UNITED STATES
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, 1995
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) New York Stock Exchange, Inc.
(Title of class) (Name of Exchange on which registered)
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
$768,903,264 based upon the last sale price as reported on the New York Stock
Exchange on March 8, 1996.
The number of shares of the registrant's Common Stock outstanding as of
March 8, 1996 was 16,018,818.
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DOCUMENTS INCORPORATED BY REFERENCE
Those portions of the Company's 1995 Annual Report to Stockholders and
Proxy Statement which the Company will file pursuant to Regulation 14A on or
before March 21, 1996 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 24 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.
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Investment Services. The Company provides investment services to individual and
institutional customers.
The Company's investment services to individual customers primarily
involve transactions in corporate equity and debt and state and local government
securities, including securities followed by the Company's research analysts and
underwritten on a managed or co-managed basis by the Company. In addition to
executing transactions, the Company provides portfolio strategy, investment
advice and research services to individual investors. The Company targets its
investment services to individuals of high net worth or high annual income.
The Company's institutional customers include banks, retirement funds,
mutual funds, investment advisers and insurance companies. Services to these
customers generally include investment advisory and other services. The majority
of the Company's institutional brokerage revenues are generated by the purchase
and sale of corporate equity securities, including securities followed by the
Company's research analysts and securities underwritten on a managed or
co-managed basis by the Company. Institutional investors typically purchase and
sell securities in block transactions. Revenues from securities transactions
with institutional customers are based on negotiated rates which typically
represent a significant discount from the Company's commission schedule.
Research. The Company's Research Division develops investment
recommendations and market information in the consumer, financial services,
health care, industrial growth, media/communications and technology 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.
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Securities Commissions. Securities transactions for individual and
institutional investors where the Company acts as agent generate securities
commission revenues. Commissions are charged on both exchange and
over-the-counter agency transactions for individual customers in accordance with
a schedule formulated by the Company, which may change from time to time. In
certain cases, discounts from the schedule may be granted. The Company's
securities commissions result primarily from executing transactions in listed
stocks and bonds. The Company also realizes commission revenues when it executes
a trade in an over-the-counter security in which it does not make a market. A
substantial portion of the commission revenues generated by the Company is
attributable to individual and institutional investors who receive 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, 1995, 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 and asset-backed obligations, emerging market debt
securities, 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 U.S. government-guaranteed
securities and agency obligations.
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Information regarding the Company's long and short trading securities
positions as of December 31, 1995 and 1994 and principal transactions revenue
for the three year period ended December 31, 1995 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 28-31, 38-39 and 41, respectively, of the 1995
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, 500 or 1,000 shares,
depending on the trading characteristics of the particular security. It is
likely that participation as a SOES market maker will continue to increase the
Company's exposure to loss from principal transactions.
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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 and demands for information
from the SEC and the United States Department of Justice pertaining to NASDAQ
market making and related 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, less than 50% (40% in 1995) 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
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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 invests in private equity securities primarily
through its partnership interest in ABS Capital Partners, L.P. ("Capital"). In
most cases, these investments are made either with the management of such
companies or to provide expansion financing. Capital may also co-invest with
other financial groups in larger transactions where its specific industry
expertise may create additional value. Private equity investments have the
potential of generating substantial investment returns, but involve a
significant degree of risk due to the concentrated investment of capital in
securities that generally lack liquidity. As of December 31, 1995, the
Company had outstanding $25.4 million of private equity investments and a
commitment to invest $10.3 million more in Capital.
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
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31, 1995, the Company provided investment advisory, administrative and/or
distribution services with respect to $10.1 billion of assets under management.
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.
In December, 1995, the Company received approval from the SEC for the
formation of Alex. Brown Capital Advisory Incorporated, a registered investment
adviser. In January, 1996, the Company transferred certain of its investment
management activities to Alex. Brown Capital Advisory Incorporated.
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, 1995, the Company provided correspondent services to 44 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
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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
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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, 1995, the Company had approximately 2,350
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 and Alex.
Brown Capital Advisory Incorporated as well as other investment advisers in
which
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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 $49,500,000 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.
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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 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
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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, 1995, Alex. Brown was required to maintain minimum net capital, in
accordance with SEC and CFTC rules, of $26,338,000 and had total net capital (as
so computed) of $322,292,000 or $295,954,000 in excess of 2% of aggregate debit
items and $256,448,000 in excess of 5% of aggregate debit items.
Item 1(d). Financial Information about Foreign and Domestic Operations and
Export Sales.
Not Applicable.
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Item 2. Properties.
The Company has offices in the following cities:
Annapolis, Maryland Naples, Florida
Atlanta, Georgia New Orleans, Louisiana
Baltimore, Maryland New York, New York
Boston, Massachusetts Philadelphia, Pennsylvania
Charlotte, North Carolina Richmond, Virginia
Chicago, Illinois San Francisco, California
Dallas, Texas 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
Los Angeles, California
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 1996 through 2002. The Company occupies
approximately 80,000 square feet of office space in midtown Manhattan under a
lease expiring in 2013. In 1995, the Company entered into a lease obligation to
occupy approximately 255,000 square feet of office space in downtown Baltimore
in order to consolidate the Company's downtown office space and to replace
several leases which expire on various dates in 1997. The new Baltimore lease
has an effective rent commencement date of January 1, 1997 and an expiration
date of December 31, 2011. The Company is a limited partner in a partnership
which owns a building in downtown Baltimore where it leases approximately 90,000
square feet.
The Company's other offices, including the separate offices of Alex.
Brown Investment Management, the Company's operations and data center and
offices in 22 U.S. cities, London, Geneva and Tokyo, occupy an aggregate of
approximately 456,000 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 page 41 of the 1995 Annual Report to Stockholders.
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Item 3. Legal Proceedings.
Alex. Brown is a defendant in a number of lawsuits relating to its
investment banking and securities brokerage business. Alex. Brown 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. The Company cannot state what the eventual outcome of these pending
actions will be. 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. The following are descriptions of certain
legal proceedings involving or affecting the Company.
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 Related Investigations.
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. The actions have been
consolidated before
16
<PAGE>
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. An
additional private action has since been filed in the Alabama state court
raising the same issues. All defendants, including the Company, have filed a
motion requesting that the Alabama case be consolidated into the New York
matter. The Company has also received requests from the United States Department
of Justice ("DOJ") and the SEC to provide information and documents with respect
to its NASDAQ market making activities. The DOJ and SEC appear to be conducting
investigations of the NASDAQ market generally.
Banca Cremi, S.A. On April 11, 1995, the Company was named as a
defendant in an action pending in the United States District Court in the
District of Maryland entitled Banca Cremi, S.A., et al. v. Alex. Brown & Sons
Incorporated, et al., Civil Action No. JFM-95-109. The action alleges that the
Company and its salespersonnel recommended unsuitable investments to Banca
Cremi, a Mexican bank, and thereby violated federal and state laws. The
complaint alleges compensatory damages in excess of $26 million.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
17
<PAGE>
Executive Officers of the Registrant
The following information regarding the persons who function as
executive officers of the Company is included herein pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
Name Age Position with the Company
A. B. Krongard................ 59 Chief Executive Officer and
Chairman of the Board of
Directors
Robert F. Price............... 48 Secretary and General
Counsel
Mayo A. Shattuck III.......... 41 President, Chief Operating
Officer and Director
Beverly L. Wright............. 47 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 Chief Financial Officer of 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.
18
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information required by Item 5 is incorporated herein by
reference to page 52 of the 1995 Annual Report to Stockholders attached hereto.
Item 6. Selected Financial Data.
Information required by Item 6 is incorporated herein by
reference to page 48 of the 1995 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 28 through 31 of the 1995 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 23.
Supplementary data are incorporated herein by reference
to page 49 of the 1995 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 as
indicated below and that information regarding executive officers called for by
Item 10 contained in Part I) is incorporated herein by reference to the
definitive proxy statement.
Item 10. Donald B. Hebb, Jr., who resigned as a director of the Company in
November, 1995, filed a Form 5 dated March 7, 1996 in which he reported a gift
from his wife of 28,000 shares of Common Stock made on December 15, 1995. The
beneficial ownership of these shares had been previously reported in Mr. Hebb's
Form 4 dated September 8, 1995.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits:
Reference is made to the Exhibit Index.
Financial Statement Schedules:
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-3 and 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,
33-59601 and 33-67050, and on Form S-3 No. 33-60955.
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.
20
<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
Date: March 25, 1996
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 25, 1996
A. B. Krongard Officer; Chairman of
the Board of Directors
(Principal Executive
Officer)
s/ Mayo A. Shattuck III President; Chief March 25, 1996
Mayo A. Shattuck III Operating Officer;
Director
s/ Beverly L. Wright Treasurer and Chief March 25, 1996
Beverly L. Wright Financial Officer
(Principal Financial
and Accounting Officer)
s/ Lee A. Ault III Director March 25, 1996
Lee A. Ault III
21
<PAGE>
s/ Neil R. Austrian Director March 25, 1996
Neil R. Austrian
s/ Thomas C. Barry Director March 25, 1996
Thomas C. Barry
s/ Benjamin H. Griswold IV Director March 25, 1996
Benjamin H. Griswold IV
s/ Steven Muller, Ph.D. Director March 25, 1996
Steven Muller, Ph.D.
s/ David M. Norman Director March 25, 1996
David M. Norman
s/ Frank E. Richardson Director March 25, 1996
Frank E. Richardson
22
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Index to Financial Statements
Page
Financial Statements:
Alex. Brown Incorporated and Subsidiaries
included on pages 33 through 47 of
the 1995 Annual Report to Stockholders,
incorporated herein by reference and
attached hereto:
Consolidated Statements of Earnings 33
Consolidated Statements of Financial Condition 34
Consolidated Statements of Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37-46
Report of Independent Auditors 47
23
<PAGE>
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S
Alex. Brown Incorporated
Alex. Brown Incorporated (the "Company") is a holding company whose primary
subsidiary is Alex. Brown & Sons Incorporated ("Alex. Brown"), a major
investment banking and securities brokerage firm. The Company, like other
securities firms, is directly affected by general economic and market
conditions, including fluctuations in volume and price levels of securities,
changes in interest rates and demand for investment banking and securities
brokerage services, all of which have an impact on the Company's revenues as
well as its liquidity. Substantial fluctuations can occur in the Company's
revenues and net earnings due to these and other factors.
In periods of reduced market activity, profitability is likely to be adversely
affected because certain expenses, consisting primarily of salaries and
benefits, communications and occupancy expenses, remain relatively fixed.
Accordingly, net earnings for any period should not be considered representative
of any other period.
Results of Operations
- -------------------------------------------------------------------------------
1995 COMPARED TO 1994
Revenues totalled $809.4 million, a 34% increase from $605.5 million in 1994.
Commission revenues totalled $173.5 million, a 24% increase from $140.0 million
in 1994, primarily as a result of increased private client and institutional
listed commissions.
Investment banking revenues increased 49% to $293.4 million from $197.5 million
in 1994, primarily due to an increase in revenues from underwriting-related
activities. Merger and advisory revenues increased 7% to $67.4 million from
$63.2 million in 1994.
Principal transaction revenues increased 16% to $139.4 million from $120.1
million in 1994, primarily due to increases in revenues from OTC trading.
Partially offsetting this increase were declines in government and
mortgage-backed securities trading.
Interest and dividend revenues increased 54% to $105.5 million from $68.6
million in 1994, due to higher margin loan balances and higher interest rates.
Margin loans at year-end totalled $1.4 billion, a 74% increase over the prior
year. Average margin balances increased 32%.
Advisory and other revenues totalled $97.6 million, a 23% increase from $79.3
million in 1994, which was primarily attributable to increases in advisory and
investment revenues. Advisory revenues increased 28% to $55.6 million from $43.3
million in 1994. Revenues from investments increased to $17.0 million as a
result of realized gains and increases in the carrying value of investments. In
the prior year, the Firm reported investment revenues of $8.1 million and a $7.8
million gain related to the sale of its interests in Alex. Brown Kleinwort
Benson Realty Advisory Holding Company. Correspondent services fees increased
26% in 1995.
Total operating expenses were $651.2 million, a 34% increase from $487.2 million
in 1994.
Compensation and benefits expense increased 31% to $432.9 million from
$329.5 million in 1994, as a result of increased incentive, commission and
salary expense.
Communications expense increased 21% to $33.9 million from $28.2 million,
reflecting expenses required to support increased levels of business
activity.
Occupancy and equipment expense increased 26% to $39.8 million, primarily as a
result of expansion in several offices, increased technology expenditures and
costs associated with vacating certain office space.
Interest expense increased 65% to $36.2 million from $21.9 million, primarily
due to the cost of financing increased margin loans and interest rate increases.
28
<PAGE>
Floor brokerage, exchange and clearing fees increased 15% to $18.6 million, due
to an increased volume of OTC and listed trades.
Other expenses increased 50% to $89.8 million from $59.7 million, as a result of
increases in expenses associated with the higher level of business activity.
The Company's effective tax rate for 1995 decreased to 39.6% from 40.1% in 1994.
As a result of the above, net earnings increased to $95.6 million from $70.9
million in 1994. Primary and fully diluted earnings per share were $6.16 and
$5.40, respectively, as compared to $4.60 and $4.05 in 1994.
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 incre`ase or higher rates
of decrease in earnings per share as compared to the rates of increase or
decrease in net earnings.
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 $197.5 million from $252.8 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 8% to $120.1 million from $131.0
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 $344.4
million in 1993, reflecting decreases in commissions and incentive compensation,
partially offset by increases in salary expense.
Communications expense increased 17% from $24.2 million to $28.2 million, due
primarily to increased levels of business activity and increased technology
expenditures.
Occupancy and equipment expense increased 20% to $31.7 million from $26.3
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.
29
<PAGE>
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 6% to $59.7 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.
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 non-investment
grade debt securities which are rated by Standard & Poor's as lower than BBB-
and by Moody's Investors Service as lower than Baa3. The market for high yield
securities can be extremely volatile and many experienced significant declines
in the past several years. At year-end 1995, in its high yield operations, Alex.
Brown had $12.9 million and $.6 million of long and short inventory,
respectively, as compared to $21.3 million and $1.0 million at year-end 1994.
As of year-end 1995, the carrying value of the Company's merchant banking
investments was $23.5 million, compared to $13.6 million at year-end 1994. Gains
related to merchant banking investments were $6.1 million in 1995 compared to
$3.9 million in 1994. At December 31, 1995, the Company had committed to invest
an additional $10.3 million in a merchant banking partnership. 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 1995, $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,
repurchase agreements and bank loans, as well as through the issuance of debt
and equity securities.
The Company borrows from banks on a short-term basis both on an unsecured basis
and 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 ("term loans"). 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 $150 million of unused
30
<PAGE>
committed lines of credit under revolving credit agreements (the "Credit
Facilities") with various banks. The Credit Facilities expire in August
1996. 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. There were no outstanding borrowings under
the Credit Facilities at December 31, 1995. At December 31, 1995, the
Company and Alex. Brown were in compliance with all restrictive covenants
contained in the Credit Facilities and term loans.
On July 10, 1995, the Company filed a shelf registration statement with the
Securities and Exchange Commission to register the offer and sale of up to $150
million of senior debt and convertible debt securities. On August 16, 1995, the
Company issued $110 million of 75/8% Senior notes due 2005. The Senior notes
were issued at a discount to yield 7.705%.
Alex. Brown is required to comply with the net capital rule of the Securities
and Exchange Commission. The Company's ability to withdraw capital from
Alex. Brown may be limited by the rule. Alex. Brown has consistently
exceeded minimum net capital requirements under the rule. At December 31,
1995, Alex. Brown had aggregate net capital of $322 million, which exceeded
the minimum net capital requirements by $296 million.
During 1995, the Company repurchased a total of 29,601 shares of its Common
Stock at a cost of $1.2 million. At year-end 1995, 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.
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 third business day following the trade execution. The risk of loss
on unsettled transactions 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, include 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.
31
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31
(in thousands, except per share amounts) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions $ 173,471 $ 140,026 $ 131,696
Investment banking 293,375 197,494 252,820
Principal transactions (note 5) 139,383 120,119 131,030
Interest and dividends 105,544 68,597 49,278
Advisory and other 97,621 79,252 63,379
------------------------------------------
Total revenues 809,394 605,488 628,203
------------------------------------------
Operating expenses:
Compensation and benefits 432,880 329,516 344,352
Communications 33,934 28,160 24,165
Occupancy and equipment 39,758 31,671 26,322
Interest 36,204 21,920 14,924
Floor brokerage, exchange and clearing fees 18,646 16,230 13,804
Other operating expenses 89,797 59,710 56,301
------------------------------------------
Total operating expenses 651,219 487,207 479,868
------------------------------------------
Earnings before income taxes 158,175 118,281 148,335
Income taxes (note 13) 62,620 47,410 59,109
------------------------------------------
Net earnings $ 95,555 $ 70,871 $ 89,226
==========================================
Earnings per share:
Primary $ 6.16 $ 4.60 $ 5.61
==========================================
Fully diluted $ 5.40 $ 4.05 $ 5.09
==========================================
Weighted average number of shares outstanding:
Primary 15,511 15,416 15,916
==========================================
Fully diluted 18,128 17,988 17,809
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Alex. Brown Incorporated
<TABLE>
<CAPTION>
December 31
------------------------------
(in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 62,103 $ 24,024
Receivables:
Customers (note 2) 1,277,869 800,017
Brokers, dealers and clearing organizations (note 3) 416,449 237,479
Current state income taxes -- 581
Other 62,056 40,308
Firm trading securities (note 4) 110,564 93,352
Securities purchased under agreements to resell 34,865 --
Deferred income taxes (note 13) 27,813 17,675
Memberships in exchanges, at cost (market $2,864 and $2,259) 323 323
Office equipment and leasehold improvements, at cost
less accumulated depreciation and amortization of
$40,483 and $37,177 (note 8) 41,189 29,405
Investment securities (note 6) 50,294 32,835
Loans to employees to purchase convertible subordinated
debentures (note 14) 48,320 33,412
Other assets (note 7) 64,662 37,022
--------------------------------
$ 2,196,507 $ 1,346,433
================================
Liabilities and Stockholders' Equity:
Bank loans (note 8) $ 120,008 $ 72,943
Payables:
Cash management facility 70,338 62,296
Customers, including free credit balances 506,993 307,245
Brokers, dealers and clearing organizations (note 3) 480,621 279,637
Current federal and state income taxes 5,032 2,145
Other 294,643 163,537
Securities sold, not yet purchased (note 9) 54,276 25,842
Securities sold under repurchase agreements 2,460 --
7 5/8% Senior notes (note 8) 109,414 --
5 3/4% Convertible subordinated debentures (note 8) 11,851 24,690
Employee convertible subordinated debentures (note 14) 51,584 34,670
Commitments and contingencies (note 11)
Stockholders' equity (note 14):
Common stock of $.10 par value
Authorized 50,000,000 shares
Issued 15,532,696 shares in 1995
and 14,290,012 in 1994 1,553 1,429
Additional paid-in capital 114,011 81,042
Loans to employees to purchase common stock (12,470) (11,011)
Retained earnings 386,193 301,968
--------------------------------
Total stockholders' equity 489,287 373,428
--------------------------------
$ 2,196,507 $ 1,346,433
================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31, 1993, 1994, and 1995
----------------------------------------------------------
Loans To
Employees
Additional To Purchase Total
Common Paid-in Common Retained Stockholders'
(in thousands) Stock Capital Stock Earnings Equity
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Net earnings -- -- -- 95,555 95,555
Issuance of 1,135,875 shares
of common stock 113 29,722 (2,465) -- 27,370
Payments on employee loans -- -- 1,006 -- 1,006
Repurchase and retirement
of 29,601 shares of
common stock (3) (1,215) -- -- (1,218)
Compensation payable
in common stock 14 4,462 -- -- 4,476
Dividends paid -- -- -- (11,330) (11,330)
----------------------------------------------------------
Balance at December 31, 1995 $1,553 $ 114,011 $(12,470) $ 386,193 $ 489,287
==========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
(in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net earnings $ 95,555 $ 70,871 $ 89,226
Reconciliation of net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 13,158 10,263 7,004
Non-cash compensation expense 7,096 5,225 5,448
Gain on investment securities (17,006) (15,576) (7,077)
Other 289 7 49
Increase in assets:
Receivables (677,989) (63,368) (170,034)
Firm trading securities (17,212) (14,345) (11,713)
Securities purchased under agreements to resell (34,865) -- --
Deferred income taxes (10,138) (10,696) (3,253)
Other assets (28,349) (18,595) (1,028)
Increase (decrease) in liabilities:
Payables 534,725 33,166 90,402
Securities sold, not yet purchased 28,434 (1,560) 5,622
-----------------------------------------
Net cash provided by (used for) operating activities (106,302) (4,608) 4,646
-----------------------------------------
Cash flows from financing activities:
Net proceeds (payments):
Short-term loans 54,321 622 57
Cash management facility 8,042 (6,541) 3,116
Securities sold under repurchase agreements 2,460 -- --
Proceeds from term loans -- 15,000 7,500
Payments on term loans (7,256) (8,652) (7,003)
Proceeds from senior notes 109,392 -- --
Issuance of common stock 14,656 6,973 9,107
Repurchase of common stock (1,218) (46,309) (21,738)
Dividends paid to stockholders (11,330) (9,920) (8,551)
-----------------------------------------
Net cash provided by (used for) financing activities 169,067 (48,827) (17,512)
-----------------------------------------
Cash flows from investing activities:
Purchase of office equipment and leasehold
improvements (24,233) (15,190) (7,833)
Purchase of intangible asset -- -- (10,500)
Purchase of investment securities (14,964) (18,242) (15,255)
Sale of investment securities 14,511 53,886 16,395
-----------------------------------------
Net cash provided by (used for) investing activities (24,686) 20,454 (17,193)
-----------------------------------------
Net increase (decrease) in cash and cash equivalents 38,079 (32,981) (30,059)
Cash and cash equivalents at beginning of year 24,024 57,005 87,064
-----------------------------------------
Cash and cash equivalents at end of year $ 62,103 $ 24,024 $ 57,005
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
1) Description of Business and 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.
The Company is primarily engaged in a single line of business as a
securities broker dealer, which includes several types of services, such as
principal and agency transactions, underwriting and other investment
banking advisory, asset management and correspondent clearing. 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.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
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 three
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.
Deferred tax assets and liabilities represent the expected future tax
consequences of the differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. The effects
of changes in tax rates on deferred tax assets and liabilities are recognized in
the period that includes the enactment date.
The Company 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.
37
<PAGE>
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.
The Company uses the intrinsic value method to account for stock-based employee
compensation plans. Under this method, compensation cost is recognized for
awards of shares of common stock to employees under compensatory plans only if
the quoted market price of the stock at the grant date (or other measurement
date, if later) is greater than the amount the employee must pay to acquire the
stock. In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 permits companies to adopt a new fair value
based method to account for stock-based employee compensation plans or to
continue using the intrinsic value method. If the intrinsic value method is
used, information concerning the pro forma effects on net earnings and earnings
per share of adopting the fair value based method is required to be presented in
the notes to the financial statements. The Company intends to continue using the
intrinsic value method and will provide the pro forma disclosures about its
stock-based employee compensation plans in its 1996 financial statements, as
required by Statement No. 123.
Certain amounts in 1994 and 1993 have been reclassified to conform to the 1995
presentation.
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):
1995 1994
- --------------------------------------------------------------------------------
Securities failed to deliver $ 16,107 $ 23,551
Deposits paid for securities borrowed 357,365 166,976
Other 42,977 46,952
----------------------------
Total receivables $416,449 $237,479
============================
Securities failed to receive $ 15,146 $ 11,052
Deposits received for securities loaned 433,808 250,098
Other 31,667 18,487
----------------------------
Total payables $480,621 $279,637
============================
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):
1995 1994
- --------------------------------------------------------------------------------
United States government and agencies thereof $ 9,315 $ 4,946
Mortgage-backed 1 648
States and municipalities 36,607 39,978
Corporate debt 42,945 25,631
Equities and convertible debt 21,696 22,149
-------------------------
$110,564 $93,352
=========================
38
<PAGE>
5) Principal Transactions Revenue
The components of principal transactions revenue were as follows (in thousands):
1995 1994 1993
- -----------------------------------------------------------------------------
Equity trading $104,335 $69,915 $ 75,586
Equity derivatives (921) 328 (321)
Fixed income trading 36,437 49,110 55,764
Fixed income derivatives (468) 766 1
------------------------------------------
$139,383 $120,119 $131,030
==========================================
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 Statements 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 average fair values during 1995 and 1994 were not
material. There were no open futures contracts at December 31, 1995.
6) Investment Securities
Investment securities consisted of the following (in thousands):
1995 1994
- -------------------------------------------------------------------------------
Merchant banking investments $23,546 $13,555
Investment partnerships 17,703 11,205
Equities 5,036 5,035
Mutual funds 3,359 2,389
U.S. government obligations 650 651
---------------------------
$50,294 $32,835
===========================
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) Borrowings
BANK LOANS
Bank loans were collateralized as follows (in thousands):
1995 1994
- --------------------------------------------------------------------------------
Customers' margin securities $100,000 $45,679
Office equipment and leasehold improvements 1,308 5,964
Unsecured 18,700 21,300
---------------------------
$120,008 $72,943
===========================
39
<PAGE>
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 (5.3% at December 31, 1995).
The weighted average interest rate on these loans was 5.5% at December 31, 1995.
The average balances of such loans outstanding were $120,507,000 during 1995 at
a weighted average interest rate of 6.4% and $121,263,000 during 1994 at a
weighted average interest rate of 4.6%.
Term loans of $1,308,000 and $5,964,000 at December 31, 1995 and 1994,
respectively, are collateralized by office equipment and leasehold improvements
and bear interest at rates ranging from 5.4% to 9.3%. The weighted average
interest rates of these term loans were 7.9% during 1995 and 7.8% during 1994.
The outstanding term loan at December 31, 1995 matures in 1996.
A term loan of $5,300,000 and $6,300,000 at December 31, 1995 and 1994,
respectively, is unsecured and bears interest at a variable rate based on the
London Interbank Offered Rate (5.7% at December 31, 1995). The weighted average
interest rates were 6.9% during 1995 and 4.8% during 1994. The loan matures as
follows: $1,200,000 in 1996, $2,350,000 in 1997 and $1,750,000 in 1998.
A term loan of $13,400,000 and $15,000,000 at December 31, 1995 and 1994,
respectively, is unsecured and bears interest at a variable rate based on the
federal funds rate. The weighted average interest rates were 6.6% during 1995
and 5.6% during 1994. The loan matures as follows: $1,600,000 in 1996,
$2,400,000 in each of 1997 and 1998 and $7,000,000 in 1999.
SENIOR NOTES
In August 1995, the Company issued $110,000,000 senior notes due August 2005
which bear interest at 7 5/8%. The notes were sold at a discount to yield
7.705%.
CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $25,000,000 convertible subordinated debentures in June 1986.
The debentures are due June 2001, bear interest at 53/4% and 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. The debentures are redeemable at
the option of the Company at prices ranging from 101% (in 1995) to par over the
term to maturity. During 1995, $13,040,000 par value of the debentures was
converted into 500,952 shares of the Company's common stock.
CREDIT FACILITIES
The Company has $150 million of unused committed lines of credit under revolving
credit agreements (the "Credit Facilities") with various banks. The Credit
Facilities expire in August 1996. 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. There were no outstanding
borrowings under the Credit Facilities at December 31, 1995. At December 31,
1995, the Company and Alex. Brown were in compliance with all restrictive
covenants contained in the Credit Facilities and term loans.
INTEREST PAYMENTS
Interest payments, including interest payments on repurchase agreements,
securities loaned and convertible subordinated debentures, were $32,210,000,
$20,381,000 and $14,122,000 during 1995, 1994 and 1993, respectively.
40
<PAGE>
9) Securities Sold, Not Yet Purchased
Securities sold, not yet purchased consisted of the following (in thousands):
1995 1994
- -------------------------------------------------------------------------------
United States government and agencies $34,958 $4,750
States and municipalities 67 329
Corporate debt 5,593 3,286
Equities and convertible debt 13,658 17,477
---------------------------
$54,276 $25,842
===========================
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, 1995, Alex. Brown's
net capital was $322,292,000 which exceeded net capital rule requirements by
$295,954,000. Alex. Brown has two London-based subsidiaries which are subject
to the capital requirements of the Securities and Futures Authority (SFA). At
December 31, 1995, 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 in which certain employees of the
Company are partners. 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, 1995 were as follows (in thousands):
Years Ending December 31 Related Parties Others
- ------------------------------------------------------------------
1996 $2,844 $ 9,187
1997 711 12,178
1998 -- 25,138
1999 -- 13,029
2000 -- 13,076
2001 and thereafter -- 117,174
- ------------------------------------------------------------------
Rent expense, including equipment rentals, was $20,720,000, $16,096,000 and
$14,829,000 including $2,450,000, $2,445,000 and $2,939,000 to related parties,
for 1995, 1994 and 1993, respectively.
LETTERS OF CREDIT
At December 31, 1995, Alex. Brown was contingently liable for up to $51,000,000
under unsecured letters of credit used to satisfy required margin deposits at
five securities clearing corporations.
INVESTMENT COMMITMENTS
At December 31, 1995, the Company had committed to invest up to $11.6 million in
certain investment partnerships, including $10.3 million in a merchant banking
partnership.
41
<PAGE>
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 three 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
counterparties to satisfy their contractual obligations.
The Company seeks to control its credit risk through the use of a variety of
reporting and control procedures described in the preceding discussion of
financial instruments with off-balance-sheet risk. Substantially all of
Alex. Brown's receivables are collateralized by securities which are
generally in physical possession, at depositories or due from other parties.
42
<PAGE>
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 notes 1, 4 , 6 and 9).
BANK LOANS
The principal balance of bank loans which are payable on demand is considered to
be the fair value of such loans. The carrying values of the term loans
approximated fair values at December 31, 1995 and 1994 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.
REPURCHASE AGREEMENTS
The carrying amounts of securities sold under repurchase agreements and
securities purchased under agreements to resell are considered to be the fair
values of such transactions.
SENIOR NOTES AND CONVERTIBLE SUBORDINATED DEBENTURES
The fair values of the Senior notes and Convertible subordinated debentures were
as follows (in thousands):
1995 1994
- ---------------------------------------------------------------------
7 5/8% Senior notes $117,469 --
5 3/4% Convertible subordinated debentures 19,413 $26,595
The fair values are based on quoted market prices. At December 31, 1995, the
Convertible subordinated debentures were callable at the Company's option at
$12,080,000.
13) Income Taxes
The components of income tax expense were as follows (in thousands):
1995 1994 1993
- -----------------------------------------------------------------------------
Federal $51,153 $ 38,649 $ 47,644
State and local 11,467 8,761 11,465
-------------------------------------------
$62,620 $ 47,410 $59,109
===========================================
Current $72,758 $ 58,106 $62,362
Deferred (10,138) (10,696) (3,253)
-------------------------------------------
$62,620 $ 47,410 $59,109
===========================================
43
<PAGE>
Income tax expense is reconciled to amounts computed by applying the federal
corporate tax rate to earnings before income taxes as follows (in thousands):
1995 1994 1993
- -----------------------------------------------------------------------------
Tax at federal statutory rate $55,361 $41,398 $51,917
State and local income taxes, net of
federal income tax benefit 7,454 5,695 7,452
Other, net (195) 317 (260)
-----------------------------------
$62,620 $47,410 $59,109
===================================
The components of the net deferred income tax asset were as follows (in
thousands):
1995 1994
- -----------------------------------------------------------------------------
Deferred income tax assets:
Unrealized loss-- Firm securities $ 3,584 $ 1,851
Equity awards -- 904
Accrued expenses 28,585 18,528
Other investments 106 123
Depreciation 3,892 2,070
Other 1,265 1,613
----------------------------
Total deferred income tax assets 37,432 25,089
----------------------------
Deferred income tax liabilities:
Unrealized profit--Firm securities 4,667 1,852
Other investments 1,852 2,221
Depreciation 1,426 1,153
Other 1,674 2,188
----------------------------
Total deferred income tax liabilities 9,619 7,414
----------------------------
Net deferred income tax asset $27,813 $17,675
============================
There was no valuation allowance relating to deferred income tax assets at
December 31, 1995 and 1994. Income tax payments were $64,903,000, $69,438,000
and $50,428,000 during 1995, 1994 and 1993, respectively.
14) Employee Benefit Plans
EMPLOYEE DEBENTURES
The Company has sold convertible subordinated debentures to certain employees
pursuant to the 1991 Equity Incentive Plan. The debentures are convertible into
the Company's common stock three years after the date issued. The debentures may
be redeemed at par if the employee terminates employment with the Company. The
Company has made loans to the employees, with a six year term, to fund the
purchase of the debentures. Information related to debentures outstanding at
December 31, 1995 and issued in January 1996 was as follows:
Principal amount Interest Conversion
Date issued of debentures rate Due date price/share
- ------------------------------------------------------------------------------
January 1991 $ 822,000 8.125% June 1997 $8.50
January 1992 1,837,000 6.750% June 1998 25.50
January 1993 2,250,000 6.375% June 1999 23.00
January 1994 3,925,000 5.375% June 2000 28.83
January 1995 5,392,000 8.000% June 2001 33.70
January 1996 7,820,000 5.750% June 2002 46.00
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
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 an average target. The right to receive loan forgiveness is subject to
three year cliff vesting. Loan forgiveness targets for the second three year
period of the loan term are set at the end of the third year.
44
<PAGE>
The Company met the return on equity targets in 1991 through 1995. Compensation
expense relating to such loan forgiveness was $2,675,000, $1,804,000 and
$1,092,000 for 1995, 1994 and 1993, respectively. Information relating to target
returns on equity is set forth below:
Initial three year period Second three year period
Date issued Annual Average Annual Average
- --------------------------------------------------------------------------------
January 1991-January 1992 15% 17% 15% 17%
January 1993 15% 17% 15% 15%
January 1994-January 1995 15% 17% -- --
January 1996 15% 15% -- --
EQUITY PARTNERSHIP PLAN
During 1995, 1994 and 1993, the Company sold 58,216, 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 generally 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 $52,379,000 to finance the purchase of the stock and
debentures. Under the Plan, the Company may forgive a portion of the principal
amount of the loans granted prior to July 1995, not to exceed the difference
between market value and book value at the time of purchase. Loan forgiveness
resulted in compensation expense of $1,277,000, $1,250,000 and $3,200,000 in
1995, 1994 and 1993, respectively. Information related to debentures outstanding
at December 31, 1995 was as follows:
Principal amount Interest Conversion
Date issued of debentures rate Due date price/share
- -------------------------------------------------------------------------------
August 1993 $23,434,000 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
February 1995 867,000 7.96% February 2003 36.125
May 1995 1,772,000 7.12% May 2003 39.000
July 1995 10,311,000 6.28% July 2005 48.750
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 430,900,
404,000 and 375,000 shares of the Company's common stock in January 1996, 1995
and 1994, respectively. These options and options granted in January 1993 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 lesser of the average market value of the Company's common stock 30
days prior to the date of grant or the market value on 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):
1995 1994 1993
- -------------------------------------------------------------------------------
Outstanding at January 1 2,195,109 2,108,156 2,168,568
Granted 439,900 413,000 384,000
Exercised (at $8.50-$31.34) (438,026) (249,105) (356,032)
Forfeited (45,484) (76,942) (88,380)
-------------------------------------------
Outstanding at December 31 2,151,499 2,195,109 2,108,156
===========================================
Options outstanding at December 31, 1995 and granted in January 1996 have an
exercise price range of $8.50-$50.00 per share and a weighted average exercise
price of $31.84 per share. Options for 889,603 shares were exercisable at
December 31, 1995.
45
<PAGE>
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 $52,000 for 1995, $94,000 for 1994, $91,000 for 1993).
RETIREMENT PLANS
Effective July 1, 1995, the Company merged its 401(k) deferred compensation and
profit sharing plans (the "Plan"). Employees are permitted within limitations
imposed by tax law to make pretax contributions to the Plan pursuant to salary
reduction agreements. The Company may make discretionary matching and profit
sharing contributions to the Plan and may make additional contributions to
preserve the Plan's tax exempt status. The Company also has retirement plans for
certain employees in foreign offices not covered by the Plan. Compensation
expense for the Company's contributions to retirement plans was $9,600,000,
$5,000,000 and $6,361,000 for 1995, 1994 and 1993, 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 657,880 shares have been
issued under the plan, including 91,441 shares in 1995.
EQUITY COMPENSATION PLAN
During 1995, 1994 and 1993, 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, $11,102,000, $7,080,000
and $8,729,000 of cash compensation was withheld and replaced by 163,155,
130,058 and 204,242 shares of the Company's common stock and interests in
investment accounts for 1995, 1994 and 1993, 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 $1,063,000
for 1999, $1,743,000 for 1998, $2,414,000 for 1995 through 1997, $1,413,000 for
1994 and $769,000 for 1993).
46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Alex. Brown Incorporated
Board of Directors
Alex. Brown Incorporated:
We have audited the accompanying consolidated statements of financial condition
of Alex. Brown Incorporated and subsidiaries as of December 31, 1995 and 1994,
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,
1995. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alex. Brown
Incorporated and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
January 24, 1996
47
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------
(in thousands, except per share amounts) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
Results of Operations:
<S> <C> <C> <C> <C> <C>
Revenues $ 809,394 $605,488 $ 628,203 $455,724 $ 410,580
Operating expenses 651,219 487,207 479,868 360,340 327,224
---------------------------------------------------------------
Earnings before income
taxes 158,175 118,281 148,335 95,384 83,356
Income taxes 62,620 47,410 59,109 36,773 31,404
---------------------------------------------------------------
Net earnings $ 95,555 $ 70,871 $ 89,226 $ 58,611 $ 51,952
===============================================================
Earnings per share:
Primary $ 6.16 $ 4.60 $ 5.61 $ 3.72 $ 3.36
Fully diluted $ 5.40 $ 4.05 $ 5.09 $ 3.50 $ 3.12
Cash dividends per share $ .775 $ .675 $ .575 $ .45 $ .34
Weighted average shares
outstanding:
Primary 15,511 15,416 15,916 15,742 15,480
Fully diluted 18,128 17,988 17,809 17,064 16,976
===============================================================
December 31
---------------------------------------------------------------
(in thousands) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------
Financial Condition:
Total assets $2,196,507 $1,346,433 $1,283,423 $1,085,034 $ 865,692
Long-term debt $ 15,900 $ 20,009 $ 13,336 $ 15,160 $ 17,279
Senior notes $ 109,414 -- -- -- --
Convertible subordinated
debentures $ 63,435 $ 59,360 $ 56,148 $ 28,723 $ 26,670
Total stockholders' equity $ 489,287 $ 373,428 $ 345,665 $ 274,395 $ 221,680
===============================================================
</TABLE>
48
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Quarters Ended 1995
-----------------------------------------------------
(in thousands, except per share amounts) December 31 September 30 June 30 March 31
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $246,665 $210,278 $201,115 $151,336
Operating expenses 192,380 172,041 162,799 123,999
-----------------------------------------------------
Earnings before income taxes 54,285 38,237 38,316 27,337
Income taxes 21,064 15,295 15,326 10,935
-----------------------------------------------------
Net earnings $ 33,221 $ 22,942 $ 22,990 $ 16,402
=====================================================
Earnings per share:
Primary $ 2.08 $ 1.45 $ 1.50 $ 1.10
=====================================================
Fully diluted $ 1.85 $ 1.28 $ 1.32 $ 0.96
=====================================================
Quarters Ended 1994
-----------------------------------------------------
(in thousands, except per share amounts) December 31 September 30 June 24 March 25
- -----------------------------------------------------------------------------------------------
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
=====================================================
</TABLE>
49
<PAGE>
CORPORATE INFORMATION
Alex. Brown Incorporated
Price Range of Common Stock and Dividends
- --------------------------------------------------------------------------------
The common stock of the Company trades on the NYSE under the symbol "AB." As of
December 31, 1995, there were approximately 504 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
- --------------------------------------------------------------------------------
1995 High Low
- --------------------------------------------------------------------------------
First Quarter $39 $29 5/8
Second Quarter $47 5/8 $38 1/8
Third Quarter $60 5/8 $42 1/8
Fourth Quarter $58 1/4 $40
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
Dividend Information
- --------------------------------------------------------------------------------
Dividend
Per Share Declaration Date Record Date Payment Date
- --------------------------------------------------------------------------------
1995 $.175 April 21, 1995 May 1, 1995 May 10, 1995
$.20 July 25, 1995 August 7, 1995 August 16, 1995
$.20 October 19, 1995 October 30, 1995 November 9, 1995
$.20 January 24, 1996 February 5, 1996 February 15, 1996
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
Form 10-K
- --------------------------------------------------------------------------------
A copy of the Company's Annual Report on Form 10-K for 1995 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
- --------------------------------------------------------------------------------
KPMG Peat Marwick LLP
111 South Calvert Street
Baltimore, Maryland 21202
(410) 783-8300
Transfer Agent and Registrar
- --------------------------------------------------------------------------------
Chemical Bank
450 West 33rd Street
New York, New York 10001
(800) 851-9677
52
<PAGE>
Commission File No. 0-14199
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
ANNUAL REPORT
ON FORM 10-K
UNDER
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Alex. Brown Incorporated
<PAGE>
ALEX. BROWN INCORPORATED
Annual Report on Form 10-K
Index to Exhibits
Exhibit No. Exhibit Page
3.1 Charter of the Registrant, as amended (4)
3.2 By-Laws of the Registrant, as amended (2)
4.1 Indenture dated as of June 12, 1986
between Alex. Brown Incorporated
and Bankers Trust Company, Trustee,
relating to the Company's 5 3/4%
convertible Subordinated Debentures
due 2001 (2)
4.2 Indenture dated as of July 10, 1995
between Alex. Brown Incorporated
and Chemical Bank, Trustee,
relating to the Company's 7 5/8%
Senior Notes due 2005 (11)
4.3 Agreement to furnish Loan Agreements ____
10.1 Lease dated as of January 1, 1984
by and between Alex. Brown Partners,
a Maryland Limited Partnership, and
Alex. Brown & Sons Incorporated (1)
10.1(a) First Amendment to Lease dated
July 29, 1993 (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 July 2, 1987 by and
between Alex. Brown & Sons
Incorporated and Calvert-Baltimore
Associates Limited Partnership (3)
<PAGE>
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 First Amended and Restated
Stockholders' Agreement dated
June 23, 1989 among the Registrant
and certain stockholders of the
Registrant, as amended (8)
10.5* Alex. Brown Incorporated 1991
Equity Incentive Plan (7)
10.6* Alex. Brown Incorporated 1991
Non-Employee Director Equity Plan (6)
10.7* Benjamin H. Griswold IV Employment (9)
Agreement
10.8* 1995 Non-Employee Director Stock (10)
Purchase Plan
11 Statement of Computation of
per share earnings ____
12 Statement of Computation of
Consolidated Ratio of Earnings
to Fixed Charges ____
13 Pages 28 through 31, 33 through
49 and 52 of the Registrant's
Annual Report to Stockholders for
the year ended December 31, 1995 (12)
21 Subsidiaries of the Registrant (2)
23 Consent of KPMG Peat Marwick LLP ____
27 Financial Data Schedule ____
<PAGE>
* Connotes a management contract or compensatory plan or other arrangement in
which a director or executive officer of the Registrant participates.
(1) Incorporated by reference to the corresponding Exhibit to the
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 the
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
Registrant'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 the
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 the
Registration Statement No. 33-40619 on Form S-8 of the Company filed on May 16,
1991.
(8) Incorporated by reference to the corresponding Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 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 Exhibit to the
Registration Statement No. 33-59601 on Form S-8 of the Company filed on May 25,
1995.
<PAGE>
(11) Incorporated by reference to the corresponding Exhibit to the
Registration Statement No. 33-60955 on Form S-3 of the Company filed on July 10,
1995.
(12) Incorporated by reference to the corresponding Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
Exhibit 4.3
[Alex. Brown logo]
ALEX. BROWN INCORPORATED
One Thirty-five East Baltimore Street
Baltimore, Maryland 21202
410-727-1700
March 25, 1996
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C. 20549
Dear Sirs:
This will confirm that Alex. Brown Incorporated (the "Company") will
furnish to the Securities and Exchange Commission upon request copies of the
following Loan Agreements:
(i) Competitive Advance, Revolving Credit Facility and Term Loan
Agreement dated as of March 8, 1996 between Alex. Brown Incorporated
and various banks including Chemical Bank, as Documentation Agent,
and The Bank of New York, as Administrative Agent;
(ii) Competitive Advance and Revolving Credit Facility Agreement dated as
of March 8, 1996 between Alex. Brown Incorporated and various banks
including Chemical Bank, as Documentation Agent, and The Bank of New
York, as Administrative Agent;
(iii) Loan Agreement dated July 14, 1994 between Alex. Brown & Sons
Incorporated and Signet Bank/Maryland;
(iv) Competitive Advance and Revolving Credit Facility Agreement dated as
of August 16, 1993 between Alex. Brown Incorporated and various banks
including Chemical Bank, as Documentation Agent, and The Bank of New
York, as Administrative Agent;
(v) Loan Agreement dated April 8, 1993 between Alex. Brown & Sons
Incorporated and The First National Bank of Maryland;
(vi) Security Agreement dated October 19, 1992 between Alex. Brown Leasing
Services Incorporated and Signet Leasing and Financial Corporation;
and
<PAGE>
(vii) Security Agreement dated March 27, 1992 between Alex. Brown Leasing
Services Incorporated and Signet Leasing and Financial Corporation.
The amount and debt authorized for each of the foregoing Loan Agreements
does not exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis.
Very truly yours,
ALEX. BROWN INCORPORATED
By: /s/ Beverly L. Wright
Beverly L. Wright
Treasurer and Chief Financial Officer
Exhibit 11
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Calculation of Earnings Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
12/31/95 12/31/94 12/31/93
-----------------------------------------------------------------------------------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
---------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares
outstanding:
Common stock 15,097 15,097 15,159 15,159 15,570 15,570
Stock options 414 554 257 327 346 420
Convertible subordinated
debentures - 2,477 - 2,502 - 1,819
---------------- -------------- -------------- -------------- -------------- --------------
15,511 18,128 15,416 17,988 15,916 17,809
================ ============== ============== ============== ============== ==============
Net earnings for
calculating earnings
per share:
Net earnings $ 95,555 $ 95,555 $ 70,871 $ 70,871 $ 89,226 $ 89,226
Interest expense on
convertible subordinated
debentures, net of tax - 2,325 - 2,059 - 1,495
---------------- -------------- -------------- -------------- -------------- --------------
$ 95,555 $ 97,880 $ 70,871 $ 72,930 $ 89,226 $ 90,721
================ ============== ============== ============== ============== ==============
Earnings per share $ 6.16 $ 5.40 $ 4.60 $ 4.05 $ 5.61 $ 5.09
================ ============== ============== ============== ============== ==============
</TABLE>
Exhibit 12
ALEX. BROWN INCORPORATED
Computation of Consolidated Ratio of Earnings to Fixed Charges
(dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Earnings before income
taxes $ 158,175 118,281 148,335 95,384 83,356
Fixed charges:
Interest expense 36,204 21,920 14,924 10,587 12,161
Portion of rental
expense representative
of interest factor * 6,907 5,365 4,943 5,025 5,117
------------- ------------- ------------ ------------ ------------
Earnings available for
fixed charges $ 201,286 145,566 168,202 110,996 100,634
============= ============= ============ ============ ============
Fixed charges:
Interest expense $ 36,204 21,920 14,924 10,587 12,161
Portion of rental
expense representative
of interest factor * 6,907 5,365 4,943 5,025 5,117
------------- ------------- ------------ ------------ ------------
Total Fixed Charges $ 43,111 27,285 19,867 15,612 17,278
============= ============= ============ ============ ============
Consolidated ratio
of earnings to
fixed charges 4.7 5.3 8.5 7.1 5.8
============= ============= ============ ============ ============
</TABLE>
* Estimated at one-third of rental expense deemed representative of the interest
factor.
Exhibit 23
The Board of Directors
Alex. Brown Incorporated:
We consent to incorporation by reference in the Registration Statements on Forms
S-8 (Nos. 33-23789, 33-26988, 33-40618, 33-40619, 33-45715, 33-46282, 33-53687,
33-55003, 33-59601 and 33-67050) and the Registration Statement on Form S-3 (No.
33-60955) of Alex. Brown Incorporated of our report dated January 24, 1996,
relating to the consolidated statements of financial condition of Alex. Brown
Incorporated and subsidiaries as of December 31, 1995, and 1994, 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, 1995, which report
appears in the December 31, 1995, annual report on Form 10-K of Alex. Brown
Incorporated incorporated by reference herein.
KPMG Peat Marwick LLP
Baltimore, Maryland
March 25, 1996
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 62,103
<RECEIVABLES> 1,756,374
<SECURITIES-RESALE> 34,865
<SECURITIES-BORROWED> 0<F1>
<INSTRUMENTS-OWNED> 160,858
<PP&E> 41,189
<TOTAL-ASSETS> 2,196,507
<SHORT-TERM> 104,108
<PAYABLES> 1,357,627
<REPOS-SOLD> 2,460
<SECURITIES-LOANED> 0<F2>
<INSTRUMENTS-SOLD> 54,276
<LONG-TERM> 188,749
<COMMON> 1,553
0
0
<OTHER-SE> 487,734
<TOTAL-LIABILITY-AND-EQUITY> 2,196,507
<TRADING-REVENUE> 139,383
<INTEREST-DIVIDENDS> 105,544
<COMMISSIONS> 173,471
<INVESTMENT-BANKING-REVENUES> 293,375
<FEE-REVENUE> 97,621
<INTEREST-EXPENSE> 36,204
<COMPENSATION> 432,880
<INCOME-PRETAX> 158,175
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,555
<EPS-PRIMARY> 6.16
<EPS-DILUTED> 5.40
<FN>
<F1>Included as part of receivables.
<F2>Included as part of payables.
</FN>
</TABLE>
