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 September 27, 1996
[ ] 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 November 8, 1996, the latest practicable date, there were 116,066,859
shares of Common Stock, $1 par value, outstanding.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at September 27, 1996
(Unaudited) and June 30, 1996
Consolidated Statements of Income (Unaudited) for the three-month
periods ended September 27, 1996 and September 29, 1995
Consolidated Statements of Cash Flows (Unaudited) for the three-month
periods ended September 27, 1996 and September 29, 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
<PAGE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
September 27, June 30,
1996 1996
--------------- ---------------
(Unaudited)
(In thousands)
Cash and cash equivalents $ 63,850 $ 127,847
Cash and securities deposited with
clearing organizations or
segregated in compliance with
Federal regulations 2,336,298 1,702,124
Securities purchased under agreements
to resell 23,330,351 24,517,275
Securities borrowed 31,184,871 29,611,207
Receivables:
Customers 7,584,102 7,976,373
Brokers, dealers and others 1,546,199 811,391
Interest and dividends 276,197 305,725
Financial instruments owned, at
fair value 28,556,778 26,222,134
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 337,967 331,924
Other assets 532,921 479,157
--------------- ---------------
Total Assets $95,749,534 $92,085,157
=============== ===============
See Notes to Consolidated Financial Statements.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
September 27, June 30,
1996 1996
--------------- ---------------
(Unaudited)
(In thousands, except share data)
Short-term borrowings $10,409,684 $ 9,867,619
Securities sold under agreements
to repurchase 34,185,790 33,353,899
Payables:
Customers 24,001,687 21,905,015
Brokers, dealers and others 1,138,331 1,847,599
Interest and dividends 358,186 448,121
Financial instruments sold, but not
yet purchased, at fair value 15,156,049 13,916,581
Accrued employee compensation and benefits 287,739 712,962
Other liabilities and accrued expenses 788,653 1,094,333
--------------- ---------------
86,326,119 83,146,129
--------------- ---------------
Commitments and Contingencies
Long-term Borrowings 6,489,520 6,043,614
--------------- ---------------
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;
159,803,764 shares issued at
September 27, 1996 and June
30, 1996 159,804 159,804
Paid-in capital 1,696,217 1,696,217
Retained earnings 778,781 694,108
Capital Accumulation Plan 471,191 471,191
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,507,350 and
2,341,350 shares at September 27,
1996 and June 30, 1996, respectively (102,818) (95,389)
Common Stock - 42,922,973 and 41,664,729
shares at September 27, 1996 and
June 30, 1996, respectively (636,980) (598,217)
Note receivable from ESOP Trust (19,800) (19,800)
--------------- ---------------
Total Stockholders' Equity 2,783,895 2,745,414
--------------- ---------------
Total Liabilities and
Stockholders' Equity $95,749,534 $92,085,157
=============== ===============
See Notes to Consolidated Financial Statements.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
-----------------------------------
September 27, September 29,
1996 1995
--------------- ---------------
(In thousands, except share data)
Revenues
Commissions $161,570 $155,190
Principal transactions 294,892 269,915
Investment banking 108,694 87,405
Interest and dividends 660,257 553,921
Other income 10,740 8,003
--------------- ---------------
Total Revenues 1,236,153 1,074,434
Interest expense 547,469 456,945
--------------- ---------------
Revenues, net of interest expense 688,684 617,489
--------------- ---------------
Non-interest expenses
Employee compensation and benefits 344,372 306,997
Floor brokerage, exchange
and clearance fees 31,566 29,746
Communications 24,556 22,498
Occupancy 21,346 21,146
Depreciation and amortization 19,968 16,276
Advertising and market development 14,756 12,524
Data processing and equipment 7,555 8,981
Other expenses 46,048 42,911
--------------- ---------------
Total non-interest expenses 510,167 461,079
--------------- ---------------
Income before provision for
income taxes 178,517 156,410
Provision for income taxes 70,068 62,564
--------------- ---------------
Net income $108,449 $93,846
=============== ===============
Net income applicable to
common shares $102,418 $87,636
=============== ===============
Earnings per share $ 0.75 $ 0.63
=============== ===============
Weighted average common and
common equivalent shares
outstanding 143,733,740 143,781,222
=============== ===============
Cash dividends declared
per common share $ 0.15 $ 0.15
=============== ===============
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
-----------------------------------
September 27, September 29,
1996 1995
--------------- ---------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 108,449 $ 93,846
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization 19,968 16,276
Deferred income taxes (13,817) (6,136)
Other 13,528 9,126
(Increases) decreases in operating receivables:
Securities borrowed (1,573,664) 100,538
Customers 392,271 (453,550)
Brokers, dealers and others (734,808) (460,735)
Other 24,206 35,870
Increases (decreases) in operating payables:
Customers 2,096,672 632,999
Brokers, dealers and others (704,031) 352,885
Other (89,935) 32,065
(Increases) decreases in:
Cash and securities deposited with clearing
organizations or segregated in compliance
with Federal regulations (634,174) 560,687
Securities purchased under agreements to resell 1,186,924 (5,799,855)
Financial instruments owned (2,334,644) 758,026
Other assets (596) 33,823
Increases (decreases) in:
Securities sold under agreements to repurchase 831,891 2,322,009
Financial instruments sold, but not
yet purchased 1,239,468 822,469
Accrued employee compensation and benefits (435,223) (252,556)
Other liabilities and accrued expenses (306,995) 74,473
--------------- ---------------
Cash used in operating activities (914,510) (1,127,740)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 542,065 729,093
Issuance of long-term borrowings 488,829 370,918
Capital Accumulation Plan - (15,598)
Common Stock distributions - 20,828
Payments for:
Retirement of Senior Notes (42,820) (229,000)
Treasury stock purchases (51,429) (21,149)
Cash dividends paid (23,733) (23,849)
--------------- ---------------
Cash provided by financing activities 912,912 831,243
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (26,011) (13,518)
Purchases of investment securities and other assets (38,131) (1,258)
Proceeds from sales of investment securities 1,743 17,131
--------------- ---------------
Cash (used in) provided by investing activities (62,399) 2,355
--------------- ---------------
Net decrease in cash and cash equivalents (63,997) (294,142)
Cash and cash equivalents, beginning of period 127,847 700,501
--------------- ---------------
Cash and cash equivalents, end of period $ 63,850 $ 406,359
=============== ===============
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"). All material intercompany transactions and balances have been
eliminated. Certain prior period amounts have been reclassified to conform
with the current period's presentation or restated for the effects of stock
dividends. 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. The consolidated financial statements are prepared in conformity
with generally accepted accounting principles which require management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. 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.
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:
<TABLE>
<CAPTION>
September 27, June 30,
In thousands 1996 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments owned:
US government and agency $10,046,815 $ 8,258,074
Other sovereign governments 1,571,132 656,699
State and municipal 170,776 149,697
Corporate equity and convertible debt 8,144,187 8,492,570
Corporate debt 4,924,747 4,739,512
Derivative financial instruments 1,779,284 1,855,617
Mortgages and other mortgage-backed securities 1,699,339 1,796,322
Other 220,498 273,643
----------- -----------
$28,556,778 $26,222,134
=========== ===========
Financial instruments sold, but not yet purchased:
US government and agency $7,017,091 $ 5,503,150
Other sovereign governments 789,891 964,808
Corporate equity and convertible debt 4,219,001 4,482,426
Corporate debt 891,888 877,576
Derivative financial instruments 2,238,178 2,088,621
----------- -----------
$15,156,049 $13,916,581
=========== ===========
</TABLE>
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At September 27, 1996, the Company was contingently liable for unsecured
letters of credit of approximately $2.0 billion and letters of credit of
approximately $221.0 million secured by financial instruments. These letters
of credit are principally used as deposits 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 the
minimum net capital requirements imposed by the capital rules. Included in
the computation of net capital of Bear Stearns is net capital of BSSC in
excess of 5% of aggregate debit items arising from customer transactions, as
defined. At September 27, 1996, Bear Stearns' net capital, as defined, of
$1.23 billion exceeded the minimum requirement by $1.20 billion.
Bear Stearns International Limited ("BSIL") and certain other wholly owned,
London-based subsidiaries, are subject to regulatory capital requirements of
the Securities and Futures Authority. BSIL and the other subsidiaries have
consistently operated in excess of these requirements.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Common and
Common Equivalents Shares outstanding during each period presented. Common
Equivalent Shares 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 Equivalent Shares.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the
three-months ended September 27, 1996 and September 29, 1995. Income taxes
paid totaled $102.0 million and $40.4 million for the three-months ended
September 27, 1996 and September 29, 1995, respectively.
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 instruments 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 specific 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.
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
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, foreign exchange forwards, and exercised
options. 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 September 27, 1996
and June 30, 1996:
<TABLE>
<CAPTION>
September 27, June 30,
In billions 1996 1996
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Rate:
Swap agreements, including options, swaptions,
caps, collars, and floors $267.9 $175.2
Futures contracts 48.3 60.5
Options held 2.2 3.0
Options written 1.6 3.1
Foreign Exchange:
Futures contracts 1.7 2.3
Forward contracts 10.8 7.9
Options held 5.0 3.2
Options written 4.8 3.3
Mortgage-Backed Securities:
Forward Contracts 23.7 23.0
Equity:
Swap agreements 3.6 3.8
Futures contracts .9 .5
Options held 1.4 1.1
Options written 1.4 1.3
</TABLE>
<PAGE>
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 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 as of September 27, 1996 and June 30, 1996 were as
follows:
<TABLE>
<CAPTION>
September 27, June 30,
1996 1996
------------------------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swap agreements $651 $ 914 $678 $846
Futures and forward
contracts 157 186 280 307
Options held 973 897
Options written 1,174 968
</TABLE>
The average monthly fair values of the derivative financial instruments for
the three-months ended September 27, 1996 and the fiscal year ended
June 30, 1996 were as follows:
<TABLE>
<CAPTION>
September 27, June 30,
1996 1996
------------------------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Swap agreements $695 $ 889 $611 $698
Futures and forward
contracts 217 205 286 275
Options held 924 704
Options written 1,050 795
</TABLE>
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 net replacement cost of
over-the-counter contracts in a gain position, which are recognized in the
Company's Consolidated Statements of Financial Condition. Exchange-traded
financial instruments, such as futures and options, generally do not give rise
to significant counterparty exposure due to 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 derivatives in a gain position at
September 27, 1996, was approximately $309.8 million.
<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
in the past have been, and are likely to continue to be, subject to wide
fluctuations, reflecting the impact of many factors including, securities market
conditions, the level and volatility of interest rates, competitive conditions,
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, 1996.
Three-Months Ended September 27, 1996 Compared to September 29, 1995
The September 1996 quarter was generally characterized by stable fixed income
markets and continued strong underwriting activity. Net income in the 1996
quarter was $108.4 million, an increase of 15.6% from the $93.8 million in the
comparable prior year quarter. Revenues, net of interest expense ("net revenues
"), increased 11.5% to $688.7 million from $617.5 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 $0.75 for the 1996 quarter versus $0.63 for the comparable 1995 quarter.
The earnings per share amounts have been adjusted for all stock dividends.
Commission revenues increased 4.1% in the 1996 quarter to $161.6 million from
$155.2 million in the comparable 1995 quarter. This increase was attributable to
increases in the firm's institutional equities and securities clearance
revenues.
Revenues from principal transactions increased 9.3% in the 1996 quarter to
$294.9 million from $269.9 million in the comparable 1995 quarter, reflecting
increases in revenues derived from the Company's fixed income activities. This
increase was principally due to improved market conditions and customer demand.
<PAGE>
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
September 27, 1996 September 29, 1995
Fixed Income $187,170 $129,181
Equity 72,198 108,761
Foreign Exchange & Other
Derivative Financial
Instruments 35,524 31,973
-------- -------
$294,892 $269,915
======== ========
Investment banking revenues increased 24.4% to $108.7 million in the 1996
quarter from $87.4 million in the comparable 1995 quarter. This increase
reflected an increase in underwriting revenue partially offset by a decrease in
merger and acquisition and advisory fees. The increase in underwriting revenue
was principally due to increased levels of equity new issue volume as compared
to the comparable 1995 quarter.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 16.3% to $112.8 million in the 1996 quarter from
$97.0 million in the comparable 1995 quarter. This increase was attributable to
higher levels of customer margin debt and customer free credit balances
reflecting the continued expansion of customer activities in the clearance
business. Average margin debt increased to $25.3 billion in the 1996 quarter
from $18.5 billion in the comparable 1995 quarter. Average free credit balances
increased to $ 7.8 billion in the 1996 quarter from $5.7 billion in the
comparable 1995 quarter.
Employee compensation and benefits increased 12.2% to $344.4 million in the 1996
quarter from $307.0 million in the comparable 1996 quarter. The increase was
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, increased to 50.00% in the 1996
quarter from 49.72% in the comparable 1995 quarter.
All other expenses increased 7.6% to $165.8 million in the 1996 quarter from
$154.1 million in the comparable 1995 quarter. Floor brokerage, exchange and
clearance fees increased 6.1% in the 1996 quarter from the comparable 1995
quarter reflecting the increase in the volume of securities transactions
processed. The remaining increase in other operating expenses was related to
higher levels of depreciation costs reflecting computer equipment upgrades and
increased advertising and market development costs related to the increase in
underwritings. These increases were partially offset by a decrease in data
processing costs.
The Company's effective tax rate decreased to 39.3% in the 1996 quarter compared
to 40.0% in the comparable 1995 quarter due to a higher level of tax preference
items in the 1996 quarter.
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 predominantly 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 largely upon economic and market conditions, volume of activity,
customer demand, and underwriting commitments.
The Company's total assets at September 27, 1996 increased to $95.7 billion from
$92.1 billion at June 30, 1996. The increase is primarily attributable to the
growth in financial instruments owned, at fair value and securities borrowed.
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.
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 or
liquidity require higher levels of overcollateralization, or margin, and
consequently increased levels of capital, in order to obtain secured financing.
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
The Company's general 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.
<PAGE>
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
financing in order to extend 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 medium-term
notes, as a longer term source of unsecured financing.
The Company maintains an alternative funding strategy focused on the liquidity
and self-funding ability of the 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 can continuously evaluate the adequacy of its equity base and the
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.
As part of the Company's alternative funding strategy, 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 agreement provides for defined margin levels on a wide range of
eligible financial instruments that may be pledged under the secured portion of
the facility. The facility terminates in October 1997. There were no borrowings
outstanding under the facility at September 27, 1996.
Capital Resources
The Company conducts a substantial portion of 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.
<PAGE>
The Company regularly monitors the nature and significance of those assets or
activities conducted outside the broker-dealer subsidiaries and attempts to fund
such assets with either capital or borrowings having maturities consistent with
the nature and the liquidity of the assets being financed.
During the three-months ended September 27, 1996 the Company repurchased
1,666,876 shares of Common Stock in connection with the Capital Accumulation
Plan for Senior Managing Directors (the "Plan") at a cost of approximately $38.8
million. The Company intends, subject to market conditions, to continue to
purchase in future periods a sufficient number of shares of Common Stock in the
open market to enable the Company to issue 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 Plan (the "Repurchase Plan") 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 Repurchase
Plan. As of November 8, 1996, there have been no purchases under the Repurchase
Plan.
Cash Flows
Cash and cash equivalents decreased by $64.0 million during the three-months
ended September 27, 1996 to $63.9 million. Total cash and cash equivalents
decreased by $294.1 million during the three-months ended September 29, 1995 to
$406.4 million. Cash used in operating activities during the three-months ended
September 27, 1996 was $914.5 million, mainly representing increases in
financial instruments owned and securities borrowed partially offset by
increases in customer payables and financial instruments sold, but not yet
purchased. Financing activities provided cash of $912.9 million, primarily
derived from short- and long-term borrowings proceeds.
Regulated Subsidiaries
As registered broker-dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Securities and Exchange Commission, 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 Securities and Futures
Authority, 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.
<PAGE>
Merchant Banking and Non-Investment-Grade Debt Securities
As part of the Company's merchant banking activities, it participates from time
to time 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 September 27, 1996 the
Company's aggregate investments in leveraged transactions and its exposure
related to any one transaction was not material.
As part of the Company's fixed-income securities activities, the Company
participates in the trading and sale of high yield, non-investment-grade debt
securities, non-investment-grade mortgage loans and the securities of companies
that are the subject of 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. As of September 27, 1996, the Company held in long and short inventory
approximately $1.5 billion 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 individual issuer and industry groups.
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
In re Daisy Systems Corporation, Debtor
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation which is pending in the United States District Court,
Northern District of California.
On September 24, 1996, the Ninth Circuit reversed the portions of the District
Court's decision granting summary judgment in Bear Stearns' favor on plaintiff's
professional negligence claim and denying plaintiff leave to file an amended
complaint asserting plaintiff's breach of fiduciary duty allegations. The Ninth
Circuit affirmed the District Court's decision granting summary judgment in Bear
Stearns' favor on plaintiff's negligent misrepresentation claim. The case was
remanded to the District Court for further proceedings.
In-Store Advertising Securities Litigation
As previously reported in the Company's 1996 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 October 10, 1996, all of the parties to the action, other than the Management
Defendants, entered into a stipulation of settlement, which was preliminarily
approved by the Court on October 21, 1996. A hearing to determine whether the
settlement should be finally approved by the Court has been scheduled for
December 18, 1996.
Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc. et al.
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court for the
Southern District of New York.
On November 4, 1996, an amended complaint was filed. The amended complaint
substantially repeats the allegations of the original complaint, and adds
additional claims for breach of contract, breach of fiduciary duties, and
violations of the Commodity Exchange Act.
<PAGE>
In re Lady Luck Gaming Corporation Securities Litigation
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation which is pending in the United States District Court
for the District of Nevada involving Lady Luck Gaming Corporation.
On September 23, 1996, the Court issued an Order requiring plaintiffs to file an
amended complaint and, on that basis, denied defendants' motions to dismiss,
without prejudice, as moot. On October 31, 1996, plaintiffs filed a Second
Amended Class Action Complaint. The Second Amended Class Action Complaint
alleges claims on behalf of a purported class consisting of all persons who
purchased shares of Lady Luck from September 29, 1993 to October 11, 1994.
The Second Amended Class Action Complaint asserts the same claims as plaintiffs'
Consolidated Amended Complaint.
Primavera Familienstiftung v. David J. Askin, et al.
As previously reported in the Company's 1996 Form 10-K, 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. Plaintiff purports to represent investors in Granite
Partners, L.P., Granite Corporation, and Quartz Hedge Fund which have filed for
bankruptcy in an action entitled In re Granite Partners, Granite Corp., Quartz
Hedge Fund in the United States District Court for the Southern District of New
York.
On August 22, 1996, the court dismissed all claims alleged against the
Broker-Dealer Defendants, with leave to replead the claim that the Broker-Dealer
Defendants aided and abetted Askin Capital Management's alleged fraud.
ABF Capital Management, et al. v. Askin Capital Management, L.P., et al.
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court for the
Southern District of New York.
On May 31, 1996, all defendants filed motions to dismiss the case. The Company's
1996 Form 10-K inadvertently states that these motions have been decided. They
are still pending.
<PAGE>
Harrison J. Goldin as Trustee for the Bankruptcy Estates of Granite Partners,
L.P., Granite Corp., and Quartz Hedge Fund v. Bear, Stearns & Co. Inc. and Bear,
Stearns Capital Markets Inc.
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States Bankruptcy Court in the
Southern District of New York.
On September 26, 1996, the investors (the "ABF Investors") in the Funds who are
plaintiffs in ABF Capital Management, et al. v. Askin Capital Management, L.P.,
et al. , moved to intervene as additional plaintiffs in order to assert claims
on behalf of the Debtors that they contend the Trustee has failed to assert.
Among other things, the ABF Investors propose claims for violations of the
federal and New York state antitrust laws; breach of contract; breach of duties
under the Uniform Commercial Code and the common law; violations of Section 559
of the Bankruptcy Code; aiding and abetting the antitrust, UCC, and common law
violations of other broker-dealers; unjust enrichment; violations of the federal
RICO statute; tortious interference with contracts between the Debtors and other
broker-dealers; obstruction of the Trustee's investigation; violations of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder; common law fraud and negligent misrepresentation; and aiding and
abetting Askin Capital Management's breach of fiduciary duty. The proposed
complaint seeks compensatory damages in unspecified amounts, plus punitive and
treble damages (on the antitrust and RICO claims), attorneys fees, costs, and
other recoveries. The proposed complaint also objects to the proofs of claim
filed by Bear Stearns in the Funds' bankruptcies, and seeks to subordinate those
claims, if the claims are allowed.
On October 11, 1996, Bear Stearns moved to withdraw the reference of this
proceeding to the Bankruptcy Court.
<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
Report on Form 8-K.
(i) A Current Report on Form 8-K dated July 30,
1996, pertaining to the Company's results of
operations for the three-months and fiscal
year ended June 30, 1996.
<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: November 12, 1996 By: /s/ Samuel L. Molinaro Jr.
--------------------------
Samuel L. Molinaro Jr.
Chief Financial Officer
<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
Earnings to Fixed Charges
(27) Financial Data Schedule
Exhibit 11
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
Three Months Ended
September 27, September 29,
1996 1995
(In thousands, except per share data)
Weighted average common
and common equivalent
shares outstanding:
Average Common Stock
outstanding 117,822 123,392
Average Common Stock
equivalents:
Common Stock issuable
under employee
benefit plans 399 402
Common Stock issuable
assuming conversion
of CAP Units 25,513 19,987
Total weighted average
common and common
equivalent shares
outstanding 143,734 143,781
Net income $108,449 $ 93,846
Preferred Stock dividend
requirements (6,031) (6,210)
Income adjustment
(net of tax) applicable
to deferred compensation
arrangements 5,498 3,534
Adjusted net income $107,916 $ 91,170
Earnings per share $ 0.75 $ 0.63
<PAGE>
<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)
Three Months Three Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended Ended
September 27, September 29, June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993 June 30, 1992
1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings before taxes
on income $178,517 $ 156,410 $ 834,926 $ 388,082 $ 642,799 $ 614,398 $ 507,625
Add: Fixed Charges
Interest 547,469 456,945 1,981,171 1,678,515 1,023,866 710,086 834,859
Interest factor
in rents 6,514 6,459 25,672 24,594 21,772 20,084 20,874
Total fixed charges 553,983 463,404 2,006,843 1,703,109 1,045,638 730,170 855,733
Earnings before
fixed charges and
taxes on income $732,500 $ 619,814 $2,841,769 $2,091,191 $1,688,437 $1,344,568 $1,363,358
Ratio of earnings to
fixed charges 1.3 1.3 1.4 1.2 1.6 1.8 1.6
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited Consolidated Statement of Financial Condition at September 27, 1996
and the unaudited Consolidated Statement of Income for the three-months ended
September 27, 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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-27-1996
<CASH> 63,850
<RECEIVABLES> 9,406,498
<SECURITIES-RESALE> 23,330,351
<SECURITIES-BORROWED> 31,184,871
<INSTRUMENTS-OWNED> 28,556,778
<PP&E> 337,967
<TOTAL-ASSETS> 95,749,534
<SHORT-TERM> 10,409,684
<PAYABLES> 25,498,204
<REPOS-SOLD> 34,185,790
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 15,156,049
<LONG-TERM> 6,489,520
0
437,500
<COMMON> 159,804
<OTHER-SE> 2,186,591
<TOTAL-LIABILITY-AND-EQUITY> 95,749,534
<TRADING-REVENUE> 294,892
<INTEREST-DIVIDENDS> 660,257
<COMMISSIONS> 161,570
<INVESTMENT-BANKING-REVENUES> 108,694
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 547,469
<COMPENSATION> 344,372
<INCOME-PRETAX> 178,517
<INCOME-PRE-EXTRAORDINARY> 178,517
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,449
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
