Item 1. Business.
General.
Alex. Brown Incorporated (together with its subsidiaries, the "Company"), incorporated in 1986, is a holding company which is the successor to the investment banking and brokerage business founded in 1800 by Alexander Brown. The firm began operating in partnership form in approximately 1805 and continued in that form until 1984 when the firm's investment banking business was transferred to Alex. Brown & Sons Incorporated ("Alex. Brown"), the Company's principal operating subsidiary. The Company's investment management business is operated through various entities. In some instances, non-affiliated third parties or the professionals in such businesses hold equity interests in such entities. In certain of those instances, the equity interests of non-affiliated third parties are equal to or greater than the Company's.
Through Alex. Brown, the Company provides investment services to individual and institutional investors, and investment banking services to corporate and municipal clients. To support the investment services provided to individual and institutional investors, the Company effects transactions in equity and debt securities as both agent and principal. In addition, the Company's Research Division supplies investment advice to individual and institutional investors regarding corporate securities in selected industry sectors. The Company provides investment banking services to corporate clients primarily in the industry sectors selected for research coverage. The Company also provides investment banking services to municipal clients, including, for example, states, counties, cities, transportation authorities, sewer and water authorities, and housing and health and higher education agencies.
The Company's operations are conducted from 24 offices in 14 states and the District of Columbia and from representative offices in London, England, Geneva, Switzerland and Tokyo, Japan. The Company's principal office is in Baltimore, with other offices in major cities including New York, San Francisco, Los Angeles, Boston, Chicago, Dallas, Atlanta, Philadelphia and Washington, D.C.
Alex. Brown is a member of the New York Stock Exchange, Inc. ("NYSE"), the American Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., other regional securities exchanges and the National Association of Securities Dealers, Inc. (the "NASD"). Alex. Brown is also a member of the Securities Investor Protection Corporation ("SIPC"), and with respect to its representative offices in London, the Securities and Futures Authority.
Investment Services. The Company provides investment services to individual and institutional customers.
The Company's investment services to individual customers primarily involve transactions in corporate equity and debt and state and local government securities, including securities followed by the Company's research analysts and underwritten on a managed or co-managed basis by the Company. In addition to executing transactions, the Company provides portfolio strategy, investment advice and research services to individual investors. The Company targets its investment services to individuals of high net worth or high annual income.
The Company's institutional customers include banks, retirement funds, mutual funds, investment advisers and insurance companies. Services to these customers generally include investment advisory and other services. The majority of the Company's institutional brokerage revenues are generated by the purchase and sale of corporate equity securities, including securities followed by the Company's research analysts and securities underwritten on a managed or co-managed basis by the Company. Institutional investors typically purchase and sell securities in block transactions. Revenues from securities transactions with institutional customers are based on negotiated rates which typically represent a significant discount from the Company's commission schedule.
Research. The Company's Research Division develops investment recommendations and market information in the consumer, financial services, health care, industrial growth, media/communications and technology industries. Within these industries, the Company follows approximately 650 companies.
Research reports are made available generally to customers. Research activities include the review and analysis of general market conditions, industries and specific companies; recommendations of specific actions with regard to industries and specific companies; the furnishing of information to retail and institutional customers; and responses to inquiries from customers and investment representatives. Additionally, the Company hosts periodic seminars in a number of industry areas at which Company representatives and industry authorities make presentations with respect to specific companies, the industry and its trends. These seminars are open to the Company's investment services customers and investment banking clients. The Company believes that its research activities have contributed to attracting and retaining its investment services customers and investment banking clients.
Securities Commissions. Securities transactions for individual and institutional investors where the Company acts as agent generate securities commission revenues. Commissions are charged on both exchange and over-the-counter agency transactions for individual customers in accordance with a schedule formulated by the Company, which may change from time to time. In certain cases, discounts from the schedule may be granted. The Company's securities commissions result primarily from executing transactions in listed stocks and bonds. The Company also realizes commission revenues when it executes a trade in an over-the-counter security in which it does not make a market. A substantial portion of the commission revenues generated by the Company is attributable to individual and institutional investors who receive the Company's research services.
Principal Transactions. In addition to executing trades as agent, the Company regularly acts as a principal in executing trades in equity and convertible securities, municipal bonds, corporate debt, mortgage and asset-backed securities and United States government and government agency securities. When transactions are executed by the Company on a principal basis, the Company, in lieu of commissions, marks up or marks down securities and records the resulting net gains or losses in revenues from principal transactions. Inventories of various securities are carried to facilitate sales to customers and other dealers. Principal transactions are effected for both individual and institutional customers.
As of December 31, 1995, the Company made markets, buying and selling as a principal, in approximately 400 common stocks and other securities traded on the NASD's Automated Quotations System or otherwise in the over-the-counter market and approximately 475 listed securities. The majority of the equity securities in which the Company makes a market are in the industry areas followed by the Company's research analysts.
The Company buys and sells as principal a wide range of fixed income securities and variable rate debt obligations, including municipal securities, collateralized mortgage and asset-backed obligations, emerging market debt securities, corporate fixed income securities and U.S. government and agency obligations. Municipal securities include general obligation and revenue bonds and notes issued by states, counties, cities and state and local government agencies and authorities. Corporate fixed income securities include high yield (non-rated and non-investment grade) obligations, convertible debentures and other bonds, notes and preferred stocks. U.S. government and agency obligations include direct U.S. government obligations and U.S. government-guaranteed securities and agency obligations.
Information regarding the Company's long and short trading securities positions as of December 31, 1995 and 1994 and principal transactions revenue for the three year period ended December 31, 1995 is set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 4, 5 and 9 of Notes to Consolidated Financial Statements, incorporated herein by reference to pages 28-31, 38-39 and 41, respectively, of the 1995 Annual Report to Stockholders.
The level of positions carried in the Company's trading accounts fluctuates significantly. The size of the securities positions on any one date may not be representative of the Company's exposure on any other date because securities positions vary substantially depending upon economic and market conditions, the allocation of capital among types of inventories, underwriting commitments, customer demand and trading volume. The Company may have large positions within its inventories from time to time which increase the Company's exposure to specific credit, event, market or liquidity risks. The aggregate value of inventories that the Company may carry is limited by certain requirements of Rule 15c3-1 (the "Net Capital Rule") of the Securities and Exchange Commission ("SEC"). See "Net Capital Requirements."
The Company's principal transactions expose the Company to risk because securities positions are subject to fluctuations in market value and certain inventory positions are in thinly traded securities. High yield securities can be extremely volatile. Each trading department is subject to internal position limits.
The Company also participates as a market maker in the NASD's Small Order Execution System ("SOES"), an automated trading system through which participating firms can execute customer orders of limited size against market makers in eligible securities through computer terminal entries. Participating market makers are required to honor such transactions; therefore, SOES participation puts an affirmative obligation on the Company to monitor trading activity in SOES securities in which it makes a market and maintain commensurate control of its positions. SOES participation is mandatory for market makers in all NASDAQ National Market System ("NMS") securities, and imposes upon market makers a penalty of 20 business days during which they may not make a market at all in any NMS security in which an unexcused withdrawal has occurred. Withdrawal is excused only in limited circumstances. The NASD is authorized to establish the maximum size of SOES orders at either 200, 500 or 1,000 shares, depending on the trading characteristics of the particular security. It is likely that participation as a SOES market maker will continue to increase the Company's exposure to loss from principal transactions.
The SEC and other regulatory organizations are reviewing the structure and operation of the NASDAQ Stock Market. As a major participant in the NASDAQ Stock Market, the Company has received subpoenas and demands for information from the SEC and the United States Department of Justice pertaining to NASDAQ market making and related activities. See also Item 3, Legal Proceedings. Changes in regulations pertaining to the NASDAQ Stock Market may have a material effect on the Company's over-the-counter trading activities.
Investment Banking. As an investment banking firm, the Company provides financial advice to, and raises capital for, a broad range of corporate clients primarily in industry areas which have been selected by the Company for research coverage. The Company manages and participates in public offerings and arranges the private placement of equity and debt securities directly with institutional and individual investors.
The Company is a major underwriter of corporate and municipal securities. The management of an underwriting syndicate is generally more profitable than participation as a syndicate member because the managing underwriter receives a management fee and a greater amount of securities for distribution.
Certain risks are involved in the underwriting of securities. Underwriting syndicates agree to purchase securities at a discount from the initial public offering price. If the securities must be sold below the syndicate cost, an underwriter is exposed to losses on the securities that it has committed to purchase. In the last several years, investment banking firms have increasingly underwritten corporate and municipal offerings with fewer syndicate participants or, in some cases, without an underwriting syndicate. In such cases the underwriter assumes a larger part or all of the risk of an underwriting transaction. Under federal securities laws, other laws and court decisions, an underwriter is exposed to substantial potential liability for material misstatements or omissions of fact in the prospectus used to describe the securities being offered. While municipal securities are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), underwriters of municipal securities nevertheless are exposed to substantial potential liability in connection with material misstatements or omissions of fact in the offering documents prepared in connection with offerings of such securities.
In the past five years, less than 50% (40% in 1995) of the public offerings of equity and corporate debt securities managed or co-managed by the Company have been initial public offerings. Generally, a strong market for new issues occurs when overall market and economic conditions are favorable. New issues are perceived to
have a higher degree of risk for investors and investor receptivity to new issues tends to vary as a function of overall market conditions.
The Company also provides advice to clients on a wide range of financial matters, including mergers and acquisitions, divestitures, financial planning, financial restructuring and recapitalizations. In connection with mergers and acquisitions, the Company often provides opinion letters and valuations and renders various other services. The Company's traditional clients for such services are companies for which the Company has raised capital or which are followed by the Company's Research Division. The Company also provides these services to companies which are not corporate finance clients or covered by the Company's Research Division but which are, or have subsidiaries or divisions, in industries followed by the Company's Research Division. Historically, the core of the Company's mergers and acquisitions business has been the representation of sellers in negotiated transactions. Fees for these services are negotiated and are generally related to the value of the transaction for which the service is provided.
The Company also invests in private equity securities primarily through its partnership interest in ABS Capital Partners, L.P. ("Capital"). In most cases, these investments are made either with the management of such companies or to provide expansion financing. Capital may also co-invest with other financial groups in larger transactions where its specific industry expertise may create additional value. Private equity investments have the potential of generating substantial investment returns, but involve a significant degree of risk due to the concentrated investment of capital in securities that generally lack liquidity. As of December 31, 1995, the Company had outstanding $25.4 million of private equity investments and a commitment to invest $10.3 million more in Capital.
In addition to its corporate investment banking activities, the Company provides financial advice to, and raises capital for, many types of issuers of tax-exempt securities, including states, counties, cities, transportation authorities, sewer and water authorities and housing and health and higher education agencies. Most of these issuers are located in the eastern U.S. The Company manages public offerings of securities and distributes these securities to individual and institutional investors.
Investment Management Services. The Company provides investment advisory, administrative and distribution services to a variety of clients, domestic and international. These services are typically provided for a fee based on the value of the assets for which such services are rendered. Investment advisory services are provided to high net worth individuals, institutional investors, foundations, endowments, mutual funds and private investment funds. As of December
31, 1995, the Company provided investment advisory, administrative and/or distribution services with respect to $10.1 billion of assets under management.
Advisory, administrative and distribution services are provided to the "Flag" family of mutual funds, which are Company sponsored, as well as to mutual funds and investment partnerships sponsored by unaffiliated third parties. Most investment advisory services are provided pursuant to contracts which provide for termination by either party at any time. Advisory fees are generally charged as a percentage of assets managed.
Other than with respect to advisory services provided to mutual funds, the Company's largest advisory service is Alex. Brown Investment Management ("ABIM"), a partnership in which the Company has a 50% interest and its associated investment advisory professionals have the remaining 50% interest. ABIM manages equity and balanced accounts for institutions and individuals.
In December, 1995, the Company received approval from the SEC for the formation of Alex. Brown Capital Advisory Incorporated, a registered investment adviser. In January, 1996, the Company transferred certain of its investment management activities to Alex. Brown Capital Advisory Incorporated.
Correspondent Services. The Company provides administrative, execution, operational and clearing services to other securities firms on a fully disclosed basis. In addition to commissions and other transaction related fees, the Company receives interest revenue in those instances where it extends margin credit directly to customers of its correspondent brokers. The Company may extend credit directly to its correspondent firms to finance their operations or securities positions which such firms hold for their own accounts. The Company relies on the general credit of its correspondent brokers and may be exposed to risk of loss if any of its correspondents or their customers are unable to meet their financial commitments. The ratio of capital to the level of business of the Company's correspondent brokers may be less than that of the Company. From time to time the Company makes unsecured subordinated loans to correspondent brokers. Such loans are funded through general working capital sources. As of December 31, 1995, the Company provided correspondent services to 44 securities firms.
Margin Accounts and Interest Income. The Company extends margin financing to its customers and to the customers of correspondent brokers for whom the Company provides clearing and execution services. Margin loans are collateralized by cash and securities in customer accounts, including securities that may be subject to restrictions on sale by the customer. Customers are charged for margin financing
utilizing a base rate that the Company establishes based upon a variety of factors, including the Company's own cost of funds, with adjustments based upon the size of the loan and other factors. The amount of the Company's interest revenue is affected by the volume of customer borrowing and by prevailing interest rates. The average volume of customer borrowing has increased in each of the last five years.
Margin lending by the Company is subject to the margin rules of the Board of Governors of the Federal Reserve System, NYSE margin requirements and the Company's internal policies, which in many instances are more stringent than the NYSE requirements. In permitting customers to purchase on margin, the Company assumes the risk that a market decline may reduce the value of the collateral it holds below the customer's indebtedness before the collateral can be sold. The proceeds realizable upon the sale of such collateral can be adversely affected by the liquidity of the market for the security, applicable restrictions on the sale of the security or the size of the collateral position as compared to the trading volume of the security. Under applicable NYSE rules, in the event of a significant decline in the market value of the securities in a margin account, the Company is obligated to require the customer to deposit additional securities or cash in the account or to sell securities to reduce or eliminate the customer's indebtedness to the Company.
Credit balances and securities in customers' accounts, to the extent not required to be segregated pursuant to rules of the SEC, may be used in the conduct of the Company's business, including the extensions of margin credit. Customer lending activities may influence the basis on which net capital requirements of Alex. Brown are determined under the Net Capital Rule. As these activities expand, the Company's net capital requirements increase. See "Net Capital Requirements."
Accounting, Administration and Operations. Accounting, administration and operations personnel are responsible for the processing of securities transactions; receipt, identification and delivery of funds and securities; custody of customer securities; internal financial control; accounting functions; office services; personnel services and compliance with regulatory and legal requirements.
There is a considerable fluctuation in the volume of transactions which a securities firm must process. In the past, when the volume of trading in securities reached record levels, the securities industry has experienced operating problems. The Company has not experienced any material operating difficulties during periods of record heavy trading volume; however, extraordinarily heavy trading volume in the future could result in clearance and processing difficulties. The
Company utilizes its own facilities and the services of Automatic Data Processing Inc. for the electronic processing related to recording data pertinent to securities transactions and general accounting.
The Company believes that its internal controls and safeguards against securities theft, including use of depositories and periodic securities counts, are adequate. As required by the NYSE and certain other authorities, the Company carries fidelity bonds covering loss or theft of securities as well as employee dishonesty, forgery and alteration of checks and similar items, and securities forgery. The amounts of coverage provided by the bonds are believed to be adequate.
The Company posts its books and records daily. Periodic reviews of certain controls are conducted, and administrative and operations personnel meet with management to review operational conditions in the Company to assure compliance with applicable laws, rules and regulations.
Competition. The Company encounters intense competition in all aspects of the securities business and competes directly with other securities firms, a significant number of which have substantially greater capital and other resources and many of which offer a wider range of financial services than the Company. Other securities firms, oriented primarily to the market for individual investors, charge commissions that are significantly discounted from those in the range generally charged by the Company to its individual customers. In addition to competition from firms currently in the securities business, there is increasing competition from other sources, such as commercial banks and insurance companies offering financial services, and from other investment alternatives. The Company believes that the principal competitive factors in the securities industry are the quality and ability of professional personnel and relative prices of services and products offered. The Company and its competitors directly solicit potential customers, and many of the Company's competitors engage in advertising programs which the Company does not use to any significant degree. The Company and its competitors also furnish investment research publications in an effort to hold and attract existing and potential clients.
Employees. As of December 31, 1995, the Company had approximately 2,350 full-time employees. None of the Company's employees are covered by a collective bargaining arrangement.
Regulation. The securities industry in the United States is subject to extensive regulation under both federal and state laws. The SEC is the federal agency responsible for the administration of the federal securities laws. Alex. Brown is registered as a broker-dealer with the SEC. Alex. Brown and Alex. Brown Capital Advisory Incorporated as well as other investment advisers in which
the Company has an equity interest are registered as investment advisers with the SEC. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, principally the NASD and national securities exchanges such as the NYSE, which has been designated by the SEC as Alex. Brown's primary regulator. These self-regulatory organizations adopt rules (subject to approval by the SEC) that govern the industry and conduct periodic examinations of Alex. Brown's operations. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. Alex. Brown is registered as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico.
Broker-dealers are subject to regulations covering all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers' funds and securities, capital structure of securities firms, record-keeping and the conduct of directors, officers and employees. Additional legislation, changes in rules promulgated by the SEC and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the mode of operation and profitability of broker-dealers. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings which can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets, rather than protection of creditors and stockholders of broker-dealers. From time to time, the Company has been subject to disciplinary actions, none of which, to date, has had a material adverse effect on the operations of the Company.
Alex. Brown is a member of SIPC, which provides, in the event of the liquidation of a broker-dealer, protection for customers' accounts held by Alex. Brown of up to $500,000 for each customer, subject to a limitation of $100,000 for claims for cash balances. In addition, Alex. Brown has obtained protection in excess of SIPC coverage of $49,500,000 for each account.
Alex. Brown & Sons Limited and Alex. Brown & Sons Investments Limited, through which the Company operates representative offices in London, England, are subject to the United Kingdom Financial Services Act of 1986, which governs all aspects of United Kingdom investment business and to the rules of the Securities and Futures Authority.
Certain subsidiaries and employees of the Company are engaged in the insurance business and are subject to regulation and supervision by appropriate authorities in the states in which they conduct their business.
Net Capital Requirements. As a registered broker-dealer and a member firm of the NYSE, Alex. Brown is subject to the Net Capital Rule, which has also been adopted through incorporation by reference in NYSE Rule 325. The Net Capital Rule, which specifies minimum net capital requirements for registered brokers and dealers, is designed to measure the general financial integrity and liquidity of a broker-dealer and requires that at least a minimum part of its assets be kept in relatively liquid form. Alex. Brown is also subject to the net capital requirements of the Commodities Futures Trading Commission ("CFTC") and various commodity exchanges, which generally require that Alex. Brown, as an introducing broker, maintain minimum net capital equal to the alternative net capital requirements discussed below.
Alex. Brown has elected to compute net capital under the alternative method of calculation permitted by the Net Capital Rule. Under the alternative method, Alex. Brown is required to maintain minimum net capital, as defined in the Net Capital Rule, equal to the greater of $1,500,000 or 2% of the amount of its "aggregate debit items" computed in accordance with the Formula for Determination of Reserve Requirements for Brokers and Dealers (SEC Rule 15c3-3). The "aggregate debit items" are assets that have as their source transactions with customers, primarily margin loans. Failure to maintain the required net capital may subject a firm to suspension or revocation of registration by the SEC and suspension or expulsion by the NYSE and other regulatory bodies and ultimately may require its liquidation. The Net Capital Rule and NYSE Rule 326 prohibit payments of dividends, redemption of stock, the prepayment of subordinated indebtedness, and making any unsecured advance or loan to a stockholder, employee or affiliate, if net capital thereafter would be less than 5% of aggregate debit items. The Net Capital Rule also provides that the SEC may restrict for up to twenty business days any withdrawal of equity capital, or unsecured loan or advance to a stockholder, employee or affiliate ("capital withdrawal") if such capital withdrawal, together with all other net capital withdrawals during a thirty day period, exceeds 30% of excess net capital and the SEC concludes that the capital withdrawal may be detrimental to the financial integrity of the broker-dealer. The Net Capital Rule also provides that the total outstanding principal amount of a broker-dealer's indebtedness under certain subordination agreements, the proceeds of which are included in its net capital, may not exceed 70% of the sum of the outstanding principal amount of all subordinated indebtedness included in net capital, par or stated value of capital stock, paid in capital in excess of par, retained earnings and other capital accounts for a period in excess of 90 days.
Under NYSE Rule 326, a member firm is required to reduce its business if its net capital is less than 4% of aggregate debit items. NYSE Rule 326 also prohibits the expansion of business if net capital is less than 5% of aggregate debit items for 15 consecutive days. The
provisions of Rule 326 also become operative if capital withdrawals (including scheduled maturities of subordinated indebtedness during the following six months, charges relating to lending on control and restricted securities under NYSE Rule 431 and discretionary liabilities which are included in capital under the Net Capital Rule) would result in a reduction of a firm's net capital to the levels indicated.
Net capital is essentially defined as net worth (assets minus liabilities), plus qualifying subordinated borrowings and certain discretionary liabilities, and less certain mandatory deductions that result from excluding assets that are not readily convertible into cash and from valuing conservatively certain other assets, such as a firm's positions in securities. Among these deductions are adjustments (called "haircuts") to the market value of firm securities to reflect the possibility of a market decline prior to disposition.
A change in the Net Capital Rule, the imposition of new rules or any unusually large charge against net capital could limit those operations of Alex. Brown that require the intensive use of capital, such as underwriting and trading activities and the financing of customer account balances, and also could restrict the Company's ability to withdraw capital from Alex. Brown which in turn could limit the Company's ability to pay dividends, repay debt and redeem or purchase shares of its outstanding stock.
Alex. Brown has been in compliance at all times with all aspects of the Net Capital Rule and CFTC net capital requirements applicable to it. As of December 31, 1995, Alex. Brown was required to maintain minimum net capital, in accordance with SEC and CFTC rules, of $26,338,000 and had total net capital (as so computed) of $322,292,000 or $295,954,000 in excess of 2% of aggregate debit items and $256,448,000 in excess of 5% of aggregate debit items.
Item 1(d). Financial Information about Foreign and Domestic Operations and Export Sales.
Not Applicable.
Item 2.
Item 2. Properties.
The Company has offices in the following cities:
Annapolis, Maryland Naples, Florida Atlanta, Georgia New Orleans, Louisiana Baltimore, Maryland New York, New York Boston, Massachusetts Philadelphia, Pennsylvania Charlotte, North Carolina Richmond, Virginia Chicago, Illinois San Francisco, California Dallas, Texas Timonium, Maryland Fishkill, New York Tokyo, Japan Geneva, Switzerland Towson, Maryland Greenwich, Connecticut Washington, D.C. Houston, Texas West Palm Beach, Florida Jacksonville, Florida Wilmington, Delaware London, England Winston-Salem, North Carolina Los Angeles, California
The Company's two most material lease obligations are with respect to its New York and Baltimore facilities. The Company occupies an aggregate of approximately 200,000 square feet of space in downtown Baltimore under leases expiring on various dates from 1996 through 2002. The Company occupies approximately 80,000 square feet of office space in midtown Manhattan under a lease expiring in 2013. In 1995, the Company entered into a lease obligation to occupy approximately 255,000 square feet of office space in downtown Baltimore in order to consolidate the Company's downtown office space and to replace several leases which expire on various dates in 1997. The new Baltimore lease has an effective rent commencement date of January 1, 1997 and an expiration date of December 31, 2011. The Company is a limited partner in a partnership which owns a building in downtown Baltimore where it leases approximately 90,000 square feet.
The Company's other offices, including the separate offices of Alex. Brown Investment Management, the Company's operations and data center and offices in 22 U.S. cities, London, Geneva and Tokyo, occupy an aggregate of approximately 456,000 square feet under leases that expire at various dates through 2013. Future minimum rental commitments under existing leases are set forth in Note 11 of Notes to Consolidated Financial Statements incorporated herein by reference to page 41 of the 1995 Annual Report to Stockholders.
Item 3.
Item 3. Legal Proceedings.
Alex. Brown is a defendant in a number of lawsuits relating to its investment banking and securities brokerage business. Alex. Brown is also a member of a defendant class of underwriters in a number of lawsuits relating to its participation in underwritings and, in addition, may be required to contribute to any adverse final judgments or settlements in actions arising out of its participation in the underwritings of certain issues in which it is not a defendant. The Company cannot state what the eventual outcome of these pending actions will be. A substantial settlement or judgment in any of these cases could have a material adverse effect on the Company. While there can be no assurances of a favorable determination of these actions, the Company believes there are meritorious defenses to all of the cases described herein, and intends to defend each action vigorously. The following are descriptions of certain legal proceedings involving or affecting the Company.
In-Store Advertising, Inc. The Company has been named as a defendant in several purported class action lawsuits, as well as one shareholder derivative lawsuit, pertaining to the July 19, 1990 public offering of Common Stock of In-Store Advertising, Inc. ("In-Store Advertising"), at $19 per share (the "Offering"). The Company co-managed the Offering and directly underwrote 414,000 shares. The lawsuits are pending in the United States District Court for the Southern District of New York, and have been consolidated under the caption In-Store Advertising, Inc. Securities Litigation. Collectively, plaintiffs purport to represent all persons who purchased shares of In-Store Advertising in the Offering, and all persons who purchased shares in the open market during the period from the date of the Offering to August 28, 1990. Plaintiffs allege, among other things, that the prospectus for the Offering contained material misstatements of fact and omitted material facts and that the defendants, including the Company, made untrue statements of material fact and omitted material facts concerning In-Store Advertising's anticipated revenues and earnings. The Plaintiffs allege violations of the federal securities laws and the common law, and seek unspecified actual and punitive damages, rescission, costs, fees and other relief. On July 8, 1993, In-Store Advertising filed for protection under the Bankruptcy Code, and on August 6, 1993, its plan of reorganization was approved. As a result thereof, In-Store Advertising has been discharged from any liability relating to this litigation. Pretrial discovery is proceeding.
NASDAQ Market-Maker Anti-Trust Litigation and Related Investigations. The Company has been named as a defendant in several purported class action proceedings that allege violations of a Federal anti-trust statute. The Company was joined as defendant in such actions during July, 1994. The actions have been consolidated before
the United States District Court for the Southern District of New York under the caption In re NASDAQ Market-Maker Anti-Trust and Securities Litigation. The plaintiffs allege that twenty-four defendants, including the Company, that act as dealers on the NASDAQ computerized quotations system, conspired to raise and fix the spreads between the bid and ask prices of securities traded over NASDAQ. Plaintiffs further allege that as a result of such conspiracy, NASDAQ spreads are larger than spreads for stocks traded on the New York Stock Exchange and the American Stock Exchange. The purported class consists of all persons in the United States who are current customers and who bought or sold securities through NASDAQ within four years prior to the filing of the complaints. Plaintiffs seek treble damages of an unspecified amount. An additional private action has since been filed in the Alabama state court raising the same issues. All defendants, including the Company, have filed a motion requesting that the Alabama case be consolidated into the New York matter. The Company has also received requests from the United States Department of Justice ("DOJ") and the SEC to provide information and documents with respect to its NASDAQ market making activities. The DOJ and SEC appear to be conducting investigations of the NASDAQ market generally.
Banca Cremi, S.A. On April 11, 1995, the Company was named as a defendant in an action pending in the United States District Court in the District of Maryland entitled Banca Cremi, S.A., et al. v. Alex. Brown & Sons Incorporated, et al., Civil Action No. JFM-95-109. The action alleges that the Company and its salespersonnel recommended unsuitable investments to Banca Cremi, a Mexican bank, and thereby violated federal and state laws. The complaint alleges compensatory damages in excess of $26 million.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Registrant
The following information regarding the persons who function as executive officers of the Company is included herein pursuant to Instruction 3 to Item 401(b) of Regulation S-K:
Name Age Position with the Company
A. B. Krongard................ 59 Chief Executive Officer and Chairman of the Board of Directors Robert F. Price............... 48 Secretary and General Counsel Mayo A. Shattuck III.......... 41 President, Chief Operating Officer and Director Beverly L. Wright............. 47 Treasurer and Chief Financial Officer
Officers serve at the discretion of the Board of Directors. There is no family relationship among any of the directors or executive officers of the Company.
Mr. Krongard was first employed by Alex. Brown & Sons (the "Partnership") in 1971 and became a general partner in 1980. He has been a Managing Director of Alex. Brown since 1984, was elected Chief Executive Officer of the Company and Alex. Brown in July 1991, and was elected Chairman of the Board of Directors of the Company in 1994.
Mr. Price was first employed by the Partnership in 1976 and became a Managing Director of Alex. Brown in 1987. He served as Secretary and General Counsel from 1984 until 1989 when he resigned from the Company. Upon his return to the Company in 1991, he became Secretary and General Counsel.
Mr. Shattuck was first employed by the Company in 1985. He became a Managing Director of Alex. Brown in 1989, and was elected President and Chief Operating Officer in 1991.
Ms. Wright was first employed by the Partnership in 1978 and became a general partner in 1984. She has been a Managing Director of Alex. Brown since 1984, and was named Treasurer and Chief Financial Officer of the Company and Chief Financial Officer of Alex. Brown in 1986.
There is no arrangement or understanding between any of the above-listed officers and any other person pursuant to which any such officer was elected as an officer.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information required by Item 5 is incorporated herein by reference to page 52 of the 1995 Annual Report to Stockholders attached hereto.
Item 6.
Item 6. Selected Financial Data.
Information required by Item 6 is incorporated herein by reference to page 48 of the 1995 Annual Report to Stockholders attached hereto.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Information required by Item 7 is incorporated herein by reference to pages 28 through 31 of the 1995 Annual Report to Stockholders attached hereto.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Financial Statements required by Item 8 are listed in the Index to Financial Statements on page 23.
Supplementary data are incorporated herein by reference to page 49 of the 1995 Annual Report to Stockholders attached hereto.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
The information required by Items 10, 11, 12, and 13 (except as indicated below and that information regarding executive officers called for by Item 10
Item 10 contained in Part I) is incorporated herein by reference to the definitive proxy statement.
Item 10. Donald B. Hebb, Jr., who resigned as a director of the Company in November, 1995, filed a Form 5 dated March 7, 1996 in which he reported a gift from his wife of 28,000 shares of Common Stock made on December 15, 1995. The beneficial ownership of these shares had been previously reported in Mr. Hebb's Form 4 dated September 8, 1995.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits:
Reference is made to the Exhibit Index.
Financial Statement Schedules:
All schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K.
None.
Other Matters
For the purposes of complying with the amendments to the rules governing Form S-3 and Form S-8 under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Forms S-8 Nos. 33-23789, 33-26988, 33-40618, 33-40619, 33-45715, 33-46282, 33-53687, 33-55003, 33-59601 and 33-67050, and on Form S-3 No. 33-60955.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALEX. BROWN INCORPORATED
By: s/ A. B. Krongard A. B. Krongard Chief Executive Officer Date: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:
Signature Title Date
s/ A. B. Krongard Chief Executive March 25, 1996 A. B. Krongard Officer; Chairman of the Board of Directors (Principal Executive Officer)
s/ Mayo A. Shattuck III President; Chief March 25, 1996 Mayo A. Shattuck III Operating Officer; Director
s/ Beverly L. Wright Treasurer and Chief March 25, 1996 Beverly L. Wright Financial Officer (Principal Financial and Accounting Officer)
s/ Lee A. Ault III Director March 25, 1996 Lee A. Ault III
s/ Neil R. Austrian Director March 25, 1996 Neil R. Austrian
s/ Thomas C. Barry Director March 25, 1996 Thomas C. Barry
s/ Benjamin H. Griswold IV Director March 25, 1996 Benjamin H. Griswold IV
s/ Steven Muller, Ph.D. Director March 25, 1996 Steven Muller, Ph.D.
s/ David M. Norman Director March 25, 1996 David M. Norman
s/ Frank E. Richardson Director March 25, 1996 Frank E. Richardson
ALEX. BROWN INCORPORATED AND SUBSIDIARIES
Page Financial Statements:
Alex. Brown Incorporated and Subsidiaries included on pages 33 through 47 of the 1995 Annual Report to Stockholders, incorporated herein by reference and attached hereto:
Consolidated Statements of Earnings 33 Consolidated Statements of Financial Condition 34 Consolidated Statements of Stockholders' Equity 35 Consolidated Statements of Cash Flows 36 Notes to Consolidated Financial Statements 37-46 Report of Independent Auditors 47
M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S Alex. Brown Incorporated
Alex. Brown Incorporated (the "Company") is a holding company whose primary subsidiary is Alex. Brown & Sons Incorporated ("Alex. Brown"), a major investment banking and securities brokerage firm. The Company, like other securities firms, is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities, changes in interest rates and demand for investment banking and securities brokerage services, all of which have an impact on the Company's revenues as well as its liquidity. Substantial fluctuations can occur in the Company's revenues and net earnings due to these and other factors.
In periods of reduced market activity, profitability is likely to be adversely affected because certain expenses, consisting primarily of salaries and benefits, communications and occupancy expenses, remain relatively fixed. Accordingly, net earnings for any period should not be considered representative of any other period.
Results of Operations - ------------------------------------------------------------------------------- 1995 COMPARED TO 1994
Revenues totalled $809.4 million, a 34% increase from $605.5 million in 1994.
Commission revenues totalled $173.5 million, a 24% increase from $140.0 million in 1994, primarily as a result of increased private client and institutional listed commissions.
Investment banking revenues increased 49% to $293.4 million from $197.5 million in 1994, primarily due to an increase in revenues from underwriting-related activities. Merger and advisory revenues increased 7% to $67.4 million from $63.2 million in 1994.
Principal transaction revenues increased 16% to $139.4 million from $120.1 million in 1994, primarily due to increases in revenues from OTC trading. Partially offsetting this increase were declines in government and mortgage-backed securities trading.
Interest and dividend revenues increased 54% to $105.5 million from $68.6 million in 1994, due to higher margin loan balances and higher interest rates. Margin loans at year-end totalled $1.4 billion, a 74% increase over the prior year. Average margin balances increased 32%.
Advisory and other revenues totalled $97.6 million, a 23% increase from $79.3 million in 1994, which was primarily attributable to increases in advisory and investment revenues. Advisory revenues increased 28% to $55.6 million from $43.3 million in 1994. Revenues from investments increased to $17.0 million as a result of realized gains and increases in the carrying value of investments. In the prior year, the Firm reported investment revenues of $8.1 million and a $7.8 million gain related to the sale of its interests in Alex. Brown Kleinwort Benson Realty Advisory Holding Company. Correspondent services fees increased 26% in 1995.
Total operating expenses were $651.2 million, a 34% increase from $487.2 million in 1994.
Compensation and benefits expense increased 31% to $432.9 million from $329.5 million in 1994, as a result of increased incentive, commission and salary expense.
Communications expense increased 21% to $33.9 million from $28.2 million, reflecting expenses required to support increased levels of business activity.
Occupancy and equipment expense increased 26% to $39.8 million, primarily as a result of expansion in several offices, increased technology expenditures and costs associated with vacating certain office space.
Interest expense increased 65% to $36.2 million from $21.9 million, primarily due to the cost of financing increased margin loans and interest rate increases.
Floor brokerage, exchange and clearing fees increased 15% to $18.6 million, due to an increased volume of OTC and listed trades.
Other expenses increased 50% to $89.8 million from $59.7 million, as a result of increases in expenses associated with the higher level of business activity.
The Company's effective tax rate for 1995 decreased to 39.6% from 40.1% in 1994.
As a result of the above, net earnings increased to $95.6 million from $70.9 million in 1994. Primary and fully diluted earnings per share were $6.16 and $5.40, respectively, as compared to $4.60 and $4.05 in 1994.
The weighted average number of shares outstanding for purposes of calculating earnings per share includes shares related to outstanding dilutive stock options and is affected by the market price of the Company's Common Stock. Additionally, the calculation of fully diluted earnings per share assumes the conversion into Common Stock of the Company's outstanding convertible subordinated debt, if dilutive. These factors can result in lower rates of incre`ase or higher rates of decrease in earnings per share as compared to the rates of increase or decrease in net earnings.
1994 COMPARED TO 1993 Revenues totalled $605.5 million, a decrease of 4% from $628.2 million in 1993.
Commission revenues totalled $140.0 million, a 6% increase from $131.7 million in 1993, primarily reflecting increased institutional listed commissions.
Investment banking revenues decreased 22% to $197.5 million from $252.8 million in 1993, primarily as a result of decreased underwriting-related revenues. Partially offsetting this decline was a significant increase in merger and advisory fees.
Principal transaction revenues decreased 8% to $120.1 million from $131.0 million in 1993, due to declines in equity, high yield and mortgage-backed trading reflecting unsettled market conditions experienced throughout the year.
Interest and dividend revenues increased 39% to $68.6 million from $49.3 million in 1993, due to higher interest rates and an increase in margin loans.
Advisory and other revenues totalled $79.3 million, a 25% increase from $63.4 million in 1993. The largest contributor to this increase was a gain of $7.8 million relating to the sale of our interests in Alex. Brown Kleinwort Benson Realty Advisory Holding Company. Additionally, revenues from asset management operations increased. Net investment revenue (excluding the gain on sale mentioned above) totalled $8.1 million for the year as compared to $7.9 million in the previous year.
Total operating expenses were $487.2 million, a 2% increase from $479.9 million in 1993.
Compensation and benefits expense decreased 4% to $329.5 million from $344.4 million in 1993, reflecting decreases in commissions and incentive compensation, partially offset by increases in salary expense.
Communications expense increased 17% from $24.2 million to $28.2 million, due primarily to increased levels of business activity and increased technology expenditures.
Occupancy and equipment expense increased 20% to $31.7 million from $26.3 million in 1993, primarily as a result of planned growth, increased technology expenditures and an expense provision related to vacating certain office space prior to expiration of the lease of one of the Company's offices.
Interest expense increased 47% to $21.9 million from $14.9 million in 1993, primarily as a result of financing increased margin loans and securities positions and increased interest rates.
Floor brokerage, exchange and clearing fees increased 18% to $16.2 million from $13.8 million, reflecting higher volumes of listed securities transactions, by both Alex. Brown and its correspondents.
Other operating expenses increased 6% to $59.7 million from $56.3 million in 1993, as a result of costs associated with higher levels of business activity, which were partially offset by a decrease in affiliate expenses.
The Company's effective tax rate increased to 40.1% from 39.8% in 1993.
As a result of the above, net earnings decreased to $70.9 million from $89.2 million in 1993. Primary and fully diluted earnings per share were $4.60 and $4.05, respectively, as compared to $5.61 and $5.09 in 1993.
LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated statement of financial condition reflects a liquid financial position. The majority of the securities (both long and short) in Alex. Brown's trading accounts are readily marketable and actively traded. Customer receivables include margin balances and amounts due on uncompleted transactions. Receivables from other brokers and dealers generally represent either current open transactions, which usually settle within a few days, or securities borrowed transactions which normally can be closed out within a few days. Most of the Company's receivables are secured by marketable securities. The Company also has investments in fixed assets and illiquid securities but such investments are not a significant portion of the Company's total assets.
High yield securities, also referred to as "junk" bonds, are non-investment grade debt securities which are rated by Standard & Poor's as lower than BBB- and by Moody's Investors Service as lower than Baa3. The market for high yield securities can be extremely volatile and many experienced significant declines in the past several years. At year-end 1995, in its high yield operations, Alex. Brown had $12.9 million and $.6 million of long and short inventory, respectively, as compared to $21.3 million and $1.0 million at year-end 1994.
As of year-end 1995, the carrying value of the Company's merchant banking investments was $23.5 million, compared to $13.6 million at year-end 1994. Gains related to merchant banking investments were $6.1 million in 1995 compared to $3.9 million in 1994. At December 31, 1995, the Company had committed to invest an additional $10.3 million in a merchant banking partnership. It is anticipated that merchant banking investments will generally have a holding period of three years or more. It is also anticipated that these activities will be funded with existing sources of working capital. The Company has no outstanding bridge loans.
From time to time the Company makes subordinated loans to correspondents as part of its Correspondent Services business. These loans may be secured or unsecured and are funded through general working capital sources. At year-end 1995, $3.0 million of such loans were outstanding.
The Company finances its business through a number of sources, consisting primarily of paid-in capital, funds generated from operations, free credit balances in customers' accounts, deposits received on securities loaned, repurchase agreements and bank loans, as well as through the issuance of debt and equity securities.
The Company borrows from banks on a short-term basis both on an unsecured basis and under arrangements pursuant to which the amount of funds available is based on the value of the securities owned by the Company and customers' margin securities pledged as collateral. In addition, the Company borrows on a long-term basis from banks on both an unsecured basis and with fixed assets pledged as collateral ("term loans"). The Company has historically been able to obtain necessary bank borrowings and believes that it will continue to be able to do so in the future. The Company has $150 million of unused
committed lines of credit under revolving credit agreements (the "Credit Facilities") with various banks. The Credit Facilities expire in August 1996. The Credit Facilities and term loans contain various restrictive covenants, the most significant of which require the maintenance of minimum levels of net worth by both the Company and Alex. Brown and minimum levels of net capital by Alex. Brown. There were no outstanding borrowings under the Credit Facilities at December 31, 1995. At December 31, 1995, the Company and Alex. Brown were in compliance with all restrictive covenants contained in the Credit Facilities and term loans.
On July 10, 1995, the Company filed a shelf registration statement with the Securities and Exchange Commission to register the offer and sale of up to $150 million of senior debt and convertible debt securities. On August 16, 1995, the Company issued $110 million of 75/8% Senior notes due 2005. The Senior notes were issued at a discount to yield 7.705%.
Alex. Brown is required to comply with the net capital rule of the Securities and Exchange Commission. The Company's ability to withdraw capital from Alex. Brown may be limited by the rule. Alex. Brown has consistently exceeded minimum net capital requirements under the rule. At December 31, 1995, Alex. Brown had aggregate net capital of $322 million, which exceeded the minimum net capital requirements by $296 million.
During 1995, the Company repurchased a total of 29,601 shares of its Common Stock at a cost of $1.2 million. At year-end 1995, the Company had a remaining repurchase authorization of approximately 1.4 million shares. The Company anticipates that, subject to market conditions, it will make additional repurchases.
Management of the Company believes that existing capital and credit facilities, when combined with funds generated from operations, will provide the Company with sufficient resources to meet its present and reasonably foreseeable future cash and capital needs.
RISK MANAGEMENT The Company records securities transactions on a settlement date basis, generally the third business day following the trade execution. The risk of loss on unsettled transactions relates to customers' or brokers' inability or refusal to meet the terms of their contracts. The Company monitors its exposure to market and counterparty risk through a variety of financial, position and credit exposure reporting and control procedures. The Risk Management, Credit and Investment Committees, each of which meets on a regular basis, include members of senior management. Each trading department is subject to internal position limits established by the Risk Management Committee which also reviews positions and results of the trading departments. Alex. Brown's Credit Committee establishes and reviews appropriate credit limits for customers and brokers seeking margin, repurchase and reverse repurchase agreement facilities and securities borrowed and securities loaned arrangements. The Investment Committee approves investment purchases and sales and reviews holdings.
EFFECTS OF INFLATION Because the Company's assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects the Company's expenses such as employee compensation, office space leasing costs and communication charges, and increases therein may not be readily recoverable in the price of services offered by the Company. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets and on the value of securities owned by the Company, it may adversely affect the Company's financial position and results of operations.
CONSOLIDATED STATEMENTS OF EARNINGS Alex. Brown Incorporated
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION Alex. Brown Incorporated
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Alex. Brown Incorporated
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Alex. Brown Incorporated
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Alex. Brown Incorporated
1) Description of Business and Significant Accounting Policies
The accompanying consolidated financial statements include the activities of Alex. Brown Incorporated and subsidiaries in which it owns a controlling financial interest (the Company). Its principal subsidiary is Alex. Brown & Sons Incorporated (Alex. Brown), which is wholly owned.
The Company is primarily engaged in a single line of business as a securities broker dealer, which includes several types of services, such as principal and agency transactions, underwriting and other investment banking advisory, asset management and correspondent clearing. The Company, like other securities firms, is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities, changes in interest rates and demand for investment banking and securities brokerage services, all of which have an impact on the Company's revenues as well as its liquidity.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
All material intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in entities in which the Company holds a noncontrolling financial interest of 20% to 50%.
Securities transactions and the related revenues and expenses are reflected in the financial statements on a settlement date basis, which is generally three business days after trade date. Revenues and expenses on a trade date basis are not materially different from revenues and expenses on a settlement date basis.
Firm trading and investment securities and securities sold, not yet purchased are carried at market value, and unrealized gains and losses relating thereto are reflected in revenues. Market values are generally based on quoted market prices. If quoted market prices are not available, market values are determined based on other relevant factors, including quoted market prices for similar securities. Investments made in connection with merchant banking transactions are recorded at their initial cost. The carrying values of such investments are adjusted when the market values are supported by listed market prices, adjusted for liquidity and other relevant factors. In addition, the carrying values are reduced when the Company determines that the eventual realizable value is less than the carrying value based on financial and market information relevant to the investment.
Securities purchased under agreements to resell and securities sold under repurchase agreements are accounted for as financing transactions. Such securities consist of obligations of the United States government or one of its agencies. The Company's practice is to maintain collateral sufficient to secure amounts receivable pursuant to securities purchased under agreements to resell.
Depreciation of office equipment is determined using the straight line method over useful lives ranging from 3 to 10 years. Leasehold improvements are amortized on the straight line method over the lesser of the estimated economic useful life of the improvements or the remaining term of the lease.
Deferred tax assets and liabilities represent the expected future tax consequences of the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in the period that includes the enactment date.
The Company classifies all short-term investments with maturities at dates of purchase of three months or less as cash equivalents except for short-term investments carried in trading accounts.
Cash management facility payable represents the excess of outstanding checks written on certain banks over amounts on deposit at such banks.
Primary and fully diluted earnings per share are based on the weighted average number of shares outstanding and assume the exercise of outstanding dilutive options to purchase common stock. Fully diluted earnings per share further assumes the conversion into common stock of convertible subordinated debentures, if dilutive.
The Company uses the intrinsic value method to account for stock-based employee compensation plans. Under this method, compensation cost is recognized for awards of shares of common stock to employees under compensatory plans only if the quoted market price of the stock at the grant date (or other measurement date, if later) is greater than the amount the employee must pay to acquire the stock. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Statement No. 123 permits companies to adopt a new fair value based method to account for stock-based employee compensation plans or to continue using the intrinsic value method. If the intrinsic value method is used, information concerning the pro forma effects on net earnings and earnings per share of adopting the fair value based method is required to be presented in the notes to the financial statements. The Company intends to continue using the intrinsic value method and will provide the pro forma disclosures about its stock-based employee compensation plans in its 1996 financial statements, as required by Statement No. 123.
Certain amounts in 1994 and 1993 have been reclassified to conform to the 1995 presentation.
2) Receivables from Customers
Receivables from customers include amounts due on uncompleted transactions and margin balances. Securities owned by customers and held as collateral for these receivables are not reflected in the financial statements.
3) Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Receivables from and payables to brokers, dealers and clearing organizations consisted of the following
(in thousands):
1995 1994 - --------------------------------------------------------------------------------
Securities failed to deliver $ 16,107 $ 23,551 Deposits paid for securities borrowed 357,365 166,976 Other 42,977 46,952 ---------------------------- Total receivables $416,449 $237,479 ============================ Securities failed to receive $ 15,146 $ 11,052 Deposits received for securities loaned 433,808 250,098 Other 31,667 18,487 ---------------------------- Total payables $480,621 $279,637 ============================
Payables to brokers, dealers and clearing organizations include amounts which are due upon delivery of securities to Alex. Brown. In the event the counterparty does not fulfill its contractual obligation to deliver these securities, Alex. Brown may be required to purchase the securities at prevailing market prices to satisfy its obligations.
4) Firm Trading Securities
Firm trading securities consisted of the following (in thousands): 1995 1994 - --------------------------------------------------------------------------------
United States government and agencies thereof $ 9,315 $ 4,946 Mortgage-backed 1 648 States and municipalities 36,607 39,978 Corporate debt 42,945 25,631 Equities and convertible debt 21,696 22,149 ------------------------- $110,564 $93,352 =========================
5) Principal Transactions Revenue
The components of principal transactions revenue were as follows (in thousands):
1995 1994 1993 - -----------------------------------------------------------------------------
Equity trading $104,335 $69,915 $ 75,586 Equity derivatives (921) 328 (321) Fixed income trading 36,437 49,110 55,764 Fixed income derivatives (468) 766 1 ------------------------------------------ $139,383 $120,119 $131,030 ==========================================
The Company's equity trading operations include trading in over the counter equities, listed equities and convertible securities. The Company's fixed income trading activities include trading in U.S. government and government agency obligations, mortgage-backed securities, state and municipal obligations and investment grade and non-investment grade (high yield) corporate debt. The Company sells short S&P 500 Index futures contracts to hedge its equity inventories and Treasury Bond and Municipal Bond Index futures contracts to hedge its fixed income inventories. The futures contracts involve off-balance-sheet risk since the cost to close out the contracts may exceed the amounts recognized in the Consolidated Statements of Financial Condition. The contracts are listed on regulated exchanges and are marked to market daily with the resulting gain or loss reflected in revenue. The exchanges guarantee performance of counterparties; therefore, credit risk is limited to a default by the exchange. The notional amounts and fair values of these contracts at December 31, 1994 and average fair values during 1995 and 1994 were not material. There were no open futures contracts at December 31, 1995.
6) Investment Securities
Investment securities consisted of the following (in thousands): 1995 1994 - -------------------------------------------------------------------------------
Merchant banking investments $23,546 $13,555 Investment partnerships 17,703 11,205 Equities 5,036 5,035 Mutual funds 3,359 2,389 U.S. government obligations 650 651 --------------------------- $50,294 $32,835 ===========================
7) Intangible Asset
In December 1993, the Company entered into an agreement to purchase the rights to the name "Alex. Brown" for $10.5 million. That agreement was consummated on January 3, 1994. Previously, the name had been used by the Company pursuant to an agreement with certain lineal descendants of Alexander Brown, the founder of the Company. The Company is amortizing the cost of the name over 40 years.
8) Borrowings
BANK LOANS
Bank loans were collateralized as follows (in thousands): 1995 1994 - --------------------------------------------------------------------------------
Customers' margin securities $100,000 $45,679 Office equipment and leasehold improvements 1,308 5,964 Unsecured 18,700 21,300 --------------------------- $120,008 $72,943 ===========================
The Company obtains bank loans which are collateralized by securities owned by the Company and customers' margin securities. Such loans are payable on demand and bear interest based on the federal funds rate (5.3% at December 31, 1995). The weighted average interest rate on these loans was 5.5% at December 31, 1995. The average balances of such loans outstanding were $120,507,000 during 1995 at a weighted average interest rate of 6.4% and $121,263,000 during 1994 at a weighted average interest rate of 4.6%.
Term loans of $1,308,000 and $5,964,000 at December 31, 1995 and 1994, respectively, are collateralized by office equipment and leasehold improvements and bear interest at rates ranging from 5.4% to 9.3%. The weighted average interest rates of these term loans were 7.9% during 1995 and 7.8% during 1994. The outstanding term loan at December 31, 1995 matures in 1996.
A term loan of $5,300,000 and $6,300,000 at December 31, 1995 and 1994, respectively, is unsecured and bears interest at a variable rate based on the London Interbank Offered Rate (5.7% at December 31, 1995). The weighted average interest rates were 6.9% during 1995 and 4.8% during 1994. The loan matures as follows: $1,200,000 in 1996, $2,350,000 in 1997 and $1,750,000 in 1998.
A term loan of $13,400,000 and $15,000,000 at December 31, 1995 and 1994, respectively, is unsecured and bears interest at a variable rate based on the federal funds rate. The weighted average interest rates were 6.6% during 1995 and 5.6% during 1994. The loan matures as follows: $1,600,000 in 1996, $2,400,000 in each of 1997 and 1998 and $7,000,000 in 1999.
SENIOR NOTES
In August 1995, the Company issued $110,000,000 senior notes due August 2005 which bear interest at 7 5/8%. The notes were sold at a discount to yield 7.705%.
CONVERTIBLE SUBORDINATED DEBENTURES
The Company issued $25,000,000 convertible subordinated debentures in June 1986. The debentures are due June 2001, bear interest at 53/4% and are convertible into the Company's common stock at the rate of one share of common stock for each $26.03 of principal amount of debentures. The debentures are redeemable at the option of the Company at prices ranging from 101% (in 1995) to par over the term to maturity. During 1995, $13,040,000 par value of the debentures was converted into 500,952 shares of the Company's common stock.
CREDIT FACILITIES
The Company has $150 million of unused committed lines of credit under revolving credit agreements (the "Credit Facilities") with various banks. The Credit Facilities expire in August 1996. The Credit Facilities and term loans contain various restrictive covenants, the most significant of which require the maintenance of minimum levels of net worth by both the Company and Alex. Brown and minimum levels of net capital by Alex. Brown. There were no outstanding borrowings under the Credit Facilities at December 31, 1995. At December 31, 1995, the Company and Alex. Brown were in compliance with all restrictive covenants contained in the Credit Facilities and term loans.
INTEREST PAYMENTS
Interest payments, including interest payments on repurchase agreements, securities loaned and convertible subordinated debentures, were $32,210,000, $20,381,000 and $14,122,000 during 1995, 1994 and 1993, respectively.
9) Securities Sold, Not Yet Purchased
Securities sold, not yet purchased consisted of the following (in thousands):
1995 1994 - -------------------------------------------------------------------------------
United States government and agencies $34,958 $4,750 States and municipalities 67 329 Corporate debt 5,593 3,286 Equities and convertible debt 13,658 17,477 --------------------------- $54,276 $25,842 ===========================
Securities sold, not yet purchased represent obligations to purchase securities at prevailing market prices. These transactions result in off-balance-sheet risk since Alex. Brown's ultimate cost to satisfy the obligations is dependent upon future prices of the securities and may exceed the amounts recognized in the Consolidated Statements of Financial Condition.
10) Net Capital Requirements
Alex. Brown is required to comply with the net capital rule of the Securities and Exchange Commission. The rule may limit the Company's ability to withdraw capital from Alex. Brown. Alex. Brown has consistently exceeded the minimum net capital requirements under the rule. At December 31, 1995, Alex. Brown's net capital was $322,292,000 which exceeded net capital rule requirements by $295,954,000. Alex. Brown has two London-based subsidiaries which are subject to the capital requirements of the Securities and Futures Authority (SFA). At December 31, 1995, these subsidiaries were in compliance with the SFA capital adequacy requirements.
11) Commitments and Contingencies
LEASES
The Company's subsidiaries are obligated under operating leases for office facilities and equipment expiring at various dates to 2013. Two leases for office facilities are with partnerships in which certain employees of the Company are partners. Under these leases, the subsidiaries pay all insurance, energy and other occupancy costs. Another lease for office facilities is with a partnership in which the Company has an ownership interest. The approximate annual minimum rentals under the leases payable to such related parties and others as of December 31, 1995 were as follows (in thousands):
Years Ending December 31 Related Parties Others - ------------------------------------------------------------------ 1996 $2,844 $ 9,187 1997 711 12,178 1998 -- 25,138 1999 -- 13,029 2000 -- 13,076 2001 and thereafter -- 117,174 - ------------------------------------------------------------------
Rent expense, including equipment rentals, was $20,720,000, $16,096,000 and $14,829,000 including $2,450,000, $2,445,000 and $2,939,000 to related parties, for 1995, 1994 and 1993, respectively.
LETTERS OF CREDIT
At December 31, 1995, Alex. Brown was contingently liable for up to $51,000,000 under unsecured letters of credit used to satisfy required margin deposits at five securities clearing corporations.
INVESTMENT COMMITMENTS
At December 31, 1995, the Company had committed to invest up to $11.6 million in certain investment partnerships, including $10.3 million in a merchant banking partnership.
LITIGATION
In the course of its investment banking and securities brokerage business, Alex. Brown has been named a defendant in a number of lawsuits and may be required to contribute to final settlements in actions, in which it has not been named a defendant, arising out of its participation in the underwritings of certain issues. A substantial settlement or judgment in any of these cases could have a material adverse effect on the Company. Although the ultimate outcome of such litigation is not subject to determination at present, in the opinion of management, after consultation with counsel, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Alex. Brown executes, settles and finances securities transactions in connection with its customer and correspondent clearing activities ("customers"). These activities may expose the Company to off-balance-sheet risk in the event a counterparty is unable to fulfill its contractual obligations.
In accordance with industry practice, customers and other brokers are not required to deliver cash or securities to Alex. Brown pursuant to securities transactions until settlement date, which is generally three business days after trade date. The Company is exposed to risk of loss should any counterparty to a securities transaction fail to fulfill its contractual obligations, and Alex. Brown is required to buy or sell securities at prevailing market prices.
Alex. Brown's customers may sell securities not yet purchased or write option contracts ("short sales"). Regulatory and internal margin requirements determine the collateral value that customers who execute short sales must have in their accounts in the form of cash or securities. Customer short sales may expose the Company to risk of loss in the event that collateral held by Alex. Brown is not sufficient to cover losses which customers may incur. In the event a customer fails to fulfill its obligations, Alex. Brown may be required to buy or sell securities at prevailing market prices.
The Company seeks to minimize the above risks through a variety of reporting and control procedures. Customers and other brokers are required to maintain collateral in compliance with regulatory and internal requirements. The adequacy of collateral is reviewed daily and customers may be required to deposit additional collateral or reduce short positions when necessary. Alex. Brown sets credit limits for customers executing transactions on margin and monitors compliance with such limits on a daily basis. Alex. Brown establishes credit limits for brokers with which it conducts stock loan, stock borrow and repurchase and reverse repurchase transactions. Alex. Brown monitors compliance with and the appropriateness of such limits.
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
As a securities broker, Alex. Brown engages in various securities trading and brokerage activities with other brokers and institutional and individual customers. In connection with these activities, Alex. Brown enters into reverse repurchase and repurchase agreements which are collateralized by U.S. government and agency securities and securities lending arrangements which may result in credit exposure in the event the counterparty fails to fulfill its contractual obligations. A substantial portion of Alex. Brown's transactions are executed with and on behalf of other brokers and dealers and institutional investors, including commercial banks, insurance companies, pension plans, mutual funds and other financial institutions. The Company's exposure to credit risk can be directly impacted by volatile securities markets which may impair the ability of counterparties to satisfy their contractual obligations.
The Company seeks to control its credit risk through the use of a variety of reporting and control procedures described in the preceding discussion of financial instruments with off-balance-sheet risk. Substantially all of Alex. Brown's receivables are collateralized by securities which are generally in physical possession, at depositories or due from other parties.
12) Fair Value of Financial Instruments
RECEIVABLES
Receivables from customers and brokers, dealers and clearing organizations include margin loans which are payable on demand, amounts due on open transactions which usually settle within a few days and cash deposits made in connection with securities borrowed transactions which normally can be closed out within a few days. The carrying amounts of these receivables, which are generally secured by marketable securities, and other receivables approximate fair value.
FIRM TRADING AND INVESTMENT SECURITIES (LONG AND SHORT)
Firm trading and investment securities are carried in the consolidated financial statements at market value (see notes 1, 4 , 6 and 9).
BANK LOANS
The principal balance of bank loans which are payable on demand is considered to be the fair value of such loans. The carrying values of the term loans approximated fair values at December 31, 1995 and 1994 based on borrowing rates currently available to the Company for loans with similar terms and remaining maturities.
PAYABLES
Payables to customers and brokers, dealers and clearing organizations include free credit balances which are payable on demand, amounts due on open transactions which usually settle within a few days, and cash deposits received in connection with customer short sales and securities loaned transactions which normally can be closed out within a few days. Other payables include expense accruals and amounts due to other brokers resulting from securities underwritings. The carrying amount of payables approximates fair value.
REPURCHASE AGREEMENTS
The carrying amounts of securities sold under repurchase agreements and securities purchased under agreements to resell are considered to be the fair values of such transactions.
SENIOR NOTES AND CONVERTIBLE SUBORDINATED DEBENTURES
The fair values of the Senior notes and Convertible subordinated debentures were as follows (in thousands):
1995 1994 - --------------------------------------------------------------------- 7 5/8% Senior notes $117,469 -- 5 3/4% Convertible subordinated debentures 19,413 $26,595
The fair values are based on quoted market prices. At December 31, 1995, the Convertible subordinated debentures were callable at the Company's option at $12,080,000.
13) Income Taxes
The components of income tax expense were as follows (in thousands):
1995 1994 1993 - ----------------------------------------------------------------------------- Federal $51,153 $ 38,649 $ 47,644 State and local 11,467 8,761 11,465 ------------------------------------------- $62,620 $ 47,410 $59,109 =========================================== Current $72,758 $ 58,106 $62,362 Deferred (10,138) (10,696) (3,253) ------------------------------------------- $62,620 $ 47,410 $59,109 ===========================================
Income tax expense is reconciled to amounts computed by applying the federal corporate tax rate to earnings before income taxes as follows (in thousands):
1995 1994 1993 - -----------------------------------------------------------------------------
Tax at federal statutory rate $55,361 $41,398 $51,917 State and local income taxes, net of federal income tax benefit 7,454 5,695 7,452 Other, net (195) 317 (260) ----------------------------------- $62,620 $47,410 $59,109 ===================================
The components of the net deferred income tax asset were as follows (in thousands):
1995 1994 - ----------------------------------------------------------------------------- Deferred income tax assets: Unrealized loss-- Firm securities $ 3,584 $ 1,851 Equity awards -- 904 Accrued expenses 28,585 18,528 Other investments 106 123 Depreciation 3,892 2,070 Other 1,265 1,613 ---------------------------- Total deferred income tax assets 37,432 25,089 ----------------------------
Deferred income tax liabilities: Unrealized profit--Firm securities 4,667 1,852 Other investments 1,852 2,221 Depreciation 1,426 1,153 Other 1,674 2,188 ---------------------------- Total deferred income tax liabilities 9,619 7,414 ---------------------------- Net deferred income tax asset $27,813 $17,675 ============================
There was no valuation allowance relating to deferred income tax assets at December 31, 1995 and 1994. Income tax payments were $64,903,000, $69,438,000 and $50,428,000 during 1995, 1994 and 1993, respectively.
14) Employee Benefit Plans
EMPLOYEE DEBENTURES
The Company has sold convertible subordinated debentures to certain employees pursuant to the 1991 Equity Incentive Plan. The debentures are convertible into the Company's common stock three years after the date issued. The debentures may be redeemed at par if the employee terminates employment with the Company. The Company has made loans to the employees, with a six year term, to fund the purchase of the debentures. Information related to debentures outstanding at December 31, 1995 and issued in January 1996 was as follows:
Principal amount Interest Conversion Date issued of debentures rate Due date price/share - ------------------------------------------------------------------------------
January 1991 $ 822,000 8.125% June 1997 $8.50 January 1992 1,837,000 6.750% June 1998 25.50 January 1993 2,250,000 6.375% June 1999 23.00 January 1994 3,925,000 5.375% June 2000 28.83 January 1995 5,392,000 8.000% June 2001 33.70 January 1996 7,820,000 5.750% June 2002 46.00
The Company has agreed to forgive one-sixth of the loans at the end of each of the first three years if the Company's return on equity exceeds an annual target or one-half of the loans at the end of the third year, to the extent not otherwise forgiven, if the Company's return on equity for the three year period exceeds an average target. The right to receive loan forgiveness is subject to three year cliff vesting. Loan forgiveness targets for the second three year period of the loan term are set at the end of the third year.
The Company met the return on equity targets in 1991 through 1995. Compensation expense relating to such loan forgiveness was $2,675,000, $1,804,000 and $1,092,000 for 1995, 1994 and 1993, respectively. Information relating to target returns on equity is set forth below:
Initial three year period Second three year period Date issued Annual Average Annual Average - --------------------------------------------------------------------------------
January 1991-January 1992 15% 17% 15% 17% January 1993 15% 17% 15% 15% January 1994-January 1995 15% 17% -- -- January 1996 15% 15% -- --
EQUITY PARTNERSHIP PLAN
During 1995, 1994 and 1993, the Company sold 58,216, 18,250 and 544,000 shares of common stock, respectively, and convertible subordinated debentures at market to certain key employees pursuant to the 1991 Equity Incentive Plan. The debentures are generally convertible into the Company's common stock in stages beginning four years after the date issued. The debentures may be redeemed at par if the employee terminates employment with the Company. The Company made loans to the employees of $52,379,000 to finance the purchase of the stock and debentures. Under the Plan, the Company may forgive a portion of the principal amount of the loans granted prior to July 1995, not to exceed the difference between market value and book value at the time of purchase. Loan forgiveness resulted in compensation expense of $1,277,000, $1,250,000 and $3,200,000 in 1995, 1994 and 1993, respectively. Information related to debentures outstanding at December 31, 1995 was as follows:
Principal amount Interest Conversion Date issued of debentures rate Due date price/share - -------------------------------------------------------------------------------
August 1993 $23,434,000 5.32% August 2001 $23.750 May 1994 442,000 6.92% May 2002 26.375 November 1994 532,000 7.45% November 2002 26.625 February 1995 867,000 7.96% February 2003 36.125 May 1995 1,772,000 7.12% May 2003 39.000 July 1995 10,311,000 6.28% July 2005 48.750
STOCK OPTIONS
The Company has granted nonqualified stock options to certain employees and directors. Payment for the shares may be made in cash, shares of the Company's common stock or a combination thereof. Options were granted to purchase 430,900, 404,000 and 375,000 shares of the Company's common stock in January 1996, 1995 and 1994, respectively. These options and options granted in January 1993 are exercisable in six equal installments beginning one year from the date of grant and expire after ten years. The exercise price for these options is 25% greater than the lesser of the average market value of the Company's common stock 30 days prior to the date of grant or the market value on the date of grant. Options previously granted are generally exercisable in five equal installments beginning one year from the date of grant and expire after five years.
The following table sets forth activity relating to the number of shares covered by stock options (options granted include amounts granted through January of the following year):
1995 1994 1993 - ------------------------------------------------------------------------------- Outstanding at January 1 2,195,109 2,108,156 2,168,568 Granted 439,900 413,000 384,000 Exercised (at $8.50-$31.34) (438,026) (249,105) (356,032) Forfeited (45,484) (76,942) (88,380) ------------------------------------------- Outstanding at December 31 2,151,499 2,195,109 2,108,156 ===========================================
Options outstanding at December 31, 1995 and granted in January 1996 have an exercise price range of $8.50-$50.00 per share and a weighted average exercise price of $31.84 per share. Options for 889,603 shares were exercisable at December 31, 1995.
RESTRICTED STOCK AWARDS
Restricted stock awards were granted prior to 1991 and vest over five years. Unvested shares are subject to forfeiture if the recipient terminates employment with the Company. The market value of shares granted is being amortized over the periods in which the employees are providing the related services (compensation expense of $52,000 for 1995, $94,000 for 1994, $91,000 for 1993).
RETIREMENT PLANS
Effective July 1, 1995, the Company merged its 401(k) deferred compensation and profit sharing plans (the "Plan"). Employees are permitted within limitations imposed by tax law to make pretax contributions to the Plan pursuant to salary reduction agreements. The Company may make discretionary matching and profit sharing contributions to the Plan and may make additional contributions to preserve the Plan's tax exempt status. The Company also has retirement plans for certain employees in foreign offices not covered by the Plan. Compensation expense for the Company's contributions to retirement plans was $9,600,000, $5,000,000 and $6,361,000 for 1995, 1994 and 1993, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an employee stock purchase plan pursuant to which employees may purchase shares of the Company's common stock through payroll deductions, subject to certain limitations, at a price equal to 85% of the fair market value of the stock on four quarterly investment dates. The plan provides for the issuance of up to 1,000,000 shares. A total of 657,880 shares have been issued under the plan, including 91,441 shares in 1995.
EQUITY COMPENSATION PLAN
During 1995, 1994 and 1993, certain key employees had a portion of cash compensation withheld and replaced by restricted common stock of the Company at a 15% discount from market and interests in investment accounts through which the employees can direct investments in selected Company-sponsored investment vehicles. Compensation expense is recorded currently based on the value of the stock and interests in the investment accounts on the award date. The restricted stock cannot be sold and funds cannot be withdrawn from the investment accounts for three years (five years if employment terminates during the initial three year period). These restrictions are removed in the event of death, disability or retirement. Pursuant to the Equity Compensation Plan, $11,102,000, $7,080,000 and $8,729,000 of cash compensation was withheld and replaced by 163,155, 130,058 and 204,242 shares of the Company's common stock and interests in investment accounts for 1995, 1994 and 1993, respectively.
DEFERRED COMPENSATION PLAN
The Company maintains a deferred compensation plan for Private Client investment representatives. Eligible participants can direct the investment of their deferred compensation amounts by selecting among various Company-sponsored investment vehicles and the common stock of the Company at a 15% discount from market. The employees vest in the deferred compensation accounts after four years. The deferred compensation is forfeited if the employee terminates employment with the Company during the vesting period except for termination due to death, disability or retirement. The amount of deferred compensation, including any stock discounts, is being amortized over the periods in which the employees are providing the related services (compensation expense of $1,063,000 for 1999, $1,743,000 for 1998, $2,414,000 for 1995 through 1997, $1,413,000 for 1994 and $769,000 for 1993).
REPORT OF INDEPENDENT AUDITORS Alex. Brown Incorporated
Board of Directors Alex. Brown Incorporated:
We have audited the accompanying consolidated statements of financial condition of Alex. Brown Incorporated and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alex. Brown Incorporated and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland January 24, 1996
SELECTED CONSOLIDATED FINANCIAL INFORMATION Alex. Brown Incorporated
QUARTERLY FINANCIAL DATA (UNAUDITED) Alex. Brown Incorporated
CORPORATE INFORMATION Alex. Brown Incorporated
Price Range of Common Stock and Dividends - -------------------------------------------------------------------------------- The common stock of the Company trades on the NYSE under the symbol "AB." As of December 31, 1995, there were approximately 504 holders of record of the Company's common stock. The following tables set forth the high and low sales prices of the common stock and the cash dividends declared on the common stock for the periods indicated.
Price Range of Common Stock - -------------------------------------------------------------------------------- 1995 High Low - -------------------------------------------------------------------------------- First Quarter $39 $29 5/8 Second Quarter $47 5/8 $38 1/8 Third Quarter $60 5/8 $42 1/8 Fourth Quarter $58 1/4 $40
1994 High Low - -------------------------------------------------------------------------------- First Quarter $30 1/8 $23 3/4 Second Quarter $28 3/4 $23 1/4 Third Quarter $29 5/8 $24 Fourth Quarter $30 3/8 $25
Dividend Information - -------------------------------------------------------------------------------- Dividend Per Share Declaration Date Record Date Payment Date - -------------------------------------------------------------------------------- 1995 $.175 April 21, 1995 May 1, 1995 May 10, 1995 $.20 July 25, 1995 August 7, 1995 August 16, 1995 $.20 October 19, 1995 October 30, 1995 November 9, 1995 $.20 January 24, 1996 February 5, 1996 February 15, 1996
1994 $.15 April 14, 1994 April 26, 1994 May 6, 1994 $.175 July 18, 1994 July 29, 1994 August 10, 1994 $.175 October 18, 1994 October 28, 1994 November 8, 1994 $.175 January 25, 1995 February 6, 1995 February 15, 1995
Form 10-K - -------------------------------------------------------------------------------- A copy of the Company's Annual Report on Form 10-K for 1995 as filed with the Securities and Exchange Commission is available without charge on request by writing to Beverly L. Wright, Chief Financial Officer, Alex. Brown Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202.
Auditors - -------------------------------------------------------------------------------- KPMG Peat Marwick LLP 111 South Calvert Street Baltimore, Maryland 21202 (410) 783-8300
Transfer Agent and Registrar - -------------------------------------------------------------------------------- Chemical Bank 450 West 33rd Street New York, New York 10001 (800) 851-9677
Commission File No. 0-14199
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
EXHIBITS
TO
ANNUAL REPORT ON FORM 10-K UNDER THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Alex. Brown Incorporated
ALEX. BROWN INCORPORATED Annual Report on Form 10-K
Index to Exhibits
Exhibit No. Exhibit Page
3.1 Charter of the Registrant, as amended (4)
3.2 By-Laws of the Registrant, as amended (2)
4.1 Indenture dated as of June 12, 1986 between Alex. Brown Incorporated and Bankers Trust Company, Trustee, relating to the Company's 5 3/4% convertible Subordinated Debentures due 2001 (2)
4.2 Indenture dated as of July 10, 1995 between Alex. Brown Incorporated and Chemical Bank, Trustee, relating to the Company's 7 5/8% Senior Notes due 2005 (11)
4.3 Agreement to furnish Loan Agreements ____
10.1 Lease dated as of January 1, 1984 by and between Alex. Brown Partners, a Maryland Limited Partnership, and Alex. Brown & Sons Incorporated (1)
10.1(a) First Amendment to Lease dated July 29, 1993 (9)
10.2 Lease dated as of January 1, 1985 by and between Brown Realty Company and Alex. Brown & Sons Incorporated (1)
10.2(a) Amendment to Lease dated July 29, 1993 (9)
10.3 Lease dated July 2, 1987 by and between Alex. Brown & Sons Incorporated and Calvert-Baltimore Associates Limited Partnership (3)
10.3(a) First Amendment to Lease dated March 8, 1988 by and between Calvert-Baltimore Associates Limited Partnership and Alex. Brown & Sons Incorporated (5)
10.3(b) Second Amendment to Lease dated August 10, 1989 by and between Calvert-Baltimore Associates Limited Partnership and Alex. Brown & Sons Incorporated (5)
10.4 First Amended and Restated Stockholders' Agreement dated June 23, 1989 among the Registrant and certain stockholders of the Registrant, as amended (8)
10.5* Alex. Brown Incorporated 1991 Equity Incentive Plan (7)
10.6* Alex. Brown Incorporated 1991 Non-Employee Director Equity Plan (6)
10.7* Benjamin H. Griswold IV Employment (9) Agreement
10.8* 1995 Non-Employee Director Stock (10) Purchase Plan
11 Statement of Computation of per share earnings ____
12 Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges ____
13 Pages 28 through 31, 33 through 49 and 52 of the Registrant's Annual Report to Stockholders for the year ended December 31, 1995 (12)
21 Subsidiaries of the Registrant (2)
23 Consent of KPMG Peat Marwick LLP ____
27 Financial Data Schedule ____
* 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.
(11) Incorporated by reference to the corresponding Exhibit to the Registration Statement No. 33-60955 on Form S-3 of the Company filed on July 10, 1995.
(12) Incorporated by reference to the corresponding Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.