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, 1996
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.)
1 South 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
$1,463,000,000 based upon the last sale price as reported on the New York Stock
Exchange on March 7, 1997.
The number of shares of the registrant's Common Stock outstanding as of
March 7, 1997 was 24,848,343.
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DOCUMENTS INCORPORATED BY REFERENCE
Those portions of the registrant's 1996 Annual Report to Stockholders
and Proxy Statement, which the registrant prepared in connection with its
Annual Meeting of Stockholders and filed pursuant to Regulation 14A on March 20,
1997 and which contain information required to be included in this Form 10-K,
are incorporated by reference as indicated in Parts I, II, III and IV herein.
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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 securities 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
and securities brokerage 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 22 offices in 13 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 technologies, media/communications, technology and
transportation industries. Within these industries, the Company follows
approximately 800 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 these seminars, Company
representatives and industry experts 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 in which the
Company acts as agent for individual and institutional investors generate
securities commission revenues. Commissions are charged on both
exchange and over-the-counter agency transactions for individual customers in
accordance with a Company-formulated schedule, 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, as agent, in an over-the-counter security. 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. Principal transactions are effected for both individual and
institutional customers. 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.
As of December 31, 1996, the Company made markets, buying and selling
as a principal, in approximately 450 common stocks and other securities traded
on the NASD's Automated Quotations System or otherwise in the over-the-counter
market and in 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 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, 1996 and 1995 and principal transactions revenue
for the three-year period ended December 31, 1996 is set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Notes 4, 5 and 8 of Notes to Consolidated Financial Statements, incorporated
herein by reference to pages 30-33, 40 and 42, respectively, of the 1996 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. 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 imposes 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 a market maker a penalty of 20 business days during which it 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. Unless a
stock is one of the first 50 "pilot stocks" subject to SEC Rule 11Ac1-4, the
Company is required to maintain a minimum vote size equal to the applicable SOES
tier size, which may be 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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In July, 1996, the United States Department of Justice ("DOJ")
commenced an action against twenty-four NASDAQ market-makers, including Alex.
Brown, in the United States District Court for the Southern District of New
York, entitled United States v. Alex. Brown & Sons Incorporated, et al., and
simultaneously entered into a settlement agreement with the defendant
market-makers. Pursuant to the settlement, which is subject to court approval,
the defendant market-makers agreed to not engage in certain types of conduct and
to engage in certain monitoring of their activities as NASDAQ dealers. See also
Item 3, Legal Proceedings.
On August 8, 1996, the SEC issued a Report Pursuant to Section 21(a) of
the Securities Exchange Act of 1934 Regarding the NASD and the NASDAQ Market
(the "Report of Investigation"). In the Report of Investigation, the SEC stated
its belief that "significant changes to the NASD and the NASDAQ are warranted."
Following the DOJ settlement and the Report of Investigation, certain
changes were made to the rules governing the NASDAQ market, the effects of which
have not yet been evaluated. The Company believes that other changes to the
structure and operation of the NASDAQ market are likely. Such changes may have a
material effect on the profitability of 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
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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% (46% in 1996) of the public
offerings of equity and corporate debt securities managed or co-managed by the
Company have been initial public offerings. Generally, a strong market for new
issues occurs when overall market and economic conditions are favorable. New
issues are perceived to have a higher degree of risk for investors and
investor receptivity to new issues tends to vary as a function of overall
market conditions.
The Company also provides advice to clients on a wide range of
financial matters, including mergers and acquisitions, divestitures, financial
planning, financial restructuring and recapitalizations. In connection with
mergers and acquisitions, the Company often provides opinion letters and
valuations and renders various other services. The Company's traditional clients
for such services are companies for which the Company has raised capital or
which are followed by the Company's Research Division. The Company also provides
these services to companies which are not corporate finance clients or covered
by the Company's Research Division but which are, or have subsidiaries or
divisions, in industries followed by the Company's Research Division.
Historically, the core of the Company's mergers and acquisitions business has
been the representation of sellers in negotiated transactions. Fees for these
services are negotiated and are generally related to the value of the
transaction for which the service is provided.
The Company also invests in private equity securities primarily through
its partnership interests in the ABS Capital Partners funds ("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, 1996, the Company had outstanding $43.4
million of private equity investments and commitments to invest $52.4 million
more in Capital.
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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 domestic
and international clients. 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. A number of these services are provided through the
Company's subsidiaries, Alex. Brown Capital Advisory & Trust Company and Alex.
Brown Capital Advisory Incorporated. As of December 31, 1996, the Company
provided investment advisory, administrative and/or distribution services
with respect to $12.5 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 ABIM's
associated investment advisory professionals have the remaining 50% interest.
ABIM manages equity and balanced accounts for institutions and individuals.
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 in which it extends margin
credit directly to customers of correspondent brokers. The Company may extend
credit directly to 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 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
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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, 1996, the
Company provided correspondent services to 43 securities firms.
Margin Accounts and Interest Income. The Company extends margin
financing to its customers and to the customers of correspondent brokers for
whom the Company provides clearing and execution services. Margin loans are
collateralized by cash and securities in customer accounts, including securities
that may be subject to restrictions on sale by the customer. Customers are
charged for margin financing utilizing a base rate that the Company
establishes based upon a variety of factors, including the Company's own cost of
funds, with adjustments based upon the size of the loan and other factors. The
amount of the Company's interest revenue is affected by the volume of
customer borrowing and by prevailing interest rates. The average volume
of customer borrowing has increased in each of the last five years.
Margin lending by the Company is subject to the margin rules of the
Board of Governors of the Federal Reserve System, NYSE margin requirements and
the Company's internal policies, which in many instances are more stringent than
the NYSE requirements. In permitting customers to purchase on margin, the
Company assumes the risk that a market decline may reduce the value of the
collateral it holds below the customer's indebtedness before the collateral can
be sold. The proceeds realizable upon the sale of such collateral can be
adversely affected by the liquidity of the market for the security, applicable
restrictions on the sale of the security or the size of the collateral position
as compared to the trading volume of the security. Under applicable NYSE rules,
in the event of a significant decline in the market value of the securities in a
margin account, the Company is obligated to require the customer to deposit
additional securities or cash in the account or to sell securities to reduce or
eliminate the customer's indebtedness to the Company.
Credit balances and securities in customers' accounts, to the
extent not required to be segregated pursuant to rules of the SEC, may be used
in the conduct of the Company's business, including the extensions of margin
credit. Customer lending activities may influence the basis on which net
capital requirements of Alex. Brown are determined under the Net Capital
Rule. As these activities expand, the Company's net capital requirements
increase. See "Net Capital Requirements."
Accounting, Administration and Operations. Accounting, administration
and operations personnel are responsible for the processing of securities
transactions; receipt, identification and
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delivery of funds and securities; custody of customer securities; internal
financial control; accounting functions; office services; personnel
services and compliance with financial and operational 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 experienced operating
problems. The Company has not experienced any material operating
difficulties during periods of record trading volume; however, extraordinarily
heavy trading volume in the future could result in clearance and processing
difficulties. The Company utilizes its own facilities and the services
of Automatic Data Processing Inc. for the electronic processing related
to recording data pertinent to securities transactions and general accounting.
The Company believes that its internal controls and safeguards against
securities theft, including use of depositories and periodic securities counts,
are adequate. As required by the NYSE and certain other authorities, the Company
carries fidelity bonds covering loss or theft of securities as well as employee
dishonesty, forgery and alteration of checks and similar items, and securities
forgery. The amounts of coverage provided by the bonds are believed to be
adequate.
The Company posts its books and records daily. Periodic reviews of
certain controls are conducted, and administrative and operations personnel meet
with management to review operational conditions in the Company to assure
compliance with applicable laws, rules and regulations.
Competition. The Company encounters intense competition in all aspects
of the securities business and competes directly with other securities firms, a
significant number of which have substantially greater capital and other
resources and many of which offer a wider range of financial services than the
Company. Other securities firms, oriented primarily to the market for individual
investors, charge commissions that are significantly discounted from those in
the range generally charged by the Company to its individual customers. In
addition to competition from firms currently in the securities business, there
is increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. The Company believes that the principal competitive factors in the
securities industry are the quality and ability of professional personnel and
relative prices of services and products offered. The Company and its
competitors directly solicit potential customers, and many of the Company's
competitors engage in advertising programs which the Company does not use to any
significant degree. The Company and its competitors also
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furnish investment research publications in an effort to hold and attract
existing and potential clients.
Employees. As of December 31, 1996, the Company had approximately
2,680 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 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,
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Alex. Brown has obtained protection in excess of SIPC coverage of $74,500,000
for each account.
Alex. Brown & Sons Limited and Alex. Brown & Sons Investments Limited,
through which the Company operates in London, England, are subject to the
United Kingdom Financial Services Act of 1986, which governs all aspects of
United Kingdom investment business, and to the rules of the Securities and
Futures Authority.
Certain subsidiaries and employees of the Company are engaged in the
insurance business and are subject to regulation and supervision by appropriate
authorities in the states in which they conduct their business.
Net Capital Requirements. As a registered broker-dealer and a member
firm of the NYSE, Alex. Brown is subject to the Net Capital Rule, which has also
been adopted through incorporation by reference in NYSE Rule 325. The Net
Capital Rule, which specifies minimum net capital requirements for registered
brokers and dealers, is designed to measure the general financial integrity and
liquidity of a broker-dealer and requires that at least a minimum part of its
assets be kept in relatively liquid form.
Alex. Brown 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,
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the proceeds of which are included in its net capital, may not exceed 70% of
the sum of the outstanding principal amount of all subordinated indebtedness
included in net capital, par or stated value of capital stock, paid in capital
in excess of par, retained earnings and other capital accounts for a period in
excess of 90 days.
Under NYSE Rule 326, a member firm is required to reduce its business
if its net capital is less than 4% of aggregate debit items. NYSE Rule 326 also
prohibits the expansion of business if net capital is less than 5% of aggregate
debit items for 15 consecutive days. The provisions of Rule 326 also become
operative if capital withdrawals (including scheduled maturities of
subordinated indebtedness during the following six months, charges relating
to lending on control and restricted securities under NYSE Rule 431 and
discretionary liabilities which are included in capital under the Net Capital
Rule) would result in a reduction of a firm's net capital to the levels
indicated.
Net capital is essentially defined as net worth (assets minus
liabilities), plus qualifying subordinated borrowings and certain discretionary
liabilities, and less certain mandatory deductions that result from excluding
assets that are not readily convertible into cash and from valuing
conservatively certain other assets, such as a firm's positions in securities.
Among these deductions are adjustments (called "haircuts") to the market value
of firm securities to reflect the possibility of a market decline prior to
disposition.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of Alex.
Brown that require the intensive use of capital, such as underwriting and
trading activities and the financing of customer account balances, and also
could restrict the Company's ability to withdraw capital from Alex. Brown which
in turn could limit the Company's ability to pay dividends, repay debt or 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 applicable Commodity Futures Trading Commission ("CFTC")
net capital requirements. As of December 31, 1996, Alex. Brown was required to
maintain minimum net capital, in accordance with SEC and CFTC rules, of
$32,116,000 and had total net capital (as so computed) of $394,821,000 or
$362,705,000 in excess of 2% of aggregate debit items and $314,531,000 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 Los Angeles, California
Atlanta, Georgia New York, New York
Baltimore, Maryland Philadelphia, Pennsylvania
Boston, Massachusetts Richmond, Virginia
Charlotte, North Carolina San Francisco, California
Chicago, Illinois Timonium, Maryland
Dallas, Texas Tokyo, Japan
Fishkill, New York Towson, Maryland
Geneva, Switzerland Washington, D.C.
Greenwich, Connecticut West Palm Beach, Florida
Houston, Texas Wilmington, Delaware
Jacksonville, Florida Winston-Salem, North Carolina
London, England
The Company's two most material lease obligations are with respect to
its Baltimore and New York facilities. The Company occupies an aggregate of
approximately 277,000 square feet of space in downtown Baltimore under leases
expiring on various dates through 2011. The Company occupies approximately
85,000 square feet of office space in midtown Manhattan under a lease expiring
in 2013.
The Company's other offices, including the separate offices of Alex.
Brown Investment Management, occupy an aggregate of approximately 369,000
square feet under leases that expire on various dates through 2005. Future
minimum rental commitments under existing leases are set forth in Note 10 of
Notes to Consolidated Financial Statements incorporated herein by reference
to page 42 of the 1996 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. The Company is also a
member of a defendant class of underwriters in a number of lawsuits relating to
its participation in underwritings and, in addition, may be required to
contribute to any adverse final judgments or settlements in actions arising out
of its participation in the underwritings of certain issues in which it is
not a defendant. 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,
including those described below, and intends to defend each action vigorously.
The following are descriptions of certain legal proceedings involving or
affecting the Company.
NASDAQ Market-Maker Antitrust Litigation and Related Investigations.
Alex. Brown is a defendant in a consolidated class action proceeding in the
United States District Court for the Southern District of New York captioned
In re NASDAQ Market-Makers Antitrust Litigation alleging violations of a
Federal antitrust statute. Alex. Brown was joined as a defendant in this action
in July, 1994. The plaintiffs allege that thirty-five defendants, including
Alex. Brown, that act as dealers on the NASDAQ computerized quotations system,
conspired to raise and fix the spreads between the bid and ask prices of certain
securities traded over NASDAQ. Plaintiffs further allege that as a result
of such conspiracy, NASDAQ spreads were wider than spreads for similar
stocks traded on the New York Stock Exchange or the American Stock Exchange.
The class consists of all persons in the United States who bought or sold
certain securities through NASDAQ during certain periods within four years
prior to the filing of the complaints. Plaintiffs seek treble damages of an
unspecified amount. An additional private action has been filed in the
Alabama state court raising the same issues which have been included in the
consolidated class action complaint.
In addition, in July, 1996, twenty-four market-makers in NASDAQ
securities, including Alex. Brown, entered into an agreement with the United
States Department of Justice whereby, without admitting any wrongdoing, these
market-makers agreed not to engage in certain types of conduct and to engage
in certain monitoring activities of its NASDAQ dealers. The agreement is
subject to Court approval. The agreement followed the issuance of a complaint
by the Department of Justice also in the United States District Court for the
Southern District of New York entitled United States v. Alex. Brown & Sons
Incorporated, et al. Alex. Brown has also received requests from the SEC
to provide
16
<PAGE>
information and documents with respect to its NASDAQ market making activities.
Banca Cremi, S.A. On April 11, 1995, Alex. Brown was named as a
defendant in an action pending in the United States District Court for 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 alleged that
Alex. Brown and its salespersonnel recommended unsuitable investments to
Banca Cremi, a Mexican bank, and thereby violated federal and state laws.
The complaint alleged compensatory damages in excess of $26 million. On
February 5, 1997, the Court granted Alex. Brown's Motion for Summary Judgment
and dismissed this lawsuit. On March 7, 1997, Plaintiffs filed a Notice of
Appeal of the Court's decision.
In-Store Advertising, Inc. Alex. Brown was 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"). Alex. Brown co-managed the Offering and directly underwrote 414,000
shares. The lawsuits were filed in the United States District Court for the
Southern District of New York, and were consolidated under the caption
In-Store Advertising, Inc. Securities Litigation. Plaintiffs alleged, among
other things, that the prospectus for the Offering contained material
misstatements of fact and omitted material facts and that the defendants
made untrue statements of material fact and omitted material facts concerning
In-Store Advertising's anticipated revenues and earnings. The Plaintiffs
alleged violations of the federal securities laws and the common law. In
October, 1996, Alex. Brown and the other underwriters reached an agreement
with the Plaintiffs to settle the action. The Court approved the settlement
on December 18, 1996, and the matter has been dismissed.
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................ 60 Chief Executive Officer and
Chairman of the Board of
Directors
Mayo A. Shattuck III.......... 42 President, Chief Operating
Officer and Director
Beverly L. Wright............. 48 Treasurer and Chief
Financial Officer
Robert F. Price............... 49 Secretary and General Counsel
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. 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.
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 of the Company
and a Managing Director of Alex. Brown.
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 55 of the 1996 Annual Report to Stockholders attached
hereto.
Item 6. Selected Financial Data.
Information required by Item 6 is incorporated herein by
reference to page 50 of the 1996 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 30 through 33 of the 1996 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 herein.
Supplementary data are incorporated herein by reference to
page 51 of the 1996 Annual Report to Stockholders attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
The information required by Items 10, 11, 12, and 13 (except that
information regarding executive officers called for by Item 10 contained in Part
I) is incorporated herein by reference to the Proxy Statement prepared in
connection with the Company's 1997 Annual Meeting of Stockholders.
19
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits:
Reference is made to the Index to Exhibits.
Financial Statement Schedules:
All schedules are omitted because they are not applicable, or
not required, or because the required information is included
in the financial statements or notes thereto.
(b) Reports on Form 8-K.
None.
Other Matters
For the purposes of complying with the amendments to the rules
governing Form S-8 under the Securities Act of 1933, the undersigned registrant
hereby undertakes as follows, which undertaking shall be incorporated by
reference into registrant's Registration Statements on Forms S-8 Nos. 33-23789,
33-26988, 33-40618, 33-40619, 33-45715, 33-46282, 33-53687, 33-55003, 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, 1997
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 and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ A. B. Krongard Chief Executive March 25, 1997
- - -------------------------- Officer; Chairman of
A. B. Krongard the Board of Directors
(Principal Executive
Officer)
/s/ Mayo A. Shattuck III President; Chief March 25, 1997
- - -------------------------- Operating Officer;
Mayo A. Shattuck III Director
/s/ Beverly L. Wright Treasurer and Chief March 25, 1997
- - -------------------------- Financial Officer
Beverly L. Wright (Principal Financial
and Accounting Officer)
/s/ Lee A. Ault III Director March 25, 1997
- - --------------------------
Lee A. Ault III
21
<PAGE>
/s/ Neil R. Austrian Director March 25, 1997
- - --------------------------
Neil R. Austrian
/s/ Thomas C. Barry Director March 25, 1997
- - --------------------------
Thomas C. Barry
/s/ Kenneth D. Brody Director March 25, 1997
- - --------------------------
Kenneth D. Brody
/s/ Benjamin H. Griswold IV Director March 25, 1997
- - --------------------------
Benjamin H. Griswold IV
/s/ Steven Muller, Ph.D. Director March 25, 1997
- - --------------------------
Steven Muller, Ph.D.
/s/ Frank E. Richardson Director March 25, 1997
- - --------------------------
Frank E. Richardson
/s/ John J. F. Sherrerd Director March 25, 1997
- - --------------------------
John J. F. Sherrerd
22
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Index to Financial Statements
Page
----
Financial Statements:
Alex. Brown Incorporated and Subsidiaries
included on pages 34 through 49 of
the 1996 Annual Report to Stockholders,
incorporated herein by reference and
attached hereto:
Consolidated Statements of Earnings 34
Consolidated Statements of Financial Condition 35
Consolidated Statements of Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38-48
Report of Independent Auditors 49
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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,
operating results and financial condition 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.
In the following discussion, all share and per share information have been
adjusted to reflect a three-for-two stock split paid on January 15, 1997.
RESULTS OF OPERATIONS
1996 Compared to 1995
Revenues totalled $1,059.4 million, a 31% increase as compared to $809.4
million in 1995.
Commission revenues totalled $201.9 million, a 16% increase from $173.5
million in 1995, primarily as a result of increased institutional and private
client listed commissions, as well as an increase in private client OTC agency
business.
Investment banking revenues increased 41% to $414.9 million from $293.4
million in 1995, primarily due to significant increases in revenues from
underwriting activities. Merger and advisory revenues increased 38% to $93.0
million from $67.4 million in 1995.
Principal transaction revenues increased 20% to $167.8 million from $139.4
million in 1995, primarily due to increases in revenues from OTC trading.
Partially offsetting this increase were declines in fixed income trading.
Interest and dividend revenues increased 38% to $142.3 million from $103.2
million in 1995, principally as a result of interest earned on higher margin
loan balances. Margin loan balances at year-end totalled $1.6 billion, a 16%
increase over the prior year. Average margin balances increased 55% year over
year.
Advisory and other revenues totalled $132.5 million, a 33% increase from
$100.0 million in 1995, primarily attributable to increases in asset management
advisory revenues and fees from correspondent services. Asset management
advisory revenues increased 41% to $77.6 million from $54.9 million in 1995.
Correspondent services fees increased 28% to $28.3 million in 1996 from $22.1
million in 1995. Revenues from net investment gains totalled $18.4 million as a
result of net realized gains and increases in the carrying value of investments.
Assets under management totalled $12.5 billion at year-end 1996.
Total operating expenses totalled $800.0 million, a 23% increase from $651.2
million in 1995.
Compensation and benefits expense increased 28% to $554.7 million from
$432.9 million, primarily as a result of increased incentive and commission
expenses.
Communications expense increased 13% to $38.4 million from $33.9 million,
reflecting expenses required to support increased levels of business activity.
Occupancy and equipment expense decreased 3% to $38.5 million from $39.8
million in 1995, due to the elimination of an expense provision which had been
recorded in 1995 related to vacating certain office space prior to expiration of
the lease of one of the Company's offices.
Interest expense increased 40% to $50.7 million from $36.2 million,
primarily due to the cost of financing increased margin loan balances.
page 30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Alex. Brown Incorporated
Floor brokerage, exchange and clearing fees increased 11% to $20.8 million
from $18.6 million, due to an increased volume of listed trades and brokerage
services.
Other operating expenses increased 8% to $97.0 million from $89.8 million,
primarily due to increased expenses associated with the higher level of business
activity.
The Company's effective tax rate for 1996 increased to 40.6% from 39.6% in
1995.
As a result of the above, net earnings increased 61% to $154.1 million from
$95.6 million in 1995. Primary and fully diluted earnings per share were $6.28
and $5.51, respectively, as compared to $4.11 and $3.60 in 1995.
The weighted average number of shares outstanding for purposes of calculating
earnings per share includes shares related to outstanding dilutive stock options
and is affected by the market price of the Company's Common Stock. Additionally,
the calculation of fully diluted earnings per share assumes the conversion into
Common Stock of the Company's outstanding convertible subordinated debt, if
dilutive. The combination of these factors can result in lower rates of increase
or higher rates of decrease in earnings per share as compared to the rates of
increase or decrease in net earnings.
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 55% to $103.2 million from $66.5
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 $100.0 million, a 23% increase from
$81.4 million in 1994, which was primarily attributable to increases in advisory
and investment revenues. Advisory revenues increased 29% to $54.9 million from
$42.6 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
24% 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.
page 31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Alex. Brown Incorporated
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 $4.11 and
$3.60, respectively, as compared to $3.06 and $2.70 in 1994.
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 1996, in its high yield operations, Alex.
Brown had $9.4 million of long inventory and $6.5 million of short inventory as
compared to $12.9 million of long inventory and $0.6 million of short inventory
at year-end 1995.
As of December 31, 1996, the carrying value of the Company's merchant banking
investments was $24.5 million, compared to $23.5 million at year-end 1995. Net
gains related to merchant banking investments were $9.0 million in 1996 compared
to $6.1 million in 1995. It is anticipated that merchant banking investments
will generally have a holding period of three years or more and 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
1996, $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 historically has been able to
obtain necessary bank borrowings and believes that it will continue to be able
to do so in the future. The Company and Alex. Brown have $450 million of unused
committed lines of credit under revolving credit agreements (the "Credit
Facilities") with various banks. The Credit Facilities expire between March 1997
and March 1999. The Credit Facilities and term loans contain various restrictive
financial 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 borrow-
page 32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Alex. Brown Incorporated
ings under the Credit Facilities at December 31, 1996. The Company and Alex.
Brown were in compliance with all restrictive covenants contained in the Credit
Facilities and term loans at December 31, 1996.
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, 1996, Alex.
Brown had aggregate net capital of $394.8 million, which exceeded its minimum
net capital requirement by $362.7 million.
During 1996, the Company repurchased a total of 517,448 shares of its Common
Stock at a cost of $16.1 million. As of December 31, 1996, the Company had a
remaining repurchase authorization of approximately 1.5 million shares. The
Company anticipates that, subject to market conditions, it will make additional
repurchases in the future.
Management of the Company believes that existing capital and credit
facilities, when combined with funds generated from operations, will provide the
Company with sufficient resources to meet its present and reasonably foreseeable
cash and capital needs.
Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
was issued in June 1996 and, effective January 1, 1997, establishes new criteria
for determining whether a transfer of financial assets in exchange for cash or
other consideration should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFASNo. 125 also establishes new accounting
requirements for pledged collateral. In December 1996, SFASNo. 127 was issued
which deferred the effective date of certain provisions of SFAS No. 125 until
January 1, 1998 related to repurchase agreements, securities lending and similar
transactions. The Company expects that there will be no material effect upon
implementing SFAS No. 125 on its financial position or results of operations.
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.
INFLATION
Because the Company's assets are, to a large extent, liquid in nature, they
are not significantly affected by inflation. However, the rate of inflation
affects the Company's expenses such as employee compensation, office space
leasing costs and communication charges, and increases therein may not be
readily recoverable in the price of services offered by the Company. To the
extent inflation results in rising interest rates and has other adverse effects
upon the securities markets and on the value of securities owned by the Company,
it may adversely affect the Company's financial position and results of
operations.
page 33
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31
- - ---------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------
<S> <C>
Revenues:
Commissions $ 201,896 $ 173,471 $ 140,026
Investment banking 414,891 293,375 197,494
Principal transactions (note 5) 167,815 139,383 120,119
Interest and dividends 142,307 103,190 66,485
Advisory and other 132,512 99,975 81,364
- - ---------------------------------------------------------------------------------------------------
Total revenues 1,059,421 809,394 605,488
- - ---------------------------------------------------------------------------------------------------
Operating expenses:
Compensation and benefits 554,711 432,880 329,516
Communications 38,388 33,934 28,160
Occupancy and equipment 38,504 39,758 31,671
Interest 50,668 36,204 21,920
Floor brokerage, exchange and clearing fees 20,755 18,646 16,230
Other operating expenses 97,013 89,797 59,710
- - ---------------------------------------------------------------------------------------------------
Total operating expenses 800,039 651,219 487,207
- - ---------------------------------------------------------------------------------------------------
Earnings before income taxes 259,382 158,175 118,281
Income taxes (note 12) 105,237 62,620 47,410
- - ---------------------------------------------------------------------------------------------------
Net earnings $ 154,145 $ 95,555 $ 70,871
===================================================================================================
Earnings per share:
Primary $ 6.28 $ 4.11 $ 3.06
===================================================================================================
Fully diluted $ 5.51 $ 3.60 $ 2.70
===================================================================================================
Weighted average number of shares outstanding:
Primary 24,563 23,267 23,124
===================================================================================================
Fully diluted 28,470 27,192 26,982
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 34
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
Alex. Brown Incorporated
<TABLE>
<CAPTION>
December 31
-------------------------------
(in thousands) 1996 1995
- - ----------------------------------------------------------------------------------------------
<S> <C>
Assets:
Cash and cash equivalents $ 109,800 $ 62,103
Receivables:
Customers (note 2) 1,487,041 1,277,869
Brokers, dealers and clearing organizations (note 3) 368,099 416,449
Current state income taxes 17,429 --
Other 59,097 62,056
Firm trading securities (note 4) 210,412 110,564
Securities purchased under agreements to resell 15,510 34,865
Deferred income taxes (note 12) 46,433 27,813
Memberships in exchanges, at cost (market $3,597 and $2,864) 323 323
Office equipment and leasehold improvements, at cost
less accumulated depreciation and amortization of
$44,580 and $40,483 (note 7) 48,079 41,189
Investment securities (note 6) 56,889 50,294
Loans to employees to purchase convertible subordinated
debentures (note 13) 54,454 48,320
Other assets 69,009 64,662
- - ----------------------------------------------------------------------------------------------
$2,542,575 $2,196,507
==============================================================================================
Liabilities and Stockholders' Equity:
Bank loans (note 7) $ 29,900 $ 120,008
Payables:
Cash management facility 83,733 70,338
Customers, including free credit balances 676,734 506,993
Brokers, dealers and clearing organizations (note 3) 495,947 480,621
Current federal and state income taxes 1,840 5,032
Other 378,981 294,643
Securities sold, not yet purchased (note 8) 48,223 54,276
Securities sold under repurchase agreements -- 2,460
7 5/8% Senior notes (note 7) 109,475 109,414
5 3/4% Convertible subordinated debentures (note 7) 11,797 11,851
Employee convertible subordinated debentures (note 13) 62,043 51,584
Commitments and contingencies (note 10)
Stockholders' equity (note 13):
Common stock of $.10 par value
Authorized 50,000,000 shares
Issued 24,030,822 shares in 1996
and 23,299,044 in 1995 2,403 2,330
Additional paid-in capital 125,882 113,234
Loans to employees to purchase common stock (10,320) (12,470)
Retained earnings 525,937 386,193
- - ----------------------------------------------------------------------------------------------
Total stockholders' equity 643,902 489,287
- - ----------------------------------------------------------------------------------------------
$2,542,575 $2,196,507
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 35
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31, 1994, 1995 and 1996
------------------------------------------------------------------
Loans To
Employees
Additional To Purchase Total
Common Paid-in Common Retained Stockholders'
(in thousands) Stock Capital Stock Earnings Equity
- - -------------------------------------------------------------------------------------------------------
<S> <C>
Balance at December 31, 1993,
as previously reported $1,536 $114,014 $(10,902) $241,017 $345,665
Three-for-two stock split 768 (768) -- -- --
- - -------------------------------------------------------------------------------------------------------
Balance at December 31, 1993,
as restated 2,304 113,246 (10,902) 241,017 345,665
Net earnings -- -- -- 70,871 70,871
Issuance of 707,608 shares
of common stock 71 7,934 (484) -- 7,521
Payments on employee loans -- -- 375 -- 375
Repurchase and retirement
of 2,609,889 shares of
common stock (261) (46,048) -- -- (46,309)
Compensation payable
in common stock 30 5,195 -- -- 5,225
Dividends paid -- -- -- (9,920) (9,920)
- - -------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 2,144 80,327 (11,011) 301,968 373,428
Net earnings -- -- -- 95,555 95,555
Issuance of 1,703,812 shares
of common stock 170 29,665 (2,465) -- 27,370
Payments on employee loans -- -- 1,006 -- 1,006
Repurchase and retirement
of 44,401 shares of
common stock (4) (1,214) -- -- (1,218)
Compensation payable
in common stock 20 4,456 -- -- 4,476
Dividends paid -- -- -- (11,330) (11,330)
- - -------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 2,330 113,234 (12,470) 386,193 489,287
Net earnings -- -- -- 154,145 154,145
Issuance of 918,676 shares
of common stock 92 18,995 -- -- 19,087
Payments on employee loans -- -- 2,150 -- 2,150
Repurchase and retirement
of 517,448 shares of
common stock (52) (16,023) -- -- (16,075)
Compensation payable
in common stock 33 9,676 -- -- 9,709
Dividends paid -- -- -- (14,401) (14,401)
- - -------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $2,403 $125,882 $(10,320) $525,937 $643,902
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 36
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------
(in thousands) 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net earnings $ 154,145 $ 95,555 $ 70,871
Reconciliation of net earnings to net cash
provided by (used for) operating activities:
Depreciation and amortization 12,921 13,158 10,263
Non-cash compensation expense 12,656 7,096 5,225
Gain on investment securities (18,386) (17,006) (15,576)
Other (201) 289 7
(Increase) decrease in assets:
Receivables (171,755) (677,989) (63,368)
Firm trading securities (99,848) (17,212) (14,345)
Securities purchased under agreements to resell 19,355 (34,865) --
Deferred income taxes (18,620) (10,138) (10,696)
Other assets (5,390) (28,349) (18,595)
Increase (decrease) in liabilities:
Payables 266,213 534,725 33,166
Securities sold, not yet purchased (6,053) 28,434 (1,560)
- - -------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 145,037 (106,302) (4,608)
- - -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds (payments):
Short-term loans (86,000) 54,321 622
Cash management facility 13,395 8,042 (6,541)
Securities sold under repurchase agreements (2,460) 2,460 --
Proceeds from term loans -- -- 15,000
Payments on term loans (4,108) (7,256) (8,652)
Proceeds from senior notes -- 109,392 --
Issuance of common stock 19,286 14,656 6,973
Repurchase of common stock (16,075) (1,218) (46,309)
Dividends paid to stockholders (14,401) (11,330) (9,920)
- - -------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (90,363) 169,067 (48,827)
- - -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of office equipment and leasehold
improvements (18,768) (24,233) (15,190)
Purchase of investment securities (21,181) (14,964) (18,242)
Sale of investment securities 32,972 14,511 53,886
- - -------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (6,977) (24,686) 20,454
- - -------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 47,697 38,079 (32,981)
Cash and cash equivalents at beginning of year 62,103 24,024 57,005
- - -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 109,800 $ 62,103 $ 24,024
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
page 37
<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, operating results and financial
condition 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 quoted market prices, adjusted
for liquidity and other relevant factors. In addition, the carrying values are
reduced when the Company determines that the estimated 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 2.5 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.
page 38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
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.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, and has
elected to continue to apply the intrinsic value method under Accounting
Principles Board ("APB") No. 25, Accounting for Stock Issued to Employees to
account for stock-based employee compensation. 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. SFAS 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 for stock-based
employee compensation grants made in 1995 and subsequent years is required to be
presented in the notes to the financial statements. The pro forma disclosures
are presented in note 13 to the consolidated financial statements.
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in June 1996 and, effective January
1, 1997, establishes new criteria for determining whether a transfer of
financial assets in exchange for cash or other consideration should be accounted
for as a sale or as a pledge of collateral in a secured borrowing. SFASNo. 125
also establishes new accounting requirements for pledged collateral. In December
1996, SFASNo. 127 was issued which deferred the effective date of certain
provisions of SFASNo. 125 until January 1, 1998 related to repurchase
agreements, securities lending and similar transactions. The Company expects
that there will be no material effect upon implementing SFASNo. 125 on its
financial position or results of operations.
Certain amounts in prior periods have been reclassified to conform to the
1996 presentation. Per share information and shares outstanding have been
adjusted to reflect a three-for-two stock split paid on January 15, 1997.
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):
1996 1995
- - --------------------------------------------------------------------------------
Securities failed to deliver $ 9,392 $ 16,107
Deposits paid for securities borrowed 329,134 357,365
Other 29,573 42,977
- - --------------------------------------------------------------------------------
Total receivables $368,099 $416,449
================================================================================
Securities failed to receive $ 13,610 $ 15,146
Deposits received for securities loaned 454,109 433,808
Other 28,228 31,667
- - --------------------------------------------------------------------------------
Total payables $495,947 $480,621
================================================================================
page 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
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):
1996 1995
- - --------------------------------------------------------------------------------
United States government and agencies thereof $ 6,440 $ 9,315
Asset/Mortgage-backed 30,913 1
States and municipalities 97,306 36,607
Corporate debt 22,810 42,945
Equities and convertible securities 52,943 21,696
- - --------------------------------------------------------------------------------
$210,412 $110,564
================================================================================
5) Principal Transactions Revenue
The components of principal transactions revenue were as follows (in thousands):
1996 1995 1994
- - --------------------------------------------------------------------------------
Equity trading $139,146 $107,820 $ 72,876
Equity derivatives (278) (921) 328
Fixed income trading 29,125 32,952 46,149
Fixed income derivatives (178) (468) 766
- - --------------------------------------------------------------------------------
$167,815 $139,383 $120,119
================================================================================
The Company's equity trading operations include trading in over the counter
equities, listed equities, convertible securities and non-investment grade (high
yield) corporate debt. The Company's fixed income trading activities include
trading in U.S. government and government agency obligations, asset-backed and
mortgage-backed securities, state and municipal obligations and investment grade
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, 1996 and average fair values during 1996 and 1995 were not
material. There were no open futures contracts at December 31, 1995.
6) Investment Securities
Investment securities consisted of the following (in thousands):
1996 1995
- - --------------------------------------------------------------------------------
Merchant banking investments $24,457 $23,546
Investment partnerships 18,940 17,703
Mutual funds 6,700 3,359
U.S. government obligations 4,477 650
Equities 2,315 5,036
- - --------------------------------------------------------------------------------
$56,889 $50,294
================================================================================
page 40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
7) Borrowings
BANK LOANS
Bank loans were collateralized as follows (in thousands):
1996 1995
- - --------------------------------------------------------------------------------
Customers' margin securities $14,000 $100,000
Office equipment and leasehold improvements -- 1,308
Unsecured 15,900 18,700
- - --------------------------------------------------------------------------------
$29,900 $120,008
================================================================================
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 (6.3% at December 31, 1996).
The weighted average interest rate on these loans was 6.8% at December 31, 1996.
The average balances of such loans outstanding were $156,139,000 during 1996 at
a weighted average interest rate of 5.7% and $120,507,000 during 1995 at a
weighted average interest rate of 6.4%.
A term loan of $4,100,000 and $5,300,000 at December 31, 1996 and 1995,
respectively, is unsecured and bears interest at a variable rate based on the
London Interbank Offered Rate (5.5% at December 31, 1996). The weighted average
interest rates were 6.1% during 1996 and 6.9% during 1995. The loan matures as
follows: $2,350,000 in 1997 and $1,750,000 in 1998.
A term loan of $11,800,000 and $13,400,000 at December 31, 1996 and 1995,
respectively, is unsecured and bears interest at a variable rate based on the
federal funds rate. The weighted average interest rates were 5.9% during 1996
and 6.6% during 1995. The loan matures as follows: $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 5 3/4% and are convertible
into the Company's common stock at the rate of one share of common stock for
each $17.35 of principal amount of debentures. The debentures are redeemable at
the option of the Company at 100.5% through June 11, 1997 and at par thereafter.
During 1996 and 1995, $75,000 and $13,040,000 par value, respectively, of the
debentures were converted into 4,320 and 751,428 shares, respectively, of the
Company's common stock.
CREDIT FACILITIES
The Company and Alex. Brown have $450 million of unused committed lines of
credit under revolving credit agreements (the "Credit Facilities") with various
banks. The Credit Facilities expire between March 1997 and March 1999. The
Credit Facilities and term loans contain various restrictive financial
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, 1996. The Company and Alex. Brown were in
compliance with all restrictive covenants contained in the Credit Facilities and
term loans at December 31, 1996.
page 41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
INTEREST PAYMENTS
Interest payments, including interest payments on repurchase agreements,
securities loaned, senior notes and convertible subordinated debentures, were
$49,810,000, $32,210,000 and $20,381,000 during 1996, 1995 and 1994,
respectively.
8) Securities Sold, Not Yet Purchased
Securities sold, not yet purchased consisted of the following (in thousands):
1996 1995
- - --------------------------------------------------------------------------------
United States government and agencies $16,126 $34,958
States and municipalities 379 67
Corporate debt 7,310 5,593
Equities and convertible securities 24,408 13,658
- - --------------------------------------------------------------------------------
$48,223 $54,276
================================================================================
Securities sold, not yet purchased represent obligations to purchase securities
at prevailing market prices. These transactions result in off-balance-sheet risk
since Alex. Brown's ultimate cost to satisfy the obligations is dependent upon
future prices of the securities and may exceed the amounts recognized in the
Consolidated Statements of Financial Condition.
9) Net Capital Requirements
Alex. Brown is required to comply with the net capital rule of the Securities
and Exchange Commission. The rule may limit the Company's ability to withdraw
capital from Alex. Brown. Alex. Brown has consistently exceeded the minimum net
capital requirements under the rule. At December 31, 1996, Alex. Brown's net
capital was $394,821,000 which exceeded net capital rule requirements by
$362,705,000. Alex. Brown has two London-based subsidiaries which are subject to
the capital requirements of the Securities and Futures Authority (SFA). At
December 31, 1996, these subsidiaries were in compliance with the SFA capital
adequacy requirements.
10) Commitments and Contingencies
LEASES
The Company's subsidiaries are obligated under operating leases for office
facilities and equipment expiring at various dates to 2013. The approximate
annual minimum rentals under the leases as of December 31, 1996 were as follows
(in thousands):
Years Ending December 31
- - --------------------------------------------------------------------------------
1997 $ 14,630
1998 14,557
1999 15,085
2000 14,655
2001 13,863
2002 and thereafter 112,858
- - --------------------------------------------------------------------------------
Rent expense, including equipment rentals, was $18,848,000, $20,720,000, and
$16,096,000 including $2,474,000, $2,450,000 and $2,445,000 to related parties,
for 1996, 1995 and 1994, respectively.
page 42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
LETTERS OF CREDIT
At December 31, 1996, Alex. Brown was contingently liable for up to $55,979,000
under unsecured letters of credit used to satisfy required margin deposits at
five securities clearing corporations.
INVESTMENT COMMITMENTS
At December 31, 1996, the Company had committed to invest up to $72.6 million in
certain investment partnerships, including $52.4 million in two merchant banking
partnerships.
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.
page 43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
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.
11) Fair Value of Financial Instruments
RECEIVABLES
Receivables from customers and brokers, dealers and clearing organizations
include margin loans which are payable on demand, amounts due on open
transactions which usually settle within a few days and cash deposits made in
connection with securities borrowed transactions which normally can be closed
out within a few days. The carrying amounts of these receivables, which are
generally secured by marketable securities, and other receivables approximate
fair value.
FIRM TRADING AND INVESTMENT SECURITIES (LONG AND SHORT)
Firm trading and investment securities are carried in the consolidated financial
statements at market value (see notes 1, 4, 6 and 8).
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, 1996 and 1995 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.
page 44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
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):
1996 1995
- - --------------------------------------------------------------------------------
7 5/8% Senior notes $110,715 $117,469
5 3/4% Convertible subordinated debentures 33,105 19,413
The fair values are based on quoted market prices. At December 31, 1996, the
convertible subordinated debentures were callable at the Company's option at
$11,944,000.
12) Income Taxes
The components of income tax expense were as follows (in thousands):
1996 1995 1994
- - --------------------------------------------------------------------------------
Federal $ 86,108 $ 51,153 $ 38,649
State and local 19,129 11,467 8,761
- - --------------------------------------------------------------------------------
$105,237 $ 62,620 $ 47,410
================================================================================
Current $123,857 $ 72,758 $ 58,106
Deferred (18,620) (10,138) (10,696)
- - --------------------------------------------------------------------------------
$105,237 $ 62,620 $ 47,410
================================================================================
Income tax expense is reconciled to amounts computed by applying the federal
corporate tax rate to earnings before income taxes as follows (in thousands):
1996 1995 1994
- - --------------------------------------------------------------------------------
Tax at federal statutory rate $ 90,784 $ 55,361 $ 41,398
State and local income taxes, net of
federal income tax benefit 13,899 7,454 5,695
Other, net 554 (195) 317
- - --------------------------------------------------------------------------------
$105,237 $ 62,620 $ 47,410
================================================================================
The components of the net deferred income tax asset were as follows (in
thousands):
1996 1995
- - --------------------------------------------------------------------------------
Deferred income tax assets:
Unrealized loss-- Firm securities $ 1,866 $ 3,584
Accrued expenses 47,779 28,585
Depreciation 3,346 3,892
Other 2,866 1,371
- - --------------------------------------------------------------------------------
Total deferred income tax assets 55,857 37,432
- - --------------------------------------------------------------------------------
Deferred income tax liabilities:
Unrealized profit--Firm securities 4,506 4,667
Other investments 2,017 1,852
Depreciation 1,365 1,426
Other 1,536 1,674
- - --------------------------------------------------------------------------------
Total deferred income tax liabilities 9,424 9,619
- - --------------------------------------------------------------------------------
Net deferred income tax asset $ 46,433 $ 27,813
================================================================================
page 45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
There was no valuation allowance relating to deferred income tax assets at
December 31, 1996 and 1995. Income tax payments were $138,759,000, $64,903,000
and $69,438,000 during 1996, 1995 and 1994, respectively.
13) Employee Benefit Plans
EQUITY INCENTIVE PLAN
Pursuant to the 1991 Equity Incentive Plan (the "Plan"), the Company may make
stock based awards, including stock options, convertible debentures and
restricted stock awards, to key employees in any calendar year in respect of a
maximum of 7.5% of the total shares of common stock of the Company outstanding
on the first day of such year. During 1995 and 1994, the Company sold 87,324 and
27,375 shares of common stock, respectively, at market to certain employees
pursuant to the Plan. The Company has also sold convertible subordinated
debentures to certain employees pursuant to the Plan. The debentures are
generally convertible into the Company's common stock three years after the date
issued or 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 to finance the entire purchase price of
the stock and debentures. The Company has agreed to forgive certain loans over
six years if the Company's return on equity exceeds certain targets during the
period and may forgive portions of other loans on a discretionary basis. Loan
forgiveness resulted in compensation expense of $9,287,000, $3,952,000 and
$3,054,000 in 1996, 1995 and 1994, respectively. Information related to
debentures outstanding at December 31, 1996 and issued in January 1997 was as
follows:
Weighted average
Principal amount Weighted average conversion
of debentures interest rate Due date price/share
- - --------------------------------------------------------------------------------
$ 356,000 8.125% 1997 $ 5.67
1,578,000 6.750% 1998 17.00
1,900,000 6.375% 1999 15.33
3,725,000 5.375% 2000 19.22
26,867,000 5.858% 2001 17.16
15,544,000 6.106% 2002 32.57
25,555,000 6.313% 2003 42.19
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 granted since January 1993 are
generally 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.
page 46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
The following table sets forth activity relating to the number of shares and
weighted average exercise prices of stock options (options granted include
amounts granted through January of the following year) (number of shares in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- - ----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
- - ----------------------------------------------------------------------------------------------------
<S> <C>
Beginning of period 3,227 $21.22 3,292 $16.42 3,162 $13.79
Granted 682 55.83 660 33.18 619 24.26
Exercised (593) 11.38 (657) 9.40 (374) 7.01
Forfeited (125) 24.71 (68) 18.55 (115) 16.99
- - ----------------------------------------------------------------------------------------------------
End of period 3,191 $30.31 3,227 $21.22 3,292 $16.42
Exercisable at end of period 1,261 $20.30 1,339 $15.49 1,422 $12.27
====================================================================================================
</TABLE>
The following table sets forth information about stock options outstanding at
December 31, 1996 and granted through January 1997 (number of shares in
thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Weighted Average Weighted Average Weighted Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices Shares Contractual Life Price Shares Price
- - -------------------------------------------------------------------------------------------------
<S> <C>
$11.63-$17.92 902 3.1 years $17.19 747 $17.04
$20.89-$25.65 995 8.7 $22.86 395 $22.58
$32.24-$43.41 641 9.1 $33.37 119 $33.25
$56.80 653 10.2 $56.80 -- --
- - -------------------------------------------------------------------------------------------------
3,191 7.2 $30.31 1,261 $20.30
- - -------------------------------------------------------------------------------------------------
</TABLE>
The Company applies the intrinsic value method in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its options in the
financial statements. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFASNo. 123, the
Company's net earnings would have been the pro forma amounts indicated below:
1996 1995
- - --------------------------------------------------------------------------------
Net earnings As reported $154,145 $95,555
Pro forma $153,589 $95,330
Primary earnings per share As reported $6.28 $4.11
Pro forma $6.28 $4.11
Fully diluted earnings per share As reported $5.51 $3.60
Pro forma $5.54 $3.61
Pursuant to SFAS No. 123, pro forma net earnings reflect only options granted in
1996 and 1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting periods and compensation cost for options granted prior to January 1,
1995 is not considered.
The weighted average fair values of options granted during 1996 and 1995 were
$3,318,000 and $2,244,000, respectively, on the dates of grant. The fair values
of options granted were calculated using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1996 and
1995, respectively: risk-free interest rate of 5.7% and 7.8%; expected
volatility of 41% in both years; dividend yield of 1.9% and 2.3%; expected
dividend growth rate of 26.4% and 27.1%; and expected lives of eight years and
expected forfeitures of 18% for both years.
page 47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alex. Brown Incorporated
RETIREMENT PLANS
The Company maintains a 401(k) deferred compensation and profit sharing plan
(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 $12,500,000, $9,600,000 and $5,000,000 for
1996, 1995 and 1994, 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 1,500,000 shares. A total of 1,139,478 shares have
been issued under the plan, including 152,662 shares in 1996.
EQUITY COMPENSATION PLAN
During 1996, 1995 and 1994, 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). The Company may allow participants to extend the deferral period.
These restrictions are removed in the event of death, disability or retirement.
Pursuant to the Equity Compensation Plan, $18,240,000, $11,102,000, and
$7,080,000 of cash compensation was withheld and replaced by 240,942, 244,733
and 195,087 shares of the Company's common stock and interests in investment
accounts for 1996, 1995 and 1994, 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 Company may allow participants to extend
the deferral period after vesting. 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 $1,305,000
for 2000, $2,325,000 for 1999, $2,956,000 for 1998, $3,640,000 for 1997,
$3,498,000 for 1996, $2,414,000 for 1995 and $1,413,000 for 1994).
page 48
<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, 1996 and 1995,
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,
1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
January 20, 1997
page 49
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------------
(in thousands, except per share amounts) 1996 1995 1994 1993 1992
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Results of Operations:
Revenues $ 1,059,421 $ 809,394 $ 605,488 $ 628,203 $ 455,724
Operating expenses 800,039 651,219 487,207 479,868 360,340
Earnings before income
taxes 259,382 158,175 118,281 148,335 95,384
Income taxes 105,237 62,620 47,410 59,109 36,773
- - ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 154,145 $ 95,555 $ 70,871 $ 89,226 $ 58,611
=====================================================================================================================
Earnings per share:
Primary $ 6.28 $ 4.11 $ 3.06 $ 3.74 $ 2.48
Fully diluted $ 5.51 $ 3.60 $ 2.70 $ 3.40 $ 2.33
Cash dividends per share $ .637 $ .516 $ .450 $ .383 $ .300
Weighted average shares
outstanding:
Primary 24,563 23,267 23,124 23,873 23,613
Fully diluted 28,470 27,192 26,982 26,713 25,596
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31
- - -----------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------
<S> <C>
Financial Condition:
Total assets $2,542,575 $2,196,507 $1,346,433 $1,283,423 $1,085,034
Long-term debt $ 11,150 $ 15,900 $ 20,009 $ 13,336 $ 15,160
Senior notes $ 109,475 $ 109,414 -- -- --
Convertible subordinated
debentures $ 73,840 $ 63,435 $ 59,360 $ 56,148 $ 28,723
Total stockholders' equity $ 643,902 $ 489,287 $ 373,428 $ 345,665 $ 274,395
=====================================================================================================
</TABLE>
Per share information and shares outstanding have been adjusted to reflect a
three-for-two stock split paid on January 15, 1997.
page 50
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
Alex. Brown Incorporated
<TABLE>
<CAPTION>
Quarters Ended 1996
-------------------------------------------------------
(in thousands, except per share amounts) December 31 September 30 June 30 March 31
- - ---------------------------------------------------------------------------------------------------
<S> <C>
Revenues $ 264,372 $213,973 $310,235 $ 270,840
Operating expenses 200,609 169,002 226,853 203,574
- - ---------------------------------------------------------------------------------------------------
Earnings before income taxes 63,763 44,971 83,382 67,266
Income taxes 26,462 18,664 33,541 26,570
- - ---------------------------------------------------------------------------------------------------
Net earnings $ 37,301 $ 26,307 $ 49,841 $ 40,696
===================================================================================================
Earnings per share:
Primary $ 1.51 $ 1.07 $ 2.01 $ 1.67
===================================================================================================
Fully diluted $ 1.34 $ 0.95 $ 1.77 $ 1.48
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended 1995
- - -----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) December 31 September 30 June 30 March 31
- - -----------------------------------------------------------------------------------------------------
<S> <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 $ 1.39 $ 0.96 $ 1.00 $ 0.73
=====================================================================================================
Fully diluted $ 1.23 $ 0.86 $ 0.88 $ 0.64
</TABLE>
Per share information has been adjusted to reflect a three-for-two stock split
paid on January 15, 1997.
page 51
<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, 1996, there were approximately 469 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
<TABLE>
<CAPTION>
1996 High Low
- - ----------------------------------------------------------------------------------------------
<S> <C>
First Quarter $35.75 $26.33
Second Quarter $39.92 $31.25
Third Quarter $39.42 $28.33
Fourth Quarter $48.42 $37.58
</TABLE>
<TABLE>
<CAPTION>
1995 High Low
- - ----------------------------------------------------------------------------------------------
<S> <C>
First Quarter $26.00 $19.75
Second Quarter $31.75 $25.42
Third Quarter $40.42 $28.08
Fourth Quarter $38.83 $26.67
</TABLE>
Dividend Information
<TABLE>
<CAPTION>
Dividend
Per Share Declaration Date Record Date Payment Date
- - ----------------------------------------------------------------------------------------------
<S> <C>
1996 $.133 April 19, 1996 April 29, 1996 May 8, 1996
$.167 July 23, 1996 August 2, 1996 August 13, 1996
$.167 October 22, 1996 November 1, 1996 November 12, 1996
$.17 January 17, 1997 January 30, 1997 February 10, 1997
1995 $.117 April 21, 1995 May 1, 1995 May 10, 1995
$.133 July 25, 1995 August 7, 1995 August 16, 1995
$.133 October 19, 1995 October 30, 1995 November 9, 1995
$.133 January 24, 1996 February 5, 1996 February 15, 1996
</TABLE>
Form 10-K
A copy of the Company's Annual Report on Form 10-K for 1996 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,
1 South Street, Baltimore, Maryland 21202.
Auditors
KPMG Peat Marwick LLP
111 South Calvert Street
Baltimore, Maryland 21202
(410) 783-8300
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 851-9677
page 55
<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, 1996
Alex. Brown Incorporated
<PAGE>
ALEX. BROWN INCORPORATED
Annual Report on Form 10-K
Index to Exhibits
Exhibit No. Exhibit See Note
----------- ------- --------
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 The Chase Manhattan Bank,
Trustee, relating to the Company's
7 5/7% 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 30 through 51 and 55 of
the Registrant's Annual Report
to Stockholders for the year
ended December 31, 1996 (12)
21. Subsidiaries of the Registrant (2)
23. Consent of KPMG Peat Marwick __
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, 1996.
Exhibit 4.3
March 25, 1997
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 and Revolving Credit Facility Agreement
dated as of February 27, 1997 between Alex. Brown Incorporated
and various banks including The Chase Manhattan Bank, as
Documentation Agent, and The Bank of New York, as the
Administrative Agent;
(ii) Loan Agreement dated July 14, 1994 between Alex. Brown & Sons
Incorporated and Signet Bank/Maryland;
(iii) Loan Agreement dated April 8, 1993 between Alex. Brown & Sons
Incorporated and the First National Bank of Maryland.
The amount of 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 as of the date hereof.
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
12/31/96 12/31/95 12/31/94
-------------------- -------------------- --------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
------- ------- ------- ------- ------- -------
<S> <C>
Weighted average shares
outstanding:
Common stock 23,987 23,987 22,646 22,646 22,738 22,738
Stock options 576 846 621 831 386 491
Convertible subordinated
debentures -- 3,637 -- 3,715 -- 3,753
-------- ------- ------- ------- ------- -------
24,563 28,470 23,267 27,192 23,124 26,982
======== ======= ======= ======= ======= =======
Net earnings for
calculating earnings
per share:
Net earnings $154,145 154,145 95,555 95,555 70,871 70,871
Interest expense on
convertible subordinated
debentures, net of tax -- 2,648 -- 2,325 -- 2,059
-------- ------- ------- ------- ------- -------
$154,145 156,793 95,555 97,880 70,871 72,930
======== ======= ======= ======= ======= =======
Earnings per share $ 6.28 5.51 4.11 3.60 3.06 2.70
======== ======= ======= ======= ======= =======
</TABLE>
*Per share information and shares outstanding have been adjusted to reflect the
three-for-two stock split paid on January 15, 1997.
Exhibit 12
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Computation of Consolidated Ratio of Earnings to Fixed Charges
(dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C>
Earnings before income taxes $ 259,382 158,175 118,281 148,335 95,384
Fixed charges:
Interest expense 50,668 36,204 21,920 14,924 10,587
Portion of rental
expense representative
of interest factor* 6,283 6,907 5,365 4,943 5,025
-------- ------- ------- ------- -------
Earnings available for fixed charges $ 316,333 201,286 145,566 168,202 110,996
======== ======= ======= ======= =======
Fixed charges:
Interest expense $ 50,668 36,204 21,920 14,924 10,587
Portion of rental expense
representative of interest factor* 6,283 6,907 5,365 4,943 5,025
-------- ------- ------- ------- -------
Total Fixed Charges $ 56,951 43,111 27,285 19,867 15,612
======== ======= ======= ======= =======
Consolidated ratio of earnings
to fixed charges 5.6 4.7 5.3 8.5 7.1
======== ======= ======= ======= =======
</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
20, 1997, relating to the consolidated statements of financial condition of
Alex. Brown Incorporated and subsidiaries as of December 31, 1996 and 1995, 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, 1996,
which report appears in the December 31, 1996 annual report on Form 10-K of
Alex. Brown Incorporated incorporated by reference herein.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 109,800
<RECEIVABLES> 1,931,666
<SECURITIES-RESALE> 15,510
<SECURITIES-BORROWED> 0<F1>
<INSTRUMENTS-OWNED> 267,301
<PP&E> 48,079
<TOTAL-ASSETS> 2,542,575
<SHORT-TERM> 18,750
<PAYABLES> 1,637,235
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0<F2>
<INSTRUMENTS-SOLD> 48,223
<LONG-TERM> 194,465
<COMMON> 2,403
0
0
<OTHER-SE> 641,499
<TOTAL-LIABILITY-AND-EQUITY> 2,542,575
<TRADING-REVENUE> 167,815
<INTEREST-DIVIDENDS> 142,307
<COMMISSIONS> 201,896
<INVESTMENT-BANKING-REVENUES> 414,891
<FEE-REVENUE> 132,512
<INTEREST-EXPENSE> 50,668
<COMPENSATION> 554,711
<INCOME-PRETAX> 259,382
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 154,145
<EPS-PRIMARY> 6.28
<EPS-DILUTED> 5.51
<FN>
<F1>Included as part of receivables.
<F2>Included as part of payables.
</FN>
</TABLE>
