Document/Exhibit Description Pages Size
1: 10-K Annual Report 43 282K
2: EX-12 Computation of Ratio of Earnings to Fixed Charges 1 7K
3: EX-13 2007 Annual Report to Stockholders 100 642K
4: EX-21 Subsidiaries of the Registrant 1 7K
5: EX-23 Consent of Deloitte & Touche LLP 1 13K
6: EX-31.1 Certification of Chief Executive Officer 2± 10K
7: EX-31.2 Certification of Chief Financial Officer 2± 10K
8: EX-32.1 Certification of Chief Executive Officer 1 7K
9: EX-32.2 Certification of Chief Financial Officer 1 7K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) 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, 2007.
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 of Organization)
383 Madison Avenue, New York, NY 10179
(Address of principal executive offices) (Zip Code)
(212) 272-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
[Enlarge/Download Table]
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, par value $1.00 per share New York Stock Exchange
Depositary Shares, each representing a one-fourth interest in a share of 6.15% Cumulative
Preferred Stock, Series E New York Stock Exchange
Depositary Shares, each representing a one-fourth interest in a share of 5.72% Cumulative
Preferred Stock, Series F New York Stock Exchange
Depositary Shares, each representing a one-fourth interest in a share of 5.49% Cumulative
Preferred Stock, Series G New York Stock Exchange
BearLinxSM Alerian MLP Select Index ETN New York Stock Exchange
Euro Floating Rate Global Notes Due July 2012 New York Stock Exchange
Principal Protected Sector Selector Notes Linked to a Basket of U.S. Sector Exchange
Traded Funds Due February 2008 American Stock Exchange
Principal Protected Notes Linked to the S&P 500 Index Due October 2008 American Stock Exchange
Principal Protected Notes Linked to the Nasdaq-100 Index Due December 2009 American Stock Exchange
Principal Protected Notes Linked to the S&P 500 Index Due November 2009 American Stock Exchange
Principal Protected Notes Linked to the Dow Jones Industrial Average Due March 2011 American Stock Exchange
Medium-Term Notes, Linked to a Basket of Three International Equity Indices Due August 2010 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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, 2007, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant was approximately $16.6
billion. 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 January 16, 2008, the registrant had 118,090,675 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:
Part II of this Form 10-K incorporates information by reference from
certain portions of the registrant's 2007 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 16,
2008, 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, 2007.
================================================================================
THE BEAR STEARNS COMPANIES INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED NOVEMBER 30, 2007
Page
Form 10-K Item Number: No.
PART I
Item 1. Business................................................. 3
Forward-Looking Statements............................... 4
Business Segments........................................ 4
Competition.............................................. 12
Employees................................................ 12
Regulatory and Compliance Factors Affecting the Company
and the Securities Industry........................... 12
Item 1A. Risk Factors............................................. 16
Item 1B. Unresolved Staff Comments................................ 21
Item 2. Properties............................................... 21
Item 3. Legal Proceedings........................................ 21
Item 4. Submission of Matters to a Vote of Security Holders...... 29
Executive Officers of the Registrant..................... 29
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities............................................ 31
Item 6. Selected Financial Data.................................. 32
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.................... 32
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.................................................. 32
Item 8. Financial Statements and Supplementary Data.............. 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 32
Item 9A. Controls and Procedures.................................. 32
Item 9B. Other Information........................................ 33
PART III
Item 10. Directors, Executive Officers and Corporate Governance... 33
Item 11. Executive Compensation................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters............ 33
Item 13. Certain Relationships and Related Transactions, and 33
Director Independence.................................... 33
Item 14. Principal Accountant Fees and Services................... 33
PART IV
Item 15. Exhibits, Financial Statement Schedules.................. 34
Signatures............................................... 38
Index to Financial Statements and Financial Schedules.... F-1
PART I
Item 1. Business.
(a) Overview and Available Information
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. 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 significant
activities through other wholly owned subsidiaries, including: Bear Stearns
Global Lending Limited; Custodial Trust Company; Bear Stearns Financial Products
Inc.; Bear Stearns Capital Markets Inc.; Bear Stearns Credit Products Inc.; Bear
Stearns Forex Inc.; EMC Mortgage Corporation; Bear Stearns Commercial Mortgage,
Inc.; Bear Stearns Investment Products Inc. and Bear Energy L.P.. The Company's
business is conducted from its principal headquarters in New York City, its
offices and branches throughout the U.S., and international offices in Dublin,
Hong Kong, London and Tokyo and other world financial centers. 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 business of the Company includes: market-making and trading in U.S.
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.
In October 2007, the Company announced an agreement in principle to form a
strategic alliance with CITIC Securities Co. Limited ("CITIC"). The companies
will work together to develop new financial products and services to meet the
evolving needs of the Chinese market. This alliance will include sharing
management expertise and technology to develop new capital markets products and
businesses in China, establishing an exclusive joint venture combining the
existing businesses of both companies in the rest of Asia, and cross-investments
of approximately $1 billion in each firm by the other. The Company and CITIC
have agreed to negotiate with each other on an exclusive basis. The proposed
transactions are subject to the negotiation of definitive agreements, the
approval by the respective boards of directors of the Company and CITIC, and
various governmental and regulatory approvals. There can be no assurances that
the Company and CITIC will be able to successfully complete negotiations or
consummate the transaction.
-3-
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 the Company's certificate of incorporation and by-laws, and
charters for the Company's Audit Committee, Compensation Committee, Corporate
Governance and Nominating Committee, Finance and Risk Committee and Qualified
Legal Compliance Committee. Copies of the Corporate Governance Guidelines and
the Code of Business Conduct and Ethics governing our directors, officers and
employees are also posted on the Company's website within the "Corporate
Governance" section under the heading "Our Firm" 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 of Business Conduct and Ethics ("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.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this report
including without limitation, 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. Forward-looking statements include statements
other than historical information or statements of current condition and may
relate to management's expectations, strategic objectives, business prospects,
anticipated economic performance and financial condition and other similar
matters. As a global investment bank, there are a variety of factors, many of
which are beyond the Company's control, which affect the Company's operations,
performance, business strategy and results, and could cause actual results to
differ materially from the expectations and objectives expressed in any
forward-looking statements. These factors include, but are not limited to,
actions and initiatives taken by competitors, general economic conditions, the
effects of current, pending and future legislation, regulation and regulatory
actions, and the other risks and uncertainties disclosed in this report,
including those described below under "Risk Factors" in Part I, Item 1A of this
report and under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Part II, Item 7 of this report. Readers are
cautioned not to place undue reliance on forward-looking statements, which 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 any
such forward-looking statement is based.
(b) Business Segments
The Company is a global investment banking, securities and derivatives
trading, clearance and brokerage firm 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 offered 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.
Financial information regarding the Company's business segments and
foreign operations as of November 30, 2007, November 30, 2006, and November 30,
-4-
2005 and for the fiscal years ended November 30, 2007, November 30, 2006 and
November 30, 2005 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.
A summary of the business and activities within each of the three
segments, Capital Markets, Global Clearing Services and Wealth Management, is
described below.
CAPITAL MARKETS
Capital Markets is comprised of the Company's Equities, Fixed Income and
Investment Banking businesses operating as a single integrated unit, providing
sales, trading and origination effort for various equity, fixed income, and
advisory products and services. Each of the three businesses works in tandem to
deliver these services to institutional and corporate clients.
Equities
General. Equities provides global institutional investing customers with
proficient trade execution and consistent liquidity on global securities
exchanges, prime brokerage services, correspondent clearing services for other
broker-dealers and equity derivatives. Fees and commissions are earned from
agency and principal sales of products such as exchange-traded equity
securities, new equity securities issued, convertible bonds, listed options,
structured equity derivatives, and risk and convertible arbitrage. Additionally,
the division earns commission payments for providing proprietary research on
securities of companies located worldwide. Commissions are also earned for
providing innovative investment management products that model equity investment
risk.
Institutional Equity. Institutional Equities is one of the leading
providers of complete brokerage services to institutional investors located
globally. Operating from various branch offices worldwide, Institutional
Equities' sales, trading and research professionals provide consistent
liquidity, proficient trade execution, proprietary securities research,
investment advice, equity risk management and access to capital markets
worldwide.
Institutional Equities provides a complete offering of trade executions of
equity securities including: as agent on global exchanges, using algorithmic
strategies, portfolio executions and as principal. Institutional Equities'
ability to provide Direct Market Access ("DMA") executions to its global
institutional investor customer base provides liquidity, global capital markets
access and large order flow at competitive commission rates.
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. 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.
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 for U.S. and European transactions.
-5-
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 U.S., Europe,
Asia and Latin America.
Electronic Connectivity and Trading. Bear Stearns' Equity Analytics
Systematic Trading ("E.A.S.T.") system currently includes the following
products: U.S. Domestic and European Algorithms, Global Pre- and Post-Trade
Analytics, Smart Order Routing, EASTrader, and Pairs Trading, using competitive
statistical models such as Risk Models and Transaction Cost Models.
Specialist and Market-Making. The Company engages in specialist and
market-making activities on the NYSE, AMEX and ISE. The Company performs
specialist and market making functions in NYSE-Arca listed, and AMEX-listed
stocks and exchange traded funds, 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 Global Equity Research Department provides in-depth,
thematic research underpinned by detailed financial models. The department
disseminates independent third party research reports and ratings on U.S.
covered companies as well as foreign securities with liquid American Depository
Receipts. In 2007, Global Equity Research expanded its coverage most rapidly in
the European and Asian sectors, adding over 100 companies to the coverage
universe in those regions. Global Equity Research as of November 30, 2007
provided research coverage of approximately 1,200 companies worldwide in over
100 industries. Global Equity Research is also an innovator in deploying
technology to help clients access and analyze research including BearCast(TM), a
podcasting tool, BearXplorer, a patented risk management product, and the use of
RSS (Really Simple Syndication) to apprise analysts and clients of breaking
news.
Energy. The Company trades as principal and maintains proprietary trading
positions in the spot, forward and futures markets in several commodities,
including natural gas, electric power, crude oil, emission credits, coal and
related products through our subsidiaries in the U.S. and Europe including Bear
Energy L.P. ("Bear Energy"). In addition, the Company has equity ownership
interests in various power generation facilities and related assets through a
subsidiary, Arroyo Energy.
In November 2007, Bear Energy purchased substantially all of the assets of
Williams Power Company, Inc., an energy trading and marketing subsidiary of The
Williams Companies, Inc. The portfolio of assets includes approximately 7700
megawatts of gas-fired tolling capacity, 1800 megawatts of full requirements
power supply contracts, and an associated trading book.
Fixed Income
General. The Company is a market-maker in the new issue and secondary
markets, and is an active participant in the global market for fixed income
securities. The Company also provides short-term collateralized financing
through its active participation in the repurchase and reverse repurchase
markets. Fixed income businesses include the following:
-6-
Government Bonds and Agency Obligations. Bear Stearns is designated by the
FRBNY as a primary dealer in U.S. government obligations and participates in the
auction of, and maintains proprietary positions in, U.S. 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
and market-making in various U.S. government agency obligations and sponsored
corporation securities and maintains proprietary positions in such securities.
In addition, the Company trades in government securities in other European and
Asian bond markets as well as engaging in matched book activities, acting as an
intermediary between borrowers and lenders of short-term funds, mainly via
repurchase and reverse repurchase agreements.
Mortgage-Related Securities and Products. The Company purchases and
originates commercial and residential mortgage loans through its subsidiaries in
the U.S., Europe and Asia. The Company is a leading underwriter of and
market-maker in, residential and commercial mortgages, U.S. agency-backed
mortgage products, asset-backed securities, collateralized debt obligations and
is active in all areas of secured lending, structured finance and securitization
products.
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
Mortgage Corporation ("EMC"), a full service residential mortgage banking and
servicing entity, 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 specializes in the purchasing and servicing of distressed mortgage
loans and real estate owned ("REO") property. It has been a perennial leader in
the distressed / non-performing loan sector dating back to its inception in 1990
at the height of the U.S. thrift crisis. EMC's major clients include major
financial institutions, money center banks and government agencies. As a
servicer, EMC maintains strong ratings from rating agencies as a primary and
special servicer and is well regarded in the industry for its default and loss
mitigation capabilities.
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.
Fixed Income Derivatives. The Company offers to institutional customers,
and trades for its own account, a variety of exchange-traded and OTC derivative
products. Integrated into all of the Fixed Income businesses, derivative
personnel based in New York, Chicago, London, Hong Kong, Tokyo, Singapore and
Dublin provide the resources and support necessary for the Company to compete
globally.
Credit-Related Securities and Products. The Company trades, makes markets
and takes proprietary positions in both dollar and non-dollar 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 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 worldwide and for its own
account. 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. In addition, the Company
offers its domestic and international customers quantitative, strategic and
research services relating to fixed income securities and credit derivatives.
-7-
Foreign Exchange and Precious Metals. The Company acts as a dealer in
foreign exchange and precious metals in New York, London, Paris and Hong Kong.
The Company trades 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. To meet specific interest rate and currency
risk objectives, the Company offers research and provides advisory services to
clients worldwide.
Fixed Income Analytics and Research. 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, relative value and market-specific
analysis. The department produces a wide range of comprehensive publications, as
well as leading data and analytics tools, which are available to our global
customer base. Representative of the Company's commitment to offering a broad
range of research products on a worldwide basis, the department is comprised of
the following divisions located in New York, London, Singapore, Tokyo and Hong
Kong:
(i) Financial Analytics and Structured Transactions Group
("F.A.S.T.") is a firmwide resource that provides financial
engineering and securitization capabilities, fixed income
portfolio management and analytic systems, investment
research, trading technology and general financial
expertise. F.A.S.T. encompasses the Rates and Structured
Products Research groups and is responsible for designing
and implementing the valuation models used by trading,
research and risk management to value a broad spectrum of
asset classes. 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 within asset classes.
(ii) High Grade Research offers comprehensive coverage on approximately
17 industries and over 470 credit names whose securities are rated
as investment-grade by the leading credit rating agencies.
(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.
(iv) Economic Research develops tools and models for analyzing and
forecasting U.S. 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 in
Latin America, Central America and the Caribbean, Asia, Eastern
Europe, the Middle East, and Africa, as well as local currency debt
and foreign exchange markets.
(vi) Municipal Research focuses on sectors, trends, and credit-specific
analysis of securities issued by states, cities, counties and other
governmental entities.
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's strategy is to concentrate a major portion of its corporate
finance business development within industries in which the Company maintains
the highest level of expertise and has established a leadership position in
providing investment banking services. Industry specialty groups include, but
are not limited to, media and entertainment, health care, financial
institutions, industrial, technology and telecommunications. The Company also
has a group that focuses on financial sponsors. These groups are responsible for
initiating, developing and maintaining client relationships and executing
transactions involving these clients.
In addition to maintaining a structure according to distinct industry
groups, the Company has a number of professionals who specialize in specific
types of transactions, including but not limited to, the following:
-8-
Mergers and Acquisitions. This Group provides to corporate and other
institutional clients strategic advisory services on a wide range of financial
matters, including mergers and acquisitions, restructurings, split-offs and
spin-offs and takeover defenses.
Equity Capital Markets ("ECM"). ECM focuses on providing financing for
issuers of equity and convertible equity securities in the public markets. ECM
assists in the origination, structuring and execution of transactions for a
broad range of the Company's 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 for various
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.
These 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 provides comprehensive investment
banking, capital markets and advisory services specific to real estate on a
nationwide basis.
Merchant Banking. Bear Stearns Merchant Banking, the Company's private
equity affiliate, invests private equity capital in compelling leveraged
buyouts, recapitalizations and growth capital opportunities across a variety of
industries. As of November 30, 2007, Merchant Banking had approximately $1.9
billion of assets under management.
Emerging Markets
The Company provides financial services in various emerging markets
worldwide including Asia, Latin America 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.
GLOBAL CLEARING SERVICES
Global Clearing Services provides trade execution, securities clearing
services, custody, financing, securities lending, and technology solutions to a
diverse worldwide client base comprised principally of hedge funds,
broker-dealers and registered investment advisors together with high-net-worth
individuals. In addition, Global Clearing clients can take advantage of Bear
Stearns expertise in cash and liquidity management in order to maximize yields
while maintaining liquidity and ensuring safety of principal. The Company's
advanced proprietary technology, combined with comprehensive retail products, an
integrated prime brokerage product, operations expertise and exceptional service
have enabled Global Clearing Services to become a perennial leader in the
industry.
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.
For broker-dealers conducting retail, institutional and money management
activities, the Company provides "fully disclosed correspondent clearing
services".
-9-
For registered investment advisors whose services include investment
management, the Company provides trade execution, financing, clearing and
custody services as well as web-based portfolio reporting for their investors.
Global Clearing Services also offers investment advisors innovative and
cost-effective technology and informational retrieval systems, including
Consultant's EDGE, a customizable turn-key and investment advisory program
sponsored by Bear Stearns, that integrates sophisticated planning, asset
allocation and proposal tools with a defined group of investments.
The financial responsibilities that arise 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.
Additionally, 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.
At November 30, 2007, the Company held approximately $288.5 billion of
equity in Global Clearing Services client accounts.
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.
WEALTH MANAGEMENT
Wealth Management had $42.7 billion in assets under management at November
30, 2007, compared to $52.5 billion in assets under management at November 30,
2006. Wealth Management is comprised of the Private Client Services ("PCS") and
Asset Management areas.
Private Client Services
PCS provides high-net-worth individuals with an institutional level of
transactional, wealth management and advisory services, including access to the
Company's resources and professionals. PCS has approximately 500 account
executives in its principal office, six regional offices, eight satellite
offices and two international offices.
Asset Management
Bear Stearns Asset Management ("BSAM") provides asset management services
to institutional clients and high-net-worth individuals worldwide, accessed
through both direct and third-party channels. BSAM's assets under management
typically generate fees as a percentage of asset value. For certain 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
including: money markets, fixed income, currencies, and equities. BSAM offers
clients a multitude of investment styles such as value, growth, core, fixed
income, high yield, leverage loans, quantitative, as well as long-short
investing.
-10-
BSAM's alternative business is a leading provider of absolute return
investment strategies. In addition to access to BSAM's open architecture
platform, HedgeSelect, and risk analytic services provided by Bear Measurisk, a
subsidiary of the Company, BSAM provides investment services to the Company's
proprietary and third party hedge funds.
BSAM's private equity business provides investment products and services
for institutional and qualified private clients. BSAM also manages funds of
funds and separate accounts, including Bear Stearns Private Equity Limited, a
publicly listed company that invests in private equity primarily by acquiring
interests in the secondary market, by co-investing alongside individual
sponsors, and by making commitments to newly formed funds. In addition, BSAM
manages venture capital funds and provides placement services for private equity
and real estate funds.
OTHER ACTIVITIES
Administration and Operations
Administration and operations personnel are responsible for human
resources, legal and compliance areas; internal financial controls; accounting
functions; regulatory and financial reporting; technological development and
systems support; processing of securities transactions; receipt, identification
and delivery of funds and securities; the custody of customer securities; the
administration of margin accounts of the Company and correspondent organizations
as well as other support functions. The processing, settlement and accounting of
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, by the Company's personnel in other
offices.
Technology and Information Security:
The Company's businesses rely on the security of the information it
processes, stores and transmits as part of its operations. The Company has made
substantial investments in existing technology and will continue to support the
development and use of new technology to enhance the overall business. The
Company has strengthened client services by providing web-based access to our
products and services. The Company provides global electronic trading and
information distribution capabilities throughout its Capital Markets, Global
Clearing Services and Wealth Management segments.
Continued advancements in technology and electronic commerce will continue
to change the ways that securities and other financial products are traded,
distributed and settled, creating both opportunities and challenges for the
Company and its businesses. The Company remains committed to being an innovator
of technological development in the global capital markets.
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.
-11-
(c) Competition
All aspects of the Company's business are highly competitive and the
Company expects them to remain so. 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. As a result, competitors have gained
geographic reach and have increased capital, and other resources, such as the
ability to offer a wider range of products and services. In particular, the
Company encounters intense competition in all aspects of its securities business
both domestically and internationally, particularly in underwriting, trading and
advisory services. In many cases, the Company competes directly with other
securities firms 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.
The Company believes that the principal factors affecting competition are
the caliber and talent of professional personnel, the array of services and
products offered, the quality of service provided, transaction execution,
reputation and price.
(d) Employees
As of November 30, 2007, the Company had 14,153 employees. The Company
considers its relationship with its employees to be good.
(e) Regulatory and Compliance Factors Affecting the Company and the
Securities Industry
The financial services industry is subject to extensive regulation in the
U.S. and the other countries in which the Company operates. As a matter of
public policy, regulators around the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of people and entities participating in those markets. Violation of
these regulations can subject a company to legal and administrative proceedings,
which may result in censures, fines, cease-and-desist orders, restrictions on
business activities, which could result in significant losses and reputational
damages.
U.S. Regulation: The securities industry in the U.S. 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 Financial Industry Regulatory Authority
("FINRA"), which has been designated by the SEC as the primary regulator of
certain of the Company's subsidiaries, including Bear Stearns and BSSC, and
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.
-12-
U.S. 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, as amended and rules promulgated thereunder, as
well as the rules of self-regulatory organizations such as the FINRA. 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.
The futures industry in the U.S. is subject to regulation under the
Commodity Exchange Act, as amended. The Commodities Futures Trading Commission
("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 National Futures Association, 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 FINRA, 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 Rule 325 NYSE, as incorporated into the FINRA
rulebook. 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.
-13-
The Company has consented to be regulated under the "Alternative Net
Capital Requirements for Broker-Dealers That Are Part of Consolidated Supervised
Entities" (Rule 34-49830) ("CSE") that allow investment banks to voluntarily
submit to be supervised by the SEC on a global consolidated basis. As a result,
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 is in compliance with the CSE
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.
Domestic futures and options trading are subject to extensive regulation
by the CFTC, pursuant to the Commodity Exchange Act and the Commodity Futures
Trading Commission Act of 1974. International futures and options trading
activities are subject to regulation by the respective regulatory authorities in
the locations where futures exchanges reside, including the FSA in the United
Kingdom.
Margin requirements (good faith deposits) covering substantially all
transactions in futures and options contracts are subject to each particular
exchange's requirements in addition to other regulations. In the U.S., 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.
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".
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 is authorized by the Federal Energy Regulatory Commission
("FERC") to sell wholesale physical power at a market-based rate. As a
FERC-authorized power marketer, Bear Energy is subject to regulation under the
Federal Power Act and FERC regulations. In addition, as a result of our
interests in
-14-
electrical power generation facilities, we are subject to extensive and evolving
federal, state and local energy, environmental and other governmental laws and
regulations relating to, among others, air quality, waste management, natural
resources, site remediation and, health and safety.
Anti-Money Laundering: The USA Patriot Act of 2001 contains anti-money
laundering laws that mandate the implementation of various regulations
applicable to banks, broker-dealers and other financial services firms,
including standards for verifying client identity at account opening, and
obligations to monitor client transactions and report superstitious activity.
Through these and other provisions, the USA Patriot Act seeks to promote
cooperation among financial institutions, regulators and law enforcement in
identifying parties that may be involved in terrorism or money laundering.
Anti-money laundering laws outside of the U.S. contain similar provisions. The
Company has established policies and procedures, and internal controls that are
designed to comply with these rules and regulations.
Non-U.S. 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: senior management responsibilities,
regulatory capital, sales and trading practices, safekeeping of customer funds,
record keeping, registration standards for individuals and reporting,
disclosures to customers and other matters.
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").
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, with a limit of
$100,000 for cash balances, 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 the
account's 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 our 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. Our 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 us or that we currently deem
immaterial may also adversely affect our 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 U.S. and elsewhere
-15-
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. In addition, in the
event of extreme market events, such as the global credit crisis, we could incur
significant losses. Even in the absence of a market downturn, we are exposed to
substantial risk of loss due to market volatility.
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.
Our businesses may be adversely affected by fluctuations in interest
rates, foreign exchange rates, and equity and commodity prices. In connection
with our dealer and arbitrage activities, including market-making in OTC
derivative contracts, we 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. Increasing interest rates may cause a decline in the volume
of mortgage origination activity and therefore securitization activity.
Declining real estate values could also reduce the level of new mortgage loan
originations and securitizations. When we buy or sell a foreign currency or a
financial instrument denominated in a currency other than U.S. 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, we are exposed to a
risk that the exchange rate may move against us. We are also exposed to equity
price risk through making markets in equity securities, distressed debt, equity
derivatives as well as specialist activities. We 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. Additionally we may be exposed to
widening credit spreads and/or increasing interest rates which creates a less
favorable environment for certain lines of business. Credit spread risk arises
from the potential that changes in an issuer's credit rating or credit
perception could affect the value of financial instruments. The markets for
energy and energy-related commodities are likely to continue to be volatile. Use
of standard commodity contracts (many of which constitute derivatives) can
create volatility in earnings and may require substantial credit support, some
of which may be in the form of cash collateral, increases to which may result in
the event of an adverse change to our credit ratings. Wide fluctuations in
commodity prices might result from relatively minor changes in the supply or
demand for these commodities, market uncertainty and other factors beyond our
control, including natural disasters and changes to the legal and regulatory
landscape.
The current global credit crisis, inventory exposure, and potential
counterparty credit exposure, may continue to adversely affect our business and
financial results. During 2007, higher interest rates, falling property prices
and a significant increase in the number of subprime mortgages originated in
2005 and 2006 contributed to dramatic increases in mortgage delinquencies and
defaults in 2007 and anticipated future delinquencies among high-risk, or
subprime, borrowers in the United States. The widespread dispersion of credit
risk related to mortgage delinquencies and defaults through the securitization
of mortgage-backed securities, sales of collateralized debt obligations ("CDOs")
and the creation of structured investment vehicles ("SIVs") and the unclear
impact on large banks of mortgage-backed securities, CDOs and SIVs caused banks
to reduce their loans to each other or make them at higher interest rates.
Similarly, the ability of corporations to obtain funds through the issuance of
commercial paper or other short-term unsecured sources was negatively impacted.
As prices declined and delinquencies increased, investors lost confidence in the
rating system for structured products as rating agencies moved to downgrade CDOs
and other structured products. In addition, investors lost confidence in
commercial paper conduits and SIVs causing concerns over large potential
liquidations of AAA collateral. The lack of liquidity and transparency regarding
the underlying assets in securitizations, CDOs and SIVs resulted in significant
price declines across all mortgage-related products in fiscal 2007. Price
declines were further driven by forced sales of assets in order to meet demands
by investors for the return of their collateral and collateral calls by lenders.
Many banks and institutional investors have also recognized substantial losses
as they revalue their CDOs and other mortgage-related assets downward. During
the second half of 2007, the economic impact of these problems spread on a
global basis and disrupted the broader financial markets. The combination of
these events caused a large number of mortgage lenders and some hedge funds to
shut down or file for bankruptcy. The deterioration and recognition of
substantial exposure through derivatives and policies written by monoline
insurers resulted in the downgrade of certain of these monoline insurers.
Several of these monoline insurers also reported significant losses. Further
downgrades of these monoline insurers or their failure could result in
additional significant write-downs at many financial institutions and could have
a material adverse effect on the broader financial markets. Financial
institutions have entered into large numbers of credit default swaps with
counterparties to hedge credit risk. As a result of the global credit crises and
the increasingly large numbers of credit defaults, there is a risk that
counterparties could fail, shut down, file for bankruptcy or be unable to pay
out contracts. The failure of a significant number of counterparties or a
counterparty that holds a significant amount of credit default swaps could have
a material adverse effect on the broader financial markets. It is difficult to
predict how long these conditions will continue, whether they will continue to
deteriorate and which of our markets, products and businesses will continue to
be adversely affected. As a result, these conditions could adversely affect our
financial condition and results of operations. In addition, we may be subject to
increased regulatory scrutiny and litigation due to these issues and events.
-16-
We are an underwriter and market-maker for, residential and commercial
mortgages, U.S. agency-backed mortgage products, asset-backed securities and
CDOs. We purchase and originate commercial and residential mortgage loans of
varying quality. The markets for these instruments remain extremely illiquid and
as a result, the valuation of our CDOs and subprime related exposures is complex
and involves a comprehensive process, including the use of quantitative modeling
and management judgment. Valuation of these exposures will also continue to be
impacted by external market factors, including default rates, rating agency
actions, and the prices at which observable market transactions occur. Our
ability to mitigate our exposures by selling or hedging our exposures is also
limited by the market environment. Our future results may continue to be
materially impacted by the valuation adjustments that we apply to our portfolio
of residential and commercial mortgages, other asset-backed securities and CDOs.
Long-term power generation purchase contracts without corresponding
long-term power sale contracts might expose us to fluctuations in the wholesale
power markets and negatively affect our results of operations. We have entered
into agreements with certain power generation facilities to purchase all or a
substantial portion of their power generation capacity. Where there is a
corresponding long-term power sale contract, we have attempted to mitigate
risks; however, factors beyond our control, such as natural disasters impacting
a particular power generating facility or the viability of our counterparties
under such long-term power sale contracts, may cause an adverse impact to our
results of operations. To the extent we do not have a corresponding long-term
power sale contract in place, we will look to sell all or a portion of the power
capacity and other products available from certain generation facilities to the
wholesale power markets. These sales are not subject to traditional cost-based
regulation, therefore we sell these products at prices determined by the
applicable market, which may be adversely impacted by wide fluctuations in
commodity prices due to circumstances beyond our control. As a result, we are
not guaranteed any particular rate of return on our capital investments in
long-term power generation purchase contracts through mandated rates, and our
revenues and results of operations depend upon current and forward market prices
for power and related products.
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 us. 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.
-17-
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, Funding and Capital" 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 us 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 us, 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. Our 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 our
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 our market share and competitive position in the
business segments in which we operate. Material deterioration in any one or a
combination of these factors could result in a downgrade of our credit ratings,
thus increasing the cost of and/or limiting the availability of unsecured
financing. Additionally, a reduction in our 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. We are exposed to credit risk in
our 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 our
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.
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Litigation, governmental investigations and/or other legal proceedings
could adversely affect our 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 exposed to.
Extensive regulation of our businesses limits our activities and may
subject us to significant penalties. The financial services industry is subject
to extensive regulation. We are subject to regulation by governmental and
self-regulatory organizations in the U.S. and in the other jurisdictions in
which we operate around the world. These regulations are designed to ensure the
integrity of the financial markets and to protect the interests of the people
and entities participating in these markets. Consequently, these regulations
often serve to limit our activities, including through net capital, customer
protection and market conduct requirements. If we were to violate these
regulations, we would 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. In addition,
non-compliance with these regulations could have a material adverse financial
effect or cause significant reputational harm to us, 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
business.
Our participation in the U.S., Canadian and certain European energy
markets subjects us to legal, regulatory and reputational risks. Our energy
businesses are subject to extensive and evolving federal, regional, state and
local laws, rules and regulations. Intensified scrutiny of the energy markets by
governmental agencies and the public has resulted in an increase in compliance
standards and regulatory reporting requirements, as well as governmental
investigations and audits of energy market participants. An adverse audit or
investigation finding may subject to us to substantial fines and penalties and,
to the extent publicized, may cause significant reputational harm. We may also
incur substantial costs in complying with current or future laws, rules and
regulations relating to air quality, water quality, waste management,
preservation of natural resources, site remediation and health and safety at or
associated with our ownership interests in or contractual rights to power
generation facilities. We could be required to expend significant amounts of
capital for environmental monitoring, installation of pollution control
equipment, payment of emission fees, and application for, and holding of,
permits and licenses for these power generation facilities.
We are also subject to risks relating to potential disruptions at any of
the power generation facilities in which we have ownership rights or may
otherwise have contractual rights or obligations. Disruptions may occur for many
reasons, each of which may cause harm to our businesses and reputation. Many of
these disruptions are outside of our control and include the breakdown or
failure of power generation equipment, transmission lines or other equipment or
processes, whether caused by failed or improper maintenance, advanced equipment
age or natural disasters. A contractual failure of performance by third-party
suppliers or service providers, including the failure to obtain and deliver raw
materials necessary for the operation of power generation facilities, may also
cause disruptions. Where the disruption is due to unforeseen or catastrophic
events, including terrorist attacks, natural disasters or other hostile or
catastrophic events, we may not have insurance against these risks or, if we
carry such insurance, the insurance proceeds may be inadequate to cover our
losses. Market conditions or other similar disruption factors could also cause a
failure to satisfy or obtain waivers under agreements with third parties,
including lenders, which impose significant obligations on our subsidiaries that
own or otherwise have contractual rights in power generation facilities. The
occurrence of any of the foregoing events may prevent the affected facilities
from performing under applicable power sales agreements, may impair their
operations or financial results and may result in litigation or reputational
harm to us.
The financial services industry is intensely competitive. We encounter
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 do
we. We compete 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 us. 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
U.S. and other parts of the world and related U.S. military action overseas.
We have complemented and may continue to complement our growth through
acquisitions and joint ventures, which subject us to numerous risks that could
have a material adverse effect on our business, financial condition or results
of operations. Acquisitions and joint ventures may require significant capital
resources, divert management's attention from our existing business and may not
have the benefits anticipated. Acquisitions and joint ventures also entail
inherent risks and challenges, including but not limited to, difficulty with
system integration, geographic divergence, language integration and the
increasing scope, complexity and diversity of products and operations.
Acquisitions and joint ventures could also subject us to contingent or other
liabilities unknown to us at the time of the acquisition or joint venture. We
may also incur significantly greater expenditures in integrating an acquired
business or joint venture than had been initially anticipated. In addition, our
inability to retain and integrate key personnel in connection with an
acquisition could materially impair the value of an acquired business.
Managing reputational risk is paramount to the value of our brand. Our
reputation is one of our most important corporate assets, and is critical in
attracting and maintaining customers, investors and employees.
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Threats to a firm's reputation can come from many sources, including, without
limitation, unethical practices, employee misconduct, failing to deliver minimum
standards of service and quality, compliance failures and activities of
customers and affiliates. We have policies and procedures in place to protect
our reputation and promote ethical conduct, but these policies and procedures
may not be fully effective. Negative publicity regarding us, our business,
employees, customers or affiliates, whether or not true, may result in the loss
of customers, employees and investors, costly litigation, a decline in revenues
and increased governmental regulation.
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 must 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.
Future events may be different from those anticipated by our management's
assumptions and estimates, which may cause unexpected losses in the future.
Pursuant to U.S. GAAP, we are required to use certain estimates in preparing our
financial statements, including accounting estimates to determine reserves
related to future litigation and the fair value of our financial instruments,
among other items. For certain of our financial instruments, including
distressed debt, non-performing mortgage-related assets, certain mortgage-backed
securities and residual interests, Chapter 13 and other credit card receivables
from individuals, and complex and exotic derivative structures, the fair value
can only be determined based upon internally developed models or methodologies
utilizing significant inputs that are generally less readily observable from
objective sources. Should our determined values for such items prove
substantially inaccurate, we may experience unexpected losses that could be
material.
Item 1B. Unresolved Staff Comments.
None
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. At the end of the lease
arrangement, which expires on August 10, 2012, 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 occupies space
at five other locations in New York City with a combined total of approximately
538,000 square feet of space under leases expiring on various dates through the
year 2020. Elsewhere in the U.S. the Company's offices in 34 cities occupy an
aggregate of approximately 1.1 million square feet under leases expiring on
various dates through the year 2019. The Company's fourteen international
offices occupy an aggregate of approximately 311,000 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 five 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
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and accounting functions. Approximately 141,000 square feet in one of the
buildings on the property is being leased to an unaffiliated third party under a
15-year operating lease expiring in 2019.
The Company believes that the facilities it occupies are adequate for the
purposes for which they are currently used and are well maintained.
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 investment advisor, 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. 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. The Company believes,
based upon its current knowledge, after consultation with counsel, that the
resolution of the legal actions, proceedings and investigations currently
pending against it will not have a material adverse effect on the financial
condition of the Company, taken as a whole. However, in the light of the
uncertainties involved in such legal actions, proceedings, and investigations,
the ultimate resolution of these matters cannot be ascertained at this time. As
a result, the resolution of a particular matter may have a material effect on
the Company's 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 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 U.S. 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, the 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
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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.
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 appealed the final approval order to the U.S.
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. (the "New
York Action"), 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.
On September 24, 2007, the parties in the Federal Class Action entered
into a stipulation of settlement. The stipulation of settlement provides that,
subject to final approval by the District Court, the claims asserted on behalf
of the settlement class against Bear Stearns will be dismissed with prejudice
and that Bear Stearns denies any wrongdoing in connection with the claims
asserted against it in the Federal Class Action. Under the stipulation of
settlement, promptly following preliminary approval of the settlement by the
District Court, Bear Stearns will withdraw its appeal of the District Court's
approval of McKesson's settlement of the Federal Class Action. The District
Court granted preliminary approval on September 28, 2007. Pursuant to the
stipulation of settlement, on October 9, 2007, Bear Stearns withdrew its appeal
in the U.S. Circuit Court of Appeals for the Ninth Circuit. On January 18, 2008,
the District Court gave final approval to the settlement of the Federal Class
Action and entered a judgment for dismissal. Bear Stearns has agreed to dismiss
its claims against McKesson in the New York Action and Bear Stearns and McKesson
have agreed to exchange mutual releases. Bear Stearns will make no payment in
connection with the settlement.
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 U.S. 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 U.S. 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.
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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 appealed the Bankruptcy Court's decision to the U.S.
District for the Southern District of New York.
On appeal, the District Court affirmed the Bankruptcy Court's findings in
part, but also reversed in part, the Bankruptcy's Court's grant of summary
judgment to the Trustee, finding that a trial is necessary to make a factual
finding as to whether BSSC acted in good faith with respect to its receipt of
the alleged fraudulent transfers.
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 U.S.
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 U.S.
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 had denied the motion to
dismiss filed by BSIL and BSSC. Defendants filed a motion with the U.S. 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.
The parties reached a mutual agreement to settle this proceeding. By Order
dated December 3, 2007, the Bankruptcy Court approved the terms of the parties'
settlement.
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 U.S. 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.
-23-
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 recovery 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 the 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 in the
aftermarket, purchased technology-related securities during the period March
1997 to December 2000. The 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 District Court granted the defendants' (including Bear Stearns')
motion to dismiss all claims asserted against them by these antitrust
plaintiffs. The plaintiffs appealed that decision to the Second Circuit Court of
Appeals and on September 28, 2005, the Court of Appeals vacated the dismissal
and remanded this matter to the lower court for further proceedings.
On December 7, 2006, the U.S. Supreme Court granted defendants' petition
for certiorari to appeal the decision issued by the Second Circuit Court of
Appeals. On June 18, 2007, the U.S. Supreme Court reversed the Second Circuit
Court of Appeals' decision.
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 U.S. 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 Bear Stearns 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. The Issuer plaintiffs appealed the
District Court's ruling to the U.S. Court of Appeals for the Second Circuit. By
Order dated September 11, 2007, the Second Circuit reversed the District Court's
denial of
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class certification and remanded the matter back to the District Court for
further consideration of certain questions specified in the Second Circuit's
Order.
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 U.S. District Court for
the Southern District of New York by a mutual fund investor on behalf of persons
who purchased and/or sold ownership units of mutual funds 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.
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 U.S. 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 U.S. 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.
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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 reached an agreement in principle to settle the action against
all defendants, including Bear Stearns. On September 19, 2007, the Court
approved the settlement and the case was dismissed with prejudice. Pursuant to
the settlement, Bear Stearns was not required to make any payments, and obtained
a full release of all claims that were asserted against it.
Short Selling Litigation
The Company, along with numerous other financial services firms, was named
as a defendant in a purported class action filed in the U.S. 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 generally
alleged that the customers were charged fees in connection with the short sales
but that the applicable securities were not necessarily borrowed to effect
delivery, which resulted in failed deliveries of the securities and/or excess
charges to the customers. The complaint alleged that this conduct constituted a
conspiracy in violation of the federal antitrust laws, and also asserts New York
state-law claims.
Defendants moved to dismiss the complaint on March 15, 2007. On December
20, 2007, the District Court dismissed the complaint in its entirety, dismissing
the federal antitrust claims with prejudice, and the state-law claims without
prejudice, as to all defendants, and directing that the case be closed.
BSSC, 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.
BSSC believes it has substantial defenses to the claims brought in these
actions.
Mortgage-Related Matters
The Company has received requests for information from various regulatory
and governmental entities relating to subprime mortgages, mortgage
securitizations, collateralized debt obligations, and synthetic products related
to subprime mortgages. The Company is cooperating with the requests.
BSAM-Managed Hedge Fund Matters
The Company, Bear Stearns, BSAM, BSSC and/or certain individual current or
former employees have been named as defendants in two purported class action
complaints relating to the Bear Stearns High Grade Structured Credit Strategies
Master Fund, Ltd. (the "High Grade Fund") and the Bear Stearns High Grade
Structured Credit Strategies Enhanced Leverage Master Fund, Ltd. (the "Enhanced
Leverage Fund"). BSAM served as investment manager for both of these funds.
The first action, titled Navigator Capital Partners, L.P. v. BSAM, et al.,
was filed on August 6, 2007 in New York State Supreme Court. The action is
styled as both a purported class action on behalf of purchasers of partnership
interests in Bear Stearns High Grade Structured Credit Strategies Fund, L.P.
(the "HG Partnership"), also known as a "feeder fund," which invested
substantially all of its assets in the High Grade Fund, as well as a derivative
action on behalf of the HG Partnership as a nominal defendant. The Complaint
asserts claims for breaches of fiduciary duty against BSAM and the individual
defendants. The remaining defendants are alleged to have aided and abetted in
the breaches of fiduciary duty. The named plaintiff in this action alleges that
it purchased in excess of $700,000 of Partnership interests. The relief being
sought by the plaintiff is unspecified damages, costs and fees.
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The second action, titled FIC, L.P. v. BSAM, et al., was filed on December
21, 2007 in the U.S. District Court for the Southern District of New York. The
action was brought by a purchaser of partnership interests in the Bear Stearns
High Grade Structured Credit Strategies Enhanced Leverage Fund, L.P., also known
as a "feeder fund," which invested substantially all its assets synthetically
through a leverage instrument to conduct activities indirectly through an
investment in the Enhanced Leverage Fund. The Complaint asserts claims for
breach of contract and breaches of fiduciary duty against BSAM and the
individual defendants. The remaining defendants are charged with having aided
and abetted in the breaches of fiduciary duty. The relief being sought by the
plaintiff is unspecified damages, costs and fees.
Also, the Company, Bear Stearns, BSAM, and certain individual employees
have been named as defendants in an action filed by Barclays Bank PLC
("Barclays") on December 20, 2007 in the U.S. District Court for the Southern
District of New York. The complaint asserts claims for, among other things,
fraud, breach of fiduciary duty, and negligent misrepresentation for the conduct
of defendants relating to the Enhanced Leverage Fund, and transactions Barclays
entered into with the feeder funds of the Enhanced Leverage Fund. The relief
being sought by Barclays is unspecified compensatory and punitive damages,
costs, and fees.
In addition, one or more of Bear Stearns, BSAM, BSSC, and/or certain
individual current or former employees have been named as respondents in
multiple FINRA arbitrations related to investments in feeder funds of the High
Grade Fund and/or the Enhanced Leverage Fund. The relief being sought by the
claimants in these arbitrations is compensatory damages, unspecified punitive
damages, costs and expenses.
The Company believes it has substantial defenses to claims asserted
against it in these proceedings.
The Company has also been contacted by and received requests for
information and documents from various federal and state regulatory and law
enforcement authorities regarding the High Grade Fund and the Enhanced Leverage
Fund, including the Securities and Exchange Commission, the U.S. Attorney's
Office for the Eastern District of New York and the Securities Division of the
Commonwealth of Massachusetts (the "Securities Division"). On November 14, 2007,
the Securities Division filed an administrative complaint against BSAM alleging
that BSAM violated multiple provisions of the Massachusetts Securities Act by
failing to adequately disclose and/or manage conflicts of interest related to
procedures for related party transactions.
Derivative Actions
Samuel T. Cohen v. Board of Directors and certain of the Company's present
and former executive officers: On or about December 19, 2007, a shareholder of
the Company commenced a purported shareholder derivative suit in the U.S.
District Court for the Southern District of New York against the Company's Board
of Directors and certain of its present and former executive officers. The
Company is named as a nominal defendant. The Complaint asserts claims for
breaches of fiduciary duty, corporate mismanagement, waste and violations of the
federal securities laws in connection with losses sustained by the Company as a
result of its purchases of residential sub-prime loans. Plaintiff seeks
compensatory damages in an unspecified amount and an order directing the Company
to improve its corporate governance procedures.
Jerome Birn v. Board of Directors and certain of the Company's present and
former executive officers: On or about January 23, 2008, a shareholder of the
Company commenced a purported shareholder derivative suit in the U.S. District
Court for the Southern District of New York against the Company's Board of
Directors and certain of its present and former executive officers. The Company
is named as a nominal defendant. The Complaint asserts claims for breaches of
fiduciary duty, waste of corporate assets, unjust enrichment and violations of
the federal securities laws in connection with losses sustained by the Company
as a result of its purchases of residential sub-prime loans and certain
repurchases of its own common shares. Plaintiff seeks compensatory damages in an
unspecified amount and an order directing the Company to improve its corporate
governance procedures.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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Executive Officers of the Registrant
Set forth below are the names, ages, titles, principal occupation and
certain biographical information as of January 21, 2008 concerning the Company's
executive officers. All of the Company's officers have been appointed by and
serve at the discretion of the Board of Directors.
Age as of
January 21,
Name 2008 Principal Occupation
-------------------------- --------- -----------------------------------------
Alan D. Schwartz......... 57 President 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........ 43 Senior Vice President-Finance of the
Company and Controller of the Company
and Bear Stearns
Alan C. Greenberg........ 80 Chairman of the Executive Committee
Jeffrey Mayer............ 48 Executive Vice President, Co-Head of
the Fixed Income Division of the
Company and Bear Stearns and member of
the Executive Committee
Samuel L. Molinaro Jr.... 50 Executive Vice President, Chief
Financial Officer and Chief Operating
Officer of the Company and Bear Stearns
and member of the Executive Committee
Michael S. Solender...... 43 General Counsel of the Company and Bear
Stearns
Mr. Schwartz became Chief Executive Officer of the Company and Bear
Stearns in January 2008. Mr. Schwartz became sole President of the Company and
Bear Stearns in August 2007. Mr. Schwartz became a President of the Company and
Bear Stearns and a member of the Executive Committee in June 2001. Mr. Schwartz
was Co-Chief Operating Officer of the Company and Bear Stearns from June 2001 to
August 2007.
Mr. Farber became Senior Vice President-Finance of the Company in February
2007, and has been Controller of the Company and Bear Stearns since January
2004. Mr. Farber was Assistant Controller of the Company from May 2000 to
January 2004, and since May 2000 has been 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 2001 was Chairman of the Board of the Company.
Mr. Mayer became Executive Vice President of the Company and Bear Stearns
on August 2007, and has been Co-Head of the Fixed Income Division of the Company
and Bear Stearns since March 2002. In August 2007 Mr. Mayer became a member of
the Executive Committee.
Mr. Molinaro became Chief Operating Officer for the Company and Bear
Stearns in August 2007. Mr. Molinaro became Executive Vice President of the
Company and Bear Stearns in December 2001, and has been Chief Financial Officer
of the Company and Bear Stearns since October 1996.
Mr. Solender became General Counsel of the Company and Bear Stearns in
January 2004. Since February 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 had been General Counsel of the U.S.
Consumer Product Safety Commission from January 2000 to November 2001.
-28-
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
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
information regarding securities authorized for issuance under equity
compensation plans will be set forth under the caption "Equity Compensation Plan
Information" in the registrant's proxy statement to be forwarded to stockholders
in connection with the solicitation of proxies by the Company's Board of
Directors for use at the 2008 Annual Meeting of Stockholders to be held on April
16, 2008 and incorporated herein by reference.
The following table provides information as of November 30, 2007 with
respect to the shares of common stock repurchased by the Company during the
fourth quarter of fiscal 2007:
Issuer Purchases of Equity Securities
[Enlarge/Download Table]
(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 Yet Be Purchased Under
Period Purchased per Share Plans or Programs (1) the Plans or Programs (1)
---------------- -------------- -------------- -------------------------- -------------------------
9/1/07-9/30/07 --- $ --- --- $2,590,979,572
10/1/07-10/31/07 1,107,610 $119.12 1,107,610 $2,459,038,371
11/1/07-11/30/07 2,333,543 $103.19 2,333,543 $2,218,229,353
Total 3,441,153 $108.32 3,441,153
(1) On December 13, 2006, the Board of Directors of the Company approved
an amendment to the Stock Repurchase Program ("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. In addition, on September 18,
2007, the Board of Directors of the Company approved an amendment to the
Repurchase Program authorizing the purchase of up to $2.5 billion of common
stock in fiscal 2007 and beyond. This amendment supersedes the previous $2.0
billion authorization. During the fiscal year ended November 30, 2007, the
Company purchased under the current and prior authorizations approximately 11.9
million shares at a cost of approximately $1.6 billion of which 3.4 million
shares at a cost of $374 million were purchased pursuant to corporate share
repurchases. Approximately $2.1 billion was available to be purchased under the
current authorization as of November 30, 2007. The Repurchase Program will be
used to acquire both shares of common stock for the Company's employee stock
award plans and for up to $1.0 billion in corporate share repurchases. The
Company expects to utilize the repurchase authorization to offset the dilutive
impact of annual share awards. Purchases may be made in the open market or
through privately negotiated transactions. The Company may, depending on price
and other factors, repurchase additional shares in excess of that required for
annual share awards.
During the fiscal year ended November 30, 2007, the Company also purchased
711,557 shares of its common stock at a total cost of $108 million pursuant to a
$200 million amendment to the CAP Plan Earnings Purchase Authorization, which
was approved by the Compensation Committee of the Board of Directors of the
Company on December 12, 2006. Approximately $92 million of this authorization is
remaining for future repurchases as of November 30, 2007.
The repurchase programs have no set expiration or termination date.
-29-
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,as
amended (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 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 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 files or 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.
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
-30-
over financial reporting to determine whether any changes occurred during the
fourth fiscal quarter covered by this report that have materially affected, or
are reasonably likely to materially affect, Company's internal control over
financial reporting. Based on that evaluation, there has been no such change in
the Company's internal control over financial reporting during the fourth fiscal
quarter covered by this annual report.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required to be furnished pursuant to this item with
respect to Directors of the Company, procedures by which stockholders may
recommend nominees to the Company's Board of Directors and audit committee
financial expert 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 2008 Annual Meeting of Stockholders to be held
on April 16, 2008, and is incorporated herein by reference. 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.
The information required to be furnished pursuant to this item with
respect to the Company's Code is included in Part I, Item 1 of this report.
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 caption "Election of Directors" in the Proxy Statement, and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
The information required to be furnished pursuant to this item will be set
forth under the caption "Ratification of Selection of Independent Auditors" in
the Proxy Statement, and is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
-31-
(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, and the required schedules appear on pages F-3 -
F-7.
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).
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(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, February 28, 2006 and April 18, 2007 (incorporated by
reference to Exhibit (10.3) to the registrant's Quarterly Report on
Form 10-Q for its fiscal quarter ended May 31, 2007).*
(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 and
April 18, 2007 (incorporated by reference to Exhibit (10.1) to the
registrant's Quarterly Report on Form 10-Q for its fiscal quarter
ended May 31, 2007).*
-33-
(10)(a)(5) Non-Employee Directors' Stock Option and Stock Unit Plan, amended
and restated as of January 8, 2002 (incorporated by reference to
Exhibit 10(a)(1) to the registrant's Quarterly Report on Form 10-Q
for its fiscal quarter ended August 31, 2002).*
(10)(a)(6) Restricted Stock Unit Plan, as amended and restated as of March 31,
2004 and April 18, 2007 (incorporated by reference to Exhibit (10.2)
to the registrant's Quarterly Report on Form 10-Q for its fiscal
quarter ended May 31, 2007).*
(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)(a)(13) Agreement and Release dated November 15, 2007 with Warren Spector
(incorporated by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K filed with the Commission on November 21,
2007).*
(10)(a)(14) 2007 Performance Compensation Plan (incorporated by reference to
Exhibit 10.4 to the registrant's Current Report on Form 8-K filed
with the Commission on April 24, 2007).*
(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) + 2007 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 (incorporated by
reference to Exhibit 18 to the registrant's Annual Report on Form
10-K for its fiscal year ended November 30, 2006).
(21) + Subsidiaries of the registrant.
(23) + Consent of Deloitte & Touche LLP.
-34-
(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.
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
January 2008.
THE BEAR STEARNS COMPANIES INC.
(Registrant)
By: /s/ SAMUEL L. MOLINARO JR.
------------------------------
Samuel L. Molinaro Jr.
Executive Vice President,
Chief Financial Officer and Chief
Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 29th day of January 2008.
NAME TITLE
---- -----
/s/ ALAN C. GREENBERG Chairman of the Executive Committee and
---------------------------- Director
Alan C. Greenberg
/s/ JAMES E. CAYNE
----------------------------
James E. Cayne Chairman of the Board and Director
/s/ ALAN D. SCHWARTZ President, Chief Executive Officer
---------------------------- (Principal Executive Officer) and
Alan D. Schwartz Director
/s/ HENRY S. BIENEN
----------------------------
Henry S. Bienen Director
/s/ CARL D. GLICKMAN
----------------------------
Carl D. Glickman Director
/s/ MICHAEL GOLDSTEIN
----------------------------
Michael Goldstein Director
/s/ DONALD J. HARRINGTON
----------------------------
Donald J. Harrington Director
/s/ FRANK T. NICKELL
----------------------------
Frank T. Nickell Director
/s/ PAUL A. NOVELLY
----------------------------
Paul A. Novelly Director
/s/ FREDERIC V. SALERNO
----------------------------
Frederic V. Salerno Director
/s/ VINCENT TESE
----------------------------
Vincent Tese Director
/s/ WESLEY S. WILLIAMS JR.
----------------------------
Wesley S. Williams Jr. Director
/s/ SAMUEL L. MOLINARO JR. Executive Vice President, Chief Financial
---------------------------- Officer (Principal Financial Officer) and
Samuel L. Molinaro Jr. Chief Operating Officer
/s/ JEFFREY M. FARBER Senior Vice President-Finance and
---------------------------- Controller
Jeffrey M. Farber (Principal Accounting Officer)
-36-
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 78
Reporting
Report of Independent Registered Public Accounting Firm 79-80
The Bear Stearns Companies Inc.
(i) Consolidated Statements of Income-fiscal years ended
November 30, 2007, 2006 and 2005 81
(ii) Consolidated Statements of Financial Condition at
November 30, 2007 and 2006 82
(iii) Consolidated Statements of Cash Flows-fiscal years ended
November 30, 2007, 2006 and 2005 83
(iv) Consolidated Statements of Changes in Stockholders'
Equity-fiscal years ended November 30, 2007, 2006 and 84-85
2005
(v) Consolidated Statements of Comprehensive Income-fiscal
years ended November 30, 2007, 2006 and 2005 86
(vi) Notes to Consolidated Financial Statements 87-126
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 2007 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, 2007 and
2006, and for each of the three years in the period ended November 30, 2007, and
the Company's internal control over financial reporting as of November 30, 2007,
and have issued our reports thereon dated January 28, 2008 (such report on the
consolidated financial statements expresses an unqualified opinion and includes
an explanatory paragraph relating to the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 155, "Accounting for Certain Hybrid
Instruments, an amendment of FASB Statements No. 133 and 140" and SFAS No. 157,
"Fair Value Measurements"); such consolidated financial statements and reports
are included in your 2007 Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included the financial statement schedule
(Schedule I) of The Bear Stearns Companies Inc. (Parent Company Only), listed in
Item 15. This 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 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.
Effective December 1, 2006, the Company adopted SFAS No. 155, "Accounting for
Certain Hybrid Instruments, an amendment of FASB Statements No. 133 and 140" and
SFAS No. 157, "Fair Value Measurements."
/s/ Deloitte & Touche LLP
New York, New York
January 28, 2008
F-2
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE BEAR STEARNS COMPANIES INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
(in millions)
Fiscal Years Ended November 30, 2007 2006 2005
REVENUES
Interest.................................... $4,102 $3,157 $1,233
Other....................................... 534 195 248
------ ------ ------
4,636 3,352 1,481
====== ====== ======
EXPENSES
Interest.................................... 4,235 3,387 1,582
Other....................................... 198 206 196
------ ------ ------
4,433 3,593 1,778
------ ------ ------
Income (loss) before benefit from income
taxes and equity in earnings of 203 (241) (297)
subsidiaries.............................
(Provision for) benefit from income taxes... (160) 20 96
------ ------ ------
Income (loss) before equity in earnings of 43 (221) (201)
subsidiaries
Equity in earnings of subsidiaries, net of tax 190 2,275 1,663
------ ------ ------
Net income.................................. $ 233 $2,054 $1,462
====== ====== ======
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 millions, except share data)
As of November 30, 2007 2006
-------- --------
ASSETS
Cash and cash equivalents............................. $ 17,401 $ 2,007
Securities purchased under agreements to resell....... 1,409 97
Receivables from subsidiaries......................... 47,985 67,185
Subordinated loans receivable from subsidiaries....... 12,948 9,963
Investments in subsidiaries, at equity................ 8,097 7,975
Assets of variable interest entities.................. 650 575
Other assets.......................................... 7,587 3,580
-------- --------
Total Assets.......................................... $ 96,077 $ 91,382
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unsecured short-term borrowings....................... $ 8,723 $ 19,467
Collateralized financings............................. 122 --
Payables to subsidiaries.............................. 6,961 6,573
Liabilities of variable interest entities............. 205 220
Other liabilities and accrued expenses................ 2,345 1,102
-------- --------
18,356 27,362
-------- --------
Commitments and contingencies (Note 1)
Long-term borrowings.................................. 65,665 51,628
Long-term borrowings from subsidiaries................ 263 263
STOCKHOLDERS' EQUITY
Preferred stock....................................... 352 359
Common stock, $1.00 par value; 500,000,000 shares
authorized as of November 30, 2007 and 2006;
184,805,847 shares issued as of November 30, 2007
and 2006........................................... 185 185
Paid-in capital....................................... 4,986 4,579
Retained earnings..................................... 9,441 9,385
Employee stock compensation plans..................... 2,478 2,066
Accumulated other comprehensive loss.................. (8) --
Treasury stock, at cost:
Common stock: 71,807,227and 67,396,876 shares as of
November 30, 2007 and 2006, respectively......... (5,641) (4,445)
-------- --------
Total Stockholders' Equity............................ 11,793 12,129
-------- --------
Total Liabilities and Stockholders' Equity............ $ 96,077 $ 91,382
======== ========
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 millions)
[Download Table]
Fiscal Years Ended November 30, 2007 2006 2005
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................... $ 233 $ 2,054 $ 1,462
Adjustments to reconcile net income to cash
provided by operating activities:
Non-cash items included in net income:
Employee stock compensation plans ........ 31 1,010 801
Equity in earnings of subsidiaries, net
of dividends received ................. (1,292) (493) (876)
Other .................................... 14 10 10
Decreases (increases) in assets:
Securities purchased under agreements to
resell ..................................... (1,312) 77 99
Other assets ............................... (2,397) 1,007 (34)
Increases (decreases) in liabilities:
Payables to subsidiaries ................... 388 1,566 1,276
Other liabilities and accrued expenses ..... 2,071 (50) 306
-------- -------- -------
Cash (used in) provided by operating
activities .................................. (2,264) 5,181 3,044
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net .................... (10,744) 9,898 4,524
Collateralized financings ..................... 122 -- --
Proceeds from issuance of long-term borrowings 21,193 16,503 14,112
Issuance of common stock ...................... 162 289 202
Cash retained resulting from tax deductibility
under share-based payment arrangements ..... 254 363 426
Redemption of preferred stock ................. (7) (13) (76)
Payments for:
Retirement of long-term borrowings ......... (8,865) (7,143) (5,966)
Treasury stock purchases ................... (1,670) (1,374) (870)
Cash dividends paid ........................... (172) (155) (139)
-------- -------- -------
Cash provided by financing activities ......... 273 18,368 12,213
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Receivables from subsidiaries ................. 19,200 (23,691) (11,313)
Subordinated loans receivable from subsidiaries (2,985) 223 (1,469)
Investments in subsidiaries, net .............. 1,170 (228) (321)
-------- -------- -------
Cash provided by (used in) investing
activities ................................. 17,385 (23,696) (13,103)
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 15,394 (147) 2,154
Cash and cash equivalents, beginning of fiscal
year .......................................... 2,007 2,154 --
-------- -------- -------
Cash and cash equivalents, end of fiscal year.. $ 17,401 $ 2,007 $ 2,154
======== ======== =======
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. 2007 Annual Report to Stockholders (the
"Annual Report") incorporated by reference in this Form 10-K.
The condensed unconsolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United
States of America which require management to make certain estimates and
assumptions, including those regarding fair value measurements,
stock-based 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 Financial Instruments (Note 3)
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
"Hedging 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
$561 million, $709 million and $146 million for the fiscal years ended
November 30, 2007, 2006 and 2005, respectively. Cash payments for income
taxes, net of refunds, would have been approximately $815 million, $1.1
billion and $572 million for the fiscal years ended November 30, 2007,
2006 and 2005, 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 $1.5 billion, $1.8 billion and $787 million for the fiscal
years ended November 30, 2007, 2006 and 2005, 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
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 8/10/12 | | 20 |
| | 4/16/08 | | 1 | | 31 | | | 425 |
| Filed on: | | 1/29/08 | | | | | | | FWP |
| | 1/28/08 | | 38 | | | | | 4 |
| | 1/23/08 | | 27 | | | | | 424B5 |
| | 1/21/08 | | 28 |
| | 1/18/08 | | 22 |
| | 1/16/08 | | 1 | | | | | FWP |
| | 12/21/07 | | 27 | | | | | 4, 8-K, S-8 POS |
| | 12/20/07 | | 26 | | 27 | | | 4/A, 8-K |
| | 12/19/07 | | 27 |
| | 12/3/07 | | 23 | | | | | 424B2, FWP |
| For Period End: | | 11/30/07 | | 1 | | 43 | | | 10-K/A, 4, 424B2 |
| | 11/21/07 | | 34 | | | | | 8-K |
| | 11/15/07 | | 34 | | | | | 424B2, 8-K |
| | 11/14/07 | | 27 | | | | | 424B5, 8-K |
| | 10/9/07 | | 22 | | | | | 424B2, FWP |
| | 9/28/07 | | 22 | | | | | FWP |
| | 9/24/07 | | 22 |
| | 9/19/07 | | 26 | | | | | FWP |
| | 9/18/07 | | 29 |
| | 9/11/07 | | 24 |
| | 8/6/07 | | 26 |
| | 6/18/07 | | 24 |
| | 5/31/07 | | 1 | | 34 | | | 10-Q, 4, 8-K |
| | 4/24/07 | | 34 | | | | | 8-K |
| | 4/18/07 | | 33 | | 34 | | | 4, 8-K, DEF 14A |
| | 3/15/07 | | 26 | | | | | 424B2, 8-K, FWP |
| | 1/9/07 | | 23 |
| | 12/13/06 | | 29 |
| | 12/12/06 | | 29 | | | | | 424B5 |
| | 12/7/06 | | 24 | | | | | FWP |
| | 12/5/06 | | 24 | | | | | 424B2 |
| | 12/1/06 | | 38 | | | | | 4 |
| | 11/30/06 | | 4 | | 43 | | | 10-K, 4, 8-K |
| | 11/14/06 | | 32 | | | | | POSASR |
| | 10/25/06 | | 22 | | | | | 424B2, 424B5 |
| | 5/2/06 | | 23 |
| | 4/24/06 | | 22 |
| | 4/18/06 | | 24 |
| | 2/28/06 | | 33 | | | | | 10-Q, 4, 8-K |
| | 2/24/06 | | 22 |
| | 2/8/06 | | 33 | | | | | 4 |
| | 12/31/05 | | 25 |
| | 12/15/05 | | 33 | | | | | 8-K |
| | 12/8/05 | | 22 |
| | 11/30/05 | | 5 | | 43 | | | 10-K, 10-K/A, 4, 8-K |
| | 11/3/05 | | 25 |
| | 10/25/05 | | 24 |
| | 10/3/05 | | 26 | | | | | 424B3, 424B5 |
| | 9/28/05 | | 24 |
| | 9/6/05 | | 34 | | | | | 4, 424B5 |
| | 8/31/05 | | 34 | | | | | 10-Q, 4, 8-K |
| | 7/15/05 | | 26 |
| | 7/12/05 | | 22 |
| | 6/3/05 | | 23 |
| | 5/23/05 | | 22 | | | | | 424B5 |
| | 2/15/05 | | 24 | | | | | SC 13G |
| | 2/9/05 | | 33 |
| | 1/12/05 | | 21 |
| | 1/4/05 | | 34 | | | | | 4, 8-K |
| | 11/30/04 | | 33 | | 34 | | | 10-K, 4 |
| | 11/23/04 | | 33 | | | | | 4, 8-K |
| | 11/18/04 | | 33 | | | | | 8-K |
| | 10/13/04 | | 24 |
| | 9/29/04 | | 25 | | | | | 4 |
| | 9/16/04 | | 24 |
| | 9/15/04 | | 25 | | | | | 424B3 |
| | 5/31/04 | | 33 | | | | | 10-Q |
| | 3/31/04 | | 33 | | 34 | | | 4, DEF 14A |
| | 3/19/04 | | 25 | | | | | 424B5 |
| | 2/24/04 | | 24 | | | | | 424B5 |
| | 1/26/04 | | 25 | | | | | 424B3, 8-K |
| | 11/30/03 | | 34 | | | | | 10-K |
| | 11/25/03 | | 23 | | | | | 4, S-8 POS |
| | 11/18/03 | | 33 | | | | | 424B5, 8-K |
| | 11/7/03 | | 25 |
| | 11/6/03 | | 24 | | | | | 4 |
| | 10/22/03 | | 25 | | | | | 424B3 |
| | 10/15/03 | | 25 | | | | | 10-Q |
| | 7/17/03 | | 33 | | | | | 8-A12B, 8-K |
| | 7/9/03 | | 33 |
| | 7/3/03 | | 25 | | | | | 424B3 |
| | 4/23/03 | | 34 | | | | | 4 |
| | 3/7/03 | | 21 |
| | 2/28/03 | | 33 | | | | | 10-K, 10-Q, 4, DEFR14A |
| | 1/6/03 | | 21 |
| | 10/17/02 | | 23 |
| | 8/31/02 | | 34 | | | | | 10-Q |
| | 6/28/02 | | 33 |
| | 4/19/02 | | 23 |
| | 3/21/02 | | 22 |
| | 2/15/02 | | 21 |
| | 1/15/02 | | 32 | | | | | 424B3, 8-K |
| | 1/8/02 | | 32 | | 34 | | | 8-K |
| | 11/30/01 | | 34 | | | | | 10-K405, S-8 |
| | 7/6/01 | | 24 |
| | 6/29/01 | | 33 |
| | 4/24/01 | | 22 | | | | | 424B5 |
| | 3/15/01 | | 24 |
| | 11/29/00 | | 33 |
| | 4/12/00 | | 26 | | | | | 424B3 |
| | 12/20/99 | | 34 | | | | | 424B3 |
| | 10/28/99 | | 33 | | | | | 424B3, DEF 14A |
| | 7/1/99 | | 33 |
| | 6/29/99 | | 21 |
| | 4/27/99 | | 21 |
| | 1/22/99 | | 21 | | | | | 424B3, 8-K |
| | 1/12/99 | | 21 | | | | | 424B3 |
| | 11/27/98 | | 21 |
| | 11/1/98 | | 25 |
| | 10/18/98 | | 21 |
| | 10/17/98 | | 25 |
| | 6/18/98 | | 32 | | | | | 8-A12B |
| | 4/20/98 | | 32 | | | | | 424B3, 424B5, 8-A12B |
| | 2/2/98 | | 33 | | | | | 424B3, 8-K |
| | 1/29/98 | | 33 |
| | 1/14/98 | | 32 | | | | | 424B5, 8-A12B, 8-K |
| | 4/10/97 | | 15 |
| | 1/20/97 | | 21 |
| | 6/30/96 | | 34 | | | | | 10-K, 8-K |
| | 4/29/96 | | 34 | | | | | 424B3 |
| | 11/27/95 | | 15 | | | | | 424B3 |
| | 1/1/95 | | 34 |
| | 6/30/92 | | 34 |
| List all Filings |
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Filing Submission 0000914121-08-000077 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
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