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, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ______________
Commission File Number 1-8989
The Bear Stearns Companies Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3286161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Park Avenue, New York, New York 10167
(Address of principal executive offices) (Zip Code)
(212)272-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of February 11, 1997, the latest practicable date, there were 114,392,510
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, 1996
(Unaudited) and June 30, 1996
Consolidated Statements of Income (Unaudited) for the three-and
six-month periods ended December 31, 1996 and December 31, 1995
Consolidated Statements of Cash Flows (Unaudited) for the six-month
periods ended December 31, 1996 and December 31, 1995
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 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,
1996 1996
------------ ------------
(Unaudited)
(In thousands)
Cash and cash equivalents $ 832,067 $ 127,847
Cash and securities deposited with
clearing organizations or
segregated in compliance with
Federal regulations 2,152,131 1,702,124
Securities purchased under agreements
to resell 27,061,787 24,517,275
Securities borrowed 31,213,945 29,611,207
Receivables:
Customers 8,047,211 7,976,373
Brokers, dealers and others 1,897,497 811,391
Interest and dividends 246,483 305,725
Financial instruments owned, at
fair value 33,159,010 26,222,134
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 342,948 331,924
Other assets 443,071 479,157
------------ -----------
Total Assets $105,396,150 $92,085,157
============ ===========
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
December 31, June 30,
1996 1996
-------------- -----------
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 12,620,911 $ 9,867,619
Securities sold under agreements
to repurchase 39,680,817 33,353,899
Payables:
Customers 24,571,887 21,905,015
Brokers, dealers and others 1,458,518 1,847,599
Interest and dividends 377,667 448,121
Financial instruments sold, but not
yet purchased, at fair value 16,056,170 13,916,581
Accrued employee compensation and benefits 545,766 712,962
Other liabilities and accrued expenses 616,704 1,094,333
----------- ------------
95,928,440 83,146,129
----------- ------------
Commitments and Contingencies
Long-term Borrowings 6,429,221 6,043,614
----------- ------------
Preferred Stock Issued by Subsidiary 150,000 150,000
----------- ------------
Stockholders' Equity
Preferred Stock 437,500 437,500
Common Stock, $1.00 par value:
200,000,000 shares authorized;
159,803,764 shares issued at
December 31, 1996 and June 30, 1996 159,804 159,804
Paid-in capital 1,696,419 1,696,217
Retained earnings 931,969 694,108
Capital Accumulation Plan 460,477 471,191
Treasury stock, at cost
Adjustable Rate Cumulative Preferred Stock,
Series A - 2,512,350 and 2,341,350 shares
at December 31, 1996 and June 30,
1996, respectively (103,043) (95,389)
Common Stock - 44,859,306 and 41,664,729
shares at December 31, 1996 and
June 30, 1996, respectively (680,936) (598,217)
Note receivable from ESOP Trust (13,701) (19,800)
------------- ------------
Total Stockholders' Equity 2,888,489 2,745,414
------------- ------------
Total Liabilities and Stockholders' Equity $105,396,150 $92,085,157
============= ============
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,
1996 1995 1996 1995
--------------- -------------- -------------- ---------------
(In thousands, except share data)
Revenues
Commissions $ 183,584 $ 163,220 $ 345,154 $ 318,410
Principal transactions 429,239 260,840 724,131 530,755
Investment banking 183,138 150,397 291,832 237,802
Interest and dividends 745,610 607,060 1,405,867 1,160,981
Other income 14,959 8,546 25,699 16,549
-------------- -------------- -------------- --------------
Total Revenues 1,556,530 1,190,063 2,792,683 2,264,497
Interest expense 616,396 502,403 1,163,865 959,348
-------------- -------------- -------------- --------------
Revenues, net of interest expense 940,134 687,660 1,628,818 1,305,149
-------------- -------------- -------------- --------------
Non-interest expenses
Employee compensation and benefits 456,825 345,427 801,197 652,424
Floor brokerage, exchange
and clearance fees 34,447 30,787 66,013 60,533
Communications 24,778 22,407 49,334 44,905
Occupancy 21,945 21,256 43,291 42,402
Depreciation and amortization 21,450 17,347 41,418 33,623
Advertising and market development 16,683 14,382 31,439 26,906
Data processing and equipment 8,206 8,706 15,761 17,687
Other expenses 65,245 46,467 111,293 89,378
-------------- -------------- -------------- --------------
Total non-interest expenses 649,579 506,779 1,159,746 967,858
-------------- -------------- -------------- --------------
Income before provision for
income taxes 290,555 180,881 469,072 337,291
Provision for income taxes 114,043 75,725 184,111 138,289
-------------- -------------- -------------- --------------
Net income $ 176,512 $ 105,156 $ 284,961 $ 199,002
============== ============== ============== ==============
Net income applicable to
common shares $ 170,573 $ 98,956 $ 272,991 $ 186,592
============== ============== ============== ==============
Earnings per share $ 1.21 $ 0.69 $ 1.92 $ 1.29
============== ============== ============== ==============
Weighted average common and
common equivalent shares
outstanding 148,780,831 150,209,550 149,826,971 150,861,434
============== ============== ============== ==============
Cash dividends declared
per common share $ 0.15 $ 0.15 $ 0.15 $ 0.15
============== ============== ============== ==============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31, December 31,
1996 1995
------------- -------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 284,961 $ 199,002
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 41,418 33,623
Deferred income taxes (38,419) (17,771)
Other 33,010 26,405
(Increases) decreases in operating receivables:
Securities borrowed (1,602,738) 1,489,306
Customers (70,838) 51,966
Brokers, dealers and others (1,086,106) (725,586)
Other 44,425 (10,385)
Increases (decreases) in operating payables:
Customers 2,666,872 1,147,630
Brokers, dealers and others (384,326) 2,346,449
Other (70,454) 6,932
(Increases) decreases in:
Cash and securities deposited with clearing
organizations or segregated in compliance
with Federal regulations (450,007) (229,246)
Securities purchased under agreements to resell (2,544,512) (7,134,932)
Financial instruments owned (6,936,876) (5,468,771)
Other assets 129,915 44,359
Increases (decreases) in:
Securities sold under agreements to repurchase 6,326,918 6,925,139
Financial instruments sold, but not
yet purchased 2,139,589 (93,821)
Accrued employee compensation and benefits (193,796) (88,912)
Other liabilities and accrued expenses (479,765) 47,991
------------- -------------
Cash used in operating activities (2,190,729) (1,450,622)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 2,753,292 565,690
Issuance of long-term borrowings 862,638 719,308
Capital Accumulation Plan (10,714) 5,227
Common Stock distributions 10,729 103
Note repayment from ESOP Trust 6,099 5,647
Payments for:
Retirement of Senior Notes (478,944) (289,000)
Treasury stock purchases (105,655) (51,741)
Cash dividends paid (47,064) (47,892)
------------- -------------
Cash provided by financing activities 2,990,381 907,342
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (52,442) (40,790)
Purchases of investment securities and other assets (78,661) (2,259)
Proceeds from sales of investment securities 35,671 18,865
------------- -------------
Cash used in investing activities (95,432) (24,184)
------------- -------------
Net increase (decrease) in cash and cash equivalents 704,220 (567,464)
Cash and cash equivalents, beginning of period 127,847 700,501
------------- -------------
Cash and cash equivalents, end of period $ 832,067 $ 133,037
============= =============
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"). 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:
December 31 June 30
(in thousands) 1996 1996
- ----------------------------------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 12,423,759 $ 8,258,074
Other sovereign governments 1,768,151 656,699
State and municipal 185,403 149,697
Corporate equity and convertible debt 8,414,418 8,492,570
Corporate debt 6,214,685 4,739,512
Derivative financial instruments 2,039,119 1,855,617
Mortgages and other mortgage-backed securities 1,909,198 1,796,322
Other 204,277 273,643
----------- -----------
$33,159,010 $26,222,134
=========== ===========
Financial instruments sold, but not yet purchased:
US government and agency $ 7,924,749 $ 5,502,459
Other sovereign governments 432,921 964,808
Corporate equity and convertible debt 3,810,537 4,482,426
Corporate debt 1,038,383 877,576
Derivative financial instruments 2,847,135 2,088,621
Other 2,445 691
------------ -----------
$ 16,056,170 $13,916,581
============ ===========
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company was contingently liable for unsecured
letters of credit of approximately $2.2 billion and letters of credit of
approximately $352.4 million secured by financial instruments. These
letters of credit are principally used as deposits for securities borrowed
and to satisfy margin deposits at option and commodity exchanges.
In the normal course of business, the Company has been named as a defendant
in several lawsuits which involve claims for substantial amounts. Although
the ultimate outcome of these suits cannot be ascertained at this time, it
is the opinion of management, after consultation with counsel, that the
resolution of such suits will not have a material adverse effect on the
results of operations or the financial condition of the Company.
4. NET CAPITAL REQUIREMENTS
The Company's principal operating subsidiary, Bear, Stearns & Co. Inc.
("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns
Securities Corp. ("BSSC"), are registered broker-dealers and accordingly,
are subject to Securities and Exchange Commission Rule 15c3-1 (the "Net
Capital Rule") and the capital rules of the New York Stock Exchange, Inc.
("NYSE") and other principal exchanges of which Bear Stearns and BSSC are
members. Bear Stearns and BSSC have consistently operated in excess of the
minimum net capital requirements imposed by the capital rules. Included in
the computation of net capital of Bear Stearns is net capital of BSSC in
excess of 5% of aggregate debit items arising from customer transactions,
as defined. At December 31, 1996, Bear Stearns' net capital, as defined, of
$ 1.20 billion exceeded the minimum requirement by $ 1.17 billion.
Bear Stearns International Limited ("BSIL") and certain other wholly owned,
London-based subsidiaries, are subject to regulatory capital requirements
of the Securities and Futures Authority. BSIL and the other subsidiaries
have consistently operated in excess of these requirements.
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 Equivalent Shares outstanding during each period presented. Common
Equivalent Shares include the assumed distribution of shares of Common
Stock issuable under certain of the Company's deferred compensation
arrangements, with appropriate adjustments made to net income for expense
accruals related thereto. Additionally, shares of Common Stock issued or
issuable under various employee benefit plans are included as Common
Equivalent Shares.
6. CASH FLOW INFORMATION
Cash payments for interest approximated interest expense for the six-months
ended December 31, 1996 and December 31, 1995. Income taxes paid totaled
$218.4 million and $118.3 million for the six-months ended December 31,
1996 and December 31, 1995, respectively.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter derivative
financial instruments and in connection with its proprietary market-making
and trading activities, enters into transactions in a variety of cash and
derivative financial instruments in order to reduce its exposure to market,
currency, and interest rate risk. SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,"
defines a derivative as a future, forward, swap, or option contract, or
other financial instruments with similar characteristics such as caps,
floors, and collars. Generally these financial instruments represent future
commitments to exchange interest payment streams or currencies or to
purchase or to sell other financial instruments at specific terms at
specified future dates. Option contracts provide the holder with the right,
but not the obligation, to purchase or sell a financial instrument at a
specific price before or on an established date. These financial
instruments may have market and/or credit risk in excess of amounts
recorded in the Consolidated Statements of Financial Condition.
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 consolidated statements of financial condition, are used to calculate
contractual cash flows to be exchanged and are generally not actually paid
or received, with the exception of currency swaps, foreign exchange
forwards, and exercised options. The notional/contract amounts of financial
instruments that give rise to off-balance sheet market risk are indicative
only of the extent of involvement in the particular class of financial
instrument and are not necessarily an indication of overall market risk.
The following table represents the notional/contract amounts of the
Company's outstanding derivative financial instruments at December 31, 1996
and June 30, 1996:
December 31, June 30,
In billions 1996 1996
------------------------------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options, swaptions,
caps, collars, and floors $164.8 $175.2
Futures contracts 24.4 60.5
Options held 2.0 3.0
Options written .7 3.1
Foreign Exchange:
Futures contracts 2.4 2.3
Forward contracts 11.2 7.9
Options held 5.0 3.2
Options written 5.4 3.3
Mortgage-Backed Securities:
Forward Contracts 35.1 23.0
Equity:
Swap agreements 4.9 3.8
Futures contracts 1.1 .5
Options held .4 1.1
Options written .5 1.3
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)
The derivative instruments used in the Company's trading and dealer
activities, are marked to market daily with the resulting gains or losses
recorded in the Consolidated Statements of Financial Condition and the
related income or loss reflected in revenues derived from principal
transactions.
The fair values of derivative financial instruments held or issued for
trading purposes as of December 31, 1996 and June 30, 1996 were as follows:
December 31, June 30,
1996 1996
---------------------- ----------------------- .
In millions Assets Liabilities Assets Liabilities
------------------------------------------------------------------------------------------
Swap agreements $902 $1,213 $678 $846
Futures and forward
contracts 299 219 280 307
Options held 849 897
Options written 1,440 968
The average monthly fair values of the derivative financial instruments for
the six-months ended December 31, 1996 and the fiscal year ended June 30,
1996 were as follows:
December 31, June 30,
1996 1996
-------------------- ---------------------- .
In millions Assets Liabilities Assets Liabilities
-----------------------------------------------------------------------------------------
Swap agreements $652 $897 $611 $698
Futures and forward
contracts 236 237 286 275
Options held 889 704
Options written 1,194 795
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, net of collateral held, ("net replacement cost") of
over-the-counter contracts in a gain position, which are recognized in the
Company's Consolidated Statements of Financial Condition. Exchange-traded
financial instruments, such as futures and options, generally do not give
rise to significant counterparty exposure due to margin requirements of the
individual exchanges. Options written generally do not give rise to
counterparty credit risk since they obligate the Company (not its
counterparty) to perform. The Company's net replacement cost of derivatives
in a gain position at December 31, 1996, was approximately $474.7 million.
8. SUBSEQUENT EVENT
On January 29, 1997, the Board of Directors declared a 5% stock dividend on
the Company's Common Stock to shareholders of record at February 14, 1997,
to be distributed February 28, 1997. 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
in the past have been, and are likely to continue to be, subject to wide
fluctuations, reflecting the impact of many factors including, securities market
conditions, the level and volatility of interest rates, competitive conditions,
and the size and timing of transactions. Moreover the results of operations for
a particular interim period may not be indicative of results to be expected for
an entire fiscal year.
For a description of the Company's business, including its trading in cash
instruments and derivative products, its underwriting and trading policies, and
their respective risks, and the Company's risk management policies and
procedures, see the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1996.
Three-Months Ended December 31, 1996
Compared to December 31, 1995 .
The December 1996 quarter was generally characterized by strong fixed income and
equity markets and a favorable underwriting environment. Net income in the 1996
quarter was $176.5 million, an increase of 67.9% from the $105.2 million in the
comparable prior year quarter. Revenues, net of interest expense ("net
revenues"), increased 36.7% to $940.1 million from $687.7 million in the 1995
quarter. The increase was attributable to increases in all revenue categories,
particularly principal transactions. Earnings per share were $1.21 for the 1996
quarter versus $0.69 for the comparable 1995 quarter. The earnings per share
amounts have been adjusted for all stock dividends.
Commission revenues increased 12.5% in the 1996 quarter to $183.6 million from
$163.2 million in the comparable 1995 quarter. This increase was attributable to
increased revenues from the firm's institutional equities and private client
services as well as increased securities clearance revenues.
Revenues from principal transactions increased 64.6% in the 1996 quarter to
$429.2 million from $260.8 million in the comparable 1995 quarter, reflecting
increases in revenues derived from the Company's fixed income activities,
principally in the mortgage-backed securities, asset-backed securities and
corporate bond areas. These increases were principally due to active fixed
income market conditions and increased customer order flow.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
December 31, 1996 December 31, 1995
------------------ ------------------
Fixed Income $287,021 $140,014
Equity 84,221 89,187
Foreign Exchange & Other
Derivative Financial
Instruments 57,997 31,639
---------- ---------
$429,239 $260,840
========== =========
Investment banking revenues increased 21.8% to $183.1 million in the 1996
quarter from $150.4 million in the comparable 1995 quarter. This increase
reflected an increase in underwriting revenue partially offset by a decrease in
merger and acquisition and advisory fees. The increase in underwriting revenue
was principally due to increased levels of high yield and equity new issue
volume as compared to the 1995 quarter.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 23.5% to $129.2 million in the 1996 quarter from
$104.7 million in the comparable 1995 quarter. This increase was attributable to
higher levels of customer activities reflecting the continued expansion of the
clearance business. Average margin debt increased to $30.3 billion in the 1996
quarter from $19.8 billion in the comparable 1995 quarter. Average free credit
balances increased to $7.4 billion in the 1996 quarter from $6.2 billion in the
comparable 1995 quarter.
Employee compensation and benefits increased 32.2% to $456.8 million in the 1996
quarter from $345.4 million in the comparable 1995 quarter. The increase was
attributable to higher incentive and discretionary bonus accruals associated
with the increased earnings in the 1996 quarter. Employee compensation and
benefits, as a percentage of net revenues, decreased to 48.59% in the 1996
quarter from 50.23% in the comparable 1995 quarter.
All other expenses increased 19.5% to $192.8 million in the 1996 quarter from
$161.4 million in the comparable 1995 quarter. Floor brokerage, exchange and
clearance fees increased 11.9% in the 1996 quarter from the comparable 1995
quarter reflecting the increase in the volume of securities transactions
processed. Increased depreciation costs reflected computer equipment upgrades.
The remaining increases in advertising and market development costs and other
operating expenses were associated with increased volume of business throughout
the Company.
The Company's effective tax rate decreased to 39.3% in the 1996 quarter compared
to 41.9% in the comparable 1995 quarter due to a higher level of tax preference
items in the 1996 quarter.
Six-Months Ended December 31, 1996
Compared to December 31, 1995 .
Net income for the six-months ended December 31, 1996 was $285.0 million, an
increase of 43.2% from $199.0 million for the comparable 1995 period.
Revenues, net of interest expense ("net revenues"), increased 24.8% to $1.6
billion in the 1996 period from $1.3 billion in the 1995 period. The increase
was attributable to increases in all revenue categories, particularly principal
transactions and investment banking. Earnings per share were $1.92 for the 1996
period versus $1.29 for the comparable 1995 period. The earnings per share
amounts have been adjusted for all stock dividends.
Commission revenues increased 8.4% in the 1996 period to $345.2 million from
$318.4 million in the comparable 1995 period. This increase was attributable to
increased revenues from the firm's institutional equities and private client
services as well as increased securities clearance revenues.
Revenues from principal transactions increased 36.4% in the 1996 period to
$724.1 million from $530.8 million in the comparable 1995 period, reflecting
increases in revenues derived from the Company's fixed income activities,
principally in the mortgage-backed securities, asset-backed securities and
corporate bond areas. These increases were principally due to active fixed
income market conditions and increased customer order flow.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Six-Months Ended Six-Months Ended
December 31, 1996 December 31, 1995
----------------- -----------------
Fixed Income $474,367 $276,340
Equity 156,490 191,181
Foreign Exchange & Other
Derivative Financial
Instruments 93,274 63,234
-------- --------
$724,131 $530,755
======== ========
Investment banking revenues increased 22.7% to $291.8 million in the 1996 period
from $237.8 million in the comparable 1995 period. This increase reflected an
increase in underwriting revenue partially offset by a decrease in merger and
acquisition and advisory fees.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 20.0% to $242.0 million in the 1996 period from
$201.6 million in the comparable 1995 period. This increase was attributable to
higher levels of customer activities reflecting the continued expansion of the
clearance business. Average margin debt increased to $27.8 billion in the 1996
period from $19.2 billion in the comparable 1995 period. Average free credit
balances increased to $7.6 billion in the 1996 period from $6.0 billion in the
comparable 1995 period.
Employee compensation and benefits increased 22.8% to $801.2 million in the 1996
period from $652.4 million in the comparable 1995 period. The increase was
attributable to higher incentive and discretionary bonus accruals associated
with the increased earnings in the 1996 period. Employee compensation and
benefits, as a percentage of net revenues, decreased to 49.19% in the 1996
period from 49.99% in the comparable 1995 period.
All other expenses increased 13.7% to $358.5 million in the 1996 period from
$315.4 million in the comparable 1995 period. Floor brokerage, exchange and
clearance fees increased 9.1% in the 1996 period from the comparable 1995 period
reflecting the increase in the volume of securities transactions processed. The
remaining increase in other operating expenses was related to higher levels of
depreciation costs reflecting computer equipment upgrades, increased advertising
and market development costs related to the increase in underwritings and
communications costs related to increased headcount. These increases were
partially offset by a decrease in data processing costs.
The Company's effective tax rate decreased to 39.3% in the 1996 period compared
to 41.0% in the comparable 1995 period due to a higher level of tax preference
items in the 1996 period.
Liquidity and Capital Resources
Financial Leverage
The Company maintains a highly liquid balance sheet with a majority of the
Company's assets consisting of marketable securities inventories, which are
marked to market daily, and collateralized receivables arising from
customer-related and proprietary securities transactions. Collateralized
receivables consist of resale agreements secured predominantly by US government
and agency securities, and customer margin loans and securities borrowed which
are typically secured by marketable corporate debt and equity securities. The
Company's total assets and financial leverage can fluctuate significantly
depending largely upon economic and market conditions, volume of activity,
customer demand, and underwriting commitments.
The Company's total assets at December 31, 1996 increased to $105.4 billion from
$92.1 billion at June 30, 1996. The increase is primarily attributable to the
growth in financial instruments owned, at fair value and securities borrowed.
The Company's ability to support fluctuations in total assets is a function of
its ability to obtain short-term secured and unsecured funding and its access to
sources of long-term capital in the form of long-term borrowings and equity,
which together form its capital base. The Company continuously monitors the
adequacy of its capital base which is a function of asset quality and liquidity.
Highly liquid assets such as US government and agency securities typically are
funded by the use of repurchase agreements and securities lending arrangements
which require very low levels of margin. In contrast, assets of lower quality or
liquidity require higher levels of overcollateralization, or margin, and
consequently increased levels of capital, in order to obtain secured financing.
Accordingly, the mix of assets being held by the Company significantly
influences the amount of leverage the Company can employ and the adequacy of its
capital base.
Funding Strategy
The Company's general funding strategy provides for the diversification of its
short-term funding sources in order to maximize liquidity. Sources of short-term
funding consist principally of collateralized borrowings, including repurchase
transactions and securities lending arrangements, customer free credit balances,
unsecured commercial paper, medium-term notes and bank borrowings generally
having maturities from overnight to one year.
Repurchase transactions, whereby securities are sold with a commitment for
repurchase by the Company at a future date, represent the dominant component of
secured short-term funding.
The Company continued to increase the utilization of its medium-term note
financing in order to extend maturities of its debt and achieve additional
diversification of its funding sources. In addition to short-term funding
sources, the Company utilizes long-term senior debt, including medium-term
notes, as a longer term source of unsecured financing.
The Company maintains an alternative funding strategy focused on the liquidity
and self-funding ability of the underlying assets. The objective of the strategy
is to maintain sufficient sources of alternative funding to enable the Company
to fund debt obligations maturing within one year without issuing any new
unsecured debt, including commercial paper. The most significant source of
alternative funding is the Company's ability to hypothecate or pledge its
unencumbered assets as collateral for short-term funding.
As part of the Company's alternative funding strategy, the Company regularly
monitors and analyzes the size, composition, and liquidity characteristics of
the assets being financed and evaluates its liquidity needs in light of current
market conditions and available funding alternatives. Through this analysis, the
Company can continuously evaluate the adequacy of its equity base and the
schedule of maturing term-debt supporting its present asset levels. The Company
can then seek to adjust its maturity schedule, in light of market conditions and
funding alternatives.
As part of the Company's alternative funding strategy, the Company maintains a
committed revolving-credit facility (the "facility") totaling $2.0 billion which
permits borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear
Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain affiliates. The
facility provides that up to $1.0 billion of the total facility may be borrowed
by the Company on an unsecured basis. Secured borrowings can be collateralized
by both investment-grade and non-investment-grade financial instruments. In
addition, this agreement provides for defined margin levels on a wide range of
eligible financial instruments that may be pledged under the secured portion of
the facility. The facility terminates in October 1997. There were no borrowings
outstanding under the facility at December 31, 1996.
Capital Resources
The Company conducts a substantial portion of all of its operating activities
within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC, Bear,
Stearns International Limited ("BSIL") and Bear Stearns International Trading
Limited ("BSIT"). In connection therewith, a substantial portion of the
Company's long-term borrowings and equity have been used to fund investments in,
and advances to, Bear Stearns, BSSC, BSIL and BSIT.
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.
In January 1997, Bear Stearns Capital Trust I, a wholly owned subsidiary of the
Company, issued $200 million of Fixed/Adjustable Rate Capital Securities (the
"Capital Securities"). The Capital Securities have a liquidation value of $1,000
per capital security with rights to semi-annual preferential cumulative cash
distributions at an annual rate of 7% through January 2002. Thereafter, the rate
will be variable based on the three-month London Interbank Offered Rate
("LIBOR"), plus a margin of 1.75%. Proceeds from the issuance of the Capital
Securities were used to purchase Subordinated Debentures, from the Company which
will mature on January 15, 2027. The interest rate on the Subordinated
Debentures will be the same as the rate on the Capital Securities. The proceeds
were then used by the Company for general corporate purposes.
During the six-months ended December 31, 1996 the Company repurchased 3,816,296
shares of Common Stock in connection with the Capital Accumulation Plan for
Senior Managing Directors (the "Plan") at a cost of approximately $93.4 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 Plan. Repurchases
of Common Stock pursuant to the Plan are not made pursuant to the Company's
Stock Repurchase Plan (the "Repurchase Plan") authorized by the Board of
Directors. As of February 11, 1996, there have been no purchases under the
Repurchase Plan.
Cash Flows
Cash and cash equivalents increased by $ 704.2 million during the six-months
ended December 31, 1996 to $832.1 million. Total cash and cash equivalents
decreased by $567.5 million during the six-months ended December 31, 1995 to
$133.0 million. Cash used in operating activities during the six-months ended
December 31, 1996 was $2.2 billion, mainly representing increases in financial
instruments owned and securities purchased under agreements to resell partially
offset by increases in customer payables and securities sold under agreements
to repurchase. Financing activities provided cash of $3.0 billion, primarily
derived from short- and long-term borrowings proceeds.
Regulated Subsidiaries
As registered broker-dealers, Bear Stearns and BSSC are subject to the net
capital requirements of the Securities and Exchange Commission, the New York
Stock Exchange, Inc. and the Commodity Futures Trading Commission, which are
designed to measure the general financial soundness and liquidity of
broker-dealers. Bear Stearns and BSSC have consistently operated in excess of
the minimum net capital requirements imposed by these agencies.
Additionally, BSIL and BSIT, London-based broker-dealer subsidiaries, are
subject to the regulatory capital requirements of the Securities and Futures
Authority, a self-regulatory organization established pursuant to the United
Kingdom Financial Services Act of 1986. BSIL and BSIT have consistently operated
in compliance with these capital requirements.
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 December 31, 1996 the
Company's aggregate investments in leveraged transactions and its exposure
related to any one transaction was not material.
As part of the Company's fixed-income securities activities, the Company
participates in the trading and sale of high yield securities,
non-investment-grade debt securities, non-investment-grade mortgage loans and
the securities of companies that are the subject of pending bankruptcy
proceedings (collectively "high yield securities"). Non-investment-grade
mortgage loans are principally secured by residential properties and include
both non-performing loans and real estate owned. As of December 31, 1996, the
Company held high yield securities of $1.2 billion in long inventory and $100
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 groups.
Part II - Other Information
Item 1. Legal Proceedings
In re Daisy Systems Corporation, Debtor
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court, for the
Northern District of California.
The Court has set a trial date of November 24, 1997.
In-Store Advertising Securities Litigation
As previously reported in the Company's 1996 Form 10-K, Bear Stearns was a
defendant in a litigation pending in the United States District Court for the
Southern District of New York.
The settlement of that action received final court approval on December 18,
1996.
Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc. et al.
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court for the
Southern District of New York.
On December 16, 1996, Bear Stearns moved to dismiss the Amended Complaint.
In re Lady Luck Gaming Corporation Securities Litigation:
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court for the
District of Nevada.
On December 13, 1996, Defendants moved to dismiss the Second Amended Class
Action Complaint.
Primavera Familienstiftung v. David J. Askin, et al.
As previously reported in the Company's 1996 Form 10-K, Bear, Stearns is a
defendant in a litigation pending in the United States District Court for the
Southern District Of New York.
Askin Capital Management L.P. (ACM), David J. Askin and Geoffrey S.
Bradshaw-Mack (the "Askin Defendants") violated Sections 10 (b) and 20 (a) of
the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
committed and committed common law fraud. On November 8, 1996, plaintiff filed a
Third Amended Class Action Complaint, repleading its claim that the Askin
Defendants committed federal securities law violations and common law fraud and
that the Broker-Dealer Defendants aided and abetted the Askin Defendants'
alleged fraud. On December 20, 1996, all defendants moved to dismiss the
complaint.
ABF Capital Management, et al. v. Askin Capital Management, L.P., et al.
As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a
defendant in a litigation pending in the United States District Court for the
Southern District of New York.
On January 22, 1997, the Court dismissed the claims against the
Broker-Dealer Defendants for aiding and abetting ACM's alleged breach of
fiduciary duty, for unjust enrichment and for RICO violations, but denied the
motion to dismiss the claims against the Broker-Dealer Defendants for aiding and
abetting ACM's alleged fraud.
Harrison J. Goldin as Trustee for the Bankruptcy Estates of Granite Partners,
L.P., Granite Corp., and Quartz Hedge Fund v. Bear, Stearns & Co. Inc. and Bear,
Stearns Capital Markets Inc.
As previously reported in the Company's 1996 Form 10-K, Bear Stearns and
Bear Stearns Capital Markets were defendants in a litigation pending in the
United States Bankruptcy Court for the Southern District of New York.
On December 2, 1996, Bear Stearns' motion to withdraw the reference of this
case to the Bankruptcy Court was granted. The case now is pending in the United
States District Court for the Southern District of New York.
County of Orange, et ano. v. Bear, Stearns, et al.
On December 5, 1996, the County of Orange, California (the "County") and
John Moorlach, the County's Treasurer-Tax Collector, commenced an adversary
proceeding in the United States Bankruptcy Court for the Central District of
California (the "Bankruptcy Court") against twenty-six defendants, including
Bear, Stearns & Co., Inc. and Bear, Stearns Securities Corp. (collectively,
"Bear Stearns"). The action arises in connection with a bankruptcy petition the
County filed in the Bankruptcy Court on December 6, 1994. On May 17, 1996, the
Bankruptcy Court confirmed a plan pursuant to which the County emerged from
bankruptcy.
The complaint alleges, among other things, that numerous reverse repurchase
transactions entered into between Orange County (through its former
Treasurer-Tax Collector, Robert Citron) and the twenty-six defendants were ultra
vires, or beyond the authority granted by the constitution and laws of
California to the Treasurer-Tax Collector. The complaint also alleges that the
defendants owed a duty to inform the County that the transactions were
unsuitable and to refrain from entering into the transactions. The County seeks
damages in unspecified amounts, an order that any claims asserted against the
County in its bankruptcy case by any of the defendants should be disallowed and
that any securities still held by any of the defendants pursuant to the
challenged transactions should be turned over the County.
The parties in this action, have entered into a stipulation staying the
proceeding. Bear, Stearns denies all allegations of wrongdoing asserted against
it in this litigation, intends to defend these claims vigorously, and believes
that it has substantial defenses to these claims.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on October 28, 1996 (the "Annual
Meeting"), the stockholders of the Company approved the Company's Fiscal 1997
Performance Goals under, and an amendment to, the Management Compensation Plan
(the "Performance Goals and Amendment"), and amendments to the Capital
Accumulation Plan for Senior Managing Directors (the "CAP Plan Amendments") and
the Performance Compensation Plan. In addition, at the Annual Meeting the
stockholders of the Company elected thirty-nine directors to serve until the
next Annual Meeting of Stockholders or until 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 Amendment, the CAP Plan Amendments and the Performance
Compensation Plan, 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 Amendment, the CAP
Plan Amendments and the Performance Compensation Plan, set forth below is
information on the results of the votes cast at the Annual Meeting.
Broker
For Against Abstained Non-Votes
--------- ----------- --------- ---------
Performance Goals
and Amendment 73,030,069 5,975,924 591,403 21,909,620
CAP Plan Amendments 99,096,835 1,740,855 669,326 0
Performance Compensation Plan 73,488,303 5,515,732 593,360 21,909,621
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 cast and\or withheld with respect to each such nominee.
Nominees For Withheld
--------------------------------- ----------------- -------------------
E. Garrett Bewkes III 100,151,711 1,355,305
Denis A. Bovin 100,135,042 1,371,974
James E. Cayne 100,118,650 1,388,366
Peter Cherasia 100,138,396 1,368,620
Ralph R. Cioffi 100,130,466 1,376,550
Barry S. Cohen 100,137,949 1,369,067
Wendy L. deMonchaux 100,127,752 1,379,264
Grace J. Fippinger * 100,218,863 1,288,153
Bruce E. Geismar 100,138,127 1,368,889
Carl D. Glickman 100,090,255 1,416,761
Thomas R. Green 100,228,251 1,278,765
Alan C. Greenberg 100,145,438 1,361,578
Donald J. Harrington 100,145,757 1,361,259
Richard Harriton 100,203,482 1,303,534
Daniel L. Keating 99,914,110 1,592,906
John W. Kluge 99,883,039 1,623,977
Mark E. Lehman 100,148,350 1,358,666
David A. Liebowitz 100,134,901 1,372,115
Bruce M. Lisman 100,135,575 1,371,441
Roland N. Livney 100,133,542 1,373,474
Michael Minikes 100,138,010 1,369,006
William J. Montgoris 100,144,940 1,362,076
Donald R. Mullen Jr. 100,137,210 1,369,806
Frank T. Nickell 100,227,474 1,279,542
Craig M. Overlander 100,137,934 1,369,082
Stephen E. Raphael 100,134,387 1,372,629
E. John Rosenwald Jr. 99,910,575 1,596,441
Lewis A. Sachs 99,978,574 1,528,442
Richard Sachs 100,121,463 1,385,553
Frederic V. Salerno 100,219,043 1,287,973
Alan D. Schwartz 99,913,058 1,593,958
David M. Solomon 100,123,406 1,383,610
Warren J. Spector 100,139,639 1,367,377
Robert M. Steinberg 100,135,809 1,371,207
Michael L. Tarnopol 100,144,251 1,362,765
Vincent Tese 100,133,652 1,373,364
Michael J. Urfirer 100,129,211 1,377,805
Fred Wilpon 99,901,178 1,605,838
Uzi Zucker 100,208,658 1,298,358
* - Subsequent to the election of the directors, Grace J. Fippinger died.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10)(a)(6) Capital Accumulation Plan for Senior Managing Directors, as
amended and restated as of January 22, 1997, certain provisions
of which are subject to the approval of the Stockholders at the
1997 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, 1996, pertaining to the
Company's results of operations for the three-months ended September 27,
1996.
(ii) A Current Report on Form 8-K dated October 29, 1996, pertaining to the
declaration of dividends and the appointment of Samuel L. Molinaro Jr. as
Chief Financial Officer.
(iii) A Current Report on Form 8-K dated November 12, 1996, pertaining to
information in the 1996 Proxy Statement.
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, 1997 By: /s/ Samuel L. Molinaro Jr.
Samuel L. Molinaro Jr.
Senior Vice President - Finance
and Chief Financial Officer
THE BEAR STEARNS COMPANIES INC.
FORM 10-Q
Exhibit Index
Exhibit No. Description
- ----------- -----------
(10) (a) (6) Capital Accumulation Plan for Senior Managing
Directors, as amended and restated as of
January 22, 1997, certain provisions of which are
subject to the approval of the Stockholders at
the 1997 Annual Meeting
(11) Statement Re Computation of
Per Share Earnings
(12) Statement Re Computation of
Earnings to Fixed Charges
(27) Financial Data Schedule