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 June 30, 1999
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
Arlington, VA 22209
(Address of principal executive offices) (Zip code)
(703) 312-9500
(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 12,608,888 shares as of July 31, 1999
Class B Common Stock 36,272,929 shares as of July 31, 1999
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Page Number (s)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets-
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations-
Three Months Ended June 30, 1999 and 1998 4
Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
Item 3. Changes in Information About Market Risk 18
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18-19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
EXHIBIT INDEX 19
2
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30, December 31,
1999 1998
-------- --------
ASSETS
Cash and cash equivalents $ 38,094 $ 46,827
Receivables:
Investment banking 4,280 3,075
Asset management fees 6,483 5,108
Income taxes 1,300 8,795
Affiliates 7,224 6,871
Other 1,371 967
Due from clearing broker 29,305 10,721
Marketable trading securities, at market value:
Corporate equities 5,618 8,709
Corporate bonds 3,062 4,441
Long-term investments 123,214 97,157
Deferred tax asset 2,402 2,402
Furniture, equipment, software and leasehold improvements,
net of accumulated depreciation and amortization of
$4,144 and $3,467, respectively 6,516 6,946
Prepaid expenses and other assets 2,852 3,097
-------- --------
Total assets $231,721 $205,116
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Trading account securities sold but not yet purchased, at market value:
Corporate equities $ 2,495 $ 2,527
Corporate bonds 135 365
Due to issuer 19,700 -
Accounts payable and accrued expenses 12,414 8,226
Accrued compensation and benefits 7,486 5,185
Long-term secured loans 1,639 1,911
-------- --------
Total liabilities 43,869 18,214
-------- --------
Commitments and contingencies (Note 10) - -
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, 13,756,071 and 13,716,571 issued, respectively 137 137
Class B Common Stock, $0.01 par value, 100,000,000 shares authorized,
36,272,929 and 36,312,429 issued and outstanding, respectively 363 363
Additional paid-in capital 208,180 208,525
Treasury stock, at cost, 1,147,183 and 910,037 shares, respectively (8,371) (7,081)
Accumulated other comprehensive loss (19,445) (16,136)
Retained earnings 6,988 1,094
-------- --------
Total shareholders' equity 187,852 186,902
-------- --------
Total liabilities and shareholders' equity $231,721 $205,116
======== ========
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 June 30,
------------------------
1999 1998
----------- ---------
Revenues:
Investment banking:
Underwriting $ 9,245 $16,313
Corporate finance 5,820 29,615
Institutional brokerage:
Principal sales credits 6,952 7,639
Agency commissions 3,749 4,336
Gains and losses, net:
Trading (148) (8,316)
Investment 9,863 (242)
Asset management 2,522 2,306
Interest and dividends 2,376 5,683
------- -------
Total revenues 40,379 57,334
------- -------
Expenses:
Compensation and benefits 22,109 28,899
Business development and professional services 5,908 8,259
Clearing and brokerage fees 1,195 1,649
Occupancy and equipment 1,422 900
Communications 913 877
Interest expense 494 1,468
Other operating expenses 2,489 2,689
------- -------
Total expenses 34,530 44,741
------- -------
Net income before taxes 5,849 12,593
Income tax provision - 5,160
------- -------
Net income $ 5,849 $ 7,433
======= =======
Basic and diluted earnings per share $ 0.12 $ 0.15
======= =======
Weighted average shares outstanding:
Basic 48,692 50,029
======= =======
Diluted 49,703 50,029
======= =======
See notes to consolidated financial statements.
4
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Six Months
Ended June 30,
------------------------
1999 1998
----------- ---------
Revenues:
Investment banking:
Underwriting $12,416 $ 64,023
Corporate finance 8,697 33,276
Institutional brokerage:
Principal sales credits 14,229 16,673
Agency commissions 6,568 8,044
Gains and losses, net:
Trading (1,364) (14,237)
Investment 12,124 2,762
Asset management 4,859 5,475
Interest and dividends 4,919 9,302
------- --------
Total revenues 62,448 125,318
------- --------
Expenses:
Compensation and benefits 36,347 57,242
Business development and professional services 8,502 15,065
Clearing and brokerage fees 2,209 2,992
Occupancy and equipment 2,984 1,664
Communications 1,837 1,703
Interest expense 1,001 3,127
Other operating expenses 3,674 5,196
------- --------
Total expenses 56,554 86,989
------- --------
Net income before taxes 5,894 38,329
Income tax provision - 15,317
------- --------
Net income $ 5,894 $ 23,012
======= ========
Basic and diluted earnings per share $ 0.12 $ 0.46
======= ========
Weighted average shares outstanding:
Basic 48,862 50,029
======= ========
Diluted 49,564 50,029
======= ========
See notes to consolidated financial statements.
5
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months
Ended June 30,
------------------
1999 1998
------- --------
Cash flows from operating activities:
Net income $ 5,894 $ 23,012
Non-cash items included in earnings--
Income and incentive income on
long-term investments (10,351) (4,751)
Depreciation and amortization 1,093 484
Deferred income taxes - 2,012
Other (321) -
Changes in operating assets:
Receivables--
Investment banking (1,205) (2,333)
Asset management fees (1,096) (1,472)
Income taxes 7,495 4,509
Affiliates 9 (1,816)
Other 396 (6,373)
Due from clearing broker (18,584) (35,971)
Marketable trading securities 4,470 (59,207)
Prepaid expenses and other assets 245 (2,024)
Changes in operating liabilities:
Due to issuer - 23,183
Trading account securities sold but not
yet purchased (262) 2,491
Net repayments on short-term subordinated loans - (40,000)
Accounts payable and accrued expenses 4,188 (6,031)
Accrued compensation and benefits 2,301 11,199
-------- ---------
Net cash used in operating activities (5,728) (93,088)
-------- ---------
Cash flows from investment activities:
Purchases of fixed assets (954) (3,205)
Purchases of investments, net (145) (15,905)
-------- ---------
Net cash used in investing activities (1,099) (19,110)
-------- ---------
Cash flows from financing activities:
Repayments of long-term secured loans (272) (247)
Purchases of treasury stock (1,634) -
Dividends - (24,000)
-------- ---------
Net cash used in financing activities (1,906) (24,247)
-------- ---------
Net decrease in cash and cash equivalents (8,733) (136,445)
Cash and cash equivalents, beginning of period 46,827 207,691
-------- ---------
Cash and cash equivalents, end of period $ 38,094 $ 71,246
======== =========
Non-cash transaction: On June 30, 1999, the Company purchased a $19.7 million
investment that settled subsequent to the trade date (Note 4). The payable for
the investment has been recorded in "Due to issuer" in the Company's balance
sheet.
See notes to consolidated financial statements.
6
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 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 for prior periods
have been reclassified to conform to the current period presentation.
2. Summarized Income Statement Information:
The Company's investment in FBR Asset Investment Corporation of $24.0 million
represents 19% of the Company's total investments and 10% of the Company's total
assets as of June 30, 1999. The following table summarizes FBR Asset Investment
Corporation's income statement information for the periods presented (in
thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------- ------- ------- -------
Gross revenues $ 5,420 $ 3,102 $10,585 $ 5,652
Total expenses (2,341) (1,033) (4,798) (1,186)
------- ------- ------- -------
Net income before investment gains 3,079 2,069 5,787 4,466
Investment gains 743 - 743 -
------- ------- ------- -------
Net income $ 3,822 $ 2,069 $ 6,530 $ 4,466
======= ======= ======= =======
3. Comprehensive Income:
The components of comprehensive income are as follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income $ 5,849 $7,433 $ 5,894 $23,012
Other comprehensive income (loss):
Net unrealized investment gains (losses) on
available-for-sale securities and investment
in FBR Asset Investment Corporation 4,347 - (3,309) -
------- ------ ------- -------
Comprehensive income $10,196 $7,433 $ 2,585 $23,012
======= ====== ======= =======
7
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Imperial Credit Industries, Inc. Investment:
On June 30, 1999, the Company purchased 800,000 shares of Series B, 11.5%,
$25 liquidation value per share, cumulative preferred stock of Imperial Credit
Industries, Inc. ("ICII") in a private transaction. The Company paid $19.7
million for this investment. With respect to rights to receive dividends and
other distributions, the Series B preferred stock ranks senior to any other
class or series of shares issued by ICII. The investment earns dividends
according to the following annual rate schedule:
Period Coupon
------ ------
July 1, 1999 - December 31, 1999 11.5%
January 1, 2000 - March 31, 2000 14.5%
April 1, 2000 - June 30, 2000 17.5%
July 1, 2000 - September 30, 2000 20.5%
October 1, 2000 - December 31, 2000 23.5%
January 1, 2001 - April 30, 2007 25.0%
Dividends will be declared quarterly. The Series B preferred stock shall be
redeemable at any time, at the option of ICII, at 103% of the sum of the
liquidation preference (if redemption occurs on or before December 31, 1999)
plus unpaid accrued dividends. At any time after December 31, 1999, the
redemption price shall be 105% of the sum of the liquidation preference plus
unpaid accrued dividends. On May 1, 2007, the mandatory redemption date, ICII
shall be required to redeem all outstanding Series B preferred stock at $25 plus
accrued dividends.
The Company carries the investment at estimated market value. Unrealized
gains and/or losses will be recorded in earnings.
5. Sale of Warrants:
During the quarter ended June 30, 1999, the Company sold warrants to purchase
the common stock of Building One Services Corporation ("BOSS") to Boss
Investment L.L.C. The Company received the warrants in 1997 when it acted as
the lead manager in the initial public offering of BOSS' predecessor company's
stock. The Company recorded $2.1 million of investment gains related to the
sale of these warrants in the quarter ended June 30, 1999.
6. Executive Officer Compensation:
During 1999, the Company's Executive Officer Directors are eligible for
bonuses under the 1997 Key Employee Incentive Plan (the "Plan") based on two
components. First, Executive Officer Directors are eligible to participate in a
bonus pool of up to 20% of the Company's pre-tax income (before payment of the
bonuses), adjusted for certain expense items that are excluded from pre-tax
income. The 20% pool is subject to a cap related to the ratio of compensation
expense (excluding certain items) to total revenues. Second, Executive Officer
Directors are eligible to participate in a bonus pool of $6.0 million.
Eligibility for the $6.0 million pool is based on a formula tied to the
performance of the Company's principal broker-dealer's trading operations
without reference to the overall profitability of the Company. During the three
and six months ended June 30, 1999, the Company recorded $2.6 million and $3.4
million of compensation expense, respectively, related to the Plan. During the
three and six months ended June 30, 1998, the Company recorded $3.2 million and
$9.6 million of compensation expense, respectively, related to the 1997 Stock
and Annual Incentive Plan.
8
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes:
As of June 30, 1999, the Company had net operating losses ("NOL") for tax
purposes of approximately $19.0 million that expire through 2018. The Company
maintains a partial valuation allowance related to the NOL because, based on the
weight of available evidence, it is more likely than not that a portion of the
NOL may not be realized. As a result of recording the valuation allowance,
based on current evidence, the Company estimates that no income tax provision
will be recorded in the Statement of Operations until the Company earns an
additional $7.3 million in taxable net income.
8. 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, not to exceed 15 to 1. As of June
30, 1999, the broker-dealer subsidiaries had aggregate net capital of $28.1
million, which exceeded the requirement by $25.7 million.
9. Earnings 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 securities. The following is a reconciliation of the basic
and diluted share calculations:
For the Three For the Six
Months Ended Months Ended
June 30, 1999 June 30, 1999
------------- -------------
Weighted average common shares-basic 48,691,961 48,861,969
Effect of dilutive securities:
Stock options 2,079,030 and 2,054,030
shares, respectively 1,010,664 701,582
------------- -------------
Weighted average common shares-diluted 49,702,625 49,563,551
============= =============
In addition to the options disclosed above, options to purchase 3,945,850 and
4,257,400 shares of common stock were outstanding, as of June 30, 1999 and 1998,
respectively, but were not included in the computations of diluted earnings per
share because their effect would be anti-dilutive.
10. Commitments and Contingencies:
As of June 30, 1999, 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. There can be no assurances that these matters will not have
a material adverse effect on the Company's results of operations in a future
period, depending in part on the results for such period. However, based on
management's review with counsel, resolution of these matters is not expected to
have a material adverse effect on the consolidated financial condition or
results of operations of the Company. During the quarter ended June 30, 1999,
the Company recorded $1.0 million in other operating costs representing
management's estimate of the Company's aggregate increase in exposure related to
pending and threatened litigation.
9
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Commitments and Contingencies, continued:
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 actively to 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.
11. Employee Stock Purchase Plan:
On June 30, 1999, the Company issued 194,789 shares of previously repurchased
Class A Common Stock to employees, in accordance with the 1997 Employee Stock
Purchase Plan. The shares were issued at a per share price of $5.53,
representing 85% of the market value of the Company's common stock on January 1,
1999 (the first day of the offering period). The excess of the average cost of
treasury stock issued of $7.30 over the issuance price of $5.53 totaled $344,777
and was charged to additional paid-in capital.
12. Segment Information:
The Company considers its capital markets and asset management operations to
be two separate reportable segments. Parent company interest income, income
taxes and administration expenses are not allocated to the segments and,
therefore, are included in the "Other" column below. There are no significant
revenue transactions between the segments. The following table illustrates the
financial information for both segments for the periods presented (in
thousands):
Capital Asset Consolidated
Markets Management Other Totals
------- ---------- ----- ------
Three Months Ended June 30, 1999
- --------------------------------
Total revenues $29,562 $10,194 $ 623 $40,379
Pre-tax income (loss) 283 7,583 (2,017) 5,849
Three Months Ended June 30, 1998
- ----------------------------------
Total revenues 53,741 2,943 650 57,334
Pre-tax income 10,854 1,591 148 12,593
Six Months Ended June 30, 1999
- ------------------------------
Total revenues 46,018 15,695 735 62,448
Pre-tax income (loss) (1,979) 10,478 (2,605) 5,894
Six Months Ended June 30, 1998
- ------------------------------
Total revenues 114,578 9,041 1,699 125,318
Pre-tax income 31,805 5,815 709 38,329
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
June 30, 1999 and 1998, and the Notes thereto and the Company's 1998 Annual
Report on Form 10-K.
BUSINESS ENVIRONMENT
The Company's business activities are linked to the capital markets,
particularly capital raising, and to securities sales and trading activities
which are, by their nature, highly competitive and subject to general market
conditions. These activities include capital raising, merger and acquisition
(M&A) and advisory services, proprietary investments and asset management
services. Revenue generated from these activities, by nature, tends to be
unpredictable. Consequently, the Company's net income and revenues have been,
and are likely to continue to be, subject to wide fluctuations, reflecting the
impact of many factors beyond the Company's control, including the state of the
economy, securities market conditions, competitive conditions and the size and
timing of transactions. In order to remain flexible with the ever-changing
securities industry, the Company is continuing to seek to diversify its
businesses, which includes enhancing its asset management segment through the
creation of new venture funds and other proprietary investment partnerships.
RECENT DEVELOPMENTS
fbr.com
- -------
In the last two years, procedures for conducting trading and other securities
transactions have changed dramatically due to the rise of online trading over
the Internet. Industry market reports estimate that one in every seven equity
trades is made online. The underwriting of securities increasingly involves the
use of the Internet. In order to capitalize on these trends and enhance its
core business via the Internet, during the second quarter of 1999, the Company
introduced fbr.com, an online investment bank and electronic brokerage. fbr.com
is a division of FBR Investment Services, Inc. ("FBRIS"), a wholly owned broker-
dealer subsidiary of the Company, formed in February 1997 and registered as a
broker-dealer under the name FBR Direct, Inc. in June 1997. Management believes
it can leverage its strengths in underwriting, research and proprietary
investment vehicles by offering these services online via fbr.com. Since
announcing fbr.com on April 15, 1999, the Company has offered shares of
five equity offerings online.
The Company may incur significant marketing, compensation, and technology
costs related to fbr.com operations. During the quarter ended June 30, 1999,
the Company hired new personnel, principally customer service representatives,
and plans to hire additional employees throughout the remainder of 1999. Costs
related to fbr.com start-up and operations amounted to $1.8 million during the
quarter ended June 30, 1999, of which $1.0 million were expensed in the
Company's Statement of Operations and $0.8 million were capitalized as software
and equipment costs. The Company will amortize/depreciate the software and
equipment costs over their estimated useful lives.
Subsequent to June 30, 1999, the Company leased commercial office space near
its headquarters for an 80-seat customer service call center, continued the
development of its online trading systems with third-party developers and
initiated a marketing effort. Management estimates that costs related to the
development, execution and marketing of fbr.com may significantly increase
during the remainder of the year, and, in turn, the Company's profits during
1999 may be reduced or eliminated.
Management believes that brand awareness is vitally important in the online
securities industry. In July, 1999, the Company engaged a national advertising
agency with experience in the financial services industry to develop and execute
a brand awareness campaign for fbr.com. The Company may spend up to $25 million
over the next several quarters related to this campaign, which includes print
and broadcast advertising costs.
11
RECENT DEVELOPMENTS, continued
Strategic Alliance with Fidelity Investments
- --------------------------------------------
On August 12, 1999, the Company announced a strategic alliance with Fidelity
Investments ("Fidelity") in which Fidelity will participate in the distribution
of securities underwritten by the Company. Under the alliance, the Company will
invite Fidelity to participate as a selling group member in selected offerings
underwritten by the Company. Initially, the two firms will focus their efforts
on certain industry sectors that make up the Company's core research and
underwriting capabilities and include technology, real estate, regional banks,
thrifts, specialty finance companies, energy and healthcare. In the future,
both firms may explore potential business relationships in other business areas,
including asset management, research and electronic trading of securities.
RESULTS OF OPERATIONS
Three months ended June 30, 1999 compared to three months ended June 30, 1998
The Company's revenues decreased 30% from $57.3 million in 1998 to $40.4
million in 1999. Net income decreased 21% from $7.4 million in 1998 to $5.8
million in 1999. The Company's basic and diluted earnings per share decreased
20% from $0.15 in 1998 to $0.12 in 1999. The decrease in net income was
primarily related to lower investment banking activity offset by an increase in
investment gains and a decrease in trading losses. In addition, during 1999,
the Company increased litigation accruals and incurred fbr.com start-up costs.
Underwriting revenue decreased 43% from $16.3 million in 1998 to $9.2 million
in 1999. During the quarter ended June 30, 1999, the Company managed seven
public offerings raising $513 million and generating $9.2 million in revenues.
During the second quarter of 1998, the Company completed ten transactions
raising $1.2 billion and generating $16.3 million in revenues. The average size
of transactions managed decreased from $119.4 million in 1998 to $73.3 million
in 1999. The decrease in underwriting revenue is attributed to (1) the decline
in the size of completed transactions and the size of the Company's
proportionate fee and (2) fewer completed deals attributed to the continuation
of lower prices and reduced activity in the markets for securities of companies
in the financial services and real estate sectors, two of the Company's primary
areas of focus.
Corporate finance revenue decreased 80% from $29.6 million in 1998 to $5.8
million in 1999 due primarily to a decrease in the number of private placement
transactions completed. In 1999, the Company completed two private placements
generating $0.7 million in revenues compared to five completed transactions in
1998 that generated $22.3 million in revenues. In the second quarter of 1998,
the Company completed one of the largest private placement transactions in its
history from which it generated revenues of $17.8 million. M&A and advisory fee
revenue also decreased from $7.3 million in 1998 to $5.1 million in 1999 due to
a decline in the number of deals completed and retainer fees earned.
Principal sales credits decreased 9% from $7.6 million in 1998 to $7.0
million in 1999. This decrease was attributed to lower volumes in the Company's
NASDAQ trading, notably, in the real estate and financial services sectors, two
of the Company's primary industries. In addition, the Company completed fewer
underwriting transactions during 1999 than in 1998, resulting in less secondary
trading following the completion of deals.
Agency commissions decreased 14% from $4.3 million in 1998 to $3.7 million in
1999. This decrease was attributed to the decline in securities transaction
volume due, in part, to the completion of fewer managed transactions, discussed
above.
Net trading losses decreased 98% from $(8.3) million in 1998 to $(0.1)
million in 1999. The decrease in trading losses is attributed to a significant
management effort to reduce broker-dealer trading inventories to an amount
needed to provide the appropriate level of liquidity in securities for which the
Company is a market maker. This reduction has limited exposure of the Company's
broker-dealer trading inventories to future downturns in the markets.
12
RESULTS OF OPERATIONS, continued
Three months ended June 30, 1999 compared to three months ended June 30, 1998,
continued
Net investment gains/(losses) changed from $(0.2) million in 1998 to $9.9
million in 1999. Investment gains in 1999 include: $2.1 million resulting from
the sale of Building One Services Corporation warrants; $4.9 million related to
the Company's investments in proprietary investment partnerships; and $2.0
million related to the Company's investment in FBR Asset Investment Corporation.
Investment gains increased in 1999 due, in part, to higher returns generated by
two of the Company's investments in proprietary investment partnerships.
Although the Company realized investment gains during 1999, unrealized losses
related to the Company's investments totaled $19.4 million as of June 30, 1999.
If and when management determines that the decline in value of these investments
is "other than temporary", a portion or all of the losses will be realized as
investment losses in the Statement of Operations during the period in which the
determination is made. The Company's investment portfolio is also exposed to
future downturns in the markets and preferred and debt securities are exposed to
deterioration of credit and credit defaults.
Asset management revenue increased 9% from $2.3 million in 1998 to $2.5
million in 1999. This increase was due primarily to an increase in base
management fees earned from technology venture capital funds. During 1999, the
Company completed the close of a second technology venture capital fund. The
Company recorded $0.2 million in base management fees in 1999 related to this
fund.
Interest and dividends decreased 58% from $5.7 million in 1998 to $2.4
million in 1999. This decrease is due primarily to a decrease in the Company's
trading inventory from which dividend income may be earned. During 1998, the
Company recorded $2.0 million of dividend income, including two dividends
totaling $1.0 million, from two significant trading positions, compared to $0.1
million in 1999. Net interest revenue (net of interest expense) decreased 18%
from $2.2 million in 1998 to $1.8 million in 1999 due to a decrease in the
Company's invested net assets in income-producing vehicles.
Total expenses decreased 23% from $44.7 million in 1998 to $34.5 million in
1999 due primarily to lower variable compensation expense and lower investment
banking expenses associated with the decrease in investment banking revenues,
and a decrease in the amount of executive compensation due, in part, to the
decline in profits.
Compensation and benefits expense decreased 23% from $28.9 million in 1998 to
$22.1 million in 1999. This decrease was primarily due to a decline in variable
investment banking compensation, directly related to the decrease in investment
banking revenues, offset by a $1.4 million reduction of 1997 bonus accruals in
1998. Executive officer bonus compensation also declined from $3.2 million in
1998 to $2.6 million in 1999.
Business development and professional services decreased 28% from $8.3
million in 1998 to $5.9 million in 1999 primarily due to a $1.2 million decrease
in legal costs and a $1.1 million decrease in travel and meals expenses
associated with lower investment banking activity. This decrease is offset by
$0.6 million of professional fees and other promotional expenses in 1999 related
to the launch of fbr.com.
Clearing and brokerage fees decreased 28% from $1.6 million in 1998 to $1.2
million in 1999 due to a decline in the volume of sales and trading activity.
As a percentage of principal sales credits and agency commissions revenue,
clearing and brokerage fees decreased from 13.8% in 1998 to 11.2% in 1999 due to
lower rates charged by the Company's principal clearing broker.
Occupancy and equipment expense increased 58% from $0.9 million in 1998 to
$1.4 million in 1999 due to the expansion of office space and an increase in
depreciation expense related to computer and telecommunications equipment and
furniture for the expanded facilities. As a result of the expansion, office
rent expense increased $0.2 million in 1999 compared to 1998, and depreciation
and amortization expense increased $0.2 million in 1999 compared to 1998.
13
RESULTS OF OPERATIONS, continued
Three months ended June 30, 1999 compared to three months ended June 30, 1998,
continued
Other operating expenses decreased 7% from $2.7 million in 1998 to $2.5
million in 1999 due to the reduction or elimination of certain non-revenue-
producing expenses and other overhead costs such as printing and copying and
other office expenses, offset by a $1.0 million charge for litigation accruals.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
The Company's revenues decreased 50% from $125.3 million in 1998 to $62.4
million in 1999. Net income decreased 74% from $23.0 million in 1998 to $5.9
million in 1999. The Company's basic and diluted earnings per share decreased
74% from $0.46 in 1998 to $0.12 in 1999. The decrease in net income was
primarily related to lower investment banking activity offset by an increase in
investment gains and a decrease in trading losses. In addition, during 1999,
the Company increased litigation accruals and incurred fbr.com start-up costs.
Underwriting revenue decreased 81% from $64.0 million in 1998 to $12.4
million in 1999. During 1999, the Company managed eleven public offerings
raising $791.9 million and generating $12.4 million in revenues. During 1998,
the Company completed twenty-one transactions raising $2.6 billion and
generating $64.0 million in revenues. In 1998, the Company completed one of the
largest public offerings in its history from which it earned $22.9 million in
revenues. The average size of transactions managed decreased from $123.4
million in 1998 to $72.0 million in 1999. The decrease in underwriting revenue
is attributed to (1) the decline in the size of completed transactions and the
size of the Company's proportionate fee and (2) fewer completed deals attributed
to the continuation of lower prices and reduced activity in the markets for
securities of companies in the financial services and real estate sectors, two
of the Company's primary areas of focus.
Corporate finance revenue decreased 74% from $33.3 million in 1998 to $8.7
million in 1999 due primarily to a decrease in the number of private placement
transactions completed and a decrease in M&A and other advisory fee revenue. In
1999, the Company completed four private placements generating $3.0 million in
revenues compared to seven completed transactions in 1998 that generated $23.9
million in revenues. In 1998, the Company completed one of the largest private
placement transactions in its history from which it generated revenue of $17.8
million. M&A and advisory fee revenue also decreased from $9.4 million in 1998
to $5.7 million in 1999 due to a decline in the number of deals completed and
retainer fees earned.
Principal sales credits decreased 15% from $16.7 million in 1998 to $14.2
million in 1999. This decrease was due to lower volumes in the Company's NASDAQ
trading, notably, in the real estate and financial services sectors, two of the
Company's primary industries. In addition, the Company completed fewer
underwriting transactions during 1999 than in 1998, resulting in less secondary
trading following the completion of deals.
Agency commissions decreased 18% from $8.0 million in 1998 to $6.6 million in
1999. This decrease was attributed to the decline in securities transaction
volume due, in part, to the completion of fewer managed transactions, discussed
above.
Net trading losses decreased 90% from $(14.2) million in 1998 to $(1.4)
million in 1999. The decrease in trading losses is attributed to a significant
management effort to reduce trading inventories to an amount needed to provide
the appropriate level of liquidity in securities for which the Company is a
market maker. This reduction has limited exposure of the Company's broker-
dealer trading inventories to future downturns in the markets.
14
RESULTS OF OPERATIONS, continued
Six months ended June 30, 1999 compared to six months ended June 30, 1998,
continued
Net investment gains increased 339% from $2.8 million in 1998 to $12.1
million in 1999. Investment gains in 1998 were generated solely from the
Company's investments in proprietary investment partnerships. Investment gains
in 1999 include: $2.1 million resulting from the sale of Building One Services
Corporation warrants; $6.6 million related to the Company's investments in
proprietary investment partnerships; and $2.6 million related to the Company's
investment in FBR Asset Investment Corporation. Investment gains increased in
1999 due, in part, to higher returns generated by two of the Company's
investments in proprietary investment partnerships. Although the Company
realized investment gains during 1999, unrealized losses related to the
Company's investments totaled $19.4 million as of June 30, 1999. If and when
management determines that the decline in value of these investments is "other
than temporary", a portion or all of the losses will be realized as investment
losses in the Statement of Operations during the period in which the
determination is made. The Company's investment portfolio is also exposed to
future downturns in the markets and preferred and debt securities are exposed to
deterioration of credit and credit defaults.
Asset management decreased 11% from $5.5 million in 1998 to $4.9 million in
1999. In 1998, the Company earned $1.9 million in incentive income related to
one proprietary investment partnership compared to none in 1999. Also in 1998,
the Company earned $0.8 million in advisory fees related to its mutual funds
compared to $0.3 million in 1999 due to a decline in the average net assets of
the mutual funds. However, base management fees earned from proprietary
investment partnerships increased 56% from $2.6 million in 1998 to $4.0 million
in 1999 due to the change in the mix of assets under management to higher base-
fee partnerships, in particular, technology venture capital funds.
Interest and dividends decreased 47% from $9.3 million in 1998 to $4.9
million in 1999. This decrease is due primarily to a decrease in the Company's
trading inventory from which dividend income may be earned. During 1998, the
Company recorded $2.3 million of dividend income, including two dividends
totaling $1.0 million, from two significant trading positions, compared to $0.3
million in 1999. Net interest revenue (net of interest expense) decreased 8%
from $3.9 million in 1998 to $3.6 million in 1999 due to a decrease in the
Company's invested net assets in income-producing vehicles.
Total expenses decreased 35% from $87.0 million in 1998 to $56.6 million in
1999 due primarily to lower variable compensation expense and lower investment
banking expenses associated with the decrease in investment banking revenues and
a decrease in the amount of executive compensation due, in part, to the decline
in profits.
Compensation and benefits expense decreased 37% from $57.2 million in 1998 to
$36.3 million in 1999. This decrease was primarily due to a decline in variable
investment banking compensation, directly related to the decrease in investment
banking revenues, offset by a $7.3 million reduction of 1997 bonus accruals in
1998. Executive officer bonus compensation also declined from $9.6 million in
1998 to $3.4 million in 1999.
Business development and professional services decreased 44% from $15.1
million in 1998 to $8.5 million in 1999 primarily due to a decrease in legal
costs and travel and meals expenses associated with lower investment banking
activity. This decrease is offset by an increase in professional fees and other
promotional expenses in 1999 related to the launch of fbr.com.
Clearing and brokerage fees decreased 26% from $3.0 million in 1998 to $2.2
million in 1999 due to a decline in the volume of sales and trading activity.
As a percentage of principal sales credits and agency commissions revenue,
clearing and brokerage fees decreased from 12.1% in 1998 to 10.6% in 1999 due to
lower rates charged by the Company's principal clearing broker.
15
RESULTS OF OPERATIONS, continued
Six months ended June 30, 1999 compared to six months ended June 30, 1998,
continued
Occupancy and equipment expense increased 79% from $1.7 million in 1998 to
$3.0 million in 1999 due to the expansion of office space and an increase in
depreciation expense related to computer and telecommunications equipment and
furniture for the expanded facilities. As a result of the expansion, office
rent expense increased $0.5 million in 1999 compared to 1998, and depreciation
and amortization expense increased $0.6 million in 1999 compared to 1998.
Other operating expenses decreased 29% from $5.2 million in 1998 to $3.7
million in 1999 due to the reduction or elimination of certain non-revenue-
producing expenses and other overhead costs such as printing and copying and
other office expenses, offset by a $1.0 million charge for litigation accruals.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company's principal assets consist of cash and cash
equivalents, receivables, including a receivable from its clearing broker,
securities held for trading purposes and long-term investments. Liquid assets
consist primarily of cash and cash equivalents of $38.1 million and a receivable
for cash on deposit with the Company's clearing broker of $29.3 million.
As of June 30, 1999, long-term investments consist of the following: $24.0
million investment in FBR Asset Investment Corporation; $33.3 million of
investments in proprietary investment partnerships managed by the Company; $27.2
million of debt or preferred instruments issued in non-public transactions by
four companies, including three instruments held by FBR Business Development
Fund; $19.7 million Imperial Credit Industries, Inc. investment; and $19.0
million of available-for-sale securities. Subsequent to June 30, 1999, the
Company paid for the Imperial Credit Industries, Inc. investment with available
cash. Long-term investments have increased by $26.1 million from December 31,
1998 to June 30, 1999. This increase was due primarily to investment gains and
accrued incentive income of $10.4 million, net of unrealized decreases in the
value of available for sale securities of $3.3 million, and the $19.7 million
purchase of the Imperial Credit Industries, Inc. investment.
With respect to long-term investment risk, the Company's primary exposure is
to debt and equity price changes and the resulting impact on the Company's long-
term investments. The effect of these changes was particularly evident in the
volatility of the capital markets in the second half of 1998, as the Company
recorded $16.1 million of unrealized investment losses in shareholders' equity,
related to its investments in long-term marketable securities and FBR Asset
Investment Corporation. As of June 30, 1999, these unrealized investment losses
had increased to $19.4 million. To the extent these price declines are
determined to be "other than temporary", any resulting losses would be
recognized in earnings. In addition, the Company's long-term investments in
private debt and preferred equity instruments are subject to
credit/concentration risks, which could result in losses recognized in earnings.
As of June 30, 1999, the potential loss in the fair value of all of the
Company's long-term investments, using a hypothetical 10% decline in reported
value, is $12.3 million.
Friedman, Billings, Ramsey & Co., Inc. ("FBRC") and FBR Investment Services,
Inc. ("FBRIS") are wholly owned broker-dealer subsidiaries of the Company and
are registered with the SEC and are members of the NASD. As such, they are
subject to minimum net capital requirements. As of June 30, 1999, FBRC and
FBRIS were required to maintain minimum regulatory net capital of $2.2 million
and $0.1 million and had total regulatory net capital of $27.5 million and $0.5
million which was $25.3 million and $0.4 million, respectively, in excess of
their requirements.
16
LIQUIDITY AND CAPITAL RESOURCES, continued
The Company is currently funding costs associated with the start up of
fbr.com with operating cash and working capital. Management believes that the
Company's current level of equity capital and committed line of credit, combined
with funds anticipated to be generated from operations, are adequate to meet its
liquidity and regulatory capital requirements and other Company activities,
including those associated with fbr.com. The Company may, however, seek debt or
equity financing, in public or private transactions, to provide capital for
corporate purposes and/or to fund fbr.com and other strategic business
opportunities, including possible acquisitions, joint ventures, alliances or
other business arrangements which could require substantial capital outlays.
The Company's policy is to evaluate strategic business opportunities as they
arise.
The Company constantly reviews its capital needs and sources, the cost of
capital and return on equity, and seeks strategies to provide favorable returns
on capital. In evaluating the Company's anticipated capital needs and current
cash resources during 1998, the Company's Board of Directors authorized a share
repurchase program of up to 2.5 million shares of the Company's Class A Common
Stock. Since announcing the share repurchase program, the Company has purchased
1,468,027 shares as of June 30, 1999.
WARRANTS
In connection with certain capital raising transactions, the Company has
received and holds warrants for stock of the issuing corporation generally
exercisable at the corporation's respective offering price. Due to the
restrictions on the warrants and the underlying securities, the Company carries
the warrants at a nominal value, and will recognize any potential, future
revenues and profits, if any, only when realized. In 1999, the Company granted
certain economic rights, related to these warrants, to certain key employees,
subject to vesting provisions that require continued employment with the Company
for a period of time. As of June 30, 1999, the Company's warrants, after grants
to employees and assuming 100% vesting, are as follows:
Number of Exercise June 30, 1999 Expiration
Warrants Price Closing Price Date
-------- ------- ------------- -----------
American Capital Strategies, Ltd. 307,335 $15.00 $ 18.250 08/29/02
Capital Automotive REIT 894,464 15.00 13.250 02/12/03
East West Bank 232,500 10.00 10.0625 06/12/03
Local Financial Corporation 382,000 10.00 9.875 09/08/02
Styling Technology Corporation 71,050 12.00 13.000 11/21/01
FBR Asset Investment Corporation 970,805 20.00 *13.530 12/11/07
Xypoint Corporation 285,107 2.10 *2.000 07/10/03
UOL Publishing, Inc. 36,500 4.625 7.250 09/16/03
Resource Asset Investment Trust 99,292 15.00 12.625 01/08/03
During 1999, the Company granted and sold all of its warrants related to
Building One Services Corporation common stock. The Company recorded $2.1
million of investment gains related to the sale of these warrants in the quarter
ended June 30, 1999.
* Represents the market price of the underlying unregistered security in recent
Rule 144A transaction trading.
17
Item 3. Changes in Information About Market Risk
None.
Forward-Looking Statements
The Company has made in this report, and from time to time may otherwise make
in its public filings, press releases and discussions with Company management,
forward-looking statements concerning the Company's operations, economic
performance and financial condition. Such statements include, but are not
limited to, those relating to growth, new business initiatives, principal
investment activities, levels of activity, levels of assets under management and
capital levels and availability. Such statements are subject to various risks
and uncertainties and the Company cautions readers that any forward-looking
information provided by or on behalf of the Company is not a guarantee of future
performance and there is no assurance that results for any present or future
period will be consistent with such statements or comparable to those attained
in any prior period. Actual results could differ materially from those
currently anticipated due to a number of factors, including: (i) general
economic and market conditions, (ii) competitive conditions within the
securities industry, (iii) changes in demand for investment banking and
securities brokerage services, (iv) changes in the industries in which the
Company is active, (v) changes in interest rates, loan delinquency rates, stock
market volume and prices, and mutual fund, 401(k) and pension plan inflows or
outflows, (vi) changes in the securities and banking laws and regulations, (vii)
trading and principal investment activities, (viii) availability of adequate
financing to support the Company's business, (ix) potential restrictions on the
withdrawal of capital from certain subsidiaries of the Company due to net
capital requirements, (x) failure of the Company, its vendors or other third
parties to achieve year 2000 compliance, (xi) the Company's ability to recruit
and retain key employees, (xii) the availability of technology and the Company's
ability to implement necessary technologies, and (xiii) litigation and
arbitration. For a more detailed explanation of these and other risks and
uncertainties, refer to "Business - Factors Affecting the Company's Business,
Operating Results and Financial Condition" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market and Business
Risk and - Matters Related to Year 2000" in the Company's Annual Report on Form
10-K for 1998, incorporated herein by reference. The Company undertakes no
obligation to update publicly any forward-looking statements whether as a result
of new information, future events, or otherwise.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 20, 1999 at which
shareholders took the following actions:
1. The election of five directors nominated to serve until the next Annual
Meeting,
2. The approval of amendments to the 1997 Stock and Annual Incentive Plan to
place an annual limit of one million shares on the number of shares of Common
Stock that may be allocated to a Plan participant and to specify certain
performance criteria for Plan awards; and
3. The ratification of the appointment of Arthur Andersen LLP as the Company's
independent auditors for 1999.
The results of the voting in connection with the preceding items were as
follows:
1. Election of Directors: A total of 47,683,851 votes were received for this
item.
For Against Abstain
--- ------- -------
Emanuel J. Friedman 47,621,912 61,939 -
Eric F. Billings 47,621,912 61,939 -
W. Russell Ramsey 47,621,912 61,939 -
Wallace L. Timmeny 47,621,912 61,939 -
Mark R. Warner 47,621,912 61,939 -
18
Item 4. Submission of Matters to a Vote of Security Holders, continued:
2. Approval of Amendments to 1997 Stock and Annual Incentive Plan: A total of
47,683,851 votes were received for this item.
For Against Abstain
--- ------- -------
44,918,000 526,496 2,239,355
3. Ratification of the Appointment of Arthur Andersen LLP: A total of
47,683,851 votes were received for this item.
For Against Abstain
--- ------- -------
45,444,047 14,679 2,225,125
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Memorandum of Understanding
(27) Financial data schedule
(b) Reports on Form 8-K
. April 15, 1999: launch of fbr.com
. April 29, 1999: first quarter 1999 results
. July 29, 1999: second quarter 1999 results
. August 12, 1999: strategic alliance with Fidelity Investments
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.
08/16/99 By: /s/ Eric Y. Generous
---------------- ---------------------------------------------
Date Eric Y. Generous, Chief Financial Officer
(Principal Financial Officer)
08/16/99 By: /s/ Kurt R. Harrington
---------------- ---------------------------------------------
Date Kurt R. Harrington, Treasurer (Principal
Accounting Officer)
EXHIBIT INDEX
EXHIBIT 10.01 Memorandum of Understanding
EXHIBIT 27.01 Financial Data Schedule
19