and
reduced customer volumes, which contributed to the decline in these business
areas. These comparisons are against an exceptionally strong 1999 period, which
benefited from three rate cuts made by the Fed in the latter part of calendar
1998.
Investment banking revenues increased 30.6% to $308.2 million in the 2000
quarter from $235.9 million in the comparable 1999 period. This increase
reflects higher mergers and acquisitions advisory fees and equity underwriting
revenues during the 2000 quarter reflecting a strong market in the equity
underwriting area.
Net interest and dividends increased 18.3% to $187.8 million in the 2000 quarter
from $158.8 million in the comparable 1999 period. The increase was attributable
to increased levels of customer margin debt and customer shorts. Average
customer margin debt increased to $56.6 billion in the 2000 quarter from $38.3
billion in the comparable 1999 period and reached $61.5 billion at February 25,
2000. Average customer shorts increased to $64.7 billion in the 2000 quarter
from $59.8 billion in the comparable 1999 period. Average free credit balances
increased to $15.3 billion in the 2000 quarter from $12.5 billion in the
comparable 1999 period. The increase in net interest profit was partially offset
by higher funding costs incurred in advance of the Year 2000 as the Company
moved to extend short term maturities over the calendar year end.
Other income increased 136.5% to $52.0 million in the 2000 quarter from $22.0
million in the comparable 1999 period. This increase was primarily attributable
to an increase in performance-based and management fees earned by the Company's
Asset Management area, active equity markets and strong customer volume. The
Asset Management area increased assets under management to $13.7 billion at
February 25, 2000, which reflected a 33.7% increase over the comparable 1999
period. The largest component of the increase was attributable to mutual funds
and alternative investments, including venture capital funds, equity hedge funds
and mortgage hedge funds.
<PAGE>
Employee compensation and benefits increased 14.5% to $718.7 million in the 2000
quarter from $627.5 million in the comparable 1999 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
pre-tax earnings in the 2000 quarter, an increase in salesmen's commissions
related to increased commission revenues as well as an increase in headcount.
Employee compensation and benefits, as a percentage of net revenues, decreased
to 47.7% in the 2000 quarter from 48.9% in the comparable 1999 period.
All other expenses increased 16.6% to $333.6 million in the 2000 quarter from
$286.2 million in the comparable 1999 period. CAP Plan expense increased by
$16.7 million to $50.7 million in the 2000 quarter from $34.0 million in the
comparable 1999 period, reflecting higher pre-tax earnings and increased
participation. Data processing, communications and depreciation increased $19.3
million or 22.3% as a result of both the upgrading of existing communication and
computer systems throughout the firm and increased usage of information
services. EDP professional fees increased by $4.5 million in the 2000 quarter
due to various technology initiatives, including those related to several
internet-based systems.
The Company's effective tax rate increased to 38.7% in the 2000 quarter compared
to 37.6% in the comparable 1999 period due to higher levels of projected
earnings and a lower level of projected tax preference items.
Business Segments
The Company is primarily engaged in business as a securities broker and dealer
operating in three principal segments: Capital Markets, Execution Services and
Wealth Management. These segments are strategic business units analyzed
separately due to the distinct nature of the products they provide and the
clients they serve. Certain Capital Markets products are distributed by the
Wealth Management and Execution Services distribution network with the related
revenues of such intersegment services allocated to the respective segments
through transfer pricing.
The following segment operating results exclude certain corporate items. See
Note 8, footnote (a), of Notes to Consolidated Financial Statements.
Three-Months Ended February 25, 2000
Compared to Three-Months Ended February 26, 1999
- --------------------------------------------------------------
Capital Markets
----------------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands February 25, 2000 February 26, 1999
----------------------------------------------------------------------
Net revenues $815,683 $783,432
Pre-tax income $272,289 $308,402
----------------------------------------------------------------------
<PAGE>
Net revenues for Capital Markets were $815.7 million in the 2000 quarter, up
from $783.4 million in the comparable 1999 period. Pre-tax income for Capital
Markets was $272.3 million in the 2000 quarter, down from $308.4 million in the
comparable 1999 period. Equity results were strong in the 2000 quarter as active
markets and strong deal flow resulted in improved performances from equity
derivatives, over-the-counter, risk arbitrage and international equity trading.
Investment banking revenues increased sharply in the 2000 quarter reflecting
strong levels of mergers and acquisitions and equity underwriting activity.
Fixed income results in the 2000 quarter were weaker than in the comparable 1999
period as rising interest rates and lower customer volumes resulted in decreases
in the Company's mortgage-backed securities, corporate bonds operations and
domestic and European fixed income sales operations. Pre-tax income in the 2000
quarter decreased from the comparable 1999 period primarily due to lower levels
of profitability from the fixed income area.
Execution Services
---------------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands February 25, 2000 February 26, 1999
---------------------------------------------------------------------
Net revenues $403,736 $307,697
Pre-tax income $155,349 $114,308
---------------------------------------------------------------------
At February 25, 2000, the Company provided securities clearance services to
approximately 2,900 clearing clients worldwide. Such clients include
approximately 2,500 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 242,000 trades per day during the 2000 quarter versus approximately 177,000
trades per day in the comparable 1999 period.
Net revenues for Execution Services approximated $403.7 million in the 2000
quarter, up 31.2% from $307.7 million in the comparable 1999 period. Pre-tax
income for Execution Services was $155.3 million in the 2000 quarter, up 35.9%
from $114.3 million in the comparable 1999 period. Results reflect increased
levels of customer margin debt and transaction volumes which benefited the
Company's clearance revenues and improved domestic and European sales volume
which benefited the Company's institutional equity business.
<PAGE>
Wealth Management
-------------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands February 25, 2000 February 26, 1999
-------------------------------------------------------------------
Net revenues $226,625 $145,179
Pre-tax income $58,765 $25,830
-------------------------------------------------------------------
PCS provides high-net-worth individuals with an institutional level of service,
including access to the Company's resources and professionals. PCS maintains a
team of approximately 500 account executives in seven regional offices. PCS had
approximately $42.5 billion in client assets at February 25, 2000, an increase
of 22.2% compared to February 26, 1999.
The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"),
had approximately $13.7 billion in assets under management at February 25, 2000
which reflected a 33.7% increase over $10.3 billion in assets under management
at February 26, 1999. The largest components of the increase were attributable
to mutual funds and alternative investments. Alternative investments include
mortgage hedge funds which increased $241.8 million from the 1999 period, and
equity hedge funds which increased $389.8 million from the 1999 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 $226.6 million in the 2000 quarter, up
56.1% from $145.2 million in the comparable 1999 period. Pre-tax income for
Wealth Management was $58.8 million in the 2000 quarter, up 127.5% from $25.8
million in the comparable 1999 period. Growth in assets under management, active
equity markets and strong customer volumes resulted in the increase in
management fees and commissions in the 2000 quarter. Strong performances by
certain of the Company's equity hedge funds and private partnerships 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.
<PAGE>
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 equity and corporate debt
securities. 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 February 25, 2000 increased to $175.0 billion from
$162.0 billion at November 26, 1999. The increase is primarily attributable to
an increase in securities borrowed and receivables from customers resulting from
increased levels of customer shorts and margin debt.
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, 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 quarter ended February 25, 2000, the Company received proceeds
approximating $2.5 billion from the issuance of long-term debt which, net of
retirements, served to increase long-term debt to $17.7 billion at February 25,
2000 from $15.9 billion at November 26, 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.
<PAGE>
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. 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 currently 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.
Capital Resources
The Company conducts a substantial portion of all of its operating activities
within its regulated subsidiaries Bear Stearns, BSSC, Bear, Stearns
International Limited ("BSIL"), Bear Stearns International Trading Limited
("BSIT") and Bear Stearns Bank plc ("BSB"). In connection therewith, a
substantial portion of the Company's long-term borrowings and equity 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.
During the quarter ended February 25, 2000 the Company repurchased a total of
3,025,547 shares of Common Stock through open market transactions in connection
with the CAP Plan at a cost of approximately $122.3 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 and
any additional amounts allocated to participants under the CAP Plan.
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 up to an additional $500 million 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 three-months ended February 25, 2000, the Company purchased, under the
previous repurchase program authorization, a total of 3,398,986 shares of Common
Stock through open market transactions in connection with the Stock Award Plan
at a cost of approximately $136.1 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 maximum aggregate number of shares of Common Stock
that the Company may purchase under the Repurchase Program.
<PAGE>
Cash Flows
Cash and cash equivalents decreased by $1.1 billion during the quarter ended
February 25, 2000. Cash used in operating activities during the quarter ended
February 25, 2000 was $10.5 billion, primarily due to increases in securities
borrowed, customer receivables and financial instruments owned and a decrease in
customer payables, partially offset by increases in financial instruments sold,
but not yet purchased and securities sold under agreements to repurchase.
Financing activities provided cash of $9.5 billion, primarily derived from
proceeds from the issuance of short-term and long-term borrowings.
Regulated Subsidiaries
As registered broker-dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Securities Exchange Act of 1934, the 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 of 1986.
Additionally, BSB is subject to the regulatory capital requirements of the
Central Bank of Ireland. At February 25, 2000 Bear Stearns, BSSC, BSIL, BSIT,
and BSB were in compliance with their respective regulatory capital
requirements.
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 February 25, 2000, the Company held investments in
seventeen leveraged transactions with an aggregate value of approximately $183.3
million.
<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 February 25, 2000 the
Company held high yield instruments of $1.6 billion owned and $0.3 billion sold
short, as compared to $1.5 billion owned and $0.3 billion sold short as of
November 26, 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.
Year 2000 Issue
The Year 2000 issue was the result of legacy computer programs having been
written using two digits rather than four digits to define the applicable year
and therefore without consideration of the impact of the upcoming change in the
century. Such programs, unless corrected, may not have been able to accurately
process dates ending in the Year 2000 and thereafter.
Through February 25, 2000, the amounts incurred related to the assessment of,
and efforts in connection with, the Year 2000 and the development and execution
of a remediation plan have approximated $78.2 million of which approximately
$11.0 million in hardware and software has been capitalized. The total remaining
Year 2000 project cost as of February 25, 2000 was not material.
Nothing has come to the Company's attention which would cause it to believe that
its Year 2000 compliance effort was not successful. While the Company will
continue to monitor for Year 2000 related problems, to date no significant Year
2000 issues have been encountered.
<PAGE>
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates, equity and futures prices,
changes in the implied volatility of interest rate, foreign exchange rate,
equity and futures prices and also changes in the credit ratings of either the
issuer or its related country of origin. Market risk is inherent to both
derivative and non-derivative financial instruments, and accordingly, the scope
of the Company's market risk management procedures includes all market
risk-sensitive financial instruments. The Company's exposure to market risk is
directly related to its role as a financial intermediary in customer-related
transactions and to its proprietary trading and arbitrage activities. For a
discussion of the Company's primary market risk exposures, which include
interest rate risk, foreign exchange rate risk, and equity price risk, and a
discussion of how those exposures are managed, see the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999.
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.
<PAGE>
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.
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.
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 February 25, 2000. The total
value at risk presented below is less than the sum of the individual components
(i.e. Interest Rate Risk, Foreign Exchange Rate Risk, Equity Risk) due to the
benefit of diversification among the risks.
This table illustrates the value at risk for each component of market risk as
of:
February 25, November 26,
in millions 2000 1999
----------- -------- --------
MARKET RISK
Interest $ 8.2 $ 11.9
Currency 3.0 1.2
Equity 9.8 12.6
Diversification benefit (7.9) (8.4)
------ ------
Total $ 13.1 $ 17.3
====== ======
<PAGE>
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.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
Alpha Group Consultants, et al. v. Weintraub, et al./In re Weintraub
Entertainment Group Litigation
As previously reported in the Company's Report on Form 10-K for the fiscal year
ending June 30, 1999 ("1999 Form 10-K") and Report on Form 10-Q for the quarter
ended December 31, 1999 ("Second Quarter Fiscal 2000 Form 10-Q"), Bear Stearns
is a defendant in litigation pending in the United States District Court for the
Southern District of California.
On March 6, 2000, the court granted final approval to the parties' proposed
settlement.
Del Rosario, et al. v. Bear, Stearns & Co. Inc., et al.
As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a
respondent in an arbitration proceeding pending before the NASD.
On February 24, 2000, claimants informed the NASD that they had decided to
voluntarily withdraw all claims against the respondents. On March 20, 2000, the
NASD removed this matter from its arbitration docket.
Manhattan Investment Fund Limited
The following matters arise out of the failure and subsequent bankruptcy filing
of Manhattan Investment Fund Limited ("MIFL").
(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.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
(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.
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.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
(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 & Co. Inc. 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. The complaint in this action has not
yet been served on Bear, Stearns & Co. Inc. or BSSC.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
McKesson HBOC, Inc.
As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a
defendant in litigation pending in the Chancery Court of the State of Delaware,
New Castle County, the Superior Court of the State of California, San Francisco
County, and the United States District Court for the Northern District of
California.
On March 31, 2000, plaintiffs in the Mitchell action pending in California
Superior Court filed an amended complaint against the same defendants and
asserting the same claims against Bear Stearns as the original complaint.
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.
The Company also is involved from time to time in investigations and proceedings
by governmental, regulatory and self-regulatory agencies.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement Re Computation of Per Share Earnings
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the quarter, the Company filed the following Current Reports on Form
8-K.
(i) A Current Report on Form 8-K dated December 1, 1999 and filed on
December 7, 1999, pertaining to an opinion of Cadwalader, Wickersham & Taft
as to the legality of 7.625% of Global Notes due 2009 ("Global Notes")
issued by the Company, certain federal income tax consequences in
connection with the offering of the Global Notes, and a consent in
connection with the offering of the Global Notes.
(ii) A Current Report on Form 8-K dated January 19, 2000 and filed on
January 21, 2000, pertaining to the Company's results of operations for the
three-months ended December 31, 1999 and the change in fiscal year end to
November 30.
(iii) A Current Report on Form 8-K dated January 25, 2000 and filed on
February 1, 2000, pertaining to an opinion of Cadwalader, Wickersham & Taft
as to the legality of 7.625% of Global Notes due 2005 ("Global Notes")
issued by the Company, certain federal income tax consequences in
connection with the offering of the Global Notes, and a consent in
connection with the offering of the Global Notes.
<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.
(Registrant)
Date: April 10, 2000 By: /s/ Marshall J Levinson
Marshall J Levinson
Controller
(Principal Accounting Officer)
<PAGE>
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
Exhibit Index
Exhibit No. Description Page
(11) Statement Re Computation of Per Share Earnings 35
(12) Statement Re Computation of Earnings to Fixed Charges 36
(27) Financial Data Schedule 37
<TABLE>
EXHIBIT 11
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<CAPTION> Three-Months Ended
-------------------------------------
February 25, February 26,
2000 1999
------------ ------------
(In thousands, except share data)
<S> <C> <C>
Weighted average common
and common equivalent
shares outstanding:
Average Common Stock outstanding 115,372 123,251
Average Common Stock
equivalents:
Common Stock issuable
under employee benefit plans 505 512
Common Stock issuable
assuming conversion of CAP Units 41,764 41,324
------------ ------------
Total weighted average common and
common equivalent shares outstanding (1) 157,641 165,087
Effect of dilutive instruments:
Employee stock options 45 -
------------ ------------
Total weighted average diluted common and
common equivalent shares outstanding (1) 157,686 165,087
============ ============
Net income $278,181 $230,666
Preferred Stock dividend requirements (9,778) (9,778)
Income adjustment (net of tax) applicable
to deferred compensation arrangements 28,875 19,203
------------ ------------
Adjusted net income $297,278 $240,091
============ ============
Basic and diluted earnings per share (1) $ 1.89 $ 1.45
============ ============
(1) Reflects all stock dividends declared through October 29, 1999.
</TABLE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12
(In thousands, except for ratio)
<CAPTION>
(Unaudited) (Unaudited)
Three-Months Three-Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended Ended
February 25,2000 February 26,1999 June 30, 1999 June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings before taxes
on income $ 453,803 $ 369,830 $ 1,064,108 $ 1,063,492 $ 1,013,690 $ 834,926 $ 388,082
---------- ----------- ----------- ------------ ------------- ------------- -------------
Add: Fixed Charges
Interest 1,181,959 828,943 3,379,914 3,638,513 2,551,364 1,981,171 1,678,515
Interest factor
in rents 7,722 8,278 31,363 30,130 26,516 25,672 24,594
----------- ----------- ----------- ------------ ------------- ------------- -------------
Total fixed charges 1,189,681 837,221 3,411,277 3,668,643 2,577,880 2,006,843 1,703,109
----------- ----------- ----------- ------------ ------------- ------------- -------------
Earnings before fixed
charges and taxes
on income $ 1,643,484 $ 1,207,051 $ 4,475,385 $ 4,732,135 $ 3,591,570 $ 2,841,769 $ 2,091,191
=========== =========== =========== ============ ============= ============= =============
Ratio of earnings to
fixed charges 1.4 1.4 1.3 1.3 1.4 1.4 1.2
=========== =========== =========== ============ ============= ============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
Exhibit 27
THE BEAR STEARNS COMPANIES INC.
FINANCIAL DATA SCHEDULE
(UNAUDITED)
(In thousands, except share data)
This schedule contains summary financial information extracted from the
unaudited Consolidated Statement of Financial Condition at February 25, 2000 and
the unaudited Consolidated Statement of Income for the three-months ended
February 25, 2000, which are contained in the body of the accompanying Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Nov-30-2000
<PERIOD-END> Feb-25-2000
<CASH> 465,513
<RECEIVABLES> 24,168,840
<SECURITIES-RESALE> 33,755,084
<SECURITIES-BORROWED> 67,870,635
<INSTRUMENTS-OWNED> 42,301,001
<PP&E> 504,235
<TOTAL-ASSETS> 175,009,863
<SHORT-TERM> 21,342,578
<PAYABLES> 45,663,246
<REPOS-SOLD> 56,042,251
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 23,234,482
<LONG-TERM> 17,748,479
0
800,000
<COMMON> 184,806
<OTHER-SE> 3,952,485
<TOTAL-LIABILITY-AND-EQUITY> 175,009,863
<TRADING-REVENUE> 647,591
<INTEREST-DIVIDENDS> 1,369,759
<COMMISSIONS> 310,411
<INVESTMENT-BANKING-REVENUES> 308,219
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 1,181,959
<COMPENSATION> 718,655
<INCOME-PRETAX> 453,803
<INCOME-PRE-EXTRAORDINARY> 453,803
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278,181
<EPS-BASIC> 1.89
<EPS-DILUTED> 1.89
</TABLE>
