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 March 27, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________ to ______________
Commission File Number 1-8989
The Bear Stearns Companies Inc.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3286161
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Park Avenue, New York, New York 10167
(Address of principal executive offices) (Zip Code)
(212)272-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 7, 1997, the latest practicable date, there were 117,697,992 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 March 27, 1997
(Unaudited) and June 30, 1996
Consolidated Statements of Income (Unaudited) for the three-and
nine-month periods ended March 27, 1997 and March 29, 1996
Consolidated Statements of Cash Flows (Unaudited) for the nine-month
periods ended March 27, 1997 and March 29, 1996
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Assets
March 27, June 30,
1997 1996
-------------- ------------
(Unaudited)
(In thousands)
Cash and cash equivalents $ 186,635 $ 127,847
Cash and securities deposited with
clearing organizations or
segregated in compliance with
Federal regulations 1,374,907 1,702,124
Securities purchased under agreements
to resell 29,110,233 24,517,275
Securities borrowed 34,301,033 29,611,207
Receivables:
Customers 8,674,099 7,976,373
Brokers, dealers and others 2,966,077 811,391
Interest and dividends 314,834 305,725
Financial instruments owned, at
fair value 39,251,308 26,222,134
Property, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 353,790 331,924
Other assets 462,743 479,157
------------- ------------
Total Assets $ 116,995,659 $ 92,085,157
============= ============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Liabilities and Stockholders' Equity
March 27, June 30,
1997 1996
-------------- --------------
(Unaudited)
(In thousands, except share data)
Short-term borrowings $ 13,292,397 $ 9,867,619
Securities sold under agreements
to repurchase 42,143,563 33,353,899
Payables:
Customers 26,496,745 21,905,015
Brokers, dealers and others 1,571,525 1,847,599
Interest and dividends 399,625 448,121
Financial instruments sold, but not
yet purchased, at fair value 20,748,651 13,916,581
Accrued employee compensation and benefits 834,493 712,962
Other liabilities and accrued expenses 957,424 1,094,333
------------- -------------
106,444,423 83,146,129
------------- -------------
Commitments and Contingencies
Long-term Borrowings 7,222,620 6,043,614
------------- ------------
Preferred stock issued by subsidiary 150,000 150,000
Mandatorily redeemable capital securities of
subidiary trust 200,000
------------- ------------
Stockholders' Equity
Preferred Stock 437,500 437,500
Common Stock, $1.00 par value:
200,000,000 shares authorized;
167,784,940 shares issued at
March 27, 1997 and June 30, 1996 167,785 159,804
Paid-in capital 1,870,321 1,696,217
Retained earnings 892,441 694,108
Capital Accumulation Plan 460,477 471,191
Treasury stock, at cost
Adjustable Rate Cumulative Preferred
Stock, Series A - 2,515,750 and
2,341,350 shares at March 27, 1997
and June 30, 1996, respectively (103,196) (95,389)
Common Stock - 48,781,448 and 41,664,729
shares at March 27, 1997 and
June 30, 1996, respectively (733,011) (598,217)
Note receivable from ESOP Trust (13,701) (19,800)
------------- ------------
Total Stockholders' Equity 2,978,616 2,745,414
------------- ------------
Total Liabilities and Stockholders' Equity $116,995,659 $ 92,085,157
============= =============
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------------------- ---------------------------------------
March 27, March 29, March 27, March 29,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
(In thousands, except per share data)
Revenues
Commissions $ 191,817 $ 183,182 $ 536,971 $ 501,592
Principal transactions 407,336 353,073 1,131,467 883,828
Investment banking 188,706 144,357 480,538 382,159
Interest and dividends 712,685 604,777 2,118,552 1,765,758
Other income 10,757 10,607 36,456 27,156
---------------- ---------------- ---------------- ----------------
Total Revenues 1,511,301 1,295,996 4,303,984 3,560,493
Interest expense 576,836 503,754 1,740,701 1,463,102
---------------- ---------------- ---------------- ----------------
Revenues, net of interest expense 934,465 792,242 2,563,283 2,097,391
---------------- ---------------- ---------------- ----------------
Expenses
Employee compensation and benefits 464,596 392,442 1,265,793 1,044,866
Floor brokerage, exchange
and clearance fees 36,587 35,461 102,600 95,994
Communications 26,085 23,149 75,419 68,054
Occupancy 22,658 21,686 65,949 64,088
Depreciation and amortization 22,533 17,495 63,951 51,118
Advertising and market development 15,890 13,926 47,329 40,832
Data processing and equipment 10,019 8,559 25,780 26,246
Other expenses 60,322 57,709 171,615 147,087
---------------- ---------------- ---------------- ----------------
Total expenses 658,690 570,427 1,818,436 1,538,285
---------------- ---------------- ---------------- ----------------
Income before provision for
income taxes 275,775 221,815 744,847 559,106
Provision for income taxes 110,294 92,944 294,405 231,233
---------------- ---------------- ---------------- ----------------
Net income $ 165,481 $ 128,871 $ 450,442 $ 327,873
================ ================ ================ ================
Net income applicable to
common shares $ 159,552 $ 122,824 $ 432,543 $ 309,417
================ ================ ================ ================
Earnings per share $ 1.14 $ 0.86 $ 3.05 $ 2.15
================ ================ ================ ================
Weighted average common and
common equivalent shares
outstanding 146,932,199 148,302,451 148,978,719 150,030,431
================ ================ ================ ================
Cash dividends declared
per common share $ 0.15 $ 0.15 $ 0.45 $ 0.45
================ ================ ================ ================
See Notes to Consolidated Financial Statements.
THE BEAR STEARNS COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine-Months Ended
March 27, March 29,
1997 1996
------------ ------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 450,442 $ 327,873
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 63,951 51,118
Deferred income taxes (74,804) (38,026)
Other 57,119 38,515
(Increases) decreases in operating receivables:
Securities borrowed (4,689,826) (1,953,708)
Customers (697,726) (654,327)
Brokers, dealers and others (2,154,686) 50,830
Other (38,955) (4,772)
Increases (decreases) in operating payables:
Customers 4,591,730 4,557,562
Brokers, dealers and others (274,862) 265,324
Other (48,496) 49,181
Decreases (increases) in:
Cash and securities deposited with clearing
organizations or segregated in compliance
with Federal regulations 327,217 (743,150)
Securities purchased under agreements to resell (4,592,958) (9,606,743)
Financial instruments owned (13,029,174) (4,269,961)
Other assets 157,262 35,077
Increases (decreases) in:
Securities sold under agreements to repurchase 8,789,664 5,503,199
Financial instruments sold, but not
yet purchased 6,832,070 3,635,213
Accrued employee compensation and benefits 81,023 138,991
Other liabilities and accrued expenses (146,336) 228,728
------------ ------------
Cash used in operating activities (4,397,345) (2,389,076)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings 3,424,778 1,251,912
Issuance of long-term borrowings 1,942,402 1,534,362
Net proceeds from issuance of subsidiary securities 199,884
Net common stock distributions 15 6,419
Note repayment from ESOP Trust 6,099 5,647
Payments for:
Retirement of Senior Notes (767,984) (509,000)
Treasury stock purchases (154,339) (111,878)
Cash dividends paid (70,200) (71,622)
------------ ------------
Cash provided by financing activities 4,580,655 2,105,840
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (85,817) (58,783)
Purchases of investment securities and other assets (42,442) (17,634)
Proceeds from sales of investment securities 3,737 19,757
------------ ------------
Cash used in investing activities (124,522) (56,660)
------------ ------------
Net increase (decrease) in cash and cash equivalents 58,788 (339,896)
Cash and cash equivalents, beginning of period 127,847 700,501
------------ ------------
Cash and cash equivalents, end of period $ 186,635 $ 360,605
============ ============
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:
March 27, June 30,
In thousands 1997 1996
- ------------------------------------------------------------------------------------------------------------
Financial instruments owned:
US government and agency $ 14,464,066 $ 8,258,074
Other sovereign governments 3,196,094 656,699
State and municipal 167,261 149,697
Corporate equity and convertible debt 9,791,594 8,492,570
Corporate debt 5,794,436 4,739,512
Derivative financial instruments 2,448,761 1,855,617
Mortgages and other mortgage-backed securities 3,039,385 1,796,322
Other 349,711 273,643
----------- -----------
$39,251,308 $26,222,134
=========== ===========
Financial instruments sold, but not yet purchased:
US government and agency 10,731,161 $ 5,502,459
Other sovereign governments 1,462,501 964,808
Corporate equity and convertible debt 3,996,021 4,482,426
Corporate debt 1,177,996 877,576
Derivative financial instruments 3,380,613 2,088,621
Other 359 691
------------ -----------
$ 20,748,651 $13,916,581
============ ===========
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES
At March 27, 1997, the Company was contingently liable for unsecured letters
of credit of approximately $2.1 billion and letters of credit of
approximately $145.2 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 March 27, 1997, Bear Stearns' net capital, as defined, of $ 1.62
billion exceeded the minimum requirement by $ 1.60 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 nine-months
ended March 27, 1997 and March 29, 1996. Income taxes paid totaled $329.2
million and $213.0 million for the nine-months ended March 27, 1997 and
March 29, 1996, respectively.
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company, in its capacity as a dealer in over-the-counter derivative
financial instruments and in connection with its proprietary market-making
and trading activities, enters into transactions in a variety of cash and
derivative financial instruments in order to reduce its exposure to market,
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 March 27, 1997 and
June 30, 1996:
March 27, June 30,
In billions 1997 1996
--------------------------------------------------------------------------
Interest Rate:
Swap agreements, including options, swaptions,
caps, collars, and floors $174.7 $175.2
Futures contracts 25.4 60.5
Options held 1.5 3.0
Options written .6 3.1
Foreign Exchange:
Futures contracts 5.1 2.3
Forward contracts 14.6 7.9
Options held 9.3 3.2
Options written 8.9 3.3
Mortgage-Backed Securities:
Forward Contracts 33.8 23.0
Equity:
Swap agreements 5.6 3.8
Futures contracts 1.5 .5
Options held .7 1.1
Options written .6 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 March 27, 1997 and June 30, 1996 were as follows:
March 27, June 30,
1997 1996
----------------------------------------------------
In millions Assets Liabilities Assets Liabilities
---------------------------------------------------------------------------
Swap agreements $ 893 $1,193 $678 $846
Futures and forward
contracts 369 273 280 307
Options held 1,189 897
Options written 1,926 968
The average monthly fair values of the derivative financial instruments for
the nine-months ended March 27, 1997 and the fiscal year ended June 30, 1996
were as follows:
March 27, June 30,
1997 1996
---------------------------------------------------
In millions Assets Liabilities Assets Liabilities
--------------------------------------------------------------------------
Swap agreements $712 $ 975 $611 $698
Futures and forward
contracts 254 225 286 275
Options held 969 704
Options written 1,414 795
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 March 27, 1997, was approximately $568.6 million.
THE BEAR STEARNS COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Preferred Stock Issued by Subsidiaries
Preferred Stock Issued by Subsidiary
Bear Stearns Finance LLC ("BSF"), a wholly owned subsidiary of the Company,
has $150.0 million outstanding Exchangeable Preferred Income Cumulative
Shares ("EPICS"), Series A, which have a liquidation value of $25 per share
and an annual dividend rate of 8.00%. The EPICS are callable at the option
of BSF, in whole or in part, at any time, on or after February 28, 1999, at
their stated liquidation value.
Mandatorily Redeemable Capital Securities of Subsidiary Trust
In January 1997, Bear Stearns Capital Trust I (the "Trust"), a wholly owned
subsidiary of the Company, issued $200.0 million of mandatorily redeemable
capital securities (the "capital securities"). The capital securities are
fixed/adjustable rate capital securities which have a liquidation value of
$1,000 per capital security. Holders of the capital securities are entitled
to receive semi-annual preferential cumulative cash distributions at an
annual rate of 7% through January 2002. Thereafter, the distributions will
be at a variable rate based on the three-month London Interbank Offered
Rate ("LIBOR"), plus a margin of 1.75%. The proceeds of the issuance of the
Capital Securities were used to purchase fixed/adjustable rate junior
subordinated deferrable interest debentures (the "subordinated debentures")
issued by the Company. The subordinated debentures are the sole assets of
the trust. The subordinated debentures will mature on January 15, 2027. The
interest rate on the subordinated debentures is the same as the rate on the
capital securities. The Company's guarantee of the Capital Securities,
considered together with the other obligations of the Company with respect
to capital securities, constitutes a full and unconditional guarantee by
the Company of the Trust's obligation under the capital securities issued
by the Trust.
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 March 27, 1997 Compared to March 29, 1996
The March 1997 quarter was generally characterized by active fixed income and
equity markets and a favorable underwriting environment during January and
February. Both markets were weakened in March due to concerns about the Federal
Reserve Board raising interest rates. On March 26, 1997 the Federal Reserve
Board raised rates by 25 basis points. Net income in the 1997 quarter was $165.5
million, an increase of 28.4% from $128.9 million in the comparable prior year
quarter. Revenues, net of interest expense ("net revenues"), increased 18.0% to
$934.5 million from $792.2 million in the 1996 quarter. The increase was
attributable to increases in all revenue categories, particularly principal
transactions and investment banking. Earnings per share were $1.14 for the 1997
quarter versus $0.86 for the comparable 1996 quarter. The earnings per share
amounts have been adjusted for all stock dividends.
Commission revenues increased 4.7% in the 1997 quarter to $191.8 million from
$183.2 million in the comparable 1996 quarter. This increase was attributable to
increased revenues from the firm's institutional equities and securities
clearance areas.
Revenues from principal transactions increased 15.4% in the 1997 quarter to
$407.3 million from $353.1 million in the comparable 1996 quarter, reflecting
increases in revenues derived from the Company's fixed income, equity and
derivative activities. The increases in the fixed income activities were
primarily derived from the corporate bond, high yield and emerging markets
areas, principally due to active market conditions and increased customer order
flow. The increase in revenues derived from equity activities reflect growth in
the convertible bond area while the increase in derivative activities reflects
increased market share and good customer order flow, principally in equity
derivatives and structured transactions.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Three-Months Ended Three-Months Ended
March 27, 1997 March 29, 1996
------------------ ------------------
Fixed Income $225,693 $199,933
Equity 104,855 98,712
Foreign Exchange & Other
Derivative Financial
Instruments 76,788 54,428
-------- --------
$407,336 $353,073
======== ========
Investment banking revenues increased 30.7% to $188.7 million in the 1997
quarter from $144.4 million in the comparable 1996 quarter. This increase
reflected an increase in both merger and acquisition and underwriting revenue.
The increase in underwriting revenue was due to increased levels of both
investment-grade corporate debt and emerging market new issues as compared to
the 1996 quarter. Merger and acquisition fee revenue increased due to increased
transaction volume.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 34.5% to $135.8 million in the 1997 quarter from
$101.0 million in the comparable 1996 quarter. This increase was attributable to
higher levels of customer margin balances and increased securities lending
activities. Average margin debt increased to $31.7 billion in the 1997 quarter
from $21.7 billion in the comparable 1996 quarter. Average free credit balances
increased to $8.1 billion in the 1997 quarter from $7.0 billion in the
comparable 1996 quarter.
Employee compensation and benefits increased 18.4% to $464.6 million in the 1997
quarter from $392.4 million in the comparable 1996 quarter. The increase was
attributable to higher incentive and discretionary bonus accruals associated
with the increased earnings in the 1997 quarter. Employee compensation and
benefits, as a percentage of net revenues, increased to 49.72% in the 1997
quarter from 49.54% in the comparable 1996 quarter.
All other expenses increased 9.1% to $194.1 million in the 1997 quarter from
$178.0 million in the comparable 1996 quarter. Floor brokerage, exchange and
clearance fees increased 3.2% to $36.6 million in the 1997 quarter from $35.5
million in the 1996 quarter reflecting the increase in the volume of securities
transactions processed. Depreciation costs increased reflecting computer
equipment upgrades. Increased data processing costs reflected increases in
software licensing and maintenance costs. The remaining increase in other
operating expenses was related to higher levels of communication costs due to
increased headcount, and increased advertising and market development costs
related to the increase in business activity.
The Company's effective tax rate decreased to 40.0% in the 1997 quarter compared
to 41.9% in the comparable 1996 quarter due to a higher level of tax preference
items in the 1997 quarter.
Nine-Months Ended March 27, 1997 Compared to March 29, 1996 .
Net income for the nine-months ended March 27, 1997 was $450.4 million, an
increase of 37.4% from $327.9 million for the comparable 1996 period. Revenues,
net of interest expense ("net revenues"), increased 22.2% to $2.6 billion in the
1997 period from $2.1 billion in the 1996 period. The increase was attributable
to increases in all revenue categories, particularly principal transactions and
investment banking. Earnings per share were $3.05 for the 1997 period versus
$2.15 for the comparable 1996 period. The earnings per share amounts have been
adjusted for all stock dividends.
Commission revenues increased 7.1% in the 1997 period to $537.0 million from
$501.6 million in the comparable 1996 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 28.0% in the 1997 period to $1.1
billion from $883.5 million in the comparable 1996 period, reflecting increases
in revenues derived from the Company's fixed income and derivatives activities,
partially offset by a decrease in the Company's equity activities. The increases
were principally in the mortgage-backed securities, asset-backed securities and
investment-grade corporate bond areas and were principally due to active fixed
income market conditions and increased customer order flow. The increase in
revenues from derivative activities reflects market share growth and increased
customer order flow.
The Company's principal transaction revenues by reporting categories, including
derivatives, are as follows:
Nine-Months Ended Nine-Months Ended
March 27, 1997 March 29, 1996
----------------- -----------------
Fixed Income $ 700,060 $475,719
Equity 261,345 290,447
Foreign Exchange & Other
Derivative Financial
Instruments 170,062 117,662
----------- --------
$1,131,467 $883,828
=========== ========
Investment banking revenues increased 25.7% to $480.5 million in the 1997 period
from $382.2 million in the comparable 1996 period. This increase reflected an
increase in underwriting revenue.
Net interest and dividends (revenues from interest and net dividends, less
interest expense) increased 24.8% to $377.9 million in the 1997 period from
$302.7 million in the comparable 1996 period. This increase was attributable to
higher levels of customer margin balances. Average margin debt increased to
$29.1 billion in the 1997 period from $20.0 billion in the comparable 1996
period. Average free credit balances increased to $7.8 billion in the 1997
period from $6.3 billion in the comparable 1996 period.
Employee compensation and benefits increased 21.1% to $1.3 billion in the 1997
period from $1.0 billion in the comparable 1996 period. The increase was
attributable to higher incentive and discretionary bonus accruals associated
with the increased earnings in the 1997 period. Employee compensation and
benefits, as a percentage of net revenues, decreased to 49.38% in the 1997
period from 49.82% in the comparable 1996 period.
All other expenses increased 12.0% to $552.6 million in the 1997 period from
$493.4 million in the comparable 1996 period. Floor brokerage, exchange and
clearance fees increased 6.9% to $102.6 million in the 1997 quarter from $96.0
million in the 1996 quarter. Depreciation increased reflecting computer
equipment upgrades. The remaining increase in other operating expenses was
related to higher advertising and market development costs related to the
increase in underwritings and increased communications costs related to
increased headcount.
The Company's effective tax rate decreased to 39.5% in the 1997 period compared
to 41.4% in the comparable 1996 period due to a higher level of tax preference
items in the 1997 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 March 27, 1997 increased to $117.0 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 utilizes medium-term note financing in order to extend maturities of
its debt and achieve additional diversification of its funding sources. In
addition to short-term funding sources, the Company utilizes long-term senior
debt, including medium-term notes, as a longer term source of unsecured
financing.
The Company maintains an alternative funding strategy focused on the liquidity
and self-funding ability of the underlying assets. The objective of the strategy
is to maintain sufficient sources of alternative funding to enable the Company
to fund debt obligations maturing within one year without issuing any new
unsecured debt, including commercial paper. The most significant source of
alternative funding is the Company's ability to hypothecate or pledge its
unencumbered assets as collateral for short-term funding.
As part of the Company's alternative funding strategy, the Company regularly
monitors and analyzes the size, composition, and liquidity characteristics of
the assets being financed and evaluates its liquidity needs in light of current
market conditions and available funding alternatives. Through this analysis, the
Company can continuously evaluate the adequacy of its equity base and the
schedule of maturing term-debt supporting its present asset levels. The Company
can then seek to adjust its maturity schedule, in light of market conditions and
funding alternatives.
As part of the Company's alternative funding strategy, the Company maintains a
committed revolving-credit facility (the "facility") totaling $2.0 billion which
permits borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear
Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain affiliates. The
facility provides that up to $1.0 billion of the total facility may be borrowed
by the Company on an unsecured basis. Secured borrowings can be collateralized
by both investment-grade and non-investment-grade financial instruments. In
addition, this agreement provides for defined margin levels on a wide range of
eligible financial instruments that may be pledged under the secured portion of
the facility. The facility terminates in October 1997. There were no borrowings
outstanding under the facility at March 27, 1997.
Capital Resources
The Company conducts a substantial portion of all of its operating activities
within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC, Bear,
Stearns International Limited ("BSIL") and Bear Stearns International Trading
Limited ("BSIT"). In connection therewith, a substantial portion of the
Company's long-term borrowings and equity have been used to fund investments in,
and advances to, Bear Stearns, BSSC, BSIL and BSIT.
The Company regularly monitors the nature and significance of those assets or
activities conducted outside the broker-dealer subsidiaries and attempts to fund
such assets with either capital or borrowings having maturities consistent with
the nature and the liquidity of the assets being financed.
Bear Stearns Bank plc ("BSB") received its banking license from the Central Bank
of Ireland on April 10, 1997. BSB is a wholly owned subsidiary of the Company.
As the headquarters for our international banking activities, the bank will
serve as a platform from which the Company can direct international activities
and gain further access to clients, potential products and other international
markets.
In January 1997, Bear Stearns Capital Trust I (the "Trust"), a wholly owned
subsidiary of the Company, issued $200.0 million of mandatorily redeemable
capital securities (the "capital securities"). The capital securities are
fixed/adjustable rate capital securities which have a liquidation value of
$1,000 per capital security. Holders of the capital securities are entitled to
receive semi-annual preferential cumulative cash distributions at an annual rate
of 7% through January 2002. Thereafter, the distributions will be at a variable
rate based on the three-month London Interbank Offered Rate ("LIBOR"), plus a
margin of 1.75%. The proceeds of the issuance of the Capital Securities were
used to purchase fixed/adjustable rate junior subordinated deferrable interest
debentures (the "subordinated debentures") issued by the Company. The
subordinated debentures are the sole assets of the trust. The subordinated
debentures will mature on January 15, 2027. The interest rate on the
subordinated debentures is the same as the rate on the capital securities. The
Company's guarantee of the Capital Securities, considered together with the
other obligations of the Company with respect to capital securities, constitutes
a full and unconditional guarantee by the Company of the Trust's obligation
under the capital securities issued by the Trust. The proceeds of the
subordinated debentures were used for general corporate purposes.
During the nine-months ended March 27, 1997 the Company repurchased 5,789,561
shares of Common Stock in connection with the Capital Accumulation Plan for
Senior Managing Directors (the "Plan") at a cost of approximately $145.6
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 on July 30, 1996. As of May 9, 1997, there have been no purchases
under the Repurchase Plan.
Cash Flows
Cash and cash equivalents increased by $58.8 million during the nine-months
ended March 27, 1997 to $186.6 million. Total cash and cash equivalents
decreased by $339.9 million during the nine-months ended March 29, 1996 to
$360.6 million. Cash used in operating activities during the nine-months ended
March 27, 1997 was $4.4 billion, primarily representing increases in financial
instruments owned, securities borrowed and securities purchased under agreements
to resell partially offset by increases in securities sold under agreements to
repurchase and financial instruments sold, but not yet purchased. Financing
activities provided cash of $4.6 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 March 27, 1997 the
Company's aggregate investments in leveraged transactions and its exposure
related to any one transaction was not material.
As part of the Company's fixed-income securities activities, the Company
participates in the trading and sale of high yield 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 March 27, 1997, the
Company held high yield securities of $1.3 billion in long inventory and $184.9
million in short inventory.
These investments generally involve greater risk than investment-grade debt
securities due to credit considerations, liquidity of secondary trading markets
and vulnerability to general economic conditions.
The level of the Company's high yield securities inventories, and the impact of
such activities upon the Company's results of operations, can fluctuate from
period to period as a result of customer demands and economic and market
considerations. Bear Stearns' Risk Committee continuously monitors exposure to
market and credit risk with respect to high yield securities inventories and
establishes limits with respect to overall market exposure and concentrations of
risk by both individual issuer and industry groups.
Effects of Statements of Financial Accounting Standards
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share", ("SFAS 128"). SFAS 128
simplifies the standards for computing and presenting earnings per share ("EPS")
previously found in APB Opinion No. 15, Earnings per Share, and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement along with a
reconciliation between the two presentations.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Restatement of prior-period EPS
data is also required. The Company does not expect the impact of adopting SFAS
128 to be material.
Part II - Other Information
Item 1. Legal Proceedings
ABF Capital Management, et al. v. Askin Capital Management, L.P., et al.
As previously reported in the Company's 1996 Form 10-K and 1997 Form
10-Qs, Bear Stearns is a defendant in a litigation pending in the United States
District Court for the Southern District of New York.
Plaintiffs have sought a rehearing of the dismissal of their claim for
aiding and abetting breach of fiduciary duty.
A.R. Baron & Co., Inc.
In connection with investigations concerning the collapse of the
A.R. Baron brokerage firm, Bear, Stearns Securities Corp. and Bear, Stearns &
Co. Inc. have received formal and informal inquiries from various governmental
agencies. Bear Stearns is cooperating with those inquiries.
In re Blech Securities Litigation
As previously reported in the Company's 1996 Form 10-K and 1997 Form
10-Qs, Bear Stearns is a defendant in a litigation pending in the United States
District Court for the Southern District of New York.
On April 2, 1997, the court denied Bear Stearns' motion to dismiss the
Section 10(b) and Rule 10b-5 and common law fraud allegations asserted against
Bear Stearns, and granted Bear Stearns' motion to dismiss the Section 20(a)
allegations.
On March 31, 1997, plaintiffs filed a motion to certify a class of
persons who purchased Blech Securities during the period beginning July 1, 1991
and continuing through September 21, 1994. Bear Stearns was the clearing agent
to D. Blech & Co. from September 1993 through September 21, 1994.
Del Rosario, et al v. Bear Stearns & Co., Inc., et al.
In March 1997, three former Bear Stearns brokerage customers commenced
a National Association of Securities Dealers ("NASD") arbitration proceeding
against Bear Stearns, a former Bear Stearns account executive and another
brokerage firm.
The claimants assert that they have been damaged as a result of alleged
unauthorized wire transfers and unauthorized and unsuitable trading in their
accounts. The claimants assert claims based upon: (1) fraud (2) churning, (3)
breach of the fiduciary duty of care and good faith, (4) negligence, (5) breach
of contract, (6) failure to supervise the claimants' accounts and (7)
conspiracy. The claimants seek damages in an unspecified amount, but at least
$20 million plus punitive damages.
Bear Stearns denies all allegations of wrongdoing asserted against it
in this arbitration proceeding, intends to defend these claims vigorously and
believes that it has substantial defenses to these claims.
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 and 1997 Form
10-Qs, Bear Stearns and Bear Stearns Capital Markets are defendants in a
litigation pending in the United States District Court for the Southern District
of New York.
By Order dated March 3, 1997, control of the litigation was transferred
from the Trustee to a "Litigation Advisory Board" consisting of seven members,
five of whom purport to be investors in the Funds.
Montpellier Resources, Limited, et al., v. Bear Stearns, et al.
On March 17, 1997, Montpellier Resources, Limited, Nandalor Investment
Partnership and Flamingo Investments Limited, which purport to be investors in
Granite Corporation ("Granite") and/or Quartz Hedge Fund ("Quartz"), commenced
an action against Bear Stearns, Kidder Peabody & Co., Incorporated, Donaldson,
Lufkin & Jenrette (collectively, the "Broker-Dealer Defendants") and Askin
Capital Management, L.P. ("ACM") in the United States District Court for the
Southern District of New York. The complaint purports to be a class action on
behalf of all investors who purchased interests in either Granite or Quartz
between January 1, 1991 and April 7, 1994.
The complaint alleges that ACM, the investment advisor to Granite and
Quartz, defrauded the plaintiffs and breached a fiduciary duty to them, and that
the Broker-Dealer Defendants aided and abetted that alleged fraud and breach of
fiduciary duty. Among other things, the Broker-Dealer Defendants are alleged to
have created and encouraged ACM to purchase inappropriate securities, provided
ACM with inflated marks for securities, unreasonably extended credit to ACM, and
otherwise departed from the standards of ordinary care. Plaintiffs seek recovery
of their investments (alleged to have been approximately $6 million for the
named plaintiffs), punitive damages of not less than $1 billion from each
defendant, plus interest, costs, attorneys fees and other unspecified damages.
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.
NASDAQ Antitrust Litigation
As previously reported in the Company's 1996 Form 10-K and 1997 10-Qs,
Bear Stearns is a defendant in a litigation pending in the United States
District Court for the Southern District of New York.
On April 23, 1997, the court approved the proposed settlement.
Parvis Co. Ltd. v. Bear Stearns & Co., Inc., et al.
In March 1997, a former Bear Stearns account holder commenced a
National Association of Securities Dealers ("NASD") arbitration proceeding
against Bear Stearns and a former Bear Stearns account executive.
The claimant asserts that it was damaged as a result of alleged
unauthorized wire transfers from its account. The claimant alleges claims based
upon: (1) breach of the fiduciary duty of care and good faith, (2) negligence,
(3) violation of NASD Rules, SEC Rules and New York Stock Exchange Rules, (4)
breach of contract and (5) failure to supervise. The claimant seeks damages in
an unspecified amount, but at least $15 million.
Bear Stearns denies all allegations of wrongdoing asserted against it
in this arbitration proceeding, intends to defend these claims vigorously and
believes that it has substantial defenses to these claims.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement Re Computation of Per Share Earnings
(12) Statement Re Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(b) Reports on Form 8-K
During the quarter, the Company filed the following Current Report on Form
8-K.
(i) A Current Report on Form 8-K dated January 22, 1997, pertaining to the
Company's results of operations for the six-months ended December 31, 1996.
(ii) A Current Report on Form 8-K dated January 22, 1997, pertaining to a
tax opinion in connection with the Company's Medium-Term Note Program.
(iii) A Current Report on Form 8-K dated January 29, 1997, pertaining to
the declaration of quarterly cash dividends and 5% stock dividend.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Bear Stearns Companies Inc.
(Registrant)
Date: May 12, 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
(11) Statement Re Computation of
Per Share Earnings
(12) Statement Re Computation of
Earnings to Fixed Charges
(27) Financial Data Schedule