<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 1, 1997
------------------
BANKERS TRUST NEW YORK CORPORATION
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK
-----------------------------------------------------------------
(State or other jurisdiction of incorporation)
1-5920 13-6180473
---------------------- -------------------------------
(Commission file number) (IRS employer identification no.)
130 LIBERTY STREET, NEW YORK, NEW YORK 10006
-----------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 250-2500
--------------
<PAGE>
ITEM 5 OTHER EVENTS
As previously reported by Bankers Trust New York Corporation (the "Corporation")
on its Current Report on Form 8-K filed September 4, 1997, Alex. Brown
Incorporated ("ABI") merged into BT Alex. Brown Holdings Incorporated, a wholly-
owned subsidiary of the Corporation (the "Merger"). The Merger was accounted
for as a "pooling of interests" under generally accepted accounting principles.
The first quarter Alex. Brown historical consolidated statements of financial
condition as of March 31, 1997 (unaudited) and December 31, 1996, and the
related interim statements of earnings, cash flows and stockholders' equity for
the three months ended March 31, 1997 and 1996, unaudited notes to the
consolidated financial statements and Management's Discussion and Analysis of
Results of Operations and Financial Condition are contained in Exhibit 99.1.
The second quarter Alex. Brown historical consolidated statements of financial
condition as of June 30, 1997 (unaudited) and December 31, 1996, and the related
interim statements of earnings for the three and six months ended June 30, 1997
and 1996 and statements of cash flows and stockholders' equity for the six
months ended June 30, 1997 and 1996, unaudited notes to the consolidated
financial statements and Management's Discussion and Analysis of Results of
Operations and Financial Condition are contained in Exhibit 99.2.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
(99.1) The first quarter Alex. Brown historical consolidated statements of
financial condition as of March 31, 1997 (unaudited) and December 31, 1996, and
the related interim statements of earnings, cash flows and stockholders' equity
for the three months ended March 31, 1997 and 1996, unaudited notes to the
consolidated financial statements and Management's Discussion and Analysis of
Results of Operations and Financial Condition.
(99.2) The second quarter Alex. Brown historical consolidated statements of
financial condition as of June 30, 1997 (unaudited) and December 31, 1996, and
the related interim statements of earnings for the three and six months ended
June 30, 1997 and 1996 and statements of cash flows and stockholders' equity for
the six months ended June 30, 1997 and 1996, unaudited notes to the consolidated
financial statements and Management's Discussion and Analysis of Results of
Operations and Financial Condition.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BANKERS TRUST NEW YORK CORPORATION
September 12, 1997
by: /s/ RICHARD H. DANIEL
--------------------------------
RICHARD H. DANIEL
Vice Chairman and Controller
(Principal Financial Officer)
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES Exhibit 99.1
Consolidated Statements of Earnings
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
Revenues:
Commissions $ 58,222 $ 52,005
Investment banking 74,871 101,838
Principal transactions 31,994 52,508
Interest and dividends 35,653 32,909
Advisory and other 32,779 31,580
-------- --------
Total revenues 233,519 270,840
-------- --------
Operating expenses:
Compensation and benefits 122,434 145,575
Communications 10,704 8,642
Occupancy and equipment 9,144 8,763
Interest 12,308 12,185
Floor brokerage, exchange
and clearing fees 5,829 4,943
Other operating expenses 21,597 23,466
-------- --------
Total operating expenses 182,016 203,574
-------- --------
Earnings before income taxes 51,503 67,266
Income taxes 20,344 26,570
-------- --------
Net earnings $ 31,159 $ 40,696
======== ========
Earnings per share:
Primary $ 1.23 $ 1.67
======== ========
Fully diluted $ 1.10 $ 1.48
======== ========
Weighted average number of shares outstanding:
Primary 25,294 24,316
======== ========
Fully diluted 29,079 28,009
======== ========
Cash dividends declared per share $ 0.17 $ 0.133
======== ========
See accompanying notes to consolidated financial statements.
1
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
ASSETS
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
Cash and cash equivalents $ 71,689 $ 109,800
Receivables:
Customers 1,501,801 1,487,041
Brokers, dealers and clearing organizations 339,638 368,099
Current state and federal income taxes 4,139 17,429
Other 53,360 59,097
Firm trading securities (Note 2) 231,783 210,412
Securities purchased under agreements to resell 42,920 15,510
Deferred income taxes 50,194 46,433
Memberships in exchanges, at cost
(market $3,836 and $3,597) 323 323
Office equipment and leasehold improvements,
at cost less accumulated depreciation and
amortization of $47,589 and $44,580 56,795 48,079
Investment securities (Note 5) 57,742 56,889
Loans to employees to purchase convertible
subordinated debentures (Note 6) 60,657 54,454
Other assets 81,901 69,009
---------- ----------
$2,552,942 $2,542,575
========== ==========
(continued)
2
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Financial Condition (continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
Bank loans $ 110,700 $ 29,900
Payables:
Cash management facility 61,864 83,733
Customers, including free credit balances 560,202 676,734
Brokers, dealers and clearing organizations 653,320 495,947
Current federal and state income taxes 4,223 1,840
Other 196,209 378,981
Securities sold, not yet purchased (Note 2) 70,133 48,223
7 5/8% Senior notes 109,490 109,475
5 3/4% Convertible subordinated debentures 11,797 11,797
Employee convertible subordinated debentures (Note 6) 72,611 62,043
Commitments and contingencies (Note 7)
Stockholders' equity (Note 6):
Common stock of $.10 par value
Authorized 50,000,000 shares
Issued and outstanding 24,920,106 shares in 1997
and 24,030,822 shares in 1996 2,492 2,403
Additional paid-in capital 156,371 125,882
Loans to employees to purchase common stock (9,392) (10,320)
Retained earnings 552,922 525,937
---------- ----------
Total stockholders' equity 702,393 643,902
---------- ----------
$2,552,942 $2,542,575
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Loans To
Employees
Additional To Purchase Total
Common Paid-in Common Retained Stockholders'
Stock Capital Stock Earnings Equity
----- ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Three months ended March 31, 1997
Balance at December 31, 1996 $2,403 $125,882 $(10,320) $525,937 $643,902
Net earnings - - - 31,159 31,159
Issuance of 665,889 shares of
common stock 66 19,627 - - 19,693
Payments on employee loans - - 520 - 520
Repurchase and retirement of
4,866 shares of common stock - (201) - - (201)
Compensation payable
in common stock 23 11,063 - - 11,086
Loan forgiveness - - 408 - 408
Dividends paid - - - (4,174) (4,174)
------ -------- -------- -------- --------
Balance at March 31, 1997 $2,492 $156,371 $ (9,392) $552,922 $702,393
====== ======== ======== ======== ========
Three months ended March 31, 1996
Balance at December 31, 1995 $2,330 $113,234 $(12,470) $386,193 $489,287
Net earnings - - - 40,696 40,696
Issuance of 563,712 shares of
common stock 56 9,987 - - 10,043
Payments on employee loans - - 1,769 - 1,769
Repurchase and retirement of
2,901 shares of common stock - (79) - - (79)
Compensation payable
in common stock 26 7,061 - - 7,087
Loan forgiveness - - 52 - 52
Dividends paid - - - (3,175) (3,175)
------ -------- -------- -------- --------
Balance at March 31, 1996 $2,412 $130,203 $(10,649) $423,714 $545,680
====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 31,159 $ 40,696
Reconciliation of net earnings to net cash
used for operating activities:
Depreciation and amortization 2,675 3,166
Non-cash compensation awards 16,882 10,037
Gain on investment securities (703) (5,405)
Other (280) (66)
(Increase) decrease in assets:
Receivables 32,728 (142,953)
Firm trading securities (21,371) (56,584)
Deferred income taxes (3,761) (1,557)
Securities purchased under agreements to resell (27,410) 6,615
Other assets (13,223) (22,515)
Increase in liabilities:
Payables (139,548) 37,811
Securities sold, not yet purchased 21,910 (5,066)
--------- ---------
Net cash used for operating activities (100,942) (135,821)
--------- ---------
Cash flows from financing activities:
Net proceeds (payments):
Short-term loans 82,000 73,000
Securities sold under repurchase agreements 0 (2,460)
Cash management facility (21,869) 13,339
Payments on term loans (1,200) (1,996)
Issuance of common stock 19,486 10,501
Repurchase of common stock (201) (79)
Dividends paid to stockholders (4,174) (3,175)
--------- ---------
Net cash provided by financing activities 74,042 89,130
--------- ---------
Cash flows from investing activities:
Purchase of office equipment and leasehold improvements (11,061) (1,590)
Purchase of investment securities (5,705) (6,247)
Sale of investment securities 5,555 10,583
--------- ---------
Net cash provided by (used for) investing activities (11,211) 2,746
--------- ---------
Net decrease in cash and cash equivalents (38,111) (43,945)
Cash and cash equivalents at beginning of period 109,800 62,103
--------- ---------
Cash and cash equivalents at end of period $ 71,689 $ 18,158
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997
(Unaudited)
(1) The accompanying consolidated financial statements do not include all of the
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments considered
necessary to fairly reflect Alex. Brown Incorporated's (the "Company")
financial position and results of operations, consisting of normal recurring
adjustments, have been included. Certain revenue and expense items in 1996
have been reclassified to conform to the current year presentation.
(2) Firm trading securities and securities sold, not yet purchased consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Long Short
---- -----
03/31/97 12/31/96 03/31/97 12/31/96
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States government
and agencies $ 10,645 $ 6,440 $ 42,130 $ 16,126
Mortgage-backed 15,408 30,913 - -
States and municipalities 117,075 97,306 389 379
Corporate debt 41,290 22,810 9,835 7,310
Equities and convertible debt 47,365 52,943 17,778 24,408
--------- --------- --------- ---------
$ 231,783 $ 210,412 $ 70,133 $ 48,223
========= ========= ========= =========
</TABLE>
(3) In April, 1997, the Company declared a $0.17 per share quarterly cash
dividend payable May 14, 1997 to stockholders of record on May 2, 1997.
(4) On April 6, 1997 Bankers Trust New York Corporation and Alex. Brown
Incorporated announced that they signed a definitive agreement to merge.
Under terms of the agreement approved unanimously by both boards of
directors, each Alex. Brown common share will be exchanged for 0.83 shares
of Bankers Trust common stock. The merger, which is expected to be
completed by the fourth quarter of 1997, is subject to customary closing
conditions, including certain regulatory approvals and shareholder
approvals. The transaction is expected to be tax-free to shareholders and
accounted for on a pooling-of-interests basis.
(5) Investment securities at March 31, 1997 and December 31, 1996 included $28.6
million and $24.5 million, respectively, of merchant banking investments.
(6) Convertible subordinated debentures issued to certain employees pursuant to
the 1991 Equity Incentive Plan are convertible into the Company's Common
Stock. The Company made loans to employees to fund the purchases of the
debentures. During the first three months of 1997, employees converted $0.7
million convertible subordinated debentures, which were issued in prior
years, into 82,190 shares of the Company's common stock.
6
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
March 31, 1997
(Unaudited)
(7) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
At March 31, 1997, the Company's principal subsidiary, Alex. Brown & Sons
Incorporated, was contingently liable for up to $53.5 million under
unsecured letters of credit used to satisfy required margin deposits at
five securities clearing corporations.
LITIGATION
In the course of its investment banking and securities brokerage business,
Alex. Brown & Sons Incorporated has been named a defendant in a number of
lawsuits and may be required to contribute to final settlements in actions,
in which it has not been named a defendant, arising out of its
participation in the underwritings of certain issues. A substantial
settlement or judgment in any of these cases could have a material adverse
effect on the Company. Although the ultimate outcome of such litigation is
not subject to determination at present, in the opinion of management,
after consultation with counsel, the resolution of these matters will not
have a material adverse effect on the Company's consolidated financial
statements.
(8) Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, was issued in February 1997 and, effective for financial statements
issued for periods ending after December 15, 1997, establishes standards
for computing and presenting earnings per share ("EPS"). SFAS No. 128
replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the consolidated statement of earnings and requires the reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Earlier application is not
permitted, but disclosure of pro forma EPS amounts computed using the
standards established by SFAS No. 128 is permitted in the notes to
financial statements for periods ending prior to the effective date. Pro
forma EPS for the three month periods ended March 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Basic $1.27 $1.71
Diluted $1.10 $1.48
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Alex. Brown Incorporated (the "Company") is a holding company whose primary
subsidiary is Alex. Brown & Sons Incorporated ("Alex. Brown"), a major
investment banking and securities brokerage firm. The Company, like other
securities firms, is directly affected by general economic and market
conditions, including fluctuations in volume and price levels of securities,
changes in interest rates and demand for investment banking and securities
brokerage services, all of which have an impact on the Company's revenues,
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
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
Revenues totaled $233.5 million, a 14% decrease as compared to $270.8 million in
the first quarter of 1996. Commission revenues increased 12% to $58.2 million
for the first quarter, primarily as a result of an increase in institutional and
private client commission revenues. Investment banking revenues decreased 26%
to $74.9 million, due to a 51% decrease in merger and advisory revenues to $14.9
million and a 21% decline in corporate underwriting revenues. Principal
transaction revenues decreased 39% to $32.0 million, primarily due to decreases
in equity trading. Interest and dividend revenues increased 8% to $35.7 million,
primarily as a result of interest earned on higher margin loan balances.
Advisory and other revenues increased 4% to $32.8 million. This increase was
primarily attributable to a 36% increase in advisory revenues to $22.8 million.
Partially offsetting this increase were lower gains from investments which
totaled $0.7 million in the first quarter as compared to $5.4 million in the
first quarter of the prior year and a 7% reduction in fees from correspondent
services to $6.8 million. Assets under management totaled approximately $12.8
billion at March 31, 1997.
Expenses totaled $182.0 million, an 11% decrease as compared to $203.6 million
in the first quarter of 1996. Compensation and benefits decreased 16% to $122.4
million from $145.6 million, as a result of decreased incentive expense.
Communications expense increased 24% to $10.7 million due to higher costs for
quote services and an increase in communications expense associated with the
Baltimore headquarters relocation completed during the quarter. Occupancy and
equipment expenses increased 4% to $9.1 million primarily as
8
<PAGE>
a result of additional space with the new Baltimore headquarters. Interest
expense increased 1% to $12.3 million from $12.2 million primarily due to the
cost of financing increased margin loan balances. Floor brokerage, exchange and
clearing fees increased 18% to $5.8 million, primarily due to costs associated
with the increase in shares traded on the New York Stock Exchange. Other
operating expenses decreased 8% to $21.6 million due to a reduction of expenses
associated with the reduced level of business activity.
The Company's effective tax rate for the quarter was 39.5%, unchanged from the
first quarter of 1996.
As a result of the above, net earnings decreased 23% to $31.2 million from $40.7
million in the first quarter of 1996. Primary and fully diluted earnings per
share were $1.23 and $1.10, respectively, as compared to $1.67 and $1.48 for the
same period in the prior year.
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 March 31, 1997, in its high yield operations,
Alex. Brown had $14.6 million of long inventory and $1.2 million of short
inventory as compared to $9.4 million of long inventory and $6.5 million of
short inventory at year-end 1996.
As of March 31, 1997, the carrying value of the Company's merchant banking
investments was $28.6 million, compared to $24.5 million at year-end 1996.
There was a net loss related to merchant banking investments of $0.7 million for
the first three months of 1997. 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 March 31, 1997, $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 has borrowed 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
9
<PAGE>
committed lines of credit under revolving credit agreements (the "Credit
Facilities") with various banks. The Credit Facilities expire between February
1998 and February 2000. 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 March 31, 1997. The Company and Alex.
Brown were in compliance with all restrictive covenants contained in the Credit
Facilities and term loans at March 31, 1997.
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 March 31, 1997, Alex. Brown had
aggregate net capital of $427.4 million, which exceeded its minimum net capital
requirement by $395.7 million.
During the first three months of 1997, the Company repurchased a total of 4,866
shares of its Common Stock at a cost of $0.2 million. As of March 31, 1997,
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.
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.
10
<PAGE>
EXHIBIT 99.2
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
<S> <C> <C> <C> <C>
Commissions $ 56,979 $ 54,352 $115,201 $106,357
Investment banking 95,495 133,662 170,366 235,501
Principal transactions 33,291 49,243 65,285 101,751
Interest and dividends 36,439 36,228 72,092 69,137
Advisory and other 38,959 36,750 71,738 68,330
-------- ------- ------- -------
Total revenues 261,163 310,235 494,682 581,076
-------- ------- ------- -------
Operating expenses:
Compensation and benefits 137,904 162,754 260,338 308,328
Communications 12,073 9,810 22,777 18,452
Occupancy and equipment 11,659 9,263 20,803 18,026
Interest 12,174 13,075 24,482 25,261
Floor brokerage, exchange
and clearing fees 6,462 5,460 12,291 10,403
Other operating expenses (Note 6) 28,539 26,491 50,136 49,958
-------- ------- ------- -------
Total operating expenses 208,811 226,853 390,827 430,428
-------- ------- ------- -------
Earnings before income taxes 52,352 83,382 103,855 150,648
Income taxes 20,679 33,541 41,023 60,111
-------- ------- ------- -------
Net earnings $ 31,673 $ 49,841 $ 62,832 $ 90,537
======== ======= ======= =======
Earnings per share:
Primary $1.23 $2.01 $2.46 $3.69
======== ======= ======= =======
Fully diluted $1.09 $1.77 $2.19 $3.25
======== ======= ======= =======
Weighted average number of
shares outstanding:
Primary 25,749 24,783 25,523 24,549
======== ======= ======= =======
Fully diluted 29,503 28,483 29,396 28,285
======== ======= ======= =======
Cash dividends declared per share $0.17 $0.167 $0.34 $0.30
======== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands)
ASSETS
June 30, December 31,
1997 1996
------------ ------------
(Unaudited)
Cash and cash equivalents $ 26,357 $ 109,800
Receivables:
Customers 1,502,942 1,487,041
Brokers, dealers and clearing organizations 565,266 368,099
Current state and federal income taxes 2,979 17,429
Other 66,582 59,097
Firm trading securities (Note 2) 119,124 210,412
Securities purchased under agreements to resell 3,941 15,510
Deferred income taxes 53,094 46,433
Memberships in exchanges, at cost
(market $3,939 and $3,597) 323 323
Office equipment and leasehold improvements,
at cost less accumulated depreciation and
amortization of $48,385 and $44,580 59,839 48,079
Investment securities (Note 4) 61,485 56,889
Loans to employees to purchase convertible
subordinated debentures (Note 5) 60,657 54,454
Other assets 92,696 69,009
---------- ----------
$2,615,285 $2,542,575
========== ==========
(continued)
2
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Financial Condition (continued)
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- --------
(Unaudited)
<S> <C> <C>
Bank loans $ 143,100 $ 29,900
Payables:
Cash management facility 74,139 83,733
Customers, including free credit balances 666,555 676,734
Brokers, dealers and clearing organizations 487,387 495,947
Current state income taxes 2,852 1,840
Other 276,787 378,981
Securities sold, not yet purchased (Note 2) 38,019 48,223
7 5/8% Senior notes 109,505 109,475
5 3/4% Convertible subordinated debentures 3,889 11,797
Employee convertible subordinated debentures
(Note 5) 72,601 62,043
Commitments and contingencies (Note 8)
Stockholders' equity (Note 5):
Common stock of $.10 par value
Authorized 50,000,000 shares
Issued and outstanding 25,434,822
shares in 1997
and 24,030,822 shares in 1996 2,543 2,403
Additional paid-in capital 166,474 125,882
Loans to employees to purchase common stock (8,921) (10,320)
Retained earnings 580,355 525,937
---------- ----------
Total stockholders' equity 740,451 643,902
---------- ----------
$2,615,285 $2,542,575
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Loans To
Employees
Additional To Purchase Total
Common Paid-in Common Retained Stockholders'
Stock Capital Stock Earnings Equity
------ ------- ----- -------- ------
<S> <C> <C> <C> <C> <C>
Six months ended
June 30, 1997
Balance at December 31,
1996 $2,403 $125,882 $(10,320) $525,937 $643,902
Net earnings - - - 62,832 62,832
Issuance of 1,196,395
shares of common stock 120 30,712 - - 30,832
Payments on employee loans - - 991 - 991
Repurchase and retirement
of 58,383 shares of
common stock (6) (3,582) - - (3,588)
Compensation payable in
common stock 26 13,462 - - 13,488
Loan forgiveness - - 408 - 408
Dividends paid - (8,414) (8,414)
------ -------- -------- -------- --------
Balance at June 30, 1997 $2,543 $166,474 $ (8,921) $580,355 $740,451
====== ======== ======== ======== ========
Six months ended June 30,
1996
Balance at December 31,
1995 $2,330 $113,234 $(12,470) $386,193 $489,287
Net earnings - - - 90,537 90,537
Issuance of 748,180
shares of common stock 75 13,903 - - 13,978
Payments on employee loans - - 1,879 - 1,879
Repurchase and retirement
of 22,879 shares of
common stock (2) (715) - - (717)
Compensation payable
in common stock 27 7,257 - - 7,284
Loan forgiveness - - 52 - 52
Dividends paid - - - (6,401) (6,401)
------ -------- -------- -------- --------
Balance at June 30, 1996 $2,430 $133,679 $(10,539) $470,329 $595,899
====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 62,832 $ 90,537
Reconciliation of net earnings to net cash
used for operating activities:
Depreciation and amortization 6,721 6,257
Non-cash compensation awards 19,405 10,343
Gain on investment securities (4,721) (13,877)
Other (252) (83)
(Increase) decrease in assets:
Receivables (206,103) (299,448)
Firm trading securities 91,288 (99,530)
Deferred income taxes (6,661) (3,207)
Securities purchased under agreements to resell 11,569 5,693
Other assets (24,263) (29,017)
Increase (decrease) in liabilities:
Payables (119,921) 177,810
Securities sold, not yet purchased (10,204) 11,813
--------- ---------
Net cash used for operating activities (180,310) (142,709)
--------- ---------
Cash flows from financing activities:
Net proceeds (payments):
Short-term loans 115,000 89,000
Securities sold under repurchase agreements 0 (2,460)
Cash management facility (9,594) 10,473
Payments on term loans (1,800) (2,642)
Issuance of common stock 23,043 13,846
Repurchase of common stock (3,588) (717)
Dividends paid to stockholders (8,414) (6,401)
--------- ---------
Net cash provided by financing activities 114,647 101,099
--------- ---------
Cash flows from investing activities:
Purchase of office equipment and leasehold improvements (17,905) (3,224)
Purchase of investment securities (17,929) (10,614)
Sale of investment securities 18,054 20,315
--------- ---------
Net cash provided by (used for) investing activities (17,780) 6,477
--------- ---------
Net decrease in cash and cash equivalents (83,443) (35,133)
Cash and cash equivalents at beginning of period 109,800 62,103
--------- ---------
Cash and cash equivalents at end of period $ 26,357 $ 26,970
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997
(Unaudited)
(1) The accompanying consolidated financial statements do not include all of the
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. In the opinion of management, all adjustments considered
necessary to fairly reflect Alex. Brown Incorporated's (the "Company")
financial position and results of operations, consisting of normal recurring
adjustments, have been included. Certain revenue items in 1996 have been
reclassified to conform to the current year presentation.
(2) Firm trading securities and securities sold, not yet purchased consisted of
the following (in thousands):
<TABLE>
<CAPTION>
Long Short
---- -----
06/30/97 12/31/96 06/30/97 12/31/96
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States government
and agencies $ 13,322 $ 6,440 $ 9,006 $ 16,126
Mortgage-backed 726 30,913 - -
States and municipalities 54,587 97,306 318 379
Corporate debt 2,518 22,810 202 7,310
Equities and convertible debt 47,971 52,943 28,493 24,408
--------- --------- --------- ---------
$119,124 $ 210,412 $ 38,019 $ 48,223
========= ========= ========= =========
</TABLE>
(3) On July 22, 1997, the Company declared a $0.17 per share quarterly cash
dividend payable August 12, 1997 to stockholders of record on August 1,
1997.
(4) Investment securities at June 30, 1997 and December 31, 1996 included $28.7
million and $24.5 million, respectively, of merchant banking investments.
(5) Convertible subordinated debentures issued to certain employees pursuant to
the 1991 Equity Incentive Plan are convertible into the Company's Common
Stock. The Company made loans to employees to fund the purchases of the
debentures. During the first six months of 1997, employees converted $0.7
million convertible subordinated debentures, which were issued in prior
years, into 84,037 shares of the Company's common stock.
(6) On May 5, 1997, Alex. Brown announced the reorganization of its fixed income
operations. Included in other expenses for the three months and six months
ended June 30, 1997 is a charge of $7.7 million relating to severance costs
incurred in connection with the reorganization.
(7) On April 6, 1997, Bankers Trust New York Corporation and Alex. Brown
Incorporated announced the signing of a definitive agreement to merge.
Under terms of the agreement approved unanimously by both boards of
directors, each Alex. Brown common share will be exchanged for 0.83 shares
of Bankers Trust common stock. The merger, which is expected to be
completed by the fourth quarter of 1997, is subject to customary closing
conditions, including certain regulatory and shareholder approvals. The
transaction is expected to be tax-free to shareholders and accounted for on
a pooling-of-interests basis. A Special Meeting of Stockholders of Alex.
Brown Incorporated is scheduled to be held at the Company's headquarters in
Baltimore, Maryland on Wednesday, August 13, 1997 at 4:30 p.m. for
stockholders of record on the close of business on July 2, 1997. This
meeting is to consider a proposal to approve and adopt the agreement and
plan of merger by and between Alex. Brown Incorporated, Bankers Trust New
York Corporation and its wholly-owned subsidiary, Voyager Merger
Corporation.
6
<PAGE>
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
June 30, 1997
(Unaudited)
(8) COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
At June 30, 1997, the Company's principal subsidiary, Alex. Brown & Sons
Incorporated, was contingently liable for up to $69.5 million under
unsecured letters of credit used to satisfy required margin deposits at
five securities clearing corporations.
LITIGATION
In the course of its investment banking and securities brokerage business,
Alex. Brown & Sons Incorporated has been named a defendant in a number of
lawsuits and may be required to contribute to final settlements in actions,
in which it has not been named a defendant, arising out of its
participation in the underwritings of certain issues. A substantial
settlement or judgment in any of these cases could have a material adverse
effect on the Company. Although the ultimate outcome of such litigation is
not subject to determination at present, in the opinion of management,
after consultation with counsel, the resolution of these matters will not
have a material adverse effect on the Company's consolidated financial
statements.
(9) Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, was issued in February 1997 and, effective for financial statements
issued for periods ending after December 15, 1997, establishes standards
for computing and presenting earnings per share ("EPS"). SFAS No. 128
replaces the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the consolidated statement of earnings and requires the reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Earlier application is not
permitted, but disclosure of pro forma EPS amounts computed using the
standards established by SFAS No. 128 is permitted in the notes to
financial statements for periods ending prior to the effective date. Pro
forma EPS for the three and six month periods ended June 30, 1997 and 1996
are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
--------------- --------------
Basic $1.27 $2.06 $2.53 $3.77
Diluted $1.10 $1.78 $2.20 $3.26
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Alex. Brown Incorporated (the "Company") is a holding company whose primary
subsidiary is Alex. Brown & Sons Incorporated ("Alex. Brown"), a major
investment banking and securities brokerage firm. The Company, like other
securities firms, is directly affected by general economic and market
conditions, including fluctuations in volume and price levels of securities,
changes in interest rates and demand for investment banking and securities
brokerage services, all of which have an impact on the Company's revenues,
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
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
Revenues totaled $261.2 million, a 16% decrease as compared to $310.2 million in
the second quarter of 1996. Commission revenues increased 5% to $57.0 million
for the second quarter, primarily as a result of an increase in institutional
listed and private client mutual funds commission revenues. Investment banking
revenues decreased 29% to $95.5 million, due to a 50% decrease in corporate
underwriting revenues. Partially offsetting this decline was a 66% increase in
merger and advisory revenues to $38.8 million. Principal transaction revenues
decreased 32% to $33.3 million, primarily due to decreases in equity trading.
Interest and dividend revenues increased 1% to $36.4 million, primarily as a
result of interest earned on higher margin loan balances. Advisory and other
revenues increased 6% to $39.0 million. This increase was primarily
attributable to a 39% increase in advisory revenues to $25.8 million. Partially
offsetting this increase were lower gains from investments which totaled $4.0
million in the second quarter as compared to $8.5 million in the second quarter
of the prior year and an 18% reduction in fees from correspondent services to
$6.6 million. Assets under management totaled approximately $13.9 billion at
June 30, 1997.
Expenses totaled $208.8 million, an 8% decrease as compared to $226.9 million in
the second quarter of 1996. Compensation and benefits decreased 15% to $137.9
million from $162.8 million, as a result of decreased incentive and commission
expenses. Communications expense increased 23% to $12.1 million due to higher
8
<PAGE>
costs for quote services and an increase in postage and printing costs.
Occupancy and equipment expenses increased 26% to $11.7 million, primarily as a
result of additional space occupied in connection with the relocation to the new
Baltimore headquarters. Interest expense decreased 7% to $12.2 million from
$13.1 million primarily due to a decrease in overnight bank loans as financing
needs decreased corresponding with a reduction in average inventory levels.
Floor brokerage, exchange and clearing fees increased 18% to $6.5 million,
primarily due to costs associated with the increase in shares traded on the New
York Stock Exchange. Other operating expenses increased 8% to $28.5 million,
primarily due to severance costs of $7.7 million related to the reorganization
of our fixed income operations.
The Company's effective tax rate for the quarter was 39.5% compared to 40.2% for
the second quarter of the prior year.
As a result of the above, net earnings decreased 36% to $31.7 million from $49.8
million in the second quarter of 1996. Primary and fully diluted earnings per
share were $1.23 and $1.09, respectively, as compared to $2.01 and $1.77 for the
same period in the prior year.
SIX MONTHS 1997 COMPARED TO SIX MONTHS 1996
Revenues totaled $494.7 million, a 15% decrease as compared to $581.1 million in
the first six months of 1996. Commission revenues increased 8% to $115.2
million for the first six months of 1997, primarily as a result of an increase
in institutional listed and private client mutual fund commission revenues.
Investment banking revenues decreased 28% to $170.4 million, due to a 38%
decrease in corporate underwriting revenues and merger and advisory fees were
essentially unchanged from the prior period. Principal transaction revenues
decreased 36% to $65.3 million, primarily due to decreases in equity trading.
Interest and dividend revenues increased 4% to $72.1 million, primarily as a
result of interest earned on higher margin loan balances. Advisory and other
revenues increased 5% to $71.7 million. This increase was primarily
attributable to a 38% increase in advisory revenues to $48.6 million. Partially
offsetting this increase were lower gains from investments which totaled $4.7
million in the first six months as compared to $13.9 million in the first six
months of the prior year, and a 13% reduction in fees from correspondent
services to $13.4 million.
Expenses totaled $390.8 million, a 9% decrease as compared to $430.4 million in
the first six months of 1996. Compensation and benefits decreased 16% to $260.3
million from $308.3 million, as a result of decreased incentive and commission
expenses. Communications expense increased 23% to $22.8 million due to higher
costs for quote services, an increase in communications expense associated with
the Baltimore headquarters relocation and postage and printing costs. Occupancy
and equipment expenses increased 15% to $20.8 million, primarily as a result of
additional space occupied in connection with the relocation to the new
Baltimore headquarters. Interest expense decreased 3% to $24.5 million from
$25.3 million, primarily due to a decrease in overnight bank loans as financing
needs decreased corresponding with a reduction in average inventory levels.
Floor brokerage, exchange and clearing fees increased 18% to $12.3 million,
primarily due to costs associated with the increase in shares traded on the New
York Stock Exchange. Other operating expenses totaled $50.1 million for the
first six months of 1997, including severance costs of $7.7 million related to
the reorganization of our fixed income operations, reflecting less than a 1%
increase from the prior year.
The Company's effective tax rate for the first six months was 39.5% compared to
39.9% for the first six months of 1996.
As a result of the above, net earnings decreased 31% to $62.8 million from $90.5
million in the first six
9
<PAGE>
months of 1996. Primary and fully diluted earnings per share were $2.46 and
$2.19, respectively, as compared to $3.69 and $3.25 for the same period in the
prior year.
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 June 30, 1997, as a result of the reorganization
of its fixed income business, Alex. Brown reduced its high yield long inventory
to $0.1 million as compared to $9.4 million of long inventory and $6.5 million
of short inventory at year-end 1996.
As of June 30, 1997, the carrying value of the Company's merchant banking
investments was $28.7 million, compared to $24.5 million at year-end 1996.
There was a net gain related to merchant banking investments of $1.9 million for
the first six months of 1997. 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 June 30, 1997, $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 has borrowed on a
long-term basis from banks on an unsecured basis ("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 August 1997 and February 2000. 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
borrowings under the Credit Facilities at June 30, 1997. The Company and Alex.
Brown were in compliance with all restrictive covenants contained in the Credit
Facilities and term loans at June 30, 1997.
Alex. Brown is required to comply with the net capital rule of the Securities
and Exchange Commission. The
10
<PAGE>
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 June 30, 1997, Alex. Brown had aggregate net capital of
$438.1 million, which exceeded its minimum net capital requirement by $402.8
million.
During the first six months of 1997, the Company repurchased a total of 58,383
shares of its Common Stock at a cost of $3.6 million. As of June 30, 1997, the
Company had a remaining repurchase authorization of approximately 1.5 million
shares.
Management of the Company believes that existing capital and credit facilities,
when combined with funds generated from operations, will provide the Company
with sufficient resources to meet its present and reasonably foreseeable cash
and capital needs.
RISK MANAGEMENT
The Company records securities transactions on a settlement date basis,
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.
11
