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 26, 1997
[ ] 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 7, 1997, the latest practicable date, there were 117,682,798
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 26, 1997 (Unaudited) and June 30, 1997
Consolidated Statements of Income (Unaudited) for the
three-month periods ended September 26, 1997 and September 27,
1996
Consolidated Statements of Cash Flows (Unaudited) for the
three-month periods ended September 26, 1997 and September 27,
1996
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
<CAPTION>
September 26, June 30,
1997 1997
--------------- ----------------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash and cash equivalents $ 1,037,501 $ 1,249,132
Cash and securities deposited with
clearing organizations or
segregated in compliance with
federal regulations 1,777,598 1,448,814
Securities purchased under agreements
to resell 34,872,745 28,340,599
Securities borrowed 43,428,158 40,711,280
Receivables:
Customers 9,726,111 8,572,521
Brokers, dealers and others 979,340 1,227,947
Interest and dividends 435,347 405,892
Financial instruments owned, at
fair value 47,668,602 38,437,280
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 398,866 379,533
Other assets
626,312 660,537
--------------- ----------------
Total Assets $140,950,580 $121,433,535
=============== ================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
<CAPTION>
September 26, June 30,
1997 1997
--------------- ----------------
(Unaudited)
(In thousands, except share data)
<S> <C> <C>
Short-term borrowings $ 14,668,687 $ 14,416,671
Securities sold under agreements
to repurchase 49,227,444 39,431,216
Payables:
Customers 30,912,706 29,921,386
Brokers, dealers and others 3,194,473 2,808,359
Interest and dividends 517,017 452,662
Financial instruments sold, but not
yet purchased, at fair value 27,463,069 20,784,796
Accrued employee compensation and benefits 511,941 907,337
Other liabilities and accrued expenses 1,181,190 964,409
--------------- ----------------
127,676,527 109,686,836
--------------- ----------------
Commitments and contingencies
Long-term borrowings 9,501,926 8,120,328
--------------- ----------------
Guaranteed Preferred Beneficial Interests in Company
Subordinated Debt Securities 200,000 200,000
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; 167,794,941
shares issued at September 26, 1997 and June 30, 1997 167,785 167,785
Paid-in capital 1,883,674 1,874,016
Retained earnings 1,169,941 1,031,736
Capital Accumulation Plan 651,370 655,007
Treasury stock, at cost
Adjustable Rate Cumulative Preferred Stock,
Series A - 2,520,750 shares at
September 26, 1997 and June 30, 1997 (103,421) (103,421)
Common Stock - 49,548,757 shares and 50,191,531
shares at September 26,1997 and June 30, 1997,
respectively (771,020) (772,551)
Note receivable from ESOP Trust (13,701) (13,701)
--------------- ----------------
Total Stockholders' Equity 3,422,128 3,276,371
--------------- ----------------
Total Liabilities and Stockholders' Equity $140,950,581 $121,433,535
=============== ================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended
---------------------------------
September 26, September 27,
1997 1996
--------------- ----------------
(In thousands, except share data)
<S> <C> <C>
Revenues
Commissions $ 213,444 $ 161,570
Principal transactions 391,514 294,892
Investment banking 219,328 108,694
Interest and dividends 964,571 660,257
Other income 24,148 10,740
--------------- ----------------
Total Revenues 1,813,005 1,236,153
Interest expense 816,915 547,469
--------------- ----------------
Revenues, net of interest expense 996,090 688,684
--------------- ----------------
Non-interest expenses
Employee compensation and benefits 499,197 344,372
Floor brokerage, exchange
and clearance fees 39,585 31,566
Communications 28,133 24,556
Occupancy 23,546 21,346
Depreciation and amortization 26,017 19,968
Advertising and market development 15,954 14,756
Data processing and equipment 12,234 7,555
Other expenses 84,286 46,048
--------------- ----------------
Total non-interest expense 728,952 510,167
--------------- ----------------
Income before provision for
income taxes 267,138 178,517
Provision for income taxes 105,520 70,068
--------------- ----------------
Net income $ 161,618 $ 108,449
=============== ================
Net income applicable to
common shares 155,693 102,418
=============== ================
Earnings per share
$ 1.11 $ 0.72
=============== ================
Weighted average common and
common equivalent shares
outstanding 152,011,423 150,920,427
=============== ================
Cash dividends declared
per common share $ 0.15 $ 0.14
=============== ================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
----------------------------------
September 26, September
27,
1997 1996
---------------- --------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 161,618 $ 108,449
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization 26,017 19,968
Deferred income taxes (29,652) (13,817)
Other 25,735 13,528
(Increases) decreases in operating receivables:
Cash and securities deposited with clearing organizations or
segregated in compliance with federal regulations (328,784) (634,174)
Securities purchased under agreements to resell (6,532,146) 1,186,924
Securities borrowed (2,716,878) (1,573,664)
Receivables:
Customers (1,153,590) 392,271
Brokers, dealers and others 248,607 (734,808)
Financial instruments owned (9,231,322) (2,334,644)
Other assets 80,395 23,610
Increases (decreases) in operating payables:
Securities sold under agreements to repurchase 9,796,228 831,891
Payables:
Customers 991,320 2,096,672
Brokers, dealers and others 383,910 (704,031)
Financial instruments sold, but not yet purchased 6,678,273 1,239,468
Accrued employee compensation and benefits (419,396) (435,223)
Other liabilities and accrued expenses 278,505 (396,930)
---------------- --------------
Cash used in operating activities (1,741,160) (914,510)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 252,016 542,065
Issuance of long-term borrowingS 1,727,457 488,829
Capital Accumulation Plan 7,405
Common Stock distributions 7,552
Payments for:
Retirement of Senior Notes (349,808) (42,820)
Treasury stock purchases (5,201) (51,429)
Cash dividends paid (23,591) (23,733)
---------------- --------------
Cash provided by financing activities 1,615,830 912,912
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (45,350) (26,011)
Purchases of investment securities and other assets (46,353) (38,131)
Proceeds from sales of investment securities and other assets 5,402 1,743
---------------- --------------
Cash used in investing activities (86,301) (62,399)
---------------- --------------
Net decrease in cash and cash equivalents (211,631) (63,997)
Cash and cash equivalents, beginning of period 1,249,132 127,847
---------------- --------------
Cash and cash equivalents, end of period $ 1,037,501 $ 63,850
================ ==============
</TABLE>
See Notes to Consolidated Financial Statements.
<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 26, June 30,
In thousands 1997 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments owned:
US government and agency $17,198,514 $ 13,275,828
Other sovereign governments 3,574,386 1,847,691
Corporate equity and convertible debt 11,007,861 11,280,199
Corporate debt 6,857,451 4,961,737
Derivative financial instruments 4,542,316 2,780,231
Mortgages and other mortgage-backed securities 3,773,484 3,745,779
Other 714,590 545,815
------- -------
$47,668,602 $38,437,280
=========== ============
Financial instruments sold, but not yet purchased:
US government and agency $10,955,071 $ 8,695,621
Other sovereign governments 3,617,678 1,479,278
Corporate equity 4,699,868 4,976,169
Corporate debt 1,964,658 1,099,700
Derivative financial instruments 6,137,322 4,412,986
Other 88,472 121,042
------ -------
$27,463,069 $20,784,796
=========== ===========
</TABLE>
<PAGE>
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At September 26, 1997, the Company was contingently liable for unsecured
letters of credit of approximately $2.3 billion and letters of credit of
approximately $3.0 million secured by financial instruments that 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 26, 1997, Bear Stearns' net capital, as defined, of
$1.00 billion exceeded the minimum requirement by $.97 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.
<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 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 Equivalent
shares.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the
three-months ended September 26, 1997 and September 27, 1996. Income taxes
paid totaled $85.5 million and $102.0 million for the three-months ended
September 26, 1997 and September 27, 1996, 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
risk, which includes interest rate, exchange rate, equity price and
commodity price 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 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 and foreign exchange forwards and
mortgage-backed securities 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 as of September 26,
1997 and June 30, 1997:
September 26, June 30,
In billions 1997 1997
--------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options, swaptions,
caps, collars, and floors $231.6 $208.3
Futures contracts 43.8 34.3
Options held 5.8 4.0
Options written 1.0 0.7
Foreign Exchange:
Futures contracts 18.7 19.9
Forward contracts 14.7 13.6
Options held 15.9 10.0
Options written 15.3 9.4
Mortgage-Backed Securities:
Forward Contracts 45.1 40.5
Equity:
Swap agreements 6.7 6.0
Futures contracts 1.6 0.6
Options held 2.6 2.8
Options written 2.5 2.9
<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 recorded at fair value on a daily basis 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 as of September 26, 1997 and June 30, 1997 were as
follows:
September 26, June 30,
1997 1997
--------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------
Swap agreements $1,269 $1,572 $730 $1,250
Futures and forward
contracts 383 381 172 248
Options held 2,936 1,880
Options written 4,208 2,927
The average monthly fair values of the derivative financial instruments for
the three-months ended September 26, 1997 and the fiscal year ended June 30,
1997 were as follows:
September 26, June 30,
1997 1997
-------------------------------------------------------
In millions Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------
Swap agreements $972 $1,456 $734 $1,029
Futures and forward
contracts 294 360 245 218
Options held 2,440 1,120
Options written 3,479 1,657
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 the
margin requirements of the individual exchanges. Generally, options written
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 26, 1997 was approximately
$960.5 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, in particular 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. Certain statements contained in this discussion are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks and uncertainties, including those previously mentioned, which
could cause actual results to differ from those discussed in the forward-looking
statements.
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, 1997.
Three-Months Ended September 26, 1997
Compared to Three-Months Ended September 27, 1996
The September 1997 quarter was generally characterized by active fixed income
and equity markets and strong underwriting and merger and acquisition activity.
Net income in the 1997 quarter was $161.6 million, an increase of 49.0% from the
$108.5 million in the comparable prior year quarter. Revenues, net of interest
expense ("net revenues"), increased 44.6% to $996.1 million from $688.7 million
in the comparable 1996 quarter. The increase was attributable to increases in
all revenue categories, particularly investment banking and principal
transactions. Earnings per share were $1.11 for the 1997 quarter versus $0.72
for the comparable 1996 quarter, adjusted for all stock dividends.
Commission revenues increased 32.1% in the 1997 quarter to $213.4 million from
$161.6 million in the comparable 1996 quarter. This increase was primarily
attributable to a 44.2% increase in institutional commissions and a 51.1%
increase in commissions derived from private client services from the comparable
1996 quarter reflecting increased volume due to active equity markets. In
addition, securities clearance commissions increased 16.4% from the comparable
1996 quarter.
<PAGE>
Revenues from principal transactions increased 32.8% in the 1997 quarter to
$391.5 million from $294.9 million in the comparable 1996 quarter, primarily
reflecting increases in revenues derived from the Company's derivatives
activities and fixed income activities, particularly in the high yield and
convertible bonds areas. This increase reflected a favorable interest rate
environment and increased customer demand.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
September 26, 1997 September 27, 1996
Fixed Income $214,221 $187,170
Equity 92,899 72,198
Foreign Exchange & Other
Derivative Financial
Instruments 84,394 35,524
------ ------
$391,514 $294,892
======== ========
Investment banking revenues increased 101.8% to $219.3 million in the 1997
quarter from $108.7 million in the comparable 1996 quarter. Underwriting
revenues increased due to increases in volume, most notably from high yield and
equity issuances. Merger and acquisition and advisory fees also increased,
reflecting increased activity.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 30.9% to $147.7 million in the 1997 quarter from
$112.8 million in the comparable 1996 quarter. This increase was attributable to
higher levels of customer margin debt reflecting the continued expansion of
customer activities in the clearance business. Average margin debits increased
to $42.7 billion in the 1997 quarter from $25.3 billion in the comparable 1996
quarter. Average free credit balances increased to $9.4 billion in the 1997
quarter from $7.8 billion in the comparable 1996 quarter.
Employee compensation and benefits increased 45.0% to $499.2 million in the 1997
quarter from $344.4 million in the comparable 1996 quarter. The increase was
attributable to higher incentive and discretionary bonus accruals associated
with the increased earnings in the 1997 quarter. Employee compensation and
benefits, as a percentage of net revenues, increased to 50.1% in the 1997
quarter from 50.0% in the comparable 1996 quarter.
All other expenses increased 38.6% to $229.8 million in the 1997 quarter from
$165.8 million in the comparable 1996 quarter. Floor brokerage, exchange and
clearance fees increased 25.4% in the 1997 quarter from the comparable 1996
quarter reflecting the increase in the volume of securities transactions
processed. The remaining increase in
<PAGE>
other operating expenses was primarily related to an increase in accruals for
expenses associated with the Capital Accumulation Plan for Senior Managing
Directors (the "CAP Plan"), reflecting both improved earnings and greater
participation. In addition, expenses related to depreciation and data processing
increased reflecting computer equipment upgrades.
The Company's effective tax rate increased to 39.5% in the 1997 quarter compared
to 39.3% in the comparable 1996 quarter due to an increase in state and local
taxes.
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 U.S.
government and agency securities, 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 26, 1997 increased to $141.0 billion
from $121.4 billion at June 30, 1997. The increase is primarily attributable to
the growth in financial instruments owned, at fair value, securities purchased
under agreements to resell 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 U.S. 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.
<PAGE>
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.
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 utilizes 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.
During October 1997, the Company exercised its option to extend such
facility to October 1998 and to increase the amount of the facility to $3.7
billion.
<PAGE>
The new facility permits borrowing on a secured basis by Bear Stearns and BSSC
and certain affiliates and provides that up to $1.85 billion of the total
facility may be borrowed by the Company on an unsecured basis. There were no
borrowings outstanding under the facility at September 26, 1997.
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. 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 26, 1997, the Company repurchased
171,000 shares of Common Stock in connection with the CAP Plan at a cost of
approximately $7.4 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 CAP Plan. Repurchases of Common Stock pursuant to the CAP
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 6, 1997, there
have been no purchases under the Repurchase Plan.
Cash Flows
Cash and cash equivalents decreased by $211.6 million during the three-months
ended September 26, 1997 to $1.0 billion. Cash used in operating activities
during the three-months ended September 26, 1997 was $1.7 billion, mainly
representing increases in financial instruments owned, securities purchased
under agreements to resell and securities borrowed partially offset by increases
in securities sold under agreements to repurchase and financial instruments
sold, but not yet purchased. Financing activities provided cash of $1.6 billion,
primarily derived from short- and long-term borrowings proceeds partially offset
by retirement of senior notes.
<PAGE>
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.
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 26, 1997,
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. At September 26, 1997, the Company held high yield securities of $1.8
billion in long inventory and $346.9 million in short inventory.
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 group.
<PAGE>
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------- -----------
The Company's principal business activities by their nature engender
significant market and credit risks. Managing these risks is critical to
the success and stability of the Company. As a result, comprehensive risk
management policies and procedures have been established to identify,
control and monitor each of these major risks. Additionally, the Company's
diverse portfolio of business activities helps to reduce the impact that
volatility in any particular market may have on its net revenues. In
addition to market risk, the Company is also subject to credit risk,
operating risk and funding risk.
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest and currency exchange rates and in equity and commodity
prices. Market risk is inherent to both derivative and non-derivative financial
instruments, and accordingly, the scope of the Company's market risk management
procedures extends beyond derivatives to include all market risk sensitive
financial instruments. The Company's exposure to market risk is directly related
to its role as a financial intermediary in customer-related transactions and to
its proprietary trading and arbitrage activities. For a discussion of the
Company's primary market risk exposures, which includes interest rate risk,
foreign exchange rate risk, and equity price risk, and a discussion of how those
exposures are managed see the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997.
Value at Risk
The estimation of potential losses that could arise from changes in market
conditions is typically accomplished through the use of statistical models which
seek to predict risk of loss based on historical price and volatility patterns.
Such statistical models are commonly known as value at risk. Value at risk is
used to describe a probabilistic approach to measuring the exposure to market
risk. This approach utilizes statistical concepts to estimate the probability of
the value of a financial instrument falling above or below a specified amount.
The calculation utilizes the standard deviation of historical changes in value
of the market risk sensitive financial instruments (i.e., volatility) to
estimate the amount of change in the current value that could occur at a
specified probability level.
Measuring market risk using statistical risk management models has recently
become the main focus of risk management efforts by many companies whose
earnings are significantly exposed to changes in the fair value of financial
instruments. The Company believes that statistical models alone do not provide a
reliable method of monitoring and controlling risk. While value at risk models
are relatively sophisticated, the quantitative risk information generated is
limited by the parameters established in creating the related models. The
financial instruments being evaluated may have features which may trigger a
potential loss in excess of the amounts previously disclosed if the changes in
market rates or prices exceed the confidence level of the
<PAGE>
model used. Therefore, such models do not substitute for the experience or
judgment of senior management and traders, who have extensive knowledge of the
markets and adjust positions and revise strategies as they deem necessary. The
Company uses these models only as a supplement to other risk management tools.
For purposes of Securities and Exchange Commission disclosure requirements,
the Company has performed an entity-wide value at risk analysis of virtually all
of the Company's financial assets and liabilities, including all reported
financial instruments owned and sold, repurchase and resale agreements, and
funding assets and liabilities. The value at risk related to non-trading
financial instruments has been included in this analysis and not reported
separately because the amounts were not material. The calculation is based on a
methodology which uses a one-day interval and a 95% confidence level. Interest
rate and foreign exchange rate risk use a Monte Carlo value at risk approach.
For interest rates, each country's yield curve has five factors which describe
possible curve movements. These were generated from principal component
analysis. In addition, volatility and spread risk factors were used, where
appropriate. Inter-country correlations were also used. Equity price risk was
measured using a historical value at risk. Equity derivatives were treated as
correlated with various indices, of which the Company used forty. Parameter
estimates, such as volatilities and correlations, were based on daily tests
through September 26, 1997.
This table illustrates the value at risk for each component of market risk as
of:
September 26, June 30,
1997 1997
MARKET RISK
Interest $ 15.9 $11.6
Currency 3.2 3.2
Equity 9.0 8.9
Value at risk for the interest rate risk component increased primarily
due to increases in fixed income positions while value at risk for the equity
and currency components remained relatively constant, consistent with net
positions in these components.
As previously discussed, the Company utilizes a wide variety of market risk
management methods, including: limits for each trading activity; marking all
positions to market on a daily basis; daily profit and loss statements; position
reports; aged inventory position reports; and independent verification of all
inventory pricing. Additionally, trading department management reports
positions, profits and losses, and trading strategies to the Risk Committee on a
weekly basis. The Company believes that these procedures, which stress timely
communication between trading department management and senior management, are
the most important elements of the risk management process.
<PAGE>
PART II - Other Information
Item 1. Legal Proceedings
Spencer C. Busby, et al. v. Donna Karan International, et al.
As previously reported in the Company's 1997 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court for the
Eastern District of New York.
On August 22, 1997, the Busby and Portannese actions were consolidated with a
third case, Steinmetz v. Donna Karan International, Inc., et al., a case in
which no claims are asserted against Bear Stearns.
Gregory P. Christofferson, et al. v. Bear Stearns & Co., Inc., et al.
As previously reported in the Company's 1997 Form 10-K, Bear Stearns and three
Bear Stearns officers defendants in a litigation pending in the Superior Court
of the State of California in and for the County of Los Angeles.
On October 17, 1997, the court ruled on summary judgment motions. The court
dismissed all claims against a former Bear Stearns officer named as a defendant
in the case, all claims other than fraud against two Bear Stearns officers named
as defendants in the case, and plaintiffs' claim for intentional interference
with prospective economic advantage against Bear Stearns. Trial is scheduled to
begin on all remaining claims on January 5, 1998.
In re Lady Luck Gaming Corporation Securities Litigation.
As previously reported in the Company's 1997 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court for
the District of Nevada.
On October 8, 1997, the court dismissed with prejudice all of plaintiffs' claims
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The court
also dismissed with prejudice plaintiffs' claims under Sections 11, 12(2) and
20(a) of the Securities Act of 1933, with respect to eleven of sixteen alleged
misrepresentations or omissions in the Lady Luck prospectus underlying the
litigation. Plaintiffs' claims with respect to the remaining five alleged
misrepresentations or omissions were dismissed without prejudice, pending the
filing of an amended complaint limited only to those claims.
<PAGE>
NASDAQ Antitrust Litigation.
As previously reported in the Company's 1997 Form 10-K, over 30 market-makers,
including Bear Stearns, are defendants in a litigation pending in the United
States District Court for the Southern District of New York.
On June 30 and August 27, 1997, plaintiffs in the class action filed in
connection with the NASDAQ Antitrust Litigation filed motions seeking court
approval of settlements totaling nearly $100 million entered into by plaintiffs
and six of the defendants in this action. On October 14, 1997, the court
approved those settlements. The settling defendants do not include Bear Stearns.
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
The Bear Stearns Companies Inc. Capital Accumulation Plan for Senior Managing
Directors (the "CAP Plan") allows all Senior Managing Directors of the Company
(including employee directors and executive officers of the Company) to defer a
portion of their compensation earned during each fiscal year. A participant's
compensation generally must be deferred for a period (a "Deferral Period") of
five years after the end of the fiscal year for which it was otherwise payable
and is credited to a participant's deferred compensation account ("Capital
Accumulation Account") in the form of units ("CAP Units"). The number of CAP
Units credited is a function of the amount deferred by each participant and the
average per share cost of the Company's Common Stock acquired by the Company in
the open market for purposes of the CAP Plan.
Each CAP Unit also entitles a participant to receive, on an annual basis, an
amount generally equal to the Company's pre-tax earnings per share (as
determined in accordance with the CAP Plan) for such fiscal year divided by the
average cost per share of Common Stock acquired by the Company for purposes of
the CAP Plan, less an adjustment for increases or decreases in the Company's
retained earnings attributable to net income or loss, after deducting dividends
declared with respect to capital stock of the Company, during such year (a "Net
Earnings Adjustment"). The Net Earnings Adjustment generally will be credited to
a participant's Capital Accumulation Account on an annual basis in the form of
additional CAP Units.
Upon completion of the Deferral Period, a participant is entitled to receive
from the Company a number of shares of Common Stock equal to the number of CAP
Units then credited to his Capital Accumulation Account (plus cash in the
amount, if any, of the participant's cash balance).
On September 11, 1997, effective July 1, 1997, an aggregate of 5,391,435 CAP
Units were credited to participants' Capital Accumulation Accounts with respect
to an aggregate of approximately $141,080,775 of compensation deferred during
fiscal year 1997. In addition, an aggregate of 2,103,083 CAP Units were credited
to participants' Capital Accumulation Accounts with respect to the Net Earnings
Adjustment made for fiscal year 1997. The Company relied on the exemption from
registration provided by Section 4 (2) of the Securities Act of 1933, as
amended.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(b)(2) Amendments to the Amended and Restated By-Laws of the
Registrant, adopted on October 28, 1997
(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 29,
1997, pertaining to the Company's results of
operations for the three-months and fiscal year
ended June 30, 1997.
(ii) A Current Report on Form 8-K dated August 14,
1997, pertaining to a tax opinion in connection
with the Company's Medium Term Note Program.
<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 10, 1997 By: /s/ Samuel L. Molinaro Jr.
--------------------------
Samuel L. Molinaro Jr.
Senior Vice President and
Chief Financial Officer
<PAGE>
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
Exhibit Index
Exhibit No. Description Page
(3)(b (2) Amendments to the Amended and Restated By-Laws of the
Registrant, adopted on October 28, 1997 26
(11) Statement Re Computation of Per Share Earnings 30
(12) Statement Re Computation of Earnings to Fixed Charges 31
(27) Financial Data Schedule 32
EXHIBIT 3(B)(2)
RESOLVED, that the By-laws of the Corporation, be, and they
hereby are, amended to add a new Article 4A to read as
follows:
Article 4A
COMMITTEES OF THE CORPORATION
The Board may, by resolution passed by a majority of the Whole Board, designate
one or more committees of the Corporation, each committee to consist of one or
more of the directors or officers of the Corporation as the Board shall
determine. A member of any committee of the Corporation may be removed with or
without cause by action taken by a majority of the Whole Board. Each such
committee shall have and may exercise such powers, authority and
responsibilities as the Board shall determine and as may be properly granted to
such committee under the laws of the state of Delaware, the Certificate of
Incorporation and these By-laws. The powers, authority and responsibilities
thereby granted may include those that may be delegated to officers of the
Corporation.
RESOLVED, that the Corporation hereby elects to be governed by
paragraph (2) of subsection (c) of Section 141 of the Delaware
General Corporation Law and that the By-laws of the
Corporation shall be amended by amending Article 4 to read as
follows:
Article 4
COMMITTEES OF THE BOARD
The Board may, by resolution passed by a majority of the Whole Board, designate
one or more committees, each committee to consist of one or more of the
directors of the Corporation. The Board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. A member of any committee of the Board
may be removed with or without cause by action taken by a majority of the Whole
Board. In the absence or disqualification of a member of the committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in the place of
<PAGE>
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board, shall have and may exercise all the
powers and authority of the Board in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it; but no such committee shall have the power
or authority in reference to the following matters: (i) approving or adopting,
or recommending to the stockholders, any action or matter expressly required by
The General Corporation Law to be submitted to stockholders for approval or (ii)
adopting, amending or repealing any By-law of the Corporation.
<TABLE>
EXHIBIT 11
THE BEAR STEARNS COMPANIES INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<CAPTION>
Three Months Ended
------------------------------------------------
September 26, September 27,
1997 1996
------------------------------------------------
(In thousands, except per share data)
<S> <C> <C>
Weighted average common and common
equivalent shares outstanding:
Average Common Stock
outstanding 118,395 123,713
Average Common Stock
equivalents:
Common Stock issuable
under employee
benefit plans 460 418
Common Stock issuable
assuming conversion
of CAP Units 33,156 26,789
------------------- ---------------------------
Total weighted average
common and common
equivalent shares
outstanding 152,011 150,920
=================== ===========================
Net income $ 161,618 $ 108,449
Preferred Stock dividend
requirements (5,925) (6,031)
Income adjustment
(net of tax) applicable
to deferred compensation
arrangements 13,532 5,498
------------------- ---------------------------
Adjusted net income $ 169,225 $ 107,916
=================== ===========================
Earnings per share $ 1.11 $ 0.72
=================== ===========================
</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)
Three Months Three Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended Ended
September 26, September 26, June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
1997 1996
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings before taxes
on income $ 267,138 $ 178,517 $ 1,013,690 $ 834,926 $ 388,082 $ 642,799 $ 614,398
------------ ------------ ---------- --------- --------- ---------- --------
Add: Fixed Charges
Interest 816,915 547,469 2,551,364 1,981,171 1,678,515 1,023,866 710,086
Interest factor
in rents 7,231 6,514 26,516 25,672 24,594 21,772 20,084
------------ ----------- ----------- --------- --------- --------- -------
Total fixed charges 824,146 553,983 2,577,880 2,006,843 1,703,109 1,045,638 730,170
---------- ----------- ----------- ---------- ---------- ---------- --------
Earnings before fixed
charges and taxes on
income $ 1,091,284 $ 732,500 $ 3,591,570 $2,841,769 $ 2,091,191 $ 1,688,437 $1,344,568
========= ======== ========== ========= ========= ========== =========
Ratio of earnings to
fixed charges 1.3 1.3 1.4 1.4 1.2 1.6 1.8
========== ========= ========== ========= ========== ========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information ectracted from the
unaudited Consolidated Statement of Financial Condition at September 26,
1997 and the unaudied Consolidated Statement of Income for the three-months
ended September 26 1997, 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-30-1997
<PERIOD-END> SEP-26-1997
<CASH> 1,037,501
<RECEIVABLES> 11,140,798
<SECURITIES-RESALE> 34,872,745
<SECURITIES-BORROWED> 43,428,158
<INSTRUMENTS-OWNED> 47,668,602
<PP&E> 398,866
<TOTAL-ASSETS> 140,950,580
<SHORT-TERM> 14,668,687
<PAYABLES> 34,624,196
<REPOS-SOLD> 49,227,444
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 27,463,069
<LONG-TERM> 9,501,926
0
437,500
<COMMON> 167,785
<OTHER-SE> 2,809,437
<TOTAL-LIABILITY-AND-EQUITY> 140,950,580
<TRADING-REVENUE> 391,514
<INTEREST-DIVIDENDS> 964,571
<COMMISSIONS> 213,444
<INVESTMENT-BANKING-REVENUES> 219,328
<FEE-REVENUE> 24,148
<INTEREST-EXPENSE> 816,915
<COMPENSATION> 499,197
<INCOME-PRETAX> 267,138
<INCOME-PRE-EXTRAORDINARY> 267,138
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 161,618
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.11
</TABLE>
