-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWiRfzVsu9JgMHopCehVbgohPn208qAGjb10k6qnDhqoIpRB1qKkxK8/ZYKV5Ppn cdN4S7q7A1ZhDMa1puzq9w== 0000950130-97-004068.txt : 19970918 0000950130-97-004068.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950130-97-004068 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970901 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19970912 SROS: AMEX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKERS TRUST NEW YORK CORP CENTRAL INDEX KEY: 0000009749 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 136180473 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-05920 FILM NUMBER: 97679676 BUSINESS ADDRESS: STREET 1: 130 LIBERTY STREET CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2122502500 MAIL ADDRESS: STREET 1: 130 LIBERTY STREET CITY: NEW YORK STATE: NY ZIP: 10006 FORMER COMPANY: FORMER CONFORMED NAME: BT NEW YORK CORP DATE OF NAME CHANGE: 19671107 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) September 1, 1997 ------------------ BANKERS TRUST NEW YORK CORPORATION ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK ----------------------------------------------------------------- (State or other jurisdiction of incorporation) 1-5920 13-6180473 ---------------------- ------------------------------- (Commission file number) (IRS employer identification no.) 130 LIBERTY STREET, NEW YORK, NEW YORK 10006 ----------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 250-2500 -------------- ITEM 5 OTHER EVENTS As previously reported by Bankers Trust New York Corporation (the "Corporation") on its Current Report on Form 8-K filed September 4, 1997, Alex. Brown Incorporated ("ABI") merged into BT Alex. Brown Holdings Incorporated, a wholly- owned subsidiary of the Corporation (the "Merger"). The Merger was accounted for as a "pooling of interests" under generally accepted accounting principles. The first quarter Alex. Brown historical consolidated statements of financial condition as of March 31, 1997 (unaudited) and December 31, 1996, and the related interim statements of earnings, cash flows and stockholders' equity for the three months ended March 31, 1997 and 1996, unaudited notes to the consolidated financial statements and Management's Discussion and Analysis of Results of Operations and Financial Condition are contained in Exhibit 99.1. The second quarter Alex. Brown historical consolidated statements of financial condition as of June 30, 1997 (unaudited) and December 31, 1996, and the related interim statements of earnings for the three and six months ended June 30, 1997 and 1996 and statements of cash flows and stockholders' equity for the six months ended June 30, 1997 and 1996, unaudited notes to the consolidated financial statements and Management's Discussion and Analysis of Results of Operations and Financial Condition are contained in Exhibit 99.2. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits (99.1) The first quarter Alex. Brown historical consolidated statements of financial condition as of March 31, 1997 (unaudited) and December 31, 1996, and the related interim statements of earnings, cash flows and stockholders' equity for the three months ended March 31, 1997 and 1996, unaudited notes to the consolidated financial statements and Management's Discussion and Analysis of Results of Operations and Financial Condition. (99.2) The second quarter Alex. Brown historical consolidated statements of financial condition as of June 30, 1997 (unaudited) and December 31, 1996, and the related interim statements of earnings for the three and six months ended June 30, 1997 and 1996 and statements of cash flows and stockholders' equity for the six months ended June 30, 1997 and 1996, unaudited notes to the consolidated financial statements and Management's Discussion and Analysis of Results of Operations and Financial Condition. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. BANKERS TRUST NEW YORK CORPORATION September 12, 1997 by: /s/ RICHARD H. DANIEL -------------------------------- RICHARD H. DANIEL Vice Chairman and Controller (Principal Financial Officer) EX-99.1 2 1ST QUARTER ALEX BROWN CONSOLIDATED STATEMENTS ALEX. BROWN INCORPORATED AND SUBSIDIARIES Exhibit 99.1 Consolidated Statements of Earnings (in thousands, except per share amounts) (Unaudited) Three Months Ended March 31, ---------------------------- 1997 1996 ---- ---- Revenues: Commissions $ 58,222 $ 52,005 Investment banking 74,871 101,838 Principal transactions 31,994 52,508 Interest and dividends 35,653 32,909 Advisory and other 32,779 31,580 -------- -------- Total revenues 233,519 270,840 -------- -------- Operating expenses: Compensation and benefits 122,434 145,575 Communications 10,704 8,642 Occupancy and equipment 9,144 8,763 Interest 12,308 12,185 Floor brokerage, exchange and clearing fees 5,829 4,943 Other operating expenses 21,597 23,466 -------- -------- Total operating expenses 182,016 203,574 -------- -------- Earnings before income taxes 51,503 67,266 Income taxes 20,344 26,570 -------- -------- Net earnings $ 31,159 $ 40,696 ======== ======== Earnings per share: Primary $ 1.23 $ 1.67 ======== ======== Fully diluted $ 1.10 $ 1.48 ======== ======== Weighted average number of shares outstanding: Primary 25,294 24,316 ======== ======== Fully diluted 29,079 28,009 ======== ======== Cash dividends declared per share $ 0.17 $ 0.133 ======== ======== See accompanying notes to consolidated financial statements. 1 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Financial Condition (in thousands) ASSETS March 31, December 31, 1997 1996 --------- ------------ (Unaudited) Cash and cash equivalents $ 71,689 $ 109,800 Receivables: Customers 1,501,801 1,487,041 Brokers, dealers and clearing organizations 339,638 368,099 Current state and federal income taxes 4,139 17,429 Other 53,360 59,097 Firm trading securities (Note 2) 231,783 210,412 Securities purchased under agreements to resell 42,920 15,510 Deferred income taxes 50,194 46,433 Memberships in exchanges, at cost (market $3,836 and $3,597) 323 323 Office equipment and leasehold improvements, at cost less accumulated depreciation and amortization of $47,589 and $44,580 56,795 48,079 Investment securities (Note 5) 57,742 56,889 Loans to employees to purchase convertible subordinated debentures (Note 6) 60,657 54,454 Other assets 81,901 69,009 ---------- ---------- $2,552,942 $2,542,575 ========== ========== (continued) 2 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Financial Condition (continued) (in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 1997 1996 --------- ------------ (Unaudited) Bank loans $ 110,700 $ 29,900 Payables: Cash management facility 61,864 83,733 Customers, including free credit balances 560,202 676,734 Brokers, dealers and clearing organizations 653,320 495,947 Current federal and state income taxes 4,223 1,840 Other 196,209 378,981 Securities sold, not yet purchased (Note 2) 70,133 48,223 7 5/8% Senior notes 109,490 109,475 5 3/4% Convertible subordinated debentures 11,797 11,797 Employee convertible subordinated debentures (Note 6) 72,611 62,043 Commitments and contingencies (Note 7) Stockholders' equity (Note 6): Common stock of $.10 par value Authorized 50,000,000 shares Issued and outstanding 24,920,106 shares in 1997 and 24,030,822 shares in 1996 2,492 2,403 Additional paid-in capital 156,371 125,882 Loans to employees to purchase common stock (9,392) (10,320) Retained earnings 552,922 525,937 ---------- ---------- Total stockholders' equity 702,393 643,902 ---------- ---------- $2,552,942 $2,542,575 ========== ========== See accompanying notes to consolidated financial statements. 3 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (in thousands) (Unaudited)
Loans To Employees Additional To Purchase Total Common Paid-in Common Retained Stockholders' Stock Capital Stock Earnings Equity ----- ---------- ----------- -------- --------- Three months ended March 31, 1997 Balance at December 31, 1996 $2,403 $125,882 $(10,320) $525,937 $643,902 Net earnings - - - 31,159 31,159 Issuance of 665,889 shares of common stock 66 19,627 - - 19,693 Payments on employee loans - - 520 - 520 Repurchase and retirement of 4,866 shares of common stock - (201) - - (201) Compensation payable in common stock 23 11,063 - - 11,086 Loan forgiveness - - 408 - 408 Dividends paid - - - (4,174) (4,174) ------ -------- -------- -------- -------- Balance at March 31, 1997 $2,492 $156,371 $ (9,392) $552,922 $702,393 ====== ======== ======== ======== ======== Three months ended March 31, 1996 Balance at December 31, 1995 $2,330 $113,234 $(12,470) $386,193 $489,287 Net earnings - - - 40,696 40,696 Issuance of 563,712 shares of common stock 56 9,987 - - 10,043 Payments on employee loans - - 1,769 - 1,769 Repurchase and retirement of 2,901 shares of common stock - (79) - - (79) Compensation payable in common stock 26 7,061 - - 7,087 Loan forgiveness - - 52 - 52 Dividends paid - - - (3,175) (3,175) ------ -------- -------- -------- -------- Balance at March 31, 1996 $2,412 $130,203 $(10,649) $423,714 $545,680 ====== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 4 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (Unaudited)
Three Months Ended March 31, ---------------------------- 1997 1996 ---------- ---------- Cash flows from operating activities: Net earnings $ 31,159 $ 40,696 Reconciliation of net earnings to net cash used for operating activities: Depreciation and amortization 2,675 3,166 Non-cash compensation awards 16,882 10,037 Gain on investment securities (703) (5,405) Other (280) (66) (Increase) decrease in assets: Receivables 32,728 (142,953) Firm trading securities (21,371) (56,584) Deferred income taxes (3,761) (1,557) Securities purchased under agreements to resell (27,410) 6,615 Other assets (13,223) (22,515) Increase in liabilities: Payables (139,548) 37,811 Securities sold, not yet purchased 21,910 (5,066) --------- --------- Net cash used for operating activities (100,942) (135,821) --------- --------- Cash flows from financing activities: Net proceeds (payments): Short-term loans 82,000 73,000 Securities sold under repurchase agreements 0 (2,460) Cash management facility (21,869) 13,339 Payments on term loans (1,200) (1,996) Issuance of common stock 19,486 10,501 Repurchase of common stock (201) (79) Dividends paid to stockholders (4,174) (3,175) --------- --------- Net cash provided by financing activities 74,042 89,130 --------- --------- Cash flows from investing activities: Purchase of office equipment and leasehold improvements (11,061) (1,590) Purchase of investment securities (5,705) (6,247) Sale of investment securities 5,555 10,583 --------- --------- Net cash provided by (used for) investing activities (11,211) 2,746 --------- --------- Net decrease in cash and cash equivalents (38,111) (43,945) Cash and cash equivalents at beginning of period 109,800 62,103 --------- --------- Cash and cash equivalents at end of period $ 71,689 $ 18,158 ========= =========
See accompanying notes to consolidated financial statements. 5 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1997 (Unaudited) (1) The accompanying consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary to fairly reflect Alex. Brown Incorporated's (the "Company") financial position and results of operations, consisting of normal recurring adjustments, have been included. Certain revenue and expense items in 1996 have been reclassified to conform to the current year presentation. (2) Firm trading securities and securities sold, not yet purchased consisted of the following (in thousands):
Long Short ---- ----- 03/31/97 12/31/96 03/31/97 12/31/96 --------- --------- --------- --------- United States government and agencies $ 10,645 $ 6,440 $ 42,130 $ 16,126 Mortgage-backed 15,408 30,913 - - States and municipalities 117,075 97,306 389 379 Corporate debt 41,290 22,810 9,835 7,310 Equities and convertible debt 47,365 52,943 17,778 24,408 --------- --------- --------- --------- $ 231,783 $ 210,412 $ 70,133 $ 48,223 ========= ========= ========= =========
(3) In April, 1997, the Company declared a $0.17 per share quarterly cash dividend payable May 14, 1997 to stockholders of record on May 2, 1997. (4) On April 6, 1997 Bankers Trust New York Corporation and Alex. Brown Incorporated announced that they signed a definitive agreement to merge. Under terms of the agreement approved unanimously by both boards of directors, each Alex. Brown common share will be exchanged for 0.83 shares of Bankers Trust common stock. The merger, which is expected to be completed by the fourth quarter of 1997, is subject to customary closing conditions, including certain regulatory approvals and shareholder approvals. The transaction is expected to be tax-free to shareholders and accounted for on a pooling-of-interests basis. (5) Investment securities at March 31, 1997 and December 31, 1996 included $28.6 million and $24.5 million, respectively, of merchant banking investments. (6) Convertible subordinated debentures issued to certain employees pursuant to the 1991 Equity Incentive Plan are convertible into the Company's Common Stock. The Company made loans to employees to fund the purchases of the debentures. During the first three months of 1997, employees converted $0.7 million convertible subordinated debentures, which were issued in prior years, into 82,190 shares of the Company's common stock. 6 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued March 31, 1997 (Unaudited) (7) COMMITMENTS AND CONTINGENCIES LETTERS OF CREDIT At March 31, 1997, the Company's principal subsidiary, Alex. Brown & Sons Incorporated, was contingently liable for up to $53.5 million under unsecured letters of credit used to satisfy required margin deposits at five securities clearing corporations. LITIGATION In the course of its investment banking and securities brokerage business, Alex. Brown & Sons Incorporated has been named a defendant in a number of lawsuits and may be required to contribute to final settlements in actions, in which it has not been named a defendant, arising out of its participation in the underwritings of certain issues. A substantial settlement or judgment in any of these cases could have a material adverse effect on the Company. Although the ultimate outcome of such litigation is not subject to determination at present, in the opinion of management, after consultation with counsel, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial statements. (8) Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, was issued in February 1997 and, effective for financial statements issued for periods ending after December 15, 1997, establishes standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the consolidated statement of earnings and requires the reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Earlier application is not permitted, but disclosure of pro forma EPS amounts computed using the standards established by SFAS No. 128 is permitted in the notes to financial statements for periods ending prior to the effective date. Pro forma EPS for the three month periods ended March 31, 1997 and 1996 are as follows:
March 31, 1997 March 31, 1996 -------------- -------------- Basic $1.27 $1.71 Diluted $1.10 $1.48
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Alex. Brown Incorporated (the "Company") is a holding company whose primary subsidiary is Alex. Brown & Sons Incorporated ("Alex. Brown"), a major investment banking and securities brokerage firm. The Company, like other securities firms, is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities, changes in interest rates and demand for investment banking and securities brokerage services, all of which have an impact on the Company's revenues, operating results and financial condition as well as its liquidity. Substantial fluctuations can occur in the Company's revenues and net earnings due to these and other factors. In periods of reduced market activity, profitability is likely to be adversely affected because certain expenses, consisting primarily of salaries and benefits, communications and occupancy expenses, remain relatively fixed. Accordingly, net earnings for any period should not be considered representative of any other period. In the following discussion, all share and per share information have been adjusted to reflect a three-for-two stock split paid on January 15, 1997. RESULTS OF OPERATIONS FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996 Revenues totaled $233.5 million, a 14% decrease as compared to $270.8 million in the first quarter of 1996. Commission revenues increased 12% to $58.2 million for the first quarter, primarily as a result of an increase in institutional and private client commission revenues. Investment banking revenues decreased 26% to $74.9 million, due to a 51% decrease in merger and advisory revenues to $14.9 million and a 21% decline in corporate underwriting revenues. Principal transaction revenues decreased 39% to $32.0 million, primarily due to decreases in equity trading. Interest and dividend revenues increased 8% to $35.7 million, primarily as a result of interest earned on higher margin loan balances. Advisory and other revenues increased 4% to $32.8 million. This increase was primarily attributable to a 36% increase in advisory revenues to $22.8 million. Partially offsetting this increase were lower gains from investments which totaled $0.7 million in the first quarter as compared to $5.4 million in the first quarter of the prior year and a 7% reduction in fees from correspondent services to $6.8 million. Assets under management totaled approximately $12.8 billion at March 31, 1997. Expenses totaled $182.0 million, an 11% decrease as compared to $203.6 million in the first quarter of 1996. Compensation and benefits decreased 16% to $122.4 million from $145.6 million, as a result of decreased incentive expense. Communications expense increased 24% to $10.7 million due to higher costs for quote services and an increase in communications expense associated with the Baltimore headquarters relocation completed during the quarter. Occupancy and equipment expenses increased 4% to $9.1 million primarily as 8 a result of additional space with the new Baltimore headquarters. Interest expense increased 1% to $12.3 million from $12.2 million primarily due to the cost of financing increased margin loan balances. Floor brokerage, exchange and clearing fees increased 18% to $5.8 million, primarily due to costs associated with the increase in shares traded on the New York Stock Exchange. Other operating expenses decreased 8% to $21.6 million due to a reduction of expenses associated with the reduced level of business activity. The Company's effective tax rate for the quarter was 39.5%, unchanged from the first quarter of 1996. As a result of the above, net earnings decreased 23% to $31.2 million from $40.7 million in the first quarter of 1996. Primary and fully diluted earnings per share were $1.23 and $1.10, respectively, as compared to $1.67 and $1.48 for the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated statement of financial condition reflects a liquid financial position. The majority of the securities (both long and short) in Alex. Brown's trading accounts are readily marketable and actively traded. Customer receivables include margin balances and amounts due on uncompleted transactions. Receivables from other brokers and dealers generally represent either current open transactions, which usually settle within a few days, or securities borrowed transactions which normally can be closed out within a few days. Most of the Company's receivables are secured by marketable securities. The Company also has investments in fixed assets and illiquid securities but such investments are not a significant portion of the Company's total assets. High yield securities, also referred to as "junk" bonds, are non-investment grade debt securities which are rated by Standard & Poor's as lower than BBB- and by Moody's Investors Service as lower than Baa3. The market for high yield securities can be extremely volatile and many experienced significant declines in the past several years. At March 31, 1997, in its high yield operations, Alex. Brown had $14.6 million of long inventory and $1.2 million of short inventory as compared to $9.4 million of long inventory and $6.5 million of short inventory at year-end 1996. As of March 31, 1997, the carrying value of the Company's merchant banking investments was $28.6 million, compared to $24.5 million at year-end 1996. There was a net loss related to merchant banking investments of $0.7 million for the first three months of 1997. It is anticipated that merchant banking investments will generally have a holding period of three years or more and will be funded with existing sources of working capital. The Company has no outstanding bridge loans. From time to time the Company makes subordinated loans to correspondents as part of its Correspondent Services business. These loans may be secured or unsecured and are funded through general working capital sources. At March 31, 1997, $3.0 million of such loans were outstanding. The Company finances its business through a number of sources, consisting primarily of paid-in capital, funds generated from operations, free credit balances in customers' accounts, deposits received on securities loaned, repurchase agreements and bank loans, as well as through the issuance of debt and equity securities. The Company borrows from banks on a short-term basis both on an unsecured basis and under arrangements pursuant to which the amount of funds available is based on the value of the securities owned by the Company and customers' margin securities pledged as collateral. In addition, the Company has borrowed on a long-term basis from banks on both an unsecured basis and with fixed assets pledged as collateral ("term loans"). The Company historically has been able to obtain necessary bank borrowings and believes that it will continue to be able to do so in the future. The Company and Alex. Brown have $450 million of unused 9 committed lines of credit under revolving credit agreements (the "Credit Facilities") with various banks. The Credit Facilities expire between February 1998 and February 2000. The Credit Facilities and term loans contain various restrictive financial covenants, the most significant of which require the maintenance of minimum levels of net worth by both the Company and Alex. Brown and minimum levels of net capital by Alex. Brown. There were no outstanding borrowings under the Credit Facilities at March 31, 1997. The Company and Alex. Brown were in compliance with all restrictive covenants contained in the Credit Facilities and term loans at March 31, 1997. Alex. Brown is required to comply with the net capital rule of the Securities and Exchange Commission. The Company's ability to withdraw capital from Alex. Brown may be limited by the rule. Alex. Brown has consistently exceeded minimum net capital requirements under the rule. At March 31, 1997, Alex. Brown had aggregate net capital of $427.4 million, which exceeded its minimum net capital requirement by $395.7 million. During the first three months of 1997, the Company repurchased a total of 4,866 shares of its Common Stock at a cost of $0.2 million. As of March 31, 1997, the Company had a remaining repurchase authorization of approximately 1.5 million shares. The Company anticipates that, subject to market conditions, it will make additional repurchases in the future. Management of the Company believes that existing capital and credit facilities, when combined with funds generated from operations, will provide the Company with sufficient resources to meet its present and reasonably foreseeable cash and capital needs. RISK MANAGEMENT The Company records securities transactions on a settlement date basis, generally the third business day following the trade execution. The risk of loss on unsettled transactions relates to customers' or brokers' inability or refusal to meet the terms of their contracts. The Company monitors its exposure to market and counterparty risk through a variety of financial, position and credit exposure reporting and control procedures. The Risk Management, Credit and Investment Committees, each of which meets on a regular basis, include members of senior management. Each trading department is subject to internal position limits established by the Risk Management Committee which also reviews positions and results of the trading departments. Alex. Brown's Credit Committee establishes and reviews appropriate credit limits for customers and brokers seeking margin, repurchase and reverse repurchase agreement facilities and securities borrowed and securities loaned arrangements. The Investment Committee approves investment purchases and sales and reviews holdings. INFLATION Because the Company's assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects the Company's expenses such as employee compensation, office space leasing costs and communication charges, and increases therein may not be readily recoverable in the price of services offered by the Company. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets and on the value of securities owned by the Company, it may adversely affect the Company's financial position and results of operations. 10 EX-99.2 3 2ND QUARTER ALEX BROWN CONSOLIDATED STATEMENTS EXHIBIT 99.2 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Earnings (in thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Commissions $ 56,979 $ 54,352 $115,201 $106,357 Investment banking 95,495 133,662 170,366 235,501 Principal transactions 33,291 49,243 65,285 101,751 Interest and dividends 36,439 36,228 72,092 69,137 Advisory and other 38,959 36,750 71,738 68,330 -------- ------- ------- ------- Total revenues 261,163 310,235 494,682 581,076 -------- ------- ------- ------- Operating expenses: Compensation and benefits 137,904 162,754 260,338 308,328 Communications 12,073 9,810 22,777 18,452 Occupancy and equipment 11,659 9,263 20,803 18,026 Interest 12,174 13,075 24,482 25,261 Floor brokerage, exchange and clearing fees 6,462 5,460 12,291 10,403 Other operating expenses (Note 6) 28,539 26,491 50,136 49,958 -------- ------- ------- ------- Total operating expenses 208,811 226,853 390,827 430,428 -------- ------- ------- ------- Earnings before income taxes 52,352 83,382 103,855 150,648 Income taxes 20,679 33,541 41,023 60,111 -------- ------- ------- ------- Net earnings $ 31,673 $ 49,841 $ 62,832 $ 90,537 ======== ======= ======= ======= Earnings per share: Primary $1.23 $2.01 $2.46 $3.69 ======== ======= ======= ======= Fully diluted $1.09 $1.77 $2.19 $3.25 ======== ======= ======= ======= Weighted average number of shares outstanding: Primary 25,749 24,783 25,523 24,549 ======== ======= ======= ======= Fully diluted 29,503 28,483 29,396 28,285 ======== ======= ======= ======= Cash dividends declared per share $0.17 $0.167 $0.34 $0.30 ======== ======= ======= =======
See accompanying notes to consolidated financial statements. 1 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Financial Condition (in thousands) ASSETS June 30, December 31, 1997 1996 ------------ ------------ (Unaudited) Cash and cash equivalents $ 26,357 $ 109,800 Receivables: Customers 1,502,942 1,487,041 Brokers, dealers and clearing organizations 565,266 368,099 Current state and federal income taxes 2,979 17,429 Other 66,582 59,097 Firm trading securities (Note 2) 119,124 210,412 Securities purchased under agreements to resell 3,941 15,510 Deferred income taxes 53,094 46,433 Memberships in exchanges, at cost (market $3,939 and $3,597) 323 323 Office equipment and leasehold improvements, at cost less accumulated depreciation and amortization of $48,385 and $44,580 59,839 48,079 Investment securities (Note 4) 61,485 56,889 Loans to employees to purchase convertible subordinated debentures (Note 5) 60,657 54,454 Other assets 92,696 69,009 ---------- ---------- $2,615,285 $2,542,575 ========== ========== (continued) 2 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Financial Condition (continued) (in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31, 1997 1996 --------- -------- (Unaudited) Bank loans $ 143,100 $ 29,900 Payables: Cash management facility 74,139 83,733 Customers, including free credit balances 666,555 676,734 Brokers, dealers and clearing organizations 487,387 495,947 Current state income taxes 2,852 1,840 Other 276,787 378,981 Securities sold, not yet purchased (Note 2) 38,019 48,223 7 5/8% Senior notes 109,505 109,475 5 3/4% Convertible subordinated debentures 3,889 11,797 Employee convertible subordinated debentures (Note 5) 72,601 62,043 Commitments and contingencies (Note 8) Stockholders' equity (Note 5): Common stock of $.10 par value Authorized 50,000,000 shares Issued and outstanding 25,434,822 shares in 1997 and 24,030,822 shares in 1996 2,543 2,403 Additional paid-in capital 166,474 125,882 Loans to employees to purchase common stock (8,921) (10,320) Retained earnings 580,355 525,937 ---------- ---------- Total stockholders' equity 740,451 643,902 ---------- ---------- $2,615,285 $2,542,575 ========== ==========
See accompanying notes to consolidated financial statements. 3 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (in thousands) (Unaudited)
Loans To Employees Additional To Purchase Total Common Paid-in Common Retained Stockholders' Stock Capital Stock Earnings Equity ------ ------- ----- -------- ------ Six months ended June 30, 1997 Balance at December 31, 1996 $2,403 $125,882 $(10,320) $525,937 $643,902 Net earnings - - - 62,832 62,832 Issuance of 1,196,395 shares of common stock 120 30,712 - - 30,832 Payments on employee loans - - 991 - 991 Repurchase and retirement of 58,383 shares of common stock (6) (3,582) - - (3,588) Compensation payable in common stock 26 13,462 - - 13,488 Loan forgiveness - - 408 - 408 Dividends paid - (8,414) (8,414) ------ -------- -------- -------- -------- Balance at June 30, 1997 $2,543 $166,474 $ (8,921) $580,355 $740,451 ====== ======== ======== ======== ======== Six months ended June 30, 1996 Balance at December 31, 1995 $2,330 $113,234 $(12,470) $386,193 $489,287 Net earnings - - - 90,537 90,537 Issuance of 748,180 shares of common stock 75 13,903 - - 13,978 Payments on employee loans - - 1,879 - 1,879 Repurchase and retirement of 22,879 shares of common stock (2) (715) - - (717) Compensation payable in common stock 27 7,257 - - 7,284 Loan forgiveness - - 52 - 52 Dividends paid - - - (6,401) (6,401) ------ -------- -------- -------- -------- Balance at June 30, 1996 $2,430 $133,679 $(10,539) $470,329 $595,899 ====== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 4 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows (in thousands) (Unaudited)
Six Months Ended June 30, ---------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net earnings $ 62,832 $ 90,537 Reconciliation of net earnings to net cash used for operating activities: Depreciation and amortization 6,721 6,257 Non-cash compensation awards 19,405 10,343 Gain on investment securities (4,721) (13,877) Other (252) (83) (Increase) decrease in assets: Receivables (206,103) (299,448) Firm trading securities 91,288 (99,530) Deferred income taxes (6,661) (3,207) Securities purchased under agreements to resell 11,569 5,693 Other assets (24,263) (29,017) Increase (decrease) in liabilities: Payables (119,921) 177,810 Securities sold, not yet purchased (10,204) 11,813 --------- --------- Net cash used for operating activities (180,310) (142,709) --------- --------- Cash flows from financing activities: Net proceeds (payments): Short-term loans 115,000 89,000 Securities sold under repurchase agreements 0 (2,460) Cash management facility (9,594) 10,473 Payments on term loans (1,800) (2,642) Issuance of common stock 23,043 13,846 Repurchase of common stock (3,588) (717) Dividends paid to stockholders (8,414) (6,401) --------- --------- Net cash provided by financing activities 114,647 101,099 --------- --------- Cash flows from investing activities: Purchase of office equipment and leasehold improvements (17,905) (3,224) Purchase of investment securities (17,929) (10,614) Sale of investment securities 18,054 20,315 --------- --------- Net cash provided by (used for) investing activities (17,780) 6,477 --------- --------- Net decrease in cash and cash equivalents (83,443) (35,133) Cash and cash equivalents at beginning of period 109,800 62,103 --------- --------- Cash and cash equivalents at end of period $ 26,357 $ 26,970 ========= =========
See accompanying notes to consolidated financial statements. 5 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997 (Unaudited) (1) The accompanying consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary to fairly reflect Alex. Brown Incorporated's (the "Company") financial position and results of operations, consisting of normal recurring adjustments, have been included. Certain revenue items in 1996 have been reclassified to conform to the current year presentation. (2) Firm trading securities and securities sold, not yet purchased consisted of the following (in thousands):
Long Short ---- ----- 06/30/97 12/31/96 06/30/97 12/31/96 --------- --------- --------- --------- United States government and agencies $ 13,322 $ 6,440 $ 9,006 $ 16,126 Mortgage-backed 726 30,913 - - States and municipalities 54,587 97,306 318 379 Corporate debt 2,518 22,810 202 7,310 Equities and convertible debt 47,971 52,943 28,493 24,408 --------- --------- --------- --------- $119,124 $ 210,412 $ 38,019 $ 48,223 ========= ========= ========= =========
(3) On July 22, 1997, the Company declared a $0.17 per share quarterly cash dividend payable August 12, 1997 to stockholders of record on August 1, 1997. (4) Investment securities at June 30, 1997 and December 31, 1996 included $28.7 million and $24.5 million, respectively, of merchant banking investments. (5) Convertible subordinated debentures issued to certain employees pursuant to the 1991 Equity Incentive Plan are convertible into the Company's Common Stock. The Company made loans to employees to fund the purchases of the debentures. During the first six months of 1997, employees converted $0.7 million convertible subordinated debentures, which were issued in prior years, into 84,037 shares of the Company's common stock. (6) On May 5, 1997, Alex. Brown announced the reorganization of its fixed income operations. Included in other expenses for the three months and six months ended June 30, 1997 is a charge of $7.7 million relating to severance costs incurred in connection with the reorganization. (7) On April 6, 1997, Bankers Trust New York Corporation and Alex. Brown Incorporated announced the signing of a definitive agreement to merge. Under terms of the agreement approved unanimously by both boards of directors, each Alex. Brown common share will be exchanged for 0.83 shares of Bankers Trust common stock. The merger, which is expected to be completed by the fourth quarter of 1997, is subject to customary closing conditions, including certain regulatory and shareholder approvals. The transaction is expected to be tax-free to shareholders and accounted for on a pooling-of-interests basis. A Special Meeting of Stockholders of Alex. Brown Incorporated is scheduled to be held at the Company's headquarters in Baltimore, Maryland on Wednesday, August 13, 1997 at 4:30 p.m. for stockholders of record on the close of business on July 2, 1997. This meeting is to consider a proposal to approve and adopt the agreement and plan of merger by and between Alex. Brown Incorporated, Bankers Trust New York Corporation and its wholly-owned subsidiary, Voyager Merger Corporation. 6 ALEX. BROWN INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued June 30, 1997 (Unaudited) (8) COMMITMENTS AND CONTINGENCIES LETTERS OF CREDIT At June 30, 1997, the Company's principal subsidiary, Alex. Brown & Sons Incorporated, was contingently liable for up to $69.5 million under unsecured letters of credit used to satisfy required margin deposits at five securities clearing corporations. LITIGATION In the course of its investment banking and securities brokerage business, Alex. Brown & Sons Incorporated has been named a defendant in a number of lawsuits and may be required to contribute to final settlements in actions, in which it has not been named a defendant, arising out of its participation in the underwritings of certain issues. A substantial settlement or judgment in any of these cases could have a material adverse effect on the Company. Although the ultimate outcome of such litigation is not subject to determination at present, in the opinion of management, after consultation with counsel, the resolution of these matters will not have a material adverse effect on the Company's consolidated financial statements. (9) Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, was issued in February 1997 and, effective for financial statements issued for periods ending after December 15, 1997, establishes standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the consolidated statement of earnings and requires the reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Earlier application is not permitted, but disclosure of pro forma EPS amounts computed using the standards established by SFAS No. 128 is permitted in the notes to financial statements for periods ending prior to the effective date. Pro forma EPS for the three and six month periods ended June 30, 1997 and 1996 are as follows: Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 --------------- -------------- Basic $1.27 $2.06 $2.53 $3.77 Diluted $1.10 $1.78 $2.20 $3.26 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Alex. Brown Incorporated (the "Company") is a holding company whose primary subsidiary is Alex. Brown & Sons Incorporated ("Alex. Brown"), a major investment banking and securities brokerage firm. The Company, like other securities firms, is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities, changes in interest rates and demand for investment banking and securities brokerage services, all of which have an impact on the Company's revenues, operating results and financial condition as well as its liquidity. Substantial fluctuations can occur in the Company's revenues and net earnings due to these and other factors. In periods of reduced market activity, profitability is likely to be adversely affected because certain expenses, consisting primarily of salaries and benefits, communications and occupancy expenses, remain relatively fixed. Accordingly, net earnings for any period should not be considered representative of any other period. In the following discussion, all share and per share information have been adjusted to reflect a three-for-two stock split paid on January 15, 1997. RESULTS OF OPERATIONS SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996 Revenues totaled $261.2 million, a 16% decrease as compared to $310.2 million in the second quarter of 1996. Commission revenues increased 5% to $57.0 million for the second quarter, primarily as a result of an increase in institutional listed and private client mutual funds commission revenues. Investment banking revenues decreased 29% to $95.5 million, due to a 50% decrease in corporate underwriting revenues. Partially offsetting this decline was a 66% increase in merger and advisory revenues to $38.8 million. Principal transaction revenues decreased 32% to $33.3 million, primarily due to decreases in equity trading. Interest and dividend revenues increased 1% to $36.4 million, primarily as a result of interest earned on higher margin loan balances. Advisory and other revenues increased 6% to $39.0 million. This increase was primarily attributable to a 39% increase in advisory revenues to $25.8 million. Partially offsetting this increase were lower gains from investments which totaled $4.0 million in the second quarter as compared to $8.5 million in the second quarter of the prior year and an 18% reduction in fees from correspondent services to $6.6 million. Assets under management totaled approximately $13.9 billion at June 30, 1997. Expenses totaled $208.8 million, an 8% decrease as compared to $226.9 million in the second quarter of 1996. Compensation and benefits decreased 15% to $137.9 million from $162.8 million, as a result of decreased incentive and commission expenses. Communications expense increased 23% to $12.1 million due to higher 8 costs for quote services and an increase in postage and printing costs. Occupancy and equipment expenses increased 26% to $11.7 million, primarily as a result of additional space occupied in connection with the relocation to the new Baltimore headquarters. Interest expense decreased 7% to $12.2 million from $13.1 million primarily due to a decrease in overnight bank loans as financing needs decreased corresponding with a reduction in average inventory levels. Floor brokerage, exchange and clearing fees increased 18% to $6.5 million, primarily due to costs associated with the increase in shares traded on the New York Stock Exchange. Other operating expenses increased 8% to $28.5 million, primarily due to severance costs of $7.7 million related to the reorganization of our fixed income operations. The Company's effective tax rate for the quarter was 39.5% compared to 40.2% for the second quarter of the prior year. As a result of the above, net earnings decreased 36% to $31.7 million from $49.8 million in the second quarter of 1996. Primary and fully diluted earnings per share were $1.23 and $1.09, respectively, as compared to $2.01 and $1.77 for the same period in the prior year. SIX MONTHS 1997 COMPARED TO SIX MONTHS 1996 Revenues totaled $494.7 million, a 15% decrease as compared to $581.1 million in the first six months of 1996. Commission revenues increased 8% to $115.2 million for the first six months of 1997, primarily as a result of an increase in institutional listed and private client mutual fund commission revenues. Investment banking revenues decreased 28% to $170.4 million, due to a 38% decrease in corporate underwriting revenues and merger and advisory fees were essentially unchanged from the prior period. Principal transaction revenues decreased 36% to $65.3 million, primarily due to decreases in equity trading. Interest and dividend revenues increased 4% to $72.1 million, primarily as a result of interest earned on higher margin loan balances. Advisory and other revenues increased 5% to $71.7 million. This increase was primarily attributable to a 38% increase in advisory revenues to $48.6 million. Partially offsetting this increase were lower gains from investments which totaled $4.7 million in the first six months as compared to $13.9 million in the first six months of the prior year, and a 13% reduction in fees from correspondent services to $13.4 million. Expenses totaled $390.8 million, a 9% decrease as compared to $430.4 million in the first six months of 1996. Compensation and benefits decreased 16% to $260.3 million from $308.3 million, as a result of decreased incentive and commission expenses. Communications expense increased 23% to $22.8 million due to higher costs for quote services, an increase in communications expense associated with the Baltimore headquarters relocation and postage and printing costs. Occupancy and equipment expenses increased 15% to $20.8 million, primarily as a result of additional space occupied in connection with the relocation to the new Baltimore headquarters. Interest expense decreased 3% to $24.5 million from $25.3 million, primarily due to a decrease in overnight bank loans as financing needs decreased corresponding with a reduction in average inventory levels. Floor brokerage, exchange and clearing fees increased 18% to $12.3 million, primarily due to costs associated with the increase in shares traded on the New York Stock Exchange. Other operating expenses totaled $50.1 million for the first six months of 1997, including severance costs of $7.7 million related to the reorganization of our fixed income operations, reflecting less than a 1% increase from the prior year. The Company's effective tax rate for the first six months was 39.5% compared to 39.9% for the first six months of 1996. As a result of the above, net earnings decreased 31% to $62.8 million from $90.5 million in the first six 9 months of 1996. Primary and fully diluted earnings per share were $2.46 and $2.19, respectively, as compared to $3.69 and $3.25 for the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated statement of financial condition reflects a liquid financial position. The majority of the securities (both long and short) in Alex. Brown's trading accounts are readily marketable and actively traded. Customer receivables include margin balances and amounts due on uncompleted transactions. Receivables from other brokers and dealers generally represent either current open transactions, which usually settle within a few days, or securities borrowed transactions which normally can be closed out within a few days. Most of the Company's receivables are secured by marketable securities. The Company also has investments in fixed assets and illiquid securities but such investments are not a significant portion of the Company's total assets. High yield securities, also referred to as "junk" bonds, are non-investment grade debt securities which are rated by Standard & Poor's as lower than BBB- and by Moody's Investors Service as lower than Baa3. The market for high yield securities can be extremely volatile and many experienced significant declines in the past several years. At June 30, 1997, as a result of the reorganization of its fixed income business, Alex. Brown reduced its high yield long inventory to $0.1 million as compared to $9.4 million of long inventory and $6.5 million of short inventory at year-end 1996. As of June 30, 1997, the carrying value of the Company's merchant banking investments was $28.7 million, compared to $24.5 million at year-end 1996. There was a net gain related to merchant banking investments of $1.9 million for the first six months of 1997. It is anticipated that merchant banking investments will generally have a holding period of three years or more and will be funded with existing sources of working capital. The Company has no outstanding bridge loans. From time to time the Company makes subordinated loans to correspondents as part of its Correspondent Services business. These loans may be secured or unsecured and are funded through general working capital sources. At June 30, 1997, $3.0 million of such loans were outstanding. The Company finances its business through a number of sources, consisting primarily of paid-in capital, funds generated from operations, free credit balances in customers' accounts, deposits received on securities loaned, repurchase agreements and bank loans, as well as through the issuance of debt and equity securities. The Company borrows from banks on a short-term basis both on an unsecured basis and under arrangements pursuant to which the amount of funds available is based on the value of the securities owned by the Company and customers' margin securities pledged as collateral. In addition, the Company has borrowed on a long-term basis from banks on an unsecured basis ("term loans"). The Company historically has been able to obtain necessary bank borrowings and believes that it will continue to be able to do so in the future. The Company and Alex. Brown have $450 million of unused committed lines of credit under revolving credit agreements (the "Credit Facilities") with various banks. The Credit Facilities expire between August 1997 and February 2000. The Credit Facilities and term loans contain various restrictive financial covenants, the most significant of which require the maintenance of minimum levels of net worth by both the Company and Alex. Brown and minimum levels of net capital by Alex. Brown. There were no borrowings under the Credit Facilities at June 30, 1997. The Company and Alex. Brown were in compliance with all restrictive covenants contained in the Credit Facilities and term loans at June 30, 1997. Alex. Brown is required to comply with the net capital rule of the Securities and Exchange Commission. The 10 Company's ability to withdraw capital from Alex. Brown may be limited by the rule. Alex. Brown has consistently exceeded minimum net capital requirements under the rule. At June 30, 1997, Alex. Brown had aggregate net capital of $438.1 million, which exceeded its minimum net capital requirement by $402.8 million. During the first six months of 1997, the Company repurchased a total of 58,383 shares of its Common Stock at a cost of $3.6 million. As of June 30, 1997, the Company had a remaining repurchase authorization of approximately 1.5 million shares. Management of the Company believes that existing capital and credit facilities, when combined with funds generated from operations, will provide the Company with sufficient resources to meet its present and reasonably foreseeable cash and capital needs. RISK MANAGEMENT The Company records securities transactions on a settlement date basis, generally the third business day following the trade execution. The risk of loss on unsettled transactions relates to customers' or brokers' inability or refusal to meet the terms of their contracts. The Company monitors its exposure to market and counterparty risk through a variety of financial, position and credit exposure reporting and control procedures. The Risk Management, Credit and Investment Committees, each of which meets on a regular basis, include members of senior management. Each trading department is subject to internal position limits established by the Risk Management Committee which also reviews positions and results of the trading departments. Alex. Brown's Credit Committee establishes and reviews appropriate credit limits for customers and brokers seeking margin, repurchase and reverse repurchase agreement facilities and securities borrowed and securities loaned arrangements. The Investment Committee approves investment purchases and sales and reviews holdings. INFLATION Because the Company's assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects the Company's expenses such as employee compensation, office space leasing costs and communication charges, and increases therein may not be readily recoverable in the price of services offered by the Company. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets and on the value of securities owned by the Company, it may adversely affect the Company's financial position and results of operations. 11 -----END PRIVACY-ENHANCED MESSAGE-----