SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 25, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 1-8989
------
THE BEAR STEARNS COMPANIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3286161
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
245 PARK AVENUE, NEW YORK, NEW YORK 10167
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 272-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF JULY 5, 2001, THE LATEST PRACTICABLE DATE, THERE WERE 101,194,008
SHARES OF COMMON STOCK, $1 PAR VALUE, OUTSTANDING.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of May 25, 2001
(Unaudited) and November 30, 2000 (Audited)
Consolidated Statements of Income (Unaudited) for the three months
and six months ended May 25, 2001 and May 26, 2000
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended May 25, 2001 and May 26, 2000
Notes to Consolidated Financial Statements (Unaudited)
Independent Accountants' Report
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signature
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BEAR STEARNS COMPANIES INC.
Consolidated Statements of
Financial Condition
(Unaudited)
In thousands, except share data May 25, 2001 November 30, 2000
--------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 1,753,067 $ 2,319,974
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations 7,672,120 3,773,232
Securities purchased under agreements to resell 38,296,414 35,499,232
Receivable for securities provided as collateral 239,384 587,540
Securities borrowed 58,060,385 61,759,831
Receivables:
Customers 18,411,988 17,315,232
Brokers, dealers and others 2,110,777 790,051
Interest and dividends 422,474 612,140
Financial instruments owned, at fair value 42,472,323 45,172,665
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization 531,302 542,613
Other assets 3,035,059 2,793,963
-----------------------------------
Total Assets $ 173,005,293 $ 171,166,473
===================================
LIABILITIES & STOCKHOLDERS' EQUITY
Short-term borrowings $ 14,151,512 $ 14,574,854
Securities sold under agreements to repurchase 45,550,871 54,461,463
Obligation to return securities received as collateral 1,115,585 2,534,871
Payables:
Customers 51,780,040 46,785,311
Brokers, dealers and others 4,298,144 4,450,285
Interest and dividends 650,729 842,749
Financial instruments sold, but not yet purchased, at fair value 26,054,346 19,005,776
Accrued employee compensation and benefits 1,007,184 1,479,417
Other liabilities and accrued expenses 830,596 781,571
-----------------------------------
145,439,007 144,916,297
-----------------------------------
Commitments and contingencies (Note 3)
Long-term borrowings 21,269,063 20,095,888
-----------------------------------
Guaranteed Preferred Beneficial Interests in Company Subordinated
Debt Securities 762,500 500,000
-----------------------------------
STOCKHOLDERS' EQUITY
Preferred stock 800,000 800,000
Common stock, $1.00 par value; 500,000,000 shares authorized;
184,805,848 shares issued as of May 25, 2001 and November 30, 2000 184,806 184,806
Paid-in capital 2,586,900 2,583,638
Retained earnings 2,877,942 2,600,149
Employee stock compensation plans 1,856,405 1,916,708
Unearned compensation (221,017) (218,791)
Treasury stock, at cost--
Adjustable Rate Cumulative Preferred Stock Series A:
2,520,750 shares as of May 25, 2001 and November 30, 2000 (103,421) (103,421)
Common stock: 82,232,630 and 75,823,544 shares as of May 25, 2001
and November 30, 2000, respectively (2,446,892) (2,108,801)
-----------------------------------
Total Stockholders' Equity 5,534,723 5,654,288
-----------------------------------
Total Liabilities and Stockholders' Equity $ 173,005,293 $ 171,166,473
===================================
See Notes to Consolidated Financial Statements.
3
THE BEAR STEARNS COMPANIES INC.
Consolidated Statements of
Income
(UNAUDITED)
Three Months Ended Six Months Ended
In thousands, except share and per share data May 25, 2001 May 26, 2000 May 25, 2001 May 26, 2000
-----------------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions $ 290,767 $ 321,690 $ 573,168 $ 632,101
Principal transactions 722,569 504,286 1,312,140 1,145,427
Investment banking 181,389 235,829 319,713 544,048
Interest and dividends 1,215,744 1,414,878 2,302,343 2,784,637
Other income 38,913 17,351 78,194 69,396
----------------------------------------------------------
Total revenues 2,449,382 2,494,034 4,585,558 5,175,609
Interest expense 1,080,724 1,172,728 2,003,113 2,348,237
----------------------------------------------------------
Revenues, net of interest expense 1,368,658 1,321,306 2,582,445 2,827,372
----------------------------------------------------------
NON-INTEREST EXPENSES
Employee compensation and benefits 742,834 704,528 1,385,093 1,423,183
Floor brokerage, exchange and clearance fees 41,092 41,236 76,665 79,670
Communications and technology 113,504 106,362 228,538 222,403
Occupancy 37,294 34,666 68,551 66,773
Advertising and market development 33,705 31,874 67,537 59,248
Other expenses 133,400 236,821 236,268 356,473
----------------------------------------------------------
Total non-interest expenses 1,101,829 1,155,487 2,062,652 2,207,750
----------------------------------------------------------
Income before provision for income taxes and cumulative effect
of change in accounting principle 266,829 165,819 519,793 619,622
Provision for income taxes 97,336 47,442 184,346 223,064
----------------------------------------------------------
Income before cumulative effect of change in accounting principle 169,493 118,377 335,447 396,558
Cumulative effect of change in accounting principle, net of tax -- -- (6,273) --
----------------------------------------------------------
Net income $ 169,493 $ 118,377 $ 329,174 $ 396,558
==========================================================
Net income applicable to common shares $ 159,715 $ 108,599 $ 309,618 $ 377,002
==========================================================
Basic earnings per share $ 1.23 $ 0.77 $ 2.34 $ 2.67
==========================================================
Diluted earnings per share $ 1.18 $ 0.77 $ 2.24 $ 2.67
==========================================================
Weighted average number of common shares outstanding:
Basic 145,455,590 152,446,615 147,164,834 155,042,809
Diluted 154,825,604 152,624,273 156,749,394 155,152,977
==========================================================
Cash dividends declared per common share $ 0.15 $ 0.10 $ 0.30 $ 0.25
==========================================================
Note: Certain reclassifications have been made to prior period amounts to
conform to the current period's presentation.
See Notes to Consolidated Financial Statements.
4
THE BEAR STEARNS COMPANIES INC.
Consolidated Statements of
Cash Flows
(UNAUDITED)
Six Months Ended Six Months Ended
In thousands May 25, 2001 May 26, 2000
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 329,174 $ 396,558
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization 97,625 75,506
Deferred income taxes (99,332) (118,865)
Other 81,588 (1,719)
(Increases) decreases in operating assets:
Cash and securities deposited with clearing organizations or segregated
in compliance with federal regulations (3,898,888) (1,198,251)
Securities purchased under agreements to resell (2,797,182) 1,546,556
Securities borrowed 3,699,446 (1,443,889)
Receivables:
Customers (1,096,756) (2,950,646)
Brokers, dealers and others (1,320,726) 95,441
Financial instruments owned 1,629,212 (7,740,173)
Other assets 32,806 (357,434)
(Decreases) increases in operating liabilities:
Securities sold under agreements to repurchase (8,910,592) 3,723,009
Payables:
Customers 4,994,729 (3,075,078)
Brokers, dealers and others (159,260) (1,825,783)
Financial instruments sold, but not yet purchased 7,048,570 4,425,572
Accrued employee compensation and benefits (584,619) 367,600
Other liabilities and accrued expenses (142,995) 402,274
-----------------------------------
Cash used in operating activities (1,097,200) (7,679,322)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 293,084 4,517,191
Net proceeds from issuance of long-term borrowings 2,662,474 4,947,853
Net proceeds from issuance of subsidiary securities 254,231 --
Tax benefit of common stock distributions 3,150 11,186
Payments for:
Retirement of long-term borrowings (2,147,842) (1,642,363)
Treasury stock purchases (362,418) (437,889)
Cash dividends paid (51,380) (47,669)
-----------------------------------
Cash provided by financing activities 651,299 7,348,309
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (86,314) (86,121)
Purchases of investment securities and other assets (45,163) (99,302)
Proceeds from sale of investment securities and other assets 10,471 6,347
-----------------------------------
Cash used in investing activities (121,006) (179,076)
-----------------------------------
Net decrease in cash and cash equivalents (566,907) (510,089)
Cash and cash equivalents, beginning of year 2,319,974 1,570,483
-----------------------------------
Cash and cash equivalents, end of period $ 1,753,067 $ 1,060,394
===================================
See Notes to Consolidated Financial Statements.
5
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The 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 November
30, 2000 Consolidated Statement of Financial Condition was derived from
the audited financial statements. The Consolidated Statement of Financial
Condition as of May 25, 2001, the Consolidated Statements of Income for
the three months and six months ended May 25, 2001 and May 26, 2000 and
the Consolidated Statements of Cash Flows for the six months ended May 25,
2001 and May 26, 2000 are unaudited.
The consolidated financial statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission
(the "SEC") with respect to the Form 10-Q and reflect all adjustments
which, in the opinion of management, are normal and recurring, as well as
the accounting change to adopt Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities", which are necessary for a fair statement of the results for
the interim periods presented. Pursuant to such rules and regulations,
certain disclosures that are normally included in annual financial
statements have been omitted. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended November 30, 2000 filed by the Company under the Securities Exchange
Act of 1934.
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. Certain prior period amounts have been
reclassified to conform to the current period's presentation. 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.
6
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, consisting of the Company's proprietary trading and investment
accounts, at fair value, were as follows:
In thousands May 25, 2001 November 30, 2000
-------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS OWNED:
US government and agency $ 9,036,065 $ 9,180,638
Other sovereign governments 3,729,077 5,137,115
Corporate equity and convertible debt 7,063,213 8,663,306
Corporate debt 6,948,222 5,511,779
Derivative financial instruments 5,956,018 4,797,087
Mortgages and mortgage-backed securities 8,881,744 11,304,982
Other 857,984 577,758
--------------------------------------
$ 42,472,323 $ 45,172,665
======================================
FINANCIAL INSTRUMENTS SOLD, BUT NOT YET PURCHASED:
US government and agency $ 10,283,351 $ 4,121,060
Other sovereign governments 3,286,516 3,556,830
Corporate equity 5,944,266 5,222,967
Corporate debt 2,260,118 2,264,953
Derivative financial instruments 4,280,095 3,839,966
--------------------------------------
$ 26,054,346 $ 19,005,776
======================================
Financial instruments sold, but not yet purchased, represent obligations
of the Company to deliver the specified financial instrument at the
contracted price, and thereby, create a liability to repurchase the
financial instrument in the market at prevailing prices. Accordingly,
these transactions result in off-balance-sheet risk as the Company's
ultimate obligation to satisfy the sale of financial instruments sold, but
not yet purchased, may exceed the amount recognized in the Consolidated
Statements of Financial Condition.
3. COMMITMENTS AND CONTINGENCIES
At May 25, 2001, the Company was contingently liable for unsecured letters
of credit of $2.6 billion and letters of credit of $250.1 million secured
by financial instruments, which are principally used as collateral for
securities borrowed and to satisfy margin requirements at option and
commodity exchanges.
In the normal course of business, the Company has been named as a
defendant in several lawsuits which involve claims for substantial
amounts. Additionally, the Company is involved from time to time in
investigations and proceedings by governmental agencies and
self-regulatory organizations. 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 the
foregoing matters will not have a material adverse effect on the financial
condition of the Company, taken as a whole; such resolution may, however,
have a material
7
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
effect on the operating results in any future period, depending on the
level of such results in such period.
4. REGULATORY REQUIREMENTS
The Company's principal operating subsidiaries, Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear, Stearns Securities Corp. ("BSSC"), are
registered broker-dealers and, accordingly, are subject to Rule 15c3-1
under 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 $869.4 million which
is net capital of BSSC in excess of 6% of aggregate debit items arising
from customer transactions, as defined. At May 25, 2001, Bear Stearns' net
capital, as defined, of $2.21 billion exceeded the minimum requirement by
$2.17 billion.
Bear, Stearns International Limited ("BSIL") and Bear Stearns
International Trading Limited ("BSIT"), London-based broker-dealer
subsidiaries, which are indirectly wholly owned by the Company, are
subject to regulatory capital requirements of the Securities and Futures
Authority, a self-regulatory organization established pursuant to the
United Kingdom Financial Services Act of 1986.
Bear Stearns Bank plc ("BSB"), which is indirectly wholly owned by the
Company, is incorporated in Dublin and is subject to the regulatory
capital requirements of the Central Bank of Ireland.
At May 25, 2001, 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 in accordance with SFAS No. 128,
"Earnings Per Share". Basic EPS is computed by dividing net income
applicable to common shares, adjusted for costs related to the Capital
Accumulation Plan (the "CAP Plan"), by the weighted average number of
common shares outstanding. Diluted EPS includes the determinants of basic
EPS and, in addition, gives effect to dilutive potential common shares
from employee stock compensation plans. Common shares include the assumed
distribution of shares of common stock issuable under various employee
stock compensation plans.
8
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the six
months ended May 25, 2001 and May 26, 2000. Income taxes paid totaled
$52.5 million and $516.8 million for the six months ended May 25, 2001 and
May 26, 2000, respectively.
7. DERIVATIVES AND HEDGING ACTIVITIES
Accounting Change
-----------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", later amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133", and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for
stand-alone derivative instruments, derivatives embedded within other
contracts or securities and for hedging activities. It requires that all
derivatives, whether stand-alone or embedded within other contracts or
securities (except in very defined circumstances) be carried on the
Company's balance sheet at their then fair value. The Company adopted SFAS
No. 133 on December 1, 2000.
An important objective of the Company's risk management process is to
hedge the economic risks associated with its long and short-term debt. To
accomplish this objective, the Company modifies the interest rate
characteristics of its debt through derivatives, typically interest rate
swaps. This is part of the on-going asset and liability risk management
function. SFAS No. 133 now requires derivatives designated as hedges to be
carried at their fair value, and that the hedged items previously carried
at their accrued values now be marked to market to account for the risks
being hedged. Any resultant change in values for both the hedging
derivative and the hedged item is recognized in earnings immediately, with
the net impact being deemed the `ineffective' portion of the hedge.
At December 1, 2000, the Company recognized a cumulative after-tax loss of
$6.3 million as a result of adopting SFAS No. 133. This loss is reported
in the Consolidated Statement of Income for the six months ended May 25,
2001 separately as "cumulative effect of change in accounting principle".
9
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
Derivatives Credit Risk
-----------------------
Derivative financial instruments represent contractual commitments between
counterparties that derive their value from changes in an underlying
interest rate, currency exchange rate, index (e.g., Standard & Poor's 500
Index), reference rate (e.g., London Interbank Offered Rate), or asset
value referenced in the related contract. Some derivatives, such as
futures contracts, certain options, and indexed referenced warrants, can
be traded on an exchange. Other derivatives, such as interest rate and
currency swaps, caps, floors, collars, swaptions, equity swaps and
options, structured notes, and forward contracts are negotiated in the
over-the-counter markets. Derivatives generate both on-balance-sheet and
off-balance-sheet implications depending on the nature of the contract.
The Company is engaged as a dealer in over-the-counter derivatives and,
accordingly, enters into transactions involving derivative instruments as
part of its customer-related and proprietary trading activities. The
Company's dealer activities require it to make markets and trade a variety
of derivative instruments. In connection with these activities, the
Company attempts to mitigate its exposure to market risk by entering into
hedging transactions which may include over-the-counter derivative
contracts or the purchase or sale of interest-bearing securities, equity
securities, financial futures and forward contracts. The Company also
utilizes derivative instruments in order to hedge proprietary
market-making and trading activities. In this regard, the utilization of
derivative instruments is designed to reduce or mitigate market risks
associated with holding dealer inventories or in connection with
arbitrage-related trading activities. The Company also utilizes interest
rate and currency swaps to hedge its fixed-rate debt issuances as part of
its asset and liability management.
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
generally limited to the net replacement cost of over-the-counter
contracts, reported as financial instruments owned, at fair value in the
Company's Consolidated Statements of Financial Condition on a
net-by-counterparty basis. 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. Options written generally 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 assessing
the future creditworthiness of counterparties and limiting transactions
with specific counterparties. The Company also seeks to control credit
risk by following an established credit approval process, monitoring
credit limits and requiring collateral where appropriate.
10
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED)
The following table summarizes the counterparty credit quality of the
Company's exposure with respect to over-the-counter derivatives (including
foreign exchange and forward-settling mortgage transactions) as of May
25, 2001, after consideration of collateral:
Derivative Credit Exposure
--------------------------
($ in millions)
Exposure, Percentage of
Net of Exposure, Net of
Rating (1) Exposure Collateral(2) Collateral Collateral
---------------------------------------------------------------------------------------------------------
AAA $ 649 $ 292 $ 357 19.5%
AA 864 122 742 40.5
A 882 279 603 33.0
BBB 171 117 54 3.0
BB and Lower 2,593 2,519 74 4.0
Non-rated 10 9 1 0.0
(1) Internal counterparty credit ratings as assigned by the Company's
Credit Department, converted to rating agency equivalents.
(2) Collateral value is limited to the exposure amount for each
counterparty.
11
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT DATA
The Company operates in three principal segments: Capital Markets, Global
Clearing 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 Institutional Equities, Fixed
Income and Investment Banking areas. Institutional 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 fixed
income derivatives. Investment Banking provides capabilities in capital
raising, strategic advisory, mergers and acquisitions and merchant
banking. Capital raising encompasses the Company's underwriting of equity,
investment grade and high yield debt securities.
The Global Clearing Services segment provides clearing, margin lending and
securities borrowing to facilitate customer short sales, 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 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 and, in turn, earns management and/or
performance fees on the institutional and high-net-worth products it
offers.
The three business segments are comprised of many business areas with
interactions among each as they serve the needs of similar clients.
Revenues and expenses reflected below include those which are directly
related to each segment. Revenue from inter-segment transactions are
credited based upon specific criteria or agreed upon rates with such
amounts eliminated in consolidation. Individual segments also include
revenues and expenses relating to various items including corporate
overhead and interest which are internally allocated by the Company
primarily based on balance sheet usage or expense levels. The Company
generally evaluates performance of the segments based on net revenues and
profit or loss before provision for income taxes.
12
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SEGMENT DATA (CONTINUED)
For the three months ended May 25, 2001:
In thousands Net Revenues Pre-Tax Income Segment Assets
--------------------------------------------------------------------------------------
Capital Markets $ 1,018,985 $ 276,392 $ 123,164,105
Global Clearing Services 207,383 65,859 53,941,162
Wealth Management 133,917 4,209 3,531,828
Other (a) 8,373 (79,631) (7,631,802)
--------------------------------------------------------------------------------------
Total $ 1,368,658 $ 266,829 $ 173,005,293
======================================================================================
For the three months ended May 26, 2000:
In thousands Net Revenues Pre-Tax Income Segment Assets
--------------------------------------------------------------------------------------
Capital Markets $ 825,363 $ 222,398 $ 118,279,024
Global Clearing Services 287,068 136,511 54,543,433
Wealth Management 154,851 10,827 3,133,413
Other (a) 54,024 (203,917) (3,805,213)
--------------------------------------------------------------------------------------
Total $ 1,321,306 $ 165,819 $ 172,150,657
======================================================================================
For the six months ended May 25, 2001:
In thousands Net Revenues Pre-Tax Income Segment Assets
--------------------------------------------------------------------------------------
Capital Markets $ 1,820,520 $ 464,673 $ 123,164,105
Global Clearing Services 431,283 144,992 53,941,162
Wealth Management 278,505 20,413 3,531,828
Other (a) 52,137 (110,285) (7,631,802)
--------------------------------------------------------------------------------------
Total $ 2,582,445 $ 519,793 $ 173,005,293
======================================================================================
For the six months ended May 26, 2000:
In thousands Net Revenues Pre-Tax Income Segment Assets
--------------------------------------------------------------------------------------
Capital Markets $ 1,831,672 $ 541,854 $ 118,279,024
Global Clearing Services 555,042 255,721 54,543,433
Wealth Management 364,655 76,190 3,133,413
Other (a) 76,003 (254,143) (3,805,213)
--------------------------------------------------------------------------------------
Total $ 2,827,372 $ 619,622 $ 172,150,657
======================================================================================
(a) Other is comprised of consolidation/elimination entries, unallocated
revenues (predominantly interest), and certain corporate
administrative functions, including certain legal costs and costs
related to the CAP Plan which were $41.0 million and $15.0 million
for the three months ended May 25, 2001 and May 26, 2000,
respectively, and $72.0 million and $65.7 million for the six months
ended May 25, 2001 and May 26, 2000 respectively.
13
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. TRANSFERS AND SERVICING OF FINANCIAL ASSETS
New Accounting Pronouncement
----------------------------
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
Replacement of FASB Statement No. 125," which revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral. The provisions of SFAS No. 140 carry over most of the guidance
outlined in SFAS No. 125 and further establish accounting and reporting
standards with a financial-components approach that focuses on control.
Financial assets or liabilities are recognized when control is established
and derecognized when control has been surrendered or the liability has
been extinguished. In addition, specific implementation guidelines have
been established to further distinguish transfers of financial assets that
are sales from transfers that are secured borrowings.
SFAS No. 140 as adopted by the Company is effective prospectively for
transfers of financial assets occurring after March 31, 2001, except for
certain provisions regarding disclosures and accounting for collateral,
which will be adopted by the Company when required at the end of fiscal
2001. The impact of full adoption of the standard is currently being
evaluated by the Company.
Securitization Activities
-------------------------
The Company securitizes commercial and residential mortgages, consumer
receivables and other types of financial assets. Fair value of assets sold
and retained interests, if any, are determined by reference to quoted
market prices when readily available. When quoted market prices are not
readily available, the firm generally estimates fair value using pricing
models that consider credit risk, prepayment rates, forward yield curves,
volatilities, discount rates, default rates, loss severity and other
factors. During the period April 1, 2001 to May 25, 2001, the Company
securitized approximately $14.0 billion of financial assets. Retained
interests in securitized assets were not material at May 25, 2001.
Collateralized Financing Transactions
-------------------------------------
The Company enters into secured borrowing or lending agreements to obtain
collateral necessary to effect settlements, finance inventory positions,
meet customer needs or re-lend as part of its dealer operations.
The Company receives securities collateral in connection with its business
as a broker/dealer including resale agreements, securities lending
transactions, derivative transactions, customer margin loans and other
secured money lending activities. In many instances, the Company is
permitted to sell or repledge such securities. At May 25, 2001, the fair
value of securities
14
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. TRANSFERS AND SERVICING OF FINANCIAL ASSETS (CONTINUED)
received as collateral by the Company that can be sold, repledged or
otherwise used is approximately $200.0 billion, of which approximately
$145.0 billion was sold, delivered or repledged.
The Company also pledges its own assets to collateralize financing
agreements. At May 25, 2001, the carrying value of securities included in
"Financial instruments owned" that had been loaned, pledged to lenders, or
otherwise used was approximately $30.0 billion.
15
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
The Bear Stearns Companies Inc.
We have reviewed the accompanying consolidated statement of financial condition
of The Bear Stearns Companies Inc. and Subsidiaries as of May 25, 2001, and the
related consolidated statements of income for the three months and six months
ended May 25, 2001 and May 26, 2000 and cash flows for the six months ended May
25, 2001 and May 26, 2000. These financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated statement of
financial condition of The Bear Stearns Companies Inc. and Subsidiaries as of
November 30, 2000, and the related consolidated statements of income, cash flows
and changes in stockholders' equity for the fiscal year then ended (not
presented herein) included in The Bear Stearns Companies Inc.'s Annual Report on
Form 10-K for the fiscal year ended November 30, 2000; and in our report dated
January 16, 2001, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated statement of financial condition as of November 30,
2000 is fairly stated, in all material respects, in relation to the consolidated
statement of financial condition from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
New York, New York
July 9, 2001
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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.
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 concerning management's expectations, strategic
objectives, business prospects, anticipated economic performance and financial
condition and other similar matters are subject to risks and uncertainties,
including those previously mentioned, which could cause actual results to differ
materially from those discussed in the forward-looking statements.
Forward-looking statements speak only as of the date of the document in which
they are made. We disclaim any obligation or undertaking to provide any updates
or revisions to any forward-looking statement to reflect any change in our
expectations or any change in events, conditions or circumstances on which the
forward-looking statement is based.
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 November 30, 2000.
Business Environment
--------------------
The challenging market conditions that emerged in the latter part of fiscal 2000
continued into the Company's second quarter ended May 25, 2001. A slowdown in
consumer spending, a decline in capital spending and an increase in
unemployment all contributed to a generally weak U.S. economy. The Federal
Reserve Board (the "Fed") responded by lowering the Federal Funds rate three
times for a total of 150 basis points during the fiscal quarter to 4 percent,
its lowest level in seven years, while indicating that inflation was not a
significant concern. These market conditions were in contrast to the market
conditions that existed during the comparable prior year quarter in which the
combination of strong economic growth and signs of inflation led the Fed to
raise the Federal Funds rate twice for a total of 75 basis points.
U.S. equity indices continued to be volatile during the quarter as the market
responded to numerous economic reports, corporate earnings reports and profit
warnings. During the second quarter ended May 25, 2001, the Dow Jones Industrial
Average ("DJIA") and the Standard & Poor's 500 Index ("S&P 500") declined as
much as 11.8% and 13.0%, respectively, before rebounding to close up 5.4% and
2.6%, respectively. The Nasdaq Composite Index ("Nasdaq") declined as much as
27.6% during the quarter before rebounding to close down 0.5% for the quarter.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Despite these challenging market conditions, many of the Company's core
businesses achieved solid results during the quarter. The three interest rate
reductions by the Fed during the quarter contributed to strong fixed income
markets resulting in record fixed income principal transactions revenues.
Driving the increase in net revenues were the record quarterly revenues achieved
by the Company's mortgage-backed securities operations as both primary and
secondary market activity levels rallied sharply. Commissions revenues from
institutional equities were also strong during the quarter. However, the
broad-based weakness in the global equity markets adversely affected new issue
volumes and announced mergers and acquisitions activity. Net interest revenues
during the quarter decreased principally due to lower customer interest bearing
balances. In the comparable prior year quarter the fixed income markets were
less favorable as rising rates and widening of credit spreads resulted in a
decrease in fixed income market activity while increased trading volumes
resulted in an increase in equity activities.
Results of Operations
---------------------
Three Months Ended May 25, 2001
Compared to Three Months Ended May 26, 2000
-------------------------------------------
Net income for the three months ended May 25, 2001 was $169.5 million, up 43.2%
from $118.4 million for the comparable prior year quarter. The prior year
quarter results included an after-tax litigation charge of $96.0 million or
$0.63 per share. Revenues, net of interest expense for the 2001 quarter were
$1.37 billion, up 3.6% from $1.32 billion in the 2000 quarter. The results
reflect an increase in principal transactions revenues, partially offset by a
decrease in net interest, investment banking and commissions revenues. Results
reflect strong fixed income markets, particularly mortgage-backed securities
activities, which benefited from three interest rate cuts by the Fed. Less
favorable global equity markets led to reduced levels of new issue volume and
mergers and acquisitions activity. Further, less favorable U.S. equity markets
served to reduce private client activity and resulted in reduced revenue levels
from the Company's equity market making and trading activities. In addition,
declines in customer margin balances from clearance accounts experienced at the
end of the first fiscal quarter persisted throughout much of the period
resulting in significant period over period declines in average margin balances
and reduced net interest profits. Earnings per diluted share were $1.18 for the
2001 quarter, up 53.2% from $0.77 per share for the 2000 quarter.
Commissions revenues for the 2001 quarter decreased 9.6% to $290.8 million from
$321.7 million for the comparable prior year quarter. The decrease was primarily
attributable to a decrease in retail and clearance commissions, partially offset
by an increase in institutional commissions. A weak retail environment driven by
economic uncertainty and volatile markets during the 2001 quarter led to a
reduction in retail trade volume as retail investors were hesitant to reenter
the market. Securities clearance revenues decreased, reflecting lower leverage
levels being employed by the Company's prime brokerage customers. Increases in
the average daily trading volume on both the NYSE and the NASDAQ(R) year over
year helped to drive institutional commission revenues.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal transactions revenues by reporting categories were as
follows:
Three Months Ended Three Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
Fixed income $448,330 $144,400 210.5%
Equity 145,030 213,571 (32.1%)
Derivative financial instruments, including foreign exchange 129,209 146,315 (11.7%)
------------------------------------------------------------------------------------------------------------------------------------
Total principal transactions revenues $722,569 $504,286 43.3%
====================================================================================================================================
Revenues from principal transactions were $722.6 million for the 2001 quarter,
up 43.3% from $504.3 million for the comparable prior year quarter. Record fixed
income principal transactions revenues were reported for the 2001 quarter,
driven by superior results from the Company's industry-leading mortgage-backed
securities area as well as strong results from the corporate bonds, high yield,
asset-backed and government bonds areas. Generally weaker global equity market
conditions resulted in reduced revenues derived from equity activities,
particularly in the over-the-counter market making, international equity and
risk arbitrage areas. Principal transactions revenues derived from derivative
financial instruments decreased due to a slowdown in equity derivatives
reflecting less favorable market conditions.
Investment banking revenues for the 2001 quarter decreased 23.1% to $181.4
million from $235.8 million for the comparable prior year quarter. The decline
reflects the continued weakness in the equity underwriting environment as
economic uncertainty and volatile equity markets prompted depressed new issue
volumes and lower levels of announced mergers and acquisitions activity. The
decline in equity underwriting was partially offset by an increase in corporate
debt and municipal underwriting. Weakness in the equity markets also contributed
to reduced mergers and acquisitions activity. Included in investment banking
revenues are merchant banking revenues of $21.4 million and $17.9 million for
the 2001 quarter and the 2000 quarter, respectively.
Net interest and dividends (interest income and net dividends less interest
expense) for the 2001 quarter decreased 44.3% to $135.0 million from $242.2
million for the comparable prior year quarter, principally due to lower levels
of average customer interest bearing balances. Average customer margin debit
balances were $37.8 billion during the 2001 quarter compared to $59.7 billion
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
during the 2000 quarter. Margin debit balances totaled $42.2 billion at May 25,
2001 compared to $52.1 billion at May 26, 2000. Average customer shorts were
$50.6 billion during the 2001 quarter compared to $61.8 billion during the 2000
quarter and totaled $61.4 billion at May 25, 2001, up from $58.8 billion at May
26, 2000. Average free credit balances were $17.9 billion during the 2001
quarter compared to $15.0 billion during the 2000 quarter and totaled $15.9
billion at May 25, 2001, an increase from $14.0 billion at May 26, 2000.
Other income increased 124.3% to $38.9 million in the 2001 quarter from $17.4
million in the comparable prior year quarter. The increase in other income was
primarily due to an increase in performance-based fees on alternative investment
products, increased management fees from mutual funds and wrap accounts and
improved results on firm investments in alternative investment products earned
by the Company's Asset Management area. Assets under management increased to
$22.4 billion (including approximately $5.0 billion of alternative investment
products) at May 25, 2001, which reflected a 53.9% increase over $14.6 billion
in assets under management at May 26, 2000. The largest components of the
increase in assets under management were attributable to mutual funds and
alternative investments, including hedge funds, private equity and venture
capital.
Employee compensation and benefits for the 2001 quarter increased 5.4% to $742.8
million from $704.5 million for the comparable prior year quarter. Employee
compensation and benefits as a percentage of net revenues was 54.3% for the 2001
quarter versus 53.3% for the comparable prior year quarter. Compensation as a
percentage of net revenues was adversely impacted during the 2001 quarter by the
decline in net interest profit and weakness in investment banking revenues.
Non-compensation expenses were $359.0 million for the 2001 quarter, a decrease
of 20.4% from $451.0 million in the comparable prior year quarter. Excluding the
litigation charge in the 2000 quarter, expenses were up 19.3% primarily due to
non-recurring costs for severance and accelerated amortization costs associated
with the write-off of technology equipment and leasehold improvements in
connection with the Company's pending move to new corporate headquarters at 383
Madison Avenue, aggregating $31 million, as well as an increase in the Capital
Accumulation Plan ("CAP Plan") expense. Expenses related to the CAP Plan for the
2001 quarter were $41.0 million, up from $15.0 million in the 2000 quarter. The
increase in CAP Plan related expenses reflects the higher level of earnings and
more participants for the 2001 quarter as compared to the comparable prior year
quarter.
The Company's effective tax rate increased to 36.5% in the 2001 quarter compared
to 28.6% for the comparable 2000 quarter, primarily due to a higher proportion
of earnings in higher tax jurisdictions.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Ended May 25, 2001
Compared to Six Months Ended May 26, 2000
-----------------------------------------
Net income for the six months ended May 25, 2001, after the cumulative effect of
a change in accounting principle, was $329.2 million, down 17.0% from $396.6
million for the comparable prior year period. Revenues, net of interest expense
for the 2001 period were $2.6 billion, down 8.7% from $2.8 billion in the 2000
period. Earnings per diluted share were $2.24 for the 2001 period, after the
accounting change, down from $2.67 per share for the comparable prior year
period. The prior year period results included an after-tax litigation charge of
$96.0 million or $0.63 per share. Earnings per diluted share for the 2001 period
were $2.28 and net income was $335.4 million before including the effect of the
required adoption of Statement of Financial Accounting Standards ("SFAS") No.
133 "Accounting for Derivative Instruments and Hedging Activities". The results
primarily reflect a decrease in investment banking, net interest and commissions
revenues, partially offset by an increase in principal transactions revenues.
The results were adversely affected by the industry-wide, broad-based weakness
in the equity markets.
Commissions revenues for the 2001 period decreased 9.3% to $573.2 million from
$632.1 million for the comparable prior year period. The decrease was primarily
attributable to a decrease in retail and clearance commissions, partially offset
by an increase in institutional commissions. Uncertain economic conditions and
volatile equity markets led to a decrease in retail trade volume during the
quarter. Institutional commissions revenues benefited from the increased average
trading volumes on both the NYSE and NASDAQ(R).
The Company's principal transactions revenues by reporting categories were as
follows:
Six Months Ended Six Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
Fixed income $ 732,613 $ 389,909 87.9%
Equity 336,609 434,448 (22.5%)
Derivative financial instruments, including foreign exchange 242,918 321,070 (24.3%)
------------------------------------------------------------------------------------------------------------------------------------
Total principal transactions revenues $1,312,140 $1,145,427 14.6%
====================================================================================================================================
Revenues from principal transactions were $1.3 billion for the 2001 period, up
14.6% from $1.1 billion for the comparable prior year period. Principal
transactions revenues derived from fixed income activities increased 87.9% for
the 2001 period. Action taken by the Fed to lower the Federal Funds rate five
times during the period by a total of 250 basis points boosted the fixed income
markets. Strong customer order flows resulted in record fixed income principal
transactions revenues during the period driven by record performance in
mortgage-backed securities and strong results from the corporate bonds, high
yield, asset-backed and government bonds areas. Principal transactions revenues
derived from equity activities decreased 22.5% for the 2001 period, primarily
due to decreases in the over-the-counter market making, international equity
trading and risk arbitrage areas. Principal transactions revenues derived
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from derivative financial instruments decreased 24.3% during the 2001 period due
to a decline in equity derivatives as a result of the weak global equity markets
during the period.
Investment banking revenues for the 2001 period decreased 41.2% to $319.7
million from $544.0 million for the comparable prior year period. Continued
volatility in the equity markets and declines in U.S. equity prices led to a
slowdown in equity underwriting activities as investors were less interested in
new offerings. A strong fixed income environment resulted in an increase in
corporate debt and municipal new issue volume. Mergers and acquisitions activity
declined during the 2001 period. Included in investment banking revenues are
merchant banking revenues of $46.7 million and $46.3 million for the 2001 period
and 2000 period, respectively.
Net interest and dividends (revenues from interest and net dividends less
interest expense) for the 2001 period decreased 31.4% to $299.2 million from
$436.4 million for the comparable prior year period, principally due to lower
levels of average customer interest bearing balances. Average customer margin
debit balances were $39.8 billion during the 2001 period compared to $58.2
billion during the comparable prior year period. Margin debit balances totaled
$42.2 billion at May 25, 2001 compared to $52.1 billion at May 26, 2000. Average
customer shorts were $52.8 billion during the 2001 period compared to $63.2
billion during the comparable prior year period and totaled $61.4 billion at May
25, 2001, up from $58.8 billion at May 26, 2000. Average free credit balances
were $18.1 billion during the 2001 period compared to $15.2 billion during the
comparable prior year period and totaled $15.9 billion at May 25, 2001, an
increase from $14.0 billion at May 26, 2000.
Other income increased 12.7% to $78.2 million in the 2001 period from $69.4
million in the comparable prior year period. The increase in other income was
primarily due to an increase in management fees earned by the Company's Asset
Management area, partially offset by a decrease in performance-based fees.
Assets under management increased to $22.4 billion (including approximately $5.0
billion of alternative investment products) at May 25, 2001, which reflected a
53.9% increase over $14.6 billion in assets under management at May 26, 2000.
The largest components of the increase in assets under management were
attributable to mutual funds and alternative investments, including hedge funds,
private equity and venture capital.
Employee compensation and benefits for the 2001 period decreased 2.7% to $1.39
billion from $1.42 billion for the comparable prior year period. Employee
compensation and benefits, as a percentage of net revenues, increased to 53.6%
in the 2001 period from 50.3% in the comparable
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
prior year period due principally to lower levels of net interest and investment
banking revenue experienced in the 2001 period.
Non-compensation expenses were $677.6 million for the 2001 period, a decrease of
13.6% from $784.6 million from the comparable prior year period. However,
excluding the litigation charge that is included in the 2000 period, expenses
were up 6.8% primarily due to non-recurring costs for severance and accelerated
amortization costs associated with the write-off of technology equipment and
leasehold improvements in connection with the Company's pending move to new
corporate headquarters at 383 Madison Avenue, aggregating $31 million, as well
as an increase in the CAP Plan expense. Expenses related to the CAP Plan for the
2001 period were $72.0 million, up from $65.7 million in the comparable prior
year period.
The Company's effective tax rate decreased to 35.3% in the 2001 period compared
to 36.0% in the comparable prior year period, primarily due to a higher
proportion of tax preference items and a reduction in the New York state tax
rate.
Business Segments
-----------------
The Company is primarily engaged in business as a securities broker and dealer
operating in three principal segments: Capital Markets, Global Clearing 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 Global Clearing 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 unallocated revenues
(predominantly interest) as well as certain corporate administrative functions,
such as certain legal costs and costs related to the CAP Plan.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended May 25, 2001
Compared to Three Months Ended May 26, 2000
-------------------------------------------
Capital Markets
---------------
Three Months Ended Three Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
---------------------------------------------------------------------------------------------------------------------
Net revenues
Institutional Equities $ 348,350 $ 421,271 (17.3%)
Fixed Income 514,286 183,014 181.0%
Investment Banking 156,349 221,078 (29.3%)
---------------------------------------------------------------------------------------------------------------------
Total net revenues $1,018,985 $ 825,363 23.5%
=====================================================================================================================
Pre-tax income $ 276,392 $ 222,398 24.3%
=====================================================================================================================
The Capital Markets segment is comprised of the Institutional Equities, Fixed
Income and Investment Banking areas. Institutional 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,
foreign exchange and fixed income derivatives. Investment Banking provides
capabilities in capital raising, strategic advice, mergers and acquisitions and
merchant banking. Capital raising encompasses the Company's underwriting of
equity, investment-grade and high yield debt securities.
Net revenues for Capital Markets were $1.0 billion in the 2001 quarter, up 23.5%
from $825.4 million in the comparable prior year quarter. Pre-tax income for
Capital Markets was $276.4 million in the 2001 quarter, up 24.3% from $222.4
million in the comparable prior year quarter. Investment Banking net revenues in
the 2001 quarter decreased 29.3% to $156.3 million from $221.1 million in the
2000 quarter. Continued weakness in the global equity markets led to reduced
levels of equity new issue volume and announced mergers and acquisitions
activity during the 2001 quarter. Institutional Equities net revenues in the
2001 quarter decreased 17.3% to $348.4 million from $421.3 million in the 2000
quarter, primarily attributable to decreases in the equity derivatives,
over-the-counter market making and international equity trading areas, which
were partially offset by strong commissions revenues resulting from increased
domestic trading volumes on both the NYSE and NASDAQ(R). Fixed Income net
revenues increased to $514.3 million in the 2001 quarter or 181.0% from $183.0
million in the comparable prior year quarter. The fixed income markets benefited
from declining interest rates, precipitated by three interest rate cuts by the
Fed for a total of 150 basis points during the 2001 quarter. This resulted in a
record performance from the mortgage-backed securities area as both primary and
secondary market activity levels increased sharply. The strong fixed income
environment also resulted in strong performances in the corporate bonds, high
yield, asset-backed, credit derivative and government bond trading areas.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Global Clearing Services
------------------------
Three Months Ended Three Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
--------------------------------------------------------------------------------
Net revenues $207,383 $287,068 (27.8%)
Pre-tax income $ 65,859 $136,511 (51.8%)
The Global Clearing Services segment provides clearing, margin lending and
securities borrowing to facilitate customer short sales, 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.
Net revenues for Global Clearing Services were $207.4 million in the 2001
quarter, down 27.8% from $287.1 million for the comparable prior year quarter.
Pre-tax income for Global Clearing Services was $65.9 million in the 2001
quarter, down 51.8% from $136.5 million for the 2000 quarter. While the Company
continued to add new clients in the 2001 quarter, customer margin debit and
customer short balances declined in the 2001 quarter as a result of less
favorable equity market conditions and lower leverage levels being employed by
prime brokerage customers. Average customer margin debit balances were $37.8
billion during the 2001 quarter compared to $59.7 billion during the comparable
prior year quarter. Margin debit balances totaled $42.2 billion at May 25, 2001
compared to $52.1 billion at May 26, 2000. Average customer shorts were $50.6
billion during the 2001 quarter compared to $61.8 billion during the 2000
quarter and totaled $61.4 billion at May 25, 2001, up from $58.8 billion at May
26, 2000. Average free credit balances were $17.9 billion during the 2001
quarter compared to $15.0 billion during the 2000 quarter and totaled $15.9
billion at May 25, 2001, an increase from $14.0 billion at May 26, 2000.
Wealth Management
-----------------
Three Months Ended Three Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
--------------------------------------------------------------------------------
Net revenues $133,917 $154,851 (13.5%)
Pre-tax income $ 4,209 $ 10,827 (61.1%)
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, including access to the Company's resources
and professionals. PCS has approximately 450 account executives.
The Asset Management area had $22.4 billion in assets under management at May
25, 2001, which reflected a 53.9% increase over $14.6 billion in assets under
management at May 26, 2000. Strong net inflows and performances from certain of
the funds' investments led to the
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
growth in assets under management. Assets from alternative investment products
grew 97.9% to approximately $5.0 billion under management at May 25, 2001 from
$2.5 billion at May 26, 2000, while assets from mutual funds increased $2.3
billion to $5.3 billion at May 25, 2001 from $3.0 billion at May 26, 2000.
Net revenues for Wealth Management were $133.9 million in the 2001 quarter, down
13.5% from $154.9 million for the comparable prior year quarter. Pre-tax income
for Wealth Management was $4.2 million in the 2001 quarter, down 61.1% from
$10.8 million for the 2000 quarter. Private client service revenues in the 2001
quarter decreased from the 2000 quarter due to a reduction in retail trading
volume and lower customer margin balances as a result of uncertain economic
conditions and volatile equity markets. A strong performance from the asset
management area reflects an improvement in performance-based fees on alternative
investment products, increased management fees from mutual funds and wrap
accounts, and improved results on firm investments in alternative investment
products.
Six Months Ended May 25, 2001
Compared to Six Months Ended May 26, 2000
-----------------------------------------
Capital Markets
---------------
Six Months Ended Six Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
-------------------------------------------------------------------------------------------------------------------
Net revenues
Institutional Equities $ 689,521 $ 797,414 (13.5%)
Fixed Income 854,675 518,297 64.9%
Investment Banking 276,324 515,961 (46.4%)
-------------------------------------------------------------------------------------------------------------------
Total net revenues $1,820,520 $1,831,672 (0.6%)
===================================================================================================================
Pre-tax income $ 464,673 $ 541,854 (14.2%)
===================================================================================================================
Net revenues for Capital Markets were $1.82 billion in the 2001 period, down
0.6% from $1.83 billion in the comparable prior year period. Pre-tax income for
Capital Markets was $464.7 million in the 2001 period, down 14.2% from $541.9
million in the 2000 period. Investment Banking net revenues in the 2001 period
decreased 46.4% to $276.3 million from $516.0 million in the comparable prior
year period. Unfavorable global equity markets led to declining equity
underwriting and mergers and acquisitions activity during the 2001 period.
Institutional Equities net revenues in the 2001 period decreased 13.5% to $689.5
million from $797.4 million in the 2000 period, primarily attributable to
decreases in the equity derivatives, over-the-counter market making and
international equity trading areas, partially offset by strong commissions
revenues resulting from increased domestic trading volumes on both the NYSE and
NASDAQ(R). Fixed Income net revenues increased to $854.7 million in the 2001
period or 64.9% from $518.3 million in the comparable prior year period. An
improved fixed income environment prompted by the five interest rate reductions
during the 2001 period by the Fed resulted in record fixed income principal
transactions revenues during the 2001 period driven by superior results from the
Company's mortgage-backed securities area as well as strong results from the
asset-backed, high yield and investment grade areas.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Global Clearing Services
------------------------
Six Months Ended Six Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
-------------------------------------------------------------------------------------------------------------------
Net revenues $ 431,283 $ 555,042 (22.3%)
Pre-tax income $ 144,992 $ 255,721 (43.3%)
Net revenues for Global Clearing Services were $431.3 million in the 2001
period, down 22.3% from $555.0 million for the comparable prior year period.
Pre-tax income for Global Clearing Services was $145.0 million in the 2001
period, down 43.3% from $255.7 million for the 2000 period. The decrease in net
revenues in the 2001 period was primarily due to a decrease in customer margin
debit and customer short balances creating reduced net interest profits compared
to the 2000 period. While the Company's client base continued to expand during
the 2001 period, the decline in margin debit and customer short balances was a
result of deteriorating equity market conditions and lower leverage levels being
employed by prime brokerage customers.
Wealth Management
-----------------
Six Months Ended Six Months Ended % Increase
In thousands May 25, 2001 May 26, 2000 (Decrease)
-------------------------------------------------------------------------------------------------------------------
Net revenues $ 278,505 $ 364,655 (23.6%)
Pre-tax income $ 20,413 $ 76,190 (73.2%)
Net revenues for Wealth Management were $278.5 million in the 2001 period, down
23.6% from $364.7 million for the comparable prior year period. Pre-tax income
for Wealth Management was $20.4 million in the 2001 period, down 73.2% from
$76.2 million for the 2000 period. Private client service revenues in the 2001
period decreased from the 2000 period due to a reduction in retail trading
volume as a result of uncertain economic conditions and volatile equity markets.
Asset management revenues increased, reflecting higher levels of management fees
on the Company's mutual fund and alternative investment products.
Liquidity and Capital Resources
-------------------------------
Financial Leverage
------------------
The Company maintains a highly liquid balance sheet with the vast majority of
the Company's assets consisting of cash, marketable securities inventories,
which are marked-to-market daily, and collateralized receivables arising from
customer-related and proprietary securities transactions.
Collateralized receivables consist of resale agreements secured predominantly by
U.S. government and agency securities, customer margin loans and securities
borrowed, which are typically secured by marketable corporate debt and equity
securities. The nature of the Company's business as a securities dealer requires
it to carry significant levels of securities inventories in order to meet its
customer and proprietary trading needs. Additionally, the
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company's role as a financial intermediary for customer activities which it
conducts on a principal basis, together with its customer-related activities
attributable to its clearance business, results in significant levels of
customer-related balances, including customer margin debt, securities borrowing
and repurchase activity. The Company's total assets and financial leverage can
fluctuate, depending largely upon economic and market conditions, volume of
activity and customer demand.
The Company's total assets at May 25, 2001 increased to $173.0 billion from
$171.2 billion at November 30, 2000. The increase was primarily attributable to
an increase in cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations, securities purchased under
agreements to resell, partially offset by a decrease in securities borrowed and
financial instruments owned. The Company's total capital base, which consists of
long-term debt, preferred equity issued by subsidiaries and total stockholders'
equity, increased to $27.6 billion at May 25, 2001 from $26.3 billion at
November 30, 2000 primarily due to an increase in long-term borrowings. In an
effort to capitalize on the favorable interest rate environment, the Company
also issued $262.5 million of 7.8% Guaranteed Preferred Beneficial Interests in
Company Subordinated Debt Securities ("Trust Issued Preferred Securities").
The Company's ability to support increases in total assets is a function of its
ability to obtain short-term secured and unsecured funding, as well as its
access to longer-term sources of capital (i.e., long-term debt and equity). The
Company regularly measures and monitors its total capital requirements, which
are a function of balance sheet risk (i.e., market, credit and liquidity) and
regulatory capital requirements. The Company seeks to ensure the adequacy of its
total capital base, the size of which is determined primarily as a function of
the self-funding ability of its assets. As such, the mix and liquidity
characteristics of assets being held are the primary determinant of required
total capital, thus significantly influencing the amount of leverage that the
Company can employ.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth total assets, adjusted assets, and net adjusted
assets with the resultant leverage ratios at May 25, 2001 and November 30, 2000.
With respect to a comparative measure of financial risk and capital adequacy,
the Company believes that the low risk spread asset nature of its securities
borrowed position renders net adjusted leverage as the most relevant measure.
In billions, except ratios May 25, 2001 November 30, 2000
--------------------------------------------------------------------------------
Total Assets $173.0 $171.2
Adjusted Assets (1) $134.5 $135.1
Net Adjusted Assets (2) $ 76.4 $ 73.3
Leverage Ratio (3) 27.5 27.8
Adjusted Leverage (4) 21.4 21.9
Net Adjusted Leverage (5) 12.1 11.9
(1) Adjusted Assets represent Total Assets less securities purchased under
agreements to resell and the receivable for securities provided as
collateral.
(2) Net Adjusted Assets represent Adjusted Assets less securities borrowed.
(3) Leverage Ratio equals Total Assets divided by stockholders' equity and
preferred stock issued by subsidiaries.
(4) Adjusted Leverage equals Adjusted Assets divided by stockholders' equity
and preferred stock issued by subsidiaries.
(5) Net Adjusted Leverage equals Net Adjusted Assets divided by stockholders'
equity and preferred stock issued by subsidiaries.
Funding Strategy
----------------
The Company's general funding strategy seeks to ensure ample liquidity and
diversity of funding sources in order to meet the Company's financing needs at
all times and in all market environments. The Company attempts to finance its
balance sheet by maximizing, where economically competitive, its use of secured
funding. In addition, with respect to short-term, unsecured financing, the
Company's emphasis on diversification by product, geography, maturity and
instrument results in prudent, moderate usage of more credit sensitive,
potentially less stable funding. Short-term sources of cash consist principally
of collateralized borrowings, including repurchase transactions, securities
lending arrangements and customer free credit balances. Short-term funding also
includes unsecured commercial paper, medium-term notes and bank borrowings
generally having maturities from overnight to one year.
The vast majority of the Company's balance sheet is financed with short-term
secured and longer-term sources of funding. The Company views its secured
funding as inherently less credit sensitive and therefore more stable due to the
collateralized nature of the borrowing. In this fashion, via an adequate total
capital base and extensive use of secured funding, the Company seeks to limit
its reliance on short-term unsecured borrowings.
In addition to short-term funding sources, the Company utilizes long-term senior
debt and medium-term notes as a longer-term source of unsecured financing.
During the 2001 quarter, the Company made payments approximating $2.1 billion on
long-term debt which, net of proceeds of approximately $2.7 billion from the
issuance of long-term debt and a reduction to the carrying value of $0.2 billion
related to the adoption of SFAS No.133, increased total long-term debt by $0.4
billion. The amount of long-term debt, as well as total capital, that the
Company maintains is a function of its asset composition.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company regularly monitors and analyzes the size, composition and liquidity
characteristics of its asset base in the context of each asset's ability to be
used to obtain secured financing and the associated margin level required for
such financing. This analysis results in a determination of the Company's
aggregate need for long-term funding sources, which translates into the amount
of long-term debt required for a given equity base and mix of assets.
The Company maintains an alternative funding strategy focused on the liquidity
and self-funding ability of the underlying assets. The objective is to maintain
sufficient total capital and funding sources to enable the Company to refinance
unsecured borrowings with fully secured borrowings. The analysis focuses on a
twelve-month time period and assumes that the Company does not liquidate assets
and cannot issue any new unsecured debt, including commercial paper. Within this
context, the Company monitors its cash position and the borrowing value of
unencumbered, unhypothecated marketable securities in relation to its unsecured
debt maturing over the next twelve months, striving to maintain the ratio of
liquidity sources to maturing debt at 100% or greater.
In addition, the Company monitors the maturity profile of its unsecured debt to
minimize refinancing risk, maintains relationships with a broad global base of
debt investors and bank creditors, establishes and adheres to strict short-term
debt investor concentration limits and periodically tests its secured and
unsecured committed credit facilities. The Company also maintains available
sources of short-term funding that exceed the actual utilization thereof to
allow it to endure changes in investor appetite and credit capacity to hold the
Company's debt obligations.
The Company has in place a committed revolving-credit facility (the "facility")
totaling $3.105 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
$1.5525 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 February 2002 with
all loans outstanding at that date payable no later than February 2003. There
were no borrowings outstanding under the facility at May 25, 2001.
The Company has in place a $1.25 billion committed revolving securities repo
facility (the "repo facility") which permits borrowings, under a repurchase
arrangement, by Bear, Stearns International Limited ("BSIL"), Bear Stearns
International Trading Limited ("BSIT") and Bear Stearns Bank plc ("BSB"). The
repo facility terminates in August 2001 with all repos outstanding at that date
payable no later than August 2002. There were no borrowings outstanding under
the repo facility at May 25, 2001.
The Company has in place a $500 million committed revolving credit facility,
which permits borrowing on a secured basis by BSSC. The facility terminates in
December 2001 with all loans outstanding at that date payable no later than
December 2002. There were no borrowings outstanding under the facility at May
25, 2001.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources
-----------------
The Company conducts a substantial portion of its operating activities within
its regulated subsidiaries Bear Stearns, BSSC, BSIL, BSIT and BSB. In connection
therewith, a substantial portion of the Company's long-term borrowings and
equity has 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.
Long-term debt totaling $19.2 billion and $16.7 billion had remaining maturities
beyond one year at May 25, 2001 and November 30, 2000, respectively. The
Company's access to external sources of financing, as well as the cost of that
financing, is at least partially dependent on the Company's short-term and
long-term debt ratings. At May 25, 2001, the Company's long-term/short-term debt
ratings were as follows:
--------------------------------------------------------------------------------
Moody's Investors Service A2/P-1
--------------------------------------------------------------------------------
Standard & Poor's A/A-1
--------------------------------------------------------------------------------
Fitch A+/F1+
--------------------------------------------------------------------------------
Dominion Bond Rating Service A/R-1 (middle)
--------------------------------------------------------------------------------
Japan Rating & Investment Information A+/not rated
--------------------------------------------------------------------------------
The Stock Repurchase Program (the "Repurchase Program") allows the Company to
purchase (in addition to any shares purchased under a previous repurchase
authorization) up to an aggregate of $1.2 billion in Common Stock. The purchases
under the $1.2 billion repurchase authorization may be made periodically in 2001
or beyond in the open market or otherwise at prices then prevailing. During the
quarter ended May 25, 2001, the Company purchased, under the previous and
current repurchase program authorizations, a total of 4,700,298 shares of Common
Stock through open market transactions at a cost of approximately $234.7 million
in connection with various employee compensation plans including the CAP Plan.
The Company intends, subject to market conditions and plan limitations, to
continue to purchase a sufficient number of shares of Common Stock in the open
market to enable the Company to issue shares with respect to stock compensation.
Cash Flows
----------
Cash and cash equivalents decreased $566.9 million to $1,753.1 million at May
25, 2001 from $2,320.0 million at November 30, 2000. Cash used in operating
activities was $1,097.2 million, primarily attributable to a decrease in
securities sold under agreements to repurchase, increases in securities
purchased under agreements to resell and cash and securities deposited with
clearing organizations, partially offset by decreases in securities borrowed,
and increases in payables to customers and financial instruments sold, but not
yet purchased. Cash provided by financing activities of $651.3 million reflected
proceeds from the issuance long-term borrowings, partially offset by payments
for retirement of long-term borrowings. The Company also issued the Trust
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Issued Preferred Securities for gross proceeds of $262.5 million. Cash used in
investing activities of $121.0 million reflected purchases of property,
equipment and leasehold improvements, as well as net increases in investment
securities and other assets.
Regulated Subsidiaries
----------------------
As registered broker-dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Securities Exchange Act of 1934, as amended, 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 May 25, 2001
Bear Stearns, BSSC, BSIL, BSIT, and BSB were in compliance with their respective
regulatory capital requirements.
Merchant Banking Investments
----------------------------
As part of its merchant banking activities, the Company participates from time
to time in principal investments in leveraged transactions. As part of these
activities, the Company originates, structures and invests in merger,
acquisition, restructuring and leveraged capital transactions, including
leveraged buyouts. The Company's principal investments in these transactions are
generally made in the form of equity investments, equity-related investments or
subordinated loans and have not historically required significant levels of
capital investment. At May 25, 2001, the Company held investments in 22
leveraged transactions with an aggregate carrying value of approximately $248.3
million. In addition, the Company has various direct and indirect principal
investments in, as well as commitments to participate in, partnerships that
invest in leveraged transactions.
High Yield Positions
--------------------
As part of the Company's fixed income securities activities, the Company
participates in the underwriting, securitization and trading of
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 positions").
Also included in high yield positions is a portfolio of credit card receivables
from individuals that are subject to bankruptcy proceedings.
Non-investment-grade debt securities have been defined as high yield and
emerging market debt rated BB+ or lower or equivalent ratings recognized by
credit rating agencies. Non-investment-grade mortgage loans are principally
secured by residential properties and include non-performing loans. At May 25,
2001 and November 30, 2000, the Company held high yield positions approximating
$2.9 billion and $2.3 billion, respectively, in long inventory, and $0.5 billion
and $0.4 billion, respectively, in short inventory.
In addition, the Company provides extensions of credit to highly leveraged
companies in loan syndication transactions and then participates out a portion
of these leveraged transactions. At May 25, 2001 and November 30, 2000, the
amount outstanding to highly leveraged borrowers totaled $471.9 million and
$336.9 million, respectively. Additionally, lending commitments to
non-investment-grade borrowers totaled approximately $1.0 billion and $926.2
million at May 25, 2001 and
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
November 30, 2000, respectively. The Company also has exposure to
non-investment-grade counterparties related to its trading-related derivative
activities. At May 25, 2001 and November 30, 2000, the Company's exposure to
non-investment-grade counterparties, net of collateral, was $75.0 million and
$49.0 million, respectively.
The Company's Risk Committee monitors exposure to market and credit risk with
respect to high yield positions and establishes limits with respect to overall
market exposure and concentrations of risk by both individual issuer and
industry group. High yield positions generally involve greater risk than
investment-grade debt securities due to credit considerations, liquidity of
secondary trading markets, and increased vulnerability to general economic
conditions. The level of the Company's high yield positions, 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.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
For a description of the Company's risk management policies and Value-at-Risk
("VaR") model, including 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, refer to
the Company's Annual Report on Form 10-K for the fiscal year ended November 30,
2000.
The total VaR 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 VaR for
each component of market risk at May 25, 2001 and November 30, 2000.
In millions May 25, 2001 November 30, 2000
--------------------------------------------------------------------------------
MARKET RISK
Interest rate $ 9.2 $11.7
Currency 1.0 1.4
Equity 6.6 10.7
Diversification benefit (5.5) (7.9)
--------------------------------------------------------------------------------
Total $11.3 $15.9
================================================================================
The table below illustrates the high, low and average (calculated on a monthly
basis) VaR for each component of market risk and aggregate market risk during
the 2001 quarter:
In millions High Low Average
--------------------------------------------------------------------------------
MARKET RISK
Interest rate $15.0 $9.2 $12.8
Currency 1.0 0.8 0.9
Equity 6.8 5.9 6.5
Aggregate Value-at-Risk 16.5 11.3 14.3
--------------------------------------------------------------------------------
The average daily trading profit was $11.3 million and $7.9 million for the
quarters ended May 25, 2001 and May 26, 2000, respectively, and $10.8 million
and $9.3 million for the six months ended May 25, 2001 and May 26, 2000,
respectively. During the quarters and six months ended May 25, 2001 and May 26,
2000, there were no trading days in which daily trading losses exceeded the
reported VaR amounts.
34
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Goldberger v. Bear, Stearns & Co. Inc., et al. /
Bier, et al. v. Bear, Stearns & Co. Inc., et al.
------------------------------------------------
As previously reported in the Company's Report on Form 10-K for the fiscal year
ended November 30, 2000 (the "Fiscal Year 2000 Form 10-K"), Bear Stearns is a
defendant in litigation pending in the United States District Court for the
Southern District of New York.
On June 18, 2001, the parties entered into a stipulation pursuant to which
plaintiffs withdrew their appeal.
McKesson HBOC, Inc. Litigations
-------------------------------
As previously reported in the Company's Fiscal Year 2000 Form 10-K, the Company
is a defendant in various litigations arising out of a merger between McKesson
Corporation ("McKesson") and HBO & Company ("HBOC") resulting in an entity
called McKesson HBOC, Inc. ("McKesson HBOC").
On April 23, 2001, complaints were filed by the Utah State Retirement Board, the
Public Employees' Retirement Association of Colorado and the Minnesota State
Board of Investment in the Superior Court of California, City and County of San
Francisco, asserting allegations similar to those alleged in the second amended
consolidated complaint filed in the litigation entitled In re McKesson HBOC,
Inc. Securities Litigation pending in the United States District Court for the
Northern District of California and described in the Company's Fiscal Year 2000
Form 10-K. In addition, on April 26, 2001, a similar complaint was filed in the
Superior Court in San Francisco by the State of Oregon, by and through the
Oregon Public Employees Retirement Board. These complaints assert claims against
the Company based on violations of California Corporate Securities Code Sections
25500 and 25504.2, California Business and Professions Code Sections 17200 et
seq., California Civil Code Sections 1709 and 1710, common law fraud and deceit,
intentional misrepresentation, negligent misrepresentation, aiding and abetting
alleged breaches of fiduciary duty owed by former officers of HBOC and McKesson
and Georgia common law and the Georgia Securities Law. Compensatory and punitive
damages in an unspecified amount are sought in each of these complaints. On June
22, 2001, the Company filed motions to dismiss each of the complaints. The court
has not yet ruled on these motions.
On April 19, 2001, a complaint was filed in the Court of Common Pleas, Trial
Division, Philadelphia County, Pennsylvania, by former shareholders of KWS&P,
Inc. and KWS&P/SFA, Inc. (collectively, "KWS&P") against the Company and a
former employee of the Company arising out of the Company's engagement by KWS&P
in connection with a merger between KWS&P and McKesson HBOC. The complaint
alleges claims based on common law fraud, civil conspiracy, breach of fiduciary
duty, tortious interference with contract, misrepresentation and omission,
negligence and violations of the Pennsylvania Unfair Trade Practices and
Consumer Protection Law as well as for negligent supervision against the
Company.
35
LEGAL PROCEEDINGS (CONTINUED)
Compensatory and punitive damages in an unspecified amount are sought. On July
2, 2001, the defendants filed preliminary objections to the complaint, which
objections have not yet been ruled on by the court.
The Company has denied all allegations of wrongdoing asserted against it in
these litigations, and believes that it has substantial defenses to these
claims.
Cromer Finance Ltd. v. Michael Berger, et al.
---------------------------------------------
As previously reported in the Company's Fiscal Year 2000 Form 10-K, Bear Stearns
and Bear, Sterns Securities Corp. ("BSSC") are defendants in litigation pending
in the United States District Court for the Southern District of New York.
On April 17, 2001, the court granted the Bear Stearns defendants' motion to
dismiss this action.
Argos v. Michael Berger, et al.
-------------------------------
As previously reported in the Company's Fiscal Year 2000 Form 10-K, Bear Stearns
and BSSC are defendants in litigation pending in the United States District
Court of the Southern District of New York.
On May 15, 2001, the court granted the Bear Stearns defendants' motion to
dismiss this action.
Helen Gredd, Chapter 11 Trustee for Manhattan Investment Fund Ltd. v. Bear,
Stearns Securities Corp.
---------------------------------------------------------------------------
On April 24, 2001, an action was commenced in the United States Bankruptcy Court
for the Southern District of New York by the Chapter 11 Trustee for Manhattan
Investment Fund Ltd. ("MIFL"). BSSC is the sole defendant. The complaint
alleges, among other things, that certain transfers of cash and securities to
BSSC in connection with short sales of securities by MIFL in 1999 were
"fraudulent transfers" made in violation of Sections 548 and 550 of the United
States Bankruptcy Code and are recoverable by the Trustee. The Trustee also
alleges that any claim that may be asserted by BSSC against MIFL should be
equitably subordinated to the claims of other creditors pursuant to Sections 105
and 510 of the Bankruptcy Code. The Trustee seeks to recover in excess of $1.9
billion in connection with the allegedly fraudulent transfers to BSSC.
BSSC has denied all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
IPO Allocation Litigations
--------------------------
The Company has been served with complaints in a number of putative class action
litigations alleging, generally, that the underwriters in various initial public
offerings of technology and internet-related companies obtained excessive
compensation by allocating shares in these "hot" public offerings to preferred
customers who, in return, purportedly agreed to pay additional
36
LEGAL PROCEEDINGS (CONTINUED)
compensation to the underwriters. The complaints allege, among other things,
that this conduct violated Sections 11 and 12(a) of the Securities Act of 1933
and Section 10(b) of the Securities Exchange Act of 1934 and Rule 1Ob-5
thereunder. Certain of the complaints also allege violations of the federal
antitrust laws. The complaints seek compensatory and statutory damages in an
unspecified amount. The Company has not yet responded to any of these
complaints. The Company believes that it has substantial defenses to these
claims.
The Company also is involved from time to time in investigations and proceedings
by governmental agencies and self-regulatory organizations.
37
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of the Company held on March 29, 2001 (the "Annual
Meeting"), the stockholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of shares
of authorized Common Stock to 500,000,000 shares; approved the Company's
Non-Employee Directors' Stock Option Plan; and approved an amendment to the
Company's Stock Award Plan to increase the number of shares subject to awards
granted under the Stock Award Plan. In addition, at the Annual Meeting the
stockholders of the Company elected eleven directors to serve until the next
Annual Meeting of Stockholders or until successors are duly elected and
qualified.
The affirmative vote of a majority of the outstanding shares of Common Stock was
required to approve the amendment to the Restated Certificate of Incorporation.
The affirmative vote of a majority of the shares of Common Stock represented at
the Annual Meeting and entitled to vote on each matter was required to approve
the Non-Employee Director's Stock Option Plan and the amendment to the Stock
Award Plan, while the affirmative vote of a plurality of the votes cast by
holders of shares of Common Stock was required to elect the directors.
With respect to the approval of the amendment to the Restated Certificate of
Incorporation, the Non-Employee Directors' Stock Option Plan and the amendment
to the Stock Award Plan, set forth below is information on the results of the
votes cast at the Annual Meeting.
Broker
For Against Abstained Non-Votes
---------- ---------- --------- ----------
Amendment to the Restated
Certificate of Incorporation 76,618,108 15,051,386 532,436 0
Non-Employee Directors'
Stock Option Plan 58,521,950 9,888,246 504,299 23,287,435
Amendment to the Stock
Award Plan 50,456,853 17,947,624 510,018 23,287,435
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cast and/or withheld with respect to each such nominee.
Nominees For Withheld
-------------------- ---------- ----------
James E. Cayne 90,882,039 1,319,891
Carl D. Glickman 90,826,831 1,375,099
Alan C. Greenberg 90,798,739 1,403,191
Donald J. Harrington 90,874,464 1,327,466
William L. Mack 90,892,008 1,309,922
Frank T. Nickell 90,897,029 1,304,901
Frederic V. Salerno 90,873,761 1,328,169
Alan D. Schwartz 81,573,847 10,628,083
Warren J. Spector 90,888,689 1,313,241
Vincent Tese 90,873,930 1,328,000
Fred Wilpon 90,878,590 1,323,340
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(11) Statement Re Computation of Per Share Earnings
(12) Statement Re Computation of Earnings to Fixed Charges
(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 March 21, 2001 and filed on
March 26, 2001, pertaining to the Company's results of operations
for the three months ended February 23, 2001.
(ii) A Current Report on Form 8-K dated March 30, 2001 and filed on
April 3, 2001, announcing the payment of regular quarterly cash
dividends on outstanding shares of the Company's Adjustable Rate
Cumulative Preferred Stock, 6.15% Cumulative Preferred Stock, 5.72%
Cumulative Preferred Stock and 5.49% Cumulative Preferred Stock.
(iii) A Current Report on Form 8-K dated April 20, 2001 and filed on
April 27, 2001, pertaining to an opinion of Cadwalader, Wickersham &
Taft as to the legality of the 6.50% Global Notes due 2006 ("Global
Notes") issued by the Company, certain federal income tax
consequences in connection with the offering of the Global Notes,
and a consent in connection with the offering of the Global Notes.
(iv) A Current Report on Form 8-K dated May 3, 2001 and filed on May
10, 2001, pertaining to the filing of an underwriting agreement,
related transaction documents and an opinion of Cadwalader,
Wickersham & Taft as to certain federal income tax consequences and
a consent in connection with the offering of 7.8% Trust Issued
Preferred Securities.
(v) A Current Report on Form 8-K dated May 4, 2001 and filed on May
11, 2001, pertaining to an opinion of Cadwalader, Wickersham & Taft
as to the legality of the 6.50% Global Notes due 2006 ("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.
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Bear Stearns Companies Inc.
-------------------------------
(Registrant)
Date: July 9, 2001 By: /s/ Marshall J Levinson
------------------------------
Marshall J Levinson
Controller
(Principal Accounting Officer)
40
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
(11) Statement Re Computation of Per Share Earnings 42
(12) Statement Re Computation of Earnings to Fixed Charges 43
41