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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, 2002.
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
------------------------------------ -----------------------------------------
Common Stock, par value $1.00 per New York Stock Exchange
share
Adjustable Rate Cumulative Preferred New York Stock Exchange
Stock, Series A
Depositary Shares, each representing New York Stock Exchange
a one-fourth interest in a share
of 6.15% Cumulative Preferred
Stock, Series E
Depositary Shares, each representing New York Stock Exchange
a one-fourth interest in a share
of 5.72% Cumulative Preferred
Stock, Series F
Depositary Shares, each representing New York Stock Exchange
a one-fourth interest in a share
of 5.49% Cumulative Preferred
Stock, Series G
7.5% Trust Issued Preferred New York Stock Exchange
Securities, of Bear Stearns
Capital Trust II (and registrant's
guarantee thereof)
7.80% Trust Issued Preferred New York Stock Exchange
Securities, of Bear Stearns
Capital Trust III (and
registrant's guarantee thereof)
Principal Protected Sector Selector American Stock Exchange
Notes Due 2008
S&P Linked Notes Due 2003 Chicago Board Options Exchange
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [_]
At February 14, 2003, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was
approximately $5,598,669,829. 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 14, 2003, the registrant had 99,243,757 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 2002 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 26, 2003, 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, 2002.
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PART I
ITEM 1. BUSINESS.
(a) General Development of the Business
The Bear Stearns Companies Inc. (the "Company") was incorporated under the
laws of the State of Delaware on August 21, 1985. The Company is a holding
company that through its subsidiaries, principally Bear, Stearns & Co. Inc.
("Bear Stearns"); 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"). 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 and any amendments to such reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission (the "SEC").
(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 sales, trading and
research in areas such as institutional domestic and international equity sales,
block trading, convertible bonds, over-the-counter ("OTC") equities, equity
derivatives, risk and convertible arbitrage and New York Stock Exchange, Inc.
("NYSE"), American Stock Exchange, Inc. ("AMEX") and International Securities
Exchange ("ISE") specialist activities. Fixed income includes sales, trading and
research for institutional clients in a variety of products such as mortgage and
asset-backed securities, corporate and government bonds, municipal and high
yield products, foreign exchange and fixed income 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 and high yield debt securities.
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, 2002, the Company held approximately $164 billion of
assets 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 service, including access to the Company's resources
and professionals. PCS maintains approximately 500 account executives in its
principal office and six regional offices. Asset management serves the diverse
investment needs of corporations, municipal governments, multi-employer plans,
foundations, endowments, family groups and high-net-worth individuals in the US
and abroad. The asset management area had $24.0 billion in assets under
management at November 30, 2002, which compared to $24.2 billion in assets under
management at November 30, 2001. The change in assets under management reflects
declines in market value, substantially offset by net inflows.
2
Financial information regarding the Company's business segments and
foreign operations as of November 30, 2002, November 30, 2001, and November 30,
2000 and for the fiscal years ended November 30, 2002, November 30, 2001 and
November 30, 2000 is set forth under "Item 8. Financial Statements and
Supplementary Data," in Note 16 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.
The Company provides trust company and clearance services through its
subsidiary, Custodial Trust Company ("CTC"), which is located in Princeton, New
Jersey.
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.
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 under the Irish Central Bank Act, 1971.
BSB allows the Company's existing and prospective clients the opportunity of
dealing with a banking counterparty.
As of November 30, 2002, the Company had 10,574 employees.
The following areas are included in the three business segments mentioned
above in Item 1(b).
INSTITUTIONAL EQUITIES
General. The Company provides customers with liquidity, sales and trading
expertise and equity research in products such as domestic and international
equities and convertible securities.
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.
3
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 52% 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 research, sales and trading
of equity-linked securities including convertible bonds, convertible preferreds,
equity-linked notes and warrants. Market coverage includes the United States,
Europe 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 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.
4
SPECIALIST AND MARKET-MAKING
The Company engages in specialist and market-making activities on the
NYSE, AMEX and ISE through participation in a 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.
Additionally, the Company, apart from the joint venture, performs
market-making functions for options traded on the ISE. The Company owns and/or
operates Primary Market Maker and Competitive Market Maker memberships to allow
it to make markets in the majority of single stock options traded on the ISE.
The rules of the ISE require market-makers to provide continuous quoting in a
variety of option series and classes. This may also require commitments of
capital.
The Company is also registered as a market-maker in single stock futures
on the Nasdaq Liffe Markets and OneChicago exchanges.
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 furnishes weekly 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.
5
Mortgage-Related Securities and Products. The Company trades and makes
markets in the following mortgage-related securities and products: Government
National Mortgage Association ("GNMA") securities; Federal Home Loan Mortgage
Corporation ("FHLMC") participation certificates; Federal National Mortgage
Association ("FNMA") mortgage-backed securities; Small Business Administration
loans; loans guaranteed by the Farmers Home Loan Administration; Federal Housing
Authority insured multi-family loans; real estate mortgage investment conduit
("REMIC") and non-REMIC collateralized mortgage obligations, including residual
interests; and other derivative mortgage-backed securities and products. The
Company also trades real estate mortgage loans originated by unaffiliated
mortgage lenders, both on a securitized and non-securitized basis. 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
6
delivery, and debt service reserve and debt service deposit agreements. The
Company periodically uses both municipal and treasury bond futures to hedge its
cash-market bond inventory. In addition, the Company maintains a municipal
arbitrage portfolio for its own account consisting of municipal futures and cash
bond positions. The Company's underwriting, capital markets, trading and sales
activities are supported by a municipal research group.
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 450
companies whose fixed income securities are investment grade.
(iii) High yield research provides coverage on 250 corporate and sovereign
issuers whose fixed income securities are non-investment-grade.
7
INVESTMENT BANKING
The Company is a major global investment banking firm providing a full
range of capital formation and advisory services to a broad spectrum of clients.
The Company manages and participates in public offerings and arranges the
private placement of debt and equity securities directly with institutional
investors. The Company provides advisory services to clients on a wide range of
financial matters and assists with mergers, acquisitions, leveraged buyouts,
divestitures, corporate reorganizations and recapitalizations.
The Company's strategy is to concentrate a major portion of its corporate
finance business development efforts within those industries in which the
Company has established a leadership position in providing investment banking
services. Industry specialty groups include media and entertainment, health
care, financial institutions, 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.
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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 institutional
investors. The markets currently covered by the Company include Latin America,
Asia and Eastern Europe.
GLOBAL CLEARING SERVICES
Global Clearing Services provides a full range of services to hedge funds,
broker-dealers and registered investment advisors. The services include custody,
clearing, financing, securities lending, execution capabilities and technology
solutions for a broad range of clients.
For start-up and established hedge funds located throughout the world,
Global Clearing Services provides custody, clearing, financing and securities
lending in addition to comprehensive prime brokerage, which includes advanced
web-based portfolio reporting, enhanced leverage programs, term financing and
cash management, capital introductions and risk management.
Broker-dealers conducting retail, institutional and money management
activities utilize the Company's fully disclosed correspondent clearing
services. The Company's advanced proprietary technology, combined with
comprehensive retail products, integrated prime brokerage, operations experience
and exceptional service have enabled the Company to remain an industry leader.
Registered investment advisors whose strategies include the use of
leverage and active trading draw on the Company's unique combination of
web-based portfolio and transparency reporting (i.e., investor reporting),
trading solutions and comprehensive service.
The Company receives revenues both from commissions and service charges
realized from clearing activities, as well as from interest income. The Company
extends credit directly to the customers of correspondent firms in order to
facilitate the conduct of customer securities transactions on a margin basis.
The Company also extends margin credit directly to correspondents to the extent
that such firms pledge proprietary assets as collateral.
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.
The Company derives substantial net interest income from customer margin
loans and securities lending.
Customer Financing. Securities transactions are effected for customers on
either a cash or margin basis. In a margin transaction, the Company extends
credit to a customer for a portion of the purchase price that is collateralized
by securities and cash in the customer's account, in accordance with regulatory
and internal requirements. The Company receives income from interest charged on
the extension of credit. The rate of interest charged to customers for margin
financing is based upon the federal funds rate, brokers call rate or London
Interbank Offered Rate ("LIBOR").
Securities Lending Activities. In connection with both its trading and
brokerage activities, the Company borrows securities from and lends securities
to brokers and dealers and other trading entities to cover short sales and to
complete transactions in which customers have failed to deliver securities by
settlement date.
9
CUSTODIAL TRUST COMPANY
The Company offers a range of trust company and securities-clearance
services through its wholly owned subsidiary CTC. CTC provides the Company with
banking powers, such as access to the securities and funds-wire services of the
Federal Reserve System. CTC provides fiduciary, custody and agency services for
institutional accounts; the clearance of government securities for institutions
and dealers; the processing of mortgage and mortgage-related products, including
derivatives and collateralized mortgage obligations products; and lending. At
November 30, 2002, CTC held approximately $94 billion of assets for clients,
including institutional clients such as pension funds, mutual funds, endowment
funds and insurance companies.
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 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 Stock
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
maintains approximately 500 account executives in its principal office and six
regional 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
approximately $24 billion in assets under management as of November 30, 2002,
clients benefit from the Asset Management Department'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.
In addition, the Asset Management Department offers individual investors
STRATIS, a multi-manager wrap account, and The Bear Stearns Funds, a family of
mutual funds which includes the S&P STARS, S&P STARS Opportunities, Intrinsic
Value, Small Cap Value, Insiders Select, Alpha Growth, International Equity,
Income and High Yield Total Return Portfolios.
10
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 is based in London and 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 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 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.
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.
11
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 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 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.
12
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 Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which has been adopted through incorporation by reference in
NYSE Rule 325. The Net Capital Rule, which specifies minimum net capital
requirements for registered broker-dealers, is designed to measure the general
financial integrity and liquidity of 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 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.
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.
13
BSIL is a broker-dealer based in London and is a member of the Chicago
Board of Trade ("CBOT"), EUREX, LIFFE, Frankfurt Stock Exchange ("FWB"), IPE,
International Securities Markets Association ("ISMA"), London Clearing House
("LCH"), Mercato Telematico allIngrosso dei Titoli de Stato ("MTS"), Milan Stock
Exchange, NASDAQ, OMLX, Stockholmsboren and Euronext Paris ("EURONEXT").
Euronext Paris is the exchange which itself includes the following markets:
Bourse de Paris, Marche a Terme International de France ("MATIF"), Marche des
Options Negociables de Paris ("MONEP") and Nouveau Marche ("NM"). Another London
subsidiary, Bear Stearns International Trading Limited ("BSIT"), is a
market-maker in various non-dollar-denominated equity securities and is a member
of the London Stock Exchange, CREST (The Settlement Network) and virt-x
Exchange. Both BSIL and BSIT are regulated in the United Kingdom by the 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 a Tokyo broker-dealer registered with the Financial Services
Agency of Japan. BSJL is a limited trade participant to the Tokyo Stock Exchange
and the Osaka Stock Exchange and has a membership on the Tokyo International
Financial Futures Exchange. 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 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 impact 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 developments, monetary and fiscal policy, investor
sentiment, availability and cost of capital, technological changes and events,
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."
14
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 1.2 million square feet at 383 Madison Avenue, New York,
New York under an operating lease arrangement.
The lease arrangement expires on May 20, 2007. 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 also leases approximately 320,000 square feet of office space
at One MetroTech Center, Brooklyn, New York pursuant to a lease expiring in 2004
for its securities processing, accounting and clearance operations.
Additionally, the Company leases approximately 30,000, 140,000, 13,000, 59,000
and 61,000 square feet of space at four locations in New York City under leases
expiring in 2002, 2002, 2007, 2009 and 2011, respectively. The Company's offices
in Atlanta, Boca Raton, Boston, Chicago, Dallas, Denver, El Paso, Houston,
Irving, Los Angeles, Palo Alto, Philadelphia, Pound Ridge, Princeton, San
Francisco, San Juan and Tampa occupy an aggregate of approximately 632,000
square feet, while its thirteen foreign offices occupy a total of approximately
178,000 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 six buildings comprising an aggregate of approximately 681,000 square
feet. The Company is currently using the existing facilities on the property to
house its data processing facility and other operations, compliance, personnel
and accounting functions.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, the Company and/or subsidiaries of the
Company have been named as defendants in several lawsuits which involve claims
for substantial amounts. Additionally, the Company is involved from time to time
in investigations and proceedings by governmental agencies and self-regulatory
organizations. Although the ultimate outcome of these matters cannot be
ascertained at this time, it is the opinion of management, after consultation
with counsel, that the resolution of the foregoing matters will not have a
material 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.I.A. Holding, S.A., et al. v. Lehman Brothers, Inc., et al. On July 8,
1997, 277 alleged customers of Ahmad Ihsan El-Daouk ("Daouk") commenced an
action in the United States District Court for the Southern District of New York
against Lehman Brothers, Inc. ("Lehman") and Bear Stearns. On July 3, 1998, 276
of the 277 original plaintiffs filed an amended complaint against Lehman and
Bear Stearns. As amended, the complaint alleges, among other things, that the
defendants committed breach of fiduciary duty, fraud, constructive fraud, breach
of contract, negligent hiring, retention and supervision, and that they aided
and abetted fraud and aided and abetted breach of fiduciary duty in connection
with alleged improper trading activities in the accounts of Daouk's
15
customers. Plaintiffs seek compensatory damages in unspecified amounts and
imposition of constructive trusts with respect to any property that "belongs, or
may belong" to plaintiffs in Lehman's or Bear Stearns' possession.
On May 5, 1999, the court granted permission to 21 plaintiffs who moved to
dismiss their cases with prejudice on the condition that each provides a
covenant not to sue and a release.
The court thereafter randomly divided the remaining plaintiffs into
fourteen separate groups for purposes of trial. On January 23, 2002, the court
granted in part Bear Stearns' and Lehman's motions for summary judgment with
respect to the first group of plaintiffs set for trial. The court dismissed all
claims asserted by four of the fourteen plaintiffs in this first group. In
addition, the court granted in part defendants' motions with respect to ten of
these fourteen plaintiffs, and dismissed all claims except those for breach of
fiduciary duty, aiding and abetting a breach of fiduciary duty and aiding and
abetting fraud.
On May 9, 2002, the court granted in part motions filed by Bear Stearns,
Lehman, and the plaintiffs, seeking reconsideration of the court's January 23,
2002 decision, which granted in part Bear Stearns' and Lehman Brothers' motion
for summary judgment. On reconsideration, the court reinstated the claim for
aiding and abetting fraud asserted by three of the four plaintiffs whose claims
against Bear Stearns had been dismissed in their entirety; the fourth
plaintiff's claims against Bear Stearns remain dismissed. In addition, the court
reinstated the plaintiffs' secondary liability claims with respect to certain of
the plaintiffs. Finally, the court dismissed all claims asserted by the
plaintiff with the largest claim against Bear Stearns in the first group of
plaintiffs set for trial (the court has randomly divided the remaining
plaintiffs into separate groups for purposes of trial).
The parties have entered into an agreement to settle this action.
A.R. Baron & Company, Inc. The following matters arise out of Bear
Stearns' role as clearing broker for A.R. Baron & Company, Inc. ("Baron") from
July 20, 1995 through June 28, 1996:
(i) John Berwecky, et al. v. Bear, Stearns & Co. Inc., et al./Jack Perry
v. Bear, Stearns & Co. Inc., et al. On July 21 and August 22, 1997, shareholders
of companies whose securities were underwritten by, or that otherwise had some
relationship with Baron (these securities are referred to below as "Baron
securities") commenced two actions in the United States District Court for the
Southern District of New York against Bear Stearns, BSSC and a managing director
of Bear Stearns.
On January 13, 1998, the Berwecky and Perry cases were consolidated for
all purposes and lead plaintiffs and lead counsel for plaintiffs were appointed.
On April 1, 1998, an amended consolidated class action complaint was filed. As
amended, the complaint alleges, among other things, that Bear Stearns, BSSC, a
managing director of Bear Stearns and Baron engaged in a scheme to manipulate
the market for and to inflate the prices of the Baron securities. Plaintiffs
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. Plaintiffs
purport to represent a class consisting of all persons who acquired Baron
securities from Baron between July 20, 1995 and June 28, 1996. Damages in an
unspecified amount are sought.
On September 18, 2000, the court certified a class consisting of all
persons who acquired Baron securities from Baron between July 20, 1995 and June
28, 1996.
In November 2002, the court gave final approval to the parties' settlement
of this action.
(ii) 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, an 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
16
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.
(iii) 110958 Ontario Inc. v. Bear, Stearns & Co. Inc., et al. On February
19, 1997, a brokerage customer of Baron commenced a National Association of
Securities Dealers ("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.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this NASD arbitration proceeding and believes that it has substantial
defenses to these claims.
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.
Plaintiffs' current pleading alleges, among other things, a scheme to
manipulate the market for and to inflate the prices of Blech Securities, and
alleges that Bear Stearns violated Sections 10(b) and 20(a) of the Exchange Act
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.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in this litigation and believes that it has substantial defenses to these
claims.
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.
Bear Stearns and BSSC have denied all allegations of wrongdoing asserted
against them in this NASD arbitration proceeding, and believe that they have
substantial defenses to these claims.
Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc., et al. On June 25,
1996, a complaint was filed in the United States District Court for the Southern
District of New York by a former customer against Bear Stearns, BSSC, Bear
Stearns Forex Inc. ("Forex") and a registered representative. On November 4,
1996, an amended complaint was filed, and on October 22, 1998, a second amended
complaint was filed against the same individual
17
and entities that were named as defendants in the original complaint. As
amended, the complaint alleges, among other things, claims for breach of
fiduciary duty, negligence and violations of Section 4o of the Commodity
Exchange Act. Plaintiff sought to recover at least $300 million in losses and at
least $100 million in punitive damages.
On May 17, 2000, a jury returned a verdict finding that Bear Stearns, BSSC
and Forex were liable to plaintiff for negligence and awarded damages in the
amount of $111.5 million. The jury also found that defendants had not breached
any fiduciary duties. On June 2, 2000, the court also awarded pre-judgment
interest of $52.3 million. On December 29, 2000, the court denied defendants'
motions to overturn the verdict.
Defendants appealed the verdict to the United States Court of Appeals for
the Second Circuit, and on September 19, 2002, the United States Court of
Appeals for the Second Circuit reversed the jury verdict against Bear Stearns in
this case and ordered that the complaint be dismissed. On December 5, 2002, the
Second Circuit denied plaintiff's motions for reargument and en banc review of
this decision.
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").
(i) Mitchell v. McCall, et al. On June 23, 1999, a shareholder of McKesson
HBOC commenced a purported derivative action on behalf of McKesson HBOC in the
Superior Court of the State of California, County of San Francisco, against Bear
Stearns, Arthur Andersen LLP, and certain present and former directors and/or
officers of McKesson HBOC, McKesson and/or HBOC. On March 31, 2000, plaintiffs
filed an amended complaint against the same defendants as were named in the
original complaint. As amended, the complaint alleges, among other things, that
Bear Stearns committed breach of fiduciary duty and negligence in connection
with acting as a financial advisor to McKesson with respect to a merger between
McKesson and HBOC. Compensatory and punitive damages in unspecified amounts are
sought.
(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 complaint, and denied Bear Stearns' motion
to dismiss the Section 14(a) claim.
(iii) Utah State Retirement Board and Public Employees' Retirement
Association of Colorado v. McKesson HBOC, Inc., et al. / Minnesota State Board
of Investment v. McKesson HBOC, Inc., et al. / 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, asserting allegations similar to those alleged in the second amended
consolidated complaint filed in the litigation entitled In re McKesson HBOC,
Inc. Securities Litigation pending in the United States District Court for the
Northern District of California. 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.
18
On August 1, 2002, the plaintiffs in each of these actions filed amended
complaints, and on October 2, 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 these actions 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. Compensatory and
punitive damages in unspecified amounts are sought.
(iv) 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.
On July 2, 2001, the defendants filed preliminary objections to the
complaint. On December 18, 2001, the court sustained defendants' preliminary
objections and dismissed the complaint. On January 7, 2002, plaintiff filed a
notice of appeal. 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.
(v) 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.
(vi) Merrill Lynch Fundamental Growth Fund, Inc., et al. v. McKesson HBOC,
Inc., et al. On or around March 19, 2002, an action was commenced 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. Named as defendants are McKesson HBOC, HBOC,
certain present or former officers and/or directors of McKesson, HBOC and/or
McKesson HBOC, Arthur Andersen and Bear Stearns. The complaint alleges, among
other things, that Bear Stearns violated Section 25500 of the California
Corporations Code and committed common law fraud, negligent misrepresentation
and conspiracy 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 not been served with the complaint in this action.
On August 6, 2002, plaintiffs and Bear Stearns entered into a tolling
agreement pursuant to which any statute of limitations applicable to the claims
asserted against Bear Stearns in the complaint will be tolled until the earlier
of (a) 30 days after written termination of the tolling agreement or (b) the
date plaintiffs file a new complaint
19
against Bear Stearns. The tolling agreement may be terminated by either party
upon written notice, at which time plaintiffs may reinstate their claims. The
agreement further provides that plaintiffs may obtain the benefit of an adverse
judgment against Bear Stearns in any of the pending state or federal cases
arising from the McKesson-HBOC merger (to the extent permitted by principles of
res judicata and collateral estoppel). On August 8, 2002, plaintiffs filed an
amended complaint that does not name Bear Stearns as a defendant. On October 2,
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).
Bear Stearns has denied all allegations of wrongdoing asserted against it
in these litigations and believes that it has substantial defenses to these
claims.
Manhattan Investment Fund Limited. The following matters arise out of the
failure and subsequent bankruptcy filing of Manhattan Investment Fund Limited
("MIFL").
(i) Scotia Nominees, as nominees for L.C.O. Investments, Ltd. v. Michael
Berger, et al. On January 25, 2000, an action was commenced in the Supreme Court
of the State of New York, County of New York, by Scotia Nominees, a shareholder
of MIFL. On March 27, 2000, plaintiff filed an amended complaint, and on March
6, 2001, plaintiffs filed a second amended complaint, and named as defendants in
the second amended complaint are MIFL, three directors of MIFL, Manhattan
Capital Management, Inc., BSSC, Deloitte & Touche, and Fund Administration
Services (Bermuda) Ltd. ("FASB").
As amended, the complaint alleges that BSSC aided and abetted a breach of
fiduciary duty and conspired to convert plaintiffs' funds by, among other
things, failing to alert the shareholders of MIFL about false and misleading
statements made by certain of the other defendants related to the financial
condition of MIFL and continuing to provide credit to MIFL. Compensatory damages
in excess of $5 million are sought from BSSC.
On January 18, 2002, the court announced a tentative ruling dismissing all
claims against BSSC. The court subsequently issued an order dismissing all
claims asserted in this action with prejudice.
(ii) 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 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 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.
BSSC has denied all allegations of wrongdoing asserted against it in this
litigation, and believes that it has substantial defenses to these claims.
Sterling Foster & Co., Inc. The following matter arises out of Bear
Stearns' role as clearing broker for Sterling Foster & Co., Inc. ("Sterling
Foster").
(i) 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 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
20
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.
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.
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.
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 of 1933 and Section 10(b) of the Securities Exchange Act
of 1934 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.
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 December 20, 2002, these
regulatory agencies and the North American Securities Administrators Association
announced an agreement in principle with 10 brokerage firms, including Bear
Stearns (and shortly thereafter an additional two brokerage firms) to resolve
the investigation concerning research practices. This agreement is subject to
approval of the governing bodies of these regulatory and/or governmental
authorities, including the SEC. The agreement requires, among other things, that
Bear Stearns pay $80 million in penalties, restitution and money for investor
education. In addition, all firms that are a party to the agreement are
required: (i) to sever the links between research and investment banking,
including
21
analyst compensation for equity research, and the practice of analysts
accompanying investment banking personnel on pitches and road shows; (ii) for a
five-year period, to contract with no less than three independent research firms
that will provide research to the brokerage firms and customers; and (iii) not
to allocate IPO shares to corporate executives and directors who are in a
position to influence investment banking decisions.
The Company is also involved from time to time in investigations and
proceedings by governmental agencies and self-regulatory organizations.
* * *
The Company and/or subsidiaries of the Company 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.
22
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information as of January 31, 2003
concerning executive officers of the Company as of November 30, 2002.
AGE AS OF
JANUARY 31,
NAME 2003 PRINCIPAL OCCUPATION
------------------------- ----------- ----------------------------------------
James E. Cayne .......... 68 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")
Alan C. Greenberg ....... 75 Chairman of the Executive Committee
Mark E. Lehman .......... 51 Executive Vice President and General
Counsel of the Company and Bear Stearns
and member of the Executive Committee
Marshall J Levinson ..... 60 Controller of the Company
Michael Minikes ......... 59 Treasurer of the Company and Bear
Stearns
Samuel L. Molinaro Jr. .. 45 Executive Vice President and Chief
Financial Officer of the Company and
Bear Stearns and member of the Executive
Committee
Alan D. Schwartz ........ 52 President and Co-Chief Operating Officer
of the Company and Bear Stearns and
member of the Executive Committee
Warren J. Spector ....... 45 President and Co-Chief Operating Officer
of the Company and Bear Stearns and
member of the Executive Committee
23
Each of the executive officers of the Company has been a Senior Managing
Director of Bear Stearns for more than the past five years.
Mr. 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. 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 and General Counsel of the
Company and Bear Stearns for more than the past five years.
Mr. Levinson has been Controller of the Company since October 1998. Prior
thereto, Mr. Levinson was Chief Financial Officer and Chief Administrative
Officer of Bear, Stearns International Limited in London.
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. 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.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required to be furnished pursuant to this item is set
forth under the caption "Price Range of Common Stock and Dividends" in the
Annual Report, which is incorporated herein by reference to Exhibit No. 13 of
this report.
ITEM 6. SELECTED FINANCIAL DATA.
The information required to be furnished pursuant to this item is set
forth under the caption "Selected Financial Data" in the Annual Report, which is
incorporated herein by reference to Exhibit No. 13 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF 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.
25
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 2003 Annual
Meeting of Stockholders to be held on March 26, 2003, 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. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures within 90 days of the filing date of
this annual report, and, based on their evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
26
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
Adjustable Rate Cumulative Preferred Stock, Series A (incorporated
by reference to Exhibit 4(a)(6) to the registrant's registration
statement on Form S-8 (File No. 33-49979)).
(3)(a)(4) Certificate of Correction to the Certificate of Stock Designation
relating to the registrant's Adjustable Rate Cumulative Preferred
Stock, Series A (incorporated by reference to Exhibit 4(a)(7) to the
registrant's registration statement on Form S-8 (File No.
33-49979)).
(3)(a)(5) 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)(6) 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)(7) 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)(8) 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)(9) 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).
27
(3)(a)(10) 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)(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).
(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)).
(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 October
28, 1999 (incorporated by reference to Exhibit 10(a)(5) to the
registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended December 31, 1999).*
(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).*
28
(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. 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) Lease, dated as of March 6, 1987, among Olympia & York 245 Lease
Company, 245 Park Avenue Company and The Bear Stearns Companies Inc.
(incorporated by reference to Exhibit (10)(c)(2) to the registrant's
registration statement on Form S-1 (File No. 33-15948)).
(10)(b)(4) Lease, dated as of August 26, 1994, between Tenth City Associates
and The Bear Stearns Companies Inc. (incorporated by reference to
Exhibit 10(b)(3) to the registrant's Annual Report on Form 10-K for
its fiscal year ended June 30, 1994).
(11) Statement re: computation of per share earnings. (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 in
accordance with Section (b)(11) of Item 601 of Regulation S-K).
(12) Statement re: computation of ratio of earnings to fixed charges and
computation of ratio of earnings to fixed charges and preferred
stock dividends.
(13) 2002 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(21) Subsidiaries of the registrant.
(23) Consent of Deloitte & Touche LLP.
(99.1) 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.
(99.2) 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
29
(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, 2002 and
filed September 19, 2002, pertaining to the Company's results
of operations for the quarter ended August 31, 2002.
(ii) A Current Report on Form 8-K dated September 20, 2002 and
filed September 26, 2002, announcing the United States Court
of Appeals for the Second Circuit overturned a district court
decision that upheld a jury verdict awarding Henryk de
Kwiatowski, a former customer of Bear Stearns, approximately
$164.5 million in damages and interest in May 2000 and ordered
the district court to dismiss the case.
(iii) A Current Report on Form 8-K dated October 30, 2002 and filed
November 6, 2002, pertaining to an opinion of Cadwalader,
Wickersham & Taft as to the legality of the 5.70% Global Notes
due 2014 ("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.
30
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 28th day of
February 2003.
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 28th day of February 2003.
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 (Principal Executive Officer) and
James E. Cayne 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
31
/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/ FRED WILPON
.............................
Fred Wilpon Director
/s/ SAMUEL L. MOLINARO JR.
............................. Executive Vice President and Chief Financial
Samuel L. Molinaro Jr. Officer (Principal Financial Officer)
/s/ MARSHALL J LEVINSON
.............................
Marshall J Levinson Controller (Principal Accounting Officer)
32
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James E. Cayne, certify that:
1. I have reviewed this Annual Report on Form 10-K of The Bear Stearns Companies
Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 28, 2003
/s/ JAMES E. CAYNE
------------------------------------
James E. Cayne
Chairman of the Board,
Chief Executive Officer
33
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT
OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Samuel L. Molinaro, Jr., certify that:
1. I have reviewed this Annual Report on Form 10-K of The Bear Stearns Companies
Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Annual Report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 28, 2003
/s/ SAMUEL L. MOLINARO JR.
----------------------------
Samuel L. Molinaro, Jr.
Executive Vice President,
Chief Financial 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
FORM ANNUAL
FINANCIAL STATEMENTS 10-K REPORT*
-------------------- --------- -------
Independent Auditors' Report 81
THE BEAR STEARNS COMPANIES INC.
-------------------------------
(i) Consolidated Statements of Income--fiscal years ended
November 30, 2002, 2001 and 2000 52
(ii) Consolidated Statements of Financial Condition at
November 30, 2002 and November 30, 2001 53
(iii) Consolidated Statements of Cash Flows--fiscal years
ended November 30, 2002, 2001 and 2000 54
(iv) Consolidated Statements of Changes in Stockholders'
Equity--fiscal years ended November 30, 2002, 2001 and
2000 55-56
(v) Notes to Consolidated Financial Statements 57-80
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 2002 Annual
Report to Stockholders.
All other schedules are omitted because they are not applicable or the
requested information is included in the consolidated financial statements
or notes thereto.
F-1
DELOITTE
& TOUCHE
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 November 30, 2002
and November 30, 2001, and the related consolidated statements of income, cash
flows and changes in stockholders' equity for the fiscal years ended November
30, 2002, November 30, 2001 and November 30, 2000, and have issued our report
thereon dated January 15, 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.
/s/ Deloitte & Touche LLP
New York, New York
January 15, 2003
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, 2002 NOVEMBER 30, 2001 NOVEMBER 30, 2000
----------------- ----------------- -----------------
REVENUES
Interest ..................................... $ 504,086 $1,327,435 $1,863,498
Other ........................................ 259,236 331,757 155,932
---------- ---------- ----------
763,322 1,659,192 2,019,430
---------- ---------- ----------
EXPENSES
Interest ..................................... 770,735 1,752,063 2,483,116
Other ........................................ 171,525 214,748 105,860
---------- ---------- ----------
942,260 1,966,811 2,588,976
---------- ---------- ----------
Loss before benefit from income taxes,
cumulative effect of change in accounting
principle and equity in earnings of
subsidiaries .............................. (178,938) (307,619) (569,546)
Benefit from income taxes .................... 514 180,162 118,740
---------- ---------- ----------
Loss before cumulative effect of change in
accounting principle and equity in earnings
of subsidiaries ........................... (178,424) (127,457) (450,806)
Cumulative effect of change in accounting
principle, net of tax ..................... -- (6,273) --
Equity in earnings of subsidiaries, net of tax 1,056,769 752,422 1,223,989
---------- ---------- ----------
Net income ................................... $ 878,345 $ 618,692 $ 773,183
========== ========== ==========
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, 2002 NOVEMBER 30, 2001
----------------- -----------------
ASSETS
Cash and cash equivalents ......................... $ -- $ 6,712,580
Securities purchased under agreements to resell ... 94,013 --
Receivables from subsidiaries ..................... 27,160,708 19,889,935
Subordinated loans receivable from subsidiaries ... 5,289,478 4,697,000
Investments in subsidiaries, at equity ............ 6,146,820 5,882,014
Other assets ...................................... 2,674,106 2,633,836
----------- -----------
Total Assets ...................................... $41,365,125 $39,815,365
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ............................. $8,825,971 $ 9,293,866
Payables to subsidiaries .......................... 1,878,983 990,629
Other liabilities and accrued expenses ............ 959,520 435,391
----------- -----------
11,664,474 10,719,886
----------- -----------
Long-term borrowings .............................. 22,756,068 22,688,988
Long-term borrowings from subsidiaries ............ 562,500 777,964
STOCKHOLDERS' EQUITY
Preferred stock ................................... 692,832 800,000
Common stock, $1.00 par value; 500,000,000 shares
authorized as of November 30, 2002 and November 30,
2001; 184,805,848 shares issued as of November 30,
2002 and November 30, 2001 ........................ 184,806 184,806
Paid-in capital ................................... 2,866,290 2,728,981
Retained earnings ................................. 3,909,272 3,118,635
Employee stock compensation plans ................. 2,213,979 2,015,375
Unearned compensation ............................. (208,588) (230,071)
Treasury stock, at cost:
Adjustable Rate Cumulative Preferred Stock
Series A: 2,520,750 shares as of November 30,
2002 and November 30, 2001 ................... (103,421) (103,421)
Common stock: 84,781,479 and 84,763,780 shares
as of November 30, 2002 and November 30, 2001,
respectively ................................. (3,173,087) (2,885,778)
----------- -----------
Total Stockholders' Equity ........................ 6,382,083 5,628,527
----------- -----------
Total Liabilities and Stockholders' Equity ........ $41,365,125 $39,815,365
=========== ===========
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, 2002 NOVEMBER 30, 2001 NOVEMBER 30, 2000
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................................... $ 878,345 $ 618,692 $ 773,183
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Employee stock compensation plans ............................ 533,240 355,612 676,920
Equity in earnings of subsidiaries, net of dividends received 112,141 (1,032) (926,686)
Other ........................................................ 16,043 16,423 17,559
(Increases) decreases in assets:
Securities purchased under agreements to resell .............. (94,013) -- --
Other assets ................................................. 83,571 107,161 (886,258)
Increases (decreases) in liabilities:
Payables to subsidiaries ..................................... 891,019 314,278 90,275
Other liabilities and accrued expenses ....................... 652,257 (174,992) (62,195)
----------- ----------- -----------
Cash provided by (used in) operating activities ................. 3,072,603 1,236,142 (317,202)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (payments for) proceeds from short-term borrowings .......... (467,895) (3,565,215) 1,396,226
Net proceeds from issuance of long-term borrowings .............. 4,764,610 6,103,526 8,183,991
(Decrease) increase in long-term borrowings from subsidiaries ... (215,464) 254,231 --
Issuance of common stock ........................................ 26,436 288 --
Proceeds from put option premium ................................ -- -- 1,065
Redemption of preferred stock ................................... (91,336) -- --
Payments for:
Retirement of long-term borrowings ........................... (5,083,978) (4,149,578) (4,304,964)
Treasury stock purchases ..................................... (629,664) (1,048,015) (726,836)
Cash dividends paid ............................................. (97,544) (100,206) (99,329)
----------- ----------- -----------
Cash (used in) provided by financing activities ................. (1,794,835) (2,504,969) 4,450,153
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables from subsidiaries ................................... (6,957,557) 7,538,113 (2,934,186)
Subordinated loans receivable from subsidiaries ................. (592,478) (200,000) (590,045)
Investments in subsidiaries, net ................................ (376,947) (73,406) 235,261
Business acquisition ............................................ -- (242,983) --
Purchases of investment securities and other assets ............. (79,924) (48,930) (51,202)
Proceeds from sale of investment securities and other assets .... 16,558 3,826 9,854
----------- ----------- -----------
Cash (used in) provided by investing activities ................. (7,990,348) 6,976,620 (3,330,318)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents ............ (6,712,580) 5,707,793 802,633
Cash and cash equivalents, beginning of fiscal year ............. 6,712,580 1,004,787 202,154
----------- ----------- -----------
Cash and cash equivalents, end of fiscal year ................... $ -- $ 6,712,580 $ 1,004,787
=========== =========== ===========
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. 2002 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 Long-term borrowings (Note 5)
o Preferred stock (Note 8 - refer to section entitled "Preferred Stock
Issued by The Bear Stearns Companies Inc.")
o Commitments and contingencies (Note 15)
The Company engages in derivatives activities in order to modify the
interest rate characteristics of its long and short-term debt.
2. STATEMENT OF CASH FLOWS
Income taxes paid (consolidated) totaled approximately $222 million, $55
million and $985 million for the fiscal years ended November 30, 2002,
2001 and 2000, 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 $1,169 million, $751 million and $297 million for the fiscal
years ended November 30, 2002, 2001 and 2000, 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
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