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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 001-13731
Friedman, Billings, Ramsey Group, Inc.
(Exact name of Registrant as specified in its charter)
Virginia 54-1837743
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Nineteenth Street North 22209
Arlington, VA ----------
- ---------------------------------------- (Zip code)
(Address of principal executive offices)
(703) 312-9500
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(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
____ ____
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title Outstanding
Class A Common Stock 16,940,569 shares as of April 30, 2001
Class B Common Stock 32,450,529 shares as of April 30, 2001
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FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Page Number (s)
---------------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - (unaudited)
Consolidated Balance Sheets-
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Operations-
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3. Changes in Information about Market Risk 16
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
EXHIBIT INDEX 16
2
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE
SHEETS (Dollars in thousands)
(Unaudited)
March 31, December 31,
2001 2000
----------- ------------
ASSETS
Cash and cash equivalents $ 39,945 $ 52,337
Restricted cash 17,500 --
Receivables:
Investment banking 1,585 4,696
Asset management fees 3,078 1,806
Affiliates 2,059 1,849
Other 4,493 2,744
Due from clearing broker 23,137 11,840
Marketable and trading securities, at market value 12,914 18,447
Long-term investments 118,817 142,950
Prepaid expenses and other assets 5,117 5,377
Furniture, equipment, software and leasehold improvements,
net of accumulated depreciation and amortization of
$11,894 and $10,636, respectively 9,388 10,173
-------- --------
Total assets $238,033 $252,219
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Trading account securities sold but not yet purchased, at market value: $ 6,307 $ 930
Accounts payable and accrued expenses 10,316 11,348
Accrued compensation and benefits 8,026 22,849
Deferred tax liability 1,760 1,760
Long-term secured loans 623 776
-------- --------
Total liabilities 27,032 37,663
-------- --------
Commitments and contingencies (Note 9) -- --
Shareholders' equity:
Preferred Stock, $0.01 par value, 15,000,000 shares authorized,
none issued and outstanding -- --
Class A Common Stock, $0.01 par value, 150,000,000 shares
authorized, 17,727,239 and 17,455,406 shares issued, respectively 177 175
Class B Common Stock, $0.01 par value, 100,000,000 shares authorized,
32,649,029 and 32,910,029 shares issued and outstanding, respectively 327 329
Additional paid-in capital 210,228 210,164
Treasury stock, at cost, 985,170 shares (7,188) (7,188)
Accumulated other comprehensive income (loss) 1,392 (1,128)
Retained earnings 6,065 12,204
-------- --------
Total shareholders' equity 211,001 214,556
-------- --------
Total liabilities and shareholders' equity $238,033 $252,219
======== ========
See notes to consolidated financial statements.
3
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months
Ended March 31,
--------------------
2001 2000
-------- --------
Revenues:
Investment banking:
Underwriting $ 7,654 $10,506
Corporate finance 2,244 6,190
Institutional brokerage:
Principal transactions 5,972 6,001
Agency commissions 6,565 5,676
Asset management:
Base management fees 2,907 2,174
Incentive allocations (3,044) 36,603
Net investment loss (2,085) (2,900)
Interest, dividends and other 2,240 1,993
------- -------
Total revenues 22,453 66,243
------- -------
Expenses:
Compensation and benefits 16,251 46,223
Business development and professional services 5,326 4,617
Clearing and brokerage fees 1,732 1,567
Occupancy and equipment 2,500 2,323
Communications 1,167 1,181
Interest expense 81 222
Other operating expenses 1,535 1,554
------- -------
Total expenses 28,592 57,687
------- -------
Net (loss) income before taxes (6,139) 8,556
Income tax provision -- 2,139
------- -------
Net (loss) income $(6,139) $ 6,417
======= =======
Basic (loss) earnings per share $ (0.12) $ 0.13
======= =======
Diluted (loss) earnings per share $ (0.12) $ 0.12
======= =======
Weighted average shares outstanding:
Basic 49,389 49,021
======= =======
Diluted 49,389 51,353
======= =======
See notes to consolidated financial statements.
4
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months
Ended March 31,
-----------------------
2001 2000
-------- --------
Cash flows from operating activities:
Net (loss) income $ (6,139) $ 6,417
Non-cash items included in earnings--
Incentive allocations and net investment (income)
loss from long-term investments 31,238 (33,703)
Depreciation and amortization 1,258 1,163
Deferred income taxes -- 2,139
Changes in operating assets:
Receivables--
Investment banking 3,111 (8,450)
Asset management fees (1,272) (1,206)
Income taxes
Affiliates (210) (4,424)
Other (1,749) 406
Due from clearing broker (11,297) (13,930)
Marketable and trading securities 2,813 (678)
Prepaid expenses and other assets 260 259
Changes in operating liabilities:
Trading account securities sold but not
yet purchased 5,377 12,194
Accounts payable and accrued expenses (1,032) 77
Accrued compensation and benefits (14,823) 31,879
-------- --------
Net cash provided by (used in) operating activities 7,535 (7,857)
-------- --------
Cash flows from investment activities:
Rushmore acquisition (17,500) --
Purchases of fixed assets (473) (2,014)
Purchases of long-term investments, net (1,865) (341)
-------- --------
Net cash used in investing activities (19,838) (2,355)
-------- --------
Cash flows from financing activities:
Repayments of long-term secured loans (153) (142)
Proceeds from issuance of common stock 64 840
-------- --------
Net cash (used in) provided by financing activities (89) 698
-------- --------
Net decrease in cash and cash equivalents (12,392) (9,514)
Cash and cash equivalents, beginning of period 52,337 43,743
-------- --------
Cash and cash equivalents, end of period $ 39,945 $ 34,229
======== ========
See notes to consolidated financial statements.
5
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
1. Basis of Presentation:
The consolidated financial statements of Friedman, Billings, Ramsey Group,
Inc. and subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Therefore, they do not include all
information required by generally accepted accounting principles for complete
financial statements. The interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
presented. All significant intercompany accounts and transactions have been
eliminated in consolidation. The results of operations for interim periods are
not necessarily indicative of the results for the entire year. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2000 included on
Form 10-K filed by the Company under the Securities Exchange Act of 1934.
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 could differ from those estimates.
Certain amounts in the consolidated financial statements and notes for prior
periods have been reclassified to conform to the current period presentation.
2. Comprehensive Income:
The components of comprehensive income are (in thousands):
Three Months
Ended March 31,
2001 2000
------- ------
Net (loss) income $(6,139) $6,417
Other comprehensive income:
Net change in unrealized investment gains related
to available-for-sale securities and investment
in FBR Asset Investment Corporation 2,520 1,837
------- ------
Comprehensive (loss) income $(3,619) $8,254
======= ======
3. Long-Term Investments, Incentive Allocations and Net Investment Income:
Long-term investments consist of the following (in thousands):
March 31, December 31,
2001 2000
-------- --------
Equity method investments:
Venture capital and other proprietary investment
partnerships $ 55,488 $ 72,773
FBR Asset Investment Corporation 32,635 30,054
Private debt and preferred equity investments 17,837 17,837
Cost method partnership investments 7,308 7,208
Other 5,549 15,078
-------- --------
$118,817 $142,950
======== ========
6
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
3. Long-Term Investments, Incentive Allocations and Net Investment Income,
continued:
FBR Technology Venture Partners, L.P. ("TVP")
---------------------------------------------
As of March 31, 2001, TVP's investments include equity investments in
securities of development-stage and early-stage, privately and publicly held
technology companies. The disposition of the privately held investments is
generally restricted due to the lack of a ready market and may remain restricted
for a period of time even if a company becomes public. TVP's investments may
represent significant portions of the issuer's equity and they may carry special
contractual privileges, as well as certain restrictions, not applicable to other
security holders. As a result, precise valuation for the private and restricted
investments is a matter of judgment and the determination of fair value must be
considered only an approximation. Public company investments are valued based
on the March 31, 2001 closing price. During the quarter ended March 31, 2001,
the partnership made distributions of $62.5 million.
FBR Asset Investment Corporation ("FBR-Asset")
----------------------------------------------
During the quarter ended March 31, 2001, the Company recorded $453 of net
investment income in the statement of operations for its proportionate share
(reflecting share repurchases) of FBR-Asset's net income. The Company also
recorded, in other comprehensive income, $2,934 of unrealized investment gains
for its proportionate share of FBR-Asset's net unrealized gains related to
available-for-sale securities. As of March 31, 2001, the net unrealized gain
related to FBR-Asset and included in the Company's accumulated other
comprehensive income has been increased to $2,675.
Available-For-Sale Securities
-----------------------------
As of March 31, 2001, the unrealized losses related to available-for-sale
securities has increased to $(1,283) and are included in accumulated other
comprehensive loss.
4. Summarized Income Statement Information:
The Company's investment in FBR Technology Venture Partners, L.P. ("TVP") of
$6,389 represents 5% of the Company's total long-term investments and 3% of the
Company's total assets as of March 31, 2001. The following table summarizes
TVP's income statement information (in thousands):
Three Months
Ended March 31,
2001 2000
-------- --------
Investment income $ 1 $ 37
Total expenses 338 323
-------- --------
Net investment loss (337) (286)
Unrealized (depreciation) appreciation
of investments (75,365) 183,567
Net realized gains on investments 57,577 11,159
-------- --------
Net (loss) income $(18,125) $194,440
======== ========
7
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
4. Summarized Income Statement Information, continued:
The Company's investment in FBR Asset Investment Corporation ("FBR-Asset")
of $32,634 represents 27% of the Company's total long-term investments and 14%
of the Company's total assets as of March 31, 2001. The following table
summarizes FBR-Asset's income statement information (in thousands):
Three Months
Ended March 31,
2001 2000
------ -------
Gross revenues $3,180 $ 6,323
Total expenses 2,487 3,590
------ -------
Net income before net investment loss 693 2,733
Net investment loss (565) (4,861)
------ -------
Net income (loss) $ 128 $(2,128)
====== =======
5. Executive Officer Compensation:
During 2001, certain of the Company's executive officers are eligible for
bonuses under the Key Employee Incentive Plan (the "Plan"). As of March 31,
2001, the Company has not accrued any executive officer compensation.
Compensation, if any, related to the Plan will be paid subsequent to December
31, 2001.
6. Income Taxes:
The Company has a net operating loss ("NOL") carryforward to offset future
taxable income. As of March 31, 2001, the Company has a gross NOL carryforward
of $31.4 million that expires through 2019. The Company has provided a
valuation allowance against its deferred tax assets based on its ongoing
assessment of realizability of the deferred tax assets. This assessment includes
analyzing future taxable income, a significant component of which is dependent
on the realizability of the investment partnerships' and venture funds'
unrealized gains that have been recorded for financial reporting purposes, but
not for income tax purposes.
7. Net Capital Requirements:
The Company's U.S. broker-dealer subsidiaries are subject to the Securities
and Exchange Commission's Uniform Net Capital Rule which requires the
maintenance of minimum net capital and requires the ratio of aggregate
indebtedness to net capital, both as defined by the rule, not to exceed 15 to 1.
The Company's U.K. broker-dealer subsidiary is subject to the net capital rules
of the Securities and Futures Authority. As of March 31, 2001, the broker-
dealer subsidiaries had aggregate net capital of $32.3 million, which exceeded
the requirements by $30.2 million.
8. Earnings (Loss) Per Share:
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. The diluted earnings per share calculation also includes the
impact of dilutive options.
8
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
8. Earnings (Loss) Per Share, continued:
As of March 31, 2001 and 2000, respectively, 8,888,900 and 8,897,615 options
to purchase shares of common stock were outstanding. As of March 31, 2001 and
2000, respectively, 2,408,484 and 614,612 of the total outstanding options were
exercisable.
9. Commitments and Contingencies:
As of March 31, 2001, the Company is not a defendant or plaintiff in any
lawsuits or arbitrations that are expected to have a material adverse effect on
the Company's financial condition. The Company is a defendant in a small number
of civil lawsuits and arbitrations (together "litigation") relating to its
various businesses. In addition, the Company is subject to regulatory oversight
relating to its various businesses. There can be no assurance that these
matters will not have a material adverse effect on the Company's financial
condition or results of operations in a future period. However, based on
management's review with counsel, including a review of the reserves set aside
for litigation, resolution of these matters is not expected to have a material
adverse effect on the Company's financial condition or results of operations.
Many aspects of the Company's business involve substantial risks of liability
and litigation. Underwriters, broker-dealers and investment advisers are
exposed to liability under Federal and state securities laws, other Federal and
state laws and court decisions, including decisions with respect to
underwriters' liability and limitations on indemnification, as well as with
respect to the handling of customer accounts. For example, underwriters may be
held liable for material misstatements or omissions of fact in a prospectus used
in connection with the securities being offered and broker-dealers may be held
liable for statements made by their securities analysts or other personnel. In
certain circumstances, broker-dealers and asset managers may also be held liable
by customers and clients for losses sustained on investments. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. The Company is
also subject to the risk of litigation, including litigation that may be without
merit. As the Company intends to actively defend such litigation, significant
legal expenses could be incurred. An adverse resolution of any future
litigation against the Company could materially affect the Company's operating
results and financial condition.
As of March 31, 2001, the Company had $25.3 million of unfunded commitments
to various investment partnerships that may be called over the next 10 years.
9
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
10. Segment Information:
The Company considers its capital markets, asset management operations and
online financial services to be three separate reportable segments. During 2000,
the Company developed systems and methodologies to allocate overhead costs to
its business units and, accordingly, has presented segment information
consistent with internal management reporting. There are no significant revenue
transactions between the segments. The following table illustrates the
financial information for its segments for the periods presented (in thousands):
Online
Capital Asset Financial Consolidated
Markets Management Services Totals
-------- ----------- ---------- -------------
Three Months Ended March 31, 2001
- -----------------------------------
Total revenues $23,617 $(1,258) $ 94 $22,453
Pre-tax (loss) income (2,998) (1,894) (1,247) (6,139)
Three Months Ended March 31, 2000
- -----------------------------------
Total revenues $30,989 $34,944 $ 310 $66,243
Pre-tax income (loss) 3,410 6,621 (1,475) 8,556
11. Subsequent Events:
On April 1, 2001, the Company completed the acquisition of Money Management
Associates, LP ("MMA") and Rushmore Trust and Savings, FSB ("Rushmore"). MMA
was a privately-held investment adviser with $933.4 million in assets under
management as of March 31, 2001. Together, MMA and Rushmore are the investment
adviser, servicing agent or administrator for more than 20 mutual funds. Upon
closing, Rushmore was rechartered as a national bank and was named FBR National
Bank & Trust ("FBR Bank"). The FBR Bank will offer traditional banking services
(lending, deposits, cash management, trust services and serve as a transfer
agent and custodian), along with mutual fund accounting. Under the terms of the
agreement, the Company acquired MMA/Rushmore for $17.5 million in cash at
closing and a $9.7 million non-interest-bearing installment note payable over a
ten-year period. The $17.5 million was placed in escrow on March 30, 2001 and is
classified as restricted cash on the March 31, 2001 balance sheet.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the consolidated financial condition and results of
operations of Friedman, Billings, Ramsey Group, Inc. (the "Company") should be
read in conjunction with the unaudited Consolidated Financial Statements as of
March 31, 2001 and 2000, and the Notes thereto and the Company's 2000 Annual
Report on Form 10-K.
BUSINESS ENVIRONMENT
Our principal business activities: investment banking (capital raising and
merger and acquisition and advisory services), institutional brokerage and asset
management (including proprietary investments) are linked to the capital
markets. In addition, our business activities are primarily focused on small and
mid-cap stocks in the financial services, real estate, technology and energy
sectors. By their nature, our business activities are highly competitive and are
not only subject to general market conditions, volatile trading markets and
fluctuations in the volume of market activity, but also to the conditions
affecting the companies and markets in our areas of focus. In the first quarter,
there was a decrease in underwritten transactions, particularly in technology
issues and the secondary markets remained volatile and under pressure.
Our revenues and net income are subject to substantial positive and negative
fluctuations due to a variety of factors that cannot be predicted with great
certainty. These factors include the overall condition of the economy and the
securities markets as a whole and of the sectors on which we focus. For
example, a significant portion of the performance based or incentive revenues
that we recognize from our venture capital, private equity and asset management
activities is based on the value of securities held by the funds we manage.
Increases in value from these activities include unrealized gains that may be
reduced from one period to another. The downturn in the technology sector has
adversely affected this portion of our business and caused us to reduce certain
unrealized gains in securities held by these funds. Although, when market
conditions permit, we take steps to realize or lock-in gains on these
securities, these securities are often illiquid and therefore, the value of
these securities is subject to increased market risk. Fluctuations in revenues
and net income also occur due to the overall level of market activity which,
among other things, affects the flow of investment dollars and the size, number
and timing of investment banking transactions. In addition, a downturn in the
level of market activity can lead to a decrease in brokerage commissions.
Therefore, net income and revenues in any particular period may not be
representative of full-year results and may vary significantly from year to year
and from quarter to quarter.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, as well as significant growth in competition in the market for
brokerage and investment banking services. The relaxation of banks' barriers
to entry into the securities industry and expansion by insurance companies into
traditional brokerage products, coupled with the repeal of laws separating
commercial and investment banking activities, have increased the number and size
of companies competing for a similar customer base.
In order to compete in this increasingly competitive environment, we
continually evaluate each of our businesses across varying market conditions for
competitiveness, profitability and alignment with our long-term strategic
objectives, including the diversification of revenue sources. As a result, we
may choose, from time to time, to reallocate resources based on the
opportunities for profitability and revenue growth for each of our businesses
relative to our commitment of resources. As reflected by our April 1, 2001
acquisition of MMA/Rushmore, we believe that it is important to diversify and
strengthen our revenue base by increasing the segments of our business that
offer a recurring and more predictable source of revenue.
11
RESULTS OF OPERATIONS
Three months ended March 31, 2001 compared to three months ended March 31, 2000
The Company's revenues decreased 66% from $66.2 million in 2000 to $22.5
million in 2001 primarily due to a decrease in asset management revenues,
particularly incentive allocations related to FBR Technology Venture Partners,
L.P. ("TVP") and, to a lesser extent, investment banking revenues.
Underwriting revenue decreased 27% from $10.5 million in 2000 to $7.7 million
in 2001. The decrease is attributed to fewer managed transactions completed in
2001 offset by higher fees per transaction. During the first quarter of 2001,
the Company managed 3 public offerings raising $176.8 million and generating
$7.2 million in revenues. During the first quarter of 2000, the Company managed
10 public offerings generating $10.5 million in revenues and raising $2.8
billion. The average size of underwritten transactions for which we were a lead
or co-manager decreased from $282.8 million in 2000 to $58.9 million in 2001.
Corporate finance revenue decreased 65% from $6.2 million in 2000 to $2.2
million in 2001 due primarily to a decrease in the number of private placement
and M&A transactions completed. In 2000, the Company completed one private
placement generating $0.9 million in revenues compared to no completed
transactions in 2001. M&A and advisory fee revenue also decreased from $5.3
million in 2000 to $2.2 million in 2001 due to a decrease in the number of deals
completed.
Institutional brokerage revenue from principal transactions remained
unchanged at $6.0 million in 2000 and 2001.
Institutional brokerage agency commissions increased 16% from $5.7 million in
2000 to $6.6 million in 2001 primarily due to increased customer trading,
attributed to, among other things, volatility in the markets. In addition, we
believe we have continued to achieve greater penetration of institutional
accounts through broader research coverage and sales and trading services.
Asset management incentive allocations decreased significantly from $36.6
million in 2000 to $(3.0) million in 2001. Incentive allocations in 2001 and
2000 are primarily from TVP, and represent both realized and unrealized gains or
losses related to our partnership interests and underlying securities in TVP.
Asset management net investment loss decreased 25% from $(2.9) million in
2000 to $(2.1) million in 2001. Net investment loss in 2001 includes gross
gains of $2.4 million offset by losses of $(4.5) million as follows: $(2.9)
million of net investment loss from investments in our managed partnerships, of
which $(3.7) million related to our technology venture capital investments;
$0.5 million of net investment income generated from our investment in FBR-
Asset; and $0.3 of net investment income related to gains on our marketable
securities. Net investment income in 2000 included gross gains of $8.1 million
offset by losses of $(11.0) million as follows: $5.5 million of gains related to
investments in our managed partnerships, of which $4.3 million related to our
investment in TVP; $(7.9) million of unrealized losses related to private,
mezzanine investments; $1.8 million of gains related to our investment in FBR-
Asset; $(1.8) million of realized losses related to the sale of available-for-
sale securities; and $(0.5) million of "other than temporary" unrealized
depreciation related to an available-for-sale security.
Unrealized losses related to our investments that are included in
"accumulated other comprehensive income" in our balance sheet totaled $1.4
million as of March 31, 2001. If and when we liquidate these or determine that
the decline in value of these investments is "other than temporary", a portion
or all of the losses will be recognized as investment losses in the statement of
operations during the period in which the liquidation or determination is made.
12
RESULTS OF OPERATIONS
Three months ended March 31, 2001 compared to three months ended March 31, 2000,
continued
Our investment portfolio is also exposed to future downturns in the markets
and private debt and equity securities are exposed to deterioration of credit
quality, defaults and downward valuations. On a quarterly basis, we review the
valuations of our private debt and equity investments. If and when we determine
that the net realizable value of these investments is less than our carrying
value, we will reflect the reduction as an investment loss.
Net interest, dividends, and other revenue (net of interest expense)
increased 22% from $1.8 million in 2000 to $2.2 million in 2001 primarily due to
reduced interest expense on our trading accounts.
Total expenses decreased 50% from $57.7 million in 2000 to $28.6 million in
2001 due primarily to a decrease in variable compensation expense associated
with decreased revenue.
Compensation and benefits expense decreased 65% from $46.2 million in 2000 to
$16.3 million in 2001. This decrease was primarily due to a decrease in
compensation associated with our venture capital funds and, to a lesser extent,
a decrease in investment banking and executive officer compensation. The fund
management teams for the venture capital funds have agreements with the Company
to receive a percentage of the incentive allocations.
Business development and professional services increased 15% from $4.6
million in 2000 to $5.3 million in 2001 primarily due to an increase in
consulting expenses associated with recruiting investment banking, sales and
trading professionals.
Clearing and brokerage fees increased 6% from $1.6 million in 2000 to $1.7
million in 2001 due to an increase in the volume of sales and trading activity.
As a percentage of institutional brokerage revenue, clearing and brokerage fees
remained unchanged at 14% in 2000 and 2001.
Occupancy and equipment expense increased 9% from $2.3 million in 2000 to
$2.5 million in 2001 primarily due to an increase associated with opening new
offices. Depreciation and amortization expense increased $0.1 in 2001 compared
to 2000.
Communications expense remained unchanged at $1.2 million in 2000 and 2001.
Other operating expenses were fairly stable, decreasing 6% from $1.6 million
in 2000 to $1.5 million in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity and regulatory capital needs
through three primary sources: (1) internally generated funds; (2) equity
capital contributions; and (3) credit provided by banks, clearing brokers, and
affiliates of our principal clearing broker. We have required the use, and may
continue the use, of temporary subordinated loans in connection with regulatory
capital requirements to support our underwriting activities. We have no material
long-term debt.
Our principal assets consist of cash and cash equivalents, receivables,
securities held for trading purposes and long-term investments. As of March 31,
2001, liquid assets consisted primarily of cash and cash equivalents of $39.9
million and a $23.1 million receivable for cash on deposit with the Company's
clearing broker. Cash equivalents of $39.9 million consist primarily of money
market funds invested in debt obligations of the U.S. government. We also held
$3.0 million net in marketable securities in our trading accounts. We had
borrowing capacity (borrowing against security positions) from FBRC's clearing
broker of approximately $21.6 million as of March 31, 2001 and a total of $40.0
million in a committed subordinated revolving loan from an affiliate of the
Company's clearing broker that is allowable for net capital purposes. The
Company intends to replace this agreement upon expiration in December 2001.
13
LIQUIDITY AND CAPITAL RESOURCES, continued
Long-term investments consist primarily of investments in managed
partnerships, including venture capital funds in which we serve as managing
partner, available-for-sale securities, our investment in FBR-Asset and long-
term debt and equity investments in privately held companies. The decrease in
the Company's long-term investments is due to distributions of $21.0 million and
net investment depreciation of $5.1 million offset by capital contributions of
$1.9 million. Although the investments in venture capital funds and other
limited partnerships are for the most part illiquid, the underlying investments
of such entities may be in publicly traded, equity and debt securities, some of
which may be restricted due to contractual "lock-up" requirements. The Company
is continually evaluating and implementing various strategies designed to
minimize its risk of loss from potential market declines of securities
underlying its long-term investments. During 2000 and the first quarter of 2001,
the Company employed option strategies that were indexed to common equity shares
held by certain of the Company's managed investment partnerships. The options
are subject to fair value accounting. Total realized and unrealized gains of
$4.3 million were recognized during 2001 and included in net investment loss in
the statement of operations. As of March 31, 2001, the outstanding options had a
fair value of $2.7 million.
As of March 31, 2001, a majority, by value, of the underlying assets of the
investment partnerships and the REIT were equity securities of domestic,
publicly traded companies or, in the case of the REIT, mortgage-backed
securities. These underlying investments are marked to market, subject to
liquidity discounts in the case of securities that are subject to contractual
"lock-up" requirements or regulatory restrictions (including Rule 144) or
otherwise not readily marketable, and we record our proportionate share of
unrealized gains and losses. To the extent the underlying investments in the
investment partnerships, venture funds, REIT and direct investments are not
marketable securities, they are valued at estimated fair values. In 2001, we
recorded net realized and unrealized losses from our investments of $(2.1)
million and incentive allocations that represent unrealized losses and
realization events related to our partnership interests and underlying
securities of $(3.0) million. We also maintain, as a separate component of
shareholders' equity, $1.4 million of accumulated other comprehensive income,
representing $(1.3) million of unrealized losses on our direct investments and
$2.7 million of unrealized gains representing our proportionate share of the
REIT. As of March 31, 2001, the recorded value of our long-term investment
securities and our marketable and trading securities (net of short positions)
was $125.4 million. The net potential loss in fair value, using a 10%
hypothetical decline in reported value, was $12.5 million.
As of March 31, 2001, we had net operating losses ("NOL") for tax purposes of
$31.4 million that expire through 2019. We maintain a partial valuation
allowance related to the NOL and deferred tax assets, in general because, based
on the weight of available evidence, it is more likely than not that a portion
of the net deferred tax assets may not be realized.
We believe that the Company's current level of equity capital and committed
line of credit, including funds generated from operations, are adequate to meet
our liquidity and regulatory capital requirements and other activities. We may,
however, seek debt or equity financing, in public or private transactions, or
otherwise re-deploy assets, to provide capital for corporate purposes and/or to
fund strategic business opportunities, including possible acquisitions, joint
ventures, alliances or other business arrangements which could require
substantial capital outlays. Our policy is to evaluate strategic business
opportunities, including acquisitions and divestitures, as they arise.
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LIQUIDITY AND CAPITAL RESOURCES, continued
We constantly review our capital needs and sources, the cost of capital and
return on equity, and we seek strategies to provide favorable returns on
capital. In evaluating our anticipated capital needs and current cash resources
during 1998, our Board of Directors authorized a share repurchase program of up
to 2.5 million shares of our Company's Class A Common Stock. Since announcing
the share repurchase program, the Company purchased 1,468,027 shares as of March
31, 2001. 482,857 of the purchased shares were reissued to employees pursuant
to our Employee Stock Purchase Plan.
WARRANTS
In connection with various public and private capital raising transactions,
we have received and we hold the following warrants for stock of the issuing
corporation. The exercise price for each warrant is set at the offering price
of the underlying stock in the relevant capital raising transaction. Due to the
restrictions on the warrants and the underlying securities, we carry the
warrants at nominal values, and recognize profits, if any, only when realized.
Closing
Number Price on Expiration
of Exercise March 31, Date of
Warrants Price 2001 Warrants
-------- -------- ------------ ----------
Access Data............................... 218,183 $ 1.6500 * 03/29/05
American Home Mortgage Holdings, Inc. .... 125,000 7.8000 $ 7.5000 09/30/04
BIT Central, Inc. ........................ 63,000 1.0000 * 06/30/05
Capital Automotive REIT................... 894,457 15.0000 16.0000 02/12/03
Dry, Inc.................................. 11,832 10.0000 * 10/16/05
FBR Asset Investment Corporation.......... 815,805 20.0000 24.5000 12/11/07
Headstrong................................ 60,000 13.0000 * 05/26/10
Local Financial Corporation............... 390,332 10.0000 12.6875 09/08/02
PlanetClick, Inc. ........................ 56,164 3.1988 * 06/30/04
PocketScript.............................. 103,013 1.5000 * 01/27/07
RAIT Investment Trust..................... 99,292 15.0000 13.7900 01/08/03
Styling Technology Corporation............ 71,050 12.0000 ** 11/21/01
Synchrologic.............................. 61,263 6.6500 * 08/25/05
The Bancorp.com, Inc. .................... 28,093 10.0000 * 11/01/04
Total Funding.com......................... 521,400 3.0000 * 02/11/05
Ultraprise Corporation.................... 136,427 2.5333 * 12/22/04
Vcampus Corporation (formerly UOLP)....... 18,500 4.6250 1.0625 09/16/03
World Web, Ltd. .......................... 233,334 1.5000 * 12/13/04
Xypoint Corporation....................... 285,107 2.1000 * 07/10/03
* The underlying unregistered security does not have a ready market. We
received the warrants in a private placement transaction.
** This security was not trading on March 31, 2001.
15
Item 3. Changes in Information About Market Risk
None.
Forward-Looking Statements
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Some of the forward-looking
statements can be identified by the use of forward-looking words such as
"believes", "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates" or "anticipates" or the negative of those words
or other comparable terminology. Such statements include, but are not limited
to, those relating to the effects of growth, our principal investment
activities, levels of assets under management and our current equity capital
levels. Forward-looking statements involve risks and uncertainties. You should
be aware that a number of important factors could cause our actual results to
differ materially from those in the forward-looking statements. These factors
include, but are not limited to, competition among venture capital firms and the
high degree of risk associated with venture capital investments, the effect of
demand for public offerings, mutual fund and 401(k) and pension plan inflows or
outflows, volatility of the securities markets, available technologies,
government regulation, economic conditions and competition for business and
personnel in the business areas in which we focus, fluctuating quarterly
operating results, the availability of capital to us and risks related to online
commerce. We will not necessarily update the information presented or
incorporated by reference in this Form 10-Q if any of these forward-looking
statements turn out to be inaccurate. For a more detailed discussion of the
risks affecting our business see our Form 10-K for 1999 and especially the
section "Business--Factors Affecting Our Business, Operating Results and
Financial Condition".
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial data schedule
(b) Reports on Form 8-K
. April 27, 2001: first quarter 2001 results
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, thereunto duly authorized.
Friedman, Billings, Ramsey Group, Inc.
5/15/01 By: /s/ Kurt R. Harrington
- --------- ------------------------------------------------
Date Kurt R. Harrington, Senior Vice President and Chief
Financial Officer (Principal Financial and Accounting
Officer)
16