EXHIBIT 13
----------
SELECTED FINANCIAL DATA
THE BEAR STEARNS COMPANIES INC.
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
June 30, 1994 June 30, 1993 June 30, 1992 June 30, 1991 June 30, 1990
------------- ------------- ------------- ------------- -------------
(In thousands, except share and employee data)
Operating Results
-----------------
Revenues $ 3,441,072 $ 2,853,185 $ 2,678,933 $ 2,379,953 $ 2,386,053
Interest expense 1,020,055 710,086 834,859 1,141,029 1,217,212
- - - - - - - -------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 2,421,017 2,143,099 1,844,074 1,238,924 1,168,841
- - - - - - - -------------------------------------------------------------------------------------------------------------------------
Non-interest expenses
Employee compensation and benefits 1,227,061 1,037,099 909,916 652,186 608,291
Other 551,157 491,602 426,533 357,237 368,018
- - - - - - - -------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 1,778,218 1,528,701 1,336,449 1,009,423 976,309
- - - - - - - -------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 642,799 614,398 507,625 229,501 192,532
Provision for income taxes 255,834 251,951 213,047 86,636 73,164
- - - - - - - -------------------------------------------------------------------------------------------------------------------------
Net income $ 386,965 $ 362,447 $ 294,578 $ 142,865 $ 119,368
=========================================================================================================================
Net income applicable to common shares $ 362,592 $ 355,696 $ 291,350 $ 139,028 $ 114,877
=========================================================================================================================
Financial Position
------------------
Total assets $ 67,392,018 $ 57,439,505 $ 45,768,333 $ 39,284,913 $ 31,574,487
Long-term borrowings $ 3,408,096 $ 1,883,123 $ 1,040,396 $ 681,846 $383,890
Stockholders' equity $ 2,316,566(1) $ 1,776,530 $ 1,276,984 $ 1,096,023 $ 1,076,057
Common shares outstanding(2) 113,439,155 120,507,836 117,758,410 125,898,591 137,342,654
=========================================================================================================================
Per share data
--------------
Earnings per share(2)(3) $ 2.89 $ 2.86 $ 2.34 $ 1.08 $ .82
Cash dividends declared per common share $ .60 $ .60 $ .65 $ .57 $ .56
Book value per common share(2) $ 14.25 $ 11.95 $ 9.56 $ 8.10 $ 7.42
=========================================================================================================================
Other data
----------
Return on average common equity 23.3% 28.8% 27.6% 13.6% 11.5%
Profit margin(4) 26.6% 28.6% 27.5% 18.5% 16.5%
Employees 7,321 6,306 5,873 5,612 5,732
=========================================================================================================================
<FN>
- - - - - - - -----------------------
(1) Includes $150,000,000 of Exchangeable Preferred Income Cumulative Shares, which were issued by a subsidiary of the
Company. See note 8 of Notes to Consolidated Financial Statements.
(2) Adjusted to reflect stock dividends.
(3) See Note 1 of Notes to Consolidated Financial Statements.
(4) Represents the ratio of income before provision for income taxes to revenues, net of interest expense.
NYFS04...:\25\22625\0110\7120\ARS92394.P00
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Company's principal business activities, investment
banking, securities trading and brokerage, are, by their nature,
highly competitive and subject to various risks, particularly volatile
trading markets and fluctuations in the volume of market activity.
Consequently, the Company's net income and revenues have in the past
been and 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, over which the
Company has little control.
BUSINESS ENVIRONMENT
The business environment in fiscal 1994 was marked by two
dramatically contrasting scenarios. The first seven months of fiscal
1994 were characterized by continued declining interest rates which
contributed to strong domestic equity and fixed income markets and
increased underwriting activities. The trend of low interest rates
during the first seven months of the fiscal year led to a surge in the
volumes of investment-grade and non-investment-grade debt and
municipal securities offerings during the early part of the fiscal
year as issuers moved to take advantage of the low rate environment.
Favorable long-term interest rates also continued to benefit domestic
mortgage-backed securities markets as homeowners refinanced existing
mortgages which increased levels of mortgage-backed securities
issuances to record levels. International markets continued to be
strong for the first part of fiscal 1994 with a high demand for equity
issuances from the emerging markets, particularly Mexico, Latin
America and Asia.
In February 1994, the Federal Reserve Board began the first
of several moves to raise short-term interest rates. These increases
created significant instability in the global fixed income markets
during the remainder of fiscal 1994. Mortgage-backed securities
markets experienced particular volatility during the fourth quarter,
reflecting the general rise in interest rates together with investor
concerns over prepayment patterns. The volatile fixed income markets
also impacted the domestic equity markets and resulted in a sharp
decline in equity underwriting activity. Stock prices and average
daily trading volumes decreased as investors' concerns about the
domestic economy increased. International markets weakened in the
second
half of fiscal 1994 with significantly lower levels of new issues and
market volume.
Reflecting the difficult market environment, the Company
experienced a decline in both net revenues and net income during the
fourth quarter of fiscal 1994 when compared with previous quarters.
Revenues, net of interest expense, for the Company's fourth quarter
declined to $429.9 million compared with $679.9 million in the
comparable 1993 period. Net income declined to $32.4 million or $.21
per share from $124.8 million or $.97 per share in the fourth quarter
of fiscal 1993. The decline in revenues and profitability reflected
the impact of difficult trading markets brought on by price volatility
and declining customer order flow in mortgage-backed securities,
bankruptcy/high yield, convertibles and emerging markets. In
addition, rising interest rates resulted in a sudden and precipitous
reduction in the level of new home mortgage originations which in turn
significantly slowed the level of mortgage-backed securities sales and
underwriting activity. As a result, the Company experienced a
significant decline in revenues derived from mortgage-backed
securities activity reflecting a combination of difficult market
conditions and losses from the markdown of mortgage-backed securities
inventory.
Market conditions during the first quarter of fiscal 1995
continue to be difficult. Continued uncertainty in the fixed income
markets has resulted in price volatility and declining trading volume,
thereby reducing the levels of sales, trading and underwriting
revenues. Despite an increase in merger and acquisition activity and
the continued growth in clearance related activities, the Company
presently anticipates that revenues, net income and earnings per share
will be below the levels achieved in the first quarter of fiscal 1994.
Fiscal 1993 was generally characterized by declining long-
term interest rates which contributed to strong domestic equity and
fixed income markets and robust underwriting activity. The
international markets were also strong with a significant amount of
new equity issuances in the emerging markets areas. Declining long-
term interest rates led to the increase in new mortgage originations
which in turn led to record levels of mortgage-backed securities
originations.
RESULTS OF OPERATIONS
The Company reported record results in fiscal 1994 as net
income of $386,965,000, or $2.89 per share, increased 6.8% from
$362,447,000, or $2.86 per share, in fiscal 1993. The Company
reported net income of $294,578,000, or $2.34 per share, in fiscal
1992.
Revenues, net of interest expense ("net revenues"),
increased 13.0% to $2,421,017,000 in fiscal 1994 from $2,143,099,000
in fiscal 1993, reflecting a significant increase in revenues derived
from commissions, net interest and investment banking. Net revenues in
fiscal 1992 amounted to $1,844,074,000.
Commission revenues in fiscal 1994 increased 14.7% to
$482,988,000 from $421,090,000 in fiscal 1993. Commission revenues
derived from retail and institutional investors increased, reflecting
the higher levels of activity throughout the period. Securities
clearance revenues increased reflecting the continued growth in the
Company's client base. Commodity commissions increased 36.3%,
reflecting the expansion of the business both domestically and
internationally. Fiscal 1993 commission revenues improved 12.4% from
$374,752,000 in fiscal 1992, also reflecting higher levels of
activities and increases in the client base.
Revenues from principal transactions in fiscal 1994
decreased 2.2% to $1,131,914,000 from $1,156,816,000 in fiscal 1993,
reflecting decreases in revenues from the Company's fixed income
activities, particularly U.S. government, corporate bond and the
bankruptcy/high yield areas. These decreases reflect weakened market
conditions attributable to rising interest rates during the second
half of fiscal 1994 and declining customer demand. The decreases were
partially offset by increases in revenues derived from the Company's
mortgage-related and mortgage-backed securities activities, derivative
activities and over-the-counter market making activities.
Additionally, the Company experienced an increase in revenues from its
emerging markets group, reflecting expansion of the Company's equity
and fixed income activities in Latin America and Asia. Fiscal 1993
principal transactions revenues increased 19.2% from $970,841,000 in
fiscal 1992, reflecting increases in revenues from the Company's fixed
income and equity securities trading areas.
The following table summarizes the Company's principal
transaction revenues by reporting categories:
In thousands June 30, 1994 June 30, 1993 June 30, 1992
------------------------------------------------------------------------------
Fixed Income $ 733,449 $ 852,546 $ 723,486
Equity 307,274 256,476 240,738
Foreign exchange &
derivative financial
instruments 91,191 47,794 6,617
------------------------------------------------------------------------------
$1,131,914 $1,156,816 $ 970,841
==============================================================================
Investment banking revenues in fiscal 1994 increased 41.2%
to $493,739,000 from $349,736,000 in fiscal 1993. Underwriting
revenues, management fees and selling concessions increased during
fiscal 1994, reflecting the increased volume of new issues of
investment-grade and non-investment-grade debt, common equity and
municipal securities as well as an increase in the Company's market
share. Fiscal 1993 investment banking revenues increased 14.1% from
$306,454,000 in fiscal 1992 principally reflecting a significant
increase in underwriting revenues and advisory fees. The fiscal 1993
period included revenues of approximately $30,000,000 resulting from
the increase in the carrying value related to the Company's
investments in leveraged acquisitions. Excluding these revenues,
investment banking revenues increased 54.4% in fiscal 1994.
Net interest and dividends (revenues from interest and net
dividends less interest expense) in fiscal 1994 increased 42.4% to
$284,337,000 from $199,723,000 in fiscal 1993, principally reflecting
higher levels of interest earning assets, particularly customer margin
debt. The increase in the Company's customer margin debt principally
reflected an increase in the securities clearance client base and
favorable equity market conditions. Net interest and dividends in
fiscal 1993 increased 18.8% from $168,133,000 in fiscal 1992,
reflecting higher levels of interest earning assets due to favorable
equity market conditions and an increase in the securities clearance
client base.
Employee compensation and benefits in fiscal 1994 increased
18.3% to $1,227,061,000 from $1,037,099,000 in fiscal 1993. The
increase is attributable to higher levels of incentive and
discretionary bonuses associated with the increased net
revenues in fiscal 1994 and an increase in salesmen's compensation as
a result of higher commission revenues. Employee compensation and
benefits as a percentage of net revenues increased to 50.7% for fiscal
1994 from 48.4% for fiscal 1993 principally as a result of the change
in the mix of operating revenues. Employee compensation and benefits
in fiscal 1993 increased 14.0% from $909,916,000 in fiscal 1992,
reflecting increased discretionary and incentive bonuses associated
with higher earnings in fiscal 1993 and an increase in salesmen's
compensation.
Remaining non-interest expenses in fiscal 1994 increased
12.1% to $551,157,000 from $491,602,000 in fiscal 1993. Floor
brokerage, exchange and clearance fees increased 15.1% in fiscal 1994,
reflecting the increase in the volume of securities transactions
processed in fiscal 1994. Additionally, the Company incurred
increased communications and promotional costs, reflecting expansion
of the Company's business activities. Remaining non-interest expenses
in fiscal 1993 increased 15.3% from $426,533,000 in fiscal 1992,
principally attributable to an increase in communications and
promotional costs and a write-down in the value of the Company's
investment in a real estate limited partnership offset by a decrease
in the Company's data processing costs.
The decrease in the Company's effective tax rate to 39.8% in
fiscal 1994 from 41.0% in fiscal 1993 is attributable to
proportionately higher levels of tax preference items and the
Company's adoption of Statement of Financial Accounting Standards No.
109, which were partially offset by the increase in the Federal
statutory rate to 35%. In fiscal 1993, the effective tax rate
decreased from 42.0% in fiscal 1992 due to a reduction of the impact
of state and local taxes.
During the year ended June 30, 1994, the Company adopted
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The
effect of initial adoption did not have a material impact on the
Company's financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL LEVERAGE
The Company maintains a highly liquid balance sheet with a
majority of the Company's assets consisting of marketable
securities inventories, which are marked to market daily, and
collateralized receivables arising from customer-related and
proprietary securities transactions. Collateralized receivables
consist of resale agreements, secured by U.S. government and agency
securities, and customer margin loans and securities borrowed which
are typically secured with marketable corporate debt and equity
securities. The nature of the Company's business as a securities
dealer requires it to carry significant levels of securities
inventories in order to meet its customer and proprietary trading
needs. Additionally, the Company's role as a financial intermediary
for customer activities that it conducts on a principal basis together
with its customer related activities attributable to its clearance
business result in significant levels of customer-related balances,
including customer margin debt and repurchase activity. Accordingly,
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 June 30, 1994 increased to
$67.4 billion from $57.4 billion at June 30, 1993. The increase is
attributable to the growth in resale agreements, securities borrowed
and customer margin debt. The Company funded this increase with
secured borrowings, principally repurchase agreements, unsecured
commercial paper and medium-term notes and an increase in the
Company's capital, including long-term borrowings and stockholders'
equity.
The Company's ability to support increases in total assets
is a function of its ability to obtain short-term secured and
unsecured funding and its access to sources of long-term capital. The
adequacy of the Company's capital base is continually monitored by the
Company and is a function of asset quality and liquidity. The
relationship between an asset's liquidity and the level of capital
required to support the asset reflects the need to provide
counterparties with additional collateral, or margin, in order to
obtain secured financing.
Highly liquid assets such as U.S. government and agency
securities typically are funded by the use of repurchase agreements
and securities lending arrangements, which require very low levels of
margin. In contrast, assets of lower quality or liquidity require
higher margin levels and consequently increased levels of capital in
order to obtain secured financing. The level of customer receivables
and proprietary inventories the Company can maintain is also limited
by Securities and Exchange Commission Rule 15c3-1 (the "Net Capital
Rule"). Accordingly,
the mix of assets being held by the Company significantly influences
the amount of leverage the Company can employ and the adequacy of its
capital base.
FUNDING STRATEGY
Generally, the Company's funding strategy provides for the
diversification of its short-term funding sources in order to maximize
liquidity. Sources of short-term funding consist principally of
collateralized borrowings, including repurchase transactions and
securities lending arrangements, customer free credit balances,
unsecured commercial paper, medium-term notes and bank borrowings
generally having maturities from overnight to one year. Repurchase
transactions, whereby securities are sold with a commitment for
repurchase by the Company at a future date, represent the dominant
component of secured short-term funding. The Company continued to
increase its utilization of medium-term note financing during fiscal
1994 in order to extend maturities and provide further diversification
to 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. During fiscal
1994, the Company initiated a Euro-commercial paper program and also
placed $300,000,000 of long-term debt in the Euromarket in order to
further diversify its global funding sources. In addition, in early
fiscal 1995, the Company launched its European and Asian medium-term
note program.
The Company maintains an alternative liquidity strategy
focused on the liquidity and self-funding ability of the underlying
assets. The objective of the strategy is to maintain sufficient
sources of alternative funding to enable the Company to fund debt
obligations maturing within one year without issuing any new unsecured
debt, including commercial paper. The most significant source of
alternative funding is the Company's ability to hypothecate or pledge
its unencumbered assets as collateral for short-term funding.
As part of the Company's alternative liquidity strategy, the
Company regularly monitors and analyzes the size, composition and
liquidity characteristics of the assets being financed and evaluates
its liquidity needs in light of current market conditions and
available funding alternatives. A key factor in this analysis is the
determination for each asset category of the level of
overcollateralization, or margin, that may be required by a lender in
providing secured financing in accordance with legal and regulatory
guidelines and market
practice. The next component of the analysis is the determination of
the estimated length of time that would be required to convert the
asset into cash based upon the depth of the market in which the asset
is traded, the size of the position and ordinary settlement periods.
For each class of asset, the Company categorizes the margin
requirement by maturity from overnight to in excess of one year and
attempts to match the schedule of its liabilities and determine its
prospective liquidity needs in terms of timing and amount.
Through the use of 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, as necessary,
in light of market conditions and funding alternatives. The Company
also maintains $1,495,000,000 of committed unsecured revolving lines
of credit which support the Company's commercial paper programs and
which expire on November 8, 1994. It has never been necessary for the
Company to activate these or prior lines of credit.
CAPITAL RESOURCES
The Company conducts substantially all of its operating
activities within its regulated broker-dealer subsidiaries, Bear,
Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp.
("BSSC"), 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 liquidity of the assets being financed.
During fiscal 1994, the Company moved to take advantage of
favorable long-term financing opportunities and completed several
capital-related transactions. The Company expanded its long-term
borrowing base to $3,408,096,000 through the issuance of senior notes
in an aggregate principal amount of $1,196,000,000. The Company also
issued, for aggregate proceeds of $100,000,000, Cumulative Preferred
Stock. The issuance of the Cumulative Preferred Stock together with
increased retained earnings served to increase stockholders' equity
from $1,776,530,000 at June 30, 1993 to $2,166,566,000 at June 30,
1994. Additionally, Bear Stearns Finance LLC ("BSF") a wholly-owned
subsidiary of the Company, issued Exchangeable Preferred Income
Cumulative Shares ("EPICS"), for proceeds of $150,000,000. The
proceeds of the EPICS issuance were loaned by BSF to the Company under
the terms of a 30-year subordinated loan agreement which provided the
Company with two consecutive 30-year renewal options. Additionally,
the Company has the right, subject to certain conditions, to issue to
BSF, in exchange for each note, depositary shares evidencing Preferred
Stock of the Company. The increase in the Company's long-term
borrowings and equity capital base was predicated upon both the
availability of long-term financing opportunities at historically low
levels of interest rates and growth in the Company's balance sheet and
liquidity needs.
The Company's Capital Accumulation Plan for Senior Managing
Directors (the "CAP Plan") allows participants to defer portions of
their total annual compensation and ultimately receive shares of the
Company's Common Stock in satisfaction thereof. Additionally, under
the terms of the Company's Performance Unit Plan for Senior Managing
Directors (the "PUP Plan"), participants were eligible to receive
additional shares of the Company's Common Stock based upon the level
of the Company's annual pre-tax earnings. In connection with the CAP
Plan and PUP Plan, the Company repurchased a total of 6,833,843 shares
of Common Stock in open market transactions at a cost of approximately
$137,084,000 during the fiscal year ended June 30, 1994. Repurchases
of Common Stock pursuant to the CAP Plan and PUP Plan were not made
pursuant to the Company's Stock Repurchase Program authorized by the
Board of Directors and were not included in calculating the maximum
aggregate number of shares of Common Stock that the Company may
repurchase under the Stock Repurchase Program. Of the shares
repurchased, a total of 6,670,306 shares were credited to the
participants of the CAP Plan at a cost of approximately $133,807,000
and a total of 163,537 shares were credited to the participants of the
PUP Plan at a cost of approximately $3,277,000 at June 30, 1994.
Effective June 30, 1994, the PUP Plan was terminated. It is
anticipated that during October 1994, the 414,372 shares held under
the PUP Plan will be distributed to the participants. The Company
intends, subject to market conditions, to continue to purchase in
future periods a sufficient number of shares of Common Stock in the
open market to enable the Company to issue shares in respect of all
compensation deferred and any additional amounts allocated to
participants under the CAP Plan.
CASH FLOWS
Cash and cash equivalents decreased to $294.6 million at the
end of fiscal 1994 from $317.9 million at the end of fiscal 1993, a
decrease of $23.3 million. Fiscal 1993 year end cash and cash
equivalents increased $193.8 million from $124.1 million at the end of
fiscal 1992. Cash provided from financing activities was primarily
used to support the growth in operating activities in each of the
three fiscal years.
Cash used in operating activities in fiscal 1994 was $3.4
billion. The usage was primarily attributable to increases in
securities borrowed of $4.4 billion, customer receivables of $2.3
billion, securities purchased under agreements to resell of $3.5
billion, offset by an increase in customer payables of $3.3 billion
and in securities sold under agreements to repurchase of $4.8 billion.
Cash used in operating activities in fiscal 1993 was $3.1
billion and was primarily attributable to increases in securities
borrowed of $7.0 billion, financial instruments owned of $3.0 billion
and customer receivables of $1.2 billion, offset by increases in
customer payables of $3.6 billion, securities sold under agreements to
repurchase of $2.7 billion and financial instruments sold, but not yet
purchased of $2.8 billion. Cash used in operating activities in
fiscal 1992 was $1.5 billion and was primarily attributable to
increases in financial instruments owned, securities purchased under
agreement to resell and a reduction in securities loaned, offset by
increases in financial instruments sold, but not yet purchased,
customer payables and securities sold under agreements to repurchase.
Cash provided by financing activities in each of the three
fiscal years ended June 30, 1994 was primarily attributable to
increased net borrowings which were used to support the Company's
growth over the same periods while taking advantage of favorable long-
term financing opportunities.
Investing activities in fiscal 1994 used $66.1 million of
cash primarily for purchases of $80.9 million of property, equipment
and leasehold improvements and $17.2 million of investment securities
and other assets partially offset by proceeds from the sale of
investment securities and other assets of $31.9 million.
Investing activities in fiscal 1993 provided $48.2 million
in cash. Cash of $113.5 million was provided by the proceeds from the
sale of investment securities and other assets
partially offset by the purchase of investment securities and other
assets of $11.0 million. Cash of $54.2 million was used for the
purchase of property, equipment and leasehold improvements.
Cash used for investing activities in fiscal 1992 was $76.1
million. Purchases of property, equipment and leasehold improvements
of $69.6 million and purchases of investment securities and other
assets of $30.6 million were partially offset by the proceeds from the
sale of investment securities and other assets of $24.1 million.
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 adequacy requirements.
MERCHANT BANKING AND HIGH YIELD SECURITIES
As part of the Company's merchant banking activities, it
participates from time to time in principal investments in leveraged
acquisitions. As part of these activities, the Company originates,
structures and invests in merger, acquisition, restructuring and
leveraged capital transactions, including leveraged buyouts. The
Company's principal investments in these transactions are generally
made in the form of equity investments or subordinated loans and have
not required significant levels of capital investment. At June 30,
1994, the Company held direct equity investments in 15 leveraged
transactions with an aggregate carrying value of $53,905,000. The
Company did not make any significant direct investments in leveraged
acquisitions during fiscal 1994.
As part of the Company's fixed income securities activities,
the Company participates in the trading and sale of high yield, non-
investment-grade debt securities, non-investment-grade mortgage loans
(including real estate owned) 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 properties. At June 30, 1994,
the Company held in inventory approximately $1,629,576,000 of such
investments. 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. The
Company's Risk Committee continuously monitors exposure to market and
credit risk with respect to high yield securities inventories and
establishes limits with respect to overall market exposure and
concentrations of risk by both individual issuer and industry group.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments represent contractual
commitments between counterparties which derive their value from
changes in the underlying interest rate, currency exchange rate, index
(eg. S&P 500), reference rate (eg. LIBOR) or asset value referenced in
the related contract. Derivatives can be traded on an exchange, such
as futures contracts, certain options and indexed referenced warrants
or negotiated in the over-the-counter markets, such as interest rate
and currency swaps, caps, floors and forward contracts. Derivatives
generate both on-and off-balance sheet considerations depending on the
nature of the contract.
The Company is engaged as a dealer in over-the-counter
derivative activity and, accordingly, enters into transactions
involving derivative instruments as part of its customer related and
proprietary trading activities. The Company's dealer activities
require it to make markets and trade a variety of derivative
instruments including interest rate and currency swaps, caps, collars,
floors and swaptions, and equity derivative transactions including
structured notes and warrants. In connection with these activities,
the Company attempts to mitigate its exposure to market risk by
entering into essentially
offsetting hedging transactions which may include over-the-counter
derivative contracts or the purchase or sale of interest bearing
securities, equity securities, financial futures and forward
contracts. The Company also utilizes derivative instruments in order
to hedge proprietary market-making and trading activities. In this
regard, the utilization of derivative instruments is designed to
reduce or mitigate market risks associated with holding dealer
inventories or in connection with arbitrage related trading
activities. The Company also utilizes interest rate and currency
swaps to hedge its fixed rate debt issuances as part of its asset and
liability management.
The aggregate notional value of derivative contracts is a
reflection of the level of activity and does not represent the amounts
that are recorded on the Consolidated Statement of Financial
Condition. As of June 30, 1994 and 1993, respectively, the Company
had notional/contract amounts of $89,095,000,000 and $57,875,000,000
of derivative financial instruments, of which $24,351,000,000 and
$8,719,000,000, were listed futures and options contracts. The
Company's derivative financial instruments which are used to either
hedge trading positions or are part of its derivative dealer
activities are marked to fair value on a daily basis. The unrealized
gain or loss is recorded on the Consolidated Statement of Financial
Condition and the related income or loss is reflected in revenues
derived from principal transactions. Unrealized gains and losses on
derivative financial instruments used to hedge the Company's long-term
debt issuances are deferred and related income and loss is recorded on
an accrual basis together with the interest expense incurred on the
underlying debt instrument. The Company hedges its long-term debt
issuances principally by converting fixed rate instruments to floating
rate debt, generally based on LIBOR, using interest rate swaps. This
strategy allows the Company to manage interest rate exposure on its
assets and liabilities and has enabled the Company to reduce its
interest expense by $54,350,000, $38,452,000 and $18,045,000 during
fiscal 1994, 1993 and 1992, respectively.
Fair value on exchange traded derivative financial
instruments is based upon quoted market values, while over-the-counter
derivative financial instruments are valued at mid-market based upon
dealer price quotations and valuation pricing models. Valuation
pricing models consider time value and volatility factors underlying
each of the financial instruments, as well as other relevant economic
factors such as market, credit, and liquidity risk.
Exposures to market risk arising from derivative financial
instruments are similar to the market risks of cash securities. The
Company actively manages its market risk profile through the use of
pricing and risk management models. These techniques include
projecting the effects of potential changes, such as the level of
interest and foreign exchange rates or equity prices on the Company's
derivative portfolio in order to measure market risk sensitivity.
Credit risk from derivative financial instruments arises
from the potential failure of counterparties to perform in accordance
with the terms of their contract. The Company's exposure to credit
risk associated with counterparty non-performance is measured by the
current replacement cost of derivative contracts in a gain position,
net of any related collateral held. The Company attempts to control
its exposure to credit risk arising from derivatives by adhering to an
established credit approval process including the establishment of
credit limits and the use of credit enhancement techniques. Such
techniques include the requirement to post collateral to secure
replacement cost exposures or, in the event of a counterparty being
downgraded, the requirement to post additional collateral or to
terminate the contract. The Company also attempts to obtain master
netting agreements which provide protection in the event of
counterparty default by allowing for the net settlement of open
obligations. Credit exposures are monitored on a daily basis and are
continuously analyzed to verify that current and potential credit
exposures are within prescribed limits. For further discussion of the
Company's derivative activities and the associated risks, see Note 11
to the Consolidated Financial Statements.
RISK MANAGEMENT
The Company's exposure to market risk is directly related to
its role as a financial intermediary in customer-related transactions
and to its proprietary trading and arbitrage activities. As a
financial intermediary, the Company often acts as principal in
customer-related transactions in financial instruments which exposes
the Company to the risk of market price movements. The Company seeks
to manage this risk by entering into hedging transactions designed to
offset the market risk the Company has taken for its customers.
The Company also engages in proprietary trading and
arbitrage activities. The Company makes dealer markets in investment-
grade corporate debt and equity securities, non-
investment-grade corporate debt securities, U.S. government and agency
securities, mortgages and mortgage-backed securities and municipal
bonds. In connection therewith the Company is required to maintain
significant inventories in order to ensure availability and facilitate
customer order flow. The Company attempts to hedge its exposure to
market risk with respect to its dealer inventories by entering into
essentially offsetting transactions, including options, futures and
forward contracts, the design of which is to reduce or mitigate the
Company's market risk profile. Additionally, the Company marks to
market its securities inventories daily and regularly monitors the
aging of inventory positions.
The Company's arbitrage activities are designed to take
advantage of market price discrepancies between securities trading in
different markets or between related products or derivative
securities. Arbitrage activities generally involve maintaining
offsetting positions in other financial instruments designed to reduce
the overall market risk of the transaction. In many instances, the
Company may be required to purchase or sell derivative financial
instruments as part of the arbitrage of a cash market security. These
transactions may involve forward settling transactions such as
forwards or futures, where the objective may be to capture differences
in the time value of money, or option transactions, where the
motivation is trading the volatility of the underlying instrument.
In addition to those specific methods discussed above, the
Company utilizes a variety of hedging strategies and credit monitoring
techniques in order to monitor its exposure to market and counterparty
risk. These procedures include daily profit and loss statements and
position reports and weekly meetings of Bear Stearns' Risk Committee,
composed of Senior Managing Directors of the various trading
departments and chaired by Alan C. Greenberg, Chairman of the Board of
the Company and of Bear Stearns. In addition, the Company's Risk
Management Department together with departmental management,
consisting principally of Senior Managing Directors who have day-to-
day responsibility for management oversight, review the age and
composition of their departments' proprietary accounts and the profits
and losses of each portfolio on a daily basis in order to ensure that
trading strategies are being adhered to within acceptable risk
parameters. Additionally, trading department management report
positions, profits and losses and trading strategies to the Risk
Committee on a weekly basis. The Company utilizes state-of-the-art
portfolio hedging techniques and highly automated analytical systems
in order to monitor the Company's risk profile and enhance management
oversight.
Bear Stearns' Institutional Credit Committee establishes and
reviews appropriate credit limits for customers other than margin
credit to individual investors. The Institutional Credit Committee is
composed of senior members of management. The committee generally
meets once a week and establishes credit limits for customers seeking
repurchase and resale agreement facilities, derivative financial
instruments and other forms of secured and unsecured credit, including
derivative contracts, and establishes exposure limits for various
other institutional customers. The members of this committee
generally are management personnel who are not involved in the
operations of the departments seeking credit approval for customers.
The Company monitors its exposure to counterparty risk on a daily
basis through the review of customer credit exposure reports and the
monitoring of collateral values.
EFFECTS OF INFLATION
Because the Company's assets are, to a large extent, liquid
in nature, they are not significantly affected by inflation. However,
the rate of inflation affects the Company's expenses, such as employee
compensation, office space leasing costs and communication charges,
which may not be readily recoverable in the price of services offered
by the Company. To the extent inflation results in rising interest
rates and has other effects upon the securities markets and on the
value of securities held in inventory, it may adversely affect the
Company's financial position and results of operations.
EFFECTS OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
The FASB issued Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS
112"), which is effective for fiscal years beginning after December
15, 1993. SFAS 112 establishes accounting standards for employers who
provide benefits to former or inactive employees after employment but
before retirement. The statement requires employers to accrue the
obligations associated with service rendered to date for employee
benefits accumulated or vested where payment is probable and can be
reasonably estimated. The initial adoption of SFAS 112 will not have
a material effect on the liquidity, operating results or financial
condition of the Company.
The FASB issued Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts" ("Interpretation 39"),
which is effective for the Company's fiscal years beginning July 1,
1994. Interpretation 39 requires that unrealized gains and losses on
swaps, forwards, options and similar contracts be recognized as assets
and liabilities, respectively; whereas it is the Company's current
policy to record such unrealized gains and losses on a net basis on
the Consolidated Statement of Financial Condition. Netting will be
permitted only when a legal right of offset exists with the same
counterparty under a master netting arrangement. The Financial
Accounting Standards Board is currently reconsidering Interpretation
39 as it relates to repurchase agreements. The Company expects that
implementation of Interpretation 39 after the FASB's reconsideration
will not materially affect the financial statements. At June 30,
1994, total assets and liabilities would have increased by
approximately $8,100,000,000 under the present terms of Interpretation
39.
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
In thousands, except share data June 30, 1994 June 30, 1993 June 30, 1992
-------------------------------------------------------------------------------------------------------------
REVENUES
Commissions $ 482,988 $ 421,090 $ 374,752
Principal transactions 1,131,914 1,156,816 970,841
Investment banking 493,739 349,736 306,454
Interest and dividends 1,304,392 909,809 1,002,992
Other income 28,039 15,734 23,894
-------------------------------------------------------------------------------------------------------------
Total revenues 3,441,072 2,853,185 2,678,933
Interest expense 1,020,055 710,086 834,859
-------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 2,421,017 2,143,099 1,844,074
-------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Employee compensation and benefits 1,227,061 1,037,099 909,916
Floor brokerage, exchange and clearance fees 98,592 85,693 67,063
Communications 75,406 59,705 52,799
Occupancy 76,317 69,818 71,268
Depreciation and amortization 47,984 41,234 39,684
Advertising and market development 52,693 43,718 32,484
Data processing and equipment 27,404 27,051 35,313
Other expenses 172,761 164,383 127,922
-------------------------------------------------------------------------------------------------------------
Total non-interest expenses 1,778,218 1,528,701 1,336,449
-------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 642,799 614,398 507,625
Provision for income taxes 255,834 251,951 213,047
-------------------------------------------------------------------------------------------------------------
Net income $ 386,965 $ 362,447 $ 294,578
=============================================================================================================
Net income applicable to common shares $ 362,592 $ 355,696 $ 291,350
=============================================================================================================
Earnings per share $ 2.89 $ 2.86 $ 2.34
=============================================================================================================
Weighted average common and
common equivalent shares outstanding 128,051,287 125,797,870 128,597,392
=============================================================================================================
See Notes to Consolidated Financial Statements.
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
In thousands, except share data June 30, 1994 June 30, 1993
-------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 294,604 $ 317,886
Cash and securities deposited with clearing organizations
or segregated in compliance with Federal regulations 2,989,948 2,291,992
Securities purchased under agreements to resell 19,515,764 16,038,657
Securities borrowed 21,073,208 16,721,404
Receivables
Customers 7,266,609 4,954,404
Brokers, dealers and others 980,452 1,016,068
Interest and dividends 178,123 109,217
Financial instruments owned-at fair value 14,443,918 15,214,510
Property, equipment and leasehold improvements,
net of accumulated depreciation and amortization of
$170,020 in 1994 and $185,866 in 1993 271,807 238,936
Other assets 377,585 536,431
-------------------------------------------------------------------------------------------------------------
Total Assets $ 67,392,018 $ 57,439,505
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 7,860,311 $ 6,118,894
Securities sold under agreements to repurchase 26,863,122 22,058,354
Securities loaned 124,037 565,584
Payables
Customers 16,387,932 13,038,380
Brokers, dealers and others 710,053 1,595,098
Interest and dividends 287,326 177,948
Financial instruments sold, but not yet purchased-at fair value 8,351,258 8,973,839
Accrued employee compensation and benefits 593,742 469,376
Other liabilities and accrued expenses 489,575 782,379
-------------------------------------------------------------------------------------------------------------
61,667,356 53,779,852
-------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Long-term borrowings 3,408,096 1,883,123
-------------------------------------------------------------------------------------------------------------
Preferred Stock Issued by Subsidiary 150,000
-------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock, $1.00 par value; 10,000,000 shares authorized;
Adjustable Rate Cumulative Preferred Stock, Series A;
$50 liquidation preference; 3,000,000 shares issued 150,000 150,000
Cumulative Preferred Stock, Series B; $200 liquidation preference;
937,500 shares issued and outstanding 187,500 187,500
Cumulative Preferred Stock, Series C; $200 liquidation preference;
500,000 shares issued and outstanding 100,000
Common Stock, $1.00 par value; 200,000,000 shares authorized;
144,965,094 shares and 131,507,178 shares issued in
1994 and 1993, respectively 144,965 131,507
Paid-in capital 1,447,066 1,225,557
Retained earnings 388,685 328,414
Capital Accumulation Plan 275,415 138,331
Treasury stock, at cost-
Adjustable Rate Cumulative Preferred Stock, Series A;
2,118,550 shares in 1994 and 2,118,550 shares in 1993 (85,507) (85,507)
Common Stock; 31,525,939 shares in 1994 and 22,203,018 shares in 1993 (410,882) (263,755)
Note receivable from ESOP Trust (30,676) (35,517)
-------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,166,566 1,776,530
-------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 67,392,018 $ 57,439,505
=============================================================================================================
See Notes to Consolidated Financial Statements.
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
In thousands June 30, 1994 June 30, 1993 June 30, 1992
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 386,965 $ 362,447 $ 294,578
Adjustments to reconcile net income to cash used in operating activities:
Depreciation and amortization 47,984 41,234 39,684
Deferred income taxes (63,381) 5,528 (14,131)
Other (9,414) (6,723) 15,283
(Increases) decreases in operating receivables:
Securities borrowed (4,351,804) (7,030,538) (232,231)
Brokers, dealers and others 35,616 (452,640) (28,606)
Customers (2,312,205) (1,206,310) (400,984)
Other (85,730) 83,933 (62,105)
Increases (decreases) in operating payables:
Securities loaned (441,547) (930,097) (2,023,840)
Brokers, dealers and others (883,098) (265,666) 395,308
Customers 3,349,552 3,565,820 1,926,214
Other 109,378 (70,067) 71,168
(Increases) decreases in:
Cash and securities deposited with clearing organizations or
segregated in compliance with Federal regulations (697,956) (132,653) (306,020)
Securities purchased under agreements to resell (3,477,107) 251,311 (2,313,758)
Financial instruments owned 795,307 (3,033,106) (3,374,302)
Other assets 165,322 (30,498) (86,218)
Increases (decreases) in:
Securities sold under agreements to repurchase 4,804,768 2,740,390 1,604,497
Financial instruments sold, but not yet purchased (622,581) 2,806,958 2,522,592
Accrued employee compensation and benefits 108,491 34,353 159,474
Other liabilities and accrued expenses (227,934) 150,227 317,554
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
Cash used in operating activities (3,369,374) (3,116,097) (1,495,843)
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Cumulative Preferred Stock, Series B 181,307
Net proceeds from issuance of Cumulative Preferred Stock, Series C 96,689
Net proceeds from issuance of Preferred Stock by subsidiary 145,000
Net proceeds from short-term borrowings 1,741,417 2,302,560 972,707
Issuance of long-term borrowings 1,795,979 840,347 357,425
Capital Accumulation Plan 137,084 138,331 114,089
Other Common Stock transactions 3,733 2,577
Note repayment from ESOP trust 4,841 4,483
Payments for:
Retirement of Senior Notes (273,000)
Retirement of Subordinated Notes (1,000) (1,000) (1,000)
Treasury stock purchases (147,763) (140,504) (116,997)
Note receivable from ESOP Trust (40,000)
Cash dividends paid (90,769) (66,425) (68,305)
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 3,412,211 3,261,676 1,217,919
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold improvements (80,855) (54,202) (69,613)
Purchases of investment securities and other assets (17,192) (11,030) (30,619)
Proceeds from sale of investment securities and other assets 31,928 113,451 24,091
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
Cash (used in) provided by investing activities (66,119) 48,219 (76,141)
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (23,282) 193,798 (354,065)
Cash and cash equivalents, beginning of year 317,886 124,088 478,153
- - - - - - - -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 294,604 $ 317,886 $ 124,088
=============================================================================================================================
<FN>
Non-cash financing activities totaled $1,947, $2,846 and $7,599 for the years ended June 30, 1994, 1993 and 1992,
respectively.
See Notes to Consolidated Financial Statements.
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Treasury Stock
-------------------
Adjustable Adjustable
Rate Cumulative Cumulative Rate
Cumulative Preferred Preferred Cumulative
Preferred Stock, Stock, Preferred
Stock, Series Series Stock,
Series B-$200 C-$200 Common Capital Series Common Note
In thousands, A-$50 Liquid- Liquid- Stock Accumu- A-$50 Stock Receivable
except Liquidation ation ation $1 Par Paid-In Retained lation Liquidation $1 Par From
share data Preference Preference Preference Value Capital Earnings Plan Preference Value ESOP Trust
- - - - - - - -------------------------------------------------------------------------------------------------------------------------------
Balance, June
30, 1991 $150,000 $ $ $113,630 $ 991,771 $ 43,976 $ 23,414 $(78,094) $(148,674) $
Net income 294,578
Cash
dividends
declared -
Common
($.65 per
share) (64,397)
Preferred (3,192)
Purchase of
treasury
stock -
Adjustable
Rate
Cumulative
Preferred
Stock,
Series A
(165,900
shares) (6,969)
Common Stock
(8,726,464
shares) (115,543)
Common Stock
issued out of
treasury
(180,383
shares) 742 1,653
5% stock
dividends
(11,625,382
shares) 11,625 145,873 (157,498)
Note
receivable
from ESOP
Trust (40,000)
Allocations
under
Capital
Accumulation
Plan 114,089
- - - - - - - -------------------------------------------------------------------------------------------------------------------------------
Balance, June
30, 1992 $150,000 $ $ $125,255 $1,138,386 $113,467 $137,503 $(85,063) $(262,564) $(40,000)
===============================================================================================================================
See Notes to Consolidated Financial Statements.
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Treasury Stock
-------------------
Adjustable Adjustable
Rate Cumulative Cumulative Rate
Cumulative Preferred Preferred Cumulative
Preferred Stock, Stock, Preferred
Stock, Series Series Stock,
Series B-$200 C-$200 Common Capital Series Common Note
In thousands, A-$50 Liquid- Liquid- Stock Accumu- A-$50 Stock Receivable
except Liquidation ation ation $1 Par Paid-In Retained lation Liquidation $1 Par From
share data Preference Preference Preference Value Capital Earnings Plan Preference Value ESOP Trust
- - - - - - - -------------------------------------------------------------------------------------------------------------------------------
Balance, June
30, 1992 $ 150,000 $ $ $125,255 $1,138,386 $113,467 $ 137,503 $(85,063) $(262,564) $(40,000)
Net income 362,447
Cash
dividends
declared -
Common
($.60 per
share) (62,625)
Preferred (7,225)
Issuance of
Cumulative
Preferred
Stock,
Series B 187,500 (6,193)
Purchase of
treasury
stock -
Adjustable
Rate
Cumulative
Preferred
Stock,
Series A
(10,000
shares) (444)
Common Stock
(8,882,232
shares) (135,307)
Common Stock
issued out of
treasury
(10,210,238
shares) 9,621 (137,503) 134,116
Income tax
benefits
attributable
to Common
Stock issued
out of
treasury 12,345
5% stock
dividend
(6,252,011
shares) 6,252 71,398 (77,650)
Note repayment
from ESOP
Trust 4,483
Allocations
under
Capital
Accumulation
Plan 138,331
- - - - - - - -------------------------------------------------------------------------------------------------------------------------------
Balance, June
30, 1993 $150,000 $187,500 $ $131,507 $1,225,557 $328,414 $ 138,331 $(85,507) $(263,755) $(35,517)
===============================================================================================================================
See Notes to Consolidated Financial Statements.
The Bear Stearns Companies Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Treasury Stock
-------------------
Adjustable Adjustable
Rate Cumulative Cumulative Rate
Cumulative Preferred Preferred Cumulative
Preferred Stock, Stock, Preferred
Stock, Series Series Stock,
Series B-$200 C-$200 Common Capital Series Common Note
In thousands, A-$50 Liquid- Liquid- Stock Accumu- A-$50 Stock Receivable
except Liquidation ation ation $1 Par Paid-In Retained lation Liquidation $1 Par From
share data Preference Preference Preference Value Capital Earnings Plan Preference Value ESOP Trust
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Balance, June
30, 1993 $ 150,000 $ 187,500 $ $131,507 $1,225,557 $328,414 $138,331 $(85,507) $(263,755) $(35,517)
Net income 386,965
Cash
dividends
declared -
Common
($.60 per
share) (67,150)
Preferred (24,667)
Issuance of
Cumulative
Preferred
Stock,
Series C 100,000 (3,311)
Purchase of
treasury
stock-
Common Stock
(7,477,587
shares) (149,710)
Common Stock
issued out of
treasury
(416,769
shares) 1,150 2,583
Income tax
benefits
attributable
to Common
Stock issued
out of
treasury 2,251
5% stock
dividend
(13,457,916
shares) 13,458 221,419 (234,877)
Note repayment
from ESOP
Trust 4,841
Allocations
under
Capital
Accumulation
Plan 137,084
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Balance, June
30, 1994 $150,000 $187,500 $100,000 $144,965 $1,447,066 $388,685 $275,415 $ (85,507) $(410,882) $(30,676)
==============================================================================================================================
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The 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 year amounts have been reclassified to
conform with the current year's presentation.
The Company, through its principal subsidiaries, Bear,
Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp.
("BSSC") and Bear, Stearns International Limited ("BSIL"), is
primarily engaged in a single line of business as a securities broker
and dealer, which comprises several classes of services, such as
principal transactions, agency transactions and underwriting and
investment banking.
FINANCIAL INSTRUMENTS
Proprietary securities and commodities transactions,
commission revenues and related expenses are recorded on a trade date
basis. Financial instruments owned and financial instruments sold,
but not yet purchased, including contractual commitments arising
pursuant to futures, forward and option contracts, interest rate swaps
and other derivative contracts are recorded at fair value with the
resulting net unrealized gains and losses reflected in net income.
Fair value is generally based on quoted market prices. If
quoted market prices are not available, or if liquidating the
Company's position is reasonably expected to impact market prices,
fair value is determined based on other relevant factors, including
dealer price quotations, price activity for equivalent instruments and
valuation pricing models. Valuation pricing models consider time
value and volatility factors underlying financial instruments as well
as other relevant economic measurements.
Equity securities acquired as a result of leveraged
acquisition transactions are reflected in the financial statements at
their initial cost until such time as significant transactions or
developments indicating that an increase in the
carrying value of the securities is appropriate. Generally the
carrying values of these securities will be increased only in those
instances where market values are readily ascertainable by reference
to substantial transactions occurring in the marketplace. Reductions
to the carrying value of these securities are made in the event that
the Company's estimate of net realizable value has declined below the
carrying value.
RESALE AND REPURCHASE AGREEMENTS
Transactions involving purchases of securities under
agreements to resell ("reverse repurchase agreements") or sales of
securities under agreements to repurchase ("repurchase agreements")
are treated as collateralized financing transactions and are recorded
at their contracted resale or repurchase amounts plus accrued
interest. It is the Company's policy to take possession of securities
with a market value in excess of the principal amount loaned plus
accrued interest in order to collateralize reverse repurchase
agreements. Similarly, the Company is required to provide securities
to counterparties in order to collateralize repurchase agreements.
The Company's agreements with counterparties generally contain
contractual provisions to allow for additional collateral to be
obtained, or excess collateral returned, when necessary. It is the
Company's policy to value collateral daily and to obtain additional
collateral or retrieve excess collateral from counterparties where
deemed appropriate.
SECURITIES LENDING ACTIVITIES
Securities borrowed and securities loaned are recorded at
the amount of cash collateral advanced or received. Securities
borrowed transactions require the Company to deposit cash, letters of
credit or other collateral with the lender. With respect to
securities loaned, the Company receives collateral in the form of cash
or other collateral. The amount of collateral required to be
deposited for securities borrowed or received for securities loaned is
an amount generally in excess of the market value of the applicable
securities borrowed or loaned. The Company monitors the market value
of securities borrowed and loaned on a daily basis with additional
collateral obtained or refunded as necessary.
FIXED ASSETS
Depreciation of property and equipment is provided by the
Company on a straight-line basis over the estimated useful life of the
asset. Amortization of leasehold improvements is provided on a
straight-line basis over the lesser of the respective estimated useful
life of the asset or the remaining life of the lease, as appropriate.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities denominated in foreign currencies are
translated at year-end rates of exchange, while income statement items
are translated at average rates of exchange for the year. Gains or
losses resulting from foreign currency transactions are included in
net income.
INCOME TAXES
The Company and certain of its wholly-owned subsidiaries
file a consolidated Federal income tax return. During the quarter
ended September 24, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred income taxes are provided based upon
the net tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities. In addition,
deferred income taxes are determined using the enacted tax rates and
laws which will be in effect when the related temporary differences
are expected to be reversed. The cumulative effect of adopting the
provisions of SFAS 109 was not material to the liquidity, operating
results or financial condition of the Company. As permitted under
SFAS 109, prior years' financial statements have not been restated.
EARNINGS PER SHARE
Earnings per share is based upon net income applicable to
common shares and the weighted average number of shares of Common
Stock and common stock equivalents outstanding during each period
presented. Common stock equivalents include the assumed distribution
of shares of Common Stock issuable under certain of the Company's
deferred compensation arrangements with appropriate adjustments made
to net income for earnings accruals related thereto. Additionally,
shares of Common Stock issued or issuable
under various employee benefit plans are included as common stock
equivalents.
STATEMENT OF CASH FLOWS
For purposes of the Consolidated Statements of Cash Flows,
the Company has defined cash equivalents as highly liquid investments
not held for sale in the ordinary course of business. Cash payments
for interest approximated interest expense for the years ended June
30, 1994, 1993 and 1992.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" requires the
Company to report the fair value of financial instruments, as defined.
Approximately 99.0% of the Company's assets and 99.2% of the Company's
liabilities are carried at fair value or contracted amounts which
approximate fair value.
Financial instruments owned and financial instruments sold,
but not yet purchased are carried at fair value. Assets which are
recorded at contracted amounts approximating fair value consist
largely of short-term secured receivables, and include reverse
repurchase agreements, securities borrowed, and certain other
receivables. Similarly, the Company's short-term liabilities pursuant
to bank loans, commercial paper, medium-term notes, repurchase
agreements, securities loaned and certain other payables are recorded
at contracted amounts approximating fair value. These instruments
generally have variable interest rates or short-term maturities, in
many cases overnight, and accordingly are not materially affected by
changes in interest rates.
The estimated market value of the Company's long-term
borrowings based upon market rates of interest available to the
Company at June 30, 1994 for debt obligations of similar maturity is
approximately $3,347,172,000, which is less than the aggregate
carrying value by approximately $60,924,000. However, the Company
enters into interest rate swaps and other transactions designed to
either convert its fixed rate debt into floating rates or otherwise
hedge its exposure to interest rate movements. Accordingly,
unrecognized gains on interest rate swaps and other transactions
hedging the Company's long-term borrowings substantially offset the
effect of changes in interest rates on the fair value of the Company's
long-term borrowings.
3. FINANCIAL INSTRUMENTS
Financial instruments owned and financial instruments sold,
but not yet purchased, consist of the Company's proprietary trading
and investment accounts, at fair value, as follows:
In thousands June 30, 1994 June 30, 1993
------------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS OWNED:
United States government and agency $3,674,261 $7,644,206
Non-U.S. government 495,645 432,008
State and municipal 162,487 234,503
Equities and convertible debt 4,295,161 3,136,707
Derivative financial instruments 989,385 242,507
Corporate debt 2,065,930 1,810,815
Mortgages and other mortgage-backed securities 1,964,036 1,613,514
Other 797,013 100,250
------------------------------------------------------------------------------------
$14,443,918 $15,214,510
====================================================================================
FINANCIAL INSTRUMENTS SOLD, BUT
NOT YET PURCHASED:
United States government and agency $3,307,797 $5,879,085
Non-U.S. government 484,062 82,281
Corporate equity 3,216,645 2,090,848
Corporate debt 767,629 490,563
Derivative financial instruments 527,379 383,026
Other 47,746 48,036
------------------------------------------------------------------------------------
$8,351,258 $8,973,839
====================================================================================
Financial instruments sold, but not yet purchased represent
obligations of the Company to deliver the specified financial
instrument at the contracted price, and thereby create a liability to
repurchase the financial instrument in the market at prevailing
prices. Accordingly, these transactions result in off-balance-sheet
risk as the Company's ultimate obligation to satisfy the sale of
financial instruments sold, but not yet purchased may exceed the
amount recognized in the Consolidated Statements of Financial
Condition.
4. SHORT-TERM FINANCING
The Company's short-term financing is generally obtained on
a secured basis through the use of repurchase agreements and
securities lending arrangements. Additionally, the Company obtains
short-term financing on an unsecured basis through the issuance of
commercial paper, medium-term notes and bank loans. Repurchase
agreements are collateralized principally by U.S. government and
agency securities. Securities lending arrangements are typically
secured by corporate equity and debt securities, utilizing both
securities owned by the Company and customers' securities. The
interest rates on such short-term borrowings reflect money market
rates of interest at the time of the transactions.
Short-term borrowings at June 30, 1994 and 1993, include
$3,689,230,000 and $4,404,160,000, respectively, of borrowings made
under the Company's commercial paper programs. During the year ended
June 30, 1994, the weighted average interest rate on such borrowings
was 3.46%.
At June 30, 1994 and 1993, the Company had outstanding
$3,892,200,000 and $1,587,255,000, respectively, principal amount of
Medium-Term Notes maturing from nine to eighteen months from the date
of issue. The Medium-Term Notes generally bear interest at variable
rates based upon the London Interbank Offered Rate ("LIBOR"). The
weighted average interest rate on the Medium-Term Notes was 3.65%
during the year ended June 30, 1994.
The Company maintains $1,495,000,000 of committed lines of
credit under revolving credit facilities which provide for unsecured
borrowings at fluctuating interest rates related to LIBOR. Fees are
payable on these lines of credit at a rate of 1/8 of 1% per annum on
the total commitment. The revolving credit facilities contain various
covenants that require, among other things, that the Company maintain
specified minimum levels of stockholders' equity and Bear Stearns and
BSSC maintain
minimum levels of net capital. At June 30, 1994, there were no
borrowings outstanding under any of these agreements and the Company
was in compliance with all covenants contained in the revolving credit
facilities. The agreements expire on November 8, 1994.
5. LONG-TERM BORROWINGS
Long-term borrowings at June 30 consist of the following:
In thousands 1994 1993
------------------------------------------------------------------------------
THE BEAR STEARNS COMPANIES INC.
Floating Rate Notes due 1994 to 2004 $ 895,000 $ 200,000
5 1/4% Swiss Franc Bonds due 1996 99,043
Accrual related to hedging 5 1/4% Bonds (19,043)
Fixed-Rate Senior Notes due 1996 to 2004;
interest rates ranging from 5 7/8% to 9 3/8% 1,596,510 1,248,148
Medium-Term Notes & Other 916,586 353,975
BEAR, STEARNS & CO. INC.
10 3/4% Senior Subordinated Notes due 1994 1,000
------------------------------------------------------------------------------
$3,408,096 $1,883,123
==============================================================================
The Floating Rate Notes are unsecured and bear interest at
rates primarily related to LIBOR. For those Floating Rate Notes which
are not based upon LIBOR, the Company has entered into interest rate
swaps and certain other transactions in order to convert them into
floating rates based upon LIBOR. During the year ended June 30, 1994,
the weighted average effective interest rate on the Floating Rate
Notes was 3.96%. The weighted average effective interest rate on the
Floating Rate Notes at June 30, 1994 was 4.83%.
The Company has entered into interest rate swaps and certain
other transactions in order to convert its fixed-rate Senior Notes
into floating rates based upon LIBOR. The weighted average effective
interest rate on the Company's Senior Notes
during the year ended June 30, 1994 was 4.22%. The weighted average
effective interest rate on the Company's Senior Notes at June 30, 1994
was 4.94%.
The Company's Medium-Term Notes have maturities ranging from
eighteen months to thirty years from the date of issue and bear
interest at either a fixed rate or a variable rate primarily based
upon LIBOR. During the year ended June 30, 1994, the weighted average
interest rate on the Medium-Term Notes was 4.40%. The weighted
average interest rate on the Company's Medium-Term Notes at June 30,
1994 was 4.93%.
During the year ended June 30, 1994, the Company called and
redeemed both $100,000,000 of 8 1/8% Senior Notes due 1997 and the
entire issue of 5 1/4% Swiss Franc Bonds. In addition, the interest
rate and currency swap related to the 5 1/4% Swiss Franc Bonds was
terminated.
Maturities of long-term borrowings at June 30, 1994 consist
of the following:
In thousands
------------------------------------------------------
Fiscal Year Amount
1995 $ 371,000
1996 673,050
1997 425,537
1998 204,655
1999 272,000
Thereafter 1,461,854
------------------------------------------------------
$3,408,096
======================================================
Instruments governing certain indebtedness of the Company
contain various covenants, the most significant of which require the
maintenance of minimum levels of stockholders' equity by the Company
and Bear Stearns. At June 30, 1994, the Company and Bear Stearns were
in compliance with all covenants contained in these various debt
agreements.
6. INCOME TAXES
During the quarter ended September 24, 1993, the Company
adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). The cumulative effect of
adopting the provisions of SFAS 109 was not material to the liquidity,
operating results or financial condition of the Company. As permitted
under SFAS 109, prior years' financial statements have not been
restated.
The provision (benefit) for income taxes for the fiscal
years ended June 30 consists of:
In thousands 1994 1993 1992
------------------------------------------------------------------------------
Current
Federal $206,010 $167,302 $144,621
State and local 83,746 71,816 70,700
Foreign 29,459 7,305 11,857
------------------------------------------------------------------------------
319,215 246,423 227,178
------------------------------------------------------------------------------
Deferred
Federal (43,265) 3,585 (9,493)
State and local (20,116) 1,943 (4,638)
------------------------------------------------------------------------------
(63,381) 5,528 (14,131)
------------------------------------------------------------------------------
$255,834 $251,951 $213,047
==============================================================================
Significant components of the Company's deferred tax assets
(liabilities) as of June 30 are as follows:
In thousands 1994 1993(1) 1992
------------------------------------------------------------------------------
Deferred Tax Assets:
Deferred compensation $121,463 $ 61,236 $ 56,807
Valuation reserves 12,680 9,220 8,688
Liability reserves 28,409 19,529 8,781
Other 1,470 6,613 12,967
------------------------------------------------------------------------------
Total deferred tax assets $164,022 $ 96,598 $ 87,243
------------------------------------------------------------------------------
Deferred Tax Liabilities:
Real estate partnership $(51,348) $(41,975) $(38,487)
Unrealized appreciation (8,432) (15,288)
Depreciation (7,985) (11,798) (10,743)
Accrued dividends (1,572) (516) (11,706)
Other (16,373) (12,090) (7,146)
------------------------------------------------------------------------------
Total deferred tax liabilities $(85,710) $(81,667) $(68,082)
------------------------------------------------------------------------------
Net Deferred Tax Asset $ 78,312 $ 14,931 $ 19,161
==============================================================================
<FN>
(1) The deferred tax assets (liabilities) as of June 30, 1993 have been
effected for the adoption of SFAS 109.
Undistributed earnings of foreign subsidiaries, which would
be subject to additional income taxes if repatriated, amounted to
approximately $38,391,000 as of June 30, 1994. No deferred Federal
income taxes have been provided for these undistributed earnings as
the Company intends to permanently reinvest earnings of foreign
subsidiaries. In the event these undistributed earnings are
repatriated, the amount of potential Federal income tax is not
expected to be material. Income before provision for income taxes for
operations within foreign jurisdictions amounted to approximately
$47,686,000, $19,808,000 and $32,780,000 for the years ended June 30,
1994, 1993 and 1992, respectively.
A reconciliation of the statutory Federal income tax rate
and the Company's effective tax rate is as follows:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
June 30, 1994 June 30, 1993 June 30, 1992
------------------------------------------------------------------------------------
Statutory rate 35.0% 34.0% 34.0%
State and local income taxes,
net of Federal benefit 6.4% 7.9 8.6
Dividend exclusion (1.1) (0.6) (0.7)
Other, net (0.5) (0.3) 0.1
------------------------------------------------------------------------------------
39.8% 41.0% 42.0%
====================================================================================
The Omnibus Budget Reconciliation Act of 1993 (the "Revenue
Act") was enacted on August 10, 1993. Under the Revenue Act, the
corporate statutory rate was increased to 35.0% retroactive to January
1, 1993. The impact of this change was not reflected in the fiscal
1993 results of operations as the Revenue Act was passed into law
subsequent to June 30, 1993. The cumulative effect of the retroactive
increase in the corporate statutory rate was not material.
Not included in the reconciliation table reflected above are
approximately $2,251,000 and $12,345,000 of income tax benefits
attributable to the distribution of Common Stock under the Capital
Accumulation Plan for Senior Managing Directors, as amended (the "CAP
Plan"), other deferred compensation plans and the exercise of stock
options, credited directly to paid-in capital, for fiscal 1994 and
1993, respectively.
Income taxes paid totaled $276,565,000, $223,550,000 and
$210,134,000 for the fiscal years ended June 30, 1994, 1993 and 1992,
respectively.
7. REGULATORY REQUIREMENTS
Bear Stearns and BSSC, a wholly-owned subsidiary of Bear
Stearns, 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 June 30, 1994, Bear Stearns' net
capital, as defined, of $1,000,371,000 exceeded the minimum
requirement by $983,291,000.
BSIL and certain other wholly-owned London-based
subsidiaries are subject to 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 the other subsidiaries have consistently operated in
excess of these requirements.
The regulatory rules referred to above, and certain
covenants contained in various instruments governing indebtedness of
the Company, Bear Stearns and other regulated subsidiaries, may
restrict the Company's ability to withdraw capital from its regulated
subsidiaries which in turn could limit the Company's ability to pay
dividends. At June 30, 1994, approximately $830,659,000 of net assets
of consolidated subsidiaries are restricted as to the payment of cash
dividends and advances to the Company.
8. PREFERRED STOCK
PREFERRED STOCK ISSUED BY THE BEAR STEARNS COMPANIES INC.
The Adjustable Rate Cumulative Preferred Stock, Series A
(the "Preferred Stock") has a liquidation preference of $50 per share
and is entitled to dividends, on a cumulative basis, at a rate equal
to 135 basis points below the highest of the Treasury Bill Rate, the
Ten Year Constant Maturity Rate and the Thirty Year Constant Maturity
Rate, as defined; however, the dividend rate for any dividend period
may not be less than 5.50% per annum, nor greater than 11.00% per
annum. The Company may redeem the Preferred Stock, either in whole or
in part, at a redemption price of $50 per share plus accumulated and
unpaid dividends. The weighted average dividend rate on the Preferred
Stock was 5.54% during the year ended June 30, 1994.
The Company has outstanding 7,500,000 depositary shares
representing 937,500 shares of Cumulative Preferred Stock, Series B
("Series B Preferred Stock"), having an aggregate liquidation
preference of $187,500,000. Each depositary share represents a
one-eighth interest in a share of Series B Preferred Stock. Dividends
on the Series B Preferred Stock are payable at an annual rate of
7.88%. Series B Preferred Stock is redeemable at the option of the
Company at any time on or after April 15, 1998, in whole or in part,
at a redemption price of $200 per share (equivalent to $25 per
depositary share), plus accrued and unpaid dividends.
On July 22, 1993, the Company issued 4,000,000 depositary
shares representing 500,000 shares of Cumulative Preferred Stock,
Series C ("Series C Preferred Stock"), having an aggregate liquidation
preference of $100,000,000. Each depositary share represents a one-
eighth interest in a share of Series C Preferred Stock. Dividends on
the Series C Preferred Stock are payable at an annual rate of 7.60%.
Series C Preferred Stock is redeemable at the option of the Company at
any time on or after July 15, 1998, in whole or in part, at a
redemption price of $200 per share (equivalent to $25 per depositary
share), plus accrued and unpaid dividends.
PREFERRED STOCK ISSUED BY SUBSIDIARY
In February 1994, Bear Stearns Finance LLC ("BSF"), a
wholly-owned subsidiary of the Company, issued Exchangeable Preferred
Income Cumulative Shares ("EPICS"), Series A, which have a liquidation
value of $25 per share, and an annual dividend rate of 8%. The EPICS
are callable at the option of BSF, in whole or in part, at any time,
on or after February 28, 1999, at their stated liquidation value.
The proceeds of the EPICS issuance were loaned by BSF to the
Company under the terms of a 30-year subordinated loan agreement.
This agreement allows the Company to extend the maturity of the loan
through two 30-year renewal options. On any given monthly dividend
date, on or after August 31, 1994, the Company has the right, subject
to certain conditions, to issue to BSF, in exchange for such note,
depositary shares evidencing Preferred Stock of the Company. In the
event of such exchange, BSF is required to redeem the EPICS, in their
entirety, solely in exchange for such depositary shares.
9. EMPLOYEE BENEFIT PLANS
The Company has a qualified noncontributory profit sharing
plan covering substantially all employees. Contributions are made at
the discretion of management in amounts that relate
to the Company's level of income before provision for income taxes.
The Company's expense related to the profit sharing plan for the years
ended June 30, 1994, 1993 and 1992 was $9,874,000, $8,866,000, and
$7,465,000, respectively.
The Company maintains a nonqualified defined contribution
retirement plan covering substantially all account executives. The
plan provides for retirement benefits to be paid based upon a
percentage of each participant's compensation and the performance of
certain participant selected investment options for benefits accrued.
The Company also maintained a qualified defined contribution
retirement plan which covered substantially all account executives
which was terminated on December 31, 1991 and following Internal
Revenue Service approval all vested accounts were distributed to
participants. The Company's combined expense for these plans for the
years ended June 30, 1994, 1993 and 1992 was $3,789,000, $3,530,000
and $3,750,000, respectively.
The Company maintains a $40,000,000 leveraged employee stock
ownership plan (the "ESOP") covering substantially all full time
employees. Pursuant to the terms of a Brokerage and Loan Agreement,
the Company advanced funds to the ESOP trust to acquire shares of
Common Stock in open market transactions. Advances made under the
ESOP Note (the "Note") bear interest at a rate of 8.00% per annum.
The Note is repayable in seven annual principal installments which
commenced December 31, 1992. The Note is expected to be repaid
through a combination of contributions by the Company and dividends on
the shares of Common Stock held by the ESOP trust. The note
receivable from the ESOP trust is reflected as a reduction in the
Company's stockholders' equity. The Company's expense related to the
ESOP for the years ended June 30, 1994, 1993 and 1992 was $6,176,000,
$6,262,000 and $2,701,000, respectively.
The Company maintains a benefit plan which provides health
care benefits for retired employees. During the year ended June 30,
1994, the Company adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ("SFAS 106"). SFAS 106 requires that the Company accrue the
expected cost of providing various postretirement benefits during the
years that the employee renders the necessary service. The adoption
of SFAS 106 did not have a material impact on the Company.
10. EMPLOYEE STOCK PLANS
DEFERRED COMPENSATION PLANS
The Company maintains nonqualified deferred compensation
plans (the "Plans") for certain key employees which allowed
participants to defer a portion of their fiscal 1990 compensation.
Under the terms of the Plans, compensation deferred was credited to
participants' deferred compensation accounts in the form of Stock
Units which are equivalent to, and payable in, shares of Common Stock.
Under the Plans, such Stock Units give participants an unsecured right
to receive payments, whenever the Company declares a dividend on its
Common Stock, in an amount equal to the cash dividends payable on an
equivalent number of shares of Common Stock. Participants may also
elect to receive such dividend equivalents in the form of additional
Stock Units. Upon completion of each participant's deferral period,
distributions of amounts deferred are made through the issuance of
shares of Common Stock equal to the number of Stock Units then
credited to a participant's account.
During the year ended June 30, 1993, the Company terminated
one of the Plans, the 1989 Deferred Compensation Plan for Executive
Officers and distributed shares of Common Stock held in treasury in
satisfaction of its obligations thereunder.
The activity related to Stock Units for the fiscal years
ended June 30, was as follows:
1994 1993
------------------------------------------------------------------------------
Outstanding, beginning of year 65,029 458,784
Resulting from dividend equivalents 2,891
Distributed (53,542) (396,646)
------------------------------------------------------------------------------
Outstanding, end of year 11,487 65,029
==============================================================================
CAPITAL ACCUMULATION PLAN
The CAP Plan allows participants to defer a defined minimum
percentage of their total annual compensation. Participants'
compensation generally must be deferred for a minimum of five years
from the date it was otherwise payable and is to be credited to
participants' deferred compensation accounts
in the form of CAP Units. The number of CAP Units credited is a
function of the amount deferred by each participant and the average
per share cost of Common Stock acquired by the Company in the open
market for the combined purpose of the CAP Plan and the Performance
Unit Plan for Senior Managing Directors (the "PUP Plan") as described
below. The aggregate number of CAP Units that may be credited to
participants in any fiscal year may not exceed the number of shares of
Common Stock acquired by the Company.
Each CAP Unit gives the participant an unsecured right to
receive, on an annual basis, an amount equal to the Company's pre-tax
income or loss per share, as defined by the CAP Plan, less the value
of changes in the Company's book value per Common Share during such
fiscal year resulting from increases or decreases in the Company's
consolidated retained earnings (the "earnings adjustment"). The
earnings adjustment will be credited to each participant's deferred
compensation account in the form of additional CAP Units, subject to
the limitations discussed above, based on the number of CAP Units in
such account at the end of each fiscal year. Upon completion of the
deferral period, participants are entitled to receive shares of Common
Stock equal to the number of CAP Units then credited to their
respective deferred compensation accounts.
During the years ended June 30, 1994, 1993 and 1992,
participants deferred compensation of approximately $120,551,000,
$127,839,000 and $86,932,000, respectively. During the years ended
June 30, 1994, 1993 and 1992, the Company recognized expense of
approximately $13,256,000, $6,336,000 and $15,742,000, respectively,
attributable to shares of Common Stock or cash credited to
participants' deferred compensation accounts with respect to earnings
adjustments. The aggregate number of shares of Common Stock
distributable pursuant to the Company's obligation for CAP Units at
June 30, 1994, 1993 and 1992 was 15,466,094, 8,376,410 and 10,603,217,
respectively. Compensation deferred pursuant to the CAP Plan and
allocated to participants' deferred compensation accounts in the form
of CAP Units is shown as a separate component of the Company's
stockholders' equity. Included in this component of the Company's
stockholders' equity are costs incurred attributable to the PUP Plan.
On December 16, 1992, the Company terminated all deferrals
previously made for fiscal 1991 and 1992 pursuant to the CAP Plan and
concurrently distributed 10,060,730 shares of Common Stock in
satisfaction of its obligations thereunder.
PERFORMANCE UNIT PLAN
Effective January 1, 1993, the Company established the
Performance Unit Plan and granted 6,630,251 Performance Units to
eligible employees.
Each Performance Unit gives the participant solely an
unsecured right to receive an amount in cash or stock equal to the
Company's annual pre-tax income or loss per share, as defined by the
PUP Plan, net of an adjustment which reflects changes in the Company's
book value per common share (the PUP "earnings adjustment").
During the year ended June 30, 1994 and the six months ended
June 30, 1993, the Company incurred costs of $3,277,000 and $4,156,000
attributable to the earnings adjustment. The number of Earnings Units
credited for the years ended June 30, 1994 and 1993 were 163,537 and
259,445, respectively.
STOCK OPTION PLAN
The Company has a stock option plan providing for the
issuance of up to 9,899,651 shares of Common Stock to certain key
employees of the Company. On August 17, 1989, the Company granted
stock options for 2,187,855 shares of Common Stock with an exercise
price of $10 1/8. These stock options are all exercisable as of
August 17, 1994 and expire August 16, 1995. Shares of Common Stock
issued upon exercise of the stock options are issued out of the
Company's Common Stock held in treasury. The activity related to the
stock options for the fiscal year ended June 30, 1994 was as follows:
--------------------------------------------------------
Outstanding, beginning of year 1,827,618
Exercised (339,800)
Forfeited (58,492)
--------------------------------------------------------
Outstanding, end of year 1,429,326
========================================================
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
MARKET 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 financial instruments in order to reduce
its exposure to market, currency and interest rate risk. Derivative
financial instruments include forward and option contracts, financial
futures and interest rate swaps including caps, floors and collars.
Generally these financial instruments represent future commitments to
exchange interest payment streams or purchase or sell other financial
instruments at specific terms at specified future dates, or to
exchange currencies. 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 involve varying degrees of off-
balance-sheet market risk whereby changes in interest rates, foreign
currency exchange rates, market values of the underlying financial
instruments or commodities may result in changes in the value of the
financial instrument which are in excess of the amounts recognized in
the Consolidated Statements of Financial Condition. The Company
attempts to control its exposure to market risk arising from the use
of these financial instruments through the use of hedging strategies
and various analytical monitoring techniques.
In order to measure derivative activity, notional or
contract amounts are frequently utilized. Notional/contract amounts,
which are not included on the balance sheet, are used to calculate
contractual cash flows to be exchanged and are generally not actually
paid or received, with the exception of currency swaps and foreign
exchange forwards. The notional/contract amounts of financial
instruments that give rise to off-balance-sheet market risk are
indicative only of the extent of involvement in the particular class
of financial instrument and are not necessarily an indication of
overall market risk. The Company's exposure to market risk is
influenced by a number of factors, including the relationship among
off-balance-sheet financial instruments and between off-balance-sheet
financial instruments and the Company's proprietary securities and
commodities inventories. In many cases, the use of financial
instruments serves to modify or offset market risk associated with
other transactions and accordingly, serves to decrease the Company's
overall exposure to market risk.
The following table represents the notional/contract amounts
of the Company's outstanding derivative contracts at June 30, 1994 and
1993:
Notional/Contract Amount
___________________________________________
In millions June 30, 1994 June 30, 1993
------------------------------------------------------------------------------
Forward Contracts:
Mortgage-Backed Securities $ 26,097(1) $ 35,900
Foreign Exchange 2,067(2) 4,056
Securities Futures Contracts 24,016(3) 7,923
Swap Agreements:(4)
U.S. Dollar 24,203 7,313
Non-Dollar 8,076
Options Written:
Securities 3,003 1,532
Foreign Exchange 1,633 1,151
==============================================================================
<FN>
1. Represents purchases of $11,789 and sales of $14,308.
2. Represents purchases of $833 and sales of $1,234.
3. Represents purchases of $15,128 and sales of $8,888.
4. Includes swap options, caps, collars and floors.
As part of the Company's proprietary commodity trading
activities, the Company enters into commodity futures and forward
contracts providing for the purchase and sale of crude oil and
petroleum products with contract amounts at June 30, 1994 of
$741,405,000 and $956,508,000, respectively, compared to $727,500,000
and $689,740,000, respectively, at June 30, 1993. The prices of a
significant portion of the forward purchase and sales commitment with
respect to crude oil are only determinable in the future based upon
contracted pricing formulas specified in the agreement.
The majority of the Company's off-balance-sheet transactions
are short-term in duration with a weighted average maturity of
approximately 1.48 years at June 30, 1994. At June 30, 1994,
$67,825,000,000 of all outstanding derivatives contracts, including
purchased options, will mature in fiscal
year 1995, $10,759,000,000 in 1996, $5,588,000,000 in 1997,
$4,545,000,000 in 1998, $5,351,000,000 in 1999 and $4,170,000,000
thereafter.
CREDIT RISK
The notional/contract amounts of these instruments do not
represent the Company's potential risk of loss due to counterparty
nonperformance. Credit risk arises from the potential inability of
counterparties to perform in accordance with the terms of the
contract. The Company's exposure to credit risk associated with
counterparty nonperformance is limited to the net replacement cost of
over-the-counter contracts (including purchased options) in a gain
position which are recognized in the Company's Consolidated Statements
of Financial Condition. Options written do not give rise to
counterparty credit risk since they obligate the Company (not its
counterparty) to perform. Exchange traded financial instruments such
as futures and options generally do not give rise to significant
counterparty exposure due to the margin requirements of the individual
exchanges.
The Company has controls in place to monitor credit
exposures by limiting transactions with specific counterparties and
assessing the future creditworthiness of counterparties. The Company
also seeks to control credit risk by following an established credit
approval process, monitoring credit limits, and requiring collateral
where appropriate.
At June 30, 1994 and 1993, the Company's exposure to credit
risk on over-the-counter financial instruments was approximately
$351,797,000 and $614,779,000 for forward contracts and purchased
options, $383,962,000 and $74,427,000 for swap agreements. The
following table summarizes the counterparty credit ratings for the
replacement cost (net of $349,028,000 of collateral) of contracts in a
gain position at June 30, 1994:
In millions
----------------------------------------------------------
RATING(1) NET REPLACEMENT COST
AAA $ 54
AA 79
A 219
BBB and lower 14
Other(2) 21
-----------------------------------------------------------
<FN>
1. Rating Agency Equivalent
2. Other indicates counterparties for which no credit rating was available
from an independent third party source. It does not necessarily
indicate the counterparties credit rating is below investment grade.
CUSTOMER ACTIVITIES
The Company's clearance activities for customers and
correspondents ("customers") involve the execution, settlement and
financing of various customer securities and commodities transactions.
Customer securities activities are transacted on either a cash or
margin basis and customer commodity transactions are generally
transacted on a margin basis subject to individual exchange
regulations. In connection with these activities, the Company
executes and clears customer transactions involving the sale of
securities not yet purchased ("short sales") and the writing of option
contracts. These transactions may expose the Company to off-balance-
sheet risk in the event the customer is unable to fulfill its
contracted obligations and margin requirements are not sufficient to
fully cover losses which customers may incur. In the event the
customer fails to satisfy its obligations, the Company may be required
to purchase or sell financial instruments at prevailing market prices
in order to fulfill the customer's obligations.
The Company seeks to control the risks associated with its
customer activities by requiring customers to maintain margin
collateral in compliance with various regulatory and internal
guidelines. The Company monitors required margin levels daily and,
pursuant to such guidelines, requires the customers to deposit
additional collateral, or reduce positions, when necessary. The
Company also establishes credit limits for customers engaged in
commodity futures activities, which are
monitored daily. Additionally, with respect to the Company's
correspondent clearing activities, introducing correspondent brokers
are required to guarantee the performance of their customers in
meeting contracted obligations.
The Company's customer financing and securities settlement
activities may require the Company to pledge customer securities as
collateral in support of various secured financing sources such as
bank loans, securities loaned and repurchase agreements and to satisfy
margin deposits of various exchanges. In the event the counterparty
is unable to meet its contracted obligation to return customer
securities pledged as collateral, the Company may be exposed to the
risk of acquiring the securities at prevailing market prices in order
to satisfy its customer obligations. The Company controls this risk
by monitoring the market value of securities pledged on a daily basis
and by requiring adjustments of collateral levels in the event of
excess market exposure. Additionally, the Company establishes credit
limits for such activities and monitors compliance on a daily basis.
At June 30, 1994, the market value of customer securities pledged
under these secured financing transactions approximated the amounts
due.
CONCENTRATIONS OF CREDIT RISK
As a securities broker and dealer, the Company is engaged in
various securities underwriting, brokerage and trading activities.
These services are provided to a diverse group of domestic and foreign
corporations, governments and institutional and individual investors.
A substantial portion of the Company's transactions are collateralized
and are executed with and on behalf of institutional investors
including other brokers and dealers, commercial banks, insurance
companies, pension plans and mutual funds and other financial
institutions. The Company's exposure to credit risk associated with
the nonperformance of these customers in fulfilling their contractual
obligations pursuant to securities and commodities transactions can be
directly impacted by volatile or illiquid trading markets which may
impair the customers' ability to satisfy their obligations to the
Company. The Company attempts to minimize credit risk associated with
these activities by monitoring customer credit exposure and collateral
values on a daily basis and requiring additional collateral to be
deposited with or returned to the Company when deemed necessary.
A significant portion of the Company's securities processing
activities includes clearing transactions for
specialists, market makers, risk arbitrageurs, hedge funds and other
professional traders. Due to the nature of their operations, which
may include significant levels of margin lending and involve short
sales and option writing, the Company may have significant credit
exposure due to the potential inability of these customers to meet
their commitments. The Company seeks to control this risk by
monitoring margin collateral levels on a daily basis for compliance
with both regulatory and internal guidelines and requesting additional
collateral where necessary. Additionally, in order to further control
this risk, the Company has developed computerized risk control systems
which analyze the customer's sensitivity to major market movements.
Where deemed necessary, the Company will require the customer to
deposit additional margin collateral, or reduce positions, if it is
determined that the customer's activities may be subject to above-
normal market risks.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company occupies office space under leases which expire
at various dates through 2016. The lease commitments include the
lease of the Company's headquarters at 245 Park Avenue, New York City
which expires on December 31, 2002. At June 30, 1994, future minimum
aggregate annual rentals payable under these noncancelable leases (net
of subleases) for the fiscal years ending 1995 through 1999 and the
aggregate amount thereafter, are as follows:
In thousands
---------------------------------------------------
FISCAL YEAR
1995 $ 47,782
1996 47,209
1997 45,789
1998 44,304
1999 43,130
Aggregate amount thereafter 165,658
---------------------------------------------------
The various leases contain provisions for periodic
escalations to the extent of increases in certain operating and other
costs. Rental expense, including escalation, under these leases was
$65,316,000, $60,253,000, and $62,621,000, for the years ended June
30, 1994, 1993 and 1992, respectively.
LETTERS OF CREDIT
At June 30, 1994, the Company is contingently liable for
unsecured letters of credit of $1,551,974,000 and letters of credit of
$356,400,000 secured by financial instruments which are principally
used as deposits for securities borrowed and to satisfy margin
deposits at option and commodity exchanges.
BORROW VERSUS PLEDGE
At June 30, 1994, U.S. government and agency securities with
a market value of approximately $5,981,080,000 have been pledged
against borrowed securities with an approximate market value of
$5,819,292,000.
LITIGATION
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.
13. SEGMENT AND GEOGRAPHIC AREA DATA
The Company is primarily engaged in a single line of
business as a securities broker and dealer, which comprises several
classes of services, such as principal transactions, agency
transactions, and underwriting and investment banking. These
activities constitute a single industry segment for purposes of
Statement of Financial Accounting Standards No. 14. Information
regarding the Company's operations are as follows:
In thousands 1994 1993 1992
-------------------------------------------------------------------------------------------------------------
Foreign revenues $ 199,461 $ 134,349 $ 134,910
Domestic revenues 3,241,611 2,718,836 2,544,023
-------------------------------------------------------------------------------------------------------------
Consolidated revenues $ 3,441,072 $ 2,853,185 $ 2,678,933
=============================================================================================================
Foreign income before provision for income taxes $ 52,461 $ 4,450 $ 34,037
Domestic income before provision for income taxes 590,338 609,948 473,588
-------------------------------------------------------------------------------------------------------------
Consolidated income before provision for income taxes $ 642,799 $ 614,398 $ 507,625
=============================================================================================================
Foreign assets $ 8,925,849 $ 8,229,623 $ 5,190,905
Domestic assets 58,466,169 49,209,882 40,577,428
-------------------------------------------------------------------------------------------------------------
Consolidated assets $67,392,018 $57,439,505 $45,768,333
=============================================================================================================
Because of the international nature of the financial markets
and the resultant integration of U.S. and non-U.S. services, it is
difficult to precisely separate foreign operations. The Company
conducts and manages these activities with a view toward the
profitability of the Company as a whole. Accordingly, the foreign
operations information is, of necessity, based upon certain management
judgments and internal allocations.
14. QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
In thousands, except per share data Quarter Quarter Quarter Quarter Total
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1994
Revenues $ 769,361 $1,002,557 $ 898,961 $ 770,193 $3,441,072
Interest expense 184,006 250,452 245,324 340,273 1,020,055
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 585,355 752,105 653,637 429,920 2,421,017
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses
Employee compensation and benefits 289,373 379,427 321,042 237,219 1,227,061
Other 117,990 140,764 136,097 156,306 551,157
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 407,363 520,191 457,139 393,525 1,778,218
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 177,992 231,914 196,498 36,395 642,799
Provision for income taxes 73,689 97,101 81,048 3,996 255,834
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Net income $ 104,303 $ 134,813 $ 115,450 $ 32,399 $ 386,965
==============================================================================================================================
Earnings per share(1) $ .77 $ 1.00 $ .88 $ .21 $ 2.89
==============================================================================================================================
Cash dividends declared per common share $ .15 $ .15 $ .15 $ .15 $ .60
==============================================================================================================================
First Second Third Fourth
In thousands, except per share data Quarter Quarter Quarter Quarter Total
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED JUNE 30, 1993
Revenues $ 603,229 $ 632,569 $ 733,895 $ 883,492 $2,853,185
Interest expense 165,171 177,887 163,428 203,600 710,086
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Revenues, net of interest expense 438,058 454,682 570,467 679,892 2,143,099
Non-interest expenses
Employee compensation and benefits 217,307 231,756 276,148 311,888 1,037,099
Other 112,207 112,073 110,892 156,430 491,602
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 329,514 343,829 387,040 468,318 1,528,701
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 108,544 110,853 183,427 211,574 614,398
Provision for income taxes 45,588 46,559 73,011 86,793 251,951
- - - - - - - ------------------------------------------------------------------------------------------------------------------------------
Net income $ 62,956 $ 64,294 $ 110,416 $ 124,781 $ 362,447
==============================================================================================================================
Earnings per share(1) $ .52 $ .50 $ .88 $ .97 $ 2.86
==============================================================================================================================
Cash dividends declared per common share $ .15 $ .15 $ .15 $ .15 $ .60
==============================================================================================================================
<FN>
(1) The sum of the quarters' earnings per share amounts does not equal the full fiscal years' amounts due to the effect of
averaging the number of shares of Common Stock and common stock equivalents throughout the year.
Independent Auditors' Report
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF THE BEAR STEARNS COMPANIES INC.
We have audited the accompanying consolidated statements of financial
condition of The Bear Stearns Companies Inc. and Subsidiaries as of
June 30, 1994 and 1993, and the related consolidated statements of
income, cash flows and changes in stockholders' equity for each of the
three years in the period ended June 30, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of The Bear Stearns
Companies Inc. and Subsidiaries at June 30, 1994 and 1993, and the
results of their operations and their cash flows for each of the three
years in the period ended June 30, 1994 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
August 15, 1994
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock of the Company is traded on the NYSE under the
symbol BSC. The following table sets forth for the periods indicated
the high and low sales prices for the Common Stock on the NYSE, as
adjusted to reflect the 5% stock dividends distributed on the Common
Stock on August 31, 1993 and May 27, 1994, and the cash dividends
declared on the Common Stock.
As of September 1, 1994, there were 4,022 holders of record of
the Company's Common Stock. On September 1, 1994, the last reported
sales price of the Company's Common Stock was $17F.
On August 2, 1994, the Company announced the declaration of a
quarterly cash dividend of $0.15 per share on its Common Stock to
stockholders of record on August 12, 1994, which was paid on August
26, 1994. The Board of Directors of the Company presently intends to
continue paying cash dividends on the outstanding shares of Common
Stock on a quarterly basis although the timing and amount of such
dividends will depend upon the Company's earnings, financial condition
and cash requirements at the time such payment is considered.
Dividends are payable on January 15, April 15, July 15, and
October 15in each year on the Company's outstanding Adjustable Rate
Cumulative Preferred Stock, Series A, Cumulative Preferred Stock,
Series B and Cumulative Preferred Stock, Series C (collectively, the
"Preferred Stock"). The terms of the Preferred Stock require that all
accrued dividends in arrears be paid prior to the payment of any
dividend on the Common Stock.
Since the Company is a holding company, its ability to pay
dividends is limited by the ability of its subsidiaries to pay
dividends and to make advances to the Company. See the Notes to
Consolidated Financial Statements under the caption "Regulatory
Requirements" for a further description.
Cash Dividends
Declared
Per Common
High Low Share
------ ------- -----------
FISCAL YEAR ENDED JUNE 30, 1993
First Quarter (through September 25, 1992) $ 14-5/8 $ 13 $ .15
Second Quarter (through December 31, 1992) 15-7/8 12-1/4 .15
Third Quarter (through March 26, 1993) 16-5/8 14-1/4 .15
Fourth Quarter (through June 30, 1993) 21-1/4 16 .15
FISCAL YEAR ENDED JUNE 30, 1994
First Quarter (through September 24, 1993) $ 24-1/8 $ 20-3/4 $ .15
Second Quarter (through December 31, 1993) 24-5/8 19-3/8 .15
Third Quarter (through March 25, 1994) 23-1/8 19-5/8 .15
Fourth Quarter (through June 30, 1994) 21-5/8 16-7/8 .15