2004 LTIP Plan Rules : BSC

III. APPROVAL OF AMENDMENT TO THE STOCK AWARD PLAN

General


The Stock Award Plan was adopted by the Board of Directors on September 28, 1999 and was approved by stockholders at the 1999 Annual Meeting. Amendments to the Stock Award Plan increasing the number of shares available for issuance under the Plan were approved by stockholders at the 2001 and 2002 Annual Meetings.


The purpose of the Stock Award Plan is to provide the Company with greater flexibility in the composition of incentive awards and to secure for the Company and its stockholders the continued services of key employees who are important to the success and growth of the business of the Company and its subsidiaries. The Company believes that awards under the Stock Award Plan may serve to broaden the equity participation of such key employees and further link the long-term interests of management and stockholders. The Company will consider awards pursuant to the Stock Award Plan in light of its overall compensation philosophy and competitive conditions in the marketplace. The Company intends to grant future stock options pursuant to the Stock Award Plan in concert with employee participation in the CAP Plan.


The Company relies on the CAP Plan to provide long-term incentive compensation to the Company's key executives. The Company adopted the Stock Award Plan in the belief that the flexibility to selectively use options as part of an overall compensation package for key employees may enhance the Company's ability to attract and retain such individuals in an intensely competitive business environment. A number of the Company's competitors utilize equity awards as a significant component of their incentive compensation programs. The use of equity-based compensation as a larger percentage of total compensation should more closely align executive incentives with the long-term goals of the Company's stockholders in a tax-efficient manner.

Proposed Amendment to the Stock Award Plan


Currently, an aggregate of 35,000,000 shares of Common Stock are subject to the Stock Award Plan. Shares subject to options which terminate or expire unexercised will become available for future option grants. The Company granted 5,707,869 options related to performance in fiscal 2003. In light of the fact that equity compensation is a significant component of the Company's compensation structure, on February 19, 2004, the Board of Directors approved an amendment to the Stock Award Plan, subject to stockholder approval at the Annual Meeting, to increase the number of authorized shares of Common Stock available for the grant of options under the Stock Award Plan to 40,000,000 shares (subject to adjustment as described below and provided in the Plan). The proposed increase in the aggregate number of shares available for the grant of options is intended to enhance the Company's flexibility in structuring incentive awards by facilitating future stock option grants.


Set forth below is the text of revised section 3.1 of the Stock Award Plan containing the amendment being proposed at the Annual Meeting. The amendment is qualified in its entirety by reference to such text.


The text of section 3.1 shall be amended to read as follows:


"3.1 Number Of Shares. Subject to the provisions of Paragraph 17 (relating to adjustments upon changes in capitalization), the number of shares of Common Stock subject at any one time to options granted under the Plan, plus the number of shares of Common Stock theretofore issued or delivered pursuant to the exercise of options granted under the Plan, shall not exceed 40,000,000 shares. If and to the extent that options granted under the Plan terminate, expire or are cancelled without having been exercised, new options may be granted under the Plan with respect to the shares of Common Stock covered by such terminated, expired or cancelled options; provided, that the granting and terms of such new options shall in all respects comply with the provisions of the Plan."

Description of The Stock Award Plan


All references to the "Plan" in the remaining text of this subsection shall mean the Stock Award Plan. The summary of the material terms of the Stock Award Plan is qualified in its entirety by reference to the full text of the Stock Award Plan, a copy of which is attached to this Proxy Statement as Exhibit B.


The determination of employee recipients of options and awards, their terms and conditions within the parameters of the Plan and the number of shares covered by each option or award is determined and administered by the Compensation Committee.

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Incentive Stock Options; Non-Qualified Stock Options and Stock Appreciation Rights


Key employees of the Company or any of its subsidiaries, including executive officers and directors, to the extent that they are key employees of the Company or any of its subsidiaries, are eligible to participate in the Plan based upon its terms and conditions. Awards may be granted by the Compensation Committee and may include: (1) options to purchase shares of Common Stock in the form of incentive stock options, as defined in Section 422 of the Internal Revenue Code ("ISOs"), or non-qualified stock options and (2) stock appreciation rights granted in tandem with such options ("SARs"). At the time of original grant of options, the Compensation Committee may also authorize the grant of reload options, which shall be non-qualified stock options for such number of shares of Common Stock as were used by the participant to pay the purchase price upon the exercise of previously granted options, but are still subject to the other terms set forth in the Plan. For each calendar year, during any part of which the Plan is in effect, no participant may be granted awards relating in the aggregate to more than 1,000,000 shares of Common Stock, as adjusted to reflect certain changes to the outstanding Common Stock pursuant to the Plan. Awards of options and SARs are not transferable except by will or the laws of descent and distribution. However, non-qualified stock options may be transferred, for no consideration, to certain family members of the Plan participant or to trusts for such family members.


The option price per share of options granted under the Plan will be determined by the Compensation Committee. However, the per share option price of any ISO shall not be less than the fair market value (as defined below) of a share of Common Stock at the time the ISO is granted, and the per share option price of any non-qualified stock option shall not be less than the fair market value of a share of Common Stock at the time the non-qualified stock option is granted. The "fair market value" of the Common Stock on any date means (1) if the Common Stock is listed on a national securities exchange or quotation system, the closing sales price on such exchange or quotation system on such date or, in the absence of reported sales on such date, the closing sales price on the immediately preceding date on which sales were reported, (2) if the Common Stock is not listed on a national securities exchange or quotation system, the mean between the bid and offered prices as quoted by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") for such date or (3) if the Common Stock is neither listed on a national securities exchange or quotation system nor quoted by NASDAQ, the fair value as determined by such other method as the Compensation Committee determines in good faith to be reasonable. At the close of trading on February 26, 2004, the closing sales price of the Common Stock as reported on the NYSE was $87.33 per share. Each option will be exercisable at such times, or upon the occurrence of such events, and in such amount, as may be determined by the Compensation Committee and stated in the option award agreement. The term of each option may not exceed ten years from the date of grant. Payment of the option price upon exercise of an option may be made (1) by check payable to the Company, (2) with the consent of the Compensation Committee by delivery of Common Stock already owned by the optionee for at least six months (which may include shares received as the result of a prior exercise of an option) having a fair market value (determined as of the date such option is exercised) equal to all or part of the aggregate purchase price, (3) in accordance with a cashless exercise program as specified in the Plan or (4) by any combination of the foregoing alternatives or by any other means that the Compensation Committee deems appropriate. No optionee will have any rights to dividends or other rights of a stockholder with respect to his or her shares subject to the option until the optionee has given written notice of exercise and paid in full for such shares.


The Compensation Committee may, in its sole discretion, with respect to each option granted under the Plan, grant tandem stock appreciation rights, that is, the right to relinquish such option in whole or in part and to receive a cash payment equal to the excess of the fair market value of the stock covered by the relinquished option (or part thereof) over the applicable option price.

Change in Control; Termination, Modification or Amendment


In the event of a Change in Control of the Company, the Compensation Committee may, to assure fair and equitable treatment of the participants in the Plan: (1) accelerate the ability to exercise any outstanding options, (2) offer to purchase any outstanding option granted pursuant to the Plan from the holder for its equivalent cash value and (3) make adjustments or modifications to outstanding options as the Compensation Committee deems appropriate to maintain and protect the rights and interests of participants in the Plan following such Change in Control. In no event, however, may any option be exercised prior to the expiration of six months from the date of grant (unless otherwise provided in the option agreement pursuant to which such option was granted) or after ten years from the

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date of grant. "Change in Control" means: (a) a majority of the Board of Directors ceases to consist of Continuing Directors (as defined below); (b) any person becomes the beneficial owner of 25% or more of the outstanding voting power of the Company unless such acquisition is approved by a majority of the Continuing Directors; (c) the stockholders of the Company approve an agreement to merge or consolidate into any other entity, unless such merger or consolidation is approved by a majority of the Continuing Directors; or (d) the stockholders of the Company approve an agreement to dispose of all or substantially all of the assets of the Company, unless such disposition is approved by a majority of the Continuing Directors. "Continuing Directors" means those members of the Board of Directors on the effective date of the Plan or who are elected to the Board of Directors after such date upon the recommendation or with the approval of a majority of the Continuing Directors at the time of such recommendation or approval.


The Company's Board of Directors may terminate, modify or amend the Plan, but no amendment may be made which would, without the approval of the stockholders (1) change the class of employees eligible to receive options payable in Common Stock, (2) increase the total number of shares reserved for issuance under the Plan or (3) materially increase the benefits accruing to participants under the Plan, within the meaning of Rule 16b-3 promulgated under the Exchange Act. The Compensation Committee may amend the terms of any award or option already granted, provided that any such retroactive amendment is consistent with the provisions of the Plan and does not disqualify an ISO under the provisions of Section 422 of the Internal Revenue Code.


In the event of certain changes to the outstanding Common Stock such as stock splits, stock dividends, reclassifications or recapitalizations, the Board of Directors will appropriately adjust the character and number of shares available under the Plan and the Compensation Committee will appropriately adjust the character, number and price of shares subject to outstanding options to reflect such changes.


The Plan became effective on the date of its adoption by the Board of Directors. The Plan will terminate upon the earlier of (1) the adoption of a resolution of the Company's Board of Directors to terminate the Plan or (2) ten years from the effective date of the Plan.

Options Granted Under the Stock Award Plan


Because the Plan is discretionary, benefits to be received by individual optionees are not determinable. The following table shows the number of shares of Common Stock issuable upon exercise of stock options granted to the named individuals and groups to date under the Plan.

 

Group or Individual
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Number of
Options
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James E. Cayne, Chairman of the Board and Chief Executive Officer 536,007
Alan C. Greenberg, Chairman of the Executive Committee 319,813
Samuel L. Molinaro Jr., Executive Vice President and Chief Financial Officer 189,635
Alan D. Schwartz, President and Co-Chief Operating Officer 480,095
Warren J. Spector, President and Co-Chief Operating Officer 510,607
All current executive officers as a group (9 persons) 2,255,770
All current directors who are not executive officers as a group
All employees (who are not executive officers) as a group 23,901,101
 

Certain Federal Income Tax Consequences


The following discussion is based on the Internal Revenue Code and applicable regulations thereunder in effect on the date of this Proxy Statement. Any subsequent changes in the Internal Revenue Code or such regulations may affect the accuracy of this discussion. In addition, this discussion does not consider any state, local or foreign tax consequences or any circumstances that are unique to a particular Plan participant that may affect the accuracy or applicability of this discussion.

Incentive Stock Options ("ISOs")


Neither the grant nor the exercise of an ISO will be treated as the receipt of taxable income by the employee or a deductible item by the Company. The amount by which the fair market value of the shares issued upon exercise exceeds the option strike price will constitute an item of adjustment that must be taken into account in determining the employee's alternative minimum tax.

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If the employee holds shares acquired by him or her upon the exercise of an ISO until the later of two years from the date of grant of the option and one year from such exercise and has been an employee of the Company at all times from the date of grant of the ISO to the day three months before such exercise, then any gain realized by the employee on a later sale or exchange of such shares will be a capital gain and any loss sustained will be a capital loss. The Company will not be entitled to a tax deduction with respect to any such sale or exchange of ISO shares.


If the employee disposes of any shares acquired upon the exercise of an ISO during the two-year period from the date of grant of the option or the one-year period beginning on the day after such exercise (i.e., a "disqualifying disposition"), the employee will generally be obligated to report as ordinary income for the year in which the disposition occurred the amount by which the fair market value of such shares on the date of exercise of the option (or, as noted in the following sentence, in the case of certain sales or exchanges of such shares for less than such fair market value, the amount realized upon such sale or exchange) exceeds the option strike price, and the Company will be entitled to an income tax deduction equal to the amount of such ordinary income reported by the employee on his or her federal income tax return.


If an ISO holder who has acquired stock upon the exercise of an ISO makes a disqualifying disposition of any such stock, and the disposition is a sale or exchange with respect to which a loss (if sustained) would be recognized by the ISO holder, then the amount includable in the ISO holder's gross income, and the amount deductible by the Company, will not exceed the excess (if any) of the amount realized on the sale or exchange over the tax basis of the stock.

Non-Qualified Stock Options ("NQSOS")


In the case of an NQSO, the grant of the option will not result in taxable income to the option holder or an income tax deduction to the Company. The NQSO holder generally recognizes ordinary income at the time the NQSO is exercised in the amount by which the fair market value of the shares acquired exceeds the option strike price. The Company is generally entitled to a corresponding ordinary income tax deduction, at that time, equal to the amount of such ordinary income.

Stock Appreciation Rights ("SARS")


The granting of SARs does not produce taxable income to participating employees or an income tax deduction for the Company. The exercise of a SAR for cash is immediately taxable as ordinary income to the grantee and deductible by the Company.

Limitations on Company Deductions; Parachute Payments


Under Section 162(m) of the Internal Revenue Code, certain compensation payments in excess of $1,000,000 are subject to a limitation on deductibility by the Company. This limitation on deductibility applies with respect to that portion of compensation in excess of $1,000,000 paid to individual executive officers named in the Summary Compensation Table per taxable year. However, certain "performance-based compensation" the material terms of which are disclosed to and approved by stockholders is not subject to this limitation on deductibility. The Company has structured the Plan with the intention that compensation resulting therefrom would be such performance-based compensation and would be deductible.


Under certain circumstances, accelerated vesting or exercise of options or SARs in connection with a Change in Control of the Company might be deemed an "excess parachute payment" for purposes of the golden parachute tax provisions of Sections 280G and 4999 of the Internal Revenue Code. To the extent it is so considered, the optionee or grantee may be subject to an excise tax equal to 20% of the amount of the excess parachute payment and the Company may be denied a tax deduction, with respect to such excess.

2003 LTIP Plan Rules : BSC

Description of the CAP Plan


This summary of the material terms of the CAP Plan is qualified in its entirety by reference to the full text of the 2000 Plan, a copy of which is attached as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended February 23, 2001 and the full text of the 1999 Plan, a copy of which is attached as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1999.


The CAP Plan is administered by the Management and Compensation Committee with respect to all participants other than those who are subject to the reporting requirements of Section 16(a) of the Exchange Act. The CAP Plan is administered with respect to such reporting persons by the Compensation Committee.


Employees of Bear Stearns who hold the position of Senior Managing Director and who are "accredited investors" as defined in Rule 501 under the Securities Act are eligible to participate in the CAP Plan.


Pursuant to the 1999 Plan, participants could elect to defer for specified periods required percentages of their current compensation and additional amounts in excess of such required percentages. For each CAP Plan year of such deferrals, participants were entitled to receive a number of CAP Units equal to the total deferral amount for such CAP Plan year divided by the Average Cost Per Share of the available shares for such CAP Plan year. Average Cost Per Share for any period is calculated by taking the weighted average of the sum of the average price paid (including commissions) by the Company in respect of shares purchased during such period and the fair market value as of the last trading day of such period in respect of shares purchased by the Company prior to such period and accepted by the Compensation Committee for use under the CAP Plan. No further deferrals may be made pursuant to the 1999 Plan.


With respect to the CAP Plan year commencing on July 1, 1999 and ending on November 30, 2000, participants in the Performance Compensation Plan were entitled to receive a number of CAP Units equal to such participant's required deferral amount less the value of the stock options granted in or for such CAP Plan year to such participant (such value as determined by the Compensation Committee), divided by the Average Cost Per Share. All other participants were eligible to be granted an award in the discretion of the Compensation Committee.


With respect to each CAP Plan year beginning on or after December 1, 2000, participants are eligible to be granted an award in the discretion of the Compensation Committee, based upon future and past services, among other factors. For each CAP Plan year, the Company will credit to a participant's Capital Accumulation Account, as of the last day of such CAP Plan year, that number of CAP Units equal to the amount determined by the Compensation Committee with respect to such participant, divided by the fair market value of the Common Stock on the date the Compensation Committee grants such award.


CAP Units and cash balances credited under the 1999 Plan are fully vested. Generally, CAP Units awarded under the 2000 Plan vest 50% after the second anniversary of the date of the award and 50% after the third anniversary of the date of the award. CAP Units awarded under the 2000 Plan may vest at an earlier date or may continue to vest following termination of employment. A participant may not assign, pledge or otherwise transfer an interest in a Capital Accumulation Account except by designating a beneficiary who shall be entitled to receive any amounts payable under the CAP Plan upon the participant's death. The Company is not required to establish a special or separate fund or to otherwise segregate any assets to assure any payments under the CAP Plan, and has no obligation to invest all or any portion of Capital Accumulation Accounts in Common Stock. The CAP Plan provides that the rights of each participant shall be no greater than the rights of a general unsecured creditor of the Company.


CAP Units credited in respect of each CAP Plan year and any credits or adjustments to such CAP Units will be recorded in separate subaccounts. Any amounts attributable to CAP Units or Net Earnings Adjustments (as defined in the CAP Plan) for a particular fiscal year which could not be credited to Capital Accumulation Accounts due to limitations on the number of shares available to be credited under the CAP Plan in respect of such fiscal year will be credited to interest-bearing cash balance accounts in accordance with the provisions of the CAP Plan. In subsequent fiscal years, to the extent that the Company acquires shares of Common Stock and the Compensation Committee designated such shares for such use under the CAP Plan, it will reduce such cash balances by crediting to the applicable Capital Accumulation Account at the end of each fiscal quarter a number of CAP Units corresponding to such shares. Credits made to Capital Accumulation Accounts and cash balance accounts relating

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to previously granted awards will, unless otherwise provided in the agreement evidencing the award, be subject to the same terms and conditions (including vesting and cancellation) as the underlying award.


Each CAP Unit credited to a participant's Capital Accumulation Account will entitle such participant to receive, on an annual basis, a Net Earnings Adjustment generally equal to the Company's pre-tax earnings per share (as determined in accordance with the CAP Plan) for such fiscal year less an adjustment for changes in the Company's book value per share of the Common Stock during such years resulting from increases or decreases in the Company's retained earnings attributable to net income or loss after deducting dividends declared with respect to any capital stock of the Company during such year. The Net Earnings Adjustment generally will be credited to a participant's Capital Accumulation Account on an annual basis in the form of a number of additional CAP Units.


As soon as practicable following completion of each applicable deferral period, the Company will deliver in respect of each CAP Plan year, a number of shares of Common Stock equal to the number of CAP Units credited to a Capital Accumulation Account for such CAP Plan year plus any cash in the cash balance account for such CAP Plan year.


In general, within 60 days of the occurrence of a Change in Control of the Company, participants in the 1999 CAP Plan will be entitled to receive payment of that number of shares of Common Stock equal to the total CAP Units credited to their Capital Accumulation Accounts as of the date of the Change in Control and an amount in cash equal to any cash balance as of such date. With respect to the 2000 CAP Plan, the Compensation Committee may, in its sole discretion, provide within 60 days of the occurrence of the Change in Control for payment and/or the full vesting of a participant's total CAP Units and cash balance account.


"Change in Control" means (a) a majority of the Board of Directors ceases to consist of Continuing Directors (as defined below); (b) any person becomes the beneficial owner of 50% or more of the Company's outstanding voting power, unless such acquisition is approved by a majority of the Continuing Directors; (c) the stockholders of the Company approve an agreement to dispose of all or substantially all of the assets of the Company (or, in the case of the 1999 CAP Plan, an agreement to merge or consolidate into any other entity), unless such disposition is approved by a majority of the Continuing Directors; or (d) (in the case of the 2000 CAP Plan) the consummation of a merger or consolidation of the Company (or any subsidiary) with any other corporation, unless, the Company's voting securities outstanding immediately prior to such merger or consolidation continue to represent more than 50% of the combined voting power of the Company, such surviving entity or any parent thereof outstanding immediately thereafter, and individuals who constitute the Board of Directors of the Company immediately prior to the execution of the definitive merger or consolidation agreement continue immediately thereafter to represent at least a majority of the Board of Directors of the Company, such surviving entity or any parent thereof.


"Continuing Director" means any member of the Board of Directors who was a director on the effective date of the 1999 CAP Plan or 2000 CAP Plan, as applicable, or who is elected thereafter upon the recommendation or with the approval of a majority of the Continuing Directors at the time of such recommendation or approval.


The Company reserves the right to terminate the entire CAP Plan, or any portion of the CAP Plan representing a particular fiscal year's deferred compensation, at any time in its sole discretion. Generally, no amendment, suspension or termination may retroactively impair or otherwise adversely affect the rights of any person to benefits which have accrued under the CAP Plan prior to the date of such action. In the case of the 2000 CAP Plan, upon termination of the 2000 CAP Plan in its entirety or with respect to one or more CAP Plan years, the Compensation Committee, in its sole and absolute discretion, may accelerate the vesting of all or any portion of the CAP Units or cash balance credited to a participant's account, which would not then be vested.


The maximum number of shares that may be credited under the CAP Plan may be adjusted by the Compensation Committee in the event of any change in the Common Stock, such as through merger, consolidation, reorganization, stock dividend, stock split or otherwise. In the event of any such change after the date that CAP Units initially are credited to a participant's Capital Accumulation Account, the number of CAP Units held in each participant's account will be equitably adjusted, as determined by the Compensation Committee or the Management and Compensation Committee, as applicable, in its sole discretion, to reflect such event.