SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 1996 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ______________ Commission File Number 1-8989 The Bear Stearns Companies Inc. (Exact name of registrant as specified in its charter) Delaware 13-3286161 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 245 Park Avenue, New York, New York 10167 (Address of principal executive offices) (Zip Code) (212)272-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of February 11, 1997, the latest practicable date, there were 114,392,510 shares of Common Stock, $1 par value, outstanding.
TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition at December 31, 1996 (Unaudited) and June 30, 1996 Consolidated Statements of Income (Unaudited) for the three-and six-month periods ended December 31, 1996 and December 31, 1995 Consolidated Statements of Cash Flows (Unaudited) for the six-month periods ended December 31, 1996 and December 31, 1995 Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K Signatures
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Assets <CAPTION> December 31, June 30, 1996 1996 ------------ ------------ (Unaudited) (In thousands) <S> <C> <C> Cash and cash equivalents $ 832,067 $ 127,847 Cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations 2,152,131 1,702,124 Securities purchased under agreements to resell 27,061,787 24,517,275 Securities borrowed 31,213,945 29,611,207 Receivables: Customers 8,047,211 7,976,373 Brokers, dealers and others 1,897,497 811,391 Interest and dividends 246,483 305,725 Financial instruments owned, at fair value 33,159,010 26,222,134 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization 342,948 331,924 Other assets 443,071 479,157 ------------ ----------- Total Assets $105,396,150 $92,085,157 ============ =========== See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Liabilities and Stockholders' Equity <CAPTION> December 31, June 30, 1996 1996 -------------- ----------- (Unaudited) (In thousands, except share data) <S> <C> <C> Short-term borrowings $ 12,620,911 $ 9,867,619 Securities sold under agreements to repurchase 39,680,817 33,353,899 Payables: Customers 24,571,887 21,905,015 Brokers, dealers and others 1,458,518 1,847,599 Interest and dividends 377,667 448,121 Financial instruments sold, but not yet purchased, at fair value 16,056,170 13,916,581 Accrued employee compensation and benefits 545,766 712,962 Other liabilities and accrued expenses 616,704 1,094,333 ----------- ------------ 95,928,440 83,146,129 ----------- ------------ Commitments and Contingencies Long-term Borrowings 6,429,221 6,043,614 ----------- ------------ Preferred Stock Issued by Subsidiary 150,000 150,000 ----------- ------------ Stockholders' Equity Preferred Stock 437,500 437,500 Common Stock, $1.00 par value: 200,000,000 shares authorized; 159,803,764 shares issued at December 31, 1996 and June 30, 1996 159,804 159,804 Paid-in capital 1,696,419 1,696,217 Retained earnings 931,969 694,108 Capital Accumulation Plan 460,477 471,191 Treasury stock, at cost Adjustable Rate Cumulative Preferred Stock, Series A - 2,512,350 and 2,341,350 shares at December 31, 1996 and June 30, 1996, respectively (103,043) (95,389) Common Stock - 44,859,306 and 41,664,729 shares at December 31, 1996 and June 30, 1996, respectively (680,936) (598,217) Note receivable from ESOP Trust (13,701) (19,800) ------------- ------------ Total Stockholders' Equity 2,888,489 2,745,414 ------------- ------------ Total Liabilities and Stockholders' Equity $105,396,150 $92,085,157 ============= ============ See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <CAPTION> Three Months Ended Six Months Ended December 31, December 31, December 31, December 31, 1996 1995 1996 1995 --------------- -------------- -------------- --------------- (In thousands, except share data) <S> <C> <C> <C> <C> Revenues Commissions $ 183,584 $ 163,220 $ 345,154 $ 318,410 Principal transactions 429,239 260,840 724,131 530,755 Investment banking 183,138 150,397 291,832 237,802 Interest and dividends 745,610 607,060 1,405,867 1,160,981 Other income 14,959 8,546 25,699 16,549 -------------- -------------- -------------- -------------- Total Revenues 1,556,530 1,190,063 2,792,683 2,264,497 Interest expense 616,396 502,403 1,163,865 959,348 -------------- -------------- -------------- -------------- Revenues, net of interest expense 940,134 687,660 1,628,818 1,305,149 -------------- -------------- -------------- -------------- Non-interest expenses Employee compensation and benefits 456,825 345,427 801,197 652,424 Floor brokerage, exchange and clearance fees 34,447 30,787 66,013 60,533 Communications 24,778 22,407 49,334 44,905 Occupancy 21,945 21,256 43,291 42,402 Depreciation and amortization 21,450 17,347 41,418 33,623 Advertising and market development 16,683 14,382 31,439 26,906 Data processing and equipment 8,206 8,706 15,761 17,687 Other expenses 65,245 46,467 111,293 89,378 -------------- -------------- -------------- -------------- Total non-interest expenses 649,579 506,779 1,159,746 967,858 -------------- -------------- -------------- -------------- Income before provision for income taxes 290,555 180,881 469,072 337,291 Provision for income taxes 114,043 75,725 184,111 138,289 -------------- -------------- -------------- -------------- Net income $ 176,512 $ 105,156 $ 284,961 $ 199,002 ============== ============== ============== ============== Net income applicable to common shares $ 170,573 $ 98,956 $ 272,991 $ 186,592 ============== ============== ============== ============== Earnings per share $ 1.21 $ 0.69 $ 1.92 $ 1.29 ============== ============== ============== ============== Weighted average common and common equivalent shares outstanding 148,780,831 150,209,550 149,826,971 150,861,434 ============== ============== ============== ============== Cash dividends declared per common share $ 0.15 $ 0.15 $ 0.15 $ 0.15 ============== ============== ============== ============== See Notes to Consolidated Financial Statements. </TABLE>
<TABLE> THE BEAR STEARNS COMPANIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <CAPTION> Six Months Ended December 31, December 31, 1996 1995 ------------- ------------- (in thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 284,961 $ 199,002 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 41,418 33,623 Deferred income taxes (38,419) (17,771) Other 33,010 26,405 (Increases) decreases in operating receivables: Securities borrowed (1,602,738) 1,489,306 Customers (70,838) 51,966 Brokers, dealers and others (1,086,106) (725,586) Other 44,425 (10,385) Increases (decreases) in operating payables: Customers 2,666,872 1,147,630 Brokers, dealers and others (384,326) 2,346,449 Other (70,454) 6,932 (Increases) decreases in: Cash and securities deposited with clearing organizations or segregated in compliance with Federal regulations (450,007) (229,246) Securities purchased under agreements to resell (2,544,512) (7,134,932) Financial instruments owned (6,936,876) (5,468,771) Other assets 129,915 44,359 Increases (decreases) in: Securities sold under agreements to repurchase 6,326,918 6,925,139 Financial instruments sold, but not yet purchased 2,139,589 (93,821) Accrued employee compensation and benefits (193,796) (88,912) Other liabilities and accrued expenses (479,765) 47,991 ------------- ------------- Cash used in operating activities (2,190,729) (1,450,622) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings 2,753,292 565,690 Issuance of long-term borrowings 862,638 719,308 Capital Accumulation Plan (10,714) 5,227 Common Stock distributions 10,729 103 Note repayment from ESOP Trust 6,099 5,647 Payments for: Retirement of Senior Notes (478,944) (289,000) Treasury stock purchases (105,655) (51,741) Cash dividends paid (47,064) (47,892) ------------- ------------- Cash provided by financing activities 2,990,381 907,342 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements (52,442) (40,790) Purchases of investment securities and other assets (78,661) (2,259) Proceeds from sales of investment securities 35,671 18,865 ------------- ------------- Cash used in investing activities (95,432) (24,184) ------------- ------------- Net increase (decrease) in cash and cash equivalents 704,220 (567,464) Cash and cash equivalents, beginning of period 127,847 700,501 ------------- ------------- Cash and cash equivalents, end of period $ 832,067 $ 133,037 ============= ============= See Notes to Consolidated Financial Statements. </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"). All material intercompany transactions and balances have been eliminated. Certain prior period amounts have been reclassified to conform with the current period's presentation or restated for the effects of stock dividends. The consolidated financial statements reflect all adjustments which, in the opinion of management, are normal and recurring and are necessary for a fair statement of the results for the interim periods presented. The consolidated financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The nature of the Company's business is such that the results of any interim period may not be indicative of the results to be expected for an entire fiscal year. 2. FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments owned and financial instruments sold, but not yet purchased consist of the Company's proprietary trading and investment accounts, at fair value, as follows: <TABLE> <CAPTION> December 31 June 30 (in thousands) 1996 1996 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> Financial instruments owned: US government and agency $ 12,423,759 $ 8,258,074 Other sovereign governments 1,768,151 656,699 State and municipal 185,403 149,697 Corporate equity and convertible debt 8,414,418 8,492,570 Corporate debt 6,214,685 4,739,512 Derivative financial instruments 2,039,119 1,855,617 Mortgages and other mortgage-backed securities 1,909,198 1,796,322 Other 204,277 273,643 ----------- ----------- $33,159,010 $26,222,134 =========== =========== Financial instruments sold, but not yet purchased: US government and agency $ 7,924,749 $ 5,502,459 Other sovereign governments 432,921 964,808 Corporate equity and convertible debt 3,810,537 4,482,426 Corporate debt 1,038,383 877,576 Derivative financial instruments 2,847,135 2,088,621 Other 2,445 691 ------------ ----------- $ 16,056,170 $13,916,581 ============ =========== </TABLE>
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. COMMITMENTS AND CONTINGENCIES At December 31, 1996, the Company was contingently liable for unsecured letters of credit of approximately $2.2 billion and letters of credit of approximately $352.4 million secured by financial instruments. These letters of credit are principally used as deposits for securities borrowed and to satisfy margin deposits at option and commodity exchanges. In the normal course of business, the Company has been named as a defendant in several lawsuits which involve claims for substantial amounts. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management, after consultation with counsel, that the resolution of such suits will not have a material adverse effect on the results of operations or the financial condition of the Company. 4. NET CAPITAL REQUIREMENTS The Company's principal operating subsidiary, Bear, Stearns & Co. Inc. ("Bear Stearns") and Bear Stearns' wholly owned subsidiary, Bear, Stearns Securities Corp. ("BSSC"), are registered broker-dealers and accordingly, are subject to Securities and Exchange Commission Rule 15c3-1 (the "Net Capital Rule") and the capital rules of the New York Stock Exchange, Inc. ("NYSE") and other principal exchanges of which Bear Stearns and BSSC are members. Bear Stearns and BSSC have consistently operated in excess of the minimum net capital requirements imposed by the capital rules. Included in the computation of net capital of Bear Stearns is net capital of BSSC in excess of 5% of aggregate debit items arising from customer transactions, as defined. At December 31, 1996, Bear Stearns' net capital, as defined, of $ 1.20 billion exceeded the minimum requirement by $ 1.17 billion. Bear Stearns International Limited ("BSIL") and certain other wholly owned, London-based subsidiaries, are subject to regulatory capital requirements of the Securities and Futures Authority. BSIL and the other subsidiaries have consistently operated in excess of these requirements.
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. EARNINGS PER SHARE Earnings per share is computed by dividing net income applicable to Common and Common Equivalent Shares by the weighted average number of Common and Common Equivalent Shares outstanding during each period presented. Common Equivalent Shares include the assumed distribution of shares of Common Stock issuable under certain of the Company's deferred compensation arrangements, with appropriate adjustments made to net income for expense accruals related thereto. Additionally, shares of Common Stock issued or issuable under various employee benefit plans are included as Common Equivalent Shares. 6. CASH FLOW INFORMATION Cash payments for interest approximated interest expense for the six-months ended December 31, 1996 and December 31, 1995. Income taxes paid totaled $218.4 million and $118.3 million for the six-months ended December 31, 1996 and December 31, 1995, respectively. 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company, in its capacity as a dealer in over-the-counter derivative financial instruments and in connection with its proprietary market-making and trading activities, enters into transactions in a variety of cash and derivative financial instruments in order to reduce its exposure to market, currency, and interest rate risk. SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," defines a derivative as a future, forward, swap, or option contract, or other financial instruments with similar characteristics such as caps, floors, and collars. Generally these financial instruments represent future commitments to exchange interest payment streams or currencies or to purchase or to sell other financial instruments at specific terms at specified future dates. Option contracts provide the holder with the right, but not the obligation, to purchase or sell a financial instrument at a specific price before or on an established date. These financial instruments may have market and/or credit risk in excess of amounts recorded in the Consolidated Statements of Financial Condition.
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) In order to measure derivative activity, notional or contract amounts are frequently utilized. Notional/contract amounts, which are not included on the consolidated statements of financial condition, are used to calculate contractual cash flows to be exchanged and are generally not actually paid or received, with the exception of currency swaps, foreign exchange forwards, and exercised options. The notional/contract amounts of financial instruments that give rise to off-balance sheet market risk are indicative only of the extent of involvement in the particular class of financial instrument and are not necessarily an indication of overall market risk. The following table represents the notional/contract amounts of the Company's outstanding derivative financial instruments at December 31, 1996 and June 30, 1996: <TABLE> December 31, June 30, In billions 1996 1996 ------------------------------------------------------------------------------------------------ <S> <C> <C> Interest Rate: Swap agreements, including options, swaptions, caps, collars, and floors $164.8 $175.2 Futures contracts 24.4 60.5 Options held 2.0 3.0 Options written .7 3.1 Foreign Exchange: Futures contracts 2.4 2.3 Forward contracts 11.2 7.9 Options held 5.0 3.2 Options written 5.4 3.3 Mortgage-Backed Securities: Forward Contracts 35.1 23.0 Equity: Swap agreements 4.9 3.8 Futures contracts 1.1 .5 Options held .4 1.1 Options written .5 1.3 </TABLE>
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued) The derivative instruments used in the Company's trading and dealer activities, are marked to market daily with the resulting gains or losses recorded in the Consolidated Statements of Financial Condition and the related income or loss reflected in revenues derived from principal transactions. The fair values of derivative financial instruments held or issued for trading purposes as of December 31, 1996 and June 30, 1996 were as follows: <TABLE> <CAPTION> December 31, June 30, 1996 1996 ---------------------- ----------------------- . In millions Assets Liabilities Assets Liabilities ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Swap agreements $902 $1,213 $678 $846 Futures and forward contracts 299 219 280 307 Options held 849 897 Options written 1,440 968 </TABLE> The average monthly fair values of the derivative financial instruments for the six-months ended December 31, 1996 and the fiscal year ended June 30, 1996 were as follows: <TABLE> <CAPTION> December 31, June 30, 1996 1996 -------------------- ---------------------- . In millions Assets Liabilities Assets Liabilities ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Swap agreements $652 $897 $611 $698 Futures and forward contracts 236 237 286 275 Options held 889 704 Options written 1,194 795 </TABLE> The notional/contract amounts of these instruments do not represent the Company's potential risk of loss due to counterparty nonperformance. Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of the contract. The Company's exposure to credit risk associated with counterparty nonperformance is limited to the replacement cost, net of collateral held, ("net replacement cost") of over-the-counter contracts in a gain position, which are recognized in the Company's Consolidated Statements of Financial Condition. Exchange-traded financial instruments, such as futures and options, generally do not give rise to significant counterparty exposure due to margin requirements of the individual exchanges. Options written generally do not give rise to counterparty credit risk since they obligate the Company (not its counterparty) to perform. The Company's net replacement cost of derivatives in a gain position at December 31, 1996, was approximately $474.7 million. 8. SUBSEQUENT EVENT On January 29, 1997, the Board of Directors declared a 5% stock dividend on the Company's Common Stock to shareholders of record at February 14, 1997, to be distributed February 28, 1997. Per share amounts and weighted average shares outstanding for all periods included in the consolidated financial statements are presented after giving retroactive effect to the stock dividend.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's principal business activities, investment banking, securities trading and brokerage, are, by their nature, highly competitive and subject to various risks, particularly volatile trading markets and fluctuations in the volume of market activity. Consequently, the Company's net income and revenues in the past have been, and are likely to continue to be, subject to wide fluctuations, reflecting the impact of many factors including, securities market conditions, the level and volatility of interest rates, competitive conditions, and the size and timing of transactions. Moreover the results of operations for a particular interim period may not be indicative of results to be expected for an entire fiscal year. For a description of the Company's business, including its trading in cash instruments and derivative products, its underwriting and trading policies, and their respective risks, and the Company's risk management policies and procedures, see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Three-Months Ended December 31, 1996 Compared to December 31, 1995 . The December 1996 quarter was generally characterized by strong fixed income and equity markets and a favorable underwriting environment. Net income in the 1996 quarter was $176.5 million, an increase of 67.9% from the $105.2 million in the comparable prior year quarter. Revenues, net of interest expense ("net revenues"), increased 36.7% to $940.1 million from $687.7 million in the 1995 quarter. The increase was attributable to increases in all revenue categories, particularly principal transactions. Earnings per share were $1.21 for the 1996 quarter versus $0.69 for the comparable 1995 quarter. The earnings per share amounts have been adjusted for all stock dividends. Commission revenues increased 12.5% in the 1996 quarter to $183.6 million from $163.2 million in the comparable 1995 quarter. This increase was attributable to increased revenues from the firm's institutional equities and private client services as well as increased securities clearance revenues. Revenues from principal transactions increased 64.6% in the 1996 quarter to $429.2 million from $260.8 million in the comparable 1995 quarter, reflecting increases in revenues derived from the Company's fixed income activities, principally in the mortgage-backed securities, asset-backed securities and corporate bond areas. These increases were principally due to active fixed income market conditions and increased customer order flow.
The Company's principal transaction revenues by reporting categories, including derivatives, are as follows: Three-Months Ended Three-Months Ended December 31, 1996 December 31, 1995 ------------------ ------------------ Fixed Income $287,021 $140,014 Equity 84,221 89,187 Foreign Exchange & Other Derivative Financial Instruments 57,997 31,639 ---------- --------- $429,239 $260,840 ========== ========= Investment banking revenues increased 21.8% to $183.1 million in the 1996 quarter from $150.4 million in the comparable 1995 quarter. This increase reflected an increase in underwriting revenue partially offset by a decrease in merger and acquisition and advisory fees. The increase in underwriting revenue was principally due to increased levels of high yield and equity new issue volume as compared to the 1995 quarter. Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 23.5% to $129.2 million in the 1996 quarter from $104.7 million in the comparable 1995 quarter. This increase was attributable to higher levels of customer activities reflecting the continued expansion of the clearance business. Average margin debt increased to $30.3 billion in the 1996 quarter from $19.8 billion in the comparable 1995 quarter. Average free credit balances increased to $7.4 billion in the 1996 quarter from $6.2 billion in the comparable 1995 quarter. Employee compensation and benefits increased 32.2% to $456.8 million in the 1996 quarter from $345.4 million in the comparable 1995 quarter. The increase was attributable to higher incentive and discretionary bonus accruals associated with the increased earnings in the 1996 quarter. Employee compensation and benefits, as a percentage of net revenues, decreased to 48.59% in the 1996 quarter from 50.23% in the comparable 1995 quarter. All other expenses increased 19.5% to $192.8 million in the 1996 quarter from $161.4 million in the comparable 1995 quarter. Floor brokerage, exchange and clearance fees increased 11.9% in the 1996 quarter from the comparable 1995 quarter reflecting the increase in the volume of securities transactions processed. Increased depreciation costs reflected computer equipment upgrades. The remaining increases in advertising and market development costs and other operating expenses were associated with increased volume of business throughout the Company. The Company's effective tax rate decreased to 39.3% in the 1996 quarter compared to 41.9% in the comparable 1995 quarter due to a higher level of tax preference items in the 1996 quarter.
Six-Months Ended December 31, 1996 Compared to December 31, 1995 . Net income for the six-months ended December 31, 1996 was $285.0 million, an increase of 43.2% from $199.0 million for the comparable 1995 period. Revenues, net of interest expense ("net revenues"), increased 24.8% to $1.6 billion in the 1996 period from $1.3 billion in the 1995 period. The increase was attributable to increases in all revenue categories, particularly principal transactions and investment banking. Earnings per share were $1.92 for the 1996 period versus $1.29 for the comparable 1995 period. The earnings per share amounts have been adjusted for all stock dividends. Commission revenues increased 8.4% in the 1996 period to $345.2 million from $318.4 million in the comparable 1995 period. This increase was attributable to increased revenues from the firm's institutional equities and private client services as well as increased securities clearance revenues. Revenues from principal transactions increased 36.4% in the 1996 period to $724.1 million from $530.8 million in the comparable 1995 period, reflecting increases in revenues derived from the Company's fixed income activities, principally in the mortgage-backed securities, asset-backed securities and corporate bond areas. These increases were principally due to active fixed income market conditions and increased customer order flow. The Company's principal transaction revenues by reporting categories, including derivatives, are as follows: Six-Months Ended Six-Months Ended December 31, 1996 December 31, 1995 ----------------- ----------------- Fixed Income $474,367 $276,340 Equity 156,490 191,181 Foreign Exchange & Other Derivative Financial Instruments 93,274 63,234 -------- -------- $724,131 $530,755 ======== ======== Investment banking revenues increased 22.7% to $291.8 million in the 1996 period from $237.8 million in the comparable 1995 period. This increase reflected an increase in underwriting revenue partially offset by a decrease in merger and acquisition and advisory fees.
Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 20.0% to $242.0 million in the 1996 period from $201.6 million in the comparable 1995 period. This increase was attributable to higher levels of customer activities reflecting the continued expansion of the clearance business. Average margin debt increased to $27.8 billion in the 1996 period from $19.2 billion in the comparable 1995 period. Average free credit balances increased to $7.6 billion in the 1996 period from $6.0 billion in the comparable 1995 period. Employee compensation and benefits increased 22.8% to $801.2 million in the 1996 period from $652.4 million in the comparable 1995 period. The increase was attributable to higher incentive and discretionary bonus accruals associated with the increased earnings in the 1996 period. Employee compensation and benefits, as a percentage of net revenues, decreased to 49.19% in the 1996 period from 49.99% in the comparable 1995 period. All other expenses increased 13.7% to $358.5 million in the 1996 period from $315.4 million in the comparable 1995 period. Floor brokerage, exchange and clearance fees increased 9.1% in the 1996 period from the comparable 1995 period reflecting the increase in the volume of securities transactions processed. The remaining increase in other operating expenses was related to higher levels of depreciation costs reflecting computer equipment upgrades, increased advertising and market development costs related to the increase in underwritings and communications costs related to increased headcount. These increases were partially offset by a decrease in data processing costs. The Company's effective tax rate decreased to 39.3% in the 1996 period compared to 41.0% in the comparable 1995 period due to a higher level of tax preference items in the 1996 period. Liquidity and Capital Resources Financial Leverage The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of marketable securities inventories, which are marked to market daily, and collateralized receivables arising from customer-related and proprietary securities transactions. Collateralized receivables consist of resale agreements secured predominantly by US government and agency securities, and customer margin loans and securities borrowed which are typically secured by marketable corporate debt and equity securities. The Company's total assets and financial leverage can fluctuate significantly depending largely upon economic and market conditions, volume of activity, customer demand, and underwriting commitments. The Company's total assets at December 31, 1996 increased to $105.4 billion from $92.1 billion at June 30, 1996. The increase is primarily attributable to the growth in financial instruments owned, at fair value and securities borrowed.
The Company's ability to support fluctuations in total assets is a function of its ability to obtain short-term secured and unsecured funding and its access to sources of long-term capital in the form of long-term borrowings and equity, which together form its capital base. The Company continuously monitors the adequacy of its capital base which is a function of asset quality and liquidity. Highly liquid assets such as US government and agency securities typically are funded by the use of repurchase agreements and securities lending arrangements which require very low levels of margin. In contrast, assets of lower quality or liquidity require higher levels of overcollateralization, or margin, and consequently increased levels of capital, in order to obtain secured financing. Accordingly, the mix of assets being held by the Company significantly influences the amount of leverage the Company can employ and the adequacy of its capital base. Funding Strategy The Company's general funding strategy provides for the diversification of its short-term funding sources in order to maximize liquidity. Sources of short-term funding consist principally of collateralized borrowings, including repurchase transactions and securities lending arrangements, customer free credit balances, unsecured commercial paper, medium-term notes and bank borrowings generally having maturities from overnight to one year. Repurchase transactions, whereby securities are sold with a commitment for repurchase by the Company at a future date, represent the dominant component of secured short-term funding. The Company continued to increase the utilization of its medium-term note financing in order to extend maturities of its debt and achieve additional diversification of its funding sources. In addition to short-term funding sources, the Company utilizes long-term senior debt, including medium-term notes, as a longer term source of unsecured financing. The Company maintains an alternative funding strategy focused on the liquidity and self-funding ability of the underlying assets. The objective of the strategy is to maintain sufficient sources of alternative funding to enable the Company to fund debt obligations maturing within one year without issuing any new unsecured debt, including commercial paper. The most significant source of alternative funding is the Company's ability to hypothecate or pledge its unencumbered assets as collateral for short-term funding. As part of the Company's alternative funding strategy, the Company regularly monitors and analyzes the size, composition, and liquidity characteristics of the assets being financed and evaluates its liquidity needs in light of current market conditions and available funding alternatives. Through this analysis, the Company can continuously evaluate the adequacy of its equity base and the schedule of maturing term-debt supporting its present asset levels. The Company can then seek to adjust its maturity schedule, in light of market conditions and funding alternatives.
As part of the Company's alternative funding strategy, the Company maintains a committed revolving-credit facility (the "facility") totaling $2.0 billion which permits borrowing on a secured basis by Bear, Stearns & Co. Inc. ("Bear Stearns"), Bear, Stearns Securities Corp. ("BSSC") and certain affiliates. The facility provides that up to $1.0 billion of the total facility may be borrowed by the Company on an unsecured basis. Secured borrowings can be collateralized by both investment-grade and non-investment-grade financial instruments. In addition, this agreement provides for defined margin levels on a wide range of eligible financial instruments that may be pledged under the secured portion of the facility. The facility terminates in October 1997. There were no borrowings outstanding under the facility at December 31, 1996. Capital Resources The Company conducts a substantial portion of all of its operating activities within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC, Bear, Stearns International Limited ("BSIL") and Bear Stearns International Trading Limited ("BSIT"). In connection therewith, a substantial portion of the Company's long-term borrowings and equity have been used to fund investments in, and advances to, Bear Stearns, BSSC, BSIL and BSIT. The Company regularly monitors the nature and significance of those assets or activities conducted outside the broker-dealer subsidiaries and attempts to fund such assets with either capital or borrowings having maturities consistent with the nature and the liquidity of the assets being financed. In January 1997, Bear Stearns Capital Trust I, a wholly owned subsidiary of the Company, issued $200 million of Fixed/Adjustable Rate Capital Securities (the "Capital Securities"). The Capital Securities have a liquidation value of $1,000 per capital security with rights to semi-annual preferential cumulative cash distributions at an annual rate of 7% through January 2002. Thereafter, the rate will be variable based on the three-month London Interbank Offered Rate ("LIBOR"), plus a margin of 1.75%. Proceeds from the issuance of the Capital Securities were used to purchase Subordinated Debentures, from the Company which will mature on January 15, 2027. The interest rate on the Subordinated Debentures will be the same as the rate on the Capital Securities. The proceeds were then used by the Company for general corporate purposes.
During the six-months ended December 31, 1996 the Company repurchased 3,816,296 shares of Common Stock in connection with the Capital Accumulation Plan for Senior Managing Directors (the "Plan") at a cost of approximately $93.4 million. The Company intends, subject to market conditions, to continue to purchase in future periods a sufficient number of shares of Common Stock in the open market to enable the Company to issue shares in respect of all compensation deferred and any additional amounts allocated to participants under the Plan. Repurchases of Common Stock pursuant to the Plan are not made pursuant to the Company's Stock Repurchase Plan (the "Repurchase Plan") authorized by the Board of Directors. As of February 11, 1996, there have been no purchases under the Repurchase Plan. Cash Flows Cash and cash equivalents increased by $ 704.2 million during the six-months ended December 31, 1996 to $832.1 million. Total cash and cash equivalents decreased by $567.5 million during the six-months ended December 31, 1995 to $133.0 million. Cash used in operating activities during the six-months ended December 31, 1996 was $2.2 billion, mainly representing increases in financial instruments owned and securities purchased under agreements to resell partially offset by increases in customer payables and securities sold under agreements to repurchase. Financing activities provided cash of $3.0 billion, primarily derived from short- and long-term borrowings proceeds. Regulated Subsidiaries As registered broker-dealers, Bear Stearns and BSSC are subject to the net capital requirements of the Securities and Exchange Commission, the New York Stock Exchange, Inc. and the Commodity Futures Trading Commission, which are designed to measure the general financial soundness and liquidity of broker-dealers. Bear Stearns and BSSC have consistently operated in excess of the minimum net capital requirements imposed by these agencies. Additionally, BSIL and BSIT, London-based broker-dealer subsidiaries, are subject to the regulatory capital requirements of the Securities and Futures Authority, a self-regulatory organization established pursuant to the United Kingdom Financial Services Act of 1986. BSIL and BSIT have consistently operated in compliance with these capital requirements. Merchant Banking and Non-Investment-Grade Debt Securities As part of the Company's merchant banking activities, it participates from time to time in principal investments in leveraged acquisitions. As part of these activities, the Company originates, structures and invests in merger, acquisition, restructuring, and leveraged capital transactions, including leveraged buyouts. The Company's principal investments in these transactions are generally made in the form of equity investments or subordinated loans, and have not required significant levels of capital investment. At December 31, 1996 the Company's aggregate investments in leveraged transactions and its exposure related to any one transaction was not material. As part of the Company's fixed-income securities activities, the Company participates in the trading and sale of high yield securities, non-investment-grade debt securities, non-investment-grade mortgage loans and the securities of companies that are the subject of pending bankruptcy proceedings (collectively "high yield securities"). Non-investment-grade mortgage loans are principally secured by residential properties and include both non-performing loans and real estate owned. As of December 31, 1996, the Company held high yield securities of $1.2 billion in long inventory and $100 million in short inventory. These investments generally involve greater risk than investment-grade debt securities due to credit considerations, liquidity of secondary trading markets and vulnerability to general economic conditions. The level of the Company's high yield securities inventories, and the impact of such activities upon the Company's results of operations, can fluctuate from period to period as a result of customer demands and economic and market considerations. Bear Stearns' Risk Committee continuously monitors exposure to market and credit risk with respect to high yield securities inventories and establishes limits with respect to overall market exposure and concentrations of risk by both individual issuer and industry groups.
Part II - Other Information Item 1. Legal Proceedings In re Daisy Systems Corporation, Debtor As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a defendant in a litigation pending in the United States District Court, for the Northern District of California. The Court has set a trial date of November 24, 1997. In-Store Advertising Securities Litigation As previously reported in the Company's 1996 Form 10-K, Bear Stearns was a defendant in a litigation pending in the United States District Court for the Southern District of New York. The settlement of that action received final court approval on December 18, 1996. Henryk de Kwiatkowski v. Bear, Stearns & Co. Inc. et al. As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a defendant in a litigation pending in the United States District Court for the Southern District of New York. On December 16, 1996, Bear Stearns moved to dismiss the Amended Complaint. In re Lady Luck Gaming Corporation Securities Litigation: As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a defendant in a litigation pending in the United States District Court for the District of Nevada. On December 13, 1996, Defendants moved to dismiss the Second Amended Class Action Complaint. Primavera Familienstiftung v. David J. Askin, et al. As previously reported in the Company's 1996 Form 10-K, Bear, Stearns is a defendant in a litigation pending in the United States District Court for the Southern District Of New York.
Askin Capital Management L.P. (ACM), David J. Askin and Geoffrey S. Bradshaw-Mack (the "Askin Defendants") violated Sections 10 (b) and 20 (a) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder committed and committed common law fraud. On November 8, 1996, plaintiff filed a Third Amended Class Action Complaint, repleading its claim that the Askin Defendants committed federal securities law violations and common law fraud and that the Broker-Dealer Defendants aided and abetted the Askin Defendants' alleged fraud. On December 20, 1996, all defendants moved to dismiss the complaint. ABF Capital Management, et al. v. Askin Capital Management, L.P., et al. As previously reported in the Company's 1996 Form 10-K, Bear Stearns is a defendant in a litigation pending in the United States District Court for the Southern District of New York. On January 22, 1997, the Court dismissed the claims against the Broker-Dealer Defendants for aiding and abetting ACM's alleged breach of fiduciary duty, for unjust enrichment and for RICO violations, but denied the motion to dismiss the claims against the Broker-Dealer Defendants for aiding and abetting ACM's alleged fraud. Harrison J. Goldin as Trustee for the Bankruptcy Estates of Granite Partners, L.P., Granite Corp., and Quartz Hedge Fund v. Bear, Stearns & Co. Inc. and Bear, Stearns Capital Markets Inc. As previously reported in the Company's 1996 Form 10-K, Bear Stearns and Bear Stearns Capital Markets were defendants in a litigation pending in the United States Bankruptcy Court for the Southern District of New York. On December 2, 1996, Bear Stearns' motion to withdraw the reference of this case to the Bankruptcy Court was granted. The case now is pending in the United States District Court for the Southern District of New York. County of Orange, et ano. v. Bear, Stearns, et al. On December 5, 1996, the County of Orange, California (the "County") and John Moorlach, the County's Treasurer-Tax Collector, commenced an adversary proceeding in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court") against twenty-six defendants, including Bear, Stearns & Co., Inc. and Bear, Stearns Securities Corp. (collectively, "Bear Stearns"). The action arises in connection with a bankruptcy petition the County filed in the Bankruptcy Court on December 6, 1994. On May 17, 1996, the Bankruptcy Court confirmed a plan pursuant to which the County emerged from bankruptcy.
The complaint alleges, among other things, that numerous reverse repurchase transactions entered into between Orange County (through its former Treasurer-Tax Collector, Robert Citron) and the twenty-six defendants were ultra vires, or beyond the authority granted by the constitution and laws of California to the Treasurer-Tax Collector. The complaint also alleges that the defendants owed a duty to inform the County that the transactions were unsuitable and to refrain from entering into the transactions. The County seeks damages in unspecified amounts, an order that any claims asserted against the County in its bankruptcy case by any of the defendants should be disallowed and that any securities still held by any of the defendants pursuant to the challenged transactions should be turned over the County. The parties in this action, have entered into a stipulation staying the proceeding. Bear, Stearns denies all allegations of wrongdoing asserted against it in this litigation, intends to defend these claims vigorously, and believes that it has substantial defenses to these claims.
Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of the Company held on October 28, 1996 (the "Annual Meeting"), the stockholders of the Company approved the Company's Fiscal 1997 Performance Goals under, and an amendment to, the Management Compensation Plan (the "Performance Goals and Amendment"), and amendments to the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan Amendments") and the Performance Compensation Plan. In addition, at the Annual Meeting the stockholders of the Company elected thirty-nine directors to serve until the next Annual Meeting of Stockholders or until successors are duly elected and qualified. The affirmative vote of a majority of the shares of Common Stock represented at the Annual Meeting and entitled to vote on each matter was required to approve the Performance Goals and Amendment, the CAP Plan Amendments and the Performance Compensation Plan, while the affirmative vote of a plurality of the votes cast by holders of shares of Common Stock was required to elect the directors. With respect to the approval of the Performance Goals and Amendment, the CAP Plan Amendments and the Performance Compensation Plan, set forth below is information on the results of the votes cast at the Annual Meeting. Broker For Against Abstained Non-Votes --------- ----------- --------- --------- Performance Goals and Amendment 73,030,069 5,975,924 591,403 21,909,620 CAP Plan Amendments 99,096,835 1,740,855 669,326 0 Performance Compensation Plan 73,488,303 5,515,732 593,360 21,909,621
<TABLE> With respect to the election of directors, set forth below is information with respect to the nominees elected as directors of the Company at the Annual Meeting and the votes cast and\or withheld with respect to each such nominee. <CAPTION> Nominees For Withheld --------------------------------- ----------------- ------------------- <S> <C> <C> E. Garrett Bewkes III 100,151,711 1,355,305 Denis A. Bovin 100,135,042 1,371,974 James E. Cayne 100,118,650 1,388,366 Peter Cherasia 100,138,396 1,368,620 Ralph R. Cioffi 100,130,466 1,376,550 Barry S. Cohen 100,137,949 1,369,067 Wendy L. deMonchaux 100,127,752 1,379,264 Grace J. Fippinger * 100,218,863 1,288,153 Bruce E. Geismar 100,138,127 1,368,889 Carl D. Glickman 100,090,255 1,416,761 Thomas R. Green 100,228,251 1,278,765 Alan C. Greenberg 100,145,438 1,361,578 Donald J. Harrington 100,145,757 1,361,259 Richard Harriton 100,203,482 1,303,534 Daniel L. Keating 99,914,110 1,592,906 John W. Kluge 99,883,039 1,623,977 Mark E. Lehman 100,148,350 1,358,666 David A. Liebowitz 100,134,901 1,372,115 Bruce M. Lisman 100,135,575 1,371,441 Roland N. Livney 100,133,542 1,373,474 Michael Minikes 100,138,010 1,369,006 William J. Montgoris 100,144,940 1,362,076 Donald R. Mullen Jr. 100,137,210 1,369,806 Frank T. Nickell 100,227,474 1,279,542 Craig M. Overlander 100,137,934 1,369,082 Stephen E. Raphael 100,134,387 1,372,629 E. John Rosenwald Jr. 99,910,575 1,596,441 Lewis A. Sachs 99,978,574 1,528,442 Richard Sachs 100,121,463 1,385,553 Frederic V. Salerno 100,219,043 1,287,973 Alan D. Schwartz 99,913,058 1,593,958 David M. Solomon 100,123,406 1,383,610 Warren J. Spector 100,139,639 1,367,377 Robert M. Steinberg 100,135,809 1,371,207 Michael L. Tarnopol 100,144,251 1,362,765 Vincent Tese 100,133,652 1,373,364 Michael J. Urfirer 100,129,211 1,377,805 Fred Wilpon 99,901,178 1,605,838 Uzi Zucker 100,208,658 1,298,358 * - Subsequent to the election of the directors, Grace J. Fippinger died. </TABLE>
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10)(a)(6) Capital Accumulation Plan for Senior Managing Directors, as amended and restated as of January 22, 1997, certain provisions of which are subject to the approval of the Stockholders at the 1997 Annual Meeting (11) Statement Re Computation of Per Share Earnings (12) Statement Re Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K During the quarter, the Company filed the following Current Report on Form 8-K. (i) A Current Report on Form 8-K dated October 16, 1996, pertaining to the Company's results of operations for the three-months ended September 27, 1996. (ii) A Current Report on Form 8-K dated October 29, 1996, pertaining to the declaration of dividends and the appointment of Samuel L. Molinaro Jr. as Chief Financial Officer. (iii) A Current Report on Form 8-K dated November 12, 1996, pertaining to information in the 1996 Proxy Statement.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Bear Stearns Companies Inc. (Registrant) Date: February 14, 1997 By: /s/ Samuel L. Molinaro Jr. Samuel L. Molinaro Jr. Senior Vice President - Finance and Chief Financial Officer
THE BEAR STEARNS COMPANIES INC. FORM 10-Q Exhibit Index Exhibit No. Description - ----------- ----------- (10) (a) (6) Capital Accumulation Plan for Senior Managing Directors, as amended and restated as of January 22, 1997, certain provisions of which are subject to the approval of the Stockholders at the 1997 Annual Meeting (11) Statement Re Computation of Per Share Earnings (12) Statement Re Computation of Earnings to Fixed Charges (27) Financial Data Schedule