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 May 26, 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 July 6, 2000, the latest practicable date, there were
107,627,957 shares of Common Stock, $1 par value, outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) at
May 26, 2000 and November 26, 1999
Consolidated Statements of Income (Unaudited) for the
three-month and six-month periods ended May 26, 2000 and May
28, 1999
Consolidated Statements of Cash Flows (Unaudited) for the
six-month periods ended May 26, 2000 and May 28, 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
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
Assets
May 26, November 26,
2000 1999
------------- --------------
(In thousands)
Cash and cash equivalents $ 1,060,394 $ 1,570,483
Cash and securities deposited with clearing organizations
or segregated in compliance with federal regulations 2,387,039 1,188,788
Securities purchased under agreements to resell 34,453,442 35,999,998
Receivable for securities provided as collateral 1,081,210 2,571,404
Securities borrowed 61,873,186 60,429,297
Receivables:
Customers 19,789,686 16,839,040
Brokers, dealers and others 446,597 542,038
Interest and dividends 506,057 422,402
Financial instruments owned, at fair value 48,269,649 40,764,802
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization 514,655 504,040
Other assets 1,768,742 1,205,670
------------ -------------
Total Assets $ 172,150,657 $ 162,037,962
============= =============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
Liabilities and Stockholders' Equity
May 26, November 26,
2000 1999
------------- --------------
(In thousands, except share data)
Short-term borrowings $ 17,941,392 $ 13,424,201
Securities sold under agreements to repurchase 57,046,118 53,323,109
Obligation to return securities received as collateral 2,273,709 3,999,229
Payables:
Customers 39,768,679 42,843,757
Brokers, dealers and others 3,778,772 5,596,577
Interest and dividends 755,466 532,023
Financial instruments sold, but not
yet purchased, at fair value 24,130,493 19,704,921
Accrued employee compensation and benefits 1,166,541 733,241
Other liabilities and accrued expenses 675,022 527,565
------------- --------------
147,536,192 140,684,623
------------- --------------
Commitments and contingencies
Long-term borrowings 19,249,183 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 May 26, 2000
and November 26, 1999 184,806 184,806
Paid-in capital 2,519,402 2,509,801
Retained earnings 2,275,183 1,916,516
Capital Accumulation Plan 1,140,407 1,179,101
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,520,750 shares (103,421) (103,421)
Common Stock - 75,638,357 shares and 66,367,276
shares at May 26, 2000 and
November 26, 1999, respectively (1,951,095) (1,544,856)
------------- --------------
Total Stockholders' Equity 4,865,282 4,941,947
------------- --------------
Total Liabilities and Stockholders' Equity $ 172,150,657 $ 162,037,962
============= ==============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three-Months Ended Six-Months Ended
---------------------------------- ---------------------------------
May 26, May 28, May 26, May 28,
2000 1999 2000 1999
--------------- --------------- -------------- -------------
(In thousands, except share data)
Revenues
Commissions $ 321,690 $ 272,145 $ 632,101 $ 518,664
Principal transactions 513,944 661,790 1,161,535 1,282,087
Investment banking 235,829 244,501 544,048 480,433
Interest and dividends 1,414,878 895,570 2,784,637 1,883,328
Other income 17,351 22,988 69,396 44,991
--------------- --------------- --------------- ---------------
Total Revenues 2,503,692 2,096,994 5,191,717 4,209,503
Interest expense 1,182,386 740,900 2,364,345 1,569,843
--------------- --------------- --------------- ---------------
Revenues, net of interest expense 1,321,306 1,356,094 2,827,372 2,639,660
--------------- --------------- --------------- ---------------
Non-interest expenses
Employee compensation and benefits 704,528 676,236 1,423,183 1,303,747
Floor brokerage, exchange and clearance fees 39,236 39,721 75,870 74,851
Communications 43,000 37,130 85,116 73,667
Depreciation and amortization 37,572 33,923 75,506 67,242
Occupancy 27,547 28,006 52,532 56,205
Advertising and market development 31,874 24,973 59,248 48,334
Data processing and equipment 22,631 18,619 48,441 35,307
Other expenses 249,099 174,802 387,854 287,793
--------------- --------------- --------------- ---------------
Total non-interest expenses 1,155,487 1,033,410 2,207,750 1,947,146
--------------- --------------- --------------- ---------------
Income before provision for income taxes 165,819 322,684 619,622 692,514
Provision for income taxes 47,442 124,584 223,064 263,748
--------------- --------------- --------------- ---------------
Net income $ 118,377 $ 198,100 $ 396,558 $ 428,766
=============== =============== =============== ===============
Net income applicable to common shares $ 108,599 $ 188,322 $ 377,002 $ 409,210
=============== =============== =============== ===============
Basic and diluted earnings per share (1) $ 0.77 $ 1.38 $ 2.67 $ 2.83
=============== =============== =============== ===============
Weighted average common and common
equivalent shares outstanding (1):
Basic 152,446,615 163,805,887 155,042,809 164,467,068
=============== =============== =============== ===============
Diluted 152,624,273 163,805,887 155,152,977 164,467,068
=============== =============== =============== ===============
Cash dividends declared
per common share (1) $ 0.10 (2) $ 0.14 $ 0.25 $ 0.28
=============== =============== =============== ===============
(1) Reflects all stock dividends declared through October 29, 1999.
(2) This cash dividend relates to the two-month period ended February 25, 2000 and was declared to coincide with the
company's new quarterly periods resulting from the company's change in fiscal year-end.
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six-Months Ended
-------------------------------
May 26, May 28,
2000 1999
-------------- -------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 396,558 $ 428,766
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization 75,506 67,242
Deferred income taxes (118,865) (100,967)
Other (1,719) 101,010
(Increases) decreases in operating assets:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations (1,198,251) 2,718,592
Securities purchased under agreements to resell 1,546,556 (7,028,240)
Securities borrowed (1,443,889) 510,529
Receivables:
Customers (2,950,646) (6,532,579)
Brokers, dealers and others 95,441 431,116
Financial instruments owned (7,740,173) (5,531,002)
Other assets (357,434) 140,337
Increases (decreases) in operating liabilities:
Securities sold under agreements to repurchase 3,723,009 3,739,941
Payables:
Customers (3,075,078) (4,730,690)
Brokers, dealers and others (1,825,783) 2,046,269
Financial instruments sold, but not yet purchased 4,425,572 6,267,261
Accrued employee compensation and benefits 367,600 756,205
Other liabilities and accrued expenses 402,274 (571,461)
-------------- -------------
Cash used in operating activities (7,679,322) (7,287,671)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 4,517,191 3,509,280
Net proceeds from issuance of long-term borrowings 4,947,853 2,285,277
Net proceeds from issuance of subsidiary securities - 290,550
Redemption of Preferred Stock - (150,000)
Tax benefit of Common Stock distributions 11,186 9,628
Note repayment from ESOP Trust - 7,114
Payments for:
Retirement of long-term borrowings (1,642,363) (1,375,430)
Treasury stock purchases (437,889) (88,959)
Cash dividends paid (47,669) (53,739)
-------------- -------------
Cash provided by financing activities 7,348,309 4,433,721
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (86,121) (90,830)
Purchases of investment securities and other assets (99,302) (40,862)
Proceeds from sales of investment securities and other assets 6,347 32,449
-------------- -------------
Cash used in investing activities (179,076) (99,243)
-------------- -------------
Net decrease in cash and cash equivalents (510,089) (2,953,193)
Cash and cash equivalents, beginning of period 1,570,483 3,495,900
-------------- -------------
Cash and cash equivalents, end of period $ 1,060,394 $ 542,707
============== =============
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. 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.
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.
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:
May 26, November 26,
In thousands 2000 1999
- -------------------------------------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 8,129,485 $ 7,662,482
Other sovereign governments 3,222,979 2,785,025
Corporate equity and convertible debt 8,579,180 9,421,251
Corporate debt 5,164,082 4,835,056
Derivative financial instruments 5,860,828 4,734,149
Mortgages and other mortgage-backed securities 16,927,035 10,911,528
Other 386,060 415,311
----------- -----------
$48,269,649 $40,764,802
=========== ===========
Financial instruments sold, but not yet purchased:
US government and agency $ 6,366,241 $ 4,074,379
Other sovereign governments 3,733,195 2,116,448
Corporate equity 7,446,330 7,665,516
Corporate debt 1,487,802 1,228,338
Derivative financial instruments 5,095,999 4,599,592
Other 926 20,648
----------- -----------
$24,130,493 $19,704,921
=========== ===========
3. COMMITMENTS AND CONTINGENCIES
At May 26, 2000, the Company was contingently liable for unsecured letters
of credit of approximately $825.9 million and letters of credit secured by
financial instruments of approximately $33.6 million, both of which are
principally used as deposits for securities borrowed or to satisfy margin
deposits at option and commodity exchanges.
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.
Additionally, the Company is involved from time to time in investigations
and proceedings by governmental agencies and self-regulatory organizations.
Included among these matters is an action that is pending in the United
States District Court for the Southern District of New York filed by Henryk
de Kwiatkowski, a former customer of Bear, Stearns & Co. Inc. ("Bear
Stearns"), a wholly owned subsidiary of the Company. The amended complaint
in this action alleges claims for breach of fiduciary duty and negligence.
On May 17, 2000, a jury returned a verdict finding that Bear Stearns, Bear,
Stearns Securities Corp. ("BSSC"), a wholly owned subsidiary of Bear
Stearns, and Bear Stearns Forex Inc. ("Forex"), a wholly owned subsidiary
of the Company, were liable to Mr. de Kwiatkowski for negligence and
awarded damages in the amount of $111.5 million. The jury also found that
the defendants had not breached any fiduciary duties. On June 2, 2000, the
court also awarded pre-judgement interest of $52.3 million. Bear Stearns,
BSSC and Forex have filed appropriate motions to overturn the verdict in
the district court and if such motions are unsuccessful, plan to appeal the
verdict. During the quarter, the Company recorded an after-tax charge of
$96 million in light of such verdict. Although the ultimate outcome of
these matters cannot be ascertained at this time, it is the opinion of
management, after consultation with counsel, that the resolution of such
matters will not have a material adverse effect on the future results of
operations or financial condition of the Company, taken as a whole.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear Stearns and 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 May 26, 2000, Bear Stearns' net capital, as defined, of $1.89
billion exceeded the minimum requirement by $1.84 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 and is subject to the regulatory capital
requirements of the Central Bank of Ireland.
At May 26, 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.
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 May 26, 2000 and May 28, 1999. Income taxes paid totaled $516.8
million and $144.2 million for the six-months ended May 26, 2000 and May 28,
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 credit
risk and 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 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 May 26, 2000
and November 26, 1999:
May 26, November 26,
In billions 2000 1999
--------------------------------------------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options, swaptions,
Caps, collars, and floors $392.6 $371.4
Futures contracts 42.9 47.3
Options held 18.9 43.8
Options written 1.6 18.4
Foreign Exchange:
Futures contracts 22.8 39.9
Forward contracts 14.7 10.0
Options held 6.1 5.5
Options written 3.1 4.1
Mortgage-Backed Securities -
Forward Contracts 59.4 51.9
Equity:
Swap agreements 20.9 15.1
Futures contracts 4.1 2.1
Options held 6.4 6.5
Options written 5.5 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.
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 May 26, 2000 and November 26, 1999, were
as follows:
May 26, November 26,
2000 1999
------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
--------------------------------------------------------------------------------------------
Swap agreements $3,989 $3,415 $3,016 $2,952
Futures and forward
Contracts 440 517 264 158
Options held 1,432 1,454
Options written 1,164 1,490
The average monthly fair values of the derivative financial instruments for
the three-months ended May 26, 2000 and November 26, 1999 were as follows:
May 26, November 26,
2000 1999
------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
--------------------------------------------------------------------------------------------
Swap agreements $3,768 $3,510 $2,421 $2,625
Futures and forward
Contracts 381 353 244 287
Options held 1,573 1,178
Options written 1,249 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.
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 $2.9 billion and
$1.7 billion of collateral as of May 26, 2000 and November 26, 1999,
respectively:
May 26, November 26,
In millions 2000 1999
---------------------------------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $ 222.7 $ 192.2
AA 879.3 597.1
A 583.2 600.7
BBB 46.9 79.8
BB and Lower 50.7 56.9
Non-rated 0.3 -
(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 instruments and foreign exchange and derivatives. Investment Banking
provides capabilities in capital raising, strategic advisory, mergers and
acquisitions and merchant banking.
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.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT DATA (continued)
For the three-months ended May 26, 2000:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ------------------------------------------------------------------------------------------------------------
Capital Markets $ 636,551 $ 133,398 $118,279,024
Execution Services 432,104 168,243 54,543,433
Wealth Management 158,344 10,218 3,133,413
Other (a) 94,307 (146,040) (3,805,213)
- ------------------------------------------------------------------------------------------------------------
Total $1,321,306 $ 165,819 $172,150,657
============================================================================================================
For the three-months ended May 28, 1999:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ------------------------------------------------------------------------------------------------------------
Capital Markets $ 798,731 $ 304,353 $119,915,201
Execution Services 337,664 125,282 51,894,303
Wealth Management 163,863 37,782 2,863,706
Other (a) 55,836 (144,733) 1,749,878
- ------------------------------------------------------------------------------------------------------------
Total $1,356,094 $ 322,684 $176,423,088
============================================================================================================
For the six-months ended May 26, 2000:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ------------------------------------------------------------------------------------------------------------
Capital Markets $ 1,452,234 $ 405,687 $118,279,024
Execution Services 835,840 323,592 54,543,433
Wealth Management 384,969 68,983 3,133,413
Other (a) 154,329 (178,640) (3,805,213)
- ------------------------------------------------------------------------------------------------------------
Total $ 2,827,372 $ 619,622 $172,150,657
============================================================================================================
For the six-months ended May 28, 1999:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ------------------------------------------------------------------------------------------------------------
Capital Markets $ 1,582,163 $ 612,755 $119,915,201
Execution Services 645,361 239,590 51,894,303
Wealth Management 309,042 63,612 2,863,706
Other (a) 103,094 (223,443) 1,749,878
- ------------------------------------------------------------------------------------------------------------
Total $ 2,639,660 $ 692,514 $176,423,088
============================================================================================================
(a) Other is comprised of consolidation/elimination entries, unallocated
revenues (predominantly interest) and corporate administrative functions,
including the accrual related to the Henryk de Kwiatkowski verdict (see
Note 3) and costs related to the Capital Accumulation Plan for Senior
Managing Directors (the "CAP Plan").
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 quarter ended May 26, 2000
was characterized by continued strong US economic growth and rising interest
rates, which resulted in volatile market conditions. While several economic
reports showed the US economy continuing at a strong pace during the quarter,
there were also indicators that inflationary pressures were beginning to mount.
The combination of continued strong growth and signs of inflation led the
Federal Reserve Board (the "Fed") to raise the Federal Funds rate twice during
the quarter for a total of 75 basis points, including a 50 basis point increase
on May 16, 2000, the sixth increase since May 1999 and the largest in more than
five years. The fixed income markets were generally weaker as rising rates and
widening of credit spreads resulted in a decrease in fixed income market
activity. Interest in domestic stocks, particularly technology shares, whose
rise from early November to mid-March contributed to the consumer spending boom,
dampened. During the quarter ended May 26, 2000, the Dow Jones Industrial
Average ("DJIA") and the Standard & Poor's 500 Index ("S&P 500") increased 4.4%
and 3.3%, respectively. The technology-heavy NASDAQ Composite Index ("NASDAQ")
decreased 30.2% during the quarter. Despite the decrease in the NASDAQ,
increased trading volumes in the technology and telecommunications sectors
resulted in an increase in equity trading revenues compared to the comparable
prior year period.
A strong US economy and a stable interest rate environment characterized the
business environment during the three-months ended May 28, 1999. The Fed met
twice during that period and did not raise interest rates. At the May 18, 1999
meeting, the Fed shifted its bias from neutral to tightening. The shift in bias
led to a modest sell-off in the US equity markets with the major indexes all
retreating from previous highs. Nevertheless, the US equity markets responded
positively to strong economic growth and the Fed's actions during the period;
the DJIA and the S&P 500 increased 13.5% and 5.1%, respectively, while the
NASDAQ increased 8.0%. In the fixed income markets, interest rates remained in a
relatively low historical range. There was also an assessment that the global
financial crisis, triggered by economic turmoil in the Far East and emerging
market nations and the default by Russia on its debt obligations during the
latter part of calendar 1998, had subsided. These conditions resulted in
increased customer order flow and new securities issuances. Equity markets were
fueled by strong investor interest in internet and technology stocks. In the
fixed income markets, both the primary and secondary markets were strong, which
benefited the Company's underwriting and trading activities during the quarter.
Results of Operations
Three-Months Ended May 26, 2000
Compared to Three-Months Ended May 28, 1999
Net income from operations for the second quarter ended May 26, 2000 was $214.4
million or $1.40 per share, an increase of 8.2% from $198.1 million or $1.38 per
share for the comparable prior year period. These results are before an
after-tax charge of $96.0 million, or $0.63 per share, attributable to increased
litigation reserves following the recent jury verdict in the Henryk de
Kwiatkowski case. Including such charge, net income was $118.4 million or $0.77
per share, down 40.2% from $198.1 million or $1.38 per share for the comparable
prior year period. Net revenues for the 2000 quarter were $1.3 billion, a 2.6%
decrease from $1.4 billion for the comparable prior year period. The results
reflect decreases in principal transactions and investment banking revenues,
partially offset by increases in net interest revenues and commissions. Earnings
per share amounts for both periods reflect the stock dividends declared by the
Company in January 1999 and October 1999.
Commission revenues increased 18.2% in the 2000 quarter to a record of $321.7
million from $272.1 million in the comparable 1999 period. This increase was
attributable to strong performances in the institutional, clearance and private
client services areas driven by higher equity transaction volumes. The NYSE
average daily volume increased by 26.9% in the 2000 quarter compared to the 1999
period.
The Company's principal transactions revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
May 26, 2000 May 28, 1999
------------------ ------------------
Fixed Income $ 144,400 $ 321,290
Equity 223,229 181,608
Foreign Exchange & Other
Derivative Financial Instruments 146,315 158,892
--------- ---------
$ 513,944 $ 661,790
========= =========
Revenues from principal transactions decreased 22.3% in the 2000 quarter to
$513.9 million from $661.8 million in the comparable 1999 period. This decrease
reflects a decline in the Company's fixed income activities, particularly in the
mortgage-backed securities, high yield and emerging markets areas. The secondary
fixed income markets were weaker due to rising interest rates and reduced
customer volumes, which contributed to the decline in these business areas.
These comparisons are against a strong 1999 period, which benefited from three
rate cuts made by the Fed in the latter part of calendar 1998. Revenues derived
from equity activities increased, reflecting strong performances from the
over-the-counter and international equity areas. This increase was driven
primarily by increased trading volumes in the technology and telecommunications
sectors. The decrease in revenues derived from foreign exchange and other
derivative financial instruments was primarily attributable to a decrease in
fixed income derivatives activities resulting from the difficult market
conditions described above, partially offset by an increase in equity
derivatives activities.
Investment banking revenues decreased 3.5% to $235.8 million in the 2000 quarter
from $244.5 million in the comparable 1999 period. This decrease reflects a
decline in fixed income underwriting activity, particularly in the high yield
and corporate debt areas, partially offset by an increase in equity underwriting
activity and mergers and acquisitions fees.
Net interest and dividends increased 50.3% to $232.5 million in the 2000 quarter
from $154.7 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 $59.7 billion in the 2000 quarter from $40.3
billion in the comparable 1999 period and was $52.1 billion at May 26, 2000.
Average customer shorts increased to $61.8 billion in the 2000 quarter from
$56.0 billion in the comparable 1999 period. Average free credit balances
increased to $15.0 billion in the 2000 quarter from $11.2 billion in the
comparable 1999 period.
Other income decreased 24.5% to $17.4 million in the 2000 quarter from $23.0
million in the comparable 1999 period. The reduction is principally attributable
to a decline in incentive-based fees earned by the Asset Management area. The
reduction in incentive-based fees was partially offset by an increase in
management fees earned by the Company's Asset Management area. The Asset
Management area increased assets under management to $14.6 billion at May 26,
2000, which reflected a 23.0% increase over the comparable 1999 date. The
largest components of the increase in assets were attributable to mutual funds
and alternative investments with alternative investment assets increasing to
$2.5 billion at May 26, 2000 from $1.8 billion at May 28, 1999, an increase of
39.5%.
Employee compensation and benefits increased 4.2% to $704.5 million in the 2000
quarter from $676.2 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 as well as an increase in headcount.
Employee compensation and benefits, as a percentage of net revenues, increased
to 53.3% in the 2000 quarter from 49.9% in the comparable 1999 period.
All other expenses increased 26.3% to $451.0 million in the 2000 quarter from
$357.2 million in the comparable 1999 period. Legal expenses increased by $126.7
million in the 2000 quarter primarily due to an increase in litigation reserves
related to the Henryk de Kwiatkowski litigation. CAP Plan expense decreased by
$51.2 million to $15.0 million in the 2000 quarter from $66.2 million in the
comparable 1999 period, reflecting lower pre-tax earnings. Data processing,
communications and depreciation increased $13.5 million or 15.1% as a result of
both the upgrading of existing communication and computer systems throughout the
firm and increased usage of information services.
The Company's quarterly tax rate decreased to 28.6% in the 2000 quarter from
38.6% in the comparable 1999 period primarily due to a higher proportion of tax
preference items to total income as well as higher levels of earnings in lower
tax jurisdictions.
Six-Months Ended May 26, 2000
Compared to Six-Months Ended May 28, 1999
Net income from operations for the six-months ended May 26, 2000 was $492.6
million or $3.29 per share, an increase of 14.9% from $428.8 million or $2.83
per share for the comparable prior year period. These results are before an
after-tax charge of $96.0 million or $.62 per share, attributable to increased
litigation reserves following the recent jury verdict in the Henryk de
Kwiatkowski case. Including such charge, net income was $396.6 million or $2.67
per share, down 7.5% from $428.8 million or $2.83 per share for the comparable
prior year period. Net revenues increased 7.1% to $2.8 billion in the 2000
period from $2.6 billion in the comparable 1999 period. The results reflect
increases in commissions, investment banking revenues, net interest revenues and
other income partially offset by a decrease in principal transactions revenues.
Commission revenues increased 21.9% in the 2000 period to $632.1 million from
$518.7 million in the comparable 1999 period. This increase was primarily
attributable to strong performances in the institutional, clearance and private
client services areas driven by higher equity transaction volumes. The NYSE
average daily volume increased by 28.5% in the 2000 period compared to the 1999
period.
The Company's principal transactions revenues by reporting categories, including
derivatives, are as follows:
Six-Months Ended Six-Months Ended
May 26, 2000 May 28, 1999
-------------- ------------
Fixed Income $ 389,909 $ 705,488
Equity 450,556 330,480
Foreign Exchange & Other
Derivative Financial Instruments 321,070 246,119
-------------- ------------
$ 1,161,535 $ 1,282,087
============== ============
Revenues from principal transactions decreased 9.4% in the 2000 period to $1.2
billion from $1.3 billion in the comparable 1999 period. The decrease reflects a
decline in the Company's fixed income activities, particularly in
mortgage-backed securities, high yield and emerging markets trading. The
secondary fixed income markets were weaker due to rising interest rates and
reduced customer volumes, which contributed to the decline in these business
areas. Revenues derived from equity activities increased reflecting strong
performances from the over-the-counter, international equity trading and sales,
specialist and arbitrage activities. These increases were driven by increased
trading volumes in the technology and telecommunications sectors as well as an
increase in mergers and acquisitions activity. The increase in foreign exchange
and other derivative financial instruments revenues is principally due to
increased equity derivatives revenues.
Investment banking revenues increased 13.2% to $544.0 million in the 2000 period
from $480.4 million in the comparable 1999 period. This increase reflects higher
equity underwriting revenues as well as higher mergers and acquisitions advisory
fees in the 2000 period. These increases were partially offset by a decrease in
fixed income underwriting, particularly in the high yield and corporate debt
areas.
Net interest and dividends increased 34.1% to $420.3 million in the 2000 period
from $313.5 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 $58.2 billion in the 2000 period from $39.3
billion in the comparable 1999 period. Average customer shorts increased to
$63.2 billion in the 2000 period from $58.0 billion in the comparable 1999
period. Average free credit balances increased to $15.2 billion in the 2000
period from $11.9 billion in the comparable 1999 period. The increase in net
interest profit was partially offset by higher funding costs incurred during the
first quarter as the Company had extended short-term maturities over the 1999
(Y2K) year end.
Other income increased 54.2% to $69.4 million in the 2000 period from $45.0
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. The Asset Management area increased assets under
management to $14.6 billion at May 26, 2000, which reflected a 23.0% increase
over $11.8 billion in assets under management at the comparable 1999 date. The
largest components of the increase in assets were attributable to mutual funds
and alternative investments as discussed above.
Employee compensation and benefits increased 9.2% to $1.4 billion in the 2000
period from $1.3 billion in the comparable 1999 period. The increase in employee
compensation and benefits was primarily attributable to an increase in incentive
and discretionary bonus accruals in the 2000 period, 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,
increased to 50.3% in the 2000 period from 49.4% in the comparable 1999 period.
All other expenses increased 21.9% to $784.6 million in the 2000 period from
$643.4 million in the comparable 1999 period. Legal expenses increased by $121.1
million in the 2000 period primarily due to an increase in litigation reserves
related to the Henryk de Kwiatkowski litigation. CAP Plan expense decreased by
$34.5 million to $65.7 million in the 2000 period from $100.2 million in the
comparable 1999 period, reflecting lower pre-tax earnings. Data processing,
communications and depreciation increased $32.9 million or 18.7% in the 2000
period as a result of both the upgrading of existing communication and computer
systems throughout the firm and increased usage of information services.
The Company's effective tax rate decreased to 36.0% in the 2000 period compared
to 38.1% in the comparable 1999 period primarily due to higher levels of
earnings in lower tax jurisdictions.
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 May 26, 2000
Compared to Three-Months Ended May 28, 1999
- ---------------------------------------------------------
Capital Markets
------------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands May 26, 2000 May 28, 1999
------------------------------------------------------------------
Net revenues $636,551 $798,731
Pre-tax income $133,398 $304,353
------------------------------------------------------------------
Net revenues for Capital Markets were $636.6 million in the 2000 quarter, down
from $798.7 million in the comparable 1999 period. Pre-tax income for Capital
Markets was $133.4 million in the 2000 quarter, down from $304.4 million in the
comparable 1999 period. Fixed income results in the 2000 quarter were lower
compared to the 1999 period as rising interest rates and lower customer volumes
resulted in decreases in the Company's mortgage-backed securities, high yield,
derivatives, and domestic and European fixed income sales operations. Equity
results were strong in the 2000 quarter as active markets and strong deal flow
resulted in improved performances from over-the-counter, equity derivatives and
international equity trading areas. Investment banking revenues decreased
slightly in the 2000 quarter reflecting a decline in fixed income underwriting
activity partially offset by increased levels of mergers and acquisitions and
equity underwriting activity. 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 May 26, 2000 May 28, 1999
-----------------------------------------------------------------
Net revenues $432,104 $337,664
Pre-tax income $168,243 $125,282
-----------------------------------------------------------------
At May 26, 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 introducing brokers, who engage in either the
retail or institutional brokerage business. The Company processed an average of
in excess of 265,000 trades per day during the 2000 quarter versus approximately
194,000 trades per day in the comparable 1999 period.
Net revenues for Execution Services approximated $432.1 million in the 2000
quarter, up 28.0% from $337.7 million in the comparable 1999 period. Pre-tax
income for Execution Services was $168.2 million in the 2000 quarter, up 34.3%
from $125.3 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 equity sales
volume, which benefited the Company's institutional equity business.
Wealth Management
----------------------------------------------------------------
Three-Months Ended Three-Months Ended
In thousands May 26, 2000 May 28, 1999
----------------------------------------------------------------
Net revenues $158,344 $163,863
Pre-tax income $10,218 $37,782
----------------------------------------------------------------
Private Client Services ("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 held approximately $40.5 billion in client assets at
May 26, 2000, an increase of 6.0% compared to May 28, 1999.
The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"),
had approximately $14.6 billion in assets under management at May 26, 2000 which
reflected a 23.0% increase over $11.8 billion in assets under management at May
28, 1999. The largest components of the increase in assets were attributable to
mutual funds and alternative investments with alternative investment assets
increasing to $2.5 billion at May 26, 2000 from $1.8 billion at May 28, 1999, an
increase of 39.5%.
Net revenues for Wealth Management were $158.3 million in the 2000 quarter, down
3.4% from $163.9 million in the comparable 1999 period. The reduction is
principally attributable to a decline in incentive-based fees earned by the
Asset Management area. Active equity markets and strong customer volumes from
private client activities led to increased commission revenues which partially
offset this decline. Pre-tax income in the 2000 quarter decreased from the
comparable 1999 period primarily due to the semi-fixed nature of certain
expenses and increased costs directly related to obtaining new investors.
Six-Months Ended May 26, 2000
Compared to Six-Months Ended May 28, 1999
- ----------------------------------------------------
Capital Markets
----------------------------------------------------------------
Six-Months Ended Six-Months Ended
In thousands May 26, 2000 May 28, 1999
----------------------------------------------------------------
Net revenues $1,452,234 $1,582,163
Pre-tax income $405,687 $612,755
----------------------------------------------------------------
Net revenues for Capital Markets were $1.5 billion in the 2000 period, down from
$1.6 billion in the comparable 1999 period. Pre-tax income for Capital Markets
was $405.7 million in the 2000 period, down from $612.8 million in the
comparable 1999 period. Fixed income results in the 2000 quarter were lower
compared to the 1999 period as rising interest rates and lower customer volumes
resulted in decreases in the Company's mortgage-backed securities, domestic and
European fixed income sales and high yield operations. 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, international
equity trading and risk arbitrage. Investment banking revenues increased in the
2000 period reflecting increased levels of equity underwriting activity and
mergers and acquisitions. Pre-tax income in the 2000 period decreased from the
comparable 1999 period primarily due to lower levels of profitability from the
fixed income area.
Execution Services
-----------------------------------------------------------------
Six-Months Ended Six-Months Ended
In thousands May 26, 2000 May 28, 1999
-----------------------------------------------------------------
Net revenues $835,840 $645,361
Pre-tax income $323,592 $239,590
-----------------------------------------------------------------
Net revenues for Execution Services approximated $835.8 million in the 2000
period, up 29.5% from $645.4 million in the comparable 1999 period. Pre-tax
income for Execution Services was $323.6 million in the 2000 period, up 35.1%
from $239.6 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.
Wealth Management
----------------------------------------------------------------
Six-Months Ended Six-Months Ended
In thousands May 26, 2000 May 28, 1999
----------------------------------------------------------------
Net revenues $384,969 $309,042
Pre-tax income $68,983 $63,612
----------------------------------------------------------------
Net revenues for Wealth Management were $385.0 million in the 2000 period, up
24.6% from $309.0 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 period. Strong
performances by certain of the Company's managed funds led to increases in
performance-based fees during the period. Pre-tax income for Wealth Management
was up 8.4% in the 2000 period from the comparable 1999 period. The increase in
pre-tax income was not proportional to the increase in net revenues in the 2000
period primarily due to the semi-fixed nature of certain expenses and increased
costs directly related to obtaining new investors.
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 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 May 26, 2000 increased to $172.2 billion from
$162.0 billion at November 26, 1999. The increase is primarily attributable to
an increase in financial instruments owned and receivables from customers
resulting from increased levels of 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 six-months ended May 26, 2000, the Company received proceeds
approximating $4.9 billion from the issuance of long-term debt which, net of
retirements, served to increase long-term debt to $19.2 billion at May 26, 2000
from $15.9 billion at November 26, 1999.
The Company maintains an alternative liquidity 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 maturing short- term 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 & 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 six-months ended May 26, 2000 the Company repurchased a total of
5,352,855 shares of Common Stock through open market transactions in connection
with the CAP Plan at a cost of approximately $221.7 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 (in addition to any shares purchased under a previous repurchase
authorization) up to $500 million in aggregate cost of Common Stock. Purchases
under the Repurchase Program may be made periodically in fiscal year 2000 or
beyond either in the open market or through privately negotiated transactions.
During the six-months ended May 26, 2000, the Company purchased, under the
previous and current repurchase authorizations, a total of 5,473,554 shares of
Common Stock through open market transactions at a cost of approximately $224.3
million. At May 26, 2000, an additional $372.7 million of Common Stock may be
purchased pursuant to the Repurchase Program. Purchases of Common Stock pursuant
to the CAP Plan are not made pursuant to the Repurchase Program and are not
included in calculating the remaining number of shares of Common Stock that the
Company may purchase under such program.
Cash Flows
Cash and cash equivalents decreased by $510.1 million during the six-months
ended May 26, 2000. Cash used in operating activities during the six-months
ended May 26, 2000 was $7.7 billion, primarily due to increases in financial
instruments owned and customer receivables and a decrease in customer payables,
partially offset by an increase in financial instruments sold, but not yet
purchased. Financing activities provided cash of $7.3 billion, primarily derived
from net proceeds from short-term borrowings and the issuance of long-term
borrowings, partially offset by payments for retirement of long-term borrowings.
Investing activities during the six-months ended May 26, 2000 used $179.1
million for purchases of property, equipment and leasehold improvements of $86.1
million and net purchases of investment securities and other assets of $93.0
million.
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 May 26, 2000, the Company held investments in twenty five
leveraged transactions with an aggregate value of approximately $287.6 million.
As part of the Company's fixed-income securities activities, the Company
participates in the trading and sale of high yield, non-investment-grade debt
securities, non-investment-grade mortgage loans, 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 May 26, 2000, the Company
held high yield instruments of $1.7 billion owned and $0.4 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.
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 May 26, 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:
May 26, November 26,
In millions 2000 1999
----------- ------ --------
MARKET RISK
Interest $ 10.2 $ 11.9
Currency 1.5 1.2
Equity 7.9 12.6
Diversification benefit (6.6) (8.4)
------ --------
Total $ 13.0 $ 17.3
====== ========
As previously discussed, the Company utilizes a wide variety of market risk
management methods, including: limits for each trading activity; marking all
positions to market on a daily basis; daily profit and loss statements; position
reports; aged inventory position reports; and independent verification of
inventory pricing. Additionally, management of each trading department reports
positions, profits and losses, and trading strategies to the Risk Committee on a
weekly basis. The Company believes that these procedures, which stress timely
communication between trading department management and senior management, are
the most important elements of the risk management process.
Part II - Other Information
Item 1. Legal Proceedings
In re Daisy Systems Corp., Debtor.
As previously reported in the Company's Report on Form 10-K for the fiscal year
ended June 30, 1999 ("1999 Form 10-K"), Bear, Stearns and Co. Inc. ("Bear
Stearns") is a defendant in litigation pending in the United States District
Court for the Northern District of California.
The parties have reached an agreement, which is subject to court approval, to
settle this action.
Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc., et al.
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 May 17, 2000, a jury returned a verdict finding that Bear Stearns, Bear,
Stearns Securities Corp. ("BSSC") and Bear Stearns Forex Inc. ("Forex") were
liable to plaintiff for negligence and awarded damages in the amount of $111.5
million. The jury also found that defendants had not breached any fiduciary
duties. On June 2, 2000, the court also awarded pre-judgement interest of $52.3
million. Bear Stearns, BSSC and Forex have filed appropriate motions to overturn
the verdict in the district court and if such motions are unsuccessful, plan to
appeal the verdict.
Kennilworth Partners LP, et al. v. Bear, Stearns Securities Corp., et al.
On May 2, 2000, Kennilworth Partners LP and Kennilworth Partners II LP commenced
a National Association of Securities Dealers ("NASD") arbitration proceeding
against BSSC and Bear Stearns. Claimants allege that respondents committed
breach of contract, breach of the covenant of good faith and fair dealing,
breach of fiduciary duty, common law fraud and tortious interference with
contract in connection with the provision of clearing services to the claimants.
Compensatory and punitive damages in excess of $50 million are sought.
Bear Stearns and BSSC have denied all allegations of wrongdoing asserted against
them in this NASD arbitration proceeding, and believe that they have substantial
defenses to these claims.
Argos, et al. v. Michael Berger, et al.
As previously reported in the Company's Report on Form 10-Q for the quarter
ended February 25, 2000, Bear Stearns is a defendant in litigation pending in
the United States District Court for the Southern District of New York.
On June 21, 2000, an amended complaint was filed adding nine shareholders of
Manhattan Investment Fund Limited as plaintiffs and asserting the same claims
against the same defendants as were named in the original complaint.
Compensatory damages in excess of $93.5 million, and $1 billion in punitive
damages from each defendant, are sought.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
Other
The Company also is involved from time to time in investigations and proceedings
by governmental agencies and self-regulatory organizations.
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 and filed on
March 15, 2000, pertaining to the Company's results
of operations for the three-months ended February 25,
2000.
(ii) A Current Report on Form 8-K dated March 17,
2000 and filed on March 20, 2000, pertaining to an
opinion of Cadwalader, Wickersham & Taft as to
certain federal income tax consequences described in
the Prospectus Supplement dated March 17, 2000
related to the Company's medium-term note, series B
program.
(iii) A Current Report on Form 8-K dated March 22,
2000 and filed on March 29, 2000, pertaining to an
opinion of Cadwalader, Wickersham & Taft as to the
legality of the Floating Rate Global Notes due 2003
("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.
(iv) A Current Report on Form 8-K dated April 6, 2000
and filed on April 7, 2000, pertaining to the
Company's recast unaudited statements of income for
the three-month periods ended February 26, 1999, May
28, 1999, August 27, 1999 and November 26, 1999 and
the three-month periods ended February 27, 1998, May
29, 1998, August 28, 1998 and November 27, 1998.
(v) A Current Report on Form 8-K dated May 17, 2000
and filed on May 19, 2000, pertaining to the
litigation captioned Henryk de Kwiatkowski v. Bear,
Stearns & Co. Inc., et al.
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: July 10, 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
(11) Statement Re Computation of Per Share Earnings 39
(12) Statement Re Computation of Earnings to Fixed Charges 40
(27) Financial Data Schedule 41