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 September 24, 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 November 4, 1999, the latest practicable date, there were 113,501,998
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 September 24, 1999
(Unaudited) and June 30, 1999
Consolidated Statements of Income (Unaudited) for the three-month
periods ended September 24, 1999 and September 25, 1998
Consolidated Statements of Cash Flows (Unaudited) for the three-month
periods ended September 24, 1999 and September 25, 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
September 24, June 30,
1999 1999
------------- --------------
(Unaudited)
(In thousands)
Cash and cash equivalents $ 2,073,237 $ 2,129,080
Cash and securities deposited with
clearing organizations or
segregated in compliance with
federal regulations 2,041,258 2,891,397
Securities purchased under agreements
to resell 39,030,184 32,996,226
Receivable for securities provided as
collateral 1,855,079 1,735,293
Securities borrowed 55,291,008 54,173,726
Receivables:
Customers 15,008,244 14,510,628
Brokers, dealers and others 609,714 1,452,590
Interest and dividends 502,395 366,110
Financial instruments owned, at
fair value 39,677,221 41,942,878
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 490,298 486,735
Other assets 1,301,563 1,209,677
------------- --------------
Total Assets $ 157,880,201 $ 153,894,340
============= ==============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
September 24, June 30,
1999 1999
------------- --------------
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 13,634,442 $ 14,145,410
Securities sold under agreements
to repurchase 52,541,553 50,673,644
Obligation to return securities received as
collateral 2,559,624 1,944,286
Payables:
Customers 40,360,235 40,822,913
Brokers, dealers and others 5,162,409 2,195,691
Interest and dividends 617,531 542,478
Financial instruments sold, but not
yet purchased, at fair value 20,561,255 21,506,372
Accrued employee compensation and benefits 462,332 1,306,357
Other liabilities and accrued expenses 624,436 654,588
------------- --------------
136,523,817 133,791,739
------------- --------------
Commitments and contingencies
Long-term borrowings 15,841,482 14,647,092
------------- --------------
Guaranteed Preferred Beneficial Interests in
Company Subordinated Debt Securities 500,000 500,000
------------- --------------
Stockholders' Equity
Preferred Stock 800,000 800,000
Common Stock, $1.00 par value;
200,000,000 shares authorized;
176,011,113 shares issued 176,011 176,011
Paid-in capital 2,270,929 2,269,927
Retained earnings 2,062,300 1,931,957
Capital Accumulation Plan 1,186,155 1,144,329
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,520,750 shares (103,421) (103,421)
Common Stock - 58,881,726 shares and
56,333,508 shares at September 24, 1999
and June 30, 1999, respectively (1,377,072) (1,263,294)
------------- --------------
Total Stockholders' Equity 5,014,902 4,955,509
------------- --------------
Total Liabilities and Stockholders' Equity $ 157,880,201 $ 153,894,340
============= =============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three-Months Ended
------------------------------
September 24, September 25,
1999 1998 (1)
------------- --------------
(In thousands, except share data)
Revenues
Commissions $ 228,532 $ 240,800
Principal transactions 362,206 197,049
Investment banking 262,530 121,776
Interest and dividends 1,013,912 1,104,839
Other income 23,228 16,140
------------- --------------
Total Revenues 1,890,408 1,680,604
Interest expense 844,395 939,703
------------- --------------
Revenues, net of interest expense 1,046,013 740,901
------------- --------------
Non-interest expenses
Employee compensation and benefits 516,393 405,881
Floor brokerage, exchange
and clearance fees 35,898 42,064
Communications 37,683 33,095
Depreciation and amortization 37,422 32,394
Occupancy 26,915 25,888
Advertising and market development 25,186 23,038
Data processing and equipment 20,485 10,985
Other expenses 96,454 74,247
------------- --------------
Total non-interest expenses 796,436 647,592
------------- --------------
Income before provision for
income taxes 249,577 93,309
Provision for income taxes 91,720 29,206
------------- --------------
Net income $ 157,857 $ 64,103
============= ==============
Net income applicable to
common shares $ 148,079 $ 54,008
============= ==============
Earnings per share (2) $ 0.95 $ 0.36
============= ==============
Weighted average common and
common equivalent shares
outstanding (2) 167,383,814 167,673,330
============= ==============
Cash dividends declared
per common share (2) $ 0.14 $ 0.14
============= ==============
(1) Certain amounts have been reclassified to conform to the current period's
presentation.
(2) Adjusted for all stock dividends declared through October 29, 1999.
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three-Months Ended
------------------------------
September 24, September 25,
1999 1998
-------------- ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 157,857 $ 64,103
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization 37,422 32,394
Deferred income taxes (22,464) 1,937
Other 22,111 21,927
Decreases (increases) in operating assets:
Cash and securities deposited with clearing
organizations or segregated in compliance with
federal regulations 850,139 (5,099,479)
Securities purchased under agreements to resell (6,033,958) (6,652,202)
Securities borrowed (1,117,282) 6,144,467
Receivables:
Customers (497,616) 3,296,024
Brokers, dealers and others 842,876 255,042
Financial instruments owned 2,761,209 (7,474,532)
Other assets (277,684) 57,553
Increases (decreases) in operating liabilities:
Securities sold under agreements to repurchase 1,867,909 6,638,481
Payables:
Customers (462,678) 2,510,765
Brokers, dealers and others 2,960,842 (1,153,808)
Financial instruments sold, but not yet purchased (945,117) 1,537,380
Accrued employee compensation and benefits (864,525) (881,403)
Other liabilities and accrued expenses 45,667 289,492
-------------- ------------
Cash used in operating activities (675,292) (411,859)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments from short-term borrowings (510,968) (187,683)
Net proceeds from issuance of long-term borrowings 1,628,760 1,201,791
Capital Accumulation Plan 70,406 153,785
Tax benefit of Common Stock distributions 1,385 1,941
Payments for:
Retirement of long-term borrowings (439,173) (770,633)
Treasury stock purchases (136,541) (158,423)
Cash dividends paid (27,514) (27,034)
-------------- ------------
Cash provided by financing activities 586,355 213,744
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (40,985) (41,630)
Purchases of investment securities and other assets (12,534) (14,422)
Proceeds from sales of investment securities and other assets 86,613 27,756
-------------- ------------
Cash provided by (used in) investing activities 33,094 (28,296)
-------------- ------------
Net decrease in cash and cash equivalents (55,843) (226,411)
Cash and cash equivalents, beginning of period 2,129,080 1,073,821
-------------- ------------
Cash and cash equivalents, end of period $ 2,073,237 $ 847,410
============== ============
Statement of Financial Accounting Standards No. 125 requires balance sheet
recognition of collateral related to certain secured financing transactions,
which is a non-cash activity, and did not impact the Consolidated Statements of
Cash Flows.
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of The Bear Stearns Companies Inc. and its subsidiaries (the
"Company"). All material intercompany transactions and balances have been
eliminated. Certain prior period amounts have been reclassified to conform
to the current period's presentation. On October 29, 1999 the Board of
Directors declared a 5% stock dividend on the Company's Common Stock to
stockholders of record on November 12, 1999 to be distributed November 26,
1999. Earnings per share data for all periods included in the consolidated
financial statements are presented after giving retroactive effect to the 5%
stock dividend.
The consolidated financial statements reflect all adjustments which, in the
opinion of management, are normal and recurring and are necessary for a fair
statement of the results for the interim periods presented. The consolidated
financial statements are prepared in conformity with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. The nature of the Company's business is such that the results of
any interim period may not be indicative of the results to be expected for
an entire fiscal year.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments owned and financial instruments sold, but not yet
purchased consist of the Company's proprietary trading and investment
accounts, at fair value, as follows:
September 24, June 30,
In thousands 1999 1999
- -----------------------------------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 8,225,639 $ 8,211,944
Other sovereign governments 2,976,191 2,742,486
Corporate equity and convertible debt 8,473,169 14,578,501
Corporate debt 4,678,778 4,972,621
Derivative financial instruments 3,934,632 3,035,278
Mortgages and other mortgage-backed securities 10,625,551 7,869,884
Other 763,261 532,164
------------- ------------
$ 39,677,221 $ 41,942,878
============= ============
Financial instruments sold, but not yet purchased:
US government and agency $ 4,676,681 $ 5,250,633
Other sovereign governments 3,231,838 2,639,952
Corporate equity 6,112,412 6,134,317
Corporate debt 2,556,147 1,707,998
Derivative financial instruments 3,983,300 5,687,296
Other 877 86,176
------------- ------------
$ 20,561,255 $ 21,506,372
============= ============
3. COMMITMENTS AND CONTINGENCIES
At September 24, 1999, the Company was contingently liable for unsecured
letters of credit of approximately $1.7 billion and letters of credit
secured by financial instruments of approximately $22.9 million, both of
which are principally used as deposits for securities borrowed or to satisfy
margin deposits at option and commodity exchanges. The Company had various
other commitments aggregating $736.6 million at September 24, 1999.
In the normal course of business, the Company has been named as a defendant
in several lawsuits, which involve claims for substantial amounts. Although
the ultimate outcome of these matters cannot be ascertained at this time, it
is the opinion of management, after consultation with counsel, that the
resolution of such matters will not have a material adverse effect on the
results of operations or the financial condition of the Company.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns
Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly,
are subject to Rule 15c3-1 of the Securities Exchange Act of 1934 (the "Net
Capital Rule") and the capital rules of the New York Stock Exchange, Inc.
("NYSE") and other principal exchanges of which Bear Stearns and BSSC are
members. Included in the computation of net capital of Bear Stearns is net
capital of BSSC in excess of 5% of aggregate debit items arising from
customer transactions, as defined. At September 24, 1999, Bear Stearns' net
capital, as defined, of $1.78 billion exceeded the minimum requirement by
$1.72 billion.
Bear, Stearns International Limited ("BSIL") and Bear Stearns International
Trading Limited ("BSIT"), London-based broker-dealer subsidiaries, which
are indirectly wholly owned by the Company, are subject to regulatory
capital requirements of the Securities and Futures Authority, a
self-regulatory organization established pursuant to the United Kingdom
Financial Services Act of 1986.
Bear Stearns Bank Plc ("BSB"), which is indirectly wholly owned by the
Company, is incorporated in Dublin, Ireland and is subject to the
regulatory capital requirements of the Central Bank of Ireland.
At September 24, 1999, Bear Stearns, BSSC, BSIL, BSIT and BSB were in
compliance with their respective regulatory capital requirements.
5. EARNINGS PER SHARE
Earnings per share is computed by dividing net income applicable to common
shares by the weighted average number of common shares outstanding during
each period presented. Common shares include the assumed distribution of
shares of common stock issued or issuable under various employee benefit
plans including certain of the Company's deferred compensation arrangements,
with appropriate adjustments made to net income for expense accruals related
thereto.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the
three-months ended September 24, 1999 and September 25, 1998. Income taxes
paid totaled $57.3 million and $17.9 million for the three-months ended
September 24, 1999 and September 25, 1998, respectively.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter derivative
financial instruments and in connection with its proprietary market-making
and trading activities, enters into transactions in a variety of cash and
derivative financial instruments in order to reduce its exposure to market
risk, which includes interest rate, exchange rate, 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 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 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 BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table represents the notional/contract amounts of the
Company's outstanding derivative financial instruments as of September 24,
1999 and June 30, 1999:
September 24, June 30,
In billions 1999 1999
---------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options,
swaptions,caps,collars,and floors $360.8 $339.1
Futures contracts 43.2 52.5
Options held 24.7 24.0
Options written 3.3 3.9
Foreign Exchange:
Futures contracts 25.0 19.3
Forward contracts 14.2 15.6
Options held 8.0 2.6
Options written 4.8 3.1
Mortgage-Backed Securities:
Forward Contracts 59.2 63.4
Equity:
Swap agreements 13.9 11.9
Futures contracts 1.8 0.8
Options held 6.1 7.5
Options written 5.6 7.3
The derivative 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)
The fair values of derivative financial instruments held or issued for
trading and hedging purposes as of September 24, 1999 and June 30, 1999 were
as follows:
September 24, June 30,
1999 1999
-------------------------------------------------
In millions Assets Liabilities Assets Liabilities
----------------------------------------------------------------------------
Swap agreements $2,641 $2,775 $1,375 $2,290
Futures and forward
Contracts 210 387 278 259
Options held 1,086 1,397
Options written 865 3,164
The average monthly fair values of the derivative financial instruments for
the three-months ended September 24, 1999 and the fiscal year ended June 30,
1999 were as follows:
September 24, June 30,
1999 1999
------------------------------------------------
In millions Assets Liabilities Assets Liabilities
----------------------------------------------------------------------------
Swap agreements $2,116 $2,499 $2,227 $2,317
Futures and forward
Contracts 350 355 334 368
Options held 1,119 1,154
Options written 1,753 3,156
The notional/contract amounts of these instruments do not represent the
Company's potential risk of loss due to counterparty nonperformance. Credit
risk arises from the potential inability of counterparties to perform in
accordance with the terms of the contract. The Company's exposure to credit
risk associated with counterparty nonperformance is limited to the net
replacement cost of over-the-counter contracts, which are recognized as
assets in the Company's Consolidated Statements of Financial Condition.
Exchange-traded financial instruments, such as futures and options,
generally do not give rise to significant counterparty exposure due to the
margin requirements of the individual exchanges. Generally, options written
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)
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 $1.9 billion and
$1.7 billion of collateral, respectively, at September 24, 1999 and June
30, 1999:
September 24, June 30,
In millions 1999 1999
-------------------------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $224.0 $ 140.0
AA 516.8 627.1
A 461.7 303.4
BBB 63.0 56.6
BB and Lower 24.6 39.7
Non-rated 5.8 3.4
(1) Internal designations of counterparty credit quality are
based on actual ratings made by external ratings agencies or
comparable ratings established and utilized by the Company's
Credit Department.
8. SEGMENT DATA
The Company operates in three principal segments: Capital Markets,
Execution Services and Wealth Management. These segments are strategic
business units that offer different products and services. They are managed
separately as different levels and types of expertise are required to
effectively manage the segments' transactions.
The Capital Markets segment is comprised of Equities, Fixed Income and
Investment Banking areas. Equities combines the efforts of sales, trading
and research in such areas as block trading, convertible bonds,
over-the-counter equities, equity derivatives and risk arbitrage. Fixed
Income provides distribution power for issuers in the primary market,
liquidity for investors in the secondary market and research for
institutional clients in a variety of products such as mortgage-backed and
asset-backed securities, corporate and government bonds, municipal and high
yield securities, and foreign exchange and derivatives. Investment banking
provides capabilities in capital raising, strategic advisory, mergers and
acquisitions and merchant banking.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 over
2,700 clearing clients worldwide. The commission-related areas provide
research and execution capabilities in US equity securities and financial
futures to our institutional clients.
The Wealth Management segment is comprised of the Private Client Services
("PCS") and Asset Management areas. PCS provides high-net-worth individuals
with an institutional level of service. Asset Management serves the diverse
investment needs of corporations, municipal governments, multi-employer plans,
foundations, endowments, family groups and high-net-worth individuals.
The three business segments are comprised of the many business areas with
interactions among each as they serve the needs of similar clients. Revenues
and expenses reflected below include those which are directly related to each
segment. Revenue from inter-segment transactions are credited based upon
specific criteria or agreed upon rates with such amounts eliminated in
consolidation. They also include revenues and expenses which are the result of
the Company's allocations for items such as interest, which is allocated
primarily based on capital utilization, and corporate overhead, which is
generally allocated based on levels of expenses. 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)
For the three months ended September 24, 1999:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ---------------------------------------------------------------------------------------------------------
Capital Markets $ 552,084 $ 162,564 $106,176,915
Execution Services 316,615 114,779 51,155,292
Wealth Management 129,329 18,575 3,125,044
Other (a) 47,985 (46,341) (2,577,050)
- ---------------------------------------------------------------------------------------------------------
Total $ 1,046,013 $ 249,577 $157,880,201
=========================================================================================================
For the three months ended September 25, 1998:
(in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets
- ---------------------------------------------------------------------------------------------------------
Capital Markets $269,052 $ (63,206) $118,760,619
Execution Services 297,641 124,553 42,471,701
Wealth Management 120,414 13,757 3,557,871
Other (a) 53,794 18,205 (1,715,773)
- ---------------------------------------------------------------------------------------------------------
Total $740,901 $ 93,309 $163,074,418
=========================================================================================================
(a) Other is comprised of consolidation/elimination entries as well as
corporate administrative functions, including costs related to the Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan") which were
$20.5 million and $12.0 million for the three months ended September 24,
1999 and September 25, 1998, respectively.
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 first fiscal quarter ended
September 24, 1999 was marked by volatility in the fixed income markets with
wider credit and swap spreads and by active markets and growth in both NYSE and
NASDAQ trading volume.
The 1998 quarter was marked by extreme fixed income market volatility attributed
to economic turmoil in the Far East and emerging market nations and the default
by Russia on its debt obligations, which triggered the flight to quality by
investors who sought safer, less risky investments. This caused yield spreads
between US Treasury securities and lower-rated issues to widen dramatically and
resulted in a decline in liquidity in the global bond markets.
In the 1999 quarter, in order to mitigate inflationary pressures, the Federal
Reserve Board raised the overnight lending rate by 25 basis points in August
1999. While concerns of inflation and the anticipation of an increase in the
overnight lending rate by the Federal Reserve Board contributed to some
volatility in the financial markets during the 1999 quarter, overall economic
trends, including higher levels of consumer confidence and low unemployment,
were generally positive. Equity markets continued to be fueled by strong
interest in internet and technology issues. In the fixed income markets,
conditions were generally positive, which benefited the Company's underwriting
and trading activities, specifically the mortgage-backed securities,
high yield and corporate bonds areas.
Results of Operations
Three-Months Ended September 24, 1999
Compared to Three-Months Ended September 25, 1998
Net income in the 1999 quarter was $157.9 million, an increase of 146.3% from
$64.1 million in the comparable prior year quarter. Revenues, net of interest
expense ("net revenues"), increased 41.2% to $1.0 billion from $740.9 million in
the comparable 1998 quarter. The increase was primarily attributable to an
increase in principal transactions revenues and investment banking revenues.
Earnings per share were $0.95 for the 1999 quarter versus $0.36 for the
comparable 1998 quarter. The earnings per share amounts have been adjusted for
the 5% stock dividend declared by the Company in October 1999.
Commission revenues decreased 5.1% in the 1999 quarter to $228.5 million from
$240.8 million in the comparable 1998 quarter. The decrease was primarily due to
a decline in commissions earned from private clients services volume, partially
offset by an increase in commission revenues derived from institutional clients.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
September 24, 1999 September 25, 1998
------------------ ------------------
Fixed Income $ 207,824 $ 72,554
Equity 89,261 73,620
Foreign Exchange & Other
Derivative Financial Instruments 65,121 50,875
--------- ---------
$ 362,206 $ 197,049
========= =========
Revenues from principal transactions increased 83.8% in the 1999 quarter to
$362.2 million from $197.0 million in the comparable 1998 quarter. The Company's
revenues from principal transactions during the 1998 quarter were negatively
impacted by the volatility experienced in the equity and fixed income markets
and by the widening of credit spreads. Principal transactions revenues derived
from fixed income increased 186.4% principally attributable to the
mortgage-backed securities, high yield and investment-grade corporate bonds
areas. In addition, the increase in revenues was also derived from the Company's
derivative activities. Principal transactions revenues derived from the
Company's equity activities increased on improved over-the-counter and risk
arbitrage results.
Investment banking revenues increased 115.6% to $262.5 million in the 1999
quarter from $121.8 million in the comparable 1998 quarter. The increase was
principally attributable to higher underwriting and merchant banking revenues
earned during the 1999 quarter. Underwriting revenues increased by approximately
44.7% primarily reflecting an increase in equity new issue volume. Merchant
banking revenues increased to $86.9 million reflecting gains realized from
certain of the Company's investments.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 2.7% to $169.5 million in the 1999 quarter from
$165.1 million in the comparable 1998 quarter. The increase was primarily due to
wider spreads on specialist margin balances in the 1999 period. Average margin
debt decreased to $42.9 billion in the 1999 quarter from $44.6 billion in the
comparable 1998 quarter. Average customer shorts decreased to $55.5 billion in
the 1999 quarter from $64.1 billion in the comparable 1998 quarter. Average free
credit balances decreased to $12.6 billion in the 1999 quarter from $13.1
billion in the comparable 1998 quarter.
Employee compensation and benefits increased 27.2% to $516.4 million in the 1999
quarter from $405.9 million in the 1998 quarter. The increase was primarily
attributable to an increase in discretionary bonuses related to increased net
revenues and earnings in the 1999 quarter and an increase in headcount. Employee
compensation and benefits, as a percentage of net revenues, decreased to 49.4%
in the 1999 quarter from 54.8% in the comparable 1998 quarter.
All other expenses increased 15.9% to $280.0 million in the 1999 quarter
compared to $241.7 million in the comparable 1998 quarter. Expenses associated
with the Capital Accumulation Plan for Senior Managing Directors (the "CAP
Plan") increased to $20.5 million in the 1999 quarter from $12.0 million in 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 $19.1 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 36.8% in the 1999 quarter compared
to 31.3% in the comparable 1998 quarter due to a lower percentage of tax
preference items.
Business Segments
The Company is primarily engaged in business as a securities broker and dealer
operating in three principal segments: Capital Markets, Execution Services and
Wealth Management. These segments are strategic business units analyzed
separately due to the distinct nature of the products they provide and the
clients they serve. Certain Capital Markets products are distributed by the
Wealth Management and Execution Services distribution network with the related
revenues of such intersegment services allocated to the respective segments
through transfer pricing policies.
The following segment operating results exclude certain corporate items. See
Note 8 of Notes to Consolidated Financial Statements.
Capital Markets
----------------------------------------------------------------------------
September 24, September 25,
In thousands 1999 1998
----------------------------------------------------------------------------
Net revenues $ 552,084 $ 269,052
Pre-tax income (loss) 162,564 (63,206)
----------------------------------------------------------------------------
Net revenues for Capital Markets approximated $552.1 million in the 1999
quarter, up 105.2% from $269.1 million in the 1998 quarter. Pre-tax income for
Capital Markets was $162.6 million in the 1999 quarter, compared to a loss of
$63.2 million in 1998 quarter. Fixed income results in the 1999 quarter improved
over the 1998 quarter due to the Company's mortgage-backed, high yield and
corporate bond trading operations. Fixed income results in the 1998 period were
adversely impacted by market volatility experienced in the wake of Russia's
default. In addition, equity results improved as active markets and deal flow
resulted in improved performances from over-the-counter equities, risk arbitrage
and equity derivatives. Investment banking revenues increased from $67.4 million
to $189.8 million reflecting improved capital market conditions as compared to
the 1998 quarter across all product areas and increased mergers and acquisitions
activity. In addition, merchant banking revenues increased to $86.9 million.
Execution Services
---------------------------------------------------------------------------
September 24, September 25,
In thousands 1999 1998
---------------------------------------------------------------------------
Net revenues $ 316,615 $ 297,641
Pre-tax income 114,779 124,553
---------------------------------------------------------------------------
At both September 24, 1999 and September 25, 1998 the Company provided clearing,
margin lending and securities borrowing to facilitate customer short sales to
just over 2,700 clearing clients worldwide. Such clients include approximately
2,300 prime brokerage clients including hedge fund managers, money managers,
short sellers, arbitrageurs and other professional investors and approximately
400 fully disclosed clients, who engage in either the retail or institutional
brokerage business. The Company processes trades in over 70 countries and
accounts for approximately 10% of the average daily New York Stock Exchange
volume, and processed an average of in excess of 184,000 trades per day during
the 1999 quarter versus 159,000 trades per day in the 1998 quarter.
Net revenues for Execution Services approximated $316.6 million in the 1999
quarter, up 6.4% from $297.6 million in the 1998 quarter. Pre-tax income for
Execution Services was $114.8 million in the 1999 quarter, down 7.9% from $124.6
million in the 1998 quarter. Commission revenues increased reflecting improved
domestic and European institutional equity sales volume. Net interest revenues
also increased in the 1999 quarter reflecting improved profit margins in
specialist clearance margin accounts. The decline in pre-tax income reflects
increased technology spending of approximately $15.0 million attributable to
internet and web-based applications being developed and rolled out to
correspondent clearing clients.
Wealth Management
--------------------------------------------------------------------------
September 24, September 25,
In thousands 1999 1998
--------------------------------------------------------------------------
Net revenues $ 129,329 $ 120,414
Pre-tax income 18,575 13,757
--------------------------------------------------------------------------
PCS provides high-net-worth individuals with an institutional level of service,
including access to the Company's resources and professionals. PCS maintains a
select team of approximately 500 account executives in seven regional offices.
PCS had approximately $36.9 billion in client assets at September 24, 1999, an
increase of 18.7% compared to September 25, 1998.
The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"),
had approximately $12.0 billion in assets under management at September 24, 1999
which reflected a 25.9% increase over September 25, 1998. The largest components
of the increase were attributable to limited partnership investments and mutual
funds. Asset Management serves the diverse investment needs of corporations,
municipal governments, multi-employer plans, foundations, endowments, family
groups and high-net-worth individuals.
Net revenues for Wealth Management were $129.3 million in the 1999 quarter, up
7.4% from $120.4 million in the 1998 quarter. Pre-tax income for Wealth
Management was $18.6 million in the 1999 quarter, up 35.0% from $13.8 million in
the 1998 quarter. Growth in assets under management, active equity markets and
strong customer volumes resulted in increased commissions and fee-based income
in the 1999 quarter.
Liquidity and Capital Resources
Financial Leverage
The Company maintains a highly liquid balance sheet with a majority of the
Company's assets consisting of marketable securities inventories, which are
marked-to-market daily, and collateralized receivables arising from
customer-related and proprietary securities transactions. Collateralized
receivables consist of resale agreements secured predominantly by US
government and agency securities, customer margin loans and securities borrowed,
which are typically secured by marketable corporate debt and equity securities.
The Company's total assets and financial leverage can fluctuate significantly,
depending largely upon economic and market conditions, volume of activity,
customer demand and underwriting commitments.
The Company's total assets at September 24, 1999 increased to $157.9 billion
from $153.9 billion at June 30, 1999. The increase is primarily attributable to
an increase in securities purchased under agreements to resell and securities
borrowed, partially offset by a decrease in financial instruments owned and cash
securities deposited with clearing organizations or segregated in compliance
with federal regulations.
The Company's ability to support increases in total assets is a function of its
ability to obtain short-term secured and unsecured funding and its access to
sources of long-term capital in the form of long-term borrowings and equity,
which together form its capital base. The Company continuously monitors the
adequacy of its capital base, which is a function of asset quality and
liquidity. Highly liquid assets, such as US government and agency securities,
typically are funded by the use of repurchase agreements, which require very low
levels of margin. In contrast, assets of lower quality or liquidity require
higher levels of margin or overcollateralization and consequently increased
levels of capital. Accordingly, the mix of assets being held by the Company
significantly influences the amount of leverage the Company can employ and the
adequacy of its capital base.
Funding Strategy
The Company's general funding strategy provides for the diversification of its
short-term funding sources in order to maximize liquidity. Sources of short-term
funding consist principally of collateralized borrowings, including repurchase
transactions and securities lending arrangements, customer free credit balances,
unsecured commercial paper, medium-term notes and bank borrowings generally
having maturities from overnight to one year.
Repurchase transactions, whereby the Company sells securities with a commitment
for 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 three- months ended September 24, 1999, the Company received proceeds
approximating $1.6 billion from the issuance of long-term debt which, net of
retirements, served to increase long-term debt to $15.8 billion at September 24,
1999 from $14.6 billion at June 30, 1999.
The Company maintains an alternative funding strategy focused on the liquidity
and self-funding ability of the underlying assets. The objective of the strategy
is to maintain sufficient sources of alternative funding to enable the Company
to fund debt obligations without issuing any new unsecured debt, including
commercial paper. The most significant source of alternative funding is the
Company's ability to hypothecate or pledge its unencumbered assets as collateral
for short-term funding.
As part of the Company's alternative funding strategy, the Company regularly
monitors and analyzes the size, composition, and liquidity characteristics of
the assets being financed and evaluates its liquidity needs in light of current
market conditions and available funding alternatives. Through this analysis, the
Company can continuously evaluate the adequacy of its equity base and the
schedule of maturing term-debt supporting its present asset levels. The Company
can then seek to adjust its maturity schedule, in light of market conditions and
funding alternatives.
In October 1999, the Company executed a new $3.225 billion revolving-credit
facility (the "facility"), which permits borrowing on a secured basis by Bear
Stearns, BSSC and certain affiliates. The facility also provides that the
Company may borrow up to $1.6125 billion of the facility on an unsecured basis.
Secured borrowings can be collateralized by both investment-grade and
non-investment-grade financial instruments. In addition, the facility provides
for defined margin levels on a wide range of eligible financial instruments that
may be pledged under the secured portion of the facility. The facility
terminates in October 2000 with all loans outstanding at that date payable no
later than October 2001.
Capital Resources
The Company conducts a substantial portion of all of its operating activities
within its regulated subsidiaries Bear Stearns, BSSC, BSIL, Bear Stearns
International Trading Limited ("BSIT") and Bear Stearns Bank Plc ("BSB"). In
connection therewith, a substantial portion of the Company's long-term
borrowings and equity have been used to fund investments in, and advances to
these regulated subsidiaries. The Company regularly monitors the nature and
significance of assets or activities conducted outside the regulated
subsidiaries and attempts to fund such assets with either capital or borrowings
having maturities consistent with the nature and liquidity of the assets being
financed.
During the three-months ended September 24, 1999, the Company repurchased a
total of 3,290,425 million shares of Common Stock through open market
transactions in connection with the CAP Plan at a cost of approximately $142.6
million. Included in the shares purchased during the quarter were 1,596,956
shares with a cost of $70.4 million, which were credited to participants'
deferred compensation accounts with respect to deferrals made during fiscal
1999. 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.
Repurchases of Common Stock pursuant to 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 September 24, 1999 there have been no purchases under the
Repurchase Plan.
Cash Flows
Cash and cash equivalents decreased slightly by $55.8 million during the
three-months ended September 24, 1999. Cash used in operating activities during
the three-months ended September 24, 1999 was $675.3 million, primarily due to
increases in securities purchased under agreements to resell and securities
borrowed and a decrease in financial instruments sold, but not yet purchased,
offset by increases in payables to brokers, dealers and others and securities
sold under agreements to repurchase, and a decrease in financial instruments
owned. Financing activities provided cash of $586.4 million, primarily derived
from proceeds of the issuance of long-term borrowings and partially offset by
the net payments from short-term borrowings and the retirement/maturities of
long-term borrowings. Cash provided by investing activities of $33.1 million was
primarily attributable to proceeds from the sales of investment securities and
other assets of $86.6 million, offset by purchases of investment securities and
other assets of $12.5 million and purchases of property, equipment and leasehold
improvements of $41.0 million.
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 New York Stock
Exchange, 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 September 24, 1999 Bear Stearns, BSSC, BSIL,
BSIT, and BSB were in compliance with their respective regulatory capital
requirements.
Merchant Banking and High Yield Securities
As part of the Company's merchant banking activities, it participates from time
to time in principal investments in leveraged acquisitions. As part of these
activities, the Company originates, structures and invests in merger,
acquisition, restructuring, and leveraged capital transactions, including
leveraged buyouts. The Company's principal investments in these transactions are
generally made in the form of equity investments, equity-related investments or
subordinated loans, and have not historically required significant levels of
capital investment. At September 24, 1999, the Company's aggregate investments
in leveraged transactions and its exposure related to any one transaction was
not material to the Company's consolidated financial position.
As part of the Company's fixed-income securities activities, the Company
participates in the trading and sale of high yield, non-investment-grade debt
securities, non-investment-grade mortgage loans and securities of companies that
are the subject of pending bankruptcy proceedings (collectively "high yield
securities"). Non-investment-grade mortgage loans are principally secured by
residential properties and include both non-performing loans and real estate
owned. At September 24, 1999 the Company held high yield instruments of $1.4
billion in assets and $0.4 billion in liabilities, as compared to $1.4 billion
in assets and $0.2 billion in liabilities as of June 30, 1999.
These investments generally involve greater risk than investment-grade debt
securities due to credit considerations, illiquidity of secondary trading
markets, and increased vulnerability to general economic conditions.
The level of the Company's high yield 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 demand and economic and market
considerations. The Company's 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 having been
written using two digits rather than four digits to define the applicable year
and therefore without consideration of the impact of the upcoming change in the
century. Such programs, unless corrected, may not be able to accurately process
dates ending in the Year 2000 and thereafter.
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
tested compatibility with such systems. The Company also participates actively
in various industry-wide tests.
Through September 24, 1999, the amounts incurred related to the assessment of,
and efforts in connection with, the Year 2000 and the development and execution
of a remediation plan have approximated $70.5 million of which approximately
$10.6 million in hardware and software has been capitalized. 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 $4.5 million, which will be funded through operating
cash flows and primarily expensed as incurred.
The Company presently believes that the activities it is undertaking in the Year
2000 project should satisfactorily resolve Year 2000 compliance exposures within
its own systems worldwide. The Company has completed the reprogramming and
replacement phase of the project. Additional testing will continue through the
end of the calendar year as deemed appropriate. 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.
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.
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 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, 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 September 24, 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:
September 24, June 30,
in millions 1999 1999
- ----------- ---------- --------
MARKET RISK
Interest $ 10.4 $ 9.3
Currency 1.8 1.3
Equity 11.2 11.3
Diversification benefit (8.0) (7.2)
------- ------
Total $ 15.4 $14.7
======= ======
As previously discussed, the Company utilizes a wide variety of market risk
management methods, including: limits for each trading activity; marking all
positions to market on a daily basis; daily profit and loss statements; position
reports; aged inventory position reports; and independent verification of
inventory pricing. Additionally, management of each trading department reports
positions, profits and losses, and trading strategies to the Risk Committee on a
weekly basis. The Company believes that these procedures, which stress timely
communication between trading department management and senior management, are
the most important elements of the risk management process.
PART II - Other Information
Item 1. Legal Proceedings
Crescent Porter Hale Foundation, et al. v. Bob K. Pryt, et al.
As previously reported in the Company's Report on Form 10-K for the fiscal year
ending June 30, 1999 ("1999 Form 10-K"), Bear Stearns is a defendant in
litigation pending in the Superior Court of the State of California, San
Francisco County.
The parties have reached an agreement, which is subject to court approval, to
settle this action.
In re Granite Partners, L.P., Granite Corporation and Quartz Hedge Fund
As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a
defendant in litigation pending in the United States District Court for the
Southern District of New York.
The parties have reached an agreement, which is subject to court approval, to
settle the Primavera, ABF Capital, Montpellier, Johnston, Bambou, AIG and
Litigation Advisory Board actions.
Parvus Co. Ltd. v. Bear, Stearns & Co. Inc., et al.
As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a
respondent in an NASD arbitration proceeding.
The parties have reached an agreement to settle this action.
Sterling Foster & Co., Inc.
As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a
defendant in litigations pending in the United States District Court for the
Eastern District of New York.
On October 19, 1999, the Mihalevich action was voluntarily dismissed.
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 and filed on July 21,
1999, pertaining to the Company's results of operations for the
three-months and fiscal year ended June 30, 1999.
(ii) A Current Report on Form 8-K dated July 22, 1999 and filed
on July 28, 1999, pertaining to an opinion of Cadwalader,
Wickersham & Taft as to the legality of Global Notes due 2001 and
2002 ("Global Notes") issued by the Company and an opinion of
Cadwalader, Wickersham & Taft as to certain federal income tax
consequences in connection with the offering of the Global Notes.
(iii) A Current Report on Form 8-K dated August 5, 1999 and filed
on August 6, 1999, pertaining to Bear, Stearns Securities Corp.'s
settlement of an administrative proceeding filed by the United
States Securities and Exchange Commission resolving allegations
related to the firm's role as clearing broker for A.R. Baron &
Co.
(iv) A Current Report on Form 8-K dated August 9, 1999 and filed
on August 11, 1999, pertaining to an opinion of Cadwalader,
Wickersham & Taft as to certain federal income tax consequences
related to the Company's Medium Term Note Program.
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: November 8, 1999 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 34
(12) Statement Re Computation of Earnings to Fixed Charges 35
(27) Financial Data Schedule 36