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 December 31, 1999
[ ] 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 February 10, 2000, the latest practicable date, there were 113,409,567
shares of Common Stock, $1 par value, outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at December 31, 1999
(Unaudited) and June 30, 1999
Consolidated Statements of Income (Unaudited)for the three-and
six-month periods ended December 31, 1999 and December 31, 1998
Consolidated Statements of Cash Flows (Unaudited)for the six-month
periods ended December 31, 1999 and December 31, 1998
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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
December 31, June 30,
1999 1999
-------------------- ---------------------
(Unaudited)
(In thousands)
Cash and cash equivalents $ 822,780 $ 2,129,080
Cash and securities deposited with clearing organizations
or segregated in compliance with federal regulations 2,185,529 2,891,397
Securities purchased under agreements to resell 34,701,654 32,996,226
Receivable for securities provided as collateral 1,763,128 1,735,293
Securities borrowed 73,529,786 54,173,726
Receivables:
Customers 19,059,883 14,510,628
Brokers, dealers and others 434,861 1,452,590
Interest and dividends 446,353 366,110
Financial instruments owned, at fair value 42,588,736 41,942,878
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization 517,406 486,735
Other assets 1,342,478 1,209,677
---------------------
--------------------
Total Assets $ 177,392,594 $ 153,894,340
==================== =====================
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
December 31, June 30,
1999 1999
-------------------- ---------------------
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 17,943,682 $ 14,145,410
Securities sold under agreements
to repurchase 63,128,957 50,673,644
Obligation to return securities received as
collateral 2,938,766 1,944,286
Payables:
Customers 43,457,705 40,822,913
Brokers, dealers and others 4,284,488 2,195,691
Interest and dividends 547,711 542,478
Financial instruments sold, but not
yet purchased, at fair value 21,480,555 21,506,372
Accrued employee compensation and benefits 879,743 1,306,357
Other liabilities and accrued expenses 513,141 654,588
-------------------- ---------------------
155,174,748 133,791,739
-------------------- ---------------------
Commitments and contingencies
Long-term borrowings 16,787,849 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
December 31, 1999 and June 30, 1999, respectively 184,806 176,011
Paid-in capital 2,510,569 2,269,927
Retained earnings 2,033,656 1,931,957
Capital Accumulation Plan 1,174,690 1,144,329
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,520,750 shares (103,421) (103,421)
Common Stock - 69,441,402 shares and 56,333,508
shares at December 31, 1999 and
June 30, 1999, respectively (1,670,303) (1,263,294)
-------------------- ---------------------
Total Stockholders' Equity 4,929,997 4,955,509
-------------------- ---------------------
Total Liabilities and Stockholders' Equity $ 177,392,594 $ 153,894,340
==================== =====================
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three-Months Ended Six-Months Ended
------------------------------ --------------------------
December 31, December 31, December 31, December 31,
1999 1998 (1) 1999 1998 (1)
------------- -------------- ------------ -------------
(In thousands, except share data)
Revenues
Commissions $ 297,859 $ 254,676 $ 526,391 $ 495,476
Principal transactions 606,261 419,002 968,467 616,051
Investment banking 273,164 163,664 535,694 285,440
Interest and dividends 1,302,362 1,068,680 2,316,274 2,173,519
Other income 59,439 26,705 82,667 42,845
------------- -------------- ------------ ------------
Total Revenues 2,539,085 1,932,727 4,429,493 3,613,331
Interest expense 1,113,399 911,935 1,957,794 1,851,638
------------- -------------- ------------ ------------
Revenues, net of interest expense 1,425,686 1,020,792 2,471,699 1,761,693
------------- -------------- ------------ ------------
Non-interest expenses
Employee compensation and benefits 673,740 552,344 1,190,133 958,225
Floor brokerage, exchange
and clearance fees 41,455 41,375 77,353 83,439
Communications 39,940 36,362 77,633 69,457
Depreciation and amortization 38,000 32,758 75,422 65,152
Occupancy 28,515 25,923 55,430 51,811
Advertising and market development 24,797 23,854 49,983 46,892
Data processing and equipment 29,002 15,293 49,487 26,278
Other expenses 160,205 85,405 256,649 159,652
------------- -------------- ------------ ------------
Total non-interest expenses 1,035,654 813,314 1,832,090 1,460,906
------------- -------------- ------------ ------------
Income before provision for
income taxes 390,032 207,478 639,609 300,787
Provision for income taxes 144,935 71,558 236,655 100,764
------------- -------------- ------------ ------------
Net income $ 245,097 $ 135,920 $ 402,954 $ 200,023
============= ============== ============ ============
Net income applicable to
common shares $ 235,319 $ 126,142 $ 383,398 $ 180,150
============= ============== ============ ============
Earnings per share $ 1.64 $ 0.80 (2) $ 2.58 $ 1.16 (2)
============= ============== ============ ============
Weighted average common and
common equivalent shares
outstanding 161,852,191 166,273,480 (2) 164,423,424 166,934,802 (2)
============= ============== ============ ============
Cash dividends declared
per common share $ 0.15 $ 0.14 (2) $ 0.29 $ 0.27 (2)
============= ============== ============ ============
(1) Certain amounts have been reclassified to conform to the current period's presentation.
(2) Adjusted for all stock dividends declared through October 29, 1999.
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six-Months Ended
---------------------------------------------
December 31, December 31,
1999 1998
--------------------- ------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 402,954 $ 200,023
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 75,422 65,152
Deferred income taxes (76,200) 6,682
Other 28,802 36,759
Decreases (increases) in operating assets:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations 705,868 (1,306,886)
Securities purchased under agreements to resell (1,705,428) (3,214,244)
Securities borrowed (19,356,060) 2,251,790
Receivables:
Customers (4,549,255) 2,807,770
Brokers, dealers and others 1,017,729 (475,020)
Financial instruments owned 320,787 943,797
Other assets (137,887) 412,993
Increases (decreases) in operating liabilities:
Securities sold under agreements to repurchase 12,455,313 4,659,499
Payables:
Customers 2,634,792 4,725,473
Brokers, dealers and others 2,078,178 (979,434)
Financial instruments sold, but not yet purchased (25,817) (4,659,933)
Accrued employee compensation and benefits (499,064) (613,523)
Other liabilities and accrued expenses (136,214) (323,248)
--------------------- ------------------
Cash (used in) provided by operating activities (6,766,080) 4,537,650
--------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments on) short-term borrowings 3,798,272 (4,593,267)
Net proceeds from issuance of long-term borrowings 3,196,837 1,936,990
Net proceeds from issuance of subsidiary securities - 290,550
Capital Accumulation Plan 70,406 153,785
Tax benefit of Common Stock distributions 3,457 603
Note repayment for ESOP Trust - 7,114
Payments for:
Retirement of long-term borrowings (1,065,852) (1,398,805)
Treasury stock purchases (436,512) (229,491)
Cash dividends paid (54,548) (53,691)
--------------------- ------------------
Cash provided by (used in) financing activities 5,512,060 (3,886,212)
--------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (106,093) (91,585)
Purchases of investment securities and other assets (41,261) (19,870)
Proceeds from sales of investment securities and other assets 95,074 50,273
--------------------- ------------------
Cash used in investing activities (52,280) (61,182)
--------------------- ------------------
Net (decrease) increase in cash and cash equivalents (1,306,300) 590,256
Cash and cash equivalents, beginning of period 2,129,080 1,073,821
--------------------- ------------------
Cash and cash equivalents, end of period $ 822,780 $ 1,664,077
===================== ==================
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.
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. Certain prior period amounts have been reclassified to conform
to the current period's presentation. On October 29, 1999 the Board of
Directors declared a 5% stock dividend on the Company's Common Stock to
stockholders of record on November 12, 1999 which was distributed November
26, 1999. Earnings per share data for all prior periods included in the
consolidated financial statements are presented after giving retroactive
effect to the 5% stock dividend.
The 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 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 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.
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:
December 31, June 30,
In thousands 1999 1999
- -----------------------------------------------------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 7,982,129 $ 8,211,944
Other sovereign governments 2,780,371 2,742,486
Corporate equity and convertible debt 9,317,507 14,578,501
Corporate debt 4,932,118 4,972,621
Derivative financial instruments 5,958,362 3,035,278
Mortgages and other mortgage-backed securities 11,249,716 7,869,884
Other 368,533 532,164
------------- ------------
$ 42,588,736 $ 41,942,878
============= ============
Financial instruments sold, but not yet purchased:
US government and agency $ 5,080,489 $ 5,250,633
Other sovereign governments 1,189,436 2,639,952
Corporate equity 8,468,678 6,134,317
Corporate debt 1,383,321 1,707,998
Derivative financial instruments 5,358,500 5,687,296
Other 131 86,176
------------- ------------
$ 21,480,555 $ 21,506,372
============= ============
3. COMMITMENTS AND CONTINGENCIES
At December 31, 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 $879.3 million at December 31, 1999.
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.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 December 31, 1999, Bear Stearns' net
capital, as defined, of $1.54 billion exceeded the minimum requirement by
$1.49 billion.
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, Ireland and is subject to the regulatory
capital requirements of the Central Bank of Ireland.
At December 31, 1999, Bear Stearns, BSSC, BSIL, BSIT and BSB were in
compliance with their respective regulatory capital requirements.
5. EARNINGS PER SHARE
Earnings per share is computed by dividing net income applicable to common
shares by the weighted average number of common shares outstanding during
each period presented. Common shares include the assumed distribution of
shares of common stock issued or issuable under various employee benefit
plans, including certain of the Company's deferred compensation
arrangements, with appropriate adjustments made to net income for expense
accruals related thereto.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the six-months
ended December 31, 1999 and December 31, 1998. Income taxes paid totaled
$207.1 million and $43.3 million for the six-months ended December 31, 1999
and December 31, 1998, 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.
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.
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 December 31,
1999 and June 30, 1999:
December 31, June 30,
In billions 1999 1999
---------------------------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options, swaptions,
caps, collars, and floors $377.6 $339.1
Futures contracts 25.2 52.5
Options held 38.5 24.0
Options written 11.3 3.9
Foreign Exchange:
Futures contracts 21.2 19.3
Forward contracts 12.0 15.6
Options held 4.8 2.6
Options written 5.3 3.1
Mortgage-Backed Securities:
Forward Contracts 51.2 63.4
Equity:
Swap agreements 14.5 11.9
Futures contracts 0.9 0.8
Options held 5.9 7.5
Options written 5.4 7.3
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
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 December 31, 1999 and June 30, 1999, were
as follows:
December 31, June 30,
1999 1999
-------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------------------
Swap agreements $4,045 $3,848 $1,375 $2,290
Futures and forward
Contracts 314 167 278 259
Options held 1,627 1,397
Options written 1,371 3,164
The average monthly fair values of the derivative financial instruments for
the six-months ended December 31, 1999 and the fiscal year ended June 30,
1999 were as follows:
December 31, June 30,
1999 1999
------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------------------
Swap agreements $2,653 $2,800 $2,227 $2,317
Futures and forward
Contracts 331 284 334 368
Options held 1,242 1,154
Options written 1,547 3,156
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
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
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.
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 $2.8 billion and
$1.7 billion of collateral, respectively, as of December 31, 1999 and June
30, 1999:
December 31, June 30,
In millions 1999 1999
--------------------------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $ 147.6 $ 140.0
AA 579.9 627.1
A 448.8 303.4
BBB 92.7 56.6
BB and Lower 30.8 39.7
Non-rated 0.5 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.
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
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT DATA (continued)
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. Investment Banking provides capabilities in capital
raising, strategic advisory, mergers and acquisitions and merchant banking.
The Execution Services segment is comprised of clearance and predominantly
commission-related areas, including institutional equity sales,
institutional futures sales and specialist activities. Clearance provides
clearing, margin lending and securities borrowing to facilitate customer
short sales to 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.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT DATA (continued)
For the three-months ended December 31, 1999:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ---------------------------------------------------------------------------------------------------------
Capital Markets $ 756,211 $ 267,642 $ 114,809,087
Execution Services 378,261 134,893 60,876,923
Wealth Management 217,620 56,749 3,133,425
Other (a) 73,594 (69,252) (1,426,841)
- ---------------------------------------------------------------------------------------------------------
Total $ 1,425,686 $ 390,032 $ 177,392,594
=========================================================================================================
For the three-months ended December 31, 1998:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ---------------------------------------------------------------------------------------------------------
Capital Markets $ 511,580 $ 95,916 $ 101,617,686
Execution Services 300,469 107,970 46,485,101
Wealth Management 143,582 26,068 3,159,677
Other (a) 65,161 (22,476) (131,965)
- ---------------------------------------------------------------------------------------------------------
Total $ 1,020,792 $ 207,478 $ 151,130,499
=========================================================================================================
For the six-months ended December 31, 1999:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ---------------------------------------------------------------------------------------------------------
Capital Markets $ 1,308,295 $ 430,206 $ 114,809,087
Execution Services 694,876 249,672 60,876,923
Wealth Management 346,949 75,324 3,133,425
Other (a) 121,579 (115,593) (1,426,841)
- ---------------------------------------------------------------------------------------------------------
Total $ 2,471,699 $ 639,609 $ 177,392,594
=========================================================================================================
For the six-months ended December 31, 1998:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ---------------------------------------------------------------------------------------------------------
Capital Markets $ 780,632 $ 32,710 $ 101,617,686
Execution Services 598,110 232,523 46,485,101
Wealth Management 263,996 39,826 3,159,677
Other (a) 118,955 (4,272) (131,965)
- ---------------------------------------------------------------------------------------------------------
Total $1,761,693 $ 300,787 $ 151,130,499
=========================================================================================================
(a) Other is comprised of consolidation/elimination entries as well as
corporate administrative functions, including costs related to the Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan") which were
$52.0 million and $12.0 million for the three-months ended December 31,
1999 and December 31, 1998, respectively and $72.5 million and $24.0
million for the six-months ended December 31, 1999 and December 31, 1998,
respectively.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and stock appreciation rights in tandem with such options. In
January 1999, the Company granted 3,886,334 options under such plan, at
fair market value on date of grant. These options vest after three years
and have a ten year expiration.
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 Company's second fiscal quarter ended
December 31, 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 by 25 basis points
on November 16, 1999. For the quarter ended December 31, 1999, the Dow Jones
Industrial Average, Standard and Poor's 500 Index and NASDAQ Composite Index
increased 11.8%, 15.0% and 48.5%, respectively. These factors contributed to
strong equity underwriting and mergers and acquisitions activities. Fixed income
markets, while improved over the comparable prior year period, remained weak in
the face of rising interest rates and reduced trading activity due to the Year
2000 uncertainty, which led to lower investor and issuer activity.
In the fiscal quarter ended December 31, 1998, US financial markets were
recovering from economic turmoil in both the Far East and emerging market
nations and the default by Russia on its debt obligations. The Federal Reserve
reduced the Federal Funds rate on three occasions during the 1998 quarter. The
reduction in the Federal Funds rate by a total of 75 basis points, coupled with
the US economy's resilience, prompted the recovery of US financial markets.
Credit spreads tightened significantly, which led to improved, but still weak,
conditions in both the primary and secondary domestic fixed income markets with
reduced levels of liquidity in all market segments. Rising domestic equity
markets during the 1998 quarter reflected strong investor interest in the
internet and technology sectors.
Results of Operations
Three-Months Ended December 31, 1999 Compared to Three-Months Ended December 31,
1998
Net income in the 1999 quarter was $245.1 million, an increase of 80.3% from the
$135.9 million in the comparable prior year quarter. Revenues, net of interest
expense ("net revenues") increased 39.7% to $1.4 billion in the 1999 quarter
from $1.0 billion in the comparable 1998 quarter. The increase was attributable
to strong performances from all of the Company's core businesses during the
quarter, most notably from principal transactions and investment banking.
Earnings per share were $1.64 for the 1999 quarter versus $0.80 for the
comparable 1998 quarter. The 1998 quarter earnings per share amount reflects the
adjustment for the 5% stock dividends declared by the Company in January 1999
and October 1999.
Commission revenues increased 17.0% in the 1999 quarter to a record level $297.9
million from $254.7 million in the comparable 1998 quarter. This increase was
primarily attributable to the firm's clearance business, which was positively
impacted by overall increases in average daily volume in the 1999 quarter
compared to the 1998 quarter.
The Company's principal transactions revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
December 31, 1999 December 31, 1998
Fixed Income $ 265,774 $ 223,582
Equity 204,063 139,170
Foreign Exchange & Other
Derivative Financial Instruments 136,424 56,250
--------- ---------
$ 606,261 $ 419,002
========= =========
Revenues from principal transactions increased 44.7% in the 1999 quarter,
principally attributable to an increase in revenues derived from derivative
financial instruments, including both equity and fixed income, which benefited
from strong market conditions and customer flow. Principal transactions revenues
also increased as a result of equity activities, including the over-the-counter
and international equity areas. Stronger market conditions resulted in higher
trading volumes in these areas, especially in the technology and
telecommunications sectors. Revenues derived from fixed income also increased,
primarily reflecting increases in both the distressed and emerging markets
areas. Comparisons in these areas are against a 1998 quarter that reflected the
impact of difficult market conditions in the Far East and emerging market
nations, which led to credit spread widening across a range of fixed income
products in the 1998 quarter.
Investment banking revenues increased 66.9% to $273.2 million in the 1999
quarter from $163.7 million in the comparable 1998 quarter. This increase was
driven by record level equity underwriting revenues which increased 241.4% in
the 1999 quarter, reflecting a strong volume of technology related initial
public offerings ("IPO"). Revenues from the Company's mergers and acquisitions
activities increased 225.7% in the 1999 quarter reflecting strong domestic
activity and continuing deal interest.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 20.6% to $189.0 million in the 1999 quarter from
$156.7 million in the comparable 1998 quarter. This increase was primarily
attributable to higher levels of margin debt principally attributable to the
Company's securities clearance business. The increase in net interest profit was
partially offset by generally higher funding costs incurred by the Company as we
extended debt maturities due to uncertainty in anticipation of potential Year
2000 issues. Customer margin debt at December 31, 1999 approximated $56.2
million from $42.7 million at December 31, 1998. Average margin debt balances
increased to $48.2 billion in the 1999 quarter from $38.4 billion in the
comparable 1998 quarter reflecting strong equity markets. Average customer
shorts decreased slightly to $61.1 billion in the 1999 quarter from $61.8
billion in the comparable 1998 quarter. Average free credit balances increased
to $14.1 billion in the 1999 quarter from $12.5 billion in the comparable 1998
quarter.
Other income increased 122.6% to $59.4 million in the 1999 quarter from $26.7
million in the comparable 1998 quarter. This increase was primarily attributable
to increases in management and performance-based fees derived from the Company's
Asset Management area. Asset Management increased assets under management at
December 31, 1999 to $13.1 billion, which reflected a 29.7% increase over the
comparable 1998 quarter. The largest component of the increase was primarily
attributable to alternative investments, including venture capital hedge funds,
equity hedge funds and mortgage hedge funds. Active equity markets and strong
customer volumes resulted in the increase in management and performance-based
fees.
Employee compensation and benefits increased 22.0% to $673.7 million in the 1999
quarter from $552.3 million in the comparable 1998 quarter. This increase was
primarily attributable to an increase in incentive and discretionary bonus
accruals related to increased net revenues and earnings in the 1999 quarter, as
well as an increase in salesmen's compensation resulting from increased
commission revenues and an increase in headcount from the 1998 quarter. Employee
compensation and benefits, as a percentage of net revenues, decreased to 47.3%
in the 1999 quarter from 54.1% in the comparable 1998 quarter reflecting the
improved operating results.
All other expenses increased 38.7% to $361.9 million in the 1999 quarter from
$261.0 million in the comparable 1998 quarter. Expenses associated with the
Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan")
increased by $40.0 million from the comparable 1998 quarter, reflecting higher
pre-tax earnings in the 1999 quarter. Communications, depreciation and data
processing expenses increased by approximately $22.5 million as a result of both
increased usage and the upgrading of existing communication and computer
systems. Electronic data processing ("EDP") professional fees increased by $10.1
million due to various technology initiatives, including the Year 2000 issue.
EDP professional fees related to the Year 2000 issue increased $3.5 million to
$5.1 million in the 1999 quarter.
The Company's effective tax rate increased to 37.2% in the 1999 quarter compared
to 34.5% in the comparable 1998 quarter due to higher levels of earnings and a
lower level of tax preference items in the 1999 quarter.
Six-Months Ended December 31, 1999
Compared to Six-Months Ended December 31, 1998
Net income for the six-months ended December 31, 1999 was $403.0 million, an
increase of 101.5% from $200.0 million for the comparable 1998 period. Net
revenues increased 40.3% to $2.5 billion in the 1999 period from $1.8 billion in
the 1998 period. The increase was primarily attributable to increased principal
transactions and investment banking revenues. Earnings per share were $2.58 for
the 1999 period versus $1.16 for the comparable 1998 period. The 1998 period
earnings per share amount reflects the adjustment for the 5% stock dividends
declared by the Company in January 1999 and October 1999.
Commission revenues increased 6.2% in the 1999 period to $526.4 million from
$495.5 million in the comparable 1998 period. This increase was primarily
attributable to higher commissions earned in the clearance area due to
significantly 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 and private client
services areas.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Six-Months Ended Six-Months Ended
December 31, 1999 December 31, 1998
------------------- -----------------
Fixed Income $473,599 $ 296,136
Equity 293,323 212,790
Foreign Exchange & Other
Derivative Financial Instruments 201,545 107,125
-------- --------
$968,467 $616,051
======== ========
Revenues from principal transactions increased 57.2% in the 1999 period to
$968.5 million from $616.1 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, emerging
markets, and corporate bonds 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 quarter ended September
1998. 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 over-the-counter stock and arbitrage areas.
Investment banking revenues increased 87.7% to $535.7 million in the 1999 period
from $285.4 million in the comparable 1998 period. The increase was principally
attributable to higher equity underwriting revenues refelcting 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 189.1%, due to a
strong volume of technology-related IPOs. Revenues from merchant banking
activities were also very strong, increasing six-fold due to gains realized from
certain of the Company's investments.
Net interest and dividends increased 11.4% to $358.5 million in the 1999 period
from $321.9 million in the comparable 1998 period. The increase was primarily
attributable to increased levels of customer margin debt. Average customer
margin debt increased to $45.6 billion in the 1999 period from $41.5 billion in
the comparable 1998 period. Average customer shorts decreased to $58.9 billion
in the 1999 period from $63.0 billion in the comparable 1998 period. Average
free credit balances increased to $13.4 billion in the 1999 period from $12.8
billion in the comparable 1998 period.
Employee compensation and benefits increased 24.2% to $1,190.1 million in the
1999 period from $958.2 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. Employee compensation and benefits, as a percentage
of net revenues, decreased to 48.2% in the 1999 period from 54.4% in the
comparable 1998 period primarily due to improved six-month net revenue
performance.
All other expenses increased 27.7% to $642.0 million in the 1999 period from
$502.7 million in the comparable 1998 period. CAP Plan expense increased by
$48.5 million in the 1999 period from the comparable 1998 period, reflecting
higher pre-tax earnings. Data processing, communications and depreciation
increased $41.7 million or 25.9% as a result of both increased usage and the
upgrading of existing communication and computer systems. EDP professional fees
increased by $15.4 million due to various technology initiatives, including the
Year 2000 issue. EDP professional fees related to the Year 2000 issue increased
$5.5 million to $8.2 million in the 1999 period.
The Company's effective tax rate increased to 37.0% in the 1999 period compared
to 33.5% 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
Note 8, footnote (a), of Notes to Consolidated Financial Statements.
Three-Months Ended December 31, 1999
Compared to Three-Months Ended December 31, 1998
- --------------------------------------------------------------
Capital Markets
-----------------------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands December 31,1999 December 31,1998
-----------------------------------------------------------------------------
Net revenues $ 756,211 $ 511,580
Pre-tax income 267,642 95,916
-----------------------------------------------------------------------------
Net revenues for Capital Markets approximated $756.2 million in the 1999
quarter, up 47.8% from $511.6 million in the comparable 1998 quarter. Pre-tax
income for Capital Markets was $267.6 million in the 1999 quarter, up 179.0%
from $95.9 million in the comparable 1998 quarter. Fixed income results in the
1999 quarter improved over the 1998 quarter due to improved results in the
Company's distressed, derivatives, corporate bonds and emerging markets trading
operations, which were partially offset by lower levels of customer activity
across all asset classes. Fixed income results in the 1998 quarter were
adversely impacted as a result of market volatility in the Far East and emerging
market areas. Equity results improved as active markets and strong deal flow
resulted in improved performances from equity derivatives and block trading.
Investment banking revenues increased reflecting record levels of equity
underwriting activity, as well as an increase in mergers and acquisitions
activity.
Execution Services
----------------------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands December 31,1999 December 31,1998
----------------------------------------------------------------------------
Net revenues $ 378,261 $ 300,469
Pre-tax income 134,893 107,970
----------------------------------------------------------------------------
At December 31, 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 processes trades in over 70 countries and
accounts for approximately 10% of the average daily NYSE volume, and processed
an average of in excess of 208,000 trades per day during the 1999 quarter versus
approximately 159,000 trades per day in the comparable 1998 quarter.
Net revenues for Execution Services approximated $378.3 million in the 1999
quarter, up 25.9% from $300.5 million in the comparable 1998 quarter. Pre-tax
income for Execution Services was $134.9 million in the 1999 quarter, up 24.9%
from $108.0 million in the comparable 1998 quarter. Clearance revenues increased
due to improved domestic and European institutional equity sales volume.
Additionally, higher average margin balances and wider spreads on customer short
balances resulted in higher net interest revenues during the 1999 quarter.
Wealth Management
--------------------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands December 31,1999 December 31,1998
--------------------------------------------------------------------------
Net revenues $ 217,620 $ 143,582
Pre-tax income 56,749 26,068
--------------------------------------------------------------------------
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 had approximately $42.0 billion in client assets at December 31, 1999, an
increase of 17.8% compared to December 31, 1998.
The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"),
had approximately $13.1 billion in assets under management at December 31, 1999
which reflected a 29.7% increase over December 31, 1998. The largest components
of the increase were attributable to mutual funds and alternative investments,
including mortgage hedge funds and equity hedge funds. 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 $217.6 million in the 1999 quarter, up
51.6% from $143.6 million in the comparable 1998 quarter. Pre-tax income for
Wealth Management was $56.7 million in the 1999 quarter, up 117.7% from $26.1
million in the comparable 1998 quarter. Growth in assets under management,
active equity markets and strong customer volumes resulted in the increase in
management and performance-based fees and commissions in the 1999 quarter.
Six-Months Ended December 31, 1999
Compared to Six-Months Ended December 31, 1998
Capital Markets
-------------------------------------------------------------------------
Six-Months Ended Six-Months Ended
In thousands December 31, 1999 December 31, 1998
-------------------------------------------------------------------------
Net revenues $ 1,308,295 $ 780,632
Pre-tax income 430,206 32,710
-------------------------------------------------------------------------
Net revenues for Capital Markets approximated $1,308.3 million in the 1999
period, up 67.6% from $780.6 million in the comparable 1998 period. Pre-tax
income for Capital Markets was $430.2 million in the 1999 period compared to
$32.7 million in the comparable 1998 period, an increase of 1,215.2%. Fixed
income results improved in the 1999 period over the 1998 period due to
performances from the Company's high yield, mortgage-backed, corporate bonds,
emerging markets and derivatives trading operations, partially offset by
decreases in government bond securities trading. Equity results improved as
active markets and increased deal flow resulted in improved performances from
equity derivatives, over-the-counter equities, and risk arbitrage. Investment
banking revenues increased in the 1999 period due to strong equity underwriting
revenues and increased mergers and acquisitions activity. In addition, merchant
banking revenues increased significantly in the 1999 period due to gains
realized from certain investments.
Execution Services
-----------------------------------------------------------------------
Six-Months Ended Six-Months Ended
In thousands December 31, 1999 December 31, 1998
-----------------------------------------------------------------------
Net revenues $ 694,876 $ 598,110
Pre-tax income 249,672 232,523
-----------------------------------------------------------------------
Net revenues for Execution Services approximated $694.9 million in the 1999
period, up 16.2% from $598.1 million in the comparable 1998 period. Pre-tax
income for Execution Services was $249.7 million in the 1999 period, up 7.4%
from $232.5 million in the comparable 1998 period. Results reflect improved
domestic and European equity sales volume and increased levels of customer
margin debt.
Wealth Management
----------------------------------------------------------------------
Six-Months Ended Six-Months Ended
In thousands December 31, 1999 December 31, 1998
----------------------------------------------------------------------
Net revenues $ 346,949 $ 263,996
Pre-tax income 75,324 39,826
----------------------------------------------------------------------
Net revenues for Wealth Management were $346.9 million in the 1999 period, up
31.4% from $264.0 million in the comparable 1998 period. Pre-tax income for
Wealth Management was $75.3 million in the 1999 period, up 89.1% from $39.8
million in the comparable 1998 period. Growth in assets under management, active
equity markets and strong customer volumes resulted in the increase in
management and performance-based fees and commissions in the 1999 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
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 December 31, 1999 increased to $177.4 billion from
$153.9 billion at June 30, 1999. The increase is primarily attributable to an
increase in securities borrowed and receivables from customers.
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 six- months ended December 31, 1999, the Company received proceeds
approximating $3.2 billion from the issuance of long-term debt which, net of
retirements, served to increase long-term debt to $16.8 billion at December 31,
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. 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, 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, 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 six-months ended December 31, 1999, the Company repurchased a total
of 8,122,792 shares of Common Stock through open market transactions in
connection with the CAP Plan at a cost of approximately $320.1 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 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.
Separately, the Board of Directors of the Company approved an amendment to the
Stock Repurchase Program (the "Repurchase Program") to allow an additional
amount up to $500 million. The Repurchase Program will be utilized primarily to
acquire shares of Common Stock in order to mitigate the dilutive effect of the
Company's Stock Award Plan. Repurchases 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 repurchase under the Repurchase Program. 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
six-months ended December 31, 1999, the Company repurchased, under the previous
repurchase program authorization, a total of 3,366,960 shares of Common Stock
through open market transactions in connection with the Stock Award Plan at a
cost of approximately $128.0 million.
Cash Flows
Cash and cash equivalents decreased by $1.3 billion during the six-months ended
December 31, 1999. Cash used in operating activities during the six-months ended
December 31, 1999 was $6.8 billion, primarily due to increases in securities
borrowed and customer receivables, partially offset by an increase in securities
sold under agreements to repurchase. Financing activities provided cash of $5.5
billion, primarily derived from proceeds of the issuance of short-term
borrowings and proceeds from the issuance of long-term borrowings, partially
offset by payments for the retirement of long-term borrowings. Cash used in
investing activities of $52.3 million was primarily attributable to purchases of
property, equipment and leasehold improvements, offset by net 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 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 December 31, 1999 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 December 31, 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.
As part of the Company's fixed-income securities activities, the Company
participates in the trading and sale of high yield, non-investment-grade debt
securities, non-investment-grade mortgage loans and securities of companies that
are the subject of pending bankruptcy proceedings (collectively "high yield
investments"). Non-investment-grade mortgage loans are principally secured by
residential properties and include both non-performing loans and real estate
owned. At December 31, 1999 the Company held high yield instruments of $1.4
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.
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 December 31, 1999, the amounts incurred related to the assessment of,
and efforts in connection with, the Year 2000 and the development and execution
of a remediation plan have approximated $77.0 million of which approximately
$11.0 million in hardware and software costs have been capitalized. The total
remaining Year 2000 project cost is estimated at approximately $1.0 million.
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.
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. 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 December 31, 1999. The total value at risk
presented below is less than the sum of the individual components (i.e. Interest
Rate Risk, Foreign Exchange Rate Risk, Equity Risk) due to the benefit of
diversification among the risks.
This table illustrates the value at risk for each component of market risk as
of:
December 31, June 30,
in millions 1999 1999
- ----------- ----------- --------
MARKET RISK
Interest $ 7.7 $ 9.3
Currency 1.1 1.3
Equity 14.4 11.3
Diversification benefit (6.8) (7.2)
-------- -------
Total $ 16.4 $ 14.7
======== =======
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.
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"), Bear Stearns is a defendant in
litigation pending in the United States District Court for the Southern District
of California.
On November 17, 1999, the parties agreed, subject to final court approval, to
settle this action. On January 12, 2000, the court granted preliminary approval
to the parties' proposed settlement.
A.R. Baron & Company, Inc.
As previously reported in the Company's Report 1999 Form 10-K, Bear Stearns is a
defendant in litigation pending in the Supreme Court of the State of New York,
County of New York.
On November 30, 1999, the Supreme Court of the State of New York, Appellate
Division, affirmed the lower court order dismissing the complaint in the Schwarz
action.
Goldberger v. Bear, Stearns & Co. Inc./Bier, et al. v. Bear, Stearns & Co. Inc.
As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
Southern District of New York.
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.
Crescent Porter Hale Foundation, et al. v. Bob K. Pryt, et al.
As previously reported in the Company's 1999 Form 10-K and Report on Form 10-Q
for the quarter ended September 24, 1999 ("Fiscal First Quarter 2000 Form
10-Q"), Bear Stearns is a defendant in litigation pending in the Superior Court
of the State of California, San Francisco County.
On December 9, 1999, the court approved the settlement of this action.
In re Granite Partners, L.P., Granite Corporation and Quartz Hedge Fund
As previously reported in the Company's 1999 Form 10-K and Fiscal First Quarter
2000 Form 10-Q, Bear Stearns is a defendant in litigation pending in the United
States District Court for the Southern District of New York.
On November 18, 1999, the court approved the settlement of the Primavera, ABF
Capital, Montpellier, Johnston, Bambou, AIG and Litigation Advisory Board
actions.
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 January 20, 2000, plaintiffs voluntarily dismissed the Kelly Action without
prejudice.
Sterling Foster & Co., Inc.
As previously reported in the Company's 1999 Form 10-K and Fiscal First Quarter
2000 Form 10-Q, Bear Stearns is a defendant in litigation pending in the United
States District Court for the Eastern District of New York.
On January 22, 2000, the court granted defendants' motion to dismiss the
complaint in the Greenberg action.
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 of 1933 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.
The Company also is involved from time to time in investigations and proceedings
by governmental, regulatory and self-regulatory agencies.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on October 28, 1999 (the "Annual
Meeting"), the stockholders of the Company approved amendments to the Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan Amendments"), an
amendment to the Performance Compensation Plan (the "Performance Compensation
Plan Amendment"), 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 affirmative vote of a majority of the shares of Common Stock represented at
the Annual Meeting and entitled to vote on each matter was required to approve
the CAP Plan Amendments, the Performance Compensation Plan Amendment and the
adoption of the Stock Award Plan, while the affirmative vote of a plurality of
the votes cast by holders of shares of Common Stock was required to elect the
directors.
With respect to the approval of the CAP Plan Amendments, the Performance
Compensation Plan Amendment and the adoption of the Stock Award Plan, set forth
below is information on the results of the votes cast at the Annual Meeting.
Broker
For Against Abstained Non-Votes
CAP Plan Amendments 101,165,196 4,203,978 397,699 1
Performance Compensation
Plan Amendment 101,398,767 3,991,686 376,419 2
Adoption of Stock Award Plan 69,446,597 19,548,372 384,151 16,387,754
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cast and/or withheld with respect to each such nominee.
Nominees For Withheld
------------------------ ----------------- -------------------
James E. Cayne 102,468,914 3,297,960
Carl D. Glickman 102,674,060 3,092,814
Alan C. Greenberg 102,425,686 3,341,188
Donald J. Harrington 102,714,497 3,052,377
William L. Mack 102,443,201 3,323,673
Frank T. Nickell 85,566,361 20,200,513
Frederic V. Salerno 102,599,923 3,166,951
Alan D. Schwartz 102,434,858 3,332,016
Warren J. Spector 102,435,860 3,331,014
Vincent Tese 82,935,666 22,831,208
Fred Wilpon 102,429,750 3,337,124
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) (a) (4) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of October 28, 1999
(10) (a) (5) Performance Compensation Plan, as amended and restated as of
October 28, 1999
(10) (a) (6) Stock Award Plan, as amended and restated as of January 11, 2000
(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 October 13,
1999 and filed on October 14, 1999, pertaining to
the Company's results of operations for the
quarter ended September 24, 1999.
(ii) 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.
(iii) 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.
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: February 14, 2000 By: /s/ Marshall J Levinson
-----------------------
Marshall J Levinson
Controller
(Principal Accounting Officer)
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
Exhibit Index
Exhibit No. Description Page
(10) (a) (4) Capital Accumulation Plan for Senior Managing Directors,
as amended and restated as of October 28, 1999 41
(10) (a) (5) Performance Compensation Plan, as amended and restated
as of October 28, 1999 78
(10) (a) (6) Stock Award Plan, as amended and restated as of
January 11, 2000 83
(11) Statement Re Computation of Per Share Earnings 93
(12) Statement Re Computation of Earnings to Fixed Charges 94
(27) Financial Data Schedule 95