SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 25, 2000 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ______________ Commission File Number 1-8989 The Bear Stearns Companies Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3286161 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 245 Park Avenue, New York, New York 10167 (Address of principal executive offices) (Zip Code) (212)272-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of April 6, 2000, the latest practicable date, there were 110,609,487 shares of Common Stock, $1 par value, outstanding.
TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition (Unaudited) at February 25, 2000 and November 26, 1999 Consolidated Statements of Income (Unaudited) for the three-month periods ended February 25, 2000 and February 26, 1999 Consolidated Statements of Cash Flows (Unaudited) for the three-month periods ended February 25, 2000 and February 26, 1999 Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Signature
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) Assets February 25, November 26, <CAPTION> 2000 1999 -------------- --------------- (In thousands) <S> <C> <C> Cash and cash equivalents $ 465,513 $ 1,570,483 Cash and securities deposited with clearing organizations or segregated in compliance with federal regulation 1,216,328 1,188,788 Securities purchased under agreements to resell 33,755,084 35,999,998 Receivable for securities provided as collateral 3,062,515 2,571,404 Securities borrowed 67,870,635 60,429,297 Receivables: Customers 22,264,873 16,839,040 Brokers, dealers and others 1,903,967 542,038 Interest and dividends 440,793 422,402 Financial instruments owned, at fair value 42,301,001 40,764,802 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization 504,235 504,040 Other assets 1,224,919 1,205,670 -------------- -------------- Total Assets $ 175,009,863 $ 162,037,962 ============== ============== See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) Liabilities and Stockholders' Equity February 25, November 26, <CAPTION> 2000 1999 --------------- ----------------- (In thousands, except share data) <S> <C> <C> Short-term borrowings $ 21,342,578 $ 13,424,201 Securities sold under agreements to repurchase 56,042,251 53,323,109 Obligation to return securities received as collateral 3,601,839 3,999,229 Payables: Customers 39,517,939 42,843,757 Brokers, dealers and others 6,145,307 5,596,577 Interest and dividends 562,910 532,023 Financial instruments sold, but not yet purchased, at fair value 23,234,482 19,704,921 Accrued employee compensation and benefits 869,069 733,241 Other liabilities and accrued expenses 507,718 527,565 --------------- ----------------- 151,824,093 140,684,623 --------------- ----------------- Commitments and contingencies Long-term borrowings 17,748,479 15,911,392 --------------- ----------------- Guaranteed Preferred Beneficial Interests in Company Subordinated Debt Securities 500,000 500,000 --------------- ----------------- Stockholders' Equity Preferred Stock 800,000 800,000 Common Stock, $1.00 par value; 200,000,000 shares authorized; 184,805,848 shares issued at February 25, 2000 and November 26, 1999 184,806 184,806 Paid-in capital 2,511,462 2,509,801 Retained earnings 2,167,875 1,916,516 Capital Accumulation Plan 1,164,903 1,179,101 Treasury stock, at cost Adjustable Rate Cumulative Preferred Stock, Series A - 2,520,750 shares (103,421) (103,421) Common Stock - 72,244,413 shares and 66,367,276 shares at February 25, 2000 and November 26, 1999, respectively (1,788,334) (1,544,856) --------------- ----------------- Total Stockholders' Equity 4,937,291 4,941,947 --------------- ----------------- Total Liabilities and Stockholders' Equity $ 175,009,863 $ 162,037,962 =============== ================= See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <CAPTION> Three-Months Ended ------------------------------------ February 25, February 26, 2000 1999 ---------------- ----------------- (In thousands, except share data) <S> <C> <C> Revenues Commissions $ 310,411 $ 246,519 Principal transactions 647,591 620,297 Investment banking 308,219 235,932 Interest and dividends 1,369,759 987,758 Other income 52,045 22,003 ---------------- ----------------- Total Revenues 2,688,025 2,112,509 Interest expense 1,181,959 828,943 ---------------- ----------------- Revenues, net of interest expense 1,506,066 1,283,566 ---------------- ----------------- Non-interest expenses Employee compensation and benefits 718,655 627,511 Floor brokerage, exchange and clearance fees 36,634 35,130 Communications 42,116 36,537 Depreciation and amortization 37,934 33,319 Occupancy 24,985 28,199 Advertising and market development 27,374 23,361 Data processing and equipment 25,810 16,688 Other expenses 138,755 112,991 ---------------- ----------------- Total non-interest expenses 1,052,263 913,736 ---------------- ----------------- Income before provision for income taxes 453,803 369,830 Provision for income taxes 175,622 139,164 ---------------- ----------------- Net income $ 278,181 $ 230,666 ================ ================= Net income applicable to common shares $ 268,403 $ 220,888 ================ ================= Basic and diluted earnings per share (1) $ 1.89 $ 1.45 ================ ================= Weighted average common and common equivalent shares outstanding (1): Basic 157,641,253 165,086,729 ================ ================= Diluted 157,685,693 165,086,729 ================ ================= Cash dividends declared per common share (1) $ 0.15 $ 0.14 ================ ================= (1) Reflects all stock dividends declared through October 29, 1999. See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three-Months Ended <CAPTION> ------------------------------------ February 25, February 26, 2000 1999 ----------------- --------------- (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 278,181 $ 230,666 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 37,934 33,319 Deferred income taxes (54,064) (68,022) Other (8,262) 38,646 (Increases) decreases in operating assets: Cash and securities deposited with clearing organizations or segregated in compliance with federal regulations (27,540) 2,612,458 Securities purchased under agreements to resell 2,244,914 (5,691,818) Securities borrowed (7,441,338) 561,210 Receivables: Customers (5,425,833) (3,133,212) Brokers, dealers and others (1,361,929) (54,391) Financial instruments owned (2,424,700) (3,906,799) Other assets 105,915 175,457 Increases (decreases) in operating liabilities: Securities sold under agreements to repurchase 2,719,142 582,783 Payables: Customers (3,325,818) (5,947,787) Brokers, dealers and others 538,172 1,649,075 Financial instruments sold, but not yet purchased 3,529,561 9,551,228 Accrued employee compensation and benefits 85,128 358,998 Other liabilities and accrued expenses 1,265 (768,118) ----------------- --------------- Cash used in operating activities (10,529,272) (3,776,307) ----------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of short-term borrowings 7,918,377 1,193,670 Net proceeds from issuance of long-term borrowings 2,516,070 874,263 Net proceeds from issuance of subsidiary securities - 290,550 Tax benefit of Common Stock distributions 2,340 4,171 Note repayment from ESOP Trust - 7,114 Payments for: Retirement of long-term borrowings (674,361) (791,512) Treasury stock purchases (247,472) (54,998) Cash dividends paid (26,822) (26,490) ----------------- --------------- Cash provided by financing activities 9,488,132 1,496,768 ----------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements (38,129) (44,710) Purchases of investment securities and other assets (28,582) (1,442) Proceeds from sales of investment securities and other assets 2,881 22,169 ----------------- --------------- Cash used in investing activities (63,830) (23,983) ----------------- --------------- Net decrease in cash and cash equivalents (1,104,970) (2,303,522) Cash and cash equivalents, beginning of period 1,570,483 3,495,900 ----------------- --------------- Cash and cash equivalents, end of period $ 465,513 $ 1,192,378 ================= =============== Statement of Financial Accounting Standards No. 125 requires balance sheet recognition of collateral related to certain secured financing transactions, which is a non-cash activity and did not impact the Consolidated Statements of Cash Flows. See Notes to Consolidated Financial Statements. </TABLE>
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of The Bear Stearns Companies Inc. and its subsidiaries (the "Company"). All material intercompany transactions and balances have been eliminated. The Board of Directors declared 5% stock dividends on the Company's Common Stock in January 1999 and October 1999. Earnings per share data for all periods included in the unaudited consolidated financial statements reflect such 5% stock dividends. On January 18, 2000, the Company's Board of Directors elected to change its fiscal year-end to November 30 from June 30, effective with the year beginning November 27, 1999, as announced in its Form 8-K filed on January 21, 2000. This Quarterly Report on Form 10-Q presents the unaudited results of the Company's operations for the first fiscal quarter ended February 25, 2000 and for the three-month period covering November 28, 1998 through February 26, 1999. The unaudited consolidated financial statements reflect all adjustments which, in the opinion of management, are normal and recurring and are necessary for a fair statement of the results for the interim periods presented. The unaudited consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The nature of the Company's business is such that the results of any interim period may not be indicative of the results to be expected for an entire fiscal year.
<TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments owned and financial instruments sold, but not yet purchased consist of the Company's proprietary trading and investment accounts, at fair value, as follows: <CAPTION> February 25, November 26, In thousands 2000 1999 - --------------------------------------------------------------------------------------------------------- <S> <C> <C> Financial instruments owned: US government and agency $ 7,179,139 $ 7,662,482 Other sovereign governments 2,827,577 2,785,025 Corporate equity and convertible debt 8,863,167 9,421,251 Corporate debt 5,536,269 4,835,056 Derivative financial instruments 5,991,456 4,734,149 Mortgages and other mortgage-backed securities 11,566,299 10,911,528 Other 337,094 415,311 ------------ ----------- $ 42,301,001 $40,764,802 ============ =========== Financial instruments sold, but not yet purchased: US government and agency $ 5,199,734 $ 4,074,379 Other sovereign governments 1,687,143 2,116,448 Corporate equity 9,275,113 7,665,516 Corporate debt 1,761,560 1,228,338 Derivative financial instruments 5,309,315 4,599,592 Other 1,617 20,648 ------------ ------------ $ 23,234,482 $ 19,704,921 ============ ============ </TABLE> 3. COMMITMENTS AND CONTINGENCIES At February 25, 2000, the Company was contingently liable for unsecured letters of credit of approximately $2.0 billion and letters of credit secured by financial instruments of approximately $28.8 million, both of which are principally used as deposits for securities borrowed or to satisfy margin deposits at option and commodity exchanges. The Company had various other commitments aggregating approximately $900 million at February 25, 2000.
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. COMMITMENTS AND CONTINGENCIES (continued) In the normal course of business, the Company has been named as a defendant in several lawsuits, which involve claims for substantial amounts. Although the ultimate outcome of these matters cannot be ascertained at this time, it is the opinion of management, after consultation with counsel, that the resolution of such matters will not have a material adverse effect on the results of operations or the financial condition of the Company. 4. NET CAPITAL REQUIREMENTS The Company's principal operating subsidiary, Bear, Stearns & Co. Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly, are subject to Rule 15c3-1 of the Securities Exchange Act of 1934 (the "Net Capital Rule") and the capital rules of the New York Stock Exchange, Inc. ("NYSE") and other principal exchanges of which Bear Stearns and BSSC are members. Included in the computation of net capital of Bear Stearns is net capital of BSSC in excess of 5% of aggregate debit items arising from customer transactions, as defined. At February 25, 2000, Bear Stearns' net capital, as defined, of $1.54 billion exceeded the minimum requirement by $1.49 billion.
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. NET CAPITAL REQUIREMENTS (continued) Bear, Stearns International Limited ("BSIL") and Bear Stearns International Trading Limited ("BSIT"), London-based broker-dealer subsidiaries, which are indirectly wholly owned by the Company, are subject to regulatory capital requirements of the Securities and Futures Authority, a self-regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. Bear Stearns Bank plc ("BSB"), which is indirectly wholly owned by the Company, is incorporated in Dublin and is subject to the regulatory capital requirements of the Central Bank of Ireland. At February 25, 2000, Bear Stearns, BSSC, BSIL, BSIT and BSB were in compliance with their respective regulatory capital requirements. 5. EARNINGS PER SHARE Earnings per share ("EPS") is computed by dividing net income applicable to common shares by the weighted average number of common shares outstanding during each period presented. Weighted average shares used to calculate diluted EPS include the effect of stock options. Common shares include common stock outstanding as well as the assumed distribution of shares of common stock issuable under certain employee benefit plans, including certain of the Company's deferred compensation arrangements, with appropriate adjustments made to net income for expense accruals related thereto. 6. CASH FLOW INFORMATION Cash payments for interest approximated interest expense for the three-months ended February 25, 2000 and February 26, 1999. Income taxes paid totaled $114.0 million and $26.6 million for the three-months ended February 25, 2000 and February 26, 1999, respectively. 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company, in its capacity as a dealer in over-the-counter derivative financial instruments and in connection with its proprietary market-making and trading activities, enters into transactions in a variety of cash and derivative financial instruments in order to reduce its exposure to market risk, which includes interest rate, exchange rate and equity price risk.
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) Statement of Financial Accounting Standards ("SFAS") No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," defines a derivative as a future, forward, swap, or option contract, or other financial instrument with similar characteristics such as caps, floors and collars. Generally, these financial instruments represent future commitments to exchange interest payment streams or currencies or to purchase or sell other financial instruments at specific terms at specified future dates. Option contracts provide the holder with the right, but not the obligation, to purchase or sell a financial instrument at a specific price on or before an established date. These financial instruments may have market and/or credit risk in excess of amounts recorded in the Consolidated Statements of Financial Condition. In order to measure derivative activity, notional or contract amounts are frequently used. Notional/contract amounts, which are not included on the balance sheet, are used to calculate contractual cash flows to be exchanged and are generally not actually paid or received, with the exception of currency swaps and foreign exchange forwards and mortgage-backed securities forwards. The notional/contract amounts of financial instruments that give rise to off-balance-sheet market risk are indicative only of the extent of involvement in the particular class of financial instrument and are not necessarily an indication of overall market risk.
<TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The following table represents the notional/contract amounts of the Company's outstanding derivative financial instruments as of February 25, 2000 and November 26, 1999: <CAPTION> February 25, November 26, In billions 2000 1999 ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Interest Rate: Swap agreements, including options, swaptions, Caps, collars, and floors $389.0 $371.4 Futures contracts 31.7 47.3 Options held 23.7 43.8 Options written 3.5 18.4 Foreign Exchange: Futures contracts 32.3 39.9 Forward contracts 13.0 10.0 Options held 4.6 5.5 Options written 4.9 4.1 Mortgage-Backed Securities: Forward Contracts 60.5 51.9 Equity: Swap agreements 17.4 15.1 Futures contracts 3.4 2.1 Options held 5.2 6.5 Options written 4.7 6.3 The derivative financial instruments used in the Company's trading and dealer activities are recorded at fair value with the resulting unrealized gains or losses recorded in the Consolidated Statements of Financial Condition and the related income or loss reflected in revenues derived from principal transactions. </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The fair values of derivative financial instruments held or issued for trading and hedging purposes as of February 25, 2000 and November 26, 1999, were as follows: <CAPTION> February 25, November 26, 2000 1999 --------------------------------------------------------- In millions Assets Liabilities Assets Liabilities ----------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Swap agreements $3,845 $3,603 $3,016 $2,952 Futures and forward Contracts 405 497 264 158 Options held 1,742 1,454 Options written 1,209 1,490 The average monthly fair values of the derivative financial instruments for the three-months ended February 25, 2000 and November 26, 1999 were as follows: February 25, November 26, 2000 1999 ------------------------------------------------------- In millions Assets Liabilities Assets Liabilities ---------------------------------------------------------------------------------------------- Swap agreements $3,620 $3,414 $2,421 $2,625 Futures and forward Contracts 373 307 244 287 Options held 1,548 1,178 Options written 1,253 1,577 The notional/contract amounts of these instruments do not represent the Company's potential risk of loss due to counterparty nonperformance. Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of the contract. The Company's exposure to credit risk associated with counterparty nonperformance is limited to the net replacement cost of over-the-counter contracts, which are recognized as assets in the Company's Consolidated Statements of Financial Condition. Exchange-traded financial instruments, such as futures and options, generally do not give rise to significant counterparty exposure due to the margin requirements of the individual exchanges. Generally, options written do not give rise to counterparty credit risk since they obligate the Company (not its counterparty) to perform. The Company has controls in place to monitor credit exposures by limiting transactions with specific counterparties and assessing the creditworthiness of counterparties. The Company also seeks to control credit risk by following an established credit approval process, monitoring credit limits and requiring collateral where appropriate. </TABLE>
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The following table summarizes the credit quality of the Company's over-the-counter derivatives by showing counterparty credit ratings for the replacement cost of contracts in a gain position, net of $2.5 billion and $1.7 billion of collateral as of February 25, 2000 and November 26, 1999, respectively: February 25, November 26, In millions 2000 1999 --------------------------------------------------------- RATING(1) NET REPLACEMENT COST AAA $ 151.2 $ 192.2 AA 810.3 597.1 A 688.6 600.7 BBB 65.7 79.8 BB and Lower 76.9 56.9 (1) Internal designations of counterparty credit quality are based on actual ratings made by external ratings agencies or comparable ratings established and utilized by the Company's Credit Department. 8. SEGMENT DATA The Company operates in three principal segments: Capital Markets, Execution Services and Wealth Management. These segments are strategic business units that offer different products and services. They are managed separately as different levels and types of expertise are required to effectively manage the segments' transactions. The Capital Markets segment is comprised of Equities, Fixed Income and Investment Banking areas. Equities combines the efforts of sales, trading and research in such areas as block trading, convertible bonds, over-the-counter equities, equity derivatives and risk arbitrage. Fixed Income includes the efforts of sales, trading and research for institutional clients in a variety of products such as mortgage-backed and asset-backed securities, corporate and government bonds, municipal and high yield securities and foreign exchange and derivatives. Investment Banking provides capabilities in capital raising, strategic advisory, mergers and acquisitions and merchant banking.
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SEGMENT DATA (continued) The Execution Services segment is comprised of clearance and predominantly commission-related areas, including institutional equity sales, institutional futures sales and specialist activities. Clearance provides clearing, margin lending and securities borrowing to facilitate customer short sales to approximately 2,900 clearing clients worldwide. The commission-related areas provide research and execution capabilities in US equity securities and financial futures to our institutional clients. The Wealth Management segment is comprised of the Private Client Services ("PCS") and Asset Management areas. PCS provides high-net-worth individuals with an institutional level of service. Asset Management serves the diverse investment needs of corporations, municipal governments, multi-employer plans, foundations, endowments, family groups and high-net-worth individuals. The three business segments are comprised of the many business areas with interactions among each as they serve the needs of similar clients. Revenues and expenses reflected below include those which are directly related to each segment. Revenues from inter-segment transactions are credited based upon specific criteria or agreed upon rates with such amounts eliminated in consolidation. Individual segments also include revenues and expenses relating to various items including corporate overhead and interest which are internally allocated by the Company primarily based on balance sheet usage or expense levels. The Company generally evaluates performance of the segments based on net revenues and profit or loss before provision for income taxes.
<TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SEGMENT DATA (continued) For the three-months ended February 25, 2000: <CAPTION> <S> <C> <C> <C> (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - ----------------------------------- ---------------------- -------------------------- ------------------------- Capital Markets $ 815,683 $ 272,289 $111,395,212 Execution Services 403,736 155,349 63,922,620 Wealth Management 226,625 58,765 3,024,660 Other (a) 60,022 (32,600) (3,332,629) - --------------------------------------------------------------------------------------------------------------- Total $ 1,506,066 $ 453,803 $175,009,863 =============================================================================================================== For the three-months ended February 26, 1999: (in thousands) Net Revenues Pre-Tax Income (Loss) Segment Assets - ----------------------------------- ---------------------- -------------------------- ------------------------- Capital Markets $ 783,432 $ 308,402 $128,074,751 Execution Services 307,697 114,308 51,136,175 Wealth Management 145,179 25,830 2,939,018 Other (a) 47,258 (78,710) (10,000,944) - --------------------------------------------------------------------------------------------------------------- Total $1,283,566 $ 369,830 $172,149,000 =============================================================================================================== (a) Other is comprised of consolidation/elimination entries, unallocated revenues (predominantly interest) and corporate administrative functions, including costs related to the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan") which were $50.7 million and $34.0 million for the three-months ended February 25, 2000 and February 26, 1999, respectively. </TABLE> 9. STOCK AWARD PLAN On October 28, 1999, the stockholders of the Company approved the Company's Stock Award Plan (the "Stock Award Plan"). The purpose of the Stock Award Plan is to secure for the Company and its stockholders the benefits of the additional incentive, inherent in the ownership of the Company's stock, by selected key employees of the Company who are important to the success and growth of the business. Pursuant to the Stock Award Plan, such employees may be offered the opportunity to acquire common stock through the grant of options. In January 2000, the Company granted 3,886,334 options under such plan. The stock options were issued with an exercise price equal to the market price of the common stock on the date of the grant. These options vest after three years and have a ten-year expiration.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in this discussion are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those discussed in the forward-looking statements. The Company's principal business activities, investment banking, securities trading and brokerage, are, by their nature, highly competitive and subject to various risks, in particular volatile trading markets and fluctuations in the volume of market activity. Consequently, the Company's net income and revenues in the past have been, and are likely to continue to be, subject to wide fluctuations, reflecting the impact of many factors, including securities market conditions, the level and volatility of interest rates, competitive conditions, liquidity of global markets, international and regional political events, regulatory developments and the size and timing of transactions. For a description of the Company's business, including its trading in cash instruments and derivative products, its underwriting and trading policies, and their respective risks, and the Company's risk management policies and procedures, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Business Environment The business environment during the quarter ended February 25, 2000 was characterized by strong US economic growth and low inflation which resulted in robust domestic equity markets and growth in both New York Stock Exchange ("NYSE") and NASDAQ trading volume. The Federal Reserve Board (the "Fed") raised the federal funds rate 25 basis points on February 2, 2000 to 5.75% in an effort to slow the momentum of the consumer-led US economy and prevent inflationary pressures from taking hold. It was the fourth such rate increase in less than a year. The Fed also took an inflationary bias, leading market participants to anticipate further rate hikes. This and other factors caused the Dow Jones Industrial Average and the Standard and Poor's 500 Index to decrease 10.3% and 5.9%, respectively for the quarter ended February 25, 2000. The Fed's tightening, however, did little to suppress investors' appetite for technology issues. The technology-heavy NASDAQ Composite Index increased 33.1% during the three-months ended February 25, 2000 as capital continued to move into technology issues. These factors contributed to strong performances in the Company's equity businesses resulting in record levels in commission and equity underwriting revenues. Heightened customer order flow and trading volumes in the equity markets contributed to strong equity trading revenues. The fixed income markets were generally weaker as rising interest rates and reduced customer activity resulted in a decrease in fixed income trading and fixed income underwriting revenues.
A strong US economy and a stable interest rate environment characterized the business environment during the three-months ended February 26, 1999. The financial markets during this period benefited from the recovery of the bond market crisis triggered by the default of Russia on its debt obligations which occurred during the latter part of calendar year 1998. Improved financial markets resulted in increased customer order flow and new securities issuances. Equity markets were fueled by strong investor interest in internet and technology stocks. The primary and secondary fixed income markets were also strong which benefited the Company's underwriting and trading activities. Results of Operations Three-Months Ended February 25, 2000 Compared to Three-Months Ended February 26, 1999 On January 18, 2000, the Company's Board of Directors approved a change in the Company's fiscal year-end to November 30 from June 30, effective with the year beginning November 27, 1999. The discussion that follows compares the results of operations for the quarter ended February 25, 2000 to the three-month period ended February 26, 1999. Net income for the quarter ended February 25, 2000 was $278.2 million, an increase of 20.6% from $230.7 million for the comparable prior year period. Net revenues increased 17.3% to $1.5 billion in the 2000 quarter from $1.3 billion in the comparable 1999 period. The results reflect increases across the board in commissions, investment banking and principal transactions revenues as well as net interest revenues and other income. Earnings per share were $1.89 for the 2000 quarter versus $1.45 for the comparable 1999 period. Earnings per share amounts for both periods reflect the stock dividends declared by the Company in January 1999 and October 1999. Commission revenues increased 25.9% in the 2000 quarter to $310.4 million from $246.5 million in the comparable 1999 period. This increase was attributable to strong performances in the clearance, institutional and private client services areas driven by higher equity transaction volumes. The NYSE average daily volume increased by greater than 30% in the 2000 quarter over the 1999 period. The Company's principal transactions revenues by reporting categories, including derivatives, are as follows: Three-Months Ended Three-Months Ended February 25, 2000 February 26, 1999 -------------------- ----------------- Fixed Income $ 238,094 $ 384,199 Equity 227,329 148,872 Foreign Exchange & Other Derivative Financial Instruments 182,168 87,226 --------- -------- $ 647,591 $620,297 ========= ========
Revenues from principal transactions increased 4.4% in the 2000 quarter to $647.6 million from $620.3 million in the comparable 1999 period. This increase reflects strong performances from the Company's equity derivatives activities and equity market making activities, particularly in the over-the-counter international equity and risk arbitrage areas. These increases were driven by increased trading volumes in the technology and telecommunications sectors as well as an increase in merger and acquisitions activity. Revenues derived from fixed income activities decreased as a result of weaker performances in the mortgage-backed securities and European sovereign debt areas. The secondary fixed income markets were generally weaker due to rising interest rates and reduced customer volumes, which contributed to the decline in these business areas. These comparisons are against an exceptionally strong 1999 period, which benefited from three rate cuts made by the Fed in the latter part of calendar 1998. Investment banking revenues increased 30.6% to $308.2 million in the 2000 quarter from $235.9 million in the comparable 1999 period. This increase reflects higher mergers and acquisitions advisory fees and equity underwriting revenues during the 2000 quarter reflecting a strong market in the equity underwriting area. Net interest and dividends increased 18.3% to $187.8 million in the 2000 quarter from $158.8 million in the comparable 1999 period. The increase was attributable to increased levels of customer margin debt and customer shorts. Average customer margin debt increased to $56.6 billion in the 2000 quarter from $38.3 billion in the comparable 1999 period and reached $61.5 billion at February 25, 2000. Average customer shorts increased to $64.7 billion in the 2000 quarter from $59.8 billion in the comparable 1999 period. Average free credit balances increased to $15.3 billion in the 2000 quarter from $12.5 billion in the comparable 1999 period. The increase in net interest profit was partially offset by higher funding costs incurred in advance of the Year 2000 as the Company moved to extend short term maturities over the calendar year end. Other income increased 136.5% to $52.0 million in the 2000 quarter from $22.0 million in the comparable 1999 period. This increase was primarily attributable to an increase in performance-based and management fees earned by the Company's Asset Management area, active equity markets and strong customer volume. The Asset Management area increased assets under management to $13.7 billion at February 25, 2000, which reflected a 33.7% increase over the comparable 1999 period. The largest component of the increase was attributable to mutual funds and alternative investments, including venture capital funds, equity hedge funds and mortgage hedge funds.
Employee compensation and benefits increased 14.5% to $718.7 million in the 2000 quarter from $627.5 million in the comparable 1999 period. The increase in employee compensation and benefits was primarily attributable to an increase in incentive and discretionary bonus accruals related to increased net revenues and pre-tax earnings in the 2000 quarter, an increase in salesmen's commissions related to increased commission revenues as well as an increase in headcount. Employee compensation and benefits, as a percentage of net revenues, decreased to 47.7% in the 2000 quarter from 48.9% in the comparable 1999 period. All other expenses increased 16.6% to $333.6 million in the 2000 quarter from $286.2 million in the comparable 1999 period. CAP Plan expense increased by $16.7 million to $50.7 million in the 2000 quarter from $34.0 million in the comparable 1999 period, reflecting higher pre-tax earnings and increased participation. Data processing, communications and depreciation increased $19.3 million or 22.3% as a result of both the upgrading of existing communication and computer systems throughout the firm and increased usage of information services. EDP professional fees increased by $4.5 million in the 2000 quarter due to various technology initiatives, including those related to several internet-based systems. The Company's effective tax rate increased to 38.7% in the 2000 quarter compared to 37.6% in the comparable 1999 period due to higher levels of projected earnings and a lower level of projected tax preference items. Business Segments The Company is primarily engaged in business as a securities broker and dealer operating in three principal segments: Capital Markets, Execution Services and Wealth Management. These segments are strategic business units analyzed separately due to the distinct nature of the products they provide and the clients they serve. Certain Capital Markets products are distributed by the Wealth Management and Execution Services distribution network with the related revenues of such intersegment services allocated to the respective segments through transfer pricing. The following segment operating results exclude certain corporate items. See Note 8, footnote (a), of Notes to Consolidated Financial Statements. Three-Months Ended February 25, 2000 Compared to Three-Months Ended February 26, 1999 - -------------------------------------------------------------- Capital Markets ---------------------------------------------------------------------- Three-Months Ended Three-Months Ended In thousands February 25, 2000 February 26, 1999 ---------------------------------------------------------------------- Net revenues $815,683 $783,432 Pre-tax income $272,289 $308,402 ----------------------------------------------------------------------
Net revenues for Capital Markets were $815.7 million in the 2000 quarter, up from $783.4 million in the comparable 1999 period. Pre-tax income for Capital Markets was $272.3 million in the 2000 quarter, down from $308.4 million in the comparable 1999 period. Equity results were strong in the 2000 quarter as active markets and strong deal flow resulted in improved performances from equity derivatives, over-the-counter, risk arbitrage and international equity trading. Investment banking revenues increased sharply in the 2000 quarter reflecting strong levels of mergers and acquisitions and equity underwriting activity. Fixed income results in the 2000 quarter were weaker than in the comparable 1999 period as rising interest rates and lower customer volumes resulted in decreases in the Company's mortgage-backed securities, corporate bonds operations and domestic and European fixed income sales operations. Pre-tax income in the 2000 quarter decreased from the comparable 1999 period primarily due to lower levels of profitability from the fixed income area. Execution Services --------------------------------------------------------------------- Three-Months Ended Three-Months Ended In thousands February 25, 2000 February 26, 1999 --------------------------------------------------------------------- Net revenues $403,736 $307,697 Pre-tax income $155,349 $114,308 --------------------------------------------------------------------- At February 25, 2000, the Company provided securities clearance services to approximately 2,900 clearing clients worldwide. Such clients include approximately 2,500 prime brokerage clients including hedge funds and clients of money managers, short sellers, arbitrageurs and other professional investors and approximately 400 fully disclosed clients, who engage in either the retail or institutional brokerage business. The Company processed an average of in excess of 242,000 trades per day during the 2000 quarter versus approximately 177,000 trades per day in the comparable 1999 period. Net revenues for Execution Services approximated $403.7 million in the 2000 quarter, up 31.2% from $307.7 million in the comparable 1999 period. Pre-tax income for Execution Services was $155.3 million in the 2000 quarter, up 35.9% from $114.3 million in the comparable 1999 period. Results reflect increased levels of customer margin debt and transaction volumes which benefited the Company's clearance revenues and improved domestic and European sales volume which benefited the Company's institutional equity business.
Wealth Management ------------------------------------------------------------------- Three-Months Ended Three-Months Ended In thousands February 25, 2000 February 26, 1999 ------------------------------------------------------------------- Net revenues $226,625 $145,179 Pre-tax income $58,765 $25,830 ------------------------------------------------------------------- PCS provides high-net-worth individuals with an institutional level of service, including access to the Company's resources and professionals. PCS maintains a team of approximately 500 account executives in seven regional offices. PCS had approximately $42.5 billion in client assets at February 25, 2000, an increase of 22.2% compared to February 26, 1999. The Asset Management area, through Bear Stearns Asset Management Inc. ("BSAM"), had approximately $13.7 billion in assets under management at February 25, 2000 which reflected a 33.7% increase over $10.3 billion in assets under management at February 26, 1999. The largest components of the increase were attributable to mutual funds and alternative investments. Alternative investments include mortgage hedge funds which increased $241.8 million from the 1999 period, and equity hedge funds which increased $389.8 million from the 1999 period, as well as real estate and venture capital investments. Asset Management serves the diverse investment needs of corporations, municipal governments, multi-employer plans, foundations, endowments, family groups and high-net-worth individuals. Net revenues for Wealth Management were $226.6 million in the 2000 quarter, up 56.1% from $145.2 million in the comparable 1999 period. Pre-tax income for Wealth Management was $58.8 million in the 2000 quarter, up 127.5% from $25.8 million in the comparable 1999 period. Growth in assets under management, active equity markets and strong customer volumes resulted in the increase in management fees and commissions in the 2000 quarter. Strong performances by certain of the Company's equity hedge funds and private partnerships led to sharp increases in incentive-based fees during the period. Liquidity and Capital Resources Financial Leverage The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of marketable securities inventories, which are marked-to-market daily, and collateralized receivables arising from customer-related and proprietary securities transactions.
Collateralized receivables consist of resale agreements secured predominantly by US government and agency securities, customer margin loans and securities borrowed, which are typically secured by marketable equity and corporate debt securities. The Company's total assets and financial leverage can fluctuate significantly, depending largely upon economic and market conditions, volume of activity, customer demand and underwriting commitments. The Company's total assets at February 25, 2000 increased to $175.0 billion from $162.0 billion at November 26, 1999. The increase is primarily attributable to an increase in securities borrowed and receivables from customers resulting from increased levels of customer shorts and margin debt. The Company's ability to support increases in total assets is a function of its ability to obtain short-term secured and unsecured funding and its access to sources of long-term capital in the form of long-term borrowings and equity, which together form its capital base. The Company continuously monitors the adequacy of its capital base, which is a function of asset quality and liquidity. Highly liquid assets, such as US government and agency securities, typically are funded by the use of repurchase agreements, which require very low levels of margin. In contrast, assets of lower quality or liquidity require higher levels of margin or overcollateralization and consequently increased levels of capital. Accordingly, the mix of assets being held by the Company significantly influences the amount of leverage the Company can employ and the adequacy of its capital base. Funding Strategy The Company's general funding strategy provides for the diversification of its short-term funding sources in order to maximize liquidity. Sources of short-term funding consist principally of collateralized borrowings, including repurchase transactions, customer free credit balances, unsecured commercial paper, medium-term notes and bank borrowings generally having maturities from overnight to one year. Repurchase transactions, whereby the Company sells securities with an agreement to repurchase at a future date, represent the dominant component of secured short-term funding. In addition to short-term funding sources, the Company utilizes long-term debt, including medium-term notes, as a longer-term source of unsecured financing. During the quarter ended February 25, 2000, the Company received proceeds approximating $2.5 billion from the issuance of long-term debt which, net of retirements, served to increase long-term debt to $17.7 billion at February 25, 2000 from $15.9 billion at November 26, 1999. The Company maintains an alternative funding strategy focused on the liquidity and self-funding ability of the underlying assets. The objective of the strategy is to maintain sufficient sources of alternative funding to enable the Company to fund debt obligations without issuing any new unsecured debt, including commercial paper. The most significant source of alternative funding is the Company's ability to hypothecate or pledge its unencumbered assets as collateral for short-term funding.
As part of the Company's alternative funding strategy, the Company regularly monitors and analyzes the size, composition, and liquidity characteristics of the assets being financed and evaluates its liquidity needs in light of current market conditions and available funding alternatives. Through this analysis, the Company can continuously evaluate the adequacy of its equity base and the schedule of maturing term-debt supporting its present asset levels. The Company can then seek to adjust its maturity schedule, in light of market conditions and funding alternatives. The Company currently has in place a committed revolving-credit facility (the "facility") totaling $3.225 billion, which permits borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain affiliates. The facility also provides that the Company may borrow up to $1.6125 billion of the facility on an unsecured basis. Secured borrowings can be collateralized by both investment-grade and non-investment-grade financial instruments. In addition, the facility provides for defined margin levels on a wide range of eligible financial instruments that may be pledged under the secured portion of the facility. The facility terminates in October 2000 with all loans outstanding at that date payable no later than October 2001. Capital Resources The Company conducts a substantial portion of all of its operating activities within its regulated subsidiaries Bear Stearns, BSSC, Bear, Stearns International Limited ("BSIL"), Bear Stearns International Trading Limited ("BSIT") and Bear Stearns Bank plc ("BSB"). In connection therewith, a substantial portion of the Company's long-term borrowings and equity have been used to fund investments in, and advances to, these regulated subsidiaries. The Company regularly monitors the nature and significance of assets or activities conducted outside the regulated subsidiaries and attempts to fund such assets with either capital or borrowings having maturities consistent with the nature and liquidity of the assets being financed. During the quarter ended February 25, 2000 the Company repurchased a total of 3,025,547 shares of Common Stock through open market transactions in connection with the CAP Plan at a cost of approximately $122.3 million. The Company intends, subject to market conditions, to continue to purchase, in future periods, a sufficient number of shares of Common Stock in the open market to enable the Company to issue shares with respect to all compensation deferred and any additional amounts allocated to participants under the CAP Plan. On January 18, 2000, the Board of Directors of the Company approved an amendment to the Stock Repurchase Program (the "Repurchase Program") to allow the Company to purchase up to an additional $500 million of Common Stock. Purchases under the Repurchase Program may be made periodically in fiscal year 2000 or beyond either in the open market or through privately negotiated transactions. During the three-months ended February 25, 2000, the Company purchased, under the previous repurchase program authorization, a total of 3,398,986 shares of Common Stock through open market transactions in connection with the Stock Award Plan at a cost of approximately $136.1 million. Purchases of Common Stock pursuant to the CAP Plan are not made pursuant to the Repurchase Program and are not included in calculating the maximum aggregate number of shares of Common Stock that the Company may purchase under the Repurchase Program.
Cash Flows Cash and cash equivalents decreased by $1.1 billion during the quarter ended February 25, 2000. Cash used in operating activities during the quarter ended February 25, 2000 was $10.5 billion, primarily due to increases in securities borrowed, customer receivables and financial instruments owned and a decrease in customer payables, partially offset by increases in financial instruments sold, but not yet purchased and securities sold under agreements to repurchase. Financing activities provided cash of $9.5 billion, primarily derived from proceeds from the issuance of short-term and long-term borrowings. Regulated Subsidiaries As registered broker-dealers, Bear Stearns and BSSC are subject to the net capital requirements of the Securities Exchange Act of 1934, the NYSE, and the Commodity Futures Trading Commission, which are designed to measure the general financial soundness and liquidity of broker-dealers. BSIL and BSIT, London-based broker-dealer subsidiaries, are subject to the regulatory capital requirements of the Securities and Futures Authority, a self-regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. Additionally, BSB is subject to the regulatory capital requirements of the Central Bank of Ireland. At February 25, 2000 Bear Stearns, BSSC, BSIL, BSIT, and BSB were in compliance with their respective regulatory capital requirements. Merchant Banking and High Yield Securities As part of the Company's merchant banking activities, it participates from time to time in principal investments in leveraged acquisitions. As part of these activities, the Company originates, structures and invests in merger, acquisition, restructuring, and leveraged capital transactions, including leveraged buyouts. The Company's principal investments in these transactions are generally made in the form of equity investments, equity-related investments or subordinated loans, and have not historically required significant levels of capital investment. At February 25, 2000, the Company held investments in seventeen leveraged transactions with an aggregate value of approximately $183.3 million.
As part of the Company's fixed-income securities activities, the Company participates in the trading and sale of high yield, non-investment-grade debt securities, non-investment-grade mortgage loans, non-investment-grade commercial loans and securities of companies that are the subject of pending bankruptcy proceedings (collectively "high yield investments"). Non-investment-grade mortgage loans are principally secured by residential properties and include both non-performing loans and real estate owned. At February 25, 2000 the Company held high yield instruments of $1.6 billion owned and $0.3 billion sold short, as compared to $1.5 billion owned and $0.3 billion sold short as of November 26, 1999. These investments generally involve greater risk than investment-grade debt securities due to credit considerations, illiquidity of secondary trading markets, and increased vulnerability to general economic conditions. The level of the Company's high yield investment inventories, and the impact of such activities upon the Company's results of operations, can fluctuate from period to period as a result of customer demand and economic and market considerations. The Company's Risk Committee monitors exposure to market and credit risk with respect to high yield investment inventories and establishes limits with respect to overall market exposure and concentrations of risk by both individual issuer and industry group. Year 2000 Issue The Year 2000 issue was the result of legacy computer programs having been written using two digits rather than four digits to define the applicable year and therefore without consideration of the impact of the upcoming change in the century. Such programs, unless corrected, may not have been able to accurately process dates ending in the Year 2000 and thereafter. Through February 25, 2000, the amounts incurred related to the assessment of, and efforts in connection with, the Year 2000 and the development and execution of a remediation plan have approximated $78.2 million of which approximately $11.0 million in hardware and software has been capitalized. The total remaining Year 2000 project cost as of February 25, 2000 was not material. Nothing has come to the Company's attention which would cause it to believe that its Year 2000 compliance effort was not successful. While the Company will continue to monitor for Year 2000 related problems, to date no significant Year 2000 issues have been encountered.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's principal business activities by their nature engender significant market and credit risks. In addition, the Company is also subject to operating risk and funding risk. Managing these risks is critical to the success and stability of the Company. As a result, comprehensive risk management policies and procedures have been established to identify, control and monitor each of these major risks. Additionally, the Company's diverse portfolio of business activities helps to reduce the impact that volatility in any particular market may have on its net revenues. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates, equity and futures prices, changes in the implied volatility of interest rate, foreign exchange rate, equity and futures prices and also changes in the credit ratings of either the issuer or its related country of origin. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of the Company's market risk management procedures includes all market risk-sensitive financial instruments. The Company's exposure to market risk is directly related to its role as a financial intermediary in customer-related transactions and to its proprietary trading and arbitrage activities. For a discussion of the Company's primary market risk exposures, which include interest rate risk, foreign exchange rate risk, and equity price risk, and a discussion of how those exposures are managed, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Value at Risk The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models, which seek to predict risk of loss based on historical price and volatility patterns. The output of such statistical models is commonly referred to as value at risk. Value at risk is used to describe a probabilistic approach to measuring the exposure to market risk. This approach utilizes statistical concepts to estimate the probability of the value of a financial instrument rising above or falling below a specified amount. The calculation utilizes the standard deviation of historical changes in value (i.e., volatility) of the market risk sensitive financial instruments to estimate the amount of change in the current value that could occur at a specified probability level. Measuring market risk using statistical risk management models has been the main focus of risk management efforts by many companies whose earnings are significantly exposed to changes in the fair value of financial instruments.
The Company believes that statistical models alone do not provide a reliable method of monitoring and controlling risk. While value at risk models are relatively sophisticated, the quantitative risk information generated is limited by the parameters established in creating the related models. The financial instruments being evaluated, in some cases, have features which may trigger a potential loss in excess of the amounts previously disclosed if the changes in market rates or prices exceed the confidence level of the model used. Therefore, such models do not substitute for the experience or judgment of senior management and traders, who have extensive knowledge of the markets and adjust positions and revise strategies, as they deem necessary. The Company uses these models only as a supplement to other risk management tools. For purposes of Securities and Exchange Commission disclosure requirements, the Company has performed an entity-wide value at risk analysis of virtually all of the Company's financial assets and liabilities, including all reported financial instruments owned and sold, repurchase and resale agreements, and funding assets and liabilities. The value at risk related to non-trading financial instruments has been included in this analysis and not reported separately because the amounts were not material. The calculation is based on a methodology, which uses a one-day interval and a 95% confidence level. Interest rate and foreign exchange rate risk use a "Monte Carlo" value at risk approach. Monte Carlo simulation involves the generation of price movements in a portfolio using a random number generator. The generation of random numbers is based on the statistical properties of the securities in the portfolio. For interest rates, each country's yield curve has five factors that describe possible curve movements. These were generated from principal component analysis. In addition, volatility and spread risk factors were used, where appropriate. Intercountry correlations were also used. Equity price risk was measured using a combination of historical and Monte Carlo value at risk approaches. Equity derivatives were treated as correlated with various indexes, of which the Company used approximately fifty. Parameter estimates, such as volatilities and correlations, were based on daily tests through February 25, 2000. The total value at risk presented below is less than the sum of the individual components (i.e. Interest Rate Risk, Foreign Exchange Rate Risk, Equity Risk) due to the benefit of diversification among the risks. This table illustrates the value at risk for each component of market risk as of: February 25, November 26, in millions 2000 1999 ----------- -------- -------- MARKET RISK Interest $ 8.2 $ 11.9 Currency 3.0 1.2 Equity 9.8 12.6 Diversification benefit (7.9) (8.4) ------ ------ Total $ 13.1 $ 17.3 ====== ======
As previously discussed, the Company utilizes a wide variety of market risk management methods, including: limits for each trading activity; marking all positions to market on a daily basis; daily profit and loss statements; position reports; aged inventory position reports; and independent verification of inventory pricing. Additionally, management of each trading department reports positions, profits and losses, and trading strategies to the Risk Committee on a weekly basis. The Company believes that these procedures, which stress timely communication between trading department management and senior management, are the most important elements of the risk management process.
Part II - Other Information Item 1. Legal Proceedings Alpha Group Consultants, et al. v. Weintraub, et al./In re Weintraub Entertainment Group Litigation As previously reported in the Company's Report on Form 10-K for the fiscal year ending June 30, 1999 ("1999 Form 10-K") and Report on Form 10-Q for the quarter ended December 31, 1999 ("Second Quarter Fiscal 2000 Form 10-Q"), Bear Stearns is a defendant in litigation pending in the United States District Court for the Southern District of California. On March 6, 2000, the court granted final approval to the parties' proposed settlement. Del Rosario, et al. v. Bear, Stearns & Co. Inc., et al. As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a respondent in an arbitration proceeding pending before the NASD. On February 24, 2000, claimants informed the NASD that they had decided to voluntarily withdraw all claims against the respondents. On March 20, 2000, the NASD removed this matter from its arbitration docket. Manhattan Investment Fund Limited The following matters arise out of the failure and subsequent bankruptcy filing of Manhattan Investment Fund Limited ("MIFL"). (i) Scotia Nominees, as nominees for L.C.O. Investments, Ltd. v. Michael Berger, et al. On January 25, 2000, an action was commenced in the Supreme Court of the State of New York, County of New York, by Scotia Nominees, a shareholder of MIFL. On March 27, 2000, plaintiff filed an amended complaint. Named as defendants in the amended complaint are MIFL, three directors of MIFL, Manhattan Capital Management, Inc., Bear, Stearns Securities Corp. ("BSSC"), Deloitte & Touche, and Fund Administration Services (Bermuda) Ltd. ("FASB"). The complaint alleges, among other things, that BSSC committed breach of duty and aided and abetted a breach of fiduciary duty by failing to alert the shareholders of MIFL about false and misleading statements made by certain of the other defendants related to the financial condition of MIFL. Compensatory damages in excess of $5 million are sought from Bear Stearns. Bear Stearns denies all allegations of wrongdoing asserted against it in this litigation, and believes that it has substantial defenses to these claims. (ii) Cromer Finance Ltd. v. Michael Berger, et al. On March 24, 2000, a purported class action was commenced in the United States District Court for the Southern District of New York by Cromer Finance, Ltd., a shareholder of MIFL, on behalf of a purported class consisting of all persons who purchased securities of MIFL and suffered damages between September 1, 1996 through January 18, 2000. Named as defendants are a director of MIFL, Deloitte & Touche, FASB, Ernst & Young LLP, and BSSC. The complaint alleges, among other things, that BSSC aided and abetted common law fraud in connection with providing clearing services for MIFL. Compensatory and punitive damages in unspecified amounts are sought. Bear Stearns denies all allegations of wrongdoing asserted against it in this litigation, and believes that it has substantial defenses to these claims. (iii) Argos, et al. v. Michael Berger, et al. On March 31, 2000, an action was commenced in the United States District Court for the Southern District of New York by 17 shareholders of MIFL. Named as defendants are a director of MIFL, Financial Asset Management, Inc., FASB, Ernst & Young International, Deloitte & Touche, Bear, Stearns & Co. Inc. and BSSC. The complaint alleges, among other things, that the Bear Stearns defendants aided and abetted a breach of fiduciary duty in connection with BSSC providing clearing services and financing for MIFL. Compensatory damages in excess of $53 million, and $1 billion in punitive damages from each defendant, are sought. The complaint in this action has not yet been served on Bear, Stearns & Co. Inc. or BSSC. Bear Stearns denies all allegations of wrongdoing asserted against it in this litigation, and believes that it has substantial defenses to these claims. McKesson HBOC, Inc. As previously reported in the Company's 1999 Form 10-K, Bear Stearns is a defendant in litigation pending in the Chancery Court of the State of Delaware, New Castle County, the Superior Court of the State of California, San Francisco County, and the United States District Court for the Northern District of California. On March 31, 2000, plaintiffs in the Mitchell action pending in California Superior Court filed an amended complaint against the same defendants and asserting the same claims against Bear Stearns as the original complaint. Compensatory and punitive damages in unspecified amounts are sought. Bear Stearns denies all allegations of wrongdoing asserted against it in this litigation, and believes that it has substantial defenses to these claims. The Company also is involved from time to time in investigations and proceedings by governmental, regulatory and self-regulatory agencies.
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement Re Computation of Per Share Earnings (12) Statement Re Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K During the quarter, the Company filed the following Current Reports on Form 8-K. (i) A Current Report on Form 8-K dated December 1, 1999 and filed on December 7, 1999, pertaining to an opinion of Cadwalader, Wickersham & Taft as to the legality of 7.625% of Global Notes due 2009 ("Global Notes") issued by the Company, certain federal income tax consequences in connection with the offering of the Global Notes, and a consent in connection with the offering of the Global Notes. (ii) A Current Report on Form 8-K dated January 19, 2000 and filed on January 21, 2000, pertaining to the Company's results of operations for the three-months ended December 31, 1999 and the change in fiscal year end to November 30. (iii) A Current Report on Form 8-K dated January 25, 2000 and filed on February 1, 2000, pertaining to an opinion of Cadwalader, Wickersham & Taft as to the legality of 7.625% of Global Notes due 2005 ("Global Notes") issued by the Company, certain federal income tax consequences in connection with the offering of the Global Notes, and a consent in connection with the offering of the Global Notes.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Bear Stearns Companies Inc. (Registrant) Date: April 10, 2000 By: /s/ Marshall J Levinson Marshall J Levinson Controller (Principal Accounting Officer)
THE BEAR STEARNS COMPANIES INC. FORM 10-Q Exhibit Index Exhibit No. Description Page (11) Statement Re Computation of Per Share Earnings 35 (12) Statement Re Computation of Earnings to Fixed Charges 36 (27) Financial Data Schedule 37