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 December 31, 1995
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 February 9, 1996, the latest practicable date, there were 117,131,757
shares of Common Stock, $1 par value, outstanding.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Statements of Financial Condition at December 31, 1995
(Unaudited) and June 30, 1995.
Consolidated Statements of Income (Unaudited) for the three- and
six-month periods ended December 31, 1995 and December 31, 1994.
Consolidated Statements of Cash Flows (Unaudited) for the six-month
periods ended December 31, 1995 and December 31, 1994.
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 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.
Signatures.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
December 31, June 30,
1995 1995
(Unaudited)
(In thousands, except share data)
Cash and cash equivalents $ 133,037 $ 700,501
Cash and securities deposited with
clearing organizations or
segregated in compliance with
Federal regulations 1,538,819 1,309,573
Securities purchased under agreements
to resell 26,075,676 18,940,744
Securities borrowed 23,142,782 24,632,088
Receivables
Customers 6,719,358 5,993,772
Brokers, dealers and others 526,710 578,676
Interest and dividends 234,689 227,069
Financial instruments owned - at
fair value 26,978,269 21,509,498
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 320,034 312,867
Other assets 349,646 392,372
Total Assets $86,019,020 $74,597,160
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
December 31, June 30,
1995 1995
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 9,136,467 $ 8,570,777
Securities sold under agreements
to repurchase 36,509,863 29,584,724
Payables
Customers 18,583,060 16,236,611
Brokers, dealers and others 2,315,461 1,167,311
Interest and dividends 318,033 311,101
Financial instruments sold, but not
yet purchased - at fair value 11,147,297 11,241,118
Accrued employee compensation and benefits 395,277 469,189
Other liabilities and accrued expenses 499,478 453,924
78,904,936 68,034,755
Commitments and Contingencies
Long-term Borrowings 4,496,875 4,059,944
Preferred Stock Issued by Subsidiary 150,000 150,000
Stockholders' Equity
Preferred Stock 437,500 437,500
Common Stock, $1.00 par value:
200,000,000 shares authorized;
152,202,724 shares issued at
December 31, 1995 and June 30, 1995 152,203 152,203
Paid-in capital 1,570,988 1,557,237
Retained earnings 581,431 430,330
Capital Accumulation Plan 296,211 344,338
Treasury stock - at cost:
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,118,550 shares at
December 31, 1995 and June 30, 1995 (85,507) (85,507)
Common Stock - 34,074,946 and 34,866,529
shares at December 31, 1995 and June 30,
1995, respectively (465,817) (458,193)
Note receivable from ESOP Trust (19,800) (25,447)
Total Stockholders' Equity 2,467,209 2,352,461
Total Liabilities and Stockholders' Equity $86,019,020 $74,597,160
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three-Months Ended Six-Months Ended
December 31, December 31, December 31, December 31,
1995 1994 1995 1994
(In thousands, except share data)
Revenues
Commissions $ 163,220 $ 126,654 $ 318,410 $ 246,983
Principal transactions 260,840 147,998 530,755 328,937
Investment banking 150,397 75,080 237,802 133,432
Interest and dividends 607,060 469,840 1,160,981 912,137
Other income 8,546 7,161 16,549 13,669
Total revenues 1,190,063 826,733 2,264,497 1,635,158
Interest expense 502,403 400,130 959,348 774,930
Revenues, net of
interest expense 687,660 426,603 1,305,149 860,228
Non-interest expenses
Employee compensation
and benefits 345,427 223,259 652,424 454,288
Floor brokerage, exchange
and clearance fees 30,787 26,072 60,533 51,733
Communications 22,407 21,342 44,905 42,668
Occupancy 21,256 20,103 42,402 40,092
Depreciation and
amortization 17,347 14,419 33,623 28,212
Advertising and market
development 14,382 17,064 26,906 31,488
Data processing and
equipment 8,706 8,496 17,687 16,903
Other expenses 46,467 42,740 89,378 84,541
Total non-interest
expenses 506,779 373,495 967,858 749,925
Income before provision
for income taxes 180,881 53,108 337,291 110,303
Provision for income taxes 75,725 20,181 138,289 41,915
Net income $ 105,156 $ 32,927 $ 199,002 $ 68,388
Net income applicable to
common shares $ 98,956 $ 26,598 $ 186,592 $ 55,827
Earnings per share $ 0.76 $ 0.21 $ 1.42 $ 0.45
Weighted average common
and common equivalent
shares outstanding 136,244,492 134,215,343 136,835,770 134,683,356
Cash dividends declared
per common share $ 0.15 $ 0.15 $ 0.30 $ 0.30
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six-Months Ended
December 31, December 31,
1995 1994
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 199,002 $ 68,388
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 33,623 28,212
Deferred income taxes (17,771) (8,494)
Other 26,405 11,382
(Increases) decreases in operating receivables:
Securities borrowed 1,489,306 (1,601,437)
Brokers, dealers and others 51,966 (1,573,800)
Customers (725,586) 1,199,830
Other (10,385) 20,109
Increases (decreases) in operating payables:
Brokers, dealers and others 1,147,630 805,927
Customers 2,346,449 267,114
Other 6,932 (34,982)
(Increases) decreases in:
Cash and securities deposited with clearing
organizations or segregated in compliance
with Federal regulations (229,246) (320,608)
Securities purchased under agreements to resell (7,134,932) 5,423,130
Financial instruments owned (5,468,771) (2,126,527)
Other assets 44,359 (16,694)
Increases (decreases) in:
Securities sold under agreements to repurchase 6,925,139 (3,729,859)
Financial instruments sold, but not
yet purchased (93,821) 2,462,477
Accrued employee compensation and benefits (88,912) (373,856)
Other liabilities and accrued expenses 47,991 78,724
Cash (used in) provided by operating activities (1,450,622) 579,036
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (payments) from short-term borrowings 565,690 (107,343)
Issuance of long-term borrowings 719,308 367,368
Allocation of Capital Accumulation Plan 5,227 -
Other common stock transactions 103 3,564
Note repayment from ESOP Trust 5,647 5,229
Payments for:
Retirement of Senior Notes (289,000) (279,050)
Treasury stock purchases (51,741) (44,670)
Cash dividends paid (47,892) (46,306)
Cash provided by (used in) financing activities 907,342 (101,208)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements, net (40,790) (56,146)
Purchases of investment securities and other assets (2,259)
Proceeds from sale of investment securities and
other assets 18,865 23,700
Cash used in investing activities (24,184) (32,446)
Net (decrease) increase in cash and cash equivalents (567,464) 445,382
Cash and cash equivalents, beginning of period 700,501 294,604
Cash and cash equivalents, end of period $ 133,037 $ 739,986
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 an entire fiscal year. Certain prior
period amounts have been reclassified to conform with
the current period's presentation.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments owned and financial instruments
sold, but not yet purchased, consist of the Company's
proprietary trading and investment accounts, at fair
value, as follows (in thousands):
December 31, June 30,
1995 1995
Financial instruments owned:
United States government and agency $ 8,962,140 $ 8,688,713
Non-US government 915,090 1,256,859
Corporate equity and convertible debt 8,684,511 5,235,219
Corporate debt 4,183,346 2,723,564
Derivative financial instruments 1,477,184 1,223,258
Mortgages and other
mortgage-backed securities 2,035,617 1,771,735
Other 720,381 610,150
$26,978,269 $21,509,498
Financial instruments sold, but not
yet purchased:
United States government and agency $ 4,573,395 $ 6,111,612
Non-US government 496,639 765,230
Corporate equity 3,393,456 2,424,455
Corporate debt 827,594 781,792
Derivative financial instruments 1,775,446 1,155,527
Other 80,767 2,502
$11,147,297 $11,241,118
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company is contingently liable for
unsecured letters of credit of approximately $1.9 billion and
letters of credit of approximately $257.8 million secured by
financial instruments owned by the Company, which are principally
used as collateral for securities borrowed and to satisfy margin
deposits at option and commodity exchanges.
In the normal course of business, the Company has been named as a
defendantin several lawsuits which involve claims for substantial amounts.
Although the ultimate outcome of these suits cannot be ascertained at
this time, it is the opinion of management, after consultation with
counsel, that the resolution of such suits will not have a material
adverse effect on the results of operations or the financial condition of
the Company.
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear, Stearns & Co.
Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary,
Bear, Stearns Securities Corp. ("BSSC"), are registered broker-
dealers and, accordingly, are subject to Securities and Exchange
Commission Rule 15c3-1 (the "Net Capital Rule") and the capital
rules of the New York Stock Exchange, Inc. ("NYSE") and other
principal exchanges of which Bear Stearns and BSSC are members.
Bear Stearns and BSSC have consistently operated in excess of NYSE
& SEC capital requirements. Included in the computation of net
capital of Bear Stearns is the net capital of BSSC in excess of 5%
of aggregate debit items arising from customer transactions, as
defined. At December 31, 1995, Bear Stearns' net capital of $1.5
billion exceeded the minimum requirement by $1.4 billion.
Bear, Stearns International Limited ("BSIL"), Bear Stearns
International Trading Limited ("BSIT") and certain other wholly
owned, London-based, broker-dealer subsidiaries, are subject to
regulatory capital requirements of the Securities and Futures
Authority ("SFA"). BSIL, BSIT and the other subsidiaries have
consistently operated in excess of these requirements.
5. EARNINGS PER SHARE
Earnings per share is computed by dividing net income applicable to
common shares by the weighted average number of shares of Common
Stock and Common Stock equivalents outstanding during each period
presented. Common Stock equivalents include the assumed
distribution of shares of Common Stock issuable under certain of the
Company's deferred compensation arrangements, with appropriate
adjustments made to net income for expense accruals related thereto.
Additionally, shares of Common Stock issued or issuable under
various employee benefit plans are included as Common Stock
equivalents.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the
six- months ended December 31, 1995 and 1994, respectively. Income taxes
paid totaled $118.3 million and $59.5 million for the six-months
ended December 31, 1995 and 1994, respectively.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter
derivative financial instruments and in connection with its
proprietary market-making and trading activities, enters into
transactions in a variety of cash and derivative financial
instruments in order to reduce its exposure to market, currency and
interest rate risk. SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments,"
defines a derivative as a future, forward, swap or option contract,
or other financial instrument with similar characteristics such as
caps, floors and collars. Generally these financial instruments
represent future commitments to exchange interest payment streams or
currencies or to purchase or to sell other financial instruments at
specific terms at specified future dates. Option contracts provide
the holder with the right, but not the obligation, to purchase or
sell a financial instrument at a defined price before or on an
established date. These financial instruments may have market
and/or credit risk in excess of amounts recorded in the Consolidated
Statements of Financial Condition.
In order to measure derivative activity, notional or contract
amounts are frequently utilized. Notional/contract amounts, which
are not included on the balance sheet, are used to calculate
contractual cash flows to be exchanged and are generally not
actually paid or received, with the exception of currency swaps and
foreign exchange forwards. The notional/contract amounts of
financial instruments that give rise to off-balance-sheet market
risk are indicative only of the extent of involvement in the
particular class of financial instrument and are not necessarily an
indication of overall market risk.
The following table represents the notional/contract amounts of the
Company's outstanding derivative financial instruments at December
31, 1995 and June 30, 1995 (in billions):
Notional/Contract Amount
December 31, June 30,
1995 1995
Interest Rate:
Swap agreements $83.4 $68.0
Futures contracts 15.5 15.4
Options held .8 .5
Foreign Exchange:
Futures contracts 1.5 .7
Forward contracts 5.4 4.7
Options held 1.1 2.1
Options written 2.5 1.8
Mortgage-Backed Securities:
Forward contracts 29.9 28.1
Equity:
Swap agreements 4.0 3.0
Futures contracts .3 .3
Options held 3.0 1.6
Options written 6.6 1.6
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - continued
The derivative instruments used in the Company's trading and dealer
activities, are marked to market daily with the resulting unrealized
gains or losses recorded in the Consolidated Statements of Financial
Condition and the related income or loss reflected in revenues
derived from principal transactions. The fair values of derivative
financial instruments held or issued for trading purposes and the
average monthly fair value of the instruments are as follows (in
millions):
Fair Value at Fair Value at
December 31, 1995 June 30, 1995
Assets Liabilities Assets Liabilities
Swap agreements $ 641 $ 725 $ 587 $ 492
Forward contracts 228 246 209 181
Options held 608 427
Options written 804 483
Total $1,477 $1,775 $1,223 $1,156
Average Fair Value (1) Average Fair Value (1)
Assets Liabilities Assets Liabilities
Swap agreements $ 559 $ 554 $ 598 $ 398
Forward contracts 152 147 131 120
Options held 507 393
Options written 601 262
Total $1,218 $1,302 $1,122 $ 780
<F1>
(1) Average fair values represent month-end balances for the six-months
ended December 31, 1995 and the fiscal year ended June 30, 1995.
The notional/contract amounts of these instruments do not represent
the Company's potential risk of loss due to counterparty
nonperformance. Credit risk arises from the potential inability of
counterparties to perform in accordance with the terms of the
contract. The Company's exposure to credit risk associated with
counterparty nonperformance is limited to the replacement cost of
over-the-counter contracts in a gain position which are recognized in
the Company's Consolidated Statements of Financial Condition, net of
collateral held ("net replacement cost"). Exchange traded financial
instruments, such as futures and options, generally do not give rise
to significant counterparty exposure due to the margin requirements
of the individual exchanges. Options written generally do not give
rise to counterparty credit risk since they obligate the Company (not
its counterparty) to perform. The Company's net replacement cost of
over-the-counter contracts in a gain position at December 31, 1995,
is approximately $272.0 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's principal business activities, investment banking,
securities trading and brokerage, are, by their nature, highly
competitive and subject to various risks, particularly volatile trading
markets and fluctuations in the volume of market activity.
Consequently, the Company's net income and revenues have in the past and
are likely to continue to be, subject to wide fluctuations, reflecting
the impact of many factors including, economic and securities-market
conditions, the level and volatility of interest rates, competitive
conditions within the industry, and the size and timing of transactions.
Moreover, the results of operations for a particular interim period may
not be indicative of results to be expected for an entire fiscal year.
For a description of the Company's business, including its trading in
cash instruments and derivative products, its underwriting and trading
policies, and their respective risks, and the Company's risk management
policies and procedures, see the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1995.
Three-Months Ended December 31, 1995
Compared to December 31, 1994
The December 1995 quarter was characterized by favorable debt and equity
markets and the continuation of increased merger and acquisition
activity. Net income in the 1995 quarter was $105.2 million, an
increase of 219.4% from the $32.9 million in the comparable prior year
quarter. Revenues, net of interest expense ("net revenues"), increased
61.2% to $687.7 million in the 1995 quarter from $426.6 million in the
1994 quarter. The increase was attributable to increases in all
revenue categories, particularly principal transactions and investment
banking. Earnings per share were $0.76 for the 1995 quarter versus
$0.21 for the comparable 1994 quarter.
Commission revenues increased 28.9% in the 1995 quarter to $163.2
million from $126.7 million in the comparable 1994 quarter. Clearance,
futures, institutional and retail commissions increased reflecting
continued expansion of the correspondent business and higher levels of
customer activity.
Revenues from principal transactions increased 76.2% in the 1995 quarter
to $260.8 million from $148.0 million in the 1994 quarter, reflecting
increases in the Company's fixed-income and equity trading activities,
particularly mortgage-backed securities, convertible bonds, government
trading and arbitrage, due to increased customer demand and improved
market conditions.
The Company's principal transaction revenues by reporting categories
including derivatives, are as follows (in thousands):
Three-Months Three-Months
Ended Ended
December 31, December31,
1995 1994
Fixed Income $140,014 $100,046
Equity 89,187 33,341
Foreign Exchange & Other
Derivative Financial
Instruments 31,639 14,611
$260,840 $147,998
Investment banking revenues increased 100.3% to $150.4 million in the
1995 quarter from $75.1 million in the 1994 quarter. This increase
reflected both an increase in underwriting revenue attributable to
increased levels of both equity and debt new issue volume and an
increase in merger and acquisition fees.
Net interest and dividends (revenues from interest and net dividends,
less interest expense) increased 50.1% to $104.7 million in the 1995
quarter from $69.7 million in the 1994 quarter. This increase is
attributable to higher levels of margin debt primarily reflecting the
continued expansion of customer activities in the correspondent
business. Average quarterly margin debt increased to $19.8 billion in
the 1995 quarter from $14.4 billion in the 1994 quarter. Average free
credit balances increased to $6.2 billion in the 1995 quarter from $5.7
billion in the 1994 quarter.
Employee compensation and benefits increased 54.7% to $345.4 million in
the 1995 quarter from $223.3 million in the comparable 1994 quarter.
The increase is attributable to higher incentive and discretionary bonus
accruals associated with the increased earnings in the 1995 quarter.
Employee compensation and benefits, as a percentage of net revenues,
decreased to 50.23% in the 1995 quarter from 52.34% in the 1994 quarter.
All other expenses increased 7.4% to $161.4 million in the 1995 quarter
from $150.2 million in the 1994 quarter. Floor brokerage, exchange and
clearance fees increased 18.1% in the 1995 quarter from the 1994 quarter
reflecting the increase in the volume of securities transactions
processed. The remaining increase in other operating expenses is
related to higher levels of depreciation costs reflecting computer equipment
upgrades.
The Company's effective tax rate increased to 41.9% in the 1995 quarter
compared to 38.0% in the 1994 quarter due to increased state and local
taxes.
Six-Months Ended December 31, 1995
Compared to December 31, 1994
Net income for the six-months ended December 31, 1995 was $199.0
million, an increase of 191.0% from the $68.4 million for the comparable
1994 period. Revenues, net of interest expense ("net revenues"),
increased 51.7% to $1.3 billion in the 1995 period from $860.2 million
in the 1994 period. The increase was attributable to increases across
all revenue categories particularly principal transactions and investment
banking. Earnings per share were $1.42 for the 1995 period versus $0.45 for the
comparable 1994 period.
Commission revenues increased 28.9% in the 1995 period to $318.4 million
from $247.0 million in the comparable 1994 period. Clearance, futures,
institutional and retail commissions increased reflecting continued
expansion of the correspondent business and higher levels of customer
activity.
Revenues from principal transactions increased 61.4% in the 1995 period
to $530.8 million from $328.9 million in the 1994 period, reflecting an
increase in the Company's fixed income and equity trading activities,
particularly in the convertible bonds, mortgage-backed securities and
government trading areas. The increase was principally due to increased
customer demand and improved market conditions.
The Company's principal transaction revenues by reporting categories
including derivatives, are as follows (in thousands):
Six Months Six Months
Ended Ended
December 31, December 31,
1995 1994
Fixed Income $276,340 $184,819
Equity 191,181 93,749
Foreign Exchange & Other
Derivative Financial
Instruments 63,234 50,369
$530,755 $328,937
Investment banking revenues increased 78.2% to $237.8 million in the
1995 period from $133.4 million in the comparable 1994 period. This
increase reflected both an increase in underwriting revenue attributable
to increased levels of both equity and debt new issue volume and an
increase in merger and acquisition fees.
Net interest and dividends (revenues from interest and net dividends,
less interest expense) increased 46.9% to $201.6 million in the 1995
period from $137.2 million in the 1994 period. This increase is
attributable to higher levels of margin debt primarily reflecting the
continued expansion of customer activities in the correspondent
business.
Employee compensation and benefits increased 43.6% to $652.4 million in
the 1995 period from $454.3 million in the comparable 1994 period. The
increase is attributable to higher incentive and discretionary bonus
accruals associated with the increased earnings in the 1995 period.
Employee compensation and benefits, as a percentage of net revenues,
decreased to 49.99% in the 1995 period from 52.81% in the 1994 period.
All other expenses increased 6.7% to $315.4 million in the 1995 period
from $295.6 million in the 1994 period. Floor brokerage, exchange and
clearance fees increased 17.0% in the 1995 period from the 1994 period
reflecting the increase in volume of securities transactions processed.
The remaining increase in other operating expenses is related to higher
levels of depreciation costs reflecting computer equipment upgrades .
The Company's effective tax rate increased to 41.0% in the 1995 period
compared to 38.0% in the 1994 period due to increased 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 by US
government and agency securities and customer margin loans and
securities borrowed which are typically secured by marketable corporate
debt and equity securities. The Company's total assets and financial
leverage can fluctuate significantly depending upon economic and market
conditions, volume of activity, customer demands and underwriting
commitments.
The Company's total assets at December 31, 1995 were $86.0 billion
versus $74.6 billion at June 30, 1995. The increase is primarily
attributable to the growth in securities purchased under agreements to
resell. The Company's ability to support fluctuations in total assets
is a function of its ability to obtain short-term secured and unsecured
funding and its access to sources of long-term capital in the form of
long-term borrowings and equity, which together form its capital base.
The Company continuously monitors the adequacy of its capital base which
is a function of asset quality and liquidity. The relationship between
an asset's liquidity and the level of capital required to support the
asset reflects the need to provide counterparties with collateral, or
margin, in order to obtain secured financings.
Highly liquid assets such as US government and agency securities
typically are funded by the use of repurchase agreements and securities
lending arrangements which require very low levels of margin. In
contrast, assets of lower quality and/or liquidity require higher margin
levels and consequently increased capital in order to obtain secured
financing. The level of customer receivables and proprietary
inventories the Company can maintain in certain of its regulated
subsidiaries is also limited by rules of both the Securities and
Exchange Commission ("SEC") and the Securities and Futures Authority
("SFA") in London. Accordingly, the mix of assets being held by the
Company significantly influences the amount of leverage the Company can
employ and the adequacy of its capital base.
Funding Strategy
Generally, the Company's funding strategy provides for the
diversification of its short-term funding sources in order to maximize
liquidity. Sources of short-term funding consist principally of
collateralized borrowings, including repurchase transactions and
securities lending arrangements, customer free credit balances,
unsecured commercial paper, medium-term notes and bank borrowings
generally having maturities from overnight to one year.
Repurchase transactions, whereby securities are sold with a commitment
for repurchase by the Company at a future date, represent the dominant
component of secured short-term funding.
The Company continued to increase the utilization of its medium-term
note program to extend the maturities of its debt and achieve additional
diversification of its funding sources. In addition to short-term
funding sources, the Company utilizes long-term senior debt, including
notes issued through its medium-term note program, as a longer term
source of unsecured financing.
The Company maintains an alternative funding strategy focused on the
liquidity and self-funding ability of its underlying assets. The
objective of the strategy is to maintain sufficient sources of
alternative funding to enable the Company to fund debt obligations
maturing within one year without issuing any new unsecured debt,
including commercial paper. The most significant source of alternative
funding is the Company's ability to hypothecate or pledge its
unencumbered assets as collateral for short-term funding.
As part of the Company's alternative funding strategy, the Company
regularly monitors and analyzes the size, composition and liquidity
characteristics of the assets being financed and evaluates its liquidity
needs in light of current market conditions and available funding
alternatives. Through this analysis, the Company evaluates the adequacy
of its equity base and its schedule of maturing term-debt supporting its
present asset levels. The Company can then seek to adjust its maturity
schedule, in light of market conditions and funding alternatives.
In addition, the Company maintains a committed revolving-credit facility
(the "facility") totaling $2.0 billion which permits borrowing on a
secured basis by Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear,
Stearns Securities Corp. ("BSSC") and certain affiliates. The facility
provides that up to $1.0 billion of the total facility may be borrowed
by the Company on an unsecured basis. Secured borrowings can be
collateralized by both investment-grade and non-investment-grade
financial instruments. In addition, this facility provides for defined
margin levels on a wide range of eligible financial instruments which
may be pledged under the secured portion of the facility. The facility
terminates in October 1996. As of December 31, 1995, no amounts were
outstanding under the facility.
Capital Resources
The Company conducts substantially all of its operating activities
within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC,
Bear, Stearns International Limited ("BSIL") and Bear Stearns
International Trading Limited ("BSIT"). In connection therewith, a
substantial portion of the Company's long-term borrowings and equity
have been used to fund investments in, and advances to, Bear Stearns,
BSSC, BSIL and BSIT.
The Company regularly monitors the nature and significance of those
assets or activities conducted outside the broker-dealer subsidiaries
and funds such assets with either capital or borrowings having
maturities generally consistent with the nature and liquidity of the
assets being financed.
During the six-months ended December 31, 1995, the Company repurchased
2,511,061 shares of Common Stock in connection with the Capital
Accumulation Plan for Senior Managing Directors (the "Plan") at a cost
of approximately $52.4 million. The Company intends, subject to market
conditions, to purchase a sufficient number of shares in respect of all
compensation deferred and any additional amounts allocated to
participants under the Plan. Repurchases of Common Stock pursuant to
the Plan are not made pursuant to the Company's Stock Repurchase Program
authorized by the Board of Directors and are not included in calculating
the maximum aggregate number of shares of Common Stock that the Company
may repurchase under the Stock Repurchase Program.
On January 11, 1996 the Company announced the formation of Bear Stearns
Financial Products Inc. ("BSFP") and Bear Stearns Trading Risk
Management Inc. ("BSTRM"). BSFP and BSTRM have been established to
provide clients with a Bear Stearns counterparty offering a wide range of
global fixed income and equity derivative products. BSFP is a wholly owned
subsidiary of the Company which has been rated AAA by Standard and Poor's
("S&P") and BSTRM is a wholly owned and fully guaranteed subsidiary of BSFP
which has been rated AAAt by S&P. Capital of $150 million has been provided
by the Company to fund BSFP.
Cash Flows
Total cash and cash equivalents decreased by $567.5 million during the
six-months ended December 31, 1995 to $133.0 million. Total cash and
cash equivalents increased by $445.4 million during the six-months ended
December 31, 1994 to $740.0 million. Cash used in operating activities
during the six-months ended December 31, 1995 was $1.5 billion, mainly
representing increases in financial instruments owned and securities
purchased under agreements to resell partially offset by increases in
securities sold under agreements to repurchase. Financing activities
provided cash of $907.3 million, primarily derived from short and long-
term borrowing proceeds.
Regulated Subsidiaries
As registered broker-dealers, Bear Stearns and BSSC are subject to the
net capital requirements of the SEC, the New York Stock Exchange, Inc.
and the Commodity Futures Trading Commission, which are designed to
measure the general financial soundness and liquidity of broker-dealers.
Bear Stearns and BSSC have consistently operated in excess of the
minimum net capital requirements imposed by these agencies.
Additionally, BSIL and BSIT, London-based broker-dealer subsidiaries,
are subject to the regulatory capital requirements of the SFA, a self
regulatory organization established pursuant to the United Kingdom
Financial Services Act of 1986. BSIL and BSIT have consistently
operated in compliance with these capital requirements.
Merchant Banking and Non-Investment-Grade Debt Securities
As part of the Company's merchant banking activities, it participates
periodically in principal investments in leveraged acquisitions. As
part of these activities, the Company originates, structures and invests
in merger, acquisition, restructuring and leveraged capital
transactions, including leveraged buyouts. The Company's principal
investments in these transactions are generally made in the form of
equity investments or subordinated loans, and have not required
significant levels of capital investment. At December 31, 1995, the
Company's aggregate investments in leveraged transactions and its
exposure related to any one transaction was not material.
As part of its fixed-income securities activities, the Company
participates in the trading and sale of high yield, non-investment-grade
securities, non-investment-grade mortgage loans (including real estate
owned) and securities of companies that are subject to pending
bankruptcy proceedings (collectively "high yield securities"). Non-
investment-grade mortgage loans are principally secured by residential
properties and include both non-performing loans and real estate owned
properties. As of December 31, 1995, the Company held in long and short
inventory approximately $1.2 billion and $113.0 million, respectively
of high yield securities.
These investments generally involve greater risk than investment-grade
debt securities due to credit considerations, liquidity of secondary
trading markets and vulnerability to general economic conditions.
The level of the Company's high yield securities inventories, and the
impact of such activities upon the Company's results of operations, can
fluctuate from period to period as a result of customer demands and
economic and market considerations. Bear Stearns' Risk Committee
continuously monitors exposure to market and credit risk with respect
to high yield securities inventories and establishes limits with respect
to overall market exposure and concentrations of risk by both the
individual issuers and industry groups.
Part II Other Information
Item 1. Legal Proceedings
Primavera Familienstiftung v. Askin Capital Management, L.P., Bear,
Stearns & Co. Inc., et al.
As previously reported in the Company's 1995 Form 10-Q, Bear, Stearns is
a defendant in a litigation entitled Primavera Familienstiftung v. David
J. Askin, et al. The action is related to a bankruptcy proceeding filed
by Granite Partners, L.P., Granite Corporation, and Quartz Hedge Fund
(the "Funds" or the "Debtors") pending in the Bankruptcy Court in the
Southern District of New York (the "Bankruptcy Court").
On December 21, 1995, the Trustee, appointed to supervise the Debtors in
the bankruptcy, initiated a proceeding in the Bankruptcy Court seeking
to stay the action filed in the District Court.
On January 23, 1996, Primavera filed a motion to withdraw the reference
to the Bankruptcy Court with respect to the proceeding initiated by the
Trustee to stay the District Court action.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on October 30, 1995 (the "Annual
Meeting"), the stockholders of the Company approved the Company's Fiscal 1996
Performance Goals under the Management Compensation Plan (the "Performance
Goals") and an amendment to the Capital Accumulation Plan for Senior Managing
Directors (the "Amendment"). In addition, at the Annual Meeting the
stockholders of the Company elected thirty-eight directors to serve until the
next Annual Meeting of Stockholders or until their successors are duly elected
and qualified.
The affirmative vote of a majority of the shares of Common Stock represented at
the Annual Meeting and entitled to vote on each matter was required to approve
the Performance Goals and the Amendment, while the affirmative vote of a
plurality of the votes cast by holders of shares of Common Stock was required to
elect the directors.
With respect to the approval of the Performance Goals and the Amendment, set
forth below is information on the results of the votes cast at the Annual
Meeting.
Broker
For Against Abstained Non-Votes
Performance Goals 72,567,997 17,194,904 325,731 15,753,978
Amendment 97,990,026 5,556,022 854,303 1,442,259
With respect to the election of directors, set forth below is information with
respect to the nominees elected as directors of the Company at the Annual
Meeting and the votes cost and/or withheld with respect to each such nominee.
Nominees For Withheld
E. Garrett Bewkes, III 104,251,477 1,591,133
Denis A. Bovin 104,392,519 1,450,091
James E. Cayne 104,398,745 1,443,865
Peter Cherasia 104,396,652 1,445,958
Barry S. Cohen 104,386,524 1,456,086
Stephen M. Cunningham 104,396,164 1,446,446
Wendy L. deMonchaux 104,376,493 1,466,117
Kevin J. Finnerty 104,398,664 1,443,946
Grace J. Fippinger 104,249,076 1,593,534
Bruce E. Geismar 104,392,804 1,449,806
Carl D. Glickman 104,296,944 1,545,666
Thomas R. Green 104,421,970 1,420,640
Alan C. Greenberg 104,399,226 1,443,384
Donald J. Harrington, C.M. 104,378,454 1,464,156
Richard Harriton 104,236,263 1,606,347
Daniel L. Keating 104,397,754 1,444,856
John W. Kluge 99,118,121 6,724,489
Mark E. Lehman 104,396,538 1,446,072
David A. Liebowitz 104,394,976 1,447,634
Bruce M. Lisman 104,376,907 1,465,703
Roland N. Livney 104,372,513 1,470,097
Michael Minikes 104,414,739 1,427,871
William J. Montgoris 104,402,786 1,439,824
Donald R. Mullen, Jr. 104,377,115 1,465,495
Frank T. Nickell 104,422,196 1,420,414
Craig M. Overlander 104,398,436 1,444,174
Stephen E. Raphael 104,379,350 1,463,260
E. John Rosenwald, Jr. 104,399,672 1,442,938
Lewis A. Sachs 104,394,701 1,447,909
Frederic V. Salerno 104,385,329 1,457,281
Alan D. Schwartz 104,234,927 1,607,683
David M. Solomon 104,380,334 1,462,276
Warren J. Spector 104,398,316 1,444,294
Robert M. Steinberg 104,383,275 1,459,335
Michael L. Tarnopol 104,232,094 1,610,516
Vincent Tese 104,373,083 1,469,527
Fred Wilpon 104,415,939 1,426,671
Uzi Zucker 104,382,133 1,460,477
There were no broker non-votes with respect to the election of directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10)a(10) Amendment to CAP Plan, adopted January 18, 1996, certain
provisions of which are subject to stockholders approval
at the 1996 Annual Meeting.
(10)a(11) Amendment to CAP Plan, adopted February 7, 1996, subject
to stockholders approval at the 1996 Annual Meeting.
(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 October 16, 1995,
pertaining to the Company's results of operations for the
three-months ended December 31, 1995.
(ii) A Current Report on Form 8-K dated October 26, 1995,
pertaining to a tax opinion in connection with the Nikkei
225 Index Stock Reset Call Warrants.
(iii) A Current Report on Form 8-K dated December 19, 1995
pertaining to a tax opinion in connection with the
Company's Medium Term Note Program.
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: February 14, 1996 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(10) Amendment to CAP Plan, adopted January 18, 1996
certain provisions of which are subject to
Stockholders approval at the 1996 Annual Meeting. 26
(10)a(11) Amendment to CAP Plan, adopted February 7, 1996
subject to Stockholders approval at the 1996
Annual Meeting. 29
(11) Statement Re Computation of Per
Share Earnings. 31
(12) Statement Re Computation of Ratio of
Earnings to Fixed Charges. 33
(27) Financial Data Schedule. 35