SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 29, 1996 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 May 8, 1996, the latest practicable date, there were 114,782,276 shares of Common Stock, $1 par value, outstanding. TABLE OF CONTENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Statements of Financial Condition at March 29, 1996 (Unaudited) and June 30, 1995. Consolidated Statements of Income (Unaudited) for the three- and nine-month periods ended March 29, 1996 and March 31, 1995. Consolidated Statements of Cash Flows (Unaudited) for the nine-month periods ended March 29, 1996 and March 31, 1995. Notes to Consolidated Financial Statements (Unaudited). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Part II. OTHER INFORMATION Item 1. Legal Proceedings. Item 6. Exhibits and Reports on Form 8-K. Signatures. <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Assets <CAPTION> March 29, June 30, 1996 1995 (Unaudited) (In thousands, except share data) <S> <C> <C> Cash and cash equivalents $ 360,605 $ 700,501 Cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations 2,052,723 1,309,573 Securities purchased under agreements to resell 28,547,487 18,940,744 Securities borrowed 26,585,796 24,632,088 Receivables Customers 6,648,099 5,993,772 Brokers, dealers and others 527,846 578,676 Interest and dividends 226,716 227,069 Financial instruments owned - at fair value 25,779,459 21,509,498 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization 320,532 312,867 Other assets 394,423 392,372 Total Assets $91,443,686 $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> March 29, June 30, 1996 1995 (Unaudited) (In thousands, except share data) <S> <C> <C> Short-term borrowings $ 9,822,689 $ 8,570,777 Securities sold under agreements to repurchase 35,087,923 29,584,724 Payables Customers 20,794,173 16,236,611 Brokers, dealers and others 1,430,884 1,167,311 Interest and dividends 360,282 311,101 Financial instruments sold, but not yet purchased - at fair value 14,876,331 11,241,118 Accrued employee compensation and benefits 632,080 469,189 Other liabilities and accrued expenses 680,630 453,924 83,684,992 68,034,755 Commitments and Contingencies Long-term Borrowings 5,092,646 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 March 29, 1996 and June 30, 1995 152,203 152,203 Paid-in capital 1,571,735 1,557,237 Retained earnings 686,684 430,330 Capital Accumulation Plan 294,716 344,338 Treasury stock - at cost: Adjustable Rate Cumulative Preferred Stock, Series A - 2,341,350 and 2,118,550 shares at March 29, 1996 and June 30, 1995, (95,389) (85,507) respectively Common Stock - 36,208,919 and 34,866,529 shares at March 29, 1996 and June 30, 1995, respectively (511,601) (458,193) Note receivable from ESOP Trust (19,800) (25,447) Total Stockholders' Equity 2,516,048 2,352,461 Total Liabilities and Stockholders' Equity $91,443,686 $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 Nine Months Ended March 29, March 31, March 29, March 31, 1996 1995 1996 1995 (In thousands, except share data) <S> <C> <C> <C> <C> Revenues Commissions $ 183,182 $ 148,925 $ 501,592 $ 395,908 Principal transactions 353,073 248,648 883,828 577,585 Investment banking 144,357 99,811 382,159 233,243 Interest and dividends 604,777 523,890 1,765,758 1,436,027 Other income 10,607 6,148 27,156 19,817 Total revenues 1,295,996 1,027,422 3,560,493 2,662,580 Interest expense 503,754 439,091 1,463,102 1,214,021 Revenues, net of interest expense 792,242 588,331 2,097,391 1,448,559 Non-interest expenses Employee compensation and benefits 392,442 300,243 1,044,866 754,531 Floor brokerage, exchange and clearance fees 35,461 27,002 95,994 78,735 Communications 23,149 21,642 68,054 64,310 Occupancy 21,686 21,879 64,088 61,971 Depreciation and amortization 17,495 15,180 51,118 43,392 Advertising and market development 13,926 11,577 40,832 43,065 Data processing and equipment 8,559 8,482 26,246 25,385 Other expenses 57,709 48,874 147,087 133,415 Total non-interest expenses 570,427 454,879 1,538,285 1,204,804 Income before provision for income taxes 221,815 133,452 559,106 243,755 Provision for income taxes 92,944 50,712 231,233 92,627 Net income $ 128,871 $ 82,740 $ 327,873 $ 151,128 Net income applicable to common shares $ 122,824 $ 76,432 $ 309,417 $ 132,259 Earnings per share $ 0.90 $ 0.58 $ 2.26 $ 1.00 Weighted average common and common equivalent shares outstanding 141,240,431 140,313,596 142,886,126 141,008,136 Cash dividends declared per common share $ 0.15 $ 0.15 $ 0.45 $ 0.45 </TABLE> <TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <CAPTION> Nine-Months Ended March 29, March 31, 1996 1995 (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 327,873 $ 151,128 Adjustments to reconcile net income to cash used for operating activities: Depreciation and amortization 51,118 43,392 Deferred income taxes (38,026) (24,138) Other 38,515 17,880 (Increases) decreases in operating receivables: Securities borrowed (1,953,708) (3,760,251) Brokers, dealers and others 50,830 (425,076) Customers (654,327) 1,563,114 Other (4,772) (38,582) Increases (decreases) in operating payables: Brokers, dealers and others 265,324 406,459 Customers 4,557,562 (114,911) Other 49,181 (18,396) (Increases) decreases in: Cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations (743,150) 1,474,620 Securities purchased under agreements to resell (9,606,743) 1,662,919 Financial instruments owned (4,269,961) (2,700,704) Other assets 35,077 (18,167) Increases (decreases) in: Securities sold under agreements to repurchase 5,503,199 (601,753) Financial instruments sold, but not yet purchased 3,635,213 1,851,397 Accrued employee compensation and benefits 138,991 (225,180) Other liabilities and accrued expenses 228,728 (115,956) Cash used in operating activities (2,389,076) (872,205) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings 1,251,912 1,041,543 Issuance of long-term borrowings 1,534,362 481,368 Allocation of Capital Accumulation Plan 5,227 Other common stock transactions 1,192 11,026 Note repayment from ESOP Trust 5,647 5,229 Payments for: Retirement of Senior Notes (509,000) (400,300) Treasury stock purchases (111,878) (51,141) Cash dividends paid (71,622) (69,460) Cash provided by financing activities 2,105,840 1,018,265 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements, net (58,783) (83,428) Purchases of investment securities and other assets (17,634) (1,172) Proceeds from sale of investment securities and other assets 19,757 31,538 Cash used in investing activities (56,660) (53,062) Net (decrease) increase in cash and cash equivalents (339,896) 92,998 Cash and cash equivalents, beginning of period 700,501 294,604 Cash and cash equivalents, end of period $ 360,605 $ 387,602 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): March 29, June 30, 1996 1995 Financial instruments owned: United States government and agency $ 7,851,053 $ 8,688,713 Non-US government 804,294 1,256,859 Corporate equity and convertible debt 7,715,136 5,235,219 Corporate debt 4,675,201 2,723,564 Derivative financial instruments 2,110,473 1,223,258 Mortgages and other mortgage-backed securities 2,116,122 1,771,735 Other 507,180 610,150 $25,779,459 $21,509,498 Financial instruments sold, but not yet purchased: United States government and agency $ 6,972,399 $ 6,111,612 Non-US government 887,687 765,230 Corporate equity 3,577,335 2,424,455 Corporate debt 1,082,795 781,792 Derivative financial instruments 2,355,643 1,155,527 Other 472 2,502 $14,876,331 $11,241,118 THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. COMMITMENTS AND CONTINGENCIES At March 29, 1996, the Company is contingently liable for unsecured letters of credit of approximately $1.9 billion and letters of credit of approximately $204.5 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 such suits will not have a material adverse effect on the results of operations or the financial condition of the Company. 4. NET CAPITAL REQUIREMENTS The Company's principal operating subsidiary, Bear, Stearns & Co. Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns Securities Corp. ("BSSC"), are registered broker- dealers and, accordingly, are subject to Securities and Exchange Commission Rule 15c3-1 (the "Net Capital Rule") and the capital rules of the New York Stock Exchange, Inc. ("NYSE") and other principal exchanges of which Bear Stearns and BSSC are members. Bear Stearns and BSSC have consistently operated in excess of NYSE & SEC capital requirements. Included in the computation of net capital of Bear Stearns is the net capital of BSSC in excess of 5% of aggregate debit items arising from customer transactions, as defined. At March 29, 1996, Bear Stearns' net capital of $1.35 billion exceeded the minimum requirement by $1.33 billion. Bear, Stearns International Limited ("BSIL"), Bear Stearns International Trading Limited ("BSIT") and certain other wholly owned, London-based, broker-dealer subsidiaries, are subject to regulatory capital requirements of the Securities and Futures Authority ("SFA"). BSIL, BSIT and the other subsidiaries have consistently operated in excess of these requirements. 5. EARNINGS PER SHARE Earnings per share is computed by dividing net income applicable to Common and Common Equivalent 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 nine- months ended March 29, 1996 and 1995, respectively. Income taxes paid totaled $213.0 million and $89.8 million for the nine-months ended March 29, 1996 and March 31, 1995, 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 March 29, 1996 and June 30, 1995 (in billions): Notional/ContractAmount March 29, June 30, 1996 1995 Interest Rate: Swap agreements, including options, swaptions, caps collars and floors $110.2 $68.0 Futures contracts 26.4 15.4 Options held 1.6 .5 Foreign Exchange: Futures contracts 2.6 .7 Forward contracts 6.3 4.7 Options held 1.4 2.1 Options written 1.5 1.8 Mortgage-Backed Securities: Forward contracts 37.6 28.1 Equity: Swap agreements 3.9 3.0 Futures contracts .8 .3 Options held 3.6 1.6 Options written 2.2 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 FairValue at March 29, 1996 June 30, 1995 Assets Liabilities Assets Liabilities Swap agreements $ 654 $ 866 $ 587 $ 492 Forward contracts 380 315 209 181 Options held 1,076 427 Options written 1,175 483 Total $2,110 $2,356 $ 1,223 $1,156 Average Fair Value 1 Average Fair Value 1 Assets Liabilities Assets Liabilities Swap agreements $ 579 $ 635 $ 598 $ 398 Forward contracts 205 253 131 120 Options held 647 393 Options written 748 262 Total $1,431 $1,636 $1,122 $ 780 <F1> 1 Average fair values represent month-end balances for the nine-months ended March 29, 1996 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 March 29, 1996, is approximately $383.7 million. 8. SUBSEQUENT EVENT On April 18, 1996, the Board of Directors declared a 5% stock dividend on the Company's Common Stock to shareholders of record at May 17, 1996, to be distributed May 31, 1996. Per share amounts and weighted average shares outstanding for all periods included in the consolidated financial statements are presented after giving retroactive effect to the stock dividend.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's principal business activities, investment banking, securities trading and brokerage, are, by their nature, highly competitive and subject to various risks, particularly volatile trading markets and fluctuations in the volume of market activity. Consequently, the Company's net income and revenues 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 March 29, 1996 Compared to March 31, 1995 The March 1996 quarter was characterized by favorable debt and equity markets and an increase in underwriting activity. Net income in the 1996 quarter was $128.9 million, an increase of 55.8% from the $82.7 million in the comparable prior year quarter. Revenues, net of interest expense ("net revenues"), increased 34.7% to $792.2 million in the 1996 quarter from $588.3 million in the 1995 quarter. The increase was attributable to increases in all revenue categories, particularly principal transactions and investment banking. Earnings per share were $0.90 for the 1996 quarter versus $0.58 for the comparable 1995 quarter. The earnings per share amounts reflect all stock dividends declared through the date of this report. Commission revenues increased 23.0% in the 1996 quarter to $183.2 million from $148.9 million in the comparable 1995 quarter. Commissions increased in all areas reflecting higher levels of customer and correspondent activity. Revenues from principal transactions increased 42.0% in the 1996 quarter to $353.1 million from $248.6 million in the 1995 quarter, reflecting increases in the Company's fixed income and equity market-making and trading activities, particularly mortgage-backed securities, derivatives, and arbitrage. This increase was principally due to increased customer demand and improved market conditions along with the expansion of the Company's derivative business. The Company's principal transaction revenues by reporting categories including derivatives, are as follows (in thousands): Three-Months Three-Months Ended Ended March 29, March 31, 1996 1995 Fixed Income $199,933 $131,790 Equity 98,712 96,270 Foreign Exchange & Other Derivative Financial Instruments 54,428 20,588 $353,073 $248,648 Investment banking revenues increased 44.6% to $144.4 million in the 1996 quarter from $99.8 million in the 1995 quarter. This increase reflected an increase in underwriting revenue partially offset by a decrease in merger and acquisition and advisory fees. Underwriting revenue increased due to increased levels of both debt and equity new issue volume. Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 19.1% to $101.0 million in the 1996 quarter from $84.8 million in the 1995 quarter. This increase is attributable to higher levels of margin debt primarily reflecting the continued expansion of customer activities in the correspondent business. Average quarterly margin debt increased to $21.7 billion in the 1996 quarter from $14.2 billion in the 1995 quarter. Average free credit balances increased to $7.0 billion in the 1996 quarter from $5.7 billion in the 1995 quarter. Employee compensation and benefits increased 30.7% to $392.4 million in the 1996 quarter from $300.2 million in the comparable 1995 quarter. The increase is attributable to higher incentive and discretionary bonus accruals associated with the increased earnings in the 1996 quarter. Employee compensation and benefits, as a percentage of net revenues, decreased to 49.54% in the 1996 quarter from 51.03% in the 1995 quarter. All other expenses increased 15.1% to $178.0 million in the 1996 quarter from $154.6 million in the 1995 quarter. Floor brokerage, exchange and clearance fees increased 31.3% in the 1996 quarter from the 1995 quarter reflecting the increase in the volume of securities transactions processed. The remaining increase in other operating expenses is related to higher levels of depreciation costs reflecting computer equipment upgrades and increased advertising and market development costs related to the increase in underwritings. The Company's effective tax rate increased to 41.9% in the 1996 quarter compared to 38.0% in the 1995 quarter due to increased state and local taxes. Nine-Months Ended March 29, 1996 Compared to March 31, 1995 Net income for the nine-months ended March 29, 1996 was $327.9 million, an increase of 117.0% from the $151.1 million for the comparable 1995 period. Revenues, net of interest expense ("net revenues"), increased 44.8% to $2.1 billion in the 1996 period from $1.4 billion in the 1995 period. The increase was attributable to increases across all revenue categories particularly principal transactions and investment banking. Earnings per share were $2.26 for the 1996 period versus $1.00 for the comparable 1995 period. The earnings per share amounts reflect all stock dividends declared through the date of this report. Commission revenues increased 26.7% in the 1996 period to $501.6 million from $395.9 million in the comparable 1995 period. Commissions increased in all areas reflecting higher levels of customer and correspondent activity. Revenues from principal transactions increased 53.0% in the 1996 period to $883.8 million from $577.6 million in the 1995 period, reflecting an increase in the Company's fixed income and equity market-making and trading activities, particularly convertible bonds, mortgage-backed securities and derivatives. This increase was principally due to increased customer demand and improved market conditions along with the expansion of the Company's derivative business. The Company's principal transaction revenues by reporting categories, including derivatives, are as follows (in thousands): Nine Months Nine Months Ended Ended March 29, March 31, 1996 1995 Fixed Income $475,719 $316,149 Equity 290,447 190,479 Foreign Exchange & Other Derivative Financial Instruments 117,662 70,957 $883,828 $577,585 Investment banking revenues increased 63.8% to $382.2 million in the 1996 period from $233.2 million in the comparable 1995 period. This increase reflected both an increase in underwriting revenue attributable to increased levels of both equity and debt new issue volume and an increase in merger and acquisition fees. Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 36.3% to $302.7 million in the 1996 period from $222.0 million in the 1995 period. This increase is attributable to higher levels of margin debt primarily reflecting the continued expansion of customer activities in the correspondent business. Employee compensation and benefits increased 38.5% to $1.0 billion in the 1996 period from $754.5 million in the comparable 1995 period. The increase is attributable to higher incentive and discretionary bonus accruals associated with the increased earnings in the 1996 period. Employee compensation and benefits, as a percentage of net revenues, decreased to 49.82% in the 1996 period from 52.09% in the 1995 period. All other expenses increased 9.6% to $493.4 million in the 1996 period from $450.3 million in the 1995 period. Floor brokerage, exchange and clearance fees increased 21.9% in the 1996 period from the 1995 period reflecting the increase in volume of securities transactions processed. The remaining increase in other operating expenses is related to higher levels of depreciation costs reflecting computer equipment upgrades . The Company's effective tax rate increased to 41.4% in the 1996 period compared to 38.0% in the 1995 period due to increased state and local taxes.
Liquidity and Capital Resources Financial Leverage The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of marketable securities inventories, which are marked to market daily, and collateralized receivables arising from customer-related and proprietary securities transactions. Collateralized receivables consist of resale agreements secured by US government and agency securities and customer margin loans and securities borrowed which are typically secured by marketable corporate debt and equity securities. The Company's total assets and financial leverage can fluctuate significantly depending upon economic and market conditions, volume of activity, customer demands and underwriting commitments. The Company's total assets at March 29, 1996 were $91.4 billion versus $74.6 billion at June 30, 1995. The increase is primarily attributable to the growth in securities purchased under agreements to resell. The Company's ability to support fluctuations in total assets is a function of its ability to obtain short-term secured and unsecured funding and its access to sources of long-term capital in the form of long-term borrowings and equity, which together form its capital base. The Company continuously monitors the adequacy of its capital base which is a function of asset quality and liquidity. The relationship between an asset's liquidity and the level of capital required to support the asset reflects the need to provide counterparties with collateral, or margin, in order to obtain secured financings. Highly liquid assets such as US government and agency securities typically are funded by the use of repurchase agreements and securities lending arrangements which require very low levels of margin. In contrast, assets of lower quality and/or liquidity require higher margin levels and consequently increased capital in order to obtain secured financing. The level of customer receivables and proprietary inventories the Company can maintain in certain of its regulated subsidiaries is also limited by rules of both the Securities and Exchange Commission ("SEC") and the Securities and Futures Authority ("SFA") in London. Accordingly, the mix of assets being held by the Company significantly influences the amount of leverage the Company can employ and the adequacy of its capital base. Funding Strategy Generally, the Company's funding strategy provides for the diversification of its short-term funding sources in order to maximize liquidity. Sources of short-term funding consist principally of collateralized borrowings, including repurchase transactions and securities lending arrangements, customer free credit balances, unsecured commercial paper, medium-term notes and bank borrowings generally having maturities from overnight to one year. Repurchase transactions, whereby securities are sold with a commitment for repurchase by the Company at a future date, represent the dominant component of secured short-term funding. The Company continued to increase the utilization of its medium-term note program to extend the maturities of its debt and achieve additional diversification of its funding sources. In addition to short-term funding sources, the Company utilizes long-term senior debt, including notes issued through its medium-term note program, as a longer term source of unsecured financing. The Company maintains an alternative funding strategy focused on the liquidity and self-funding ability of its underlying assets. The objective of the strategy is to maintain sufficient sources of alternative funding to enable the Company to fund debt obligations maturing within one year without issuing any new unsecured debt, including commercial paper. The most significant source of alternative funding is the Company's ability to hypothecate or pledge its unencumbered assets as collateral for short-term funding. As part of the Company's alternative funding strategy, the Company regularly monitors and analyzes the size, composition and liquidity characteristics of the assets being financed and evaluates its liquidity needs in light of current market conditions and available funding alternatives. Through this analysis, the Company evaluates the adequacy of its equity base and its schedule of maturing term- debt supporting its present asset levels. The Company can then seek to adjust its maturity schedule, in light of market conditions and funding alternatives. In addition, the Company maintains a committed revolving-credit facility (the "facility") totaling $2.0 billion which permits borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain affiliates. The facility provides that up to $1.0 billion of the total facility may be borrowed by the Company on an unsecured basis. Secured borrowings can be collateralized by both investment-grade and non-investment-grade financial instruments. In addition, this facility provides for defined margin levels on a wide range of eligible financial instruments which may be pledged under the secured portion of the facility. The facility terminates in October 1996. As of March 29, 1996, no amounts were outstanding under the facility. Capital Resources The Company conducts substantially all of its operating activities within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC, Bear, Stearns International Limited ("BSIL") and Bear Stearns International Trading Limited ("BSIT"). In connection therewith, a substantial portion of the Company's long-term borrowings and equity have been used to fund investments in, and advances to, Bear Stearns, BSSC, BSIL and BSIT. The Company regularly monitors the nature and significance of those assets or activities conducted outside the broker-dealer subsidiaries and funds such assets with either capital or borrowings having maturities generally consistent with the nature and liquidity of the assets being financed. During the nine-months ended March 29, 1996, the Company repurchased 4,629,690 shares of Common Stock in connection with the Capital Accumulation Plan for Senior Managing Directors (the "Plan") at a cost of approximately $100.5 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 $339.9 million during the nine-months ended March 29, 1996 to $360.6 million. Total cash and cash equivalents increased by $93.0 million during the nine- months ended March 31, 1995 to $387.6 million. Cash used in operating activities during the nine-months ended March 29, 1996 was $2.4 billion, mainly representing increases in financial instruments owned and securities purchased under agreements to resell partially offset by increases in securities sold under agreements to repurchase and in customer payables. Financing activities provided cash of $2.1 billion, primarily derived from short and long-term borrowing proceeds. Regulated Subsidiaries As registered broker-dealers, Bear Stearns and BSSC are subject to the net capital requirements of the SEC, the New York Stock Exchange, Inc. and the Commodity Futures Trading Commission, which are designed to measure the general financial soundness and liquidity of broker-dealers. Bear Stearns and BSSC have consistently operated in excess of the minimum net capital requirements imposed by these agencies. Additionally, BSIL and BSIT, London-based broker-dealer subsidiaries, are subject to the regulatory capital requirements of the SFA, a self regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. BSIL and BSIT have consistently operated in compliance with these capital requirements. Merchant Banking and Non-Investment-Grade Debt Securities As part of the Company's merchant banking activities, it participates periodically in principal investments in leveraged acquisitions. As part of these activities, the Company originates, structures and invests in merger, acquisition, restructuring and leveraged capital transactions, including leveraged buyouts. The Company's principal investments in these transactions are generally made in the form of equity investments or subordinated loans, and have not required significant levels of capital investment. At March 29, 1996, the Company's aggregate investments in leveraged transactions and its exposure related to any one transaction was not material. As part of its fixed-income securities activities, the Company participates in the trading and sale of high yield, non-investment- grade securities, non-investment-grade mortgage loans (including real estate owned) and securities of companies that are subject to pending bankruptcy proceedings (collectively "high yield securities"). Non-investment-grade mortgage loans are principally secured by residential properties and include both non-performing loans and real estate owned properties. As of March 29, 1996, the Company held in long and short inventory approximately $1.2 billion and $238 million, respectively of high yield securities. These investments generally involve greater risk than investment- grade debt securities due to credit considerations, liquidity of secondary trading markets and vulnerability to general economic conditions. The level of the Company's high yield securities inventories, and the impact of such activities upon the Company's results of operations, can fluctuate from period to period as a result of customer demands and economic and market considerations. Bear Stearns' Risk Committee continuously monitors exposure to market and credit risk with respect to high yield securities inventories and establishes limits with respect to overall market exposure and concentrations of risk by both the individual issuers and industry groups.
Part II Other Information Item 1. Legal Proceedings 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 Litigation which is pending in the United States District Court for the Southern District of New York. On April 4, 1996, the court granted the Venture Capital Defendants' motion for severance or separate trial, and ordered that the Underwriter Defendants' and the Venture Capital Defendants' Section 11 contribution claims against KPMG Peat Marwick be stayed pending resolution of the main action and then, if necessary, be tried separately. Thanksgiving Tower Partners et al. v. Anros Thanksgiving Partners As previously reported in the Company's 1995 Form 10-K, an affiliate of Bear Stearns is a defendant in a litigation entitled Thanksgiving Tower Partners which is pending in the United States District Court for the Northern District of Texas. On March 29, 1996, the court awarded the affiliate of Bear Stearns attorney's fees and costs in the amount of $879,949.47. Primavera Familienstiftung v. David J. Askin, et al.; ABF Capital Management et al. v. Askin Capital Management, L.P. et al.; In Re: Granite Partners, Granite Corporation Quartz Hedge Fund As previously reported in the Company's Form 10-Q for the first quarter of 1996, Bear Stearns is a defendant in a litigation entitled Primavera Familienstiftung v. David J. Askin, et al. which is pending in the United States District Court for the Southern District of New York. The action is related to a bankruptcy proceeding filed by Granite Partners, L.P., Granite Corporation, and Quartz Hedge Fund (the "Funds" or the "Debtors") pending in the Bankruptcy Court in the Southern District of New York (the "Bankruptcy Court"). On March 27, 1996, a group of investors in the Funds filed a lawsuit in the Supreme Court of the State of New York against Askin Capital Management, L.P. ("ACM") and three broker-dealers, including Bear Stearns. The suit alleges, among other things, that the broker-dealers aided and abetted an alleged fraud and breach of fiduciary duty by ACM to the plaintiffs, that the broker-dealers were unjustly enriched at the expense of the plaintiffs, and that each of the defendants is liable for violating the federal RICO statute. Among other things, the dealers are alleged to have created and encouraged ACM to purchase inappropriate securities, provided ACM with inflated "marks" for the securities in ACM's portfolios, unreasonably extended credit to ACM, and otherwise departed from the standards of ordinary care. The suit seeks recovery of the amounts the plaintiffs paid for their interests in the Funds (alleged to approximately $230 million), an unspecified amount of allegedly unjust enrichment, treble damages, punitive damages alleged to be no less than $1 billion, plus interest, costs, attorneys fees and other unspecified damages. On April 24, 1996, the case was removed to the United States District Court for the Southern District of New York. On April 9, 1996, the Bankruptcy Court granted in part and denied in part the Trustee's motion to stay the action filed in the District Court. On April 23, 1996, Bear Stearns and other defendants filed a motion to dismiss the action. On April 19, 1996, the Trustees issued and filed with the Bankruptcy Court a Final Report in his investigation of the events leading to the Debtor's bankruptcy filing. Among other things, the Trustees asserted that the Funds may have claims against Bear Stearns, including claims for commercially unreasonable liquidation purportedly for $44.3 million; for unpaid principal and interest purportedly for $13.7 million; and for wrongful liquidation, tortuous interference with contract, aiding and abetting ACM's breach of fiduciary duty, and other theories in unspecified amounts; plus potential punitive damages.
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 Reports on Form 8-K: (i) A Current Report on Form 8-K dated January 18, 1996, pertaining to the Company's results of operations for the three-months ended December 31, 1995. (ii) A Current Report on Form 8-K dated February 20, 1996, pertaining to a tax opinion and form of Warrant Agreement with respect to the Vantage Point Portfolio Call Warrants.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Bear Stearns Companies Inc. (Registrant) Date: May 13, 1996 By: /s/ Samuel L. Molinaro, Jr. Samuel L. Molinaro, Jr. Senior Vice President-Finance
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