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 September 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 12,803,888 shares as of October 29, 1999
Class B Common Stock 36,077,929 shares as of October 29, 1999
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page Number(s)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - (unaudited)
Consolidated Balance Sheets-
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations-
Three Months Ended September 30, 1999 and 1998 4
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows-
Nine Months Ended September 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 11-19
Item 3. Changes in Information About Market Risk 19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 20
2
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, December 31,
1999 1998
-------------- -------------
ASSETS
Cash and cash equivalents $ 23,787 $ 46,827
Receivables:
Investment banking 3,032 3,075
Asset management fees 6,414 5,108
Income taxes 1,300 8,795
Affiliates 7,703 6,871
Other 1,701 967
Due from clearing broker 13,640 10,721
Marketable trading securities, at market value:
Corporate equities 15,574 8,709
Corporate bonds 3,181 4,441
Long-term investments 111,955 97,157
Deferred tax asset 2,402 2,402
Furniture, equipment, software and leasehold improvements,
net of accumulated depreciation and amortization of
$4,831 and $3,467, respectively 9,001 6,946
Prepaid expenses and other assets 2,422 3,097
-------- --------
Total assets $202,112 $205,116
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Trading account securities sold but not yet purchased, at market value:
Corporate equities $ 1,559 $ 2,527
Corporate bonds 9 365
Due to issuer 7,798 -
Accounts payable and accrued expenses 11,458 8,226
Accrued compensation and benefits 8,866 5,185
Long-term secured loans 1,500 1,911
-------- --------
Total liabilities 31,190 18,214
-------- --------
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, 13,935,071 and 13,716,571 issued, respectively 139 137
Class B Common Stock, $0.01 par value, 100,000,000 shares authorized,
36,093,929 and 36,312,429 issued and outstanding, respectively 361 363
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 (13,314) (16,136)
Retained earnings (deficit) (16,073) 1,094
-------- --------
Total shareholders' equity 170,922 186,902
-------- --------
Total liabilities and shareholders' equity $202,112 $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 September 30,
-------------------
1999 1998
------- -------
Revenues:
Investment banking:
Underwriting $ 4,026 $ 4,040
Corporate finance 2,024 4,417
Institutional brokerage:
Principal sales credits 5,041 7,619
Agency commissions 3,372 3,862
Gains and losses, net:
Trading (320) (39,542)
Investment (10,557) (7,480)
Asset management 2,776 2,119
Interest and dividends 2,560 3,456
-------- --------
Total revenues 8,922 (21,509)
-------- --------
Expenses:
Compensation and benefits 16,318 10,870
Business development and professional services 9,662 10,238
Clearing and brokerage fees 1,098 1,603
Occupancy and equipment 1,738 1,284
Communications 1,246 834
Interest expense 159 1,553
Other operating expenses 1,762 2,838
-------- --------
Total expenses 31,983 29,220
-------- --------
Net income (loss) before taxes (23,061) (50,729)
Income tax provision (benefit) - (15,317)
-------- --------
Net income (loss) $(23,061) $(35,412)
======== ========
Basic and diluted earnings (loss) per share $(.47) $(.71)
======== ========
Weighted average shares outstanding 48,882 49,780
======== ========
See notes to consolidated financial statements.
4
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Nine Months
Ended September 30,
-------------------
1999 1998
------- ------
Revenues:
Investment banking:
Underwriting $ 16,442 $ 68,063
Corporate finance 10,721 37,693
Institutional brokerage:
Principal sales credits 19,270 24,292
Agency commissions 9,940 11,906
Gains and losses, net:
Trading (1,684) (53,779)
Investment 1,567 (4,718)
Asset management 7,635 7,594
Interest and dividends 7,479 12,758
-------- --------
Total revenues 71,370 103,809
-------- --------
Expenses:
Compensation and benefits 52,665 68,112
Business development and professional services 18,164 25,303
Clearing and brokerage fees 3,307 4,596
Occupancy and equipment 4,722 2,947
Communications 3,083 2,537
Interest expense 1,160 4,680
Other operating expenses 5,436 8,034
-------- --------
Total expenses 88,537 116,209
-------- --------
Net income (loss) before taxes (17,167) (12,400)
Income tax provision (benefit) - -
-------- --------
Net income (loss) $(17,167) $(12,400)
======== ========
Basic and diluted earnings (loss) per share $ (.35) $ (.25)
======== ========
Weighted average shares outstanding 48,869 49,945
======== ========
See notes to consolidated financial statements.
5
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months
Ended September 30,
-------------------
1999 1998
------ -------
Cash flows from operating activities:
Net income (loss) $(17,167) $ (12,400)
Non-cash items included in earnings--
Net loss and incentive income on
long-term investments 144 2,570
Depreciation and amortization 1,780 971
Other (321) -
Changes in operating assets:
Receivables--
Investment banking 43 2,664
Asset management fees (1,028) (1,272)
Income taxes 7,495 (8,795)
Affiliates (469) (5,919)
Other 92 1,657
Due from clearing broker (2,919) 7,377
* Marketable trading securities 2,193 20,151
Prepaid expenses and other assets 675 (1,532)
Changes in operating liabilities:
Trading account securities sold but not
yet purchased (1,324) (13,255)
Net repayments on short-term subordinated loans - (40,000)
Accounts payable and accrued expenses 3,232 (19,594)
Accrued compensation and benefits 3,681 (7,976)
-------- ---------
Net cash used in operating activities (3,893) (75,353)
-------- ---------
Cash flows from investment activities:
Purchases of fixed assets (4,126) (4,332)
Purchases of investments, net (12,976) (37,252)
-------- ---------
Net cash used in investing activities (17,102) (41,584)
-------- ---------
Cash flows from financing activities:
Repayments of long-term secured loans (411) (379)
Purchases of treasury stock (1,634) (5,679)
Dividends - (24,000)
-------- ---------
Net cash used in financing activities (2,045) (30,058)
-------- ---------
Net decrease in cash and cash equivalents (23,040) (146,995)
Cash and cash equivalents, beginning of period 46,827 205,709
-------- ---------
Cash and cash equivalents, end of period $ 23,787 $ 58,714
======== =========
* Non-cash transaction: On September 30, 1999, the Company signed an
underwriting agreement to underwrite $7,798 of marketable securities that
settled subsequent to September 30, 1999. The payable for the commitment 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 ("FBR Asset") of
$23.8 million represents 21% of the Company's total long-term investments and
12% of the Company's total assets as of September 30, 1999. Effective September
29, 1999, FBR Asset's stock is publicly traded on the American Stock Exchange
under the symbol "FB". The following table summarizes FBR Asset's income
statement information for the periods presented (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Gross revenues $ 4,603 $ 6,756 $ 15,188 $ 12,408
Total expenses (2,198) (3,190) (6,996) (4,376)
-------- -------- --------- --------
Net income before investment gains 2,405 3,566 8,192 8,032
Investment gains 331 - 1,074 -
-------- -------- --------- --------
Net income $ 2,736 $ 3,566 $ 9,266 $ 8,032
======== ======== ========= ========
3. Comprehensive Loss:
The components of comprehensive loss are (in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net loss $(23,061) $(35,412) $(17,167) $(12,400)
Other comprehensive income (loss):
Net unrealized investment gains
(losses) on available-for-sale
securities and investment in FBR
Asset Investment Corporation 6,131 (14,888) 2,822 (14,888)
-------- -------- -------- --------
Comprehensive loss $(16,930) $(50,300) $(14,345) $(27,288)
======== ======== ========= ========
7
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Available-for-Sale Investment Depreciation:
During the quarter ended September 30, 1999, the Company recognized in
earnings unrealized depreciation of $6.5 million related to one available-for-
sale investment. In accordance with Financial Accounting Standard No. 115 ("SFAS
No. 115"), unrealized depreciation related to available-for-sale investments
should be recognized in earnings when the depreciation is considered "other than
temporary." Due to the fact that the depreciation has reduced the Company's
shareholder's equity since September 1998, it was reclassified from "accumulated
other comprehensive loss" to "investment loss" in September 1999, in accordance
with SFAS No. 115. This adjustment did not impact the Company's total
shareholders' equity or book value.
5. 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 nine months ended September 30, 1999, the Company
recorded $0.3 million and $3.8 million of compensation expense, respectively,
related to the Plan. During the three months ended September 30, 1998, the
Company recorded a reduction of $7.6 million of compensation expense, related to
the 1997 Stock and Annual Incentive Plan. The Company did not reflect any
executive officer profit sharing compensation expense (the 20% pool) in the
Statement of Operations for the nine months ended September 30, 1999 and 1998
because the Company experienced net losses for these periods.
6. Income Taxes:
As of September 30, 1999, the Company had net operating losses ("NOL") for
tax purposes of approximately $39.2 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 $30.1 million in taxable net income.
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, not to exceed 15 to 1. As of
September 30, 1999, the broker-dealer subsidiaries had aggregate net capital of
$14.0 million, which exceeded the requirement by $12.4 million.
8. Earnings (Loss) Per Share:
Basic earnings (loss) 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.
8
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Earnings (Loss) Per Share, continued:
Options to purchase 6,551,705 and 4,198,900 shares of common stock were
outstanding, as of September 30, 1999 and 1998, respectively, but were not
included in the computations of diluted earnings (loss) per share because their
effect would be anti-dilutive.
9. Commitments and Contingencies:
As of September 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 consolidated financial condition or
results of operations in a future period. However, based on management's review
with counsel, resolution of these matters is not expected to have a material
adverse effect on the Company's consolidated 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 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.
10. 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):
9
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Segment Information, continued:
Capital Asset Consolidated
Markets Management Other Totals
--------- ----------- -------- -------------
Three Months Ended September 30, 1999
- -------------------------------------
Total revenues $ 16,165 $(7,087) $ (156) $ 8,922
Pre-tax income (loss) (12,954) (9,852) (255) (23,061)
Three Months Ended September 30, 1998
- -------------------------------------
Total revenues (16,456) (4,944) (109) (21,509)
Pre-tax income (loss) (44,614) (5,919) (196) (50,729)
Nine Months Ended September 30, 1999
- ------------------------------------
Total revenues 62,183 8,608 579 71,370
Pre-tax income (loss) (14,933) 626 (2,860) (17,167)
Nine Months Ended September 30, 1998
- ------------------------------------
Total revenues 98,122 4,097 1,590 103,809
Pre-tax income (loss) (12,809) (104) 513 (12,400)
11. Subsequent Events:
Acquisition of Investment Adviser and Bank:
- ------------------------------------------
Subsequent to September 30, 1999, the Company announced a definitive
agreement to acquire Money Management Associates, LP ("MMA"), a privately-held
investment adviser, servicing agent and administrator for 20 mutual funds and
Rushmore Trust and Savings, a federally chartered and insured savings bank
(together "adviser and bank"). Under the terms of the agreement, the Company
will acquire the adviser and bank for $17.5 million in cash at closing and a $10
million non-interest-bearing installment note payable over a ten-year period.
The transaction is subject to the approval of regulators and the approval of the
shareholders of the related mutual funds.
Redemption of Imperial Credit Industries, Inc. Investment:
- ---------------------------------------------------------
In November 1999, Imperial Credit Industries, Inc. ("ICII") redeemed their
preferred stock that the Company purchased in the second quarter of 1999. The
Company received $20.6 million representing 103% of the Company's original cost,
including a 3% redemption fee. The Company also received accrued dividends at
an annual rate of 14.5%. As a result of the redemption, the Company's
regulatory net capital was increased by approximately $20 million.
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
September 30, 1999 and 1998, and the Notes thereto and the Company's 1998 Annual
Report on Form 10-K.
BUSINESS ENVIRONMENT
The Company's principal business activities (capital raising, securities
sales and trading, merger and acquisition and advisory services, proprietary
investments and asset management services) are linked to the capital markets.
In addition, the Company's business activities are primarily focused on small
and mid-cap stocks in the bank, financial services, real estate and technology
sectors. By their nature, the Company's 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 to the
conditions affecting the companies and markets in the Company's areas of focus.
During the first three quarters of 1999, with the exception of the technology
sector, the sectors on which the Company focuses have under-performed the
overall securities markets.
The Company's revenues, particularly from capital raising, private equity and
other principal investment activities, are subject to substantial positive and
negative fluctuations due to a variety of factors that cannot be predicted with
great certainty, including the overall condition of the economy and the
securities markets as a whole and of the sectors on which the Company focuses.
Fluctuations also occur due to the level of market activity, which, among other
things, affects the flow of investment dollars and the size, number and timing
of transactions. As a result, 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 on-
line trading 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 in the future, have increased the number of
companies competing for a similar customer base.
In order to compete in this increasingly competitive environment, the Company
continually evaluates its businesses across varying market conditions for
profitability and alignment with long-term strategic objectives, including the
diversification of revenue sources. The Company believes that it is important to
diversify and strengthen its revenue base by increasing segments of its business
that offer a recurring and more predictable source of revenue.
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 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.
11
RECENT DEVELOPMENTS
Rushmore Acquisition:
- --------------------
In October 1999, the Company announced a definitive agreement to acquire
Money Management Associates, LP ("MMA") and Rushmore Trust and Savings, FSB,
Bethesda, Maryland. MMA is a privately-held investment adviser with
approximately $887 million in assets under management. Together, MMA and
Rushmore are the investment adviser, servicing agent or administrator for 20
mutual funds. Rushmore is a federally chartered and federally insured savings
bank that offers traditional banking services (lending, deposits, cash
management, trust services and serves as a transfer agent and custodian), along
with mutual fund accounting. Upon closing, the Company will have new
capabilities in traditional banking and cash management services to offer
customers. Under the terms of the agreement, the Company will acquire
MMA/Rushmore for $17.5 million in cash at closing and a $10 million non-
interest-bearing installment note will be payable over a ten-year period. The
transaction is subject to the approval of regulators and the shareholders of the
Rushmore Funds.
Redemption of Imperial Credit Industries, Inc. Investment:
- ---------------------------------------------------------
In November 1999, Imperial Credit Industries, Inc. ("ICII") redeemed their
preferred stock that the Company purchased in the second quarter of 1999. The
Company received $20.6 million which represents 103% of the Company's original
cost, including a 3% redemption fee. The Company also received accrued
dividends at an annual rate of 14.5%.
RESULTS OF OPERATIONS
Three months ended September 30, 1999 compared to three months ended September
30, 1998
The Company's revenues changed from $(21.5) million in 1998 to $8.9 million
in 1999. Net loss decreased 35% from $35.4 million in 1998 to $23.1 million in
1999. The Company's basic and diluted loss per share decreased 34% from $0.71
in 1998 to $0.47 in 1999. The decrease in net loss was primarily related to
lower trading losses offset by an increase in compensation expense.
Underwriting revenue remained constant at $4.0 million in 1998 and 1999.
During the quarter ended September 30, 1999, the Company managed six public
offerings raising $294 million and generating $4.0 million in revenues. During
the third quarter of 1998, the Company managed four transactions raising $984
million and generating $4.0 million in revenues. The average size of
transactions managed decreased from $246.1 million in 1998 to $49.0 million in
1999. While the aggregate dollars raised was greater in 1998 compared to 1999,
the Company's allocation of revenue earned as a percentage of total dollars
raised increased in 1999 due, in part, to differences in the types of
transactions completed and the allocation of revenue among the deal managers.
Corporate finance revenue decreased 54% from $4.4 million in 1998 to $2.0
million in 1999 due primarily to a decrease in revenue generated from private
placement transactions and M&A and advisory service fees. In 1999, the Company
completed one private placement generating $0.6 million in revenues compared to
one completed transaction in 1998 that generated $1.9 million in revenues. M&A
and advisory fee revenue also decreased from $2.5 million in 1998 to $1.4
million in 1999 due to a decline in the number of deals completed and retainer
fees earned.
Principal sales credits decreased 34% from $7.6 million in 1998 to $5.0
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 of focus.
Agency commissions decreased 13% from $3.9 million in 1998 to $3.4 million in
1999. This decrease was attributed to the decline in securities transaction
volume attributed to less market volatility in the real estate and financial
services sectors in 1999 compared to 1998.
12
RESULTS OF OPERATIONS, continued
Three months ended September 30, 1999 compared to three months ended September
30, 1998, continued
Net trading losses decreased 99% from $39.5 million in 1998 to $0.3 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 the Company's broker-
dealer trading inventories' exposure to future downturns in the markets.
Net investment losses increased 41% from $7.5 million in 1998 to $10.6
million in 1999. Investment losses in 1999 include $6.5 million of "other
than temporary" unrealized depreciation related to an available-for-sale
investment accounted for under Financial Accounting Standard No. 115 and $4.7
million related to the Company's investments in proprietary investment
partnerships. Investment losses in 1998 were primarily related to the Company's
investment in one proprietary investment partnership that invests primarily in
the financial services sector. Unrealized depreciation related to the Company's
investments and included in "accumulated other comprehensive loss" in the
Company's balance sheet totaled $13.3 million as of September 30, 1999. If and
when management determines that this decline in value is "other than temporary",
a portion or all of the depreciation will be recognized 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 quality and to defaults.
Asset management revenue increased 31% from $2.1 million in 1998 to $2.8
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 raised a second technology venture capital fund.
Net interest and dividends (net of interest expense) increased 26% from $1.9
million in 1998 to $2.4 million in 1999. This increase is due primarily to an
increase in the Company's interest-bearing investments, primarily the Imperial
Credit Industries, Inc. investment.
Total expenses increased 9% from $29.2 million in 1998 to $32.0 million in
1999 due primarily to an increase in variable compensation expense.
Compensation and benefits expense increased 50% from $10.9 million in 1998 to
$16.3 million in 1999. This increase was primarily due to a reduction of
executive compensation accruals in 1998. In 1998, the Company reduced executive
compensation expense by $7.6 million due to the decline in profits. In 1999,
the executive officer compensation reduction was $1.4 million.
Business development and professional services decreased 6% from $10.2
million in 1998 to $9.7 million in 1999 primarily due to a $3.7 million decrease
in investment banking and professional services expenses associated with lower
investment banking activity. This decrease is offset by a $3.2 million increase
in advertising and other promotional expenses in 1999 related to the launch of
fbr.com.
Clearing and brokerage fees decreased 32% from $1.6 million in 1998 to $1.1
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 14.0% in 1998 to 13.1% in 1999 due to
lower rates charged by the Company's principal clearing broker.
Occupancy and equipment expense increased 35% from $1.3 million in 1998 to
$1.7 million in 1999 primarily due to an increase in depreciation expense
related to software, computer and telecommunications equipment for fbr.com's
operations.
Communications expense increased 49% from $0.8 million in 1998 to $1.2
million in 1999 due to an increase in costs associated with an upgrade of the
Company's broker-dealer trading system.
13
RESULTS OF OPERATIONS, continued
Three months ended September 30, 1999 compared to three months ended September
30, 1998, continued
Other operating expenses decreased 38% from $2.8 million in 1998 to $1.8
million in 1999 due to the decrease in losses related to unsecured customer
accounts. In addition, the Company reduced or eliminated certain non-revenue-
producing expenses and other overhead costs such as printing and copying and
other office management expenses.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
The Company's revenues decreased 31% from $103.8 million in 1998 to $71.4
million in 1999. Net loss increased 38% from $12.4 million in 1998 to $17.2
million in 1999. The Company's basic and diluted loss per share increased 40%
from $0.25 in 1998 to $0.35 in 1999. The increase in net loss was primarily
related to lower investment banking activity offset by a decrease in trading
losses.
Underwriting revenue decreased 76% from $68.1 million in 1998 to $16.4
million in 1999. During 1999, the Company managed seventeen public offerings
raising $1.1 billion and generating $16.4 million in revenues. During 1998, the
Company completed twenty-five transactions raising $3.6 billion and generating
$68.1 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 $144 million in 1998 to
$64.0 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 72% from $37.7 million in 1998 to $10.7
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 five private placements generating $3.6 million in
revenues compared to eight completed transactions in 1998 that generated $25.8
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 $11.9 million in 1998
to $7.1 million in 1999 due to a decline in the number of deals completed and
retainer fees earned.
Principal sales credits decreased 21% from $24.3 million in 1998 to $19.3
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 of focus.
Agency commissions decreased 17% from $11.9 million in 1998 to $9.9 million
in 1999. This decrease was attributed to the decline in securities transaction
volume attributed to less market volatility in the real estate and financial
services sectors in 1999 compared to 1998.
Net trading losses decreased 97% from $53.8 million in 1998 to $1.7 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 the Company's broker-dealer trading
inventories' exposure to future downturns in the markets.
14
RESULTS OF OPERATIONS, continued
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998, continued
Net investment gains (losses) changed from $(4.7) million in 1998 to $1.6
million in 1999. Investment losses in 1998 were generated solely from the
Company's proprietary investment partnerships. Net investment gains in 1999
include: $1.9 million related to the Company's proprietary investment
partnerships; $2.1 million resulting from the sale of Building One Services
Corporation warrants; $3.5 million related to the Company's investment in FBR
Asset Investment Corporation; net of $6.5 million of "other than temporary"
unrealized depreciation related to an available-for-sale investment accounted
for under Financial Accounting Standard No. 115. Although the Company realized
investment gains during 1999, unrealized losses related to the Company's
investments that are included in "accumulated other comprehensive loss" in the
Company's balance sheet totaled $13.3 million as of September 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 recognized 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 quality and to defaults.
Asset management revenue remained constant at $7.6 million in 1998 and 1999,
however, the mix between base management fees and incentive income changed from
1998 to 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 $1.0 million in advisory fees related to its
mutual funds compared to $0.4 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 47% from $4.5 million in 1998 to
$6.6 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.
Net interest and dividends (net of interest expense) decreased 22% from $8.1
million in 1998 to $6.3 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 $3.5 million of dividend income,
including two dividends totaling $1.0 million, from two significant trading
positions, compared to $1.3 million in 1999. Net interest revenue (net of
interest expense) increased 9% from $4.6 million in 1998 to $5.0 million in 1999
due to an increase in the Company's interest-bearing investments.
Total expenses decreased 24% from $116.2 million in 1998 to $88.5 million in
1999 due primarily to lower variable compensation expense and lower investment
banking expenses associated with the decrease in investment banking revenues.
Compensation and benefits expense decreased 23% from $68.1 million in 1998 to
$52.7 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 and offset by $3.8 million of executive officer bonus compensation recorded
in 1999 under the $6 million performance-based pool.
Business development and professional services decreased 28% from $25.3
million in 1998 to $18.2 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 fbr.com's operations.
Clearing and brokerage fees decreased 28% from $4.6 million in 1998 to $3.3
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 12.7% in 1998 to 11.3% in 1999 due to
lower rates charged by the Company's principal clearing broker.
15
RESULTS OF OPERATIONS, continued
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998, continued
Occupancy and equipment expense increased 60% from $2.9 million in 1998 to
$4.7 million in 1999 primarily due to the expansion of office space and an
increase in depreciation expense related to software, computer and
telecommunications equipment and furniture for the expanded facilities and
fbr.com's operations. As a result of the expansion, office rent expense
increased $0.6 million in 1999 compared to 1998, and depreciation and
amortization expense increased $0.8 million in 1999 compared to 1998.
Communications expense increased 22% from $2.5 million in 1998 to $3.1
million in 1999 due to an increase in costs associated with an upgrade of the
Company's broker-dealer trading system.
Other operating expenses decreased 32% from $8.0 million in 1998 to $5.4
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 in 1999 for litigation
accruals.
LIQUIDITY AND CAPITAL RESOURCES
As of September 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 $23.8 million and a receivable
for cash on deposit with the Company's clearing broker of $13.6 million.
As of September 30, 1999, long-term investments consist of: $23.8 million
investment in FBR Asset Investment Corporation; $29.0 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;
$18.7 million Imperial Credit Industries, Inc. investment; and $13.3 million of
available-for-sale securities. Subsequent to September 30, 1999, the Imperial
Credit Industries Inc., investment was redeemed at cost plus a 3% redemption fee
and accrued dividends.
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 depreciation in shareholders'
equity, related to its investments in long-term marketable securities and FBR
Asset Investment Corporation. During the quarter ended September 30, 1999, the
Company determined that the $6.5 million decline in value of one investment was
"other than temporary", therefore, in accordance with Financial Accounting
Standard No. 115, the related unrealized depreciation was recorded in earnings.
As of September 30, 1999, the unrealized depreciation related to available-for-
sale securities and included in "accumulated other comprehensive loss" on the
Company's balance sheet was $13.3 million. To the extent the price declines
related to these securities 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 September 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 $11.2 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 September 30, 1999, FBRC and
FBRIS were required to maintain minimum regulatory net capital of $1.3 million
and $0.3 million and had total regulatory net capital of $11.1 million and $2.9
million which was $9.8 million and $2.6 million, respectively, in excess of
their requirements.
16
LIQUIDITY AND CAPITAL RESOURCES, continued
Management believes that the Company's current level of equity capital and
committed line of credit, including funds 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, or
otherwise re-deploy assets, 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, including acquisitions and divestitures, 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 September 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 September 30, 1999, the Company's warrants, after
grants to employees and assuming 100% vesting, are:
Number of Exercise Sept. 30, 1999 Expiration
Warrants Price Closing Price Date
--------- -------- -------------- ----------
American Capital Strategies, Ltd. 307,335 $15.00 $18.500 08/29/02
Capital Automotive REIT 894,464 15.00 12.375 02/12/03
East West Bank 232,500 10.00 11.875 06/12/03
Local Financial Corporation 382,000 10.00 9.250 09/08/02
PlanetClick, Inc. 125,000 3.20 * 06/30/04
Styling Technology Corporation 71,050 12.00 10.750 11/21/01
FBR Asset Investment Corporation 970,805 20.00 11.000 12/11/07
Xypoint Corporation 285,107 2.10 * 07/10/03
Vcampus Corporation (formerly UOLP) 36,500 4.625 14.875 09/16/03
Resource Asset Investment Trust 99,292 15.00 11.125 01/08/03
* The underlying unregistered security does not have a ready market. The Company
received the warrants in a private placement transaction.
MATTERS RELATED TO YEAR 2000
The following year 2000 discussion is a "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Disclosure Act.
The Company utilizes certain software and related information technologies
that may be affected by the date change in the year 2000. The Company is also
heavily reliant on certain third parties for critical information processing,
particularly its principal clearing broker, Bear Stearns Securities Corporation
("Bear Stearns"). Additionally, the Company relies on certain non-information
technology systems, such as communications and building operations systems, that
could be affected by the date change. The failure of these non-information
technology systems could interrupt or shutdown business operations for some
period of time.
17
MATTERS RELATED TO YEAR 2000, continued
The year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. When the century date
change occurs, certain date-sensitive systems may recognize the year 2000 as
1900, or not at all. This inability to recognize or properly treat the year
2000 may result in a systems failure or may cause systems to process critical
financial and operational information incorrectly.
The Company has assessed and continues to assess the level of the year 2000
readiness of its internal information technology systems, those of vendors on
which it places significant reliance and its non-information technology systems.
The Company's year 2000 plan contains four phases: phase one is the inventorying
and prioritization of in-house and third party information technology and non-
information technology systems; phase two is the diagnostic assessment of
critical information technology and non-information technology systems for year
2000 compliance; phase three is the implementation and testing of solutions,
including necessary repair work, modifications, and replacements to system
software and hardware; and phase four is the execution of the contingency plan
created during phases one through three for those areas where residual risk was
identified.
The Company continues to refine its year 2000 plan and substantially
completed phases one and two in March 1999. The Company completed phases three
and four in August 1999. The Company has assessed nd will continue to assess
its year 2000 risk, its year 2000 plan and contingency efforts. The total cost
associated with the Company's year 2000 plan has not been and is not expected to
be material to the Company's financial position. Estimates of remaining costs
are based on estimates made by management.
The Company has inquired of and obtained certain information regarding Bear
Stearns' year 2000 plans and state of readiness. Bear Stearns has indicated
that it has established a task force to review and develop an action plan to
address the year 2000 issue. Bear Stearns has indicated that the action plan
addresses both information and non-information technology issues. Bear Stearns
has indicated that it believes that the activities that it is undertaking should
satisfactorily resolve year 2000 compliance exposure within its own worldwide
systems. Bear Stearns has also indicated that it actively participates in
various industry wide testing that exercises critical systems used to interface
with third party clients and service providers.
Bear Stearns and the Company also rely heavily on various third party systems
or services to conduct business, including NASDAQ, Inc., the New York Stock
Exchange, Inc. and regional and national telecommunications and market data
services providers. The Company is presently monitoring the progress of these
and other entities' year 2000 compliance. Due diligence that the Company has
and is continuing to perform to evaluate the readiness of key third party
vendors includes point to point testing with mission critical vendors, such as
NASDAQ, Instinet and Bridge, conducting interviews with key third party vendors
and analysis of compliance letters received from third party vendors. To date
the Company has not encountered a vendor that does not expect to be fully
compliant by the end of the year. In addition, the Company intends to continue
monitoring the progress of its third party vendors through any combination of
the following activities: reviewing status updates whenever provided by third
party vendors, performing additional point to point testing when third party
vendors provide this capability, and reviewing results from the Securities
Industries Association testing when made available.
To mitigate material risks due to failure resulting from year 2000 issues,
the Company has prepared contingency plans for its mission critical systems.
These plans were finalized in August 1999. The failure of Bear Stearns or other
critical service providers to satisfactorily address the year 2000 issue, or the
failure of the Company's contingency plans to mitigate any year 2000 failures,
such as the Company's inability to submit trade orders timely and Bear Stearns'
inability to clear the Company's trades, could have a material adverse effect on
the Company's operations, liquidity and financial condition.
18
MATTERS RELATED TO YEAR 2000, continued
There can be no assurance that actual year 2000 related costs will not
differ materially from the Company's current expectations or that the
contingency plans, if needed, will sufficiently mitigate year 2000 related
problems. Specific factors that might cause such material differences include,
but are not limited to, the success of the Company in identifying additional
systems and programs that are not year 2000 ready, the nature and amount of
programming required to upgrade or replace each of the affected programs, the
availability, rate and magnitude of related labor and consulting costs; the
success of the Company's business partners, vendors and clients in addressing
the year 2000 issue and the ability to formulate and successfully implement
contingency plans, if required, and similar uncertainties.
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, securities brokerage and asset
management 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 and results, (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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(10) Purchase and sale agreement
(27) Financial data schedule
(b) Reports on Form 8-K
o July 29, 1999: second quarter 1999 results
o August 12, 1999: strategic alliance with Fidelity Investments
o October 21, 1999: third quarter 1999 results and acquisition of
a bank and mutual fund company
19
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.
11/15/99 By: /s/ Eric Y. Generous
---------------- -----------------------------------------
Date Eric Y. Generous, Chief Financial Officer
(Principal Financial Officer)
11/15/99 By: /s/ Kurt R. Harrington
---------------- ------------------------------------------
Date Kurt R. Harrington, Treasurer (Principal
Accounting Officer)
EXHIBIT INDEX
EXHIBIT 10.01 Purchase and Sale Agreement
EXHIBIT 27.01 Financial Data Schedule
20