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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) For the fiscal year ended June 30, 1997.
Or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transition period from
___________ to ___________
COMMISSION FILE NUMBER: 1-8989
THE BEAR STEARNS COMPANIES INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3286161
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
245 PARK AVENUE, NEW YORK, NEW YORK 10167
(212) 272-2000
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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COMMON STOCK, PAR VALUE $1.00 PER NEW YORK STOCK EXCHANGE
SHARE
ADJUSTABLE RATE CUMULATIVE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, SERIES A
DEPOSITARY SHARES, EACH REPRESENTING A NEW YORK STOCK EXCHANGE
ONE-EIGHTH INTEREST IN A SHARE OF
7.88% CUMULATIVE PREFERRED STOCK,
SERIES B
DEPOSITARY SHARES, EACH REPRESENTING A NEW YORK STOCK EXCHANGE
ONE-EIGHTH INTEREST IN A SHARE OF
7.60% CUMULATIVE PREFERRED STOCK,
SERIES C
DEPOSITARY SHARES, EACH REPRESENTING NEW YORK STOCK EXCHANGE
A ONE-EIGHTH INTEREST IN A SHARE OF
8% CUMULATIVE PREFERRED STOCK,
SERIES D (NOT PRESENTLY OUTSTANDING)
9-1/8% SENIOR NOTES DUE 1998 NEW YORK STOCK EXCHANGE
9-3/8% SENIOR NOTES DUE 2001 NEW YORK STOCK EXCHANGE
CUSTOMIZED UPSIDE BASKET SECURITIES AMERICAN STOCK EXCHANGE
DUE 1998
S&P 500 LINKED NOTES DUE 2003 CHICAGO BOARD OPTIONS EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
At September 2, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $4,450,610,484. For purposes
of this information, the outstanding shares of Common Stock owned by directors
and executive officers of the registrant were deemed to be shares of Common
Stock held by affiliates.
On September 2, 1997, the registrant had outstanding 117,703,804 shares of
Common Stock, par value $1.00 per share, which is the registrant's only class of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Parts II and IV of this Form 10-K incorporate information by reference from
certain portions of the registrant's 1997 Annual Report to Stockholders. The
information required to be furnished pursuant to Part III of this Form 10-K will
be set forth in, and incorporated by reference from, the registrant's definitive
proxy statement for the annual meeting of stockholders to be held October 27,
1997, which definitive proxy statement will be filed by the registrant with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year ended June 30, 1997.
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PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
The Bear Stearns Companies Inc. (the "Company") was incorporated under
the laws of the State of Delaware on August 21, 1985. The Company is a holding
company that through its subsidiaries, principally Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear, Stearns Securities Corp. ("BSSC"), is a leading
United States investment banking, securities trading and brokerage firm serving
corporations, governments, institutional and individual investors worldwide.
BSSC, a wholly owned subsidiary of Bear Stearns, provides professional and
correspondent clearing services, in addition to clearing and settling the
Company's proprietary and customer transactions. The Company succeeded on
October 29, 1985, to the business of Bear, Stearns & Co., a New York limited
partnership (the "Partnership"). As used in this report, the "Company" refers
(unless the context requires otherwise) to The Bear Stearns Companies Inc., its
subsidiaries and the prior business activities of the Partnership.
(b) Financial Information About Industry Segments
The Company's business activities are highly integrated and constitute a
single industry segment. During each of the three successive fiscal years ending
June 30, 1997, classes of similar products or services outside this industry
segment represented less than 10% of consolidated revenues, operating-profit,
and assets. Financial information regarding the Company's foreign operations for
each of these fiscal years is set forth under the Notes to the Consolidated
Financial Statements in Footnote 13, entitled "Segment and Geographic Area
Data," in the registrant's 1997 Annual Report to Stockholders (the "Annual
Report"), which is incorporated herein by reference to Exhibit No. (13) of this
report.
(c) Narrative Description of Business
The Company is a holding company which through its principal
subsidiaries, Bear Stearns and BSSC, is a leading United States investment
banking, securities trading and brokerage firm serving corporations,
governments, institutional and individual investors worldwide. The business of
the Company includes: market-making and trading in corporate, United States
government, government-agency, mortgage-related, asset-backed and municipal
securities; trading in options, futures, foreign currencies, interest-rate swaps
and other derivative products; securities and commodities arbitrage; securities,
options and commodities brokerage; underwriting and distributing securities;
providing securities clearance services; financing customer activities;
securities lending; arranging for the private placement of securities; assisting
in mergers, acquisitions, restructurings and leveraged transactions; providing
other financial advisory services; making principal investments in leveraged
acquisitions; acting as specialist on the floor of the New York Stock Exchange,
Inc. ("NYSE"); providing fiduciary and other services, such as real estate
brokerage, investment management and investment advisory; and, securities
research.
The Company's business is conducted from its principal offices in New
York City; from domestic regional offices in Atlanta, Boston, Chicago, Dallas,
Los Angeles and San Francisco; from representative offices in Beijing, Geneva,
Hong Kong, Lugano and Shanghai; through international subsidiaries in Buenos
Aires, Dublin, Hong Kong, London, Paris, Sao Paulo, Singapore and Tokyo; and
through joint ventures with other firms in Belgium, Madrid, Paris and the
Philippines. The Company's foreign offices provide services and engage in
investment activities involving foreign clients and international transactions.
The Company provides trust-company services through its subsidiary, Custodial
Trust Company ("CTC"), located in Princeton, New Jersey.
Bear Stearns and BSSC are broker dealers registered with the Securities
and Exchange Commission (the "SEC"). They are also members of the NYSE, all
other principal United States securities and commodities exchanges, the National
Association of Securities Dealers, Inc. ("NASD") and the National Futures
Association ("NFA"). Bear Stearns is a "primary dealer" in United States
government securities, as designated by the Federal Reserve Bank of New York.
As of June 30, 1997, the Company had 8,309 employees.
SECURITIES TRADING ACTIVITIES
General. The Company makes inter-dealer markets and trades on a
principal basis in a wide range of instruments including: corporate debt and
equity securities; United States and foreign-government securities;
government-agency securities; mortgages and mortgage-backed securities; other
asset-backed securities; municipal and other tax-exempt securities; and
interest-rate swaps and other derivative products. Bear Stearns is one of the
largest dealers in the United States in fixed income securities, including
United States government and agency securities, mortgage-backed securities, and
corporate and municipal securities. Inventories of fixed income, listed-equity,
and over-the-counter equity securities are carried to facilitate sales to
customers and other dealers.
United States Government and Agency Obligations. The Company is
recognized by the Federal Reserve Bank of New York as a primary dealer in United
States Government, government-guaranteed and agency obligations, and similar
instruments. The Company participates in the auction of, and maintains
proprietary positions in, United States Treasury bills, notes, bonds, and
stripped-coupon securities. The Company also participates as a selling group
member and/or underwriter in the distribution of various United States
government-agency and sponsored-corporation securities and maintains proprietary
positions in such securities. In connection with these activities, the Company
enters into transactions in options, futures and forward contracts to hedge its
proprietary positions. As a primary dealer, Bear Stearns furnishes weekly
reports of its inventory positions and market transactions in United States
government securities to the Federal Reserve Bank of New York. Bear Stearns also
buys and sells government securities directly with the Federal Reserve Bank of
New York as part of the Bank's open-market activities. The Company's daily
trading inventory in United States government, government-guaranteed and agency
obligations is mainly financed through the use of repurchase agreements. In
addition, the Company serves as an intermediary between borrowers and lenders of
short-term funds, mainly via repurchase and reverse-repurchase agreements.
Corporate Fixed Income Securities. The Company acts as a dealer in
sovereign and corporate fixed income securities and preferred stocks in New
York, London, Hong Kong and Tokyo. It buys and sells these securities for its
own account in principal transactions with institutional and individual
customers, as well as other dealers. The Company conducts trading in the full
spectrum of dollar and non-dollar debt securities. The Company offers hedging
and arbitrage services to domestic and foreign institutional and individual
customers utilizing financial futures and other instruments. Moreover, the
Company offers quantitative, strategic, and research services relating to fixed
income securities to its domestic and international clients. The Company
participates in the trading and sales of high yield, non-investment-grade
securities and the securities and bank loans of companies subject to pending
bankruptcy proceedings.
Mortgage-Related Securities and Products. The Company trades and makes
markets in the following mortgage-related securities and products: Government
National Mortgage Association ("GNMA") securities; Federal Home Loan Mortgage
Corporation ("FHLMC") Participation Certificates; Federal National Mortgage
Association ("FNMA") mortgage-backed securities; Small Business Administration
loans; loans guaranteed by the Farmers Home Loan Administration; Federal Housing
Authority insured multi-family loans; real estate mortgage investment conduit
("REMIC") and non-REMIC collateralized mortgage obligations, including residual
interests; and other derivative mortgage-backed securities and products. The
Company also trades real estate mortgage loans originated by unaffiliated
mortgage lenders, both on a securitized and non-securitized basis.
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The Company acts as underwriter and placement agent in transactions involving
rated and unrated mortgage-related securities issued by affiliated and
unaffiliated parties. The Company enters into significant commitments -- such as
forward contracts -- on GNMA, FNMA, and FHLMC securities, and on other rated and
unrated mortgage-related securities. Certain rated and unrated mortgage-related
securities are considered to be liquid, while other such securities, and
non-securitized mortgage loans, are considered to be less readily marketable.
The Company trades GNMA, FNMA and FHLMC "to be announced" securities --
securities having a stated coupon and the original term to maturity, although
the issuer and/or the specific pool of mortgage loans is not known at the time
of the transaction. The Company buys and sells such securities for its own
account in transactions with institutional and individual customers, as well as
with other dealers. Under the Company's trading agreements, the Company
generally has the right to request margin from its counterparty.
The Company, through various special-purpose subsidiaries, purchases,
sells, and services entire loan portfolios of varying quality. These portfolios
are generally purchased from financial institutions and other secondary
mortgage-market sellers. Prior to bidding on a portfolio of loans, an analysis
of the portfolio is performed by experienced mortgage-loan underwriters. Upon
acquisition of a loan portfolio, the loans are classified as either
investment-grade or non-investment-grade. Loan collection is emphasized for the
non- investment-grade segment of the loan portfolio. A collection department
employs a staff of workout specialists and loan counselors who assist delinquent
borrowers. If collection efforts are unsuccessful, the foreclosure unit will
commence and monitor the foreclosure process until either the borrower makes the
loan current, or the property securing the loan is foreclosed or otherwise
acquired. The portfolio may include real estate which has been foreclosed or was
in the process of foreclosure at the time of its acquisition. The foreclosure
unit maintains and markets properties through regional real estate brokers.
Investment-grade mortgage loans are sold to other institutional investors in
either securitized or non-securitized form. In addition, special-purpose
subsidiaries issue REMIC and non-REMIC collateralized mortgage obligations
directly or through trusts that are established for this purpose.
Asset-Backed Securities. The Company acts as underwriter and placement
agent with respect to investment- and non-investment-grade, asset-backed
securities issued by unaffiliated third parties. These asset- backed securities
include: securities backed by consumer automobile receivables originated by the
captive finance subsidiaries of automobile manufacturers, commercial banks and
finance companies; credit card receivables; and home-equity lines of credit or
second mortgages. The Company also trades and makes markets in these
asset-backed securities. The market for asset-backed securities is of relatively
recent origin. While there are ready markets for the investment-grade,
asset-backed securities described above, other varieties may lack liquidity.
Municipal Securities and Related Products. The Company is a dealer in
tax-exempt and taxable municipal securities and instruments including: general
obligation and revenue bonds; notes; leases; and variable-rate obligations
issued by states, counties, cities, and state and local governmental
authorities. The Company is active as a managing underwriter of negotiated and
competitive new security issuances and on a select basis, provides financial
advisory services. The Company makes markets in a broad spectrum of long- and
short-term municipal securities, mainly to facilitate transactions with
institutional and individual customers, as well as other dealers. As agent for
issuers and for a fee, the Company remarkets short-term debt instruments
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to investors in the variable rate, demand bond market. The Company periodically
uses both municipal and treasury bond futures to hedge its cash-market bond
inventory. In addition, the Company maintains a municipal arbitrage portfolio
for its own account consisting of municipal futures and cash bond positions. The
Company's underwriting, trading and sales activities are supported by a
municipal research group.
Arbitrage. The Company engages for its own account in both "classic" and
"risk" securities-arbitrage. The Company's risk arbitrage activity generally
involves the purchase of a security at a discount from a value which is expected
to be realized if a proposed or anticipated merger, recapitalization, tender or
exchange offer is consummated. In classic arbitrage the Company seeks to profit
from temporary discrepancies (i) between the price of a security in two or more
markets, (ii) between the price of a convertible security and its underlying
security, (iii) between securities that are, or will be, exchangeable at a later
date, and (iv) between the prices of securities with contracts settling on
differing dates.
Block Trading. The Company effects transactions in large blocks of
securities exceeding 50,000 shares, mainly with institutional customers.
Transactions are handled on an agency basis whenever possible, but the Company
may be required to take a long or short position in a security to the extent
that an offsetting purchaser or seller is not immediately available.
Strategic Structuring and Transactions (SST). The Company targets
mispriced assets using sophisticated models and proprietary quantitative
methods. The Company maintains substantial proprietary trading and investment
positions in domestic and foreign markets across a wide spectrum of equity and
commodity securities including listed and over the counter options, futures and
swaps.
Foreign Exchange. The Company trades in foreign exchange, including:
major and minor currencies on a spot and forward basis; listed and
over-the-counter foreign-currency options; and foreign-currency futures.
Currency option strategies are made available to customers to help them meet
their specific risk management objectives.
Derivatives. The Company manages a customer-driven business which
focuses on individually- negotiated derivative instruments across the fixed
income, currency, credit, and equity markets. Among the products in which the
Company is most active are interest rate swaps and options, equity swaps and
options, currency swaps and options, credit derivatives, and tax exempt
derivatives. The Company also structures products which combine derivatives
having both privately- and publicly-placed debt and/or equity components. By
tailoring products across the spectrum of derivatives markets, the Company
designs solutions to meet customers' asset-liability management, investment, and
capital market needs.
Over-the-Counter Equity Securities. The Company makes markets on a
principal basis in common and preferred stocks, warrants, and other securities
traded on the NASD's Automated Quotation System and otherwise in the
over-the-counter market. Principal transactions with customers are effected at a
net price equal to the prevailing inter-dealer price, plus or minus a mark-up or
mark-down.
Emerging Markets. The Company provides financial services in various
emerging markets worldwide including: securities brokerage; equity and fixed
income trading and sales; securities research; and a full range of investment
banking, capital formation and advisory services. As part of these activities,
the Company manages and participates in public offerings and arranges with
institutional investors the private placement of debt and equity securities. The
markets currently covered by the Company include Latin America, Asia, and
Eastern Europe.
Specialist Activities. The Company is a participant in a specialist unit
on the NYSE which performs specialist functions in 135 NYSE-listed stocks. This
market-making operation is conducted through a joint
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venture with a member organization pursuant to a joint-account agreement. The
market-making function of the specialist involves risk of loss during periods of
market fluctuation, since specialists are obliged to take positions in their
issues counter to the direction of the market in order to minimize short-term
imbalances in the auction market.
BROKERAGE ACTIVITIES
A major portion of the Company's revenues is derived from customer
commissions on brokerage transactions in equity and debt securities. The Company
is one of the leading firms in the United States in providing brokerage services
to institutional investors. The Company's brokerage clients include United
States and foreign institutional investors such as investment advisors, mutual
funds, commercial banks, insurance companies, pension and profit-sharing funds,
and high-net-worth individuals. A significant portion of the Company's
commission business is generated by institutional clients -- often in block
trades requiring special marketing and trading expertise -- and from
transactions originated by the correspondent organizations for whom the Company
provides securities-clearance services. The largest portion of the Company's
commission revenue is derived from brokerage transactions in listed securities.
Institutional. A substantial portion of the Company's commission
business involves the execution of transactions in corporate securities for
domestic and foreign institutional investors. The primary source of revenue from
equity activities is negotiated-commission revenue earned from providing
customers with liquidity, trading expertise, trade-processing capability, and
investment advice. Investment advice includes economic forecasts, industry and
company analyses, overall strategic guidance and Company recommendations.
Individual Investors. The Company's individual-investor sales force
concentrates on servicing individual clients possessing a high net-worth and
corporations engaging in securities transactions of a size sufficient to benefit
from the Company's full range of institutional-caliber services.
Option and Index Products. The Company provides an array of equity and
index option-related execution services to institutional and individual clients.
The Company utilizes sophisticated research and computer modeling to formulate
for clients specific recommendations relating to options and index trading.
Futures. The Company provides transaction services for customers who
trade contracts in futures, financial instruments and physical products,
including options on futures and physical commodities. These products are based
on selected stock indices, fixed income securities, currencies, agricultural and
energy products and precious metals. Domestic trading is subject to extensive
regulation by the Commodity Futures Trading Commission ("CFTC") pursuant to the
Commodity Exchange Act and the Commodity Futures Trading Commission Act of 1974.
International trading activities are subject to regulation by the respective
regulatory authorities in the location where the futures or commodity exchange
resides, including the Securities and Futures Authority ("SFA") in the United
Kingdom.
The margin requirements covering substantially all transactions in
futures contracts are subject to the particular exchange's regulations. In the
United States, the Company is a clearing member of the Chicago Board of Trade,
the Chicago Mercantile Exchange, Inc., the New York Mercantile Exchange and
other principal futures exchanges. The Company is a member of the International
Petroleum Exchange ("IPE"), the London Commodity Exchange ("LCE"), the London
International Financial Futures Exchange ("LIFFE"), Marche a Terme International
de France ("MATIF") in Europe; and a "special" member of the Tokyo Stock
Exchange for clearing Japanese government bond futures.
International. Bear Stearns International Limited ("BSIL") is a London
based securities broker dealer and engages in several types of activities
including principal and agency transactions, underwriting, and investment
banking. BSIL is a member of the SFA, the IPE, the LIFFE, the International
Securities Market Association ("ISMA") and the London Securities & Derivatives
Exchange Limited ("OMLX"). Another
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London subsidiary, Bear Stearns International Trading ("BSIT"), is a
market-maker in various non-dollar denominated equity securities and engages in
index and derivative arbitrage. BSIT is a member of the London Stock Exchange
and the Stock Exchange Automated Quotations International ("SEAQ").
The Company's French subsidiary is Bear Stearns S.A. ("BSFSA"). BSFSA is
a regulated French broker dealer and is a member of the MATIF.
Bear Stearns Bank plc ("Bank") is an Irish based bank, which was
incorporated in 1996 and subsequently granted a banking license under Section 9
of the Irish Central Bank Act, 1971.
Bear Stearns (Japan) Ltd. ("BSJL") is a broker dealer registered with
the Japanese Ministry of Finance. BSJL sells equity and fixed income securities
to Japanese institutional customers. BSJL has a special membership on the Tokyo
Stock Exchange. Bear Stearns Hong Kong Ltd. is a member of the Securities and
Futures Commission and sells U.S. commodities to retail customers. Bear Stearns
Asia Ltd. is a member of the Stock Exchange of Hong Kong and sells equity and
fixed income securities and derivative products to institutional and retail
customers in Asia (excluding Japan) and also provides investment banking
services to institutional clients. Bear Stearns Singapore Pte. Limited is a
broker dealer registered with the Monetary Authority of Singapore and sells
fixed income and equity securities to institutional investors in Singapore and
Southeast Asia.
INVESTMENT BANKING
The Company is a major global investment banking firm providing a full
range of capital formation and advisory services to a broad spectrum of clients.
The Company manages and participates in public offerings and arranges the
private placement of debt and equity securities directly with institutional
investors. The Company provides advisory services to clients on a wide range of
financial matters and assists with mergers, acquisitions, leveraged buyouts,
divestitures, corporate reorganizations, and recapitalizations.
The Company's strategy is to concentrate a major portion of its
corporate finance business development efforts within those industries in which
the Company has established a leadership position in providing investment
banking services. Industry specialty groups include chemicals, energy,
entertainment, financial services, forest products, gaming, health care,
industrial, insurance, lodging, merchandising, media/communications, oil and
gas, pharmaceuticals, real estate, retailing, satellite, technology, and
utilities. These groups are responsible for initiating, developing and
maintaining client relationships, and for executing transactions involving these
clients. The Company has focused primarily on those industries in which the
Company also has a strong research capability.
In addition to being structured according to distinct industry groups,
the Company has a number of professionals who specialize in specific types of
transactions. These include mergers and acquisitions ("M&A"), equity offerings,
high yield securities, and other transaction specialties.
Mergers and Acquisitions. The Company is active in arranging various M&A
transactions for its clients. The Company participates in a broad range of
domestic and international assignments including acquisitions, divestitures,
strategic restructurings, proxy contests, leveraged buyouts, and defenses
against unsolicited takeovers.
Equity Offerings. The equity capital markets group focuses on providing
financing for issuers of equity and convertible equity securities in the public
markets. The group assists in the origination, and is responsible for the
structuring and execution, of transactions for a broad range of clients.
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High Yield Securities. The high yield securities group focuses on
providing financing in the public and private capital markets. The group is
responsible for originating, structuring, and executing high yield transactions
across a wide range of companies and industries, as well as managing client
relationships with both high yield corporate issuers and financial sponsors of
leveraged transactions.
Leveraged Acquisitions. As part of its investment banking activities,
the Company occasionally makes investments as principal in leverage acquisitions
and in leveraged buy-out funds as a limited partner. The Company's investments
generally take the form of equity securities, either common or preferred stock.
Equity securities purchased in these transactions generally are held for
appreciation and are not readily marketable. While the Company believes that the
current carrying value of these instruments is at least equal to their eventual
realizable value, it is not possible to determine whether, or when, the Company
will realize the value of these investments.
Commercial Real Estate. The Company is engaged in a variety of real
estate activities on a nationwide basis. It provides comprehensive real
estate-related investment banking, capital markets and financial advisory
services.
SECURITIES CLEARANCE ACTIVITIES
The Company provides a full range of securities clearing services to
clients. Organizations that are engaged in the retail or institutional brokerage
business and are members of the NYSE and/or NASD comprise one category of
correspondent clearing clients called "fully-disclosed correspondents." In
addition, the Company has extensive involvement in the clearing of securities
transactions for other types of clients such as: hedge funds, market-makers,
specialists, arbitrageurs, money managers, and other professional investors
trading at multiple securities firms called "professional clearing clients".
Besides commissions and service charges realized from securities
clearing activities, the Company also earns substantial amounts of interest
income. The Company extends credit directly to the customers of correspondent
firms in order to facilitate the conduct of customer securities transactions on
a margin basis. The correspondents indemnify the Company against margin losses
on their customers' accounts. The Company also extends margin credit directly to
correspondents to the extent that such firms pledge proprietary assets as
collateral. Since the Company must rely on the guaranties and general credit of
the correspondents, the Company may be exposed to significant risk of loss if
correspondents are unable to meet their financial commitments should there be a
substantial adverse change in the value of margined securities. The
correspondent clearing business for hedge funds, market-makers, arbitrageurs,
specialists, and other professional traders can require a substantial commitment
of the Company's capital involving varying degrees of risk. The Company has
developed computerized control systems to monitor and analyze risk on a daily
basis.
In addition to clearing trades, the Company provides other products and
services to its correspondents such as recordkeeping, trading reports,
accounting, general back-office support, securities lending, reorganization and
custody of securities. The Company's Prime Broker Plus system provides
consolidated reporting and securities processing for professional investors
executing trades at more than one securities firm.
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The financial responsibilities arising from the Company's clearing relationships
are allocated in accordance with agreements with correspondents. To the extent
that the correspondent has available resources, the Company is protected against
claims by customers of the correspondent when the latter has been allocated
responsibility for a function giving rise to a claim. However, if the
correspondent is unable to meet its obligations, dissatisfied customers may
attempt to seek recovery from the Company.
The Company attempts to broaden, wherever possible, its relationships
with correspondent clearing clients. In addition to performing administrative,
operational and settlement functions, the Company also advises correspondents on
communications systems and makes available to them a variety of non-brokerage
products and services on favorable terms enabling them to benefit from the
Company's centralized purchasing power.
INTEREST
The Company derives substantial net interest income from customer margin
loans and securities lending.
Customer Financing. Securities transactions are effected for customers
on either a cash or margin basis. In margin transactions, the Company extends
credit to the customer, subject to various regulatory and internal requirements,
which is collateralized by securities and cash in the customer's account, for a
portion of the purchase price. The Company receives income from interest charged
on the extension of credit; the rate of interest charged to customers for margin
financing is based upon the Federal funds rate or brokers-call rate. By allowing
customers to purchase securities on margin, the Company assumes the risk of loss
if an adverse market movement reduces the value of the collateral below the
amount of a customer's indebtedness. The Company's net interest income is
impacted by the volume of customer borrowings and by the prevailing levels of
interest rates.
Securities Lending Activities. In connection with both its trading and
brokerage activities, the Company borrows and lends securities to brokers and
dealers to cover short sales and to complete transactions in which customers
have failed to deliver securities by settlement date. The borrower of securities
is required to deposit cash or other collateral or to post a letter of credit
with the lender. The borrower of securities generally receives a rebate (based
on the amount of cash deposited) or pays a fee calculated to yield a negotiated
rate-of- return for the lender. Stock borrow and stock loan transactions are
generally executed pursuant to written agreements with counterparties which
require that (i) securities borrowed and loaned be marked-to-market on a daily
basis, (ii) excess collateral be refunded, and (iii) deficit collateral be
furnished. Mark-to-market adjustments are usually made on a daily basis through
the facilities of various clearing houses to reflect changes in the market value
of loaned securities.
OTHER ACTIVITIES
Asset Management. The Company's asset management division manages equity
and fixed income assets for some of the United States' leading corporate pension
plans, public systems, endowments, foundations, multi-employer plans, insurance
companies, corporations, families and high net-worth individuals. With more than
$8 billion under management, the asset management division provides its clients
with diverse products, expertise and experience for enhancing investment returns
by identifying, and taking advantage of, investment opportunities in the
financial markets. Institutional products include: Large, Mid and Small Cap
Value Equity; Global and Emerging Markets Fixed Income; and Alternative
Investment Strategies.
In addition, the asset management division serves individual investors
through its management of The Bear Stearns Funds, a family of mutual funds which
include: S&P Stars; Large Cap Value; Small Cap Value; The Insiders Select; Total
Return Bond; and The Emerging Markets Debt.
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Equities Research. The equity research department analyzes and provides
timely information and opinions on over 100 industries and more than 850
companies, both domestic and international. In addition to more than 80
analysts, its staff includes a market strategist, an economics team, and
accounting specialists, all of whom analyze the impact of broader economic
factors and regulatory changes on the market and individual stocks.
Fixed Income Research. A fixed income research unit contained within the
Company's Financial Analytics and Structured Transactions Group (F.A.S.T.)
provides financial engineering and securitization capabilities, investment
research, fixed income portfolio management and analytical systems and trading
technology for mortgage-related and fixed income securities. This unit also
performs original research on valuation techniques and provides consulting
services.
Other Research. A high-grade, fixed income research unit, consisting of
approximately 15 analysts and researchers, provides similar services in respect
of high-grade, fixed income securities. A high yield, fixed income research unit
consisting of approximately 15 analysts and researchers, provides similar
services in respect of high yield, fixed income securities. The Company derives
revenues for its research activities principally from securities transactions in
an agency or dealer capacity; from its consulting services; and, from offering
some of its research products for a fee.
Custodial Trust Company. The Company offers a range of trust company and
securities-clearance services through its wholly owned subsidiary CTC. CTC
provides the Company with banking powers, such as access to the securities and
funds-wire services of the Federal Reserve System. CTC provides fiduciary,
custody and agency services for institutional accounts; the clearance of
government securities for institutions and dealers; the processing of mortgage
and mortgage-related products, including derivatives and CMO products; and
commercial lending. At June 30, 1997, CTC held over $38.6 billion of assets for
non-affiliated institutional clients such as pension funds, mutual funds,
endowment funds, religious organizations and insurance companies.
Fiduciary Services. The Company is an investment consultant which
assists pension and welfare funds, other institutional investors and
high-net-worth individual clients in structuring and executing their investment
affairs.
ADMINISTRATION AND OPERATIONS
Administration and operations personnel are responsible for the
processing of securities transactions; the receipt, identification and delivery
of funds and securities; internal financial controls; accounting functions;
office services; the custody of customer securities; and the overseeing of
margin accounts of the Company and correspondent organizations. The processing,
settlement, and accounting for transactions for the Company, correspondent
organizations, and the customers of correspondent organizations is handled by a
staff of approximately 3,500 employees located in separate operations offices in
New York City and Whippany, New Jersey and, to a lesser extent, the Company's
offices worldwide.
The Company executes its own and correspondent transactions on all
United States exchanges and in the over-the-counter market. The Company clears
all of its domestic and international transactions (i.e., delivery of securities
sold, receipt of securities purchased, and transfer of related funds) through
its own facilities, unaffiliated commercial banks and through memberships in
various clearing corporations. However, certain government, government-agency
and mortgage-related securities transactions are cleared through CTC.
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There is considerable fluctuation in the volume of transactions the
Company processes, clears and settles. Operations personnel monitor day-to-day
operations to assure compliance with applicable laws, rules and regulations. The
Company records transactions and posts its books on a daily basis. Failure to
keep current and accurate books and records can render the Company liable to
disciplinary action by governmental and self-regulatory organizations.
The Company maintains its own data processing facilities, which have
been expanded significantly in recent years.
The Company believes its internal controls and safeguards are adequate,
but recognizes that fraud and misconduct by customers and employees, including
the possible theft of securities, are risks inherent in the securities industry.
As required by the NYSE and certain other authorities, the Company carries a
broker's blanket-bond insurance covering the loss or theft of securities, check-
and draft-forgery, embezzlement, and the misplacement of securities. This
blanket-bond policy provides fidelity coverage and coverage for loss or theft of
securities, fraudulent trading, and securities forgery of up to $200 million
subject to a deductible of $2.5 million per occurrence.
COMPETITION
The Company encounters intense competition in all aspects of the
securities business and competes directly with other securities firms -- both
domestic and foreign -- many having substantially greater capital and resources
and offering a wider range of financial services than does the Company. Besides
competition from firms in the securities business, in recent years the Company
has experienced increasing competition from other sources, such as commercial
banks and insurance companies. The Company believes that the principal factors
affecting competition involve the caliber and abilities of professional
personnel, the relative prices of the services and products being offered, and
the quality of its services.
REGULATIONS AND OTHER FACTORS AFFECTING THE COMPANY AND THE SECURITIES INDUSTRY
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. Bear Stearns
and BSSC are registered as broker dealers with the SEC and are registered as
broker dealers in all 50 states and the District of Columbia. Additionally, Bear
Stearns is registered as an investment adviser with the SEC. Much of the
regulation of broker dealers has been delegated to self-regulatory
organizations, principally the NASD, the Municipal Securities Rulemaking Board,
and national securities exchanges such as the NYSE, which has been designated by
the SEC as the primary regulator of certain of the Company's subsidiaries,
including Bear Stearns and BSSC. These self-regulatory organizations (i) adopt
rules, subject to approval by the SEC, which govern the industry and (ii)
conduct periodic examinations of the Company's operations. Securities firms are
also subject to regulation by state securities administrators in those states in
which they conduct business.
Broker dealers are subject to regulations which cover all aspects of the
securities business including: sales methods; trade practices; use and
safekeeping of customer funds and securities; capital structures; recordkeeping;
and, the conduct of directors, officers and employees. The types of regulations
to which investment advisers are subject include: record keeping; fee
arrangements; client disclosure; and, the conduct of directors, officers and
employees. The mode of operation and profitability of broker dealers or
investment advisers may be directly affected by new legislation; changes in
rules promulgated by the SEC and self-regulatory organizations; and, changes in
the interpretation or enforcement of existing laws and rules. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings which can result in censures, fines, the issuances of
cease-and-desist orders, and the suspension or expulsion of a broker dealer or
an investment adviser, its officers or employees. The principal purpose of
regulation and discipline of broker dealers and investment advisers is the
protection of customers and the securities markets,
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rather than the protection of creditors and stockholders of broker dealers or
investment advisers. On occasion the Company's subsidiaries have been subject to
routine investigations and proceedings, and sanctions have been imposed for
infractions of various regulations, none of which, to date, has had a material
adverse effect on the Company or its business.
The Market Reform Act of 1990 was adopted for the following reasons: (i)
to strengthen regulatory oversight of the securities markets, (ii) to improve
the financial condition of market participants, and (iii) to improve the safety
and efficiency of market mechanisms by creating a system for providing
information and oversight for the parents and other affiliates of broker
dealers. The SEC has adopted the Risk Assessment Reporting Requirements for
Brokers and Dealers (the "Risk Assessment Rules") to implement the provisions of
the Market Reform Act of 1990. The Risk Assessment Rules require that
broker-dealers: (i) develop an organizational chart; (ii) maintain risk
management procedures or standards for monitoring and controlling the risks
resulting from activities of material associated persons; (iii) maintain and
preserve records and other information; and (iv) file quarterly reports covering
the risk-management procedures and the financial and securities activities of
the holding companies of broker dealers, or broker dealer affiliates or
subsidiaries that are reasonably likely to have a material impact on the
financial and operational condition of the broker dealer.
The Insider Trading and Securities Fraud Enforcement Act of 1988
augments enforcement of the securities laws through a variety of measures
designed to provide greater deterrence, detection, and punishment of
insider-trading violations. Among other things, the law (i) expands the scope of
civil penalties to controlling persons who fail to take adequate steps to
prevent insider trading, (ii) initiates a bounty program by giving the SEC
discretion to reward informants who provide assistance to the agency and (iii)
requires broker dealers and investment advisors to establish and enforce written
policies and procedures reasonably designed to prevent the misuse of inside
information.
The Government Securities Act of 1986 (the "Government Securities Act")
established a comprehensive and coordinated pattern for the regulation of
brokers, dealers and financial institutions who trade in government securities,
which includes Bear Stearns. Under the Government Securities Act, Bear Stearns
is subject to Department of Treasury regulations covering among other things:
capital adequacy; custody and use of government securities; and, transfers and
control of government securities subject to repurchase transactions.
The commodities industry in the United States is subject to regulation
under the Commodity Exchange Act, as amended. The CFTC is the federal agency
charged with the administration of the Commodity Exchange Act and the
regulations thereunder. Bear Stearns and BSSC are registered with the CFTC as
futures commission merchants and are subject to regulation as such by the CFTC
and various domestic boards of trade and other commodity exchanges. Bear
Stearns' and BSSC's commodity-futures business is also regulated by the NFA, a
not-for-profit membership corporation, which has been designated a registered
futures association by the CFTC.
As registered broker dealers and member firms of the NYSE, both Bear
Stearns and BSSC are subject to the Net Capital Rule (Rule 15c3-1) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which has been
adopted through incorporation by reference in NYSE Rule 325. The Net Capital
Rule, which specifies minimum net capital requirements for registered broker
dealers, is designed to measure the general financial integrity and liquidity of
a broker dealer and requires that at least a minimal portion of its assets be
kept in relatively liquid form.
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Bear Stearns and BSSC are also subject to the net capital requirements
of the CFTC and various commodity exchanges which generally require that Bear
Stearns and BSSC maintain a minimum net capital equal to the greater of the
alternative net capital requirement provided for under the Exchange Act or 4% of
the funds required to be segregated under the Commodity Exchange Act and the
regulations promulgated thereunder.
Compliance with the Net Capital Rule could limit those operations of
Bear Stearns and/or BSSC which require significant capital usage, such as
underwriting, trading and the financing of customer margin-account debit
balances. The Net Capital Rule could also restrict the Company's ability to
withdraw capital from Bear Stearns or BSSC, which in turn could limit the
Company's ability to pay dividends, pay interest, repay debt, or redeem or
purchase shares of its outstanding capital stock. Additional information
regarding net-capital requirements is set forth in the Annual Report, Notes to
Consolidated Financial Statements, Footnote 7, entitled "Regulatory
Requirements," which is incorporated herein by reference to Exhibit No. (13) of
this report.
Bear Stearns and BSSC are members of the Securities Investor Protection
Corporation ("SIPC") which provides insurance protection for customer accounts
held by the firm of up to $500,000 for each customer, subject to a limitation of
$100,000 for cash balance claims in the event of the liquidation of a broker
dealer. In addition, the BSSC purchased $24.5 million of additional
security-positions coverage from a private insurer for each of the BSSC's
customers.
The activities of the Company's bank and trust company subsidiary, CTC,
are regulated by the New Jersey Department of Banking and the Federal Deposit
Insurance Corporation ("FDIC"). FDIC regulations applicable to CTC limit the
extent to which CTC and Bear Stearns may have common officers and directors or
may share physical facilities. FDIC regulations require certain disclosures in
connection with joint advertising or promotional activities conducted by Bear
Stearns and CTC. Such regulations also restrict certain activities of CTC in
connection with the securities business of Bear Stearns. Federal legislation
limits (i) an expansion in the scope of the activities of CTC, (ii) the annual
rate of increase in its assets, (iii) the cross-marketing of certain services
with its affiliates and (iv) the use of overdrafts at Federal Reserve banks on
behalf of affiliates.
The Company does a substantial volume of business in the international
fixed income and equity markets through BSIL and is a market-maker in certain
non-dollar-denominated securities and engages in index and derivative arbitrage
through BSIT. BSIL and BSIT are subject to both the United Kingdom Financial
Services Act 1986, which governs all aspects of the investment business in the
United Kingdom, and the regulations of the SFA which includes: regulatory
capital; sales and trading practices; use and safekeeping of customer funds;
securities recordkeeping; margin practices and procedures; registration
standards for individuals; and periodic reporting and settlement procedures.
BSIL and BSIT are subject to supervision by and are regulated in accordance with
the rules of the SFA. BSIL is a member of the IPE, the LIFFE, the ISMA, the OMLX
and the LCE. BSIT is a member of the London Stock Exchange and SEAQ
International.
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The Company, like other securities firms, is directly affected by such
things as: national and international economic and political conditions; broad
trends in business and finance; legislation and regulations affecting the
national and international financial and business communities; currency values;
the level and volatility of interest rates; and fluctuations in the volume and
the price levels in the securities and commodities markets. These and other
factors can affect the Company's volume of security new-issues, mergers,
acquisitions, and business restructurings; the stability and liquidity of
securities and commodities markets; and, the ability of issuers, other
securities firms and counterparties to perform on their obligations. Decreases
in the volume of security new-issues, mergers, acquisitions or restructurings
generally results in lower revenues from investment banking and, to a lesser
extent, reduced principal transactions. A reduced volume of securities and
commodities transactions and reduced market liquidity generally result in lower
revenues from principal transactions and commissions. Lower price levels for
securities may result in a reduced volume of transactions, and may also result
in losses from declines in the market value of securities held in proprietary
trading and underwriting accounts. In periods of reduced sales and trading or
investment banking activity, profitability may be adversely affected because
certain expenses remain relatively fixed. Sudden and sharp declines in the
market values of securities and/or the failure of issuers and counterparties to
perform on their obligations can result in illiquid markets. In such markets,
the Company may not be able to sell securities and/or may have difficulty in
hedging its securities positions. Such market conditions, if prolonged, may also
lower the Company's revenues from investment banking and principal transactions.
The Company's securities trading, derivatives, arbitrage, market-making,
specialist, leveraged-buyout and underwriting activities are conducted by the
Company on a principal basis and expose the Company to significant risk of loss.
Such risks include market, counterparty credit, and liquidity risks. See "Item
7A. Quantitative and Qualitative Disclosure about Market Risk."
ITEM 2. PROPERTIES.
The Company's executive offices and principal administrative offices
occupy approximately 753,000 square feet of space at 245 Park Avenue, New York,
New York under leases expiring through 2002.
The Company also leases approximately 297,000 square feet of office
space at One MetroTech Center, Brooklyn, New York pursuant to a lease expiring
in 2004 for its securities processing and clearance operations. Additionally,
the Company leases approximately 43,000, 140,000 ,27,000 and 13,000 square feet
of space at four locations in New York City under leases expiring in 2001, 2004,
2007 and 2007, respectively. The Company's regional offices in Atlanta, Boston,
Chicago, Dallas, Los Angeles and San Francisco occupy an aggregate of
approximately 276,000 square feet, while its eleven foreign offices occupy a
total of approximately 115,000 square feet under leases expiring on various
dates through the year 2016.
The Company owns approximately 65 acres of land in Whippany, New Jersey,
including four buildings comprising an aggregate of approximately 300,000 square
feet. The Company is currently using the existing facilities on the property to
house its data processing facility and other operational functions. Because the
Whippany property includes land in excess of current needs, the Company has
received approval to construct two additional buildings, one of which it is
currently developing for itself; conversely, it may sell the land and
development rights to others.
In September 1997, the Company entered into a 99-year ground lease at
383 Madison Avenue, New York City. The Company expects to develop this site as
its new world headquarters by building an office tower. The new facility will be
completed by the expiration of the current lease at 245 Park Avenue in 2002.
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The new facility will allow the Company to consolidate its New York City real
estate requirements into one facility and will allow expansion related to future
growth.
ITEM 3. LEGAL PROCEEDINGS.
The Company and Bear Stearns are parties to the legal proceedings
discussed below, which have arisen in the normal course of business. In view of
the inherent difficulty of predicting the outcome of litigation and other legal
proceedings, the Company cannot state what the eventual outcome of these pending
proceedings will be. It is the opinion of management, after consultation with
independent counsel, that the legal proceedings referred to below will not,
individually or in the aggregate, have a material adverse effect on the
Company's financial position.
A.I.A. Holding, S.A., et al. v. Lehman Brothers, Inc., et al. On
July 8, 1997, 277 alleged customers of Ahmad Ihsan El-Daouk commenced an action
in the United States District Court for the Southern District of New York
against Lehman Brothers, Inc. and Bear Stearns. Plaintiffs allege that Daouk,
acting through corporations he controlled, entered into introducing broker
agreements with Lehman and then Bear Stearns, and that he arranged for each of
the plaintiffs to invest funds with Lehman and/or Bear Stearns. Lehman exited
the business during the summer of 1992. Certain accounts opened at Lehman were
transferred to Bear Stearns sometime in 1992, and certain accounts were opened
at Bear Stearns beginning sometime in 1992.
The Complaint alleges, among other things, that for more than
seven years Daouk defrauded plaintiffs by misleading plaintiffs into believing
that the accounts Daouk managed on their behalf were earning substantial
profits, when in fact he was churning the accounts, incurring trading losses and
otherwise dissipating, stealing or converting their funds. This allegedly was
accomplished, in part, by Daouk intercepting account statements and other
information sent by Lehman and Bear Stearns to Daouk's customers and
substituting forged statements created by Daouk.
Bear Stearns is alleged to be liable to Daouk's customers on
numerous grounds, including claims that the Bear Stearns broker responsible for
the Daouk accounts allegedly was aware of the scheme, substantially assisted
Daouk in the commission of the fraud and received illegal payments for having
done so, Daouk held himself out to be a Bear Stearns agent with Bear Stearns'
knowledge and acquiescence, and Bear Stearns failed to perform properly its role
as Daouk's clearing broker by, among other things, failing to properly supervise
Daouk, failing to detect Daouk's fraud, permitting Daouk to commingle accounts
and allowing him to churn accounts.
The Complaint asserts 12 causes of action against Lehman and 12
causes of action against Bear Stearns, including, among other things, claims
alleging breach of fiduciary duty, negligence, negligent misrepresentation,
fraud, constructive fraud, breach of contract, negligent hiring, retention and
supervision, aiding and abetting fraud and aiding and abetting breach of
fiduciary duty. Plaintiffs allege that "the plaintiffs' losses appear to have
exceeded $100 million." Plaintiffs seek compensatory damages in unspecified
amounts, imposition of constructive trusts with respect to any property that
"belongs, or may belong," to plaintiffs in Lehman's or Bear Stearns' possession,
interest, attorneys' fees and costs.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Alpha Group Consultants, et al. v. Weintraub, et al./In re
Weintraub Entertainment Group Litigation. On January 31, 1991, Alpha Group
Consultants Ltd. and the Allan D. Simon & Stefani R. Simon Living Trust
commenced an action in the United States District Court for the Southern
District of California involving a private placement by Weintraub Entertainment
Group ("WEG") of $81 million debentures and
14
warrants in 1987. On April 2, 1992 and February 4, 1993 the court allowed
additional plaintiffs to intervene. The original defendants in the case were WEG
(a debtor in bankruptcy, named as a defendant only to the extent permitted by
federal bankruptcy law), certain directors and officers of WEG and Bear Stearns,
which acted as the placement agent in WEG's private placement.
Plaintiffs' current pleading alleges, among other things, that at
the time of the offering and after the offering, the defendants made false and
misleading statements concerning WEG's financial condition, the experience of
certain WEG officers, the intended use of proceeds from the sale of the WEG
securities, the prospects for a public market for WEG securities, WEG's business
plans, and certain terms of WEG's contracts with distributors. Plaintiffs allege
violations of Sections 12(2) and 15 of the Securities Act of 1933, Sections
10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, the Racketeer Influenced and Corrupt Organizations Act ("RICO"),
California state statutes, and common law duties allegedly owed by the
defendants to the plaintiffs. Plaintiffs purport to represent a class consisting
of purchasers of WEG debentures and warrants during the period January 23, 1987
through October 1, 1990. Plaintiffs seek unspecified compensatory and punitive
damages, treble damages under RICO, attorneys' fees and expenses.
On May 12, 1993, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
On May 10, 1993, the court entered a final judgment and order
(the "Settlement Order") approving a settlement among plaintiffs and the WEG
director and officer defendants and barring Bear Stearns from seeking
contribution, indemnity, or reimbursement from the WEG director and officer
defendants. The Settlement Order also provided that Bear Stearns' liability, if
plaintiffs succeed in establishing liability on the part of Bear Stearns, would
be limited to Bear Stearns' proportional share of the total damages awarded. On
September 15, 1993, the court entered an order granting class certification.
On April 22, 1994, the court granted summary judgment in favor of
Bear Stearns on all claims.
On July 15, 1997, the United States Court of Appeals for the
Ninth Circuit reversed the district court's grant of summary judgment in
connection with a statement in the offering materials provided to investors
concerning the timing of the payment of guaranteed advances by certain motion
picture distributors to WEG. The Ninth Circuit affirmed the district court's
dismissal of all other claims in the litigation.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Amalgamated Insurance Fund-Insurance Fund, et al. v. Bear Stearns
& Co., Inc., et al./Alico Services Corp., Alico Resources Corp. and Pension Plan
for Employees of Amalgamated Life Insurance Company v. Bear Stearns & Co., Inc.,
et al. On January 9, 1997, five former Bear Stearns brokerage customers who are
employee welfare benefit plans or employee pension benefit plans under the
Employee Retirement Income Security Act ("ERISA") commenced a National
Association of Securities Dealers ("NASD") arbitration proceeding against Bear
Stearns, a former Bear Stearns account executive and two current Bear Stearns
employees (the "Amalgamated proceeding").
The claimants allege, among other things, unauthorized and
unsuitable trading and churning in their accounts involving derivative
securities. The claimants assert claims based upon breach of fiduciary duty,
breach of fiduciary duty under ERISA, participation in breach of fiduciary duty,
breach of contract, common law fraud, securities fraud, negligent
misrepresentation, negligence, investing in unsuitable securities, failure to
supervise and churning, unjust enrichment, and Sherman Antitrust Act and the
Donnelly Act. Claimants seek, among other relief, compensatory damages in an
unspecified amount, but in a range of $30 to $40 million or
15
more. Claimants also seek punitive damages in an unspecified amount and trebled
damages under the Sherman Antitrust Act and New York's Donnelly Act.
On May 14, 1997, Bear Stearns filed an answer denying liability,
asserting affirmative defenses, counterclaims and third party claims that allege
that certain trustees of the plans and registered investment advisors hired by
the plans are solely responsible for any losses suffered by the funds, and
seeking, among other things, indemnification and contribution.
On May 2, 1997, three additional former Bear Stearns brokerage
customers commenced an NASD arbitration case against the same Respondents,
including Bear Stearns, alleging essentially the same claims, based upon
essentially the same facts and circumstances and, once again, seeking damages
including unspecified compensatory, punitive and treble damages (the "Alico
proceeding"). One of the three Claimants in this second arbitration purports to
assert claims as assignee of claims purportedly assigned to it by 17 other
pension and benefits funds that formerly were brokerage customers of Bear
Stearns.
Bear Stearns denies all allegations of wrongdoing asserted
against it in the Amalgamated and Alico arbitration proceedings, intends to
defend these claims vigorously and believes that it has substantial defenses to
these claims.
A.R. Baron & Company, Inc. The following matters arise out of
Bear Stearns' role as clearing broker for A.R. Baron & Company, Inc. ("Baron")
from July 20, 1995 through June 28, 1996.
(i) John Berwecky, et al. v. Bear Stearns & Co. Inc., et al./Jack
Perry v. Bear Stearns & Co., Inc., et al. On July 21 and August 22, 1997,
shareholders of companies whose securities were underwritten by, or that
otherwise had some relationship with Baron (these securities are referred to
below as "Baron securities") commenced two actions in the United States District
Court for the Southern District of New York against Bear Stearns, Bear Stearns
Securities Corp. and a managing director of Bear Stearns (collectively "Bear
Stearns").
The complaints allege, among other things, that Bear Stearns and
Baron engaged in a scheme to manipulate the market for and to inflate the prices
of the Baron securities. Plaintiffs allege violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Plaintiffs purport to represent a class of all persons who acquired
Baron securities from July 20, 1995 through June 28, 1996. Plaintiffs seek
unspecified damages, attorneys fees and costs.
Bear Stearns denies all allegations of wrongdoing asserted
against it in these litigations, intends to defend against these claims
vigorously, and believes that it has substantial defenses to these claims.
(ii) Richard Schwarz v. Bear Stearns & Co. Inc., et al. On July
22, 1997, a customer of Baron commenced an action in the Supreme Court of the
State of New York, New York County, against Bear, Stearns & Co. Inc. and Bear
Stearns Securities Corp. (collectively "Bear Stearns").
The complaint alleges, among other things, that Baron engaged in
a scheme to manipulate the market for and to inflate the prices of Baron
securities, and that Bear Stearns, as clearing broker, wrongfully permitted
Baron to continue in business. Plaintiff alleges violations of the New York
Consumer Protection Act, common law negligence and negligent misrepresentation.
Plaintiff purports to represent a class of all persons who were customers of
Baron from July 20, 1995 through July 3, 1996. Plaintiff seeks unspecified
damages, attorneys fees and costs.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend against these claims
vigorously, and believes that it has substantial defenses to these claims.
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(iii) In connection with investigations concerning the A.R. Baron
brokerage firm, Bear Stearns and Bear Stearns Securities Corp. have received
formal and informal inquiries from various regulatory and governmental agencies.
Bear Stearns is cooperating with these inquiries.
In re Blech Securities Litigation. On October 24, 1994, a
shareholder of certain biotechnology companies whose securities were
underwritten by, or that otherwise had some relationship with, D. Blech & Co.
("Blech Securities"), commenced an action in the United States District Court
for the Southern District of New York against D. Blech & Co., David Blech,
certain money managers and investment advisors, and Bear Stearns, which had been
a clearing broker for D. Blech & Co. from September 1993 through September 1994.
On December 14, 1994, the action was consolidated with three related actions. On
March 27, 1995, an Amended Consolidated Class Action Complaint was filed. On
June 6, 1996, the court granted Bear Stearns' motion to dismiss all allegations
in the First Amended Complaint asserted against Bear Stearns, and granted
plaintiffs leave to replead. On July 26, 1996, a Second Amended Consolidated
Class Action Complaint was filed.
Plaintiffs' current pleading alleges, among other things, a
scheme to manipulate the market for and to inflate the prices of Blech
Securities, and alleges that Bear Stearns violated Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and
committed common law fraud. Previously asserted and dismissed claims under the
Racketeer Influenced and Corrupt Organizations Act ("RICO") are not re-asserted
in plaintiffs' current pleading. On April 2, 1997, the court dismissed
plaintiff's Section 20(a) allegations. Plaintiffs purport to represent a class
consisting of persons who purchased Blech Securities from July 1, 1991 through
September 21, 1994, in a public offering or in the public market.
Plaintiffs seek unspecified damages.
On May 16, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend against these claims
vigorously, and believes that it has substantial defenses to these claims.
Spencer C. Busby, et al. v. Donna Karan International, Inc., et
al./Salvatore Portannese, et al. v. Donna Karan International, Inc., et al.
Beginning on June 19, 1997, two actions were commenced in the United States
District Court for the Eastern District of New York involving an initial public
offering on June 28, 1996 of 10,750,000 shares of common stock of Donna Karan
International, Inc. at a price of $24 per share. The defendants in these cases
are Donna Karan International, Inc., certain directors and officers of Donna
Karan, and the underwriters of the offering, Morgan Stanley & Co., Bear Stearns,
Merrill Lynch & Co. and Smith Barney Inc. (the "Underwriter Defendants").
Plaintiffs allege, among other things, that defendants made false
and misleading statements in the prospectus and registration statement utilized
in the offering concerning Donna Karan's prospects for growth, inability to
implement expansion plans, and risks affecting Donna Karan's business expansion
plans. Plaintiffs allege violations by all defendants, including the Underwriter
Defendants of Sections 11 and 12(a)(2) of the Securities Act of 1933. Other
defendants are alleged to have violated Section 15 of the Securities Act and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. With respect to the claims asserted against the
Underwriter-Defendants, including Bear Stearns, plaintiffs purport to represent
a class consisting of all persons who purchased Donna Karan common stock during
the period June 28, 1996 through May 7, 1997 pursuant or traceable to the
registration statement and prospectus issued in connection with the offering.
Plaintiffs seek damages in an unspecified amount, interest, rescissory relief,
and attorneys' fees and expenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
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Gregory P. Christofferson, et al. v. Bear Stearns & Co., Inc., et
al. On May 3, 1995, plaintiffs commenced an action in the Superior Court of the
State of California in and for the County of Los Angeles against Bear Stearns
and three Bear Stearns officers. The case involves an approach by plaintiffs to
Bear Stearns in 1993, seeking Bear Stearns' participation as an investment
partner or investment banker in acquiring a commercial real estate property
portfolio. Plaintiffs allege that Bear Stearns reviewed plaintiffs' written
portfolio evaluation materials and met with plaintiffs, and later advised
plaintiffs that Bear Stearns was not interested in pursuing the proposed
transaction. Bear Stearns subsequently represented the United States Postal
Service in an attempt by the United States Postal Service to acquire this
portfolio. Plaintiffs and the United States Postal Service, the latter advised
by Bear Stearns, ultimately negotiated a joint bid, which resulted in each group
acquiring a portion of the portfolio.
Plaintiffs current complaint alleges, among other things, fraud,
intentional interference with prospective economic advantage, misappropriation
of trade secrets and breach of implied and oral contract. Plaintiffs seeks
damages in excess of $25 million, plus punitive damages, attorneys' fees and
interest.
On March 26, 1996, Bear Stearns filed an answer denying liability
and assenting affirmation defenses. On March 3, 1997, Bear Stearns filed a
cross-complaint, alleging, among other things, that plaintiffs engaged in unfair
competition by threatening to sue and suing Bear Stearns and others to prevent
competition, and alleging that, if defendants are found to have breached a
contract with plaintiffs, the contract was induced by fraud and thus voidable.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
County of Orange v. Bear Stearns & Co., Inc., et al. On December
5, 1996, the County of Orange, California ("Orange County") and John Moorlach,
the County's Treasurer-Tax Collector, commenced an adversary proceeding in the
United States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court") against twenty-six defendants, including Bear Stearns and
Bear, Stearns Securities Corp. (collectively, "Bear Stearns"). The action arises
in connection with a bankruptcy petition the County filed in the Bankruptcy
Court on December 6, 1994. On May 17, 1996, the Bankruptcy Court confirmed a
plan pursuant to which the County emerged from bankruptcy.
With respect to Bear Stearns the complaint alleges, among other
things, that certain securities transactions entered into between Orange County
(through its former Treasurer-Tax Collector, Robert Citron) and Bear Stearns
entitle Orange County to relief under Sections 502 and 510 of the Bankruptcy
Code, violated the Constitution and laws of California and are null and void,
and that Bear Stearns committed negligence by failing to inform the County that
the transactions were unsuitable and failing to obtain the informed consent of
Orange County's Board of Supervisors for these securities transactions. The
County seeks damages in an unspecified amount, declaratory relief and an order
disallowing any claims asserted against Orange County in its bankruptcy case by
Bear Stearns.
The parties in this action have entered into a stipulation
staying the proceeding pending the completion of other litigation, not involving
Bear Stearns.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
In re Daisy Systems Corporation, Debtor. On May 30, 1991, a
Trustee for Daisy Systems Corporation ("Daisy"), a debtor in bankruptcy, and
Daisy/Cadnetix, Inc. ("DCI") filed a complaint in the United States District
Court, Northern District of California, on behalf of Daisy and DCI against Bear
Stearns and six former directors of Cadnetix, Inc. ("Cadnetix") and/or a
Cadnetix subsidiary. The litigation arises out of Daisy's retention of Bear
Stearns in 1988 to provide investment banking services to Daisy with respect to
a
18
potential merger of Daisy with Cadnetix. On March 20, 1992, a First Amended
Complaint was filed. On July 24, 1992, a Second Amended Complaint was filed.
The Second Amended Complaint alleges, among other things, that
Bear Stearns was negligent in performing its due diligence with respect to the
merger, and in advising Daisy that it was "highly confident" that financing
could be obtained to fund the merger. The Trustee alleges that Bear Stearns
breached fiduciary duties to Daisy, committed professional malpractice in its
efforts on Daisy's behalf, and made negligent representations upon which Daisy
relied, breached a covenant of good faith and fair dealing implied in its
contracts with Daisy, and should have its unsecured claim in the Daisy
bankruptcy proceeding equitably subro- gated to the claims of all other
claimants in the bankruptcy. The Trustee seeks monetary damages and exemplary
damages in an unspecified amount, as well as costs and expenses.
On May 13, 1993, Bear Stearns answered the Complaint, denying
liability and asserting affirmative defenses.
On February 3, 1993, the court dismissed plaintiffs' breach of
fiduciary duty and equitable subrogation claims. On August 12, 1994, the court
granted summary judgment dismissing all remaining claims against Bear Stearns,
and denying a motion by the Trustee to file a Third Amended Complaint.
On September 24, 1996, the United States Court of Appeals for the
Ninth Circuit affirmed the dismissal of the negligent misrepresentation claim,
reinstated the Trustee's negligence claim and reversed the denial of the motion
for leave to amend the breach of fiduciary duty claim, and remanded the case to
the district court for further proceedings.
On August 15, 1997, Bear Stearns filed an answer denying
liability and asserting affirmative defenses. The district court has set a trial
date of April 6, 1998.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Del Rosario, et al. v. Bear Stearns & Co., Inc., et al. On March
7, 1997, three former Bear Stearns brokerage customers commenced an NASD
arbitration proceeding against Bear Stearns, a former Bear Stearns account
executive and Smith Barney, Inc.
The claimants allege, among other things, unauthorized wire
transfers and unauthorized and unsuitable trading in their accounts. The
claimants assert claims based upon fraud, churning, breach of the fiduciary duty
of care and good faith, negligence, breach of contract, failure to supervise the
claimants' accounts and conspiracy. The claimants seek damages in an unspecified
amount, but at least $20 million plus punitive damages.
On June 27, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses, and moved to dismiss certain damage claims.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this arbitration proceeding, intends to defend these claims
vigorously and believes that it has substantial defenses to these claims.
Bernard H. Glatzer v. Bear, Stearns & Co., Inc. On May 11, 1993,
Bernard H. Glatzer commenced an action in the District Court of Harris County,
Texas. On October 11, 1993, the case was removed to the United States District
Court for the Southern District of Texas, and on January 23, 1995 the case was
transferred to the United States District Court for the Southern District of New
York. Plaintiff alleges that he devised and presented "a novel, elegant,
original and unique business plan" for financing independent oil
19
and gas production by independent oil and gas companies and presented this plan
to Bear Stearns on a confidential basis, and that Bear Stearns utilized
plaintiff's business plan as part of services provided by the Company to another
corporate entity.
Plaintiff's current pleading alleges, among other things, theft
and misuse of trade secrets, misappropriation, breach of fiduciary duty,
tortious interference with contractual opportunity, prospective business
relationship, business opportunity, contractual advantage and/or contractual
relations, unjust enrichment, quantum meruit/quasi-contract, fraud and
conspiracy. Plaintiff seeks damages in the amount of $200 million, as well as
exemplary or punitive damages, and attorneys' fees and expenses.
On July 21, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
In re Granite Partners, L.P., Granite Corporation and Quartz
Hedge Fund. On April 7, 1994, Granite Partners, L.P., Granite Corporation, and
Quartz Hedge Fund (the "Funds"), three investment funds managed by Askin Capital
Management L.P. ("ACM") and David J. Askin ("Askin"), commenced a bankruptcy
proceeding in the United States Bankruptcy Court for the Southern District of
New York after suffering losses in mortgage-backed securities and related
instruments. Five actions involving Bear Stearns relating to the Funds are
pending. Four of these actions involve allegations that, among other things,
Bear Stearns, Kidder, Peabody & Co., Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation (the "Dealer Defendants") misrepresented, and/or
encouraged ACM to purchase, certain securities despite the alleged
inappropriateness of those securities for the investment funds ACM was managing,
that the Dealer Defendants allegedly provided inflated performance marks, that
the Dealer Defendants allegedly provided excessive financing to the Funds, and
that the Dealer Defendants otherwise departed from the standards of ordinary
care. The fifth of these actions also involves allegations that Bear Stearns,
among other things, made improper margin calls and wrongfully liquidated the
Funds' positions after the Funds defaulted on their obligations.
(i) Primavera Familienstiftung v. David J. Askin, et al. On
September 20, 1995, Primavera Familienstiftung, a purported investor in Granite
Corporation, amended its complaint in a previously commenced action in the
United States District Court for the Northern District of California to include
claims against the Dealer Defendants. On October 18, 1996, the action was
transferred to the United States District Court for the Southern District of New
York. On August 22, 1996 a motion to dismiss by the Dealer Defendants was
granted, with leave to replead. On November 8, 1996, a third amended complaint
was filed.
Plaintiff's current pleading alleges, among other things, that
the Dealer Defendants aided and abetted an alleged fraud by Askin and ACM (the
"Askin Defendants"). Previously alleged and dismissed claims include allegations
that the Dealer Defendants violated Section 10(b) of the Securities Exchange
Act, Rule 10b-5 promulgated thereunder and Section 20(a) of the Securities
Exchange Act, committed common law fraud, aided and abetted a breach of
fiduciary duty by the Askin Defendants, committed breach of contract and
violated Uniform Commercial Code provisions. Plaintiff purports to represent a
class consisting of all investors who purchased interests in the Funds between
January 26, 1993 and April 7, 1994. Plaintiff seeks compensatory and punitive
damages in unspecified amounts (the named plaintiff allegedly invested $1
million in the Funds), together with the costs and expenses of the action.
On June 9, 1997, this litigation was consolidated with the ABF
Capital action (described below) for pre-trial purposes.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
20
(ii) ABF Capital Management, et al. v. Askin Capital Management,
L.P., et al. On March 27, 1996, certain other purported investors in the Funds
filed a lawsuit in the Supreme Court of the State of New York, County of New
York, against ACM and the Dealer Defendants. On April 24, 1996, the case was
removed to the United States District Court for the Southern District of New
York.
Plaintiffs' current pleading alleges, among other things, that
the Dealer Defendants aided and abetted an alleged fraud by ACM. Previously
alleged and dismissed claims include allegations that the Dealer Defendants
aided and abetted an alleged breach of fiduciary duty by ACM, were unjustly
enriched and violated the Racketeer Influenced and Corrupt Organizations Act
("RICO"). The suit seeks recovery of the amounts the plaintiffs paid for their
interests in the Funds (alleged to be approximately $230 million), an
unspecified amount of allegedly unjust enrichment, treble damages, punitive
damages of not less than $1 billion from each defendant, plus interest, costs,
attorneys fees and other unspecified damages.
On June 9, 1997, this action was consolidated with the Primavera
action (described above) for pretrial purposes.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
(iii) Montpellier Resources, Ltd., et al. v. Bear Stearns, et al.
On March 14, 1997, three purported investors in the Funds commenced an action
against ACM and the Dealer Defendants in the United States District Court for
the Southern District of New York. On June 2, 1997, the complaint was amended to
add sixteen additional plaintiffs.
Plaintiffs' allegations are substantially similar to those in the
ABF Capital action (as modified by the Court's ruling on the Dealer Defendants'
motion to dismiss in that action). Plaintiffs purport to represent a class
consisting of all investors who purchased interests in the Funds between January
1, 1991 and April 7, 1994. Plaintiffs seek recovery of their investments
(alleged to have been approximately $34 million for the named plaintiffs),
punitive damages of not less than $1 billion from each defendant, plus interest,
costs, attor- neys' fees and other unspecified damages.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
(iv) Richard Johnston, et al. v. Askin Capital Management, L.P.,
et al. On June 9, 1997, three purported investors in the Funds commenced an
action in the United States District Court for the Southern District of New York
against ACM and the Dealer Defendants. Plaintiffs' allegations are substantially
similar to those in the ABF Capital action (as modified by the Court's ruling on
the Dealer Defendants' motion to dismiss in that action). Plaintiffs seek
recovery of their investments (alleged to have been approximately $6 million),
punitive damages alleged to be no less than $100 million from each defendant,
plus interest, costs, attorneys' fees and other unspecified damages.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
(v) Granite Partners, L.P., et al. v. Bear, Stearns & Co. Inc.,
et al. On September 12, 1996, a Trustee appointed by the Bankruptcy Court filed
an adversary proceeding on behalf of the Funds against Bear Stearns and Bear
Stearns Capital Markets in the United States Bankruptcy Court for the Southern
District of New York.
On December 2, 1996, the reference of this case to the Bankruptcy
Court was withdrawn, and the case now is pending in the United States District
Court for the Southern District of New York. On March
21
3, 1997, the Bankruptcy Court ordered that control of the litigation be
transferred from the Trustee to a Litigation Advisory Board (the "LAB")
consisting of seven members, including five purported investors in the Funds. On
August 4, 1997, LAB filed an amended complaint against Bear Stearns, Bear
Stearns Capital Markets, a Senior Managing Director of Bear Stearns, Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ"), a senior vice president of
DLJ, and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The amended complaint alleges, among other things, that one or
more of the defendants induced and participated in breaches of fiduciary duty by
Askin and ACM, tortiously interfered with contracts between the Funds and ACM,
accepted payment for trades they knew ACM was not authorized to execute,
breached their contracts with and duty to the Funds through improper margin
calls and liquidations, and in other ways converted the Funds' property,
violated the Sherman Act and the Donnelly Act in connection with allegedly
collusive liquidations, improperly destroyed tape recordings, tortiously
interfered the contracts between the Funds and other dealers, committed common
law fraud, negligent misrepresentation and innocent misrepresentation, breached
warranties and unjustly enriched themselves. The suit now seeks, among other
things, actual and punitive damages in unspecified amounts (there is alleged to
have been approximately $400 million in equity invested in the Funds prior to
liquidation), rescission of the purchase prices paid by the Funds for certain
securities, treble damages for the antitrust claims, restitution for certain
profits and compensation made by the defendants in connection with the Funds,
plus interest, costs, attorneys fees and other damages.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
Henryk de Kwiatkowski v. Bear Stearns & Co., Inc. et al. On June
25, 1996, a Complaint was filed in the United States District Court for the
Southern District of New York by a former customer against Bear Stearns, Bear
Stearns Securities Corp., Bear Stearns Forex, Inc. and a registered
representative. On November 4, 1996, an Amended Complaint was filed.
Plaintiff's current pleading alleges, among other things, breach
of contract, breach of fiduciary duty, fraud, negligent misrepresentation,
negligence and violations of the Commodity Exchange Act. Plaintiff seeks to
recover at least $300 million in losses and at least $100 million in punitive
damages.
On August 28, 1997, the district court dismissed plaintiff's
breach of contract, fraud and negligent misrepresentation claims, and all but
one of plaintiff's Commodity Exchange Act claims. The court did not dismiss
claims for breach of fiduciary duty, negligence and violation of Section 40 of
the Commodity Exchange Act.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
In re Lady Luck Gaming Corporation Securities Litigation.
Beginning in March 1995, a series of actions were commenced in the United States
District Court for the District of Nevada involving an initial public offering
("IPO") of 4,500,000 shares of Lady Luck Corporation ("Lady Luck") on September
29, 1993. A Consolidated Class Action Complaint was filed on August 14, 1995,
and a Second Amended Class Action Complaint was filed on October 31, 1996. The
defendants are Bear Stearns, Oppenheimer & Co., Inc., Lady Luck and several
directors and officers of Lady Luck. Bear Stearns and Oppenheimer are sued in
their capacity as co-lead underwriters of the IPO.
Plaintiffs' current pleading alleges, among other things, that
the prospectus issued in connection with the IPO contained certain false or
misleading statements concerning Lady Luck and the casino- gaming industry as a
whole. Plaintiffs allege violations of Sections 11 and 12 of the Securities Act
and Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder against Bear Stearns and Oppenheimer. Plaintiffs purport to represent
a class consisting of all persons who purchased shares of Lady
22
Luck from September 29, 1993 to October 11, 1994. Plaintiffs seek unspecified
compensatory damages and any appropriate equitable relief.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
NASDAQ Antitrust Litigation. On December 16, 1994, a class action
complaint consolidating a series of previously filed actions was filed in the
United States District Court for the Southern District of New York. On August
22, 1995, plaintiffs filed a complaint entitled "refiled consolidated
complaint," which was further amended on July 21, 1997, in a complaint entitled
"amended refiled consolidated complaint." As amended, the complaint alleges that
over 30 market-makers, including Bear Stearns, engaged in a conspiracy with
respect to the "spread" between bid prices in so-called "odd-eighths". The
complaint alleges violations of antitrust laws and seeks damages in an
unspecified amount, treble damages, and declaratory and injunctive relief. On
November 27, 1996, the court certified a class consisting of certain persons who
purchased or sold certain securities on NASDAQ during specified time periods for
each security during the period from May 1, 1989 to May 27, 1994. On June 30 and
August 27, 1997, plaintiffs filed motions seeking court approval of settlements
totaling nearly $100 million entered into by plaintiffs and three of the
defendants in this action. The settling defendants do not include Bear Stearns.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this litigation, intends to defend these claims vigorously, and
believes that it has substantial defenses to these claims.
On July 17, 1996, the Antitrust Division of the United States
Department of Justice filed a civil antitrust complaint in the United States
District Court for the Southern District of New York against 24 firms that make
markets in NASDAQ securities, including Bear Stearns. The complaint alleges,
among other things, that these market maker defendants violated Section 1 of the
Sherman Act through a "common understanding" to follow a "quoting convention"
that the complaint asserts had inflated the "inside spread" (the difference
between the best quoted buying price and the best quoted selling price on
NASDAQ) in certain NASDAQ stocks. This allegedly resulted in investors having to
pay higher transaction costs for buying and selling stocks than they otherwise
would have paid. At the same time the complaint was filed, a proposed settlement
of the action was announced, pursuant to which the defendants in the action,
while admitting none of the charges, agreed not to engage in certain conduct.
The settlement provides, among other things, for the monitoring and
tape-recording by each of the defendants of not less than 3.5 percent, or a
maximum of 70 hours per week, of telephone conversations by its over-the-counter
desk traders, the provision to the Department of Justice of any taped
conversation that may violate the terms of the settlement, and for Department of
Justice representatives to have access, unannounced in advance, during regular
business hours, for the purpose of monitoring trader conversations as the
conversations occur.
On April 23, 1997, the district court approved the proposed
settlement.
On May 20, 1997, the plaintiffs in the class action filed in
connection with the NASDAQ Antitrust Litigation, who previously had intervened
in the civil antitrust action filed by the Antitrust Division of the United
States Department of Justice in order to object to the settlement of that
action, filed an appeal of the district court's approval of the settlement. On
May 21, 1997, the district court granted a stay, pending the outcome of the
appeal, of the portion of the district court's order approving the settlement
that provided for the tape recording of telephone conversations by defendants'
over-the-counter desk traders.
Parvus Co. Ltd. v. Bear Stearns & Co., Inc., et al. In March
1997, a former Bear Stearns account holder commenced an NASD arbitration
proceeding against Bear Stearns and a former Bear Stearns account executive.
23
The claimant alleges, among other things, unauthorized wire
transfers from its account. The claimant alleges claims based upon breach of the
fiduciary duty of care and good faith, negligence, violation of NASD Rules, SEC
Rules and New York Stock Exchange Rules, breach of contract and failure to
supervise.
The claimant seeks damages in an unspecified amount, but at least $15 million.
On June 13, 1997, Bear Stearns filed an answer denying liability
and asserting affirmative defenses.
Bear Stearns denies all allegations of wrongdoing asserted
against it in this arbitration proceeding, intends to defend these claims
vigorously and believes that it has substantial defenses to these claims.
* * *
The Company or a subsidiary of the Company also has been named as
a defendant in numerous other civil actions arising out of its activities as a
broker and dealer in securities, as an underwriter, as an investment banker, as
an employer or arising out of alleged employee misconduct. Several of these
actions allege damages in large or indeterminate amounts, and some of these
actions are class actions. With respect to claims involving the Partnership,
Bear Stearns has assumed from the Partnership, and has agreed to indemnify the
Partnership against, the Partnership's liability, if any, arising out of all
legal proceedings to which the Partnership is or was named as a party. In view
of the number and diversity of all of the claims referred to in this paragraph
and above, the number of jurisdictions in which these claims are pending and the
inherent difficulty of predicting the outcome of these claims, the Company
cannot state what the eventual outcome of these claims will be. The Company is
contesting the allegations in these lawsuits, and believes that there are
substantial defenses in these lawsuits.
The Company also is involved from time to time in investigations
and proceedings by governmental and self-regulatory agencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information as of September 15,
1997 concerning executive officers of the Company as of July 1, 1997.
24
AGE AS OF
SEPTEMBER 15,
NAME 1997 PRINCIPAL OCCUPATION AND DIRECTORSHIPS HELD
- ---- ------ -------------------------------------------
Alan C. Greenberg..................... 70 Chairman of the Board of the Company and Bear
Stearns and Chairman of the Executive
Committee of the Company's Board of Directors
(the "Executive Committee")
James E. Cayne........................ 63 President and Chief Executive Officer of the
Company and Bear Stearns, member of the
Executive Committee and Chairman of the
Management and Compensation Committee of the
Company's Board of Directors (the "Management
and Compensation Committee")
Mark E. Lehman........................ 46 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee
Alan D. Schwartz...................... 47 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee
and the Management and Compensation
Committee; Director, DAKA International,Inc.
Warren J. Spector..................... 39 Executive Vice President of the Company and Bear
Stearns and member of the Executive Committee
and the Management and Compensation
Committee
William J. Montgoris.................. 50 Chief Operating Officer of the Company and Bear
Stearns and member of the Management and
Compensation Committee; Member of the
Board of Trustees of St. John's University
Samuel L. Molinaro Jr................. 39 Senior Vice President - Finance and Chief
Financial Officer of the Company
Except as indicated below, each of the executive officers of the Company
has been a Senior Managing Director of Bear Stearns for more than the past five
years.
Mr. Greenberg has been Chairman of the Board of the Company for more
than the past five years. Mr. Greenberg was Chief Executive Officer of the
Company and Bear Stearns from the Company's inception until July 1993.
Mr. Cayne has been Chief Executive Officer of the Company and Bear
Stearns since July 1993. Mr. Cayne has been President of the Company for more
than the past five years.
Mr. Lehman became an Executive Vice President of the Company in
September 1995. Prior thereto, Mr. Lehman was Senior Vice President - General
Counsel of Bear Stearns for more than five years. Mr. Lehman is General Counsel
of the Company and Bear Stearns.
Mr. Schwartz has been an Executive Vice President of the Company for
more than the past five years. Mr. Schwartz is responsible for all of the
investment banking activities of Bear Stearns.
Mr. Spector became an Executive Vice President of the Company in
November 1992. Prior thereto, Mr. Spector was involved in the management of Bear
Stearns' Mortgage Department for more than five years. Mr. Spector is
responsible for all fixed income activities of Bear Stearns.
25
Mr. Montgoris has been Chief Operating Officer of the Company and Bear
Stearns since August 1993. From April 1987 until October 1996, Mr. Montgoris was
also Chief Financial Officer of the Company.
Mr. Molinaro has been Chief Financial Officer of the Company since
October 1996. Prior thereto, Mr. Molinaro was the Senior Vice President-Finance
of the Company and Bear Stearns, and a Senior Managing Director of Bear Stearns
from September 1993. Mr. Molinaro served as Assistant Controller of Bear Stearns
and was a Managing Director of Bear Stearns prior to September 1993.
Officers serve at the discretion of the Board of Directors.
26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required to be furnished pursuant to this item is set
forth under the caption "Price Range of Common Stock and Dividends" in the
Annual Report, which is incorporated herein by reference to Exhibit No. (13) of
this report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required to be furnished pursuant to this item is set
forth under the caption "Selected Financial Data" in the Annual Report, which is
incorporated herein by reference to Exhibit No. (13) of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The information required to be furnished pursuant to this item is set
forth under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report, which is incorporated
herein by reference to Exhibit No. (13) of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required to be furnished pursuant to this item is set
forth under the caption "Risk Management" in the Annual Report, which is
incorporated herein by reference to Exhibit No. (13) of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required to be furnished pursuant to this item is
contained in the Consolidated Financial Statements and the Notes to Consolidated
Financial Statements in the Annual Report. Such information and the Independent
Auditors' Report in the Annual Report are incorporated herein by reference to
Exhibit No. (13) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required to be furnished pursuant to this item with
respect to Directors of the Company will be set forth under the caption
"Election of Directors" in the registrant's proxy statement (the "Proxy
Statement") to be furnished to stockholders in connection with the solicitation
of proxies by the Company's Board of Directors for use at the 1997 Annual
Meeting of Stockholders to be held on October 27, 1997, and is incorporated
herein by reference, and the information with respect to Executive Officers is
set forth, pursuant to General Instruction G of Form 10-K, under Part I of this
Report.
The information required to be furnished pursuant to this item with
respect to compliance with Section 16(a) of the Exchange Act will be set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required to be furnished pursuant to this item will be
set forth under the caption "Executive Compensation" of the Proxy Statement, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required to be furnished pursuant to this item will be
set forth under the captions "Voting Securities" and "Security Ownership of
Management" of the Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be furnished pursuant to this item will be
set forth under the caption "Certain Relationships and Related Party
Transactions" of the Proxy Statement, and is incorporated herein by reference.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
EXHIBITS:
FINANCIAL STATEMENTS:
The financial statements required to be filed hereunder are listed on
page F-1 hereof.
FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules required to be filed hereunder are
listed on page F-1 hereof.
EXHIBITS:
(3)(a)(1) Restated Certificate of Incorporation of the registrant, filed
September 11, 1985 (incorporated by reference to Exhibit No.
(4)(a)(1) to the registrant's registration statement on Form S-8
(File No.
33-49979)).
(3)(a)(2) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(2) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(3) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(3) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(4) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
February 14, 1986 (incorporated by reference to Exhibit No.
(4)(a)(4) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(5) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed September 18, 1986
(incorporated by reference to Exhibit No. (4)(a)(5) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(6) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed February 19, 1987
(incorporated by reference to Exhibit No. (4)(a)(6) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(7) Certificate of Correction to the Restated Certificate of
Incorporation of the registrant, filed February 25, 1987
(incorporated by reference to Exhibit No. (4)(a)(7) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(8) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
October 27, 1988 (incorporated by reference to Exhibit No.
(4)(a)(8) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(9) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 6, 1989
(incorporated by reference to Exhibit No. (4)(a)(9) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(10) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 7, 1990
(incorporated by reference to Exhibit No. (4)(a)(10) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
29
EXHIBITS:
(3)(a)(11) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 10, 1992
(incorporated by reference to Exhibit No. (4)(a)(11) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(12) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed March 23, 1993
(incorporated by reference to Exhibit No. (4)(a)(12) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(13) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed July 22, 1993 (incorporated
by reference to Exhibit No. (4)(a)(13) to the registrant's
registration statement on Form S-8 (File No. 33-49979)).
(3)(a)(14) Form of Certificate of Stock Designations to the Restated
Certificate of Incorporation of the registrant (incorporated by
reference to Exhibit No. 4.4 to the registrant's registration
statement on Form 8-A filed on February 23, 1994).
(3)(b) Amended and Restated By-laws of the registrant (incorporated by
reference to Exhibit No. (3)(b) to registrant's Annual Report on
Form 10-K for its fiscal year ended June 30, 1991 and Exhibit No.
(3)(b) to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1992).
(4)(a) Indenture, dated as of April 13, 1989, between the registrant and
Citibank, N.A., as trustee (incorporated by reference to the
identically numbered exhibit to the registrant's registration
statement on Form S-3 (File No. 33-27713)).
(4)(b) Indenture, dated as of May 31, 1991, between the registrant and
Manufacturers Hanover Trust Company, as trustee (incorporated by
reference to Exhibit No. (4)(a) to registrant's registration
statement on Form S-3 (File No. 33-40933)).
(4)(c) Except as set forth in (4)(a) and 4(b) above, the instruments
defining the rights of holders of long-term debt securities of the
registrant and its subsidiaries are omitted pursuant to Section
(b)(4)(iii) of Item 601 of Regulation S-K. Registrant hereby
agrees to furnish copies of these instruments to the SEC upon
request.
(4)(d) Form of Deposit Agreement (incorporated by reference to Exhibit
(4)(d) to the registrant's registration statement on Form S-3
(File No. 33-59140)).
(10)(a)(1) Employee Convertible Debenture Purchase Plan (incorporated by
reference to Exhibit A to the registrant's proxy statement
furnished to stockholders in connection with the solicitation of
proxies for the registrant's Annual Meeting of Stockholders held
on September 21, 1987).*
(10)(a)(2) 1989 Deferred Compensation Plan for Executive Officers
(incorporated by reference to Exhibit B to the registrant's proxy
statement furnished to stockholders in connection with the
solicitation of proxies for the registrant's Annual Meeting of
Stockholders held on October 29, 1990).*
(10)(a)(3) Management Compensation Plan, as amended and restated as of July
1, 1994 (incorporated by reference to Exhibit 10(a)(4) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1994).*
(10)(a)(4) Amendment to the Management Compensation Plan, adopted September
10, 1996 (incorporated by reference to Exhibit 10(a)(5) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
30
EXHIBITS:
(10)(a)(5) Amendment to the Management Compensation Plan, adopted September
18, 1997, subject to approval of Stockholders at the 1997 Annual
Meeting.*
(10)(a)(6) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of January 22, 1997 (the "CAP Plan")
(incorporated by reference to Exhibit 10(a)(6) to the registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended
December 31. 1996, certain provisions of which are subject to
approval of Stockholders at the 1997 Annual Meeting).*
(10)(a)(7) Amendment to the CAP Plan, adopted September 10, 1997 subject to
the approval of Stockholders at the 1997 Annual Meeting.*
(10)(a)(8) Performance Compensation Plan, adopted September 10, 1996 (filed
as Exhibit A to the registrant's proxy statement furnished to
Stockholders in connection with the solicitation of proxies for
the registrant's Annual Meeting of Stockholders to be held on
October 28, 1996).*
(10)(a)(9) Amendment to the Performance Compensation Plan, adopted September
10, 1997, subject to approval of stockholders at the 1997 Annual
Meeting.*
(10)(a)(10) The Bear Stearns Companies Inc. AE Investment and Deferred
Compensation Plan, effective January 1, 1989 (the "AE Investment
and Deferred Compensation Plan") (incorporated by reference to
Exhibit 10(a)(14) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1996).*
(10)(a)(11) Amendment to the AE Investment and Deferred Compensation Plan,
adopted April 29, 1996 and effective as of January 1, 1995
(incorporated by reference to Exhibit 10(a)(15) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
(10)(b)(1) Lease, dated as of November 1, 1991, between Forest City Jay
Street Associates and The Bear Stearns Companies Inc. with respect
to the premises located at One Metrotech Center, Brooklyn, New
York (incorporated by reference to Exhibit (10)(b)(1) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1992).
(10)(b)(2) Lease, dated as of March 6, 1987, among Olympia & York 245 Lease
Company, 245 Park Avenue Company and The Bear Stearns Companies
Inc. (incorporated by reference to Exhibit (10)(c)(2) to the
registrant's registration statement on Form S-1 (File No.
33-15948)).
(10)(b)(3) Lease, dated as of August 26, 1994, between Tenth City Associates
and The Bear Stearns Companies Inc. (incorporated by reference to
Exhibit 10(b)(3) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1994).
(11) Statement re: computation of per share earnings.
(12) Statement re: computation of ratio of earnings to fixed charges.
(13) 1997 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) Subsidiaries of the registrant.
31
EXHIBITS:
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedule.
- ---------------------------------
* Executive Compensation Plans and Arrangements
32
(B) REPORTS ON FORM 8-K.
The Company filed the following Current Report on Form 8-K during
the last quarter of the period covering this report:
A Current Report on Form 8-K dated April 16, 1997, pertaining to
the registrant's results of operations for the three months and nine
months ended March 27, 1997 and to the declaration of dividends.
A Current Report on Form 8-K dated May 16, 1997 pertaining to a
tax opinion in connection with the issuance of S&P Linked Notes.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 29th day of
September, 1997.
THE BEAR STEARNS COMPANIES INC.
(Registrant)
By: /s/ William J. Montgoris
------------------------------
William J. Montgoris
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of September, 1997.
NAME TITLE
---- -----
/s/ Alan C. Greenberg Chairman of the Board; Director
- ----------------------------------
Alan C. Greenberg
/s/ James E. Cayne President and Chief Executive Officer (Principal
- ---------------------------------- Executive Officer); Director
James E. Cayne
/s/ William J. Montgoris Chief Operating Officer; Director
- ----------------------------------
William J. Montgoris
/s/ Mark E. Lehman Executive Vice President; Director
- ----------------------------------
Mark E. Lehman
/s/ Alan D. Schwartz Executive Vice President; Director
- ----------------------------------
Alan D. Schwartz
/s/ Warren J. Spector Executive Vice President; Director
- ----------------------------------
Warren J. Spector
34
Treasurer; Director
- ----------------------------------
Michael Minikes
/s/ E. Garrett Bewkes III Director
- ----------------------------------
E. Garrett Bewkes III
/s/ Denis A. Bovin Director
- ----------------------------------
Denis A. Bovin
/s/ Peter D. Cherasia Director
- ----------------------------------
Peter D. Cherasia
/s/ Ralph R. Cioffi Director
- ----------------------------------
Ralph R. Cioffi
/s/ Barry J. Cohen Director
- ----------------------------------
Barry J. Cohen
Director
- ----------------------------------
Wendy L. de Monchaux
Director
- ----------------------------------
Bruce E. Geismar
/s/ Carl D. Glickman Director
- ----------------------------------
Carl D. Glickman
Director
- ----------------------------------
Thomas R. Green
Director
- ----------------------------------
Donald J. Harrington
Director
- ----------------------------------
Richard Harriton
Director
- ----------------------------------
Daniel L. Keating
35
/s/ David A. Liebowitz Director
- ----------------------------------
David A. Liebowitz
Director
- ----------------------------------
Bruce M. Lisman
Director
- ----------------------------------
Roland N. Livney
/s/ Donald R. Mullen Jr. Director
- ----------------------------------
Donald R. Mullen Jr.
Director
- ----------------------------------
Frank T. Nickell
Director
- ----------------------------------
Craig M. Overlander
/s/ Stephen E. Raphael Director
- ----------------------------------
Stephen E. Raphael
/s/ E. John Rosenwald Jr. Vice Chairman of the Board; Director
- ----------------------------------
E. John Rosenwald Jr.
Director
- ----------------------------------
Lewis A. Sachs
/s/ Richard Sachs Director
- ----------------------------------
Richard Sachs
/s/ Frederic V. Salerno Director
- ----------------------------------
Frederic V. Salerno
Director
- ----------------------------------
David M. Solomon
/s/ Robert M. Steinberg Director
- ----------------------------------
Robert M. Steinberg
36
Vice Chairman of the Board; Director
- ----------------------------------
Michael L. Tarnopol
/s/ Vincent Tese Director
- ----------------------------------
Vincent Tese
/s/ Michael J. Urfirer Director
- ----------------------------------
Michael J. Urfirer
Director
- ----------------------------------
Fred Wilpon
Director
- ----------------------------------
Uzi Zucker
/s/ Michael J. Abatemarco Controller
- ----------------------------------
Michael J. Abatemarco
/s/ Samuel L. Molinaro Jr. Senior Vice President-Finance and Chief Financial
- ---------------------------------- Officer (Principal Accounting Officer and Principal
Samuel L. Molinaro Jr. Financial Officer)
37
THE BEAR STEARNS COMPANIES INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS 14 (A) (1) AND 14 (A) (2)
FINANCIAL STATEMENTS PAGE REFERENCE
ANNUAL
FORM 10-K REPORT *
Independent Auditors' Report 68
THE BEAR STEARNS COMPANIES INC.
(i) Consolidated Statements of Income-
fiscal years ended June 30, 1997, 1996 and 1995 48
(ii) Consolidated Statements of Financial Condition at
June 30, 1997 and 1996 49
(iii) Consolidated Statements of Changes in Stockholders' Equity -
fiscal years ended June 30, 1995, 1996 and 1997 50-51
(iv) Consolidated Statements of Cash Flows-
fiscal years ended June 30, 1997, 1996 and 1995 52
(v) Notes to Consolidated Financial Statements 53-67
FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report F-2
I Condensed financial information of registrant F-3 - F-6
II Valuation and qualifying accounts F-7
* Incorporated by reference from the indicated pages of the 1997 Annual
Report to Stockholders.
All other schedules are omitted because they are not applicable or the
requested information is included in the consolidated financial
statements or notes thereto.
F-1
DELOITTE &
TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Bear Stearns Companies Inc.:
We have audited the consolidated financial statements of The Bear Stearns
Companies Inc. and Subsidiaries as of June 30, 1997 and 1996, and for each of
the three years in the period ended June 30, 1997, and have issued our report
thereon dated September 2, 1997; such consolidated financial statements and
report are included in the Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included the financial statement schedules
of The Bear Stearns Companies Inc. and Subsidiaries, listed in Item 14. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
September 2, 1997
F-2
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1995
----------- ---------- ----------
Revenues
Interest
Coupon.................................. $ 744 $ - $ 8,397
Intercompany............................ 979,757 869,127 711,701
Other..................................... 82,682 59,811 52,444
----------- ---------- ----------
1,063,183 928,938 772,542
----------- ---------- ----------
Expenses
Interest.................................. 1,039,461 876,536 743,730
Other..................................... 86,844 66,502 51,788
----------- ---------- ----------
1,126,305 943,038 795,518
----------- ---------- ----------
Loss before benefit from provision
for income taxes and equity in earnings
of subsidiaries............................. (63,122) (14,100) (22,976)
Benefit from provision for income taxes..... (23,206) 5,689 2,427
----------- ---------- ----------
Loss before equity in earnings of
subsidiaries................................ (39,916) (19,789) (25,403)
Equity in earnings of subsidiaries.......... 653,246 510,427 266,014
----------- ---------- ----------
Net income.................................. $ 613,330 $ 490,638 $ 240,611
=========== ========== ==========
See Notes to Condensed Financial Information.
F-3
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 1997 June 30, 1996
------------- -------------
ASSETS
Cash .......................................................... $ 79 $ 2,783
Receivables from subsidiaries.................................. 21,365,235 15,306,820
Investment in subsidiaries, at equity.......................... 3,636,514 2,958,437
Property, equipment and leasehold improvements, net of
accumulated depreciation and amortization of $375,021
in 1997 and $274,319 in 1996................................... 311,405 263,916
Other assets................................................... 922,459 372,055
------------ ------------
Total Assets........................................... $ 26,235,692 $ 18,904,011
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.......................................... $ 13,496,206 $ 9,531,203
Payables to subsidiaries....................................... 48,919 24,355
Other liabilities.............................................. 904,026 368,556
------------ ------------
14,449,151 9,924,114
------------ ------------
Long-term borrowings........................................... 8,120,328 6,043,614
------------ ------------
Long-term borrowings from subsidiaries......................... 389,842 190,869
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value; 10,000,000 shares authorized:
Adjustable Rate Cumulative Preferred Stock, Series A; $50
liquidation preference; 3,000,000 shares issued............. 150,000 150,000
Cumulative Preferred Stock, Series B; $200 liquidation
preference; 937,500 shares issued and outstanding........... 187,500 187,500
Cumulative Preferred Stock, Series C; $200 liquidation
preference; 500,000 shares issued and outstanding.......... 100,000 100,000
Common stock, $1.00 par value; 200,000,000 shares authorized;
167,784,941 shares and 159,803,764 shares issued in 1997
and 1996, respectively......................................
Paid-in capital................................................ 167,785 159,804
Retained earnings.............................................. 1,874,016 1,696,217
Capital Accumulation Plan...................................... 1,031,736 694,108
Treasury stock, at cost - 655,007 471,191
Adjustable Rate Cumulative Preferred Stock, Series A;
2,520,750 shares and 2,341,350 shares in 1997 and
1996, respectively........................................ (103,421) (95,389)
Common stock; 50,191,531 shares and 41,664,729 shares
in 1997 and 1996, respectively............................ (772,551) (598,217)
Note receivable from ESOP Trust................................ (13,701) (19,800)
------------ ------------
Total Stockholders' Equity..................................... 3,276,371 2,745,414
------------ ------------
Total Liabilities and Stockholders' Equity..................... $ 26,235,692 $ 18,904,011
============ ============
See Notes to Condensed Financial Information.
F-4
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1997 June 30, 1996 June 30, 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income....................................... $ 613,330 $ 490,638 $ 240,611
Adjustments to reconcile net income to cash
used in operating activities:
Equity in earnings of subsidiaries, net
of dividends received........................ (279,147) (300,043) (193,724)
Other........................................ 84,658 66,081 65,118
(Increases) decreases in assets:
Receivables from subsidiaries................ (6,058,415) (3,187,678) (1,313,631)
Investments in subsidiaries, net............. (398,930) (236,437) 10,025
Other assets................................. (513,631) 1,490 (18,744)
Increases (decreases) in liabilities:
Payables to subsidiaries..................... 24,564 (6,383) (477)
Other liabilities............................ 542,957 174,542 48,042
----------- ----------- -----------
Cash used in operating activities................ (5,984,614) (2,997,790) (1,162,780)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from short-term borrowings.......... 3,965,003 1,306,746 648,360
Issuance of long-term borrowings................. 3,129,439 2,654,134 1,040,090
Increase in long-term borrowings
from subsidiaries.............................. 198,973 -- --
Capital Accumulation Plan........................ 196,114 181,702 87,560
Common Stock distributions....................... 4,006 6,497 18,088
Note repayment from ESOP Trust................... 6,099 5,647 5,229
Payments for:
Retirement of Senior Notes................... (1,062,844) (674,000) (400,300)
Treasury stock purchases..................... (202,296) (191,474) (70,373)
Cash dividends paid.............................. (93,784) (95,001) (92,642)
----------- ----------- -----------
Cash provided by financing activities............ 6,140,710 3,194,251 1,236,012
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property, equipment and leasehold
improvements..................................... (124,590) (77,510) (81,282)
Purchases of investment securities and
other assets................................... (46,706) (118,938) -
Proceeds from sale of investment securities
and other...................................... 12,496 742 9,217
----------- ----------- -----------
Cash used in investing activities................ (158,800) (195,706) (72,065)
----------- ----------- -----------
Net (decrease) increase in cash.................. (2,704) 755 1,167
Cash, beginning of year.......................... 2,783 2,028 861
----------- ----------- -----------
Cash, end of year................................ $ 79 $ 2,783 $ 2,028
=========== =========== ===========
See Notes to Condensed Financial Information.
F-5
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. GENERAL
The condensed financial information of the Company (Parent Company Only)
should be read in conjunction with the consolidated financial statements
of The Bear Stearns Companies Inc. and the notes thereto incorporated by
reference in this report.
2. DIVIDENDS RECEIVED FROM SUBSIDIARIES
The Company received from its consolidated subsidiaries cash dividends
of $374.1 million, $210.4 million, and $72.2 million for the fiscal
years ended June 30, 1997, 1996 and 1995, respectively.
3. STATEMENT OF CASH FLOWS
Income taxes paid (consolidated) totaled $478.4 million, $279.0 million,
and $125.6 million in the fiscal years ended June 30, 1997, 1996 and
1995, respectively. Cash payments for interest approximated interest
expense for the fiscal years ended June 30, 1997, 1996 and 1995,
respectively.
F-6
SCHEDULE II
THE BEAR STEARNS COMPANIES INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS)
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
DESCRIPTION EGINNING OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------------ -------- ---------- -------------
Allowance for Doubtful Accounts:
Year ended June 30, 1997... $50,649 $ 4,916 $(4,166) $51,399
Year ended June 30, 1996... 54,175 4,892 (8,418) 50,649
Year ended June 30, 1995... 42,053 16,479 (4,357) 54,175
F-7
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(a)(1) Restated Certificate of Incorporation of the registrant, filed
September 11, 1985 (incorporated by reference to Exhibit No.
(4)(a)(1) to the registrant's registration statement on Form S-8
(File No.
33-49979)).
(3)(a)(2) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(2) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(3) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed October 29, 1985
(incorporated by reference to Exhibit No. (4)(a)(3) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(4) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
February 14, 1986 (incorporated by reference to Exhibit No.
(4)(a)(4) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(5) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed September 18, 1986
(incorporated by reference to Exhibit No. (4)(a)(5) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(6) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed February 19, 1987
(incorporated by reference to Exhibit No. (4)(a)(6) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(7) Certificate of Correction to the Restated Certificate of
Incorporation of the registrant, filed February 25, 1987
(incorporated by reference to Exhibit No. (4)(a)(7) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(8) Certificate of Change of Address of Registered Agent to the
Restated Certificate of Incorporation of the registrant, filed
October 27, 1988 (incorporated by reference to Exhibit No.
(4)(a)(8) to the registrant's registration statement on Form S-8
(File No. 33-49979)).
(3)(a)(9) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 6, 1989
(incorporated by reference to Exhibit No. (4)(a)(9) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(10) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 7, 1990
(incorporated by reference to Exhibit No. (4)(a)(10) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(11) Certificate of Amendment to the Restated Certificate of
Incorporation of the registrant, filed November 10, 1992
(incorporated by reference to Exhibit No. (4)(a)(11) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(12) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed March 23, 1993
(incorporated by reference to Exhibit No. (4)(a)(12) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(13) Certificate of Stock Designation to the Restated Certificate of
Incorporation of the registrant, filed July 22, 1993 (incorporated
by reference to Exhibit No. (4)(a)(13) to the registrant's
registration statement on Form S-8 (File No. 33-49979)).
(3)(a)(14) Form of Certificate of Stock Designations to the Restated
Certificate of Incorporation of the registrant (incorporated by
reference to Exhibit No. 4.4 to the registrant's registration
statement on Form 8-A filed on February 23, 1994).
(3)(b) Amended and Restated By-laws of the registrant (incorporated by
reference to Exhibit No. (3)(b) to registrant's Annual Report on
Form 10-K for its fiscal year ended June 30, 1991 and Exhibit No.
(3)(b) to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 1992).
(4)(a) Indenture, dated as of April 13, 1989, between the registrant and
Citibank, N.A., as trustee (incorporated by reference to the
identically numbered exhibit to the registrant's registration
statement on Form S-3 (File No. 33-27713)).
(4)(b) Indenture, dated as of May 31, 1991, between the registrant and
Manufacturers Hanover Trust Company, as trustee (incorporated by
reference to Exhibit No. (4)(a) to registrant's registration
statement on Form S-3 (File No. 33-40933)).
(4)(c) Except as set forth in (4)(a) and 4(b) above, the instruments
defining the rights of holders of long-term debt securities of the
registrant and its subsidiaries are omitted pursuant to Section
(b)(4)(iii) of Item 601 of Regulation S-K. Registrant hereby
agrees to furnish copies of these instruments to the SEC upon
request.
(4)(d) Form of Deposit Agreement (incorporated by reference to Exhibit
(4)(d) to the registrant's registration statement on Form S-3
(File No. 33-59140)).
(10)(a)(1) Employee Convertible Debenture Purchase Plan (incorporated by
reference to Exhibit A to the registrant's proxy statement
furnished to stockholders in connection with the solicitation of
proxies for the registrant's Annual Meeting of Stockholders held
on September 21, 1987).*
(10)(a)(2) 1989 Deferred Compensation Plan for Executive Officers
(incorporated by reference to Exhibit B to the registrant's proxy
statement furnished to stockholders in connection with the
solicitation of proxies for the registrant's Annual Meeting of
Stockholders held on October 29, 1990).*
(10)(a)(3) Management Compensation Plan, as amended and restated as of July
1, 1994 (incorporated by reference to Exhibit 10(a)(4) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1994).*
(10)(a)(4) Amendment to the Management Compensation Plan, adopted September
10, 1996 (incorporated by reference to Exhibit 10(a)(5) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
(10)(a)(5) Amendment to the Management Compensation Plan, adopted September
18, 1997, subject to approval of Stockholders at the 1997 Annual
Meeting.*
(10)(a)(6) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of January 22, 1997 (the "CAP Plan")
(incorporated by reference to Exhibit 10(a)(6) to the registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended
December 31. 1996, certain provisions of which are subject to
approval of Stockholders at the 1997 Annual Meeting).*
(10)(a)(7) Amendment to the CAP Plan, adopted September 10, 1997 subject to
the approval of Stockholders at the 1997 Annual Meeting.*
(10)(a)(8) Performance Compensation Plan, adopted September 10, 1996 (filed
as Exhibit A to the registrant's proxy statement furnished to
Stockholders in connection with the solicitation of proxies for
the registrant's Annual Meeting of Stockholders to be held on
October 28, 1996).*
(10)(a)(9) Amendment to the Performance Compensation Plan, adopted September
10, 1997, subject to approval of stockholders at the 1997 Annual
Meeting.*
(10)(a)(10) The Bear Stearns Companies Inc. AE Investment and Deferred
Compensation Plan, effective January 1, 1989 (the "AE Investment
and Deferred Compensation Plan") (incorporated by reference to
Exhibit 10(a)(14) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1996).*
(10)(a)(11) Amendment to the AE Investment and Deferred Compensation Plan,
adopted April 29, 1996 and effective as of January 1, 1995
(incorporated by reference to Exhibit 10(a)(15) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1996).*
(10)(b)(1) Lease, dated as of November 1, 1991, between Forest City Jay
Street Associates and The Bear Stearns Companies Inc. with respect
to the premises located at One Metrotech Center, Brooklyn, New
York (incorporated by reference to Exhibit (10)(b)(1) to the
registrant's Annual Report on Form 10-K for its fiscal year ended
June 30, 1992).
(10)(b)(2) Lease, dated as of March 6, 1987, among Olympia & York 245 Lease
Company, 245 Park Avenue Company and The Bear Stearns Companies
Inc. (incorporated by reference to Exhibit (10)(c)(2) to the
registrant's registration statement on Form S-1 (File No.
33-15948)).
(10)(b)(3) Lease, dated as of August 26, 1994, between Tenth City Associates
and The Bear Stearns Companies Inc. (incorporated by reference to
Exhibit 10(b)(3) to the registrant's Annual Report on Form 10-K
for its fiscal year ended June 30, 1994).
(11) Statement re: computation of per share earnings.
(12) Statement re: computation of ratio of earnings to fixed charges.
(13) 1997 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) Subsidiaries of the registrant.
(23) Consent of Deloitte & Touche LLP.
(27) Financial Data Schedule.
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* Executive Compensation Plans and Arrangements