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, 1997 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ______________ Commission File Number 1-8989 The Bear Stearns Companies Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3286161 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 245 Park Avenue, New York, New York 10167 (Address of principal executive offices) (Zip Code) (212)272-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of February 10, 1998, the latest practicable date, there were 115,099,817 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, 1997 (Unaudited)and June 30, 1997 Consolidated Statements of Income (Unaudited) for the three-and six-month periods ended December 31, 1997 and December 31, 1996 Consolidated Statements of Cash Flows (Unaudited) for the six- month periods ended December 31, 1997 and December 31, 1996 Notes to Consolidated Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 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, 1997 1997 -------------- ---------------- (Unaudited) (In thousands) <S> <C> <C> Cash and cash equivalents $ 1,269,745 $ 1,249,132 Cash and securities deposited with clearing organizations or segregated in compliance with federal regulations 2,806,890 1,448,814 Securities purchased under agreements to resell 33,997,149 28,340,599 Securities borrowed 42,821,711 40,711,280 Receivables: Customers 12,683,829 8,572,521 Brokers, dealers and others 1,458,913 1,227,947 Interest and dividends 416,653 405,892 Financial instruments owned, at fair value 40,818,227 38,437,280 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization 434,587 379,533 Other assets 803,321 660,537 -------------- ---------------- Total Assets $ 137,511,025 $ 121,433,535 ============== ================ 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, 1997 1997 -------------- ------------- (Unaudited) (In thousands, except share data) <S> <C> <C> Short-term borrowings $ 14,522,968 $ 14,416,671 Securities sold under agreements to repurchase 46,243,472 39,431,216 Payables: Customers 35,663,578 29,921,386 Brokers, dealers and others 1,357,043 2,808,359 Interest and dividends 574,092 452,662 Financial instruments sold, but not yet purchased, at fair value 22,450,080 20,784,796 Accrued employee compensation and benefits 773,943 907,337 Other liabilities and accrued expenses 1,136,802 964,409 -------------- ---------------- 122,721,978 109,686,836 -------------- ---------------- Commitments and contingencies Long-term borrowings 10,894,572 8,120,328 -------------- ---------------- Guaranteed Preferred Beneficial Interests in Company Subordinated Debt Securities 200,000 200,000 Preferred stock issued by subsidiary 150,000 150,000 -------------- ---------------- Stockholders' Equity Preferred Stock 437,500 437,500 CommonStock, $1.00 par value; 200,000,000 shares authorized; 167,784,941 shares issued at December 31, 1997 and June 30, 1997 167,785 167,785 Paid-in capital 1,883,674 1,874,016 Retained earnings 1,306,688 1,031,736 Capital Accumulation Plan 694,967 655,007 Treasury stock, at cost Adjustable Rate Cumulative Preferred Stock, Series A - 2,520,750 shares at December 31, 1997 and June 30, 1997 (103,421) (103,421) Common Stock - 50,993,838 shares and 50,191,531 shares at December 31, 1997 and June 30, 1997, respectively (835,604) (772,551) Note receivable from ESOP Trust (7,114) (13,701) -------------- ---------------- Total Stockholders' Equity 3,544,475 3,276,371 -------------- ---------------- Total Liabilities and Stockholders' Equity $137,511,025 $121,433,535 ============== ================ 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, 1997 1996 1997 1996 -------------- ---------------- -------------- -------------- (In thousands, except share data) <S> <C> <C> <C> <C> Revenues Commissions $ 230,496 $ 183,584 $ 443,940 $ 345,154 Principal transactions 390,512 429,239 782,026 724,131 Investment banking 278,884 183,138 498,212 291,832 Interest and dividends 1,081,298 745,610 2,045,869 1,405,867 Other income 11,877 14,959 36,025 25,699 -------------- ---------------- -------------- -------------- Total Revenues 1,993,067 1,556,530 3,806,072 2,792,683 Interest expense 919,304 616,396 1,736,219 1,163,865 -------------- ---------------- -------------- -------------- Revenues, net of interest expense 1,073,763 940,134 2,069,853 1,628,818 -------------- ---------------- -------------- -------------- Non-interest expenses Employee compensation and benefits 535,793 456,825 1,034,990 801,197 Floor brokerage, exchange and clearance fees 43,522 34,447 83,107 66,013 Communications 28,824 24,778 56,957 49,334 Depreciation and amortization 27,427 21,450 53,444 41,418 Occupancy 25,387 21,945 48,933 43,291 Advertising and market development 20,057 16,683 36,011 31,439 Data processing and equipment 12,460 8,206 24,694 15,761 Other expenses 120,688 65,245 204,974 111,293 -------------- ---------------- -------------- -------------- Total non-interest expenses 814,158 649,579 1,543,110 1,159,746 -------------- ---------------- -------------- -------------- Income before provision for income taxes 259,605 290,555 526,743 469,072 Provision for income taxes 99,383 114,043 204,903 184,111 -------------- ---------------- -------------- -------------- Net income $ 160,222 $ 176,512 $ 321,840 $ 284,961 ============== ================ ============== ============== Net income applicable to common shares 154,299 170,573 309,991 272,991 ============== ================ ============== ============== Earnings per share $ 1.11 $ 1.21 $ 2.22 $ 1.92 ============== ================ ============== ============== Weighted average common and common equivalent shares outstanding 152,312,886 148,780,833 152,757,258 149,826,973 ============== ================ ============== ============== Cash dividends declared per common share $ 0.15 $ 0.14 $ 0.30 $ 0.29 ============== ================ ============== ============== 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, 1997 1996 ---------------- -------------- (In thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 321,840 $ 284,961 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization 53,444 41,418 Deferred income taxes (58,468) (38,419) Other 56,738 33,010 (Increases) decreases in operating receivables: Cash and securities deposited with clearing organizations or segregated in compliance with federal regulations (1,358,076) (450,007) Securities purchased under agreements to resell (5,656,550) (2,544,512) Securities borrowed (2,110,431) (1,602,738) Receivables: Customers (4,111,308) (70,838) Brokers, dealers and others (230,966) (1,086,106) Financial instruments owned (2,380,947) (6,936,876) Other assets (14,591) 174,340 Increases (decreases) in operating payables: Securities sold under agreements to repurchase 6,812,256 6,326,918 Payables: Customers 5,742,192 2,666,872 Brokers, dealers and others (1,454,246) (384,326) Financial instruments sold, but not yet purchased 1,665,284 2,139,589 Accrued employee compensation and benefits (184,391) (193,796) Other liabilities and accrued expenses 286,743 (550,219) ---------------- -------------- Cash used in operating activities (2,621,477) (2,190,729) --------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings 106,297 2,753,292 Issuance of long-term borrowings 3,433,171 862,638 Capital Accumulation Plan 51,010 (10,714) Common Stock distributions 7,552 10,729 Note repayment from ESOP Trust 6,587 6,099 Payments for: Retirement of Senior Notes (660,299) (478,944) Treasury stock purchases (71,165) (105,655) Cash dividends paid (47,160) (47,064) ---------------- -------------- Cash provided by financing activities 2,825,993 2,990,381 ---------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment and leasehold improvements (108,498) (52,442) Purchases of investment securities and other assets (80,807) (78,661) Proceeds from sales of investment securities and other assets 5,402 35,671 ---------------- -------------- Cash used in investing activities (183,903) (95,432) ---------------- -------------- Net increase in cash and cash equivalents 20,613 704,220 Cash and cash equivalents, beginning of period 1,249,132 127,847 ---------------- -------------- Cash and cash equivalents, end of period $1,269,745 $ 832,067 ================ ============== 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 1997 1997 - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> Financial instruments owned: US government and agency $ 8,641,199 $ 9,163,407 Other sovereign governments 2,663,875 1,847,691 Corporate equity and convertible debt 10,905,220 11,280,199 Corporate debt 5,777,656 4,961,737 Derivative financial instruments 3,556,782 2,780,231 Mortgages and other mortgage-backed securities 8,811,676 7,858,200 Other 461,819 545,815 ------- ------- $ 40,818,227 $ 38,437,280 ============ ============ Financial instruments sold, but not yet purchased: US government and agency $ 8,014,466 $ 8,687,884 Other sovereign governments 3,119,594 1,479,278 Corporate equity 4,221,154 4,985,396 Corporate debt 1,676,024 1,099,700 Derivative financial instruments 5,358,404 4,412,986 Other 60,438 119,552 ------ ------- $ 22,450,080 $ 20,784,796 ============ ============ </TABLE>
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. COMMITMENTS AND CONTINGENCIES At December 31, 1997, the Company was contingently liable for unsecured letters of credit of approximately $2.2 billion and letters of credit of approximately $104.0 million secured by financial instruments that 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, 1997, Bear Stearns' net capital, as defined, of $1.62 billion exceeded the minimum requirement by $1.59 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.
THE BEAR STEARNS COMPANIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. EARNINGS PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") during the quarter ended December 31, 1997. SFAS 128 simplifies the standards for computing and presenting earnings per share ("EPS") previously found in APB Opinion No. 15, Earnings Per Share, and makes them comparable to international EPS standards. As the Company has a simple capital structure and makes a single presentation of earnings per share on the income statement, the adoption of this standard did not affect the reported amounts of EPS for the current or comparable period. EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period presented. Common 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 shares. 6. CASH FLOW INFORMATION Cash payments for interest approximated interest expense for the six-months ended December 31, 1997 and December 31, 1996. Income taxes paid totaled $227.1 million and $218.4 million for the six-months ended December 31, 1997 and December 31, 1996, respectively. 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company, in its capacity as a dealer in over-the-counter derivative financial instruments and in connection with its proprietary market-making and trading activities, enters into transactions in a variety of cash and derivative financial instruments in order to reduce its exposure to market risk, which includes interest rate, exchange rate, equity price and commodity price 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 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 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 and mortgage-backed securities 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 as of December 31, 1997 and June 30, 1997: December 31, June 30, In billions 1997 1997 -------------------------------------------------------------------------- Interest Rate: Swap agreements, including options, swaptions, caps, collars, and floors $251.7 $208.3 Futures contracts 36.7 34.3 Options held 4.5 4.0 Options written 0.5 0.7 Foreign Exchange: Futures contracts 12.0 19.9 Forward contracts 20.1 13.6 Options held 14.5 10.0 Options written 13.1 9.4 Mortgage-Backed Securities: Forward Contracts 44.3 40.5 Equity: Swap agreements 7.5 6.0 Futures contracts 1.2 0.6 Options held 4.4 2.8 Options written 3.7 2.9
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 recorded at fair value on a daily basis 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 as of December 31, 1997 and June 30, 1997 were as follows: December 31, June 30, 1997 1997 ------------------------------------------------------ In millions Assets Liabilities Assets Liabilities -------------------------------------------------------------------------- Swap agreements $1,013 $1,163 $730 $1,250 Futures and forward contracts 259 316 172 248 Options held 2,292 1,880 Options written 3,906 2,927 The average monthly fair values of the derivative financial instruments for the six-months ended December 31, 1997 and the fiscal year ended June 30, 1997 were as follows: December 31, June 30, 1997 1997 ------------------------------------------------------------------------ In millions Assets Liabilities Assets Liabilities --------------------------------------------------------------------------- Swap agreements $ 990 $1,336 $ 734 $1,029 Futures and forward contracts 283 325 245 218 Options held 2,501 1,120 Options written 3,692 1,657 The notional/contract amounts of these instruments do not represent the Company's potential risk of loss due to counterparty nonperformance. Credit risk arises from the potential inability of counterparties to perform in accordance with the terms of the contract. The Company's exposure to credit risk associated with counterparty nonperformance is limited to the net replacement cost of over-the-counter contracts 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 the margin requirements of the individual exchanges. Generally, options written 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 after consideration of collateral at December 31, 1997 was approximately $1,310.2 million.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Company's principal business activities, investment banking, securities trading and brokerage, are, by their nature, highly competitive and subject to various risks, in particular 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. Certain Statements Contained In This Discussion Are "Forward-looking Statements" Within The Meaning Of The Private Securities Litigation Reform Act Of 1995. Such Forward-looking Statements Involve Known And Unknown Risks And Uncertainties, Including Those Previously Mentioned, Which Could Cause Actual Results To Differ Materially From Those Discussed In The Forward-looking Statements. 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, 1997. Three-Months Ended December 31, 1997 Compared to December 31, 1996 The December 1997 quarter reflected an environment characterized by volatile equity and fixed income markets attributed to turbulence in the Asian markets. Domestic markets reflected volatility, however, experienced continued strong volumes and a favorable underwriting and merger and acquisitions environment. Net income in the 1997 quarter was $160.2 million, a decrease of 9.2% from the $176.5 million in the comparable prior year quarter. Revenues, net of interest expense ("net revenues"), increased 14.2% to $1,073.8 million from $940.1 million in the 1996 quarter. Earnings per share were $1.11 for the 1997 quarter versus $1.21 for the comparable 1996 quarter. The earnings per share amounts have been adjusted for all stock dividends. Commission revenues increased 25.6% in the 1997 quarter to $230.5 million from $183.6 million in the comparable 1996 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 decreased 9.0% in the 1997 quarter to $390.5 million from $429.2 million in the comparable 1996 quarter, reflecting decreases in revenues derived from the Company's fixed income activities, principally in mortgage-backed securities and corporate bond areas. The Company's principal transaction revenues by reporting categories, including derivatives, are as follows: Three-Months Ended Three-Months Ended December 31, 1997 December 31, 1996 Fixed Income $226,903 $287,021 Equity 108,297 84,221 Foreign Exchange & Other Derivative Financial Instruments 55,312 57,997 ------ ------ $390,512 $429,239 ======== ======== Investment banking revenues increased 52.3% to $278.9 million in the 1997 quarter from $183.1 million in the comparable 1996 quarter. This increase reflected an increase in merger and acquisition fees and advisory fees as well as an increase in underwriting revenues. The increase in underwriting revenues was principally due to increased levels of equity and high yield new issue volume as compared to the 1996 quarter. Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 25.4% to $162.0 million in the 1997 quarter from $129.2 million in the comparable 1996 quarter. This increase was primarily attributable to higher levels of margin debt. Average margin debt increased to $44.3 billion in the 1997 quarter from $30.3 billion in the comparable 1996 quarter. Average free credit balances increased to $11.0 billion in the 1997 quarter from $7.4 billion in the comparable 1996 quarter. Employee compensation and benefits increased 17.3% to $535.8 million in the 1997 quarter from $456.8 million in the comparable 1996 quarter. The increase was attributable to higher incentive and discretionary bonus accruals and an increase in headcount. Employee compensation and benefits, as a percentage of net revenues, increased to 49.9% in the 1997 quarter from 48.6% in the comparable 1996 quarter. All other expenses increased 44.4% to $278.4 million in the 1997 quarter from $192.8 million in the comparable 1996 quarter. Floor brokerage, exchange and clearance fees increased 26.3% in the 1997 quarter from the comparable 1996 quarter reflecting the increase in the volume of securities transactions processed. Expenses related to depreciation and data processing increased reflecting computer equipment upgrades. The increase in other expenses was primarily related to an increase in reserves for legal matters, reflecting the impact of the settlement of the NASDAQ antitrust litigation, an increase in accruals for expenses associated with the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan") and increased EDP professional fees. EDP professional fees increased due to additional consultants hired for various technology initiatives. The Company's effective tax rate decreased to 38.3% in the 1997 quarter compared to 39.3% in the comparable 1996 quarter due to a higher level of tax preference items in the 1997 quarter. Six-Months Ended December 31, 1997 Compared to December 31, 1996 . Net income for the six-months ended December 31, 1997 was $321.8 million, an increase of 12.9% from $285.0 million for the comparable 1996 period. Revenues, net of interest expense ("net revenues"), increased 27.1% to $2.1 billion in the 1997 period from $1.6 billion in the 1996 period. The increase was attributable to increases in all revenue categories, particularly investment banking and commissions. Earnings per share were $2.22 for the 1997 period versus $1.92 for the comparable 1996 period. The earnings per share amounts have been adjusted for all stock dividends. Commission revenues increased 28.6% in the 1997 period to $443.9 million from $345.2 million in the comparable 1996 period. This increase was primarily 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 8.0% in the 1997 period to $782.0 million from $724.1 million in the comparable 1996 period, primarily reflecting increases in revenues derived from the Company's foreign exchange and derivative activities. Additionally, principal transactions revenues derived from equity activities increased primarily attributable to increases in the convertible bonds and risk arbitrage areas. These increases were partially offset by a decline in the Company's fixed income activities, primarily mortgage-backed securities and corporate bonds.
The Company's principal transaction revenues by reporting categories, including derivatives, are as follows: Six-Months Ended Six-Months Ended December 31, 1997 December 31, 1996 Fixed Income $441,125 $474,367 Equity 201,196 156,490 Foreign Exchange & Other Derivative Financial Instruments 139,705 93,274 ------- ------ $782,026 $724,131 ======== ======== Investment banking revenues increased 70.7% to $498.2 million in the 1997 period from $291.8 million in the comparable 1996 period. This increase reflected an increase in merger and acquisition fees and advisory fees as well as an increase in underwriting revenues. The increase in underwriting revenues was principally due to increased levels of equity and high yield new issue volume as compared to the 1996 period. Net interest and dividends (revenues from interest and net dividends, less interest expense) increased 28.0% to $309.7 million in the 1997 period from $242.0 million in the comparable 1996 period. This increase was primarily attributable to higher levels of margin debt and customer short activity. Average margin debt increased to $43.5 billion in the 1997 period from $27.8 billion in the comparable 1996 period. Average free credit balances increased to $10.2 billion in the 1997 period from $7.6 billion in the comparable 1996 period. Average customer short balances increased to $54.9 billion in the 1997 period from $36.6 billion in the 1996 period. Employee compensation and benefits increased 29.2% to $1,035.0 million in the 1997 period from $801.2 million in the comparable 1996 period. The increase was attributable to higher incentive and discretionary bonus accruals and an increase in headcount. Employee compensation and benefits, as a percentage of net revenues, increased to 50.0% in the 1997 period from 49.2% in the comparable 1996 period. All other expenses increased 41.7% to $508.1 million in the 1997 period from $358.5 million in the comparable 1996 period. Floor brokerage, exchange and clearance fees increased 25.9% in the 1997 period from the comparable 1996 period reflecting the increase in the volume of securities transactions processed. Expenses related to depreciation and data processing increased reflecting computer equipment upgrades. The increase in other expenses was primarily related to an increase in reserves for legal matters, an increase in accruals for expenses associated with the CAP Plan and increases in EDP professional fees. EDP professional fees increased due to additional consultants hired for various technology initiatives. The Company's effective tax rate decreased to 38.9% in the 1997 period compared to 39.3% in the comparable 1996 period due to a higher level of tax preference items in the 1997 period. Liquidity and Capital Resources Financial Leverage The Company maintains a highly liquid balance sheet with a majority of the Company's assets consisting of marketable securities inventories, which are marked to market daily, and collateralized receivables arising from customer-related and proprietary securities transactions. Collateralized receivables consist of resale agreements secured predominantly by U.S. government and agency securities, 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, 1997 increased to $137.5 billion from $121.4 billion at June 30, 1997. The increase is primarily attributable to the growth in securities purchased under agreements to resell, receivables from customers, and financial instruments owned, at fair value. 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 U.S. government and agency securities, typically are funded by the use of repurchase agreements and securities lending arrangements which require very low levels of margin. In contrast, assets of lower quality or liquidity require higher 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. During the six months ended December 31, 1997, the Company issued $3.4 billion in long-term debt which, net of retirements, served to increase long-term debt to $10.9 billion at December 31, 1997 from $8.1 billion at June 30, 1997. The substantial increase in long-term borrowings reflects both the Company's intent to further extend maturities to finance balance sheet growth and favorable market conditions for issuance. 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 $3.7 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 $1.85 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 1998 . There were no borrowings outstanding under the facility at December 31, 1997. Capital Resources The Company conducts a substantial portion of all of its operating activities within its regulated broker-dealer subsidiaries, Bear Stearns, BSSC, Bear Stearns International Limited ("BSIL") and Bear Stearns International Trading Limited ("BSIT"). In connection therewith, a substantial portion of the Company's long-term borrowings and equity have been used to fund investments in, and advances to, Bear Stearns, BSSC, BSIL and BSIT. The Company regularly monitors the nature and significance of those assets or activities conducted outside the broker-dealer subsidiaries and attempts to fund such assets with either capital or borrowings having maturities consistent with the nature and the liquidity of the assets being financed. During the six-months ended December 31, 1997, the Company repurchased 1,695,166 shares of Common Stock in connection with the CAP Plan at a cost of approximately $72.1 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 CAP Plan. Repurchases of Common Stock pursuant to the CAP Plan are not made pursuant to the Company's Stock Repurchase Plan (the "Repurchase Plan") 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 Repurchase Plan. As of February 10, 1998, there have been no purchases under the Repurchase Plan. On January 15, 1998, the Company issued 5,000,000 depositary shares representing 1,250,000 shares of Cumulative Preferred Stock, Series E ("Series E Preferred Stock"), having an aggregate liquidation preference of $250,000,000. Each depositary share represents a one-fourth interest in a share of Series E Preferred Stock. Dividends on the Series E Preferred Stock are payable at an annual rate of 6.15%. Series E Preferred Stock is redeemable at the option of the Company at any time on or after January 15, 2008, in whole or in part, at a redemption price of $200 per share (equivalent to $50 per depositary share), plus accrued but unpaid dividends to the redemption date. Cash Flows Cash and cash equivalents increased by $20.6 million during the six-months ended December 31, 1997 to $1.3 billion. Cash used in operating activities during the six-months ended December 31, 1997 was $2.6 billion, mainly representing increases in securities purchased under agreements to resell, receivables from customers and financial instruments owned partially offset by increases in securities sold under agreements to repurchase and payables to customers. Financing activities provided cash of $2.8 billion, primarily derived from long-term borrowings proceeds partially offset by retirement of senior notes. 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. 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, 1997, the Company's aggregate investments in leveraged transactions and its exposure related to any one transaction was not material. As part of the Company's fixed-income securities activities, the Company participates in the trading and sale of high yield, 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. At December 31, 1997, the Company held high yield securities of $ 1.9 billion in long inventory and $ 261.4 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 group.
Year 2000 Issue The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year and therefore, without consideration of the impact of the upcoming change in the century. Such programs may not be able to accurately process dates ending in the year 2000 and after and the Company has determined that it needs to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. Over a year ago, the Company established a task force to review and develop an action plan to address the Year 2000 issue. Such ongoing assessment and monitoring has continued and includes having the Company assess the degree of compliance of its significant vendors, clients and correspondents to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issue. The Company also participates actively on various industry-wide testing committees. The Company has and will continue to utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company's total projected Year 2000 project cost, including the estimated costs and time associated with the impact of third party Year 2000 issues, are based on presently available information. Such project cost will primarily be expensed as incurred. To date, the amounts incurred and expensed related to the assessment of, and preliminary efforts in connection with, the Year 2000 project and the development of a remediation plan have not been material to the operation of the Company. The remaining cost of the Year 2000 project will be funded through operating cash flows and is not expected to have a material effect on future results of operations. The Company presently believes that with modification to existing software and conversions to new software, the Year 2000 issue can be mitigated. It is anticipated that the Company will complete the reprogramming and replacement phase of the project by the end of calendar 1998 which will give the Company calendar 1999 as a test period. However, if such modifications and conversions are not completed on a timely basis, the Year 2000 issue could have a material impact on the operations of the Company. Additionally, there can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------------- ----------- The Company's principal business activities by their nature engender significant market and credit risks. Managing these risks is critical to the success and stability of the Company. As a result, comprehensive risk management policies and procedures have been established to identify, control and monitor each of these major risks. Additionally, the Company's diverse portfolio of business activities helps to reduce the impact that volatility in any particular market may have on its net revenues. In addition to market risk, the Company is also subject to credit risk, operating risk and funding risk. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates and in equity and commodity prices. Market risk is inherent to both derivative and non-derivative financial instruments, and accordingly, the scope of the Company's market risk management procedures extends beyond derivatives to include all market risk sensitive financial instruments. The Company's exposure to market risk is directly related to its role as a financial intermediary in customer-related transactions and to its proprietary trading and arbitrage activities. For a discussion of the Company's primary market risk exposures, which includes interest rate risk, foreign exchange rate risk, and equity price risk, and a discussion of how those exposures are managed see the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997. Value at Risk The estimation of potential losses that could arise from changes in market conditions is typically accomplished through the use of statistical models which seek to predict risk of loss based on historical price and volatility patterns. Such statistical models are commonly known as value at risk. Value at risk is used to describe a probabilistic approach to measuring the exposure to market risk. This approach utilizes statistical concepts to estimate the probability of the value of a financial instrument falling above or below a specified amount. The calculation utilizes the standard deviation of historical changes in value of the market risk sensitive financial instruments (i.e., volatility) to estimate the amount of change in the current value that could occur at a specified probability level. Measuring market risk using statistical risk management models has recently become the main focus of risk management efforts by many companies whose earnings are significantly exposed to changes in the fair value of financial instruments. The Company believes that statistical models alone do not provide a reliable method of monitoring and controlling risk. While value at risk models are relatively sophisticated, the quantitative risk information generated is limited by the parameters established in creating the related models. The financial instruments being evaluated may have features which may trigger a potential loss in excess of the amounts previously disclosed if the changes in market rates or prices exceed the confidence level of the
model used. Therefore, such models do not substitute for the experience or judgment of senior management and traders, who have extensive knowledge of the markets and adjust positions and revise strategies as they deem necessary. The Company uses these models only as a supplement to other risk management tools. For purposes of Securities and Exchange Commission disclosure requirements, the Company has performed an entity-wide value at risk analysis of virtually all of the Company's financial assets and liabilities, including all reported financial instruments owned and sold, repurchase and resale agreements, and funding assets and liabilities. The value at risk related to non-trading financial instruments has been included in this analysis and not reported separately because the amounts were not material. The calculation is based on a methodology which uses a one-day interval and a 95% confidence level. Interest rate and foreign exchange rate risk use a Monte Carlo value at risk approach. For interest rates, each country's yield curve has five factors which describe possible curve movements. These were generated from principal component analysis. In addition, volatility and spread risk factors were used, where appropriate. Inter-country correlations were also used. Equity price risk was measured using a historical value at risk. Equity derivatives were treated as correlated with various indices, of which the Company used forty. Parameter estimates, such as volatilities and correlations, were based on daily tests through December 31, 1997. This table illustrates the value at risk for each component of market risk as of: December 31, June 30, in millions 1997 1997 - ----------- ----- ----- MARKET RISK Interest $14.8 $ 11.6 Currency 3.2 3.2 Equity 12.5 8.9 As previously discussed, the Company utilizes a wide variety of market risk management methods, including: limits for each trading activity; marking all positions to market on a daily basis; daily profit and loss statements; position reports; aged inventory position reports; and independent verification of all inventory pricing. Additionally, trading department management reports positions, profits and losses, and trading strategies to the Risk Committee on a weekly basis. The Company believes that these procedures, which stress timely communication between trading department management and senior management, are the most important elements of the risk management process.
PART II - Other Information Item 1. Legal Proceedings Spencer C. Busby, et al. v. Donna Karan International, et al./In re Donna Karan International Inc. Securities Litigation As previously reported in the Company's 1997 Form 10-K and 10-Q for the first quarter of 1998, Bear Stearns is a defendant in litigation pending in the United States District Court for the Eastern District of New York. On November 10, 1997, plaintiffs filed an amended consolidated complaint. Plaintiffs allege violations by all defendants, including the Underwriter Defendants of Sections 11 and 12(a)(2) of the Securities Act of 1933. Other defendants are alleged to have violated Section 15 of the Securities Act and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Gregory P. Christofferson, et al. v. Bear Stearns & Co., Inc., et al. As previously reported in the Company's 1997 Form 10-K and 10-Q for the first quarter of 1998, Bear Stearns and three Bear Stearns officers are defendants in a litigation pending in the Superior Court of the State of California in and for the County of Los Angeles. The case has been settled. In re Granite Partners, L.P., Granite Corporation and Quartz Hedge Fund. As previously reported in the Company's 1997 Form 10-K, Bear Stearns is a defendant in litigation pending in the United States District Court for the Southern District of New York. On October 27, 1997, the Primavera, ABF Capital, Montpellier and Johnston cases were consolidated for pre-trial purposes. In re Lady Luck Gaming Corporation Securities Litigation. As previously reported in the Company's 1997 Form 10-K and 10-Q for the first quarter of 1998, Bear Stearns is a defendant in litigation pending in the United States District Court for the District of Nevada. On October 8, 1997, the court dismissed with prejudice all of plaintiffs' claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The court also dismissed with prejudice plaintiffs' claims under Sections 11, 12(2) and 20(a) of the Securities Act of 1933, with respect to eleven of sixteen alleged misrepresentations or
omissions in the Lady Luck prospectus underlying the litigation. Plaintiffs' claims with respect to the remaining five alleged misrepresentations or omissions were dismissed without prejudice, pending the filing of an amended complaint limited only to those claims. On November 6, 1997, plaintiffs filed a Third Amended Complaint alleging claims under Sections 11, 12(2) and 15 of the Securities Act of 1933. NASDAQ Antitrust Litigation. As previously reported in the Company's 1997 Form 10-K and 10-Q for the first quarter of 1998, over 30 market-makers, including Bear Stearns, are defendants in litigation pending in the United States District Court for the Southern District of New York. On December 23, 1997, plaintiffs and all but one of the defendants who previously had not agreed to settle the litigation, including Bear Stearns, agreed to a proposed settlement that is subject to court approval. That settlement requires, among other things, that Bear Stearns (1) pay, on or before January 7, 1998, approximately $1.1 million to a settlement fund; and (2) pay, on or before September 30, 1998, to the settlement fund U.S. Treasury securities which shall mature on or before July 30, 1999, and shall have a value at maturity of approximately $40.6 million. On December 31, 1997, the court issued an order expanding the Class Period to May 1, 1989 through July 17, 1996. Also on December 31, 1997, the court preliminarily approved the proposed settlement on behalf of the expanded class. The settlement is subject to final approval by the court following notice to class members and a hearing on the fairness of the settlement. Option Portfolio Limited Partnership, et al. v. Bear Stearns & Co., Inc. et al. On September 17, 1997, eight individuals and entities claiming to have an interest in a limited partnership that was a former Bear Stearns brokerage customer commenced an NASD arbitration proceeding against Bear Stearns and a former Bear Stearns account executive. The claimants assert claims based upon alleged common law fraud, negligence, breach of fiduciary duty and respondeat superior. The claimants seek damages in an amount in excess of $23 million. On December 11, 1997, Bear Stearns filed a petition to stay the arbitration in New York Supreme Court, New York County, New York. Bear Stearns denies all allegations of wrongdoing asserted against it in the arbitration proceeding, 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 27, 1997 (the "Annual Meeting"), the stockholders of the Company approved the Company's Fiscal 1998 Performance Goals under, and an amendment to, the Management Compensation Plan (the "Performance Goals and Amendment"), amendments to the Capital Accumulation Plan for Senior Managing Directors (the "CAP Plan Amendments") and amendments to the Performance Compensation Plan (the "Performance Compensation Plan Amendments"). In addition, at the Annual Meeting the stockholders of the Company elected 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 Amendments, 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 Amendments, 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 75,898,984 1,605,060 384,623 22,078,356 CAP Plan Amendments 75,078,868 2,310,232 499,566 22,078,357 Performance Compensation Plan 95,951,429 3,144,759 547,909 322,926 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. Nominees For Withheld --------------------------------- ----------------- ------------------- James E. Cayne 99,468,600 498,423 Carl D. Glickman 99,451,835 515,188 Alan C. Greenberg 99,551,568 415,455 Donald J. Harrington 99,550,079 416,944 William L. Mack 99,009,176 957,847 Frank T. Nickell 99,477,502 489,521 Frederic V. Salerno 99,460,651 506,372 Vincent Tese 99,002,398 964,625 Fred Wilpon 99,468,527 498,496
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (3) (b) By-laws, as restated as of January 21, 1998 (10)(a)(6) Capital Accumulation Plan for Senior Managing Directors, as amended and restated as of January 21, 1998 (10)(a)(8) Performance Compensation Plan, as restated as of January 21, 1998 (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 October 14, 1997, pertaining to the Company's results of operations for the three-months ended September 26, 1997. (ii) A Current Report on Form 8-K dated October 28, 1997, pertaining to the declaration of quarterly dividends.
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 13, 1998 By: /s/Sam L. Molinaro -------------------------- 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 Page (3) (b) By-laws, as restated as of January 21, 1998 30 (10) (a) (6) Capital Accumulation Plan for Senior Managing Directors, as amended and restated as of January 21, 1998 48 (10) (a) (8) Performance Compensation Plan, as restated as of January 21, 1998 84 (11) Statement Re Computation of Per Share Earnings 89 (12) Statement Re Computation of Earnings to Fixed Charges 90 (27) Financial Data Schedule 91