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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, 2006.
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 share New York Stock Exchange
Depositary Shares, each representing a one-fourth interest in a New York Stock Exchange
share of 6.15% Cumulative Preferred Stock, Series E
Depositary Shares, each representing a one-fourth interest in a New York Stock Exchange
share of 5.72% Cumulative Preferred Stock, Series F
Depositary Shares, each representing a one-fourth interest in a New York Stock Exchange
share of 5.49% Cumulative Preferred Stock, Series G
7.8% Trust Issued Preferred Securities, of Bear Stearns Capital New York Stock Exchange
Trust III (and registrant's guarantee thereof)
Euro Floating Rate Global Notes Due July 27, 2012 New York Stock Exchange
Principal Protected Sector Selector Notes Due 2008 American Stock Exchange
Principal Protected Notes Linked to the S&P 500 Index Due 2008 American Stock Exchange
Principal Protected Notes Linked to the Price Performance of the American Stock Exchange
Nasdaq-100 Index Due 2009
Principal Protected Notes Linked to the S&P 500 Index Due 2009 American Stock Exchange
Principal Protected Notes Linked to the Dow Jones Industrial American Stock Exchange
Average Due 2011
Medium-Term Notes, Linked to a Basket of Three International American Stock Exchange
Equity Indices Due August 2, 2010
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [|X|] No [__]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [__] No [|X|]
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. Large accelerated filer [|X|] Accelerated filer [__] Non-accelerated filer
[__]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule12b-2 of the Exchange Act). Yes [__] No [|X|]
At May 31, 2006, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was approximately
$14,998,622,013. 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 5, 2007, the registrant had 119,771,275 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 2006 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
April 18, 2007, 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, 2006.
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THE BEAR STEARNS COMPANIES INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED NOVEMBER 30, 2006
Page
Form 10-K Item Number: No.
PART I
Item 1. Business.................................................
General Development of the Business...................... 3
Financial Information about Industry Segments............ 3
Narrative Description of Business........................ 4
Competition.............................................. 15
Regulatory and Compliance Factors Affecting the Company and
the Securities Industry............................... 16
Item 1A. Risk Factors............................................. 19
Item 1B. Unresolved Staff Comments................................ 23
Item 2. Properties............................................... 23
Item 3. Legal Proceedings........................................ 24
Item 4. Submission of Matters to a Vote of Security Holders...... 30
Executive Officers of the Company........................ 31
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity 32
Securities............................................
Item 6. Selected Financial Data.................................. 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.............................. 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 33
Item 8. Financial Statements and Supplementary Data.............. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................. 33
Item 9A. Controls and Procedures.................................. 33
Item 9B. Other Information........................................ 34
PART III
Item 10. Directors and Executive Officers of the Registrant....... 34
Item 11. Executive Compensation................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters............ 34
Item 13. Certain Relationships and Related Transactions,
and Director Independence............................. 34
Item 14. Principal Accountant Fees and Services................... 35
PART IV
Item 15. Exhibits and Financial Statement Schedules............... 35
Signatures............................................... 38
Index to Financial Statements and Financial Schedules.... F-1
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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 broker-dealer and international bank subsidiaries,
principally Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities
Corp. ("BSSC"), Bear, Stearns International Limited ("BSIL") and Bear Stearns
Bank plc ("BSB") is a leading investment banking, securities and derivatives
trading, clearance and brokerage firm serving corporations, governments,
institutional and individual investors worldwide. BSSC, a subsidiary of Bear
Stearns, provides professional and correspondent clearing services, in addition
to clearing and settling customer transactions and certain proprietary
transactions of the Company. The Company succeeded on October 29, 1985 to the
business of Bear, Stearns & Co., a New York limited partnership (the
"Partnership"). In addition to conducting a substantial portion of its operating
activities through certain of its regulated subsidiaries noted above, (Bear
Stearns, BSSC, BSIL and BSB), the Company also conducts activities through the
following wholly owned subsidiaries: Bear Stearns Global Lending Limited;
Custodial Trust Company; Bear Stearns Financial Products Inc.; Bear Stearns
Capital Markets Inc.; Bear Stearns Credit Products Inc.; Bear Stearns Forex
Inc.; EMC Mortgage Corporation; Bear Stearns Commercial Mortgage, Inc. and
through its majority owned subsidiary Bear Hunter Holdings LLC. 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, through the investor relations section on its website,
its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive
officers and any amendments to such reports filed pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
These reports are available as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission (the "SEC"). Also posted on the Company's website, and
available in print upon request of any stockholder to the Investor Relations
Department, are charters for the Company's Audit Committee, Compensation
Committee, Corporate Governance Committee, Nominating Committee and Qualified
Legal Compliance Committee. Copies of the Corporate Governance Guidelines and
the Code of Business Conduct and Ethics (the "Code") governing our directors,
officers and employees are also posted on the Company's website within the
"Corporate Governance" section under the heading "About Bear Stearns" and are
available in print upon request of any stockholder to the Investor Relations
Department.
Within the time period required by the SEC and the New York Stock
Exchange, Inc. (the "NYSE") the Company will post on its website any
modifications to the Code and any waivers applicable to Senior Executives, as
defined in the Code.
The Investor Relations Department can be contacted at The Bear Stearns
Companies Inc., 383 Madison Avenue, New York, New York 10179, Attn.: Investor
Relations, telephone: (212) 272-2000.
(b) Financial Information about Industry Segments
The Company is primarily engaged in business as a securities broker and
dealer operating in three principal segments: Capital Markets, Global Clearing
Services and Wealth Management. These segments are analyzed separately due to
the distinct nature of the products they provide and the clients they serve.
Certain Capital Markets products are distributed by the Wealth Management and
Global Clearing Services distribution networks, with the related revenues of
such intersegment services allocated to the respective segments.
-3-
Capital Markets is comprised of 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 domestic and international equities, block trading,
convertible bonds, over-the-counter ("OTC") equities, equity derivatives, risk
and convertible arbitrage and, through a consolidated joint venture, specialist
and market-making activities on the NYSE, American Stock Exchange ("AMEX") and
International Securities Exchange ("ISE"). Fixed income includes sales, trading,
origination and research provided to institutional clients across a variety of
products such as mortgage- and asset-backed securities, corporate and government
bonds, municipal bonds, high yield products, foreign exchange, interest rate and
credit derivatives. Investment banking provides services in capital raising,
strategic advice, mergers and acquisitions and merchant banking. Capital raising
encompasses the Company's underwriting of equity, investment-grade, municipal
and high yield debt products.
Global Clearing Services provides execution, clearing, margin lending and
securities lending to clearing clients worldwide. Prime brokerage clients
include hedge funds and clients of money managers, short sellers, arbitrageurs
and other professional investors. Correspondent broker-dealer clients engage in
retail, institutional and money management activities and their customers are
carried by BSSC on a fully disclosed basis. For registered investment advisor
client accounts, the advisor provides investment management expertise and the
Company provides financing, execution, clearing and custody services. At
November 30, 2006, the Company held approximately $291.2 billion of equity in
Global Clearing Services client accounts.
Wealth Management is comprised of the Private Client Services ("PCS") and
asset management areas. PCS provides high-net-worth individuals with an
institutional level of investment service, including access to the Company's
resources and professionals. At November 30, 2006, PCS had approximately 500
account executives in its principal office, six regional offices, six satellite
offices and two international offices. Asset management manages equity, fixed
income and alternative assets for corporate pension plans, public systems,
endowments, foundations, multi-employer plans, insurance companies,
corporations, families and high-net-worth individuals in the United States
("US") and abroad. The asset management area had $52.5 billion in assets under
management at November 30, 2006, compared to $41.9 billion in assets under
management at November 30, 2005.
Financial information regarding the Company's business segments and
foreign operations as of November 30, 2006, November 30, 2005, and November 30,
2004 and for the fiscal years ended November 30, 2006, November 30, 2005 and
November 30, 2004 is set forth under "Item 8. Financial Statements and
Supplementary Data," in Note 19 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 and market-making
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 and residential
mortgage loan origination and securitization activities; investment management
and advisory services; fiduciary, custody, agency and securities research
services.
-4-
The Company's business is conducted from its principal offices in New York
City; from domestic regional offices in Atlanta, Boston, Chicago, Dallas,
Denver, Houston, Los Angeles, San Francisco, San Juan and Scottsdale; from
representative offices in Beijing, Hong Kong, Sao Paulo and Shanghai; and
through international offices in Dublin, Hong Kong, London, Lugano, Milan,
Singapore and Tokyo. The Company's international offices provide services and
engage in investment activities involving foreign clients and international
transactions. Additionally, certain of these foreign offices provide services to
US clients.
Bear Stearns and BSSC are broker-dealers registered with the SEC.
Additionally, Bear Stearns is registered as an investment adviser with the SEC.
Bear Stearns and BSSC are also members of the NYSE, all other principal US
securities and futures exchanges, the National Association of Securities
Dealers, Inc. ("NASD"), 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 ("FRBNY").
BSIL is a full service broker-dealer based in London. BSIL is incorporated
in the United Kingdom and is authorized and regulated by the Financial Services
Authority ("FSA").
BSB was registered with the Irish Companies Registration Office on
November 27, 1995 and was granted a banking license on April 10, 1997. BSB
allows the Company's existing and prospective clients the opportunity of dealing
with a banking counterparty. BSB is incorporated in Ireland and is regulated by
the Financial Regulator.
Bear Stearns Global Lending Limited ("BSGL") is incorporated in the Cayman
Islands and provides loans to certain Bear Stearns customers.
Custodial Trust Company ("CTC"), a Federal Deposit Insurance Corporation
("FDIC") insured New Jersey state chartered bank, offers a range of trust,
lending and securities-clearance services. CTC provides the Company with banking
powers including access to the securities and funds-wire services of the Federal
Reserve System. CTC provides trust, custody, agency and securities lending
services for institutional accounts; commercial and margin lending; the
clearance of government securities for institutions and dealers; and the
processing of mortgage and mortgage-related products, including derivatives and
collateralized mortgage obligations products. At November 30, 2006, CTC held
approximately $81 billion of assets for clients, including institutional clients
such as pension funds, mutual funds, endowment funds and insurance companies.
CTC is incorporated in the State of New Jersey.
Bear Stearns Financial Products Inc. ("BSFP") transacts business as a
triple-A-rated counterparty to eligible clients, offering a wide range of fixed
income and equity derivative products. Eligible clients are those rated A3 or
better by Moody's Investors Service, Inc. and A- or better by Standard & Poor's
Ratings Services or counterparties acceptable to both rating agencies. BSFP
transfers its market risk associated with derivative transactions to Bear
Stearns Capital Markets Inc., an affiliate of BSFP and a wholly owned subsidiary
of the Company. BSFP is incorporated in the State of Delaware.
Bear Stearns Capital Markets Inc. ("BSCM") is engaged in fixed income
derivatives transactions and hedges associated therewith. BSCM is incorporated
in the State of Delaware.
Bear Stearns Credit Products Inc. ("BSCPI") is engaged in credit
derivatives transactions and hedges associated therewith. BSCPI is incorporated
in the State of Delaware.
Bear Stearns Forex Inc. ("BSFX") is a dealer engaged in foreign currency
and precious metals transactions and hedges associated therewith. BSFX is
incorporated in the State of Delaware.
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EMC Mortgage Corporation ("EMC") was incorporated in the State of Delaware
on September 26, 1990, as a wholly owned subsidiary of the Company and maintains
its principal office at 2780 Lake Vista Drive, Lewisville, Texas. EMC is a
mortgage banking company approved by the US Department of Housing and Urban
Development ("HUD"), Federal Home Loan Mortgage Corporation ("FHLMC") and
Federal National Mortgage Association ("FNMA"). EMC purchases both conforming
and non-conforming, investment-grade and non-investment grade, conventional
fixed rate and adjustable rate residential mortgage loans with the right to
service released or retained and sells such loans to investors. EMC also
purchases and sells residual certificates and mortgage servicing rights.
Bear Stearns Commercial Mortgage, Inc. ("BSCMI") is primarily engaged in
the origination and securitization of commercial mortgage loans for resale in
the form of pass-through securities ("certificates"). These certificates
represent fractional and undivided interests in pools of mortgage loans held in
a trust. BSCMI is incorporated in the State of New York.
Bear Hunter Holdings LLC ("BHH") is a Delaware limited liability company
jointly owned by the Company and Hunter Partners LLC. Bear Wagner Specialists
LLC ("Bear Wagner"), BHH's principal wholly owned subsidiary, is a registered
broker-dealer primarily engaged in specialist and market-making activities on
the NYSE, AMEX and ISE.
As of November 30, 2006, the Company had 13,566 employees.
The following areas are included in the three business segments mentioned
above in Item 1(b).
Equities
General. The Company provides institutional customers with liquidity,
sales and trading expertise and equity research in products such as domestic and
international equities, block trading, convertible bonds, OTC equities, equity
derivatives, risk and convertible arbitrage and through our consolidated joint
venture, NYSE, AMEX and ISE specialist and market-making activities. The Company
also makes markets on a principal basis in common and preferred stocks, warrants
and other securities traded on the Automated Quotation System of the NASD and in
the OTC market.
Institutional Equity Sales. The Company is one of the leading providers of
brokerage services to institutional investors in the US. Institutional equity
sales involves the execution of transactions, providing liquidity, trading
expertise, research and investment advice to domestic and foreign institutional
customers in US equity and equity-linked securities.
The Company provides to institutional customers execution capabilities for
baskets of equity securities using sophisticated trading systems and analytics.
Although transactions are handled on an agency basis whenever possible, 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, or
to guarantee prices versus a benchmark (i.e. volume weighted average price). The
Company also provides transaction services for institutional customers who trade
in futures and futures-related instruments.
Structured Equity Products. The Company offers to institutional customers,
and trades for its own account, a variety of exchange-traded and OTC equity
derivative products. These products are transacted, as principal, with customers
for hedging, risk management, investment, financing and other purposes. These
transactions are in the form of swaps, options, 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,
customize transaction terms, develop packaged solutions to a problem, implement
trades that otherwise could not be executed and to transact business with
standardized documentation.
-6-
Arbitrage. The Company engages for its own account in both "classic" and
"risk" arbitrage. The Company's risk arbitrage activities generally focus on
traditional risk arbitrage, event-driven and capital structure situations where
equity, debt and derivative securities involved in speculated or announced
mergers, stock repurchases, spin-offs or major restructurings are analyzed and
traded by the department.
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 which focus on pairs of equities
or different levels of the capital structure of the same firm. In these relative
value cases, the Company believes compelling reasons exist for the prices of the
securities to be highly correlated.
Convertible Securities. The Company engages in the sales and trading of
equity-linked securities including convertible bonds, convertible preferreds,
equity-linked notes and warrants. Market coverage includes the US, Europe, Asia
and Latin America.
Direct Access. The Company operates a direct access business through Bear
Stearns by providing execution and operations services to qualified
institutional investors. Such investors may directly access, execute and service
orders with brokers on the floor of the NYSE.
Specialist and Market-Making. The Company engages in specialist and
market-making activities on the NYSE, AMEX and ISE through participation in a
majority-owned consolidated joint venture. The joint venture performs specialist
functions in NYSE-listed and AMEX-listed stocks 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 for which they
are specialists, which may require commitments of a significant amount of
capital to the Company's specialist businesses. As market-makers, 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,
involving risk of loss during periods of market fluctuation and volatility.
Equity Research. The Equity Research Department provides in-depth,
thematic research underpinned by detailed financial models. The department
offers research on more than 1,000 companies in approximately 100 industries
(61% of the Standard & Poor's 500 Index and 80% of the market capitalization of
the Standard & Poor's 500 Index), is widely recognized for high quality macro
research and includes the #1 Institutional Investor ranked strategy and
accounting teams. Additionally, the coverage of US stocks is complemented by
Latin American, European and Asian research teams. The emerging markets research
team has also expanded coverage of select stocks in Eastern Europe, Middle East
and Africa, and covers 17 stocks with a market capitalization of $543.6 billion.
The department provides independent third party research reports and ratings on
US covered companies as well as foreign securities with liquid American
Depository Receipts. In 2006 the department launched BearCast(TM), a podcasting
tool that allows clients to access conference calls and featured audio research
on their MP3 or iPod(R) players.
Energy. The Company has equity ownerships in various power-related assets
and has recently formed Bear Energy L.P., an energy marketing and trading
division to expand a customer business focused on energy trading.
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; mortgages; mortgage-backed and other
asset-backed securities; municipal and other tax-exempt securities; corporate
debt, credit derivatives, 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.
-7-
US Government Bonds and Agency Obligations. Bear Stearns is designated by
the Federal Reserve Bank of New York as a primary dealer in US government
obligations. The Company participates in the auction of, and maintains
proprietary positions in, US Treasury bills, notes, bonds, and stripped
principal and coupon securities. The Company also participates as a selling
group member and/or underwriter in the distribution of various US government
agency and sponsored corporation securities and maintains proprietary positions
in such securities. In connection with these activities, the Company enters into
transactions in options, futures and forward contracts to hedge such positions.
As a primary dealer, Bear Stearns bids directly on all auctions of US
government securities. Additionally, Bear Stearns furnishes periodic reports of
its inventory positions and market transactions in US government securities to
the FRBNY. Bear Stearns also buys and sells government securities directly with
the FRBNY as part of the open-market activities of the FRBNY. In addition, the
Company engages in matched book activities, 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.
Mortgage-Related Securities and Products. The Company originates
commercial and residential mortgage loans through its subsidiaries in the US,
Europe and Asia. The Company is a leading underwriter of and market-maker in,
residential and commercial mortgages and is active in all areas of secured
lending, structured finance and securitization products.
The Company trades and makes markets in the following US agency-backed
products: Government National Mortgage Association ("GNMA") securities; FHLMC
participation certificates; FNMA mortgage-backed securities; Small Business
Administration loans; loans guaranteed by the Farmers Home Loan Administration;
Federal Housing Authority insured multi-family loans. The Company trades GNMA,
FNMA and FHLMC "to be announced" securities (i.e., securities having a stated
coupon and an 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 subsidiaries, purchases, originates, sells
and services entire loan portfolios of varying quality. These loan portfolios
are (i) generated by the Company's mortgage origination platform, Bear Stearns
Residential Mortgage Corporation ("Bear Res"), and (ii) purchased by EMC from
financial institutions and other secondary mortgage-market sellers.
Bear Res is a state-licensed mortgage company that originates single
family residential loans for a nationwide network of mortgage brokers, mortgage
bankers and other loan originators.
EMC, in addition to purchasing loans from Bear Res for securitization,
purchases loan portfolios from financial institutions and other secondary
mortgage-market sellers. Prior to bidding on a portfolio of loans for purchase,
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, with emphasis on loan
collection for the non-investment-grade segment of the 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 Real Estate Mortgage Investment Conduits ("REMIC") and
non-REMIC collateralized mortgage obligations directly or through trusts that
are established for this purpose.
-8-
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. The Company purchases pools of unsecured credit card receivables of
debtors that are in active bankruptcy, primarily in the US and the United
Kingdom. These purchases are bought at a discount of the claim amounts from
banks, credit card companies and other financial institutions. The Company's
intention is to buy and hold these portfolios and pursue claim recoveries
through third party servicing firms.
Collateralized Debt Obligations. The Company acts as structurer,
underwriter and placement agent for Collateralized Debt Obligations ("CDO"). The
CDOs are backed by a variety of asset classes including leveraged bank loans,
asset-backed securities, residential and commercial mortgage backed securities,
other CDOs, and trust preferred securities issued by banks, REITS, insurance and
finance companies. Assets may be sourced from the Company's trading desk, as
well as originated directly by the Company for the CDO. CDOs are generally
managed by third party money managers, including affiliates of the Company. In
the course of originating CDOs, the Company will provide a warehouse facility
for the accumulation of assets prior to the closing of the transaction. In
certain warehouse arrangements, the risk of the assets is retained by the first
loss protection from third parties or through credit derivative transactions.
The Company also trades secondary positions of CDOs, including deals for which
it did not serve as original underwriter. The trading desk will engage in trades
on all tranches of the capital structure of the CDO, which may include
below-investment grade debt classes and first-loss equity positions.
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; 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 and takes positions in a broad
spectrum of long-term and short-term municipal securities and derivative
contracts, 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 in reducing their borrowing costs,
maximizing investment returns and managing cash flows and balance sheets,
including but not limited to interest rate swaps, caps, floors, options and
forward delivery, and debt service reserve and debt service deposit agreements.
The Company periodically uses municipal and treasury bonds and futures and
interest rate swaps to hedge its cash-market bond inventory. In addition, the
Company maintains a hedged portfolio of high quality municipal securities which
are remarketed as short-term securities in order to generate arbitrage profits.
-9-
Fixed Income 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 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,
caps, floors, 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,
customize transaction terms, develop packaged solutions to a problem, implement
trades that otherwise could not be executed and transact business with
standardized documentation. The Company also enters into derivative transactions
for other purposes, including managing the risks to which the Company is exposed
in its various businesses and 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 around the
clock capabilities with personnel based in New York, Chicago, London, Hong Kong,
Tokyo, Singapore and Dublin.
Credit-Related Securities and Products. The Company acts as a dealer and
participates in the trading of investment-grade and non-investment-grade
corporate debt securities, commercial loans, sovereign and agency 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
derivative instruments. The Company also acts as a dealer and participates in
the trading of credit derivatives for customers and for its own account in New
York, London and Tokyo. These transactions are in the form of credit default
swaps and options, total return swaps, credit-linked notes and additional
structured trades which are customized to meet the specific needs of customers.
Moreover, the Company offers its domestic and international customers
quantitative, strategic and research services relating to fixed income
securities and credit derivatives.
Foreign Exchange. The Company acts as a dealer in foreign exchange and
precious metals in New York, London and Hong Kong. The Company conducts trading
for spot or forward settlement, OTC foreign exchange options and structured
products, and listed futures and options on futures. The Company trades OTC
contracts, on a principal basis, with domestic and international clients, as
well as other dealers. The Company offers research and assists clients to meet
their specific risk management objectives. Additionally, the Company enters into
foreign exchange contracts to manage the currency risk or funding requirements
of its various businesses.
Fixed Income Analytics and Research. The Company is a leader in the
distribution, trading and underwriting of corporate, government, high yield,
emerging markets, municipal debt and mortgage-backed and asset-backed
securities. Through objective and comprehensive analysis, the Fixed Income
Analytics and Research department assists the Company's businesses and its
clients to position themselves strategically in global fixed income markets. The
department produces a wide range of comprehensive publications, as well as
leading data and analytics tools, which are available to investors throughout
the world. The department also creates portfolio and trading ideas for investors
based on valuations, analytics and market conditions.
-10-
Fixed Income Analytics and Research includes economists, industry
analysts, quantitative analysts and strategists covering the full range of
financial research disciplines: quantitative, fundamental, economic, strategic,
credit portfolio, relative value and market-specific analysis. Representative of
the Company's commitment to offering a broad range of research products, the
department is comprised of the following units located in New York, London,
Singapore, Tokyo and Hong Kong:
(i) Financial Analytics and Structured Transactions Group ("F.A.S.T.")
encompasses the Rates and Structured Products Research groups.
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. is
responsible for designing and implementing valuation models for a
broad spectrum of asset classes as well as the computation of risk
sensitivity measures. F.A.S.T. employs these principles of financial
engineering to create solutions and tools that successfully
facilitate the individual business objectives of the Company and its
clients. 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
global 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 value portfolios and
securities. F.A.S.T.'s resources are used to create, model and value
new types of securities, affording clients the perspectives of both
issuer and investor.
(ii) High Grade Research offers comprehensive coverage on approximately
16 industries and over 450 credit names whose securities are rated
as investment-grade by the leading credit rating agencies. Through
focus on the credit quality of individual issuers and macroeconomic
factors, High Grade Research offers detailed analyses and expertise
to investors in investment-grade securities.
(iii) High Yield Research offers comprehensive coverage on approximately
20 industries and over 370 credit names whose securities do not
qualify as investment-grade by the leading credit rating agencies.
High Yield Research analyzes the risks, technical metrics, and
fundamentals that investors need for creating optimal high yield
portfolios.
(iv) Economic Research develops tools and models for analyzing and
forecasting US and global economic growth and inflation trends with
particular focus on projecting movements in Federal Reserve Bank
policy, bond yields and credit spreads.
(v) Emerging Markets Research covers sovereign and corporate issues
across Latin America, Central America and the Caribbean, Asia, the
Middle East, Eastern Europe, and Africa. Emerging Markets Research
focuses on macroeconomic factors, changes in US and global interest
rates, investment fundamentals, as well as the political, economic
and fiscal environments of issuers, to give investors a unique
perspective into emerging markets fixed income securities.
(vi) Municipal Research focuses on sectors, trends, and credit-specific
analysis of securities issued by states, cities, counties and other
governmental entities. Municipal Research provides investors with
research on various credits and bond characteristics for the full
range of municipal securities. Specific sectors covered by the
Municipal Research group include Healthcare, Tobacco, and Special
Facility Airline Bonds.
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.
-11-
The Company's strategy is to concentrate a major portion of its corporate
finance business development efforts within those industries in which the
Company has established a leadership position in providing investment banking
services. Industry specialty groups include media and entertainment, health
care, financial institutions, industrial, technology and telecommunications.
This list is not exclusive but rather reflects the areas in which the Company
maintains the highest level of knowledge and expertise. 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.
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 and other transaction specialties.
Mergers and Acquisitions. The Company provides strategic advisory services
on a broad range of financial matters, including mergers and acquisitions,
restructurings, split-offs and spin-offs, takeover defenses and other strategic
advice.
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, 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
originates, structures and executes high yield transactions across a wide range
of companies and industries, and manages 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 as a limited partner in leveraged buy-out funds. The
Company's investments generally take the form of common stock, preferred stock
or warrants. Equity securities purchased in these transactions are generally
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 private equity
affiliate of the Company, invests private equity capital in compelling leveraged
buyouts, recapitalizations and growth capital opportunities in a broad range of
industries.
Emerging Markets
The Company provides financial services in various emerging markets
worldwide including Latin America, Asia and Eastern Europe. In addition to
offering a full range of investment banking, capital formation and advisory
services, the Company provides securities brokerage, equity and fixed income
trading and sales, and securities research. 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.
-12-
Global Clearing Services
Global Clearing Services provides securities clearing services, custody,
financing, securities lending, trade execution and technology solutions to a
diverse client base comprised principally of hedge funds, broker-dealers and
registered investment advisors. Global Clearing clients can take advantage of
Bear Stearns expertise in cash and liquidity management in order to offer
clients numerous opportunities for improved yields on short-term cash.
For hedge funds and other professional investors worldwide, Global
Clearing Services is a leading provider of "prime brokerage services", which
include securities clearing services, custody, advanced web-based portfolio
reporting, enhanced leverage and term financing products, securities lending and
cash management services.
The Company provides "fully disclosed correspondent clearing services" for
broker-dealers conducting retail, institutional and money management activities.
The Company's advanced proprietary technology, combined with comprehensive
retail products, integrated prime brokerage, operations expertise and
exceptional service have enabled the Company to be one of the industry leaders
for many years.
For registered investment advisors whose services include asset
management, the Company provides a combination of trade execution, web-based
portfolio reporting for their investors and comprehensive service and support.
Global Clearing Services offers investment advisors innovative and
cost-effective technology and informational retrieval systems. Consultant's EDGE
is a customizable turn-key, Bear Stearns-sponsored investment advisory program
that integrates the sophisticated planning, asset allocation and proposal tools
with a defined group of investments.
Global Clearing Services principal revenue source is earned by providing
clearing and execution services, as well as financing and securities lending to
customers. In addition, the Company derives revenue from customer cash balances
and money fund investments.
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 an event giving rise to a
claim. However, if the correspondent is unable to meet its obligations,
dissatisfied customers may attempt to seek recovery from the Company.
Securities transactions are effected for customers on either a cash or
margin basis. In a margin transaction, the Company extends credit to a customer
for a portion of the purchase price of the security. Such credit is
collateralized by securities in the customer's accounts in accordance with
regulatory and internal requirements. The Company receives income from interest
charged on such loans at a rate that is primarily based upon the Federal Funds
Rate, Bear Stearns Base Lending Rate, or the London Inter-Bank Offered Rate
(LIBOR).
The Company borrows securities from banks and other broker-dealers to
facilitate customer and proprietary short selling activity, and lends securities
to customers, broker-dealers and other trading entities to cover short sales and
to complete transactions that require delivery of securities by the settlement
date.
Futures
The Company, through BSSC and other subsidiaries, provides, directly or
through third-party brokers, futures commission merchant services for customers
and other Bear Stearns affiliates who trade contracts in futures on financial
instruments and physical commodities, including options on futures. The values
of exchange-traded futures and options are derived from the values of their
underlying selected stock indices, individual equity securities, fixed income
securities, currencies, agricultural and energy products and precious metals.
-13-
Domestic futures and options trading are subject to extensive regulation
by the Commodity Futures Trading Commission ("CFTC"), pursuant to the Commodity
Exchange Act and the Commodity Futures Trading Commission Act of 1974.
International 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, through BSSC and other subsidiaries, is a clearing member of the
Chicago Board of Trade, Chicago Mercantile Exchange, New York Mercantile
Exchange and other principal futures exchanges. In the United Kingdom, the
Company, through BSIL, is a member of the International Petroleum Exchange
("IPE"), London Metals Exchange ("LME") Euronext Liffe ("LIFFE"), Eurex AG
Frankfurt and the European Derivatives Exchange ("EDX"). BSIL also has
non-clearing memberships with Euronext Paris and Euronext Amsterdam. In Japan,
memberships are held by the Company through Bear Stearns (Japan), Limited
("BSJL") with the Tokyo Stock Exchange, Inc. ("TSE"), the Osaka Securities
Exchange Co., Ltd ("OSE") and the Tokyo International Financial Futures Exchange
("TIFFE").
PCS
PCS provides high-net-worth individuals with an institutional level of
service, including access to the Company's resources and professionals. PCS has
approximately 500 account executives in its principal office, six regional
offices, six satellite offices and two international offices. As of November 30,
2006, PCS had $11.6 billion of assets under management.
Asset Management
Bear Stearns Asset Management ("BSAM") provides asset management services
to institutional clients and high-net-worth individuals accessed worldwide
through both direct and third-party channels. As of November 30, 2006, BSAM had
$40.9 billion of assets under management. BSAM's assets under management
typically generate fees as a percentage of asset value. In some BSAM managed
funds, if agreed upon financial targets are exceeded performance fees are also
earned.
BSAM's traditional business, which includes separate and privately managed
accounts, provides asset management services across all major asset classes:
money markets; fixed income; currencies; and equities; utilizing a multitude of
investment styles such as value, growth, core, fixed income, high yield,
leverage loans, quantitative, as well as long-short investing.
BSAM's alternative business is a leading provider of absolute return
investment strategies. BSAM provides investment services to the Company's
propriety and third party hedge funds, in addition to access to BSAM's open
architecture platform, HedgeSelect, and risk analytic services provided by Bear
Measurisk, a subsidiary of the Company.
In addition to providing products and services for buyers, holders and
sellers of private equity exposure, BSAM's private equity business specialists
raise money for third party funds and managing individual venture funds.
Administration and Operations
Administration and operations personnel are responsible for human
resources, legal and 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
administration 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.
-14-
The Company executes transactions globally on listed exchanges and in OTC
markets to facilitate customer and proprietary trading activities. The Company
settles 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 agent banks, other broker-dealers and
through memberships in various clearing organizations.
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 its principal business includes investment
banking, institutional equities, fixed income sales, trading and research,
derivatives, financial futures, foreign exchange, private client services and
global clearing services. BSIL is a member of a number of European exchanges
such as Eurex Deutschland ("EUREX"), ICE Futures, LIFFE, Euronext Paris,
Euronext Amsterdam, LME, Deutsche Borse, Borse Italiana, Virt-X, EDX London,
NASDAQ Europe, Helsinki Stock Exchange and Stockholmsborsen.
Bear Stearns International Trading Limited ("BSIT") is also based in
London and its principal activity is to act as a securities dealer making
markets in equities. BSIT is a member of the London Stock Exchange ("LSE").
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 products. BSJL also offers a range
of derivative products within Japan with special focus on fixed income, credit
and equity derivatives. Asset-backed securitization, mergers and acquisitions,
corporate finance and restructuring services are also available for local and
cross-border business.
Bear Stearns Asia Limited ("BSAL"), based in Hong Kong, is the Company's
primary operating entity in the Asia-Pacific region, excluding Japan. BSAL
provides clients with international equity sales, trading and research services.
In addition, BSAL is a major center within the Company's global fixed income,
foreign exchange and derivatives businesses. BSAL also has investment banking
capabilities to serve the growing needs of clients in Asia.
Bear Stearns Singapore Pte. Limited ("BSSP") provides sales, execution and
research services on fixed income securities to institutional investors 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, facilitating access to worldwide markets and thereby expanding its
capacity to increase its client base and product range. BSB engages in capital
market activities with particular focus on the trading and sales of OTC interest
rate derivative products. BSB also provides custody and trustee services to the
growing number of alternative investment funds domiciled in Ireland and in other
offshore jurisdictions.
(d) Competition
The Company encounters intense competition in all aspects of the
securities business domestically and internationally, particularly in
underwriting, trading and advisory services. In such businesses the Company
competes directly with other securities firms with many having substantially
greater capital and resources and offering a wider range of financial services
than the Company. The Company's competitors include other brokers and dealers,
commercial banks, investment banking firms, investment advisors, mutual funds,
hedge funds, private equity funds and insurance companies.
-15-
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 provided.
Over time 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 increased capital, geographic reach and
other resources, such as the ability to offer a wider range of products and
services.
(e) Regulatory and Compliance Factors Affecting the Company and the
Securities Industry
Legal: Firms in the financial services industry have been operating in a
difficult regulatory environment. The industry has experienced increased
scrutiny from a variety of regulators, including the SEC, NYSE, NASD and state
attorneys general. Penalties and fines sought by regulatory authorities have
increased substantially over the last several years.
Substantial legal liability or significant regulatory action against Bear
Stearns could have material adverse financial effects or cause significant
reputational harm to Bear Stearns, which in turn could seriously harm our
business prospects. We face significant legal risks in our businesses, and the
volume of claims and amount of damages and penalties claimed in litigation and
regulatory proceedings against financial institutions have been increasing.
Bear Stearns, as a participant in the financial services industry, is
subject to extensive regulation in jurisdictions in which we conduct business.
Bear Stearns from time to time is the subject of inquiries and investigations by
regulatory agencies. As a result, among other things, we could be fined,
prohibited from engaging in some of our business activities or subject to
limitations or conditions on our business activities. New laws or regulations or
changes in enforcement of existing laws or regulations applicable to our clients
may also adversely affect our businesses.
In addition, the SEC and other federal and state regulators have increased
their scrutiny of complex, structured finance transactions and have brought
enforcement actions against a number of financial institutions in connection
with such transactions. In some of the enforcement actions, clients of the
financial institutions allegedly engaged in accounting, disclosure or other
violations of the securities laws, and the financial institutions allegedly
facilitated these improprieties by entering into transactions with the clients.
We seek to create innovative solutions to address our clients' needs, and we
have entered into, and continue to enter into, structured transactions with
clients. While we have policies and procedures in place that are intended to
ensure that the structured transactions we enter into are appropriately reviewed
and comply with applicable laws and regulations, it is possible that certain of
these transactions could give rise to litigation or enforcement actions. It is
possible that the heightened regulatory scrutiny of, and litigation in
connection with, structured finance transactions will make our clients less
willing to enter into these transactions, and will adversely affect our business
in this area.
There have been a number of highly publicized cases involving fraud or
other misconduct by employees in the financial services industry in recent
years, and we run the risk that employee misconduct could occur. It is not
always possible to deter or prevent employee misconduct and the precautions we
take to prevent and detect this activity may not be effective in all cases.
On occasion, the Company and its subsidiaries have been subject to
investigations and proceedings, and sanctions and fines 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. Settlements of regulatory matters
may adversely affect business areas that are the subject of such settlements. As
a general matter, regulatory settlements do not resolve related current and/or
future civil litigations.
-16-
Regulation: The securities industry in the US is subject to extensive
regulation under both federal and state laws. Moreover, Bear Stearns and BSSC
are registered as broker-dealers and investment advisers 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 operations of the Company's broker-dealer
subsidiaries. Securities firms are also subject to regulation by state
securities administrators in those states where they conduct business.
US broker-dealers are subject to rules and regulations that 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. Much of this regulation is embodied in the
Securities Exchange Act of 1934 and rules promulgated thereunder, as well as the
rules of self-regulatory organizations such as the NYSE and NASD. 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. Much of this regulation is
embodied in the Investment Advisers Act of 1940 and rules promulgated
thereunder. 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.
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 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 advisers 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 transactions 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.
-17-
The futures industry in the US is subject to regulation under the
Commodity Exchange Act, as amended. The CFTC is the federal agency charged with
the administration of the Commodity Exchange Act and the regulations thereunder.
Bear Stearns and BSSC are registered with the CFTC as futures commission
merchants and are subject to regulation as such by the CFTC and various domestic
boards of trade and other futures exchanges. Bear Stearns' and BSSC's futures
business is also regulated by the NFA, a not-for-profit membership organization,
which has been designated a registered futures association by the CFTC.
As registered broker-dealers and member firms of the NYSE, both Bear
Stearns and BSSC are subject to the Net Capital Rule (Rule 15c3-1) (the "Net
Capital Rule") under the Exchange Act, which has been adopted through
incorporation by reference in NYSE Rule 325. The Net Capital Rule, which
specifies minimum net capital requirements for registered broker-dealers, is
designed to measure the general financial integrity and liquidity of
broker-dealers and requires that at least a minimal portion of a broker-dealer's
assets be kept in relatively liquid form.
In June 2004, the SEC adopted rule amendments to "Alternative Net Capital
Requirements for Broker-Dealers That Are Part of Consolidated Supervised
Entities" (Rule 34-49830) that allow investment banks to voluntarily submit to
be regulated by the SEC on a global consolidated basis. These regulations
(referred to as CSE) were in response to what is known as the "Financial
Conglomerates Directive" (2002/87/EC) of the European Parliament, which served
to compel globally active institutions doing business in Europe to be regulated
on a global consolidated basis. During fiscal 2005, the Company applied to the
SEC to be regulated under this new CSE regime. The application filed with the
SEC by Bear Stearns, the Company's principal US broker-dealer, under the net
capital rule amendments, was approved in November 2005. As a result, effective
December 1, 2005, Bear Stearns began using alternative methods of computing
market and derivative-related credit risk, and, as a condition of using these
methods, the Company consented to consolidated supervision by the SEC. The new
framework is a notable change in the Company's regulation, as activities which
were previously transacted outside of SEC regulated entities are now under the
scope of certain SEC regulations and capital adequacy oversight. In particular,
the Company now: computes allowable capital and allowances for market, credit
and operational risk on a consolidated basis in accordance with standards
prescribed in Appendix G to the Net Capital Rules; and permits the SEC to
examine the books and records of the Parent Company and any affiliate that does
not have a principal regulator. The Company has adopted various additional SEC
reporting, record-keeping and notification requirements. Additionally, the
Company must comply with the provisions of Rule 15c3-4 of the Exchange Act with
respect to a group-wide internal risk management control system in the affiliate
group as if it were an OTC derivative dealer, subject to certain limitations.
The Company is now deemed a CSE and is in compliance with regulatory capital
requirements.
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 8% of
the total risk maintenance margin requirements for positions carried in customer
accounts plus 4% of the total risk maintenance margin requirements for positions
carried in non-customer accounts, in each case as defined in Rule 1.17 of the
CFTC.
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 16 of Notes to Consolidated Financial
Statements entitled "Regulatory Requirements".
-18-
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
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.
Bear Energy LP and certain of our other subsidiaries are authorized by the
Federal Energy Regulatory Commission ("FERC") to sell wholesale physical power
at market-based rates. As FERC-authorized power marketers, these entities are
subject to regulation under the Federal Power Act and FERC regulations with
regard to the rates, terms and conditions under which they sell or transmit
power in interstate commerce.
Non-US Regulation: Both BSIL and BSIT are authorized and regulated in the
United Kingdom by the FSA, pursuant to The Financial Services and Markets Act
2000. The 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 and disclosures to customers.
BSJL is licensed with and regulated by the Financial Services Agency of
Japan. BSJL is a limited trade participant to the OSE and has a membership on
the TSE and TIFFE. Bear Stearns Hong Kong Limited is registered as a Commodities
Dealer with the Securities and Futures Commission ("SFC") 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. BSSP has a Capital Market
Service license to conduct regulated activities in Dealing in Securities and
Advising on Corporate Finance.
BSB was registered with the Irish Companies Registration Office on
November 27, 1995. BSB was granted a banking license on April 10, 1997 in
accordance with the Irish Central Bank Act, 1971 and is regulated by the
Financial Regulator in Ireland.
Insurance: Bear Stearns and BSSC are members of the Securities Investor
Protection Corporation ("SIPC"), which provides 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 Customer Asset Protection Company, up to
the amount of their total net equity (both cash and securities) in excess of the
underlying SIPC protection.
Item 1A. Risk Factors.
In addition to the other information contained in this Form 10-K and the
exhibits hereto, the following risk factors should be considered carefully in
evaluating the Company's business. A discussion of the policies and procedures
used to identify, assess and manage certain risks 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. The Company's business, financial
condition or results of operations or cash flows could be materially adversely
affected by any of these risks. Additional risks not presently known to the
Company or that the Company currently deems immaterial may also adversely affect
its business, financial condition, or results of operations.
Our businesses could be adversely affected by market fluctuations. Our
businesses are materially affected by conditions in the financial markets and
economic conditions generally, both in the US and elsewhere around the world. In
the event of a market downturn, our businesses could be adversely affected in
many ways, including those described below. Our revenues are likely to decline
in such circumstances and, if we were unable to reduce expenses at the same
pace, our profit margins would erode. Even in the absence of a market downturn,
we are exposed to substantial risk of loss due to market volatility.
-19-
Market fluctuations and volatility may cause us to incur significant
losses in our trading and investment activities. We generally maintain large
trading and investment positions in the fixed income, currency, commodity and
equity markets. To the extent that we own assets, i.e., have long positions, in
any of those markets, a downturn in those markets could result in losses from a
decline in the value of those long positions. Conversely, to the extent that we
have sold assets we do not own, i.e., have short positions, in any of those
markets, an upturn in those markets could expose us to potentially unlimited
losses as we attempt to cover our short positions by acquiring assets in a
rising market. In addition, we maintain substantial trading positions that can
be adversely affected by the level of volatility in the financial markets, i.e.,
the degree to which trading prices fluctuate over a particular period, in a
particular market, regardless of market levels.
The Company's businesses may be adversely affected by fluctuations in
interest rates, foreign exchange rates and equity prices. In connection with the
Company's dealer and arbitrage activities, including market-making in OTC
derivative contracts, the Company may be adversely affected by changes in the
level or volatility of interest rates, mortgage prepayment speeds or the level
and shape of the yield curve. In addition, when the Company buys or sells a
foreign currency or a financial instrument denominated in a currency other than
US dollars, exposure exists from a net open currency position. Until the
position is covered by selling or buying the equivalent amount of the same
currency or by entering into a financing arrangement denominated in the same
currency, the Company is exposed to a risk that the exchange rate may move
against it. The Company is also exposed to equity price risk through making
markets in equity securities, distressed debt, equity derivatives as well as
specialist activities. The Company may be adversely affected by changes in the
level or volatility of equity prices, which affect the value of equity
securities or instruments that derive their value from a particular stock, a
basket of stocks or a stock index.
Our investment banking revenues may decline in adverse market or economic
conditions. Unfavorable financial or economic conditions would likely reduce the
number and size of transactions in which we provide underwriting, mergers and
acquisitions advisory and other services. Our investment banking revenues, in
the form of financial advisory and underwriting fees, are directly related to
the number and size of the transactions in which we participate and would
therefore be adversely affected by a sustained market downturn. In particular,
our results of operations would be adversely affected by a significant reduction
in the number or size of mergers and acquisitions transactions.
We may generate lower revenues from commissions and asset management fees
in a market downturn. A market downturn could lead to a decline in the volume of
transactions that we execute for our customers and, therefore, to a decline in
the revenues we receive from commissions and spreads. In addition, because the
fees that we charge for managing our clients' portfolios are in many cases based
on the value of those portfolios, a market downturn that reduces the value of
our clients' portfolios or increases the amount of withdrawals would reduce the
revenue we receive from our asset management business.
Our risk management policies and procedures may leave us exposed to
unidentified or unanticipated risk. The policies and procedures we use to
identify, assess and manage the risks we assume in conducting our businesses are
set forth under the caption "Risk Management" in the Annual Report, which is
incorporated herein by reference to Exhibit No. 13 of this report. We have
devoted significant resources to develop our risk management policies and
procedures and expect to continue to do so in the future. Nonetheless, our
policies and procedures to identify, assess and manage risks may not be fully
effective. Some of our methods of managing risk are based upon our use of
observed historical market behavior. As a result, these methods may not predict
future risk exposures, which could be significantly greater than the historical
measures indicate. Other risk management methods depend upon evaluation of
information regarding markets, clients or other matters that is publicly
available or otherwise accessible by the Company. This information may not in
all cases be accurate, complete, up-to-date or properly evaluated. Management of
operational, legal and regulatory risk requires, among other things, policies
and procedures to record properly and verify a large number of transactions and
events, and these policies and procedures may not be fully effective.
-20-
Liquidity risk could impair our ability to fund operations and jeopardize
our financial condition. Liquidity, i.e., ready access to funds, is essential to
our businesses. Our sources of liquidity are set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Annual Report, which is
incorporated herein by reference to Exhibit No. 13 of this report. An inability
to raise money in the long-term or short-term debt markets, or to engage in
repurchase agreements or securities lending, could have a substantial negative
effect on our liquidity. Our access to debt in amounts adequate to finance our
activities could be impaired by factors that affect the Company in particular or
the financial services industry in general. For example, lenders could develop a
negative perception of our long-term or short-term financial prospects if we
incurred large trading losses, if the level of our business activity decreased
due to a market downturn or if regulatory authorities took significant action
against us. Our ability to borrow in the debt markets also could be impaired by
factors that are not specific to the Company, such as a severe disruption of the
financial markets or negative views about the prospects for the investment
banking, securities or financial services industries generally.
A reduction in our credit ratings could adversely affect our liquidity and
competitive position and increase our borrowing costs. The Company's access to
external sources of financing, as well as the cost of that financing, is
dependent on various factors and could be adversely affected by a deterioration
of the Company's long-and short-term debt ratings, which are influenced by a
number of factors. These include, but are not limited to: material changes in
operating margins; earnings trends and volatility; the prudence of funding and
liquidity management practices; financial leverage on an absolute basis or
relative to peers; the composition of the balance sheet and/or capital
structure; geographic and business diversification; and the Company's market
share and competitive position in the business segments in which it operates.
Material deterioration in any one or a combination of these factors could result
in a downgrade of the Company's credit ratings, thus increasing the cost of
and/or limiting the availability of unsecured financing. Additionally, a
reduction in the Company's credit ratings could also trigger incremental
collateral requirements, predominantly in the OTC derivatives market.
As a holding company, The Bear Stearns Companies Inc. is dependent on its
subsidiaries for funds. The Bear Stearns Companies Inc. is a holding company
and, therefore, depends on dividends, distributions and other payments from its
subsidiaries to fund dividend payments and to fund all payments on its
obligations, including debt obligations. Many of its subsidiaries are subject to
laws that authorize regulatory bodies to block or reduce the flow of funds from
those subsidiaries to The Bear Stearns Companies Inc. Regulatory action of that
kind could impede access to funds that The Bear Stearns Companies Inc. needs to
make payments on obligations, including debt obligations, or dividend payments.
See "Item 1. Business - Regulatory and Compliance Factors Affecting the Company
and the Securities Industry".
We are exposed to risks resulting from non-performance by counterparties,
customers, borrowers or debt security issuers. The Company is exposed to credit
risk in its role as trading counterparty to dealers and customers, as direct
lender, as holder of securities and as member of exchanges and clearing
organizations. We are exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations. These parties may
default on their obligations to us due to bankruptcy, lack of liquidity,
operational failure or other reasons. The policies and procedures we use to
manage credit risk are set forth under the caption "Risk Management - Credit
Risk" in the Annual Report, which is incorporated herein by reference to Exhibit
No. 13 of this report. There can be no assurances that these policies and
procedures will effectively mitigate our exposure to credit risk.
Operational risks may disrupt our businesses, result in regulatory action
against us or limit our growth. Operational risk is the potential for loss
arising from inadequate or failed internal processes, people or systems, or from
external events. This includes, but is not limited to, limitations in the
Company's financial systems and controls, deficiencies in legal documentation,
non-compliance with the execution of legal, regulatory and fiduciary
responsibilities, deficiencies in technology and the risk of loss attributable
to operational problems. Our businesses are highly dependent on our ability to
process, on a daily basis, a large number of transactions across numerous and
diverse markets in many currencies, and the transactions we process have become
increasingly complex. Consequently, we rely heavily on our financial, accounting
and other data processing systems. If any of these systems do not operate
properly or are disabled, we could suffer financial loss, a disruption of our
businesses, liability to clients, regulatory intervention or reputational
damage.
-21-
Litigation, governmental investigations and/or other legal proceedings
could adversely affect the company's business. We and certain of our
subsidiaries are involved in litigation, government investigations; and other
legal proceedings that arise from time to time in the ordinary course of our
business. Litigation is inherently unpredictable, and excessive verdicts do
occur. Although we believe we have substantial defenses in these matters, we
could in the future incur judgments or enter into settlements of claims that
could have a material adverse effect on our results of operations in any
particular period. See "Item 3. Legal Proceedings." for a discussion of certain
of the legal matters in which we are currently involved.
Extensive regulation of our businesses limits our activities and may
subject us to significant penalties. The financial services industry is subject
to extensive regulation. The Company is subject to regulation by governmental
and self-regulatory organizations in the US and in several other jurisdictions
in which it operates around the world. These regulations often serve to limit
our activities, including through net capital, customer protection and market
conduct requirements. We face the risk of significant intervention by regulatory
authorities, including extended investigation and surveillance activity,
adoption of costly or restrictive new regulations and judicial or administrative
proceedings that may result in substantial penalties. Non-compliance with legal
and regulatory requirements could have a material adverse financial effect or
cause significant reputational harm to the Company, which in turn could
seriously harm our business prospects. See "Item 1. Business - Regulatory and
Compliance Factors Affecting the Company and the Securities Industry" for a
further discussion of the regulatory environment in which we conduct our
businesses.
The financial services industry is intensely competitive. 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 competes on the basis of a
number of factors, including transaction execution, our products and services,
innovation, reputation and price. We may be adversely affected if our current or
potential customers and clients decide to use the financial services of our
competitors instead of us.
Alternative trading systems may adversely affect our business and may
increase competition. Securities and futures transactions are now being
conducted through the internet and other alternative, non-traditional trading
systems, and it appears that the trend toward alternative trading systems will
continue and probably accelerate. Some of these alternative trading systems
compete with our trading businesses, including our specialist businesses, and we
may experience continued competitive pressures in these and other areas. A
dramatic increase in computer-based or other electronic trading may adversely
affect our commission and trading revenues.
Changes in business, political and/or economic conditions could have an
adverse effect on the Company. Our future results could be adversely affected by
changes in business, political and economic conditions, including the cost and
availability of insurance, due to the threat of future terrorist activity in the
US and other parts of the world and related US military action overseas.
Employee misconduct is difficult to detect and prevent and may have an
adverse effect on our business. In recent years, there have been a number of
highly publicized cases involving fraud or other misconduct by employees in the
financial services industry, and we run the risk that employee misconduct could
occur. It is not always possible to deter or prevent employee misconduct and the
precautions we take to prevent and detect this activity may not be effective in
all cases.
The inability to hire and retain qualified employees may adversely affect
our businesses. Our performance is largely dependent on the talents and efforts
of highly skilled individuals. There is intense competition in the financial
services industry for qualified employees. In addition, we face increasing
competition with businesses outside the financial services industry, such as
hedge funds, private equity funds and venture capital funds, for the most highly
skilled individuals. Our business could be adversely affected if we are unable
to attract new employees and retain and motivate our existing employees.
-22-
Item 1B. Unresolved Staff Comments.
None
* * * * *
Certain statements contained in this discussion including (without
limitation) certain matters discussed under "Legal Proceedings" in Part I, Item
3 of this report, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" incorporated by reference in Part II, Item 7 of this
report, and "Quantitative and Qualitative Disclosures about Market Risk"
incorporated by reference in Part II, Item 7A of this report are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements concerning
management's expectations, strategic objectives, business prospects, anticipated
economic performance and financial condition and other similar matters are
subject to risks and uncertainties, including those described in the prior
paragraph, which could cause actual results to differ materially from those
discussed in the forward-looking statements. Forward-looking statements speak
only as of the date of the document in which they are made. The Company
disclaims any obligation or undertaking to provide any updates or revisions to
any forward-looking statement to reflect any change in the Company's
expectations or any change in events, conditions or circumstances on which the
forward-looking statement is based.
Item 2. Properties.
The Company's executive offices and principal administrative offices
occupy approximately 1.1 million square feet at 383 Madison Avenue, New York,
New York under an operating lease arrangement.
The lease arrangement expires on August 13, 2010. 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 leases approximately 308,000 square feet of office space at
One MetroTech Center North, Brooklyn, New York, through 2024 for its securities
processing, accounting and clearance operations. The Company also leases
approximately 3,000, 13,000, 59,000, 61,000, 141,000 and 148,000 square feet of
space at six locations in New York City expiring in 2010, 2007, 2009, 2011, 2020
and 2020, respectively. The Company's offices in Atlanta, Bellevue, Boca Raton,
Boston, Chicago, Clayton, Cleveland, Columbus, Dallas, Denver, El Paso, Houston,
Irving, King of Prussia, Lewisville, Los Angeles, Memphis, Morristown, Palm
Beach, Princeton, Providence, Sacramento, San Francisco, San Juan, Scottsdale
and Tampa occupy an aggregate of approximately 1,044,000 square feet under
leases expiring on various dates through the year 2019. The Company's twelve
international offices occupy a total of approximately 232,000 square feet under
leases expiring on various dates through the year 2016.
The Company owns approximately 65 acres of land in Whippany, New Jersey,
including four buildings comprising an aggregate of approximately 673,000 square
feet. The Company is currently using the facilities on the property to house its
data processing facility and other operations, disaster recovery, compliance,
personnel and accounting functions. Approximately 141,000 square feet in one of
the buildings is being leased to an unaffiliated third party under a 15-year
operating lease expiring in 2019.
-23-
Item 3. Legal Proceedings.
In the normal course of business, the Company and its subsidiaries are
named as defendants in various legal actions, including arbitrations, class
actions and other litigation. Such actions include those arising out of the
Company's or a subsidiary's activities as a broker and dealer, as an
underwriter, as an investment banker, as an employer or arising out of alleged
employee misconduct. Certain of the legal actions include claims for substantial
compensatory and/or punitive damages or claims for indeterminate amounts of
damages. The Company is also involved in other reviews, investigations and
proceedings by governmental and self-regulatory agencies regarding the Company's
business, certain of which may result in adverse judgments, settlements, fines,
penalties, injunctions or other relief.
Because litigation is inherently unpredictable, particularly in cases
where claimants seek substantial or indeterminate damages or where
investigations and proceedings are in the early stages, the Company cannot
predict with certainty the loss or range of loss related to such matters, how
such matters will be resolved, when they will be ultimately resolved, or what
the eventual settlement, fine, penalty or other relief might be. Consequently,
the Company cannot estimate losses or ranges of losses for matters where there
is only a reasonable possibility that a loss may have been incurred. 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 following matters will not have a material adverse effect on the
financial condition of the Company, taken as a whole; such resolution may,
however, have a material effect on the operating results and cash flows in any
future period, depending on the level of income for such period.
The Company has provided reserves for such matters in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies". The ultimate resolution may differ materially from the amounts
reserved.
In re McKesson HBOC, Inc. Securities Litigation: This matter arises out of
a merger between McKesson Corporation ("McKesson") and HBO & Company ("HBOC")
resulting in an entity called McKesson HBOC, Inc. ("McKesson HBOC").
Beginning on June 29, 1999, 53 purported class actions were commenced in
the US District Court for the Northern District of California. These actions
were subsequently consolidated, and the plaintiffs proceeded to file a series of
amended complaints. On February 15, 2002, plaintiffs filed a third amended
consolidated complaint, which 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 defendants include
McKesson HBOC, certain present and former directors and/or officers of McKesson
HBOC, McKesson and/or HBOC, Bear Stearns and Arthur Andersen LLP. Compensatory
damages in an unspecified amount are sought.
On January 6, 2003, the court granted Bear Stearns' motion to dismiss the
Section 10(b) claim asserted in the third amended complaint, and denied Bear
Stearns' motion to dismiss the Section 14(a) claim. On March 7, 2003, Bear
Stearns filed an answer to the third amended complaint denying all allegations
of wrongdoing and asserting affirmative defenses to the claims in the complaint.
On January 12, 2005, McKesson HBOC announced that it had reached a settlement
with the plaintiff class, which settlement required court approval. Bear
Stearns' engagement letter with McKesson in connection with the merger of
McKesson and HBOC provides that McKesson cannot settle any litigation without
Bear Stearns' written consent unless McKesson obtains an unconditional written
release for Bear Stearns and, under certain circumstances, is required to
provide indemnification to Bear Stearns.
-24-
By Order dated May 23, 2005, the Court denied preliminary approval of the
proposed settlement between McKesson HBOC and the plaintiff class. On July 12,
2005, the plaintiff and McKesson HBOC submitted a revised proposed settlement,
purporting to address the issues identified by the Court in its order denying
preliminary approval, to which Bear Stearns objected. The revised proposed
settlement provides, among other things, that Bear Stearns' rights under its
engagement letter are preserved for future resolution. McKesson HBOC's claims in
connection with the letter are also preserved.
On February 24, 2006, the Court granted final approval of the revised
proposed settlement. Bear Stearns has appealed the final approval order to the
US Circuit Court of Appeals for the Ninth Circuit, seeking to reverse the final
approval of the settlement on the ground that consummation of the settlement may
deprive Bear Stearns of certain rights and remedies provided for in its
engagement letter.
On December 8, 2005 Bear Stearns commenced a separate action in New York
State Supreme Court, New York County, Bear Stearns v. McKesson Corp., asserting
breach of contracts and other claims against McKesson based on the engagement
letter and seeking, among other things, declaratory relief and damages. On April
24, 2006, McKesson moved to dismiss certain causes of action asserted in the
complaint. On October 25, 2006, the Court issued an opinion denying McKesson's
motion to dismiss in part and allowing Bear Stearns to proceed with certain of
its claims.
Helen Gredd, Chapter 11 Trustee for Manhattan Investment Fund Ltd. v.
Bear, Stearns Securities Corp.: On April 24, 2001, an action was commenced
against BSSC in the US Bankruptcy Court for the Southern District of New York by
the Chapter 11 Trustee for Manhattan Investment Fund Limited ("MIFL"). BSSC
provided prime brokerage services to MIFL prior to its bankruptcy. BSSC is the
sole defendant in this action. 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 US Bankruptcy Code and are recoverable by the
Trustee. The Trustee also alleges that any claim that may be asserted by BSSC
against MIFL should be equitably subordinated to the claims of other creditors
pursuant to Sections 105 and 510 of the Bankruptcy Code. The Trustee seeks to
recover in excess of $1.9 billion in connection with the allegedly fraudulent
transfers to BSSC.
On March 21, 2002, the District Court dismissed the trustee's claims
seeking to recover allegedly fraudulent transfers in amounts exceeding $1.9
billion. The District Court also remanded to the Bankruptcy Court the Trustee's
remaining claims, which seek to recover allegedly fraudulent transfers in the
amount of $141.4 million plus pre-judgment interest and to equitably subordinate
any claim that may be asserted by BSSC against MIFL to the claims of other
creditors.
On October 17, 2002, BSSC filed an answer to the complaint in which it
denied all allegations of wrongdoing and asserted affirmative defenses.
By Order and Decision dated January 9, 2007, the Bankruptcy Court ruled on
the parties cross motions for summary judgment. The Court denied BSSC's motion
for summary judgment seeking dismissal of the Trustee's complaint in its
entirety and granted the Trustee's motion for summary judgment on the fraudulent
transfer claims against BSSC. BSSC believes it has substantial defenses to the
Trustee's claims and intends to appeal the Bankruptcy Court's decision.
Sterling Foster & Co., Inc.: The following matters arise out of Bear
Stearns' role as clearing broker for Sterling Foster & Co., Inc. ("Sterling
Foster").
-25-
(i) Levitt, et al. v. Bear Stearns, et al.: On February 16, 1999, a
purported class action was commenced in the US District Court for the Southern
District of New York on behalf of all persons who purchased ML Direct, Inc.
common stock or warrants through Sterling Foster & Co., Inc. ("Sterling Foster")
between September 4, 1996 and December 31, 1996. Named as defendants were Bear
Stearns and BSSC. The complaint alleged, among other things, that the defendants
violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated
thereunder and committed common law fraud in connection with providing clearing
services to Sterling Foster with respect to certain transactions by customers of
Sterling Foster in ML Direct common stock and warrants. Compensatory damages of
$50 million and punitive damages of approximately $100 million were sought. This
case was transferred to the US District Court for the Eastern District of New
York.
(ii) Rogers v. Sterling Foster & Co., Inc.: On February 16, 1999, Bear
Stearns, BSSC and an officer of BSSC were added as defendants in a purported
class action pending in the US District Court for the Eastern District of New
York. The action was brought on behalf of a purported class consisting of all
persons who purchased or otherwise acquired certain securities that were
underwritten by Sterling Foster. Named as defendants, in addition to the Bear
Stearns defendants set forth above, were Sterling Foster, seven individuals
alleged to have had an employment relationship with, or exercised control over,
Sterling Foster, six companies that issued securities underwritten by Sterling
Foster, eight individuals who were directors, officers and/or employees of these
issuers, and Bernstein & Wasserman LLP and two of its partners. The second
amended complaint alleged, among other things, that the Bear Stearns defendants
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder
and Section 349 of the New York General Business Law and committed common law
fraud in connection with providing clearing services to Sterling Foster.
Compensatory damages in an unspecified amount were sought.
These two matters were consolidated as part of the In re Sterling Foster
Inc. Securities Litigation (MDL Docket No. 1208) before the US District Court
for the Eastern District of New York. On October 31, 2006, that court approved a
settlement agreement that dismissed all claims against all settling defendants,
which included Bear Stearns, BSSC and an officer of BSSC.
Enron Corp.: The following matters arise out of Bear Stearns' business
transactions with or relating to Enron Corp. ("Enron").
(i) Enron Corp., et ano. v. Bear, Stearns International Ltd., et ano.: On
November 25, 2003, BSIL and BSSC were named as defendants in an adversary
proceeding commenced by Enron and Enron North America Corp. in the US Bankruptcy
Court for the Southern District of New York. Plaintiffs seek, inter alia, to
recover payments, totaling approximately $26 million that were allegedly made to
BSIL and BSSC during August 2001 in connection with an equity derivative
contract between BSIL and Enron. According to the complaint, Enron's payments
constituted (a) fraudulent transfers, under Section 548(a) of the US Bankruptcy
Code and under applicable state law and (b) an unlawful redemption of Enron
common stock in violation of Oregon law. Enron seeks judgment (a) avoiding and
setting aside Enron's August 2001 payments to BSIL and BSSC, (b) directing BSIL
and BSSC to pay Enron approximately $26 million, plus prejudgment interest, (c)
declaring that Enron's August 2001 payments violated Oregon law, (d) disallowing
any claims by BSIL and BSSC in connection with Enron's bankruptcy proceedings
until they have returned the August 2001 payments to Enron and (e) awarding
Enron its reasonable attorneys' fees and costs incurred in connection with the
action.
By Order dated June 3, 2005, the Bankruptcy Court denied the motion to
dismiss filed by BSIL and BSSC. On July 5, 2005, defendants filed a motion with
the US District Court for the Southern District of New York for leave to take an
interlocutory appeal from the Bankruptcy Court's decision. By Order dated May 2,
2006, the District Court denied defendants' motion for leave to take an
interlocutory appeal from the Bankruptcy Court's decision.
(ii) Enron Corp., et al. v. Bear, Stearns & Co. Inc., et al.: Bear Stearns
was named as a defendant in two adversary proceedings commenced by Enron in the
US Bankruptcy Court for the Southern District of New York. The complaints in
these actions sought equitable subordination and disallowance under the
Bankruptcy Code of certain debt claims against Enron in the amount of $19
million that were purchased by Bear Stearns from third parties subsequent to
Enron's filing for bankruptcy.
-26-
These adversary proceedings have each been dismissed pursuant to the
respective agreements among the parties to these actions. Bear Stearns did not
make any payments in connection with its dismissal from these proceedings.
IPO Allocation Securities and Antitrust Litigations
The Company and Bear Stearns (the "Bear Stearns defendants"), along with
many other financial services firms, have been named as defendants in many
putative class actions filed during 2001 and 2002 in the US 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 309
issuers are now the subjects of separate complaints. The Bear Stearns defendants
are defendants in 95 of these amended complaints. As amended, the complaints
allege, among other things, that the underwriters, including Bear Stearns,
violated Section 11 of the Securities Act and Section 10(b) of the Exchange Act
and Rule 10b-5 promulgated thereunder, based on the wrongdoing alleged in the
original complaints and by causing their securities analysts to issue
unwarranted positive reports regarding the issuers. Compensatory damages in
unspecified amounts are sought.
By order dated October 13, 2004, the Court granted in part and denied in
part class certification for each of the six cases selected to be the focus
cases for these proceedings.
By opinion and order dated February 15, 2005, the Court preliminarily
approved the proposed settlement among plaintiffs and a substantial number of
the non-bankrupt issuer defendants and their officers and directors. The
settlement generally provided that (1) the insurers of these issuers will
guarantee an ultimate recover by plaintiffs, in this and related litigations, of
$1 billion; (2) these issuers will assign to plaintiffs so-called "excess
compensation" claims against the underwriter defendants, including the Bear
Stearns defendants, that these issuers allegedly possess; and (3) plaintiffs
will, upon final approval of the settlement, dismiss all claims against these
issuers and the individual director and officer defendants. That preliminary
approval, however, was conditioned upon certain changes being made to the terms
of the settlement.
On December 5, 2006, the Second Circuit vacated the lower court's class
certification of six selected focus cases. The Second Circuit concluded that
class certification of these cases was improper and remanded the cases to the
lower court for further proceedings.
In January 2002, Bear Stearns was named as a defendant, along with nine
other financial services firms, in an antitrust complaint filed in the same
court on behalf of a putative class of purchasers who, either in IPOs or the
aftermarket, purchased technology-related securities during the period March
1997 to December 2000. Plaintiffs allege that the defendants conspired to
require that customers, in return for an allocation in the IPOs, (i) pay charges
in addition to the IPO price, such as non-competitively determined commissions
on the purchase or sale of other securities and/or (ii) agree to purchase the
IPO securities in the aftermarket at prices above the IPO price. Plaintiffs
claim that these alleged practices violated Section 1 of the Sherman Act and
state antitrust laws and seek compensatory and treble damages. On November 6,
2003, the Court granted the motion of the defendants (including the Company) to
dismiss all claims asserted against them by these antitrust plaintiffs. The
plaintiffs appealed that decision to the Second Circuit Court of Appeals. On
September 28, 2005, the Second Circuit Court of Appeals vacated the dismissal
and remanded this matter to the lower court for further proceedings.
-27-
On or around December 7, 2006, the US Supreme Court granted defendants'
petition for certiorari to appeal the decision issued by the Second Circuit
Court of Appeals.
The Company denies all allegations of wrongdoing asserted against it in
these litigations and believes that it has substantial defenses to these claims.
IPO Underwriting Fee Antitrust Litigation: Bear Stearns, along with
numerous other financial services firms, is a defendant in several consolidated
class actions currently pending in the US District Court for the Southern
District of New York. The first consolidated action, filed on March 15, 2001,
purports to be brought on behalf of a putative class of purchasers of stock in
initial public offerings (the "Purchaser Action"). The second consolidated
action, filed on July 6, 2001, purports to be brought on behalf of a putative
class of issuers of stock in initial public offerings (the "Issuer Action").
Each suit alleges that the Company violated federal antitrust laws by fixing
underwriting fees at 7% for initial public offerings with an aggregate issuance
value of $20-$80 million for the time period 1994 to the present. The plaintiff
in each action seeks injunctive relief and treble damages.
On February 24, 2004, the District Court granted defendants' motion to
dismiss the complaint in the Purchaser Action in part, dismissing plaintiffs'
claim for treble damages under Section 4 of the Clayton Act. However, the Court
denied defendants' motion to dismiss the plaintiffs' claim for injunctive
relief.
On September 16, 2004, plaintiffs in the Purchaser Action and the Issuer
Action moved for class certification. On October 25, 2005, plaintiffs in both
actions moved for partial summary judgment against defendants on liability.
By Order dated April 18, 2006, the District Court denied the Issuer
plaintiffs motion for class certification and postponed a ruling on the class
certification motion in the Purchaser Action pending resolution of whether, in
light of the Court's ruling in the Issuer Action, the Purchaser Action
plaintiffs nonetheless want to proceed with their action.
Bear Stearns has denied all allegations of wrongdoing asserted against it
in these litigations and believes that it has substantial defenses to these
claims.
Mutual Fund Litigation
On November 7, 2003, BSSC, the Company and Bear Stearns (the "Bear Stearns
defendants"), together with 18 other entities and individuals, were named as
defendants in a purported class action lawsuit, in the US District Court for the
Southern District of New York by a mutual fund investor on behalf of persons who
purchased and/or sold ownership units of mutual fund in the Janus or Putnam
families of mutual funds between November 1, 1998 and July 3, 2003. On January
26, 2004, plaintiff filed a first amended complaint, again on behalf of persons
who traded in the Janus or Putnam families of mutual funds, against the same
Bear Stearns defendants and 16 other entities and individuals, including mutual
funds and other financial institutions. On October 22, 2003, another purported
class action was filed on behalf of the general public of the State of
California against multiple defendants, and subsequently included the Company as
a defendant, with respect to various mutual funds. Both of these actions allege
that the defendants violated federal and/or state laws by allowing certain
investors to market time and/or late trade mutual fund shares and seek various
forms of relief including damages of an indeterminate amount. On March 19, 2004,
these actions were transferred to the District of Maryland for coordinated
and/or consolidated pre-trial proceedings as part of MDL 1586-In re: Mutual
Funds Investment Litigation.
-28-
On or subsequent to September 29, 2004, fifteen new and/or amended class
action or derivative complaints were filed in MDL-1586 naming as defendants the
Bear Stearns defendants, various mutual fund companies, certain broker-dealers,
and others (collectively the "defendants"). Plaintiffs who have brought actions,
either directly or derivatively, against one or more of the Bear Stearns
defendants are shareholders in the following families of mutual funds: AIM,
Invesco, PIMCO/Allianz Dresdner, Excelsior, Alliance, Franklin Templeton, One
Group, Strong, Columbia, Pilgrim Baxter, Alger, Janus, RS and MFS. Among other
things, the actions allege that the defendants violated federal and/or state
laws by allowing certain investors to market time and/or late trade mutual fund
shares and seek various forms of relief including damages of an indeterminate
amount.
The Bear Stearns defendants, along with certain other defendants, filed an
omnibus motion to dismiss the consolidated class action and derivative claims
against them. On November 3, 2005, the derivative claims against the Bear
Stearns defendants were dismissed. As of December 31, 2005, the Bear Stearns
defendants' motion to dismiss was otherwise granted in part and denied in part
as to direct investor claims in the following families of mutual funds: Janus,
AIM/Invesco, RS, One Group, MFS, Columbia, PIMCO/Allianz Dresdner, Alger,
Excelsior and Strong.
The Bear Stearns defendants believe that they have substantial defenses to
the remaining claims.
Bear Wagner Specialists LLC: Bear Wagner Specialists LLC, a subsidiary of
the Company, is among numerous defendants named in purported class actions
brought on behalf of investors beginning in October 2003 in the US District
Court for the Southern District of New York alleging violations of the federal
securities laws in connection with NYSE floor specialist activities. The actions
seek unspecified compensatory damages, restitution, and disgorgement on behalf
of purchasers and sellers of unspecified securities between October 17, 1998 and
October 15, 2003. Bear Wagner Specialists LLC and the Company are also among the
defendants in a purported class action filed in December 2003 in California
Superior Court, Los Angeles County alleging violation of California law in
connection with the same conduct. This case was transferred to the US District
Court for the Southern District of New York. The district court consolidated
these purported class actions under the caption In re NYSE Specialists
Securities Litigation, No. 03 Civ. 8264 (RWS). On September 15, 2004, a
consolidated amended complaint was filed in this action.
Bear Wagner and the Company deny all allegations of wrongdoing in the
class action specialist litigations and believe they have substantial defenses
to the claims.
In re Prime Hospitality, Inc. Shareholders Litigation: On July 15, 2005,
plaintiff shareholders of Prime Hospitality Corporation ("Prime") filed a
consolidated amended class action complaint in the Delaware Chancery Court
against the directors of Prime, the Blackstone Group ("Blackstone") and certain
affiliates of Blackstone, and Bear Stearns. As amended, the complaint alleges
that Bear Stearns acted as financial advisor to Prime in connection with the
sale of Prime to Blackstone, and that Bear Stearns aided and abetted a breach of
fiduciary duty by the directors of Prime in connection with that transaction.
The amended complaint seeks from defendants compensatory damages in an
unspecified amount, as well as various forms of equitable relief, including, but
not limited to, rescissory damages, the imposition of a constructive trust and
an accounting. On October 3, 2005, Bear Stearns filed its answer to the
consolidated amended class action complaint denying all allegations of
wrongdoing and asserted affirmative defenses.
The parties have reached an agreement in principle to settle the action
against all defendants, including Bear Stearns, subject to confirmatory
discovery. Under the agreement in principle, Bear Stearns will not make any
financial contribution to the settlement.
-29-
Municipal Bond Offering Matters
Bear Stearns has been notified by the Chicago office of the SEC of a
formal investigation into its municipal bond offering practices, which has been
focused on the municipal underwriting business conducted through the Chicago
office of Bear Stearns. Bear Stearns has also received subpoenas and requests
for information relating to its municipal underwriting business and/or public
fund asset management businesses conducted through the Chicago office of Bear
Stearns from the US Attorney's Office for the Northern District of Illinois; the
State of Illinois, Office of Executive Inspector General; the Illinois
Securities Department; and the Office of the Attorney General of Illinois.
Bear Stearns is cooperating with each of these investigations or
inquiries.
Short Selling Litigation
The Bear Stearns Companies Inc., along with numerous other financial
services firms and other unnamed persons, has been named as a defendant in a
purported class action filed in the US District Court for the Southern District
of New York by customers who engaged in short-selling transactions in equity
securities since April 12, 2000. The complaint alleges that the defendants
agreed among themselves to charge excessive fees in connection with short sales,
and not to force deliveries of borrowed securities, resulting in intentional
failures to deliver. The complaint alleges causes of action under the federal
antitrust laws, and New York law.
Bear, Stearns Securities Corp., along with numerous other financial
securities firms and other unnamed persons, has been named as a defendant in two
separate actions in California state court. The complaints generally allege that
since late 2004, the defendants have engaged in a market-manipulation scheme in
their role as prime brokers, involving the alleged intentional failure to
deliver securities to cover short sales. The complaints further allege that such
failures to deliver distorted the market for, and artificially depressed the
share price of, the securities identified in the respective complaints. The
complaints allege causes of action under California statutory and common law.
The Bear Stearns Companies Inc. and Bear, Stearns Securities Corp. believe
they have substantial defenses to the claims brought in these actions.
Other Investigations/Inquiries
Bear Stearns has been notified by the Staff of the SEC, Southeast Regional
Office, that the Staff intends to recommend that the Commission bring a civil
enforcement action against Bear Stearns in connection with Bear Stearns'
involvement in the pricing, valuation and analysis related to approximately
$62.9 million of collateralized debt obligations that were purchased by a client
of Bear Stearns. Such an action could result in, among other things,
disgorgement, civil monetary penalties and/or other remedial sanctions.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-30-
Executive Officers of the Company
The following table sets forth certain information as of January 31, 2007
concerning executive officers of the Company.
Age as of
January 31,
Name 2007 Principal Occupation
--------------------------- ------------- --------------------------------------
James E. Cayne........... 72 Chairman of the Board and Chief
Executive Officer of the Company and
Bear Stearns and member of the
Executive Committee of the Company
(the "Executive Committee")
Jeffrey M. Farber........ 42 Senior Vice President-Finance of the
Company and Controller of the Company
and Bear Stearns
Alan C. Greenberg........ 79 Chairman of the Executive Committee
Michael Minikes.......... 63 Treasurer of the Company
Samuel L. Molinaro Jr.... 49 Executive Vice President and Chief
Financial Officer of the Company and
Bear Stearns and member of the
Executive Committee
Alan D. Schwartz......... 56 President and Co-Chief Operating
Officer of the Company and Bear
Stearns and member of the Executive
Committee
Michael S. Solender...... 42 General Counsel of the Company and
Bear Stearns
Warren J. Spector........ 49 President and Co-Chief Operating
Officer of the Company and Bear
Stearns and member of the Executive
Committee
Business experience for the past five years is provided in accordance with
SEC rules.
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 five
years and prior to June 25, 2001, was President of the Company and Bear Stearns.
Mr. Farber became Senior Vice President-Finance of the Company on February
8, 2007 and has been Controller of the Company and Bear Stearns since January 7,
2004. Mr. Farber was Assistant Controller of the Company from May 1, 2000 to
January 7, 2004 and since May 1, 2000 a Senior Managing Director of Bear
Stearns. Prior to May 2000, Mr. Farber was a partner with Deloitte & Touche LLP.
Mr. Greenberg has been Chairman of the Executive Committee for more than
five years and prior to June 25, 2001, was Chairman of the Board of the Company.
Mr. Minikes has been Treasurer of the Company for more than five years and
prior to April 10, 2006 was treasurer of Bear Stearns.
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.
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 five
years.
-31-
Mr. Solender became General Counsel of the Company and Bear Stearns on
January 29, 2004. Since February 11, 2002, Mr. Solender has been a Senior
Managing Director in the Legal Department of Bear Stearns. Mr. Solender was a
partner at the law firm of Arnold & Porter LLP from January 1997 to January 2000
and from November 2001 to February 2002, and was General Counsel of the US
Consumer Product Safety Commission from January 2000 to November 2001.
Mr. Spector became President and Co-Chief Operating Officer of the Company
and Bear Stearns and a member of the Executive Committee on June 25, 2001, and
was an Executive Vice President of Bear Stearns for more than five years.
Officers serve at the discretion of the Board of Directors.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
The information relating to the market for registrant's common equity and
the Performance Graph 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.
The following table provides information as of November 30, 2006 with
respect to the shares of common stock repurchased by the Company during the
fourth quarter of fiscal 2006:
Issuer Purchases of Equity Securities
(a) Total (c) Total Number of Shares (d) Approximate Dollar
Number of (b) Average Purchased as Part of Value of Shares that May
Shares Price Paid Publicly Announced Plans or Yet Be Purchased Under the
Period Purchased per Share Programs (1) Plans or Programs (1)
------------------ --------- ------------- --------------------------- ---------------------------
9/1/06 - 9/30/06 1,389,800 $ 133.82 1,389,800 $ 531,316,619
10/1/06 - 10/31/06 335,400 $ 148.48 335,400 $ 481,516,207
11/1/06 - 11/30/06 1,068,328 $ 145.63 1,068,328 $ 325,935,985
--------- ------------
Total 2,793,528 $ 140.10 2,793,528
========= ============
(1) On December 12, 2005, the Board of Directors of the Company approved
an amendment to the Stock Repurchase Program ("Repurchase Program") to replenish
the previous authorizations to allow the Company to purchase up to $1.5 billion
of common stock in fiscal 2006 and beyond. During the fiscal year ended November
30, 2006, the Company purchased under the current and prior authorizations a
total of 9,440,880 shares at a cost of approximately of $1.2 billion.
Approximately $279.9 million was available to be purchased under the current
authorization as of November 30, 2006. On December 13, 2006, the Board of
Directors of the Company approved an amendment to the Repurchase Program to
replenish the previous authorization in order to allow the Company to purchase
up to $2.0 billion of common stock in fiscal 2007 and beyond. The Company
expects to utilize the repurchase authorization to offset the dilutive impact of
annual share awards. The Company may, depending upon price and other factors,
repurchase additional shares in excess of that required for annual share awards.
-32-
During the fiscal year ended November 30, 2006, the Company also purchased
a total of 1,141,334 shares of its common stock at a total cost of $154.0
million pursuant to a $200 million CAP Plan Earnings Purchase Authorization,
which was approved by the Compensation Committee of the Board of Directors of
the Company on November 30, 2005. On December 12, 2006, the Compensation
Committee of the Company approved an amendment to the CAP Plan Earnings Purchase
Authorization to replenish the previous authorization in order to allow the
Company to purchase up to $200 million of common stock in fiscal 2007.
The repurchase programs have no set expiration or termination date.
Item 6. Selected Financial Data.
The information required to be furnished pursuant to this item is set
forth under the caption "Financial Highlights" 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 Report of Independent Registered
Public Accounting Firm, all of which are included in the Annual Report. Such
information is incorporated herein by reference to Exhibit No. 13 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures as of the end of the period covered by
this annual report. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were
effective as of the end of the period covered by this annual report (i) to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms and (ii) to ensure that information required to be disclosed by the
Company in the reports that the Company submits under the Exchange Act is
accumulated and communicated to the Company's management, including the
Company's principal executive and principal financial officers, or persons
performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure.
-33-
Management's Report on Internal Control over Financial Reporting and
Report of Independent Registered Public Accounting Firm
The information required to be furnished pursuant to this item is set
forth under the captions "Management's Report on Internal Control over Financial
Reporting" and "Report of Independent Registered Public Accounting Firm" in the
Annual Report, which is incorporated herein by reference to Exhibit No. 13 of
this report.
Changes in Internal Control over Financial Reporting
As required by Rule 13a-15(d) under the Exchange Act, the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the Company's internal control over financial reporting
to determine whether any changes occurred during the fourth fiscal quarter
covered by this annual report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Based on that evaluation, there has been no such change during the fourth fiscal
quarter covered by this annual report.
Item 9B. Other Information
None.
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 2007 Annual
Meeting of Stockholders to be held on April 18, 2007, 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 Directors
and Executive Officers" and "Equity Compensation Plan Information" in the Proxy
Statement, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
The information required to be furnished pursuant to this item will be set
forth under the caption "Certain Relationships and Related Person Transactions"
in the Proxy Statement, and is incorporated herein by reference.
The information required to be furnished pursuant to this item will be set
forth under the captions "Board and Board Committees" and "Corporate Governance"
in the Proxy Statement, and is incorporated herein by reference.
-34-
Item 14. Principal Accountant Fees and Services.
The information required to be furnished pursuant to this item will be set
forth under the caption "Fees Paid to Independent Auditors" in the Proxy
Statement, and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) List of Financial Statements, Financial Statement Schedules
and Exhibits:
Financial Statements:
The financial statements required to be filed hereunder are listed
on page F-1 hereof.
Financial Statement Schedules:
The financial statement schedules required to be filed hereunder are
listed on page F-1 hereof.
Exhibits:
(3)(a)(1) Restated Certificate of Incorporation of the registrant
(incorporated by reference to Exhibit (4)(a)(1) to the registrant's
registration statement on Form S-3 (File No. 333-57083)).
(3)(a)(2) Certificate of Amendment of Restated Certificate of Incorporation of
the registrant (incorporated by reference to Exhibit 4(a)(2) to the
registrant's registration statement on Form S-8 (File No.
333-92357)).
(3)(a)(3) Certificate of Stock Designation relating to the registrant's 6.15%
Cumulative Preferred Stock, Series E (incorporated by reference to
Exhibit 1.4 to the registrant's registration statement on Form 8-A
filed on January 14, 1998).
(3)(a)(4) Certificate of Stock Designation relating to the registrant's 5.72%
Cumulative Preferred Stock, Series F (incorporated by reference to
Exhibit 1.4 to the registrant's registration statement on Form 8-A
filed on April 20, 1998).
(3)(a)(5) Certificate of Stock Designation relating to the registrant's 5.49%
Cumulative Preferred Stock, Series G (incorporated by reference to
Exhibit 1.4 to the registrant's registration statement on Form 8-A
filed on June 18, 1998).
(3)(a)(6) Certificate of Elimination of the Cumulative Convertible Preferred
Stock, Series A; Cumulative Convertible Preferred Stock, Series B;
Cumulative Convertible Preferred Stock, Series C; and Cumulative
Convertible Preferred Stock, Series D of the registrant
(incorporated by reference to Exhibit 4(d)(9) to the registrant's
Current Report on Form 8-K filed with the Commission on January 15,
2002).
(3)(a)(7) Certificate of Elimination of the 7.88% Cumulative Convertible
Preferred Stock, Series B of the registrant (incorporated by
reference to Exhibit 4(d)(10) to the registrant's Current Report on
Form 8-K filed with the Commission on January 15, 2002).
(3)(a)(8) Certificate of Elimination of the 7.60% Cumulative Convertible
Preferred Stock, Series C of the registrant (incorporated by
reference to Exhibit 4(d)(11) to the registrant's Current Report on
Form 8-K filed with the Commission on January 15, 2002).
(3)(a)(9) Certificate of Elimination of the Adjustable Rate Cumulative
Preferred Stock, Series A of the registrant (incorporated by
reference to the registrant's Post-Effective Amendment No. 2 to Form
S-8 (File No. 33-108976).
(3)(b) Amended and Restated By-laws of the registrant as amended through
January 8, 2002 (incorporated by reference to Exhibit 4(d)(6) to the
registrant's Current Report on Form 8-K filed with the Commission on
January 15, 2002).
(4)(a)(1) 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)(a)(2) Indenture, dated as of November 14, 2006, between the registrant and
The Bank of New York as trustee (incorporated by reference to
Exhibit (4)(a)(4) to Amendment No. 1 to registrant's registration
statement on Form S-3 (File No. 333-136666) filed with the
Commission on November 14, 2006).
-35-
(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)(1) Supplemental Note Issuance Agreement, dated November 18, 2004, among
Bear Stearns Global Asset Holdings, Ltd., The Bear Stearns Companies
Inc., as Guarantor, JPMorgan Chase Bank, N.A., as Agent, Registrar,
Transfer Agent and Exchange Agent, Kredietbank S.A. Luxembourgeoise,
as Paying Agent and Bear, Stearns International Limited and Bear,
Stearns & Co. Inc., as Dealers (incorporated by reference to Exhibit
4(c)(1) to the registrant's Current Report on Form 8-K filed with
the Commission on November 23, 2004).
(4)(c)(2) Supplemental Note Issuance Agreement, dated November 18, 2003, among
Bear Stearns Global Asset Holdings, Ltd., The Bear Stearns Companies
Inc., as Guarantor, JPMorgan Chase Bank, as Agent, Registrar,
Transfer Agent and Exchange Agent, Kredietbank S.A. Luxembourgeoise,
as Paying Agent and Bear, Stearns International Limited and Bear,
Stearns & Co. Inc., as Dealers (incorporated by reference to Exhibit
4(c)(2) to the registrant's Current Report on Form 8-K filed with
the Commission on November 23, 2004).
(4)(c)(3) Amended and Restated Note Issuance Agreement, dated June 28, 2002,
among Bear Stearns Global Asset Holdings, Ltd., The Bear Stearns
Companies Inc., JPMorgan Chase Bank, as Agent, Registrar, Transfer
Agent and Exchange Agent, Kredietbank S.A. Luxembourgeoise, as
Paying Agent and Bear, Stearns International Limited and Bear,
Stearns & Co. Inc., as Dealers (incorporated by reference to Exhibit
4(c)(3) to the registrant's Current Report on Form 8-K filed with
the Commission on November 23, 2004).
(4)(c)(4) Deed of Covenant, dated June 28, 2002, made by Bear Stearns Global
Asset Holdings, Ltd. (incorporated by reference to Exhibit 4(c)(4)
to the registrant's Current Report on Form 8-K filed with the
Commission on November 23, 2004).
(4)(c)(5) Deed of Guarantee, dated June 29, 2001, made by The Bear Stearns
Companies Inc. (incorporated by reference to Exhibit 4(c)(5) to the
registrant's Current Report on Form 8-K filed with the Commission on
November 23, 2004).
(4)(c)(6) Except as set forth in (4)(a), (4)(b) and (4)(c)(1) - (4)(c)(5)
above, the instruments defining the rights of holders of long-term
debt securities of the registrant and its subsidiaries are omitted
pursuant to Section (b)(4)(iii) of Item 601 of Regulation S-K.
Registrant hereby agrees to furnish copies of these instruments to
the SEC upon request.
(4)(d) Form of Deposit Agreement (incorporated by reference to Exhibit
(4)(d) to the registrant's registration statement on Form S-3 (File
No. 33-59140)).
(4)(e) Warrant Agreement, dated July 9, 2003, between the registrant and
JPMorgan Chase Bank, as warrant agent (incorporated by reference to
Exhibit 4.1(a) to the registrant's registration statement on Form
8-A filed on July 17, 2003).
(10)(a)(1) Capital Accumulation Plan for Senior Managing Directors, as amended
and restated as of October 28, 1999 and further amended as of March
31, 2004 (incorporated by reference to Exhibit (10)(a)(1) to the
registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended May 31, 2004).*
(10)(a)(2) Capital Accumulation Plan for Senior Managing Directors, as amended
and restated November 29, 2000 for Plan Years beginning on or after
July 1, 1999 and further amended as of March 31, 2004, February 8,
2006 and February 28, 2006 (incorporated by reference to Exhibit B
to the registrant's Definitive Proxy Statement for its 2006 Annual
Meeting of Stockholders).*
(10)(a)(3) Performance Compensation Plan, as amended and restated as of
February 9, 2005 (incorporated by reference to: (i) Exhibit 10(a)(1)
to the registrant's Quarterly Report on Form 10-Q for its fiscal
quarter ended February 28, 2003; (ii) Item 9B, Other Information to
the registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 2004; and (iii) the registrant's Current Report
on Form 8-K filed with the Commission on December 15, 2005).*
(10)(a)(4) Stock Award Plan, as amended and restated as of March 31, 2004
(incorporated by reference to Exhibit 10(a)(3) to the registrant's
Quarterly Report on Form 10-Q for its fiscal quarter ended May 31,
2004).*
(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).*
-36-
(10)(a)(6) Restricted Stock Unit Plan, as amended and restated as of March 31,
2004 (incorporated by reference to Exhibit 10(a)(4) to the
registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended May 31, 2004).*
(10)(a)(7) The Bear Stearns Companies Inc. AE Investment and Deferred
Compensation Plan, effective January 1, 1989 (the "AE Investment and
Deferred Compensation Plan") (incorporated by reference to Exhibit
10(a)(14) to the registrant's Annual Report on Form 10-K for its
fiscal year ended June 30, 1996).*
(10)(a)(8) Amendment to the AE Investment and Deferred Compensation Plan,
adopted April 29, 1996 and effective as of January 1, 1995
(incorporated by reference to Exhibit 10(a)(15) to the registrant's
Annual Report on Form 10-K for its fiscal year ended June 30,
1996).*
(10)(a)(9) Form of Forward Purchase Agreement, dated as of September 6, 2005,
between The Bear Stearns Companies Inc. and a number of CAP Plan
participants (incorporated by reference to Exhibit 10.1 to the
registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended August 31, 2005).*
(10)(a)(10) Form of Agreement evidencing a grant of CAP Units to Executive
Officers under the Capital Accumulation Plan (incorporated by
reference to Exhibit 10.1 to the registrant's Current Report on Form
8-K filed with the Commission on January 4, 2005).*
(10)(a)(11) Form of Agreement evidencing a grant of Nonqualified Stock Options
(subject to vesting) to Executive Officers under the Stock Award
Plan (incorporated by reference to Exhibit 10.2 to the registrant's
Current Report on Form 8-K filed with the Commission on January 4,
2005).*
(10)(a)(12) Form of Agreement evidencing a grant of Nonqualified Stock Options
(immediately exercisable) to Executive Officers under the Stock
Award Plan (incorporated by reference to Exhibit 10.3 to the
registrant's Current Report on Form 8-K filed with the Commission on
January 4, 2005).*
(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 North, 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 North,
Brooklyn, New York (incorporated by reference to Exhibit (10)(b)(2)
to the registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 2001).
(10)(b)(3) Second Amendment to Lease, dated April 23, 2003, between Forest City
Jay Street Associates, L.P. and The Bear Stearns Companies Inc. with
respect to the premises located at One MetroTech Center North,
Brooklyn, New York (incorporated by reference to Exhibit (10)(b)(3)
to the registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 2003).
(11) Statement regarding: computation of per share earnings. (The
calculation of per share earnings is in Part II, Item 8, Note 11 to
the Consolidated Financial Statements (Earnings Per Share) and is
omitted here in accordance with Section (b)(11) of Item 601 of
Regulation S-K).
(12) + Statement regarding: computation of ratio of earnings to fixed
charges and combined fixed charges and preferred stock dividends.
(13) + 2006 Annual Report to Stockholders (only those portions expressly
incorporated by reference herein shall be deemed filed with the
Commission).
(14) Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 14 to the registrant's Annual Report on Form 10-K for its
fiscal year ended November 30, 2004).
(18) + Letter Re: Change in Accounting Principles.
(21) + Subsidiaries of the registrant.
(23) + Consent of Deloitte & Touche LLP.
(31.1) + Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) + Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) + Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(32.2) + Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Executive Compensation Plans and Arrangements
+ Filed herewith.
-37-
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 13th day of
February 2007.
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 13th day of February 2007.
NAME TITLE
---- -----
/s/ ALAN C. GREENBERG Chairman of the Executive Committee
----------------------------- and Director
Alan C. Greenberg
/s/ JAMES E. CAYNE Chairman of the Board, Chief Executive
---------------------------- Officer (Principal Executive Officer)
James E. Cayne and Director
/s/ HENRY S. BIENEN Director
----------------------------
Henry S. Bienen
/s/ CARL D. GLICKMAN Director
----------------------------
Carl D. Glickman
/s/ MICHAEL GOLDSTEIN Director
----------------------------
Michael Goldstein
/s/ DONALD J. HARRINGTON Director
----------------------------
Donald J. Harrington
/s/ FRANK T. NICKELL Director
----------------------------
Frank T. Nickell
/s/ PAUL A. NOVELLY Director
----------------------------
Paul A. Novelly
/s/ FREDERIC V. SALERNO Director
----------------------------
Frederic V. Salerno
/s/ ALAN D. SCHWARTZ President, Co-Chief Operating Officer
---------------------------- and Director
Alan D. Schwartz
/s/ WARREN J. SPECTOR President, Co-Chief Operating Officer
---------------------------- and Director
Warren J. Spector
/s/ VINCENT TESE Director
----------------------------
Vincent Tese
/s/ WESLEY S. WILLIAMS JR. Director
----------------------------
Wesley S. Williams Jr.
/s/ SAMUEL L. MOLINARO JR. Executive Vice President and Chief
---------------------------- Financial Officer (Principal Financial
Samuel L. Molinaro Jr. Officer)
/s/ JEFFREY M. FARBER Senior Vice President-Finance and
---------------------------- Controller (Principal Accounting
Jeffrey M. Farber Officer)
-38-
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*
Management's Report on Internal Control over Financial 73
Reporting
Report of Independent Registered Public Accounting Firm 74-75
The Bear Stearns Companies Inc.
(i) Consolidated Statements of Income-fiscal years ended
November 30, 2006, 2005 and 2004 76
(ii) Consolidated Statements of Financial Condition at
November 30, 2006 and 2005 77
(iii) Consolidated Statements of Cash Flows-fiscal years ended
November 30, 2006, 2005 and 2004 78
(iv) Consolidated Statements of Changes in Stockholders'
Equity-fiscal years ended November 30, 2006, 2005 and 79-80
2004
(v) Notes to Consolidated Financial Statements 81-112
Financial Statement Schedules
Report of Independent Registered Public Accounting Firm F-2
I Condensed Financial Information of Registrant F-3-F-7
* Incorporated by reference from the indicated pages of the 2006 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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Bear Stearns Companies Inc.
We have audited the consolidated financial statements of The Bear Stearns
Companies Inc. and subsidiaries (the "Company") as of November 30, 2006 and
2005, and for each of the three years in the period ended November 30, 2006,
management's assessment of the effectiveness of the Company's internal control
over financial reporting as of November 30, 2006, and the effectiveness of the
Company's internal control over financial reporting as of November 30, 2006, and
have issued our reports thereon dated February 12, 2007; such consolidated
financial statements and reports are included in your 2006 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the financial statement schedule (Schedule I) of the The Bear Stearns Companies
Inc. (Parent Company Only), listed in Item 15. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
February 12, 2007
F-2
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(in thousands)
Fiscal Years Ended November 30, 2006 2005 2004
---------- ---------- ----------
REVENUES
Interest........................ $3,156,830 $1,232,924 $ 487,089
Other........................... 194,684 247,816 379,829
---------- ---------- ----------
3,351,514 1,480,740 866,918
---------- ---------- ----------
EXPENSES
Interest........................ 3,387,034 1,581,883 648,041
Other........................... 205,574 195,580 149,018
---------- ---------- ----------
3,592,608 1,777,463 797,059
---------- ---------- ----------
(Loss) income before benefit from
income taxes and equity in (241,094) (296,723) 69,859
earnings of subsidiaries.....
Benefit from income taxes....... 20,176 96,272 3,226
---------- ---------- ----------
(Loss) income before equity in
earnings of subsidiaries..... (220,918) (200,451) 73,085
Equity in earnings of subsidiaries,
net of tax...................... 2,274,789 1,662,628 1,271,648
---------- ---------- ----------
Net income...................... $2,053,871 $1,462,177 $1,344,733
========== ========== ==========
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)
As of November 30, 2006 2005
----------- -----------
ASSETS
Cash and cash equivalents.................... $ 2,006,871 $ 2,154,047
Securities purchased under agreements to resell 97,389 174,105
Receivables from subsidiaries................ 67,185,207 44,471,375
Subordinated loans receivable from subsidiaries 9,962,724 10,185,562
Investments in subsidiaries, at equity....... 7,975,276 7,253,755
Assets of variable interest entities......... 575,123 748,506
Other assets................................. 3,579,524 2,865,713
----------- -----------
Total Assets................................. $91,382,114 $67,853,063
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings........................ $19,467,424 $ 9,569,754
Payables to subsidiaries..................... 6,572,500 5,006,475
Liabilities of variable interest entities.... 220,118 221,638
Other liabilities and accrued expenses....... 1,102,678 1,294,125
----------- -----------
27,362,720 16,091,992
----------- -----------
Commitments and contingencies (Note 1)
Long-term borrowings......................... 51,627,510 40,707,139
Long-term borrowings from subsidiaries....... 262,500 262,500
STOCKHOLDERS' EQUITY
Preferred stock 359,156 372,326
Common stock, $1.00 par value; 500,000,000
shares authorized as of November 30, 2006
and 2005; 184,805,847 shares issued as of
November 30, 2006 and 2005................ 184,806 184,806
Paid-in capital.............................. 4,578,972 4,109,166
Retained earnings............................ 9,384,595 7,492,951
Employee stock compensation plans............ 2,221,997 2,600,186
Unearned compensation........................ (155,596) (143,302)
Treasury stock, at cost:
Common stock: 67,396,876 and 70,937,640 shares
as of November 30, 2006 and 2005,
respectively............................ (4,444,546) (3,824,701)
----------- -----------
Total Stockholders' Equity................... 12,129,384 10,791,432
----------- -----------
Total Liabilities and Stockholders' Equity... $91,382,114 $67,853,063
=========== ===========
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 Years Ended November 30, 2006 2005 2004
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................... $2,053,871 $1,462,177 $1,344,733
Adjustments to reconcile net income
to cash provided by operating
activities:
Non-cash items included in net income:
Employee stock compensation plans 1,009,519 801,216 763,162
Equity in earnings of
subsidiaries, net of
dividends received......... (493,296) (876,099) 816,131
Other........................... 10,404 9,923 8,598
Decreases (increases) in assets:
Securities purchased under
agreements to resell............ 76,716 98,829 (58,949)
Other assets.................... 1,006,510 (33,891) (1,909,965)
Increases (decreases) in liabilities:
Payables to subsidiaries........ 1,566,025 1,275,627 1,020,824
Other liabilities and accrued
expenses........................ (49,313) 305,813 (401,936)
---------- ---------- ----------
Cash provided by operating activities 5,180,436 3,043,595 1,582,598
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net......... 9,897,670 4,524,474 (340,037)
Proceeds from issuance of long-term
borrowings......................... 16,502,923 14,111,584 10,809,645
Decrease in long-term borrowings from
subsidiaries.................... - - (300,000)
Issuance of common stock........... 289,402 201,851 235,812
Cash retained resulting from tax
deductibility under
share-based payment
arrangements.................... 363,044 426,055 163,887
Redemption of preferred stock...... (13,115) (75,822) (89,037)
Payments for:
Retirement of long-term borrowings (7,142,314) (5,966,503) (6,223,054)
Treasury stock purchases........ (1,374,064) (869,629) (780,827)
Cash dividends paid................ (155,257) (139,253) (116,791)
---------- ---------- ----------
Cash provided by financing activities 18,368,289 12,212,757 3,359,598
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables from subsidiaries...... (23,690,515) (11,312,343) (2,057,686)
Subordinated loans receivable from
subsidiaries.................... 222,838 (1,469,062) (2,388,687)
Investments in subsidiaries, net... (228,224) (321,037) (545,642)
---------- ---------- ----------
Cash used in investing activities.. (23,695,901) (13,102,442) (4,992,015)
---------- ---------- ----------
Net (decrease) increase in cash and
cash equivalents................ (147,176) 2,153,910 (49,819)
Cash and cash equivalents, beginning
of fiscal year..................... 2,154,047 137 49,956
---------- ---------- ----------
Cash and cash equivalents, end of
fiscal year........................ $2,006,871 $2,154,047 $ 137
========== ========== ==========
See Notes to Condensed Financial Information.
F-5
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. General
The condensed financial information of the Company (Parent Company Only)
should be read in conjunction with the Consolidated Financial Statements
of The Bear Stearns Companies Inc. and subsidiaries and the Notes thereto
in The Bear Stearns Companies Inc. 2006 Annual Report to Stockholders (the
"Annual Report") incorporated by reference in this Form 10-K. Certain
prior year amounts have been reclassified to conform to the current year's
presentation.
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 and tax matters, 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 or other subsidiaries are accounted for using
the equity method.
For information on the following, refer to the indicated Notes to the
Consolidated Financial Statements within the Annual Report.
o Summary of Significant Accounting Policies (Note 1)
o Fair Value of Financial Instruments (Note 2)
o Variable Interest Entities and Mortgage Loan Special Purpose
Entities (Note 6)
o Short-Term Borrowings (Note 8)
o Long-Term Borrowings (Note 9)
o Preferred Stock (Note 10 - refer to section entitled "Preferred
Stock Issued by The Bear Stearns Companies Inc.")
o Employee Benefit Plan (Note 12)
o Stock Compensation Plans (Note 13)
o Commitments and Contingencies (Note 17)
The Company engages in derivatives activities in order to modify the
interest rate characteristics of its long and short-term debt. See
"Non-Trading Derivatives Activity" section of Note 4, "Derivatives and
Hedging Activities", to the Consolidated Financial Statements in the
Annual Report.
2. Statement of Cash Flows
Income taxes paid, net of refunds (consolidated) totaled approximately
$708.9 million, $146.3 million and $524.5 million for the fiscal years
ended November 30, 2006, 2005 and 2004, respectively. Cash payments for
income taxes, net of refunds, would have been $1.07 billion, $572.4
million and $688.4 million for the fiscal years ended November 30, 2006,
2005, and 2004, respectively, if increases in the value of equity
instruments issued under share-based payment arrangements had not been
deductible in determining taxable income. Cash payments for interest
approximated interest expense for each of the periods presented.
F-6
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL INFORMATION (CONTINUED)
3. Transactions with Subsidiaries
In the ordinary course of business the Company generates interest income
by providing financing to its subsidiaries.
The Company received from its consolidated subsidiaries dividends of
approximately $1,781 million, $787 million and $2,088 million for the
fiscal years ended November 30, 2006, 2005 and 2004, respectively. In
addition, the Company provides its subsidiaries with the use of fixed
assets for which the Company charges a fee.
The Company has transactions with its subsidiaries determined on an
agreed-upon basis. The Company also guarantees certain unsecured lines of
credit and certain other obligations of subsidiaries, including
obligations associated with foreign exchange forward contracts and
interest rate swap transactions. Additionally, the Company guarantees
certain obligations related to Guaranteed Preferred Beneficial Interests
in Company Subordinated Debt Securities issued by subsidiaries.
The Company also issues guarantees of counterparty obligations to
subsidiaries in connection with certain activities of such subsidiaries.
F-7