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 March 26, 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 May 6, 1999, the latest practicable date, there were 116,432,611 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 March 26,
1999 (Unaudited) and June 30, 1998
Consolidated Statements of Income (Unaudited) for the
three-and nine-month periods ended March 26, 1999 and March
27, 1998
Consolidated Statements of Cash Flows (Unaudited) for the
nine-month periods ended March 26, 1999 and March 27, 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 6. Exhibits and Reports on Form 8-K
Signature
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
March 26, June 30,
1999 1998
------------- ---------------
(Unaudited)
(In thousands)
Cash and cash equivalents $ 925,652 $ 1,073,821
Cash and securities deposited with clearing
organizations or segregated in compliance
with federal regulations 1,323,595 2,282,729
Securities purchased under agreements to resell 43,331,086 29,846,716
Receivable for securities provided as collateral 3,019,004 2,041,546
Securities borrowed 48,869,646 56,844,009
Receivables:
Customers 13,808,002 14,228,678
Brokers, dealers and others 5,223,877 1,337,146
Interest and dividends 383,190 467,456
Financial instruments owned, at fair value 48,341,770 44,619,672
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization 478,619 448,044
Other assets 940,933 1,306,078
------------- ---------------
Total Assets $166,645,374 $ 154,495,895
============= ===============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
March 26, June 30,
1999 1998
------------- ---------------
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 12,157,533 $ 14,613,565
Securities sold under agreements to repurchase 59,520,069 45,346,472
Obligation to return securities received as
collateral 4,572,944 5,257,279
Payables:
Customers 40,992,211 42,119,042
Brokers, dealers and others 2,425,745 5,055,988
Interest and dividends 604,777 636,021
Financial instruments sold, but not yet
purchased, at fair value 24,874,626 21,070,596
Accrued employee compensation and benefits 1,017,565 1,217,337
Other liabilities and accrued expenses 1,135,319 1,242,110
------------- ---------------
147,300,789 136,558,410
------------- ---------------
Commitments and contingencies
Long-term borrowings 14,355,505 13,295,952
------------- ---------------
Guaranteed Preferred Beneficial Interests in
Company Subordinated Debt Securities 500,000 200,000
Preferred stock issued by subsidiary - 150,000
------------- ---------------
Stockholders' Equity
Preferred Stock 800,000 800,000
Common Stock, $1.00 par value; 200,000,000
shares authorized; 176,161,110 and
167,784,941 shares issued at March 26, 1999
and June 30, 1998, respectively 176,161 167,785
Paid-in capital 2,183,102 1,963,788
Retained earnings 1,690,154 1,590,574
Capital Accumulation Plan 963,092 833,427
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,520,750 shares at
March 26, 1999 and June 30, 1998 (103,421) (103,421)
Common Stock - 59,871,263 shares and
50,639,294 shares at March 26, 1999
and June 30, 1998, respectively (1,220,008) (953,506)
Note receivable from ESOP Trust - (7,114)
------------- ---------------
Total Stockholders' Equity 4,489,080 4,291,533
------------- ---------------
Total Liabilities and Stockholders' Equity $166,645,374 $154,495,895
============= ===============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three-Months Ended Nine-Months Ended
------------------------------ ----------------------------
March 26, March 27, March 26, March 27,
1999 1998 1999 1998
------------- --------------- ------------ -------------
(In thousands, except share data)
Revenues
Commissions $ 245,131 $ 226,067 $ 740,607 $ 670,007
Principal transactions 600,310 452,742 1,216,361 1,234,768
Investment banking 228,960 197,407 514,400 695,619
Interest and dividends 714,602 1,037,202 3,001,121 3,083,071
Other income 15,884 14,203 58,729 50,228
------------- --------------- ------------ -------------
Total Revenues 1,804,887 1,927,621 5,531,218 5,733,693
Interest expense 574,764 877,392 2,539,402 2,613,611
------------- --------------- ------------ -------------
Revenues, net of interest expense 1,230,123 1,050,229 2,991,816 3,120,082
------------- --------------- ------------ -------------
Non-interest expenses
Employee compensation and benefits 594,694 513,254 1,552,919 1,548,244
Floor brokerage, exchange
and clearance fees 35,958 40,975 119,397 124,082
Communications 35,791 31,898 105,248 88,855
Depreciation and amortization 33,136 29,375 98,288 82,819
Occupancy 28,515 25,962 80,326 74,895
Advertising and market development 22,959 22,680 69,851 58,691
Data processing and equipment 17,954 11,919 44,232 36,613
Other expenses 128,185 108,443 287,837 313,417
------------- --------------- ------------ -------------
Total non-interest expenses 897,192 784,506 2,358,098 2,327,616
------------- --------------- ------------ -------------
Income before provision for income taxes 332,931 265,723 633,718 792,466
Provision for income taxes 128,959 99,404 229,723 304,307
------------- --------------- ------------ -------------
Net income $ 203,972 $ 166,319 $ 403,995 $ 488,159
============= =============== ============ =============
Net income applicable to common shares $ 194,194 $ 157,193 $ 374,344 $ 467,184
============= =============== ============ =============
Earnings per share $ 1.42 $ 1.09(1)$ 2.63(1)$ 3.21(1)
============= =============== ============ =============
Weighted average common and common equivalent
shares outstanding 156,709,359 157,588,766(1) 158,239,443(1) 159,494,441(1)
============= ============== ============ =============
Cash dividends declared per common share $ 0.15 $ 0.14(1)$ 0.44(1) $ 0.43(1)
============= =============== ============ =============
(1) Adjusted for the 5% stock dividend declared on January 20, 1999.
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine-Months Ended
------------------------------
March 26, March 27,
1999 1998
--------------- ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 403,995 $ 488,159
Adjustments to reconcile net income to cash provided
by (used in)operating activities:
Depreciation and amortization 98,288 82,819
Deferred income taxes (17,738) (87,962)
Other 86,733 85,475
Decreases (increases) in operating receivables:
Cash and securities deposited with clearing
organizations or segregated in compliance with
federal regulations 959,134 (398,398)
Securities purchased under agreements to resell (13,484,370) (9,729,084)
Securities borrowed 7,974,363 (11,844,587)
Receivables:
Customers 420,676 (5,040,248)
Brokers, dealers and others (3,886,731) (115,716)
Financial instruments owned, at fair value (5,383,891) (9,837,709)
Other assets 431,682 (100,229)
Increases (decreases) in operating payables:
Securities sold under agreements to repurchase 14,173,597 13,736,778
Payables:
Customers (1,126,831) 7,865,352
Brokers, dealers and others (2,632,115) 1,100,571
Financial instruments sold, but not yet purchased, at
fair value 3,804,030 6,679,454
Accrued employee compensation and benefits (274,772) 104,422
Other liabilities and accrued expenses (288,279) 259,077
------------ ----------
Cash provided by (used in) operating activities 1,257,771 (6,751,826)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments on) proceeds from short-term borrowings (2,456,032) 2,043,934
Net proceeds from issuance of long-term borrowings 3,127,139 5,178,436
Net proceeds from issuance of subsidiary securities 290,550 -
Net proceeds from issuance of Cumulative Preferred Stock,
Series E - 245,000
Capital Accumulation Plan 153,785 51,010
Tax benefit of common stock distributions 5,850 7,552
Note repayment from ESOP Trust 7,114 6,587
Payments for:
Retirement of senior notes (2,081,344) (1,147,105)
Treasury stock purchases (289,405) (179,976)
Cash dividends paid (80,416) (70,348)
------------ ----------
Cash (used in) provided by financing activities (1,322,759) 6,135,090
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (128,863) (157,901)
Purchases of investment securities and other assets (21,312) (96,061)
Proceeds from sales of investment securities and other assets 66,994 5,402
------------ ----------
Cash used in investing activities (83,181) (248,560)
------------ ----------
Net decrease in cash and cash equivalents (148,169) (865,296)
Cash and cash equivalents, beginning of period 1,073,821 1,249,132
------------ ----------
Cash and cash equivalents, end of period $ 925,652 $ 383,836
============ ==========
Statement of Financial Accounting Standards ("SFAS") 125, which requires balance
sheet recognition of collateral related to certain secured financing
transactions, 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. Share data for all periods included in the consolidated
financial statements are presented after giving retroactive effect to the 5%
stock dividend declared by the Company in January 1999. 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.
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:
March 26, June 30,
In thousands 1999 1998
- -------------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 7,965,815 $ 9,388,387
Other sovereign governments 5,024,370 2,955,515
Corporate equity and convertible debt 14,353,397 12,255,749
Corporate debt 3,891,034 4,938,541
Derivative financial instruments 3,511,982 3,545,236
Mortgages and other mortgage-backed
securities 12,874,203 10,582,090
Other 720,969 954,154
------------- -------------
$ 48,341,770 $ 44,619,672
============= =============
Financial instruments sold, but not yet purchased:
US government and agency $ 5,372,354 $ 6,327,074
Other sovereign governments 7,952,927 3,107,789
Corporate equity 4,953,318 4,336,280
Corporate debt 1,093,997 1,398,025
Derivative financial instruments 5,499,167 5,835,491
Other 2,863 65,937
-------------- -------------
$ 24,874,626 $ 21,070,596
============== =============
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At March 26, 1999, the Company was contingently liable for unsecured letters
of credit of approximately $2.0 billion and letters of credit of
approximately $22.2 million secured by financial instruments, which are
principally used as collateral for securities borrowed and to satisfy margin
requirements at option and commodity exchanges.
In the normal course of business, the Company has been named as a defendant
in several lawsuits which involve claims for substantial amounts. Although the
ultimate outcome of these matters cannot be ascertained at this time, it is the
opinion of management, after consultation with counsel, that the resolution of
such matters will not have a material adverse effect on the results of
operations or the financial condition of the Company.
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns
Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly,
are subject to Securities and Exchange Commission Rule 15c3-1 (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 March 26, 1999, Bear Stearns' net
capital, as defined, of $1.77 billion exceeded the minimum requirement by
$1.74 billion.
Bear, Stearns International Limited ("BSIL") and another wholly owned London
based subsidiary are subject to regulatory capital requirements of the
Securities and Futures Authority. At March 26, 1999, BSIL exceeded the
minimal capital required by $560.2 million.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 issuable under various employee benefit plans
including certain of the Company's deferred compensation arrangements, with
appropriate adjustments made to net income for expenses related thereto.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for each of the
nine-months ended March 26, 1999 and March 27, 1998. Income taxes paid
totaled $163.2 million and $432.2 million for the nine-months ended March
26, 1999 and March 27, 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 for trading purposes and in order to reduce
its exposure to market risk, which includes interest rate, exchange rate,
equity price and commodity 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
instruments 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 before or on an
established date. These financial instruments may have market and/or credit
risk in excess of amounts recorded in the Consolidated Statements of
Financial Condition.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
In order to measure derivative activity, notional or contract amounts are
frequently utilized. Notional/contract amounts, which are not included on
the balance sheet, are used to calculate contractual cash flows to be
exchanged and are generally not actually paid or received, with the
exception of currency swaps and foreign exchange 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 following table represents the notional/contract amounts of the
Company's outstanding derivative financial instruments at March 26, 1999 and
June 30, 1998:
March 26, June 30,
In billions 1999 1998
---------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options,
swaptions, caps, collars, and floors $330.5 $277.5
Futures contracts 49.1 49.8
Options held 16.3 4.0
Options written 4.6 1.6
Foreign Exchange:
Futures contracts 15.7 20.8
Forward contracts 16.0 29.6
Options held 5.1 9.9
Options written 5.6 7.7
Mortgage-Backed Securities:
Forward Contracts 74.2 70.2
Equity:
Swap agreements 11.6 11.6
Futures contracts 1.2 1.1
Options held 6.4 5.3
Options written 5.4 4.6
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
The derivative instruments used in the Company's trading and dealer
activities are recorded at fair value on a daily basis 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
purposes at March 26, 1999 and June 30, 1998 were as follows:
March 26, June 30,
1999 1998
----------------------------------------------
In millions Assets Liabilities Assets Liabilities
Swap agreements $2,194 $1,894 $1,872 $2,100
Futures and forward
contracts 153 169 450 551
Options held 1,192 1,279
Options written 3,456 3,189
The average monthly fair values of the derivative financial instruments for
the nine-months ended March 26, 1999 and the fiscal year ended June 30, 1998
were as follows:
March 26, June 30,
1999 1998
----------------------------------------------
In millions Assets Liabilities Assets Liabilities
Swap agreements $2,305 $2,318 $1,154 $1,494
Futures and forward
contracts 331 400 318 329
Options held 1,089 2,207
Options written 3,116 3,709
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 in a gain position which are recognized 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
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
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
trading-related derivatives by showing counterparty credit ratings for the
replacement cost of contracts in a gain position, net of $1.6 billion and
$832.4 million of collateral, respectively, at March 26, 1999 and June 30,
1998:
March 26, June 30,
In millions 1999 1998
------------------------------------------------------------------
RATING (1) NET REPLACEMENT COST
AAA $193.9 $187.7
AA 554.1 607.9
A 230.1 371.0
BBB 64.8 68.1
BB and Lower 64.5 70.8
Non-rated 7.6 27.2
(1) Internal designations of counterparty credit quality are based on actual
ratings made by external rating agencies or equivalent ratings
established and utilized by the Company's Credit Department.
8. PREFERRED STOCK
On April 15, 1999 the Company redeemed $150 million (all 6,000,000 of the
outstanding shares) of 8% Exchangeable Preferred Income Cumulative Shares,
Series A ("Series A Shares") issued by Bear Stearns Finance LLC, a wholly
owned subsidiary of the Company, at a redemption price of $25 per Series A
Share plus accrued and unpaid dividends to the redemption date.
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, 1998.
Business Environment
The business environment during the Company's third fiscal quarter ended March
26, 1999 was characterized by extremely active markets and growth in both NYSE
and NASDAQ trading volume.
The resilience of the U.S. economy coupled with the efforts of the Federal
Reserve Bank to restore liquidity to the capital markets by cutting rates in the
latter part of calendar 1998 and increased investor confidence contributed to
improved conditions in the quarter ended March 26, 1999, with both the equity
and fixed income markets continuing a strong rebound from the first fiscal
quarter. Equity markets continued to be fueled by strong investor interest in
internet and technology stocks. In the fixed income markets, conditions improved
in both the primary and secondary markets, which benefited the Company's
underwriting and trading activities, specifically the mortgage-backed, emerging
markets and corporate bonds business units.
Results of Operations
Three-Months Ended March 26, 1999
Compared to March 27, 1998
Net income in the 1999 quarter was $204.0 million, an increase of 22.6% from
$166.3 million in the comparable prior year quarter. Revenues, net of interest
expense ("net revenues"), increased 17.1% to $1,230.1 million in the 1999
quarter from $1,050.2 million in the comparable 1998 quarter. The increase was
primarily attributable to an increase in principal transactions revenues as well
as increases in investment banking and commission revenues. Earnings per share
were $1.42 for the 1999 quarter versus $1.09 for the comparable 1998 quarter.
Commission revenues increased 8.4% in the 1999 quarter to $245.1 million
from $226.1 million in the comparable 1998 quarter. This increase was primarily
attributable to an increase in institutional activities, which benefited from a
26.9% increase in NYSE 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
March 26, 1999 March 27, 1998
-------------- --------------
Fixed Income $ 364,887 $ 227,364
Equity 130,831 152,206
Foreign Exchange & Other
Derivative Financial Instruments 104,592 73,172
---------- ---------
$ 600,310 $ 452,742
========== =========
Revenues from principal transactions reached record levels in the 1999
quarter increasing 32.6%, which was principally attributable to an increase in
fixed income based revenues, such as those derived from the mortgage-backed,
emerging markets and corporate bonds business units, as well as an increase in
revenues derived from foreign exchange & other derivative financial instruments.
These increases were partially offset by a decrease in equity based revenues,
specifically in the asset management, arbitrage and emerging markets equity
trading business units, partially offset by an increase in revenues in the
over-the-counter business unit.
Investment banking revenues increased 16.0% to $229.0 million in the 1999
quarter from $197.4 million in the comparable 1998 quarter. This increase was
principally attributable to higher merger & acquisition and merchant banking
fees earned during the 1999 quarter. Underwriting revenues were also strong and
reflect an increase in equity and investment-grade corporate debt new issue
volume, offset by a decrease in high yield and municipal new issue volume.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) decreased 12.5% to $139.8 million in the 1999 quarter from
$159.8 million in the comparable 1998 quarter. This decrease was primarily
attributable to lower levels of customer margin debt and customer short
activity. Average margin debt balances decreased to $36.9 billion in the 1999
quarter from $45.8 billion in the comparable 1998 quarter. Average customer
shorts decreased to $55.4 billion in the 1999 quarter from $57.5 billion in the
comparable 1998 quarter.
Average free credit balances increased to $12.0 billion in the 1999 quarter from
$11.5 billion in the comparable 1998 quarter and did not significantly impact
the change in net interest and dividend revenues for the 1999 quarter.
Employee compensation and benefits increased 15.9% to $594.7 million in the 1999
quarter from $513.3 million in the comparable 1998 quarter. The increase was
primarily attributable to an increase in discretionary bonuses related to
increased revenues. Employee compensation and benefits, as a percentage of net
revenues, decreased to 48.3% in the 1999 quarter from 48.9% in the comparable
1998 quarter.
All other expenses increased 11.5% to $302.5 million in the 1999 quarter from
$271.3 million in the comparable 1998 quarter. Expenses associated with the
Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan")
increased by $24.0 million from the comparable 1998 quarter reflecting higher
pre-tax earnings in the 1999 quarter and an increase in the number of
participants. Data processing, communications and depreciation increased by
$13.7 million as a result of both increased usage and the upgrading of existing
communication and computer systems.
The Company's effective tax rate increased to 38.7% in the 1999 quarter compared
to 37.4% in the comparable 1998 quarter due to a higher level of earnings and a
lower percentage of tax preference items in the 1999 quarter.
Nine-Months Ended March 26, 1999
Compared to March 27, 1998
Net income for the nine-months ended March 26, 1999 was $404.0 million, a
decrease of 17.2% from $488.2 million for the comparable 1998 period. Net
revenues decreased 4.1% to $2,991.8 million in the 1999 period from $3,120.1
million in the 1998 period. The decrease was primarily attributable to a
decrease in investment banking revenues, partially offset by an increase in
commission revenues. Earnings per share were $2.63 for the 1999 period versus
$3.21 for the comparable 1998 period.
Commission revenues increased 10.5% in the 1999 period to $740.6 million
from $670.0 million in the comparable 1998 period. This increase was primarily
attributable to increased revenues from the firm's institutional and securities
clearance services, which benefited from a 29.9% increase in NYSE average daily
volume in the 1999 period compared to the 1998 period.
The Company's principal transactions revenues by reporting categories, including
derivatives, are as follows:
Nine-Months Ended Nine-Months Ended
March 26, 1999 March 27, 1998
--------------- --------------
Fixed Income $ 661,023 $ 668,488
Equity 343,622 353,401
Foreign Exchange & Other
Derivative Financial
Instruments 211,716 212,879
---------- ----------
$1,216,361 $1,234,768
========== ==========
Revenues from principal transactions decreased 1.5% in the 1999 period to
$1,216.4 million from $1,234.8 million in the comparable 1998 period. This
decrease was primarily due to volatile market conditions and the "flight to
quality" during the first quarter of fiscal 1999.
Investment banking revenues decreased 26.1% to $514.4 million in the 1999 period
from $695.6 million in the comparable 1998 period. This decrease reflects
decreases in underwriting revenues as well as mergers & acquisitions and
advisory fees. Investor and issuer concerns arising from difficult market
conditions during the first and second quarters of fiscal 1999 served to dampen
the Company's financial advisory and underwriting activities. These concerns led
to decreased levels of equity and debt new issue volume during that period.
Net interest and dividends reflected a decrease of 1.6% to $461.7 million in the
1999 period from $469.5 million in the comparable 1998 period. Average customer
margin debt declined to $40.0 billion in the 1999 period from $44.3 billion in
the comparable 1998 period, while average customer shorts increased to $60.3
billion from $54.9 billion. Average free credit balances increased to $12.5
billion in the 1999 period from $10.6 billion in the comparable 1998 period.
Employee compensation and benefits increased 0.3% to $1,552.9 million in the
1999 period from $1,548.2 million in the comparable 1998 period. Employee
compensation and benefits, as a percentage of net revenues, increased to 51.9%
in the 1999 period from 49.6% in the comparable 1998 period.
All other expenses increased 3.3% to $805.2 million in the 1999 period from
$779.4 million in the comparable 1998 period. Communications expense increased
by $16.4 million in the 1999 period from the comparable 1998 period, reflecting
an increase in information services and the installation of higher capacity
telecommunication networks. Depreciation expense increased by $15.5 million in
the 1999 period from the comparable 1998 period due to computer equipment
upgrades throughout the Company. Advertising and market development increased by
$11.2 million in the 1999 period due to increased advertising expenses in
various departments. Data processing and equipment increased by $7.6 million in
the 1999 period due to an increase in computer processing costs associated with
the distribution of new software. Legal expenses decreased by $21.8 million in
the 1999 period from the comparable 1998 period, reflecting the settlement of
the NASDAQ antitrust litigation in the 1998 period. CAP Plan expense decreased
by $3.0 million in the 1999 period from the comparable 1998 period reflecting
the reduced level of earnings.
The Company's effective tax rate decreased to 36.3% in the 1999 period compared
to 38.4% in the comparable 1998 period due to a lower level of earnings and a
higher percentage of tax preference items 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 U.S.
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 March 26, 1999 increased to $166.6 billion from
$154.5 billion at June 30, 1998. The increase is primarily attributable to
increases in securities purchased under agreements to resell, receivables from
brokers, dealers and others and financial instruments owned, partially offset by
a decrease in securities borrowed.
The Company's ability to support fluctuations 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 U.S. government and agency securities, typically
are funded by the use of repurchase agreements and securities lending
arrangements, which require low levels of margin. In contrast, assets of lower
quality or liquidity require higher levels of collateralization, or margin, in
order to obtain secured financing 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 securities are sold with a commitment for
repurchase by the Company 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 nine-months ended March 26, 1999, the Company issued $3.1 billion in
long-term debt which, net of retirements, served to increase long-term debt to
$14.4 billion at March 26, 1999 from $13.3 billion at June 30, 1998.
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.
Additionally, the Company maintains a committed revolving-credit facility (the
"facility") totaling $2.9 billion, which permits borrowing on a secured basis by
Bear Stearns, BSSC and certain affiliates. The facility provides that up to
$1.45 billion of the total facility may be borrowed by the Company on an
unsecured basis. Secured borrowings can be collateralized by both
investment-grade and non-investment-grade financial instruments. In addition,
this facility provides for defined margin levels on a wide range of eligible
financial instruments that may be pledged under the secured portion of the
facility. The facility terminates in October 1999 with all loans outstanding at
that date payable no later than October 2000.
Capital Resources
The Company conducts a substantial portion 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, Bear Stearns,
BSSC, BSIL, BSIT and BSB. The Company regularly monitors the nature and
significance of those assets or activities conducted outside the regulated
subsidiaries and generally funds such assets with either capital or borrowings
having maturities consistent with the nature and the liquidity of the assets
being financed.
During the nine-months ended March 26, 1999, the Company repurchased 7,658,035
shares of Common Stock in connection with the CAP Plan at a cost of
approximately $291.7 million. Included in the shares purchased during this
period were 3,951,237 shares with a cost of $153.8 million, which were credited
to participants' deferred compensation accounts with respect to deferrals made
during fiscal 1998. 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 in respect of all
compensation deferred and any additional amounts allocated to participants under
the CAP Plan. Repurchases of Common Stock under the CAP Plan are not made
pursuant to the Company's Stock Repurchase Plan (the "Repurchase Plan")
authorized by the Board of Directors and are not included in calculating the
maximum aggregate number of shares of Common Stock that the Company may
repurchase under the Repurchase Plan. As of May 6, 1999, there have been no
purchases under the Repurchase Plan.
Cash Flows
Cash and cash equivalents decreased by $148.2 million during the nine-months
ended March 26, 1999 to $925.7 million. Cash provided by operating activities
during the nine-months ended March 26, 1999 approximated $1.3 billion, primarily
due to an increase in securities sold under agreements to repurchase and a
decrease in securities borrowed, partially offset by increases in securities
purchased under agreements to resell and financial instruments owned. Financing
activities used cash of $1.3 billion, primarily due to net repayments of
short-term borrowings and net retirement/maturities of long-term borrowings.
Regulated Subsidiaries
As registered broker-dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Securities Exchange Act of 1934, the NYSE, and the
Commodity Futures Trading Commission, which are designed to measure the general
financial soundness and liquidity of broker-dealers. BSIL and BSIT, London-based
broker-dealer subsidiaries, are subject to the regulatory capital requirements
of the Securities and Futures Authority, a self-regulatory organization
established pursuant to the United Kingdom Financial Services Act of 1986.
Additionally, BSB is subject to the regulatory capital requirements of the
Central Bank of Ireland. At March 26, 1999 Bear Stearns, BSSC, BSIL, BSIT, and
BSB were in compliance with such regulatory capital requirements.
Merchant Banking and Non-Investment-Grade Debt 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 or subordinated loans, and have
not required significant levels of capital investment. At March 26, 1999, the
Company's aggregate investments in leveraged transactions and its exposure
related to any one transaction were 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 the securities of companies
that are the subject of pending bankruptcy proceedings (collectively "high yield
securities"). Non-investment-grade mortgage loans are principally secured by
residential properties and include both non-performing loans and real estate
owned. At March 26, 1999, the Company held high yield instruments of $1.5
billion in assets and $0.2 billion in liabilities, as compared to $1.8 billion
in assets and $0.3 billion in liabilities as of June 30, 1998.
These investments generally involve greater risk than investment-grade debt
securities due to credit considerations, illiquidity of secondary trading
markets and vulnerability to general economic conditions.
The level of the Company's high yield securities inventories, and the impact of
such activities upon the Company's results of operations, can fluctuate from
period to period as a result of customer demands and economic and market
considerations. Bear Stearns' Risk Committee continuously monitors exposure to
market and credit risk with respect to high yield securities inventories and
establishes limits with respect to overall market exposure and concentrations of
risk by both individual issuer and industry group.
Year 2000 Issue
The Year 2000 issue is the result of legacy computer programs being 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 may not be able to accurately process dates ending in the
year 2000 and thereafter. The Company determined that it needed to modify or
replace portions of its software and hardware so that its computer systems would
properly utilize dates beyond December 31, 1999.
Over four years ago, the Company established a task force to review and develop
an action plan to address the Year 2000 issue. The Company's action plan
addresses both information technology and non-information technology system
compliance issues. Since then, the ongoing assessment and monitoring phase has
continued and includes assessment of the degree of compliance of its significant
vendors, facility operators, custodial banks and fiduciary agents to determine
the extent to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company has contacted all significant
external vendors in an effort to confirm their readiness for the Year 2000 and
is in the process of testing compatibility with such systems. The Company also
participates actively in industry-wide tests.
The Company has and will continue to test the software and hardware for Year
2000 modifications. To date, 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 $45.8 million. The Company's total
projected Year 2000 project cost, including the estimated costs and time
associated with the impact of third party Year 2000 issues, are based on
currently available information. The total remaining Year 2000 project cost is
estimated at approximately $14.2 million, which will be funded through operating
cash flows and primarily expensed as incurred.
The Company presently believes that the activities that it is undertaking
in the Year 2000 project should satisfactorily resolve Year 2000 compliance
exposures within its own systems worldwide. The Company has substantially
completed the reprogramming and replacement phase of the project. Testing is in
progress and is expected to be completed in fiscal year 1999 with additional
testing through the end of the calendar year as deemed appropriate. However, if
such modifications and conversions are not operationally effective on a timely
basis, the Year 2000 issue could have a material impact on the operations of the
Company. Additionally, there can be no assurance that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company. The Company has developed an action plan and a formal contingency plan
designed to safeguard the interests of the Company and its customers. The
Company believes that these plans significantly reduce the risk of a Year 2000
issue serious enough to cause a business disruption. With regard to Year 2000
compliance of other external entities, the Company is monitoring developments
closely. Should it appear that a major utility, such as a stock exchange, would
not be ready, the Company will work with other firms in the industry to plan an
appropriate course of action.
Effects of Statements of Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information," which
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. This statement is effective for fiscal years beginning after December
15, 1997. The Company expects to adopt this standard when required in fiscal
year 1999 and is currently determining the potential impact on the Company's
financial statement disclosure.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Financial
Instruments and Hedging Activities." SFAS 133 establishes standards for
accounting and reporting of derivative financial instruments embedded in other
contracts, and hedging activities. SFAS 133 is effective for fiscal quarters of
fiscal years beginning after June 15, 1999. The Company expects to adopt this
standard when required in fiscal year 2000 and is currently determining the
potential impact on the Company's accounting for such activities.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------- -----------
The Company's principal business activities by their nature engender significant
market and credit risks. Managing these risks is critical to the success and
stability of the Company. As a result, comprehensive risk management policies
and procedures have been established to identify, control and monitor each of
these major risks. Additionally, the Company's diverse portfolio of business
activities helps to reduce the impact that volatility in any particular market
may have on its net revenues. In addition to market risk, the Company is also
subject to credit risk, operating risk and funding risk as well as other risks.
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 and in equity and commodity
prices. Market risk is inherent to both derivative and non-derivative financial
instruments, and accordingly, the scope of the Company's market risk management
procedures extends beyond derivatives to include 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 includes 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, 1998.
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 are 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 recently
become 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 may 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 which describe possible curve
movements. These were generated from principal component analysis. In addition,
volatility and spread risk factors were used, where appropriate. Inter-country
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 at March 26, 1999 and approximately forty at June 30, 1998.
Parameter estimates, such as volatilities and correlations, were based on daily
tests through March 26, 1999. The total value at risk presented below is less
than the sum of the individual components (i.e. Interest Rate Risk, Foreign
Exchange Rate Risk, Equity Risk) due to the benefit of diversification among the
risks.
This table illustrates the value at risk for each component of market risk as
of:
March 26, June 30,
in millions 1999 1998
- ----------- ---- ----
MARKET RISK
Interest $ 8.0 $ 11.1
Currency 1.2 0.9
Equity 14.0 8.9
Diversification benefit (7.0) (6.6)
----- ------
Total $ 16.2 $ 14.3
===== ======
As previously discussed, the Company utilizes a wide variety of market risk
management methods, including: limits for each trading activity; marking all
positions to market on a daily basis; daily profit and loss statements; position
reports; aged inventory position reports; and independent verification of
inventory pricing. Additionally, management of each trading department reports
positions, profits and losses, and trading strategies to the Risk Committee on a
weekly basis. The Company believes that these procedures, which stress timely
communication between trading department management and senior management, are
the most important elements of the risk management process.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A.I.A. Holding, S.A., et al. v. Lehman Brothers, Inc., et al.
As previously reported in the Company's 1998 Form 10-K and Form 10-Q for the
quarter ended December 31, 1998 ("Second Quarter 1999 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 February 19, 1999, Bear Stearns and Lehman Brothers filed a motion for
reconsideration of the court's order dismissing their fraudulent conveyance
counterclaim.
Alpha Group Consultants, et al. v. Weintraub, et al./In re Weintraub
Entertainment Group Litigation.
As previously reported in the Company's 1998 Form 10-K and Second Quarter 1999
Form 10-Q, Bear Stearns is a defendant in litigation pending in the United
States District Court for the Southern District of California.
On March 1, 1999, Bear Stearns filed a cross-motion for summary judgment on the
claims asserted in the complaint on behalf of certain absent class members.
On April 14, 1999, Bear Stearns filed a motion for reconsideration of the
court's order denying its motion for a new trial.
A.R. Baron & Company, Inc.
As previously reported in the Company's 1998 Form 10-K, Form 10-Q for the
quarter ended September 25, 1998 ("First Quarter 1999 Form 10-Q") and Second
Quarter 1999 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 January 11, 1999, plaintiffs moved for class certification. The court has not
yet issued a ruling on plaintiffs' motion.
Fezanni, et al. v. Bear, Stearns & Co. Inc., et al.
On February 2, 1999, an action was commenced in the United States District
Court for the Southern District of New York by eleven individuals or entities
that allegedly purchased certain securities underwritten by A.R. Baron & Company
("Baron"). Named as defendants are Bear Stearns & Co. Inc. ("Bear Stearns"),
BSSC, an officer of Bear, Stearns Securities Corp. ("BSSC"), thirteen former
officers and employees of Baron, and 33 other individuals and entities that
allegedly participated in alleged misconduct by Baron involving attempts to
manipulate the market for securities underwritten by Baron. The complaint
alleges that the Bear Stearns defendants violated Sections 9 and 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder and the Racketeer Influenced and Corrupt Organizations Act, aided and
abetted breach of fiduciary duty and committed common law fraud in connection
with providing clearing services and financing for Baron. The complaint seeks to
recover compensatory damages in excess of $6.5 million, treble damages in excess
of $19.5 million, punitive damages of $6.5 million from each defendant other
than Bear Stearns and BSSC, and punitive damages in the aggregate of $130
million from Bear Stearns and BSSC. The complaint in this action has not yet
been served.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
Bier, et al. v. Bear, Stearns & Co. Inc., et al.
On February 8, 1999, a purported class action was commenced in the United States
District Court for the Southern District of New York on behalf of all persons
who purchased securities through certain retail brokerage firms for which BSSC
provided clearing services and financing during the period from December 8, 1992
through December 8, 1998. Named as defendants are Bear, Stearns & Co. Inc., BSSC
and an officer of BSSC. The complaint alleges, among other things, that the
defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder and committed breach of contract, common law fraud and
negligent misrepresentation in connection with providing clearing services and
financing for the brokerage firms named in the complaint. Compensatory and
punitive damages in unspecified amounts are sought.
On April 5, 1999, this action was consolidated for all purposes with the
Goldberger action discussed below.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
In re Daisy Systems Corporation, Debtor
As previously reported in the Company's 1998 Form 10-K and Second Quarter 1999
Form 10-Q, Bear Stearns is a defendant in litigation pending in the United
States District Court for the Northern District of California.
On February 11, 1999, plaintiff filed a notice of cross-appeal.
Deutch v. Silverman
As previously reported in the Company's 1998 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
District of New Jersey.
On April 7, 1999, defendants filed a motion to dismiss the complaint. The court
has not yet issued a ruling on this motion.
Goldberger v. Bear, Stearns & Co. Inc., et al.
As previously reported in the Company's Second Quarter 1999 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 April 5, 1999, this action was consolidated for all purposes with the Bier
action discussed above.
In re Granite Partners, L.P., Granite Corporation and Quartz Hedge Fund
As previously reported in the Company's 1998 Form 10-K and First and Second
Quarter 1999 Form 10-Q's, Bear Stearns is a defendant in litigation pending in
the United States District Court for the Southern District of New York.
On February 17, 1999, the Bambou Action was consolidated for pre-trial purposes
with the ABF Capital, Primavera, Montpelier and Johnston Actions.
Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc., et al.
As previously reported in the Company's 1998 Form 10-K and First and Second
Quarter 1999 Form 10-Q's, Bear Stearns is a defendant in litigation pending in
the United States District Court for the Southern District of New York.
On January 18, 1999, defendants moved for summary judgment on all claims
asserted in the complaint. The court has not yet issued a ruling on defendants'
motion.
Sterling Foster & Co., Inc.
The following matters arise out of Bear Stearns' role as clearing broker for
Sterling Foster & Co., Inc. ("Sterling Foster").
(i) Rogers v. Sterling Foster & Co., Inc.
On February 16, 1999, Bear, Stearns & Co. Inc., BSSC and an officer of BSSC were
added as defendants in a purported class action pending in the United States
District Court for the Eastern District of New York. The action is brought on
behalf of a purported class consisting of all persons who purchased or otherwise
acquired certain securities that were underwritten by Sterling Foster & Co.,
Inc. ("Sterling Foster"). Named as defendants, in addition to the Bear Stearns
defendants set forth above, are Sterling Foster, seven individuals alleged to
have had an employment relationship with, or exercised control over, Sterling
Foster, six companies that issued securities underwritten by Sterling Foster,
eight individuals who were directors, officers and/or employees of these
issuers, and Bernstein & Wasserman LLP and two of its partners. The second
amended complaint alleges, among other things, that the Bear Stearns defendants
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder
and Section 349 of the New York General Business Law and committed common law
fraud in connection with providing clearing services to Sterling Foster.
Compensatory damages in an unspecified amount are sought.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
(ii) Greenberg v. Bear, Stearns & Co. Inc., et al.
As previously reported in the Company's Second Quarter 1999 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 March 15, 1999, this action was transferred by the Judicial Panel on
Multi-District Litigation to the United States District Court for the Eastern
District of New York.
(iii) Levitt, et al. v. Bear, Stearns & Co. Inc., et al.
On February 16, 1999, a purported class action was commenced in the United
States District Court for the Southern District of New York on behalf of all
persons who purchased ML Direct, Inc. common stock or warrants through Sterling
Foster between September 4, 1996 and December 31, 1996. Named as defendants are
Bear, Stearns & Co. Inc. and BSSC. The complaint alleges, among other things,
that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder and committed common law fraud in connection
with providing clearing services to Sterling Foster with respect to certain
transactions by customers of Sterling Foster in ML Direct common stock and
warrants. Compensatory damages of $50 million and punitive damages of
approximately $100 million are sought.
On March 15, 1999, this action was transferred by the Judicial Panel on
Multi-District Litigation to the United States District Court for the Eastern
District of New York.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, and believes that
it has substantial defenses to these claims.
(iv) Mihalevich v. Bear, Stearns & Co. Inc.
On February 5, 1999, a purported class action was commenced in the United States
District Court for the Western District of Missouri on behalf of all persons
who, "within or from the State of Missouri," purchased ML Direct, Inc. common
stock or warrants through Sterling Foster between September 4, 1996 and February
13, 1997. Named as defendants are Bear, Stearns & Co. Inc. and BSSC. The
complaint alleges, among other things, that the defendants violated the Missouri
Securities Act and committed common law fraud, constructive fraud, negligence
and made negligent misrepresentations in connection with providing clearing
services to Sterling Foster with respect to certain transactions by customers of
Sterling Foster in ML Direct common stock and warrants. Compensatory damages of
approximately $290,000 and punitive damages in an unspecified amount are sought.
On March 31, 1999, this action was conditionally transferred by the Judicial
Panel on Multi-District Litigation to the United States District Court for the
Eastern District of New York. Plaintiff has opposed this conditional transfer.
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation, intends to defend against these claims vigorously, 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 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 January 19,
1999 and filed on January 22, 1999, pertaining to
the Company's results of operations for the
three-months ended December 31, 1998.
(ii)A Current Report on Form 8-K dated January 20,
1999 and filed on January 22, 1999, pertaining to
the announcement of a 5% stock dividend on the
outstanding shares of common stock.
(iii) A Current Report on Form 8-K dated February 23,
1999 and filed on February 25, 1999, pertaining
to an opinion of Cadwalader, Wickersham and Taft
as to the legality of 6.15% Global Notes due
2004 (the "Global Notes") issued by the Company
and an opinion of Cadwalader, Wickersham &
Taft as to certain federal income tax
consequences in connection with the offering
of the Global Notes.
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: May 10, 1999 By: /s/ Marshall J Levinson
-----------------------
Marshall J Levinson
Controller and Assistant Secretary
(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 33
(12) Statement Re Computation of Earnings to Fixed Charges 34
(27) Financial Data Schedule 35