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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 for the fiscal year ended
November 30, 2003.
or
[_] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
_____________ to _____________
Commission file number: 1-8989
THE BEAR STEARNS COMPANIES INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3286161
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
383 Madison Avenue, New York, New York 10179
(212) 272-2000
(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:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, par value $1.00 per share New York Stock Exchange
Depositary Shares, each representing a one-fourth interest in New York Stock Exchange
a share of 6.15% Cumulative Preferred Stock, Series E
Depositary Shares, each representing a one-fourth interest in New York Stock Exchange
a share of 5.72% Cumulative Preferred Stock, Series F
Depositary Shares, each representing a one-fourth interest New York Stock Exchange
in a share of 5.49% Cumulative Preferred Stock, Series G
7.5% Trust Issued Preferred Securities, of Bear Stearns New York Stock Exchange
Capital Trust II (and registrant's guarantee thereof)
Principal Protected Sector Selector Notes Due 2008 American Stock Exchange
Principal Protected Notes Linked to the S&P 500 Index Due 2008 American Stock Exchange
Principal Protected Notes Linked to the Price Performance of American Stock Exchange
the Nasdaq - 100 Index Due 2009
Accelerated Market Participation Securities (Linked to the American Stock Exchange
S&P 500 Index)
Securities registered pursuant to Section 12(g) of the Act:
None
(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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [x] No [_]
At February 19, 2004, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was
approximately $8,341,877,785. 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 February 19, 2004, the registrant had 103,705,451 outstanding 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 2003 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
March 31, 2004, 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 November 30, 2003.
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THE BEAR STEARNS COMPANIES INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED NOVEMBER 30, 2003
Page
Form 10-K Item Number: No.
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PART I
Item 1. Business
General Development of the Business 3
Financial Information about Industry Segments 3
Narrative Description of Business 4
Competition 13
Regulations and Other Factors 13
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 26
Executive Officers of The Bear Stearns Companies Inc. 27
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer 29
Purchases of Equity Securities
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of Financial 29
Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on Accounting 29
and Financial Disclosure
Item 9A. Controls and Procedures 29
PART III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related 30
Stockholder Matters
Item 13. Certain Relationships and Related Transactions 30
Item 14. Principal Accountant Fees and Services 30
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 31
Signatures 35
Index to Financial Statements and Financial Schedules F-1
2
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 broker-dealer and international bank subsidiaries,
principally Bear, Stearns & Co. Inc. ("Bear Stearns"); Bear, Stearns Securities
Corp. ("BSSC"); Bear, Stearns International Limited ("BSIL") and Bear Stearns
Bank plc ("BSB") is a leading investment banking, securities and derivatives
trading, clearance and brokerage firm serving corporations, governments,
institutional and individual investors worldwide. BSSC, a subsidiary of Bear
Stearns, provides professional and correspondent clearing services, in addition
to clearing and settling customer transactions and certain proprietary
transactions of the Company. The Company succeeded on October 29, 1985 to the
business of Bear, Stearns & Co., a New York limited partnership (the
"Partnership"). In addition to conducting a substantial portion of its operating
activities through certain of its regulated subsidiaries (Bear Stearns, BSSC,
BSIL and BSB), the Company also conducts significant activities through other
wholly-owned subsidiaries including: Bear Stearns Global Lending Limited,
Custodial Trust Company, Bear Stearns Financial Products Inc., Bear Stearns
Capital Markets Inc., EMC Mortgage Corporation, Bear Stearns Mortgage Capital
Corporation, Bear Stearns Credit Products Inc. and Bear Stearns Forex Inc. 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.
The Company's website is http://www.bearstearns.com. The Company makes
available free of charge on its website its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5
filed on behalf of directors and executive officers and any amendments to such
reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission (the "SEC"). Also posted on the Company's
website, and available in print upon request of any stockholder to the Investor
Relations Department, are charters for the Company's Audit Committee,
Compensation Committee, Corporate Governance Committee, Nominating Committee and
Qualified Legal Compliance Committee. Copies of the Corporate Governance
Guidelines and the Code of Business Conduct and Ethics (the "Code") governing
our directors, officers and employees are also posted on the Company's website
within the "Corporate Governance" section under the heading "About Bear
Stearns". Within the time period required by the SEC and the New York Stock
Exchange, Inc. (the "NYSE") the Company will post on its website any
modifications to the Code and any waivers applicable to Senior Executives, as
defined in the Code, as required by the Sarbanes-Oxley Act of 2002.
The Investor Relations Department can be contacted at The Bear Stearns
Companies Inc., 383 Madison Avenue, New York, New York 10179, Attn: Investor
Relations, telephone: (212) 272-2000.
(b) Financial Information about Industry Segments
The Company is primarily engaged in business as a securities broker and
dealer operating in three principal segments: Capital Markets, Global Clearing
Services and Wealth Management. These segments are analyzed separately due to
the distinct nature of the products they provide and the clients they serve.
Certain Capital Markets products are distributed by the Wealth Management and
Global Clearing Services distribution networks, with the related revenues of
such intersegment services allocated to the respective segments.
The Capital Markets segment comprises the institutional equities, fixed
income and investment banking areas. The Capital Markets segment operates as a
single integrated unit that provides the sales, trading and origination effort
for various fixed income, equity and advisory products and services. Each of the
three businesses works in tandem to deliver these services to institutional and
corporate clients. Institutional equities consists of research, sales and
trading in areas such as domestic and international equities, block trading,
convertible bonds, over-the-counter ("OTC") equities, equity derivatives, risk
and convertible arbitrage and through a joint venture, the NYSE, American Stock
Exchange, Inc. ("AMEX") and International Securities
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Exchange ("ISE") specialist activities. Fixed income includes sales, trading and
research provided to institutional clients across a variety of products such as
mortgage- and asset-backed securities, corporate and government bonds,
municipal, high yield products, foreign exchange, interest rate and credit
derivatives. Investment banking provides services in capital raising, strategic
advice, mergers and acquisitions and merchant banking. Capital raising
encompasses the Company's underwriting of equity, investment-grade, municipal
and high yield debt products.
The Global Clearing Services segment provides execution, clearing, margin
lending and securities borrowing to facilitate customer short sales to clearing
clients worldwide. Prime brokerage clients include hedge funds and clients of
money managers, short sellers, arbitrageurs and other professional investors.
Fully disclosed clients engage in either the retail or institutional brokerage
business. At November 30, 2003, the Company held approximately $203.6 billion of
equity in Global Clearing Services client accounts.
The Wealth Management segment is composed of the Private Client Services
("PCS") and asset management areas. PCS provides high-net-worth individuals with
an institutional level of investment service, including access to the Company's
resources and professionals. At November 30, 2003, PCS had 513 account
executives in its principal office, six regional offices and two international
offices. Asset management manages equity, fixed income and alternative assets
for corporate pension plans, public systems, endowments, foundations,
multi-employer plans, insurance companies, corporations, families and
high-net-worth individuals in the US and abroad. The asset management area had
$27.1 billion in assets under management at November 30, 2003, which compared to
$24.0 billion in assets under management at November 30, 2002.
Financial information regarding the Company's business segments and
foreign operations as of November 30, 2003, November 30, 2002, and November 30,
2001 and for the fiscal years ended November 30, 2003, November 30, 2002 and
November 30, 2001 is set forth under "Item 8. Financial Statements and
Supplementary Data," in Note 18 of Notes to Consolidated Financial Statements,
entitled "Segment and Geographic Area Data," and is incorporated herein by
reference.
(c) Narrative Description of Business
The business of the Company includes: market-making and trading in US
government, government agency, corporate debt and equity, mortgage-related,
asset-backed, municipal securities and high yield products; trading in options,
futures, foreign currencies, interest rate swaps and other derivative products;
securities, options and futures brokerage; providing securities clearance
services; managing equity and fixed income assets for institutional and
individual clients; financing customer activities; securities lending;
securities and futures arbitrage; involvement in specialist activities on the
NYSE, AMEX and ISE; underwriting and distributing securities; arranging for the
private placement of securities; assisting in mergers, acquisitions,
restructurings and leveraged transactions; making principal investments in
leveraged acquisitions; engaging in commercial real estate activities;
investment management and advisory services; fiduciary, custody, agency and
securities research services.
The Company's business is conducted from its principal offices in New York
City; from domestic regional offices in Atlanta, Boston, Chicago, Dallas,
Denver, Los Angeles, San Francisco and San Juan; from representative offices in
Beijing, Herzliya, Hong Kong, Sao Paulo and Shanghai; through international
offices in Dublin, Hong Kong, London, Lugano, Milan, Singapore and Tokyo; and
through joint ventures with other firms in Belgium, Greece, Spain and Sweden.
The Company's international offices provide services and engage in investment
activities involving foreign clients and international transactions.
Additionally, certain of these foreign offices provide services to US clients.
Bear Stearns and BSSC are broker-dealers registered with the SEC.
Additionally, Bear Stearns is registered as an investment adviser with the SEC.
Bear Stearns and/or BSSC are also members of the NYSE, all other principal US
securities and futures exchanges, the National Association of Securities
Dealers, Inc. ("NASD"), the Commodity Futures Trading Commission ("CFTC"), the
National Futures Association ("NFA") and the ISE. Bear Stearns is a "primary
dealer" in US government securities as designated by the Federal Reserve Bank of
New York.
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BSIL is a full service broker-dealer based in London and among other
European exchanges, is a member of Eurex Deutschland ("EUREX"), the
International Petroleum Exchange ("IPE"), Euronext Liffe ("LIFFE"), Euronext
Paris and NASDAQ Europe ("NASDAQ"). BSIL is supervised by and is regulated in
accordance with the rules of the Financial Services Authority ("FSA").
BSB is an Ireland-based bank, which was registered in 1996 and
subsequently granted a banking license on April 10, 1997 under the Irish Central
Bank Act, 1971. BSB allows the Company's existing and prospective clients the
opportunity of dealing with a banking counterparty.
Bear Stearns Global Lending Limited ("BSGL") provides loans to certain
Bear Stearns customers. BSGL is incorporated in the Cayman Islands.
Custodial Trust Company ("CTC"), an FDIC insured New Jersey state
chartered bank, offers a range of trust, lending and securities-clearance
services. CTC provides the Company with banking powers including access to the
securities and funds-wire services of the Federal Reserve System. CTC provides
trust, custody, agency and securities lending services for institutional
accounts; commercial and margin lending; the clearance of government securities
for institutions and dealers; and the processing of mortgage and
mortgage-related products, including derivatives and collateralized mortgage
obligations products. At November 30, 2003, CTC held approximately $107 billion
of assets for clients, including institutional clients such as pension funds,
mutual funds, endowment funds and insurance companies.
Bear Stearns Financial Products Inc. ("BSFP") transacts business as a
triple-A-rated counterparty to eligible clients, offering a wide range of fixed
income and equity derivative products. Eligible clients are those rated A3 or
better by Moody's Investors Service, Inc. and A- or better by Standard & Poor's
Ratings Services or counterparties acceptable to both rating agencies. BSFP
transfers its market risk associated with derivative transactions to Bear
Stearns Capital Markets Inc., an affiliate of BSFP and a wholly-owned subsidiary
of the Company. BSFP is incorporated in the state of Delaware.
Bear Stearns Capital Markets Inc. ("BSCM") is engaged in fixed income
derivatives transactions and hedges associated therewith. BSCM is incorporated
in the state of Delaware.
EMC Mortgage Corporation ("EMC"), is a HUD and Freddie MAC approved lender
based in Irving, Texas. EMC purchases both conforming and non-conforming,
investment-grade and non-investment grade, conventional fixed rate and
adjustable rate residential mortgage loans with servicing released or retained
and sells such loans to investors. EMC also purchases and sells residual
certificates and mortgage servicing rights. In addition, through a subsidiary,
EMC may originate commercial construction loans through approved brokers.
Bear Stearns Mortgage Capital Corporation ("BSMCC") buys conventional
residential mortgages as a secondary market conduit and resells these mortgages
to institutional investors as whole loans or to a special purpose entity in
conjunction with a securitization transaction.
Bear Stearns Credit Products Inc. ("BSCPI") is engaged in credit
derivatives transactions and hedges associated therewith. BSCPI is incorporated
in the state of Delaware.
Bear Stearns Forex Inc. ("BSFX") is a foreign exchange dealer engaged in
foreign currency transactions and hedges associated therewith. BSFX is
incorporated in the state of Delaware.
As of November 30, 2003, the Company had 10,532 employees.
The following areas are included in the three business segments mentioned
above in Item 1(b).
Equities
General. The Company provides customers with liquidity, sales and trading
expertise and equity research in products such as domestic and international
equities, block trading, convertible bonds, OTC equities,
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equity derivatives, risk and convertible arbitrage and through our joint
venture, NYSE, AMEX and ISE specialist activities.
Options 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
specific recommendations relating to options and index trading.
Arbitrage. The Company engages for its own account in both "classic" and
"risk" arbitrage. The Company's risk arbitrage activities generally involve the
purchase of securities at a discount from a value that is expected to be
realized if a proposed or anticipated merger, recapitalization, tender offer 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
future date and (iv) between the prices of securities with contracts settling on
different dates. The Company also examines relative value strategies. These
strategies focus on pairs of equities or different levels of the capital
structure of the same firm. In these relative value cases, the Company believes
strong reasons exist for the prices of the securities to be highly correlated.
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 covering a wide spectrum of equity and
commodity products which include the use of futures, listed and OTC options and
swaps.
Equity Securities.
(i) OTC. 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 OTC market.
(ii) Direct Access. The Company operates a direct access business by
providing execution and operations services to qualified
institutional investors. Such investors may directly access brokers
on the floor of the NYSE and execute and service orders directly
with them.
Equity Research. The Equity Research Department provides innovative,
in-depth analysis of the global investment environment. Known for theme-oriented
research underpinned by meticulous financial modeling, the department offers
detailed information on over 1,000 companies in roughly 100 industries
(including approximately 50% of the Standard & Poor's 500 Index and
approximately 62% of the market capitalization of the Standard & Poor's 500
Index). It also has a group of economists and strategists that closely monitors
domestic and international markets. The department's broad-based domestic
coverage is complemented by research teams in Latin America, Asia and Europe,
giving its clients an advantage in a world where national boundaries are
becoming more porous. This breadth of coverage allows the department to maintain
a particularly wide-ranging recommended securities list and gives clients a
steady stream of new investment ideas and insights into the more obscure corners
of the financial world.
Convertible Securities. The Company engages in the sales and trading of
equity-linked securities including convertible bonds, convertible preferreds,
equity-linked notes and warrants. Market coverage includes the United States,
Europe, Asia and Latin America.
Equity Sales. The Company is one of the leading firms in the US providing
brokerage services to institutional investors. Institutional equity sales
involves the execution of transactions in US equity and equity-linked securities
for domestic and foreign institutional customers and providing these customers
with liquidity, trading expertise, trade execution, research and investment
advice. The Company provides transaction services for institutional customers
who trade in futures and futures-related instruments.
Block Stock and Portfolio Trading. The Company effects transactions in
large blocks of securities mainly with institutional customers. The Company also
provides customers execution capabilities for baskets of equity securities using
sophisticated computer systems. Transactions are handled on an agency basis
whenever
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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.
Specialist and Market-Making. The Company engages in specialist and
market-making activities on the NYSE, AMEX and ISE through participation in a
majority-owned joint venture. Such joint venture performs specialist functions
in NYSE-listed stocks as well as stocks and options traded on the AMEX and
performs market-making functions for options traded on the ISE. The rules of
these exchanges generally require specialists to maintain orderly markets in the
securities in which they are specialists, which may require commitments of
significant amounts of capital to the Company's specialist businesses. The
market-making functions of a specialist involve risk of loss during periods of
market fluctuation and volatility, since specialists are obligated to take
positions in their issues counter to the direction of the market in order to
minimize short-term imbalances in the auction market. Due to the occurrence of a
Control Event, as defined by the joint venture Operating Agreement, triggered in
December 2003, the Company is now entitled to designate a majority of the voting
members of the Management Committee, which would result in a controlling
interest of the joint venture. As a result, commencing in fiscal 2004, the
Company will begin consolidating this entity.
Fixed Income
General. The Company makes inter-dealer markets and trades on a principal
basis in a wide range of instruments including: US and foreign government
securities, government agency securities, corporate debt, mortgages,
mortgage-backed and 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 US in such fixed income
securities. Inventories of fixed income securities are generally carried to
facilitate sales to customers and other dealers.
US Government and Agency Obligations. The Company is designated by the
Federal Reserve Bank of New York as a primary dealer in US government
obligations. The Company participates in the auction of, and maintains
proprietary positions in, US Treasury bills, notes, bonds, and stripped
principal and coupon securities. The Company also participates as a selling
group member and/or underwriter in the distribution of various US 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 such positions.
As a primary dealer, Bear Stearns bids directly on all auctions of US
government securities. Additionally, Bear Stearns furnishes periodic reports of
its inventory positions and market transactions in US 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 Federal Reserve Bank of New York's open-market activities. In addition,
the Company engages in matched book activities, which involve acting as an
intermediary between borrowers and lenders of short-term funds, mainly via
repurchase agreements and reverse repurchase agreements. The objective of this
matched book activity is to earn a positive spread between interest rates.
Corporate and Sovereign Fixed Income. The Company acts as a dealer in
corporate and sovereign fixed income securities as well as preferred stocks in
New York, London and Tokyo. The Company 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 of investment-grade and non-investment-grade
corporate debt securities, commercial loans and sovereign and sovereign agency
securities.
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
7
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. The Company acts as underwriter
and placement agent in transactions involving rated and non-rated
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 non-rated
mortgage-related securities. Certain rated and non-rated 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
(i.e., 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.
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 undertaken 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 group 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 that has been foreclosed or was
in the process of foreclosure at the time of its acquisition. The foreclosure
group 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. Moreover, special purpose vehicles
issue REMIC and non-REMIC collateralized mortgage obligations directly or
through trusts that are established for this purpose.
The Company also operates a commercial mortgage conduit that originates
and accumulates commercial mortgage loans for the purpose of securitization.
After receipt of loan applications, extensive credit underwriting reviews are
conducted. After completing pricing analysis and successful negotiations, the
loan will "close" and be included in an ensuing securitization.
Asset-Backed Securities. The Company acts as underwriter and placement
agent with respect to investment-grade and non-investment-grade asset-backed
securities issued by affiliates as well as 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
is a market-maker in these asset-backed securities. While there are ready
markets for the investment-grade asset-backed securities described above,
non-investment-grade securities and related varieties thereof 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 state and local governments and authorities, as well as not-for-profit
institutions. 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-term
and short-term municipal securities, mainly to facilitate transactions with
institutional and individual customers, as well as other dealers. As agent for
issuers, the Company earns fees by remarketing short-term debt instruments to
investors in the variable rate demand and auction rate bond market. The Company
offers a variety of derivative products to issuers to assist them in reducing
their borrowing costs, maximizing investment returns and managing cash flows and
balance sheets, including but not limited to interest rate swaps, caps, floors,
options and forward delivery, and debt service reserve and debt service deposit
agreements. The Company periodically uses municipal and treasury bonds, futures
and interest rate swaps to hedge its
8
cash-market bond inventory. In addition, the Company maintains a hedged
portfolio of high quality municipal securities which are remarketed as
short-term securities in order to generate arbitrage profits .
Derivatives. The Company offers to institutional customers, and trades for
its own account, a variety of exchange-traded and OTC derivative products,
including fixed income, credit and equity derivatives. These products are
transacted, as principal, with customers for hedging (credit, currency, interest
rate or market), risk management, asset/liability management, investment,
financing and other purposes. These transactions are in the form of swaps,
options, swaptions, asset swaps and structured notes, as well as more complex,
structured trades which are customized to meet customers' specific needs.
Derivatives enable customers to build tailor-made risk/return profiles, to
customize transaction terms, to develop packaged solutions to a problem, to
implement trades that otherwise could not be executed and to transact business
with standardized documentation. The Company also enters into derivative
transactions for various purposes and to manage the risks to which the Company
is exposed in its various businesses and through its funding activities. The
Company manages its market and counterparty risks arising from derivatives
activities in a manner consistent with its overall risk management policies. The
Company has 24 hours a day capabilities with personnel based in New York,
Chicago, London, Hong Kong, Tokyo, Singapore and Dublin.
Foreign Exchange. The Company trades foreign exchange with clients as
principal and to hedge its securities positions or other assets and liabilities.
Foreign exchange products include major and minor currencies on a spot and
forward basis, listed and OTC foreign currency options and foreign exchange
futures contracts. Foreign exchange trading desks are maintained in New York and
London and clients can trade or leave orders 24 hours a day. The Company serves
a select list of funds, major corporations and mid-size commercial banks.
Currency option strategies are made available to customers to help them meet
their specific risk management objectives.
Fixed Income Research. The Company is one of the leaders in the
distribution, trading and underwriting of corporate, government, high yield,
emerging markets, municipal debt and mortgage-backed and asset-backed
securities. The Fixed Income Research Department provides ongoing support for
the Company's sales and trading efforts, producing reports, studies and
technical market analyses. The Fixed Income Research Department is comprised of
economists, industry analysts and strategists covering the full range of
research disciplines: quantitative, economic, strategic, credit portfolio,
relative value and market-specific analysis. Fixed Income Research is comprised
of the following three units located in New York and London:
(i) Financial Analytics and Structured Transactions Group ("F.A.S.T.")
is a center of expertise for the creation and analysis of fixed
income and derivative securities worldwide. F.A.S.T. uses innovative
solutions that employ state-of-the-art analytics and technology to
help the Company and its clients successfully meet individual
business objectives. F.A.S.T. is a global resource for financial
engineering and securitization capabilities, fixed income portfolio
management and analytical systems, investment research, trading
technology and general financial expertise. A strategic partner for
the Company's international trading desks, risk management areas and
sales force, F.A.S.T. also serves the Company's external clients. In
addition to formulating and executing customized strategic
investment and trading solutions, F.A.S.T. develops the tools and
recommendations necessary to quantify relevant risks and evaluate
portfolios and securities. F.A.S.T.'s resources are used to create
and model new types of securities, affording clients the unique
perspective of both issuer and investor.
(ii) High grade research provides coverage on 20 industries and
approximately 400 companies whose fixed income securities are
investment grade.
(iii) High yield research provides coverage on approximately 200 corporate
and sovereign issuers whose fixed income securities are
non-investment-grade.
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
9
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 media and entertainment, health
care, financial institutions, industrial, technology and telecommunications.
This list is not exclusive but rather reflects the areas where the Company
believes its knowledge and expertise are strongest. The Company also has a group
that focuses on financial sponsors. 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, leveraged and syndicated bank loans, leveraged
acquisitions, commercial real estate 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.
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 Loan Origination and Syndication. This area of the Company
integrates the origination, structuring, underwriting, distribution and trading
of loans. Such loans include both funded as well as committed investment-grade
and non-investment-grade loans.
Leveraged Acquisitions. The Company makes investments as principal in
leveraged acquisitions and in leveraged buy-out funds as a limited partner. The
Company's investments generally take the form of either common or preferred
stock or warrants. Equity securities purchased in these transactions generally
are held for appreciation and are not readily marketable.
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.
Merchant Banking. Bear Stearns Merchant Banking, the dedicated private
equity arm of the Company invests private equity capital in compelling leverage
buyouts, recapitalizations and growth capital opportunities in a broad range of
industries alongside superior management teams.
Emerging Markets
The Company provides financial services in various emerging markets
worldwide including: securities brokerage, equity and fixed income trading and
sales, and securities research, in addition to offering 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 the private placement of debt and equity securities with
10
institutional investors. The markets currently covered by the Company include
Latin America, Asia and Eastern Europe.
Global Clearing Services
Global Clearing Services provides clearing, custody, financing, securities
lending, trade execution and technology solutions for hedge funds,
broker-dealers and registered investment advisors.
For start-up and established hedge funds worldwide, Global Clearing
Services offers comprehensive "prime brokerage", which includes advanced
web-based portfolio reporting, enhanced leverage programs, term financing, cash
management and capital introduction.
For broker dealers conducting retail, institutional and money management
activities the Company provides "fully disclosed correspondent clearing
services". The Company's advanced proprietary technology, combined with
comprehensive retail products, integrated prime brokerage, operations expertise
and exceptional service have enabled the Company to maintain its industry
leadership for many years.
For registered investment advisors whose strategies include asset
management, leverage and active trading, the Company provides a combination of
trade execution, web-based portfolio reporting for investors and comprehensive
service.
The Company derives revenues from commissions and service charges from
clearing activities and from interest income on margin financing, client short
selling activity, and uninvested balances. The Company extends margin credit
directly to correspondents to finance proprietary activity.
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
correspondent 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.
Securities transactions are effected for customers on either a cash or
margin basis. In a margin transaction, the Company extends credit to a customer
for a portion of the purchase price of the security. Such credit is
collateralized by securities in the customer's accounts in accordance with
regulatory and internal requirements. The Company receives income from interest
charged on such loans at a rate that is based upon the Federal Funds Rate,
Broker Call Rate, or London Inter Bank Offered Rate (LIBOR).
The Company borrows securities from banks and other broker dealers to
facilitate customer and proprietary short selling activity, and lends securities
to broker dealers and other trading entities to cover short sales and to
complete transactions that require delivery of securities by settlement date.
Futures
The Company, through BSSC and other subsidiaries, provides, directly or
through third-party brokers, futures commission merchant services for customers
and other Bear Stearns affiliates who trade contracts in futures on financial
instruments and physical commodities, including options on futures.
Exchange-traded futures and options derive their values from the values of the
underlying selected stock indices, individual equity securities, fixed income
securities, currencies, agricultural and energy products and precious metals.
Domestic futures and options trading is subject to extensive regulation by
the CFTC pursuant to the Commodity Exchange Act and the Commodity Futures
Trading Commission Act of 1974. International futures and options trading
activities are subject to regulation by the respective regulatory authorities in
the locations where futures exchanges reside, including the FSA in the United
Kingdom.
Margin requirements (good faith deposits) covering substantially all
transactions in futures and options contracts are subject to each particular
exchange's requirements in addition to other regulations. In the US, the
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Company is a clearing member of the Chicago Board of Trade, the Chicago
Mercantile Exchange, the New York Mercantile Exchange and other principal
futures exchanges. In the United Kingdom, the Company is a member of the IPE,
the London Commodity Exchange ("LCE"), LIFFE and OM London Exchange Limited
("OMLX"). The Company also has non-clearing memberships with MATIF and Eurex in
Europe. In Japan, memberships are held with the Tokyo Stock Exchange, the Osaka
Securities Exchange ("OSE") and the Tokyo International Financial Futures
Exchange ("TIFFE").
PCS
PCS provides high-net-worth individuals with an institutional level of
service, including access to the Company's resources and professionals. PCS has
513 account executives in its principal office and six regional offices and two
international offices.
Asset Management
The Company's Asset Management Department manages equity, fixed income and
alternative assets for some of the leading corporate pension plans, public
systems, endowments, foundations, multi-employer plans, insurance companies,
corporations, families and high-net-worth individuals in the US and abroad. With
$27.1 billion in assets under management as of November 30, 2003, clients
benefit from the asset management group's ability to leverage the Company's
extensive resources and proven skill at turning innovative ideas into rewarding
investment opportunities. Institutional and high-net-worth products span a broad
spectrum of equity strategies including large cap, small cap, systematic, core
and value equity; fixed income strategies including cash and enhanced cash
management, short-term, intermediate, core, high yield and leveraged loans; and
alternative investment strategies including various equity and fixed income
hedge funds, a fund of proprietary hedge funds, private equity funds of funds,
venture capital and structured products.
Administration and Operations
Administration and operations personnel are responsible for the human
resources and legal compliance areas; for processing of securities transactions;
receipt, identification and delivery of funds and securities; internal financial
controls; accounting functions; regulatory and financial reporting; office
services; the custody of customer securities; the overseeing of margin accounts
of the Company and correspondent organizations as well as other functions. The
processing, settlement and accounting for transactions for the Company,
correspondent organizations and the customers of correspondent organizations are
handled by employees located in offices in New York, New Jersey and, to a lesser
extent, the Company's offices worldwide.
The Company executes its own and correspondent transactions on US
exchanges and in the OTC 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, other broker-dealers and through memberships in
various clearing corporations.
International
Outside the US, the Company, through its international subsidiaries,
provides various services including investment banking, securities and
derivatives trading and brokerage and clearing activities to corporations,
governments, institutions and individual clients throughout the world. These
international subsidiaries of the Company have memberships on various foreign
securities and futures exchanges.
BSIL, based in London, provides investors and issuers with a full range of
products and services in both international and US equities, fixed income,
exchange-traded futures and options and foreign exchange. In addition, BSIL is a
major sales and trading center within the Company's global fixed income, credit
and equity-related derivative businesses. BSIL has an investment banking
capability and also services the Company's growing clearance business in Europe.
Bear Stearns International Trading Limited ("BSIT") is also based in London and
provides investors and issuers with products and services in various
non-dollar-denominated equity securities.
12
Bear Stearns (Japan), Ltd. ("BSJL"), based in Tokyo, serves the diverse
needs of corporations, financial institutions and government agencies by
offering a range of international fixed income and equity products as well as
listed futures. BSJL also offers a range of derivative products within Japan
with special focus on fixed income, credit and equity derivatives. Asset-backed
securitization, mergers and acquisitions, corporate finance and restructuring
services are also available for local and cross-border business.
Bear Stearns Asia Limited ("BSAL"), based in Hong Kong, is the Company's
primary operating entity in the Asia-Pacific region, excluding Japan. This
office provides international equity sales, trading and research services to
institutional and individual clients in Asia.
BSB, based in Dublin, allows the Company's existing and prospective
clients the opportunity of dealing with a banking counterparty. BSB also serves
as a platform from which the Company directs some of its international banking
activities, gaining easier access to worldwide markets and thereby expanding its
capacity to increase its client base and product range. BSB engages in capital
market activities with particular focus on the trading and sales of OTC interest
rate derivative products. BSB also provides custody and trustee services to the
growing number of alternative investment funds domiciled in Ireland and in other
offshore jurisdictions.
Competition
The Company encounters intense competition in all aspects of the
securities business, particularly underwriting, trading and advisory services
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. The Company's competitors
include other brokers and dealers, commercial banks, investment banking firms,
investment advisors, mutual funds and hedge funds. In addition to competition
from securities firms, in recent years the Company has experienced increasing
competition from other sources, such as insurance companies.
The Company believes that the principal factors affecting competition
involve the caliber and abilities of professional personnel, the relative price
of the service and products being offered, the ability to assist with financing
arrangements and the quality of service.
In recent years, there has been substantial consolidation and convergence
as institutions involved in a broad range of financial services industries have
either ceased operations or have been acquired by or merged into other firms.
This has resulted in competitors gaining greater capital and other resources,
such as the ability to offer a wider range of products and services. In
addition, legislative changes in the US have expanded the activities of
commercial banks, as such institutions are allowed to enter businesses
previously limited to investment banks. This legislation may further increase
competition and accelerate consolidation.
Regulations and Other Factors Affecting the Company and the Securities Industry
The securities industry in the US is subject to extensive regulation under
both federal and state laws. Moreover, 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,
that 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 where they conduct business.
US broker-dealers are subject to rules and 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; the preparation of research; the extension of credit and the
conduct of officers and employees. The types of regulations to which investment
advisers are subject also are extensive and include: recordkeeping; fee
arrangements; client disclosure; custody of customer assets; and the conduct of
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
13
interpretation or enforcement of existing laws and rules. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings that can result in censures, fines, the issuance 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, rather than the protection
of creditors and stockholders of broker-dealers or investment advisers. On
occasion, the Company's subsidiaries have been subject to 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 (the "Market Reform Act") was adopted to
strengthen the SEC's regulatory oversight of the national securities markets and
increase the efficacy and stability of such markets by, among other things: (i)
providing the SEC with discretion to halt securities trading on any national
exchange for the protection of investors; (ii) requiring broker-dealers and
other registrants to regularly provide information to the SEC regarding holding
companies and other affiliated entities whose activities can impact their
financial condition; (iii) requiring broker-dealers and other registrants who
execute large-trade orders to provide information to the SEC regarding such
transactions; and (iv) allowing the SEC to prosecute market participants who
violate SEC rules and regulations designed to maintain fair and orderly markets.
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. The Risk Assessment Rules require that broker-dealers: (i) have an
organizational chart; (ii) maintain risk management procedures or standards for
monitoring and controlling risks; (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 was
adopted to strengthen the SEC's ability to deter, detect and punish insider
trading by, among other things: (i) increasing civil penalties that can be
assessed against controlling persons who purposefully or recklessly fail to take
adequate measures to prevent insider trading; (ii) allowing the SEC to provide
cash rewards to individuals who provide evidence of insider trading; (iii)
affirming the government's ability to obtain criminal sanctions against those
found guilty of insider trading; and (iv) requiring broker-dealers and
investment advisors to establish and enforce written procedures reasonably
designed to prevent the misuse of material, nonpublic information.
The Government Securities Act of 1986 was adopted to decrease volatility
and increase investor confidence and liquidity in the government securities
market by creating a coordinated and comprehensive regulatory structure for the
market where none had previously existed. In particular, the Government
Securities Act: (i) requires broker-dealers solely involved in government
securities to register with the SEC; (ii) allows the Secretary of the Treasury
to adopt rules regarding the custody, use, transfer and control of government
securities; and (iii) bestows upon the SEC authority to enforce such rules as to
broker-dealers and other SEC registrants.
The futures industry in the US 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 futures exchanges. Bear Stearns' and BSSC's futures
business is also regulated by the NFA, a not-for-profit membership organization,
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) (the "Net
Capital Rule") under 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
broker-dealers and requires that at least a minimal portion of its assets be
kept in relatively liquid form.
Bear Stearns and BSSC are also subject to the net capital requirements of
the CFTC and various futures exchanges, which generally require that Bear
Stearns and BSSC maintain a minimum net capital equal to the
14
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 that 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 under "Item 8. Financial
Statements and Supplementary Data" in Note 7 of Notes to Consolidated Financial
Statements entitled "Regulatory Requirements".
Bear Stearns and BSSC are members of the Securities Investor Protection
Corporation ("SIPC"), which provides insurance protection for customer accounts
held by these entities 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, all BSSC security accounts are protected by an
excess securities bond issued by the Travelers Casualty and Surety Company, up
to the amount of their total net equity (both cash and securities) in excess of
the underlying SIPC protection. Commencing in February 2004, Customer Asset
Protection Company, a licensed New York insurance company, replaced Travelers
Casualty and Surety Company in providing excess SIPC protection.
The activities of the Company's bank and trust company subsidiary, CTC,
are regulated by the New Jersey Department of Banking and Insurance and the
Federal Deposit Insurance Corporation ("FDIC"). 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.
The Competitive Equality in Banking Act of 1987, as amended, limits the use of
overdrafts at Federal Reserve Banks on behalf of affiliates.
BSIL is a member of the following: Chicago Board of Trade ("CBOT"), EDX
London Limited, EUREX, Euronext N.V., Deutsche Borse, International Petroleum
Exchange ("IPE"), International Securities Markets Association ("ISMA"), LCH
Clearnet Limited ("LCH"), Mercato Telematico all'Ingrosso dei Titoli de Stato
("MTS"), NASDAQ and Stockholmsborsen AB. Another London subsidiary, BSIT, is a
member of the London Stock Exchange ("LSE"), CREST (The Settlement Network),
virt-x Exchange and a shareholder in Euroclear Plc. Both BSIL and BSIT are
authorized and regulated in the United Kingdom by the Financial Services
Authority ("FSA"), pursuant to The Financial Services and Markets Act 2000. FSA
regulates all aspects of the financial services industry in the United Kingdom
and its Rules cover (inter alia): senior management responsibilities, regulatory
capital, sales and trading practices, safekeeping of customer funds, record
keeping, registration standards for individuals and reporting to customers.
BSJL is registered with the Financial Services Agency of Japan. BSJL is a
limited trade participant to the Tokyo Stock Exchange and the OSE and has a
membership on the TIFFE. Bear Stearns Hong Kong Limited is registered as a
Commodities Dealer with the Securities and Futures Commission ("SFC") in Hong
Kong and its main business consists of sales of US futures products to corporate
and retail customers in Hong Kong. BSAL is registered as a Securities Dealer
with the SFC in Hong Kong and is a participant (i.e. member) of the Hong Kong
Exchange Limited. Bear Stearns Singapore Pte. Limited ("BSSP") has a Capital
Market Service license and is also registered with the Monetary Authority of
Singapore as an exempt financial adviser. BSSP provides sales, execution and
research services on fixed income securities to institutional investors in Asia.
BSB is an Ireland-based bank which was incorporated as a limited liability
company on November 27, 1995 and then re-registered on October 15, 1996 as a
public company. BSB was granted a banking license on April 10, 1997 under the
Irish Central Bank Act, 1971 and is regulated by the Irish Financial Services
Regulatory Authority (formerly the Central Bank of Ireland), which is the
principal regulator of banks in Ireland.
The Company's principal business activities - investment banking,
securities and derivatives trading and sales, clearance and brokerage - are, by
their nature, highly competitive and subject to various risks, including
volatile trading markets and fluctuations in the volume of market activity.
Consequently, the Company's net income and revenues have been, and are likely to
continue to be, subject to wide fluctuations, reflecting the effect
15
of many factors, including general economic conditions, securities market
conditions, the level and volatility of interest rates and equity prices,
competitive conditions, liquidity of global markets, international and regional
political conditions, regulatory and legislative developments, monetary and
fiscal policy, investor sentiment, availability and cost of capital,
technological changes and events, outcome of legal proceedings, changes in
currency values, inflation, credit ratings and the size, volume and timing of
transactions. These and other factors can affect the Company's volume of
security new-issues, mergers and acquisitions and business restructurings; the
stability and liquidity of securities and futures markets; and ability of
issuers, other securities firms and counterparties to perform on their
obligations. Decrease in the volume of security new-issues, mergers and
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 futures transactions and reduced market
liquidity generally results 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. The
Company's securities trading, derivatives, arbitrage, market-making, specialist,
leveraged lending, 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 Disclosures about Market Risk."
Certain statements contained in this discussion including (without
limitation) certain matters discussed under "Legal Proceedings" in Part I, Item
3 of this report, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" incorporated by reference in Part II, Item 7 of this
report, and "Quantitative and Qualitative Disclosures about Market Risk"
incorporated by reference in Part II, Item 7A of this report are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements concerning
management's expectations, strategic objectives, business prospects, anticipated
economic performance and financial condition and other similar matters are
subject to risks and uncertainties, including those described in the prior
paragraph, which could cause actual results to differ materially from those
discussed in the forward-looking statements. Forward-looking statements speak
only as of the date of the document in which they are made. The Company
disclaims any obligation or undertaking to provide any updates or revisions to
any forward-looking statement to reflect any change in the Company's
expectations or any change in events, conditions or circumstances on which the
forward-looking statement is based.
Item 2. Properties.
The Company's executive offices and principal administrative offices
occupy approximately 1.1 million square feet at 383 Madison Avenue, New York,
New York under an operating lease arrangement.
The lease arrangement expires on August 15, 2008. At the end of the lease,
the Company may request a lease renewal. In the event the lease renewal cannot
be negotiated, the Company has the right to purchase the building for the amount
of the then outstanding indebtedness of the lessor or to arrange for the sale of
the property with the proceeds of the sale being used to satisfy the lessor's
debt obligation.
The Company extended its lease of approximately 291,000 square feet of
office space at One MetroTech Center, Brooklyn, New York, through 2024 for its
securities processing, accounting and clearance operations. Additionally, the
Company has approximately 29,000 feet at One MetroTech Center scheduled to
expire in May 31, 2004. The Company also leases approximately 13,000, 59,000 and
61,000 square feet of space at three locations in New York City expiring in
2007, 2009 and 2011, respectively. The Company's offices in Atlanta, Bellevue,
Boca Raton, Boston, Chicago, Dallas, Denver, El Paso, Houston, Irving, Los
Angeles, Palo Alto, Philadelphia, Princeton, San Francisco, San Juan and Tampa
occupy an aggregate of approximately 626,000 square feet, while its thirteen
foreign offices occupy a total of approximately 201,000 square feet under leases
expiring on various dates through the year 2018.
The Company owns approximately 65 acres of land in Whippany, New Jersey,
including four buildings comprising an aggregate of approximately 673,000 square
feet. The Company is currently using the facilities on
16
the property to house its data processing facility and other operations,
disaster recovery, compliance, personnel and accounting functions.
Item 3. Legal Proceedings.
In the normal course of business, the Company and/or its subsidiaries have
been named as defendants in various lawsuits that involve claims for substantial
amounts. Also, the Company is involved from time to time in investigations and
proceedings by governmental agencies and self-regulatory organizations. Although
the ultimate outcome of these matters cannot be ascertained at this time, it is
the opinion of management, after consultation with counsel, that the resolution
of the foregoing matters will not have a material effect on the financial
condition of the Company, taken as a whole; such resolution may, however, have a
material effect on the operating results in any future period, depending upon
the level of income for such period.
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) Fezanni, et al. v. Bear, Stearns & Co. Inc., et al.: On February 2,
1999, an action was commenced in the United States District Court for the
Southern District of New York by eleven individuals or entities that allegedly
purchased certain securities underwritten by Baron. Named as defendants are Bear
Stearns, BSSC, a former officer of BSSC, thirteen former officers and employees
of Baron, and 33 other individuals and entities that allegedly participated in
alleged misconduct by Baron involving attempts to manipulate the market for
securities underwritten by Baron. The complaint alleges that the Bear Stearns
defendants violated Sections 9 and 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder and RICO, aided and abetted breach of fiduciary duty and
committed common law fraud in connection with providing clearing services and
financing for Baron. The complaint seeks to recover compensatory damages in
excess of $6.5 million, treble damages in excess of $19.5 million, punitive
damages of $6.5 million from each defendant other than Bear Stearns and BSSC,
and punitive damages in the aggregate of $130 million from Bear Stearns and
BSSC.
Bear Stearns has denied all allegations of wrongdoing asserted against it in
this litigation and believes that it has substantial defenses to these claims.
(ii) 110958 Ontario Inc. v. Bear, Stearns & Co. Inc., et al.: On February
19, 1997, a brokerage customer of Baron commenced an NASD arbitration proceeding
against Bear Stearns, BSSC, and three Bear Stearns directors and/or officers. On
September 9, 1997, an amended Statement of Claim was filed. Claimant alleges,
among other things, that defendants violated Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated thereunder, and committed common law
fraud, breach of contract, and negligence, in connection with alleged misconduct
by Baron (for whom Bear Stearns acted as clearing broker), Baron's principal and
Baron's parent corporation, The Baron Group Inc. ("BGI"), including engaging in
unauthorized trading in claimant's brokerage account and fraudulently inducing
claimant to give Baron a secured demand note and to invest in BGI. Claimant
seeks compensatory damages of $22 million and punitive damages of $75 million.
On December 11, 2003, the NASD panel issued an award dismissing in their
entirety the claims against Bear Stearns, BSSC and the three Bear Stearns
directors and/or officers.
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 July 26, 1996, a
second amended consolidated complaint was filed.
The second amended complaint 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 Exchange Act
17
and Rule 10b-5 promulgated thereunder, and committed common law fraud. On April
2, 1997, the court dismissed plaintiffs' Section 20(a) claim. Plaintiffs seek
damages in an unspecified amount.
On May 11, 1999, the court certified the following sub-classes: (i) all persons
who traded Blech Securities in the "primary market" between October 21, 1991 and
September 21, 1994; (ii) all persons who traded Blech Securities in the
"secondary market" between October 21, 1991 and September 21, 1994; and (iii)
all persons who traded Blech Securities in the secondary market between
September 27, 1993, the date on which Bear Stearns became a clearing broker for
D. Blech & Co., Inc., and September 21, 1994.
On October 8, 2003, the court granted final approval to the parties' settlement
of this action and dismissed this action with prejudice.
Kennilworth Partners LP, et al. v. Bear, Stearns Securities Corp., et al.:
On May 2, 2000, Kennilworth Partners LP and Kennilworth Partners II LP commenced
an NASD arbitration proceeding against BSSC and Bear Stearns. Claimants allege
that respondents committed breach of contract, breach of the covenant of good
faith and fair dealing, breach of fiduciary duty, common law fraud and tortious
interference with contract in connection with the provision of clearing services
to the claimants. Compensatory and punitive damages in excess of $50 million are
sought.
On February 17, 2004, the NASD panel issued an award dismissing in their
entirety the claims against Bear Stearns and BSSC.
McKesson HBOC, Inc.: The following matters arise out of a merger between
McKesson Corporation ("McKesson") and HBO & Company ("HBOC") resulting in an
entity called McKesson HBOC, Inc. ("McKesson HBOC"). Bear Stearns believes that
it has substantial defenses to the claims in each of these matters.
(i) Saito v. McCall, et al.: In or around October 2003, three of the four
plaintiffs in an action captioned Ash v. McCall, et al., filed a fourth amended
complaint in a purported derivative action pending in the Chancery Court of the
State of Delaware, New Castle County. Named as defendants in the fourth amended
complaint are present and former officers and/or directors of HBOC, McKesson
and/or McKesson HBOC, Arthur Andersen LLP, Bear Stearns, and Deloitte & Touche
LLP. McKesson HBOC is named as a nominal defendant. As amended, the complaint
alleges that Bear Stearns committed negligence and/or professional malpractice
and breach of contract and aided and abetted a breach of fiduciary duty by
directors of McKesson in connection with the merger of HBOC and McKesson.
Compensatory damages in an unspecified amount are sought on behalf of McKesson
HBOC.
(ii) In re McKesson HBOC, Inc. Securities Litigation.: Beginning on June
29, 1999, 53 purported class actions were commenced in the United States
District Court for the Northern District of California. On November 2, 1999,
these actions were consolidated, and on February 25, 2000, the plaintiffs filed
an amended consolidated complaint, on November 14, 2000, the plaintiffs filed a
second amended consolidated complaint and on February 15, 2002, plaintiffs filed
a third amended consolidated complaint. As amended, the complaint alleges that
Bear Stearns violated Sections 10(b) and 14(a) of the Exchange Act in connection
with allegedly false and misleading disclosures contained in a joint proxy
statement/prospectus that was issued with respect to the McKesson/HBOC merger.
Plaintiffs purport to represent a class consisting of all persons who either (i)
acquired publicly traded securities of HBOC between January 20, 1997 and January
12, 1999, or (ii) acquired publicly traded securities of McKesson or McKesson
HBOC between October 18, 1998 and April 27, 1999, and who held McKesson
securities on November 27, 1998 and January 22, 1999. Named as defendants are
McKesson HBOC, certain present and former directors and/or officers of McKesson
HBOC, McKesson and/or HBOC, Bear Stearns and Arthur Andersen LLP. Compensatory
damages in an unspecified amount are sought.
On January 6, 2003, the court granted Bear Stearns' motion to dismiss the
Section 10(b) claim asserted in the third amended complaint, and denied Bear
Stearns' motion to dismiss the Section 14(a) claim. On March 7, 2003, Bear
Stearns filed an answer to the third amended complaint denying all allegations
of wrongdoing and asserting affirmative defenses to the claims in the complaint.
18
(iii) State of Oregon, by and through the Oregon Public Employees
Retirement Board v. Bear, Stearns & Co. Inc., et al.: On April 23, 2001,
complaints were filed by the Utah State Retirement Board, the Public Employees'
Retirement Association of Colorado and the Minnesota State Board of Investment
in the Superior Court of California, City and County of San Francisco (the
"Pension Fund Cases"), asserting allegations similar to those alleged in the
third amended consolidated complaint filed in the litigation entitled In re
McKesson HBOC, Inc. Securities Litigation pending in the United States District
Court for the Northern District of California, described above. In addition, on
April 26, 2001, a similar complaint was filed in the Superior Court in San
Francisco by the State of Oregon, by and through the Oregon Public Employees
Retirement Board.
On August 1, 2002, the plaintiffs in each of these actions filed amended
complaints, and on October 7, 2002, these actions were consolidated for
pre-trial purposes with the Merrill Lynch Fundamental Growth Fund, Inc. action
described below.
On October 17, 2002, the plaintiffs in the Pension Fund Cases filed a
consolidated amended complaint. Named as defendants are McKesson HBOC, certain
present and former directors and/or officers of McKesson HBOC, McKesson and/or
HBOC, Bear Stearns and Arthur Andersen LLP. As amended, the complaint alleges
that Bear Stearns violated Section 25500 of the California Business and
Professions Code and California Civil Code Sections 1709 and 1710, and committed
common law fraud and deceit and negligent misrepresentation based on allegations
similar to those in the third amended consolidated complaint filed in the
litigation entitled In re McKesson HBOC, Inc. Securities Litigation pending in
the United States District Court for the Northern District of California,
described above. Compensatory and punitive damages in unspecified amounts are
sought.
On April 21, 2003, Bear Stearns filed an answer to the amended and consolidated
complaint denying all allegations of wrongdoing and asserting affirmative
defenses to the claims in the complaint.
(iv) Merrill Lynch Fundamental Growth Fund, Inc., et al. v. McKesson HBOC,
Inc., et al.: On or around March 19, 2002, an action was commenced against,
among others, Bear Stearns in the Superior Court of the State of California,
County of San Francisco, by two investment funds that acquired the common stock
of McKesson HBOC between February 5 and March 12, 1999. On August 8, 2002,
plaintiffs filed an amended complaint and thereafter a second and third amended
complaint that did not name Bear Stearns as a defendant. On October 7, 2002,
this action was consolidated with the Pension Fund Cases described above for
pre-trial purposes (although the plaintiffs in this action will not join or be
plaintiffs in the consolidated complaint to be filed by the plaintiffs in the
Pension Fund Cases).
On September 26, 2003, the court granted plaintiffs' motion for leave to file a
fourth amended complaint adding Bear Stearns as a defendant. Also named as
defendants are McKesson HBOC, HBOC, certain present or former officers and/or
directors of McKesson, HBOC and/or McKesson HBOC and Arthur Andersen. The
complaint alleges, among other things, that Bear Stearns violated Section 25500
of the California Corporations Code and committed common law fraud and negligent
misrepresentation in connection with allegedly false and misleading disclosure
contained in a joint proxy statement/prospectus that was issued with respect to
the McKesson/HBOC merger. Compensatory damages in an unspecified amount are
sought.
Bear Stearns has filed an answer to the fourth amended complaint in which it
denied all allegations of wrongdoing and asserted affirmative defenses to the
claims in the complaint.
(v) Kelly v. Bear, Stearns & Co. Inc., et al.: On April 19, 2001, a
complaint was filed in the Court of Common Pleas, Trial Division, Philadelphia
County, Pennsylvania, by former shareholders of KWS&P, Inc. and KWS&P/SFA, Inc.
(collectively, "KWS&P") against the Company and a former employee of the Company
arising out of the Company's engagement by KWS&P in connection with a merger
between KWS&P and McKesson HBOC. The complaint alleges claims based on common
law fraud, civil conspiracy, breach of fiduciary duty, tortious interference
with contract, misrepresentation and omission, negligence and violations of the
Pennsylvania Unfair Trade Practices and Consumer Protection Law as well as for
negligent supervision against the Company. Compensatory and punitive damages in
an unspecified amount are sought.
19
On December 18, 2001, the court sustained defendants' preliminary objections and
dismissed the complaint. On September 9, 2002, the Pennsylvania Superior Court
affirmed the lower court's order granting Bear Stearns' motion to dismiss the
complaint in this action on the ground that venue was improper.
On April 26, 2002, plaintiffs in this action filed a lawsuit alleging similar
claims in the Supreme Court, State of New York, New York County, and on March
28, 2003, plaintiffs filed an amended complaint against the same defendants as
were named in the complaint filed in Pennsylvania. The amended complaint alleges
claims based on, among other things, common law fraud, gross negligence,
negligent supervision, aiding and abetting fraud, unjust enrichment and breach
of the contractual covenant of good faith and fair dealing in connection with
the merger of McKesson and HBOC. Compensatory and punitive damages in
unspecified amounts are sought.
On September 18, 2003, the court approved a stipulation among the parties
dismissing this action with prejudice.
(vi) Pacha, et al v. McKesson HBOC, Inc., et al.: On July 27, 2001, an
action was commenced in the United States District Court for the Northern
District of California by individuals who owned McKesson common stock that was
converted into common stock of McKesson HBOC in connection with the
McKesson/HBOC merger. Named as defendants are McKesson HBOC, certain present or
former directors and/or officers of McKesson HBOC, McKesson and/or HBOC, Bear
Stearns and Arthur Andersen LLP. The complaint alleges, among other things, that
Bear Stearns violated Section 14(a) of the Exchange Act and aided and abetted a
breach of fiduciary duty in connection with allegedly false and misleading
disclosure contained in a joint proxy statement/prospectus that was issued with
respect to the McKesson/HBOC merger. Compensatory and punitive damages in an
unspecified amount are sought.
On November 13, 2001, this action was consolidated for pre-trial purposes with
the In re McKesson HBOC, Inc. Securities Litigation described above.
Helen Gredd, Chapter 11 Trustee for Manhattan Investment Fund Ltd. v.
Bear, Stearns Securities Corp.: On April 24, 2001, an action was commenced in
the United States Bankruptcy Court for the Southern District of New York by the
Chapter 11 Trustee for Manhattan Investment Fund Limited ("MIFL"). BSSC is the
sole defendant. The complaint alleges, among other things, that certain
transfers of cash and securities to BSSC in connection with short sales of
securities by MIFL in 1999 were "fraudulent transfers" made in violation of
Sections 548 and 550 of the United States Bankruptcy Code and are recoverable by
the Trustee. The Trustee also alleges that any claim that may be asserted by
BSSC against MIFL should be equitably subordinated to the claims of other
creditors pursuant to Sections 105 and 510 of the Bankruptcy Code. The Trustee
seeks to recover in excess of $1.9 billion in connection with the allegedly
fraudulent transfers to BSSC.
On March 21, 2002, the district court dismissed the trustee's claims seeking to
recover allegedly fraudulent transfers in amounts exceeding $1.9 billion. The
district court also remanded to the bankruptcy court the trustee's remaining
claims, which seek to recover allegedly fraudulent transfers in the amount of
$141.4 million and to equitably subordinate any claim that may be asserted by
BSSC against MIFL to the claims of other creditors.
On October 17, 2002, BSSC filed an answer to the complaint in which it denied
all allegations of wrongdoing and asserted affirmative defenses.
Levitt, et al. v. Bear Stearns, et al.: On February 16, 1999, a purported
class action was commenced in the United States District Court for the Southern
District of New York on behalf of all persons who purchased ML Direct, Inc.
common stock or warrants through Sterling Foster & Co., Inc. ("Sterling Foster")
between September 4, 1996 and December 31, 1996. Named as defendants are Bear
Stearns and BSSC. The complaint alleges, among other things, that the defendants
violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder and committed common law fraud in connection with providing clearing
services to Sterling Foster with respect to certain transactions by customers of
Sterling Foster in ML Direct common stock and warrants. Compensatory damages of
$50 million and punitive damages of approximately $100 million are sought.
On March 15, 1999, this action was transferred by the Judicial Panel on
Multi-District Litigation to the United States District Court for the Eastern
District of New York.
20
On June 27, 2002, the court granted defendants' motion and dismissed this action
in its entirety. On August 1, 2002, plaintiff filed a notice of appeal from the
district court order dismissing the complaint in this action. On August 13,
2003, the United States Court of Appeals for the Second Circuit reversed the
district court order granting defendants' motion to dismiss and remanded the
action to the district court.
Bear Stearns and BSSC have denied all allegations of wrongdoing asserted against
them in these litigations, and believe that they have substantial defenses to
these claims.
Enron Corp.: The following matters arise out of Bear Stearns' business
transactions with Enron Corp. ("Enron").
(i) Purported Securities Actions: Bear Stearns and numerous other
defendants are named in certain actions commenced beginning on October 15, 2002
in the Superior Court of the State of California, state court in Iowa and the
United States District Court for the Southern District of Texas brought by
purchasers of securities issued by Osprey Trust, Osprey I, Inc., Enron and
certain other entities related to Enron. The complaints generally allege
violations of the disclosure requirements of the federal securities laws and/or
state law and common law claims, including fraud, and seek compensatory and/or
punitive damages in unspecified amounts.
(ii) Enron Corp., et ano. v. Bear, Stearns International Ltd., et ano.: On
November 25, 2003, Bear, Stearns International Limited ("BSIL") and BSSC were
named as defendants in an adversary proceeding commenced by Enron and Enron
North America Corp. in the United States Bankruptcy Court for the Southern
District of New York. Plaintiffs seek, inter alia, to recover payments, totaling
approximately $26 million, that they allegedly made to BSIL and BSSC during
August 2001 in connection with an equity derivative contract between BSIL and
Enron. According to the complaint, Enron's payments constituted (a) fraudulent
transfers, under Section 548(a) of the United States Bankruptcy Code and under
applicable state law and (b) an unlawful redemption of Enron common stock in
violation of Oregon law. Enron seeks judgment (a) avoiding and setting aside
Enron's August 2001 payments to BSIL and BSSC, (b) directing BSIL and BSSC to
pay Enron approximately $26 million, plus prejudgment interest, (c) declaring
that Enron's August 2001 payments violated Oregon law, (d) disallowing any
claims by BSIL and BSSC in connection with Enron's bankruptcy proceedings until
they have returned the August 2001 payments to Enron and (e) awarding Enron its
reasonable attorneys' fees and costs incurred in connection with the action.
(iii) Enron Corp. v. International Finance Corp., et al.: On November 20,
2003, numerous parties, including Bear Stearns, were named as defendants in an
adversary proceeding commenced by Enron in the United States Bankruptcy Court
for the Southern District of New York. The complaint asserts, inter alia, that
certain alleged payments by Enron during May 2001 (the "May 2001 Payments") in
connection with the purchase from certain defendants of notes issued by ENA CLO
I Trust, including a payment to Bear Stearns of approximately $34 million,
constituted fraudulent transfers in violation of Section 548(a)(1)(B) of the
United States Bankruptcy Code. As to Bear Stearns, Enron seeks an order (a)
directing BSCI to pay Enron approximately $34 million, plus prejudgment
interest, (b) disallowing any claims by BSCI in connection with Enron's
bankruptcy proceedings until Bear Stearns has paid that amount to Enron and (c)
awarding Enron its reasonable attorneys' fees and costs incurred in connection
with the proceeding.
Bear Stearns denies all allegations of wrongdoing asserted against it in these
litigations and believes that it has substantial defenses to these claims.
David Shaev Profit Sharing Account F/B/O David Shaev v. James E. Cayne, et
al.: On or about May 22, 2003, the David Shaev Profit Sharing Account F/B/O
David Shaev commenced a purported shareholder derivative action in the Supreme
Court of the State of New York, County of New York. Plaintiff filed an amended
complaint on December 5, 2003. Named as defendants are the Company's board of
directors. The Company is named as a nominal defendant. The complaint asserts a
single claim for breach of fiduciary duty against defendants in connection with
events that gave rise to the research analyst related settlement described
below. Plaintiff seeks compensatory damages in unspecified amounts and an order
that all individual defendants "remit to the Company all of their compensation
received for the periods when they breached their fiduciary duties."
21
Bear Stearns denies all allegations of wrongdoing asserted against it in this
litigation and believes that it has substantial defenses to these claims.
IPO Allocation Securities and Antitrust Litigations
The Company, along with many other financial services firms, has been named as a
defendant in many putative class actions filed during 2001 and 2002 in the
United States District Court for the Southern District of New York involving the
allocation of securities in certain initial public offerings ("IPOs"). The
complaints in these purported class actions generally allege, among other
things, that between 1998 and 2000: (i) the underwriters of certain "hot" IPOs
of technology and internet-related companies obtained excessive compensation by
allocating shares in these IPOs to preferred customers who, in return,
purportedly agreed to pay additional compensation to the underwriters, and the
underwriters failed to disclose this additional compensation and/or (ii) the
underwriters' customers, in return for a favorable allocation of these
securities, agreed to purchase additional shares in the aftermarket at
pre-arranged prices or to pay additional compensation in connection with other
transactions.
Beginning on April 19, 2002, the plaintiffs in these litigations filed amended
complaints by virtue of which the public offerings of each of the 308 issuers is
now the subject of a separate complaint. Bear Stearns is a defendant in 94 of
these amended complaints. As amended, the complaints allege, among other things,
that the underwriters, including Bear Stearns, violated Section 11 of the
Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder, based on the wrongdoing alleged in the original complaints and by
causing their securities analysts to issue unwarranted positive reports
regarding the issuers. Compensatory damages in unspecified amounts are sought.
In January 2002, the Company was named as a defendant, along with nine other
financial services firms, in an antitrust complaint filed in the same court on
behalf of a putative class of purchasers who, either in IPOs or the aftermarket,
purchased technology-related securities during the period March 1997 to December
2000. Plaintiffs allege that the defendants conspired to require that customers,
in return for an allocation in the IPOs, (i) pay charges in addition to the IPO
price, such as non-competitively determined commissions on the purchase or sale
of other securities and/or (ii) agree to purchase the IPO securities in the
aftermarket at prices above the IPO price. Plaintiffs claim that these alleged
practices violated Section 1 of the Sherman Act and state antitrust laws and
seek compensatory and treble damages. On November 6, 2003, the Court granted the
motion of the defendants (including the Company) to dismiss all claims asserted
against them by these antitrust plaintiffs. The plaintiffs have appealed that
decision to the Second Circuit Court of Appeals.
The Company denies all allegations of wrongdoing asserted against it in these
litigations and believes that it has substantial defenses to these claims.
IPO and Research Investigation
The SEC, NASD, NYSE and several state attorney generals' offices are conducting
an industry-wide investigation of certain research and initial public offering
practices of major brokerage firms, including Bear Stearns. Bear Stearns is
cooperating fully with the investigation. On April 28, 2003, without admitting
or denying the allegations, findings or conclusions of the various federal and
state regulators and self-regulatory organizations, Bear Stearns consented to a
final settlement involving many of the leading securities firms operating in the
United States. The various regulatory complaints alleged conflicts of interest
relating to the alleged involvement of research analysts with investment banking
activities. Under the terms of the settlement, Bear Stearns entered into consent
agreements and other definitive documents with the SEC, NYSE, NASD and the State
of New Jersey, Bureau of Securities, to resolve their investigations of Bear
Stearns relating to those matters.
Pursuant to the settlement, which resolved the research aspects of the
investigations, but not the NASD's investigations relating to IPO practices,
Bear Stearns has consented, among other things, to (i) pay an aggregate of $25
million as penalties, (ii) pay an aggregate of $25 million as disgorgement to a
distribution fund for the benefit of certain customers, (iii) contribute $25
million to provide independent third-party research over five years to clients,
(iv) contribute an aggregate of $5 million over five years for investor
education, (v) adopt various additional policies, systems, procedures and other
safeguards to ensure further the integrity of Bear
22
Stearns' investment research and (vi) be permanently restrained and enjoined
from violating certain rules of the NYSE and NASD relating to investment
research activities. In connection with the settlement, Bear Stearns has also
consented to a voluntary initiative imposing restrictions on the allocation of
shares in initial public offerings to executives and directors of public
companies. On October 31, 2003, the United States District Court for the
Southern District of New York entered a series of orders effectuating the
settlement.
The State of New Jersey, Bureau of Securities acted as Bear Stearns' lead state
regulator in connection with the settlement. To date, Bear Stearns has reached
similar arrangements with most of the states, the District of Columbia and the
Commonwealth of Puerto Rico and expects to reach similar arrangements with all
of the remaining states. Any monetary penalties and other payments required by
such arrangements are expected to be included within the aggregate amounts
discussed above.
In May 2003, the SEC, NYSE and NASD issued subpoenas to the Company requesting
documents and information in connection with its continuing investigation,
focusing on supervision by the heads of equity research and investment banking
as well as the chief executive officer. The SEC issued similar subpoenas to all
of the firms that recently settled the research investigations.
The State of West Virginia by its Attorney General is charging Bear Stearns and
the other securities firms that are participants in the research settlement with
violations of the West Virginia Consumer Credit and Protection Act. The Attorney
General is seeking a statutory penalty of $5,000 per violation for each and
every purported violation by each firm, including Bear Stearns, of the West
Virginia Consumer Credit and Protection Act. The Company has denied all
allegations of wrongdoing asserted against it in this litigation and believes it
has substantial defenses to these claims brought by the State of West Virginia.
IPO Underwriting Fee Antitrust Litigation: Bear Stearns, along with
numerous other financial services firms, is a defendant in several consolidated
class actions currently pending in the United States District Court for the
Southern District of New York. The first consolidated action, filed on March 15,
2001, purports to be brought on behalf of a putative class of purchasers of
stock in initial public offerings (the "Purchaser Action"). The second
consolidated action, filed on July 6, 2001, purports to be brought on behalf of
a putative class of issuers of stock in initial public offerings (the "Issuer
Action"). Each suit alleges that the Company violated federal antitrust laws by
fixing underwriting fees at 7% for initial public offerings with an aggregate
issuance value of $20-$80 million for the time period 1994 to the present. The
plaintiff in each action seeks injunctive relief and treble damages.
On February 14, 2001, the court dismissed the complaint in the Purchaser Action.
On December 13, 2002, the United States Court of Appeals for the Second Circuit
vacated that decision and remanded the case to the lower court for consideration
of other grounds asserted, but not considered by the lower court, in defendants'
motion to dismiss the complaint.
The Company has denied all allegations of wrongdoing asserted against it in
these litigations and believes that it has substantial defenses to these claims.
Mutual Fund Matters: The following matters arise out of mutual fund
trading:
(i) Inquiries and Investigations: The Company and/or its subsidiaries have
received requests for information and subpoenas from a number of federal and
state agencies seeking information in connection with mutual fund trading
investigations, including the United States Attorney's Office for the Southern
District of New York, the SEC, the Commodity Futures Trading Commission, the
NASD, the NYSE, the Office of the New York Attorney General, and the Office of
the New Jersey Attorney General. The Company is cooperating fully with each of
these inquiries or investigations.
(ii) Pflugrath v. The Bear Stearns Companies, Inc. et al.: As previously
disclosed, on November 7, 2003, BSSC, the Company and Bear Stearns, together
with 18 other entities and individuals, were named as defendants in a purported
class action lawsuit, in the United States District Court for the Southern
District of New York by a mutual fund investor on behalf of persons who
purchased and/or sold ownership units of mutual funds
23
in the Janus or Putnam families of mutual funds between November 1, 1998 and
July 3, 2003. On January 26, 2004, plaintiff filed a first amended complaint,
again on behalf of persons who traded in the Janus or Putnam families of mutual
funds, against the same Bear Stearns entities and 16 other entities and
individuals, including mutual funds and other financial institutions. On October
22, 2003, another purported class action was filed on behalf of the general
public of the State of California against multiple defendants, including the
Company, with respect to various mutual funds. Both of these actions allege that
the defendants violated federal and/or state laws by allowing certain investors
to market time and/or late trade mutual fund shares and seek various forms of
relief including damages of an indeterminate amount.
Bear Stearns denies all allegations of wrongdoing in connection with these
litigations and believes that it has substantial defenses to the claims.
Specialist Matters
Bear Wagner Specialists LLC ("Bear Wagner"): Bear Wagner, an indirect subsidiary
of the Company, has entered into an agreement in principle with the NYSE and the
staff of the SEC to settle certain previously disclosed claims concerning
specialist trading activity. The settlement is subject to final approval by the
NYSE and the SEC. Pursuant to the agreement in principle, Bear Wagner, without
admitting or denying the claims, will pay an aggregate of $16.3 million,
consisting of $10.8 million towards restitution to customers and $5.5 million in
civil penalties. The settlement would not resolve the related civil actions
discussed below (although a significant portion of the payment is expected to be
committed to restitution for allegedly injured investors), or potential
regulatory charges against individuals.
Bear Wagner is among numerous defendants named in purported class actions
brought on behalf of investors beginning in October 2003 in the United States
District Court for the Southern District of New York alleging violations of the
federal securities laws in connection with NYSE floor specialist activities. The
actions seek unspecified compensatory damages, restitution, and disgorgement on
behalf of purchasers and sellers of unspecified securities between October 17,
1998 and October 15, 2003. Bear Wagner and the Company are also among the
defendants in a purported class action filed in December 2003 in California
Superior Court, Los Angeles County alleging violation of California law in
connection with the same conduct.
Bear Wagner and the Company deny all allegations of wrongdoing in the class
action specialist litigations and believe they have substantial defenses to the
claims.
* * *
The Company and/or its subsidiaries also have been named as defendants in
numerous other civil actions arising out of its activities as a broker and
dealer, 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.
Although the ultimate outcome of these matters cannot be ascertained at this
time, it is the opinion of management, after consultation with counsel, that the
resolution of the foregoing matters will not have a material effect on the
financial condition of the Company, taken as a whole; such resolution, may,
however, have a material effect on the operating results in any future period,
depending upon the level of income for such period.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
24
Executive Officers of the Company
The following table sets forth certain information as of January 31, 2004
concerning executive officers of the Company.
Age as of January
Name 31, 2004 Principal Occupation
- ------------------------------------- ----------------------- -------------------------------------------------------
James E. Cayne....................... 69 Chairman of the Board and Chief Executive Officer of
the Company and Bear Stearns and member of the
Executive Committee of the Company (the "Executive
Committee")
Jeffrey M. Farber.................... 39 Controller of the Company and Bear Stearns
Alan C. Greenberg.................... 76 Chairman of the Executive Committee
Mark E. Lehman....................... 52 Executive Vice President and member of the Executive
Committee
Michael Minikes...................... 60 Treasurer of the Company and Bear Stearns
Samuel L. Molinaro Jr................ 46 Executive Vice President and Chief Financial Officer
of the Company and Bear Stearns and member of the
Executive Committee
Alan D. Schwartz....................... 53 President and Co-Chief Operating Officer of the
Company and Bear Stearns and member of the Executive
Committee
Michael S. Solender................... 39 General Counsel of the Company and Bear Stearns
Warren J. Spector...................... 46 President and Co-Chief Operating Officer of the
Company and Bear Stearns and member of the Executive
Committee
25
Mr. Cayne became Chairman of the Board on June 25, 2001. Mr. Cayne has
been Chief Executive Officer of the Company and Bear Stearns for more than the
past five years and prior to June 25, 2001, was President of the Company and
Bear Stearns for more than the past five years.
Mr. Farber has been Controller of the Company and Bear Stearns since
January 7, 2004. Mr. Farber was Assistant Controller of the Company from May
2000 to January 7, 2004 and Senior Managing Director of Bear Stearns. Prior to
May 2000, Mr. Farber was a partner with Deloitte & Touche LLP.
Mr. Greenberg has been Chairman of the Executive Committee for more than
the past five years and prior to June 25, 2001, was Chairman of the Board of the
Company for more than the past five years.
Mr. Lehman has been an Executive Vice President of the Company and Bear
Stearns for more than the past five years and prior to January 29, 2004, was
General Counsel of the Company and Bear Stearns for more than the past five
years.
Mr. Minikes has been Treasurer of the Company and Bear Stearns for more
than the past five years.
Mr. Molinaro became Executive Vice President of the Company and Bear
Stearns on December 1, 2001 and has been Chief Financial Officer of the Company
and Bear Stearns since October 1996. Prior to December 1, 2001, Mr. Molinaro was
the Senior Vice President-Finance of the Company and Bear Stearns for more than
the past five years.
Mr. Schwartz became President and Co-Chief Operating Officer of the
Company and Bear Stearns and a member of the Executive Committee on June 25,
2001 and was an Executive Vice President of Bear Stearns for more than the past
five years. Prior to June 30, 1999, Mr. Schwartz was an Executive Vice President
of the Company and a member of the Executive Committee for more than the past
five years.
Mr. Solender became General Counsel of the Company and Bear Stearns on
January 29, 2004. From February 11, 2002 to January 29, 2004, Mr. Solender was a
Senior Managing Director in the Legal Department of Bear Stearns. Mr. Solender
was a partner at the law firm of Arnold & Porter LLP from January 1997 to
January 2000 and November 2001 to February 2002 and General Counsel of the U.S.
Consumer Product Safety Commission from January 2000 to November 2001.
Mr. Spector became President and Co-Chief Operating Officer of the Company
and Bear Stearns and a member of the Executive Committee on June 25, 2001 and
was an Executive Vice President of Bear Stearns for more than the past five
years. Prior to June 30, 1999, Mr. Spector was an Executive Vice President of
the Company and a member of the Executive Committee for more than the past five
years.
Officers serve at the discretion of the Board of Directors.
26
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
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 Operations.
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 together with the Notes to
Consolidated Financial Statements and the Independent Auditors' Report, all
included in the Annual Report. Such information is 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.
Item 9A. Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the period covered by
this annual report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were
effective as of the end of the period covered by this annual report. As required
by Rule 13a-15(d) under the Exchange Act, the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, has evaluated
the Company's internal control over financial reporting to determine whether any
changes occurred during the fourth fiscal quarter covered by this annual report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. Based on that evaluation, there
has been no such change during the fourth fiscal quarter covered by this annual
report.
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 2004 Annual
Meeting of Stockholders to be held on March 31, 2004, 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" in the Proxy Statement, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required to be furnished pursuant to this item will be set
forth under the captions "Voting Securities," "Security Ownership of Management"
and "Equity Compensation Plan Information" in 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"
in the Proxy Statement, and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required to be furnished pursuant to this item will be set
forth under the caption "Fees Paid to Independent Auditors" in the Proxy
Statement, and is incorporated herein by reference.
28
PART IV
Item 15. 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
(incorporated by reference to Exhibit (4)(a)(1) to the registrant's
registration statement on Form S-3 (File No. 333-57083)).
(3)(a)(2) Certificate of Amendment of Restated Certificate of Incorporation of
the registrant (incorporated by reference to Exhibit 4(a)(2) to the
registrant's registration statement on Form S-8 (File No.
333-92357)).
(3)(a)(3) Certificate of Stock Designation relating to the registrant's 6.15%
Cumulative Preferred Stock, Series E (incorporated by reference to
Exhibit 1.4 to the registrant's registration statement on Form 8-A
filed on January 14, 1998).
(3)(a)(4) Certificate of Stock Designation relating to the registrant's 5.72%
Cumulative Preferred Stock, Series F (incorporated by reference to
Exhibit 1.4 to the registrant's registration statement on Form 8-A
filed on April 20, 1998).
(3)(a)(5) Certificate of Stock Designation relating to the registrant's 5.49%
Cumulative Preferred Stock, Series G (incorporated by reference to
Exhibit 1.4 to the registrant's registration statement on Form 8-A
filed on June 18, 1998).
(3)(a)(6) Certificate of Elimination of the Cumulative Convertible Preferred
Stock, Series A; Cumulative Convertible Preferred Stock, Series B;
Cumulative Convertible Preferred Stock, Series C; and Cumulative
Convertible Preferred Stock, Series D of the registrant
(incorporated by reference to Exhibit 4(d)(9) to the registrant's
Current Report on Form 8-K filed with the Commission on January 15,
2002).
(3)(a)(7) Certificate of Elimination of the 7.88% Cumulative Convertible
Preferred Stock, Series B of the registrant (incorporated by
reference to Exhibit 4(d)(10) to the registrant's Current Report on
Form 8-K filed with the Commission on January 15, 2002).
(3)(a)(8) Certificate of Elimination of the 7.60% Cumulative Convertible
Preferred Stock, Series C of the registrant (incorporated by
reference to Exhibit 4(d)(11) to the registrant's Current Report on
Form 8-K filed with the Commission on January 15, 2002).
(3)(a)(9) Certificate of Elimination of the Adjustable Rate Cumulative
Preferred Stock, Series A of the registrant (incorporated by
reference to the registrant's Post-Effective Amendment No. 2 to Form
S-8 (File No. 33-108976).
(3)(b) Amended and Restated By-laws of the registrant as amended through
January 8, 2002 (incorporated by reference to Exhibit 4(d)(6) to the
registrant's Current Report on Form 8-K filed with the Commission on
January 15, 2002).
29
(4)(a) Indenture, dated as of May 31, 1991, between the registrant and
JPMorgan Chase Bank (formerly, The Chase Manhattan Bank), as trustee
(incorporated by reference to Exhibit (4)(a) to registrant's
registration statement on Form S-3 (File No. 33-40933)).
(4)(b) Supplemental Indenture, dated as of January 29, 1998, between the
registrant and JPMorgan Chase Bank (formerly, The Chase Manhattan
Bank), as trustee (incorporated by reference to Exhibit 4(a)(2) to
the registrant's Current Report on Form 8-K filed with the
Commission on February 2, 1998).
(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)).
(4)(e) Warrant Agreement, dated July 9, 2003, between the registrant and
JPMorgan Chase Bank, as warrant agent (incorporated by reference to
Exhibit 4.1(a) to the registrant's registration statement on Form
8-A filed on July 17, 2003).
(10)(a)(1) Capital Accumulation Plan for Senior Managing Directors, as amended
and restated as of October 28, 1999 (incorporated by reference to
Exhibit (10)(a)(4) to the registrant's Quarterly Report on Form 10-Q
for its fiscal quarter ended December 31, 1999).*
(10)(a)(2) Capital Accumulation Plan for Senior Managing Directors, as amended
and restated as of November 29, 2000 for Plan Years beginning on or
after July 1, 1999 (incorporated by reference to Exhibit 10(a)(1) to
the registrant's Quarterly Report on Form 10-Q for its fiscal
quarter ended February 23, 2001).*
(10)(a)(3) Performance Compensation Plan, as amended and restated as of
February 24, 2003 (incorporated by reference to Exhibit 10(a)(1) to
the registrant's Quarterly Report on Form 10-Q for its fiscal
quarter ended February 28, 2003).*
(10)(a)(4) Stock Award Plan, as amended and restated as of March 26, 2002
(incorporated by reference to Exhibit 4(c) to the registrant's
registration statement on Form S-8 (File No. 333-86060)).*
(10)(a)(5) Non-Employee Directors' Stock Option and Stock Unit Plan, amended
and restated as of January 8, 2002 (incorporated by reference to
Exhibit 10(a)(1) to the registrant's Quarterly Report on Form 10-Q
for its fiscal quarter ended August 31, 2002).*
(10)(a)(6) Restricted Stock Unit Plan, as of November 29, 2000 (incorporated by
reference to Exhibit 10(a)(6) to the registrant's Quarterly Report
on Form 10-Q for its fiscal quarter ended February 23, 2001).*
(10)(a)(7) 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)(8) 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) First Amendment to Lease, dated December 20, 1999, between Forest
City Jay Street Associates, L.P.
30
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)(2) to the registrant's Annual Report on
Form 10-K for its fiscal year ended November 30, 2001).
(10)(b)(3) Second Amendment to Lease, dated April 23, 2003, between Forest City
Jay Street Associates, L.P. and The Bear Stearns Companies Inc. with
respect to the premises located at One Metrotech Center, Brooklyn,
New York.
(11) Statement regarding: computation of per share earnings. (The
calculation of per share earnings is in Part II, Item 8, Note 9 to
the Consolidated Financial Statements (Earnings Per Share) and is
omitted here in accordance with Section (b)(11) of Item 601 of
Regulation S-K).
(12) Statement regarding: computation of ratio of earnings to fixed
charges and computation of ratio of earnings to fixed charges and
preferred stock dividends.
(13) 2003 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(14) Code of Business Conduct and Ethics.
(21) Subsidiaries of the registrant.
(23) Consent of Deloitte & Touche LLP.
(31.1) Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(32.2) Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Executive Compensation Plans and Arrangements
31
(b) Reports on Form 8-K.
The Company filed the following Current Reports on Form 8-K
during the last quarter of the period covered by this report:
(i) A Current Report on Form 8-K dated September 18, 2003
and filed September 18, 2003, pertaining to the
Company's results of operations for the quarter ended
August 31, 2003.
(ii) A Current Report on Form 8-K dated September 25, 2003
and filed October 1, 2003, pertaining to the form of
Medium-Term Note, Series B (principal protected notes
linked to the S&P 500 Index due October 1, 2008) ("Index
Linked Notes"), issued by the Company, an opinion of
Cadwalader, Wickersham & Taft LLP as to certain federal
income tax consequences in connection with the offering
of the Index Linked Notes and a consent in connection
with the offering of the Index Linked Notes.
(iii) A Current Report on Form 8-K dated October 21, 2003 and
filed October 28, 2003, pertaining to an opinion of
Cadwalader, Wickersham & Taft LLP as to the legality of
the 4.50% Global Notes due 2010 ("Global Notes") issued
by the Company, certain federal income tax consequences
in connection with the offering of the Global Notes, and
a consent in connection with the offering of the Global
Notes.
(iv) A Current Report on Form 8-K dated November 17, 2003 and
filed November 18, 2003, pertaining to the form of
Joinder Agreement amending the IncomeNotesSM
Distribution Agreement, opinions of Cadwalader,
Wickersham & Taft LLP as to certain federal income tax
consequences in connection with the offering of the
Medium-Term Notes and IncomeNotesSM, and consents in
connection with the offering of the Medium-Term Notes
and IncomeNotesSM.
(v) A Current Report on Form 8-K dated and filed on November
21, 2003, pertaining to disclosure of certain
proceedings regarding trading in shares of mutual funds.
32
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 27th day of
February 2004.
THE BEAR STEARNS COMPANIES INC.
(Registrant)
By: /s/ SAMUEL L. MOLINARO JR.
................................
Samuel L. Molinaro Jr.
Executive Vice President and
Chief Financial 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 27th day of February 2004.
NAME TITLE
/s/ ALAN C. GREENBERG
.............................
Alan C. Greenberg Chairman of the Executive Committee
and Director
/s/ JAMES E. CAYNE
............................. Chairman of the Board and Chief Executive
Officer James E. Cayne (Principal Executive
Officer) and Director
/s/ CARL D. GLICKMAN
.............................
Carl D. Glickman Director
/s/ DONALD J. HARRINGTON
.............................
Donald J. Harrington Director
/s/ WILLIAM L. MACK
.............................
William L. Mack Director
/s/ FRANK T. NICKELL
.............................
Frank T. Nickell Director
/s/ PAUL A. NOVELLY
.............................
Paul A. Novelly Director
/s/ FREDERIC V. SALERNO
.............................
Frederic V. Salerno Director
33
NAME TITLE
/s/ ALAN D. SCHWARTZ
............................. President, Co-Chief Operating Officer and
Alan D. Schwartz Director
/s/ WARREN J. SPECTOR
............................. President, Co-Chief Operating Officer and
Warren J. Spector Director
/s/ VINCENT TESE
.............................
Vincent Tese Director
/s/ SAMUEL L. MOLINARO JR.
............................. Executive Vice President and Chief Financial
Samuel L. Molinaro Jr. Officer (Principal Financial Officer)
/s/ JEFFREY M. FARBER
.............................
Jeffrey M. Farber Controller (Principal Accounting Officer)
34
THE BEAR STEARNS COMPANIES INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS 15(a)(1) and 15(a)(2)
Page Reference
Financial Statements Form Annual
- -------------------- 10-K Report*
---- -------
Independent Auditors' Report 54
The Bear Stearns Companies Inc.
- -------------------------------
(i) Consolidated Statements of Income--fiscal years ended November 30, 2003, 2002 and 2001 55
(ii) Consolidated Statements of Financial Condition at November 30, 2003 and November 30, 2002 56
(iii) Consolidated Statements of Cash Flows--fiscal years ended November 30, 2003, 2002 and 2001 57
(iv) Consolidated Statements of Changes in Stockholders' Equity--fiscal years ended November 30, 2003, 58-59
2002 and 2001
(v) Notes to Consolidated Financial Statements 60-84
Financial Statement Schedules
- -----------------------------
Independent Auditors' Report F-2
I Condensed financial information of registrant F-3 - F-6
* Incorporated by reference from the indicated pages of the 2003 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
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The Bear Stearns Companies Inc.:
We have audited the consolidated statements of financial condition of The Bear
Stearns Companies Inc. and subsidiaries (the "Company") as of fiscal years ended
November 30, 2003 and November 30, 2002, and the related consolidated statements
of income, cash flows and changes in stockholders' equity for each of the three
years in the period ended November 30, 2003, and have issued our report thereon
dated February 13, 2004 (which report expresses an unqualified opinion and an
explanatory paragraph relating to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123," in 2003); such consolidated financial statements and report are included
in the Company's Annual Report to Stockholders on Form 10-K and are incorporated
herein by reference. Our audits also included the financial statement schedules
of The Bear Stearns Companies Inc. (Parent Company Only), listed in Item 15.
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.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123," in the fiscal year ended November 30,
2003.
/s/ Deloitte & Touche LLP
New York, New York
February 13, 2004
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
November 30, 2003 November 30, 2002 November 30, 2001
----------------- ----------------- -----------------
REVENUES
Interest .......................................................... $ 418,744 $ 504,086 $ 1,327,435
Other ............................................................. 229,091 259,236 331,757
----------- ----------- -----------
647,835 763,322 1,659,192
----------- ----------- -----------
EXPENSES
Interest .......................................................... 625,911 770,735 1,752,063
Other ............................................................. 144,119 171,525 214,748
----------- ----------- -----------
770,030 942,260 1,966,811
----------- ----------- -----------
Loss before benefit from income taxes, cumulative
effect of change in accounting principle and
equity in earnings of subsidiaries ............................. (122,195) (178,938) (307,619)
Benefit from income taxes ......................................... 1,085 514 180,162
----------- ----------- -----------
Loss before cumulative effect of change in accounting principle and
equity in earnings of subsidiaries ............................. (121,110) (178,424) (127,457)
Cumulative effect of change in accounting principle,
net of tax ..................................................... -- -- (6,273)
Equity in earnings of subsidiaries, net of tax .................... 1,277,516 1,056,769 752,422
----------- ----------- -----------
Net income ........................................................ $ 1,156,406 $ 878,345 $ 618,692
=========== =========== ===========
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)
November 30, 2003 November 30, 2002
----------------- -----------------
ASSETS
Cash and cash equivalents ............................................................ $ 49,956 $ --
Securities purchased under agreements to resell ...................................... 213,985 94,013
Receivables from subsidiaries ........................................................ 29,508,172 27,160,708
Subordinated loans receivable from subsidiaries ...................................... 6,327,813 5,289,478
Investments in subsidiaries, at equity ............................................... 6,289,361 6,146,820
Other assets ......................................................................... 3,251,293 2,674,106
------------ ------------
Total Assets ......................................................................... $ 45,640,580 $ 41,365,125
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ................................................................ $ 5,385,317 $ 8,825,971
Payables to subsidiaries ............................................................. 2,710,024 1,878,983
Other liabilities and accrued expenses ............................................... 1,348,993 959,520
------------ ------------
9,444,334 11,664,474
------------ ------------
Commitments and contingencies (Note 16)
Long-term borrowings ................................................................. 28,163,658 22,756,068
Long-term borrowings from subsidiaries ............................................... 562,500 562,500
STOCKHOLDERS' EQUITY
Preferred stock ...................................................................... 538,415 692,832
Common stock, $1.00 par value; 500,000,000 shares authorized as of
November 30, 2003 and November 30, 2002; 184,805,848 shares
issued as of November 30, 2003 and November 30, 2002 ................................. 184,806 184,806
Paid-in capital ...................................................................... 3,245,380 2,866,290
Retained earnings .................................................................... 4,954,508 3,909,272
Employee stock compensation plans .................................................... 2,299,170 2,213,979
Unearned compensation ................................................................ (188,952) (208,588)
Treasury stock, at cost:
Adjustable Rate Cumulative Preferred Stock Series A: 2,520,750
shares as of November 30, 2002 .................................................. -- (103,421)
Common stock: 82,233,811 and 84,781,479 shares as of
November 30, 2003 and November 30, 2002, respectively ........................... (3,563,239) (3,173,087)
------------ ------------
Total Stockholders' Equity ........................................................... 7,470,088 6,382,083
------------ ------------
Total Liabilities and Stockholders' Equity ........................................... $ 45,640,580 $ 41,365,125
============ ============
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
November 30, 2003 November 30, 2002 November 30, 2001
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................... $ 1,156,406 $ 878,345 $ 618,692
Adjustments to reconcile net income to cash provided
by operating activities:
Employee stock compensation plans .............................. 729,406 533,240 355,612
Equity in earnings of subsidiaries, net of
dividends received ............................................. (253,424) 112,141 (1,032)
Other .......................................................... 10,467 16,043 16,423
(Increases) decreases in assets:
Securities purchased under agreements to resell ................ (119,972) (94,013) --
Other assets ................................................... (492,181) 83,571 107,161
Increases (decreases) in liabilities:
Payables to subsidiaries ......................................... 831,041 891,019 314,278
Other liabilities and accrued expenses ........................... 636,948 652,257 (174,992)
------------ ------------ ------------
Cash provided by operating activities ............................... 2,498,691 3,072,603 1,236,142
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments for) short-term borrowings ............................ (3,440,654) (467,895) (3,565,215)
Net proceeds from issuance of long-term borrowings .................. 10,719,849 4,764,610 6,103,526
(Decrease) increase in long-term borrowings from subsidiaries ....... -- (215,464) 254,231
Issuance of common stock ............................................ 78,004 26,436 288
Redemption of preferred stock ....................................... (27,659) (91,336) --
Payments for:
Retirement of long-term borrowings ............................... (5,789,579) (5,083,978) (4,149,578)
Treasury stock purchases ......................................... (986,193) (629,664) (1,048,015)
Cash dividends paid ................................................. (104,964) (97,544) (100,206)
------------ ------------ ------------
Cash provided by (used in) financing activities ..................... 448,804 (1,794,835) (2,504,969)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables from subsidiaries ....................................... (2,009,171) (6,957,557) 7,538,113
Subordinated loans receivable from subsidiaries ..................... (1,038,335) (592,478) (200,000)
Investments in subsidiaries, net .................................... 110,883 (376,947) (73,406)
Business acquisition ................................................ -- -- (242,983)
Purchases of investment securities and other assets ................. (190,095) (79,924) (48,930)
Proceeds from sale of investment securities and other assets ........ 229,179 16,558 3,826
------------ ------------ ------------
Cash (used in) provided by investing activities ..................... (2,897,539) (7,990,348) 6,976,620
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................ 49,956 (6,712,580) 5,707,793
Cash and cash equivalents, beginning of fiscal year ................. -- 6,712,580 1,004,787
------------ ------------ ------------
Cash and cash equivalents, end of fiscal year ....................... $ 49,956 $ -- $ 6,712,580
============ ============ ============
See Notes to Condensed Financial Information.
Note: Certain reclassifications have been made to prior period amounts to
conform to the current year's presentation.
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 subsidiaries and the Notes thereto
in The Bear Stearns Companies Inc. 2003 Annual Report to Stockholders (the
"Annual Report") incorporated by reference in this Form 10-K.
The condensed unconsolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United
States of America which require management to make certain estimates and
assumptions, including those regarding inventory valuations, stock
compensation, certain accrued liabilities and the potential outcome of
litigation, which may affect the amounts reported in the condensed
unconsolidated financial statements and accompanying notes. Actual results
could differ materially from these estimates.
Investments in wholly-owned subsidiaries are accounted for using the
equity method.
For information on the following, refer to the indicated Notes to the
Consolidated Financial Statements within the Annual Report.
o Summary of Significant Accounting Policies (Note 1)
o Long-Term Borrowings (Note 5)
o Preferred Stock (Note 8 - refer to section entitled "Preferred Stock
Issued by The Bear Stearns Companies Inc.")
o Employee Benefit Plan (Note 10)
o Stock Compensation Plans (Note 11)
o Commitments and Contingencies (Note 16)
The Company engages in derivatives activities in order to modify the
interest rate characteristics of its long and short-term debt. See
"Non-Trading Derivatives Activity" section of Note 12 to the Consolidated
Financial Statements in the Annual Report.
2. Statement of Cash Flows
Income taxes paid (consolidated) totaled approximately $503.3 million,
$221.5 million and $55 million for the fiscal years ended November 30,
2003, 2002 and 2001, respectively. Cash payments for interest approximated
interest expense for each of the periods presented.
3. Transactions with Subsidiaries
The Company received from its consolidated subsidiaries dividends of
approximately $1,024 million, $1,169 million and $751 million for the
fiscal years ended November 30, 2003, 2002 and 2001, respectively.
The Company has transactions with its subsidiaries determined on an
agreed-upon basis. The Company also guarantees certain unsecured lines of
credit and certain other obligations of subsidiaries, including
obligations associated with foreign exchange forward contracts and
interest rate swap transactions. Additionally, the Company guarantees
certain obligations related to Guaranteed Preferred Beneficial Interests
in Company Subordinated Debt Securities issued by subsidiaries.
The Company also issues guarantees of counterparty obligations to
subsidiaries in connection with certain activities of such subsidiaries.
F-6