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 August 31, 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 October 11, 2001, the latest practicable date, there were 94,130,414
shares of Common Stock, $1 par value, outstanding.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of August 31, 2001 (Unaudited) and
November 30, 2000 (Audited) 3
Consolidated Statements of Income (Unaudited)
for the three months and nine months ended
August 31, 2001 and August 25, 2000 4
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended August 31, 2001
and August 25, 2000 5
Notes to Consolidated Financial Statements (Unaudited) 6
Independent Accountants' Report 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 35
Signature 37
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE BEAR STEARNS COMPANIES INC.
Consolidated Statements of
Financial Condition
(Unaudited)
August 31, November 30,
In thousands, except share data 2001 2000
------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 3,839,124 $ 2,319,974
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations 11,449,568 3,773,232
Securities purchased under agreements to resell 34,301,146 35,499,232
Receivable for securities provided as collateral 234,879 587,540
Securities borrowed 52,044,772 61,759,831
Receivables:
Customers 17,533,384 17,315,232
Brokers, dealers and others 832,857 790,051
Interest and dividends 329,598 612,140
Financial instruments owned, at fair value 47,150,425 45,172,665
Property, equipment and leasehold improvements, net of accumulated
depreciation and amortization 559,024 542,613
Other assets 2,830,531 2,793,963
----------------------------------------
Total Assets $ 171,105,308 $ 171,166,473
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 11,127,079 $ 14,574,854
Securities sold under agreements to repurchase 45,343,331 54,461,463
Obligation to return securities received as collateral 1,122,329 2,534,871
Payables:
Customers 54,072,678 46,785,311
Brokers, dealers and others 7,963,911 4,450,285
Interest and dividends 559,814 842,749
Financial instruments sold, but not yet purchased, at fair value 20,108,053 19,005,776
Accrued employee compensation and benefits 1,334,651 1,479,417
Other liabilities and accrued expenses 817,493 781,571
----------------------------------------
142,449,339 144,916,297
----------------------------------------
Commitments and contingencies (Note 3)
Long-term borrowings 22,745,075 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 and 200,000,000 shares
authorized as of August 31, 2001 and November 30, 2000, respectively;
184,805,848 shares issued as of August 31, 2001 and November 30, 2000 184,806 184,806
Paid-in capital 2,589,425 2,583,638
Retained earnings 2,987,350 2,600,149
Employee stock compensation plans 1,843,263 1,916,708
Unearned compensation (210,659) (218,791)
Treasury stock, at cost:
Adjustable Rate Cumulative Preferred Stock Series A:
2,520,750 shares as of August 31, 2001 and November 30, 2000 (103,421) (103,421)
Common stock: 90,675,936 and 75,823,544 shares as of August 31,
2001 and November 30, 2000, respectively (2,942,370) (2,108,801)
----------------------------------------
Total Stockholders' Equity 5,148,394 5,654,288
----------------------------------------
Total Liabilities and Stockholders' Equity $ 171,105,308 $ 171,166,473
========================================
See Notes to Consolidated Financial Statements.
3
THE BEAR STEARNS COMPANIES INC.
Consolidated Statements of
Income
(UNAUDITED)
Three Months Ended Nine Months Ended
---------------------------------------------------------------------
August 31, August 25, August 31, August 25,
In thousands, except share and per share data 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
REVENUES
Commissions $ 266,958 $ 262,042 $ 840,126 $ 894,143
Principal transactions 551,156 521,086 1,863,296 1,666,513
Investment banking 212,015 236,897 531,729 780,945
Interest and dividends 1,233,861 1,353,628 3,536,204 4,138,265
Other income 37,815 35,236 116,008 104,632
---------------------------------------------------------------------
Total revenues 2,301,805 2,408,889 6,887,363 7,584,498
Interest expense 1,097,047 1,137,411 3,100,160 3,485,648
---------------------------------------------------------------------
Revenues, net of interest expense 1,204,758 1,271,478 3,787,203 4,098,850
---------------------------------------------------------------------
NON-INTEREST EXPENSES
Employee compensation and benefits 635,034 657,347 2,005,800 2,069,523
Floor brokerage, exchange and clearance fees 41,773 38,120 118,438 117,790
Communications and technology 112,806 105,132 341,344 327,535
Occupancy 40,483 33,064 109,033 99,837
Advertising and market development 33,442 32,531 100,979 91,779
Professional fees 47,446 47,070 132,727 120,592
Other expenses 89,088 88,631 254,403 382,589
---------------------------------------------------------------------
Total non-interest expenses 1,000,072 1,001,895 3,062,724 3,209,645
---------------------------------------------------------------------
Income before provision for income taxes and cumulative
effect of change in accounting principle 204,686 269,583 724,479 889,205
Provision for income taxes 70,114 88,147 254,460 311,211
---------------------------------------------------------------------
Income before cumulative effect of change in accounting
principle 134,572 181,436 470,019 577,994
Cumulative effect of change in accounting principle,
net of tax - - (6,273) -
---------------------------------------------------------------------
Net income $ 134,572 $ 181,436 $ 463,746 $ 577,994
=====================================================================
Net income applicable to common shares $ 124,794 $ 171,658 $ 434,411 $ 548,659
=====================================================================
Basic earnings per share $ 1.00 $ 1.33 $ 3.34 $ 4.00
=====================================================================
Diluted earnings per share $ 0.95 $ 1.32 $ 3.20 $ 4.00
=====================================================================
Weighted average number of common shares outstanding:
Basic 140,331,572 148,816,237 144,767,767 152,967,377
=====================================================================
Diluted 149,056,301 149,242,192 154,121,483 153,169,316
=====================================================================
Cash dividends declared per common share $ 0.15 $ 0.15 $ 0.45 $ 0.40
=====================================================================
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)
Nine Months Ended
--------------------------------
August 31, August 25,
In thousands 2001 2000
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 463,746 $ 577,994
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization 153,441 112,978
Deferred income taxes (101,251) (165,837)
Other 113,866 (1,153)
(Increases) decreases in operating assets:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations (7,676,336) 34,173
Securities purchased under agreements to resell 1,198,086 (313,165)
Securities borrowed 9,715,059 (2,953,021)
Receivables:
Customers (218,152) (4,236,509)
Brokers, dealers and others (42,806) (239,135)
Interest and dividends 282,542 (53,331)
Financial instruments owned (2,756,441) (5,257,619)
Other assets 158,352 (985,546)
(Decreases) increases in operating liabilities:
Securities sold under agreements to repurchase (9,118,132) 8,905,278
Payables:
Customers 7,287,367 (3,280,496)
Brokers, dealers and others 3,517,475 (1,455,354)
Interest and dividends (282,935) 120,610
Financial instruments sold, but not yet purchased 1,102,277 768,982
Accrued employee compensation and benefits (286,904) 717,508
Other liabilities and accrued expenses 35,921 139,539
--------------------------------
Cash provided by (used in) operating activities 3,545,175 (7,564,104)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments) proceeds from short-term borrowings (2,731,350) 4,781,838
Net proceeds from issuance of long-term borrowings 5,274,042 7,444,453
Net proceeds from issuance of subsidiary securities 254,231 -
Tax benefit of common stock distributions 5,866 12,285
Payments for:
Retirement of long-term borrowings (3,644,968) (4,036,861)
Treasury stock purchases (880,045) (555,867)
Cash dividends paid (76,545) (73,562)
--------------------------------
Cash (used in) provided by financing activities (1,798,769) 7,572,286
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (169,852) (139,894)
Purchases of other assets (74,407) (142,012)
Proceeds from sale of other assets 17,003 53,994
--------------------------------
Cash used in investing activities (227,256) (227,912)
--------------------------------
Net increase (decrease) in cash and cash equivalents 1,519,150 (219,730)
Cash and cash equivalents, beginning of year 2,319,974 1,570,483
--------------------------------
Cash and cash equivalents, end of period $ 3,839,124 $ 1,350,753
================================
Note: Certain reclassifications have been made to prior period amounts to
conform to the current period's presentation.
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 and related information was
derived from the audited financial statements. The Consolidated Statement of
Financial Condition as of August 31, 2001, the Consolidated Statements of Income
for the three months and nine months ended August 31, 2001 and August 25, 2000
and the Consolidated Statements of Cash Flows for the nine months ended August
31, 2001 and August 25, 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. In accordance with
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. 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.
Certain prior period amounts have been reclassified to conform to the current
period's presentation.
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:
August 31, November 30,
In thousands 2001 2000
------------------------------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS OWNED:
US government and agency $ 10,192,058 $ 9,180,638
Other sovereign governments 3,125,961 5,137,115
Corporate equity and convertible debt 6,709,832 8,663,306
Corporate debt 6,628,332 5,511,779
Derivative financial instruments 6,357,358 4,797,087
Mortgages and mortgage-backed securities 12,815,676 11,304,982
Other 1,321,208 577,758
----------------------------------------
$ 47,150,425 $ 45,172,665
========================================
FINANCIAL INSTRUMENTS SOLD, BUT NOT YET PURCHASED:
US government and agency $ 7,633,003 $ 4,121,060
Other sovereign governments 1,730,123 3,556,830
Corporate equity and convertible debt 4,243,889 5,222,967
Corporate debt 2,301,044 2,264,953
Derivative financial instruments 4,199,994 3,839,966
----------------------------------------
$ 20,108,053 $ 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 August 31, 2001, the Company was contingently liable for unsecured letters of
credit of $2.1 billion and letters of credit of $373.1 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, as amended, (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 $875.8 million which is net capital of BSSC in excess
of 6% of aggregate debit items arising from customer transactions, as defined.
At August 31, 2001, Bear Stearns' net capital, as defined, of $2.65 billion
exceeded the minimum requirement by $2.61 billion.
Bear, Stearns International Limited ("BSIL") and Bear Stearns International
Trading Limited ("BSIT"), London-based broker-dealer subsidiaries, 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 August 31, 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. Common
shares include the assumed distribution of shares of common stock vested under
various employee stock compensation and benefit plans. Diluted EPS includes the
determinants of Basic EPS and, in addition, gives effect to dilutive potential
common shares from employee stock compensation and benefit 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 nine months
ended August 31, 2001 and August 25, 2000. Income taxes paid totaled $53.8
million and $632.8 million for the nine months ended August 31, 2001 and August
25, 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 the extent of the mark to market on the derivatives designated as hedges. 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. The gains and losses associated with the
ineffective portion of the fair value hedges were included in principal
transactions on the Consolidated Statement of Income and were immaterial for the
three and nine months ended August 31, 2001.
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 nine months ended August 31, 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, at any point
in time, 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 August 31, 2001:
Derivative Credit Exposure
($ in millions)
Percentage
Exposure, of Exposure,
Net of Net of
Rating (1) Exposure Collateral(2) Collateral(3) Collateral
---------------------------------------------------------------------------------------------------
AAA $ 1,040 $ 359 $ 683 26%
AA 1,266 229 1,040 40%
A 950 294 703 27%
BBB 168 132 71 3%
BB and lower 332 656 107 4%
Non-rated 1 0 1 0%
(1) Internal counterparty credit ratings as assigned by the Company's Credit
Department, converted to rating agency equivalents.
(2) For lower-rated counterparties, the Company generally receives collateral in
excess of the current market value of derivatives contracts.
(3) In calculating exposure net of collateral, collateral amounts are
limited to the amount of current exposure for each counterparty. Excess
collateral is not applied to reduce exposure because such excess in one
counterparty portfolio cannot be applied to deficient collateral in a
different counterparty portfolio.
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 August 31, 2001:
In thousands Net Revenues Pre-Tax Income Segment Assets
------------------------------------------------------------------------------------------------------------
Capital Markets $ 874,327 $ 196,028 $ 120,161,289
Global Clearing Services 192,021 43,251 50,764,188
Wealth Management 128,027 9,750 3,944,649
Other (a) 10,383 (44,343) (3,764,818)
------------------------------------------------------------------------------------------------------------
Total $ 1,204,758 $ 204,686 $ 171,105,308
============================================================================================================
For the three months ended August 25, 2000:
In thousands Net Revenues Pre-Tax Income Segment Assets
------------------------------------------------------------------------------------------------------------
Capital Markets $ 811,742 $ 150,852 $ 116,250,869
Global Clearing Services 241,691 100,966 61,313,073
Wealth Management 160,075 31,026 3,012,818
Other (a) 57,970 (13,261) (5,724,242)
------------------------------------------------------------------------------------------------------------
Total $ 1,271,478 $ 269,583 $ 174,852,518
============================================================================================================
For the nine months ended August 31, 2001:
In thousands Net Revenues Pre-Tax Income Segment Assets
------------------------------------------------------------------------------------------------------------
Capital Markets $ 2,694,847 $ 660,701 $120,161,289
Global Clearing Services 623,304 188,243 50,764,188
Wealth Management 406,532 30,163 3,944,649
Other (a) 62,520 (154,628) (3,764,818)
------------------------------------------------------------------------------------------------------------
Total $ 3,787,203 $ 724,479 $171,105,308
============================================================================================================
For the nine months ended August 25, 2000:
In thousands Net Revenues Pre-Tax Income Segment Assets
------------------------------------------------------------------------------------------------------------
Capital Markets $ 2,643,414 $ 692,706 $116,250,869
Global Clearing Services 796,733 356,687 61,313,073
Wealth Management 524,730 107,216 3,012,818
Other (a) 133,973 (267,404) (5,724,242)
------------------------------------------------------------------------------------------------------------
Total $ 4,098,850 $ 889,205 $174,852,518
============================================================================================================
(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 Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan"), which
were $30.0 million and $45.7 million for the three months ended
August 31, 2001 and August 25, 2000, respectively, and $102.0 million
and $111.4 million for the nine months ended August 31, 2001 and
August 25, 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 being evaluated by the Company and is currently
not expected to have a material effect on the Company's financial condition or
results of operations.
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 estimates fair value generally 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 August 31, 2001, the Company securitized approximately $24 billion of
financial assets. Retained interests in such securitized assets were not
material at August 31, 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 August 31, 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 billion, of which approximately $138 billion was
sold, delivered or repledged.
The Company also pledges its own assets to collateralize financing agreements.
At August 31, 2001, the carrying value of securities included in "Financial
instruments owned" that had been loaned, pledged to lenders, or otherwise used,
was approximately $38 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 August 31, 2001, and
the related consolidated statements of income for the three months and nine
months ended August 31, 2001 and August 25, 2000 and cash flows for the nine
months ended August 31, 2001 and August 25, 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
-------------------------
DELOITTE & TOUCHE LLP
New York, New York
October 15, 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 general economic conditions,
securities market conditions, the level and volatility of interest rates, the
level and volatility of equity prices, competitive conditions, liquidity of
global markets, international and regional political conditions, regulatory
developments, monetary and fiscal policy, investor sentiment, availability and
cost of capital, technological changes and events and the size and timing of
transactions.
In addition, while the financial services industry has recently been
characterized by extremely volatile conditions, the terrorist attack against the
United States on September 11, 2001 has resulted in additional economic and
financial disruption, as the United States securities markets were closed for
several days. These events may continue to cause additional weakness and
uncertainty in the general economic and business environment. Certain risk
factors noted above may now be more likely to have a greater impact on the
Company's future results of operations.
Certain statements contained in this discussion are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements 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 Company's third quarter ended August 31, 2001 reflected an exceptionally
challenging environment with a generally weak U.S. economy marked by a decline
in capital spending, an increase in the unemployment rate and modest growth in
consumer spending. Fears of a recession persisted as rising unemployment and a
declining stock market continued to undermine consumer confidence and spending.
The Federal Reserve Board (the "Fed") responded by lowering the Federal Funds
rate twice for a total of 50 basis points during the fiscal quarter to 3.5%,
while maintaining a weakness bias and hinting at further rate cuts in the
future. These market conditions were in
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
contrast to the market conditions that existed during the comparable prior year
quarter which was characterized by strong economic growth and favorable economic
trends such as high levels of consumer confidence and spending and historically
low levels of unemployment.
Global and domestic equity markets continued to be weak with U.S. equity indices
declining during the quarter as the market responded to numerous economic
reports, profit warnings, corporate earnings reports and security analyst
downgrades. During the third quarter ended August 31, 2001, the Dow Jones
Industrial Average ("DJIA") and the Standard and Poor's 500 Index ("S&P 500")
declined 9.6% and 11.3%, respectively, to close at 9,950 and 1,134,
respectively. The technology-heavy Nasdaq Composite Index ("Nasdaq") declined to
1,805, a decline of 19.8% for the quarter.
Despite these difficult market conditions, certain of the Company's core
businesses produced solid financial results during the quarter. The fixed income
markets continued to be a major area of strength for the Company during the
quarter. The two interest rate cuts by the Fed during the quarter contributed to
strong year-over-year fixed income trading revenues, although down sequentially
from last quarter's record results. In addition, fixed income underwriting
revenues were strong, particularly in the municipal and high yield areas.
Continued weakness in global equities markets together with reduced volatility
and volumes adversely affected equity trading revenues and equity new issue
volumes as well as announced mergers and acquisitions activity. Further, private
client activity levels continue to be far below prior year levels as private
investors have largely retreated from the equity markets. Net interest revenues
during the quarter decreased principally due to lower interest bearing balances.
Results of Operations
---------------------
Three Months Ended August 31, 2001
Compared to Three Months Ended August 25, 2000
----------------------------------------------
Net income for the three months ended August 31, 2001 was $134.6 million, down
25.8% from $181.4 million for the comparable prior year quarter. Revenues, net
of interest expense for the 2001 quarter were $1.2 billion, down 5.2% from $1.3
billion in the 2000 quarter. The results reflect a decrease in net interest
profits and investment banking revenues, partially offset by an increase in
principal transactions revenues and commissions revenues. Challenging economic
conditions and less favorable global equity markets led to reduced levels of new
issue volume and mergers and acquisitions activity. Further, continued weakness
in the U.S. equity markets resulted in reduced revenue levels from the Company's
equity market making and trading activities. Declines in customer margin
balances from professional and retail investors persisted throughout the
quarter, resulting in declines in average margin balances and reduced net
interest profits. These decreases were partially offset by strong fixed income
markets, particularly in the
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
mortgage-backed and asset-backed securities and high yield areas, which
benefited from the favorable interest rate environment. Earnings per diluted
share were $0.95 for the 2001 quarter, down 28.0% from $1.32 per share for the
2000 quarter.
Business Segments
-----------------
The remainder of Results of Operations, except the discussion of non-interest
expenses, is presented on a business segment basis. The Company's three business
segments: Capital Markets, Global Clearing Services and Wealth Management 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. Certain
reclassifications have been made to prior period amounts to conform to the
current period's presentation.
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 Capital Accumulation Plan
for Senior Managing Directors (the "CAP Plan").
Three Months Ended August 31, 2001
Compared to Three Months Ended August 25, 2000
----------------------------------------------
Capital Markets
---------------
Three Months Ended
------------------------------------------------------
August 31, August 25, % (Decrease)
In thousands 2001 2000 Increase
------------------------------------------------------------------------------------------------------------
Net revenues
Institutional Equities $ 244,741 $ 358,019 (31.6%)
Fixed Income 416,128 233,309 78.4%
Investment Banking 213,458 220,414 (3.2%)
------------------------------------------------------------------------------------------------------------
Total net revenues $ 874,327 $ 811,742 7.7%
============================================================================================================
Pre-tax income $ 196,028 $ 150,852 29.9%
============================================================================================================
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.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net revenues for Capital Markets were $874.3 million in the 2001 quarter, up
7.7% from $811.7 million in the comparable prior year quarter. Pre-tax income
for Capital Markets was $196.0 million in the 2001 quarter, up 29.9% from $150.9
million in the comparable prior year quarter. Fixed Income net revenues
increased to $416.1 million in the 2001 quarter or 78.4% from $233.3 million in
the comparable prior year quarter. The results were driven by strong
performances from the mortgage-backed and asset-backed securities and high yield
areas. The fixed income markets benefited from declining short-term interest
rates precipitated by two interest rate cuts by the Fed for a total of 50 basis
points during the 2001 quarter. Secondary trading volumes remained high during
the 2001 quarter reflecting increased investor activity. Revenues from the
distressed debt and municipal areas also increased reflecting favorable market
conditions and strong investor activity.
Institutional Equities net revenues in the 2001 quarter decreased 31.6% to
$244.7 million from $358.0 million in the 2000 quarter, primarily attributable
to decreases in the equity derivatives, over-the-counter market making,
arbitrage and specialist areas. The decrease in equity revenues resulted from
reduced volatility and lower NASDAQ(R) and NYSE trading volumes. The lack of
announced M&A activity provided fewer risk arbitrage opportunities and
consequently reduced revenue levels. In addition, the move to decimalization and
resulting spread compression placed pressure on NASDAQ(R) margins.
Investment Banking net revenues in the 2001 quarter decreased 3.2% to $213.5
million from $220.4 million in the comparable prior year quarter. Continued
weakness in the equity underwriting environment resulting from economic
uncertainty led to reduced levels of equity new issue volume and announced
mergers and acquisitions activity during the 2001 quarter. However, new issue
activity in the corporate bonds, high yield and municipal bond markets was
strong during the 2001 quarter reflecting the favorable interest rate
environment. Equity underwriting revenues for the 2001 quarter decreased 25.4%
to $35.0 million from $46.9 million in the comparable prior year quarter. Fixed
income underwriting revenues were $49.8 million in the 2001 quarter, a 44.3%
increase from $34.5 million in the comparable prior year quarter. Included in
investment banking net revenues are merchant banking revenues of $18.2 million
and $36.5 million for the 2001 quarter and the comparable prior year quarter,
respectively.
Global Clearing Services
------------------------
Three Months Ended
------------------------------------------------------
August 31, August 25,
In thousands 2001 2000 % Decrease
----------------------------------------------------------------------------------------------------------
Net revenues $ 192,021 $ 241,691 (20.6%)
Pre-tax income $ 43,251 $ 100,966 (57.2%)
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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net revenues for Global Clearing Services were $192.0 million in the 2001
quarter, down 20.6% from $241.7 million for the comparable prior year quarter.
Pre-tax income for Global Clearing Services was $43.3 million in the 2001
quarter, down 57.2% from $101.0 million for the 2000 quarter. Average daily
commissions in the 2001 quarter declined 12.3% when compared to the same period
in the prior year. Net interest revenues declined 28.4% to $101.7 million from
$142.1 million in the comparable prior year quarter. Customer margin debit and
customer short balances declined in the 2001 quarter as a result of difficult
equity market conditions and lower leverage levels being employed by prime
brokerage customers. Average customer margin debit balances were $38.3 billion
during the 2001 quarter compared to $56.4 billion during the comparable prior
year quarter. Margin debit balances totaled $34.6 billion at August 31, 2001
compared to $56.0 billion at August 25, 2000. Average customer shorts were $49.8
billion during the 2001 quarter compared to $59.8 billion during the 2000
quarter and totaled $53.0 billion at August 31, 2001, down from $60.0 billion at
August 25, 2000. Average free credit balances were $19.7 billion during the 2001
quarter compared to $14.8 billion during the 2000 quarter and totaled $20.3
billion at August 31, 2001, an increase from $13.0 billion at August 25, 2000.
Wealth Management
-----------------
Three Months Ended
-----------------------------------------------------
August 31, August 25,
In thousands 2001 2000 % Decrease
---------------------------------------------------------------------------------------------------------
Net revenues $ 128,027 $ 160,075 (20.0%)
Pre-tax income $ 9,750 $ 31,026 (68.6%)
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 $23.5 billion in assets under management at August
31, 2001, which reflected a 41.6% increase over $16.6 billion in assets under
management at August 25, 2000. Strong net inflows and performances from certain
of the funds' investments led to the growth in assets under management. Assets
from alternative investment products grew 93.3% to approximately $5.8 billion
under management at August 31, 2001 from $3.0 billion at August 25, 2000, while
assets from mutual funds increased 43.8% to $5.6 billion at August 31, 2001 from
$3.9 billion at August 25, 2000.
Net revenues for Wealth Management were $128.0 million in the 2001 quarter, down
20.0% from $160.1 million for the comparable prior year quarter. Pre-tax income
for Wealth Management was $9.8 million in the 2001 quarter, down 68.6% from
$31.0 million for the comparable prior year quarter. Private client service
revenues decreased 24.5% from the August 2000 quarter due to reduced commission
levels and a decline in net interest profits as private investors continued to
retreat from the equity markets. Asset Management revenues decreased slightly
due to lower levels of performance-based fees on alternative investment
products,
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
partially offset by increased management fees from mutual funds, hedge funds and
wrap accounts.
Non-Interest Expenses
---------------------
Employee compensation and benefits for the 2001 quarter decreased 3.4% to $635.0
million from $657.3 million for the comparable prior year quarter. Employee
compensation and benefits as a percentage of net revenues was 52.7% for the 2001
quarter versus 51.7% for the comparable prior year quarter. The generally weak
operating environment being experienced by many of the Company's business areas,
including investment banking, as well as the decline in net interest profit,
continue to adversely impact compensation as a percentage of net revenues during
the 2001 quarter. In addition, the expansion of the European capital markets'
platform has placed short-term pressure on the ratio of compensation to net
revenues.
Non-compensation expenses were $365.0 million for the 2001 quarter, an increase
of 5.9% from $344.5 million in the comparable prior year quarter. Expenses were
up primarily due to non-recurring costs for severance and accelerated
depreciation and 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. Expenses related to
the CAP Plan for the 2001 quarter, which were $30.0 million, down from $45.7
million in the 2000 quarter reflecting the lower level of earnings in the 2001
quarter as compared to the comparable prior year quarter.
The Company's effective tax rate increased to 34.3% in the 2001 quarter compared
to 32.7% for the comparable 2000 quarter.
Nine Months Ended August 31, 2001
Compared to Nine Months Ended August 25, 2000
---------------------------------------------
Net income for the nine months ended August 31, 2001, after the cumulative
effect of a change in accounting principle, was $463.7 million, down 19.8% from
$578.0 million for the comparable prior year period. Revenues, net of interest
expense for the 2001 period were $3.8 billion, down 7.6% from $4.1 billion in
the 2000 period. Earnings per diluted share were $3.20 for the 2001 period,
after the accounting change, down from $4.00 per diluted 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 $3.24 and net income was $470.0 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 reflect a decrease in investment banking, net
interest and commission revenues due to the industry-wide, broad-based weakness
in the equity markets, partially offset by an increase in principal transactions
revenues.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Markets
---------------
Nine Months Ended
--------------------------------------------------------
August 31, August 25, % (Decrease)
In thousands 2001 2000 Increase
------------------------------------------------------------------------------------------------------------
Net revenues
Institutional Equities $ 934,262 $ 1,155,433 (19.1%)
Fixed Income 1,270,803 751,606 69.1%
Investment Banking 489,782 736,375 (33.5%)
------------------------------------------------------------------------------------------------------------
Total net revenues $ 2,694,847 $ 2,643,414 1.9%
============================================================================================================
Pre-tax income $ 660,701 $ 692,706 (4.6%)
============================================================================================================
Net revenues for Capital Markets were $2.7 billion in the 2001 period, up 1.9%
from $2.6 billion in the comparable prior year period. Pre-tax income for
Capital Markets was $660.7 million in the 2001 period, down 4.6% from $692.7
million in the 2000 period. Fixed Income net revenues increased to a record $1.3
billion in the 2001 period or 69.1% from $751.6 million in the comparable prior
year period due to the favorable environment created by the seven interest rate
reductions for a total of 300 basis points during the 2001 period by the Fed.
Fixed income principal transactions revenues during the 2001 period were driven
by superior results from the Company's mortgage-backed and asset-backed
securities area as well as strong results from the high yield, municipal
securities and corporate bonds areas.
Institutional Equities net revenues in the 2001 period decreased 19.1% to $934.3
million from $1.2 billion in the 2000 period, primarily attributable to
decreases in the equity derivatives, international equity sales and trading,
over-the-counter market making and arbitrage areas.
Investment Banking net revenues in the 2001 period decreased 33.5% to $489.8
million from $736.4 million in the comparable prior year period. Unfavorable
global equity markets led to declining equity underwriting and mergers and
acquisitions activity, partially offset by an increase in fixed income
underwriting revenues, particularly in the high yield and municipal bond market
areas during the 2001 period. Equity underwriting revenues for the 2001 period
decreased 60.8% to $93.3 million from $238.1 million in the comparable prior
year period. Fixed income underwriting revenues were $121.0 million in the 2001
period, a 20.5% increase from $100.4 million in the comparable prior year
period. Included in investment banking net revenues are merchant banking
revenues of $64.9 million and $82.8 million for the 2001 period and the
comparable prior year period, respectively.
Global Clearing Services
------------------------
Nine Months Ended
------------------------------------------------------
August 31, August 25,
In thousands 2001 2000 % Decrease
----------------------------------------------------------------------------------------------------------
Net revenues $ 623,304 $ 796,733 (21.8%)
Pre-tax income $ 188,243 $ 356,687 (47.2%)
Net revenues for Global Clearing Services were $623.3 million in the 2001
period, down 21.8% from $796.7 million for the comparable prior year period.
Pre-tax income for Global Clearing
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Services was $188.2 million in the 2001 period, down 47.2% from $356.7 million
for the 2000 period. The decrease in net revenues in the 2001 period was
primarily due to a decrease in customer margin debit as average customer margin
balances were down sharply from the levels of August 2000 and customer short
balances resulting in reduced net interest profits compared to the 2000 period.
The decline in margin debit and customer short balances was a result of
deteriorating equity market conditions and lower overall leverage levels being
employed by retail and prime brokerage customers. Average customer margin debit
balances were $39.3 billion during the 2001 period compared to $57.6 billion
during the comparable prior year period. Margin debit balances totaled $34.6
billion at August 31, 2001 compared to $56.0 billion at August 25, 2000. Average
customer shorts were $51.6 billion during the 2001 period compared to $62.2
billion during the 2000 period and totaled $53.0 billion at August 31, 2001,
down from $60.0 billion at August 25, 2000. Average free credit balances were
$18.7 billion during the 2001 period compared to $15.0 billion during the 2000
period and totaled $20.3 billion at August 31, 2001, an increase from $13.0
billion at August 25, 2000.
Wealth Management
-----------------
Nine Months Ended
-----------------------------------------------------
August 31, August 25,
In thousands 2001 2000 % Decrease
---------------------------------------------------------------------------------------------------------
Net revenues $ 406,532 $ 524,730 (22.5%)
Pre-tax income $ 30,163 $ 107,216 (71.9%)
Net revenues for Wealth Management were $406.5 million in the 2001 period, down
22.5% from $524.7 million for the comparable prior year period. Pre-tax income
for Wealth Management was $30.2 million in the 2001 period, down 71.9% from
$107.2 million for the 2000 period. Private client service revenues in the 2001
period declined from the 2000 period as retail investors have reduced activity
levels significantly as a result of uncertain market conditions and the decline
in the equity markets. Asset management revenues increased, reflecting higher
levels of management fees on the Company's mutual fund and alternative
investment products, partially offset by reduced performance fees from
alternative investment products.
Non-Interest Expenses
---------------------
Employee compensation and benefits for the 2001 period decreased 3.1% to $2.0
billion from $2.1 billion for the comparable prior year period. Employee
compensation and benefits, as a percentage of net revenues was 53.0% in the 2001
period versus 50.5% in the comparable prior year period principally due to lower
levels of net interest and investment banking revenue experienced in the 2001
period. In addition, the expansion of the European capital markets platform has
placed additional short-term pressure on the ratio of compensation to net
revenues.
Non-compensation expenses were $1.06 billion for the 2001 period, a decrease of
7.3% from $1.14 billion from the comparable prior year period. However,
excluding the litigation charge included in the 2000 period, these expenses
increased 6.7% primarily due to non-recurring costs for severance and
accelerated depreciation and amortization costs associated with the write-off of
technology equipment and leasehold improvements in connection with the Company's
pending
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
move to new corporate headquarters at 383 Madison Avenue, partially offset by a
decrease in the CAP Plan expense. Expenses related to the CAP Plan for the 2001
period were $102.0 million, down from $111.4 million in the comparable prior
year period due to a lower level of earnings.
The Company's effective tax rate of 35.0% was the same in the 2001 period and
the comparable prior year period.
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 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 August 31, 2001 decreased to $171.1 billion from
$171.2 billion at November 30, 2000. The decrease was primarily attributable to
a decrease in securities borrowed, partially offset by an increase in cash and
securities deposited with clearing organizations or segregated in compliance
with federal regulations and financial instruments owned, at fair value. The
Company's total capital base, which consists of long-term debt, preferred equity
issued by subsidiaries and total stockholders' equity, increased to $28.7
billion at August 31, 2001 from $26.3 billion at November 30, 2000 primarily due
to an increase in long-term borrowings.
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.
25
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 August 31, 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 nature of its securities
borrowed position renders net adjusted leverage as the most relevant measure.
August 31, November 30,
In billions, except ratios 2001 2000
-----------------------------------------------------------------------------
Total Assets $ 171.1 $ 171.2
Adjusted Assets (1) $ 136.6 $ 135.1
Net Adjusted Assets (2) $ 84.5 $ 73.3
Leverage Ratio (3) 28.9 27.8
Adjusted Leverage (4) 23.1 21.9
Net Adjusted Leverage (5) 14.3 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 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. The Company seeks to limit its reliance
on unsecured borrowings by maintaining an adequate total capital base and
extensive use of secured funding.
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 nine months ended August 31, 2001, the Company received proceeds of
approximately $5.3 billion from the issuance of long-term debt, which was offset
by payments approximating $3.6 billion related to retirements of long-term debt.
The amount of long-term debt, as well as total capital, that the Company
maintains is a function of its asset composition. 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
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 August 31, 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 2002 with all repos outstanding at that date
payable no later than August 2003. There were no borrowings outstanding under
the repo facility at August 31, 2001.
The Company has in place a $500 million committed revolving credit facility,
which permits borrowing on a secured basis against Japanese securities 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 August 31, 2001.
27
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 $19.4 billion and $16.7 billion had remaining maturities
beyond one year at August 31, 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 August 31, 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 August 31, 2001, the Company purchased, under the current
repurchase program authorization, a total of 8,753,914 shares of Common Stock
through open market and private transactions at a cost of approximately $505.9
million in connection with various employee compensation plans, including the
CAP Plan. Included in these totals are 5,222,600 shares purchased pursuant to an
agreement which is designed to adjust the cost of such shares to approximate the
average price during the fourth quarter. 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 increased $1.5 billion to $3.8 billion at August 31,
2001 from $2.3 billion at November 30, 2000. Cash provided by operating
activities was $3.5 billion, primarily attributable to a decrease in securities
borrowed, and increases in payables to customers and brokers, dealers, and
others, partially offset by an increase in cash and securities deposited with
clearing organizations or segregated in compliance with federal regulations, and
a decrease in securities
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
sold under agreements to repurchase. Cash used in financing activities of $1.8
billion reflected net payments for short-term borrowings and the retirement of
long-term borrowings, partially offset by net proceeds from the issuance of
long-term borrowings. Cash used in investing activities of $0.2 billion
reflected purchases of property, equipment and leasehold improvements, as well
as a net increase in 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 August 31,
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 August 31, 2001, the Company held investments in 22
leveraged transactions with an aggregate carrying value of approximately $199.3
million. In addition, the Company has various direct and indirect principal
investments in, as well as commitments to participate in, private investment
funds 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 August
31, 2001 and November 30, 2000, the Company held high yield positions
approximating $2.6 billion and $2.3 billion, respectively, in long inventory,
and $0.5 billion and $0.4 billion, respectively, in short inventory.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 August 31, 2001 and November 30, 2000, the
amount outstanding to highly leveraged borrowers totaled $565.8 million and
$336.9 million, respectively. Additionally, lending commitments to
non-investment-grade borrowers totaled approximately $0.6 billion and $1.0
billion at August 31, 2001 and November 30, 2000, respectively. The Company also
has exposure to non-investment-grade counterparties related to its
trading-related derivative activities; such amounts at August 31, 2001 and
November 30, 2000 were $108.0 million and $49.0 million, net of collateral,
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 changes in 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.
30
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 August 31, 2001, November 30, 2000, and August
25, 2000.
August 31, November 30, August 25,
In millions 2001 2000 2000
----------------------------------------------------------------------------------------
MARKET RISK
Interest rate $ 15.9 $ 11.7 $ 9.0
Currency 0.9 1.4 1.1
Equity 5.6 10.7 10.1
Diversification benefit (5.5) (7.9) (6.6)
----------------------------------------------------------------------------------------
Total $ 16.9 $ 15.9 $ 13.6
========================================================================================
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 $ 17.8 $ 9.2 $ 13.9
Currency 1.1 0.9 1.0
Equity 6.6 5.6 6.1
Aggregate Value-at-Risk 18.8 11.3 15.3
-------------------------------------------------------------------------
The following charts represent a summary of the daily revenues generated by the
Company's trading departments and reflect a combination of trading revenues, net
interest revenues for certain trading areas and other revenues for the quarter
ended August 31, 2001 and August 25, 2000. These charts represent a historical
summary of the results generated by the Company's trading departments as opposed
to the probability approach used by the VaR model. The average daily trading
profit was $8.1 million and $8.3 million for the quarters ended August 31, 2001
and August 25, 2000, respectively. During the quarters ended August 31, 2001 and
August 25, 2000, there were no trading days in which daily trading losses
exceeded the reported period end VaR amounts. The frequency distribution of the
Company's daily trading profit (loss) reflects the Company's historical ability
to manage its exposure to market risk and the diversified nature of its trading
activities.
31
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
-------------------------------------------------------------------------------
DAILY TRADING PROFIT FREQUENCY DISTRIBUTION
-------------------------------------------------------------------------------
[Vertical bar graphs of Frequency (y-axis) versus Daily Trading Profit (Loss)
(x-axis) representing the following information appear here in paper format]
Three Months Ended August 31, 2001
----------------------------------
Daily Trading Frequency
Profit (Loss) (Number of
($ in millions) Trading Days)
(7) 1
(1) 2
1 3
2 3
3 2
4 5
5 9
6 4
7 4
8 7
9 7
10 7
11 2
12 2
13 3
15 1
18 1
20 2
21 1
28 1
34 1
[Vertical bar graphs of Frequency (y-axis) versus Daily Trading Profit (Loss)
(x-axis) representing the following information appear here in paper format]
Three Months Ended August 25, 2000
----------------------------------
Daily Trading Frequency
Profit (Loss) (Number of
($ in millions) Trading Days)
(3) 1
(1) 1
0 2
2 3
3 2
4 5
5 6
6 10
7 3
8 5
9 6
10 3
11 4
12 2
13 1
14 2
15 1
16 1
17 1
18 1
19 1
30 1
35 1
32
Part II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
McKesson HBOC, Inc. Litigations
-------------------------------
As previously reported in the Company's Fiscal Year 2000 Form 10-K and Report on
Form 10-Q for the fiscal quarter ended May 25, 2001 ("Second Fiscal Quarter 2001
Form 10-Q"), 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").
Pacha, et al v. McKesson HBOC, Inc., et al.
-------------------------------------------
On July 27, 2001, an action was commenced in the United States District Court
for the Northern District of California by individuals who owned McKesson common
stock that was converted into common stock of McKesson HBOC in connection with
the McKesson/HBOC merger. Named as defendants are McKesson HBOC, certain present
or former directors and/or officers of McKesson HBOC, McKesson and/or HBOC, Bear
Stearns and Arthur Andersen LLP. The complaint alleges, among other things, that
Bear Stearns violated Section 14(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") and aided and abetted a breach of fiduciary duty in connection
with allegedly false and misleading disclosure contained in a joint proxy
statement/prospectus that was issued with respect to the McKesson/HBOC merger.
Compensatory and punitive damages in an unspecified amount are sought.
The Company 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
--------------------------
As previously reported in the Company's Second Fiscal Quarter 2001 Form 10-Q,
The Company, along with many other financial services firms, has been named as a
defendant in many putative class actions filed during the last several months in
the United States District Court for the Southern District of New York involving
the allocation of securities in certain initial public offerings ("IPOs"). The
complaints in these purported class actions allege, among other things, that
between 1998 and 2000: (i) the underwriters of certain "hot" IPOs of technology
and internet-related companies obtained excessive compensation by allocating
shares in these IPOs to preferred customers who, in return, purportedly agreed
to pay additional compensation to the underwriters, and the underwriters failed
to disclose this additional compensation; and/or (ii) the underwriters'
customers, in return for a favorable allocation of these securities, agreed to
purchase additional shares in the aftermarket at pre-arranged prices or to pay
additional compensation in connection with other transactions. The complaints
allege, among other things, that the underwriters violated Sections 11 and
12(a)(2) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder. Although certain of the complaints also
asserted antitrust claims, such claims against Bear Stearns have been
voluntarily dismissed without prejudice. Compensatory and statutory damages in
unspecified amounts are sought.
The Company denies all allegations of wrongdoing asserted against it in these
litigations, and believes that it has substantial defenses to these claims.
33
LEGAL PROCEEDINGS
The Company also is involved from time to time in investigations and proceedings
by governmental agencies and self-regulatory organizations.
34
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3)(a)(1) Restated Certificate of Incorporation (incorporated by
reference to Exhibit (4)(a)(1) to the Registration
Statement on Form S-3 (File No. 333-57083)).
(3)(a)(2) Certificate of Amendment of Restated Certificate of
Incorporation, filed April 2, 2001 (incorporated by
reference to Exhibit 4(a)(2) to Post-Effective Amendment
No. 1 to the Registration Statement on Form S-8 (File No.
333-92357)).
(3)(a)(3) Certificate of Stock Designation relating to the
Company's Adjustable Rate Cumulative Preferred Stock,
Series A (incorporated by reference to Exhibit
4(a)(6) to the Registration Statement on Form S-8
(File No. 33-49979)).
(3)(a)(4) Certificate of Stock Designation relating to the
Company's Cumulative Preferred Stock, Series E
(incorporated by reference to Exhibit 1.4 to the
Registration Statement on Form 8-A filed on January 14,
1998).
(3)(a)(5) Certificate of Stock Designation relating to the
Company's Cumulative Preferred Stock, Series F
(incorporated by reference to Exhibit 1.4 to the
Registration Statement on Form 8-A filed on
April 20, 1998).
(3)(a)(6) Certificate of Stock Designation relating to the
Company's Cumulative Preferred Stock, Series G
(incorporated by reference to Exhibit 1.4 to the
Registration Statement on Form 8-A filed on June 18,
1998).
(3)(b) By-laws, Amended and Restated as of June 25, 2001.
(10)(a)(3) Stock Award Plan, amended and restated as of March 29,
2001 (incorporated by reference to Exhibit 4(c) to
Post-Effective Amendment No. 1 to the Registration
Statement on Form S-8 (File No. 333-92357)).
(10)(a)(7) Non-Employee Directors' Stock Option Plan (incorporated
by reference to Exhibit 4(c) to the Registration Statement
on Form S-8 (File No. 333-63002)).
(11) Computation of Per Share Earnings
(12) Computation of Ratio of Earnings to Fixed Charges
35
EXHIBITS AND REPORTS ON FORM 8-K
(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 June 26, 2001 and filed on June 27, 2001,
announcing that James E. Cayne has been named to the additional post of Chairman
of the Board of Directors and the appointment of each of Alan D. Schwartz and
Warren J. Spector as President and Co-Chief Operating Officer.
(ii) A Current Report on Form 8-K dated June 20, 2001 and filed on June 26,
2001, pertaining to the Company's results of operations for the three months
ended May 25, 2001.
36
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: October 15, 2001 By: /s/ Marshall J Levinson
------------------------
Marshall J Levinson
Controller
(Principal Accounting Officer)
37
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
(3)(a)(1) Restated Certificate of Incorporation (incorporated
by reference to Exhibit (4)(a)(1) to the Registration
Statement on Form S-3 (File No. 333-57083)).
(3)(a)(2) Certificate of Amendment of Restated Certificate of
Incorporation, filed April 2, 2001 (incorporated by
reference to Exhibit 4(a)(2) to Post-Effective
Amendment No. 1 to the Registration Statement on
Form S-8 (File No. 333-92357)).
(3)(a)(3) Certificate of Stock Designation relating to the
Company's Adjustable Rate Cumulative Preferred Stock,
Series A (incorporated by reference to Exhibit
4(a)(6) to the Registration Statement on Form S-8
(File No. 33-49979)).
(3)(a)(4) Certificate of Stock Designation relating to the
Company's Cumulative Preferred Stock, Series E
(incorporated by reference to Exhibit 1.4 to the
Registration Statement on Form 8-A filed on
January 14, 1998).
(3)(a)(5) Certificate of Stock Designation relating to the
Company's Cumulative Preferred Stock, Series F
(incorporated by reference to Exhibit 1.4 to the
Registration Statement on Form 8-A filed on
April 20, 1998).
3)(a)(6) Certificate of Stock Designation relating to the
Company's Cumulative Preferred Stock, Series G
(incorporated by reference to Exhibit 1.4 to the
Registration Statement on Form 8-A filed on
June 18, 1998).
(3)(b) By-laws, Amended and Restated as of June 25, 2001. 39
(10)(a)(3) Stock Award Plan, amended and restated as of
March 29, 2001 (incorporated by reference to Exhibit
4(c) to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-8 (File No.
333-92357)).
(10)(a)(7) Non-Employee Directors' Stock Option Plan
(incorporated by reference to Exhibit 4(c) to the
Registration Statement on Form S-8 (File No.
333-63002)).
(11) Computation of Per Share Earnings 67
(12) Computation of Ratio of Earnings to Fixed Charges 68
38