SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 29, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8989 The Bear Stearns Companies Inc. (Exact name of registrant as specified in its charter) Delaware 13-3286161 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 245 Park Avenue, New York, New York 10167 (Address of principal executive offices) (Zip Code) (212) 272-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 9, 1995, the latest practicable date, there were 118,779,062 shares of Common Stock, $1 par value, outstanding. TABLE OF CONTENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Financial Condition at September 29, 1995 (Unaudited) and June 30, 1994. Consolidated Statements of Income (Unaudited) for the three-month periods ended September 29, 1995 and September 30, 1994. Consolidated Statements of Cash Flows (Unaudited) for the three- month periods ended September 29, 1995 and September 30, 1994. Notes to Consolidated Financial Statements (Unaudited). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Part II. OTHER INFORMATION Item 1. Legal Proceedings. Item 6. Exhibits and Reports on Form 8-K. Signatures. <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Assets <CAPTION> September 29, June 30, 1995 1995 (Unaudited) (In thousands, except share data) <S> <C> <C> Cash and cash equivalents $ 406,359 $ 700,501 Cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations 748,886 1,309,573 Securities purchased under agreements to resell 24,740,599 18,940,744 Securities borrowed 24,531,550 24,632,088 Receivables Customers 6,454,507 5,993,772 Brokers, dealers and others 1,032,226 578,676 Interest and dividends 216,072 227,069 Financial instruments owned - at fair value 20,751,472 21,509,498 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization 310,109 312,867 Other assets 325,659 392,372 Total Assets $79,517,439 $74,597,160 See Notes to Consolidated Financial Statements. </TABLE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Liabilities and Stockholders' Equity <CAPTION> September 29, June 30, 1995 1995 (Unaudited) (In thousands, except share data) <S> <C> <C> Short-term borrowings $ 9,299,870 $ 8,570,777 Securities sold under agreements to repurchase 31,906,733 29,584,724 Payables Customers 16,869,610 16,236,611 Brokers, dealers and others 1,521,342 1,167,311 Interest and dividends 343,166 311,101 Financial instruments sold, but not yet purchased - at fair value 12,063,587 11,241,118 Accrued employee compensation and benefits 222,933 469,189 Other liabilities and accrued expenses 527,275 453,924 72,754,516 68,034,755 Commitments and Contingencies Long-term Borrowings 4,204,856 4,059,944 Preferred Stock Issued by Subsidiary 150,000 150,000 Stockholders' Equity Preferred Stock 437,500 437,500 Common Stock, $1.00 par value: 200,000,000 shares authorized; 152,202,724 shares issued at September 29, 1995 and June 30, 1995 152,203 152,203 Paid-in capital 1,562,750 1,557,237 Retained earnings 500,232 430,330 Capital Accumulation Plan 328,740 344,338 Treasury stock - at cost: Adjustable Rate Cumulative Preferred Stock, Series A - 2,118,550 shares at September 29, 1995 and June 30, 1995 (85,507) (85,507) Common Stock - 34,560,390 and 34,866,529 shares at September 29, 1995 and June 30, 1995, respectively (462,404) (458,193) Note receivable from ESOP Trust (25,447) (25,447) Total Stockholders' Equity 2,408,067 2,352,461 Total Liabilities and Stockholders' Equity $79,517,439 $74,597,160 See Notes to Consolidated Financial Statements. </TABLE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <CAPTION> Three Months Ended September 29, September 30, 1995 1994 (In thousands, except share data) <S> <C> <C> Revenues Commissions $ 155,190 $ 120,329 Principal transactions 269,915 178,796 Investment banking 87,405 58,352 Interest and dividends 553,921 444,440 Other income 8,003 6,508 Total revenues 1,074,434 808,425 Interest expense 456,945 374,800 Revenues, net of interest expense 617,489 433,625 Non-interest expenses Employee compensation and benefits 306,997 231,029 Floor brokerage, exchange and clearance fees 29,746 25,661 Communications 22,498 21,326 Occupancy 21,146 19,989 Depreciation and amortization 16,276 13,793 Advertising and market development 12,524 14,424 Data processing and equipment 8,981 8,407 Other expenses 42,911 41,801 Total non-interest expenses 461,079 376,430 Income before provision for income taxes 156,410 57,195 Provision for income taxes 62,564 21,734 Net income $ 93,846 $ 35,461 Net income applicable to common shares $ 87,636 $ 29,229 Earnings per share $ .67 $ .23 Weighted average common and common equivalent shares outstanding 136,934,498 135,135,285 Cash dividends declared per common share $ .15 $ .15 </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <CAPTION> Three-Months Ended September 29, September 30, 1995 1994 (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 93,846 $ 35,461 Adjustments to reconcile net income to cash used for operating activities: Depreciation and amortization 16,276 13,793 Deferred income taxes (6,136) (5,897) Other 9,126 6,661 (Increases) decreases in operating receivables: Securities borrowed 100,538 (2,573,032) Customers (453,550) 505,802 Brokers, dealers and others (460,735) 252,146 Other 35,870 (9,332) Increases (decreases) in operating payables: Customers 632,999 (246,198) Brokers, dealers and others 352,885 96,075 Other 32,065 792 (Increases) decreases in: Cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations 560,687 1,175,834 Securities purchased under agreements to resell (5,799,855) 2,824,608 Financial instruments owned 758,026 (2,276,382) Other assets 33,823 (6,564) Increases (decreases) in: Securities sold under agreements to repurchase 2,322,009 39,150 Financial instruments sold, but not yet purchased 822,469 732,127 Accrued employee compensation and benefits (252,556) (436,441) Other liabilities and accrued expenses 74,473 (30,197) Cash (used in) provided by operating activities (1,127,740) 98,406 CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings 729,093 586,510 Issuance of long-term borrowings 370,918 272,114 Capital Accumultion Plan (15,598) - Other common stock transactions 20,828 3,619 Payments for: Retirement of Senior Notes (229,000) (250,000) Treasury stock purchases (21,149) (37,578) Cash dividends paid (23,849) (23,112) Cash provided by financing activities 831,243 551,553 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements, net (13,518) (26,921) Purchases of investment securities and other assets (1,258) 1,982 Proceeds from sales of investment securities 17,131 10,500 Cash provided by (used in) investing activities 2,355 (14,439) Net (decrease)increase in cash and cash equivalents (294,142) 635,520 Cash and cash equivalents, beginning of period 700 501 294,604 Cash and cash equivalents, end of period $ 406,359 $ 930,124 See Notes to Consolidated Financial Statements. </TABLE> THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of The Bear Stearns Companies Inc. and its subsidiaries (the "Company") and have been prepared pursuant to the Securities and Exchange Commission's rules and regulations. The consolidated financial statements reflect all adjustments which, in the opinion of management, are normal and recurring and are necessary for a fair statement of the results for the interim periods presented. All material intercompany balances and transactions have been eliminated. The nature of the Company's business is such that the results of any interim period may not be indicative of the results to be expected for an entire fiscal year. Certain prior period amounts have been reclassified to conform with the current period's presentation. 2. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments owned and financial instruments sold, but not yet purchased, consist of the Company's proprietary trading and investment accounts, at fair value, as follows (in thousands): September 29, June 30, 1995 1995 Financial instruments owned: United States government and agency $ 6,332,962 $ 8,688,713 Non-US government 1,287,072 1,256,859 State and municipal 136,147 100,224 Corporate equity and convertible debt 6,182,230 5,235,219 Corporate debt 2,501,417 2,723,564 Derivative financial instruments 1,397,077 1,223,258 Mortgages and other mortgage-backed securities 2,497,395 1,771,735 Other 417,172 509,926 $20,751,472 $21,509,498 Financial instruments sold, but not yet purchased: United States government and agency $ 5,147,593 $ 6,111,612 Non-US government 987,174 765,230 Corporate equity 3,441,882 2,424,455 Corporate debt 981,939 781,792 Derivative financial instruments 1,503,690 1,155,527 Other 1,309 2,502 $12,063,587 $11,241,118 THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. COMMITMENTS AND CONTINGENCIES At September 29, 1995, the Company is contingently liable for unsecured letters of credit of approximately $1.4 billion and letters of credit of approximately $111.9 million secured by financial instruments owned by the Company, which are principally used as collateral for securities borrowed and to satisfy margin deposits at option and commodity exchanges. In the normal course of business, the Company has been named as a 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 these suits will not have a material adverse effect on the Company's results of operations or financial condition. 4. NET CAPITAL REQUIREMENTS The Company's principal operating subsidiary, Bear, Stearns & Co. Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns Securities Corp. ("BSSC"), are registered broker-dealers and, accordingly, are subject to Securities and Exchange Commission Rule 15c3-1 (the "Net Capital Rule") and the capital rules of the New York Stock Exchange, Inc. ("NYSE") and those of other principal exchanges in 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 the net capital of BSSC in excess of 5% of aggregate debit items arising from customer transactions, as defined. At September 29, 1995, Bear Stearns' net capital of $1.39 billion exceeded the minimum requirement by $1.38 billion. Bear, Stearns International Limited ("BSIL"), and certain other wholly owned, London-based, broker-dealer subsidiaries, are subject to regulatory capital requirements of the Securities and Futures Authority ("SFA"). BSIL and the other subsidiaries have consistently operated in excess of SFA requirements. 5. EARNINGS PER SHARE Earnings per share is computed by dividing net income applicable to common shares by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during each period presented. Common Stock equivalents include the assumed distribution of shares of Common Stock issuable under certain of the Company's deferred compensation arrangements, with appropriate adjustments made to net income for expense accruals related thereto. Additionally, shares of Common Stock issued or issuable under various employee benefit plans are included as Common Stock equivalents. 6. CASH FLOW INFORMATION Cash payments for interest approximated interest expense for the three- months ended September 29, 1995 and September 30, 1994, respectively. Income taxes paid totaled $40.4 million and $37.8 million for the three- months ended September 29, 1995 and September 30, 1994, respectively. THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company, in its capacity as a dealer in over-the-counter derivative financial instruments and in connection with its proprietary market-making and trading activities, enters into transactions in a variety of cash and derivative financial instruments in order to reduce its exposure to market, currency and interest rate risk. SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," defines a derivative as a future, forward, swap or option contract, or other financial instrument with similar characteristics such as caps, floors and collars. Generally these financial instruments represent future commitments to exchange interest payment streams or currencies or to purchase or to sell other financial instruments at specific terms at specified future dates. Option contracts provide the holder with the right, but not the obligation, to purchase or sell a financial instrument at a defined price before or on an established date. These financial instruments may have market and/or credit risk in excess of amounts recorded in the Consolidated Statements of Financial Condition. In order to measure derivative activity, notional or contract amounts are frequently utilized. Notional/contract amounts, which are not included on the balance sheet, are used to calculate contractual cash flows to be exchanged and are generally not actually paid or received, with the exception of currency swaps and foreign exchange forwards. The notional/contract amounts of financial instruments that give rise to off-balance-sheet market risk are indicative only of the extent of involvement in the particular class of financial instrument and are not necessarily an indication of overall market risk. The following table represents the notional/contract amounts of the Company's outstanding derivative financial instruments at September 29, 1995 and June 30, 1995 (in billions): Notional/Contract Amount September 29, June 30, 1995 1995 Interest Rate: Swap agreements $73.7 $68.5 Futures contracts 17.3 15.4 Foreign Exchange: Futures contracts 1.2 .7 Forward contracts 5.6 4.7 Options held 2.0 2.1 Options written 2.0 1.8 Mortgage-Backed Securities: Forward contracts 23.9 28.1 Equity: Swap agreements 4.4 3.0 Futures contracts .4 .3 Options held 4.4 1.6 Options written 2.0 1.6 THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - continued The derivative instruments used in the Company's trading and dealer activities, are marked to market daily with the resulting unrealized gains or losses recorded in the Consolidated Statements of Financial Condition and the related income or loss reflected in revenues derived from principal transactions. The fair values of derivative financial instruments held or issued for trading purposes and the average monthly fair value of the instruments are as follows (in millions): Fair Value at Fair Value at September 29, 1995 June 30, 1995 Assets Liabilities Assets Liabilities Swap agreements $ 497 $ 511 $ 587 $ 492 Forward contracts 302 324 209 181 Options held 598 427 Options written 669 483 Total $1,397 $1,504 $1,223 $1,156 Average Fair Value(1) Average Fair Value(1) Assets Liabilities Assets Liabilities Swap agreements $ 504 $ 483 $ 598 $ 398 Forward contracts 189 178 131 120 Options held 500 393 Options written 573 262 Total $1,193 $1,234 $1,122 $ 780 <F1> (1) Average fair values represent monthly balances for the quarter ended September 29, 1995 and the fiscal year ended June 30, 1995. The notional/contract amounts of these instruments do not represent the Company's potential risk of loss due to counterparty nonperformance. Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of the contract. The Company's exposure to credit risk associated with counterparty nonperformance is limited to the replacement cost of over-the-counter contracts in a gain position which are recognized in the Company's Consolidated Statements of Financial Condition, net of collateral held ("net replacement cost"). Exchange traded financial instruments, such as futures and options, generally do not give rise to significant counterparty exposure due to the margin requirements of the individual exchanges. Options written generally do not give rise to counterparty credit risk since they obligate the Company (not its counterparty) to perform. The Company's net replacement cost of over-the-counter contracts in a gain position at September 29, 1995, is approximately $353.2 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's principal business activities, investment banking, securities trading and brokerage, are, by their nature, highly competitive and subject to various risks, particularly volatile trading markets and fluctuations in the volume of market activity. Consequently, the Company's net income and revenues have in the past and are likely to continue to be, subject to wide fluctuations, reflecting the impact of many factors including, economic and securities-market conditions, the level and volatility of interest rates, competitive conditions within the industry, and the size and timing of transactions. Moreover, the results of operations for a particular interim period may not be indicative of results to be expected for an entire fiscal year. For a description of the Company's business, including its trading in cash instruments and derivative products, its underwriting and trading policies, and their respective risks, and the Company's risk management policies and procedures, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1995. Three-Months Ended September 29, 1995 Compared to September 30, 1994 The September 1995 quarter was characterized by favorable debt and equity markets as a result of stabilized interest rates. Net income in the 1995 quarter was $93.8 million, an increase of 164.6% from the $35.5 million in the comparable prior year quarter. Revenues, net of interest expense ("net revenues"), increased 42.4% to $617.5 million in the 1995 quarter from $433.6 million in the 1994 quarter. The increase was attributable to increases in all revenue categories particularly principal transactions. Earnings per share were $0.67 for the 1995 quarter versus $0.23 for the comparable 1994 quarter. Commission revenues increased 29.0% in the 1995 quarter to $155.2 million from $120.3 million in the comparable 1994 quarter. Clearance, futures, institutional and retail commissions increased reflecting continued expansion of the correspondent business and higher levels of customer activity. Revenues from principal transactions increased 51.0% in the 1995 quarter to $269.9 million from $178.8 million in the 1994 quarter, reflecting an increase in the Company's fixed-income and equity trading activities due to increased customer demand and improved market conditions.
The Company's principal transaction revenues by reporting categories including derivatives, are as follows (in thousands): September 29, September 30, 1995 1994 Fixed Income $129,181 $ 98,017 Equity 108,761 64,194 Foreign Exchange & Other Derivative Financial Instruments 31,973 16,585 $269,915 $178,796 Investment banking revenues increased 49.8% to $87.4 million in the 1995 quarter from $58.4 million in the 1994 quarter. This increase reflected both an increase in underwriting revenue attributable to increased levels of new issue volume related to both equity and debt issues and an increase in merger and acquisition fees. Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 39.3% to $97.0 million in the 1995 quarter from $69.6 million in the 1994 quarter. This increase is attributable to higher levels of margin debt reflecting the continued expansion of customer activities in the correspondent business. Average quarterly margin debt increased to $18.5 billion in the 1995 quarter from $14.6 billion in the 1994 quarter. Average free credit balances increased to $5.7 billion in the 1995 quarter from $5.6 in the 1994 quarter. Employee compensation and benefits increased 32.9% to $307.0 million in the 1995 quarter from $231.0 million in the comparable 1994 quarter. The increase is attributable to higher incentive and discretionary bonus accruals associated with the increased earnings in the 1995 quarter. Employee compensation and benefits, as a percentage of net revenues, decreased to 49.7% in the 1995 quarter from 53.3% in the 1994 quarter. All other expenses increased 6.0% to $154.1 million in the 1995 quarter from $145.4 million in the 1994 quarter. Floor brokerage, exchange and clearance fees increased 15.9% in the 1995 quarter from the 1994 quarter reflecting the increase in volume of securities transactions processed. The remaining increase in other operating expenses is related to higher levels of communications, depreciation and occupancy costs reflecting the expansion of the Company's business activities. The Company's effective tax rate increased to 40.0% in the 1995 quarter compared to 38.0% in the 1994 quarter due to increased state and local taxes.
Liquidity and Capital Resources Financial Leverage The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of marketable securities inventories, which are marked to market daily, and collateralized receivables arising from customer-related and proprietary securities transactions. Collateralized receivables consist of resale agreements secured by US government and agency securities and customer margin loans and securities borrowed which are typically secured by marketable corporate debt and equity securities. The Company's total assets and financial leverage can fluctuate significantly depending upon economic and market conditions, volume of activity, customer demands and underwriting commitments. The Company's total assets at September 29, 1995 were $79.5 billion versus $74.6 billion at June 30, 1995. The increase is primarily attributable to the growth in securities purchased under agreements to resell. The Company's ability to support fluctuations in total assets is a function of its ability to obtain short-term secured and unsecured funding and its access to sources of long-term capital in the form of long-term borrowings and equity, which together form its capital base. The Company continously monitors the adequacy of its capital base which is a function of asset quality and liquidity. The relationship between an asset's liquidity and the level of capital required to support the asset reflects the need to provide counterparties with collateral, or margin, in order to obtain secured financings. Highly liquid assets such as US government and agency securities typically are funded by the use of repurchase agreements and securities lending arrangements which require very low levels of margin. In contrast, assets of lower quality and/or liquidity require higher margin levels and consequently increased capital in order to obtain secured financing. The level of customer receivables and proprietary inventories the Company can maintain in certain of its regulated subsidiaries is also limited by rules of both the Securities and Exchange Commission and the Securities and Futures Authority ("SFA") in London. Accordingly, the mix of assets being held by the Company significantly influences the amount of leverage the Company can employ and the adequacy of its capital base. Funding Strategy Generally, the Company's funding strategy provides for the diversification of its short-term funding sources in order to maximize liquidity. Sources of short-term funding consist principally of collateralized borrowings, including repurchase transactions and securities lending arrangements, customer free credit balances, unsecured commercial paper, medium-term notes and bank borrowings generally having maturities from overnight to one year. Repurchase transactions, whereby securities are sold with a commitment for repurchase by the Company at a future date, represent the dominant component of secured short-term funding. The Company continued to increase its utilization of medium-term note financing in order to extend maturities and achieve additional diversification of its funding sources. In addition to short-term funding sources, the Company utilizes long-term senior debt, including medium-term notes, as a longer term source of unsecured financing. The Company maintains an alternative funding strategy focused on the liquidity and self-funding ability of its underlying assets. The objective of the strategy is to maintain sufficient sources of alternative funding to enable the Company to fund debt obligations maturing within one year without issuing any new unsecured debt, including commercial paper. The most significant source of alternative funding is the Company's ability to hypothecate or pledge its unencumbered assets as collateral for short-term funding. As part of the Company's alternative funding strategy, the Company regularly monitors and analyzes the size, composition and liquidity characteristics of the assets being financed and evaluates its liquidity needs in light of current market conditions and available funding alternatives. Through this analysis, the Company continuously can evaluate the adequacy of its equity base and its schedule of maturing term-debt supporting its present asset levels. The Company can then seek to adjust its maturity schedule, in light of market conditions and funding alternatives. In addition, the Company maintains a committed revolving-credit facility (the "facility") totaling $2.0 billion which permits borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain affiliates. The facility provides that up to $1.0 billion of the total facility may be borrowed by the Company on an unsecured basis. Secured borrowings can be collateralized by both investment-grade and non-investment-grade financial investments. In addition, this facility provides for defined margin levels on a wide range of eligible financial instruments which may be pledged under the secured portion of the facility. The facility terminates in October 1996. As of September 29, 1995, no amounts were outstanding under the facility. Capital Resources The Company conducts substantially all of its operating activities within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC, Bear, Stearns International Limited ("BSIL") and Bear Stearns International Trading Limited ("BSIT"). In connection therewith, a substantial portion of the Company's long-term borrowings and equity have been used to fund investments in, and advances to, Bear Stearns, BSSC, BSIL and BSIT. The Company regularly monitors the nature and significance of those assets or activities conducted outside the broker-dealer subsidiaries and attempts to fund such assets with either capital or borrowings having maturities consistent with the nature and liquidity of the assets being financed. During the three-months ended September 29, 1995, the Company repurchased 1,036,174 shares of Common Stock in connection with the Capital Accumulation Plan for Senior Managing Directors (the "Plan") at a cost of approximately $22.3 million. The Company intends, subject to market conditions, to purchase a sufficient number of shares in respect of all compensation deferred and any additional amounts allocated to participants under the Plan. Repurchases of Common Stock pursuant to the Plan are not made pursuant to the Company's Stock Repurchase Program authorized by the Board of Directors and are not included in calculating the maximum aggregate number of shares of Common Stock that the Company may repurchase under the Stock Repurchase Program. Cash Flows Total cash and cash equivalents decreased by $294.1 million in the 1995 quarter to $406.4 million at September 29, 1995. Total cash and cash equivalents increased by $635.5 million in the 1994 quarter to $930.1 million at September 30, 1994. Cash used in operating activities in the 1995 quarter was $1.1 billion, mainly representing increases in secured borrowing activities. Financing activities provided cash of $831.2 million, primarily derived from short-term borrowing proceeds. Regulated Subsidiaries As registered broker-dealers, Bear Stearns and BSSC are subject to the net capital requirements of the Securities and Exchange Commission, the New York Stock Exchange, Inc. and the Commodity Futures Trading Commission, which are designed to measure the general financial soundness and liquidity of broker- dealers. Bear Stearns and BSSC have consistently operated in excess of the minimum net capital requirements imposed by these agencies. Additionally, BSIL and BSIT, London-based broker-dealer subsidiaries, are subject to the regulatory capital requirements of the SFA, a self regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. BSIL and BSIT have consistently operated in compliance with these capital adequacy requirements. Merchant Banking and Non-Investment-Grade Debt Securities As part of the Company's merchant banking activities, it participates periodically in principal investments in leveraged acquisitions. As part of these activities, the Company originates, structures and invests in merger, acquisition, restructuring and leveraged capital transactions, including leveraged buyouts. The Company's principal investments in these transactions are generally made in the form of equity investments or subordinated loans, and have not required significant levels of capital investment. At September 29, 1995, the Company's aggregate investments in leveraged transactions and its exposure related to any one transaction was not material. As part of its fixed-income securities activities, the Company participates in the trading and sale of high yield, non-investment-grade securities, non- investment-grade mortgage loans (including real estate owned) and securities of companies that are subject to pending bankruptcy proceedings (collectively "high yield securities"). Non-investment-grade mortgage loans are principally secured by residential properties and include both non- performing loans and real estate owned properties. In addition, the Company owns foreclosed real estate properties. As of September 29, 1995, the Company held in inventory approximately $1.5 billion of high yield securities. These investments generally involve greater risk than investment-grade debt securities due to credit considerations, liquidity of secondary trading markets and vulnerability to general economic conditions. The level of the Company's high yield securities inventories, and the impact of such activities upon the Company's results of operations, can fluctuate from period to period as a result of customer demands and economic and market considerations. Bear Stearns' Risk Committee continuously monitors exposure to market and credit risk with respect to high yield securities inventories and establishes limits with respect to overall market exposure and concentrations of risk by both individual issuer and industry group.
Part II Other Information Item 1. Legal Proceedings In-Store Advertising Securities Litigation As previously reported in the Company's 1995 Form 10-K, Bear Stearns is a defendant in a litigation entitled In-Store Advertising Securities Litigation, which is pending in the United States District Court for the Southern District of New York. On August 30, 1995, the Venture Capital Defendants filed a motion for severance, or a separate trial, of their section 11 contribution claim against KPMG Peat Marwick. On September 7, 1995, KPMG Marwick joined the Venture Capital Defendants' motion, and again moved for severance, or a separate trial, of the Underwriter Defendants' section 11 contribution claim. Thanksgiving Tower Partners et al. v. Anros Thanksgiving Partners As previously reported in the Company's 1995 Form 10-K, Bear Stearns is a defendant in a litigation entitled Thanksgiving Tower Partners. In an opinion dated September 20, 1995, the United States Court of Appeals for the Fifth Circuit affirmed the judgment of the district court. In re Lady Luck Gaming Corporation Securities Litigation Beginning on March 1995, several actions were commenced in the United States District Court for the District of Nevada involving Lady Luck Gaming Corporation ("Lady Luck"). A Consolidated Class Action Complaint was filed on August 14, 1995. The Consolidated Class Action Complaint named as defendants Bear Stearns, Oppenheimer & Co.,Inc., Lady Luck, and several directors and officers of Lady Luck. Bear Stearns, along with Oppenheimer, is being sued in its capacity as Co-Lead Underwriter of the initial public offering ("IPO") of 4,500,000 shares of Lady Luck on September 29, 1993. The Consolidated Class Action Complaint alleges claims on behalf of a purported class consisting of all persons who purchased shares of Lady Luck from September 29, 1993 to May 4, 1995. The Consolidated Class Action Complaint asserts violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20 of the Securities Exchange Act of 1934. Plaintiffs allege that the Prospectus issued in connection with the IPO contained certain false or misleading statements regarding Lady Luck and the casino-gaming industry as a whole, and that defendants continued to make false or misleading statements regarding Lady Luck until May 4, 1995. Plaintiffs seek unspecified compensatory damages and any appropriate equitable relief. On September 18, 1995, defendants moved to dismiss the Consolidated Class Action Complaint. Bear Stearns denies all allegations of wrongdoing asserted against it in this litigation, intends to defend these claims vigorously, and believes that it has substantial defenses to these claims. Primavera Familienstiftung v. Askin Capital Management L.P., Bear, Stearms & Co. Inc., et al. In April 1994, Granite Partners, L.P., Granite Corporation, and Quartz Hedge Fund (the "Funds" or the "Debtors") three investment funds managed by Askin Capital Management L.P. ("ACM") and David J. Askin ("Askin") filed for bankruptcy after suffering losses in mortgage-backed securities and related instruments. After the Funds defaulted on certain obligations, Bear Stearns, Bear, Stearns Capital Markets and other firms liquidated certain positions in these accounts. The trustee (the "Trustee") appointed to supervise the Debtors in the bankruptcy determined to investigate the Debtors' claim that Bear Stearns and other firms acted improperly in connection with the liquidation of the Debtors' accounts and in other ways, are liable to the Funds for damages. In April 1995, the Trustee provided Bear Stearns and other firms with a Preliminary Draft Report containing certain tentative conclusions and analyses. The report is sealed pursuant to a court order but was the subject of a Wall Street Journal article on June 23, 1995. In May 1995, Bear Stearns submitted comments to the Preliminary Draft Report. The Trustee's investigation is continuing. The Trustee has stated that a final report will be ready no sooner than the end of 1995. On September 20, 1995, Primavera Familienstiftung commenced an action in the United States District Court for the Northern District of California, purportedly on behalf of itself and all other investors in the Funds. The Complaint named as defendants Askin; Geoffrey Bradshaw-Mack; Kidder, Peabody & Co. Incorporated; Donaldson, Lufkin & Jenrette Securities Corp.; and Bear Stearns (collectively, the "Broker Dealers"). The action was transferred to the United States District Court for the Southern District of New York. The Complaint alleges, among other things, violations of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder; violations of Section 20(a) of the 1934 Act; common law fraud; aiding and abetting Askin's breach of fiduciary duty; breach of contract; and violations of the Uniform Commercial Code, in connection with the Broker Dealers' transactions with Funds. The Complaint seeks compensatory and punitive damages in unspecified amounts, together with the costs and expenses of the action. Other investors have indicated that they are considering whether they have additional claims against Bear Stearns and other firms in connection with their dealings with the Funds.
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (11) Statement Re Computation of Per Share Earnings. (12) Statement Re Computation of Ratio of Earnings to Fixed Charges. (27) Financial Data Schedule. (b) Reports on Form 8-K During the quarter, the Company filed the following Current Report on Form 8-K: (i) A Current Report on Form 8-K dated August 1, 1995, pertaining to the Company's results of operations for the three-months and fiscal year ended June 30, 1995.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Bear Stearns Companies Inc. (Registrant) Date: November 13, 1995 By: \s\ William J. Montgoris William J. Montgoris Chief Financial Officer and Chief Operating Officer
THE BEAR STEARNS COMPANIES INC. FORM 10-Q Exhibit Index Exhibit No. Description Page (11) Statement Re Computation of Per Share Earnings. (12) Statement Re Computation of Ratio of Earnings to Fixed Charges. (27) Financial Data Schedule.