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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, 1994
Commission File No. 0-14199
ALEX. BROWN INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland 52-1434118
(State of incorporation) (I.R.S. Employer I.D. No.)
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 $555,447,225 based upon the last sale price as reported
on the New York Stock Exchange on March 9, 1995.
The number of shares of the registrant's Common Stock outstanding as of
March 9, 1995 was 14,811,926.
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DOCUMENTS INCORPORATED BY REFERENCE
Those portions of the Company's 1994 Annual Report to Stockholders and
Proxy Statement which the Company will file pursuant to Regulation 14A
on or before March 31, 1995, 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 and brokerage 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 investment management business is 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, for example, states, counties,
cities, transportation authorities, sewer and water authorities, and
housing and health and higher education agencies.
The Company's operations are conducted from 26 offices in 14
states and the District of Columbia and from representative offices in
London, England, Geneva, Switzerland and Tokyo, Japan. 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.
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
transportation industries. Within these industries, the Company follows
approximately 650 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.
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
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, 1994, the Company made markets, buying and
selling as a principal, in approximately 400 common stocks and other
securities traded on the NASD's Automated Quotations System or otherwise
in the over-the-counter market and approximately 475 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.
Information regarding the Company's long and short trading
securities positions as of December 31, 1994 and 1993 and principal
transactions revenue for the three year period ended December 31, 1994
is set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations and Notes 4, 5 and 9 of Notes to
Consolidated Financial Statements, incorporated herein by reference to
pages 26-29 and 36-38, respectively, of the 1994 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 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.
The SEC and other regulatory organizations are reviewing the
structure and operation of The NASDAQ Stock Market. As a major
participant in The NASDAQ Stock Market, the Company has received
subpoenas issued by the SEC and a request from the United States
Department of Justice all of which request documents pertaining to
NASDAQ market making activities. See also Item 3, Legal Proceedings.
Changes in regulations pertaining to the NASDAQ Stock Market may have a
material effect on the Company's over-the-counter trading activities.
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 51% (44% in 1994) 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.
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 either with the management of such
companies or to provide expansion financing. 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, 1994, the Company had outstanding $13.6
million of merchant banking investments and a commitment to invest $18.3
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 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, 1994, the Company provided investment advisory, administrative
and/or distribution services with respect to $7.7 billion of
assets.
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 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.
During 1994, the Company increased from 50% to 100% its 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. As of December 31, 1994, Brown Advisory &
Trust Company managed assets of $279 million.
Real Estate Advisory. During 1994, the Company sold its ownership
interest in Alex. Brown Kleinwort Benson Realty Advisory Holdings Company,
a joint venture among the Company, Kleinwort Benson Group plc
and certain employees, through which the Company provided real estate
consulting and advisory services to institutional investors. Except
with respect to investment banking transactions, the Company no longer
provides real estate consulting or advisory services to direct real
estate investors.
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, 1994, the Company provided
correspondent services to 40 securities firms.
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 cash and securities in customer accounts,
including securities that may be subject to restrictions on sale by the
customer. Customers are charged for margin financing utilizing a base
rate that the Company establishes based upon a variety of factors,
including the Company's own cost of funds, with adjustments based upon
the size of the loan and other factors. 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 many
instances are more stringent 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.
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 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, 1994, the Company had approximately
2,300 full-time employees. None of the Company's employees are covered
by a collective bargaining arrangement.
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 $24,500,000
for each account.
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.
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 $1,500,000 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 excess of 90 days.
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, 1994, Alex. Brown was required to maintain minimum
net capital, in accordance with SEC and CFTC rules, of $17,511,000 and
had total net capital (as so computed) of $241,621,000 or $224,110,000
in excess of 2% of aggregate debit items and $197,843,000 in excess of
5% of aggregate debit items.
Item 1(d). Financial Information about Foreign and Domestic Operations
and Export Sales.
Not Applicable.
Item 2. Properties.
The Company has offices in the following cities:
Annapolis, Maryland Atlanta, Georgia
Los Angeles, California 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
Tokyo, Japan Geneva, Switzerland
Towson, Maryland Greenwich, Connecticut
Washington, D.C. Houston, Texas
West Palm Beach, Florida Jacksonville, Florida
Wilmington, Delaware London, England
Winston-Salem, North Carolina
The Company's two most material lease obligations are with respect
to its New York and Baltimore facilities. 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.
During 1994, the Company entered into a lease obligation, expiring in
2013, with respect to 80,000 square feet of office space in midtown
Manhattan.
The Company's other offices, including the separate offices of
Alex. Brown Investment Management, the Company's operations and data
center and offices in 25 U.S. cities, London, Geneva and Tokyo occupy an
aggregate of approximately 680,000 square feet under leases that expire
at various dates through 2013. Future minimum rental commitments under
existing leases are set forth in Note 11 of Notes to Consolidated
Financial Statements incorporated herein by reference to pages 38 and 39
of the 1994 Annual Report to Stockholders.
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 legal proceedings 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. Branson v. Exide Electronics Corporation, et al., was filed
in Delaware Chancery Court, New Castle County, in which the Company was
named as a defendant. The action pertains 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 purports to represent a class consisting of all
persons who purchased shares of Exide in the Offering. The complaint
alleges 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 alleges 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 seeks
unspecified compensatory damages, costs, and fees.
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. 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,
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.
NASDAQ Market-Maker Anti-Trust Litigation and Justice Department
Investigation. The Company has been named as a defendant in several
purported class action proceedings that allege violations of a Federal
anti-trust statute. The Company was joined as defendant in such actions
during July, 1994. All actions have been consolidated before the United
States District Court for the Southern District of New York under the
caption In re NASDAQ Market-Maker Anti-Trust and Securities Litigation.
The plaintiffs allege that twenty-four defendants, including the
Company, that act as dealers on the NASDAQ computerized quotations
system, conspired to raise and fix the spreads between the bid and ask
prices of securities traded over NASDAQ. Plaintiffs further allege that
as a result of such conspiracy, NASDAQ spreads are larger than spreads
for stocks traded on the New York Stock Exchange and the American Stock
Exchange. The purported class consists of all persons in the United
States who are current customers and who bought or sold securities
through NASDAQ within four years prior to the filing of the complaints.
Plaintiffs seek treble damages of an unspecified amount. Following the
initiation of these actions, the Company received a request from the
United States Department of Justice ("DOJ") to provide information and
documents with respect to its NASDAQ market making activities. The
Company has learned that the DOJ is conducting an investigation of the
NASDAQ market generally.
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 action
pertained to the December 8, 1989 public offering of shares of
Industrial Funding Corp. ("IFC"), for which the Company served as
co-lead underwriter. Plaintiffs sued as representatives of a purported
class consisting of all persons who purchased IFC shares between
December 8, 1989 and February 28, 1991. Plaintiffs alleged violations
of the federal securities laws in connection with alleged untrue
statements and omissions of material facts, and sought compensatory and
punitive damages in an unspecified amount. By stipulation dated August
15, 1994, the parties agreed to a settlement of the litigation, which
settlement received Court approval on January 12, 1995. The Company was
not required to contribute to the settlement.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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
A. B. Krongard................58 Chief Executive Officer and Chairman
of the Board of Directors
Robert F. Price...............47 Secretary and General Counsel
Mayo A. Shattuck III..........40 President, Chief Operating Officer
and Director
Beverly L. Wright.............46 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. Krongard was first employed by Alex. Brown & Sons (the
"Partnership") in 1971 and became a general partner in 1980. He has
been a Managing Director of Alex. Brown since 1984, was elected Chief
Executive Officer of the Company and Alex. Brown in July 1991, and was
elected Chairman of the Board of Directors of the Company in 1994.
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 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 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 Alex. Brown in 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.
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 49 of the 1994 Annual Report to
Stockholders attached hereto.
Item 6. Selected Financial Data.
Information required by Item 6 is incorporated herein
by reference to page 45 of the 1994 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 26 through 29 of the 1994 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 on page 24.
Supplementary data are incorporated herein by
reference to page 46 of the 1994 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.
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:
All 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.
(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, 33-53687, 33-55003 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/ A. B. Krongard Chief Executive March 6, 1995
A. B. Krongard Officer; Chairman of
the Board of Directors
(Principal Executive
Officer)
s/ Mayo A. Shattuck III President; Chief March 7, 1995
Mayo A. Shattuck III Operating Officer;
Director
s/ Beverly L. Wright Treasurer and Chief March 27, 1995
Beverly L. Wright Financial Officer
(Principal Financial
and Accounting Officer)
s/ Lee A. Ault III Director March 27, 1995
Lee A. Ault III
s/ Thomas C. Barry Director March 7, 1995
Thomas C. Barry
s/ Andre W. Brewster Director March 3, 1995
Andre W. Brewster
s/Benjamin H.Griswold IV Director March 10, 1995
Benjamin H. Griswold IV
s/ Donald B. Hebb,Jr. Director March 27, 1995
Donald B. Hebb, Jr.
s/ Steven Muller, Ph.D Director March 3, 1995
Steven Muller, Ph.D.
s/ David M. Norman Director March 7, 1995
David M. Norman
s/ Frank E. Richardson Director March 27, 1995
Frank E. Richardson
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Index to Financial Statements
Page
Financial Statements:
Alex. Brown Incorporated and Subsidiaries
included on pages 31 through 44 of
the 1994 Annual Report to Stockholders,
incorporated herein by reference and
attached hereto:
Consolidated Statements of Earnings 31
Consolidated Statements of Financial Condition 32
Consolidated Statements of Stockholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35-43
Report of Independent Auditors 44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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
1994 COMPARED TO 1993
Revenues totalled $605.5 million, a decrease of 4% from $628.2 million
in 1993.
Commission revenues totalled $140.0 million, a 6% increase from $131.7
million in 1993, primarily reflecting increased institutional listed
commissions.
Investment banking revenues decreased 22% to $199.1 million from $254.1
million in 1993, primarily as a result of decreased underwriting-related
revenues. Partially offsetting this decline was a significant increase
in merger and advisory fees.
Principal transaction revenues decreased 9% to $118.5 million from
$129.8 million in 1993, due to declines in equity, high yield and
mortgage-backed trading reflecting unsettled market conditions
experienced throughout the year.
Interest and dividend revenues increased 39% to $68.6 million from $49.3
million in 1993, due to higher interest rates and an increase in margin
loans.
Advisory and other revenues totalled $79.3 million, a 25% increase from
$63.4 million in 1993. The largest contributor to this increase was a
gain of $7.8 million relating to the sale of our interests in Alex.
Brown Kleinwort Benson Realty Advisory Holding Company. Additionally,
revenues from asset management operations increased. Net investment
revenue (excluding the gain on sale mentioned above) totalled $8.1
million for the year as compared to $7.9 million in the previous year.
Total operating expenses were $487.2 million, a 2% increase from $479.9
million in 1993.
Compensation and benefits expense decreased 4% to $329.5 million from
$344.3 million in 1993, reflecting decreases in commissions and
incentive compensation, partially offset by increases in salary expense.
Communications expense increased 17% from $24.1 million to $28.2
million, due primarily to increased levels of business activity and
increased technology expenditures.
Occupancy and equipment expense increased 22% to $32.2 million from
$26.5 million in 1993, primarily as a result of planned growth,
increased technology expenditures and an expense provision related to
vacating certain office space prior to expiration of the lease of one of
the Company's offices.
Interest expense increased 47% to $21.9 million from $14.9 million in
1993, primarily as a result of financing increased margin loans and
securities positions and increased interest rates.
Floor brokerage, exchange and clearing fees increased 18% to $16.2
million from $13.8 million, reflecting higher volumes of listed
securities transactions, by both Alex. Brown and its correspondents.
Other operating expenses increased 5% to $59.2 million from $56.3
million in 1993, as a result of costs associated with higher levels of
business activity, which were partially offset by a decrease in
affiliate expenses.
The Company's effective tax rate increased to 40.1% from 39.8% in 1993.
As a result of the above, net earnings decreased to $70.9 million from
$89.2 million in 1993. Primary and fully diluted earnings per share were
$4.60 and $4.05, respectively, as compared to $5.61 and $5.09 in 1993.
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.
1993 COMPARED TO 1992
Revenues totalled $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 totalled $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 totalled $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 7% from $22.5 million to $24.1 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 28% to $13.8
million, as a result of higher volumes of listed securities
transactions, by both Alex. Brown and its correspondents.
Other operating expenses increased 34% to $56.3 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated statement of financial condition reflects a
liquid financial position. The majority of the securities (both long and
short) in Alex. Brown's trading accounts 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 1994, in its high yield operations,
Alex. Brown had $21.3 million and $1.0 million of long and short
inventory, respectively, as compared to $5.2 million and $.9 million at
year-end 1993.
As of year-end 1994, the carrying value of the Company's merchant
banking investments was $13.6 million, compared to $16.6 million at
year-end 1993. Gains related to merchant banking investments were $3.9
million in 1994 compared to $7.4 million in 1993. At December 31, 1994,
the Company had committed to invest an additional $18.3 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 1994, $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 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 August 1995
and $100 million expires in August 1996.
During 1994, the Company repurchased a total of 1.7 million shares of
its Common Stock at a cost of $46.3 million. At year-end 1994, the
Company had a remaining repurchase authorization of approximately 1.4
million shares. The Company anticipates that, subject to market
conditions, it will make additional repurchases.
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, 1994, Alex. Brown had aggregate net capital of $241.6
million, which exceeded the minimum net capital requirements by $224.1
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 future cash and capital needs.
RISK MANAGEMENT
The Company records securities transactions on a settlement date basis,
generally the fifth business day following the transaction. In June
1995, the securities industry plans to begin to settle most securities
transactions on the third 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 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.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Commissions $140,026 $131,696 $108,733
Investment banking 199,145 254,076 169,876
Principal transactions (note 5) 118,468 129,774 90,884
Interest and dividends 68,597 49,278 36,765
Advisory and other 79,252 63,379 49,466
Total revenues 605,488 628,203 455,724
Operating expenses:
Compensation and benefits 329,504 344,344 250,100
Communications 28,161 24,083 22,546
Occupancy and equipment 32,160 26,461 24,365
Interest 21,920 14,924 10,587
Floor brokerage, exchange and clearing fees 16,230 13,804 10,781
Other operating expenses 59,232 56,252 41,961
Total operating expenses 487,207 479,868 360,340
Earnings before income taxes 118,281 148,335 95,384
Income taxes (note 14) 47,410 59,109 36,773
Net earnings $ 70,871 $ 89,226 $ 58,611
Earnings per share:
Primary $ 4.60 $ 5.61 $ 3.72
Fully diluted $ 4.05 $ 5.09 $ 3.50
Weighted average number of shares outstanding:
Primary 15,416 15,916 15,742
Fully diluted 17,988 17,809 17,064
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31
1994 1993
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents $ 24,024 $ 57,005
Receivables:
Customers (note 2) 800,017 731,404
Brokers, dealers and clearing organizations
(note 3) 237,479 228,258
Current state income taxes (note 14) 581 73
Other 40,308 55,282
Firm trading securities (note 4) 93,352 79,007
Deferred income taxes (note 14) 17,675 6,979
Memberships in exchanges, at cost
(market $2,259 and $2,083) 323 323
Office equipment and leasehold improvements, at cost
less accumulated depreciation and amortization of
$37,177 and $29,783 (note 8) 29,405 24,216
Investment securities (note 6) 32,835 52,903
Loans to employees to purchase
convertible subordinated
debentures (note 15) 33,412 29,284
Other assets (note 7) 37,022 18,689
$1,346,433 $1,283,423
LIABILITIES AND STOCKHOLDERS' EQUITY:
Bank loans (note 8) $ 72,943 $ 65,973
Payables:
Cash management facility 62,296 68,837
Customers, including free credit balances 307,245 345,283
Brokers, dealers and clearing organizations
(note 3) 279,637 175,369
Current federal and state income taxes (note 14) 2,145 14,716
Other 163,537 184,030
Securities sold, not yet purchased (note 9) 25,842 27,402
Commitments and contingencies (note 11)
5.75% Convertible subordinated debentures
due 2001 (note 13) 24,690 24,642
Employee convertible subordinated debentures
(note 15) 34,670 31,506
Stockholders' equity (note 15):
Common stock of $.10 par value
Authorized 50,000,000 shares
Issued 14,290,012 shares in 1994
and 15,356,431 in 1993 1,429 1,536
Additional paid-in capital 81,042 114,014
Loans to employees to purchase common stock (11,011) (10,902)
Retained earnings 301,968 241,017
Total stockholders' equity 373,428 345,665
$1,346,433 $1,283,423
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1992, 1993, AND 1994
LOANS TO
EMPLOYEES
ADDITIONAL TO PURCHASE TOTAL
COMMON PAID-IN COMMON RETAINED STOCKHOLDERS'
STOCK CAPITAL STOCK EARNINGS EQUITY
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
Net earnings - - - 70,871 70,871
Issuance of 471,739 shares
of common stock 47 7,958 (484) - 7,521
Payments on employee loans - - 375 - 375
Repurchase and retirement
of 1,739,926 shares of
common stock (174) (46,135) - - (46,309)
Compensation payable
in common stock 20 5,205 - - 5,225
Dividends paid - - - (9,920) (9,920)
Balance at December 31, 1994 $1,429 $ 81,042 $(11,011) $301,968 $373,428
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1994 1993 1992
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 70,871 $ 89,226 $ 58,611
Reconciliation of net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 10,263 7,004 5,560
Non-cash compensation expense 5,225 5,448 1,596
Gain on investment securities (15,576) (7,077) (2,694)
Other 7 49 (3)
Increase in assets:
Receivables (63,368) (170,034) (183,900)
Firm trading securities (14,345) (11,713) (7,840)
Deferred income taxes (10,696) (3,253) (898)
Other assets (18,595) (1,028) (251)
Increase (decrease) in liabilities:
Payables 33,166 90,402 79,271
Securities sold, not yet purchased (1,560) 5,622 8,593
Deferred income taxes - - (132)
Net cash provided by (used for) operating
activities (4,608) 4,646 (42,087)
Cash flows from financing activities:
Net proceeds (payments):
Short-term loans 622 57 45,000
Cash management facility (6,541) 3,116 33,669
Proceeds from term loans 15,000 7,500 6,473
Payments on term loans (8,652) (7,003) (8,300)
Issuance of common stock 6,973 9,107 11,269
Repurchase of common stock (46,309) (21,738) (12,252)
Dividends paid to stockholders (9,920) (8,551) (6,509)
Net cash provided by (used for) financing
activities (48,827) (17,512) 69,350
Cash flows from investing activities:
Purchase of office equipment and leasehold
improvements (15,190) (7,833) (8,041)
Purchase of intangible asset - (10,500) -
Purchase of investment securities (18,242) (15,255) (23,121)
Sale of investment securities 53,886 16,395 8,831
Net cash provided by (used for) investing activities 20,454 (17,193) (22,331)
Net increase (decrease) in cash and
cash equivalents (32,981) (30,059) 4,932
Cash and cash equivalents at beginning of year 57,005 87,064 82,132
Cash and cash equivalents at end of year $ 24,024 $ 57,005 $ 87,064
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The carrying values of such investments are adjusted when
the market values are supported by listed market prices, adjusted for
liquidity and other relevant factors. In addition, the carrying values
are reduced when the Company determines that the eventual realizable
value is less than the carrying value based on financial and market
information relevant to the investment.
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 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 adopting SFAS Nos. `106 and
112 was not material.
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.
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):
1994 1993
Securities failed to deliver $ 23,551 $ 27,359
Deposits paid for securities borrowed 166,976 175,673
Other 46,952 25,226
Total receivables $237,479 $228,258
Securities failed to receive $ 11,052 $ 22,721
Deposits received for securities loaned 250,098 126,888
Other 18,487 25,760
Total payables $279,637 $175,369
Payables to brokers, dealers and clearing organizations include 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 obligations.
4) FIRM TRADING SECURITIES
Firm trading securities consisted of the following (in thousands):
1994 1993
United States government and agencies thereof $ 4,946 $ 4,738
Mortgage-backed 648 167
States and municipalities 39,978 40,290
Corporate debt 29,972 11,959
Corporate equity 17,808 21,853
$93,352 $79,007
5) PRINCIPAL TRANSACTIONS REVENUE
The components of principal transactions revenue were as follows (in
thousands):
1994 1993 1992
Equity trading $ 69,915 $ 75,558 $66,660
Equity derivatives 328 (321) -
Fixed income trading 47,459 54,538 24,420
Fixed income derivatives 766 (1) (196)
$118,468 $129,774 $90,884
The Company's equity trading operations include trading in over the
counter equities, listed equities and convertible securities. The
Company's fixed income trading activities include trading in U.S.
government and government agency obligations, mortgage-backed
securities, state and municipal obligations and investment grade and
non-investment grade (high yield) corporate debt. The Company sells
short S&P 500 Index futures contracts to hedge its equity inventories
and Treasury Bond and Municipal Bond Index futures contracts to hedge
its fixed income inventories. The futures contracts involve
off-balance-sheet risk since the cost to close out the contracts may
exceed the amounts recognized in the Consolidated Statement of Financial
Condition. The contracts are listed on regulated exchanges and are
marked to market daily with the resulting gain or loss reflected in
revenue. The exchanges guarantee performance of counterparties;
therefore, credit risk is limited to a default by the exchange. The
notional amounts and fair values of these contracts at December 31, 1994
and 1993 and average fair value during 1994 were not material.
6) INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
1994 1993
Merchant banking investments $13,555 $16,606
Investment partnerships 11,205 9,617
Equities 5,035 13,336
Mutual funds 2,282 1,947
U.S. government obligations 758 -
Investment managed by an affiliate - 11,397
$32,835 $52,903
The investment managed by an affiliate included marketable securities
with a long market value of $7.4 million, a short market value of $5.0
million and cash of $9.0 million at December 31, 1993. 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. Such contracts primarily involved
three-month Eurodollar futures contracts listed on a regulated exchange.
The contracts had a notional amount of $247.1 million at December 31,
1993. Substantially all of the contracts were closed out in January
1994. The fair value of the financial futures contracts at December 31,
1993, average fair value during 1994 and gains or losses associated with
such contracts were not material.
7) 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. The Company is amortizing
the cost of the name over 40 years.
8) BANK LOANS
Bank loans were collateralized as follows (in thousands):
1994 1993
Customers' margin securities $45,679 $45,057
Office equipment and leasehold improvements 5,964 13,816
Unsecured 21,300 7,100
$72,943 $65,973
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 6.2% at December 31,
1994. The averages of such loans outstanding were $121,263,000 during
1994 at a weighted average interest rate of 4.6% and $105,008,000 during
1993 at a weighted average interest rate of 3.6%.
Term loans of $5,964,000 and $13,816,000 at December 31, 1994 and 1993,
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 rate of these term loans was 7.8% during 1994
and 1993. Such loans mature as follows: $4,655,000 in 1995 and
$1,309,000 in 1996.
A term loan of $6,300,000 and $7,100,000 at December 31, 1994 and 1993,
respectively, is unsecured and bears interest at a variable rate based
on the London Interbank Offered Rate (6.0% at December 31, 1994). The
weighted average interest rates were 4.8% during 1994 and 3.7% during
1993. The loan matures as follows: $1,000,000 in 1995, $1,200,000 in
1996, $2,350,000 in 1997 and $1,750,000 in 1998.
A term loan of $15,000,000 at December 31, 1994 is unsecured and bears
interest at a variable rate based on the federal funds rate (5.5% at
December 31, 1994). The weighted average interest rate was 5.6% during
1994. The loan matures as follows: $1,600,000 in 1995 and 1996,
$2,400,000 in 1997 and 1998 and $7,000,000 in 1999.
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 1995 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, 1994, 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
$20,381,000, $14,122,000 and $10,503,000 during 1994, 1993 and 1992,
respectively.
9) SECURITIES SOLD, NOT YET PURCHASED
Securities sold, not yet purchased consisted of the following (in thousands):
1994 1993
United States government and agencies thereof $ 4,750 $ 1,989
Mortgage-backed - 6
States and municipalities 329 189
Corporate debt 3,286 3,975
Corporate equity 17,477 21,243
$25,842 $27,402
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.
10) 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, 1994, Alex. Brown's net capital was $241,621,000
which exceeded net capital rule requirements by $224,110,000. Alex.
Brown has two London-based subsidiaries which are subject to the capital
requirements of the Securities and Futures Authority (SFA). At December
31, 1994, these subsidiaries were in compliance with the SFA capital
adequacy requirements.
11) COMMITMENTS AND CONTINGENCIES
LEASES
The Company's subsidiaries are obligated under operating leases for
office facilities and equipment expiring at various dates to 2013. 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, 1994 were as follows (in thousands):
YEARS ENDING DECEMBER 31 RELATED PARTIES OTHERS
1995 $2,849 $10,889
1996 2,844 11,245
1997 624 10,036
1998 - 8,461
1999 - 8,279
2000 and thereafter - 56,067
Rent expense, including equipment rentals, was $16,096,000, $14,829,000
and $15,076,000, including $2,445,000, $2,939,000 and $3,270,000 to
related parties, for 1994, 1993 and 1992, respectively.
LETTERS OF CREDIT
At December 31, 1994, Alex. Brown was contingently liable for up to
$37,179,000 under unsecured letters of credit used to satisfy required
margin deposits at five securities clearing corporations.
INVESTMENT COMMITMENTS
At December 31, 1994, the Company had committed to invest up to $20.0
million in certain investment partnerships, including $18.3 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 its
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 its 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 brokers with which it conducts stock
loan, stock borrow and repurchase and reverse repurchase transactions.
Alex. Brown monitors compliance with and the appropriateness of such
limits.
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 counter-parties 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.
12) 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 consolidated
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 $27,264,000 and $20,916,000 had fair values of
$27,251,000 and $21,193,000 at December 31, 1994 and 1993, 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
$26,595,000 and $26,220,000 at December 31, 1994 and 1993, respectively,
based on quoted market prices.
13) 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.
14) INCOME TAXES
The components of income tax expense were as follows (in thousands):
1994 1993 1992
Federal $ 38,649 $47,644 $29,848
State and local 8,761 11,465 6,925
$ 47,410 $59,109 $36,773
Current $ 58,106 $62,362 $37,803
Deferred (10,696) (3,253) (1,030)
$ 47,410 $59,109 $36,773
Income tax expense is reconciled to amounts computed by applying the
federal corporate tax rates to earnings before income taxes as follows
(in thousands):
1994 1993 1992
Tax at federal statutory rates $41,398 $51,917 $32,431
State and local income taxes, net of
federal income tax benefit 5,695 7,452 4,570
Other, net 317 (260) (228)
$47,410 $59,109 $36,773
The components of the net deferred income tax asset were as follows (in
thousands):
1994 1993
Deferred income tax assets:
Unrealized loss-Firm securities $ 1,851 $ 667
Equity awards 904 2,223
Accrued expenses 18,528 7,461
Other investments 123 83
Depreciation 2,070 1,798
Other 1,613 1,909
Total deferred income tax assets 25,089 14,141
Deferred income tax liabilities:
Unrealized profit-Firm securities 1,852 2,287
Other investments 2,221 1,753
Depreciation 1,153 1,440
Other 2,188 1,682
Total deferred income tax liabilities 7,414 7,162
Net deferred income tax asset $17,675 $ 6,979
Income tax payments were $69,438,000, $50,428,000 and $35,459,000 during
1994, 1993 and 1992, 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. There was no valuation allowance relating to deferred
income tax assets.
15) 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 Company has agreed to
forgive one-sixth of the loans at the end of each of the first three
years if the Company's return on equity exceeds an annual target of 15%,
or one-half of the loans at the end of the third year, to the extent not
otherwise forgiven, if the Company's return on equity for the three year
period exceeds a cumulative target of 17%. The right to receive loan
forgiveness is subject to three year cliff vesting. Loan forgiveness
targets for the remainder of the loan term are set at the end of the
third year. The same targets have been set for the second three year
period for the loans related to the debentures issued in January 1991
and 1992. The Company met the return on equity targets in 1991 through
1994. Compensation expense relating to such loan forgiveness was
$1,804,000, $1,092,000 and $717,000 for 1994, 1993, and 1992,
respectively. Information related to debentures outstanding at December
31, 1994 and issued in January 1995 was as follows:
PRINCIPAL AMOUNT INTEREST CONVERSION
DATE ISSUED OF DEBENTURES RATE DUE DATE PRICE/SHARE
January 1991 $1,158,000 8.125% June 1997 $ 8.50
January 1992 2,045,000 6.750% June 1998 25.50
January 1993 2,300,000 6.375% June 1999 23.00
January 1994 3,975,000 5.375% June 2000 28.83
January 1995 5,392,000 8.000% June 2001 33.70
EQUITY PARTNERSHIP PLAN
During 1994 and 1993, the Company sold 18,250 and 544,000 shares of
common stock, respectively, and convertible subordinated debentures at
market to certain key employees pursuant to the 1991 Equity Incentive
Plan. The debentures are convertible into the Company's common stock in
stages beginning four years after the date issued. The debentures may be
redeemed at par if the employee terminates employment with the Company.
The Company made loans to the employees of $39,458,000 to finance the
purchase of the stock and debentures. Under the Plan, the Company may
forgive a portion of the principal amount of the loan, not to exceed the
difference between market value and book value at the time of purchase.
Loan forgiveness resulted in compensation expense of $1,250,000 and
$3,200,000 in 1994 and 1993, respectively. Information related to
debentures outstanding at December 31, 1994 was as follows:
PRINCIPAL AMOUNT INTEREST CONVERSION
DATE ISSUED OF DEBENTURES RATE DUE DATE PRICE/SHARE
August 1993 $24,218,000 5.32% August 2001 $23.750
May 1994 442,000 6.92% May 2002 26.375
November 1994 532,000 7.45% November 2002 26.625
STOCK OPTIONS
The Company has granted 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 404,000, 375,000 and 400,000 shares of the Company's common
stock in January 1995, 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 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):
1994 1993 1992
Outstanding at January 1 2,108,156 2,168,568 2,607,199
Granted 413,000 384,000 410,500
Exercised (at $8.50-$26.875) (249,105) (356,032) (765,036)
Forfeited (76,942) (88,380) (84,095)
Outstanding at December 31 2,195,109 2,108,156 2,168,568
Options outstanding at December 31, 1994 have an exercise price range of
$8.50-$36.64 per share and a weighted average exercise price of $24.64
per share. Options for 945,440 shares were exercisable at December 31,
1994.
RESTRICTED STOCK AWARDS
Restricted stock awards were granted prior to 1991 and 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 $431,000 for
1992, $91,000 for 1993, $94,000 for 1994 and $52,000 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 to preserve the plan's tax exempt status. Compensation
expense for the Company's contributions to the plan was $3,016,000,
$2,277,000 and $1,956,000 for 1994, 1993 and 1992, 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 $1,855,000, $3,980,000 and $2,044,000
for 1994, 1993 and 1992, respectively.
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 566,439 shares have been issued under the plan, including
104,163 shares in 1994.
EQUITY COMPENSATION PLAN
During 1994, 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. Compensation expense is recorded
currently based on the value of the stock and interests in the
investment accounts on the award date. 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, $7,080,000, $8,729,000 and $2,730,000 of cash compensation was
with- held and replaced by 130,058, 204,242 and 69,791 shares of the
Company's common stock and interests in investment accounts for 1994,
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, including
any stock discounts, is being amortized over the periods in which the
employees are providing the related services (compensation expense of
$769,000 for 1993, $1,413,000 for 1994, $1,404,000 for 1995 through 1997
and $648,000 for 1998).
REPORT OF INDEPENDENT AUDITORS
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, 1994 and 1993, 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, 1994. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Alex. Brown Incorporated and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1994 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
BALTIMORE, MARYLAND
January 24, 1995
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
YEARS ENDED DECEMBER 31
1994 1993 1992 1991 1990
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues $ 605,488 $ 628,203 $ 455,724 $410,580 $271,702
Operating expenses 487,207 479,868 360,340 327,224 259,942
Earnings before income
taxes 118,281 148,335 95,384 83,356 11,760
Income taxes 47,410 59,109 36,773 31,404 3,999
Net earnings $ 70,871 $ 89,226 $ 58,611 $ 51,952 $ 7,761
Earnings per share:
Primary $ 4.60 $ 5.61 $ 3.72 $ 3.36 $ .50
Fully diluted $ 4.05 $ 5.09 $ 3.50 $ 3.12 $ .50
Cash dividends per share $ .675 $ .575 $ .45 $ .34 $ .265
Weighted average shares
outstanding:
Primary 15,416 15,916 15,742 15,480 15,482
Fully diluted 17,988 17,809 17,064 16,976 15,619
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
1994 1993 1992 1991 1990
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION:
Total assets $1,346,433 $1,283,423 $1,085,034 $865,692 $786,852
Long-term debt $ 20,009 $ 13,336 $ 15,160 $ 17,279 $ 18,843
Convertible subordinated
debentures $ 59,360 $ 56,148 $ 28,723 $ 26,670 $ 24,496
Total stockholders' equity $ 373,428 $ 345,665 $ 274,395 $221,680 $169,783
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED
1994 DECEMBER 31 SEPTEMBER 30 JUNE 24 MARCH 25
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues $153,750 $145,451 $143,875 $162,412
Operating expenses 120,826 123,136 119,526 123,719
Earnings before income taxes 32,924 22,315 24,349 38,693
Income taxes 12,841 9,037 9,861 15,671
Net earnings $ 20,083 $ 13,278 $ 14,488 $ 23,022
Earnings per share:
Primary $ 1.34 $ 0.87 $ 0.93 $ 1.46
Fully diluted $ 1.17 $ 0.78 $ 0.83 $ 1.28
QUARTERS ENDED
1993 DECEMBER 31 SEPTEMBER 24 JUNE 25 MARCH 26
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
[S] [C] [C] [C] [C]
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
<PAGE>
CORPORATE INFORMATION
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The common stock of the Company trades on the NYSE under the symbol "AB."
As of December 31, 1994, there were approximately 630 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
1994 HIGH LOW
First Quarter $30 1/8 $23 3/4
Second Quarter $28 3/4 $23 1/4
Third Quarter $29 5/8 $24
Fourth Quarter $30 3/8 $25
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
DIVIDEND INFORMATION
DIVIDEND
PER SHARE DECLARATION DATE RECORD DATE PAYMENT DATE
1994 $.15 April 14, 1994 April 26, 1994 May 6, 1994
$.175 July 18, 1994 July 29, 1994 August 10, 1994
$.175 October 18, 1994 October 28, 1994 November 8, 1994
$.175 January 25, 1995 February 6, 1995 February 15, 1995
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
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for 1994 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 LLP 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>
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, 1994
ALEX. BROWN INCORPORATED
<PAGE>
ALEX. BROWN INCORPORATED
Annual Report on Form 10-K
Index to Exhibits
<TABLE>
Exhibit No. Exhibit Page
<S> <C> <C>
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 (9)
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 (9)
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 (9)
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)
10.4 Purchase and Sale Agreement regarding the
name "Alex. Brown" (9)
10.5 First Amended and Restated
Stockholders' Agreement dated
June 23, 1989 among the
Registrant and certain stock-
holders of the Registrant, as amended (8)
10.6* Alex. Brown Incorporated 1991
Equity Incentive Plan (7)
10.7* Alex. Brown Incorporated 1991
Non-Employee Director Equity Plan (6)
10.8* Benjamin H. Griswold IV Employment
Agreement (9)
11 Statement on Computation of
per share earnings
13 Pages 26 through 29, 31 through
46 and 49 of the Registrant's
Annual Report to Stockholders for
the Year Ended December 31, 1994 (10)
21 Subsidiaries of the Registrant (2)
23 Consent of KPMG Peat Marwick
27 Financial Data Schedule
</TABLE>
* 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 the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992.
(9) Incorporated by reference to the corresponding Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993.
(10) Incorporated by reference to the corresponding Exibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
EXHIBIT 11
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Calculation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
Year Ended Year Ended Year Ended
12/31/94 12/31/93 12/31/92
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 15,159 15,159 15,570 15,570 15,300 15,300
Stock options 257 327 346 420 442 473
Convertible subordinated
debentures - 2,502 - 1,819 - 1,291
15,416 17,988 15,916 17,809 15,742 17,064
Net earnings for
calculating earnings
per share:
Net earnings $70,871 $70,871 $89,226 $ 89,226 $ 58,611 $ 58,611
Interest expense on
convertible subordinated
debentures, net of tax - 2,059 - 1,495 - 1,080
$ 70,871 $ 72,930 $ 89,226 $ 90,721 $ 58,611 $ 59,691
Earnings per share $ 4.60 $ 4.05 $ 5.61 $ 5.09 $ 3.72 $ 3.50
</TABLE>
EXHIBIT 23
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,
33-53687, 33-55003 and 33-67050) on Forms S-8 of Alex. Brown
Incorporated of our report dated January 24, 1995, relating to the
consolidated statements of financial condition of Alex. Brown
Incorporated and subsidiaries as of December 31, 1994 and 1993, 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, 1994, which report appears in the December 31, 1994 annual report on
Form 10-K of Alex. Brown Incorporated incorporated by reference herein.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 28, 1995
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 24,024
<RECEIVABLES> 1,078,385
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0<F1>
<INSTRUMENTS-OWNED> 126,187
<PP&E> 29,405
<TOTAL-ASSETS> 1,346,433
<SHORT-TERM> 52,934
<PAYABLES> 814,860
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0<F2>
<INSTRUMENTS-SOLD> 25,842
<LONG-TERM> 79,369
<COMMON> 1,429
0
0
<OTHER-SE> 371,999
<TOTAL-LIABILITY-AND-EQUITY> 1,346,433
<TRADING-REVENUE> 118,468
<INTEREST-DIVIDENDS> 68,597
<COMMISSIONS> 140,026
<INVESTMENT-BANKING-REVENUES> 199,145
<FEE-REVENUE> 79,252
<INTEREST-EXPENSE> 21,920
<COMPENSATION> 329,504
<INCOME-PRETAX> 118,281
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,871
<EPS-PRIMARY> 4.60
<EPS-DILUTED> 4.05
<FN>
<F1>Included as part of receivables.
<F2>Included as part of payables.
</FN>
</TABLE>
