SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 25, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8989
The Bear Stearns Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3286161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Park Avenue, New York, New York 10167
(Address of principal executive offices) (Zip Code)
(212) 272-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 4, 1994, the latest practicable date, there were 109,563,220
shares outstanding of Common Stock, $1 par value.
THE PURPOSE OF THIS AMENDMENT IS TO CORRECT AN INADVERTENT OMISSION OF
PART I, ITEM 2 (MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS) AND PART II, ITEM 1 (LEGAL PROCEEDINGS) IN THE INITIAL
FILING OF THE FORM 10-Q. FOR CONVENIENCE OF THE READER, THE FORM 10-Q HAS BEEN
RESTATED IN ITS ENTIRETY IN THIS AMENDMENT.
EXPLANATORY NOTE
This report on Form 10-Q/A amends and restates in its entirety the
Quarterly Report on Form 10-Q of the Bear Stearns Companies Inc.
(the "Company") for the quarterly period ended March 25, 1994. The
purpose of this amendment is to correct the inadvertent omission
of Part I, Item 2 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) and Part II, Item 1 (Legal
Proceedings) in the initial filing of the Form 10-Q.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition at March 25, 1994
(Unaudited) and June 30, 1993.
Consolidated Statements of Income (Unaudited) for the three-month
and nine-month periods ended March 25, 1994 and March 26, 1993
Consolidated Statements of Cash Flows (Unaudited) for the nine-month
periods ended March 25, 1994 and March 26, 1993.
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.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
March 25, June 30,
1994 1993
(Unaudited)
(In thousands, except share data)
Cash and cash equivalents $ 213,022 $ 317,886
Cash and securities deposited with
clearing organizations or
segregated in compliance with
Federal regulations 2,238,649 2,291,992
Securities purchased under agreements
to resell 23,626,127 16,038,657
Securities borrowed 20,737,384 16,721,404
Receivables
Customers 8,081,339 4,954,404
Brokers, dealers and others 3,032,027 1,016,068
Interest and dividends 175,988 109,217
Financial instruments owned-at
market value 18,874,260 15,214,510
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 257,419 238,936
Other assets 397,746 536,431
Total Assets $77,633,961 $57,439,505
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
March 25, June 30,
1994 1993
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 8,782,308 $ 6,118,894
Securities sold under agreements
to repurchase 34,073,911 22,058,354
Securities loaned 767,484 565,584
Payables
Customers 16,086,224 13,038,380
Broker, dealers and others 1,171,585 1,595,098
Interest and dividends 246,492 177,948
Financial instruments sold, but not
yet purchased - at market value 9,809,407 8,973,839
Accrued employee compensation and benefits 637,650 469,376
Other liabilities and accrued expenses 617,856 782,379
72,192,917 53,779,852
Commitments and contingencies
Long-term borrowings 3,208,025 1,883,123
Preferred Stock issued by subsidiary 150,000
Stockholders' Equity
Preferred Stock, $1.00 par value;
10,000,000 shares authorized:
Adjustable Rate Cumulative Preferred
Stock, Series A - $50 liquidation
preference; 3,000,000 shares issued 150,000 150,000
Cumulative Preferred Stock, Series B-$200
liquidation preference; 937,500 shares
issued and outstanding 187,500 187,500
Cumulative Preferred Stock, Series C-$200
liquidation preference; 500,000 shares 100,000
issued and outstanding
Common Stock, $1.00 par value;
200,000,000 shares authorized;
138,072,022 and 131,507,178 shares issued
at March 25, 1994 and June 30, 1993,
respectively 138,072 131,507
Paid-in capital 1,346,513 1,225,557
Retained earnings 485,971 328,414
Capital Accumulation Plan 138,331 138,331
Treasury stock, at cost -
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,118,550 shares (85,507) (85,507)
Common Stock - 26,867,458 and 22,203,018
shares at March 25, 1994 and June 30, 1993,
respectively (347,185) (263,755)
Note receivable from ESOP Trust (30,676) (35,517)
Total Stockholders' Equity 2,083,019 1,776,530
Total Liabilities and Stockholders' Equity $ 77,633,961 $ 57,439,505
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
March 25, March 26, March 25, March 26,
1994 1993 1994 1993
(In thousands, except share data)
Revenues
Commissions $ 121,541 $ 112,750 $ 358,657 $ 303,089
Principal transactions 353,999 318,543 1,004,212 796,752
Investment banking 103,571 87,939 399,694 213,496
Interest and dividends 315,269 209,501 888,729 645,708
Other income 4,581 5,162 19,587 10,648
Total revenues 898,961 733,895 2,670,879 1,969,693
Interest expense 245,324 163,428 679,782 506,486
Revenues, net of
interest expense 653,637 570,467 1,991,097 1,463,207
Non-interest expenses
Employee compensation
and benefits 321,042 276,148 989,842 725,211
Floor brokerage, exchange
and clearance fees 22,868 21,702 70,329 60,378
Communications 19,345 14,845 54,317 43,967
Occupancy 19,227 17,994 56,325 52,457
Depreciation and
amortization 12,243 9,815 34,921 30,639
Advertising and market
development 10,997 10,520 34,869 29,888
Data processing and
equipment 7,100 5,963 20,721 20,331
Other expenses 44,317 30,053 123,369 97,512
Total non-interest
expenses 457,139 387,040 1,384,693 1,060,383
Income before provision
for income taxes 196,498 183,427 606,404 402,824
Provision for income taxes 81,048 73,011 251,838 165,158
Net income $ 115,450 $ 110,416 $ 354,566 $ 237,666
Net income applicable to
common shares $ 113,144 $ 109,677 $ 343,366 $ 239,834
Earnings per share $ .88 $ .88 $ 2.65 $ 1.89
Weighted average common
and common equivalent
shares outstanding 128,039,443 124,981,273 129,402,173 126,784,549
Cash dividends declared
per common share $ .15 $ .15 $ .45 $ .45
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 25, March 26,
1994 1993
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 354,566 $ 237,666
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 34,921 30,639
Deferred income taxes (56,862) 13,275
Other 15,996 28,606
(Increases) decreases in operating receivables:
Securities borrowed (4,015,980) (4,421,160)
Customers (3,126,935) 139,404
Brokers, dealers and others (2,015,959) (2,990,759)
Other (87,180) 112,481
Increases (decreases) in operating payables:
Securities loaned 201,900 (470,595)
Customers 3,047,844 3,236,820
Brokers, dealers and others (421,928) (683,328)
Other 68,544 (44,937)
(Increases) decreases in:
Cash and securities deposited with clearing
organizations or segregated in compliance
with Federal regulations 53,343 (684,497)
Securities purchased under agreements to resell (7,587,470) 996,966
Financial instruments owned (3,659,750) (3,955,234)
Other assets 157,907 (58,155)
Increases (decreases) in:
Securities sold under agreements to repurchase 12,015,557 3,959,123
Financial instruments sold, but not
yet purchased 835,568 3,257,391
Accrued employee compensation and benefits 152,674 (22,573)
Other liabilities and accrued expenses (107,979) 103,144
Cash used in operating activities (4,141,223) (1,215,723)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 2,663,414 851,900
Issuance of long-term borrowings 1,507,043 524,575
Net proceeds from issuance of Cumulative
Preferred Stock, Series C 96,788
Net proceeds from issuance of Cumulative
Preferred Stock, Series B 181,438
Net proceeds from issuance of Preferred Stock
by Subsidiary 145,000
Other common stock transactions 3,722 1,545
Note repayment from ESOP trust 4,841 4,483
Payments for:
Retirement of Senior Notes (183,000)
Retirement of Subordinated Notes (1,000) (1,000)
Treasury stock purchases (83,960) (82,934)
Cash dividends paid (69,181) (49,153)
Cash provided by financing activities 4,083,667 1,430,854
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements, net (53,404) (36,948)
Purchases of investment securities and other assets (3,300) (575)
Proceeds from sale of investment securities and
other assets 3,096 108,601
Proceeds from distributions on investment securities 6,300
Cash (used in) provided by investing activities (47,308) 71,078
Net (decrease)increase in cash and cash equivalents (104,864) 286,209
Cash and cash equivalents, beginning of period 317,886 124,088
Cash and cash equivalents, end of period $ 213,022 $ 410,297
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements
include the accounts of The Bear Stearns Companies Inc. and
its subsidiaries (the "Company") and have been prepared
pursuant to the Securities and Exchange Commission's rules
and regulations. The consolidated financial statements
reflect all adjustments which, in the opinion of management,
are normal and recurring and are necessary for a fair
statement of the results for the interim periods presented.
All material intercompany balances and transactions have
been eliminated. The nature of the Company's business is
such that the results of any interim period may not be
indicative of the results to be expected for a full fiscal
year. Certain prior period amounts have been reclassified
to conform with the current period's presentation.
2. FINANCIAL INSTRUMENTS - AT FAIR VALUE
Financial instruments owned and financial instruments sold,
but not yet purchased, consist of the Company's proprietary
trading and investment accounts, at fair value, as follows
(in thousands):
March 25, June 30,
1994 1993
Financial instruments owned:
United States government and agency $ 6,942,333 $ 7,644,206
Non-U.S. government 663,071 432,008
State and municipal 192,428 234,503
Corporate equity 2,610,293 1,602,077
Corporate debt 4,791,766 3,365,013
Mortgages and mortgage-backed 3,083,945 1,663,842
Other 590,424 272,861
$18,874,260 $15,214,510
Financial instruments sold, but not
yet purchased:
United States government and agency $ 5,446,356 $ 5,879,085
Non-U.S. government 388,108 82,281
Corporate equity 2,808,669 2,091,996
Corporate debt 692,244 490,563
Other 474,030 429,914
$ 9,809,407 $ 8,973,839
3. COMMITMENTS AND CONTINGENCIES
At March 25, 1994, the Company is contingently liable for
unsecured letters of credit of approximately $535,400,000
and letters of credit of approximately $72,300,000 secured
by financial instruments owned by the Company, which are
principally used as deposits for securities borrowed and to
satisfy margin deposits at option and commodity exchanges.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES - (continued)
In the normal course of its business, the Company enters into
transactions in a variety of financial instruments in order
to meet the financing and hedging needs of its customers, to
reduce its own exposure to market, currency and interest rate
risks and in connection with its proprietary market-making
and trading activities. These financial instruments include
forward and futures contracts, interest rate swaps and the
writing of options, including interest rate caps and floors.
The settlement of these transactions is not expected to have
a material effect on the consolidated financial condition of
the Company.
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 March 25,
1994, Bear Stearns' net capital of $842,663,016, exceeded the
minimum requirement by $820,293,094.
Bear, Stearns International Limited ("BSIL"), and Bear
Stearns International Trading Limited ("BSIT") wholly-owned
London-based subsidiaries, are subject to regulatory capital
requirements of the Securities and Futures Authority. BSIL
and BSIT have consistently operated in excess of these
requirements.
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 shares by the weighted average number of
shares of Common Stock and common stock equivalents
outstanding during each period presented. Common stock
equivalents include the assumed distribution of shares of
Common Stock issuable under certain of the Company's deferred
compensation arrangements with appropriate adjustments made
to net income for earnings accruals related thereto.
Additionally, shares of Common Stock issued or issuable under
various employee benefit plans are included as common stock
equivalents.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for
the nine months ended March 25, 1994 and March 26, 1993,
respectively. Income taxes paid totaled $255,073,831 and
$126,736,000 for the nine months ended March 25, 1994 and
March 26, 1993, respectively. Noncash financing activities
totaled $4,431,000 and $2,837,000 for the nine months ended
March 25, 1994 and March 26, 1993, respectively.
7. PREFERRED STOCK ISSUED BY SUBSIDIARY
In February 1994, Bear Stearns Finance LLC ("BSF"), a wholly
owned subsidiary of the Company, issued Exchangeable
Preferred Income Cumulative Shares ("EPICS"), Series A, which
have a liquidation value of $25 per share, and an annual
dividend rate of 8%. The EPICS are callable at the option of
BSF, in whole or in part, at any time, on or after February
28, 1999, at their stated liquidation value.
The proceeds of the EPICS issuance were loaned by BSF to the
Company under the terms of a 30-year subordinated loan
agreement. This agreement allows the Company to extend the
maturity of the loan through two 30-year renewal options. On
any given monthly dividend date, on or after August 31, 1994,
the Company has the right, subject to certain conditions, to
issue to BSF, in exchange for such note, Depositary Shares
evidencing Preferred Shares of the Company. In the event of
such exchange, BSF is required to redeem the EPICS, in their
entirety, solely in exchange for such Depositary Shares.
8. SUBSEQUENT EVENT
On April 14, 1994, the Board of Directors declared a 5% stock
dividend on the Company's Common Stock to Shareholders of
record at May 13, 1994, to be distributed May 27, 1994. Per
share amounts and weighted average shares outstanding for all
periods included in the consolidated financial statements are
presented after giving retroactive effect to the stock
dividend.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's principal business activities, investment
banking, securities trading and brokerage, are, by their
nature, highly competitive and subject to various risks,
particularly volatile trading markets and fluctuations in
the volume of market activity. Consequently, the Company's
net income and revenues have in the past been, and may
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, over which the Company has little control.
In addition, results of operations of any particular interim
period may not be indicative of results to be expected for
a full fiscal year.
Subsequent to the end of the Company's quarter ended March
25, 1994, the equity and fixed income markets have been
subject to extreme volatility. While the fourth quarter is
only several weeks old, Bear Stearns has been impacted by
these conditions resulting in moderate mark-to-market
losses. These losses have not had a material impact on
either the liquidity or the financial condition of the
Company.
Three Months Ended March 25, 1994
Compared to March 26, 1993
The March 1994 quarter was characterized by extreme
volatility in certain sectors of both the fixed income and
equity markets reflecting investor concerns over the
prospect of increased inflation. Net income in the 1994
quarter was $115,450,000, an increase of 4.6% as compared
with $110,416,000 for the 1993 quarter. Revenues, net of
interest expense ("net revenues") increased to $653,637,000
in the 1994 quarter from $570,467,000 in the 1993 quarter,
an increase of 14.6%. The growth was primarily attributable
to principal transactions and investment banking, which
increased 11.1% and 17.8%, respectively. Earnings per
share, were $0.88 for both the 1994 and the 1993 quarters.
The earnings per share amounts reflect all stock dividends
declared through the date of this filing.
Commission revenues rose 7.8% in the 1994 quarter to
$121,541,000 from $112,750,000 in the 1993 quarter.
Revenues derived from institutional customers increased on
higher volume reflecting active equity markets, however,
these revenues were offset by a slight decrease in
commissions from retail customers. Commission revenues
related to the securities clearance activities also
increased on higher volumes.
Revenues from principal transactions increased 11.1% to
$353,999,000 in the 1994 quarter from $318,543,000 in the
1993 quarter reflecting increases in revenues derived from
its fixed income, principally mortgage-backed securities and
convertible bonds activities. In addition, revenues derived
from equity related activities in emerging markets and over-
the-counter also increased. These increases were partially
offset by reductions in revenues derived from the Company's
activities in the bankruptcy/high-yield and corporate bond
areas.
Investment banking revenues increased to $103,571,000 in the
1994 quarter from $87,939,000 in the 1993 quarter, a 17.8%
rise. This increase largely reflects increased syndicate
commissions and management fees attributable to higher
levels of new issue volume of common equity and non-
investment grade debt. In addition, the Company also
experienced growth in both advisory and merger and
acquisition fees.
Net interest and dividends (revenues from interest and net
dividends less interest expense) increased 51.8% in the 1994
quarter to $69,945,000 from $46,073,000 in the comparable
1993 quarter. The increase in net interest and dividends
principally reflect higher levels of interest earning
assets, particularly customer margin debt.
Employee compensation and benefits increased 16.3% to
$321,042,000 in the 1994 quarter from $276,148,000 in the
1993 quarter. The increase is attributable to higher
incentive and discretionary bonus accruals associated with
the increased earnings in the 1994 quarter and an increase
in salesmen's compensation as a result of higher commission
revenues. Employee compensation and benefits as a
percentage of net revenues increased slightly to 49.1% from
48.4% in the 1993 quarter.
The remaining operating expenses increased 22.7% to
$136,097,000 in the 1994 quarter as compared to $110,892,000
in the 1993 quarter. This increase is principally related
to increased communication, depreciation, and occupancy
expenses which reflect the expansion of the Company's
business activities. In addition, expenses attributable to
the Company's deferred compensation plans increased
reflecting higher levels of income and increased
participation.
Nine Months Ended March 25, 1994
Compared to March 26, 1993
Net income for the nine-months ended March 25, 1994 was
$354,566,000 as compared with $237,666,000 for the 1993
nine-month period, an increase of 49.2%. Net revenues
increased 36.1% to $1,991,097,000 in the 1994 period from
$1,463,207,000 in the 1993 period, principally due to
increased contributions from principal activities and
investment banking. Earnings per share for the 1994 period
was $2.65 compared to $1.89 for the 1993 period. The
earnings per share amounts reflect all stock dividends
declared through the date of this filing.
Commission revenues increased 18.3% to $358,657,000 in the
1994 period from $303,089,000 in the 1993 period.
Commission revenues derived from retail and institutional
investors and securities clearance activities increased
reflecting the higher levels of activity throughout the
period. Securities clearance revenues increased reflecting
the continued growth in the Company's client base.
Principal transactions increased 26.0% to $1,004,212,000 in
the 1994 period from $796,752,000 in the comparable 1993
period primarily due to the strength of the fixed income
securities areas, particularly mortgage-backed securities,
bankruptcy/high yield and convertible bonds. Additionally,
the Company experienced growth in the over-the-counter,
emerging markets and arbitrage trading areas.
Investment banking revenues have increased 87.2% to
$399,694,000 in the 1994 period from $213,496,000 in the
1993 period. The increase reflects higher underwriting
revenues and management fees associated with the increased
new issue volume in both the investment grade and non-
investment grade debt, common equity and municipal
securities. These increases were the result of higher
levels of activity and the Company's expanded market share
of domestic underwriting volume. In addition, the Company
also experienced growth in both advisory and merger and
acquisition fees.
Net interest and dividends increased 50.1% to $208,947,000
for the 1994 period from $139,222,000 in the 1993 period.
The increase in net interest and dividends principally
reflects higher levels of interest earning assets,
particularly customer margin debt. The increase in customer
margin debt reflects favorable market conditions and an
increase in the securities clearance client base.
Employee compensation and benefits increased 36.5% to
$989,842,000 in the 1994 period compared with $725,211,000
in the 1993 period. The increase is attributable to higher
incentive and discretionary bonus accruals associated with
the increased earnings in the 1994 period and an increase
in salesmen's compensation as a result of higher commission
revenues. Employee compensation and benefits as a
percentage of net revenues increased slightly to 49.7% from
49.6% in the 1993 period.
Remaining operating expense increased 17.8% to $394,851,000
in the 1994 period as compared to $335,172,000 in the 1993
period. This increase is primarily due to increased floor
brokerage, communications, data processing and promotional
expenses due to the growth in the Company's business
activities. The increase in occupancy and depreciation
costs were the result of the Company's expansion of its
international operations.
The increase in the effective tax rate to 41.5% in the 1994
period from 41.0% in the 1993 period is attributable to the
increase in the corporate Federal statutory rate to 35.0%
pursuant to the Omnibus Budget Reconciliation Act of 1993
and is partially offset by the Company's adoption of
Statement of Financial Accounting Standards No. 109.
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, generally secured by U.S.
government and agency securities, and customer margin loans and
securities borrowed which are typically secured with marketable
corporate debt and equity securities.
The Company's total assets and financial leverage can fluctuate
significantly depending upon economic and market conditions,
volume of activity, customer demand and underwriting commitments.
The Company's total assets at March 25, 1994 increased to $77.6
billion from $57.4 billion at June 30, 1993. The increase in
total assets is primarily attributable to growth in highly liquid
assets such as securities borrowed and resale agreements. The
Company's ability to support increases 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,
consisting of long-term borrowings and equity which forms its
capital base. The adequacy of the Company's capital base is
continually monitored by the Company and is a function of asset
quality and liquidity. The relationship between an asset's
liquidity and the level of capital required to support the asset
reflects the need to provide counterparties with additional
collateral, or margin, in order to obtain secured financings.
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
margin levels and consequently increased capital in order to
obtain secured financing. The level of customer receivables and
proprietary inventories the Company can maintain is also limited
by Securities and Exchange Commission Rule 15c3-1. Accordingly,
the mix of assets being held by the Company significantly
influences the amount of leverage the Company can employ and the
adequacy of its capital base.
Funding Strategy
Generally, the Company's funding strategy provides for the
diversification of its short-term funding sources in order to
maximize liquidity. Sources of short-term funding consist
principally of collateralized borrowings, including repurchase
transactions and securities lending arrangements, customer free
credit balances, unsecured commercial paper, medium-term notes
and bank borrowings, generally having maturities from overnight
to one year. Repurchase transactions, whereby securities are
sold with a commitment for repurchase by the Company at a future
date, represent the dominant component of secured short-term
funding. Additionally, the Company utilizes medium-term note
financing as an important component of its funding mix. The use
of medium-term note financing has served to improve liquidity by
lengthening the average maturities of the Company's short-term
borrowings. In addition to short-term funding sources, the
Company utilizes long-term senior borrowings as a longer term
source of unsecured financing.
The Company maintains an alternative liquidity 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 liquidity 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 the use
of this analysis, the Company can continuously evaluate the
adequacy of its equity base and schedule of maturing term debt
supporting its present asset levels. The
Company can then seek to adjust its maturity schedule, as
necessary, in light of market conditions and funding
alternatives. The Company also maintains $1,495,000,000 of
committed unsecured revolving lines of credit which support the
Company's commercial paper programs. At March 25, 1994, no
amounts were outstanding under the revolving lines of credit.
Capital Resources
The Company conducts substantially all of its operating
activities within its regulated broker-dealer subsidiaries, Bear,
Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities
Corp. ("BSSC") and Bear, Stearns International Limited ("BSIL").
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 and BSIL. 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
liquidity of the assets being financed.
Total cash and cash equivalents decreased $104.9 million in the
1994 nine-month period from $317.9 million at June 30, 1993 to
$213.0 million at March 25, 1994. Cash provided by financing
activities was used for operating and investing activities. Cash
used in operating activities totaled $4.1 billion. Increases in
securities borrowed of $4.0 billion, securities purchased under
agreements to resell of $7.6 billion, financial instruments owned
of $3.7 billion, customer receivables of $3.1 billion, and
receivables from brokers and dealers of $2.0 billion were
partially offset by increases in securities sold under agreements
to repurchase of $12.0 billion and customer payables of $3.0
billion. Financing activities provided the Company with cash of
$4.1 billion, primarily representing net proceeds from
borrowings. Short and long term borrowings provided $2.7 and $1.5
billion, respectively. Total cash and cash equivalents increased
$286.2 million in the 1993 nine-month period from $124.1 million
at June 30, 1992 to $410.3 million at March 26, 1993. Cash
provided by financing and investing activities was used for
operating activities.
During the 1994 quarter, the Company completed several capital-
related transactions. The Company continued to expand its long
term borrowing base through the issuance of, in four separate
offerings, senior notes in an aggregate principal amount of
$596,000,000.
The Company issued $250,000,000 principal amount of 6 5/8% Senior
Notes due 2004, $100,000,000 principal amount of floating rate
Senior Euronotes due 2004, and $200,000,000 principal amount of
floating rate Senior Notes due in 1999. The interest rates on
these notes are based on LIBOR and the two year constant maturity
treasury rate, respectively. In order to convert the interest
rate on the 6 5/8% Senior Notes into a floating rate, the Company
entered into an interest rate swap transaction. During the 1994
quarter, the Company called and redeemed $100,000,000 of 8 1/8%
Senior Notes which were originally due in 1997.
The redemption was financed through the above mentioned issuances
of Senior Notes. Additionally, the Company continued to extend
maturities through the issuance of $769,000,000 of medium-term
notes with maturities ranging from one to thirty years. The net
proceeds from the issuances of the senior notes and medium-term
notes were used by the Company for general corporate purposes and
to lengthen the average maturity of the Company's borrowings.
Also during the 1994 quarter, Bear Stearns Finance LLC ("BSF"),
a wholly-owned subsidiary of the Company, issued $150 million of
its Exchangeable Preferred Income Cumulative Shares ("EPICS"),
Series A. The shares have a liquidation value of $25 per share
with monthly dividends at an annual rate of 8%. Proceeds from
the issuance of the EPICS were loaned by BSF to the Company under
the terms of a 30-year subordinated loan agreement and were used
by the Company for general corporate purposes.
During the nine months ended March 25, 1994, the Company
repurchased 3,913,417 shares of Common Stock in connection with
the Capital Accumulation Plan for Senior Managing Directors and
the Performance Unit Plan for Senior Managing Directors
(collectively the "Plans") at a cost of approximately
$86,197,000. The Company intends, subject to market conditions,
to purchase a sufficient number of shares in respect of all
compensation deferred and any additional amounts allocated to
participants under the Plans. Repurchases of Common Stock
pursuant to the Plans are not made pursuant to the Company's
Stock Repurchase Program authorized by the Board of Directors and
are not included in calculating the maximum aggregate number of
shares of Common Stock that the Company may repurchase under the
Stock Repurchase Program.
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 Bear Stearns International Trading,
Limited ("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 adequacy requirements.
Merchant Banking and High-Yield 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 March 25, 1994, the Company's aggregate
investments in leveraged transactions and its exposure to any
individual transaction were not material.
As part of the Company's fixed income securities activities, the
Company participates in the trading and sales 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 ("high yield securities"). Non-
investment grade mortgage loans are principally secured by
residential properties and include both non-performing loans and
real estate owned properties. As of March 25, 1994, the Company
held in inventory approximately $1,696,000 of high yield
securities. Collectively, these securities 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. The
Company's 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. The Company accounts for such inventory positions on a
market value basis with unrealized gains and losses being
recognized currently in earnings.
Effects of Statements of Financial Accounting Standards
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits" ("SFAS 112") which is effective for
fiscal years beginning after December 15, 1993. SFAS 112
establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but
before retirement. The statement requires employees to accrue
the obligations associated with service rendered to date for
employee benefits accumulated or vested where payment is probable
and can be reasonably estimated. The Company does not expect
initial adoption of SFAS 112 to have a material effect on the
liquidity, operating results or financial condition of the
Company.
Effective for the Company's fiscal years beginning July 1, 1994,
the Financial Accounting Standards Board ("FASB") Interpretation
No. 39, Offsetting of Amounts related to Certain Contracts,
("Interpretation 39"), requires the Company to report separately
on the Consolidated Statement of Financial Condition unrealized
gains and losses as assets and liabilities, respectively. In
addition, resale and repurchase transactions with the same
counterparty and same terms must also be reported separately as
assets and liabilities, respectively. Netting will be permitted
only when a legal right of setoff exists with the same
counterparty under a master netting agreement. The impact of
Interpretation 39 at March 25, 1994 would have been an increase
to assets and liabilities of approximately $6.0 billion.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
ALPHA GROUP CONSULTANTS, Et AL. V. BEAR STEARNS
(WEINTRAUB ENTERTAINMENT GROUP LITIGATION
As previously reported in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1993 (the
"1993 Form 10-K"), and in the Company's Quarterly Report
for the quarter ended December 31, 1993 (the "Second
Quarter Form 10-Q"), Bear Stearns is a defendant in a
litigation entitled Alpha Group Consultants, et al. v.
Weintraub, et al., which is pending in the United States
District Court for the Southern District of California.
The action is a class action on behalf of purchasers of
debentures and warrants of Weintraub Entertainment Group
during the period January 23, 1987 through October 1,
1990 (the 1993 Form 10-K mistakenly referred to March 31,
1990 as the end of the class period).
By court order dated December 9, 1993, the caption of
this action was changed from Alpha Group Consultants, et.
al. v. Weintraub, et. al. to Alpha Group Consultants, et.
al. v. Bear Stearns (Weintraub Entertainment Group
Litigation).
By court order dated April 22, 1994, the court granted
Bear Stearns' motion for summary judgment and dismissed
this action in its entirety. Plaintiffs have appealed.
RE: IN DAISY SYSTEMS CORPORATION
As previously reported in the Company's 1993 Form 10-K
and the Company's Quarterly Report for the quarter ended
September 30, 1993 (the "First Quarter Form 10-Q"), Bear
Stearns is a defendant in a litigation entitled in re
Daisy Systems Corporation, which is pending in the United
States District Court for the Northern District of
California.
The April 25, 1994 trial date referred to in the First
Quarter Form 10-Q has been rescheduled to July 25, 1994.
RE: IN-STORE ADVERTISING SECURITIES LITIGATION
As previously reported in the Company's 1993 Form 10-K
and the Second Quarter From 10-Q, Bear Stearns is a
defendant in a litigation entitled In Re-In-Store
Advertising Securities Litigation, which is pending in
the United States District Court for the Southern
District of New York.
On December 30, 1993, plaintiff's federal law claims
against defendant KPMG Peat Marwick ("Peat") were
dismissed as time barred, but the court retained
jurisdiction over plaintiff's state law claims against
Peat. On April 8, 1994 the court granted Peat permission
to move to dismiss plaintiffs' state law claims and the
cross-claims asserted against Peat by the Underwriter
Defendants (including Bear Stearns) and Venture Capital
Defendants.
THANKSGIVING TOWER PARTNERS ET AL. V. ANROS THANKSGIVING
PARTNERS
As previously reported in the Company's 1993 Form 10-K
and the Second Quarter Form 10-Q, a Bear Stearns
affiliate was a plaintiff and counterdefendant in a
litigation entitled Thanksgiving Tower Partners et al. v.
Anros Thanksgiving Partners, which is pending in the
United States District Court for the Northern District of
Texas.
On March 29, 1994, the Court announced that it would
grant summary judgment in favor of Bear Stearns'
affiliate. To date, however, no order has been entered
by the Court.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) (a) (1) Amendment to Management Compensation Plan
adopted on January 20, 1994.
(11) Statement Re Computation of Per Share
Earnings.
(12) Statement Re Computation of Ratio of
Earnings to Fixed Charges.
(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 January 12, 1994,
pertaining to the Company's results of operations for
the three months and six months ended December 31,
1993.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Bear Stearns Companies Inc.
(Registrant)
Date: May 10, 1994 By: /s/ Samuel L. Molinaro, Jr.
Samuel L. Molinaro, Jr.
Senior Vice President -
Finance and Chief
Accounting Officer
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
Exhibit Index
Exhibit No. Description Page
(10) (a) (1) Ammendment to Management Compensation Plan adopted
on January 20, 1994. 23
(11) Statement Re Computation of Per Share Earnings. 25
(12) Statement Re Computation of Ratio of
Earnings to Fixed Charges. 27