^L<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 25, 1994
Commission file number 0-14199
ALEX. BROWN INCORPORATED
- - -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1434118
- - -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 E. Baltimore St., Baltimore, MD
21202
- - -----------------------------------------------------------------------------
(Address of principal executive offices)
(Zip code)
410-727-1700
- - -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - -----------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.10 par value 15,421,739
- - -----------------------------------------------------------------------------
(Class) (Outstanding at April 26, 1994)
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Page
Part I - Financial Information
Consolidated Statements of Earnings (Unaudited)
for the three month periods ended March 25, 1994
and March 26, 1993 1
Consolidated Statements of Financial Condition
as of March 25, 1994 (Unaudited) and
December 31, 1993 2-3
Consolidated Statements of Stockholders' Equity
(Unaudited) for the three month periods ended
March 25, 1994 and March 26, 1993 4
Consolidated Statements of Cash Flows (Unaudited)
for the three month periods ended March 25, 1994
and March 26, 1993 5
Notes to Consolidated Financial Statements
(Unaudited) 6-7
Management's Discussion and Analysis of Results of
Operations and Financial Condition 8-10
Part II - Other Information 11
Signatures 12
Exhibit -
(11) Calculation of Earnings Per Share (Unaudited) 13
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 25, March 26,
1994 1993
---------- -----------
<S> <C> <C> <C>
Revenues:
Commissions $ 38,044 $ 33,474
Investment banking 51,263 53,505
Principal transactions 35,372 26,489
Interest and dividends 15,279 9,683
Advisory and other 22,454 16,588
---------- -----------
Total 162,412 139,739
---------- -----------
Operating expenses:
Compensation and benefits 87,482 78,530
Communications 6,908 5,731
Occupancy and equipment 6,625 5,640
Interest 5,561 2,791
Floor brokerage, exchange
and clearing fees 3,239 2,667
Other operating expenses 13,904 11,457
---------- -----------
Total 123,719 106,816
---------- -----------
Earnings before income taxes 38,693 32,923
Income taxes 15,671 12,840
---------- -----------
Net earnings $ 23,022 $ 20,083
========== ===========
Earnings per share:
Primary $ 1.46 $ 1.28
========== ===========
Fully diluted $ 1.28 $ 1.19
========== ===========
Weighted average number of
shares outstanding:
Primary 15,754 15,704
========== ===========
Fully diluted 18,322 17,090
========== ===========
Cash dividends declared
per share $ 0.15 $ 0.125
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(1)
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 25, December 31,
1994 1993
----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 22,140 $ 57,005
Receivables:
Customers (Note 6) 1,122,994 731,404
Brokers, dealers and clearing organizations 274,291 228,258
Other 52,696 55,355
Firm trading securities (Note 2) 84,016 79,007
Deferred income taxes 20,798 6,979
Memberships in exchanges, at cost
(market $2,134 and $2,083) 323 323
Office equipment and leasehold improvements,
at cost less accumulated depreciation and
amortization of $31,390 and $26,311 25,122 24,216
Investment securities (Note 5) 60,529 52,903
Loans to employees to purchase convertible
subordinated debentures (Note 4) 33,259 29,284
Other assets 34,405 18,689
----------- -----------
$1,730,573 $1,283,423
=========== ===========
</TABLE>
(continued)
(2)
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Financial Condition (continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 25, December 31,
1994 1993
----------- -----------
(Unaudited)
<S> <C> <C> <C>
Bank loans $ 150,070 $ 65,973
Payables:
Cash management facility 54,059 68,837
Customers, including free credit balances 283,265 345,283
Brokers, dealers and clearing organizations 268,386 175,369
Current federal and state income taxes 18,540 14,716
Other 120,055 184,030
Securities sold, not yet purchased (Note 2) 18,751 27,402
Securities sold under repurchase agreements,
at contract amounts (Note 6) 392,325 -
5.75% Convertible subordinated debentures 24,654 24,642
Employee convertible subordinated debentures
(Note 4) 35,235 31,506
Stockholders' equity (Note 4):
Common stock of $.10 par value.
Authorized 50,000,000 shares.
Issued 15,427,874 shares in 1994
and 15,356,431 shares in 1993 1,543 1,536
Additional paid-in capital 112,895 114,014
Loans to employees to purchase common stock (10,902) (10,902)
Retained earnings 261,697 241,017
----------- -----------
Total stockholders' equity 365,233 345,665
----------- -----------
$1,730,573 $1,283,423
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(3)
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Loans to
Employees
Additional To Purchase Total
Common Paid-in Common Retained Stockholder
Stock Capital Stock Earnings Equity
---------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended March 25, 1994
Balance at December 31, 1993 $ 1,536 $ 114,014 $ (10,902) $ 241,017 $ 345,665
Net earnings - - - 23,022 23,022
Issuance of 248,412 shares of
common stock 25 4,125 - - 4,150
Repurchase and retirement of
380,911 shares of common stock (38) (10,380) - - (10,418)
Compensation payable in
common stock 20 5,136 - - 5,156
Dividends paid - - - (2,342) (2,342)
---------- ----------- ----------- ---------- ------------
Balance at March 25, 1994 $ 1,543 $ 112,895 $ (10,902) $ 261,697 $ 365,233
========== =========== =========== ========== ============
Three months ended March 26, 1993
Balance at December 31, 1992 $ 1,519 $ 112,534 $ - $ 160,342 $ 274,395
Net earnings - - - 20,083 20,083
Issuance of 198,659 shares of
common stock 20 3,002 - - 3,022
Compensation payable in
common stock 6 1,136 - - 1,142
Dividends paid - - - (1,922) (1,922)
---------- ----------- ----------- ---------- ------------
Balance at March 26, 1993 $ 1,545 $ 116,672 $ - $ 178,503 $ 296,720
========== =========== =========== ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
(4)
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 25, March 26,
1994 1993
----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 23,022 $ 20,083
Reconciliation of net earnings to net cash
used for operating activities:
Depreciation and amortization 1,767 1,480
Non-cash compensation expense 5,156 1,142
Gain on investment securities (6,493) (3,992)
Other 12 12
(Increase) decrease in assets:
Receivables (434,964) 76,583
Firm trading securities (5,009) (50,938)
Deferred income taxes (13,819) (9,793)
Other assets (15,777) (873)
Decrease in liabilities:
Payables (29,152) (120,077)
Securities sold, not yet purchased (8,651) (5,142)
----------- -----------
Net cash used for operating activities (483,908) (91,515)
----------- -----------
Cash flows from financing activities:
Net proceeds (payments):
Short-term loans 86,741 58,200
Securities sold under repurchase agreements 392,325 19,552
Cash management facility (14,778) (28,652)
Payments on term loans (2,644) (564)
Issuance of common stock 3,904 3,022
Repurchase of common stock (10,418) -
Dividends paid to stockholders (2,342) (1,922)
----------- -----------
Net cash provided by financing activities 452,788 49,636
----------- -----------
Cash flows from investing activities:
Purchase of office equipment and leasehold
improvements (2,612) (2,330)
Purchase of investment securities (11,443) (1,932)
Sale of investment securities 10,310 986
----------- -----------
Net cash used for investing activities (3,745) (3,276)
----------- -----------
Net decrease in cash and cash equivalents (34,865) (45,155)
Cash and cash equivalents at beginning of period 57,005 87,064
----------- -----------
Cash and cash equivalents at end of period $ 22,140 $ 41,909
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
(5)
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 25, 1994
(Unaudited)
Notes:
(1) The accompanying financial statements do not include all of
the information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles. In the opinion of management,
all adjustments considered necessary to fairly reflect the
Company's financial position and results of operations,
consisting of normal recurring adjustments, have been
included.
(2) Firm trading securities and securities sold, not yet purchased
consisted of the following (in thousands):
<TABLE>
<CAPTION>
Long Short
3/25/94 12/31/93 3/25/94 12/31/93
------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
United States government
and agencies $ 6,527 $ 4,738 $ 962 $ 1,989
Mortgage-backed 327 167 6 6
States and municipalities 44,875 40,290 248 189
Corporate debt 10,608 11,959 1,115 3,975
Corporate equity 21,679 21,853 16,420 21,243
------- ------- ------- -------
$84,016 $79,007 $18,751 $27,402
</TABLE>
(3) In April 1994, the Company declared a $.15 quarterly cash
dividend payable May 6, 1994 to stockholders of record on
April 26, 1994.
(4) In January 1994, the Company issued $3,975,000 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 Company made loans to the employees to fund the
purchase of the debentures. During the first quarter of 1994,
employees converted $246,000 convertible subordinated
debentures, which were issued in January 1991, into 29,009
shares of the Company's Common Stock.
(5) Investment securities at March 25, 1994 included $22.8 million
of merchant banking investments and $12 million managed by an
affiliate, which included marketable securities with a long
market value of $11 million and a short market value of $6.5
million.
(6)
^L<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 25, 1994
(Unaudited)
Notes (Continued):
(6) Receivables from customers at March 25, 1994 included $388.5
million due in connection with the purchase by a customer of
U.S. government securities for settlement on March 30, 1994.
Securities sold under repurchase agreements in the amount of
$392.3 million were collateralized by the U.S. government
securities related to this receivable.
(7) COMMITMENTS AND CONTINGENCIES
Letters of Credit
At March 25, 1994, the Company's principal subsidiary,
Alex. Brown & Sons Incorporated, was contingently liable
for up to $32,979,000 under unsecured letters of credit
and $22,000 under secured letters of credit used to
satisfy required margin deposits at two securities
clearing corporations.
Litigation
In the course of its investment banking and securities
brokerage business, Alex. Brown & Sons Incorporated 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.
(7)
^L<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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
First Quarter 1994 Compared to First Quarter 1993
Revenues totaled $162.4 million, a 16% increase as compared to
$139.7 million in the first quarter of 1993. Commission revenues
increased 14% to $38 million for the quarter, primarily as a result
of increased retail and institutional listed commissions.
Investment banking revenues declined 4% to $51.3 million, primarily
as a result of lower revenues from corporate and municipal
underwritings, which were partially offset by an increase in fee
revenues. Principal transaction revenues increased 34% to $35.4
million, due primarily to increases in OTC, mortgage-backed and
government trading. Interest and dividend revenues increased 58%
to $15.3 million from $9.7 million, resulting primarily from higher
margin loan balances and increased interest-bearing securities
positions. Advisory and other revenues increased 35% to $22.5
million, reflecting increases in Asset Management and Correspondent
Services operations as well as $6.6 million of net investment
revenues, including $4.7 million from merchant banking, reflecting
the increased value of a publicly-traded merchant banking
investment.
Operating expenses totaled $123.7 million, a 16% increase from
$106.8 million in the first quarter of the 1993. Compensation and
benefits increased 11% from $78.5 million to $87.5 million,
primarily as a result of increased commissions, salaries and
benefits and incentive expense. Communications expense increased
21% to $6.9 million, reflecting increased levels of business
activity. Occupancy and equipment expense increased 17% to $6.6
million, primarily as a result of planned growth and higher
depreciation expense. Interest expense increased 99% to $5.6
(8)
^L<PAGE>
million from $2.8 million, primarily as a result of the need to
finance increased margin loans, government securities positions and
reverse repurchase agreements. Floor brokerage, exchange and
clearing fees increased 21% to $3.2 million, in line with relevant
volumes of listed trades. Other operating expenses increased 21%
to $13.9 million, reflecting the increased level of business
activity.
The Company's effective tax rate for the quarter increased to
40.5%, compared to 39% for the first quarter of 1993, primarily as
a result of a 1% increase in the corporate federal income tax rate
which was included in The Omnibus Budget Reconciliation Act of 1993
enacted last August.
As a result of the above, net earnings increased by 15% to $23
million from $20.1 million in the first quarter of 1993. Primary
and fully diluted earnings per share were $1.46 and $1.28,
respectively, as compared to $1.28 and $1.19 per share for the same
period in the prior year.
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. The combination of 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.
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
(9)
^L<PAGE>
significant declines in the past several years. At March 25, 1994,
in its high yield operations, Alex. Brown had $4.8 million and $.2
million of long and short inventory, respectively, as compared to
$5.2 million and $.9 million at year-end 1993.
In 1990, the Company completed the establishment of its merchant
banking business. As of March 25, 1994, the carrying value of the
Company's merchant banking investments was $22.8 million, compared
to $16.6 million at year-end 1993. Gains related to merchant
banking investments were $4.7 million for the quarter, reflecting
the increased value of a publicly-traded merchant banking
investment. 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 March 25, 1994, $3 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, repurchase agreements 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 also
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 August 1994 and $100 million expires
in August 1996.
During the first quarter of 1994, the Company repurchased a total
of 380,911 shares of its Common Stock at a cost of $10.4 million.
As of March 25, 1994, the Company had a remaining repurchase
authorization of approximately 750,000 shares. The Company
anticipates that, subject to market conditions, it will make
additional repurchases in the future.
Alex. Brown is required to comply with the net capital rule of the
Securities and Exchange Commission. The rule may limit the
(10)
^L<PAGE>
Company's ability to withdraw capital from Alex. Brown. Alex.
Brown has consistently exceeded minimum net capital requirements
under the rule. At March 25, 1994, Alex. Brown had aggregate net
capital of $223.8 million, which exceeded the minimum net capital
requirements by $199.4 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.
RISK MANAGEMENT
The Company records securities transactions on a settlement date
basis. 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.
(11)
^L<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement re: Calculation of Earnings Per Share
(b) No reports on Form 8-K were filed during the quarter
ended
March 25, 1994
(12)
^L<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ALEX. BROWN INCORPORATED
(Registrant)
<TABLE>
<CAPTION>
<S> <C> <S> <C> <S> <C>
Date: May 4, 1994 A. B. KRONGARD
Chairman and Chief Executive Officer
Date: May 4, 1994 BEVERLY L. WRIGHT
Principal Financial Officer
</TABLE>
(12)
^L<PAGE>
May 4, 1994
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Dear Sirs:
Pursuant to regulations of the Securities and Exchange Commission,
submitted herewith for filing on behalf of Alex. Brown Incorporated
(the "Company") is the Company's Form 10-Q dated and executed May 4, 1994.
This filing is being effected by direct transmission to the Commission's
EDGAR System.
Very truly yours,
BEVERLY L. WRIGHT
Principal Financial Officer
^L<PAGE>
Exhibit 11
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Calculation of Earnings Per Share
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 25, 1994 March 26, 1993
Fully Fully
Primary Diluted Primary Diluted
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 15,466 15,466 15,338 15,338
Stock options 288 323 366 366
Convertible subordinated
debentures - 2,533 - 1,386
---------- ----------- ----------- ---------
15,754 18,322 15,704 17,090
========== =========== =========== =========
Net earnings for
calculating earnings per
share:
Net earnings $ 23,022 $ 23,022 $ 20,083 $ 20,083
Interest expense on
convertible subordinated
debentures, net of tax - 476 - 275
---------- ----------- ----------- ---------
$ 23,022 $ 23,498 $ 20,083 $ 20,358
========== =========== =========== =========
Earnings per share $ 1.46 $ 1.28 $ 1.28 $ 1.19
========== =========== =========== =========
</TABLE>
(13)
