Analyze 10 k Samples

7/27/2019 Analyze 10 k Samples

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HOW TO ANALYZE A 10KSAMPLE COMPARISONS

Wall St. Training(212) 537-6631

(212) 656-1221 (fax)[email protected]

Hamilton Lin, CFAWall St. Training

President

www.wallst-training.com

Wall St. Training is a registered servicemark of HL Capital Partners, Ltd.


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INVESTMENTS

BEAR STEARNS

Financial instruments owned and financial instruments sold, but not yet purchased, consisting of the Company's proprietary tradinginventories, at fair value, as of November 30, were as follows:

2003 2002

------------------------------------------------------------------------

(in thousands)

------------------------------------------------------------------------

Financial Instruments Owned:

US government and agency $ 4,963,125 $ 5,754,144Other sovereign governments 1,019,394 1,064,850

Corporate equity and convertible debt 12,531,849 7,746,419

Corporate debt and other 9,554,939 7,158,347

Mortgages, mortgage- and asset-backed 21,377,386 20,198,882

Derivative financial instruments 9,785,965 11,522,026

------------------------------------------------------------------------

$59,232,658 $53,444,668

------------------------------------------------------------------------

Financial Instruments Sold,

But Not Yet Purchased:

US government and agency $ 9,991,764 $ 8,206,597

Other sovereign governments 740,052 1,209,421

Corporate equity and

convertible debt 6,301,051 4,935,396

Corporate debt and other 1,477,448 2,034,391

Mortgages, mortgage- and

asset-backed 278,294 179,593

Derivative financial instruments 8,320,538 7,855,875

------------------------------------------------------------------------

$27,109,147 $24,421,273

As of November 30, 2003 and 2002, all financial instruments owned that were pledged to counterparties where the counterparty has theright, by contract or custom, to rehypothecate those securities are classified as "Financial Instruments Owned, Pledged as Collateral" inthe Consolidated Statements of Financial Condition.

Financial instruments sold, but not yet purchased, represent obligations of the Company to deliver the specified financial instrument at th

contracted price and thereby create a liability to purchase the financial instrument in the market at prevailing prices. Accordingly, thesetransactions result in off-balance-sheet risk as the Company's ultimate obligation to repurchase such securities may exceed the amountrecognized in the Consolidated Statements of Financial Condition.

ARCH CAPITAL

The following tables reconcile estimated fair value and carrying value to the amortized cost of fixed maturities and equity securities:December 31, 2003

(in thousands) Estimated

Fair Value

and Carrying

Value

Gross

Unrealized

Gains

Gross

Unrealized

(Losses)

Amortized

Cost

Fixed maturities:U.S. government and government agencies $ 1,343,295 $ 6,651 $ (848) $ 1,337,492Corporate bonds 1,106,380 25,662 (1,612) 1,082,330

Asset backed securities 690,927 2,400 (1,495) 690,022Municipal bonds 209,568 2,358 (131) 207,341Mortgage backed securities 48,254 2,300 (54) 46,008

3,398,424 39,371 (4,140) 3,363,193Equity securities:

Privately held 32,476 4,850 (6) 27,632Total $ 3,430,900 $ 44,221 $ (4,146) $ 3,390,825


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December 31, 2002


Fair Value

and Carrying Value

Gross

Unrealized

Gains

Gross

Unrealized

(Losses)

Amortized

Cost

Fixed maturities:U.S. government and government agencies $ 179,322 $ 5,242 $ (4) $ 174,084Corporate bonds 949,003 33,305 (708) 916,406Asset backed securities 24,985 1,937 23,048Mortgage backed securities 228,794 7,695 221,099

1,382,104 48,179 (712) 1,334,637Equity securities:

Privately held 31,536 232 (326) 31,630

Total $ 1,413,640 $ 48,411 $ (1,038) $ 1,366,267

The Company frequently reviews its investment portfolio for declines in fair value. The Company's process for identifying declinesthe fair value of investments that are other than temporary involves consideration of several factors. These factors include (i) the time

period in which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects and overall financialcondition of the issuer, (iii) the significance of the decline and (iv) the Company's intent and ability to hold the investment for a sufficien

period of time for the value to recover. Generally a change in the market or interest rate environment does not constitute an impairment oan investment but rather a temporary decline. When the Company's analysis of the above factors results in the Company's conclusion thadeclines in fair values are other than temporary, the cost of the securities is written down to fair value and the previously unrealized losstherefore reflected as a realized loss.

The following table reflects fair value and gross unrealized losses on the Company's fixed maturities and equity securities atDecember 31, 2003 by length of time that the individual securities have been in a continuous unrealized loss position. At December 31,2003, 114 fixed maturities and one equity security had been in a continuous unrealized loss position for less than twelve months, while n

fixed maturities or equity securities had been in a continuous unrealized loss position for more than twelve months. The unrealized lossposition in certain of the Company's fixed maturities at December 31, 2003 principally resulted from changes in the interest rateenvironment.

(in thousands) Estimated Fair Value and

Carrying Value

Gross Unrealized

Losses

Fixed maturities:U.S. government and government agencies $ 590,324 $ (848)Corporate bonds 183,581 (1,612)Asset backed securities 297,740 (1,495)Municipal bonds 53,805 (131)Mortgage backed securities 6,307 (54)

1,131,757 (4,140)Equity securities:

Privately held 1,909 (6)Total $ 1,133,666 $ (4,146)

Fixed Maturi ties

Contractual maturities of the Company's fixed maturities at December 31, 2003 and 2002 are shown below. Expected maturities,which are management's best estimates, will differ from contractual maturities because borrowers may have the right to call or prepayobligations with or without call or prepayment penalties.

December 31, 2003 December 31, 2002


Fair

Value

Amortized

Cost

Estimated

Fair

Value

Amortized

Cost

Available for sale:Due in one year or less $ 234,674 $ 233,459 $ 19,671 $ 20,149

Due after one year through five years 2,252,441 2,225,169 1,058,158 1,023,15Due after five years through 10 years 120,305 118,760 21,966 24,100Due after 10 years 51,823 49,775 28,530 23,090

2,659,243 2,627,163 1,128,325 1,090,49Asset backed securities 690,927 690,022 228,794 221,099Mortgage backed securities 48,254 46,008 24,985 23,04

Total $ 3,398,424 $ 3,363,193 $ 1,382,104 $ 1,334,63

As of December 31, 2003 and 2002, the weighted average contractual maturities of the Company's total fixed maturity and short-terinvestments, based on fair value, were 3.4 years and 4.5 years, respectively, while the weighted average expected maturities of theCompany's total fixed maturity and short-term investments, based on fair value, were 2.0 years and 2.1 years, respectively. As ofDecember 31, 2003 and 2002, approximately 100% of the fixed maturity investments held by the Company were rated investment grade

by Standard & Poor's Corporation or Moody's Investors Service, Inc. There were no investments in any entity in excess of 10% of theCompany's shareholders' equity at December 31, 2003 or 2002 other than investments issued or guaranteed by the United States

government or its agencies.


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PROPERTY, PLANT & EQUIPMENT

HRH

Property and equipment on the consolidated balance sheet consists of the following:

(in thousands) 2003 2002

Furniture and equipment $ 53,962 $ 45,232Buildings and land 1,252 962Leasehold improvements 7,973 6,090

63,187 52,284

Less accumulated depreciation 37,700 31,898

$ 25,487 $ 20,386

INTANGIBLE ASSETS

GS

GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

GoodwillAs of November 2003 and November 2002, goodwill of $3.16 billion and $2.86 billion, respectively, was included in Other assets inthe consolidated statements of financial condition. Prior to December 1, 2001, goodwill was amortized over periods of 15 to 20 years on straight-line basis.

The following table sets forth reported net earnings and EPS, as adjusted to exclude goodwill amortization expense:

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED NOVEMBER 2001

Net earnings, as reported $ 2,310Net earnings, as adjusted 2,404EPS, as reported

Basic $ 4.53Diluted 4.26

EPS, as adjustedBasic $ 4.72Diluted 4.44

Identifiable Intangible AssetsThe following table sets forth the gross carrying amount, accumulated amortization and net carrying amount of identifiable intangibleassets:

AS OF NOVEMBER

(IN MILLIONS) 2003 2002

Customer lists (1) Gross carrying amount (3) $ 1,021 $ 859Accumulated amortization (141 ) (94

Net carrying amount $ 880 $ 765New York Stock Exchange (NYSE) specialist rights Gross carrying amount $ 714 $ 717

Accumulated amortization (78 ) (51Net carrying amount $ 636 $ 666

Option and exchange-traded fund (ETF) specialist rights Gross carrying amount $ 312 $ 312Accumulated amortization (182 ) (21

Net carrying amount $ 130 $ 29Other (2) Gross carrying amount $ 351 $ 35Accumulated amortization (177 ) (93

Net carrying amount $ 174 $ 258Total Gross carrying amount (3) $ 2,398 $ 2,239

Accumulated amortization (578)(4) (259

Net carrying amount $ 1,820 $ 1,980

(1) Primarily includes the firms clearance and execution and Nasdaq customer lists acquired in the fi rms combination with SLK and financial counseling customer lists acquired in the

firms combination with The Ayco Company, L.P.

(2) Includes primarily technology-related assets acquired in the firms combination with SLK.

(3) Gross carrying amount includes additions of $162 mill ion and $147 million for the years ended November 2003 and November 2002, respectively.

(4) For the year ended November 2003, accumulated amortization includes $188 million of impairment charges primarily related to option specialist rights.


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Identifiable intangible assets are amortized over a weighted average life of approximately 18 years. There were no identifiable intangibleassets that were considered to be indefinite-lived and, therefore, not subject to amortization.

Amortization expense associated with identifiable intangible assets was $319 million (including $188 million of impairment charges),$127 million and $115 million for the fiscal years ended November 2003, November 2002 and November 2001, respectively.

Estimated future amortization expense for existing identifiable intangible assets is set forth below:

(IN MILLIONS)

2004 $ 1232005 123

2006 1232007 1182008 91

HRH

NOTE J Intangible AssetsThe company has adopted Statement 142 on accounting for goodwill and other intangible assets as disclosed in Note B. In accordancewith Statement 142, the company performed the annual impairment tests of goodwill in 2003 and 2002 and the transitional impairmenttest of goodwill in 2002. No impairment charge resulted from these tests.

The following table provides a reconciliation for 2003, 2002 and 2001 of reported net income to adjusted net income had Statement 142been applied as of January 1, 2001.

(in thousands, except per share amounts) 2003 2002 2001

Net Income as reported $ 74,954 $ 65,119 $ 32,349Goodwill amortization, net of tax 8,421

Adjusted net income $ 74,954 $ 65,119 $ 40,770

Net Income Per Share Basic:Net income as reported $ 2.17 $ 2.23 $ 1.18Goodwill amortization, net of tax 0.31

Adjusted net income $ 2.17 $ 2.23 $ 1.49

Net Income Per Share Assuming Dilution:Net income as reported $ 2.06 $ 2.01 $ 1.07Goodwill amortization, net of tax 0.27

Adjusted net income $ 2.06 $ 2.01 $ 1.34

Intangible assets on the consolidated balance sheet consist of the following:2003 2002

(in thousands) Gross Carrying

Amount

Accumulated

Amortization

Gross Carrying

Amount

Accumulated

Amortization

Amortizable intangible assets:Customer relationships $ 72,074 $ 8,952 $ 48,286 $ 4,762

Noncompete/nonpiracy agreements 37,178 10,205 32,597 7,521Tradename 3,162 1,258 2,400 453

Total $ 112,414 $ 20,415 $ 83,283 $ 12,736

Net Carrying Amount Net Carrying Amount

Indefinite-lived intangible assets Goodwill $ 522,247 $ 371,426

Aggregate amortization expense for 2003, 2002 and 2001 was $9.8 million, $5.3 million and $13.9 million, respectively.Future amortization expense is estimated as follows (in thousands):

2004 $ 11,1812005 10,3242006 10,3052007 10,2872008 10,230


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DERIVATIVE FINANCIAL INSTRUMENTS / HEDGING INSTRUMENTS

HRH

On June 17, 1999, the company entered into two interest rate swap agreements with an original combined notional amount of $45.0million. The combined notional amount of these interest rate swaps is reduced quarterly by $0.9 million beginning September 30, 2000through their maturity on June 30, 2004. The company designated these interest rate swaps as cash flow hedges under Statement 133. Thcompany entered into these interest rate swap agreements to manage interest cost and cash flows associated with variable interest rates,

primarily short-term changes in LIBOR; changes in cash flows of the interest rate swaps offset changes in the interest payments on thecovered portion of the companys credit facility. The notional amounts of the interest rate swap agreements are used to measure interest

be paid or received and do not represent the amount of exposure to credit loss. The credit risk to the company would be a counterpartysinability to pay the differential in the fixed rate and variable rate in a rising interest rate environment. The companys exposure to credit

loss on its interest rate swap agreements in the event of non-performance by a counterparty is believed to be remote due to the companyrequirement that a counterparty have a strong credit rating. The company is exposed to market risk from changes in interest rates.

Under the interest rate swap agreements, the company makes payments based on fixed pay rates of 6.43% and 6.46% and receivespayments based on the counterparties variable LIBOR pay rates. At the end of the year, the variable rate was approximately 1.14% foreach agreement. In connection with these interest rate swap agreements, the company recorded after-tax income (loss) in othercomprehensive income of $963 thousand, ($33) thousand and ($917) thousand in 2003, 2002 and 2001, respectively. There was no impaon net income due to ineffectiveness. The fair market value of the interest rate swaps at December 31, 2003 and 2002, resulted in aliability of $0.8 million and $2.4 million, respectively, which is included in other long-term liabilities.

GS

Fair Value

Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value in the consolidatedstatements of financial condition are carried at fair value or amounts that approximate fair value, with related unrealized gains or lossesrecognized in our results of operations. The use of fair value to measure these financial instruments, with related unrealized gains andlosses recognized immediately in our results of operations, is fundamental to our financial statements and is our most critical accounting

policy. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction betweewilling parties, other than in a forced or liquidation sale.

In determining fair value, we separate our financial instruments into three categories cash (i.e., nonderivative) trading instruments,derivative contracts and principal investments, as set forth in the following table:

FINANCIAL INSTRUMENTS BY CATEGORYAS OF NOVEMBER

2003 2002

FINANCIAL FINANCIAL INSTRUMENTS FINANCIAL FINANCIAL INSTRUMENTS

INSTRUMENTS SOLD, BUT NOT YET INSTRUMENTS SOLD, BUT NOT YET

OWNED, AT PURCHASED, AT OWNED, AT PURCHASED, AT

(IN MILLIONS) FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE

Cash trading instruments $ 110,157 $ 60,813 $ 85,791 $ 44,552

Derivative contracts 45,733 41,886 42,205 38,921Principal investments 3,755

(1) 1,779

Total $ 159,645 $ 102,699 $ 129,775 $ 83,473

(1) Excludes assets of $1.07 billion in employee-owned merchant banking funds that were consolidated in 2003.

CASH TRADING INSTRUMENTS The fair values of cash trading instruments are generally obtained from quoted market prices inactive markets, broker or dealer price quotations, or alternative pricing sources with a reasonable level of price transparency. The types oinstruments valued in this manner include U.S. government and agency securities, other sovereign government obligations, liquidmortgage products, investment-grade corporate bonds, listed equities, money market securities, state, municipal and provincial obligatioand physical commodities.

Certain cash trading instruments trade infrequently and, therefore, have little or no price transparency. Such instruments may includecertain high-yield debt, corporate bank loans, mortgage whole loans and distressed debt. We value these instruments using methodologiesuch as the present value of known or estimated cash flows and generally do not adjust underlying valuation assumptions unless there issubstantive evidence supporting a change in the value of the underlying instrument or valuation assumptions (such as similar markettransactions, changes in financial ratios and changes in the credit ratings of the underlying companies).

The following table sets forth the valuation of our cash trading instruments by level of price transparency:


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CASH TRADING INSTRUMENTS BY PRICE TRANSPARENCY

AS OF NOVEMBER

2003 2002

FINANCIAL FINANCIAL INSTRUMENTS FINANCIAL FINANCIAL INSTRUME

INSTRUMENTS SOLD, BUT NOT YET INSTRUMENTS SOLD, BUT NOT YET

OWNED, AT PURCHASED, AT OWNED, AT PURCHASED, AT

N MILLIONS) FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE

uoted prices or alternative pricing sources witheasonable price transparency

$ 102,306 $ 60,673 $ 81,125 $ 44,357

ittle or no price transparency 7,851 140 4,666 195

otal $ 110,157 $ 60,813 $ 85,791 $ 44,552

Cash trading instruments we own (long positions) are marked to bid prices and instruments we have sold but not yet purchased (shortpositions) are marked to offer prices. If liquidating a position is reasonably expected to affect its prevailing market price, our valuation iadjusted generally based on market evidence or predetermined policies. In certain circumstances, such as for highly illiquid positions,managements estimates are used to determine this adjustment.

DERIVATIVE CONTRACTS Derivative contracts consist of exchange-traded and over-the-counter (OTC) derivatives. The followingtable sets forth the fair value of our exchange-traded and OTC derivative assets and liabilities:

DERIVATIVE ASSETS AND LIABILITIES

AS OF NOVEMBER

2003 2002

(IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES

Exchange-traded derivatives $ 5,182 $ 6,339 $ 8,911 $ 8,630OTC derivatives 40,551 35,547 33,294 30,291Total (1) $ 45,733 $ 41,886 $ 42,205 $ 38,921

(1) The fair values of our derivative assets and liabilities include cash we have paid and received (for example, option premiums or cash paid or received pursuant to credit support

agreements) and may change significantly from period to period based on, among other factors, changes in our trading positions and market movements.

The fair values of our exchange-traded derivatives are generally determined from quoted market prices. OTC derivatives are valued usinvaluation models. We use a variety of valuation models including the present value of known or estimated cash flows, option-pricingmodels and option-adjusted spread models. The valuation models that we use to derive the fair values of our OTC derivatives require

inputs including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations osuch inputs.

At the inception of an OTC derivative contract (day one), we value the contract at the model value if we can verify all of the significantmodel inputs to observable market data and verify the model value to market transactions. When appropriate, valuations are adjusted totake account of various factors such as liquidity, bid/offer and credit considerations. These adjustments are generally based on marketevidence or predetermined policies. In certain circumstances, such as for highly illiquid positions, managements estimates are used todetermine these adjustments.

Where we cannot verify all of the significant model inputs to observable market data and verify the model value to market transactions,we value the contract at the transaction price at inception and, consequently, record no day one gain or loss in accordance with EmergingIssues Task Force (EITF) Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes andContracts Involved in Energy Trading and Risk Management Activities. For a further discussion of EITF Issue No. 02-3, see Note 2 to

the consolidated financial statements.

Following day one, we adjust the inputs to our valuation models only to the extent that changes in such inputs can be verified by similarmarket transactions, third-party pricing services and/or broker quotes or can be derived from other substantive evidence such as empiricamarket data. In circumstances where we cannot verify the model value to market transactions, it is possible that a different valuationmodel could produce a materially different estimate of fair value.


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The following tables set forth the fair values of our OTC derivative assets and liabilities by product and by remaining contractual maturOTC DERIVATIVES(IN MILLIONS)

AS OF NOVEMBER 2003

06 612 15 510 10 YEARS

ASSETS MONTHS MONTHS YEARS YEARS OR GREATER TOTAL

Contract typeInterest rates $ 1,470 $ 160 $ 4,017 $ 4,332 $ 9,541 $ 19,520Currencies 5,486 1,230 4,069 1,842 897 13,524Commodities 1,538 645 1,648 473 159 4,463Equities 1,276 637 675 329 127 3,044

Total $ 9,770 $ 2,672 $ 10,409 $ 6,976 $ 10,724 $ 40,55106 612 15 510 10 YEARS

LIABILITIES MONTHS MONTHS YEARS YEARS OR GREATER TOTAL

Contract typeInterest rates $ 2,026 $ 381 $ 3,896 $ 2,894 $ 2,475 $ 11,672Currencies 5,993 1,121 2,951 2,949 828 13,842Commodities 2,059 921 1,461 232 183 4,856Equities 3,267 669 1,027 182 32 5,177

Total $ 13,345 $ 3,092 $ 9,335 $ 6,257 $ 3,518 $ 35,547AS OF NOVEMBER 2002

06 612 15 510 10 YEARS

ASSETS MONTHS MONTHS YEARS YEARS OR GREATER TOTAL

Contract typeInterest rates $ 864 $ 536 $ 6,266 $ 4,983 $ 9,281 $ 21,930

Currencies 2,955 917 1,007 486 211 5,576Commodities 1,200 632 1,145 185 11 3,173Equities 1,386 492 673 63 1 2,615

Total $ 6,405 $ 2,577 $ 9,091 $ 5,717 $ 9,504 $ 33,29406 612 15 510 10 YEARS

LIABILITIES MONTHS MONTHS YEARS YEARS OR GREATER TOTAL

Contract typeInterest rates $ 1,084 $ 393 $ 6,870 $ 5,556 $ 2,291 $ 16,194Currencies 3,134 751 1,478 935 603 6,901Commodities 1,432 836 977 62 2 3,309Equities 1,958 938 844 147 3,887

Total $ 7,608 $ 2,918 $ 10,169 $ 6,700 $ 2,896 $ 30,291

Price transparency for OTC derivative model inputs varies depending on, among other factors, product type, maturity and the complexityof the contract. Price transparency for interest rate and currency contracts varies by the underlying currencies, with the currencies of theleading industrialized nations having the most price transparency. Price transparency for commodity contracts varies by type ofunderlying commodity. Price transparency for equity contracts varies by market, with the equity markets of the leading industrializednations having the most price transparency. For more complex structures, price transparency is inherently more limited because they oftcombine one or more product types, requiring additional inputs such as correlations and volatilities.


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LEASES, COMMITMENTS AND CONTINGENCIES

BLACKROCK

7. Commitments

a) Lease CommitmentsThe Company leases its primary office space under agreements which expire through 2017. Future minimum commitments under theseoperating leases, net of rental reimbursements of $3,138 through 2005 from a sublease arrangement, are as follows:

2004 $ 11,7962005 11,0212006 11,000

2007 10,9662008 10,966Thereafter 106,393

$ 162,142

In connection with certain lease agreements, the Company is responsible for escalation payments.Occupancy expense amounted to $22,033, $19,263 and $12,559 for the years ended December 31, 2003, 2002 and 2001, respectively.

b) Acquired Management Contract ObligationIn connection with the management contract acquired associated with the agreement and plan of merger of CORE Cap, Inc. withAnthracite, a BlackRock managed REIT, the Company recorded an $8,040 liability using an imputed interest rate of 10%, the prevailinginterest rate on the date of acquisition. For the years ended December 31, 2003, 2002 and 2001, the related expense was $602, $683 and

$761, respectively. At December 31, 2003, the future commitment under the agreement is as follows:

2004 $ 1,5002005 1,5002006 1,0002007 1,0002008 1,000Thereafter 2,000

8,000Less: imputed interest 2,264

Present value of management contract $ 5,736

If Anthracites management contract with BlackRock, Inc. is terminated, not renewed or not extended for any reason other than cause,Anthracite would remit to the Company all future payments due under this obligation.

c) Indemnifications

In the ordinary course of business, BlackRock enters into contracts with third parties pursuant to which the third parties provide serviceson behalf of BlackRock. In many of the contracts, BlackRock agrees to indemnify the third party service provider under certaincircumstances. The terms of the indemnity vary from contract to contract and the amount of indemnification liability, if any, cannot bedetermined.

d) Mutual Fund Investigations

As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and

various information requests from the Securities and Exchange Commission in connection with industry-wide investigations of mutualfund matters. BlackRock is continuing to cooperate fully in these matters, and has incurred or reserved approximately $4,000 to cover thcurrently estimated aggregate costs in connection with these regulatory matters.

e) Other

The Company has entered into a commitment to invest $7,678 in Carbon Capital, Inc., a BlackRock managed REIT, of which $3,537remained unfunded at December 31, 2003.On April 30, 2003, the Company purchased 80% of the outstanding equity interests of an investment manager of a hedge fund of funds,for approximately $4,100 in cash. Additionally, the Company has committed to purchase the investment managers remaining equity onMarch 31, 2008, subject to acceleration provisions. The purchase price of this remaining interest is performance-based and is not subjectto a maximum or the continued employment of former employees of the investment manager with the Company. The Company is unablto estimate its potential obligation at this time.


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VIE

BLACKROCK

8. Variable Interest Entities not Subject to Consolidation

BlackRock acts as collateral manager for six CDOs. The CDOs invest in high yield securities and bank loans, among other investments,and offer opportunity for high return and are subject to greater risk than traditional investment products. These CDOs are structured totake advantage of the yield differential between their assets and liabilities and have terms to maturity of eight to twelve years when issueAs of December 31, 2003, the aggregate assets and debt of the CDOs were approximately $2,740,000 and $2,370,000, respectively.BlackRocks equity ownership, which represents the extent of the Companys risk of loss, was approximately $15,800 at December 31,2003. The Companys management has concluded that BlackRock is not the primary beneficiary of the CDOs and therefore the Compan

has not consolidated the CDOs assets, liabilities and results of operations.

BlackRock acts as trading adviser and special member to an entity which has created a series of municipal securities trusts in which theentity has retained interests. These trusts purchase fixed-rate, long-term, highly rated, insured or escrowed municipal bonds financed bythe issuance of trust certificates. The trust certificates entitle the holder to receive future payments of principal and variable interest and ttender such certificates at the option of the holder on a periodic basis. A third party acts as placement agent for the entity and the trustsand as liquidity provider to the trusts. As of December 31, 2003, the aggregate assets and debt of this entity (including the trusts) wereapproximately $375,000 and $227,000, respectively. BlackRocks equity ownership, which represents the extent of the Companys risk loss, was $5,000 at December 31, 2003. The Companys management has concluded that BlackRock is not the primary beneficiary of thentity and therefore the Company does not consolidate the entity.

GS

Variable Interest Entities (VIEs)

The firm, in the ordinary course of its business, retains interests in VIEs in connection with its securitization activities. The firm alsopurchases and sells variable interests in VIEs, primarily mortgage-backed and asset-backed interests, in connection with its market-making activities and makes investments in and loans to VIEs that hold performing and nonperforming debt, real estate and other assetsIn addition, the firm utilizes VIEs to provide investors with credit-linked and asset-repackaged notes designed to meet their objectives.

VIEs generally purchase assets by issuing debt and equity instruments and through other contractual arrangements. In certain instances,the firm has provided guarantees to certain VIEs or holders of variable interests in these VIEs. In such cases, the maximum exposure toloss included in the tables set forth below is the notional amount of such guarantees. Such amounts do not represent anticipated losses inconnection with these guarantees. The firms variable interests in these VIEs include senior and subordinated debt; limited and general

partnership interests; preferred and common stock; interest rate, foreign currency, equity, commodity and credit derivatives; guarantees;and residual interests in mortgage-backed and asset-backed securitization vehicles. Group Inc. generally is not directly or indirectlyobligated to repay the debt and equity instruments and contractual arrangements entered into by these VIEs.

The following table sets forth the firms total assets and maximum exposure to loss associated with its significant variable interests inconsolidated, asset-backed VIEs:

AS OF NOVEMBER


VIE assets (1) $ 1,832 $ 1,746Maximum exposure to loss 145 270

(1) Consolidated VIE assets include assets financed by nonrecourse short -term and long-term debt. Nonrecourse debt is debt that Group Inc. is not directly or indirectly obligated to repay

through a guarantee, general partnership interest or contractual arrangement.

The following table sets forth the firms total assets and maximum exposure to loss associated with its significant variable interests innonconsolidated VIEs:

AS OF NOVEMBER 2003

MAXIMUM EXPOSURE TO LOSS

VIE PURCHASED LOANS AND

(IN MILLIONS) ASSETS INTERESTS GUARANTEES DERIVATIVES INVESTMENTS TOTAL

Mortgage-backed $ 1,648 $ 24 $ $ $ 507 $ 531Other asset-backed 6,617 65 236 100 920 1,321Total $ 8,265 $ 89 $ 236 $ 100 $ 1,427 $ 1,852

AS OF NOVEMBER 2002

MAXIMUM EXPOSURE TO LOSS

VIE PURCHASED LOANS AND

(IN MILLIONS) ASSETS INTERESTS GUARANTEES DERIVATIVES INVESTMENTS TOTAL

Mortgage-backed $ 3,102 $ 148 $ $ $ $ 148Other asset-backed 5,614 292 137 318 747Total $ 8,716 $ 440 $ $ 137 $ 318 $ 895


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DEBT

HRH

NOTE D Long-Term Debt

Long-term debt on the consolidated balance sheet consists of the following:

(in thousands) 2003 2002

Credit facility, interest currently 3.94% to 4.75% $ 164,287 $ 173,436Installment notes payable primarily incurred in acquisitions of insurance agencies, 1.21%

to 10.0% due in various installments to 2007

19,046 9,448

183,333 182,884Less current portion 9,321 5,733

$ 174,012 $ 177,151

Maturities of long-term debt for the four years ending after December 31, 2004 are $7.4 million in 2005, $2.3 million in 2006, $164.3million in 2007 and none in 2008. At December 31, 2003, the company had a term loan included in the credit facility with $1.6 milliondue within one year classified as long-term debt in accordance with the companys intent and ability to refinance this obligation on a lonterm basis under its revolving credit facility.

Interest paid was $10.9 million, $10.7 million and $8.9 million in 2003, 2002 and 2001, respectively.

On July 1, 2002, the company signed the Second Amended and Restated Credit Agreement (the Amended Credit Agreement) whichprovided for a credit facility of up to an aggregate of $290.0 million. The Amended Credit Agreement provided a revolving credit facilitof $100.0 million and a term loan facility of $190.0 million. In July 2003, the company amended the credit facility to increase theavailable revolving credit portion of the facility to $130.0 million and extend the revolving credit maturity to December 31, 2006. Inaddition, the company modified certain covenants and repaid $12.9 million of the term loans outstanding under the credit facility.Borrowings under this facility bear interest at variable rates based on LIBOR plus a negotiated spread. In addition, the company payscommitment fees (0.375% at December 31, 2003) on the unused portion of the revolving credit facility. The term loan facility is payablequarterly beginning September 30, 2002 with the final payment due June 30, 2007. At December 31, 2003 and 2002, the company had

borrowings of $154.3 million and $173.4 million, respectively, under the term loan facility and had $120.0 million and $100.0 million,respectively, available for future borrowings under the revolving credit facility. The Amended Credit Agreement contains, among other

provisions, requirements for maintaining certain financial ratios and specific limits or restrictions on acquisitions, indebtedness,investments, payment of dividends and repurchases of common stock.

GS

Secured Borrowing and Lending Activities

The firm obtains secured short-term financing principally through the use of repurchase agreements and securities lending agreements toobtain securities for settlement, to finance inventory positions and to meet customers needs. In these transactions, the firm either providor receives collateral, including U.S. government, federal agency, mortgage-backed, investment-grade foreign sovereign obligations andequity securities.

The firm receives collateral in connection with resale agreements, securities lending transactions, derivative transactions, customer margloans and other secured lending activities. In many cases, the firm is permitted to sell or repledge securities held as collateral. Thesesecurities may be used to secure repurchase agreements, enter into securities lending or derivative transactions, or cover short positions.As of November 2003 and November 2002, the fair value of securities received as collateral by the firm that it was permitted to sell orrepledge was $410.01 billion and $316.31 billion, respectively, of which the firm sold or repledged $350.57 billion and $272.49 billion,

respectively.

The firm also pledges its own assets to collateralize repurchase agreements and other secured financings. As of November 2003 andNovember 2002, the carrying value of securities included in Financial instruments owned, at fair value that had been loaned or pledgeto counter-parties that did not have the right to sell or repledge was $47.39 billion and $34.66 billion, respectively.

NOTE 4

SHORT-TERM BORROWINGS

The firm obtains unsecured short-term borrowings through issuance of promissory notes, commercial paper and bank loans. Short-termborrowings also include the portion of long-term borrowings maturing within one year and certain long-term borrowings that may bepayable within one year at the option of the holder. The carrying value of these short-term obligations approximates fair value due to the

short-term nature.


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12

Short-term borrowings are set forth below:AS OF NOVEMBER


Promissory notes $ 24,119 $ 20,433

Commercial paper 4,767 9,463Bank loans and other 8,183 4,948Current portion of long-term borrowings 7,133 5,794Total (1) $ 44,202 $ 40,638

(1) As of November 2003 and November 2002, the weighted average interest rates for short-term borrowings, including commercial paper, were 1.48% and 2.09%, respectively.

NOTE 5

LONG-TERM BORROWINGSLong-term borrowings are set forth below:

AS OF NOVEMBER


Fixed rate obligations (1)

U.S. dollar $ 28,242 $ 19,550Non-U.S. dollar 8,703 4,407

Floating rate obligations (2)

U.S. dollar 13,269 10,175Non-U.S. dollar 7,268 4,579

Total $ 57,482 $ 38,711

(1) During 2003 and 2002, interest rates on U.S. dollar fixed rate obligations ranged from 4.13% to 12.00% and from 5.50% to 12.00%, respectively. During 2003 and 2002, interest

rates on non-U.S. dollar fixed rate obligations ranged from 0.70% to 8.88% and from 1.20% to 8.88%, respectively.

(2) Floating interest rates generally are based on LIBOR, the U.S. Treasury bil l rate or the federal funds rate. Certain equity-linked and indexed instruments are included in floating rate

obligations.

As of November 2003, long-term borrowings included nonrecourse debt of $5.4 billion, consisting of $3.2 billion issued during the yearby William Street Funding Corporation (Funding Corp) (a wholly owned subsidiary of Group Inc. formed to raise funding to support loacommitments made by another wholly owned William Street entity to investment-grade clients), $1.6 billion issued by consolidated VIEand $0.6 billion issued by other consolidated entities, primarily associated with the firms ownership of East Coast Power L.L.C. As of

November 2002, long-term borrowings included nonrecourse debt of $530 million issued by consolidated VIEs. Nonrecourse debt is debthat Group Inc. is not directly or indirectly obligated to repay through a guarantee, general partnership interest or contractual arrangemen

Long-term borrowings by fiscal maturity date are set forth below:AS OF NOVEMBER

2003 (1) (2) (3) 2002 (2)

U.S. NON-U.S. U.S. NON-U.S.

(IN MILLIONS) DOLLAR DOLLAR TOTAL DOLLAR DOLLAR TOTAL

2004 $ $ $ $ 6,846 $ 184 $ 7,030

2005 7,854 4,598 12,452 5,804 3,075 8,8792006 6,133 1,576 7,709 1,575 1,020 2,5952007 1,274 564 1,838 1,094 953 2,0472008 3,105 2,546 5,651 239 593 8322009-thereafter 23,145 6,687 29,832 14,167 3,161 17,328Total $ 41,511 $ 15,971 $ 57,482 $ 29,725 $ 8,986 $ 38,711

The firm enters into derivative contracts, such as interest rate futures contracts, interest rate swap agreements, currency swap agreementsand equity-linked contracts, to effectively convert a substantial portion of its long-term borrowings into U.S. dollar-based floating rateobligations. Accordingly, the aggregate carrying value of these long-term borrowings and related hedges approximates fair value.

The effective weighted average interest rates for long-term borrowings, after hedging activities, are set forth below:

AS OF NOVEMBER

2003 2002

($ IN MILLIONS) AMOUNT RATE AMOUNT RATE

Fixed rate obligations $ 1,517 7.43 $ 1,057 8.35

Floating rate obligations 55,965 1.79 37,654 2.24

Total $ 57,482 1.94 $ 38,711 2.40


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OTHER INCOME

JC PENNEY

18 Real Estate And Other Expense/(Income)

($ in millions) 2004 2003 2002

Real estate activities $ (30 ) $ (28 ) $ (25 )Net gains from sale of real estate (8 ) (51 ) (16 )

Asset impairments, PVOL and other unit closing costs 19 57 75Management transition costs 29 Other 2 5 25

Total $ 12 $ (17 ) $ 59

INCOME TAXES

ALLIANCE CAPITAL

6. Income Taxes

Alliance Holding is a publicly traded partnership for federal tax purposes and, accordingly, is not subject to federal or state corporat

income taxes. However, Alliance Holding is subject to the New York City unincorporated business tax ("UBT") and to a 3.5% federal taon partnership gross income from the active conduct of a trade or business. Alliance Holding's partnership gross income is primarilyderived from its interest in the Operating Partnership.

Income tax expense, all currently payable, consists of (in thousands):

Years Ended December 31,

2003 2002 2001

Federal tax on partnership gross business income and income tax expense $ 21,819 $ 21,653 $ 22,729

The principal reasons for the difference between Alliance Holding's effective tax rates and the UBT statutory tax rate of 4% are asfollows (in thousands):

Years Ended December 31,

2003 2002 2001

UBT statutory rate $ 4,017 4.0% $ 7,348 4.0% $ 7,281 4.0%Federal tax on partnership gross business income 21,819 21.7 21,653 11.8 22,729 12.5Credit for UBT taxes paid by the Operating Partnership (4,017) (4.0) (7,348) (4.0) (7,281) (4.0)Income tax expense and effective tax rate $ 21,819 21.7% $ 21,653 11.8% $ 22,729 12.5%

RECKSON ASSOCIATES

Income Taxes

Commencing with its taxable year ended December 31, 1995, the Company elected to be taxed as a REIT under the Internal RevenueCode of 1986, as amended (the "Code"). To qualify as a REIT, the Company must meet a number of organizational and operational

requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to its stockholders. It ismanagement's current intention to adhere to these requirements and maintain the Company's REIT status. As a REIT, the Companygenerally will not be subject to corporate level federal income tax on taxable income it distributes currently to its stockholders. If theCompany fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including anapplicable alternative minimum tax) and may not be able to qualify as a REIT for the subsequent four taxable years. Even if the Companqualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federalincome and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through theService Companies as taxable REIT subsidiaries are subject to federal, state and local income taxes. (See Note 14 for the Company'sreconciliation of GAAP net income to taxable income, its reconciliation of cash distributions to the dividends paid deduction and itscharacterization of taxable distributions).


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14

COMPREHENSIVE INCOME

ARCH CAPITALYears Ended December 31,

2003 2002 2001

Comprehensive IncomeNet income $ 280,591 $ 58,982 $ 22,016Other comprehensive income (loss), net of deferred income tax

Unrealized appreciation (decline) in value of investments:Unrealized holding gains (losses) arising during year,net of deferred income tax

17,334 38,884 (7,153)

Reclassification of net realized investment (gains)losses, net of income tax, included in net income

(22,833 ) 2,618 (11,140)

Other comprehensive income (loss) (5,499 ) 41,502 (18,293)Comprehensive Income $ 275,092 $ 100,484 $ 3,723

BLACKROCK

15. Comprehensive IncomeYear ended

December 31,

2003 2002 2001

Net income $ 155,402 $ 133,249 $ 107,434Other comprehensive gain (loss):Unrealized gain (loss) from investments, available for sale, net of taxes of $1,443,

$1,243 and ($171), respectively

2,699 2,053 (766)

Foreign currency translation gain (loss) 3,097 1,715 (294)

Comprehensive income $ 161,198 $ 137,017 $ 106,374

EPS

HRH

NOTE I Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:

(in thousands, except per share amounts) 2003 2002 2001

Numerator for basic net income per share net income $ 74,954 $ 65,119 $ 32,34Effect of dilutive securities:5.25% Convertible Subordinated Debentures 1 955 1,08

Numerator for dilutive net income per share net income available after assumed conversions $ 74,954 $ 66,074 $ 33,43

DenominatorWeighted average shares 34,357 29,208 27,33Effect of guaranteed future shares to be issued in connection with agency acquisitions 238 32 7

Denominator for basic net income per share 34,595 29,240 27,41Effect of dilutive securities:

Employee stock options 697 1,025 79Employee non-vested stock 113 148 10Contingent stock acquisitions 899 25 25.25% Convertible Subordinated Debentures 1 2,438 2,81

Dilutive potential common shares 1,709 3,636 3,74

Denominator for diluted net income per share adjusted weighted average shares and assumedconversions

36,304 32,876 31,16

Net Income Per Share:Basic $ 2.17 $ 2.23 $ 1.1Assuming Dilution $ 2.06 $ 2.01 $ 1.0


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15

BEAR STEARNS

FRONT OF FILING:

On February 19, 2004, the registrant had 103,705,451 outstanding shares of common stock, par value $1.00 per share, which is theregistrant's only class of common stock.

EARNINGS PER SHARE FOOTNOTEEPS is computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS is computed by dividing net income applicable tocommon shares, adjusted for costs related to vested shares under the CAP Plan, as well as the effect of the redemption of preferred stock

by the weighted average number of common shares outstanding. Common shares outstanding includes vested units issued under certainemployee stock compensation plans that will be distributed as shares of common stock. Diluted EPS includes the determinants of Basic

EPS and, in addition, gives effect to dilutive potential common shares related to employee stock compensation plans.

The computations of Basic and Diluted EPS for the fiscal years ended November 30 are set forth below:

2003 2002 2001

-------------------------------------------------------------------------------------

(in thousands, except per share amounts)

-------------------------------------------------------------------------------------

Net income $1,156,406 $878,345 $618,692

Preferred stock dividends (31,375) (35,606) (39,113)

Redemption of preferred stock 720 15,832 --

Income adjustment (net of tax) applicable to

deferred compensation arrangements--vested

shares 81,177 70,428 60,197

-------------------------------------------------------------------------------------

Net earnings used for Basic EPS 1,206,928 928,999 639,776

Income adjustment (net of tax) applicable

to deferred compensation arrangements--

non-vested shares 29,063 17,536 9,797

-------------------------------------------------------------------------------------

Net earnings used for Diluted EPS $1,235,991 $946,535 $649,573

-------------------------------------------------------------------------------------

Total basic weighted average common shares

outstanding(1) 127,820 132,798 142,643

-------------------------------------------------------------------------------------

Effect of dilutive securities:

Employee stock options 2,415 1,593 917

CAP and restricted units 14,792 11,955 8,657-------------------------------------------------------------------------------------

Dilutive potential common shares 17,207 13,548 9,574

-------------------------------------------------------------------------------------

Weighted average number of common shares

outstanding and dilutive potential common shares 145,027 146,346 152,217

-------------------------------------------------------------------------------------

Basic EPS $ 9.44 $ 7.00 $ 4.49(2)

Diluted EPS $ 8.52 $ 6.47 $ 4.27(2)

-------------------------------------------------------------------------------------

(1) Includes 29,610,739, 34,083,394 and 41,612,857 vested units for the fiscal years ended November 30, 2003, 2002 and 2001,respectively, issued under certain employee stock compensation plans, which will be distributed as shares of common stock.

(2) Net of a $.04 per share loss due to the cumulative effect of a change in accounting principle.

COMMON STOCK

BLACKROCK

13. Common Stock

BlackRocks class A, $0.01 par value, common shares authorized was 250,000,000 shares at December 31, 2003 and 2002. BlackRocksclass B, $0.01 par value, common shares authorized was 100,000,000 shares at December 31, 2003 and 2002. Holders of class A commostock have one vote per share and holders of class B common stock have five votes per share on all stockholder matters affecting bothclasses.


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16

RECKSON ASSOCIATES

7. STOCKHOLDERS' EQUITY

An OP Unit and a share of Class A common stock have essentially the same economic characteristics as they effectively share equally inthe net income or loss and distributions of the Operating Partnership. Subject to certain holding periods, OP Units may either be redeemfor cash or, at the election of the Company, for shares of Class A common stock on a one-for-one basis.

The limited partners' minority interest in the Operating Partnership ("Limited Partner Equity"), which is reflected in the accompanyingbalance sheets, is reported at an amount equal to the limited partners' ownership percentage of the net equity of the Operating Partnershipat the end of reporting period. The Limited Partner Equity is adjusted at the end of the period to reflect the ownership percentages at that

time. The Limited Partner Equity was 5.8% and 10.5% at December 31, 2003 and 2002, respectively.

The following table sets forth the Company's annual dividend rates and dividends paid on each class of its common and preferred stockfor each of the years ended December 31:

2003 2002 2001

---- ---- ----

Class A common stock:

Dividend rate......................... $ 1.698 $ 1.698 $ 1.621

============== ================ =================

Dividends paid (in thousands)......... $ 81,638 $ 85,102 $ 77,426

============== ================ =================

Class B common stock:

Dividend rate......................... $ 2.588 $ 2.593 $ 2.498

============== ================ =================Dividends paid (in thousands)......... $ 25,665 $ 26,423 $ 25,692

============== ================ =================

Series A preferred stock:

Dividend rate......................... $ 1.906 $ 1.906 $ 1.906

============== ================ =================


============== ================ =================

Series B preferred stock:

Dividend rate......................... $ 2.213 $ 2.213 $ 2.171

============== ================ =================


============== ================ =================

On January 1, 2003, the Company had issued and outstanding 9,915,313 shares of Class B Exchangeable Common Stock, par value $.01per share (the "Class B common stock"). The shares of Class B common stock were exchangeable at any time, at the option of the holdeinto an equal number of shares of Class A common stock, subject to customary antidilution adjustments. The Company, at its option,could have redeemed any or all of the Class B common stock in exchange for an equal number of shares of the Company's Class Acommon stock at any time following November 23, 2003.

On October 24, 2003, the Company gave notice to its Class B common stockholders that it would exercise its option to exchange all of itClass B common stock outstanding on November 25, 2003 for an equal number of shares of Class A common stock. The Board ofDirectors declared a final cash dividend on the Company's Class B common stock to holders of record on November 25, 2003 in theamount of $.1758 per share, which was paid on January 12, 2004. The payment covered the period from November 1, 2003 through

November 25, 2003 and was based on the previous quarterly Class B common stock dividend rate of $.6471 per share. In order to alignthe regular quarterly dividend payment schedule of the former holders of Class B common stock with the schedule of the holders of Clas

A common stock for periods subsequent to the exchange date for the Class B common stock, the Board of Directors also declared a cashdividend with regard to the Class A common stock to holders of record on October 14, 2003 in the amount of $.2585 per share, which wpaid on January 12, 2004. This payment covered the period from October 1, 2003 through November 25, 2003 and was based on thecurrent quarterly Class A common stock dividend rate of $.4246 per share. As a result, the Company has declared dividends through

November 25, 2003 to all holders of Class A common stock and Class B common stock. The Board of Directors also declared the Classcommon stock cash dividend for the portion of the fourth quarter subsequent to November 25, 2003. The holders of record of Class Acommon stock on January 2, 2004, giving effect to the exchange transaction, received a Class A common stock dividend in the amount o$.1661 per share, on January 12, 2004. This payment covered the period from November 26, 2003 through December 31, 2003 and was

based on the current quarterly Class A common stock dividend rate of $.4246 per share.

The Board of Directors of the Company authorized the purchase of up to five million shares of the Company's Class A common stock.Transactions conducted on the New York Stock Exchange will be effected in accordance with the safe harbor provisions of the SecuritiesExchange Act of 1934 and may be terminated by the Company at any time. During the year ended December 31, 2003, under this buy-

back program, the Company purchased 252,000 shares of Class A common stock at an average price of $18.01 per Class A share foran aggregate purchase price of approximately $4.5 million.


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17

STOCK OPTIONS

HRH

The company has adopted and the shareholders have approved the 2000 Stock Incentive Plan (as amended and restated in 2003), the Noemployee Directors Stock Incentive Plan and the Hilb, Rogal and Hamilton Company 1989 Stock Plan which provide for the granting ofoptions to purchase up to an aggregate of approximately 5,215,000 and 3,011,000 shares of common stock as of December 31, 2003 and2002, respectively. Stock options granted have seven to ten year terms and vest and become fully exercisable at various periods up to fiveyears.

Stock option activity under the plans was as follows:Shares Weighted Average

Exercise Price

Outstanding at January 1, 2001 2,176,002 $ 9.25Granted 587,000 19.58Exercised 233,906 7.90Expired 34,790 11.21

Outstanding at December 31, 2001 2,494,306 11.79Granted 1,263,000 41.35Exercised 358,405 8.77Expired 34,750 31.61

Outstanding at December 31, 2002 3,364,151 23.00

Granted 650,000 36.72Exercised 498,675 9.26Expired 314,175 42.14

Outstanding at December 31, 2003 3,201,301 26.04

Exercisable at December 31, 2003 1,770,609 18.88Exercisable at December 31, 2002 1,704,901 12.19Exercisable at December 31, 2001 1,653,956 9.44

The following table summarizes information about stock options outstanding at December 31, 2003:

\ Options Outstanding Options Exercisable

Ranges ofExercise Prices

NumberOutstanding

Weighted AverageRemaining

Contractual

Life (years)

Weighted AverageExercise Price

NumberExercisable

Weighted AverageExercise Price

$ 4.52 - 9.03 653,226 1.1 $ 8.23 653,226 $ 8.239.03 - 13.55 112,700 4.3 10.68 112,700 10.68

13.55 - 18.06 331,250 3.6 14.16 267,750 14.1918.06 - 22.58 501,250 4.5 19.42 289,250 19.4227.09 - 31.61 35,000 6.3 29.70 5,000 28.7831.61 - 36.12 100,000 6.4 35.86 90,000 35.9536.12 - 40.64 1,103,750 5.4 37.42 254,249 37.8140.64 - 45.15 364,125 5.4 45.15 98,434 45.15

3,201,301 4.2 $ 26.04 1,770,609 $ 18.88

There were 2,526,000 and 790,000 shares available for future grant under these plans as of December 31, 2003 and 2002, respectively.

No compensation expense related to these options was recognized in operations for 2003, 2002 or 2001 except as disclosed in Note N. Adisclosed in Note A, the company accounts for its stock options using the intrinsic value method prescribed in APB No. 25. The companhas also disclosed in Note A the effect on net income and earnings per share if the company had applied the fair value recognition

provisions of Statement 123 to its granted stock options.

During 2003, 2002 and 2001, the company awarded 142,200, 56,125 and 64,750 shares, respectively, of restricted stock under the 2000Stock Plan with a weighted average fair value at the grant date of $33.62, $37.45 and $16.16 per share, respectively. These restrictedshares vest ratably over a four year period beginning in the second year of continued employment. During 2003, 2002 and 2001, 10,4761,850 and 1,740 shares, respectively, of restricted stock were forfeited. Compensation expense related to these awards was $1.9 million,$1.6 million and $1.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.


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18

EMPLOYEE BENEFIT PLANS

GS

EMPLOYEE BENEFIT PLANS

The firm sponsors various pension plans and certain other postretirement benefit plans, primarily healthcare and life insurance, whichcover most employees worldwide. The firm also provides certain benefits to former or inactive employees prior to retirement. A summaof these plans is set forth below.

Defined Benefit Pension Plans and Postretirement Plans

The firm maintains a defined benefit pension plan for substantially all U.S. employees. Employees of certain non-U.S. subsidiariesparticipate in various local defined benefit plans. These plans generally provide benefits based on years of credited service and apercentage of the employees eligible compensation. In addition, the firm has unfunded postretirement benefit plans that provide medicaand life insurance for eligible retirees, employees and dependents in the United States.

The following table provides a summary of the changes in the plans benefit obligations and the fair value of assets for November 2003and November 2002 and a statement of the funded status of the plans as of November 2003 and November 2002:

AS OF OR FOR YEAR ENDED NOVEMBER

2003 2002

U.S. NON-U.S. POST- U.S. NON-U.S. POST-

(IN MILLIONS) PENSION PENSION RETIREMENT PENSION PENSION RETIREMENT

Benefit obligationBalance, beginning of year $ 162 $ 245 $ 184 $ 140 $ 184 $ 84Business combination 75 1 Service cost 8 41 8 6 37 8Interest cost 13 12 12 10 9 9Plan amendments 1 40Actuarial loss/(gain) 39 22 (3) 8 7 50Benefits paid (3) (13) (6) (2) (9) (7)Effect of foreign exchange rates 28 16

Balance, end of year $ 294 $ 335 $ 196 $ 162 $ 245 $ 184Fair value of plan assets

Balance, beginning of year $ 167 $ 206 $ $ 138 $ 164 $ 12

Business combination 45 Actual return on plan assets 31 27 (14) (21) (1)Firm contributions 37 58 6 45 56 7Benefits paid (3) (13) (6) (2) (9) (7)Other distributions (11)Effect of foreign exchange rates 26 16

Balance, end of year $ 277 $ 304 $ $ 167 $ 206 $ Prepaid/(accrued) benefit cost

Funded status $ (17) $ (31) $ (196) $ 5 $ (39) $ (184)Unrecognized loss 90 89 56 72 79 62Unrecognized transition (asset)/obligation (26) 15 2 (28) 15 1Unrecognized prior service cost 3 22 4 31Adjustment to recognize additional minimum liability (1)

Prepaid/(accrued) benefit cost $ 47 $ 76 $ (116) $ 49 $ 58 $ (90)

The accumulated benefit obligation for all defined benefit plans was $560 million and $356 million as of November 2003 and Novembe2002, respectively.

For plans in which the accumulated benefit obligation exceeded plan assets, the aggregate projected benefit obligation and accumulatedbenefit obligation was $160 million and $139 million, respectively, as of November 2003, and $72 million and $55 million, respectivelyas of November 2002. The fair value of plan assets for each of these plans was $97 million and $39 million as of November 2003 and

November 2002, respectively.


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The components of pension expense/(income) and postretirement expense are set forth below:

YEAR ENDED NOVEMBER

(IN MILLIONS) 2003 2002 2001

U.S. pensionService cost $ 8 $ 6 $ 4Interest cost 13 10 9Expected return on plan assets (16) (12) (12)

Net amortization 5 (2) (3)

Total $ 10 $ 2 $ (2)Non-U.S. pension

Service cost $ 41 $ 37 $ 35Interest cost 12 9 7Expected return on plan assets (15) (12) (9)

Net amortization 8 4 1Total $ 46 $ 38 $ 34Postretirement

Service cost $ 8 $ 8 $ 6Interest cost 12 9 5Expected return on plan assets (1) (1)

Net amortization 11 10 Total $ 31 $ 26 $ 10

The weighted average assumptions used to develop net periodic pension cost and the actuarial present value of the projected benefitobligation are set forth below. These assumptions represent a weighted average of the assumptions used for the U.S. and non-U.S. plansand are based on the economic environment of each applicable country.

YEAR ENDED NOVEMBER

2003 2002 2001

Defined benefit pension plansU.S. pensionprojected benefit obligationDiscount rate 6.00% 6.75%

7.00%

Rate of increase in future compensation levels 5.00 5.00 5.00U.S. pensionnet periodic benefit cost

Discount rate 6.59(1) 7.00 7.50Rate of increase in future compensation levels 5.00 5.00 5.00Expected long-term rate of return on plan assets 8.50 8.50 8.50

Non-U.S. pensionprojected benefit obligationDiscount rate 4.76 4.78 4.93Rate of increase in future compensation levels 4.37 4.14 4.11Expected long-term rate of return on plan assets 6.25 5.86 5.74

Postretirement plansprojected benefit obligationDiscount rate 6.00% 6.75%

7.00%

Rate of increase in future compensation levels 5.00 5.00 5.00

Postretirement plansnet periodic benefit costDiscount rate 6.75(1) 7.00 7.50

Rate of increase in future compensation levels 5.00 5.00 5.00Expected long-term rate of return on plan assets 8.50 8.50

(1) Includes plan added in connection with business combination.

The firms approach in determining the long-term rate of return for plan assets is based upon historical financial market relationships thahave existed over time with the presumption that this trend will generally remain constant in the future.

For measurement purposes, an annual growth rate in the per capita cost of covered healthcare benefits of 14% was assumed for the fiscayear ending November 2004. The rate was assumed to decrease ratably to 5% for the fiscal year ending November 2010 and remain atthat level thereafter.


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20

The assumed cost of healthcare has an effect on the amounts reported for the firms postretirement plans. A 1% change in the assumedhealthcare cost trend rate would have the following effects:

1% INCREASE 1% DECREASE

(IN MILLIONS) 2003 2002 2003 2002

Cost $ 4 $ 3 $ (3) $ (2)Obligation 33 25 (26) (22)

The following table sets forth the composition of plan assets for the U.S. defined benefit pension plans by asset category:

AS OF NOVEMBER

2003 2002

Equity securities 61%

66%

Debt securities 25 19Other 14 15Total 100%

100%

The investment approach of the firms U.S. defined benefit pension plans involves employing a sufficient level of flexibility to captureinvestment opportunities as they occur, while maintaining reasonable parameters to ensure that prudence and care are exercised in theexecution of the investment program. The plans employ a total return on investment approach, whereby a mix, which is broadly similar the actual asset allocation as of November 2003, of equity securities, debt securities and other assets is targeted to maximize the long-terreturn on assets for a given level of risk. Investment risk is measured and monitored on an ongoing basis by the firms RetirementCommittee through periodic portfolio reviews, meetings with investment managers and annual liability measurements.

The firm does not expect to be required to contribute to its U.S. pension plans in fiscal 2004, but does expect to contribute $6 million toits unfunded postretirement benefit plan in the form of benefit payments in fiscal 2004.

The following table sets forth amounts of benefits projected to be paid from the firms U.S. defined benefit pension and postretirementplans and reflects expected future service, where appropriate:

U.S. POST-

(IN MILLIONS) PENSION RETIREMENT

2004 $ 4 $ 62005 5 72006 5 72007 6 82008 7 82009-2013 50 45

Defined Contribution Plans

The firm contributes to employer-sponsored U.S. and non-U.S. defined contribution plans. The firms contribution to these plans was$199 million, $154 million and $193 million for the years ended November 2003, November 2002 and November 2001, respectively.

The firm has also established a nonqualified defined contribution plan (the Plan) for certain senior employees. Shares of common stockcontributed to the Plan and outstanding as of November 2003 were 4.2 million. The shares of common stock will vest and generally bedistributable to the participant on specified future dates if the participant satisfies certain conditions and the participants employmentwith the firm has not been terminated, with certain exceptions for terminations of employment due to death or a change in control.Dividends on the underlying shares of common stock are paid currently to the participants. Forfeited shares remain in the Plan and arereallocated to other participants. Contributions to the Plan are expensed on the date of grant. Plan expense was immaterial for the yearsended November 2003, November 2002 and November 2001.


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21

RELATED PARTY TRANSACTIONS

ARCH CAPITAL

9. Transactions with Related Parties

Effective August 1, 2003, Constantine Iordanou became President and Chief Executive Officer of ACGL. Mr. Iordanou succeededPeter Appel, who remains on the board of directors of ACGL. Effective July 31, 2003, the Company agreed to pay $2.3 million toMr. Appel in recognition of his performance during his tenure as President and Chief Executive Officer of ACGL. In addition, Mr. Appeagreed to assist ACGL in seeking to maximize the value of the assets deemed "non-core" under the subscription agreement entered into connection with the November 2001 capital infusion. In that connection, the Company entered into a non-core business paymentagreement with Mr. Appel which provided that Mr. Appel would be paid an amount equal to $1.5 million if, and only if, the aggregate o

the realized values of all non-core assets equaled or exceeded the aggregate of the adjusted closing book values of all such non-core asseThe agreement also provided that Mr. Appel would be paid an amount equal to 15% of the net excess, if any, of the realized value overthe adjusted closing book value of all the non-core assets; provided, however that any such additional amount payable would not exceed$1.5 million (such that the aggregate amount payable under the non-core business payment agreement would not exceed $3.0 million). Aa result of the resolution between the Company and the original investors from the November 2001 capital infusion regarding the value othe non-core assets (See Note 11, "Share CapitalSeries A Convertible Preference Shares"), at December 31, 2003, the Companyaccrued $3 million related to the non-core business payment agreement, which amount was subsequently paid to Mr. Appel inFebruary 2004.

In connection with the Company's information technology initiative in 2002, the Company has entered into arrangements with twosoftware companies, which provide document management systems and information and research tools to insurance underwriters, inwhich Robert Clements and John Pasquesi, Chairman and Vice Chairman of ACGL's board of directors, respectively, each hold minorityownership interests. The Company pays fees under such arrangements based on usage. Under one of these agreements, fees payable are

subject to a minimum of approximately $575,000 for the two-year period ending July 2004. The Company made payments ofapproximately $561,000 and $232,000 under such arrangements for the years ended December 31, 2003 and 2002, respectively.

During 2002, the Company leased temporary office space from Tri-City Brokerage Inc. (together with its affiliates, "Tri-City"), acompany in which Peter Appel, former President and Chief Executive Officer of ACGL, Mr. Clements and Distribution Investors, LLCheld ownership interests until March 2003. The aggregate rental payments related to such lease were approximately $247,000 throughMarch 31, 2003. In addition, Tri-City, as broker, placed business with the Company's insurance operations and the Company incurredcommission expenses of approximately $1.1 million under such arrangements for the three months ended March 31, 2003. In March 20the Company's merchant banking subsidiary, Hales & Company Inc., received a fee of $1.25 million from Tri-City for advisory servicesin connection with the sale of Tri-City to non-affiliated persons.

During the 2002 third quarter, the Company's board of directors accelerated the vesting terms of certain restricted common sharesgranted to Robert Clements, Chairman of the board, in connection with the November 2001 capital infusion, and Mr. Clements agreed torepay the outstanding $13.5 million loan previously made to him by the Company on or before November 12, 2002. Mr. Clements wasgranted 1,689,629 restricted common shares which were initially scheduled to vest in five equal annual amounts commencing onOctober 23, 2002. The vesting period and the amounts were changed as follows: 60% of the shares vested on October 23, 2002, 20%vested on October 23, 2003 and the remaining shares will vest on October 23, 2004.

The $13.5 million loan made by the Company to Mr. Clements was used by him to pay income and self employment taxes. Under hretention agreement, Mr. Clements received additional compensation in cash in an amount sufficient to defray the loan's interest costs. Inorder to facilitate the repayment of the loan, the Company agreed to repurchase, at Mr. Clements' option, an amount of his shares equal tthe principal balance of the loan less any cash payment made by Mr. Clements, for a price per share based on the market price for thecommon shares as reported on the NASDAQ National Market on the date of sale. In addition, the Company agreed to make gross-up

payments to Mr. Clements in the event of certain tax liabilities in connection with the repurchase. Pursuant to such arrangements,Mr. Clements sold 411,744 common shares of ACGL for an aggregate purchase price of $11.5 million. Mr. Clements used all of such sa

proceeds and $2.0 million in cash to repay the entire loan balance on November 12, 2002. The Company's diluted book value per sharedecreased by approximately $0.04 following such share repurchase. During the loan period, Mr. Clements received payments of $638,00

from the Company under his retention agreement, of which $364,000 was used by him to pay interest on the loan.

The Company agreed to reimburse Warburg Pincus and Hellman & Friedman for their costs and expenses in connection with theNovember 2001 capital infusion. The Company has reimbursed Warburg Pincus and Hellman & Friedman approximately $2.3 million inthe aggregate under such agreements. For a description of certain agreements entered into by the Company and the investors inconnection with the capital infusion, see Note 11, "Share CapitalSeries A Convertible Preference Shares."


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ACQUISITIONS

HRH

NOTE K Acquisitions

During 2003, the company acquired certain assets and liabilities of six insurance agencies and other accounts for $64.4 million ($20.1million in cash, $15.5 million in guaranteed future payments and 843,106 shares of common stock) in purchase accounting transactions.Assets acquired include intangible assets of $67.9 million. The combined purchase price may be increased by $15.2 million in 2004,$15.0 million in 2005 and $6.4 million in 2006 based upon net profits realized. For certain acquisitions, the allocation of purchase price

preliminary and subject to refinement as the valuations of certain intangible assets are not final.

On July 1, 2002, the company acquired all of the issued and outstanding membership interest units of Hobbs Group, LLC (Hobbs) otherthan those owned by Hobbs IRA Corp. (HIRAC), and all of the issued and outstanding capital stock of HIRAC, pursuant to a purchaseagreement dated May 10, 2002, by and among the company, Hobbs, the members of Hobbs (other than HIRAC) and the shareholders ofHIRAC.

Hobbs is an insurance broker serving top-tier clients and provides property and casualty insurance brokerage, risk management andexecutive and employee benefits services. This acquisition allows the company to expand its capabilities in the top-tier market. Inaddition, Hobbs provides the company with additional market presence and expertise in the employee benefits services area and anincreased presence in executive benefits. Hobbs also brings increased depth to the geographic reach of the companys existing national

platform.

At the acquisition date, the company paid approximately $116.5 million in cash, which included acquisition costs of $2.3 million and thecompanys assumption and retirement of certain debt of Hobbs, and issued to the members of Hobbs (other than HIRAC) and the

shareholders of HIRAC an aggregate of 719,729 shares of the companys common stock valued at $31.6 million. In addition, thecompany paid contingent consideration in August 2003 consisting of $38.4 million in cash and the issuance of 1,751,747 shares of thecompanys common stock valued at $56.7 million. The values of the shares issued were determined based on the average market price othe companys stock over the period including two days before and after the date at which the number of shares to be issued became fix

The company has further agreed to assume and satisfy certain existing deferred compensation and earn-out obligations of Hobbs fromHobbs prior acquisitions estimated to approximate a net present value of $30 million as of the date of acquisition. The assumed existingearn-outs will be recorded when their respective contingencies are resolved and consideration is paid.

The following table summarizes the fair values of the acquired assets and assumed liabilities at the date of acquisition and reflects thepayment of contingent consideration:

(dollar s in thousands) Amount Intangibles Weighted

Average Useful Life (years)

Current assets $ 79,600Property and equipment 2,053Intangible assets subject to amortization: 9.4Customer relationships 41,800 10.0

Noncompete/nonpiracy agreements 4,100 7.0Tradename 1,900 2.5

47,800Goodwill 204,641Other assets 293

Total assets acquired 334,387Current liabilities 82,121Deferred tax liabilities 5,650Other long-term liabilities 3,253

Total liabilities assumed 91,024

Net assets acquired $ 243,363

$151.7 million of the goodwill is deductible for tax purposes.


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The following unaudited pro forma results of operations of the company give effect to the acquisition of Hobbs as though the transactionhad occurred as of the beginning of the respective periods:

(in t housands) 2002 2001

Total Revenues $ 503,605 $ 425,492Income before cumulative effect of accounting change and extraordinary item $ 64,035 $ 38,646

Net Income $ 67,568 $ 38,646Income per share before cumulative effect of accounting change and extraordinary item:Basic $ 2.16 $ 1.37Assuming Dilution $ 1.96 $ 1.25

Net Income Per Share:Basic $ 2.28 $ 1.37Assuming Dilution $ 2.06 $ 1.25

The pro forma net income results for 2002 include a cumulative effect of accounting change of $3.9 million ($0.12 per share) related tothe companys change in revenue recognition policy (see Note B) and an extraordinary loss of $0.4 million ($0.01 per share) related toHobbs debt extinguishment.

During 2002, the company acquired certain assets and liabilities of six other insurance agencies and other accounts for $11.1 million ($9million in cash and $1.3 million in guaranteed future payments) in purchase accounting transactions. Assets acquired include intangibleassets of $11.0 million. The combined purchase price was increased by $3.2 million in 2003 and may be increased by $1.1 million in 20and $1.1 million in 2005 based upon net profits realized.

During 2001, the company acquired certain assets and liabilities of 10 insurance agencies and other accounts for $84.1 million ($48.0million in cash, $8.6 million in guaranteed future payments and 1,379,820 shares of common stock) in purchase accounting transactionsAssets acquired include intangible assets of $82.7 million. The combined purchase price was increased by $5.4 million in 2002 and $5.9million in 2003, and may be increased by $3.6 million in 2004 based upon net profits realized.

The financial statements of the company reflect the combined operations of the company and each acquisition from the respective closindate of each acquisition.

SUBSEQUENT EVENT

BLACKROCK

19. Subsequent Event

Subsequent to December 31, 2003, BlackRocks Board of Directors has approved a 2 million share repurchase program. The Companymay make repurchases from time to time as market conditions warrant in open market or privately negotiated transactions at the fulldiscretion of the Companys management. The authority to purchase 310,000 shares available under pre-existing programs terminatedwith the approval of this program. In addition to authorizing the new share repurchase program, the Board of Directors also approved amanagement stock buy-back that authorized BlackRock to purchase shares owned by senior management through the repurchase prograShares repurchased by the Company under the senior management buy-back program reduced the current 2 million share repurchaseauthorization. Eligible participants elected to sell an aggregate of 690,575 shares which, based on BlackRocks average closing price forthe five days ended January 28, 2004, approximated $40,400.

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