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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
COMMISSION FILE NO. 0-14199
ALEX. BROWN INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 52-1434118
(State of (I.R.S. Employer I.D. No.)
incorporation)
135 EAST BALTIMORE STREET, BALTIMORE, MD 21202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(410) 727-1700
(TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK (PAR VALUE, $.10 PER SHARE)
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 -----.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. -----.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT, INCLUDING SHARES HELD IN STREET NAME BY ALEX. BROWN & SONS
INCORPORATED, THE REGISTRANT'S PRINCIPAL OPERATING SUBSIDIARY, WAS
APPROXIMATELY $324,836,958 BASED UPON THE LAST SALE PRICE AS REPORTED ON THE
NEW YORK STOCK EXCHANGE ON MARCH 11, 1994.
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF
MARCH 11, 1994 WAS 15,474,631.
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DOCUMENTS INCORPORATED BY REFERENCE
Those portions of the Company's 1993 Annual Report to Stockholders and
Proxy Statement which the Company will file pursuant to Regulation 14A on or
before March 31, 1994, which contain information required to be included in
this Form 10-K, are incorporated by reference.
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PART I
Item 1. Business.
General.
Alex. Brown Incorporated (together with its subsidiaries, the "Company"),
incorporated in 1986, is a holding company which is the successor to the
investment banking business founded in 1800 by Alexander Brown. The firm began
operating in partnership form in approximately 1805 and continued in that form
until 1984 when the firm's investment banking business was transferred to
Alex. Brown & Sons Incorporated ("Alex. Brown"), the Company's principal
operating subsidiary. The Company's real estate advisory and investment
management businesses are operated through various entities. In some
instances, non-affiliated third parties or the professionals in such
businesses hold equity interests in such entities. In certain of those
instances, the equity interests of non-affiliated third parties are equal to
or greater than the Company's.
Through Alex. Brown, the Company provides investment services to
individual and institutional investors, and investment banking services to
corporate and municipal clients. To support the investment services provided
to individual and institutional investors, the Company effects transactions in
equity and debt securities as both agent and principal. In addition, the
Company's Research Division supplies investment advice to individual and
institutional investors regarding corporate securities in selected industry
sectors. The Company provides investment banking services to corporate clients
primarily in the industry sectors selected for research coverage. The Company
also provides investment banking services to municipal clients, including
states, counties, cities, transportation authorities, sewer and water
authorities, and housing and health and higher education agencies.
The Company's operations are conducted from 28 offices in 15 states and
the District of Columbia and from representative offices in London, England
and Geneva, Switzerland. The Company's principal office is in Baltimore, with
other offices in major cities including New York, San Francisco, Los Angeles,
Boston, Chicago, Dallas, Atlanta, Philadelphia and Washington, D.C.
Alex. Brown is a member of the New York Stock Exchange, Inc. ("NYSE"), the
American Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., other
regional securities exchanges and the National Association of Securities
Dealers, Inc. (the "NASD"). Alex. Brown is also a member of the Securities
Investor Protection Corporation ("SIPC"), and with respect to its
representative offices in London, the Securities and Futures Authority.
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Investment Services. The Company provides investment services to
individual and institutional customers.
The Company's investment services to individual customers primarily
involve transactions in corporate equity and debt and state and local
government securities, including securities followed by the Company's research
analysts and underwritten on a managed or co-managed basis by the Company. In
addition to executing transactions, the Company provides portfolio strategy,
investment advice and research services to individual investors. The Company
targets its investment services to individuals of high net worth or high
annual income.
The Company's institutional customers include banks, retirement funds,
mutual funds, investment advisers and insurance companies. Services to these
customers generally include investment advisory and other services. The
majority of the Company's institutional brokerage revenues are generated by
the purchase and sale of corporate equity securities, including securities
followed by the Company's research analysts and securities underwritten on a
managed or co-managed basis by the Company. Institutional investors typically
purchase and sell securities in block transactions. Revenues from securities
transactions with institutional customers are based on negotiated rates which
typically represent a significant discount from the Company's commission
schedule.
Research. The Company's Research Division develops investment
recommendations and market information in the consumer, environmental,
financial services, health care, media/ communications, technology and
transportathe consumer, environmental, financial services, health care, media/
communications, technology and transportation industries. Within these
industries, the Company follows approximately 600 companies.
Research reports are made available generally to customers. Research
activities include the review and analysis of general market conditions,
industries and specific companies; recommendations of specific actions with
regard to industries and specific companies; the furnishing of information to
retail and institutional customers; and responses to inquiries from customers
and investment representatives. Additionally, the Company hosts periodic
seminars in a number of industry areas at which Company representatives and
industry authorities make presentations with respect to specific companies,
the industry and its trends. These seminars are open to the Company's
investment services customers and investment banking clients. The Company
believes that its research activities have contributed to attracting and
retaining its investment services customers and investment banking clients.
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Securities Commissions. Securities transactions for individual and
institutional investors where the Company acts as agent generate securities
commission revenues. Commissions are charged on both exchange and
over-the-counter agency transactions for individual customers in accordance
with a schedule formulated by the Company, which may change from time to time.
In certain cases, discounts from the schedule may be granted. The Company's
securities commissions result primarily from executing transactions in listed
stocks and bonds. The Company also realizes commission revenues when it
executes a trade in an over-the-counter security in which it does not make a
market. A substantial portion of the commission revenues generated by the
Company is attributable to individual and institutional investors who receive
who receive
the Company's research services.
Principal Transactions. In addition to executing trades as agent, the
Company regularly acts as a principal in executing trades in equity and
convertible securities, municipal bonds, corporate debt, mortgage and
asset-backed securities and United States government and government agency
securities. When transactions are executed by the Company on a principal
basis, the Company, in lieu of commissions, marks up or marks down securities
and records the resulting net gains or losses in revenues from principal
transactions. Inventories of various securities are carried to facilitate
sales to customers and other dealers. Principal transactions are effected for
both individual and institutional customers.
As of December 31, 1993, the Company made markets, buying and selling as a
principal, in approximately 375 common stocks and other securities traded on
the NASD's Automated Quotations System or otherwise in the over-the-counter
market and approximately 300 listed securities. The majority of the equity
securities in which the Company makes a market are in the industry areas
followed by the Company's research analysts.
The Company buys and sells as principal a wide range of fixed income
securities and variable rate debt obligations, including municipal securities,
collateralized mortgage obligations, corporate fixed income securities and
U.S. government and agency obligations. Municipal securities include general
obligation and revenue bonds and notes issued by states, counties, cities and
state and local government agencies and authorities. Corporate fixed income
securities include high yield (non-rated and non-investment grade)
obligations, convertible debentures and other bonds, notes and preferred
stocks. U.S. government and agency obligations include direct U.S. government
obligations and government-guaranteed securities and agency obligations.
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Information regarding the Company's long and short trading securities
positions as of December 31, 1993 and 1992 is set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 4 and 8 of Notes to Consolidated Financial Statements, incorporated
herein by reference to pages 32-35, 42 and 44, respectively, of the 1993
Annual Report to Stockholders.
The level of positions carried in the Company's trading accounts
fluctuates significantly. The size of the securities positions on any one date
may not be representative of the Company's exposure on any other date because
securities positions vary substantially depending upon economic and market
conditions, the allocation of capital among types of inventories, underwriting
commitments, customer demand and trading volume. The Company may have large
positions within its inventories from time to time which increase the
Company's exposure to specific credit, event, market or liquidity risks. The
aggregate value of inventories that the Company may carry is limited by
certain requirements of Rule 15c3-1 (the "Net Capital Rule") of the
Securities and Exchange Commission ("SEC"). See "Net Capital Requirements."
The Company's principal transactions expose the Company to risk because
securities positions are subject to fluctuations in market value and certain
inventory positions are in thinly traded securities. High yield securities can
be extremely volatile. Each trading department is subject to internal position
limits.
The Company also participates as a market maker in the NASD's Small Order
Small Order
Execution System ("SOES"), an automated trading system through which
participating firms can execute customer orders of limited size against market
makers in eligible securities through computer terminal entries. Participating
market makers are required to honor such transactions; therefore, SOES
participation puts an affirmative obligation on the Company to monitor trading
activity in SOES securities in which it makes a market and maintain
commensurate control of its positions. SOES participation is mandatory for
market makers in all NASDAQ National Market System ("NMS") securities, and
imposes upon market makers a penalty of 20 business days during which they may
not make a market at all in any NMS security in which an unexcused withdrawal
has occurred. Withdrawal is excused only in limited circumstances. The NASD is
authorized to establish the maximum size of SOES orders at either 200 or 500
shares, depending on the trading characteristics of the particular security.
Although the Company does not believe that SOES participation dramatically
affects its market making activities, there can be no assurance that SOES
participation will not in the future increase the Company's exposure to loss
from principal transactions.
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Investment Banking. As an investment banking firm, the Company provides
financial advice to, and raises capital for, a broad range of corporate
clients primarily in industry areas which have been selected by the Company
for research coverage. The Company manages and participates in public
offerings and arranges the private placement of equity and debt securities
directly with institutional and individual investors.
The Company is a major underwriter of corporate and municipal securities.
The management of an underwriting syndicate is generally more profitable than
participation as a syndicate member because the managing underwriter receives
a management fee and a greater amount of securities for distribution.
Certain risks are involved in the underwriting of securities. Underwriting
syndicates agree to purchase securities at a discount from the initial public
offering price. If the securities must be sold below the syndicate cost, an
underwriter is exposed to losses on the securities that it has committed to
purchase. In the last several years, investment banking firms have
increasingly underwritten corporate and municipal offerings with fewer
syndicate participants or, in some cases, without an underwriting syndicate.
In such cases the underwriter assumes a larger part or all of the risk of an
underwriting transaction. Under federal securities laws, other laws and court
decisions, an underwriter is exposed to substantial potential liability for
material misstatements or omissions of fact in the prospectus used to describe
the securities being offered. While municipal securities are exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), underwriters of municipal securities nevertheless are
exposed to substantial potential liability in connection with material
misstatements or omissions of fact in the offering documents prepared in
connection with offerings of such securities.
In the past five years, approximately 53% (45% in 1993) of the public
offerings of equity and corporate debt securities managed or co-managed by the
Company have been initial public offerings. Generally, a strong market for new
issues occurs when overall market and economic conditions are favorable. New
issues are perceived to have a higher degree of risk for investors and
investor receptivity to new issues tends to vary as a function of overall
market conditions.
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The Company also provides advice to clients on a wide range of financial
matters, including mergers and acquisitions, divestitures, financial planning,
financial restructuring and recapitalizations. In connection with mergers and
acquisitions, the Company often provides opinion letters and valuations and
renders various other services. The Company's traditional clients for such
services are companies for which the Company has raised capital or which are
followed by the Company's Research Division. The Company also provides these
services to companies which are not Corporate Finance clients or covered by
the Company's Research Division but which are, or have subsidiaries or
divisions, in industries followed by the Company's Research Division.
Historically, the core of the Company's mergers and acquisitions business has
been the representation of sellers in negotiated transactions. Fees for these
services are negotiated and are generally related to the value of the
transaction for which the service is provided.
The Company also engages in merchant banking investments. In most cases,
these investments are made with the management of such companies. The Company
may also co-invest with other financial groups in larger transactions where
its specific industry expertise may create additional value. Merchant banking
business has the potential of generating substantial fees and investment
returns but involves a significant degree of risk due to the concentrated
investment of capital in securities that generally lack liquidity. As of
December 31, 1993, the Company had outstanding $16.6 million of merchant
banking investments and a commitment to invest $23 million in a merchant
banking partnership in which the Company and certain of its employees are
general partners over a period of up to five years.
In addition to its corporate investment banking activities, the Company
provides financial advice to, and raises capital for, many types of issuers of
tax-exempt securities, including states, counties, cities, transportation
authorities, sewer and water authorities and housing and health and higher
education agencies. Most of these issuers are located in the eastern U.S. The
Company manages public offerings of securities and distributes these
securities to individual and institutional investors.
Investment Management Services. The Company provides investment advisory,
administrative and distribution services to a variety of clients, domestic and
international. These services are typically provided for a fee generally based
on the value of the assets for which such services are rendered. Investment
advisory services are provided to high net worth individuals, institutional
investors, foundations, endowments, mutual funds and private investment funds.
As of December 31, 1993, the Company provided investment advisory,
administrative and/or distribution services with respect to $9.2 billion of
assets.
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Advisory, administrative and distribution services are provided to the
"Flag" family of mutual funds, which are Company sponsored, as well as to
mutual funds and investment partnerships sponsored by unaffiliated third
liated third
parties. Most investment advisory services are provided pursuant to contracts
which provide for termination by either party at any time. Advisory fees are
generally charged as a percentage of assets managed.
Other than with respect to advisory services provided to mutual funds, the
Company's largest advisory service is Alex. Brown Investment Management
("ABIM"), a partnership in which the Company has a 50% interest and its
associated investment advisory professionals have the remaining 50% interest.
ABIM manages equity and balanced accounts for institutions and individuals.
The Company has a 50% interest in Brown & Glenmede Holdings, Inc., a
holding company which owns all of the outstanding shares of Brown Advisory &
Trust Company, a Maryland nondepository trust company that was founded in
March, 1993. As of December 31, 1993, Brown Advisory & Trust Company managed
assets of $170 million.
Real Estate Advisory. Through a 48.7% ownership of the Common Stock of
Alex. Brown Kleinwort Benson Realty Advisors Corporation, ("ABKB"), a joint
venture among the Company, Kleinwort Benson Group plc and management of ABKB,
the Company provides real estate consulting and advisory services to
institutional investors. As of December 31, 1993, ABKB had approximately 20
real estate advisory clients with real estate assets under management
aggregating approximately $2.94 billion. Typically, advisory contracts may be
cancelled by either party upon 30 days notice.
Correspondent Services. The Company provides administrative, execution,
operational and clearing services to other securities firms on a fully
disclosed basis. In addition to commissions and other transaction related
fees, the Company receives interest revenue in those instances where it
extends margin credit directly to customers of its correspondent brokers. The
Company may extend credit directly to its correspondent firms to finance their
operations or securities positions which such firms hold for their own
accounts. The Company relies on the general credit of its correspondent
brokers and may be exposed to risk of loss if any of its correspondents or
their customers are unable to meet their financial commitments. The ratio of
capital to the level of business of the Company's correspondent brokers may be
less than that of the Company. From time to time the Company makes unsecured
subordinated loans to correspondent brokers. Such loans are funded through
general working capital sources. As of December 31, 1993, the Company provided
correspondent services to 38 securities firms. The Company intends to continue
to expand its correspondent services activities.
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Margin Accounts and Interest Income. The Company extends margin financing
to its customers and to the customers of correspondent brokers for whom the
Company provides clearing and execution services. Margin loans are
collateralized by securities and cash in customer accounts. Customers are
charged for margin financing at interest rates based upon the broker call rate
(the prevailing interest rate charged by banks on secured loans to
broker-dealers), plus an additional amount of up to 2.5%. The amount of the
Company's interest revenue is affected by the volume of customer borrowing and
by prevailing interest rates. The average volume of customer borrowing has
increased in each of the last five years.
Margin lending by the Company is subject to the margin rules of the Board
of Governors of the Federal Reserve System, NYSE margin requirements and the
Company's internal policies, which in most instances are more stringent than
ringent than
the NYSE requirements. In permitting customers to purchase on margin, the
Company assumes the risk that a market decline may reduce the value of the
collateral it holds below the customer's indebtedness before the collateral
can be sold. The proceeds realizable upon the sale of such collateral can be
adversely affected by the liquidity of the market for the security, applicable
restrictions on the sale of the security or the size of the collateral
position as compared to the trading volume of the security. Under applicable
NYSE rules, in the event of a significant decline in the market value of the
securities in a margin account, the Company is obligated to require the
customer to deposit additional securities or cash in the account or to sell
securities to reduce or eliminate the customer's indebtedness to the Company.
Credit balances and securities in customers' accounts, to the extent not
required to be segregated pursuant to rules of the SEC, may be used in the
conduct of the Company's business, including the extensions of margin credit.
Customer lending activities may influence the basis on which net capital
requirements of Alex. Brown are determined under the Net Capital Rule. As
these activities expand, the Company's net capital requirements increase. See
"Net Capital Requirements."
Accounting, Administration and Operations. Accounting, administration and
operations personnel are responsible for the processing of securities
transactions; receipt, identification and delivery of funds and securities;
custody of customer securities; internal financial control; accounting
functions; office services; personnel services and compliance with regulatory
and legal requirements.
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There is a considerable fluctuation in the volume of transactions which a
securities firm must process. In the past, when the volume of trading in
securities reached record levels, the securities industry has experienced
operating problems. The Company has not experienced any material operating
difficulties during periods of record heavy trading volume; however,
extraordinarily heavy trading volume in the future could result in clearance
and processing difficulties. The Company utilizes its own facilities and the
services of Automatic Data Processing Inc. for the electronic processing
related to recording data pertinent to securities transactions and general
accounting.
The Company believes that its internal controls and safeguards against
securities theft, including use of depositories and periodic securities
counts, are adequate. As required by the NYSE and certain other authorities,
the Company carries fidelity bonds covering loss or theft of securities as
well as employee dishonesty, forgery and alteration of checks and similar
items, and securities forgery. The amounts of coverage provided by the bonds
are believed to be adequate.
The Company posts its books and records daily. Periodic reviews of certain
controls are conducted, and administrative and operations personnel meet with
management to review operational conditions in the Company to assure
compliance with applicable laws, rules and regulations.
Competition. The Company encounters intense competition in all aspects of
the securities business and competes directly with other securities firms, a
significant number of which have substantially greater capital and other
resources and many of which offer a wider range of financial services than the
Company. Other securities firms, oriented primarily to the market for
market for
individual investors, charge commissions that are significantly discounted
from those in the range generally charged by the Company to its individual
customers. In addition to competition from firms currently in the securities
business, there is increasing competition from other sources, such as
commercial banks and insurance companies offering financial services, and from
other investment alternatives. The Company believes that the principal
competitive factors in the securities industry are the quality and ability of
professional personnel and relative prices of services and products offered.
The Company and its competitors directly solicit potential customers, and many
of the Company's competitors engage in advertising programs which the Company
does not use to any significant degree. The Company and its competitors also
furnish investment research publications in an effort to hold and attract
existing and potential clients.
Employees. As of December 31, 1993, the Company had approximately 2,175
full-time employees. None of the Company's employees are covered by a
collective bargaining arrangement.
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Regulation. The securities industry in the United States is subject to
extensive regulation under both federal and state laws. The SEC is the federal
agency responsible for the administration of the federal securities laws.
Alex. Brown is registered as a broker-dealer with the SEC. Alex. Brown as well
as other investment advisers in which the Company has an equity interest are
registered as investment advisers with the SEC. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations,
principally the NASD and national securities exchanges such as the NYSE, which
has been designated by the SEC as Alex. Brown's primary regulator. These
self-regulatory organizations adopt rules (subject to approval by the SEC)
that govern the industry and conduct periodic examinations of Alex. Brown's
operations. Securities firms are also subject to regulation by state
securities administrators in those states in which they conduct business.
Alex. Brown is registered as a broker-dealer in all 50 states, the District of
Columbia and Puerto Rico.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record-keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the SEC and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules may directly affect
the mode of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, the issuance of
cease-and-desist orders or the suspension or expulsion of a broker-dealer, its
officers or employees. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets,
rather than protection of creditors and stockholders of broker-dealers. From
time to time, the Company has been subject to disciplinary actions, none of
which, to date, has had a material adverse effect on the operations of the
Company.
Alex. Brown is a member of SIPC, which provides, in the event of the
liquidation of a broker-dealer, protection for customers' accounts held by
Alex. Brown of up to $500,000 for each customer, subject to a limitation of
$100,000 for claims for cash balances. In addition, Alex. Brown has obtained
protection in excess of SIPC coverage of $2,000,000 for each account and up to
$9,500,000 for specified accounts.
Alex. Brown & Sons Limited and Alex. Brown & Sons Investments Limited,
through which the Company operates representative offices in London, England,
are subject to the United Kingdom Financial Services Act of 1986, which
governs all aspects of United Kingdom investment business and to the rules of
the Securities and Futures Authority.
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Certain subsidiaries and employees of the Company are engaged in the
insurance business and are subject to regulation and supervision by
appropriate authorities in the states in which they conduct their business.
Net Capital Requirements. As a registered broker-dealer and a member firm
of the NYSE, Alex. Brown is subject to the Net Capital Rule, which has also
been adopted through incorporation by reference in NYSE Rule 325. The Net
Capital Rule, which specifies minimum net capital requirements for registered
brokers and dealers, is designed to measure the general financial integrity
and liquidity of a broker-dealer and requires that at least a minimum part of
its assets be kept in relatively liquid form. Alex. Brown is also subject to
the net capital requirements of the Commodities Futures Trading Commission
("CFTC") and various commodity exchanges, which generally require that Alex.
Brown, as an introducing broker, maintain a minimum net capital equal to the
alternative net capital requirements discussed below.
Alex. Brown has elected to compute net capital under the alternative
method of calculation permitted by the Net Capital Rule. Under the alternative
method, Alex. Brown is required to maintain minimum net capital, as defined in
the Net Capital Rule, equal to the greater of $1,000,000 or 2% of the amount
of its "aggregate debit items" computed in accordance with the Formula for
Determination of Reserve Requirements for Brokers and Dealers (SEC Rule
15c3-3). The "aggregate debit items" are assets that have as their source
transactions with customers, primarily margin loans. Failure to maintain the
required net capital may subject a firm to suspension or revocation of
registration by the SEC and suspension or expulsion by the NYSE and other
regulatory bodies and ultimately may require its liquidation. The Net Capital
Rule and NYSE Rule 326 prohibit payments of dividends, redemption of stock,
the prepayment of subordinated indebtedness, and making any unsecured advance
or loan to a stockholder, employee or affiliate, if net capital thereafter
would be less than 5% of aggregate debit items. The Net Capital Rule also
provides that the SEC may restrict for up to twenty business days any
withdrawal of equity capital, or unsecured loan or advance to a stockholder,
employee or affiliate ("capital withdrawal") if such capital withdrawal,
together with all other net capital withdrawals during a thirty day period,
exceeds 30% of excess net capital and the SEC concludes that the capital
withdrawal may be detrimental to the financial integrity of the broker-dealer.
The Net Capital Rule also provides that the total outstanding principal amount
of a broker-dealer's indebtedness under certain subordination agreements, the
proceeds of which are included in its net capital, may not exceed 70% of the
sum of the outstanding principal amount of all subordinated indebtedness
included in net capital, par or stated value of capital stock, paid in capital
in excess of par, retained earnings and other capital accounts for a period in
a period in
excess of 90 days.
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Under NYSE Rule 326, a member firm is required to reduce its business if
its net capital is less than 4% of aggregate debit items. NYSE Rule 326 also
prohibits the expansion of business if net capital is less than 5% of
aggregate debit items for 15 consecutive days. The provisions of Rule 326 also
become operative if capital withdrawals (including scheduled maturities of
subordinated indebtedness during the following six months, charges relating to
lending on control and restricted securities under NYSE Rule 431 and
discretionary liabilities which are included in capital under the Net Capital
Rule) would result in a reduction of a firm's net capital to the levels
indicated.
Net capital is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings and certain
discretionary liabilities, and less certain mandatory deductions that result
from excluding assets that are not readily convertible into cash and from
valuing conservatively certain other assets, such as a firm's positions in
securities. Among these deductions are adjustments (called "haircuts") to the
market value of firm securities to reflect the possibility of a market decline
prior to disposition.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of
Alex. Brown that require the intensive use of capital, such as underwriting
and trading activities and the financing of customer account balances, and
also could restrict the Company's ability to withdraw capital from Alex. Brown
which in turn could limit the Company's ability to pay dividends, repay debt
and redeem or purchase shares of its outstanding stock.
Alex. Brown has been in compliance at all times with all aspects of the
Net Capital Rule and CFTC net capital requirements applicable to it. As of
December 31, 1993, Alex. Brown was required to maintain minimum net capital,
in accordance with SEC and CFTC rules, of $15,873,000 and had total net
capital (as so computed) of $227,468,000 or $211,595,000 in excess of 2% of
aggregate debit items and $187,785,000 in excess of 5% of aggregate debit
items.
Item 1(d). Financial Information about Foreign and Domestic Operations and
Export Sales.
Not Applicable.
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Item 2. Properties.
The Company conducts business from offices in the following U.S. cities:
Annapolis, Maryland Los Angeles, California
Atlanta, Georgia Memphis, Tennessee
Baltimore, Maryland Naples, Florida
Boston, Massachusetts New Orleans, Louisiana
Burlingame, California New York, New York
Charlotte, North Carolina Philadelphia, Pennsylvania
Chicago, Illinois Richmond, Virginia
Dallas, Texas San Francisco, California
Durham, North Carolina Timonium, Maryland
Fishkill, New York Towson, Maryland
Frederick, Maryland Washington, D.C.
Greenwich, Connecticut West Palm Beach, Florida
Houston, Texas Wilmington, Delaware
Jacksonville, Florida Winston-Salem, North Carolina
In addition, wholly-owned subsidiaries of Alex. Brown lease offices in
London, England and Geneva, Switzerland.
The Company occupies an aggregate of approximately 200,000 square feet of
space in downtown Baltimore under leases expiring on various dates from 1995
through 2002. The Company is a limited partner in a partnership which owns a
building in downtown Baltimore where it leases approximately 90,000 square
feet.
The Company's other offices, including the separate offices of Alex. Brown
Investment Management, the Company's operations and data center and offices in
27 U.S. cities, London and Geneva, occupy an aggregate of approximately
560,000 square feet under leases that expire at various dates through 2004.
Future minimum rental commitments under existing leases are set forth in Note
10 of Notes to Consolidated Financial Statements incorporated herein by
reference to pages 44 and 45 of the 1993 Annual Report to Stockholders. Alex.
Brown Partners, a Maryland limited partnership (the "Partnership"), the
partners of which include certain Directors of the Company and other Managing
Directors and Principals of Alex. Brown, and certain partners thereof have
ownership interests in some of the properties occupied by the Company in
downtown Baltimore.
<PAGE>
Item 3. Legal Proceedings.
Alex. Brown is a defendant in a number of lawsuits relating to its
Investment Banking and securities brokerage business. The Company is also a
member of a defendant class of underwriters in a number of lawsuits relating
to its participation in underwritings and, in addition, may be required to
contribute to any adverse final judgments or settlements in actions arising
out of its participation in the underwritings of certain issues in which it is
not a defendant. Approximately 30 underwritten public offerings in which Alex.
Brown has participated are the subject of litigation. The Company cannot state
what the eventual outcome of these pending actions will be. The following are
descriptions of certain lawsuits filed as class actions involving or affecting
the Company. A substantial settlement or judgment in any of these cases could
have a material adverse effect on the Company. While there can be no
assurances of a favorable determination of these actions, the Company believes
there are meritorious defenses to all of the cases described herein, and
intends to defend each action vigorously.
Exide Electronics Group, Inc. On May 3, 1990, a suit captioned Bernard M.
d Bernard M.
Branson v. Exide Electronics Corporation, et al., Index No. 11536 was filed in
Delaware Chancery Court, New Castle County, in which the Company was named as
a defendant. The action pertained to the December, 1989 public offering (the
"Offering") of 1.2 million shares of the Common Stock of Exide Electronics
Group, Inc. ("Exide") at $12.50 per share. The Company was lead manager of the
offering and directly underwrote 224,000 shares. Plaintiff purported to
represent a class consisting of all persons who purchased shares of Exide in
the Offering. The complaint alleged violations of the Securities Act and of
Delaware common law in connection with alleged untrue statements and omissions
of material facts in the registration statement and prospectus prepared in
connection with the Offering. In particular, the complaint alleged that the
prospectus failed to properly disclose Exide's exposure with respect to
litigation that had been pending against Exide in a California court and in
which a jury returned a verdict against Exide, in April, 1990, in the amount
of $14.9 million. Immediately following the verdict, Exide shares traded in
the range of $7-8 per share. Plaintiff sought unspecified compensatory
damages, costs, and fees. On September 14, 1992, the Court granted the
Company's motion to dismiss the complaint. However, plaintiffs have appealed
the Court's order, and such appeal remains pending.
Industrial Funding Corp. On January 16, 1992, the Company was named as a
defendant in an action pending before the United States District Court for the
Northern District of California, entitled Wade v. Industrial Funding Corp., et
al., Index No. C-92-0343. The litigation pertains to the December 8, 1989
public offering of shares of Industrial Funding Corp. ("IFC"), for which the
Company served as co-lead underwriter. Plaintiffs sue as representatives of a
purported class consisting of all persons who purchased IFC shares between
December 8, 1989 and February 28, 1991. Plaintiffs allege violations of the
federal securities laws in connection with alleged untrue statements and
omissions of material facts in connection with the offering. In particular,
Plaintiffs allege that Defendants failed to disclose material adverse facts
regarding IFC's financial condition. Plaintiffs seek compensatory and punitive
damages in an unspecified amount.
<PAGE>
In-Store Advertising, Inc. The Company has been named as a defendant in
several purported class action lawsuits, as well as one shareholder derivative
lawsuit, pertaining to the July 19, 1990 public offering of Common Stock of
In-Store Advertising, Inc. ("In-Store Advertising"), at $19 per share (the
"Offering"). The Company co-managed the Offering and directly underwrote
414,000 shares. The lawsuits are pending in the United States District Court
for the Southern District of New York, and have been consolidated under the
caption In-Store Advertising, Inc. Securities Litigation, No. 90 Civ. 5594.
Collectively, plaintiffs purport to represent all persons who purchased shares
of In-Store Advertising in the Offering, and all persons who purchased shares
in the open market during the period from the date of the Offering to August
28, 1990. Plaintiffs allege, among other things, that the prospectus for the
Offering contained material misstatements of fact and omitted material facts
and that the defendants, including the Company, made untrue statements of
material fact and omitted material facts concerning In-Store Advertising's
anticipated revenues and earnings. The Plaintiffs allege violations of the
federal securities laws and the common law, and seek unspecified actual and
punitive damages, rescission, costs, fees and other relief. On July 8, 1993,
uly 8, 1993,
In-Store Advertising filed for protection under the Bankruptcy Code, and on
August 6, 1993, its plan of reorganization was approved. As a result thereof,
In-Store Advertising has been discharged from any liability relating to this
litigation. Pretrial discovery is proceeding.
Taxable Municipal Bond Securities Litigation. In August, 1990, the Company
was named as a defendant in three lawsuits brought on behalf of certain
municipal bond investors. The actions have now been consolidated before the
United States District Court for the Eastern District of Louisiana, under the
caption In re: Taxable Municipal Bond Securities Litigation, Index No.
MDL-863. The actions pertain to the 1986 public offerings of (i) $300 million
taxable public purpose bonds by the Board of County Commissioners of Adams
County, Colorado, (ii) $400 million taxable public purpose bonds by the
Health, Educational and Housing Facility Board of the City of Memphis and
(iii) $200 million taxable public purpose bonds by the El Paso Housing Finance
Corporation. The Company participated as a member of the underwriting
syndicate for each of these offerings, underwriting approximately .66% of the
Adams County offering, approximately 2.5% of the City of Memphis offering and
approximately 3% of the El Paso offering. The Plaintiffs in all three actions
purport to represent a class of all persons who purchased bonds in the
original offerings and who held the bonds until on or about January 25, 1990.
The complaints allege various violations of the federal securities laws, the
RICO statute and common law as a result of alleged untrue statements and
omissions of material facts in connection with the bond offerings. In
particular, the complaints allege that the defendants failed to disclose that
the proceeds from the bond offerings were to be placed with Executive Life
Insurance Company, a California insurance company, which would in turn invest
the funds in high risk "junk bonds," the values of which are alleged to have
declined significantly. The plaintiffs seek actual and punitive damages,
rescission, trebling of actual damage pursuant to the RICO statute and other
relief. The Company has joined with other members of the respective
underwriting syndicates in retaining counsel to jointly represent the
interests of the members of the syndicates.
<PAGE>
URCARCO, Inc. In 1990, the Company was named as a defendant in several
suits that have been consolidated under the caption Melder v. Morris, Index
No. 3:90-CV-1737-X, and are pending in the United States District Court for
the Northern District of Texas, Dallas Division. Plaintiffs' allegations with
respect to the Company pertain to the May, 1990 public offering (the
"Offering") of 5 million shares of the common stock of URCARCO, Inc.
("URCARCO") (now known as Americredit Corp.) at $19 7/8 per share. The Company
was the lead managing underwriter of the Offering, and directly underwrote
783,334 shares. Collectively, plaintiffs purport to represent a class
consisting of all persons who purchased shares of URCARCO in the Offering, and
all persons who purchased URCARCO shares on the open market during the period
from November 15, 1989 to July 25, 1990. URCARCO operates a chain of retail
used car lots in Texas and typically finances the purchases of its customers,
many of whom would be unable to obtain traditional credit terms. From time to
time, the Company provided investment banking services to URCARCO, and was the
lead managing underwriter of its initial public offering. Plaintiffs allege
violations of federal securities statutes and common law in connection with
alleged untrue statements and omissions of material fact in the prospectus
e prospectus
issued in connection with the Offering and in other reports issued by URCARCO.
In particular, the complaint alleges that URCARCO failed to disclose material
adverse facts about its earnings, financial condition and loss reserves.
Plaintiffs seek unspecified compensatory and punitive damages, costs and fees.
On May 18, 1993, the Court dismissed Plaintiffs' claims under the federal
securities laws on the grounds that the complaint failed to state a claim.
However, Plaintiffs have appealed the Court's order to the United States Court
of Appeals for the Fifth Circuit, and such appeal remains pending.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
Executive Officers of the Registrant
The following information regarding the persons who function as executive
officers of the Company is included herein pursuant to Instruction 3 to Item
401(b) of Regulation S-K:
Name Age Position with the Company
Benjamin H. Griswold IV ....... 53 Chairman and Director
A. B. Krongard ................ 57 Vice Chairman, Chief Executive Officer
and Director
Robert F. Price ............... 46 Secretary and General Counsel
Mayo A. Shattuck III .......... 39 President, Chief Operating Officer and
Director
Beverly L. Wright ............. 45 Treasurer and Chief Financial Officer
Officers serve at the discretion of the Board of Directors. There is no
family relationship among any of the directors or executive officers of the
Company.
Mr. Griswold was first employed by the Partnership in 1967 and became a
general partner in 1972. Mr. Griswold was Vice-Chairman of Alex. Brown from
1984 until February 1987 when he became Chairman of Alex. Brown and the
Company.
Mr. Krongard was first employed by the Partnership in 1971 and became a
general partner in 1980. He has been a Managing Director of Alex. Brown since
1984 and was elected Chief Executive Officer and Vice Chairman of the Company
and Alex. Brown in July 1991.
Mr. Price was first employed by the Partnership in 1976 and became a
Managing Director of Alex. Brown in 1987. He served as Secretary and General
Counsel from 1984 until 1989 when he resigned from the Company. Upon his
return to the Company in September, 1991, he became Secretary and General
Counsel.
Mr. Shattuck was first employed by the Company in 1985. He became a
Managing Director of Alex. Brown in 1989, and was elected President and Chief
Operating Officer in July 1991.
Ms. Wright was first employed by the Partnership in 1978 and became a
general partner in 1984. She has been a Managing Director of Alex. Brown since
1984 and was named Treasurer and Chief Financial Officer of the Company and
Company and
Alex. Brown in July 1986.
There is no arrangement or understanding between any of the above-listed
officers and any other person pursuant to which any such officer was elected
as an officer.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information required by Item 5 is incorporated herein by
reference to page 55 of the 1993 Annual Report to Stockholders
attached hereto.
Item 6. Selected Financial Data.
Information required by Item 6 is incorporated herein by
reference to page 51 of the 1993 Annual Report to Stockholders
attached hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Information required by Item 7 is incorporated herein by
reference to pages 32 through 35 of the 1993 Annual Report to
Stockholders attached hereto.
Item 8. Financial Statements and Supplementary Data.
Financial Statements required by Item 8 are listed in the Index
to Financial Statements and Schedules on page 24.
Supplementary data are incorporated herein by reference to page
52 of the 1993 Annual Report to Stockholders attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
The information required by Items 10, 11, 12, and 13 (except that
information regarding executive officers called for by Item 10 contained in
Part I) is incorporated herein by reference to the definitive proxy statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits:
Reference is made to the Exhibit Index.
Financial Statement Schedules:
Reference is made to the Index to Financial Statements and Schedules
on page 24.
(b) Reports on Form 8-K.
None.
Other Matters
For the purposes of complying with the amendments to the rules governing
Form S-8 under the Securities Act of 1933, the undersigned registrant hereby
undertakes as follows, which undertaking shall be incorporated by reference
into registrant's Registration Statements on Forms S-8 Nos. 33-23789,
33-26988, 33-40618, 33-40619, 33-45715, 33-46282 and 33-67050.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ALEX. BROWN INCORPORATED
By: s/ A. B. Krongard
------------------------------------
A. B. Krongard
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
s/ Benjamin H. Griswold IV Chairman of the Board of March 25, 1994
- ---------------------------- Directors
Benjamin H. Griswold IV
s/ A. B. Krongard Chief Executive Officer; March 25, 1994
- ---------------------------- Director (Principal
A. B. Krongard Executive Officer)
s/ Mayo A. Shattuck III President; Chief Operating March 25, 1994
- ---------------------------- Officer; Director
Mayo A. Shattuck III
s/ Beverly L. Wright Treasurer and Chief March 25, 1994
- ---------------------------- Financial Officer (Principal
Beverly L. Wright Financial and Accounting
Officer)
<PAGE>
s/ Lee A. Ault III Director March 25, 1994
- ----------------------------
Lee A. Ault III
s/ Thomas C. Barry Director March 25, 1994
- ----------------------------
Thomas C. Barry
s/ Andre W. Brewster Director March 25, 1994
- ----------------------------
Andre W. Brewster
s/ Donald B. Hebb, Jr. Director March 25, 1994
- ----------------------------
Donald B. Hebb, Jr.
s/ Steven Muller Director March 25, 1994
- ----------------------------
Steven Muller
s/ David M. Norman Director March 25, 1994
- ----------------------------
David M. Norman
s/ Frank E. Richardson Director March 25, 1994
- ----------------------------
Frank E. Richardson
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Index to Financial Statements and Schedules
Page
Financial Statements:
Alex. Brown Incorporated and Subsidiaries included on pages 37
through 50 of the 1993 Annual Report to Stockholders, incorporated
herein by reference and attached hereto:
Consolidated Statements of Earnings 37
Consolidated Statements of Financial Condition 38
Consolidated Statements of Stockholders' Equity 39
Consolidated Statements of Cash Flows 40
Notes to Consolidated Financial Statements 41-49
Report of Independent Auditors 50
Schedules:
Report of Independent Auditors S-1
Alex. Brown Incorporated and Subsidiaries for the years ended
December 31, 1991, 1992 and 1993:
Schedule II--Amounts Receivable from Related Parties and
Underwriters, Promoters and Employees other than
Related Parties .................................... S-2
Schedule IX--Short Term Borrowings .............................. S-6
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Alex. Brown Incorporated:
Under date of January 26, 1994, we reported on the consolidated statements
of financial condition of Alex. Brown Incorporated and subsidiaries as of
iaries as of
December 31, 1993 and 1992 and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1993, as contained in the 1993 annual
report to stockholders. These consolidated financial statements and our report
thereon are incorporated by reference in the annual report on Form 10-K for
1993. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick
Baltimore, Maryland
March 25, 1994
<PAGE>
<TABLE>
SCHEDULE II
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Amounts Receivable from Related Parties and Underwriters,
Promoters and Employees other than Related Parties
Years Ended December 31, 1991, 1992 and 1993
(Amounts in Thousands)
- -------------------------------------------------------------------------------------------
<CAPTION>
Balance at
Deductions End of Period
Balance at -------------------- --------------------
Name of Beginning Amounts Amounts Not
Debtor of Period Additions Collected Forgiven Current Current
<S> <C> <C> <C> <C> <C> <C>
Year ended 12/31/91:
Employee Loans
Bruce H. Brandaleone - $126 - - - $126
Richard L. Franyo - $103 - - - $103
A. F. Giacco, Jr. $710 - - - $710 -
B. H. Griswold IV - $212 - - - $212
- - $212
Richard T. Hale - $103 - - - $103
Donald B. Hebb, Jr. - $179 - - - $179
Michael B. Kerrigan $128 $ 14 - $ 64 $ 46 $ 32
A. B. Krongard - $212 - - - $212
Deborah A. Parker $165 $ 15 $ 45 - $135 -
George S. Rich $109 - - $ 55 $ 54 -
Thomas Schweizer, Jr. - $123 - - - $123
Year ended 12/31/92:
Employee Loans
Bruce H. Brandaleone $126 $140 - - - $266
J. Michael Connelly $ 77 $140 - - - $217
Richard L. Franyo $103 - - - - $103
A. F. Giacco, Jr. $7l0 - $ 50 - - $660
B. H. Griswold IV $212 $275 - - - $487
Richard T. Hale $103 - - - - $103
Donald B. Hebb, Jr. $179 - - - - $179
James S. Hedges II - $150 $ 56 - $ 35 $ 59
Michael B. Kerrigan $ 78 $146 $224 - - -
A. B. Krongard $212 $415 - - - $627
John A. Kryzanowski $ 45 $550 - - - $595
Deborah A. Parker $135 - $ 3 - - $132
W. Gar Richlin $ 82 $140 - - - $222
Thomas Schweizer, Jr. $123 $140 - - - $263
Mayo A. Shattuck III $ 83 $365 - $ 11 $ 11 $426
Timothy T. Weglicki $ 82 $140 - - - $222
Beverly L. Wright $ 95 $140 - - - $235
Year ended 12/31/93:
Employee Loans (1)
Mark C. Alpert - $238 - $ 20 - $218
Jeffrey S. Amling - $356 - $ 30 - $326
David G. Bannister $ 11 $356 - $ 41 - $326
Gregory H. Barnhill - $238 - $ 20 - $218
Christopher Bartlett - $475 - $ 40 - $435
George B. Bolton - $475 - $ 40 - $435
Steven J. Bottum - $356 - $ 30 - $326
William B. Boyd $ 45 $356 - $ 52 - $349
Bruce H. Brandaleone $266 $100 - $ 63 - $303
Peter B. Breck - $950 - $ 80 - $870
Robert F. Buchanan - $356 - $ 30 - $326
R. William Burgess Jr. - $950 - $ 80 - $870
William G. Byrnes - $950 - $ 80 - $870
Edward L. Cahill $ 96 $950 - $103 - $943
Denis J. Callaghan $ 46 $644 - $ 73 $ 11 $606
Raymond F. Condon - $356 - $ 30 - $326
J. Michael Connelly $217 $669 - $ 88 - $798
Robert F. Conroy - $238 - $ 20 - $218
Alexander T. Daignault $ 9 $238 - $ 25 - $222
Clinton R. Daly - $356 - $ 30 - $326
B. Mike Davey - $475 - $ 40 - $435
John E. Deford - $238 - $ 20 - $218
Donald W. Delson - $238 - $ 20 - $218
- $ 20 - $218
Peter F. deVos $ 25 $594 - $ 62 $ 12 $545
David M. DiPietro - $594 - $ 50 - $544
Jonathan E. Farber - $238 - $ 20 - $218
Mark B. Fisher(2) - $257 $125 - $132 -
Robert A. Frank $ 8 $594 - $ 58 - $544
Richard L. Franyo $103 - - $ 52 - $ 51
Donald E. Froude - $356 - $ 30 - $326
A. F. Giacco(3) $660 - - - - $660
Mark A. Goodman - $594 - $ 50 - $544
David M. Gray - $356 - $ 30 - $326
B. H. Griswold IV $487 $400 - $106 - $781
Richard T. Hale $103 - - $ 51 - $ 52
Donald R. Heacock - $356 - $ 30 - $326
Donald B. Hebb, Jr. $179 - - $ 90 - $ 89
Richard H. Holden Jr. $ 45 $356 - $ 52 - $349
Christopher L. Holter - $475 - $ 40 - $435
Harris Hyman IV - $475 - $ 40 - $435
Seymour M. Jacobs - $594 - $ 50 - $544
Francis J. Jamison Jr. - $356 - $ 30 - $326
Erik N. Jansen - $594 - $ 50 - $544
Robert K. Jermain - $238 - $ 20 - $218
Joelle M. Kayden $ 7 $238 - $ 27 - $218
Patrick J. Kerins - $475 - $ 40 - $435
A. B. Krongard $627 $2,950 - $306 - $3,271
John A. Kryzanowski $ 45 $356 - $ 52 - $349
John A. Kryzanowski (4) $550 - - $275 - $275
John G. Larkin - $594 - $ 50 - $544
Brent M. Lockwood - $356 - $ 30 - $326
Ira Lutsky (5) - $150 $ 7 - $ 38 $105
Ira H. Malis - $594 - $ 50 - $544
M. Anthony May - $356 - $ 30 - $326
Mary A. McCaffrey - $238 - $ 20 - $218
Peter M. McGowan $ 14 $238 - $ 27 $ 7 $218
Michael F. Misera $ 62 $1,188 - $106 $ 1 $1,143
Christopher Mortenson $ 56 $356 - $ 64 - $348
Robert N. Oram - $238 - $ 20 - $218
Jonathan W. Osgood - $475 - $ 40 - $435
Robert K. Packard - $356 - $ 30 - $326
Richard J. Paget - $356 - $ 30 - $326
Deborah A. Parker(6) $132 $ 3 $ 7 - $ 13 $115
Margaret-Mary Preston - $475 - $ 40 - $435
Robert F. Price - $525 - $ 40 - $485
Kevin G. Quinn $ 2 $356 - $ 31 $ 1 $326
Robert L. Raede - $356 - $ 30 - $326
Russell T. Ray $ 97 $950 - $104 $ 1 $942
W. Gar Richlin $222 $1,194 - $131 - $1,285
Barry W. Ridings $ 45 $475 - $ 62 - $458
William F. Rienhoff IV $ 6 $356 - $ 33 - $329
George V. Robertson - $594 - $ 50 - $544
A. Christine Robinson $ 51 $713 - $ 89 - $675
Steven A. Rockwell - $594 - $ 50 - $544
Barbara A. Ryan - $356 - $ 30 - $326
Gary R. Schatz - $238 - $ 20 - $218
Steven R. Schuh - $238 - $ 20 - $218
Thomas Schweizer, Jr. $263 $100 - $ 61 - $302
- $ 61 - $302
James M. Shapiro - $475 - $ 40 - $435
Mayo A. Shattuck III $437 $2,231 - $192 - $2,476
Jill A. Shaw - $356 - $ 30 - $326
Andrew T. Sheehan - $713 - $ 60 - $653
Stuart F. Smith - $356 - $ 30 - $326
Richard C. Spalding - $238 - $ 20 - $218
Christopher E. Vroom - $594 - $ 50 - $544
David S. Webber - $356 - $ 30 - $326
Timothy T. Weglicki $222 $100 - $ 41 - $281
Beverly L. Wright $235 $150 - $ 47 - $338
- -------------------------------------------------------------------------------------------
<FN>
(1) Unless otherwise noted, loans relate to equity awards issued pursuant
to the 1991 Equity Incentive Plan. Loans bear interest at rates ranging from
5.3% to 8.1%, payable annually, mature between January 1997 and August 2003
and are secured by either Alex. Brown Incorporated convertible subordinated
debentures or Alex. Brown Incorporated common stock. A portion of the loans
are subject to performance--based forgiveness.
(2) Loan bears interest at the rate Alex. Brown charges customers on margin
loans (5.6% at January 1, 1994) and is secured by shares of Hye Crest
Management, Inc. Principal and accrued interest are due May 1994.
(3) Loan bears interest at the applicable federal short-term rate as
determined by the Internal Revenue Code (4.0% at January 1, 1994). Principal
and accrued interest are payable semiannually. Loan matures November 1997.
(4) Loan bears interest at the applicable federal short-term rate as
determined by the Internal Revenue Code (4.0% at January 1, 1994), payable
annually, and matures January 1996.
(5) Represents two loans that bear interest at the rate Alex. Brown charges
customers on margin loans (5.6% at January 1, 1994). Monthly payments of
$3,100 are due with all unpaid principal and accrued interest due January 1995
with respect to a $93,000 loan. Monthly payments of $700 are due beginning
January 1994 with all unpaid principal and accrued interest due January 1997
with respect to a $50,000 loan.
(6) Loan bears interest at the rate Alex. Brown charges customers on margin
loans (5.6% at January 1, 1994). Semiannual principal payments of $6,750 plus
accrued interest are due through January 2003.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE IX
ALEX. BROWN INCORPORATED AND SUBS
Short-Term Borrowing
Years Ended December 31, 1991, 1992 and 1993
(Amounts in Thousands)
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
Weighted
Maximum Average Average
Average
Weighted Amount Amount Interest
Balance Average Outstanding Outstanding Rate
at End of Interest During During During
Category Period Rate Period Period* Period*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bank loans--1991 -- -- $ 48,175 $ 1,997 6.0%
Bank loans--1992 $45,000 3.8% $150,030 $ 58,155 3.9%
Bank loans--1993 $45,057 3.5% $404,591 $105,008 3.6%
Securities sold under
repurchase agreements, at
contract amounts--1991 -- -- $552,750 $ 43,102 6.3%
Securities sold under
repurchase agreements, at
contract amounts--1992 -- -- $208,988 $ 5,309 3.0%
Securities sold under
repurchase agreements, at
contract amounts--1993 -- -- $366,440 $ 91,315 2.9%
- --------------------------------------------------------------------------------------------------------------------
<FN> *The average amounts outstanding and the weighted average interest rates
during the periods were generally computed based on daily outstanding
borrowings.
</TABLE>
<PAGE>
Commission File No. 0-14199
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------------------------------------------
EXHIBITS
TO
ANNUAL REPORT
ON FORM 10-K
UNDER
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
- ------------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
<PAGE>
ALEX. BROWN INCORPORATED
Annual Report on Form 10-K
Index to Exhibits
Exhibit No. Exhibit Page
- ------------- --------------------------------------------------- --------
3.1 Charter of the Registrant, as amended (4)
3.2 By-Laws of the Registrant, as amended (2)
4.1 Indenture dated as of June 12, 1986 between Alex.
Brown Incorporated and Bankers Trust Company,
Trustee, relating to the Company's 5 3/4%
convertible Subordinated Debentures due 2001 (2)
4.2 Agreement to furnish Loan Agreements --------
10.1 Lease dated as of January 1, 1984 by and between
Alex. Brown Partners, a Maryland Limited
Partnership and Alex. Brown & Sons Incorporated (1)
10.1(a) First Amendment to Lease dated July 29, 1993 --------
10.2 Lease dated as of January 1, 1985 by and between
Brown Realty Company and Alex. Brown & Sons
Incorporated (1)
10.2(a) Amendment to Lease dated July 29, 1993 --------
10.3 Lease dated as of July 2, 1987 by and between Alex.
Brown & Sons Incorporated and Calvert-Baltimore
Associates Limited Partnership (3)
10.3(a) First Amendment to Lease dated March 8, 1988 by and
between Calvert-Baltimore Associates Limited
Partnership and Alex. Brown & Sons Incorporated (5)
10.3(b) Second Amendment to Lease dated August 10, 1989 by
and between Calvert-Baltimore Associates Limited
Partnership and Alex. Brown & Sons Incorporated (5)
<PAGE>
10.4 Purchase and Sale Agreement regarding the name
"Alex. Brown" --------
10.5 First Amended and Restated Stockholders' Agreement
dated June 23, 1989 among the Registrant and
certain stock- holders of the Registrant, as
amended (9)
10.6* Alex. Brown Incorporated 1991 Equity Incentive Plan (7)
10.7* Alex. Brown Incorporated 1991 Non-Employee Director
Equity Plan (6)
10.8* Donald B. Hebb, Jr. Employment Agreement (8)
10.9* Mayo A. Shattuck III Employment Agreement (8)
10.10* Benjamin H. Griswold IV Employment Agreement --------
11 Statement on Computation of per share earnings --------
13 Pages 32 through 35, 37 through 52 and 55 of the
Registrant's Annual Report to Stockholders for the
Year Ended December 31, 1993 (10)
21 Subsidiaries of the Registrant (2)
23 Consent of KPMG Peat Marwick --------
<PAGE>
*Connotes a management contract or compensatory plan or other arrangement in
which a director or executive officer of the Registrant participates.
(1) Incorporated by reference to the corresponding Exhibit to Registration
Statement No. 33-2687 on Form S-1 of the Company filed on January 15,
1986.
(2) Incorporated by reference to the corresponding Exhibit to Registration
Statement No. 33-13289 on Form S-1 of the Company filed on April 9, 1987.
(3) Incorporated by reference to the corresponding Exhibit to the
Registration's Annual Report on Form 10-K for the year ended December 31,
1987.
(4) Incorporated by reference to the corresponding Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988.
(5) Incorporated by reference to the corresponding Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
(6) Incorporated by reference to the corresponding Exhibit to Registration
Statement No. 33-40618 on Form S-8 of the Company filed on May 16, 1991.
(7) Incorporated by reference to the corresponding Exhibit to Registration
Statement No. 33-40619 on Form S-8 of the Company filed on May 16, 1991.
(8) Incorporated by reference to the corresponding Exhibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991.
(9) Incorporated by reference to the corresponding Exhibit the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992.
(10) Incorporated by reference to the corresponding Exibit to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993.
<PAGE>
EXHIBIT 4.2
<PAGE>
Exhibit 4.2
March 21, 1994
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
This will confirm that Alex. Brown Incorporated (the "Company") will furnish
to the Securities and Exchange Commission upon request copies of the following
Loan Agreements:
(i) Competitive Advance and Revolving Credit Facility Agreement dated as of
August 16, 1993 between Alex. Brown Incorporated and various banks
including Chemical Bank, as Documentation Agent and The Bank of New
York, as Administrative Agent;
(ii) Loan and Security Agreement dated as of June 18, 1990 between Alex.
Brown & Sons Incorporated and Sovran Bank/Maryland;
(iii) Loan Agreement dated April 8, 1993 between Alex. Brown & Sons
Incorporated and The First National Bank of Maryland;
(iv) Loan and Security Agreement dated November 23, 1988 between Alex. Brown
& Sons Incorporated and The First National Bank of Maryland;
(v) Security Agreement dated March 21, 1991 between Alex. Brown Leasing
Services Incorporated and Signet Leasing and Financial Corporation;
(vi) Security Agreement dated March 27, 1992 between Alex. Brown Leasing
Services Incorporated and Signet Leasing and Financial Corporation; and
(vii) Security Agreement dated October 19, 1992 between Alex. Brown Leasing
Services Incorporated and Signet Leasing and Financial Corporation.
<PAGE>
The amount of debt authorized by each of the foregoing Loan Agreements does
not exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
Very truly yours,
ALEX. BROWN INCORPORATED
By: s/Beverly L. Wright
------------------------------------
Beverly L. Wright
Treasurer and Chief
Financial Officer
<PAGE>
EXHIBIT 10.1(a)
<PAGE>
[Alex. Brown letterhead]
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE (the "Amendment") is made as of the 29th day
of July 1993, by and between Alex. Brown Partners, a Maryland Limited
Partnership (the "Landlord"), and Alex. Brown & Sons Incorporated, a Maryland
corporation ("Tenant").
A. Landlord and Tenant have entered into that certain Lease dated January
1, 1984 (the "Lease") when Landlord demised to Tenant and Tenant accepted from
Landlord the premises known as 119-121 E. Baltimore St., 123 East Baltimore
St. and 125-131 East Baltimore St., Baltimore, MD (the "Premises").
B. Landlord and Tenant desire to amend the Lease on the terms and
conditions contained herein.
NOW, THEREFORE, IT IS HEREBY MUTUALLY AGREED AS FOLLOWS:
1. The term of the Lease is hereby extended until March 31, 1997.
2. Landlord and Tenant agree that commencing January 1, 1994 the Net Rent
payable shall be Two Hundred Sixty-Two Thousand Five Hundred and 00/100
Dollars ($262,500.00) per year for the term of the Lease.
3.Except as modified by this amendment, the Lease shall be and continue in
full force and effect in accordance with the terms thereof and is hereby
adopted, ratified and confirmed.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed
the date and year first above written.
LANDLORD:
ALEX. BROWN PARTNERS, a Maryland
Limited Partnership
By: s/ D Hebb, Jr.
------------------------------------
Its: Managing Partner
------------------------------------
TENANT:
ALEX. BROWN & SONS INCORPORATED, a
Maryland corporation
By: s/ J. M. Connelly
------------------------------------
Its: Managing Director
------------------------------------
<PAGE>
EXHIBIT 10.2 (a)
<PAGE>
AMENDMENT TO LEASE
This Amendment to Lease is made this 29th day of July, 1993 by and between
Brown Realty Limited Partnership ("Landlord") and Alex Brown & Sons
Incorporated ("Tenant").
EXPLANATORY STATEMENT
As of January 1, 1985, Brown Realty Company, as Landlord, and Tenant (then
known as Alex. Brown & Sons, Inc.) entered into a Lease (the "Lease") for the
property known as 135 E. Baltimore Street, Baltimore, Maryland. Brown Realty
Company has subsequently assigned its interest in the Premises to Landlord,
which, pursuant to the terms of the Lease, succeeded to Brown Realty Company's
interest in the Lease. The Lease expires on December 31, 1993 and the parties
wish to amend the Lease to extend it as hereinafter provided.
NOW THEREFORE, Landlord and Tenant agree to amend the Lease as follows:
1. The Term of the Lease shall be extended so as to expire at 11:59 p.m. on
March 31, 1997.
2. The Net Rent for each of the Lease Years during the Term as extended
shall be One Hundred Twenty-Five Thousand Seven Hundred Fifty Dollars (
$125,750.00) annually, and shall be prorated for the final three (3)
months of the extended Term.
3. The notice addresses set forth in paragraph 27 of the Lease shall be
amended to read as follows:
(i) if to Landlord:
Brown Realty Limited Partnership
c/o Jack S. Griswold
225 E. Redwood Street
Baltimore, Maryland 21202
(ii) if to Tenant:
Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Attn: John E. Betsill
4. Capitalized terms used in this Amendment to Lease and not defined herein
shall have the meanings ascribed to them in the Lease.
<PAGE>
5. In all other respects, the parties ratify and confirm the provisions of
the Lease.
IN WITNESS WHEREOF, the parties have caused this amendment to be executed on
the date set forth herein.
WITNESS: BROWN REALTY LIMITED PARTNERSHIP
s/ Ann M. Cowing By: s/ Jack S. Griswold
- -------------------------- -------------------------------------------
Jack S. Griswold,
General Partner
ATTEST: ALEX. BROWN & SONS INCORPORATED
s/ John E. Betsill By: s/ J. M. Connelly
- -------------------------- -------------------------------------------
Managing Director
<PAGE>
EXHIBIT 10.4
<PAGE>
PURCHASE AND SALE AGREEMENT
This agreement is made as of the 22nd day of December, 1993, by and
between Benjamin H. Griswold IV and Jack S. Griswold (collectively, the
"Sellers") and Alex. Brown Incorporated, a Maryland corporation (the
"Company").
WHEREAS, the Sellers own and control the use of the name "Alex. Brown,"
its derivatives such as "Alex. Brown & Sons" and any and all names similar to
or susceptible of confusion with the name "Alex. Brown" (collectively, the
"Name"); and
WHEREAS, pursuant to a Use of Name Agreement dated March 21, 1991 (the
"Use of Name Agreement"), the Sellers granted to the Company the right to use
the Name subject to the terms thereof; and
WHEREAS, the Sellers now wish to sell to the Company all right, title and
interest in and to the Name, and the Company wishes to purchase the same;
NOW, THEREFORE, in consideration of the agreements, representations and
warranties set forth herein and other good and valuable consideration, the
parties hereto agree as follows:
1. The Sellers hereby agree to sell, transfer, assign and convey to the
Company effective upon receipt of payment pursuant to Section 2 hereof all
right, title and interest in and to the Name, which shall thereafter be
the sole and exclusive property of the Company in all respects; provided,
however, that the Company may not sell, assign, transfer or convey the
Name to a party other than a subsidiary or affiliate of the Company for a
period of eight (8) years from the date hereof without the prior written
consent of the Sellers, or the survivor of them, except in the event of a
merger or other form of corporate reorganization approved by the Company's
stockholders.
<PAGE>
2. The Company shall pay to the Sellers in cash and in accordance with
the written instructions of the Sellers, acting jointly, the sum of Ten
Million Five Hundred Thousand Dollars ($10,500,000) on Monday, January 3,
1994.
3. The Company hereby represents and warrants that:
(a) It has the power, authority and right to enter into this
agreement; and
(b) The execution of this agreement and the delivery of the
purchase amount to the Sellers have been duly authorized; and
(c) This agreement is the legal, valid and binding agreement of
the Company enforceable against it in accordance with its terms; and
(d) The Company's Board of Directors shall adopt the following
resolutions at its next regularly scheduled meeting:
"RESOLVED, that the Board of Directors views the Company's name,
its heritage and the integrity for which they stand with the greatest
respect; and
<PAGE>
"FURTHER RESOLVED, that the Board of Directors perceives that the
Company's name and tradition have great value, and recognizes that
Alexander Brown, his lineal descendants, their partners and the
Company's directors and officers have led the Company and its
predecessor entities with wisdom and skill; and
"FURTHER RESOLVED, that the Board of Directors accepts the
responsibility to ensure that these traditions will be observed, so
long as the Company may exist and pledges to maintain the Company's
standards of business integrity and quality; and
"FURTHER RESOLVED, that the Board of Directors believes that the
name "Alex. Brown" should be and remain the property and heritage of
the Company and therefore ratifies and approves the purchase of the
name "Alex. Brown" in accordance with the terms and conditions set
forth in the Purchase and Sale Agreement attached hereto."
4. The Sellers hereby remise, release and forever acquit the Company,
its subsidiaries, affiliates, directors, officers and assigns from any and
all claims, demands, actions, rights, causes of action, obligations and
liabilities of any kind or nature whatsoever arising out of or in
connection with any past, present or future use of the Name by the
released parties.
<PAGE>
5. The Sellers, jointly and severally, agree to indemnify and hold
harmless the Company, its subsidiaries, affiliates, directors, officers
and assigns against any losses, claims, damages or liabilities to which
they or any of them may become subject, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon an allegation by or through any other
lineal descendant of Alexander Brown (1764 to 1834) that the Sellers do
not alone own or control the use of the Name, or that the Sellers do not
alone have the unencumbered right and authority to sell, transfer, assign
or convey all right, title and interest in and to the use of the Name, or
that another such lineal descendant has any right, title or interest in or
to the use of the Name or to payment of any kind or nature in connection
with this agreement or the Company's use of the Name, and will reimburse
each indemnified party for any reasonable legal or other expenses as they
are incurred by such indemnified party in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding.
6. The Sellers and the Company have entered into this agreement after
arms length negotiations and do so voluntarily and of their own free will.
This agreement constitutes the entire understanding and agreement between
the Sellers and the Company and supersedes any and all written or oral
promises, representations, understandings or agreements relating to the
sale or use of the Name.
7. This agreement will be governed by and construed in accordance with
the laws of the State of Maryland.
<PAGE>
IN WITNESS WHEREOF, the Sellers and the Company have executed or caused to
be executed this agreement as of the date first above written.
WITNESS SELLERS
s/ M. D. Hankin s/ Benjamin H. Griswold IV
- ---------------------------- ------------------------------------------------
Benjamin H. Griswold IV
s/ M. D. Hankin s/ Jack S. Griswold
- ---------------------------- ------------------------------------------------
Jack S. Griswold
ATTEST THE COMPANY
ALEX. BROWN INCORPORATED
s/ Robert F. Price by: s/ A. B. Krongard
------------------------- --------------------------------------------
A. B. Krongard
Chief Executive Officer
<PAGE>
EXHIBIT 10.10
<PAGE>
EMPLOYMENT
AGREEMENT
This Agreement (the "Agreement") is made as of the 22nd day of December,
1993, by and between Alex. Brown Incorporated, a Maryland corporation ("Alex.
Brown"), and Benjamin H. Griswold IV ("Mr. Griswold").
WHEREAS, Mr. Griswold has been the Chairman of the Board of Directors of
Alex. Brown and has been involved in the senior management of Alex. Brown; and
WHEREAS, Alex. Brown acknowledges the significant contributions of Mr.
Griswold as Chairman of the Board and as a member of senior management of
Alex. Brown and wishes that Mr. Griswold remain employed by Alex. Brown and
not engage in any activity which might in any way compete with the businesses
of Alex. Brown;
NOW, THEREFORE, in consideration of the agreements contained herein and
other good and valuable consideration, Alex. Brown and Mr. Griswold agree as
follows:
1. Employment. Mr. Griswold shall be employed as a Managing Director of
Alex. Brown & Sons Incorporated ("ABS") for the Agreement Term (hereinafter
defined), and Mr. Griswold accepts such employment, on the terms and
conditions set forth in this Agreement. During the Agreement Term, Mr.
Griswold shall exercise such authority and perform such duties as may be
commensurate with his position as a Managing Director of ABS.
<PAGE>
2. Nomination as Board Member. In connection with the annual meetings of
stockholders in the years 1994, 1995 and 1996, the Board of Directors of Alex.
Brown will nominate Mr. Griswold for election as a director of Alex. Brown. If
elected as a director, Mr. Griswold shall exercise all of the powers, duties
and authority of a director and shall perform such other duties and serve on
such Board committees as may be designated by the Board of Directors.
3. Confidential Information; Non-Competition. Alex. Brown and Mr. Griswold
recognize that due to the nature of the relationship of Mr. Griswold to Alex.
Brown, Mr. Griswold has had access to and has acquired, may have access to and
may acquire, and has assisted in and might assist in developing, confidential
and proprietary information relating to the business and operations of Alex.
Brown or its subsidiaries or affiliates, including, without limiting the
generality of the foregoing, information with respect to present and
prospective products, systems, strategies, customers, agents, processes, and
sales and marketing methods. Mr. Griswold acknowledges that such information
has been and will continue to be of central importance to the business of
Alex. Brown, and that disclosure of it to, or its use by, others could cause
substantial loss to Alex. Brown. Mr. Griswold and Alex. Brown also recognize
that an important part of Mr. Griswold's duties has been, and will continue to
be, to develop goodwill for Alex. Brown and its subsidiaries and affiliates
through his personal contact with clients, agents, employees and others having
business relationships with such entities, and that there is a danger that
this goodwill, a proprietary asset of Alex. Brown and its subsidiaries and
affiliates, may follow Mr. Griswold if and when he discontinues his
relationship with Alex. Brown. Mr. Griswold accordingly agrees as follows:
<PAGE>
(a) During the Agreement Term, Mr. Griswold will not, directly or
indirectly, either individually or as owner, partner, agent, employee,
consultant or otherwise, except for the account of and on behalf of Alex.
Brown or its subsidiaries or affiliates, engage in any activity competitive
with the business of such entities as currently conducted, or contemplated to
be conducted, nor will he, in competition with such entities, solicit or
otherwise attempt to establish for himself or any other person, firm, or
entity, any business relationship with any person, firm, or corporation which
was, at any time during the Agreement Term, a customer or employee of Alex.
Brown or any of its subsidiaries or affiliates.
(b) Nothing in this Section 3 shall be construed to prevent Mr. Griswold
from owning, as an investment, not more than 1% of a class of equity
securities issued by any competitor of Alex. Brown and publicly traded and
registered under Section 12 of the Securities Exchange Act of 1934.
<PAGE>
4. Trade Secrets. Mr. Griswold will keep confidential any trade secrets or
confidential or proprietary information of Alex. Brown or its subsidiaries or
affiliates which are now known to him or which hereafter may become known to
him as a result of his continuing association with such entities and shall not
at any time, directly or indirectly, disclose any such information to any
person, firm or corporation, or use the same in any way other than in
connection with the business of Alex. Brown or its subsidiaries or affiliates.
For purposes of this Agreement, "trade secrets or confidential or proprietary
information" means information unique to Alex. Brown or its subsidiaries or
affiliates which has a significant business purpose and is not known or
generally available from sources outside such entities, or is not typical of
industry practice.
5. Consideration. As consideration for Mr. Griswold's agreements hereunder,
Alex. Brown agrees:
(a) to pay Mr. Griswold an amount per year not less than $500,000 during
the Agreement Term, such amount to be payable in installments which are no
less frequent than those provided to other Managing Directors of ABS;
<PAGE>
(b) to pay Mr. Griswold in addition to the amount due under Section 5(a)
hereof such other or further amounts, if any, as may be recommended
specifically by the Compensation Committee of the Board of Directors of Alex.
Brown and approved by the Board, objectively determined applying judgment in
the same manner as to other Managing Directors of ABS and relating to his
services in the development and production of business;
(c) to permit Mr. Griswold to participate during the Agreement Term in all
(i) employee benefit plans and arrangements, including pension and disability,
and group life, sickness, accident and health insurance programs, (ii) profit
sharing, stock option, stock bonus and similar equity or incentive
compensation plans, and (iii) investment programs or opportunities, in each
case now existing or hereinafter established and available for participation
by Managing Directors of ABS;
(d) in the event Mr. Griswold ceases to be employed (other than as a
result of the termination of his employment for "cause" as hereinafter defined
or a breach of Section 3 or 4 hereof) by Alex. Brown or one of its
subsidiaries or affiliates, during the Agreement Term (i) to immediately vest,
and extend the term (or provide an equivalent benefit) of, all outstanding
stock options, restricted stock awards, merchant banking participations or
other similar benefits granted to Mr. Griswold prior to the expiration of the
Agreement Term, to the first to occur of (A) the date on which such benefits
would otherwise expire had Mr. Griswold continued to be employed by Alex.
Brown, (B) the first anniversary of the termination of Mr. Griswold's
employment, or (C) the expiration of the Agreement Term; and (ii) to provide
Mr. Griswold with office space and secretarial support equivalent to that
provided to Managing Directors of ABS.
<PAGE>
6. Nature of Payments. (a) It is understood that the consideration payable
to Mr. Griswold under Section 5 of this Agreement shall be payable during the
Agreement Term whether or not Mr. Griswold continues to be employed by Alex.
Brown, and that the consideration described in Section 5 shall cease only upon
the expiration of the Agreement Term. In the event of Mr. Griswold's death
during the Agreement Term, all payments under this Agreement shall be made to
Mr. Griswold's personal representative.
(b) In the event Mr. Griswold ceases to be employed by Alex. Brown, he
shall not be required to mitigate the amount of any payment provided for in
Section 5 by seeking employment or otherwise. Notwithstanding the foregoing,
in the event Mr. Griswold is employed (other than by Alex. Brown or its
subsidiaries or affiliates), either as a sole proprietor, owner, partner,
employee, agent or consultant, during the Agreement Term, the amount payable
under Section 5 shall be reduced by the amount of gross cash compensation
received in such other employment.
<PAGE>
7. Term of Agreement. This Agreement shall expire on the earlier of (i)
December 31, 1996, (ii) a breach of the provisions of Section 3 or 4 of this
Agreement or (iii) the termination of Mr. Griswold's employment for "cause."
In this connection it is expressly understood that Alex. Brown's obligations
under Section 5 shall not expire upon Mr. Griswold's death. For purposes of
this Agreement, "cause" means (i) fraud, misappropriation or intentional
material damage to the property or business of Alex. Brown; (ii) commission of
a felony involving moral turpitude; or (iii) the continuance of demonstrably
willful and repeated failure by Mr. Griswold to perform his duties (other than
as a result of incapacity due to physical or mental illness) after written
notice to Mr. Griswold by Alex. Brown's Board of Directors specifying such
failure and a period of 60 days following such notice for Mr. Griswold to
correct such failure, provided that such "cause" shall have been found by a
majority vote of the Board after at least 10 days written notice to Mr.
Griswold specifying the failure on the part of Mr. Griswold and after an
opportunity for Mr. Griswold to be heard at a meeting of the Board. The period
from January 1, 1994 until the expiration of the Agreement is referred to
herein as the "Agreement Term."
8. Binding Agreement. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, and their respective successors, administrators
and assigns.
<PAGE>
9. Entire Agreement. This Agreement contains the entire understanding
between Mr. Griswold and Alex. Brown with respect to the subject matter hereof
and supersedes any and all prior understandings, written or oral. This
Agreement may be amended, waived, discharged or terminated only by an
instrument in writing and shall be governed by the laws of the State of
Maryland.
10. Severability. A determination that any provision of this Agreement is
invalid or unenforceable shall not affect the validity or enforceability of
any other provision hereof.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the day and year first above written.
WITNESS BENJAMIN H. GRISWOLD IV
s/ M. D. Hankin s/ Benjamin H. Griswold IV
- ---------------------------- ------------------------------------------------
ATTEST ALEX. BROWN INCORPORATED
s/ Robert F. Price By: s/ A. B. Krongard
- ---------------------------- --------------------------------------------
A. B. Krongard
Chief Executive Officer
<PAGE>
EXHIBIT 11
<PAGE>
<TABLE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Calculation of Earnings Per Share
(in thousands, except per share amounts)
<CAPTION>
Year Ended Year Ended Year Ended
12/31/93 12/31/92 12/31/91
----------------- ----------------- -----------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 15,570 15,570 15,300 15,300 14,867 14,867
Stock options 346 420 442 473 613 898
Convertible subordinated
debentures -- 1,819 -- 1,291 -- 1,211
-------- -------- -------- -------- -------- --------
15,916 17,809 15,742 17,064 15,480 16,976
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net earnings for
calculating earnings
per share:
Net earnings $89,226 $89,226 $58,611 $58,611 $51,952 $51,952
Interest expense on
convertible
subordinated
debentures, net of tax -- 1,495 -- 1,080 -- 997
-------- -------- -------- -------- -------- --------
$89,226 $90,721 $58,611 $59,691 $51,952 $52,949
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Earnings per share $ 5.61 $ 5.09 $ 3.72 $ 3.50 $ 3.36 $ 3.12
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
<PAGE>
EXHIBIT 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
Alex. Brown Incorporated (the "Company") is a holding company whose primary
subsidiary is Alex. Brown & Sons Incorporated ("Alex. Brown"), a major
investment banking and securities brokerage firm. The Company, like other
securities firms, is directly affected by general economic and market
conditions, including fluctuations in volume and price levels of securities,
changes in interest rates and demand for investment banking and securities
brokerage services, all of which have an impact on the Company's revenues as
well as its liquidity. Substantial fluctuations can occur in the Company's
revenues and net earnings due to these and other factors.
In periods of reduced market activity, profitability is likely to be adversely
affected because certain expenses, consisting primarily of salaries and
benefits, communications and occupancy expenses, remain relatively fixed.
Accordingly, net earnings for any period should not be considered
representative of any other period.
RESULTS OF OPERATIONS
1993 Compared to 1992
Revenues totaled $628.2 million, an increase of 38% from $455.7 million in
1992. Generally, the increase reflects the year's market strength which
prompted increases in trading volume on the major exchanges and in the OTC
market and an increased volume of public offerings.
Commission revenues totaled $131.7 million, a 21% increase from $108.7 million
in 1992, reflecting increased retail and institutional activity, spurred by
higher trading volumes on the major exchanges.
Investment banking revenues increased 50% to $254.1 million, primarily as a
result of increased underwriting-related revenues.
Principal transaction revenues increased 43% to $129.8 million from $90.9
million in 1992, primarily as a result of strong performance in OTC equity and
fixed income trading, including mortgage-backed securities.
Interest and dividend revenues increased 34% to $49.3 million from $36.8
million in 1992, reflecting an increase in margin loans and fixed income
inventories.
Advisory and other revenues totaled $63.4 million, a 28% increase from $49.5
million in 1992. This increase was primarily attributable to increased
revenues from asset management operations and correspondent services and
increases in net investment revenue, including gains on merchant banking
investments.
Reflecting general market conditions and related increases in transaction
volumes, total operating expenses were $479.9 million, a 33% increase from
$360.3 million in 1992.
Compensation and benefits expense increased 38% to $344.3 million, reflecting
increases in commissions, salaries and benefits and incentive compensation.
Communications expense increased 13% from $22.5 million to $25.5 million, due
primarily to increased levels of business activity.
Occupancy and equipment expense increased 9% to $26.5 million in 1993. This
increase was primarily attributable to additional equipment expense and
expansion of offices.
Interest expense increased 41% to $14.9 million, due primarily to the need to
finance increased margin loans and fixed income inventories.
Floor brokerage, exchange and clearing fees increased 13% to $12.1 million, as
a result of higher volumes of listed securities transactions, by both Alex.
Brown and its correspondents.
Other operating expenses increased 35% to $56.5 million from $42.0 million in
1992, as a result of increased processing expenses associated with the higher
volume of trades and other costs associated with higher levels of business
activity, including other professional and affiliate expenses.
<PAGE>
The Company's effective tax rate increased to 39.8% from 38.6% in 1992, as a
result of higher rates.
As a result of the above, net earnings increased to $89.2 million, from $58.6
million in 1992. Primary and fully diluted earnings per share were $5.61 and
$5.09, respectively, as compared to $3.72 and $3.50 in 1992.
The weighted average number of shares outstanding for purposes of calculating
earnings per share includes shares related to outstanding dilutive stock
options and is affected by the market price of the Company's Common Stock.
Additionally, the calculation of fully diluted earnings per share assumes the
conversion into Common Stock of the Company's outstanding convertible
subordinated debt, if dilutive. These factors can result in lower rates of
increase or higher rates of decrease in earnings per share as compared to the
rates of increase or decrease in net earnings.
1992 Compared to 1991
Revenues totaled $455.7 million, an 11% increase from $410.6 million in 1991.
Generally, the increase reflects the year's market strength which prompted
increases in trading volume on the major exchanges and in the OTC market and
increased volume of public offerings.
Commission revenues totaled $108.7 million, a 16% increase from $94.0 million
in 1991, due primarily to increased listed equity commissions.
Investment banking revenues increased 11% to $169.9 million, primarily as a
result of increased corporate underwriting and fee revenues including fees
from mergers and acquisitions.
Principal transaction revenues increased to $90.9 million from $83.5 million
in 1991, primarily as a result of strong performance in OTC equity and fixed
income trading.
Interest and dividend revenues decreased 7% to $36.8 million from $39.6
million in 1991, due primarily to the virtual elimination of matched book
interest revenue, an area of business which has been deemphasized, and the net
effect of higher margin loan balances and lower interest rates.
Advisory and other revenues increased 22% to $49.5 million from $40.6 million
in 1991. This increase was primarily attributable to increased revenues from
asset management operations, correspondent services and net investment
revenue.
Reflecting general market conditions and related increases in transaction
volumes, total operating expenses were $360.3 million, a 10% increase from
$327.2 million in 1991.
Compensation and benefits expense increased 11% to $250.1 million, reflecting
increases in commissions, salaries and benefits and incentive compensation.
Communications expense increased 8% to $22.5 million from $20.9 million in
1991, reflecting increased levels of business activity.
Occupancy and equipment expense increased 9% to $24.4 million in 1992. This
increase was primarily attributable to additional office space and equipment
and rent increases.
Interest expense decreased 13% to $10.6 million from $12.2 million, due to the
virtual elimination of matched book interest expense and lower rates which
were partially offset by increased borrowings.
Floor brokerage, exchange and clearing fees increased by 12% to $10.8 million,
as a result of higher volumes of listed securities transactions, by both Alex.
Brown and its correspondents.
Other operating expenses increased 11% to $42.0 million from $37.7 million in
1991, as a result of increased trade processing expenses associated with the
higher volume of trades processed and other costs associated with higher
levels of business activity.
<PAGE>
The Company's effective tax rate increased to 38.6% from 37.7% in 1991 as a
result of decreased availability of certain tax benefits.
As a result of the above, net earnings increased to $58.6 million from $52.0
million in 1991. Primary and fully diluted earnings per share were $3.72 and
$3.50, respectively, as compared to $3.36 and $3.12 in 1991.
Liquidity and Capital Resources
The Company's consolidated statement of financial condition reflects a liquid
financial position. The majority of the securities positions in Alex. Brown's
trading accounts (both long and short) are readily marketable and actively
traded. Customer receivables include margin balances and amounts due on
uncompleted transactions. Receivables from other brokers and dealers generally
represent either current open transactions, which usually settle within a few
days, or securities borrowed transactions which normally can be closed out
within a few days. Most of the Company's receivables are secured by marketable
securities. The Company also has investments in fixed assets and illiquid
securities but such investments are not a significant portion of the Company's
total assets.
High yield securities, also referred to as "junk" bonds, are debt securities
and non-investment grade debt securities which are rated by Standard & Poor's
as lower than BBB. The market for high yield securities can be extremely
volatile and many experienced significant declines in past years. At year-end
1993, in its high yield operations, Alex. Brown had $5.2 million and $.9
million of long and short inventory, respectively, as compared to $1.7 million
and $.1 million at year-end 1992.
In 1990, the Company completed the establishment of its merchant banking
business. As of year-end 1993, the carrying value of the Company's merchant
banking investments was $16.6 million, compared to $15.7 million at year-end
1992. Gains related to merchant banking investments were $7.4 million in 1993.
These gains resulted primarily from the sale of the Company's position in
Landstar Systems, Inc., and an increase in the carrying value of McGaw, Inc.
which had an initial public offering in March 1993. At December 31, 1993, the
Company had committed to invest $23 million in a merchant banking partnership
in which the Company and certain of its employees are the general partners. It
is anticipated that merchant banking investments will generally have a holding
period of three years or more. It is also anticipated that these activities
will be funded with existing sources of working capital. The Company has no
outstanding bridge loans.
From time to time the Company makes subordinated loans to correspondents as
part of its Correspondent Services business. These loans may be secured or
unsecured and are funded through general working capital sources. At year-end
1993, $3.0 million of such loans were outstanding.
The Company finances its business through a number of sources, consisting
primarily of paid-in capital, funds generated from operations, free credit
balances in customers' accounts, deposits received on securities loaned and
bank loans.
The Company borrows from banks on a short-term basis under arrangements
pursuant to which the amount of funds available to the Company is based on the
value of the securities owned by the Company and customers' margin securities
pledged as collateral. In addition, the Company borrows on a long-term basis
from banks on both an unsecured basis and with fixed assets pledged as
collateral. The Company has historically been able to obtain necessary bank
borrowings and believes that it will continue to be able to do so in the
future. The Company has a total of $125 million of unsecured and secured
financing from banks available under committed, revolving lines of credit, of
which $25 million expires in 1994 and $100 million expires in 1996.
During 1993, the Company repurchased a total of 876,400 shares of its Common
Stock at a cost of $21.7 million. At year-end 1993, the Company had a
remaining repurchase authorization of approximately 1,000,000 shares. The
Company anticipates that, subject to market conditions, it will make
additional repurchases in the future.
<PAGE>
Alex. Brown is required to comply with the net capital rule of the Securities
and Exchange Commission. The rule may limit the Company's ability to withdraw
capital from Alex. Brown. Alex. Brown has consistently exceeded minimum net
capital requirements under the rule. At December 31, 1993, Alex. Brown had
aggregate net capital of $227.5 million, which exceeded the minimum net
capital requirements by $211.6 million.
Management of the Company believes that existing capital and credit
facilities, when combined with funds generated from operations, will provide
the Company with sufficient resources to meet its present and reasonably
foreseeable cash and capital needs.
Effective January 1, 1993, the Company adopted Statements of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" and No. 112 "Employers' Accounting for
Postemployment Benefits." These statements require that the cost of certain
benefits provided to employees after retirement or termination of employment
be recognized over the period of employment. The cost of adoption of SFAS Nos.
106 and 112 was not material to the Company's financial condition or results
of operations.
Risk Management
The Company records securities transactions on a settlement date basis,
generally the fifth business day following the transaction. The risk of loss
on unsettled transactions is identical to settled transactions which have not
cleared and relates to customers' or brokers' inability or refusal to meet the
terms of their contracts. The Company continually monitors its exposure to
market and counterparty risk through a variety of financial, position and
credit exposure reporting and control procedures. The Risk Management, Credit
and Investment Committees, each of which meets on a regular basis, comprise
members of senior management. Each trading department is subject to internal
position limits established by the Risk Management Committee which also
reviews positions and results of the trading departments. Alex. Brown's Credit
Committee establishes and reviews appropriate credit limits for customers and
brokers seeking margin, repurchase and reverse repurchase agreement facilities
and securities borrowed and securities loaned arrangements. The Investment
Committee approves investment purchases and sales and reviews holdings.
Effects of Inflation
Because the Company's assets are, to a large extent, liquid in nature, they
are not significantly affected by inflation. However, the rate of inflation
affects the Company's expenses such as employee compensation, office space
leasing costs and communication charges, and increases therein may not be
readily recoverable in the price of services offered by the Company. To the
extent inflation results in rising interest rates and has other adverse
effects upon the securities markets and on the value of securities owned by
the Company, it may adversely affect the Company's financial position and
results of operations.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
Years Ended December 31
1993 1992 1991
- -------------------------------------------------------------
(in thousands, except per
share amounts)
Revenues:
Commissions $131,696 $108,733 $ 93,969
Investment banking 254,076 169,876 152,861
Principal transactions 129,774 90,884 83,535
Interest and dividends 49,278 36,765 39,600
Advisory and other 63,379 49,466 40,615
--------- --------- ---------
Total revenues 628,203 455,724 410,580
-----------------------------
Operating expenses:
Compensation and benefits 344,344 250,100 224,559
Communications 25,513 22,546 20,899
Occupancy and equipment 26,461 24,365 22,276
Interest 14,924 10,587 12,161
Floor brokerage, exchange and
clearing fees 12,132 10,781 9,595
Other operating expenses 56,494 41,961 37,734
--------- --------- ---------
Total operating expenses 479,868 360,340 327,224
-----------------------------
Earnings before income taxes 148,335 95,384 83,356
Income taxes (note 13) 59,109 36,773 31,404
--------- --------- ---------
Net earnings $ 89,226 $ 58,611 $ 51,952
-----------------------------
-----------------------------
Earnings per share:
Primary $5.61 $3.72 $3.36
-----------------------------
-----------------------------
Fully diluted $5.09 $3.50 $3.12
-----------------------------
-----------------------------
Weighted average number of shares outstanding:
Primary 15,916 15,742 15,480
-----------------------------
-----------------------------
Fully diluted 17,809 17,064 16,976
-----------------------------
-----------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- -------------------------------------------------------------
ALEX. BROWN INCORPORATED
December 31
-----------------------
1993 1992
- ---------------------------------------------------------------------------
(in thousands)
Assets:
Cash and cash equivalents $ 57,005 $ 87,064
Receivables:
Customers (note 2) 731,404 579,568
Brokers, dealers and clearing organizations
(note 3) 228,258 239,110
Current state income taxes (note 13) 73 336
Other 25,969
55,282
Firm trading securities (note 4) 79,007 67,294
Deferred income taxes (note 13) 6,979 3,726
Memberships in exchanges, at cost (market $2,083
and $1,490) 323 323
Office equipment and leasehold improvements, at
cost less accumulated depreciation and amortization
of $26,311 and $23,127 (note 7) 24,216 23,387
Investment securities (note 5) 52,903 46,966
Loans to employees to purchase convertible
subordinated debentures (note 14) 29,284 4,130
Other assets (note 6) 18,689 7,161
----------- -----------
$1,283,423 $1,085,034
-----------------------
-----------------------
Liabilities and Stockholders' Equity:
Bank loans (note 7) $ 65,973 $ 65,419
Payables:
Cash management facility 68,837 65,721
Customers, including free credit balances 345,283 295,104
Brokers, dealers and clearing organizations
(note 3) 175,369 216,531
Current federal and state income taxes (note 13) 14,716 6,666
Other 184,030 110,695
Securities sold, not yet purchased (note 8) 27,402 21,780
Commitments and contingencies (note 10)
5.75% Convertible subordinated debentures due 2001
(note 12) 24,642 24,593
Employee convertible subordinated debentures
(note 14) 31,506 4,130
Stockholders' equity (note 14):
Common stock of $.10 par value
Authorized 50,000,000 shares
Issued 15,356,431 shares in 1993
and 15,194,716 in 1992 1,536 1,519
Additional paid-in capital 114,014 112,534
Loans to employees to purchase common stock (10,902) --
Retained earnings 241,017 160,342
----------- -----------
Total stockholders' equity 345,665 274,395
----------- -----------
$1,283,423 $1,085,034
-----------------------
-----------------------
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
<TABLE>
<CAPTION>
Years Ended December 31, 1991, 1992, and 1993
---------------------------------------------------------------------
Loans To
Additional Employees Total
Common Paid-in To Purchase Retained Stockholders'
Stock Capital Common Stock Earnings Equity
- --------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1990 $1,475 $107,411 $ -- $ 60,897 $169,783
Net earnings -- -- -- 51,952 51,952
Issuance of 1,047,537
shares of common stock 105 11,357 -- -- 11,462
Repurchase and retirement
of 664,477 shares of common (7,993)
stock (67) (7,926) -- --
Compensation payable in
common stock -- 1,085 -- -- 1,085
Dividends paid -- -- -- (4,609) (4,609)
Balance at December 31, 1991 1,513 111,927 -- 108,240 221,680
Net earnings -- -- -- 58,611 58,611
Issuance of 781,378 shares
of common stock 78 11,191 -- -- 11,269
Repurchase and retirement
of 761,886 shares of common
stock (76) (12,176) -- -- (12,252)
Compensation payable in
common stock 4 1,592 -- -- 1,596
Dividends paid -- -- -- (6,509) (6,509)
----------- ----------- ---------------- ----------- ----------------
Balance at December 31, 1992 1,519 112,534 -- 160,342 274,395
Net earnings -- -- -- 89,226 89,226
Issuance of 983,604 shares
of common stock 99 21,928 (12,920) -- 9,107
Repurchase and retirement
of 876,400 shares of common
stock (88) (21,650) -- -- (21,738)
Compensation payable in
common stock 6 1,202 -- -- 1,208
Loan forgiveness -- -- 2,018 -- 2,018
Dividends paid -- -- -- (8,551) (8,551)
----------- ----------- ---------------- ----------- ----------------
Balance at December 31, 1993 $1,536 $114,014 $(10,902) $241,017 $345,665
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
Years Ended December 31
-----------------------------------
1993 1992 1991
- ------------------------------------------------------------------------
(in thousands)
Cash flows from operating
activities:
Net earnings $ 89,226 $ 58,611 $51,952
Reconciliation of net earnings to
net cash provided by (used for)
operating activities:
Depreciation and amortization 7,004 5,560 5,062
Non-cash compensation expense 5,448 1,596 1,085
Gain on investment securities (7,077) (2,694) (1,435)
Other 49 (3) 49
(Increase) decrease in assets:
Receivables (170,034) (183,900) (169,084)
Firm trading securities (11,713) (7,840) 16,143
Matched securities purchased
under agreements to resell -- -- 107,840
Deferred income taxes (3,253) (898) (2,586)
Other assets (1,028) (251) (812)
Increase (decrease) in
liabilities:
Payables 90,402 79,271 122,436
Securities sold, not yet
purchased 5,622 8,593 (823)
Matched repurchase agreements
and securities sold, not yet
purchased -- -- (107,840)
Deferred income taxes -- (132) (568)
----------- ----------- -----------
Net cash provided by (used for)
operating activities 4,646 (42,087) 21,419
----------- ----------- -----------
Cash flows from financing
activities:
Net proceeds (payments):
Short-term loans 57 45,000 (750)
Securities sold under
repurchase agreements -- -- (215)
Cash management facility 3,116 33,669 11,426
Proceeds from term loans 7,500 6,473 5,000
Payments on term loans (7,003) (8,300) (3,897)
Issuance of common stock 9,107 11,269 11,462
Repurchase of common stock (21,738) (12,252) (7,993)
Dividends paid to stockholders (8,551) (6,509) (4,609)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (17,512) 69,350 10,424
----------- ----------- -----------
Cash flows from investing
activities:
Purchase of office equipment and
leasehold improvements (7,833) (8,041) (3,650)
Purchase of intangible asset (10,500) -- --
Purchase of investment
securities (15,255) (23,121) (6,572)
Sale of investment securities 16,395 8,831 2,631
----------- ----------- -----------
Net cash used for investing
activities (17,193) (22,331) (7,591)
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (30,059) 4,932 24,252
Cash and cash equivalents at
beginning of year 87,064 82,132 57,880
----------- ----------- -----------
Cash and cash equivalents at end
of year $ 57,005 $ 87,064 $ 82,132
-----------------------------------
-----------------------------------
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
1) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the activities of
Alex. Brown Incorporated and subsidiaries in which it owns a controlling
financial interest (the Company). Its principal subsidiary is Alex. Brown &
Sons Incorporated (Alex. Brown), which is wholly owned. All material
intercompany transactions and balances have been eliminated. The equity method
of accounting is used for investments in entities in which the Company holds a
noncontrolling financial interest of 20% to 50%.
Securities transactions and the related revenues and expenses are reflected in
the financial statements on a settlement date basis, which is generally five
business days after trade date. Revenues and expenses on a trade date basis
are not materially different from revenues and expenses on a settlement date
basis.
Firm trading and investment securities and securities sold, not yet purchased
are carried at market value, and unrealized gains and losses relating thereto
are reflected in revenues. Market values are generally based on quoted market
prices. If quoted market prices are not available, market values are
determined based on other relevant factors, including quoted market prices for
similar securities. Investments made in connection with merchant banking
transactions are recorded at their initial cost. Upward adjustments are made
only when an increase in market value is supported by significant external
transactions which directly affect the value of such securities. Downward
adjustments are made when the Company determines that the value of the
investment is less than the carrying value.
Securities purchased under agreements to resell and securities sold under
repurchase agreements are accounted for as financing transactions. Such
securities consist of obligations of the United States government or one of
its agencies. The Company's practice is to maintain collateral sufficient to
secure amounts receivable pursuant to securities purchased under agreements to
resell.
Depreciation of office equipment is determined using the straight line method
over useful lives ranging from 3 to 10 years. Leasehold improvements are
amortized on the straight line method over the lesser of the estimated
economic useful life of the improvements or the remaining term of the lease.
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Under
the asset and liability method of SFAS 109, deferred tax assets and
liabilities represent the expected future tax consequences of the differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The effects of changes in tax
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date. The Company previously accounted for income taxes
under Statement of Financial Accounting Standards No. 96. The effect of
adopting SFAS 109 was not material.
Effective January 1, 1993, the Company adopted SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 112
"Employers' Accounting for Postemployment Benefits." These statements require
that the cost of certain benefits provided to employees after retirement or
termination of employment be recognized over the period of employment. The
effect of adoption of SFAS Nos. 106 and 112 was not material to the Company's
financial condition or results of operations.
The Company classifies all short-term investments with maturities at dates of
purchase of three months or less as cash equivalents except for short-term
investments carried in trading accounts.
Cash management facility payable represents the excess of outstanding checks
written on certain banks over amounts on deposit at such banks.
Primary and fully diluted earnings per share are based on the weighted average
number of shares outstanding and assume the exercise of outstanding dilutive
options to purchase common stock. Fully diluted earnings per share further
assumes the conversion into common stock of convertible subordinated
debentures, if dilutive.
<PAGE>
2) RECEIVABLES FROM CUSTOMERS
Receivables from customers include amounts due on uncompleted transactions and
margin balances. Securities owned by customers and held as collateral for
these receivables are not reflected in the financial statements.
3) RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING
ORGANIZATIONS
Receivables from and payables to brokers, dealers and clearing organizations
consisted of the following (in thousands):
1993 1992
- ------------------------------------------------------------
Securities failed to deliver $ 27,359 $ 40,820
Deposits paid for securities
borrowed 175,673 170,475
Other 25,226 27,815
----------- -----------
Total receivables $228,258 $239,110
-----------------------
-----------------------
Securities failed to receive $ 22,721 $ 31,242
Deposits received for securities
loaned 126,888 158,364
Other 25,760 26,925
----------- -----------
Total payables $175,369 $216,531
-----------------------
-----------------------
Payables to brokers, dealers and clearing organizations at December 31, 1993
included amounts which are due upon delivery of securities to Alex. Brown. In
the event the counterparty does not fulfill its contractual obligation to
deliver these securities, Alex. Brown may be required to purchase the
securities at prevailing market prices to satisfy its customer obligations.
4) FIRM TRADING SECURITIES
Firm trading securities consisted of the following (in thousands):
1993 1992
- --------------------------------------------------------
United States government and
agencies thereof $ 4,738 $ 2,966
Mortgage-backed 167 7,027
States and municipalities 40,290 36,298
Corporate debt 11,959 4,914
Corporate equity 21,853 16,089
--------- ---------
$79,007 $67,294
-------------------
-------------------
5) INVESTMENT SECURITIES
Investment securities included $16.6 million and $15.7 million of merchant
banking investments and $11.4 million and $11.3 million managed by an
affiliate at December 31, 1993 and 1992, respectively. The investment managed
by an affiliate included marketable securities with a long market value of
$7.4 million and $7.8 million and a short market value of $5.0 million and
$10.0 million at December 31, 1993 and 1992, respectively. This investment
also included financial futures contracts at December 31, 1993 which involved
off-balance-sheet risk since changes in the market value of the contracts may
exceed the amounts recognized in the Consolidated Statement of Financial
Condition. Financial futures contracts represent a commitment to receive or
deliver other financial instruments at specific terms at specified future
dates. Such futures contracts are conducted through regulated exchanges which
guarantee performance of counterparties; therefore, credit risk is limited to
a default by the exchange. The futures contracts at December 31, 1993, which
primarily involved a commitment based on delivery of short-term debt
obligations in June 1994, had a notional amount of $247.1 million. Such
contracts are marked to market with the resulting gain or loss reflected in
revenues. Substantially all of these contracts were closed out by January 26,
1994.
<PAGE>
6) INTANGIBLE ASSET
In December 1993, the Company entered into an agreement to purchase the rights
to the name "Alex. Brown" for $10.5 million. That agreement was consummated on
January 3, 1994. Previously, the name had been used by the Company pursuant to
an agreement with certain lineal descendants of Alexander Brown, the founder
of the Company in 1800. The Company will amortize the cost of the name over 40
years.
7) BANK LOANS
Bank loans were collateralized as follows (in thousands):
1993 1992
- ------------------------------------------------
Customers' margin securities $45,057 $45,000
Office equipment and
leasehold improvements 13,816 20,419
Unsecured 7,100 --
--------- ---------
$65,973 $65,419
-------------------
-------------------
The Company obtains bank loans which are collateralized by securities owned by
the Company and customers' margin securities. Such loans are payable on demand
and bear interest based on the federal funds rate. The weighted average
interest rate on these loans was 3.5% at December 31, 1993. The averages of
such loans outstanding were $105,008,000 during 1993 at a weighted average
interest rate of 3.6% and $58,155,000 during 1992 at a weighted average
interest rate of 3.9%.
Term loans of $13,816,000 and $20,419,000 at December 31, 1993 and 1992,
respectively, are collateralized by office equipment and leasehold
improvements and bear interest at rates ranging from 5.4% to 9.3%. The
weighted average interest rates of these term loans were 7.8% during 1993 and
8.2% during 1992. Such loans mature as follows: $6,780,000 in 1994, $4,655,000
in 1995 and $2,381,000 in 1996.
A term loan of $7,100,000 at December 31, 1993 is unsecured and bears interest
at a variable rate based on the London Interbank Offered Rate (4.3% at
December 31, 1993). The weighted average interest rate was 3.7% during 1993.
The loan matures as follows: $800,000 in 1994, $1,000,000 in 1995, $1,200,000
in 1996, $2,350,000 in 1997 and $1,750,000 in 1998.
The Company has $125 million of unused lines of credit under revolving credit
and term loan facilities (the "Credit Facilities") with various banks. The
Credit Facilities expire in August 1994 as to $25 million and August 1996 as
to $100 million.
The Credit Facilities and term loans contain various restrictive covenants,
the most significant of which require the maintenance of minimum levels of net
worth by both the Company and Alex. Brown and minimum levels of net capital by
Alex. Brown. At December 31, 1993, the Company and Alex. Brown were in
compliance with all restrictive covenants contained in the Credit Facilities
and term loans.
Interest payments, including interest payments on repurchase agreements,
securities loaned and convertible subordinated debentures, were $14,122,000,
$10,503,000 and $12,452,000 during 1993, 1992 and 1991, respectively.
<PAGE>
8) SECURITIES SOLD, NOT YET PURCHASED
Securities sold, not yet purchased consisted of the following (in thousands):
1993 1992
- ----------------------------------------------------
United States government and
agencies thereof $ 1,989 $ 7,548
Mortgage-backed 6 11
States and municipalities 189 2,107
Corporate debt 3,975 2,987
Corporate equity 21,243 9,127
----------- -----------
$27,402 $21,780
-----------------------
-----------------------
Securities sold, not yet purchased represent obligations to purchase
securities at prevailing market prices. These transactions result in
off-balance-sheet risk since Alex. Brown's ultimate cost to satisfy the
obligations is dependent upon future prices of the securities and may exceed
the amounts recognized in the Consolidated Statements of Financial Condition.
9) NET CAPITAL REQUIREMENTS
Alex. Brown is required to comply with the net capital rule of the Securities
and Exchange Commission. The rule may limit the Company's ability to withdraw
capital from Alex. Brown. Alex. Brown has consistently exceeded the minimum
net capital requirements under the rule. At December 31, 1993, Alex. Brown's
net capital was $227,468,000 which exceeded net capital rule requirements by
$211,595,000. Alex. Brown has two London-based subsidiaries which are subject
to the capital requirements of the Securities and Futures Authority (SFA). At
December 31, 1993, these subsidiaries were in compliance with the SFA capital
adequacy requirements.
10) COMMITMENTS AND CONTINGENCIES
Leases
The Company's subsidiaries are obligated under operating leases for office
facilities and equipment expiring at various dates to 2004. Two leases for
office facilities are with partnerships which are controlled by certain
employees of the Company. Under these leases the subsidiaries pay all
insurance, energy and other occupancy costs. Another lease for office
facilities is with a partnership in which the Company has an ownership
interest. The approximate annual minimum rentals under the leases payable to
such related parties and others as of December 31, 1993 were as follows (in
thousands):
Related
Years Ending December 31 Parties Others
- ------------------------------------------------------------
1994 $2,851 $ 9,353
1995 2,849 9,175
1996 2,844 8,781
1997 624 7,860
1998 -- 5,267
1999 and thereafter -- 18,073
- ------------------------------------------------------------
Rent expense, including equipment rentals, was $14,829,000, $15,076,000 and
$15,350,000, including $2,939,000, $3,270,000 and $3,105,000 to related
parties, for 1993, 1992 and 1991, respectively.
Letters of Credit
At December 31, 1993, Alex. Brown was contingently liable for up to
$24,804,000 under unsecured letters of credit used to satisfy required margin
deposits at three securities clearing corporations.
<PAGE>
Investment Commitments
At December 31, 1993, the Company had committed to invest up to $29 million in
certain investment partnerships, including $23 million in a merchant banking
partnership in which the Company and certain of its employees are the general
partners.
Litigation
In the course of its investment banking and securities brokerage business,
Alex. Brown has been named a defendant in a number of lawsuits and may be
required to contribute to final settlements in actions, in which it has not
been named a defendant, arising out of its participation in the underwritings
of certain issues. A substantial settlement or judgment in any of these cases
could have a material adverse effect on the Company. Although the ultimate
outcome of such litigation is not subject to determination at present, in the
opinion of management, after consultation with counsel, the resolution of
these matters will not have a material adverse effect on the Company's
consolidated financial statements.
Financial Instruments with Off-Balance-Sheet Risk
Alex. Brown executes, settles and finances securities transactions in
connection with its customer and correspondent clearing activities
("customers"). These activities may expose the Company to off-balance-sheet
risk in the event a counterparty is unable to fulfill its contractual
obligations.
In accordance with industry practice, customers and other brokers are not
required to deliver cash or securities to Alex. Brown pursuant to securities
transactions until settlement date, which is generally five business days
after trade date. The Company is exposed to risk of loss should any
counterparty to a securities transaction fail to fulfill his contractual
obligations, and Alex. Brown is required to buy or sell securities at
prevailing market prices.
Alex. Brown's customers may sell securities not yet purchased or write option
contracts ("short sales"). Regulatory and internal margin requirements
determine the collateral value that customers who execute short sales must
have in their accounts in the form of cash or securities. Customer short sales
may expose the Company to risk of loss in the event that collateral held by
Alex. Brown is not sufficient to cover losses which customers may incur. In
the event a customer fails to fulfill his obligations, Alex. Brown may be
required to buy or sell securities at prevailing market prices.
The Company seeks to minimize the above risks through a variety of reporting
and control procedures. Customers and other brokers are required to maintain
collateral in compliance with regulatory and internal requirements. The
adequacy of collateral is reviewed daily and customers may be required to
deposit additional collateral or reduce short positions when necessary. Alex.
Brown sets credit limits for customers executing transactions on margin and
monitors compliance with such limits on a daily basis. Alex. Brown establishes
credit limits for customers and other brokers with which it conducts
significant transactions. Alex. Brown monitors compliance with and the
appropriateness of such limits. Alex. Brown's policy is to obtain and maintain
collateral until the counterparty fulfills its obligation.
Financial Instruments with Concentrations of Credit Risk
As a securities broker, Alex. Brown engages in various securities trading and
brokerage activities with other brokers and institutional and individual
customers. In connection with these activities, Alex. Brown enters into
reverse repurchase and repurchase agreements which are collateralized by U.S.
government and agency securities and securities lending arrangements which may
result in credit exposure in the event the counterparty fails to fulfill its
contractual obligations. A substantial portion of Alex. Brown's transactions
are executed with and on behalf of other brokers and dealers and institutional
investors, including commercial banks, insurance companies, pension plans,
mutual funds and other financial institutions. The Company's exposure to
credit risk can be directly impacted by volatile securities markets which may
impair the ability of counterparties to satisfy their contractual obligations.
The Company seeks to control its credit risk through the use of a variety of
reporting and control procedures described in the preceding discussion of
financial instruments with off-balance-sheet risk. Substantially all of Alex.
Brown's receivables are collateralized by securities which are generally in
physical possession, at depositories or due from other parties.
<PAGE>
11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Receivables
Receivables from customers and brokers, dealers and clearing organizations
include margin loans which are payable on demand, amounts due on open
transactions which usually settle within a few days, and cash deposits made in
connection with securities borrowed transactions which normally can be closed
out within a few days. The carrying amounts of these receivables, which are
generally secured by marketable securities, and other receivables approximate
fair value.
Firm trading and investment securities (long and short)
Firm trading and investment securities are carried in the financial statements
at market value (see note 1).
Bank loans
The principal balance of bank loans which are payable on demand is assumed to
be the fair value of such loans. Term loans with an aggregate principal
balance of $20,916,000 and $20,419,000 had fair values of $21,193,000 and
$20,912,000 at December 31, 1993 and 1992, respectively, based on borrowing
rates currently available to the Company for loans with similar terms and
remaining maturities.
Payables
Payables to customers and brokers, dealers and clearing organizations include
free credit balances which are payable on demand, amounts due on open
transactions which usually settle within a few days, and cash deposits
received in connection with customer short sales and securities loaned
transactions which normally can be closed out within a few days. Other
payables include expense accruals and amounts due to other brokers resulting
from securities underwritings. The carrying amount of payables approximates
fair value.
Convertible subordinated debentures
The market value of the 5.75% convertible subordinated debentures was
$26,220,000 and $24,125,000 at December 31, 1993 and 1992, respectively, based
on quoted market prices.
12) CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $25,000,000 convertible subordinated debentures in June
1986. The debentures are convertible into the Company's common stock at the
rate of one share of common stock for each $26.03 of principal amount of
debentures.
13) INCOME TAXES
The components of income tax expense were as follows (in thousands):
1993 1992 1991
- --------------------------------------------------------
Federal $47,644 $29,848 $24,645
State and local 11,465 6,925 6,759
--------- --------- ---------
$59,109 $36,773 $31,404
-----------------------------
-----------------------------
Current $62,362 $37,803 $34,558
Deferred (3,253) (1,030) (3,154)
--------- --------- ---------
$59,109 $36,773 $31,404
-----------------------------
-----------------------------
<PAGE>
Income tax expense is reconciled to amounts computed by applying the federal
corporate tax rate to earnings before income taxes as follows (in thousands):
1993 1992 1991
- --------------------------------------------------------
Tax at federal statutory
rate $51,917 $32,431 $28,341
State and local income
taxes, net of federal
income tax benefit 7,452 4,570 4,461
Other, net (260) (228) (1,398)
--------- --------- ---------
$59,109 $36,773 $31,404
-----------------------------
-----------------------------
The components of the net deferred income tax asset were as follows (in
thousands):
1993 1992 1991
- --------------------------------------------------------
Unrealized profit or
loss--Firm securities $(1,620) $(429) $(164)
Equity awards 2,212 728 (345)
Accrued expenses 7,461 4,605 3,219
Other investments (1,670) (1,385) (1,063)
Deferred income -- -- 793
Depreciation 358 (588) (695)
Other, net 238 795 951
--------- --------- ---------
$ 6,979 $3,726 $2,696
-----------------------------
-----------------------------
Income tax payments were $50,428,000, $35,459,000 and $22,021,000 during 1993,
1992 and 1991, respectively.
The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" (SFAS No. 109) as of January 1, 1992. The
effects of adoption of SFAS No. 109 on the deferred income tax asset as of
January 1, 1992 and net earnings for the year ended December 31, 1992 were not
material. At December 31, 1993, the gross deferred income tax asset and the
gross deferred income tax liability were $15,391,000 and $8,412,000,
respectively. There was no valuation allowance relating to deferred income tax
assets.
14) EMPLOYEE BENEFIT PLANS
Employee Debentures
The Company has sold convertible subordinated debentures to certain employees
pursuant to the 1991 Equity Incentive Plan. The debentures are convertible
into the Company's common stock three years after the date issued. The
debentures may be redeemed at par if the employee terminates employment with
the Company. The Company has made loans to the employees to fund the purchase
of the debentures. The loans are subject to forgiveness if certain return on
equity targets are met. The Company forgave $1,041,000 of such loans in 1993
as a result of exceeding the return on equity targets in 1991 through 1993.
The Company has also sold convertible subordinated debentures to employees
under the Equity Partnership Plan described below.
Date Issued JANUARY 1994 January 1993 January 1992 January 1991
- --------------------------------------------------------------------------
Principal amount $3,975,000 $2,300,000 $2,045,000 $2,081,000
Interest rate 5.375% 6.375% 6.75% 8.125%
Due Date JUNE 2000 June 1999 June 1998 June 1997
Conversion
price/share $28.83 $23.00 $25.50 $8.50
<PAGE>
Stock Options
The Company has granted incentive and nonqualified stock options to certain
employees and directors. Payment for the shares may be made in cash, shares of
the Company's common stock or a combination thereof. Options were granted to
purchase 375,000 shares and 400,000 shares of the Company's common stock in
January 1994 and 1993, respectively. These options are exercisable in six
equal installments beginning one year from the date of grant and expire after
ten years. The exercise price for these options is 25% greater than the
average market value of the Company's common stock 30 days prior to and
including the date of grant. Options previously granted are generally
exercisable in five equal installments beginning one year from the date of
grant and expire after five years. The option prices approximated the market
values of the Company's common stock at the dates of grant except for options
exercisable at $13.17 per share which were issued in 1987 at a discount.
Compensation expense related to such discount was $182,000 for 1991.
The following table sets forth activity relating to the number of shares
covered by stock options (options granted include amounts granted through
January of the following year):
1993 1992 1991
- -----------------------------------------------------------------
Outstanding at January 1 2,168,568 2,607,199 3,058,824
Granted 384,000 410,500 657,200
Exercised (at $8.50-$25.50) (356,032) (765,036) (1,074,048)
Forfeited (88,380) (84,095) (34,777)
----------- ----------- ------------
Outstanding at December 31 2,108,156 2,168,568 2,607,199
------------------------------------
------------------------------------
Options outstanding at December 31, 1993 have an exercise price range of
$8.50--$31.34 per share and a weighted average exercise price of $20.68 per
share. Options for 696,847 shares were exercisable at December 31, 1993.
Restricted Stock Awards
In February 1992, the Company issued 45,673 shares of common stock to a trust
for the benefit of certain employees. The employees' interests in the trust
vest after three years. Compensation expense related to this grant was
$1,165,000 in 1991.
Restricted stock awards granted prior to 1991 vest over five years. Unvested
shares are subject to forfeiture if the recipient terminates employment with
the Company. The market value of shares granted is being amortized over the
periods in which the employees are providing the related services
(compensation expense of $903,000 for 1991, $431,000 for 1992, $91,000 for
1993, $109,000 for 1994 and $58,000 for 1995).
Capital Accumulation Plan
The Company maintains a 401(k) deferred compensation plan covering
substantially all employees. Employees are permitted within limitations
imposed by tax law to make pre-tax contributions to the plan pursuant to
salary reduction agreements. The Company may make discretionary matching
contributions to the plan and may make additional contributions in order to
preserve the plan's tax exempt status. Compensation expense for the Company's
contributions to the plan was $2,277,000, $1,956,000 and $1,587,000 for 1993,
1992 and 1991, respectively.
Profit Sharing Plan
The Company maintains a profit sharing plan covering substantially all
employees. Contributions to the plan by the Company are discretionary. Profit
sharing plan expense was $3,980,000, $2,044,000 and $3,441,000 for 1993, 1992
and 1991, respectively.
<PAGE>
Employee Stock Purchase Plan
The Company maintains an employee stock purchase plan pursuant to which
employees may purchase shares of the Company's common stock through payroll
deductions, subject to certain limitations, at a price equal to 85% of the
fair market value of the stock on four quarterly investment dates. The plan
provides for the issuance of up to 1,000,000 shares. A total of 462,276 shares
have been issued under the plan, including 95,413 shares in 1993.
Equity Compensation Plan
During 1993 and 1992, certain key employees had a portion of cash compensation
withheld and replaced by restricted common stock of the Company at a 15%
discount from market and interests in investment accounts through which the
employees can direct investments in selected Company-sponsored investment
vehicles. Amounts withheld during 1993 were tax deferred. The restricted stock
cannot be sold and funds cannot be withdrawn from the investment accounts for
three years (five years if employment terminates during the initial three year
period). These restrictions are removed in the event of death, disability, or
retirement. Pursuant to the Equity Compensation Plan, $8,729,000 and
$2,730,000 of cash compensation was withheld and replaced by 204,242 and
69,791 shares of the Company's common stock and interests in investment
accounts for 1993 and 1992, respectively.
Deferred Compensation Plan
The Company maintains a deferred compensation plan for Private Client
investment representatives. Eligible participants can direct the investment of
their deferred compensation amounts by selecting among various
Company-sponsored investment vehicles and the common stock of the Company at a
15% discount from market. The employees vest in the deferred compensation
accounts after four years. The deferred compensation is forfeited if the
employee terminates employment with the Company during the vesting period
except for termination due to death, disability, or retirement. The amount of
deferred compensation is being amortized over the periods in which the
employees are providing the related services (compensation expense of $761,000
for each of the years 1993 through 1997).
Equity Partnership Plan
In August 1993, the Company sold 544,000 shares of its common stock and
$25,080,000 convertible subordinated debentures at market to certain key
employees pursuant to the 1991 Equity Incentive Plan. The debentures bear
interest at 5.32%, payable annually, and are due August 2001. The debentures
are convertible into the Company's common stock in stages beginning four years
after the date issued at a rate of one share of common stock for each $23.75
of principal amount of debentures. The debentures may be redeemed at par if
the employee terminates employment with the Company. The Company made loans to
the employees of $38,000,000 to finance the purchase of the stock and
debentures. Under the Plan, the Company may forgive up to 15.6% of the loans.
The Company forgave $3,200,000 of such loans in 1993. The sale of the
convertible subordinated debentures and the authorization of the related loans
are subject to shareholder approval at the Company's Annual Meeting in April
1994.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- -----------------------------------------------------------------
ALEX. BROWN INCORPORATED
Board of Directors
Alex. Brown Incorporated:
We have audited the accompanying consolidated statements of financial
condition of Alex. Brown incorporated and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1993. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the cosolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alex. Brown
Incorporated and subsidiaries as of December 31, 1993 and 1992, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1993 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK
Baltimore, Maryland
January 26, 1994
<PAGE>
<TABLE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
- ------------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
<CAPTIONS>
Years Ended December 31
1993 1992 1991 1990(1) 1989(1)
- --------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues $ 628,203 $ 455,724 $ 410,580 $ 271,702 $ 290,648
Operating expenses 479,868 360,340 327,224 259,942 272,694
---------- ---------- ---------- ---------- ----------
Earnings before income
taxes 148,335 95,384 83,356 11,760 17,954
Income taxes 59,109 36,773 31,404 3,999 7,288
---------- ---------- ---------- ---------- ----------
Net earnings $ 89,226 $ 58,611 $ 51,952 $ 7,761 $ 10,666
Earnings per share:
Primary $ 5.61 $ 3.72 $ 3.36 $ .50 $ .65
Fully diluted $ 5.09 $ 3.50 $ 3.12 $ .50 $ .65
Cash dividends per share $ .575 $ .45 $ .34 $ .265 $ .19
Weighted average shares
outstanding: Primary 15,916 15,742 15,480 15,482 16,360
Fully diluted 17,809 17,064 16,976 15,619 16,369
-----------------------------------------------------------
-----------------------------------------------------------
<CAPTION>
December 31
-----------------------------------------------------------
1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Total assets $1,283,423 $1,085,034 $ 865,692 $ 786,852 $ 943,768
Long-term debt $ 13,336 $ 15,160 $ 17,279 $ 18,843 $ 6,143
Convertible subordinated
debentures $ 56,148 $ 28,723 $ 26,670 $ 24,496 $ 24,448
Total stockholders'
equity $ 345,665 $ 274,395 $ 221,680 $ 169,783 $ 177,966
<FN>
(1) 1989 results include a $9.4 million charge related to excess office space;
1990 results include a $2.0
million reversal of a portion of such charge.
</TABLE>
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------
ALEX. BROWN INCORPORATED
Quarters Ended
---------------------------------------------------
1993 December 31 September 24 June 25 March 26
- ----------------------------------------------------------------------
(in thousands, except per share amounts)
Revenues $218,774 $139,674 $130,016 $139,739
Operating expenses 154,981 113,267 104,804 106,816
------------- ------------- ----------- -----------
Earnings before
income taxes 63,793 26,407 25,212 32,923
Income taxes 24,879 11,179 10,211 12,840
------------- ------------- ----------- -----------
Net earnings $ 38,914 $ 15,228 $ 15,001 $ 20,083
---------------------------------------------------
---------------------------------------------------
Earnings per
share:
Primary $ 2.42 $ 0.95 $ 0.95 $ 1.28
---------------------------------------------------
---------------------------------------------------
Fully diluted $ 2.13 $ 0.86 $ 0.89 $ 1.19
---------------------------------------------------
---------------------------------------------------
Quarters Ended
---------------------------------------------------
1992 December 31 September 25 June 26 March 27
- ----------------------------------------------------------------------
Revenues $128,055 $104,654 $ 98,860 $124,155
Operating expenses 93,536 86,415 83,365 97,024
------------- ------------- ----------- -----------
Earnings before
income taxes 34,519 18,239 15,495 27,131
Income taxes 13,462 7,113 5,888 10,310
------------- ------------- ----------- -----------
Net earnings $ 21,057 $ 11,126 $ 9,607 $ 16,821
---------------------------------------------------
---------------------------------------------------
Earnings per
share:
Primary $ 1.37 $ 0.71 $ 0.60 $ 1.05
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Fully diluted $ 1.28 $ 0.67 $ 0.57 $ 0.99
---------------------------------------------------
---------------------------------------------------
<PAGE>
CORPORATE INFORMATION
- ----------------------------------------------------------------------
ALEX. BROWN INCORPORATED
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The common stock of the Company trades on the NYSE under the symbol "AB."
Prior to the Company listing on the NYSE in March, 1992 the common stock of
the Company traded on the NASDAQ National Market System under the symbol of
ABSB. As of December 31, 1993, there were approximately 665 holders of record
of the Company's common stock. The following tables set forth the high and low
sales prices of the common stock and the cash dividends declared on the common
stock for the periods indicated.
PRICE RANGE OF COMMON STOCK
1993 High Low
- --------------------------------------------------
First Quarter $24 5/8 $19 5/8
Second Quarter $23 1/2 $20
Third Quarter $29 1/4 $22 1/2
Fourth Quarter $30 1/2 $23 1/8
1992 High Low
- --------------------------------------------------
First Quarter $27 3/4 $20 1/4
Second Quarter $20 1/8 $15 3/8
Third Quarter $18 1/4 $15 3/8
Fourth Quarter $22 3/8 $14 1/2
<TABLE>
DIVIDEND INFORMATION
<CAPTION>
Dividend
Per Share Declaration Date Record Date Payment Date
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 $.125 April 27, 1993 May 7, 1993 May 18, 1993
$.15 July 27, 1993 August 6, 1993 August 17, 1993
$.15 October 19, 1993 October 29, 1993 November 9, 1993
$.15 January 26, 1994 February 9, 1994 February 18, 1994
1992 $.10 April 21, 1992 May 1, 1992 May 8, 1992
$.10 July 21, 1992 July 31, 1992 August 10, 1992
$.125 October 20, 1992 October 30, 1992 November 10, 1992
$.125 January 28, 1993 February 9, 1993 February 18, 1993
</TABLE>
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for 1993 as filed with the
Securities and Exchange Commission is available without charge on request by
writing to Beverly L. Wright, Chief Financial Officer, Alex. Brown
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202.
AUDITORS TRANSFER AGENT AND REGISTRAR
KPMG Peat Marwick Chemical Bank
111 South Calvert Street 450 W. 33rd Street
Baltimore, Maryland 21202 New York, New York 10001
(410) 783-8300 (800) 851-9677
<PAGE>
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Alex. Brown Incorporated:
We consent to incorporation by reference in the Registration Statements
(Nos. 33-23789, 33-26988, 33-40618, 33-40619, 33-45715, 33-46282 and
33-67050) on Forms S-8 of Alex. Brown Incorporated of our reports dated
January 24, 1994, relating to the consolidated statements of financial
condition of Alex. Brown Incorporated and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of earnings, stockholders'
equity and cash flows and related schedules for each of the years in the
three-year period ended December 31, 1993, which reports appear in or are
incorporated by reference in the December 31, 1993 annual report on Form 10-K
of Alex. Brown Incorporated.
KPMG Peat Marwick
Baltimore, Maryland
March 25, 1994
