SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8989
The Bear Stearns Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3286161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Park Avenue, New York, New York 10167
(Address of principal executive offices) (Zip Code)
(212) 272-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 8, 1996, the latest practicable date, there were 114,782,276
shares of Common Stock, $1 par value, outstanding.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Financial Condition at March 29, 1996
(Unaudited) and June 30, 1995.
Consolidated Statements of Income (Unaudited) for the three- and
nine-month periods ended March 29, 1996 and March 31, 1995.
Consolidated Statements of Cash Flows (Unaudited) for the nine-month
periods ended March 29, 1996 and March 31, 1995.
Notes to Consolidated Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 6. Exhibits and Reports on Form 8-K.
Signatures.
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
<CAPTION>
March 29, June 30,
1996 1995
(Unaudited)
(In thousands, except share data)
<S> <C> <C>
Cash and cash equivalents $ 360,605 $ 700,501
Cash and securities deposited with
clearing organizations or
segregated in compliance with
Federal regulations 2,052,723 1,309,573
Securities purchased under agreements
to resell 28,547,487 18,940,744
Securities borrowed 26,585,796 24,632,088
Receivables
Customers 6,648,099 5,993,772
Brokers, dealers and others 527,846 578,676
Interest and dividends 226,716 227,069
Financial instruments owned - at
fair value 25,779,459 21,509,498
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 320,532 312,867
Other assets 394,423 392,372
Total Assets $91,443,686 $74,597,160
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
<CAPTION>
March 29, June 30,
1996 1995
(Unaudited)
(In thousands, except share data)
<S> <C> <C>
Short-term borrowings $ 9,822,689 $ 8,570,777
Securities sold under agreements
to repurchase 35,087,923 29,584,724
Payables
Customers 20,794,173 16,236,611
Brokers, dealers and others 1,430,884 1,167,311
Interest and dividends 360,282 311,101
Financial instruments sold, but not
yet purchased - at fair value 14,876,331 11,241,118
Accrued employee compensation and benefits 632,080 469,189
Other liabilities and accrued expenses 680,630 453,924
83,684,992 68,034,755
Commitments and Contingencies
Long-term Borrowings 5,092,646 4,059,944
Preferred Stock Issued by Subsidiary 150,000 150,000
Stockholders' Equity
Preferred Stock 437,500 437,500
Common Stock, $1.00 par value:
200,000,000 shares authorized;
152,202,724 shares issued at
March 29, 1996 and June 30, 1995 152,203 152,203
Paid-in capital 1,571,735 1,557,237
Retained earnings 686,684 430,330
Capital Accumulation Plan 294,716 344,338
Treasury stock - at cost:
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,341,350 and 2,118,550
shares at March 29, 1996 and June 30, 1995, (95,389) (85,507)
respectively
Common Stock - 36,208,919 and 34,866,529
shares at March 29, 1996 and June 30, 1995,
respectively (511,601) (458,193)
Note receivable from ESOP Trust (19,800) (25,447)
Total Stockholders' Equity 2,516,048 2,352,461
Total Liabilities and Stockholders' Equity $91,443,686 $74,597,160
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Nine Months Ended
March 29, March 31, March 29, March 31,
1996 1995 1996 1995
(In thousands, except share data)
<S> <C> <C> <C> <C>
Revenues
Commissions $ 183,182 $ 148,925 $ 501,592 $ 395,908
Principal transactions 353,073 248,648 883,828 577,585
Investment banking 144,357 99,811 382,159 233,243
Interest and dividends 604,777 523,890 1,765,758 1,436,027
Other income 10,607 6,148 27,156 19,817
Total revenues 1,295,996 1,027,422 3,560,493 2,662,580
Interest expense 503,754 439,091 1,463,102 1,214,021
Revenues, net of
interest expense 792,242 588,331 2,097,391 1,448,559
Non-interest expenses
Employee compensation
and benefits 392,442 300,243 1,044,866 754,531
Floor brokerage, exchange
and clearance fees 35,461 27,002 95,994 78,735
Communications 23,149 21,642 68,054 64,310
Occupancy 21,686 21,879 64,088 61,971
Depreciation and
amortization 17,495 15,180 51,118 43,392
Advertising and market
development 13,926 11,577 40,832 43,065
Data processing and
equipment 8,559 8,482 26,246 25,385
Other expenses 57,709 48,874 147,087 133,415
Total non-interest
expenses 570,427 454,879 1,538,285 1,204,804
Income before provision
for income taxes 221,815 133,452 559,106 243,755
Provision for income taxes 92,944 50,712 231,233 92,627
Net income $ 128,871 $ 82,740 $ 327,873 $ 151,128
Net income applicable to
common shares $ 122,824 $ 76,432 $ 309,417 $ 132,259
Earnings per share $ 0.90 $ 0.58 $ 2.26 $ 1.00
Weighted average common
and common equivalent
shares outstanding 141,240,431 140,313,596 142,886,126 141,008,136
Cash dividends declared
per common share $ 0.15 $ 0.15 $ 0.45 $ 0.45
</TABLE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine-Months Ended
March 29, March 31,
1996 1995
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 327,873 $ 151,128
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 51,118 43,392
Deferred income taxes (38,026) (24,138)
Other 38,515 17,880
(Increases) decreases in operating receivables:
Securities borrowed (1,953,708) (3,760,251)
Brokers, dealers and others 50,830 (425,076)
Customers (654,327) 1,563,114
Other (4,772) (38,582)
Increases (decreases) in operating payables:
Brokers, dealers and others 265,324 406,459
Customers 4,557,562 (114,911)
Other 49,181 (18,396)
(Increases) decreases in:
Cash and securities deposited with clearing
organizations or segregated in compliance
with Federal regulations (743,150) 1,474,620
Securities purchased under agreements to resell (9,606,743) 1,662,919
Financial instruments owned (4,269,961) (2,700,704)
Other assets 35,077 (18,167)
Increases (decreases) in:
Securities sold under agreements to repurchase 5,503,199 (601,753)
Financial instruments sold, but not
yet purchased 3,635,213 1,851,397
Accrued employee compensation and benefits 138,991 (225,180)
Other liabilities and accrued expenses 228,728 (115,956)
Cash used in operating activities (2,389,076) (872,205)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 1,251,912 1,041,543
Issuance of long-term borrowings 1,534,362 481,368
Allocation of Capital Accumulation Plan 5,227
Other common stock transactions 1,192 11,026
Note repayment from ESOP Trust 5,647 5,229
Payments for:
Retirement of Senior Notes (509,000) (400,300)
Treasury stock purchases (111,878) (51,141)
Cash dividends paid (71,622) (69,460)
Cash provided by financing activities 2,105,840 1,018,265
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements, net (58,783) (83,428)
Purchases of investment securities and other assets (17,634) (1,172)
Proceeds from sale of investment securities and
other assets 19,757 31,538
Cash used in investing activities (56,660) (53,062)
Net (decrease) increase in cash and cash equivalents (339,896) 92,998
Cash and cash equivalents, beginning of period 700,501 294,604
Cash and cash equivalents, end of period $ 360,605 $ 387,602
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
include the accounts of The Bear Stearns Companies Inc. and its
subsidiaries (the "Company") and have been prepared pursuant to
the Securities and Exchange Commission's rules and regulations.
The consolidated financial statements reflect all adjustments
which, in the opinion of management, are normal and recurring
and are necessary for a fair statement of the results for the
interim periods presented. All material intercompany balances
and transactions have been eliminated. The nature of the
Company's business is such that the results of any interim
period may not be indicative of the results to be expected for
an entire fiscal year. Certain prior period amounts have been
reclassified to conform with the current period's presentation.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments owned and financial instruments sold, but
not yet purchased, consist of the Company's proprietary trading
and investment accounts, at fair value, as follows (in
thousands):
March 29, June 30,
1996 1995
Financial instruments owned:
United States government and agency $ 7,851,053 $ 8,688,713
Non-US government 804,294 1,256,859
Corporate equity and convertible debt 7,715,136 5,235,219
Corporate debt 4,675,201 2,723,564
Derivative financial instruments 2,110,473 1,223,258
Mortgages and other
mortgage-backed securities 2,116,122 1,771,735
Other 507,180 610,150
$25,779,459 $21,509,498
Financial instruments sold, but not
yet purchased:
United States government and agency $ 6,972,399 $ 6,111,612
Non-US government 887,687 765,230
Corporate equity 3,577,335 2,424,455
Corporate debt 1,082,795 781,792
Derivative financial instruments 2,355,643 1,155,527
Other 472 2,502
$14,876,331 $11,241,118
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At March 29, 1996, the Company is contingently liable for
unsecured letters of credit of approximately $1.9 billion and
letters of credit of approximately $204.5 million secured by
financial instruments owned by the Company, which are principally
used as collateral for securities borrowed and to satisfy margin
deposits at option and commodity exchanges.
In the normal course of business, the Company has been named as
a defendant in several lawsuits which involve claims for
substantial amounts. Although the ultimate outcome of these
suits cannot be ascertained at this time, it is the opinion of
management, after consultation with counsel, that the resolution
of such suits will not have a material adverse effect on the
results of operations or the financial condition of the Company.
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear, Stearns & Co.
Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary,
Bear, Stearns Securities Corp. ("BSSC"), are registered broker-
dealers and, accordingly, are subject to Securities and Exchange
Commission Rule 15c3-1 (the "Net Capital Rule") and the capital
rules of the New York Stock Exchange, Inc. ("NYSE") and other
principal exchanges of which Bear Stearns and BSSC are members.
Bear Stearns and BSSC have consistently operated in excess of
NYSE & SEC capital requirements. Included in the computation of
net capital of Bear Stearns is the net capital of BSSC in excess
of 5% of aggregate debit items arising from customer
transactions, as defined. At March 29, 1996, Bear Stearns' net
capital of $1.35 billion exceeded the minimum requirement by
$1.33 billion.
Bear, Stearns International Limited ("BSIL"), Bear Stearns
International Trading Limited ("BSIT") and certain other wholly
owned, London-based, broker-dealer subsidiaries, are subject to
regulatory capital requirements of the Securities and Futures
Authority ("SFA"). BSIL, BSIT and the other subsidiaries have
consistently operated in excess of these requirements.
5. EARNINGS PER SHARE
Earnings per share is computed by dividing net income applicable
to Common and Common Equivalent shares by the weighted average
number of shares of Common Stock and Common Stock Equivalents
outstanding during each period presented. Common Stock
Equivalents include the assumed distribution of shares of Common
Stock issuable under certain of the Company's deferred
compensation arrangements, with appropriate adjustments made to
net income for expense accruals related thereto. Additionally,
shares of Common Stock issued or issuable under various employee
benefit plans are included as Common Stock Equivalents.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the
nine- months ended March 29, 1996 and 1995, respectively. Income taxes
paid totaled $213.0 million and $89.8 million for the nine-months
ended March 29, 1996 and March 31, 1995, respectively.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter
derivative financial instruments and in connection with its
proprietary market-making and trading activities, enters into
transactions in a variety of cash and derivative financial
instruments in order to reduce its exposure to market, currency
and interest rate risk. SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments," defines a derivative as a future, forward, swap or
option contract, or other financial instrument with similar
characteristics such as caps, floors and collars. Generally
these financial instruments represent future commitments to
exchange interest payment streams or currencies or to purchase
or to sell other financial instruments at specific terms at
specified future dates. Option contracts provide the holder with
the right, but not the obligation, to purchase or sell a
financial instrument at a defined price before or on an
established date. These financial instruments may have market
and/or credit risk in excess of amounts recorded in the
Consolidated Statements of Financial Condition.
In order to measure derivative activity, notional or contract
amounts are frequently utilized. Notional/contract amounts,
which are not included on the balance sheet, are used to
calculate contractual cash flows to be exchanged and are
generally not actually paid or received, with the exception of
currency swaps and foreign exchange forwards. The
notional/contract amounts of financial instruments that give rise
to off-balance-sheet market risk are indicative only of the
extent of involvement in the particular class of financial
instrument and are not necessarily an indication of overall
market risk.
The following table represents the notional/contract amounts of
the Company's outstanding derivative financial instruments at
March 29, 1996 and June 30, 1995 (in billions):
Notional/ContractAmount
March 29, June 30,
1996 1995
Interest Rate:
Swap agreements, including
options, swaptions, caps
collars and floors $110.2 $68.0
Futures contracts 26.4 15.4
Options held 1.6 .5
Foreign Exchange:
Futures contracts 2.6 .7
Forward contracts 6.3 4.7
Options held 1.4 2.1
Options written 1.5 1.8
Mortgage-Backed Securities:
Forward contracts 37.6 28.1
Equity:
Swap agreements 3.9 3.0
Futures contracts .8 .3
Options held 3.6 1.6
Options written 2.2 1.6
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - continued
The derivative instruments used in the Company's trading and
dealer activities, are marked to market daily with the resulting
unrealized gains or losses recorded in the Consolidated
Statements of Financial Condition and the related income or loss
reflected in revenues derived from principal transactions. The
fair values of derivative financial instruments held or issued
for trading purposes and the average monthly fair value of the
instruments are as follows (in millions):
Fair Value at FairValue at
March 29, 1996 June 30, 1995
Assets Liabilities Assets Liabilities
Swap agreements $ 654 $ 866 $ 587 $ 492
Forward contracts 380 315 209 181
Options held 1,076 427
Options written 1,175 483
Total $2,110 $2,356 $ 1,223 $1,156
Average Fair Value 1 Average Fair Value 1
Assets Liabilities Assets Liabilities
Swap agreements $ 579 $ 635 $ 598 $ 398
Forward contracts 205 253 131 120
Options held 647 393
Options written 748 262
Total $1,431 $1,636 $1,122 $ 780
<F1>
1 Average fair values represent month-end balances for the nine-months
ended March 29, 1996 and the fiscal year ended June 30, 1995.
The notional/contract amounts of these instruments do not
represent the Company's potential risk of loss due to
counterparty nonperformance. Credit risk arises from the
potential inability of counterparties to perform in accordance
with the terms of the contract. The Company's exposure to credit
risk associated with counterparty nonperformance is limited to
the replacement cost of over-the-counter contracts in a gain
position which are recognized in the Company's Consolidated
Statements of Financial Condition, net of collateral held ("net
replacement cost"). Exchange traded financial instruments, such
as futures and options, generally do not give rise to significant
counterparty exposure due to the margin requirements of the
individual exchanges. Options written generally do not give rise
to counterparty credit risk since they obligate the Company (not
its counterparty) to perform. The Company's net replacement cost
of over-the-counter contracts in a gain position at March 29,
1996, is approximately $383.7 million.
8. SUBSEQUENT EVENT
On April 18, 1996, the Board of Directors declared a 5% stock
dividend on the Company's Common Stock to shareholders of record
at May 17, 1996, to be distributed May 31, 1996. Per share
amounts and weighted average shares outstanding for all periods
included in the consolidated financial statements are presented
after giving retroactive effect to the stock dividend.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's principal business activities, investment banking,
securities trading and brokerage, are, by their nature, highly
competitive and subject to various risks, particularly volatile
trading markets and fluctuations in the volume of market activity.
Consequently, the Company's net income and revenues have in the past
and are likely to continue to be, subject to wide fluctuations,
reflecting the impact of many factors including, economic and
securities-market conditions, the level and volatility of interest
rates, competitive conditions within the industry, and the size and
timing of transactions. Moreover, the results of operations for a
particular interim period may not be indicative of results to be
expected for an entire fiscal year.
For a description of the Company's business, including its trading
in cash instruments and derivative products, its underwriting and
trading policies, and their respective risks, and the Company's risk
management policies and procedures, see the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1995.
Three-Months Ended March 29, 1996
Compared to March 31, 1995
The March 1996 quarter was characterized by favorable debt and
equity markets and an increase in underwriting activity. Net income
in the 1996 quarter was $128.9 million, an increase of 55.8% from
the $82.7 million in the comparable prior year quarter. Revenues,
net of interest expense ("net revenues"), increased 34.7% to $792.2
million in the 1996 quarter from $588.3 million in the 1995 quarter.
The increase was attributable to increases in all revenue
categories, particularly principal transactions and investment
banking. Earnings per share were $0.90 for the 1996 quarter versus
$0.58 for the comparable 1995 quarter. The earnings per share
amounts reflect all stock dividends declared through the date of
this report.
Commission revenues increased 23.0% in the 1996 quarter to $183.2
million from $148.9 million in the comparable 1995 quarter.
Commissions increased in all areas reflecting higher levels of
customer and correspondent activity.
Revenues from principal transactions increased 42.0% in the 1996
quarter to $353.1 million from $248.6 million in the 1995 quarter,
reflecting increases in the Company's fixed income and equity
market-making and trading activities, particularly mortgage-backed
securities, derivatives, and arbitrage. This increase was
principally due to increased customer demand and improved market
conditions along with the expansion of the Company's derivative
business.
The Company's principal transaction revenues by reporting categories
including derivatives, are as follows (in thousands):
Three-Months Three-Months
Ended Ended
March 29, March 31,
1996 1995
Fixed Income $199,933 $131,790
Equity 98,712 96,270
Foreign Exchange & Other
Derivative Financial
Instruments 54,428 20,588
$353,073 $248,648
Investment banking revenues increased 44.6% to $144.4 million in the
1996 quarter from $99.8 million in the 1995 quarter. This increase
reflected an increase in underwriting revenue partially offset by a
decrease in merger and acquisition and advisory fees. Underwriting
revenue increased due to increased levels of both debt and equity
new issue volume.
Net interest and dividends (revenues from interest and net
dividends, less interest expense) increased 19.1% to $101.0 million
in the 1996 quarter from $84.8 million in the 1995 quarter. This
increase is attributable to higher levels of margin debt primarily
reflecting the continued expansion of customer activities in the
correspondent business. Average quarterly margin debt increased to
$21.7 billion in the 1996 quarter from $14.2 billion in the 1995
quarter. Average free credit balances increased to $7.0 billion in
the 1996 quarter from $5.7 billion in the 1995 quarter.
Employee compensation and benefits increased 30.7% to $392.4 million
in the 1996 quarter from $300.2 million in the comparable 1995
quarter. The increase is attributable to higher incentive and
discretionary bonus accruals associated with the increased earnings
in the 1996 quarter. Employee compensation and benefits, as a
percentage of net revenues, decreased to 49.54% in the 1996 quarter
from 51.03% in the 1995 quarter.
All other expenses increased 15.1% to $178.0 million in the 1996
quarter from $154.6 million in the 1995 quarter. Floor brokerage,
exchange and clearance fees increased 31.3% in the 1996 quarter from
the 1995 quarter reflecting the increase in the volume of securities
transactions processed. The remaining increase in other operating
expenses is related to higher levels of depreciation costs
reflecting computer equipment upgrades and increased advertising and
market development costs related to the increase in underwritings.
The Company's effective tax rate increased to 41.9% in the 1996
quarter compared to 38.0% in the 1995 quarter due to increased state
and local taxes.
Nine-Months Ended March 29, 1996
Compared to March 31, 1995
Net income for the nine-months ended March 29, 1996 was $327.9
million, an increase of 117.0% from the $151.1 million for the
comparable 1995 period. Revenues, net of interest expense ("net
revenues"), increased 44.8% to $2.1 billion in the 1996 period from
$1.4 billion in the 1995 period. The increase was attributable to
increases across all revenue categories particularly principal
transactions and investment banking. Earnings per share were $2.26
for the 1996 period versus $1.00 for the comparable 1995 period.
The earnings per share amounts reflect all stock dividends declared
through the date of this report.
Commission revenues increased 26.7% in the 1996 period to $501.6
million from $395.9 million in the comparable 1995 period.
Commissions increased in all areas reflecting higher levels of
customer and correspondent activity.
Revenues from principal transactions increased 53.0% in the 1996
period to $883.8 million from $577.6 million in the 1995 period,
reflecting an increase in the Company's fixed income and equity
market-making and trading activities, particularly convertible
bonds, mortgage-backed securities and derivatives. This increase
was principally due to increased customer demand and improved market
conditions along with the expansion of the Company's derivative
business.
The Company's principal transaction revenues by reporting
categories, including derivatives, are as follows (in thousands):
Nine Months Nine Months
Ended Ended
March 29, March 31,
1996 1995
Fixed Income $475,719 $316,149
Equity 290,447 190,479
Foreign Exchange & Other
Derivative Financial
Instruments 117,662 70,957
$883,828 $577,585
Investment banking revenues increased 63.8% to $382.2 million in the
1996 period from $233.2 million in the comparable 1995 period. This
increase reflected both an increase in underwriting revenue
attributable to increased levels of both equity and debt new issue
volume and an increase in merger and acquisition fees.
Net interest and dividends (revenues from interest and net
dividends, less interest expense) increased 36.3% to $302.7 million
in the 1996 period from $222.0 million in the 1995 period. This
increase is attributable to higher levels of margin debt primarily
reflecting the continued expansion of customer activities in the
correspondent business.
Employee compensation and benefits increased 38.5% to $1.0 billion
in the 1996 period from $754.5 million in the comparable 1995
period. The increase is attributable to higher incentive and
discretionary bonus accruals associated with the increased earnings
in the 1996 period. Employee compensation and benefits, as a
percentage of net revenues, decreased to 49.82% in the 1996 period
from 52.09% in the 1995 period.
All other expenses increased 9.6% to $493.4 million in the 1996
period from $450.3 million in the 1995 period. Floor brokerage,
exchange and clearance fees increased 21.9% in the 1996 period from
the 1995 period reflecting the increase in volume of securities
transactions processed. The remaining increase in other operating
expenses is related to higher levels of depreciation costs
reflecting computer equipment upgrades .
The Company's effective tax rate increased to 41.4% in the 1996
period compared to 38.0% in the 1995 period due to increased state
and local taxes.
<PAGE>
Liquidity and Capital Resources
Financial Leverage
The Company maintains a highly liquid balance sheet with a majority
of the Company's assets consisting of marketable securities
inventories, which are marked to market daily, and collateralized
receivables arising from customer-related and proprietary securities
transactions. Collateralized receivables consist of resale
agreements secured by US government and agency securities and
customer margin loans and securities borrowed which are typically
secured by marketable corporate debt and equity securities. The
Company's total assets and financial leverage can fluctuate
significantly depending upon economic and market conditions, volume
of activity, customer demands and underwriting commitments.
The Company's total assets at March 29, 1996 were $91.4 billion
versus $74.6 billion at June 30, 1995. The increase is primarily
attributable to the growth in securities purchased under agreements
to resell. The Company's ability to support fluctuations in total
assets is a function of its ability to obtain short-term secured and
unsecured funding and its access to sources of long-term capital in
the form of long-term borrowings and equity, which together form its
capital base. The Company continuously monitors the adequacy of its
capital base which is a function of asset quality and liquidity.
The relationship between an asset's liquidity and the level of
capital required to support the asset reflects the need to provide
counterparties with collateral, or margin, in order to obtain
secured financings.
Highly liquid assets such as US government and agency securities
typically are funded by the use of repurchase agreements and
securities lending arrangements which require very low levels of
margin. In contrast, assets of lower quality and/or liquidity
require higher margin levels and consequently increased capital in
order to obtain secured financing. The level of customer
receivables and proprietary inventories the Company can maintain in
certain of its regulated subsidiaries is also limited by rules of
both the Securities and Exchange Commission ("SEC") and the
Securities and Futures Authority ("SFA") in London. Accordingly,
the mix of assets being held by the Company significantly influences
the amount of leverage the Company can employ and the adequacy of
its capital base.
Funding Strategy
Generally, the Company's funding strategy provides for the
diversification of its short-term funding sources in order to
maximize liquidity. Sources of short-term funding consist
principally of collateralized borrowings, including repurchase
transactions and securities lending arrangements, customer free
credit balances, unsecured commercial paper, medium-term notes and
bank borrowings generally having maturities from overnight to one
year.
Repurchase transactions, whereby securities are sold with a
commitment for repurchase by the Company at a future date, represent
the dominant component of secured short-term funding.
The Company continued to increase the utilization of its medium-term
note program to extend the maturities of its debt and achieve
additional diversification of its funding sources. In addition to
short-term funding sources, the Company utilizes long-term senior
debt, including notes issued through its medium-term note program,
as a longer term source of unsecured financing.
The Company maintains an alternative funding strategy focused on the
liquidity and self-funding ability of its underlying assets. The
objective of the strategy is to maintain sufficient sources of
alternative funding to enable the Company to fund debt obligations
maturing within one year without issuing any new unsecured debt,
including commercial paper. The most significant source of
alternative funding is the Company's ability to hypothecate or
pledge its unencumbered assets as collateral for short-term funding.
As part of the Company's alternative funding strategy, the Company
regularly monitors and analyzes the size, composition and liquidity
characteristics of the assets being financed and evaluates its
liquidity needs in light of current market conditions and available
funding alternatives. Through this analysis, the Company evaluates
the adequacy of its equity base and its schedule of maturing term-
debt supporting its present asset levels. The Company can then seek
to adjust its maturity schedule, in light of market conditions and
funding alternatives.
In addition, the Company maintains a committed revolving-credit
facility (the "facility") totaling $2.0 billion which permits
borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear
Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain
affiliates. The facility provides that up to $1.0 billion of the
total facility may be borrowed by the Company on an unsecured basis.
Secured borrowings can be collateralized by both investment-grade
and non-investment-grade financial instruments. In addition, this
facility provides for defined margin levels on a wide range of
eligible financial instruments which may be pledged under the
secured portion of the facility. The facility terminates in October
1996. As of March 29, 1996, no amounts were outstanding under the
facility.
Capital Resources
The Company conducts substantially all of its operating activities
within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC,
Bear, Stearns International Limited ("BSIL") and Bear Stearns
International Trading Limited ("BSIT"). In connection therewith, a
substantial portion of the Company's long-term borrowings and equity
have been used to fund investments in, and advances to, Bear
Stearns, BSSC, BSIL and BSIT.
The Company regularly monitors the nature and significance of those
assets or activities conducted outside the broker-dealer
subsidiaries and funds such assets with either capital or borrowings
having maturities generally consistent with the nature and liquidity
of the assets being financed.
During the nine-months ended March 29, 1996, the Company repurchased
4,629,690 shares of Common Stock in connection with the Capital
Accumulation Plan for Senior Managing Directors (the "Plan") at a
cost of approximately $100.5 million. The Company intends, subject
to market conditions, to purchase a sufficient number of shares in
respect of all compensation deferred and any additional amounts
allocated to participants under the Plan. Repurchases of Common
Stock pursuant to the Plan are not made pursuant to the Company's
Stock Repurchase Program authorized by the Board of Directors and
are not included in calculating the maximum aggregate number of
shares of Common Stock that the Company may repurchase under the
Stock Repurchase Program.
Cash Flows
Total cash and cash equivalents decreased by $339.9 million during
the nine-months ended March 29, 1996 to $360.6 million. Total cash
and cash equivalents increased by $93.0 million during the nine-
months ended March 31, 1995 to $387.6 million. Cash used in
operating activities during the nine-months ended March 29, 1996 was
$2.4 billion, mainly representing increases in financial instruments
owned and securities purchased under agreements to resell partially
offset by increases in securities sold under agreements to
repurchase and in customer payables. Financing activities provided
cash of $2.1 billion, primarily derived from short and long-term
borrowing proceeds.
Regulated Subsidiaries
As registered broker-dealers, Bear Stearns and BSSC are subject to
the net capital requirements of the SEC, the New York Stock
Exchange, Inc. and the Commodity Futures Trading Commission, which
are designed to measure the general financial soundness and
liquidity of broker-dealers. Bear Stearns and BSSC have
consistently operated in excess of the minimum net capital
requirements imposed by these agencies.
Additionally, BSIL and BSIT, London-based broker-dealer
subsidiaries, are subject to the regulatory capital requirements of
the SFA, a self regulatory organization established pursuant to the
United Kingdom Financial Services Act of 1986. BSIL and BSIT have
consistently operated in compliance with these capital requirements.
Merchant Banking and Non-Investment-Grade Debt Securities
As part of the Company's merchant banking activities, it
participates periodically in principal investments in leveraged
acquisitions. As part of these activities, the Company originates,
structures and invests in merger, acquisition, restructuring and
leveraged capital transactions, including leveraged buyouts. The
Company's principal investments in these transactions are generally
made in the form of equity investments or subordinated loans, and
have not required significant levels of capital investment. At
March 29, 1996, the Company's aggregate investments in leveraged
transactions and its exposure related to any one transaction was not
material.
As part of its fixed-income securities activities, the Company
participates in the trading and sale of high yield, non-investment-
grade securities, non-investment-grade mortgage loans (including
real estate owned) and securities of companies that are subject to
pending bankruptcy proceedings (collectively "high yield
securities"). Non-investment-grade mortgage loans are principally
secured by residential properties and include both non-performing
loans and real estate owned properties. As of March 29, 1996, the
Company held in long and short inventory approximately $1.2 billion
and $238 million, respectively of high yield securities.
These investments generally involve greater risk than investment-
grade debt securities due to credit considerations, liquidity of
secondary trading markets and vulnerability to general economic
conditions.
The level of the Company's high yield securities inventories, and
the impact of such activities upon the Company's results of
operations, can fluctuate from period to period as a result of
customer demands and economic and market considerations. Bear
Stearns' Risk Committee continuously monitors exposure to market and
credit risk with respect to high yield securities inventories and
establishes limits with respect to overall market exposure and
concentrations of risk by both the individual issuers and industry
groups.
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
In-Store Advertising Securities Litigation
As previously reported in the Company's 1995 Form 10-K, Bear Stearns
is a defendant in a litigation entitled In-Store Advertising Litigation
which is pending in the United States District Court for the Southern
District of New York.
On April 4, 1996, the court granted the Venture Capital Defendants'
motion for severance or separate trial, and ordered that the
Underwriter Defendants' and the Venture Capital Defendants' Section 11
contribution claims against KPMG Peat Marwick be stayed pending
resolution of the main action and then, if necessary, be tried
separately.
Thanksgiving Tower Partners et al. v. Anros Thanksgiving Partners
As previously reported in the Company's 1995 Form 10-K, an affiliate
of Bear Stearns is a defendant in a litigation entitled Thanksgiving
Tower Partners which is pending in the United States District Court for
the Northern District of Texas.
On March 29, 1996, the court awarded the affiliate of Bear Stearns
attorney's fees and costs in the amount of $879,949.47.
Primavera Familienstiftung v. David J. Askin, et al.; ABF Capital
Management et al. v. Askin Capital Management, L.P. et al.; In Re:
Granite Partners, Granite Corporation Quartz Hedge Fund
As previously reported in the Company's Form 10-Q for the first quarter
of 1996, Bear Stearns is a defendant in a litigation entitled Primavera
Familienstiftung v. David J. Askin, et al. which is pending in the
United States District Court for the Southern District of New York.
The action is related to a bankruptcy proceeding filed by Granite
Partners, L.P., Granite Corporation, and Quartz Hedge Fund (the "Funds"
or the "Debtors") pending in the Bankruptcy Court in the Southern
District of New York (the "Bankruptcy Court").
On March 27, 1996, a group of investors in the Funds filed a lawsuit
in the Supreme Court of the State of New York against Askin Capital
Management, L.P. ("ACM") and three broker-dealers, including Bear
Stearns. The suit alleges, among other things, that the broker-dealers
aided and abetted an alleged fraud and breach of fiduciary duty by ACM
to the plaintiffs, that the broker-dealers were unjustly enriched at
the expense of the plaintiffs, and that each of the defendants is
liable for violating the federal RICO statute. Among other things, the
dealers are alleged to have created and encouraged ACM to purchase
inappropriate securities, provided ACM with inflated "marks" for the
securities in ACM's portfolios, unreasonably extended credit to ACM,
and otherwise departed from the standards of ordinary care.
The suit seeks recovery of the amounts the plaintiffs paid for their
interests in the Funds (alleged to approximately $230 million), an
unspecified amount of allegedly unjust enrichment, treble damages,
punitive damages alleged to be no less than $1 billion, plus interest,
costs, attorneys fees and other unspecified damages. On April 24,
1996, the case was removed to the United States District Court for the
Southern District of New York.
On April 9, 1996, the Bankruptcy Court granted in part and denied in
part the Trustee's motion to stay the action filed in the District
Court. On April 23, 1996, Bear Stearns and other defendants filed a
motion to dismiss the action.
On April 19, 1996, the Trustees issued and filed with the Bankruptcy
Court a Final Report in his investigation of the events leading to the
Debtor's bankruptcy filing. Among other things, the Trustees asserted
that the Funds may have claims against Bear Stearns, including claims
for commercially unreasonable liquidation purportedly for $44.3
million; for unpaid principal and interest purportedly for $13.7
million; and for wrongful liquidation, tortuous interference with
contract, aiding and abetting ACM's breach of fiduciary duty, and other
theories in unspecified amounts; plus potential punitive damages.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement Re Computation of Per Share Earnings.
(12) Statement Re Computation of Ratio of Earnings to
Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the quarter, the Company filed the following Current
Reports on Form 8-K:
(i) A Current Report on Form 8-K dated January 18, 1996,
pertaining to the Company's results of operations for
the three-months ended December 31, 1995.
(ii) A Current Report on Form 8-K dated February 20, 1996,
pertaining to a tax opinion and form of Warrant
Agreement with respect to the Vantage Point Portfolio
Call Warrants.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Bear Stearns Companies Inc.
(Registrant)
Date: May 13, 1996 By: /s/ Samuel L. Molinaro, Jr.
Samuel L. Molinaro, Jr.
Senior Vice President-Finance
<PAGE>
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
Exhibit Index
Exhibit No. Description Page
(11) Statement Re Computation of Per
Share Earnings.
(12) Statement Re Computation of Ratio of
Earnings to Fixed Charges
(27) Financial Data Schedule
<TABLE>
Exhibit 11
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<CAPTION>
Three Months Ended Nine-Months Ended
March 29, March 31, March 29, March 31,
1996 1995 1996 1995
(In thousands, except share data)
<S> <C> <C> <C> <C>
Weighted average Common
and Common Equivalent
shares outstanding:
Average Common Stock
outstanding 122,935 123,694 124,577 124,343
Average Common Stock
Equivalents:
Common Stock issuable
under employee
benefit plans 400 788 404 833
Common Stock issuable
assuming conversion
of CAP Units 17,905 15,832 17,905 15,832
Total weighted average
Common and Common
Equivalent shares
outstanding 141,240 140,314 142,886 141,008
Net income $128,871 $ 82,740 $327,873 $151,128
Preferred Stock dividend
requirements (6,047) (6,308) (18,456) (18,869)
Income adjustment
(net of tax) applicable
to deferred compensation
arrangements 4,841 4,309 12,999 8,689
Net Income Applicable to
Common and Common
Equivalent Shares $127,665 $ 80,741 $322,416 $140,948
Earnings per share $ 0.90 $ 0.58 $ 2.26 $ 1.00
</TABLE>
<TABLE>
EXHIBIT 12
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except for ratio)
<CAPTION>
(Unaudited) (Unaudited)
Nine-Months Nine-Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended Ended
March 29, March 31, June 30, 1995 June 30, 1994 June 30, 1993 June 30, 1992 June 30, 1991
1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings before
taxes on income $ 559,106 $ 243,755 $ 388,082 $ 642,799 $ 614,398 $ 507,625 $ 229,501
Add: Fixed Charges
Interest 1,463,102 1,214,021 1,678,515 1,023,866 710,086 834,859 1,141,029
Interest factor
in rents 19,301 18,264 24,594 21,772 20,084 20,874 18,715
Total fixed charges 1,482,403 1,232,285 1,703,109 1,045,638 730,170 855,733 1,159,744
Earnings before
fixed charges and
taxes on income $2,041,509 $1,476,040 $2,091,191 $1,688,437 $1,344,568 $1,363,358 $1,389,245
Ratio of earnings
to fixed charges 1.4 1.2 1.2 1.6 1.8 1.6 1.2
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This Schedule contains summary financial information from the unaudited
Consolidated Statement of Financial Condition at March 29, 1996 and the unaudited
Consolidated Statement of Income for the nine-months ended March 29, 1996, which
are contained in the body of the accompanying Form 10-Q and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> MAR-29-1996
<CASH> 360,605
<RECEIVABLES> 7,402,661
<SECURITIES-RESALE> 28,547,487
<SECURITIES-BORROWED> 26,585,796
<INSTRUMENTS-OWNED> 25,779,459
<PP&E> 320,532
<TOTAL-ASSETS> 91,443,686
<SHORT-TERM> 9,822,689
<PAYABLES> 22,585,339
<REPOS-SOLD> 35,087,923
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 14,876,331
<LONG-TERM> 5,092,646
0
437,500
<COMMON> 152,203
<OTHER-SE> 1,926,345
<TOTAL-LIABILITY-AND-EQUITY> 91,443,686
<TRADING-REVENUE> 883,828
<INTEREST-DIVIDENDS> 1,765,758
<COMMISSIONS> 501,592
<INVESTMENT-BANKING-REVENUES> 382,159
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 1,463,102
<COMPENSATION> 1,044,866
<INCOME-PRETAX> 559,106
<INCOME-PRE-EXTRAORDINARY> 559,106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309,417
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.26
</TABLE>
