<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1997
REGISTRATION NO. 333-39107
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 6211 54-1870350
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
1001 NINETEENTH STREET NORTH
ARLINGTON, VA 22209
(703) 312-9500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROBERT S. SMITH, ESQ.
GENERAL COUNSEL
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
1001 NINETEENTH STREET NORTH
ARLINGTON, VA 22209
(703) 312-9500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
CRAIG M. WASSERMAN, ESQ. HOWARD B. ADLER, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ GIBSON, DUNN & CRUTCHER LLP
51 WEST 52ND STREET 1050 CONNECTICUT AVENUE N.W.
NEW YORK, NY 10019 WASHINGTON, D.C. 20036
(212) 403-1000 (202) 955-8589
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If the only securities being delivered pursuant to this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE (2) FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, par
value $0.01 per share... -- -- -- --
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) A total of 12,650,000 shares of Class A Common Stock have been registered,
including 7,793,579 shares of Class A Common Stock registered with the filing
of the Company's Form S-1 on October 30, 1997 and 4,856,421 shares registered
with the filing of Amendment No. 1 to the Company's Form S-1 on December 8,
1997. All registration fees have been previously paid.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN
PROSPECTUS OF PART I ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-1
REGISTRATION STATEMENT LOCATION IN PROSPECTUS
- ------------------------------------------------------- ---------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page; Outside
Back Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Outside Front Cover Page;
Underwriting
6. Dilution............................................ Dilution
7. Selling Security Holders............................ Principal and Selling
Shareholders
8. Plan of Distribution................................ Outside and Inside Front Cover
Pages; Underwriting; Outside Back
Cover Page
9. Description of Securities to Be Registered.......... Prospectus Summary;
Capitalization; Description of
Capital Stock; Shares Eligible
for Future Sale
10. Interests of Named Experts and Counsel............. Legal Matters
11. Information with Respect to the Registrant......... Outside and Inside Front Cover
Pages; Prospectus Summary; Risk
Factors; Certain Transactions
Occurring Prior to Offering; Use
of Proceeds; Dividend Policy;
Dilution; Capitalization;
Selected Consolidated Financial
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Principal
and Selling Shareholders;
Description of Capital Stock;
Shares Eligible for Future Sale;
Consolidated Financial
Statements; Outside Back Cover
Page
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Management
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1997
PROSPECTUS
[LOGO OF FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. APPEARS HERE]
11,000,000 SHARES
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CLASS A COMMON STOCK
Of the 11,000,000 shares of Class A Common Stock, par value $0.01 per share
("Class A Common Stock"), of Friedman, Billings, Ramsey Group, Inc., a Virginia
corporation ("FBR" or the "Company"), offered hereby (the "Offering"),
10,000,000 are being issued and sold by the Company and 1,000,000 are being
sold by certain shareholders (the "Selling Shareholders") of the Company. The
Company will not receive any of the proceeds of the sale of shares by the
Selling Shareholders. Prior to the Offering, there has been no public market
for the Class A Common Stock. It is currently estimated that the initial public
offering price will be between $18.00 and $20.00 per share. The initial public
offering price will be determined by agreement among the Company, the Selling
Shareholders and the Underwriters (as defined herein) in accordance with the
recommendation of a "qualified independent underwriter" as required by Rule
2720 of the Conduct Rules of the National Association of Securities Dealers,
Inc. (the "NASD"). See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. In addition to the
shares of Common Stock (as defined herein) offered hereby, PNC Bank Corp. has
agreed to acquire a number of shares of Class A Common Stock equal to 4.9% of
the outstanding Common Stock upon the closing of the Offering (which, without
giving effect to the exercise of the Over-allotment Option (as defined herein)
will total 2,451,421 shares of Class A Common Stock) at a price equal to the
initial public offering price less a 4% discount. The Company has been approved
for the listing of the Class A Common Stock on the New York Stock Exchange,
Inc. ("NYSE") under the symbol "FBG."
The Company has two classes of stock outstanding: Class A Common Stock and
Class B Common Stock, par value $0.01 per share ("Class B Common Stock" and
together with Class A Common Stock, "Common Stock"). Class A Common Stock and
Class B Common Stock have identical dividend and other rights, except that
Class A Common Stock has one vote per share and Class B Common Stock has three
votes per share. Class B Common Stock is converted into Class A Common Stock at
the option of the Company in certain circumstances, including (i) upon a sale
or other transfer, (ii) at the time the holder of such shares of Class B Common
Stock ceases to be affiliated with the Company, and (iii) upon the sale of such
shares in a registered public offering. See "Description of Capital Stock--
Common Stock."
Up to 1,000,000 shares of Class A Common Stock are being reserved for sale to
certain Existing Shareholders (as defined herein), other employees and
directors of the Company, and their family members at the initial public
offering price less underwriting discount. See "Direct Offering." On December
15, 1997, the Company declared a dividend of $54 million to Existing
Shareholders (the "S Corporation Distribution"). The Company intends to make
the S Corporation Distribution on or before February 2, 1998. See "Certain
Transactions Occurring Prior to the Offering--S Corporation Distribution and
Termination of S Corporation Status." A portion of the proceeds of the Offering
may be used to fund the S Corporation Distribution.
-------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
AT PAGE 9.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters (as defined herein).
(2) Not including expenses payable by the Company, estimated at $2,153,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 1,650,000 additional shares of Class A
Common Stock solely to cover over-allotments, if any (the "Over-allotment
Option"). If such option is exercised in full, the total Price to Public,
Underwriting Discount, Proceeds to the Company and Proceeds to the Selling
Shareholders will be $ , $ , $ and $ , respectively. See
"Underwriting."
----------
The shares of Class A Common Stock are offered by the several Underwriters
subject to prior sale, receipt and acceptance by them and subject to the right
of the Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of Friedman, Billings,
Ramsey & Co., Inc. in Arlington, Virginia.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
LAZARD FRERES & CO. LLC
SALOMON SMITH BARNEY
December , 1997
<PAGE>
[PHOTOGRAPHS OF WASHINGTON, D.C. AND EMPLOYEES OF THE COMPANY]
The Company intends to distribute to its shareholders annual reports
containing consolidated financial statements audited by its independent
auditors and will make available copies of quarterly reports for the first
three quarters of each fiscal year containing unaudited financial information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF CLASS A COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF CLASS A COMMON
STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT
POSITION IN CLASS A COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE
OF CLASS A COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The terms "FBR" and the "Company," as used herein, refer to
Friedman, Billings, Ramsey Group, Inc. and its predecessors and its
consolidated subsidiaries, unless the context otherwise requires.
THE COMPANY
FBR is a full service investment banking firm focused on investment banking,
research, institutional brokerage and asset management. FBR's strategy since
inception has been to target specific industry sectors where it believes it can
develop a unique research perspective. The Company then uses its research
perspective together with its capital markets expertise to provide value for
its clients. Using this approach, FBR has achieved a 50% compounded annualized
growth rate in revenues since its inception in 1989 through November 30, 1997.
FBR believes the success of its strategy is further demonstrated by its
increasing market presence and the after-market performance of the companies
for which it has acted as lead or co-manager. Year to date as of November 30,
1997, FBR was ranked sixth in terms of lead managed U.S. issuer initial public
offering ("IPO") dollar volume, and for the period from January 1, 1996 through
November 30, 1997 was ranked #1 in after-market performance among lead managers
with at least ten lead managed IPOs, according to CommScan EQUIDESK. CommScan
EQUIDESK defines "after-market performance" as the percentage change in the
price of a share of stock from the price on the pricing date to the price of
its last trade on the date of measurement, adjusted for splits.
FBR was founded in 1989 with the philosophy that an employee-friendly
corporate culture would enhance performance results. FBR strives to maintain
excellent employee relations through policies designed to create an enjoyable
work environment for all employees such as flexible dress code, vacation policy
and maternity leave. Other non-traditional benefits at FBR include corporate
retreats, corporate gym and employee directed Company charitable donations. In
addition, the Company has emphasized training and promoting its employees from
within. The Company believes that as a result of this culture, FBR has averaged
less than 3% turnover among exempt professional employees per year since
inception. Low turnover has enhanced the Company's growth and efficiency.
Over the past 15 years, capital markets have evolved in depth and complexity,
thereby radically altering the needs of both the companies accessing those
markets and investors. The Company believes that in recent years, an increase
in non-traditional issuers accompanied by significant inflows of cash into
mutual funds and other managed funds has led to greater demand by both issuers
and investors for focused advisory, capital markets, and capital management
products and services.
The Company seeks to identify rapidly changing industries and those that are
not fully understood or appropriately valued by the market. Once an industry is
identified, the Company employs substantial effort to develop a thorough
understanding of the fundamentals and opportunities of that industry. The
Company employs a team approach in which all of its professionals contribute to
and communicate the Company's expertise in an industry. For each industry on
which the Company is focused, the Company offers significant underwriting
capabilities and brokerage services as well as advisory services in mergers,
acquisitions and strategic partnerships. In addition, FBR's asset management
activities include hedge funds and public mutual funds as well as private
equity investments and mezzanine finance in such industries.
FBR believes its strategy and culture has enabled and will enable it to
succeed in this changing marketplace. Since commencing its investment banking
activities in 1992, FBR has never failed to complete a capital raising
3
<PAGE>
transaction it has brought to the public market as lead underwriter. Since its
inception through November 30, 1997, FBR has completed $11.4 billion in capital
raising transactions and $3.3 billion in merger and acquisition advisory
transactions, which span a wide range of geographic regions and security types
and a growing variety of industry sectors.
FBR has also applied its research focus and team-based approach to its asset
management activities. The flagship FBR hedge fund, FBR Ashton, Limited
Partnership, has provided annualized internal rates of return since inception
in March 1992 of 41.8% gross and 34.1% net to its limited partners through
November 30, 1997. FBR's three public mutual funds have provided total net
return for the eleven months ended November 30, 1997 of 38.6%, 47.0% and 42.8%.
The amount of assets under management has grown from $119.3 million at the
beginning of 1996 to $444.9 million as of November 30, 1997, representing 373%
growth.
FBR's revenues grew from $57.2 million for the year ended December 31, 1995,
to $109.9 million for the year ended December 31, 1996, representing an
increase of 92%, and from $84.8 million for the eleven months ended November
30, 1996, to $217.2 million for the eleven months ended November 30, 1997,
representing an increase of 156%. FBR believes that its revenue growth, as well
as the superior performance of its capital transactions and managed products,
are the result of the Company's focus and dedication to developing research,
capital markets and asset management expertise within a growing number of
strategic industry sectors. FBR believes that its ability to combine superior
industry knowledge with its capital markets expertise has made FBR a leading
provider of investment banking, brokerage and asset management services and the
largest independent investment bank in the rapidly growing Washington, D.C.
metropolitan area.
FBR maintains executive offices in the Washington, D.C. area at Potomac
Tower, 1001 Nineteenth Street North, Arlington, VA 22209; the telephone number
is (703) 312-9500. The Company also maintains offices in Irvine, California;
Boston, Massachusetts; and London, England. FBR's home page is located on the
world wide web at http://www.fbr.com. Information contained on the Company's
home page shall not be deemed to be a part of this Prospectus.
STRATEGIC RELATIONSHIP WITH PNC BANK CORP.
To further enhance its market position, FBR has formed a strategic business
relationship with PNC Bank Corp., a diversified financial services company
headquartered in Pittsburgh ("PNC"), pursuant to which PNC has agreed to
acquire 4.9% of the shares of Common Stock issued and outstanding after the
Offering (including any shares which may be issued pursuant to the
Underwriters' Over-allotment Option), and FBR and PNC have agreed to work
together on an arms-length basis to refer potential business to each other. FBR
will be the exclusive independent broker-dealer to which PNC refers
underwriting and high-yield business that is not conducted by PNC and PNC will
work with FBR to provide enhanced derivatives, asset securitization, bridge
lending and other bank debt financing products to FBR's client base. Without
giving effect to exercise of the Over-allotment Option, PNC will acquire
2,451,421 shares of Class A Common Stock, all of which shares will be acquired
from the Selling Shareholders at a price equal to the initial public offering
price less a 4% discount (the "PNC Transaction"). See "Business -- Strategic
Business Relationship with PNC Bank Corp."
4
<PAGE>
RECENT DEVELOPMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the eleven months ended November 30, 1996 and November 30, 1997, the
Company's unaudited results of operations were:
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED NOVEMBER 30,
--------------------------------
(UNAUDITED)
-----------------------------------
1996 1997
---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1)
REVENUES:
Investment banking................... $ 43,013 $136,867
Corporate finance fees............... 5,439 42,321
Principal transactions............... 22,773 16,015
Agency commissions................... 6,791 11,081
Asset management fees................ 3,872(2) 6,610(2)
Interest and dividends............... 2,945 4,266
--------------- ----------------
Total revenues..................... 84,833 217,160
EXPENSES:
Compensation and benefits............ 43,500 137,495
Brokerage and clearance.............. 3,092 4,366
Occupancy and equipment.............. 1,466 2,406
Communications....................... 985 1,991
Interest............................. 2,372 3,341
Other................................ 9,440 24,215
--------------- ----------------
Total expenses..................... 60,855 173,814
--------------- ----------------
NET INCOME BEFORE TAXES................ 23,978 43,346
Pro forma tax provision.............. 9,808 17,834
--------------- ----------------
Pro forma net income................. $ 14,170 $ 25,512
=============== ================
Pro forma earnings per share......... $ 0.34 $ 0.61
=============== ================
TOTAL SHAREHOLDERS' EQUITY............. $ 47,249 $ 77,646
=============== ================
</TABLE>
(1) The information included in this table does not give effect to the S
Corporation Distribution. See "Certain Transactions Occurring Prior to the
Offering--S Corporation Distribution and Termination of S Corporation
Status."
(2) Does not include performance fees of approximately $10.0 million as of
November 30, 1997 which would be payable at December 31, 1997. Performance
fees derived from the Company's asset management services are due and
payable upon an anniversary date as defined by the relevant partnership
agreements and management agreements. Generally, these anniversary dates
coincide with calendar year end. Any performance fees calculated as of any
date prior to the anniversary date are subject to adjustment based on
future performance of the assets under management through the anniversary
date. The Company does not consider the earnings process complete until the
anniversary date and accordingly, does not record the related revenue until
such time. The Company currently contemplates seeking amendment of certain
of these partnership agreements to provide for quarterly recognition of
certain of these fees. At current performance levels, these fees would
result in a $4.5 million pre-tax contribution.
The results for the eleven-month period ended November 30, 1997 are unaudited
interim results and are not necessarily indicative of the results to be
expected for the entire year ending December 31, 1997, or any future interim or
annual period.
5
<PAGE>
SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION
The following table adjusts the Company's historical consolidated statement
of operations data for the eleven months ended November 30, 1997 to reflect
revisions to the Company's compensation arrangements that will take effect on
January 1, 1998 so long as the Offering has become effective by such date.
Under the cash bonus component of the Company's recently adopted 1997 Stock and
Annual Incentive Plan (the "New Plan"), the Named Executive Officers' (as
defined herein) incentive compensation will be based on net income before
taxes, rather than on gross revenues from certain of the Company's business
lines which was the basis for computing their previous incentive compensation.
In particular, cash bonus payments will be made from a pool equal to up to
thirty percent of FBR's adjusted pre-tax net income (before annual cash bonus
payments under the New Plan). The pool will be reduced to the extent the
aggregate compensation and benefits expense for the year (including annual cash
bonus payments under the New Plan) would exceed fifty-five percent of revenues.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Expenses." The financial information in the
following table assumes that the New Plan was in effect for the eleven months
ended November 30, 1997.
<TABLE>
<CAPTION>
FOR THE
ELEVEN MONTHS
ENDED
NOVEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C>
TOTAL REVENUES................................................... $217,160
EXPENSES:
Compensation and benefits (adjusted; see introductory narrative
above)........................................................ 119,438
Other expenses................................................. 36,319
--------
Total expenses............................................... 155,757
--------
NET INCOME BEFORE TAXES:......................................... 61,403
Adjusted tax provision......................................... (25,263)
--------
Adjusted net income............................................ 36,140
========
Adjusted earnings per share.................................... $ 0.86
========
</TABLE>
6
<PAGE>
THE OFFERING
Class A Common Stock
offered by the Company..... 10,000,000 shares
Class A Common Stock
offered by the Selling
Shareholders............... 1,000,000 shares (1)
Class A Common Stock to be
outstanding after the
Offering................... 13,451,421 shares (1), (2), (3)
Class B Common Stock to be
outstanding after the
Offering................... 36,577,579 shares (3)
Total Common Stock to be
outstanding after the
Offering................... 50,029,000 shares (3)
Use of Proceeds............. General corporate purposes. The Company will not
receive any of the proceeds from the sale of
shares by the Selling Shareholders. See "Use of
Proceeds."
NYSE Symbol................. "FBG"
- --------------------
(1) Without giving effect to exercise of the Over-allotment Option, 3,451,421
shares of Class B Common Stock will be converted into Class A Common Stock
upon their sale by the Selling Shareholders in the Offering and the PNC
Transaction. Of these shares, 1,000,000 will be sold in the Offering and
2,451,421 will be sold to PNC in the PNC Transaction.
(2) Excludes 5,000,000 shares of Class A Common Stock reserved for issuance
under the Company's stock plans. The Company anticipates granting stock
options with respect to substantially all of such shares at an exercise
price equal to the initial public offering price at a time substantially
contemporaneous with the closing of the Offering. See "Management--1997
Stock and Annual Incentive Plan."
(3) If the Over-allotment Option is exercised, 15,174,921 shares of Class A
Common Stock will be sold in the Offering and the PNC Transaction, and will
be outstanding after the Offering. 11,500,000 of such shares will be issued
by the Company. 3,674,921 Class B Common Stock shares will be converted
into Class A Common Stock shares upon their sale by the Selling
Shareholders in the Offering and the PNC Transaction, of which 1,150,000
shares of Class A Common Stock will be sold in the Offering and 2,524,921
shares of Class A Common Stock will be sold to PNC in the PNC Transaction.
Giving effect to exercise of the Over-allotment Option, 36,354,079 shares
of Class B Common Stock and a total of 51,529,000 shares of Common Stock
will be outstanding after the Offering.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
YEAR ENDED DECEMBER 31, ACTUAL
----------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- -------- -------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
REVENUES(2)
Investment banking....... $ 1,771 $ 35,232 $ 30,579 $ 16,075 $ 55,159 $ 25,615 $ 67,091
Corporate finance fees... 50 75 14,427 7,224 10,361 4,370 38,618
Principal transactions... 17,202 19,417 9,903 20,078 25,466 18,157 11,994
Agency commissions....... 2,268 2,908 1,935 4,483 7,555 5,060 7,898
Asset management fees
(3)..................... 116 1,164 444 6,747 7,808 2,635 6,256
Interest and dividends... 315 456 1,713 2,558 3,554 2,382 3,061
------- -------- -------- -------- -------- -------- --------
Total revenues........... 21,722 59,252 59,001 57,165 109,903 58,219 134,918
EXPENSES
Compensation and benefits
(4)..................... 11,824 24,269 23,456 27,623 55,004 28,604 85,138
Brokerage and clearance.. 1,186 1,025 1,474 2,350 3,484 2,314 3,138
Occupancy and equipment.. 406 554 944 1,187 1,683 1,103 1,934
Communications........... 284 354 764 823 1,109 799 1,536
Interest................. 73 316 1,773 1,523 2,665 2,039 2,301
Other (5)................ 1,077 3,353 13,049 8,362 14,620 6,584 17,041
------- -------- -------- -------- -------- -------- --------
Total expenses........... 14,850 29,871 41,460 41,868 78,565 41,443 111,088
INCOME BEFORE PRO-RATA
SUBCHAPTER "S"
CORPORATION STOCKHOLDER
COMPENSATION............. 6,872 29,381 17,541 15,297 31,338 16,776 23,830
Pro-rata subchapter S
corporation stockholder
compensation (6)........ 7,147 29,919 19,355 5,858 6,500 -- --
------- -------- -------- -------- -------- -------- --------
Net Income (loss)......... $ (275) $ (538) $ (1,814) $ 9,439 $ 24,838 $ 16,776 $ 23,830
======= ======== ======== ======== ======== ======== ========
PRO FORMA STATEMENTS OF OPERATIONS
DATA (UNAUDITED)(7)
Net income (loss), as
reported................ $ (275) $ (538) $ (1,814) $ 9,439 $ 24,838 $ 16,776 $ 23,830
Pro-rata S corporation
compensation............ 7,147 29,919 19,355 5,858 6,500 -- --
Pro forma tax provision.. (2,833) (12,064) (7,347) (5,683) (12,628) (6,862) (9,782)
Other pro forma
adjustment.............. -- -- -- -- (1,416) -- (1,416)
------- -------- -------- -------- -------- -------- --------
Pro forma net income..... $ 4,039 $ 17,317 $ 10,194 $ 9,614 $ 17,294 $ 9,914 $ 12,632
======= ======== ======== ======== ======== ======== ========
Pro forma earnings per
share................... $ 0.11 $ 0.45 $ 0.26 $ 0.24 $ 0.42 $ 0.24 $ 0.30
======= ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding (8)......... 37,817 38,365 39,014 39,373 41,536 41,515 41,912
OPERATING DATA (UNAUDITED)
Total employees (9)...... 41 65 92 112 175 158 230
Revenue per average
employee (in thousands). $564 $1,118 $752 $560 $766 $575 $888
Annualized return on
average equity.......... 353% 461% 144% 82% 87% 69% 59%
Compensation and benefits
expense as a percentage
of revenues............. 54.4% 41.0% 39.8% 48.3% 50.0% 49.1% 63.1%
Income before pro rata
subchapter
S corporation stockholder
distributions as a
percentage of revenues
(4)..................... 31.6% 49.6% 29.7% 26.8% 28.5% 28.8% 17.7%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED(10)
-------- ---------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED
BALANCE SHEET
DATA
Total assets................. $119,215 $295,915
Total liabilities............ 61,097 115,097
Total Shareholders' equity... 58,118 179,403
Book value per common share
outstanding................. $ 1.45 $ 3.59
</TABLE>
8
<PAGE>
- --------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis of presentation.
(2) For a description of the items comprising each line item under Revenues see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Revenues."
(3) Does not include unrealized performance fees and special profit allocations
of approximately $12.9 million as of September 30, 1997. Performance fees
derived from the Company's asset management services are due and payable
upon an anniversary date as defined by the relevant partnership agreements
and such management agreements. Generally, these anniversary dates coincide
with calendar year end. Any performance fees calculated as of any date
prior to the anniversary date are subject to adjustment based on future
performance of the assets under management through the anniversary date.
The Company does not consider the earnings process complete until the
anniversary date and accordingly, does not record the related revenue until
such time. The Company currently contemplates seeking amendment of certain
of these partnership agreements to provide for the quarterly recognition of
certain of these fees.
(4) Excludes pro rata subchapter S corporation stockholder compensation.
(5) Includes business development, professional services and other operating
expenses.
(6) Represents pro rata compensation paid to shareholders based on ownership
interest as of the end of each period.
(7) For all periods presented, the Company elected to be treated as a
subchapter S corporation and was not subject to federal or certain state
income taxes. The pro forma statement of operations data reflects federal
and state income taxes based on estimated applicable tax rates as if the
Company had not elected subchapter S corporation status for the periods
presented. Also included in the pro forma information is $1.4 million in
compensation expense associated with the issuance of book value stock
within twelve months of the Offering. See Notes 2 and 3 of Notes to
Consolidated Financial Statements.
(8) See Note 2 of Notes to Consolidated Financial Statements for discussion of
the computation of weighted average shares outstanding.
(9) As of end of the period reported.
(10) Adjusted to give effect to (i) the sale by the Company of 10 million
shares of Class A Common Stock in the Offering at an assumed initial
offering price of $19.00 per share (after deducting the estimated
underwriting discount and offering expenses payable by the Company) and
the application of the net proceeds therefrom; (ii) the distribution of
$54 million to the Company's Existing Shareholders in the S Corporation
Distribution and (iii) the recognition of $1.4 million in compensation
expense associated with the issuance of book value stock within twelve
months of the Offering.
SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION
The following table adjusts the Company's historical consolidated statement
of operations data for the nine months ended September 30, 1997 to reflect
revisions to the Company's compensation arrangements that will take effect on
January 1, 1998 so long as the Offering has become effective by such date.
Under the New Plan, the Named Executive Officers' incentive compensation will
be based on net income before taxes, rather than on gross revenues from certain
of the Company's business lines which was the basis for computing their
previous incentive compensation. In particular, cash bonus payments will be
made from a pool equal to up to thirty percent of FBR's adjusted pre-tax net
income (before annual cash bonus payments under the New Plan). The pool will be
reduced to the extent the aggregate compensation and benefits expense for the
year (including annual cash bonus payments under the New Plan) would exceed
fifty-five percent of revenues. The effect of applying the New Plan to the
Company's financial results for the nine month period ended September 30, 1997
would result in a reduction in compensation and benefits expense of $11.0
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Expenses." The financial
information in the following table assumes that the New Plan was in effect for
the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER
30, 1997
------------
(UNAUDITED)
<S> <C>
TOTAL REVENUES:................................................... 134,918
EXPENSES:
Compensation and benefits (adjusted; See introductory narrative
above)......................................................... 74,205
Other expenses.................................................. 25,950
--------
Total expenses................................................ 100,155
--------
NET INCOME BEFORE TAXES: 34,763
Adjusted tax provisions......................................... (14,270)
Other pro forma adjustment...................................... (1,416)
--------
Adjusted net income............................................. 19,077
========
Adjusted earnings per share..................................... $ 0.46
========
Annualized return on average equity............................. 78%
Compensation and benefits expense as a percentage of revenues... 55%
</TABLE>
9
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING RISK FACTORS
SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS BEFORE PURCHASING THE CLASS A COMMON STOCK OFFERED HEREBY:
GENERAL SECURITIES BUSINESS RISKS
The securities business is, by its nature, subject to numerous and
substantial risks, particularly in volatile or illiquid markets, and in
markets influenced by sustained periods of low or negative economic growth,
including the risk of losses resulting from the underwriting or ownership of
securities, trading, principal activities, counterparty failure to meet
commitments, customer fraud, employee errors, misconduct and fraud (including
unauthorized transactions by traders), failures in connection with the
processing of securities transactions, litigation, the risks of reduced
revenues in periods of reduced demand for public offerings or reduced activity
in the secondary markets and the risk of reduced spreads on the trading of
securities.
REDUCED REVENUES DURING PERIODS OF DECLINING PRICES OR REDUCED DEMAND FOR
PUBLIC OFFERINGS
OR REDUCED ACTIVITY IN THE SECONDARY MARKETS IN SECTORS ON WHICH THE COMPANY
FOCUSES
The Company's revenues are likely to be lower during periods of declining
prices or inactivity in the market for securities of companies in the sectors
on which the Company is focused. The Company's business is particularly
dependent on the market for equity offerings by companies in the financial
services, technology and real estate industries. These markets have
historically experienced significant volatility not only in the number and
size of equity offerings, but also in the after-market trading volume and
prices of newly issued securities.
The growth in the Company's revenues has arisen in large part from the
significantly increased number and size of underwritten transactions by
companies in the Company's targeted industries and by the related increase in
aftermarket trading for such companies. Underwriting activities in the
Company's targeted industries can decline for a number of reasons. For
example, market conditions for securities of companies in the financial
services, technology, and real estate sectors were negatively affected by
increasing interest rates during the second half of 1994, which limited the
amount of underwriting and corporate finance activity through the first half
of 1995. Underwriting activity may also decrease during periods of market
uncertainty occasioned by concerns over inflation, rising interest rates and
related issues. Underwriting and brokerage activity can also be materially
adversely affected for a company or industry segment by disappointments in
quarterly performance relative to analysts' expectations or by changes in
long-term prospects.
REDUCED REVENUES DUE TO ECONOMIC, POLITICAL AND MARKET CONDITIONS
Reductions in public offering, merger and acquisition and securities trading
activities, due to any one or more changes in economic, political or market
conditions could cause the Company's revenues from investment banking, trading
and sales activities to decline materially. The amount and profitability of
these activities are affected by many national and international factors,
including economic, political and market conditions; level and volatility of
interest rates; legislative and regulatory changes; currency values;
inflation; flows of funds into and out of mutual and pension funds; and
availability of short-term and long-term funding and capital.
REDUCED REVENUES DUE TO DECLINING MARKET VOLUME, PRICE OR LIQUIDITY
The Company's revenues may decrease in the event of a decline in market
volume, prices or liquidity. Declines in the volume of securities transactions
and in market liquidity generally result in lower revenues from trading
activities and commissions. Lower price levels of securities may also result
in a reduced volume of
10
<PAGE>
underwriting transactions, and could cause a reduction in revenue from
corporate finance fees, as well as losses from declines in the market value of
securities held in trading, investment and underwriting positions, reduced
asset management fees and withdrawals of funds under management. Sudden sharp
declines in market values of securities can result in illiquid markets and the
failure of issuers and counterparties to perform their obligations, as well as
increases in claims and litigation. In such markets, the Company may incur
reduced revenues or losses in its principal trading and market-making
activities.
POSSIBILITY OF LOSSES ASSOCIATED WITH UNDERWRITING ACTIVITIES
Participation in underwritings involves both economic and regulatory risks.
An underwriter may incur losses if it is unable to resell the securities it is
committed to purchase or if it is forced to liquidate its commitment at less
than the agreed purchase price. In addition, the trend, for competitive and
other reasons, toward larger commitments on the part of lead underwriters
means that, from time to time, an underwriter (including a co-manager) may
retain significant position concentrations in individual securities. Increased
competition has eroded and is expected to continue to erode underwriting
spreads. Another result of increased competition is that revenues from
individual underwriting transactions have been increasingly allocated among a
greater number of co-managers, which has resulted in reduced revenues for
certain transactions. However, the Company's underwriting business is very
competitive and is expected to remain so in the near future.
NET CAPITAL REQUIREMENTS
Underwriting commitments require a charge against net capital and,
accordingly, the Company's ability to make underwriting commitments may be
limited by the requirement that it must at all times be in compliance with the
applicable net capital regulations. See "Business--Net Capital Requirements."
REDUCED REVENUES DUE TO FOCUS ON RELATIVELY FEW INDUSTRIES
As a result of its dependence on revenues related to securities issued by
companies in specific industry sectors, any downturn in the market for the
securities of companies in these industries, or factors affecting such
companies, could adversely affect the Company's operating results and
financial condition. Securities offerings can vary significantly from industry
to industry due to economic, legislative, regulatory and political factors.
Underwriting activities in a particular industry can decline for a number of
reasons. For example, underwriting activities in the financial services
industry decreased significantly starting in the third quarter of calendar
1994, after interest rates in the United States increased. Underwriting and
brokerage activity can also be materially adversely affected for a company or
industry segment by disappointments in quarterly performance relative to
analysts' expectations, or by changes in long-term prospects for particular
companies, industries or industry segments.
The financial services, technology, real estate investment trust ("REIT")
and consolidation sectors account for the majority of the Company's investment
banking and research activities, exposing the Company to potential downturns
in these industries. The Company also derives a significant portion of its
revenues from institutional brokerage transactions related to the securities
of companies in these sectors. In the past, revenues from such institutional
brokerage transactions have declined when underwriting activities in these
industry sectors declined, the volume of trading on The Nasdaq Stock Market
("Nasdaq") or the NYSE declined, or when industry sectors or individual
companies reported results below investors' expectations.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenues and operating results may fluctuate from quarter to
quarter and from year to year due to a combination of factors, including the
number of underwriting and merger and acquisition transactions completed by
the Company's clients, access to public markets for companies in which the
Company has invested as a principal, the valuations of the Company's principal
investments and the investments of funds managed by the Company, the level of
institutional and retail brokerage transactions, the timing of recording of
asset
11
<PAGE>
management fees and special allocations of income, variations in expenditures
for personnel, litigation expenses, and expenses of establishing new business
units. The Company's revenues from an underwriting transaction are recorded
only when the underwritten security commences trading, and revenues from
merger and acquisition transactions are recorded only when retainer fees are
received or the transaction closes. Accordingly, the timing of the Company's
recognition of revenue from a significant transaction can materially affect
the Company's quarterly operating results. The Company's cost structure
currently is oriented to meet the level of demand for investment banking and
corporate finance transactions experienced during the second half of 1996 and
the first half of 1997. As a result, despite the variability of professional
incentive compensation, the Company could experience losses if demand for
these transactions declines more quickly than the Company's ability to change
its cost structure. Due to the foregoing and other factors, there can be no
assurance that the Company will be able to sustain profitability on a
quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION FOR RETAINING AND RECRUITING PERSONNEL
The Company's business is dependent on the highly skilled, and often highly
specialized, individuals it employs. Retention of research, investment
banking, sales and trading, venture capital, and management and administrative
professionals is particularly important to the Company's prospects. The
Company's strategy is to establish relationships with the Company's
prospective corporate clients in advance of any transaction, and to maintain
such relationships over the long term by providing advisory services to
corporate clients in equity, debt and merger and acquisition transactions.
Such relationships depend in part upon the individual employees who represent
the Company in its dealings with such clients. In addition, research
professionals contribute significantly to the Company's ability to secure a
role in managing public offerings and in executing trades in the secondary
market. From time to time, other companies in the securities industry have
experienced losses of research, investment banking and sales and trading
professionals, including recent losses of research analysts. The level of
competition for key personnel has increased recently, particularly due to the
market entry efforts of certain non-brokerage financial services companies,
commercial banks and other investment banks targeting or increasing their
efforts in some of the same industries that the Company serves. While the
Company has historically experienced little turnover in professional
employees, there can be no assurance that losses of key personnel due to such
competition or otherwise will not occur in the future. The loss of an
investment banking, research or sales and trading professional, particularly a
senior professional with a broad range of contacts in an industry, could
materially and adversely affect the Company's operating results.
The Company expects further growth in the number of its personnel,
particularly if current markets remain favorable to investment banking
transactions. Competition for employees with the qualifications desired by the
Company is intense, especially with respect to research and investment banking
professionals with expertise in industries in which underwriting or advisory
activity is robust. Competition for the recruiting and retention of employees
has recently increased the Company's compensation costs, and the Company
expects that continuing competition will cause its compensation costs to
continue to increase. There can be no assurance that the Company will be able
to recruit a sufficient number of new employees with the desired
qualifications in a timely manner. The failure to recruit new employees could
materially and adversely affect the Company's future operating results.
While the Company generally does not have employment agreements with its
employees, it attempts to retain its employees with incentives, such as bonus
plans and the ability to buy Company stock that vest over a number of years of
employment. These incentives, however, may be insufficient in light of the
increasing competition for experienced professionals in the securities
industry, particularly if the value of the Company's stock declines or fails
to appreciate sufficiently to be a competitive source of a portion of
professional compensation. See "Business--Employees" and "Management."
In the past, the Company has issued Common Stock to certain employees
subject to an agreement among the Company's shareholders (the "Shareholders
Agreement"), which required shareholders leaving the Company's employ to sell
their Common Stock to the Company at book value. In connection with the
Offering,
12
<PAGE>
the Shareholders Agreement will be terminated. Consequently, employee
shareholders will no longer be required to sell at book value their Common
Stock to the Company upon leaving employment at the Company and will be able
to sell their Common Stock in the public market. This change could result in a
higher level of attrition of senior employees than the Company has
historically experienced. See "Description of Capital Stock--Voting Trust
Agreement and Shareholders Agreement."
SIGNIFICANT COMPETITION FROM LARGER SECURITIES FIRMS
The Company is engaged in the highly competitive securities brokerage and
financial services businesses. It competes directly with large Wall Street
securities firms, securities subsidiaries of major commercial bank holding
companies, major regional firms and smaller "niche" players. The Company's
industry focus also subjects it to direct competition from a number of
specialty securities firms and smaller investment banking boutiques that
specialize in providing services to those industry sectors.
Competition from commercial banks has increased because of recent
acquisitions of securities firms by commercial banks, as well as internal
expansion by commercial banks into the securities business. In addition, the
Company expects competition from domestic and international banks to increase
as a result of recent and anticipated legislative and regulatory initiatives
in the United States to remove or relieve certain restrictions on commercial
banks. Such competition could adversely affect the Company's operating
results, as well as its ability to attract and retain highly skilled
individuals.
Many other companies have greater personnel and financial resources than the
Company. Larger competitors are able to advertise their products and services
on a national or regional basis and may have a greater number and variety of
distribution outlets for their products, including retail distribution.
Discount brokerage firms market their services through aggressive pricing and
promotional efforts. In addition, some competitors have a much longer history
of investment banking activities than the Company and, therefore, may possess
a relative advantage with regard to access to deal flow and capital.
Recent rapid advancements in computing and communications technology are
substantially changing the means by which financial services are delivered.
These changes are providing consumers with more direct access to a wide
variety of financial and investment services including market information and
on-line trading and account information. Advancements in technology also
create demand for more sophisticated levels of client services. Provision of
these services may entail considerable cost without an offsetting source of
revenue. See "Business--Competition."
REGULATION
The securities business is subject to extensive regulation under federal and
state laws in the United States, and also is subject to regulation in the
foreign countries in which FBR conducts its activities. One of the most
important regulations with which the Company's broker-dealer subsidiaries must
continually comply is the Securities and Exchange Commission (the "SEC") Rule
15c3-1 (the "Net Capital Rule"), and a similar rule of the United Kingdom's
Securities and Futures Authority (the "SFA") with respect to Friedman,
Billings, Ramsey International, Ltd., a U.K. company ("FBR International"),
which require the broker-dealer subsidiaries of the Company to maintain a
minimum amount of net capital, as defined under such regulations.
Compliance with many of the regulations applicable to the Company involves a
number of risks, particularly in areas where applicable regulations may be
subject to interpretation. In the event of non-compliance with an applicable
regulation, governmental regulators and the NASD may institute administrative
or judicial proceedings that may result in censure, fine, civil penalties
(including treble damages in the case of insider trading violations), issuance
of cease-and-desist orders, deregistration or suspension of the non-compliant
broker-dealer or investment adviser, suspension or disqualification of the
broker-dealer's officers or employees or other adverse consequences. The
imposition of any such penalties or orders on the Company could have a
material adverse effect on the Company's operating results and financial
condition.
13
<PAGE>
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, other United States or foreign
governmental regulatory authorities or the NASD. The Company also may be
adversely affected by changes in the interpretation or enforcement of existing
laws and rules by these governmental authorities and the NASD.
Additional regulation, changes in existing laws and rules, or changes in
interpretations or enforcement of existing laws and rules often affect
directly the method of operation and profitability of securities firms. The
Company cannot predict what effect any such changes might have. Furthermore,
the Company's businesses may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations
of general application. For example, the volume of the Company's underwriting,
merger and acquisition and principal investment businesses in a given time
period could be affected by, among other things, existing and proposed tax
legislation, antitrust policy and other governmental regulations and policies
(including the interest rate policies of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board")) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. The level of business and financing activity in each of the
industries on which the Company focuses can be affected not only by such
legislation or regulations of general applicability, but also by industry-
specific legislation or regulations. See "Business--Regulation."
POTENTIAL CONFLICTS OF INTEREST
Executive officers, directors and employees of the Company from time to time
invest, or receive a profit interest, in investments in private or public
companies or investment funds in which the Company, or an affiliate of the
Company, is an investor or for which the Company carries out investment
banking assignments, publishes research or acts as a market maker. In
addition, the Company has in the past organized and may in the future organize
businesses, such as FBR Ashton, Limited Partnership and FBR Private Equity
Fund, L.P., in which employees of the Company may acquire minority interests.
There are certain risks that, as a result of such investment or profits
interest, a director, officer or employee may take actions which would
conflict with the best interests of the Company. In addition, certain members
of senior management of the Company are actively involved in managing hedge
funds operated by the Company which could create a conflict of interest to the
extent these officers are aware of inside information concerning potential
investment targets from their other activities with the Company or to the
extent these officials wish to invest in companies for which FBR is
underwriting securities. The Company has in place compliance procedures and
practices designed to ensure that such inside information is not used for
making investment decisions on behalf of the hedge funds and to monitor hedge
fund investment in the Company's investment banking clients. No assurance can
be provided that these procedures and practices will be effective. In
addition, this conflict and these procedures and practices may limit the
freedom of such officials to make potentially profitable investments on behalf
of those hedge funds. See "Business--Asset Management."
POSSIBILITY OF LOSSES ASSOCIATED WITH PRINCIPAL AND TRADING ACTIVITIES
The Company's securities trading and market-making activities are primarily
conducted by the Company as principal and subject the Company's capital to
significant risks, including market, credit, leverage, counterparty and
liquidity risks. These activities often involve the purchase, sale or short
sale of securities as principal in markets that may be characterized by
relative illiquidity or that may be particularly susceptible to rapid
fluctuations in liquidity and price. The Company from time to time has large
position concentrations in securities of, or commitments to, a single issuer,
or issuers engaged in a specific industry, particularly as a result of the
Company's underwriting activities. The Company tends to concentrate its
trading positions in a more limited number of industry sectors and companies
than some other broker-dealers, which might result in higher trading losses
than would occur if the Company's positions and activities were less
concentrated. See "Business--Risk Management."
14
<PAGE>
Much of the Company's market-making business involves securities traded on
Nasdaq. Nasdaq has recently begun trading securities in sixteenths of a dollar
(rather than in eighths). This change and further changes in this regard may
adversely affect the Company's revenues from brokerage activities.
LITIGATION AND POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial 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 of underwriters by issuers. For example, a firm that acts as
an underwriter may be held liable for material misstatements or omissions of
fact in a prospectus used in connection with the securities being offered or
for statements made by its securities analysts or other personnel. While the
Company has never been subject to litigation based upon a material
misstatement or omission of fact in a prospectus, 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 from its other business activities,
including litigation that may be without merit. As the Company intends
actively to defend any such litigation, significant legal expenses could be
incurred. An adverse resolution of any future lawsuits against the Company
could materially adversely affect the Company's operating results and
financial condition. See "Business--Legal Proceedings."
DEPENDENCE ON CASH INFLOWS TO MUTUAL FUNDS
A slowdown or reversal of cash inflows to mutual funds and other pooled
investment vehicles could lead to lower underwriting and brokerage revenues
for the Company since mutual funds purchase a significant portion of the
securities offered in public offerings and traded in the secondary markets.
The recent demand for new equity offerings has been driven in part by
institutional investors, particularly large mutual funds, seeking to invest
cash received from the public. The public may withdraw additional cash from
mutual funds as a result of a decline in the market generally or as a result
of a decline in mutual fund net asset values. To the extent that a decline in
cash inflows into mutual funds or a decline in net asset values of these funds
reduces demand by fund managers for initial public or secondary offerings, the
Company's business and results of operations could be materially adversely
affected. Moreover, a slowdown in investment activity by mutual funds may have
an adverse effect on the securities markets generally.
MANAGEMENT OF GROWTH
Over the past several years, the Company has experienced significant growth
in its business activities and the number of its employees. This growth has
required and will continue to require increased investment in management
personnel, financial and management systems and controls and facilities,
which, in the absence of continued revenue growth, would cause the Company's
operating margins to decline from current levels. In addition, as is common in
the securities industry, the Company is and will continue to be highly
dependent on the effective and reliable operation of its communications and
information systems. The Company believes that its current and anticipated
future growth will require implementation of new and enhanced communications
and information systems and training of its personnel to operate such systems.
In addition, the scope of procedures for assuring compliance with applicable
regulations and NASD rules has changed as the size and complexity of the
Company's business has changed. As the Company has grown and continues to
grow, the Company has implemented and continues to implement additional formal
compliance procedures to reflect such growth. Any difficulty or significant
delay in the implementation or operation of existing or new systems,
compliance procedures or the training of personnel could adversely affect the
Company's ability to manage growth. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Accounting,
Administration and Operations."
DEPENDENCE ON SYSTEMS AND THIRD PARTIES
The Company's business is highly dependent on communications and information
systems, including certain systems provided by its clearing broker. Any
failure or interruption of the Company's systems, systems of the
15
<PAGE>
Company's clearing broker or third party trading systems, could cause delays
or other problems in the Company's securities trading activities, which could
have a material adverse effect on the Company's operating results. Such
failures and interruptions may result from the inability of certain computing
systems (including those of the Company, its clearing broker, and other third
party vendors) to recognize the year 2000. There can be no assurance that the
year 2000 issue can be resolved prior to the upcoming change in the century.
Although the Company may incur substantial costs, particularly costs resulting
from charges by its third party service providers, in correcting year 2000
issues, such costs are not sufficiently certain to estimate at this time. In
addition, the Company's principal disaster recovery system is provided by its
clearing broker. There can be no assurance that the Company or its clearing
broker will not suffer any systems failure or interruption, including one
caused by an earthquake, fire, other natural disaster, power or
telecommunications failure, act of God, act of war or otherwise, or that the
Company's or its clearing broker's back-up procedures and capabilities in the
event of any such failure or interruption will be adequate. See "Business--
Accounting, Administration and Operations."
TERMINATION OF SUBCHAPTER S CORPORATION STATUS; PAYMENT OF SUBSTANTIAL PRE-
OFFERING EARNINGS TO CURRENT SHAREHOLDERS
Since inception, the Company has been treated for federal and certain state
income tax purposes as a subchapter S corporation under the Internal Revenue
Code of 1986, as amended (the "Code"). Prior to the Offering (the "Termination
Date"), the Company terminated its status as an S corporation and declared a
dividend to Existing Shareholders (as defined below). The dividend was
calculated to cover the total amount of federal and state taxes payable by the
Existing Shareholders on the Company's 1997 earnings (the "Tax Amount") plus
an additional amount (the "Discretionary Distribution," and together with the
Tax Amount, the "S Corporation Distribution"). The amount of the Discretionary
Distribution was calculated on the basis of results of operations and capital
requirements of the business through the date of the declaration of the S
Corporation Distribution. Based on the Company's results of operations for the
nine months ended September 30, 1997, the Tax Amount would have been $7.5
million and the amount of the Discretionary Distribution would have been $20
million for an aggregate S Corporation Distribution of $27.5 million. At
September 30, 1997, the Company had sufficient cash, cash equivalents,
marketable securities and short term investments to fund these distributions.
Based on results of operations through November 30, 1997 and estimated results
for the remainder of 1997, the Tax Amount was $24 million and the amount of
the Discretionary Distribution was $30 million for an aggregate S Corporation
Distribution of $54 million. The Company believes that its cash, cash
equivalents, marketable securities and short term investments prior to the
closing of the Offering will be sufficient to fund the S Corporation
Distribution. However, a portion of the proceeds of the Offering may be used
to fund the S Corporation Distribution. Purchasers of Class A Common Stock in
the Offering will not receive any portion of the S Corporation Distribution.
Had the Company terminated its S corporation status at September 30, 1997, the
amount of deferred tax liability would have been immaterial. As of the
Termination Date, the Company will no longer be an S corporation and,
accordingly, will become subject to federal and state income taxes. See
"Certain Transactions Occurring Prior to the Offering--S Corporation
Distribution and Termination of S Corporation Status."
DEPENDENCE UPON AVAILABILITY OF CAPITAL AND FUNDING
The Company's business is dependent upon the availability of adequate
funding and regulatory capital under applicable regulatory requirements.
Historically, the Company has satisfied these needs from internally generated
funds and loans from third parties. The Company will declare the S Corporation
Distribution prior to the date of the Offering, thereby reducing the Company's
funds available for business operations. While the proceeds of the Offering,
at least in the short term, can be expected to alleviate in part the Company's
funding and capital needs, there can be no assurance that any, or sufficient,
funding or regulatory capital will continue to be available to the Company in
the future on terms that are acceptable to it. See "Business--Regulation,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview," "--Liquidity and Capital Resources," "Certain
Transactions Occurring Prior to the Offering--S Corporation Distribution and
Termination of S Corporation Status."
16
<PAGE>
NO SPECIFIC USE OF PROCEEDS
The Company has not designated any specific use for the net proceeds from
the sale by the Company of Class A Common Stock offered hereby. Rather, the
Company intends to use the net proceeds primarily for general corporate
purposes, including working capital and principal investments. Accordingly,
management will have significant flexibility in applying the net proceeds of
the Offering. See "Use of Proceeds."
CORPORATE GOVERNANCE CONTROLLED BY INSIDERS
Following the Offering, the Company will have outstanding two classes of
Common Stock: Class A Common Stock, which has one vote per share, and Class B
Common Stock, which has three votes per share. The shares offered hereby are
shares of Class A Common Stock. All of the outstanding shares of Class B
Common Stock are held by the 24 individuals who were shareholders of the
Company prior to the Offering (the "Existing Shareholders"). The shares held
by the Existing Shareholders have been deposited in a voting trust (the
"Voting Trust"), the trustees of which are Messrs. Friedman, Billings and
Ramsey, the three senior executive officers of the Company. Under the terms of
the Voting Trust, a majority of the three trustees have sole discretion to
vote the shares held in the Voting Trust. As a result, a majority of Messrs.
Friedman, Billings and Ramsey will be able to control 89.1% of the voting
power of the Company following the Offering (87.8% if the Over-allotment
Option is exercised in full) and will be able to control the outcome of all
corporate actions requiring shareholder approval (other than corporate actions
required to be approved by a vote of holders of shares of Class A Common Stock
voting as a separate class). Accordingly, prospective investors should realize
that their ownership of Class A Common Stock will not provide them with any
ability to determine the outcome of matters requiring a shareholder vote,
including the election of directors. See "Description of Capital Stock--Voting
Trust Agreement and Shareholders Agreement" and "Principal and Selling
Shareholders." As a result of the foregoing provisions, Messrs. Friedman,
Billings and Ramsey will have control over the operations of the Company,
including significant control over compensation decisions under the Company's
benefit and compensation plans, including plans under which they will be
direct beneficiaries. See "Management."
CONTROL OF THE COMPANY; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
The Company's Articles of Incorporation and Bylaws, as well as Virginia
corporate law, contain certain provisions that could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from attempting to acquire, control of the Company. These provisions
could limit the price that certain investors might be willing to pay in the
future for shares of Class A Common Stock. Certain of these provisions allow
the Company to issue, without shareholder approval, preferred stock having
rights senior to those of Common Stock. Other provisions impose various
procedural and other requirements that could make it more difficult for
shareholders to effect certain corporate actions. See "Description of Capital
Stock--Certain Provisions of the Company's Articles of Incorporation and
Bylaws and of Virginia Law."
ABSENCE OF PRIOR MARKET FOR COMMON STOCK AND FLUCTUATIONS OF MARKET PRICE
Prior to the Offering, there has been no public market for Class A Common
Stock, and there can be no assurance that an active public market will develop
or, if developed, will be sustained following the Offering. The initial public
offering price of Class A Common Stock will be determined through negotiations
among the Company, the Selling Shareholders and the Underwriters, based upon
several factors, although under Rule 2720 of the NASD Conduct Rules, the
initial public offering price can be no higher than that recommended by a
"qualified independent underwriter" meeting certain standards. Lazard Freres &
Co. LLC has agreed to serve in such role. For a discussion of the factors to
be taken into account in determining the initial public offering price, see
"Underwriting." Certain factors, such as sales of Class A Common Stock into
the market by existing shareholders, fluctuations in operating results of the
Company or its competitors, market conditions for similar stocks, and market
conditions generally for other companies in the investment banking industry or
in the financial services, technology or real estate industries could cause
the market price of Class A Common Stock to fluctuate substantially. In
addition, the stock market has experienced significant price and volume
fluctuations that have
17
<PAGE>
particularly affected the market prices of equity securities of companies and
that have often been unrelated to the operating performance of such companies.
Accordingly, the market price of Class A Common Stock may decline even if the
Company's operating results or prospects have not changed.
POTENTIAL DECREASES IN THE MARKET PRICE OF CLASS A COMMON STOCK RESULTING FROM
FUTURE SALES OF CLASS A COMMON STOCK
Sales of a substantial number of shares of Class A Common Stock in the
public market, whether by purchasers in the Offering or other shareholders of
the Company, could adversely affect the prevailing market price of Class A
Common Stock, and could impair the Company's future ability to raise capital
through an offering of its equity securities. Without giving effect to
exercise of the Underwriters' Over-allotment Option there will be 13,451,421
shares of Class A Common Stock outstanding immediately after completion of the
Offering and the PNC Transaction, of which 11,000,000 will be freely tradeable
in the public markets, subject, in certain cases, to the volume and other
limitations set forth in Rule 144 promulgated under the Securities Act of
1933, as amended (the "Securities Act"). All of the 36,577,579 shares of Class
B Common Stock outstanding immediately following the Offering will be subject
to lockup restrictions (the "Lockup"), unless released by the Representatives
(as defined herein). The Lockup prohibits the disposition of any such shares
until the date 18 months after the date of this Prospectus, provided that from
nine months after the date of this Prospectus, each shareholder may sell the
greater of 10,000 shares or 5% of the shareholder's shares outstanding on the
date of this Prospectus (an aggregate maximum of 1,828,878 shares). Any shares
subject to the Lockup may be released at any time with or without notice to
the public. See "Shares Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offering will experience immediate
dilution in net tangible book value of $15.41 per share, based on an assumed
initial public offering price of $19.00 per share. To the extent that any
options to be granted with respect to Class A Common Stock are exercised,
purchasers of Class A Common Stock will experience additional dilution. See
"Dilution" and "Management."
DIMINUTION IN AVAILABLE NET INCOME RESULTING FROM THE COMPANY'S CHARITABLE
GIVING
The Company has historically contributed 2% to 3% of its pre-tax net income
to charities and intends to continue to do so in the future. These
contributions, to the extent they continue, will reduce the amount of net
income available for distributions to shareholders and for other purposes.
18
<PAGE>
CERTAIN TRANSACTIONS OCCURRING PRIOR TO THE OFFERING
CREATION OF HOLDING COMPANY STRUCTURE
On January 1, 1997, Friedman, Billings, Ramsey Group, Inc., a Delaware
corporation ("Old Holding Co."), and its current subsidiaries engaged in a
series of transactions to simplify its ownership structure, to form groups of
companies concentrated in similar business activities and to facilitate access
to capital. Effective January 1, 1997, the shareholders of Old Holding Co.
surrendered their stock in such subsidiaries in exchange for stock of Old
Holding Co. Old Holding Co. was formed to act as a non-operating holding
company for two subsidiary holding companies also formed in January 1997:
Friedman, Billings, Ramsey Capital Markets, Inc., a non-operating holding
company for companies engaged in brokerage, investment banking and corporate
finance related activities; and Friedman, Billings, Ramsey Asset Management,
Inc., a non-operating holding company for companies engaged in asset
management, investment fund and venture capital activities.
REINCORPORATION MERGER
Prior to the Offering, Old Holding Co. merged with and into the Company, a
Virginia corporation, which was the surviving corporation in the merger (the
"Reincorporation Merger"). In the Reincorporation Merger, the Existing
Shareholders received 330 shares of Class B Common Stock for each of their
shares of Old Holding Co. As part of the Reincorporation Merger, the Company
also was recapitalized with Class A Common Stock, which is identical to Class
B Common Stock in all material respects, except that Class A Common Stock has
one vote per share and Class B Common Stock has three votes per share. Class B
Common Stock converts to Class A Common Stock at the option of the Company in
certain circumstances, including (i) upon a sale or other transfer, (ii) at
the time the holder of such shares of Class B Common Stock ceases to be
affiliated with the Company and (iii) upon the sale of such shares in a
registered public offering. See "Description of Capital Stock--Common Stock."
S CORPORATION DISTRIBUTION AND TERMINATION OF S CORPORATION STATUS
Prior to the Offering, the Company has been treated as a subchapter S
corporation under the Code for federal and certain state income tax purposes.
As a result, the Company's earnings were taxed for federal and certain state
tax purposes directly to its shareholders. Effective as of the Termination
Date, the Company's status as an S corporation will be terminated and the
Company will become subject to federal and state income taxes.
On December 15, 1997, the Board of Directors of Old Holding Co. declared the
S Corporation Distribution. The amount of the S Corporation Distribution was
calculated to be equal to the Tax Amount plus the Discretionary Distribution.
The actual amount of the S Corporation Distribution was calculated on the
basis of results of operations and capital requirements of the business
through the date of the declaration of the S Corporation Distribution. Based
on the Company's results of operations for the nine months ended September 30,
1997, the Tax Amount would have been $7.5 million and the amount of the S
Corporation Distribution would have been $20 million for an aggregate S
Corporation Distribution of $27.5 million. At September 30, 1997, the Company
had sufficient cash, cash equivalents, marketable securities and short term
investments to fund these distributions. Based on the Company's results of
operations through November 30, 1997 and estimated results for the remainder
of 1997, the Tax Amount was $24 million and the amount of the Discretionary
Distribution was $30 million for an aggregate S Corporation Distribution of
$54 million. The Company believes that its cash, cash equivalents, marketable
securities and short term investments prior to the closing of the Offering
will be sufficient to fund the S Corporation Distribution. However, a portion
of the proceeds of the Offering may be used to fund the S Corporation
Distribution. See "Risk Factors--Termination of Subchapter S Corporation
Status; Payment of Substantial Pre-Offering Earnings to Current Shareholders."
The Company intends to structure the S Corporation Distribution so that no
deferred tax liability will be recorded in connection with the termination of
the Company's S corporation status. Had the Company terminated its S
corporation status at September 30, 1997, the amount of such deferred tax
liability would have been immaterial.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Class A
Common Stock offered hereby, based on an assumed initial public offering price
of $19.00 per share and after deducting underwriting discounts and commissions
and estimated offering expenses, are estimated to be between approximately
$176.7 million (without giving effect to exercise of the Over-allotment
Option) and approximately $203.2 million (assuming exercise of the Over-
allotment Option). The proceeds will be used for general corporate purposes,
including working capital and principal investments. A portion of the proceeds
of the Offering may be used to fund the S Corporation Distribution. See
"Certain Transactions Occurring Prior to the Offering--S Corporation
Distribution and Termination of S Corporation Status." The Company will not
receive any of the proceeds of the sale of the Class A Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
DIVIDEND POLICY
The Company has paid dividends to its subchapter S corporation shareholders
generally to pay income tax liabilities but occasionally to distribute
profits. After the Company has been converted to a C corporate consolidated
group, the Company does not anticipate declaring or paying dividends in the
foreseeable future. The timing and amount of future dividends, if any, will be
determined by the Board of Directors of the Company and will depend, among
other factors, upon the Company's earnings, financial condition and cash
requirements at the time such payment is considered.
20
<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization as of September
30, 1997, on an actual basis and on a pro forma basis as adjusted to reflect
the receipt by the Company of the net proceeds from the sale of the shares of
Class A Common Stock offered hereby and as further adjusted as described in
the footnotes below. This table should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto, "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt..................................... $ 1,669 $ 1,669
Shareholders' equity(2)
Preferred Stock, par value $0.01,
15 million shares authorized, no shares issued
and outstanding(3)............................... -- --
Class A Common Stock, par value $0.01 per share,
150 million shares authorized, 13,451,421 shares
issued
and outstanding(3)............................... -- 135
Class B Common Stock, par value $0.01 per share,
100 million shares authorized, 40,029,000 shares
issued
and outstanding, actual 36,577,579(3)............ 400 366
Additional paid-in capital......................... 22,479 179,257
Stock subscriptions receivable..................... (355) (355)
Retained earnings(4)............................... 35,594 --
------- --------
Total Shareholders' equity........................ 58,118 179,403
------- --------
Total long-term debt and Shareholders' equity..... $59,787 $181,072
======= ========
</TABLE>
- ---------------------
(1) Gives effect to: (i) a distribution of $54.0 million to the Company's
Existing Shareholders as described in "Certain Transactions Occurring
Prior to the Offering--S Corporation Distribution and Termination of S
Corporation Status," all of which is recorded as accrued dividends (see
Notes 2 and 3 of Notes to Consolidated Financial Statements) and (ii) the
sale of an aggregate of 10,000,000 shares of Class A Common Stock in the
Offering at an assumed offering price of $19.00 per share (after deducting
the estimated underwriting discount and estimated offering expenses).
(2) Excludes 5,000,000 shares of Class A Common Stock reserved for issuance
under the Company's stock plans.
(3) Gives effect to (i) the Reincorporation Merger; (ii) an amendment to the
Company's Articles of Incorporation which increases the number of
authorized shares of Class B Common Stock and authorizes the issuance of
Class A Common Stock and Preferred Stock; (iii) the issuance of 10 million
shares of Class A Common Stock offered for sale by the Company in the
Offering, assuming the over-allotment Option is not exercised; and (iv)
assuming the over-allotment Option is not exercised the conversion of
3,451,421 shares of Class B Common Stock into the same number of shares of
Class A Common Stock upon sale by the Selling Shareholders (1,000,000
shares of which will be sold in the Offering and 2,451,421 shares of which
will be sold to PNC in the PNC Transaction).
(4) Gives effect to the recognition of $1.4 million in compensation expense
associated with the issuance of book value stock within twelve months of
the Offering (see Note 2 to Notes to Consolidated Financial Statements),
the S Corporation Distribution, and reclassification of remaining retained
earnings to additional paid in capital.
21
<PAGE>
DILUTION
Purchasers of Class A Common Stock offered hereby will experience an
immediate and substantial dilution in the pro forma net tangible book value
per share of their Class A Common Stock from the assumed initial public
offering price. Net tangible book value of the Company as of September 30,
1997 was $58.1 million or $1.45 per share. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding. The pro forma net
tangible book value of the Company as of September 30, 1997, after giving
effect to (i) the distribution of $54 million to the Company's current
shareholders, see "Certain Transactions Occurring Prior to the Offering--S
Corporation Distribution and Termination of S Corporation Status," and (ii)
the recording of compensation expense associated with book value stock issued
within twelve months of the Offering, would have been $0.07 per share. After
giving effect to the sale of an aggregate of 10 million shares of Class A
Common Stock in the Offering (at an assumed price of $19.00 per share, after
deducting estimated underwriting discounts and commissions and offering
expenses), the pro forma as adjusted net tangible book value of the Company as
of September 30, 1997 would have been $3.59 per share. This represents an
immediate increase in pro forma net tangible book value of $3.52 per share to
Existing Shareholders and an immediate dilution of $15.41 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share
of Class A Common Stock (1)................................ $19.00
Net tangible book value per share as of September 30, 1997.. $1.45
Decrease attributable to pro forma adjustments.............. (1.38)
Increase per share attributable to new investors............ 3.52
-----
Pro forma as adjusted net tangible book value per share af- 3.59
ter the Offering........................................... ------
Dilution per share to new investors......................... $15.41
======
</TABLE>
- ---------------------
(1) Before deducting estimated underwriting discounts and commissions and
offering expenses.
The following table summarizes, on a pro forma basis as of September 30,
1997, the difference between the number of shares of Class A Common Stock
purchased from the Company, the total consideration paid and the average price
per share paid by the Existing Shareholders and by the investors purchasing
shares of Class A Common Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders......... 40,029,000 80% $ 22,879,000 11% $0.57
New Investors(1).............. 10,000,000 20 190,000,000 89 19.00
---------- --- ------------ ---
Total....................... 50,029,000 100% $212,879,000 100%
========== === ============ ===
</TABLE>
- ---------------------
(1) Before deducting estimated underwriting discount and commission and
offering expenses.
The foregoing computations exclude 5,000,000 shares of Class A Common Stock
reserved for issuance under the Company's stock plans, and also assumes no
exercise of the Underwriters' Over-allotment Option.
The sale of shares by the Selling Shareholders in the Offering and the PNC
Transaction will reduce the number of shares of Class B Common Stock held by
the Existing Shareholders to 36,577,579 shares, or approximately 73.1% of the
total number of shares of Common Stock outstanding immediately after the
Offering, and will increase the number of shares of Class A Common Stock held
by new investors to 13,451,421, or 26.9% of the total number of shares of
Common Stock outstanding immediately after the Offering. See "Principal and
Selling Shareholders."
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The consolidated balance sheet
and consolidated statement of operations set forth below as of and for each of
the five years ended December 31, 1996, and as of and for the nine month
period ended September 30, 1997, are derived from the audited financial
statements of the Company. The selected consolidated financial data for the
nine months ended September 30, 1996 is derived from unaudited financial
statements of the Company and has been prepared on the same basis as the
audited financial statements to include, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of operations and the financial condition of
the Company for such periods. The results for the nine-month period ended
September 30, 1997, are not necessarily indicative of the results to be
expected for the entire year ending December 31, 1997, or any future interim
or annual period.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
YEAR ENDED DECEMBER 31, ACTUAL
---------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------------------------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
REVENUES(2)
Investment banking..... $ 1,771 $ 35,232 $30,579 $16,075 $ 55,159 $ 25,615 $ 67,091
Corporate finance fees. 50 75 14,427 7,224 10,361 4,370 38,618
Principal transactions. 17,202 19,417 9,903 20,078 25,466 18,157 11,994
Agency commissions..... 2,268 2,908 1,935 4,483 7,555 5,060 7,898
Asset management fees
(3)................... 116 1,164 444 6,747 7,808 2,635 6,256
Interest and dividends. 315 456 1,713 2,558 3,554 2,382 3,061
-------- -------- ------- ------- -------- -------- --------
Total revenues......... 21,722 59,252 59,001 57,165 109,903 58,219 134,918
EXPENSES
Compensation and
benefits (4).......... 11,824 24,269 23,456 27,623 55,004 28,604 85,138
Brokerage and
clearance............. 1,186 1,025 1,474 2,350 3,484 2,314 3,138
Occupancy and
equipment............. 406 554 944 1,187 1,683 1,103 1,934
Communications......... 284 354 764 823 1,109 799 1,536
Interest............... 73 316 1,773 1,523 2,665 2,039 2,301
Other (5).............. 1,077 3,353 13,049 8,362 14,620 6,584 17,041
-------- -------- ------- ------- -------- -------- --------
Total expenses......... 14,850 29,871 41,460 41,868 78,565 41,443 111,088
Income before pro-rata
subchapter "S"
corporation
stockholder
compensation.......... 6,872 29,381 17,541 15,297 31,338 16,776 23,830
Pro-rata subchapter S
corporation
stockholder
contributions (6)..... 7,147 29,919 19,355 5,858 6,500 -- --
-------- -------- ------- ------- -------- -------- --------
Net Income (loss)...... $ (275) $ (538) $(1,814) $ 9,439 $ 24,838 $ 16,776 $ 23,830
======== ======== ======= ======= ======== ======== ========
PRO FORMA STATEMENTS OF OPERATIONS DATA
(UNAUDITED)(7)
Net income (loss), as
reported.............. $ (275) $ (538) $(1,814) $ 9,439 $ 24,838 $ 16,776 $ 23,830
Pro-rata S corporation
compensation.......... 7,147 29,919 19,355 5,858 6,500 -- --
Pro forma tax
provision............. (2,833) (12,064) (7,347) (5,683) (12,628) (6,862) (9,782)
Other pro forma
adjustment............ -- -- -- -- (1,416) -- (1,416)
-------- -------- ------- ------- -------- -------- --------
Pro forma net income... $ 4,039 $ 17,317 $10,194 $ 9,614 $ 17,294 $ 9,914 $ 12,632
======== ======== ======= ======= ======== ======== ========
Pro forma income per
share................. $ 0.11 $ 0.45 $ 0.26 $ 0.24 $ 0.42 $ 0.24 $ 0.30
======== ======== ======= ======= ======== ======== ========
Weighted average shares
outstanding (8)....... 37,817 38,365 39,014 39,373 41,536 41,515 41,912
OPERATING DATA
(UNAUDITED)
Total employees (9).... 41 65 92 112 175 158 230
Revenue per average
employee (in
thousands)............ $564 $1,118 $752 $560 $766 $575 $888
Annualized return on
average equity........ 353% 461% 144% 82% 87% 69% 59%
Compensation and
benefits expense as a
percentage of
revenues.............. 54.4% 41.0% 39.8% 48.3% 50.0% 49.1% 63.1%
Income before pro rata
subchapter S
corporation
stockholder
distributions as a
percentage of
revenues (4).......... 31.6% 49.6% 29.7% 26.8% 28.5% 28.8% 17.7%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
--------------------------------------- -------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED (10)
------ ------- ------- ------- -------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA
Total assets........... $3,071 $13,027 $20,918 $78,911 $125,438 $119,215 $295,915
Total liabilities...... 807 2,536 7,030 55,640 76,379 61,097 115,097
Total shareholders'
equity................ 2,264 10,491 13,888 23,271 49,059 58,118 179,403
Book value per common
share outstanding..... $ 0.07 $ 0.31 $ 0.40 $ 0.66 $ 1.31 $ 1.45 $ 3.59
</TABLE>
- ---------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the basis of presentation.
(2) For a description of the items comprising each line item under Revenues
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Revenues."
(3) Does not include unrealized performance fees and special profit
allocations of approximately $12.9 million as of September 30, 1997.
Performance fees derived from the Company's asset management services are
due and payable upon an anniversary date as defined by the relevant
partnership agreements and such management agreements. Generally, these
anniversary dates coincide with calendar year end. Any performance fees
calculated as of any date prior to the anniversary date are subject to
adjustment based on future performance of the assets under management
through the anniversary date. The Company does not consider the earnings
process complete until the anniversary date and accordingly, does not
record the related revenue until such time. The Company currently
contemplates seeking amendment of certain of these partnership agreements
to provide for the quarterly recognition of these fees.
24
<PAGE>
(4) Excludes pro rata subchapter S corporation stockholder compensation.
(5) Includes business development, professional services and other operating
expenses.
(6) Represents pro rata compensation paid to shareholders based on ownership
interest as of the end of each period.
(7) For all periods presented, the Company elected to be treated as a
subchapter S corporation and was not subject to federal or certain state
income taxes. The pro forma statement of operations data reflects federal
and state income taxes based on estimated applicable tax rates as if the
Company had not elected subchapter S corporation status for the periods
presented. Also included in the pro forma information is $1.4 million in
compensation expense associated with the issuance of book value stock
within twelve months of the Offering. See Notes 2 and 3 of Notes to
Consolidated Financial Statements.
(8) See Note 2 of Notes to Consolidated Financial Statements for discussion of
the computation of weighted average shares outstanding.
(9) As of end of the period reported.
(10) Adjusted to give effect to (i) the sale by the Company of 10 million
shares of Class A Common Stock in the Offering at an assumed initial
offering price of $19.00 per share (after deducting the estimated
underwriting discount and offering expenses payable by the Company) and
the application of the net proceeds therefrom; (ii) the distribution of
$54 million to the Company's current shareholders; and (iii) the
recognition of $1.4 million in compensation expense associated with the
issuance of book value stock within twelve months of the Offering.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the audited Consolidated Financial Statements
as of December 31, 1996 and 1995, and the Notes thereto contained elsewhere in
this Prospectus. In addition to historical information, the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those anticipated in these forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
The Company's business depends primarily on the markets for the securities
of companies in selected sectors. These markets are affected by general
economic and market conditions, including fluctuations in interest rates, loan
delinquency rates, volume and price levels of securities and flow of investor
funds into and out of mutual funds, 401(k) plans and pension plans, and by
factors that apply to particular industries, such as technological advances,
changes in interest rates and changes in the regulatory environment. For
example, market conditions for securities of companies in certain sectors were
negatively affected by increasing interest rates during the second half of
1994, which limited the amount of underwriting and corporate finance activity
through the first half of 1995. Declining interest rates and an improving
economic environment contributed to a significant increase in activity in the
equity markets in the United States during the later part of 1995, and
continued throughout 1996 and the first nine months of 1997.
Fluctuations in the Company's results of operations can occur as a result of
market conditions and other factors. As a result, there can be no assurance
that operating results for any future period will be comparable to those
attained in corresponding prior periods.
RESULTS OF OPERATIONS
Revenues
Total revenues are comprised primarily of investment banking revenue,
corporate finance fees, principal transactions revenue, agency commissions,
and asset management fees. The Company believes that revenue from principal
transactions, agency commissions and investment banking is substantially
dependent on the market for public offerings of equity and debt securities by
the companies in the sectors within which the Company focuses its efforts, on
the Company's ability to lead or co-manage public offerings of the securities
of such companies and on Nasdaq trading volume and spreads in the securities
of such companies. Accordingly, the Company's revenues have fluctuated, and
are likely to continue to fluctuate, based on a variety of factors. See "Risk
Factors."
Investment banking revenue consists of underwriting discounts, selling
concessions, management fees and other underwriting fees, and reimbursed
expenses associated with underwriting activities.
Corporate finance fees are comprised of the Company's merger and
acquisition, private placement, mutual thrift conversion, and other corporate
finance advisory fees and reimbursed expenses associated with such activities.
Corporate finance fees have fluctuated, and are likely to continue in the
future to fluctuate, based on the number and size of private placements by the
Company.
Principal transactions revenue includes net revenue from the securities
trading activities of the Company as principal in Nasdaq-listed and other
over-the-counter ("OTC") securities, including principal sales credits and
trading profits, and is primarily derived from the Company's activities as a
market maker.
Agency commissions revenue includes revenue resulting from executing Nasdaq-
listed and other OTC transactions as agent, and executing trades through a
stock exchange.
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Asset management fees are earned by the Company in its capacity as the
investment manager to advisory clients and as general partner of several
investment partnerships. Management fees, performance fees, income (losses)
and special allocations on investment partnerships historically have been
earned largely from one investment partnership which invests primarily in the
securities of companies engaged in the financial services sector. Asset
management fees are likely to fluctuate with securities in the sectors in
which managed funds invest.
Expenses
Compensation and benefits expense includes incentive compensation paid to
sales, trading, investment banking and corporate finance professionals and
executive management. Incentive compensation varies primarily based on revenue
production. Salaries, payroll taxes and employee benefits are relatively fixed
in nature. Compensation expense does not include pro rata payments made to the
shareholders of the Company in lieu of profit distribution. During the periods
presented, the incentive compensation paid to the Named Executive Officers was
based primarily on gross revenues, from certain of the Company's business
lines. The Company's shareholders have adopted the New Plan under which the
Named Executive Officers' incentive compensation, after the Offering, will be
based on net income before taxes, rather than on gross revenues. In
particular, the cash bonus payments made pursuant to the New Plan will be made
from a pool equal to up to thirty percent of FBR's adjusted pre-tax net income
(before annual cash bonus payments under the New Plan). The pool will be
reduced to the extent the aggregate compensation and benefits expense for the
year (including annual cash bonus payments under the New Plan) would exceed
fifty-five percent of revenues. The effect of applying the New Plan to the
Company's financial results for the nine month period ended September 30, 1997
would result in a reduction in compensation and benefits expense of $11.0
million.
Brokerage and clearance fees include the cost of securities clearing, floor
brokerage and exchange fees.
Occupancy and equipment expense includes the rent and utility charges paid
for facilities, expenditures for facilities repairs and upgrades, and
depreciation of computer, telecommunications and office equipment.
Communications expense includes charges from third-party providers of
telecommunications services and news and market data services.
Interest expense relates primarily to margin and subordinated loan interest
charges from Friedman, Billings, Ramsey & Co., Inc.'s ("FBRC's") clearing
organization and bank and finance company borrowings.
Other expenses include business development, investment banking, insurance,
registration fees, printing and copying, postage and delivery services,
charitable contribution and miscellaneous expenses. The Company has
historically contributed from 2% to 3% of pre-tax net income annually to
charities and intends to continue doing so in the future.
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RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS:
REVENUES:
Investment banking...... 8.2% 59.4% 51.8% 28.1% 50.2% 44.0% 49.7%
Corporate finance fees.. 0.2% 0.1% 24.4% 12.7% 9.4% 7.5% 28.6%
Principal transactions.. 79.2% 32.8% 16.8% 35.1% 23.2% 31.2% 8.9%
Agency commissions...... 10.4% 4.9% 3.3% 7.8% 6.9% 8.7% 5.9%
Asset management fees... 0.5% 2.0% 0.8% 11.8% 7.1% 4.5% 4.6%
Interest and dividends.. 1.5% 0.8% 2.9% 4.5% 3.2% 4.1% 2.3%
------ ------ ------ ------ ------ -------- --------
Total revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Compensation and
benefits (1)........... 54.4% 41.0% 39.8% 48.3% 50.1% 49.1% 63.1%
Brokerage and clearance. 5.5% 1.7% 2.5% 4.1% 3.2% 4.0% 2.3%
Occupancy and equipment. 1.9% 0.9% 1.6% 2.1% 1.5% 1.9% 1.4%
Communications.......... 1.3% 0.6% 1.3% 1.4% 1.0% 1.4% 1.2%
Interest................ 0.3% 0.5% 3.0% 2.7% 2.4% 3.5% 1.7%
Other (2)............... 5.0% 5.7% 22.1% 14.6% 13.3% 11.3% 12.6%
------ ------ ------ ------ ------ -------- --------
Total expenses.......... 68.4% 50.4% 70.3% 73.2% 71.5% 71.2% 82.3%
INCOME BEFORE PRO RATA
STOCKHOLDER
COMPENSATION............ 31.6% 49.6% 29.7% 26.8% 28.5% 28.8% 17.7%
</TABLE>
- ---------------------
(1) Excludes pro rata shareholder compensation.
(2) Includes business promotion, investment banking and other expenses.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Total revenues increased 132% from $58.2 million in the first nine months of
1996 to $134.9 million in the first nine months of 1997 due primarily to
increased investment banking and corporate finance activity.
Investment banking revenue increased 162% from $25.6 million in the first
nine months of 1996 to $67.1 million in the first nine months of 1997 and
increased as a percentage of revenues from 44% to 50%. This increase was due
primarily to the increase in public offerings managed from 14 during the first
nine months of 1996 to 20 during the same period in 1997, and to an increase
in the average size of the equity offerings managed from $34 million in the
first nine months of 1996 to $123 million in the first nine months of 1997.
Corporate finance fees increased 784% from $4.4 million in the first nine
months of 1996 to $38.6 million in the first nine months of 1997. This
increase was due primarily to the increased size in dollar terms of the
Company's private placement activities as well as increased merger and
acquisition activities fostered by the addition of a team of professionals
dedicated to such activities.
Principal transactions revenue decreased 34% from $18.2 million in the first
nine months of 1996 to $12.0 million in the first nine months of 1997. This
decrease was due primarily to trading losses associated with the Company's
market-making activities and losses associated with positions in certain
securities which are held in the normal course of business and was partially
offset by an increase in the Company's Nasdaq trading activity overall, as
well as increased trading activity derived from the Company's expansion of its
equity sales and trading personnel and capabilities, and from an enhanced
research department.
Agency commissions increased 56% from $5.1 million in the first nine months
of 1996 to $7.9 million in the first nine months of 1997. This increase was
due to the expansion of the Company's institutional listed equity business
fostered by an increase in the number of institutional brokers and their
production, as well as the addition of a listed equity trader.
Asset management fees increased by 137% from $2.6 million in the first nine
months of 1996 to $6.3 million in the first nine months of 1997. The increase
was due primarily to an increase in assets under
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<PAGE>
management, principally in the Company's largest hedge fund, which focuses its
investments in the financial services industry sector.
Total expenses increased 168% from $41.4 million in the first nine months of
1996 to $111.1 million in the first nine months of 1997 due primarily to the
Company's growth.
Compensation and benefits expense increased 198% from $28.6 million in the
first nine months of 1996 to $85.1 million in the first nine months of 1997.
The increase was due primarily to increased incentive compensation which is
paid to sales, trading, investment banking and corporate finance professionals
and executive management. Compensation and benefits expense as a percentage of
total revenues increased from 49% to 63%; this change was attributable to the
net effect of a number of factors, including the change in revenue mix towards
investment banking activities, reductions in sales payout rates and increased
salaried headcount. Average employee headcount was 135 in the first nine
months of 1996 compared to 203 in the first nine months of 1997. In connection
with the Offering, the Company has established the 1997 Stock and Annual
Incentive Plan (as defined herein). One component of the plan is a target
ratio of compensation and benefits expense to gross revenues of 55%.
Brokerage and clearance expense increased 36% from $2.3 million in the first
nine months of 1996 to $3.1 million in the first nine months of 1997 due to
the increase in sales and trading activities. As a percentage of total
revenues, brokerage and clearance expense decreased from 4% in the first nine
months of 1996 to 2% in the first nine months of 1997, due primarily to the
change in revenue mix towards investment banking activities.
Occupancy and equipment expense increased 75% from $1.1 million in the first
nine months of 1996 to $1.9 million in the first nine months of 1997 as a
result of rent and related expenditures to approximately double the Company's
office space during 1997, and an increase in depreciation expense due to
acquisitions of computer and telecommunications equipment and furniture and
fixtures for the expanded staff and facilities.
Communications expense increased 92% from $.8 million in the first nine
months of 1996 to $1.5 million in the first nine months of 1997. This increase
was due primarily to increases in telecommunications expenses resulting from
the increase in employees and expansion of facilities in 1996 and 1997, and
the enhancement of network technology.
Interest expense increased by 13% from $2.0 million in the first nine months
of 1996 to $2.3 million in the first nine months of 1997, primarily due to
increases in subordinated loan borrowings to meet the regulatory capital
requirements of the increased investment banking activities and increased
margin interest expense due to increased securities position levels.
Other expenses increased 159% from $6.6 million in the first nine months of
1996 to $17.0 million in the first nine months of 1997. This increase was due
primarily to increased investment banking expenses and to increased expenses
associated with expanded office space.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenues increased 92% from $57.2 million in 1995 to $109.9 million in
1996 due primarily to increased investment banking activity.
Investment banking revenue increased 243% from $16.1 million in 1995 to
$55.2 million in 1996 and increased as a percentage of revenues from 28% to
50%. The Company managed 31 public offerings during 1996 compared to eight
during 1995.
Corporate finance fees increased 43% from $7.2 million in 1995 to $10.4
million in 1996. This increase was primarily due to the Company's increasing
focus on merger and acquisition activities.
Principal transactions revenue increased 27% from $20.1 million in 1995 to
$25.5 million in 1996. This increase was due to the significant increase in
underwriting activity, resulting in increased after-market trading,
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<PAGE>
an increase in Nasdaq market activity overall, and the benefit derived from
expansion of equity sales and trading personnel and capabilities.
Agency commissions increased 69% from $4.5 million in 1995 to $7.6 million
in 1996. This increase was due to the expansion of the Company's institutional
listed-equity business fostered by an increase in the number of institutional
brokers and in the average production of institutional brokers, as well as the
benefit derived from the Company's enhanced research department.
Asset management fees increased by 16% from $6.7 million in 1995 to $7.8
million in 1996. The increase was primarily due to an increase in assets under
management, principally in the Company's largest private hedge fund which
focuses its investments in the financial services industry sector.
Total expenses increased 88% from $41.9 million in 1995 to $78.6 million in
1996.
Compensation and benefits expense increased 99% from $27.6 million in 1995
to $55.0 million in 1996. The increase was due primarily to increased
incentive compensation which was paid to sales, trading, investment banking
and corporate finance professionals and executive management. Compensation and
benefits expense as a percentage of total revenues was 48% in 1995 and 50% in
1996. Average employee headcount was 102 in 1995 compared to 143 in 1996.
Brokerage and clearance expense increased 48% from $2.4 million in 1995 to
$3.5 million in 1996 due to the increase in sales and trading activities. As a
percentage of total revenues, brokerage and clearance expense decreased from
4% in 1995 to 3% in 1996. The percentage decline was due primarily to the
change in revenue mix towards investment banking activities.
Occupancy and equipment expense increased 42% from $1.2 million in 1995 to
$1.7 million in 1996 as a result of rent and related expenditures to
approximately double the Company's office space during 1996 and an increase in
depreciation expense due to acquisitions of computer and telecommunications
equipment and furniture and fixtures for the expanded staff and facilities.
Communications expense increased 35% from $.8 million in 1995 to $1.1
million in 1996. This increase was due primarily to increases in
telecommunications expenses resulting from the increase in employees and
expansion of facilities in 1996.
Interest expense increased by 75% from $1.5 million in 1995 to $2.7 million
in 1996 due primarily to increased subordinated loan borrowings to meet the
regulatory capital requirements of the increased investment banking activities
and increased margin interest expense due to increased securities position
levels.
Other expenses increased 75% from $8.4 million in 1995 to $14.6 million in
1996. This increase was due primarily to the increased level of investment
banking activity and increased expenses associated with expanded office space.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenues decreased 3% from $59.0 million in 1994 to $57.2 million in
1995 due to lower investment banking revenues offset by increased principal
revenues and agency commissions.
Investment banking revenue decreased 47% from $30.6 million in 1994 to $16.1
million in 1995, and decreased as a percentage of revenues from 52% to 28%.
This decrease was primarily due to the deterioration of the market for new
issues of securities in the financial services sector in late 1994 and early
1995. The Company managed eight public offerings during 1995 compared to 17
during 1994. Investment banking revenue in 1994 included two significant
related real estate transactions with total associated revenue of $23.7
million, representing 40% of total revenues.
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<PAGE>
Corporate finance fees decreased 50% from $14.4 million in 1994 to $7.2
million in 1995. This decrease was due to the smaller-size private placement
transactions executed during 1995.
Principal transactions revenue increased 103% from $9.9 million in 1994 to
$20.1 million in 1995. This increase was due primarily to the improved markets
for the debt and equity securities for which the Company made a market and a
shift of focus away from debt which underperformed in 1994.
Agency commissions increased 132% from $1.9 million in 1994 to $4.5 million
in 1995. As with principal transactions, this increase was due primarily to
the improved markets for listed financial services equities.
Asset management fees increased 1,142% from $.4 million in 1994 to $6.7
million in 1995. This increase was due primarily to the decrease in interest
rates in 1995 which dramatically improved the market performance of the
financial services securities held in the largest hedge fund managed by the
Company, and to an increase in assets under management in that fund.
Total expenses increased 1% from $41.5 million in 1994 to $41.9 million in
1995.
Compensation and benefits expense increased 18% from $23.5 million in 1994
to $27.6 million in 1995. As a percentage of total revenues, compensation and
benefits expense increased from 40% in 1994 to 48% in 1995. This increase was
due primarily to an increase in employee headcount and higher payouts
associated with principal and agency activities, offset in part by lower
investment banking compensation as a result of lower investment banking
activities.
Brokerage and clearance expense increased 59% from $1.5 million in 1994 to
$2.4 million in 1995 due to the increase in sales and trading activities. As a
percentage of total revenues, brokerage and clearance expense increased from
2% in 1994 to 4% in 1995.
Occupancy and equipment expense increased 26% from $.9 million in 1994 to
$1.2 million in 1995, as a result of increased rent expenditures from the
relocation and expansion of the Company's office space in June 1994 and an
increase in depreciation expense due to acquisitions of computer and
telecommunications equipment and furniture and fixtures for the expanded staff
and facilities.
Communications expense increased 8% from $764,000 in 1994 to $823,000 in
1995. This increase was due primarily to increases in telecommunications
expenses resulting from additional employees and increased sales and trading
volumes in 1995, partially offset by decreases in long-distance calling rates.
Interest expense decreased 14% from $1.8 million in 1994 to $1.5 million in
1995 as a net result of decreased subordinated borrowings and interest rates,
partially offset by increased margin interest expenses associated with higher
average security holdings.
Other expenses decreased 36% from $13.0 million in 1994 to $8.4 million in
1995. This decrease was due primarily to the reduced level of investment
banking activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal assets consist of cash and cash equivalents,
receivables from other broker dealers including its clearing broker,
securities held for trading purposes, short-term investments and securities
held for investment purposes and investments in investment partnerships where
the Company serves as general partner. Short-term investments are comprised
primarily of United States Treasury securities with maturities of less than
one year. Although investments in investment partnerships are for the most
part illiquid, the underlying investments of such partnerships are generally
liquid and the valuations of the investment partnerships reflect that
underlying liquidity.
31
<PAGE>
The Company has historically satisfied its liquidity and regulatory capital
needs through two primary sources: (1) equity capital contributions and
internally generated funds; and (2) credit provided by the Company's banks,
and its clearing broker and that broker's affiliates. The Company has
frequently required the use, and reasonably believes that it will continue to
require the use, of subordinated loans in connection with regulatory capital
requirements for its underwriting activities.
As of December 31, 1996, the Company had liquid assets consisting primarily
of cash and cash equivalents of $20.7 million and United States Treasury bills
of $10.3 million. In addition, 97.2% of the Company's $55.0 million in
securities in its trading and investment accounts are readily marketable.
Additionally, the Company had an unsecured bank line of credit in the amount
of $10.0 million, of which $3.0 million was available. This line of credit is
personally guaranteed by certain of the Existing Shareholders.
As of December 31, 1996, the Company had available a total of $40.0 million
in three committed subordinated revolving loans from its clearing broker and
an affiliate of its clearing broker which are allowable for net capital
purposes. Certain of these loans are personally guaranteed by certain of the
Existing Shareholders. At December 31, 1996, $15.0 million was outstanding
under these subordinated revolving loans.
As of September 30, 1997, the Company had liquid assets consisting primarily
of $27.6 million of cash and cash investments and $10.4 million of United
States Government obligations. In addition, the Company had $25.7 million in
securities in its trading accounts, 94.0% of which were readily marketable.
The Company also had an unsecured bank line of credit in the amount of $10.0
million, of which $1.5 million was available. This bank line of credit expires
in January, 1998. This line of credit is personally guaranteed by certain of
the Existing Shareholders.
As of September 30, 1997, the Company had available a total of $30.0 million
in two committed subordinated revolving loans from its clearing broker and an
affiliate of its clearing broker that are allowable for net capital purposes.
An additional $10.0 million subordinated revolving loan was approved in
October 1997. All of these loans are personally guaranteed by certain of the
Existing Shareholders.
At the beginning of each year, the Company has allowed key management
employees to buy stock at book value. On January 1, 1997, the Company issued
7,800 shares of the Company's stock (prior to the Reincorporation Merger) at
book value to certain key management employees. Upon completion of the
Offering and in the Company's financial statements for the period in which the
Offering is completed, the Company will record a one time compensation charge
of $1.4 million representing the difference between the estimated fair value
and book value at the date of issuance.
FBRC, as a broker-dealer, is registered with the SEC and is a member of the
NASD. As such, it is subject to the minimum net capital requirements
promulgated by the SEC. FBRC's regulatory net capital has historically
exceeded these minimum requirements. As of December 31, 1996 and September 30,
1997, FBRC was required to maintain minimum regulatory net capital of
approximately $1.2 million and $1.5 million, respectively, and had total
regulatory net capital of approximately $14.4 million and $31.5 million,
respectively, in excess of its requirement. Regulatory net capital
requirements increase when FBRC is involved in underwriting activities based
upon a percentage of the amount being underwritten by FBRC.
The Company believes that its current level of equity capital and committed
lines of credit, combined with funds anticipated to be generated from
operations and the capital markets, will be adequate to meet its liquidity and
regulatory capital requirements associated with its broker-dealer activities
for at least the next two years.
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<PAGE>
BUSINESS
INDUSTRY BACKGROUND
Over the past 15 years, capital markets have evolved in depth and
complexity, thereby radically altering the needs of both investors and the
companies accessing those markets. According to Securities Data Company, in
1982, 122 IPOs were underwritten in the U.S. for a total of $1.3 billion and
total public equity issued equaled $20.6 billion. In 1992, the value of new
issues in the U.S. more than doubled the level achieved in any previous year
reaching $39.9 billion, while the total public equity and high-yield debt
raised equaled $95.0 billion and $51.6 billion respectively. In 1996, 874
initial public offerings were completed in the U.S., totaling $50.0 billion,
total public equity issued equaled $191.1 billion, and high-yield debt issued
totaled $87.5 billion. A significant portion of this growth has come from
emerging industries that previously had limited access to the capital markets.
The Company believes this significant increase in non-traditional issuers has
been accompanied by significant increases in the flow of cash into mutual
funds and other managed funds leading to greater demand by both issuers and
investors for focused, industry-specific advisory and capital management
products and services.
To succeed in the current environment, investment banks must be able to
conceive and to communicate creative solutions which meet the capital needs of
companies and the investment goals of investors.
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
FBR is a full service investment banking firm focused on investment banking,
research, institutional brokerage and asset management. FBR's strategy since
inception has been to target specific industry sectors where it believes it
can develop a unique research perspective. The Company then uses this research
perspective together with its capital markets expertise to provide value for
its clients. Using this approach FBR has achieved a 50% compounded annualized
growth rate in revenues since its inception in 1989 through November 30, 1997.
FBR believes the success of its strategy is further demonstrated by its
increasing market presence and the aftermarket performance of the companies
for which it has acted as lead or co-manager. Year to date as of November 30,
1997, FBR was ranked sixth in terms of lead managed U.S. issuer initial public
offering dollar volume, and for the period from January 1, 1996 through
November 30, 1997 was ranked #1 in aftermarket performance among lead managers
with at least 10 lead managed U.S. IPOs, according to CommScan EQUIDESK.
CommScan EQUIDESK defines "aftermarket performance" as the percentage change
in the price of a share of stock from the price on the pricing date to the
price of its last trade on the date of measurement, adjusted for splits. These
rankings may change on a day to day basis with the completion of additional
IPOs and the trading of securities.
FBR was founded in 1989 with the philosophy that an employee-friendly
corporate culture would enhance performance results. FBR strives to maintain
excellent employee relations through policies designed to create an enjoyable
work environment for all employees such as flexible dress code, vacation
policy and maternity leave. Other non-traditional benefits at FBR include
corporate retreats, corporate gym and employee directed Company charitable
donations. In addition, the Company has emphasized training and promoting its
employees from within. The Company believes that, as a result of this culture,
FBR has averaged less than 3% turnover among exempt professional employees per
year since inception. Low turnover has enhanced the Company's growth and
efficiency.
The Company believes that the increases in recent years, in the depth and
complexity of the capital markets and in the number of non-traditional issuers
coupled with significant inflows of cash into mutual funds and other managed
funds, has led to greater demand by both issuers and investors for focused
advisory, capital markets, and capital management products and services.
The Company seeks to identify rapidly changing industries and those that are
not fully understood or appropriately valued by the market. Once an industry
is identified, the Company employs substantial effort to develop a thorough
understanding of the fundamentals and opportunities of that industry. The
Company employs a team approach in which all of its professionals contribute
to and communicate the Company's expertise in an
33
<PAGE>
industry. For each industry on which the Company is focused, the Company
offers significant underwriting capabilities and brokerage services as well as
advisory services in mergers, acquisitions and strategic partnerships. In
addition, FBR's asset management activities include hedge funds and public
mutual funds as well as private equity investments and mezzanine finance in
such industries.
FBR believes its strategy and culture has and will enable it to succeed in
this changing marketplace. Since commencing its investment banking activities
in 1992, FBR has never failed to complete a capital raising transaction it has
brought to the public market as lead underwriter. Since its inception, FBR has
completed $11.4 billion in capital raising transactions and $3.3 billion in
merger and acquisition advisory transactions which span a wide range of
geographic regions and security types and a growing variety of industry
sectors.
FBR has also applied its research focus and team-based approach to its asset
management activities. The flagship FBR hedge fund, FBR Ashton, Limited
Partnership has provided annualized internal rates of return since inception
in March 1992 of 41.8% gross and 34.1% net to its limited partners through
November 30, 1997. FBR's three public mutual funds have provided a total net
return for the eleven months ended November 30, 1997 of 38.6%, 47.0% and
42.8%. The amount of assets under management has grown from $119.3 million at
the beginning of 1996 to over $444.9 million as of November 30, 1997,
representing 373% growth.
FBR's revenues grew from $57.2 million for the year ended December 31, 1995,
to $109.9 million, for the year ended December 31, 1996, representing an
increase of 92%, and from $84.8 million for the eleven months ended November
30, 1996 to $217.2 million for the eleven months ended November 30, 1997,
representing an increase of 156%. FBR believes that its revenue growth, as
well as the superior performance of its capital transactions and managed
products, are the result of the Company's focus and dedication to developing
research, capital markets and asset management expertise within a growing
number of strategic industry sectors. FBR believes that its superior industry
knowledge coupled with its capital markets expertise has made FBR a leading
provider of investment banking, brokerage and asset management services and
the largest independent investment bank in the rapidly-growing Washington,
D.C. metropolitan area.
CULTURE AND STRATEGY
FBR began as a secondary research and trading firm, solely dependent on its
ability to identify undervalued investment opportunities. The principals have
instilled a culture where ideas are developed as a team by the whole Company
and communicated as a team to its clients. Although the Company has grown from
17 to over 263 people, it has sought to maintain a culture of teamwork and
broad-based knowledge of investment theses. The Company believes its culture
has significantly enhanced its continued ability to identify new strategic
sectors and opportunities to create value. The Company intends to continue to
emphasize its culture while executing the five core business strategies
described below.
Continuously Identify Rapidly-evolving or Undervalued Industries. FBR
continually searches for industries and sectors where it can produce
innovative market insights through its integrated research-focused approach
and provide value for its investment banking, institutional brokerage and
money management clients.
Build on In-depth, Focused Industry Coverage. FBR believes that industry
specialization is critical to meeting the requirements of its clients for
sophisticated and non-traditional investment advice. The Company organizes its
research and investment banking activities along industry specializations,
continually re-examining its industry categories, and monitoring them to
ensure coverage of emerging opportunities. The Company's strategy is to focus
on selected segments within a limited number of undervalued, high potential
industries and to offer FBR's full range of investment banking, sales and
trading and asset management services within those industries.
Build and Maintain Lasting Relationships. The founders of the Company have
built a core base of institutional brokerage and investment banking clients
over the past 15 years, at FBR and their previous
34
<PAGE>
employers. FBR believes that it has generated client loyalty and goodwill by
virtue of its diligent service. FBR values these relationships and regards
them as an essential part of the foundation for many of its businesses. FBR
continues to establish, and intends to build, similar new relationships in the
future.
Bring Under-valued Companies to Sophisticated Investors. FBR's strategy is
to discover opportunities where sophisticated capital and undervalued
companies intersect. FBR believes that its fundamental understanding and
commitment to undervalued, high-potential industries has enabled the Company
to build significant credibility in the issuer and investor communities,
facilitating its strategy of bringing under-valued companies to sophisticated
investors.
Offer Expanded Range of Services to Clients. FBR's strategy is to capture a
greater share of the revenue opportunities available from FBR investment
banking and brokerage clients. For issuers, FBR has expanded from its core
equity capital raising and research capabilities to provide high yield debt,
financial advisory (including merger and acquisition, stock buybacks, and
dividend analysis), venture capital/private fund and corporate/high net worth
services. For investors, FBR has expanded from its core sales and trading
services to provide asset management and venture capital services. FBR
believes its demonstrated success in providing its core services and strong
client relationships is a key competitive advantage in its plans to expand its
business.
STRATEGIC BUSINESS RELATIONSHIP WITH PNC BANK CORP.
Pursuant to an agreement between FBR and PNC dated October 29, 1997, PNC has
agreed to purchase 4.9% of the shares of Common Stock issued and outstanding
after the Offering (including shares issued pursuant to the Underwriters'
Over-allotment Option). Without giving effect to exercise of the Over-
allotment Option, PNC will acquire 2,451,421 shares of Class A Common Stock,
all of which shares will be acquired from the Selling Shareholders at a price
equal to the initial public offering price less a 4% discount. The closing of
the PNC Transaction is anticipated to occur substantially contemporaneously
with the closing of the Offering. The Company and PNC have submitted notice of
the PNC Transaction to the Federal Trade Commission's Premerger Notification
Office pursuant to the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as
amended, and, if the waiting period applicable thereto has not expired prior
to the closing of the Offering, the Company and PNC intend to delay the
closing of the PNC Transaction or to close the PNC Transaction in a manner not
requiring expiration of such waiting period. Consummation of the PNC
Transaction is subject to the completion of the Offering prior to March 31,
1998 and certain other customary conditions.
In conjunction with the PNC Transaction and pursuant to a non-binding
Memorandum of Understanding entered into by and between FBR and PNC on October
29, 1997 (the "MOU"), FBR and PNC intend to establish an ongoing strategic
business relationship with respect to selected capital markets and related
activities. The MOU provides a framework pursuant to which FBR and PNC will
work together on an arms-length basis to refer potential business to each
other. Specifically, FBR will be the exclusive independent broker-dealer to
which PNC refers underwriting and high-yield business that is not conducted by
PNC. Upon the receipt by PNC of full tier 2 equity powers, FBR will cooperate
with PNC's "section 20" securities affiliate to include PNC as a co-lead
underwriter or co-placement agent on such referred business. FBR will also
work with PNC to provide enhanced derivatives, asset securitization, bridge
lending and other bank financing products to FBR's clients.
FBR and PNC will explore both the possibility of forming bridge and/or
equity and venture capital funds to serve the common needs of their respective
client bases and potential strategic relationships in other business lines,
including mergers and acquisitions advisory services, merchant banking and
venture capital activities, asset management and real estate advisory
services.
FBR believes that the strength of PNC's middle-market and industry specialty
client relationship as well as the strength of PNC's product offerings will
provide FBR with significant business opportunities going forward.
PNC, a registered bank holding company, is one of the largest diversified
financial services companies in the United States with consolidated assets at
September 30, 1997 of $71.8 billion. PNC offers a variety of
35
<PAGE>
financial products and services in its primary geographic locations in
Pennsylvania, New Jersey, Delaware, Ohio and Kentucky and nationally through
retail distribution networks and alternative delivery channels.
INVESTMENT BANKING AND CORPORATE FINANCE
FBR's investment banking and corporate finance activities consist of a broad
range of services, including public and private offerings of a wide variety of
securities and financial advisory services in merger, acquisition and
strategic partnering transactions. Since commencing investment banking
activities in late 1992, FBR has completed or advised on 160 investment
banking and corporate finance transactions totalling $14.7 billion, with $11.4
billion in capital raising transactions and $3.3 billion in merger and
acquisition advisory transactions as of November 30, 1997.
Capital Raising Activities
FBR's capital raising activities have encompassed a wide range of
securities, structures and amounts. FBR is a leading underwriter of securities
in its areas of focus and FBR is dedicated to the successful completion and
aftermarket performance of each underwriting transaction it executes. FBR's
investment banking, research, and sales professionals employ an integrated
methodology, each leveraging off the others' capabilities to execute
successfully underwriting assignments. FBR believes the focus and dedication
of its underwriting, research and sales professionals results in superior
aftermarket performance of the companies it chooses to underwrite. For the
twelve month periods ending December 31, 1996 and November 30, 1997, FBR was
ranked number one and number two respectively in terms of IPO aftermarket
performance among lead managers with at least 10 lead managed U.S. IPOs,
according to Securities Data Company.
IPO PERFORMANCE: TOP FIVE LEAD MANAGERS
MANAGER AFTERMARKET RANKINGS
(12 MONTHS ENDING 12/31/96)
<TABLE>
<CAPTION>
AVG. %
# CHG. IPO TO
LEAD MANAGER NAME ISSUES CURRENT
----------------- ------ -----------
<S> <C> <C>
1. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. 12 114.9
2. Donaldson, Lufkin & Jenrette Securities Corporation 28 64.6
3. Oppenheimer & Co., Inc. 13 61.6
4. Credit Suisse First Boston Corporation 13 61.3
5. BT Alex. Brown Incorporated 49 54.9
</TABLE>
MANAGER AFTERMARKET RANKINGS
(12 MONTHS ENDING 11/30/97)
<TABLE>
<CAPTION>
AVG. %
# CHG. IPO TO
LEAD MANAGER NAME ISSUES CURRENT
----------------- ------ -----------
<S> <C> <C>
1. BT Alex. Brown Incorporated 24 42.7
2. FRIEDMAN, BILLINGS, RAMSEY & CO., INC. 11 38.9
3. Hambrecht & Quist LLC 15 38.1
4. Morgan Stanley, Dean Witter Discover 43 34.5
5. Credit Suisse First Boston Corporation 18 29.6
</TABLE>
Source: Information derived by the Company from the Securities Data Company
database. Performance as of 11/30/97. Includes only firms with ten or more
lead-managed U.S. IPOs during the period. These rankings may change on a day
to day basis with the completion of additional IPOs and the trading of
securities.
The successful execution of an underwritten transaction is predominantly
determined by the lead manager. As a result, to enhance further the quality of
its investment banking services delivered to corporate clients, FBR seeks to
act as sole or lead manager of an offering. Of the 145 capital raising
transactions FBR has completed since inception, raising $11.4 billion, FBR has
acted as lead or sole manager in 106 transactions involving $8.2 billion or
36
<PAGE>
more than 71% of such transactions. FBR has increased its percentage of sole
or lead managed transactions (measured by dollar volume) from 79% for 1993 to
89% for 1996. The Company was the lead or sole underwriter in 64% of its 1997
transactions through the date hereof. From January 1, 1997 to November 30,
1997, FBR was ranked number six in terms of U.S. issuer IPO volume (including
over-allotments) according to CommScan EQUIDESK.
RANKING OF LEAD OR SOLE MANAGERS
1997 YEAR TO DATE AS OF NOVEMBER 30, 1997--U.S. ISSUER IPOS
<TABLE>
<CAPTION>
US AMOUNT+
OVER- NUMBER
ALLOT. OF
POSITION MANAGER ($MM) TRANSACTIONS % SHARE
-------- ------- ---------- ------------ -------
<C> <S> <C> <C> <C>
1 Goldman, Sachs & Co. ............... 5,901.89 26 16.91
Merrill Lynch, Pierce, Fenner &
2 Smith Incorporated.................. 4,309.83 25 12.35
3 Morgan Stanley & Co. Incorporated... 4,148.05 28 11.89
4 J.P. Morgan Securities, Inc. ....... 2,147.65 6 6.16
Donaldson, Lufkin & Jenrette
5 Securities Corporation.............. 1,845.50 18 5.29
FRIEDMAN, BILLINGS, RAMSEY & CO.,
6 INC................................. 1,816.68 9 5.21
NationsBanc Montgomery Securities
7 Inc. ............................... 1,397.21 30 4.00
8 Lehman Brothers Inc. ............... 1,380.72 16 3.96
9 BT Alex. Brown Incorporated......... 1,254.90 22 3.60
Credit Suisse First Boston
10 Corporation. ....................... 1,069.87 11 3.07
11 Prudential Securities Incorporated.. 1,067.84 12 3.06
12 Bear, Stearns & Co. Inc. ........... 1,004.06 8 2.88
13 Salomon Brothers Inc. .............. 993.65 9 2.85
14 Smith Barney Inc. .................. 858.65 15 2.46
15 BancAmerica Robertson Stephens...... 667.59 15 1.91
16 J.C. Bradford & Co. ................ 537.16 4 1.54
17 PaineWebber Incorporated............ 479.62 6 1.37
18 Hambrecht & Quist LLC............... 471.31 13 1.35
19 Raymond James & Associates, Inc. ... 376.57 8 1.08
20 SBC Warburg Dillon Read Inc. ....... 314.92 2 0.90
</TABLE>
- --------
Source: Information derived by the Company from the CommScan EQUIDESK database
FBR bases its decision to underwrite an offering of a company's securities
on due diligence, company fundamentals, management's track record, historical
financial results and financial projections. FBR chooses to underwrite clients
which it believes will be able to execute long-term strategies that will
deliver significant returns to investors. As a result, FBR's investment
banking focus is nationwide and, to an increasing extent, international in
scope. Of the 145 capital-raising transactions FBR has completed from
inception of its investment banking business in late 1992 through the date
hereof, 30.3% have been in the mid-Atlantic region, 31.1% have been in the
West, 15.8% have been in the Southeast, 4.8% have been in the Northeast, and
18.0% have been in other regions. The Company has increased the number of its
sole or lead managed underwriting transactions above $50.0 million from 7 in
1993, to 13 in 1996 and to 15 in 1997 through the date hereof. To date in
1997, FBR has managed 16 equity and high-yield debt underwriting transactions
above $100 million, of which 10 were sole or lead-managed by FBR. Set forth
below are the 145 capital-markets transactions completed by FBR as of November
30, 1997:
37
<PAGE>
LIST OF CAPITAL MARKETS TRANSACTIONS
EQUITY
<TABLE>
<CAPTION>
ISSUE
DATE COMPANY ISSUE AMOUNT
-------- ------- ----- ------------
<C> <S> <C> <C>
11/26/97 Laser Mortgage Management,
Inc. ......................... Common--IPO $225,000,000
11/25/97 Consolidation Capital
Corporation................... Common--IPO 480,000,000
11/11/97 Prime Group Realty Trust...... Common--IPO 284,740,000
10/16/97 Imperial Credit Commercial
Mortgage Investment Corp. .... Common--IPO 517,500,000
10/15/97 BankUnited Financial
Corporation.................. Common--Secondary 46,920,000
10/8/97 Annaly Mortgage Management,
Inc. ........................ Common--IPO 117,493,200
9/30/97 Engel Developers Ltd. ........ Common--IPO 32,400,000
9/17/97 First Washington Realty Trust. Common--Secondary 49,680,000
9/12/97 First Alliance Corporation.... Common--Secondary 94,990,000
9/8/97 Local Financial Corporation... Private Placement 197,000,000
8/29/97 American Capital Strategies,
Ltd. ........................ Common--IPO 144,900,000
8/27/97 Prime Retail, Inc. ........... Common--Secondary 161,000,000
8/6/97 Ocwen Financial Corporation... Common--Secondary 130,500,000
7/15/97 Thornburg Mortgage Asset
Corp. ....................... Common--Secondary 47,512,500
5/15/97 First Sierra Financial, Inc. . Common--IPO 18,400,000
5/14/97 Ocwen Asset Investment Corp. . Common--IPO 276,000,000
5/1/97 Brookdale Living Communities,
Inc. ........................ Common--IPO 59,512,500
4/29/97 Long Beach Financial
Corporation.................. Common--IPO 162,500,000
4/18/97 Cornerstone Realty Income
Trust, Inc. ................. Common--IPO 54,337,500
3/24/97 Criimi Mae Inc. .............. Common--Secondary 79,203,125
3/17/97 Colonial Downs Holdings,
Inc. ........................ Common--IPO 40,375,000
2/20/97 American Business Financial
Services..................... Common--Secondary 23,000,000
2/14/97 Prime Retail, Inc. ........... Common--Secondary 29,878,750
2/11/97 Annaly Mortgage Management,
Inc. ........................ Private Placement 36,000,000
2/10/97 Ugly Duckling Corporation..... Private Placement 94,531,188
1/16/97 Washington Mutual, Inc. ...... Common--Secondary 693,008,328
12/19/96 Wilshire Financial............ Common--IPO 21,735,000
12/18/96 Credit Management Solutions,
Inc. ........................ Common--IPO 34,385,000
11/26/96 Resource America, Inc. ....... Common--Secondary 21,528,000
11/26/96 UOL Publishing, Inc. ......... Common--IPO 18,590,000
11/25/96 First Washington Realty Trust. Common--Secondary 35,996,250
11/21/96 Styling Technology
Corporation.................. Common--IPO 31,158,520
11/19/96 Mego Mortgage................. Common--IPO 23,000,000
11/14/96 MLC Holdings, Inc. ........... Common--IPO 10,062,500
11/11/96 Miami Computer Supply Corp. .. Common--IPO 9,775,000
11/1/96 Allin Communications Corp. ... Common--IPO 34,500,000
10/30/96 Ugly Duckling Corporation..... Common--Secondary 69,000,000
10/17/96 Digex, Inc.................... Common--IPO 52,396,875
9/25/96 Ocwen Financial Corporation... Common--IPO 34,500,000
8/22/96 R&G Financial................. Common--IPO 35,017,500
8/13/96 Life Savings Bank............. Private Placement 4,500,000
7/25/96 First Alliance Corp........... Common--IPO 68,425,000
6/27/96 Prime Retail, Inc. ........... Common--Secondary 43,187,100
6/25/96 Pacific America Money Center,
Inc.......................... Common--IPO 8,782,100
5/23/96 Security First Network Bank... Common--IPO 56,120,000
4/17/96 Imperial Thrift and Loan
Assoc........................ Common--Secondary 24,380,000
4/16/96 Atlantic Bank & Trust......... Common--IPO 11,643,750
4/15/96 Cardinal Bancshares, Inc...... Private Placement 5,114,760
2/23/96 OVATION, Inc.................. Private Placement 20,000,000
2/22/96 BankUnited Financial
Corporation.................. Common--Secondary 24,955,000
11/9/95 Bank Plus Corporation
(Fidelity Federal Bank)...... Common--Secondary 94,000,000
10/23/95 Imperial Thrift and Loan
Assoc........................ Common--IPO 59,800,000
6/27/95 First Washington Realty Trust. Common--Secondary 29,598,125
6/24/94 First Washington Realty Trust. Private Placement 29,912,821
8/24/94 Ambassador Apartments, Inc.
(Prime Residential, Inc.).... Common--IPO 143,336,400
6/22/94 RiverBank America............. Common--IPO 49,500,000
5/20/94 TeleBanc Financial
Corporation.................. Common--IPO 4,593,750
3/16/94 California Federal Bank....... Common Stock Rights
Offering 194,778,990
3/15/94 Prime Retail, Inc............. Common--IPO 54,625,000
10/28/93 PALFED, Inc................... Common Stock Rights
Offering 20,000,000
10/22/93 Riggs National Corporation.... Common--Secondary 38,750,000
9/30/93 Cardinal Bancshares, Inc...... Common--IPO 3,795,000
8/26/93 Glendale Federal Bank......... Recapitalization
w/rights offering 250,200,000
8/19/93 Crossland Federal Savings
Bank......................... Common--IPO 282,000,00
</TABLE>
38
<PAGE>
EQUITY
<TABLE>
<CAPTION>
ISSUE
DATE COMPANY ISSUE AMOUNT
-------- ------- ----- --------------
<C> <S> <C> <C>
7/27/93 BNH Bancshares............. Common Stock Rights
Offering $ 14,000,000
4/23/93 Independent Bancorp of
Arizona................... Private Placement 147,047,912
12/30/92 Ameribanc Investors Group.. Common Stock Rights
Offering 36,462,084
--------------
$6,247,534,527
</TABLE>
HIGH YIELD AND PREFERRED
<TABLE>
<C> <S> <C> <C>
10/14/97 Mego Mortgage
Corporation............. Private--Senior Sub. Notes $ 40,000,000
9/8/97 Local Financial
Corporation............. Private--Senior Notes 81,505,000
8/7/97 Ocwen Capital Trust I... Private--Trust Preferred 125,000,000
8/22/97 Bay View Capital
Corporation............. Subordinated Notes 100,000,000
7/16/97 Resource America, Inc... Private--Senior Notes 115,000,000
7/3/97 Crown American Realty
Trust................... Preferred 125,000,000
3/14/97 Life Savings Bank....... Private--Sub. Debt 10,000,000
2/14/97 Prime Retail, Inc....... Preferred--Convertible 4,000,000
12/23/96 BankUnited Financial
Corp.................... Private--Trust Preferred 50,000,000
12/23/96 Walden Residential...... Preferred Stock with Warrants 100,000,000
12/19/96 Wilshire Financial...... Notes 84,245,000
12/10/96 Riggs National
Corporation............. Private--Trust Preferred 150,000,000
11/26/96 Chevy Chase Savings
Bank.................... Sub. Debt 100,000,000
11/26/96 Chevy Chase Preferred
Capital Corp............ Preferred 150,000,000
11/19/96 Mego Mortgage
Corporation............. Sub. Notes 40,000,000
9/25/96 Ocwen Financial
Corporation............. Notes 125,000,000
8/7/96 Criimi Mae, Inc. ....... Preferred--Convertible 60,375,000
7/1/96 Confia.................. Private--Mortgage Backed Bonds 25,000,000
6/24/96 Prime Retail, Inc....... Conversion to Common 105,225,000
5/7/96 HomeSide, Inc........... Senior Notes 200,000,000
4/23/96 Walden Residential...... Preferred--Convertible 45,000,000
12/19/95 The Prime Group, Inc.... Private--Secured Debt 40,000,000
11/30/95 Fort Bend Holding
Corporation............. Convt. Sub. Debt 12,000,000
11/9/95 Bank Plus Corporation
(Fidelity Federal
Bank);.................. Exchangeable Preferred 51,750,000
8/9/95 Beal Financial
Corporation............. Senior Notes 57,500,000
6/23/95 Coastal Bancorp......... Senior Notes 50,000,000
6/7/95 Berkeley Federal Bank &
Trust................... Sub. Debt 100,000,000
10/11/94 Monterey Homes.......... Private--Sub. Notes w/warrants 8,000,000
7/20/94 First Nationwide
Holdings, Inc.......... Senior Notes 200,000,000
7/20/94 First Nationwide Bank,
FSB.................... Preferred 275,000,000
6/28/94 Community Bank.......... Preferred Stock with Warrants 20,125,000
6/27/94 First Washington Realty
Trust.................. Preferred--Convertible 73,000,000
6/22/94 RiverBank America....... Preferred 35,000,000
5/11/94 Telebanc Financial...... Convt. Sub. Debt 15,000,000
3/23/94 B.F. Saul Real Estate
Inv. Trust............. Sr. Secured Notes 175,000,000
3/16/94 California Federal Bank. Preferred 172,500,000
3/15/94 Prime Retail, Inc....... Preferred 57,500,000
3/15/94 Prime Retail, Inc....... Preferred--Convertible 175,380.000
2/7/94 Sierra Tahoe Bancorp.... Convt. Sub. Debt 10,000,000
1/26/94 Riggs National
Corporation............ Sub. Notes 125,000,000
12/29/93 WSFS Financial
Corporation............ Senior Notes 32,000,000
12/28/93 MDC Holdings, Inc....... Senior Debt 190,000,000
12/28/93 MDC Holdings, Inc....... Convt. Sub. Debt 28,000,000
12/6/93 Pacific Crest Capital... Preferred--Convertible 15,000,000
11/17/93 Chevy Chase Savings
Bank................... Sub. Debt 150,000,000
10/22/93 Riggs National
Corporation............ Preferred 100,000,000
9/23/93 The Dime Savings Bank... Preferred--Exchanged to debt 100,000,000
8/26/93 Glendale Federal Bank... Preferred--Convertible 201,250,000
8/19/93 CrossLand Federal
Savings Bank........... Sub. Debt 50,000,000
8/11/93 Chevy Chase Savings
Bank................... Preferred 75,000,000
--------------
$4,429,349,450
</TABLE>
39
<PAGE>
THRIFT CONVERSIONS
<TABLE>
<CAPTION>
ISSUE
DATE COMPANY ISSUE AMOUNT
-------- ------- ----- ---------------
<C> <S> <C> <C>
10/31/97 First SecurityFed Mutual Conversion $ 64,080,000
Financial, Inc. .........
4/3/97 Pulaski Savings Bank...... Mutual Holding Co. 9,522,000
9/30/96 Westwood Homestead Mutual Conversion 28,433,750
Financial Corporation ...
7/15/96 Pennwood Bancorp, Inc. ... Mutual Conversion 6,101,280
7/1/96 Kenwood Bancorp, Inc. .... Mutual Holding Co. 2nd 1,576,510
Step
7/1/96 Home Financial Bancorp.... Mutual Conversion 5,059,260
6/17/96 Commonwealth Bancorp, Mutual Holding Co. 2nd 98,721,550
Inc. .................... Step
6/4/96 First Federal Financial Mutual Conversion 6,717,830
Bancorp, Inc. ...........
4/1/96 Heritage Financial Mutual Conversion 4,933,200
Corporation..............
4/1/96 London Financial Mutual Conversion 5,290,000
Corporation..............
3/29/96 Crazy Woman Creek Bancorp Mutual Conversion 10,580,000
Incorporated.............
3/21/96 North Central Bancshares, Mutual Holding Co. 2nd 26,254,670
Inc. .................... Step
3/11/96 Washington Bancorp........ Mutual Conversion 6,575,190
1/9/96 Broadway Financial Mutual Conversion 8,926,880
Corporation..............
10/31/95 American National Bancorp, Mutual Holding Co. 2nd 21,821,250
Inc. .................... Step
12/29/95 Charter Financial, Inc. .. Mutual Holding Co. 2nd 33,396,210
Step
10/5/95 Klamath First Bancorp, Mutual Conversion 122,331,250
Inc. ....................
10/2/95 First Defiance Financial Mutual Holding Co. 2nd 64,769,140
Corp. ................... Step
9/29/95 Hardin Bancorp., SSB...... Mutual Conversion 10,580,000
7/20/95 Perpetual State Bank, Mutual Conversion $6,000,000
Inc., SSB................
6/30/95 HF Bancorp, Inc. ......... Mutual Conversion 52,900,000
6/28/95 Fort Thomas Financial Mutual Conversion 15,737,750
Corporation..............
6/28/95 Northeast Indiana Bancorp, Mutual Conversion 21,821,250
Inc. ....................
4/7/95 ISB Financial Corporation. Mutual Conversion 74,000,000
3/15/95 Horizon Bancorp, Inc. .... Mutual Conversion 3,684,212
9/30/93 Meritrust Federal Savings Mutual Conversion 5,000,000
Bank.....................
8/13/93 Cardinal Bancshares, Mutual Conversion 10,910,625
Inc. ....................
7/26/93 Albion Banc Corp. ........ Mutual Conversion 2,607,140
---------------
$ 728,330,947
TOTAL CAPITAL-RAISING TRANSACTIONS................ $11,405,214,924
</TABLE>
FBR's strategy is to maintain long-term relationships with its corporate
clients by serving their capital needs beyond their initial access to capital
markets. FBR has completed follow-on capital transactions for 23% of its
corporate client base. FBR also seeks to increase its base of publicly held
clients by serving as a lead or co-manager in follow-on offerings for
companies which FBR believes have attractive investment characteristics,
whether or not FBR participated as a lead or co-manager in the IPOs for such
companies.
In connection with certain capital raising transactions, FBR has received
and seeks to receive warrants for stock of the issuing corporation at the
initial public offering price. FBR carries the warrants at a nominal value in
its financial statements, and will recognize any potential, future revenues
and profits, if any, only when realized. The Company anticipates that certain
employees may receive a portion of the Company's warrants pursuant to
incentive compensation plans. See "Management--Employee Incentive Compensation
Plans." As of the date of this Prospectus, FBR had received warrants in client
companies as set forth below:
<TABLE>
<CAPTION>
CLOSING PRICE EXPIRATION
NUMBER OF EXERCISE ON DEC. 19, DATE OF
WARRANTS PRICE 1997 WARRANT
--------- -------- ------------- ----------
<S> <C> <C> <C> <C>
American Capital
Strategies, Ltd......... 442,751 $15.00 $16.75 8/29/02
Consolidation Capital
Corporation............. 1,130,000 20.00 20.81 11/25/01
Local Financial
Corporation............. 591,000 10.00 -- (1) 9/08/02
Styling Technology
Corporation............. 101,500 12.00 15.56 11/21/01
</TABLE>
- --------
(1) Not publicly traded.
In November 1997, the Company formed a new entity to pursue investment
opportunities, including investments in certain of its corporate finance
clients, and has invested $10 million in that entity. To date, the entity has
made one investment of $10 million of common stock in Consolidation Capital
Corporation.
40
<PAGE>
Mergers and Acquisitions Advisory Services
FBR seeks to use its research capability, business valuation skills and
secondary market experience to evaluate merger and acquisition candidates and
opportunities. FBR believes that its research capacity and capital raising
activities have created a network of relationships that enable it to identify
and engineer mutually beneficial combinations between companies. As a
financial advisor, FBR relies upon its experience gained through in-depth and
daily involvement in the capital markets. Financial advisory services have
included market comparable performance information, commentary on dividend
policy, review of merger and acquisition opportunities and evaluation of stock
repurchase programs. As of November 30, 1997, FBR had provided merger and
acquisition advisory services in transactions valued at $3.3 billion in the
aggregate.
RESEARCH SERVICES
FBR's creation in 1989 as a research and trading firm laid the foundation
for FBR's understanding of the importance of research and the role research
services play in the investment banking and institutional brokerage process.
FBR's research analysts operate under two guiding principles: (i) to identify
undervalued investment opportunities in the capital markets and (ii) to
communicate effectively the fundamentals of these investment opportunities to
Company professionals and potential investors. To achieve these objectives,
FBR believes that industry specialization is necessary, and, as a result, FBR
organizes its research staff along industry lines. As of November 30, 1997,
FBR had 31 research analysts organized into 6 teams focused on industry
sectors. Each industry team works together to identify and evaluate industry
trends and developments. Within industry groups, analysts are further
subdivided into specific areas of focus so that they can maintain and apply
specific industry knowledge to each investment opportunity they address. To
achieve this level of specialization, FBR seeks to recruit or train analysts
with significant industry and technical expertise, in addition to securities
industry expertise. In this manner, FBR believes that its analysts can assess
the capital markets to identify attractive investment opportunities within
their strategic niches, can assist investment banking personnel in valuing
companies accessing the capital markets for the first time, and can
effectively monitor and communicate developments relating to the scope of
their research to the institutional sales force and institutional investors.
FBR has focused its research efforts in some of the fastest growing and most
rapidly changing sectors of the United States and world economies. These
sectors include REITs, financial services, homebuilding, Internet, healthcare,
automotive retailing, information technology, electronic commerce,
telecommunications, gaming and industry consolidators. FBR believes these
industry sectors will have great demand for the products and services it
offers in the future and provide ample diversification for its business.
After initiating coverage on a company, FBR's analysts seek to maintain a
long-term relationship with that company and a long-term commitment to
ensuring that new developments are effectively communicated to FBR's sales
force and institutional investors. FBR produces full length research reports,
notes or earnings estimates on more than 400 issues. FBR's analysts verbally
update the sales force at two daily sales meetings. In addition, FBR analysts
distribute written updates through the use of daily morning meeting notes,
real-time electronic mail and other forms of immediate communication. FBR's
investors can also receive analyst comments through electronic media such as
Multex and First Call.
SALES AND TRADING
The Company focuses on institutional sales to and providing trading services
for equity and high-yield debt investors in the United States, Europe and
elsewhere and, as a result, institutional sales accounted for approximately
85% of sales and trading revenues for the year ended December 31, 1996. The
Company executes securities transactions for institutional investors such as
banks, mutual funds, insurance companies, hedge funds, money managers and
pension and profit-sharing plans. Institutional investors normally purchase
and sell securities in large quantities, which requires special marketing and
trading expertise.
As of November 30, 1997, FBR had 62 sales professionals. The Company's sales
professionals provide services to a nationwide institutional client base as
well as to institutional clients in Europe and elsewhere. FBR's
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sales professionals work closely with FBR's research analysts to provide the
most up-to-date information to the Company's institutional clients. FBR's
sales professionals rely on communicating with the research analysts at two
daily sales meetings, as well as on the distribution of morning meeting notes,
real-time electronic mail and frequent updates to research reports.
FBR trading professionals facilitate trading in equity and high-yield
securities. As of November 30, 1997, FBR had 17 trading professionals involved
in market-making in Nasdaq and other OTC securities, trading listed securities
and servicing the trading desks of major institutions in the United States and
Europe. FBR's trading professionals have direct access to the major stock
exchanges, including the NYSE and the American Stock Exchange, Inc. as a
result of FBR's relationship with its clearing broker. The most significant
portion of the Company's trading revenues arises from trading in Nasdaq-listed
securities. At November 30, 1997, FBR made a market in 372 securities. As of
November 30, 1997, FBR was the top market maker in 100% of the Nasdaq-listed
equity securities issued by companies for which FBR served as lead or co-
manager in a public offering of the companies for which FBR makes a market.
Source: Securities Data Company and Bloomberg L.P.
Corporate Services
Since its inception in 1989, FBR has provided retail brokerage services to
sophisticated individual investors, corporate executives, and small
institutions. FBR offers a wide range of investment services, including:
(i) differentiated investment ideas and brokerage services; (ii) the
development and implementation of investment strategies; and (iii) the
execution of corporate stock buyback plans. Since 1989, FBR has executed stock
buybacks for over 140 institutions.
Executive Services
On October 30, 1997, FBR established a Private Client Group ("PCG")
currently consisting of 5 professionals. PCG seeks to offer creative money
management solutions and investment ideas suited to high net worth
individuals. Using a consultative approach, PCG professionals research,
interpret, evaluate and select sophisticated investment strategies. PCG
specializes in hedging and preserving significant equity positions as well as
offering traditional brokerage services.
Additionally, PCG professionals are knowledgeable in various aspects of the
sale of restricted and control stocks as well as the financing of employee
stock options. Individuals who own restricted or control stock receive PCG
assistance with the complex regulations and paperwork required to sell such
securities. For individuals unable to sell positions, PCG offers a number of
strategies for preserving value in such assets, as well as the ability to
borrow funds at favorable rates to provide liquidity. Given FBR's strong
investment banking relationships, including those with executives of companies
underwritten by FBR, FBR believes that there are natural synergies between its
PCG and its existing clients.
SYNDICATE
The Syndicate department coordinates FBR's participation as an underwriter
in corporate securities distributions. In an underwriting transaction, FBR
acts as sole or lead manager, co-manager, or member of an underwriting
syndicate managed by other investment banks. In transactions in which FBR is
the sole manager, the Syndicate department coordinates the marketing and book-
building process, and participates in discussions with the issuer leading to
the pricing of the offered securities on behalf of the underwriting group.
ASSET MANAGEMENT
FBR seeks to leverage the expertise of its research professionals and
portfolio managers to develop and implement investment strategies on behalf of
institutional and high net worth individual investors. At November
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30, 1997, the Company had assets under management of more than $444.9 million,
including more than $57.3 million in separately managed accounts. The amount
of assets under management has grown by 373% since January 1, 1996.
Hedge and Offshore Funds
At November 30, 1997, the Company's hedge and offshore funds had $246.8
million under management. FBR Ashton, Limited Partnership, the largest of the
Company's hedge funds, utilizes investment strategies primarily involving
publicly-traded financial services companies' equity and fixed income
securities. From March 9, 1992 (inception) through November 30, 1997, FBR
Ashton, Limited Partnership delivered average annualized total returns of
41.8% (gross), calculated in accordance with the Association for Investment
Management and Research's standards and before accrual of fees and expenses,
and special allocations to Friedman, Billings, Ramsey Investment Management,
Inc. ("FBRIM"), the investment manager. The average annualized total return to
limited partners for FBR Ashton, Limited Partnership for the same period after
accrual of fees and expenses of, and special allocations to, FBRIM was
approximately 34.1%.
Private Equity and Venture Capital
At November 30, 1997, the Company's private equity and venture capital funds
had approximately $57.0 million under management. FBR Private Equity Fund,
L.P. was formed in June 1996 to make private investments, primarily in small
financial services firms. As of November 30, 1997, it was fully invested. FBR
Technology Venture Partners, L.P., a venture capital fund dedicated to
technology investments in software, communication, and Internet companies, was
formed in August 1997 and has commenced its investment operations.
Mutual Funds
The FBR Family of Funds, an open-end management type investment company
registered under the Investment Company Act of 1940, began business in 1997
and currently is comprised of three series, the FBR Financial Services Fund,
the FBR Small Cap Financial Services Fund, and the FBR Small Cap Growth/Value
Fund. At November 30, 1997, total assets included in The FBR Family of Funds
were approximately $83.8 million.
MUTUAL FUND PERFORMANCE
(TOTAL RETURNS)
<TABLE>
<CAPTION>
YEAR TO DATE
9 MONTHS ENDED ENDED
SEPT. 30, 1997 NOV. 30, 1997
-------------- -------------
<S> <C> <C>
FBR FINANCIAL SERVICES............................. 34.17% 38.58%
Lipper Financial Services Index.................. 37.20% 39.51%
S&P 500 Index.................................... 29.64% 31.11%
FBR SMALL CAP FINANCIAL............................ 41.58% 47.00%
Lipper Financial Services Index.................. 37.20% 39.51%
Russell 2000 Index............................... 26.52% 20.07%
FBR SMALL CAP GROWTH/VALUE......................... 39.17% 42.75%
Lipper Small Cap Index........................... 22.21% 13.88%
Russell 2000 Index............................... 26.52% 20.07%
</TABLE>
No assurance can be provided as to the future performance of any of FBR's
funds.
FBR Direct
During 1997, the Company established FBR Direct, Inc. ("FBR Direct"). The
Company expects that FBR Direct will become the distributor of The FBR Family
of Funds and the platform for the PCG after it obtains the
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<PAGE>
requisite regulatory approval. FBR Direct is currently registered as a broker-
dealer with the SEC and is a member of the NASD. It is seeking registration as
a broker-dealer in all 50 states, and will seek registration with the SEC as
an investment adviser. FBR Direct will operate primarily from the Company's
headquarters building and will use telephone and the internet access to build
on an existing base of clients and contacts of FBR's other groups, including
the PCG.
ACCOUNTING, ADMINISTRATION AND OPERATIONS
FBR's accounting, administration and operations personnel are responsible
for financial controls, internal and external financial reporting, office and
personnel services, the Company's management information and
telecommunications systems, and the processing of the Company's securities
transactions. With the exception of payroll processing, which is performed by
an outside service bureau, and customer account processing, which is performed
by the Company's clearing broker, most data processing functions are performed
by the Company's management information systems department. The Company
believes that future growth will require implementation of new and enhanced
communications and information systems and training of its personnel to
operate such systems as well as the hiring of additional personnel.
COMPETITION
The Company is engaged in the highly competitive securities brokerage and
financial services businesses. The Company competes directly with large Wall
Street securities firms, securities subsidiaries of major commercial bank
holding companies, major regional firms and smaller niche players. To an
increasing degree, the Company also competes for various segments of the
financial services business with other institutions, such as commercial banks,
savings institutions, mutual fund companies, life insurance companies and
financial planning firms. The Company believes that following a strategy of
offering superior service and investment advice in particular areas of
expertise and to a particular client base differentiates it from competitors.
In addition to competing for investment clients, companies in the securities
industry compete to attract and retain experienced and productive investment
professionals. See "Risk Factors--Competition for Retaining and Recruiting
Personnel."
Many competitors have greater personnel and financial resources than the
Company. Larger competitors are able to advertise their products and services
on a national or regional basis and may have a greater number and variety of
distribution outlets for their products, including retail distribution.
Discount brokerage firms market their services through aggressive pricing and
promotional efforts. In addition, some competitors have much more extensive
investment banking activities than the Company and therefore may possess a
relative advantage with regard to access to deal flow and capital.
Recent rapid advancements in computing and communications technology are
substantially changing the means by which financial services are delivered.
These changes are providing consumers with more direct access to a wide
variety of financial and investment services, including market information and
on-line trading and account information. Advancements in technology also
create demand for more sophisticated levels of client services. The Company is
committed to utilizing technological advancements to provide a high level of
client service. Provision of these services may entail considerable cost
without an offsetting source of revenue.
EMPLOYEES
At November 30, 1997, the Company had a total of 263 full-time employees, of
whom 39 were engaged in research, 68 in investment banking, 86 in sales,
trading and syndicate, 19 in venture capital, principal investment and asset
management activities and 51 in accounting, administration and operations. Of
these employees, 189 were classified as professionals and 74 were in support
positions. The Company also had 37 interns. None of the Company's employees
are subject to a collective bargaining agreement. The Company believes that
its relations with its employees are excellent.
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<PAGE>
PROPERTIES
The Company leases two floors of its headquarters building and its annex
totaling 41,091 square feet and has an agreement to lease two additional
floors totaling 36,166 square feet. Under these arrangements the Company has
an option to extend the lease term on all four floors for an additional five
year period. The Company also leases approximately 8,000 square feet for its
satellite offices in Irvine, California, London, England and Boston,
Massachusetts. The Company believes that its present facilities, together with
its current options to extend lease terms and occupy additional space, are
adequate for its current and presently projected needs.
LEGAL PROCEEDINGS
While the Company is not currently a defendant or plaintiff in any lawsuits
or arbitrations, many aspects of the Company's business involve substantial
risks of liability, litigation and arbitration. An underwriter is exposed to
potential 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 of underwriters by
issuers. For example, a firm that acts as an underwriter may be held liable
for material misstatements or omissions of fact in a prospectus used in
connection with the securities being offered or for statements made by its
securities analysts or other personnel.
If plaintiffs in any future suits against the Company were to prosecute
their claims successfully, or if the Company were to settle such suits by
making significant payments to the plaintiffs, the Company's operating results
and financial condition could be materially and adversely affected. The
Company carries very limited insurance which may cover only a portion of any
such payments.
In recent years, there has been an increasing incidence of litigation
involving the securities industry, including class actions that seek
substantial damages and frequently name as defendants underwriters of a public
offering and investment banks that provide advisory services in merger and
acquisition transactions. The eventual impact of the recently passed Federal
Private Securities Litigation Reform Act of 1995 on securities class action
litigation is not yet known. FBR is not currently a defendant in any such
lawsuits, and has never been named a defendant in a class action lawsuit or
other suit alleging underwriter liability.
In addition to these financial costs and risks, the defense of litigation or
arbitration may divert the efforts and attention of the Company's management
and staff, and the Company may incur significant legal expenses in defending
such litigation or arbitration. This may be the case even with respect to
claims and litigation which management believes to be frivolous, and the
Company intends to defend vigorously any frivolous claims against it. The
amount of time that management and other employees may be required to devote
in connection with the defense of litigation could be substantial and might
materially divert their attention from other responsibilities within the
Company.
The Company also may become a defendant in civil actions and arbitrations
arising out of its other activities as a broker-dealer, as an investment
adviser, as an employer and as a result of other business activities. There
can be no assurance that substantial payments in connection with the
resolution of disputed claims will not occur in the future.
In addition, the Company's charter documents allow indemnification of the
Company's officers, directors and agents to the maximum extent permitted under
Virginia law. The Company intends to enter into indemnification agreements
with these persons. The Company has been and in the future may be the subject
of indemnification assertions under these charter documents or agreements by
officers, directors or agents of the Company who are or may become defendants
in litigation.
RISK MANAGEMENT
The Company has established various policies and procedures for the
management of its exposure to operating, principal and credit risk. There can
be no assurance that the Company's risk management procedures
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and internal controls will prevent or reduce any such risks. Operating risk
arises out of the daily conduct of the Company's business and relates to the
possibility that one or more of the Company's personnel could cause the
Company to engage in imprudent business activities. Principal risk relates to
the fact that the Company holds securities that are subject to changes in
value, and such changes could result in the Company incurring material losses.
Credit risk occurs because the Company extends credit through its clearing
broker to various of its customers in the form of margin and other types of
loan activities that are normal industry practices.
Operating risk is monitored by managers of the Company's business groups,
and by the directors of each of the Company's operating subsidiaries. These
directors review the overall business activities of each of the Company's
subsidiaries, and issue directions to address issues which, in the judgment of
the directors, could result in a material loss to the Company.
Principal risk is managed primarily by conducting real-time monitoring of
the amount and types of securities held from time to time by the Company and
by limiting the exposure to any one investment or type of investment. The two
most common categories of securities owned are those related to the daily
trading activities of the Company's brokerage operations and those which arise
out of the Company's underwriting activities. The Company attempts to limit
its exposure to market risk on securities held as a result of its daily
trading activities by limiting its inventory of trading securities to the
amount needed to provide the appropriate level of liquidity in the securities
for which it is a market maker. The Company historically has not taken
positions in securities as principal investments, and it seeks to balance
trading security inventory positions daily.
Credit risk is monitored both by the Company's own operations personnel and
by the Company's clearing broker. Margin calls are issued if the value of
collateral declines below established margin requirements, and margin
maintenance requirements are increased in the event that the concentration in
a client's account exceeds certain levels.
REGULATION
In the United States, a number of federal regulatory agencies are charged
with safeguarding the integrity of the securities and other financial markets
and with protecting the interests of customers participating in those markets.
The SEC is the federal agency that is primarily responsible for the regulation
of broker-dealers and investment advisers doing business in the United States,
and the Federal Reserve Board promulgates regulations applicable to securities
credit transactions involving broker-dealers and certain other institutions in
the United States. Much of the regulation of broker-dealers, however, has been
delegated to self-regulatory organizations ("SROs"), principally the NASD (and
its subsidiaries NASD Regulation, Inc. and Nasdaq), and the national
securities exchanges. These SROs and exchanges adopt rules (which are subject
to approval by the SEC) that govern the industry, monitor daily activity and
conduct periodic examinations of member broker-dealers. While FBRC and the
Company's other broker-dealer subsidiaries are not members of the NYSE, the
Company's business is impacted by the NYSE rules.
Securities firms are also subject to regulation by state securities
commissions in the states in which they are required to be registered. FBRC is
registered as a broker-dealer with the SEC and in 48 states, Puerto Rico and
the District of Columbia, and is a member of, and subject to regulation by, a
number of SROs, including the NASD and the Municipal Securities Rulemaking
Board. FBR Direct is registered as a broker-dealer with the SEC and is seeking
registration in all 50 states, Puerto Rico and the District of Columbia; it is
a member of the NASD.
As a result of federal and state registration and SRO memberships, FBRC and
FBR Direct is subject to overlapping schemes of regulation which cover all
aspects of their securities business. Such regulations cover matters including
capital requirements, uses and safe-keeping of clients' funds, conduct of
directors, officers and employees, record-keeping and reporting requirements,
supervisory and organizational procedures intended to assure compliance with
securities laws and to prevent improper trading on material nonpublic
information, employee-related matters, including qualification and licensing
of supervisory and sales personnel, limitations on extensions of credit in
securities transactions, clearance and settlement procedures, requirements for
the
46
<PAGE>
registration, underwriting, sale and distribution of securities, and rules of
the SROs designed to promote high standards of commercial honor and just and
equitable principles of trade. A particular focus of the applicable
regulations concerns the relationship between broker-dealers and their
customers. As a result, the many aspects of the broker-dealer customer
relationship are subject to regulation including, in some instances,
"suitability" determinations as to certain customer transactions, limitations
on the amounts that may be charged to customers, timing of proprietary trading
in relation to customers' trades and disclosures to customers.
FBRC also is subject to "Risk Assessment Rules" imposed by the SEC which
require, among other things, that certain broker-dealers maintain and preserve
certain information, describe risk management policies and procedures and
report on the financial condition of certain affiliates whose financial and
securities activities are reasonably likely to have a material impact on the
financial and operational condition of the broker-dealers. Certain "Material
Associated Persons" (as defined in the Risk Assessment Rules) of the broker-
dealers and the activities conducted by such Material Associated Persons may
also be subject to regulation by the SEC. In addition, the possibility exists
that, on the basis of the information it obtains under the Risk Assessment
Rules, the SEC could seek authority over the Company's unregulated
subsidiaries either directly or through its existing authority over the
Company's regulated subsidiaries.
FBRIM, FBR Offshore Management, Inc., FBR Fund Advisers, Inc. ("FBR Fund
Advisers") and FBR Venture Capital Managers, Inc. are registered as investment
advisers with the SEC. As investment advisers registered with the SEC, they
are subject to the requirements of the Investment Advisers Act of 1940 and the
SEC's regulations thereunder, as well as certain state securities laws and
regulations. Such requirements relate to, among other things, limitations on
the ability of investment advisers to charge performance-based or non-
refundable fees to clients, record-keeping and reporting requirements,
disclosure requirements, limitations on principal transactions between an
adviser or its affiliates and advisory clients, as well as general anti-fraud
prohibitions. The state securities law requirements applicable to registered
investment advisers are in certain cases more comprehensive than those imposed
under the federal securities laws. In addition, FBR Fund Advisers and the
mutual funds it manages are subject to the requirements of the Investment
Company Act of 1940 and the SEC's regulations thereunder.
In the event of non-compliance with an applicable regulation, governmental
regulators and the NASD may institute administrative or judicial proceedings
that may result in censure, fine, civil penalties (including treble damages in
the case of insider trading violations), the issuance of cease-and-desist
orders, the deregistration or suspension of the non-compliant broker-dealer or
investment adviser, the suspension or disqualification of the broker-dealer's
officers or employees or other adverse consequences. The imposition of any
such penalties or orders on the Company could have a material adverse effect
on the Company's operating results and financial condition.
FBR's business is also subject to regulation by various foreign governments
and regulatory bodies. FBRC is registered with and subject to regulation by
the Ontario Securities Commission in Canada. FBR International is subject to
regulation by the SFA in the United Kingdom pursuant to the United Kingdom
Financial Services Act of 1986. FBR Investment Management (Bermuda) Ltd.,
which is a Bermuda company established to manage the Company's offshore funds,
is subject to regulation by the Bermuda Monetary Authority. Foreign regulation
may govern all aspects of the investment business, including regulatory
capital, sales and trading practices, use and safekeeping of customer funds
and securities, record-keeping, margin practices and procedures, registration
standards for individuals, periodic reporting and settlement procedures.
In connection with the Company's hedge fund and venture capital activities,
FBR and the hedge funds and the venture capital funds that it manages are
relying on exemptions from registration under the Investment Company Act of
1940, and under certain state securities laws and the laws of various foreign
countries. Failure to comply with the initial and continuing requirements of
any such exemptions could have a material adverse effect on the manner in
which the Company, its affiliates and these funds carry on their activities.
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Additional legislation and regulations, including those relating to the
activities of broker-dealers and investment advisers, changes in rules
promulgated by the SEC or other United States or foreign governmental
regulatory authorities and SROs or changes in the interpretation or
enforcement of existing laws and rules may adversely affect the manner of
operation and profitability of the Company. The Company's businesses may be
materially affected not only by regulations applicable to it as a financial
market intermediary, but also by regulations of general application. For
example, the volume of FBR's underwriting, merger and acquisition, securities
trading and asset management activities in any year could be affected by,
among other things, existing and proposed tax legislation, antitrust policy
and other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities.
NET CAPITAL REQUIREMENTS
As broker-dealers registered with the SEC and as member firms of the NASD,
FBRC and FBR Direct are subject to the capital requirements of the SEC and the
NASD. FBR International is subject to the capital regulations of the SFA.
These capital requirements specify minimum levels of capital, computed in
accordance with regulatory requirements, that each firm is required to
maintain and also limit the amount of leverage that each firm is able to
obtain in its respective business.
FBRC computes its net capital requirement under the aggregate indebtedness
method permitted by the SEC. Under this method, FBRC is required by the SEC to
maintain regulatory net capital, computed in accordance with the SEC's
regulations, equal to the greater of $250,000 or such amount that its
aggregate indebtedness does not exceed 1,500% of its net capital.
"Net capital" is essentially defined as net worth (assets minus liabilities,
as determined under generally accepted accounting principles), plus qualifying
subordinated borrowings, less the value of all of a broker-dealer's assets
that are not readily convertible into cash (such as goodwill, furniture,
prepaid expenses and unsecured receivables), and further reduced by certain
percentages (commonly called "haircuts") of the market value of a broker-
dealer's positions in securities and other financial instruments.
The SEC's capital rules also (i) require that broker-dealers notify it, in
writing, two business days prior to making withdrawals or other distributions
of equity capital or lending money to certain related persons if those
withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital, and that they provide such notice within two business days
after any such withdrawal or loan that would exceed, in any 30-day period, 20%
of the broker-dealer's excess net capital, (ii) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making related party
loans if after such distribution or loan, the broker-dealer has net capital of
less than $300,000 or if the aggregate indebtedness of the broker-dealer's
consolidated entities would exceed 1,000% of the broker-dealer's net capital
and in certain other circumstances, and (iii) provide that the SEC may, by
order, prohibit withdrawals of capital from a broker-dealer for a period of up
to 20 business days, if the withdrawals would exceed, in any 30-day period,
30% of the broker-dealer's excess net capital and if the SEC believes such
withdrawals would be detrimental to the financial integrity of the firm or
would unduly jeopardize the broker-dealer's ability to pay its customer claims
or other liabilities.
Compliance with regulatory net capital requirements could limit those
operations that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict the Company's ability to withdraw
capital from its affiliated broker-dealers, which in turn could limit its
ability to pay dividends, repay debt and redeem or repurchase shares of its
outstanding capital stock.
The Company believes that at all times FBRC and FBR Direct have been in
compliance in all material respects with the applicable minimum net capital
rules of the SEC and the NASD and FBR International has been in compliance in
all material respects with the applicable minimum net capital rules of the
SFA. As of September 30, 1997, FBRC was required to maintain minimum net
capital, in accordance with SEC rules, of approximately $1.5 million and had
total net capital of approximately $31.5 million, or approximately $30
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<PAGE>
million in excess of the minimum amount required. As of September 30, 1997,
FBR Direct was required to maintain minimum net capital, in accordance with
SEC rules, of $50,000 and had total net capital of approximately $122,000, or
approximately $72,000 in excess of the minimum amount required. FBR
International was required to maintain minimum net capital under SFA rules of
720,000 European Currency Units (ECUs) (approximately $820,000) and had total
net capital of approximately $1.4 million, or approximately $600,000 in excess
of the minimum amount required.
A failure of a broker-dealer to maintain its minimum required net capital
would require it to cease executing customer transactions until it came back
into compliance, and could cause it to lose its NASD membership, its
registration with the SEC or require its liquidation. Further, the decline in
a broker-dealer's net capital below certain "early warning levels," even
though above minimum net capital requirements, could cause material adverse
consequences to the broker-dealer.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
November 30, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Emanuel J. Friedman... 51 Chairman and Chief Executive Officer; Director
Eric F. Billings...... 45 Vice Chairman and Chief Operating Officer; Director
W. Russell Ramsey..... 37 President and Secretary; Director
Eric Y. Generous...... 37 Executive Vice President and Chief Financial Officer
Nicholas J. Nichols... 57 Executive Vice President and Director of Compliance
Robert S. Smith....... 38 General Counsel
Kurt R. Harrington.... 45 Treasurer and Chief Accounting Officer
Wallace L. Timmeny.... 60 Director Nominee
Mark R. Warner........ 42 Director Nominee
</TABLE>
Emanuel J. Friedman
Mr. Friedman is Chairman and Chief Executive Officer of FBR. He has
continuously served as Chairman and Chief Executive Officer since co-founding
the Company in 1989. Mr. Friedman is involved in FBR's investment banking,
research, brokerage and asset management activities. He also manages FBR
Ashton, Limited Partnership, a hedge fund sponsored by FBRIM. Mr. Friedman
founded the Friedman, Billings, Ramsey Foundation, a charitable foundation, in
1993 and currently serves as a director. Mr. Friedman entered the securities
industry in 1973 when he joined Legg Mason Wood Walker & Co., Inc., and from
1985 until 1989 he was Senior Vice President in the institutional sales group
at Johnston, Lemon & Co., Incorporated, a Washington, D.C. brokerage firm.
Eric F. Billings
Mr. Billings is Vice Chairman and Chief Operating Officer of FBR. He has
continuously served as Vice Chairman and Chief Operating Officer since co-
founding the Company in 1989. Mr. Billings is involved in FBR's investment
banking, research, brokerage and asset management activities. He also manages
FBR Weston, Limited Partnership, a hedge fund sponsored by FBRIM. Mr. Billings
entered the securities industry in 1982 when he joined Legg Mason Wood Walker
& Co., Inc., and from 1984 until 1989 served as Senior Vice President in the
institutional sales group at Johnston, Lemon & Co., Incorporated, a
Washington, D.C. brokerage firm.
W. Russell Ramsey
Mr. Ramsey is President of FBR. He has continuously served as President
since co-founding the Company in 1989. Mr. Ramsey is involved in FBR's
investment banking, research, brokerage and asset management activities. Prior
to co-founding FBR, Mr. Ramsey served as Vice President in the institutional
sales group at Johnston, Lemon & Co., Incorporated, a Washington, D.C.
brokerage firm. Mr. Ramsey serves as a director of Consolidation Capital
Corporation, a publicly-held company engaged in the consolidation of
distribution industries.
Eric Y. Generous
Mr. Generous is Chief Financial Officer and Executive Vice President of FBR.
He has continuously served as an officer since joining the Company at its
inception in 1989. Mr. Generous entered the securities industry in 1983 when
he joined Legg Mason Wood Walker & Co., Inc., and from 1984 until 1989 served
in the institutional sales group at Johnston, Lemon & Co., Incorporated, a
Washington, D.C. brokerage firm.
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Nicholas J. Nichols
Mr. Nichols joined the Company at its inception in 1989 and has been
Director of Compliance throughout that period. Mr. Nichols entered the
securities industry in 1968 when he joined Mason & Co., Inc. (currently Legg
Mason Wood Walker & Co., Inc.). Mr. Nichols established Legg Mason Wood Walker
& Co., Inc.'s institutional trading desk, and became a corporate officer and
shareholder prior to leaving the firm in 1979. For the next seven years, Mr.
Nichols monitored and evaluated congressional and regulatory securities
activities as the Director of Legislative Affairs, American Institute of CPAs.
Mr. Nichols joined the institutional sales group at Johnston, Lemon & Co.,
Incorporated as a Senior Vice President in 1986.
Robert S. Smith
Mr. Smith joined the Company as its General Counsel in January 1997. Prior
to joining the Company, Mr. Smith was a partner of McGuire, Woods, Battle &
Boothe, LLP, where he had been in practice since 1986, and represented the
Company from its inception in 1989. Mr. Smith formerly practiced as a lawyer
in the United Kingdom from 1982-1985.
Kurt R. Harrington
Mr. Harrington joined the Company in March, 1997, as Vice President,
Finance/Treasurer. From September, 1996 to March, 1997, Mr. Harrington was a
consultant to the venture capital industry. For the five years prior thereto,
Mr. Harrington was Chief Financial Officer of Jupiter National, Inc., a
publicly-traded venture capital company, and in this capacity served as a
director of a number of companies, including Viasoft, Inc., a publicly-traded
software company from January 1994 to October 1995. Mr. Harrington is a
Certified Public Accountant.
Wallace L. Timmeny
Mr. Timmeny has been named to become a director of the Company on the
Effective Date. Mr. Timmeny is a partner in the Washington, D.C. office of
Dechert Price & Rhoads, which he joined in 1996. From 1984 to 1996, Mr.
Timmeny was a partner in McGuire, Woods, Battle & Boothe, LLP in Washington,
D.C. Mr. Timmeny is currently chairman of the Executive Council of the
Securities Law Committee of the Federal Bar Association and past chairman of
an American Bar Association ("ABA") task force on the SEC's criminal reference
process, member of the ABA's task force on broker-dealer supervision and
compliance, and adjunct professor at American University School of Law, George
Mason University School of Law and Georgetown University School of Law. From
1965 to 1979, Mr. Timmeny was an attorney with the SEC, and ultimately the
Deputy Director of the Division of Enforcement of the SEC. Mr. Timmeny has
provided and may continue to provide legal services to the Company.
Mark R. Warner
Mr. Warner has been named to become a director of the Company on the
Effective Date. For more than five years, Mr. Warner has served as a Managing
Director of Columbia Capital Corporation, an investment company specializing
in emerging technologies. As Managing Director of Columbia Capital, Mr. Warner
helped found 4 public and 10 private companies. In 1996, Mr. Warner was the
Democratic candidate in the race for U.S. Senator from Virginia. Mr. Warner
was Chairman of the Democratic Party of Virginia from 1993 to 1995. Mr. Warner
currently serves on the Executive Board of Directors of the Northern Virginia
Business Roundtable, and he was founding Chairman of the Virginia Health Care
Foundation. Mr. Warner also serves on the Boards of Directors of the
Presidential Investment and Services Policy Advisory Committee, George
Washington University and Virginia Union University.
EXECUTIVE COMPENSATION
The following table shows compensation earned during the fiscal year ended
December 31, 1996 by (i) the Chief Executive Officer and (ii) the Company's
four other most highly compensated individuals who were serving as officers on
December 31, 1996 and whose salary plus bonus exceeded $100,000 for the year
ended December 31, 1996 (collectively, the "Named Executive Officers").
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL
PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1)
------------------ --------- --------- ------------------
<S> <C> <C> <C>
Emanuel J. Friedman .............. 600,000 2,809,122 1,825,154
Chairman, Chief Executive Officer
and Director
Eric F. Billings ................. 600,000 2,809,122 1,527,927
Vice Chairman, Chief Operating
Officer and Director
W. Russell Ramsey................. 600,000 2,809,122 1,457,927
President and Director
Eric Y. Generous.................. 240,000 475,000 229,501
Executive Vice President and
Chief Financial Officer
Nicholas J. Nichols............... 240,000 120,000 114,550
Executive Vice President and Di-
rector of
Compliance
</TABLE>
- --------
(1) Represents pro rata compensation paid by the Company to permit these
individuals to pay income taxes resulting from the Company's subchapter "S"
status.
COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the Offering, the Company's Board of Directors will
establish three committees: an Audit Committee, a Compensation Committee and
an Executive Committee.
Audit Committee
The Audit Committee will meet with management to consider the adequacy of
the internal controls and the objectivity of financial reporting. The Audit
Committee also will meet with the independent auditors and with appropriate
financial personnel of the Company regarding these matters. The Audit
Committee will recommend to the Company's Board the appointment of independent
auditors, subject to ratification by the shareholders of the Company at the
annual meeting. The independent auditors will periodically meet alone with the
Audit Committee and have unrestricted access to the Audit Committee. The Audit
Committee is anticipated to consist of Mr. Timmeny and Mr. Warner, neither of
whom is an employee of the Company.
Compensation Committee
The Compensation Committee's functions include administering management
incentive compensation plans and making recommendations to the Company's Board
and Executive Committee with respect to the compensation of directors and
officers of the Company. The Compensation Committee will also supervise the
Company's employee benefit plans. The Compensation Committee is anticipated to
consist of Mr. Timmeny and Mr. Warner.
To the extent that any permitted action taken by the Company's Board
conflicts with action taken by the Compensation Committee, the actions of the
Company's Board shall control.
Executive Committee
The Executive Committee will be comprised of the employee directors; Messrs.
Friedman, Billings and Ramsey. The Executive Committee will exercise the
authority of the Board of Directors between meetings of the full Board (other
than such authority as is reserved to the Audit Committee, the Compensation
Committee, or the full Board).
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COMPENSATION OF DIRECTORS
Each non-employee director will receive a single annual retainer ("Annual
Retainer") of $20,000 for service on the Company's Board. All non-employee
directors will also receive a fee of $1,000 for each in-person meeting of the
Company's Board that they attend and a fee of $500 for each telephonic meeting
of the Company's Board and each meeting of any committee of the Company's
Board that they attend. The chair of the Audit Committee will receive an
additional annual retainer of $5,000. Directors who are employees of the
Company or any subsidiary of the Company will not receive additional
compensation for service as directors.
THE NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
FBR has adopted the FBR Non-Employee Director Stock Compensation Plan (the
"Director Stock Plan"). The purposes of the Director Stock Plan are to (i)
promote a greater identity of interests between FBR's non-employee directors
and its shareholders, and (ii) attract and retain individuals to serve as
directors and to provide a more direct link between directors' compensation
and shareholder value.
General
The Director Stock Plan will be administered by the Company's Board or a
committee of the Company's Board designated for such purpose.
Pursuant to the terms of the Director Stock Plan, non-employee directors of
FBR will be eligible to participate in the Director Stock Plan following the
Offering (each, an "Eligible Director"). A total of 100,000 shares of Class A
Common Stock will be reserved for issuance and available for grants under the
Director Stock Plan.
In the event of any change in corporate capitalization (such as a stock
split) or a corporate transaction (such as a merger, consolidation,
separation, including a spin-off, or other distribution of stock or property
of FBR, any reorganization or any partial or complete liquidation of FBR), the
Company's Board or the designated committee may make such substitutions or
adjustments in the aggregate number and class of shares reserved for issuance
under the Director Stock Plan, in the number, kind and option price of shares
subject to outstanding options, in the number and kind of shares subject to
other outstanding awards granted under the Director Stock Plan, and/or such
other equitable substitutions or adjustments as it may determine to be
appropriate in its sole discretion; provided, however, that the number of
shares subject to any award must always be a whole number.
Class A Common Stock
With respect to the annual retainer and fees paid to directors (the
"Director Fees"), each Eligible Director may make an annual irrevocable
election to receive shares of Class A Common Stock in lieu of all or a portion
(in 25% increments) of the Director Fees, provided that the election of cash
and Class A Common Stock under the Director Stock Plan are alternatives and
taken together, may not exceed 100% of such Director Fees. The number of
shares of Class A Common Stock granted to an Eligible Director will be equal
to the appropriate percentage of the Director Fees payable in each fiscal
quarter divided by the fair market value (as defined in the Director Stock
Plan) of a share of Class A Common Stock on the last business day of such
fiscal quarter rounded to the nearest number of shares of Class A Common
Stock. Fractional shares of Class A Common Stock will not be granted and any
remainder in Director Fees which otherwise would have purchased fractional
shares will be paid in cash.
Class A Options
On the day the Offering becomes effective, each Eligible Director shall be
granted options ("Director Options") for 20,000 shares of Class A Common
Stock. After each annual meeting of shareholders during such director's term,
each Eligible Director shall be granted Director Options for 3,000 shares of
Class A Common
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Stock. The exercise price for the Director Options will be 100% of the fair
market value of Class A Common Stock on the date of the grant of such Director
Option; provided, that, Director Options granted prior to or upon consummation
of the Offering will be granted at the initial public offering price. Each
Director Option will become vested and exercisable on the first anniversary of
the date of grant of such Director Option. Each vested Director Option shall
terminate one year after the optionee's service as a director ceases for any
reason, but no later than the 10th anniversary of the date of grant. Any
unvested Director Options terminate and are cancelled as of the date the
optionee's service as a Director ceases for any reason. All Director Options
become fully vested and exercisable upon a Change of Control (as defined
below).
Transferability
Grants and awards under the Director Stock Plan are nontransferable other
than by will or laws of descent and distribution, or in the Board or the
designated committee's discretion pursuant to a written designation or
pursuant to qualified domestic relations order or in the Board's or the
designated committee's discretion pursuant to a gift to members of the
holder's immediate family, whether directly or indirectly or by means of a
trust or partnership, and, during the Eligible Director's lifetime, may be
exercised only by the Eligible Director or his or her guardian, legal
representative or beneficiary.
Amendments
The Company's Board may at any time terminate, amend or modify the Director
Stock Plan; provided that no termination, amendment, or modification will be
made which will impair the rights of Eligible Directors with outstanding
Director Options or awards and, to the extent required by law, or agreement or
stock exchange rule, no such amendment will be made without the approval of
FBR's shareholders.
EMPLOYEE INCENTIVE COMPENSATION PLANS
The Company's philosophy is to compensate employees based on their
individual performance and the Company's overall performance. Two main
principles guiding this philosophy are to pay market rates and to provide
long-term employee stock ownership. FBR considers equity ownership by
employees to be critical to its long-term success. When calculating total
compensation, FBR considers both cash compensation and equity awarded through
stock or options that vest over time.
It is anticipated that, following the consummation of the Offering, the
Compensation Committee of the Board of Directors will review all plans,
policies and arrangements affecting employees of FBR and will consider what
changes are appropriate, if any, for recommendation to the full Board of
Directors.
It is anticipated that the Company will establish additional incentive,
compensation and benefit plans comparable to those provided at other public
investment banking firms, including plans allowing certain employees to
receive a portion of the warrants in companies which issue warrants to FBR as
a part of FBR's underwriting compensation and plans which allow certain
employees to co-invest in the Company's principal investments.
THE 1997 STOCK AND ANNUAL INCENTIVE PLAN
FBR has adopted the Friedman, Billings, Ramsey Group, Inc. 1997 Stock and
Annual Incentive Plan (the "1997 Stock and Annual Incentive Plan"). The 1997
Stock and Annual Incentive Plan is designed to promote the success and enhance
the value of FBR by linking the interests of certain of the employees of FBR
and its subsidiaries and affiliates ("Participants") to those of FBR's
shareholders and by providing Participants with an incentive for outstanding
performance. The 1997 Stock and Annual Incentive Plan is further intended to
provide flexibility to FBR in its ability to motivate, attract and retain
Participants upon whose judgment, interest and special efforts FBR's
successful operation largely is dependent. As determined by the Compensation
Committee, or any other designated committee of the Company's Board (the
"Committee"), or by the Board or its Executive
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Committee with respect to annual cash incentive awards, employees of FBR or
its subsidiaries or affiliates, including employees who are members of the
Company's Board, are eligible to participate in the 1997 Stock and Annual
Incentive Plan. Non-employee directors are not eligible to participate in the
1997 Stock and Annual Incentive Plan. The 1997 Stock and Annual Incentive Plan
is intended to remain in effect for 10 years, to 2007. The description below
is intended as a summary of material terms only.
General
The 1997 Stock and Annual Incentive Plan will be administered by the
Committee or the Board and provides for the grant of stock options (both non-
qualified and incentive stock options) ("Options" or "Awards").
The 1997 Stock and Annual Incentive Plan provides that the total number of
shares of Class A Common Stock available for grant under the 1997 Stock and
Annual Incentive Plan may not exceed 4,900,000 shares.
The 1997 Stock and Annual Incentive Plan is not subject to the provisions of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
is not qualified under Section 401(a) of the Code.
The term of Options granted under the 1997 Stock and Annual Incentive Plan
may not exceed 10 years. Unless otherwise determined by the Committee or the
Board, Options (other than "incentive stock options" under Section 401(a) of
the Code) will generally vest ratably on each of the first five anniversaries
after the grant date. Unless otherwise determined by the Committee or the
Board, Options will have a fair market value exercise price.
A Participant exercising an Option may pay the exercise price in full in
cash, or, if approved by the Committee or the Board, with previously acquired
shares of Class A Common Stock or in a combination thereof. The Committee or
the Board, in its discretion, may allow cashless exercises of Options.
Options are nontransferable other than by will or laws of descent and
distribution or, in the Board's or Committee's discretion pursuant to a
written beneficiary designation (and, in the case of a nonqualified Option,
pursuant to a domestic relations order or in the Board's discretion, pursuant
to a gift to members of the holder's immediate family, whether directly or
indirectly, or by means of a trust or partnership or limited liability
company), or any transferee described above, and, during the Participant's
lifetime, may be exercised only by the Participant, any such transferee or a
guardian, legal representative or beneficiary.
During the 60-day period following a Change of Control, unless the Committee
determines otherwise any Participant will have the right to surrender all or
part of any Option held by such Participant in lieu of payment of the exercise
price, and to receive cash (or stock, if necessary to preserve pooling of
interests accounting for the Change of Control) in an amount equal to the
excess of (i) the higher of the price received for Class A Common Stock in
connection with the Change of Control and the highest reported sales price of
a share of Class A Common Stock on a national exchange or on Nasdaq during the
60-day period prior to and including the date of a Change of Control (the
"Change of Control Price"), over (ii) the exercise price (the excess of (i)
over (ii) being referred to as the "Spread") multiplied by the number of
shares of Class A Common Stock granted in connection with the exercise of such
Option; provided that, if the Option is an incentive stock option, the Change
of Control Price will equal the fair market value of a share of the Class A
Common Stock on the date, if any, that such Option is exercised.
Other Awards
A stock appreciation right ("SAR") permits the Participant to receive in
cash an amount equal to the excess of the fair market value of a share of
Class A Common Stock on the date of exercise over the SAR exercise price,
times the number of shares with respect to which the SAR is exercised.
Restricted Stock may be granted subject to performance or service-based goals
upon which restrictions will lapse. Performance units will be subject to
performance goals and restrictions, and will be payable in cash or shares of
Class A Common Stock (or a combination) as determined by the Committee or the
Board. The Committee or the Board may grant dividend and interest equivalents
with respect to awards.
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Change of Control
In the event of a Change of Control, any Option that is not then exercisable
and vested will become fully exercisable and vested, Restricted Stock will
vest and performance units will be deemed earned. The 1997 Stock and Annual
Incentive Plan defines a change of control ("Change of Control") as generally
(i) the acquisition of 50% or more of the Common Stock or voting securities of
FBR by a person or group, (ii) a change in a majority of the Company's Board,
unless approved by the incumbent directors, (iii) the approval by FBR's
shareholders of certain mergers involving FBR or (iv) approval by FBR's
shareholders of a liquidation, dissolution or sale of substantially all of the
assets of FBR.
Federal Income Tax Considerations of Options
The following brief summary of the United States federal income tax rules
currently applicable to nonqualified stock options and incentive stock options
is not intended to be specific tax advice to Participants under the 1997 Stock
and Annual Incentive Plan.
Two types of stock options may be granted under the 1997 Stock and Annual
Incentive Plan: nonqualified stock options ("NQOs") and incentive stock
options ("ISOs"). The grant of an Option generally has no immediate tax
consequences to the Participant or the Company. Generally, Participants will
recognize ordinary income upon the exercise of NQOs. In the case of NQOs, the
amount of income recognized is measured by the difference between the exercise
price and the fair market value of Common Stock on the date of exercise. The
exercise of an ISO for cash generally has no immediate tax consequences to a
Participant or to the Company. Participants may, in certain circumstances,
recognize ordinary income upon the disposition of shares acquired by exercise
of an ISO, depending upon how long such shares were held prior to disposition.
Special rules apply to shares acquired by exercise of ISOs for previously held
shares. In addition, special tax rules may result in the imposition of a 20%
excise tax on any "excess parachute payments" that result from the
acceleration of the vesting or exercisability of Awards upon a Change of
Control.
The Company is generally required to withhold applicable income and payroll
taxes ("employment taxes") from ordinary income which a Participant recognizes
on the exercise or receipt of an Award. The Company thus may either require
Participants to pay to the Company an amount equal to the employment taxes the
Company is required to withhold or retain or sell without notice a sufficient
number of the shares to cover the amount required to be withheld.
The Company generally will be entitled to a deduction for the amount
includible in a Participant's gross income for federal income tax purposes
upon the exercise of an NQO or upon a disqualifying disposition of shares
acquired upon exercise of an ISO.
Annual Incentive Awards
An annual cash bonus payment may be made to the Named Executive Officers,
Managing Directors, and certain other employees as specified in the 1997 Stock
and Annual Incentive Plan. The annual cash bonus component of the plan
(referred to above as the "New Plan") is intended to reward the senior
executives responsible for the overall performance of the Company, (for their
contribution to the profitability of the corporate group), to reward certain
Managing Directors responsible for business groups (for the profitability of
those groups), and to align the interests of those executives with the
interests of the Company's shareholders. Each fiscal year after 1997, a pool
equal to up to thirty percent of FBR's adjusted pre-tax net income (before
annual cash bonus payments under the 1997 Stock and Annual Incentive Plan)
will be established for participants in the annual cash bonus component of the
plan, provided that the pool will be reduced to the extent that aggregate
compensation and benefits expense for the year (including annual cash bonus
payments under the plan) would otherwise exceed fifty-five percent of
revenues. The Board of Directors or its Executive Committee will
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determine the allocation of such pool. Substantially all of the pool is
initially anticipated to be allocated to the Named Executive Officers. Upon a
Change of Control, a bonus award shall be paid based upon net income and gross
revenues through the date of the Change of Control, unless the Board of
Directors determines to continue the bonus component for the full year. The
Committee may make advance payments to participants during a fiscal year.
Amendments
The Company's Board may at any time terminate, amend, or modify the 1997
Stock and Annual Incentive Plan; provided that no termination, amendment, or
modification will be made which will impair the rights of Award holders and,
to the extent required by law or stock exchange rule, no such amendment will
be made without the approval of FBR's shareholders.
THE KEY EMPLOYEE INCENTIVE PLAN
All key employees shall be eligible to participate in an annual bonus plan
(the "Key Employee Plan"). Cash awards under the Key Employee Plan will be
determined by the Committee upon the recommendations of the Chief Executive
Officer. If termination of employment occurs because of the occurrence of
certain events, a pro rated award will be paid.
THE EMPLOYEE STOCK PURCHASE PLAN
The Company's Board and shareholders have adopted and approved FBR's 1997
Employee Stock Purchase Plan (the "Purchase Plan"). Subject to meeting federal
and state securities law requirements, the Purchase Plan will become effective
at the consummation of the Offering, or as soon as practicable thereafter.
The purpose of the Purchase Plan is to further the long-term stability and
financial success of FBR by providing a method for employees to increase their
ownership of Common Stock. Under the Purchase Plan 1,000,000 shares of Class A
Common Stock will be available for issuance and sale under the plan. Unless
sooner terminated at the discretion of the Board of Directors, the plan will
terminate on December 31, 2007.
Eligibility
All employees of FBR and its designated subsidiaries are generally eligible
to participate in the Purchase Plan, other than employees whose customary
employment is twenty hours or less per week, or is for not more than five
months in a calendar year or are ineligible to participate due to Code
restrictions.
General Description
A participant in the Purchase Plan may authorize monthly salary deductions
of a maximum of 15% and a minimum of 1% of base compensation. The fair market
value of shares which may be purchased by any employee during any calendar
year may not exceed $25,000. The amounts so deducted and contributed are
applied to the purchase of full shares of Class A Common Stock at the lesser
of 85% of the fair market value of such shares on the date of purchase or on
the offering date. The offering dates will be January 1 and July 1 of each
Purchase Plan year, provided that the initial offering period shall commence
as soon as practicable following the consummation of the Offering. Shares will
be purchased for participating employees on the last business days of June and
December for each Purchase Plan year. Shares purchased under the Purchase Plan
will be held in separate accounts for each participant.
Participants may decrease their payroll deductions at any time but not more
than once during any offering period. Participants may increase or decrease
their payroll deductions for any subsequent offering period by notifying the
Purchase Plan administrator no later than 15 days prior to such offering
period. Participants may also withdraw from participation in the Purchase Plan
at any time. If a participant withdraws from the Purchase Plan, any
contributions which have not been used to purchase shares shall be refunded. A
participant who has withdrawn may not participate in the Purchase Plan again
until the next offering period.
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In the event of retirement or other termination of employment, any
contributions which have not yet been used to purchase shares will be refunded
and a certificate issued for the full shares in the participant's account.
Alternatively, a participant may elect to have his or her shares sold and the
proceeds, less selling expenses, remitted to him or her. In the event of a
participant's death, any contributions which have not yet been used to
purchase shares and all shares in his account will be delivered to the
participant's beneficiary designated in writing and filed with FBR, or, if no
beneficiary has been designated or survives the participant, to the
participant's estate.
Amendments to the Purchase Plan
The Company's Board may at any time, or from time to time, amend the
Purchase Plan in any respect; provided, however, that the shareholders of FBR
must approve any amendment that would increase the number of securities that
may be issued under the Purchase Plan, or would require shareholder approval
under Section 423 of the Code.
EMPLOYEE SAVINGS PLAN
FBR has established a defined contribution plan covering all full-time
salaried employees of FBR and its subsidiaries. The plan is intended to meet
the requirements of Section 401(a) of the Code and includes a qualified cash
or deferral arrangement under section 401(k) of the Code. The purpose of the
plan is to encourage regular savings on the part of employees of FBR and to
give such employees a proprietary interest in FBR, and, therefore, an
additional incentive to remain in its employ and to promote its success.
Participants may elect to defer, in the form of contributions to the plan
through regular payroll deductions, from 1% to 6% of their compensation (not
exceeding $160,000 as indexed for cost of living increases) on a pre-tax basis
and, at the discretion of the Board of Directors each year, receive a Company
contribution to their account equal to 50% of their deferrals. Participants
who elect to defer the full 6% of their compensation may defer, on a pre-tax
but non-matched basis, additional amounts within the limits specified by the
plan. Participants also may make after-tax contributions within the limits
specified by the plan. Participants are fully vested at all times in their
pre-tax and after-tax contributions and become fully vested with respect to
FBR's matching contributions after two years of service, upon attaining age
65, disability or death.
SECURITIES TRADING FOR EMPLOYEES
Employees of the Company may buy or sell securities to or from FBRC where
FBRC acts as agent in its capacity as a registered securities broker-dealer.
Such transactions are generally executed on terms (i.e., commissions, mark-ups
and mark-downs) more favorable to the employee-customer than those available
to similarly-situated non-employee customers of the Company. As the Company
incurs expenses in connection with such trades which may exceed the commission
paid by the employee-customer, the Company may incur losses in connection with
the execution of such trades.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation provide that, to the fullest extent
that Virginia law permits the limitation or elimination of the liability of
directors and officers, such directors and officers will not be liable to FBR
or its shareholders. At this time, Virginia law does not permit any limitation
of liability if a director engages in willful misconduct or a knowing
violation of the criminal law.
To the fullest extent permitted by Virginia law, the Company's Articles of
Incorporation require it to indemnify any director or officer of FBR who is,
was or is threatened to be made a party to any proceeding (including a
proceeding by or in the right of FBR) because he or she was or is a director
or officer of FBR, or because such individual is or was serving FBR or any
other legal entity in any capacity at the request of the Company while a
director or officer of the Company, against any liability, including
reasonable expenses and
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legal fees, incurred in the proceeding, except such liabilities and expenses
as are incurred as a result of such individual's willful misconduct or knowing
violation of the criminal law. Under the Company's Articles of Incorporation,
"proceeding" includes pending, threatened or completed actions of all types,
whether civil, criminal, administrative or investigative. Similarly,
"liability" is defined to include not only judgments but also settlements,
penalties, fines and certain excise taxes. The Company's Articles of
Incorporation also provide that FBR may, but is not obligated to, indemnify
its other employees or agents. The Company must indemnify any director or
officer who is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise while a director or officer of the Company, to the
fullest extent provided by Virginia law. The indemnification provisions also
require FBR to pay reasonable expenses incurred by a director or officer of
FBR in a proceeding in advance of the final disposition of any such
proceeding, provided that the indemnified person undertakes to repay FBR if it
is ultimately determined that such person was not entitled to indemnification.
The rights of indemnification provided in the Company's Articles of
Incorporation are not exclusive of any other rights which may be available
under any insurance or other agreement, by vote of shareholders or
disinterested directors or otherwise. In addition, the Company's Articles of
Incorporation authorize FBR to maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of FBR, whether or not FBR
would have the power to provide indemnification to such person.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling FBR pursuant to
the foregoing provisions, FBR has been informed that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Common Stock as of November 30, 1997, and as adjusted
to reflect the completion of the Offering, by (i) each Named Executive
Officer, (ii) each director, (iii) each holder of more than 5% of Common Stock
and (iv) all current directors and executive officers as a group. Except as
indicated in the footnotes to this table, the persons named in the table have
sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK TO BE
BENEFICIALLY BENEFICIALLY OWNED
OWNED PRIOR AFTER OFFERING AND
NAME TO OFFERING(1) PNC TRANSACTION(1),(4)
---- ------------------ --------------------------
DIRECTORS, NAMED NUMBER OF
EXECUTIVE OFFICERS AND SHARES
5% BENEFICIAL OWNERS NUMBER PERCENT OFFERED(3) NUMBER PERCENT
---------------------- ---------- ------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Emanuel J. Friedman..... 10,517,100 26.3% 0 10,517,100 21.0%
Eric F. Billings........ 8,804,400 22.0 0 8,804,400 17.6
W. Russell Ramsey....... 8,398,500 21.0 710,264 5,947,079 11.9
Eric Y. Generous........ 1,320,000 3.3 194,123 650,000 1.3
Nicholas J. Nichols..... 660,000 1.6 95,613 330,000 0.7
Jonathan Billings....... 2,310,000 5.8 0 2,310,000 4.6
Wallace L. Timmeny...... 0 0.0 -- -- --
Mark R. Warner.......... 0 0.0 -- -- --
All executive officers
and directors as a
group (5 persons)...... 29,700,000 74.2% 1,000,000 26,248,579 52.5%
</TABLE>
--------
(1) Shares listed in the table are Class B Common Stock which have three votes
per share. See "Description of Capital Stock--Common Stock."
(2) The table reflects shares of Common Stock in which the Director, Named
Executive Officer, or 5% beneficial owner has the sole economic interest.
Messrs. Friedman, Billings, and Ramsey, as trustees of the Voting Trust,
have voting power and thus deemed beneficial ownership, by virtue of the
Voting Trust, with respect to all shares of Class B Common Stock deposited
in the Voting Trust. The number of shares beneficially owned by Messrs.
Friedman, Billings, and Ramsey through the Voting Trust, prior to the
Offering, is 40,029,000 shares of Class B Common Stock (100% of the
outstanding Common Stock prior to the Offering) and, after the Offering
without giving effect to exercise of the Underwriters' Over-allotment
Option, 36,577,579 shares of Class B Common Stock (73.1% of the
outstanding Common Stock after the Offering). See "Description of Capital
Stock--Voting Trust Agreement and Shareholders Agreement." Beneficial
ownership is determined in accordance with the rules of the SEC. To the
Company's knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in
the table has sole investment power with respect to the shares set forth
opposite such person's name. Except as otherwise indicated, the address of
each of the persons in this table is as follows: c/o Friedman, Billings,
Ramsey Group, Inc., 1001 Nineteenth Street North, Arlington, VA 22209.
(3) Does not include 1,741,157; 475,877; and 234,387 shares of Class A Common
Stock to be sold by W. Russell Ramsey (including through certain trusts),
Eric Y. Generous (including through certain trusts) and Nicholas J.
Nichols, respectively, to PNC in the PNC Transaction. See Note 5 and
"Business--Strategic Business Relationship with PNC Bank Corp."
(4) Without giving effect to exercise of the Over-allotment Option.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the closing of the Offering, the authorized capital stock of the
Company will consist of 150 million shares of Class A Common Stock, 100
million shares of Class B Common Stock, and 15 million shares of preferred
stock, $0.01 par value per share ("Preferred Stock").
COMMON STOCK
As of the date of this Prospectus, there were no shares of Class A Common
Stock outstanding and 40,029,000 shares of Class B Common Stock were held of
record by 24 shareholders. Holders of Class A Common Stock are entitled to one
vote per share on all matters to be voted upon by the shareholders and holders
of Class B Common Stock are entitled to three votes per share. Except as
otherwise provided by law, the holders of shares of Common Stock vote as one
class. After the completion of the Offering, the officers and directors of the
Company will beneficially own shares of Class B Common Stock which, in the
aggregate, account for approximately 73.1% of the outstanding Common Stock. In
addition, all of the outstanding shares of Class B Common Stock have been
deposited in the Voting Trust, the trustees of which are Messrs. Friedman,
Billings and Ramsey. Under the terms of the Voting Trust, a majority of
Messrs. Friedman, Billings and Ramsey will be able to control 89.1% of the
voting power of the Company following the Offering (87.8% if the Over-
allotment Option is exercised in full) and thus will be able to control the
outcome of all corporate actions requiring shareholder approval (other than
corporate actions required to be approved by a vote of the holders of shares
of Class A Common Stock voting as a separate class), including elections of
directors and amendments to the Company's Articles of Incorporation (the
"Articles") and Bylaws. See "Risk Factors--Corporate Governance Controlled by
Insiders" and "Principal and Selling Shareholders."
Subject to preferences that may be applicable to any outstanding series of
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Company's
Board out of funds legally available therefor. Dividend payments and advances
to the Company by FBRC and FBR Direct are restricted by the provisions of the
net capital rules of the SEC and the NASD. See "Business--Net Capital
Requirements." In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior liquidation
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be outstanding upon completion of the Offering
contemplated by this Prospectus will be fully paid and non-assessable. Shares
of Class B Common Stock convert to shares of Class A Common Stock at the
option of the Company in certain circumstances, including (i) upon a sale or
other transfer, (ii) at the time the holder of such shares of Class B Common
Stock ceases to be affiliated with the Company, and (iii) upon the sale of
such shares in a registered public offering.
PREFERRED STOCK
The Articles authorize 15 million shares of Preferred Stock, none of which
are outstanding. The Company's Board has the authority to issue the shares of
Preferred Stock in one or more series, to fix the rights, preferences,
privileges, limitations and restrictions granted to or imposed upon any
unissued shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series, without any
further vote or action by the stockholders. The Company's Board, without
shareholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company. The Company has no
present plans to issue any Preferred Stock.
VOTING TRUST AGREEMENT AND SHAREHOLDERS AGREEMENT
The Existing Shareholders have deposited the 40,029,000 shares of Class B
Common Stock held by them into the Voting Trust. Pursuant to the terms of the
Voting Trust, the trustees have sole discretion to vote the
61
<PAGE>
shares of Class B Common Stock deposited in the Voting Trust. As long as there
are three trustees, the vote of a majority of the trustees shall control. In
the event that there are two trustees, any action requires the concurrence of
both trustees; if a concurrence cannot be reached, the matter shall be brought
to a vote of all of the shareholders whose shares have been deposited in the
Voting Trust (the "Voting Trust Shareholders"). Upon consummation of the
Offering, the shares in the Voting Trust will constitute approximately 89.1%
of the voting power of the Company (87.8% if the Over-allotment Option is
exercised in full). Accordingly, the trustees will retain sufficient voting
power to control the outcome of all corporate actions submitted to a vote of
shareholders (other than corporate actions required to be approved by a vote
of holders of Class A Common Stock voting as a separate class). Amendment and
termination of the Voting Trust must be approved by the unanimous vote of the
trustees or by vote of the Voting Trust Shareholders. The agreement that
governs the Voting Trust (the "Voting Trust Agreement") has been filed as an
Exhibit to the Registration Statement of which this Prospectus forms a part
and the description thereof is qualified in its entirety by reference to the
Voting Trust Agreement.
Prior to the Offering, the Company had in place the Shareholders Agreement
which, among other things, placed certain restrictions on the transfer and
ownership of Common Stock. The Shareholders Agreement will be terminated by
written agreement of the Company and the Existing Shareholders upon
consummation of the Offering.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS AND
OF VIRGINIA LAW
Certain provisions of the Articles and Bylaws and applicable law could make
the acquisition of the Company by means of a tender offer, a proxy contest or
otherwise and the removal of incumbent officers and directors more difficult.
The Articles authorize the Company's Board to issue additional shares of Class
A Common Stock and Class B Common Stock and to designate and issue Preferred
Stock as described above. Such shares could be issued without additional
shareholder approvals, subject to compliance with applicable NYSE rules. These
authorized but unissued shares could be used for, among other purposes,
additional securities offerings, grants of stock based incentives, stock
dividends or stock splits, or the issuance of rights or warrants, including
rights issued in connection with a shareholder rights plan. The issuance of
such shares could have the effect of delaying, deterring or preventing a
change of control of the Company or the removal of incumbent officers or
directors.
The Articles also provide that, subject to the rights of the holders of any
shares of Preferred Stock at the time outstanding to elect directors under
specified circumstances, a director of the Company may be removed from office
only for cause by the vote of at least a majority of the voting power of all
voting stock at the time outstanding and entitled to vote in the election of
directors generally, voting as a single class.
The Articles also require the affirmative vote of at least 80% of the voting
power of all voting stock at the time outstanding and entitled to vote
generally in the election of directors, voting together as a single class for
the shareholders to adopt, amend or repeal Bylaws which (i) would require the
Company to hold a special meeting of shareholders on the request or demand of
any person or entity; or (ii) would govern the nomination of persons for
election to the Board of Directors or the proposal of business to be
considered by the shareholders at an annual or special meeting of shareholders
(the "Bylaw Limitations"). The Bylaw Limitations do not affect the power of
the Board to adopt, amend or repeal the Bylaws of the Company.
Under Virginia law, extraordinary matters, such as amendments to the
Articles, mergers, share exchanges, sales of all or substantially all the
assets of a corporation outside the ordinary course of business or dissolution
must be approved by more than two-thirds of the votes entitled to be cast at a
meeting at which a quorum is present unless otherwise provided in the Articles
of Incorporation of the corporation. The Company's Articles contain a
provision that reduces the shareholder vote required for approving such
amendments, mergers, share exchanges and sales of all or substantially all the
assets other than in the ordinary course of business from the statutory two-
thirds vote to a majority vote of the voting power of all voting stock
outstanding and entitled to vote generally in the election of directors of
each voting group entitled to vote on the matter.
62
<PAGE>
The Articles require the affirmative vote of at least 80% (the "Super
Majority Vote") of the voting power of all voting stock at the time
outstanding and entitled to vote generally in the election of directors,
voting together as a single class to approve amendments to the Articles (i) to
amend the voting provisions described in the immediately preceding paragraph;
(ii) to amend the Bylaw Limitations; and (iii) to amend the Articles to
include a provision which would require the Company to hold a special meeting
of shareholders on the request or demand of any person or entity, or govern
the nomination of persons for election to the Board of Directors or the
proposal of business to be considered by the shareholders at an annual or
special meeting of shareholders.
The Articles also contain a provision indemnifying its officers and
directors to the maximum extent provided by applicable law. See "Management--
Limitation of Liability and Indemnification Matters."
The Company has opted not to be subject to the affiliated transaction
provisions of the Virginia Stock Corporation Act (the "VSCA") or the control
share acquisition provisions of the VSCA.
The Company's Bylaws also provide that a special meeting of shareholders may
be called only by the Company's Chief Executive Officer, President, the
Chairman, the Vice Chairman or a majority of the members of the Company's
Board of Directors and contain procedural requirements generally setting forth
a prior notice requirement of a minimum of 90 days and a maximum of 120 days
for shareholders wishing to make nominations of directors or to present
business for consideration at an annual shareholders meeting.
Through their control of the Voting Trust, Messrs. Friedman, Billings, and
Ramsey will be able to amend the Articles and Bylaws, including, among other
things, to provide for a classified Board of Directors and a "fair price"
provision.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock is American
Stock Transfer and Trust Company.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, there are no shares of Class A Common
Stock and 40,029,000 shares of Class B Common Stock outstanding. The
11,000,000 shares of Class A Common Stock offered hereby will be freely
transferable without restriction or further registration under the Securities
Act, except that any shares held by an "affiliate" of the Company (as that
term is defined in Rule 144 under the Securities Act ) will be subject to the
resale limitations contained in Rule 144. Of the Company's outstanding shares
of Common Stock other than the shares of Common Stock offered hereby,
2,451,421 shares of Class A Common Stock and 36,577,579 shares of Class B
Common Stock are "restricted securities" within the meaning of Rule 144 or are
otherwise subject to the restrictions on sale under the Securities Act. Such
restricted securities may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption
from registration, such as the exemption provided by Rule 144 or Rule 145
under the Securities Act.
In general, Rule 144 provides that any person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year (as computed under Rule 144) is entitled to sell within any
three-month period the number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Class A Common Stock (approximately
134,514 shares after the Offering and the PNC Transaction, without giving
effect to exercise of the Over-allotment Option) and (ii) the average weekly
reported trading volume of the then outstanding shares of Class A Common Stock
during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the SEC. Sales under Rule 144 also are subject to
certain provisions relating to the manner and notice of sale and the
availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed an affiliate of the
Company at any time during the 90 days immediately prior to a sale, and who
has beneficially owned shares for at least a two-year period (as computed
under Rule 144), would be entitled to sell such shares under Rule 144 (k)
without regard to the volume limitation and other conditions described above.
Rule 144A under the Securities Act permits the immediate sale by the current
holders of restricted securities of all or a portion of those securities to
certain qualified institutional buyers (as that term is defined in Rule 144A),
subject to certain conditions. The foregoing description of Rule 144 and Rule
144A is not intended to be a complete description of such rules.
All of the 36,577,579 shares of Class B Common Stock outstanding immediately
following the Offering will be subject to the Lockup unless released by all of
the Representatives. The Lockup agreements prohibit the disposition of any
such shares until the date 18 months after the date of this Prospectus;
provided, however, that from nine months after the date of this Prospectus,
each shareholder may sell the greater of 10,000 shares or 5% of such
shareholder's shares on the date of this Prospectus (an aggregate maximum of
1,828,878 shares). Any shares subject to the Lockup may be released at any
time with or without notice to the public.
The Stock Purchase Agreement between FBR and PNC provides PNC with certain
registration rights with respect to the shares of Class A Common Stock which
it will acquire in the PNC Transaction. PNC will be able to exercise one
"demand" registration right any time following 180 days after the closing of
the Offering (the "Closing"), thereby requiring FBR to file a registration
statement with the SEC to register some or all of PNC's shares of Class A
Common Stock. In addition, PNC may, at any time following 180 days after the
Closing, exercise up to two "piggyback" registration rights, thereby requiring
FBR to register some or all of PNC's shares of Class A Common Stock in any
registration statement filed by FBR for the sale of Class A Common Stock by
either FBR or a third party.
No prediction can be made as to the effect, if any, that future sales of
shares of Class A Common Stock or the availability of shares for future sale
will have on the market price of the Class A Common Stock prevailing from time
to time. Sales of substantial amounts of Class A Common Stock, or the
perception that such sales could occur, could adversely affect the prevailing
market prices of Class A Common Stock and the Company's ability to raise
capital in the future through the sale of additional securities.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among the
Company, the Selling Shareholders and the Underwriters (the "Underwriting
Agreement"), the Underwriters named below, through their Representatives,
Friedman, Billings, Ramsey & Co., Inc. and Lazard Freres & Co. LLC (which is
acting as the "qualified independent underwriter" pursuant to the NASD Conduct
Rules with respect to the Offering) have severally agreed to purchase from the
Company and the Selling Shareholders the following respective numbers of
shares of Class A Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ............................
Bear, Stearns & Co. Inc............................................
Credit Suisse First Boston Corporation.............................
Lazard Freres & Co. LLC............................................
Smith Barney Inc...................................................
Total............................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Class A Common Stock offered
hereby if any of such shares are purchased. The offering of Class A Common
Stock is made for delivery when, as and if accepted by the Underwriters and
subject to prior sale and to withdrawal, cancellation or modification of the
Offering without notice. The Underwriters reserve the right to reject an order
for the purchase of shares in whole or in part.
The Underwriters propose to offer the shares of Class A Common Stock
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow and such
dealers may re-allow a concession not in excess of $ per share to certain
other dealers. The Underwriters have informed the Company that they do not
intend to confirm sales to any accounts over which they exercise discretionary
authority. After the initial public offering of Class A Common Stock, the
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
The Company and the Selling Shareholders have granted to the Underwriters
the Over-allotment Option, exercisable no later than 30 days after the date of
this Prospectus, to purchase up to 1,650,000 additional shares of Class A
Common Stock at the initial public offering price, less the underwriting
discount, set forth on the cover page of this Prospectus. To the extent the
Underwriters exercise such Over-allotment Option, each of the Underwriters
will have a firm commitment to purchase approximately the same percentage
thereof that the number of shares of Class A Common Stock to be purchased by
it shown in the table above bears to the total number of shares of Class A
Common Stock offered hereby. The Company and the Selling Shareholders will be
obligated, pursuant to the Over-allotment Option, to sell shares to the
Underwriters to the extent the Over-allotment Option is exercised. The
Underwriters may exercise the Over-allotment Option only to cover over-
allotments made in connection with the sale of Class A Common Stock offered
hereby.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
Prior to the Offering, there has been no public market for Class A Common
Stock. The initial public offering price for Class A Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors to be considered in determining the initial public offering price are
prevailing market conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to the Company,
estimates of the business potential and prospects of the Company, the present
65
<PAGE>
state of the Company's business operations, the Company's management and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover of this Prospectus is subject to change as a result of
market conditions and other factors. There can, however, be no assurance that
the price at which the shares of Class A Common Stock will sell in the public
market after the Offering will not be lower than the price at which they are
sold by the Underwriters.
FBRC is an indirect, wholly owned subsidiary of the Company. FBRC has
committed to purchase from the Company and the Selling Shareholders an
aggregate of 17% of the shares of Class A Common Stock being underwritten by
the Underwriters in the Offering on the same basis as the other Underwriters.
To the extent that part or all of the shares of Class A Common Stock
underwritten by FBRC are not resold, the consolidated equity of the Company
will be reduced. Until resold, any such shares will be eliminated in
consolidation as if they were not outstanding for purposes of any future
computations of earnings per common share and book value per common share.
FBRC intends to resell any shares that it is unable to resell in the Offering
from time to time at prevailing market prices.
Under the provisions of Rule 2720 of the NASD Conduct Rules, when an NASD
member such as FBRC participates in the distribution of its parent company's
securities, the public offering price can be no higher than that recommended
by a "qualified independent underwriter" meeting certain standards. In
accordance with this requirement, Lazard Freres & Co. LLC has agreed to serve
in such role and to recommend a price in compliance with the requirements of
Rule 2720. In connection with the Offering, Lazard Freres & Co. LLC, in its
role as qualified independent underwriter, performed due diligence
investigation and reviewed and participated in the preparation of this
Prospectus.
Lazard Freres & Co. LLC has provided financial advisory services to FBRC and
has received customary fees in connection with such services. In addition,
Lazard Freres & Co. LLC represented FBR in connection with the PNC
Transaction, for which FBR or the Selling Shareholders will pay it a fee equal
to 3% of the product of the initial public offering price and the number of
shares of Class A Common Stock purchased by PNC in the PNC Transaction
($1,470,853 assuming the Over-allotment Option is not exercised and assuming
an initial public offering price of $20 per share). See "Summary--Strategic
Relationship with PNC Bank Corp." and "Business--Strategic Business
Relationship with PNC Bank Corp."
Bear, Stearns Securities Corp., an affiliate of Bear, Stearns & Co. Inc., is
the Company's clearing broker. The Company pays Bear, Stearns Securities Corp.
customary charges for its services as clearing broker. In addition, the
Company has borrowed from time to time subordinated loans from affiliates of
Bear, Stearns & Co. Inc. to enable the Company to meet the net capital
requirements resulting from specific underwriting transactions. As of November
30, 1997, the Company had available a total of $40.0 million in three
committed subordinated revolving loan facilities from affiliates of Bear,
Stearns & Co. Inc. The interest rate on borrowings under these loan facilities
is equal to the Broker's Call Rate plus 2.0 percent (8.5 percent at September
30, 1997). On November 20, 1997, the Company borrowed an additional
$150,000,000 subordinated loan from an affiliate of Bear, Stearns & Co. Inc.
on the same terms. The loan was repaid on December 2, 1997.
Until the distribution of the Common Stock is completed, the rules of the
SEC may limit the ability of the Underwriters and certain selling group
members to bid for or purchase Class A Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions
that stabilize the price of shares of Class A Common Stock. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of shares of Class A Common Stock.
If the Underwriters create a short position in shares of Class A Common
Stock in connection with the Offering, i.e., if they sell more shares of Class
A Common Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing shares of Class A
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the Over-allotment Option
described above.
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<PAGE>
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class A Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of shares of Class A Common Stock,
they may reclaim the amount of the selling concession from the Underwriters
and selling group members who sold such shares of Class A Common Stock as part
of the Offering.
In general, purchases of securities for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of shares of Class A Common
Stock. In addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company has agreed that it will not, without the Representatives' prior
written consent, offer, sell or otherwise dispose of any shares of Class A
Common Stock, options, rights or warrants to acquire shares of Class A Common
Stock, or securities exchangeable for or convertible into shares of Class A
Common Stock, during the 180-day period commencing on the date of this
Prospectus, except that the Company may grant additional options under its
stock option plans. In addition, the Existing Shareholders have agreed not to
sell any shares of Class A Common Stock during the 18 month period commencing
on the date of this Prospectus, provided that from nine months after the date
of this Prospectus, each Existing Shareholder may sell the greater of 10,000
shares or 5% of such shareholder's shares outstanding on the date of this
Prospectus.
SUBSEQUENT RESTRICTIONS
Rule 2720(m) of the NASD Conduct Rules prohibits employees of the Company,
their spouses and, under certain circumstances, other members of their
immediate families who purchase any of the shares offered hereby from selling,
pledging, assigning, hypothecating or transferring such shares for a period of
five months following the Effective Date. Rule 144 may also restrict the
transferability of a portion of the shares of Class A Common Stock offered
hereby in certain circumstances.
DIRECT OFFERING
As part of the Offering, up to 1,000,000 shares of Class A Common Stock are
being offered for sale by the Company, by means of this Prospectus, to certain
Existing Shareholders, other employees and directors of the Company, and their
family members, at a price equal to the initial public offering price per
share less the underwriting discount (the "Direct Offering"). The obligation
of the investors to purchase shares in the Direct Offering is contingent on
the purchase of shares by the Underwriters. There is no minimum number of
shares to be purchased in the Direct Offering. Any proceeds from the sale of
shares in the Direct Offering will be held in escrow until the closing of the
underwritten offering and will be refunded to the investors if the
Underwriters do not purchase shares in the underwritten offering. Resales of
such securities by such investors are restricted by Rule 2720(m) of the NASD
Conduct Rules. See "Underwriting--Subsequent Restrictions." If the Company
sells shares to the Underwriters and to the investors in the Direct Offering,
the proceeds of such sales will be used only for the purposes described in
this Prospectus. If less than 1,000,000 shares are sold in the Direct
Offering, any shares reserved for sale in the Direct Offering, but not sold in
the Direct Offering, may be offered to persons or entities other than certain
Existing Shareholders, other employees and directors of the Company, and their
family members at the initial public offering price set forth on the cover
page of this Prospectus.
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<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Wachtell,
Lipton, Rosen & Katz, New York, New York and for the Underwriters by Gibson,
Dunn & Crutcher LLP, Washington, D.C. The validity of the shares of Class A
Common Stock offered hereby will be passed upon for the Company by McGuire,
Woods, Battle & Boothe, LLP, Washington, D.C. Each of these firms has in the
past represented and continues to represent the Company and certain of the
Underwriters on a regular basis and in a variety of matters other than the
Offering.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, to the extent and for the periods indicated in
their reports, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the SEC, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to the Class A
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and
such Class A Common Stock, reference is made to the Registration Statement and
the exhibits and schedules filed as part thereof. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete, and, in each instance, if such contract or
document is filed as an exhibit, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference to such
exhibit. A copy of the Registration Statement, and the exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the SEC's regional offices located at the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, 13th Floor, New York, New York 10048, and copies of all or
any part of the Registration Statement may be obtained from such offices upon
the payment of the fees prescribed by the SEC. The SEC also maintains a world
wide web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants such as the
Company which file electronically with the SEC. The Registration Statement,
including all exhibits thereto and amendments thereof, are available on this
world wide web site.
68
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996, and Septem-
ber 30, 1997............................................................. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995, and 1996 and the Nine Month Periods Ended September 30, 1996
(unaudited) and 1997 .................................................... F-5
Consolidated Statements of changes in Shareholders' Equity for the Years
Ended December 31, 1994, 1995 and 1996 and the Nine Month Periods Ended
September 30, 1997....................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995, and 1996 and the Nine Month Periods Ended September 30, 1996
(unaudited) and 1997 .................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Friedman, Billings, Ramsey Group, Inc.:
We have audited the accompanying consolidated balance sheets of Friedman,
Billings, Ramsey Group, Inc. (a Virginia corporation), as of December 31, 1995
and 1996 and September 30, 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996 and for the nine months in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Friedman, Billings, Ramsey Group, Inc., as of December 31, 1995 and 1996
and September 30, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, and
for the nine months in the period ended September 30, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
December 18, 1997
F-2
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $10,390,784 $ 20,680,757 $ 27,568,469
Short-term investments, at market value. 10,275,610 10,267,710 10,372,680
Receivables:
Underwritings......................... 124,083 7,301,374 6,169,933
Asset management fees................. 5,203,361 1,436,837 1,754,903
Other................................. 126,722 502,666 563,093
Due from brokers, dealers and clearing
organizations.......................... 11,545,000 9,700,384 21,947,308
Marketable trading and investment
account securities,
at market value........................ 32,521,421 55,012,848 25,718,813
Investments in limited partnerships..... 1,578,807 6,424,409 10,892,241
Insurance deposit....................... 3,700,000 9,416,929 9,912,183
Furniture, equipment and leasehold
improvements, net of accumulated
depreciation and amortization of
$816,426, $1,314,118, and $1,997,703,
respectively........................... 1,983,266 3,103,003 3,463,387
Prepaid expenses and other assets....... 1,461,941 1,591,230 851,667
----------- ------------ ------------
Total assets........................ $78,910,995 $125,438,147 $119,214,677
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
------------------------- SEPTEMBER 30, 1997
1995 1996 1997 (NOTE 2)
----------- ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Trading account
securities sold but
not yet purchased, at
market value......... $ 6,372,410 $ 39,813,811 $ 11,243,316 $ 11,243,316
Due to brokers,
dealers and clearing
organizations........ 20,566,243 -- -- --
Accounts payable and
accrued expenses..... 12,872,934 8,996,336 10,827,962 10,827,962
Accrued compensation
and benefits......... 1,517,843 3,484,769 22,705,213 22,705,213
Short-term
subordinated
revolving loan....... 10,000,000 15,000,000 -- --
Short-term lines of
credit............... 3,250,000 7,000,000 14,500,000 14,500,000
Accrued dividends
payable.............. -- -- -- 54,000,000
Long-term subordinated
loans................ 943,014 1,914,131 1,668,521 1,668,521
Other................. 117,083 170,051 151,514 151,514
----------- ------------ ------------ ------------
Total liabilities... 55,639,527 76,379,098 61,096,526 115,096,526
----------- ------------ ------------ ------------
Commitments and
contingencies (Note
12).................... -- -- -- --
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, none
issued and
outstanding.......... -- -- -- --
Class B Common Stock
$.01 par value,
100,000,000 shares
authorized,
35,271,060,
37,455,000, and
40,029,000 issued and
outstanding as of
December 31, 1995 and
1996, and September
30, 1997,
respectively......... 352,711 374,550 400,290 400,290
Additional paid-in
capital.............. 16,589,097 18,644,205 22,478,710 2,656,320
Stock subscriptions
receivable........... (67,444) (294,895) (355,173) (355,173)
Retained earnings..... 6,397,104 30,335,189 35,594,324 --
----------- ------------ ------------ ------------
Total shareholders'
equity............. 23,271,468 49,059,049 58,118,151 2,701,437
----------- ------------ ------------ ------------
Total liabilities
and shareholders'
equity............. $78,910,995 $125,438,147 $119,214,677 $117,797,963
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
FRIEDMAN BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Investment banking.... $30,579,193 $16,075,113 $ 55,158,579 $25,614,880 $ 67,091,288
Corporate finance..... 14,426,555 7,224,266 10,361,515 4,370,703 38,617,810
Principal transac-
tions................ 9,903,251 20,077,397 25,465,898 18,156,968 11,994,020
Agency commissions.... 1,935,375 4,483,188 7,554,520 5,059,119 7,898,054
Asset management...... 443,567 6,747,607 7,808,617 2,636,001 6,255,299
Interest and divi-
dends................ 1,712,542 2,557,774 3,553,933 2,381,739 3,061,456
----------- ----------- ------------ ----------- ------------
Total revenues...... 59,000,483 57,165,345 109,903,062 58,219,410 134,917,927
Expenses:
Compensation and bene-
fits................. 42,811,016 33,480,839 61,503,652 28,604,341 85,138,035
Business development
and professional
services............. 11,384,268 5,617,699 11,481,557 4,729,600 13,395,319
Clearing and brokerage
fees................. 1,473,900 2,350,033 3,484,063 2,313,856 3,137,845
Occupancy and equip-
ment................. 944,184 1,186,724 1,682,526 1,102,971 1,933,813
Communications........ 763,597 823,201 1,109,001 798,504 1,535,790
Interest expense...... 1,772,912 1,523,368 2,665,171 2,039,050 2,301,035
Other operating ex-
penses............... 1,665,446 2,744,712 3,139,007 1,854,986 3,646,373
----------- ----------- ------------ ----------- ------------
Total expenses...... 60,815,323 47,726,576 85,064,977 41,443,308 111,088,210
----------- ----------- ------------ ----------- ------------
Net income (loss)... $(1,814,840) $ 9,438,769 $ 24,838,085 $16,776,102 $ 23,829,717
=========== =========== ============ =========== ============
Pro forma statements of
operations data (unau-
dited) (Note 2):
Net income, as
reported............. $ 24,838,085 $ 23,829,717
Pro rata S Corporation
compensation......... 6,500,000 --
Pro forma income tax
provision............ (12,628,000) (9,782,381)
Pro forma compensation
adjustment (Note 2).. (1,416,000) (1,416,000)
------------ ------------
Pro forma net income.. $ 17,294,085 $ 12,631,336
============ ============
Pro forma net income
per share............ $ 0.42 $ 0.30
============ ============
Weighted average
shares outstanding... 41,536,211 41,912,081
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(ACCUM.
NUMBER OF ADDITIONAL STOCK DEFICIT)/
COMMON COMMON PAID-IN SUBSCRIPTIONS RETAINED
SHARES STOCK CAPITAL RECEIVABLE EARNINGS TOTAL
---------- -------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1993................... 33,908,820 $339,089 $11,276,303 $ (3,420) $ (1,121,053) $ 10,490,919
Net loss............... -- -- -- -- (1,814,840) (1,814,840)
Issuance of common
stock................. 649,440 6,494 191,922 -- -- 198,416
Capital contributions.. -- -- 5,016,000 -- -- 5,016,000
Repayment of stock
subscription
receivable............ -- -- -- 3,420 -- 3,420
Distributions.......... -- -- -- (5,772) (5,772)
---------- -------- ----------- ---------- ------------ ------------
Balances, December 31,
1994................... 34,558,260 345,583 16,484,225 -- (2,941,665) 13,888,143
Net income............. -- 9,438,769 9,438,769
Issuance of common
stock................. 712,800 7,128 104,872 (67,444) -- 44,556
Capital contributions.. -- -- -- -- -- --
Repayment of stock
subscription
receivable............ -- -- -- -- -- --
Distributions.......... -- -- -- -- (100,000) (100,000)
---------- -------- ----------- ---------- ------------ ------------
Balances, December 31,
1995................... 35,271,060 352,711 16,589,097 (67,444) 6,397,104 23,271,468
Net income............. -- -- -- -- 24,838,085 24,838,085
Issuance of common
stock................. 2,183,940 21,839 1,156,243 (251,427) -- 926,655
Capital contributions.. -- -- 898,865 -- -- 898,865
Repayment of stock
subscription
receivable............ -- -- -- 23,976 -- 23,976
Distributions.......... -- -- -- -- (900,000) (900,000)
---------- -------- ----------- ---------- ------------ ------------
Balances, December 31,
1996................... 37,455,000 374,550 18,644,205 (294,895) 30,335,189 49,059,049
Net income............. -- -- -- -- 23,829,717 23,829,717
Issuance of common
stock................. 2,574,000 25,740 3,658,123 (292,111) -- 3,391,752
Capital contributions.. -- -- 176,382 -- -- 176,382
Repayment of stock
subscription
receivable............ -- -- -- 231,833 -- 231,833
Distributions.......... -- -- -- -- (18,570,582) (18,570,582)
---------- -------- ----------- ---------- ------------ ------------
Balances, September 30,
1997................... 40,029,000 $400,290 $22,478,710 $ (355,173) $ 35,594,324 $ 58,118,151
========== ======== =========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $(1,814,840) $ 9,438,769 $ 24,838,085 $ 16,776,102 $ 23,829,717
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities--
Income and special
allocations on
investments in
limited partnerships.. (54,968) (774,299) (3,974,352) (540,320) (4,255,769)
Depreciation and
amortization.......... 295,978 438,979 625,167 411,552 683,587
Loss on disposition of
assets................ 37,416 -- 53,249 -- --
Changes in operating
assets:
Receivables--
Due to/from brokers,
dealers and clearing
organizations, net.. 3,385,657 10,904,877 (18,721,627) (17,284,142) (12,246,924)
Underwritings........ 1,927,231 537,087 (7,177,291) (454,279) 1,131,441
Asset management
fees................ 191,058 (5,080,357) 3,766,524 2,611,205 (318,066)
Other................ (86,779) (40,096) (375,944) (378,985) (60,427)
Marketable trading
account securities... (9,444,047) (20,146,757) (22,491,427) 4,488,730 29,294,035
Prepaid expenses and
other assets......... 12,762 (1,296,694) (129,289) (134,663) 739,563
Insurance deposit..... -- (3,700,000) (5,716,929) -- (495,254)
Changes in operating
liabilities:
Trading account
securities sold but
not yet purchased.... 1,640,405 3,535,970 33,441,401 926,624 (28,570,495)
Net proceeds
(repayments) from
short-term
subordinated
revolving
borrowings........... -- 10,000,000 5,000,000 (10,000,000) (15,000,000)
Proceeds from
(repayments) short-
term line of credit.. 250,000 2,900,000 3,750,000 (3,250,000) 7,500,000
Accounts payable and
accrued expenses..... 1,260,672 11,008,474 (3,876,598) (7,051,063) 1,831,626
Accrued compensation
and benefits......... 286,747 604,791 1,966,926 4,148,563 19,220,444
Other................. (5,933) 58,311 52,968 39,847 (18,537)
----------- ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities.......... (2,118,641) 18,389,055 11,030,863 (9,690,829) 23,264,941
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM
INVESTMENT ACTIVITIES:
Purchases of fixed
assets................ (1,939,050) (458,883) (1,798,153) (1,340,393) (1,043,970)
Investments in limited
partnerships.......... (50,000) (58,000) (500,000) (500,000) (425,000)
Withdrawals from
limited partnerships.. 134,666 6,487 -- -- 212,937
Net purchase (sales) of
short-term
investments........... (1,989,060) (7,980,194) 7,900 (113,225) (104,970)
----------- ------------ ------------ ------------ ------------
Net cash (used in)
investing
activities.......... (3,843,444) (8,490,590) (2,290,253) (1,953,618) (1,361,003)
----------- ------------ ------------ ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings of long-term
subordinated loans.... 1,092,042 -- 1,126,627 232,411 --
Repayments of long-term
subordinated loans.... (29,157) (119,871) (155,510) (83,147) (245,611)
Proceeds from issuance
of common stock,
including repayments
on stock subscriptions
receivable............ 201,836 44,556 950,631 1,424,140 3,623,585
Capital contributions.. 5,016,000 -- 527,615 -- 176,382
Distributions.......... (5,772) (44,556) (900,000) -- (18,570,582)
----------- ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities.......... 6,274,949 (119,871) 1,549,363 1,573,404 (15,016,226)
----------- ------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ 312,864 9,778,594 10,289,973 (10,071,043) 6,887,712
Cash and cash
equivalents, beginning
of year................ 299,326 612,190 10,390,784 10,390,784 20,680,757
----------- ------------ ------------ ------------ ------------
Cash and cash
equivalents, end of
year................... $ 612,190 $ 10,390,784 $ 20,680,757 $ 319,741 $ 27,568,469
=========== ============ ============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Contribution from
stockholders' of
ownership interest in
FBR Investments, LLC.. $ -- $ -- $ 371,250 $ -- $ --
=========== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
1. ORGANIZATION AND NATURE OF OPERATIONS:
Organization
Friedman, Billings, Ramsey Group, Inc., a Delaware corporation incorporated
in 1996 (hereafter referred to as the "Old Holding Company"), is the sole
parent holding company for two subsidiary holding companies, Friedman,
Billings, Ramsey Capital Markets, Inc. ("FBRCM") and Friedman, Billings,
Ramsey Asset Management , Inc. ("FBRAM"). FBRCM is the direct parent company
of Friedman, Billings, Ramsey & Co., Inc. ("FBRC"), FBR Direct, Inc. ("FBR
Direct") and Friedman, Billings, Ramsey International, Limited ("FBR
International"). FBRAM is the sole parent company of Friedman, Billings,
Ramsey Investment Management Company ("FBRIM"), FBR Offshore Management, Inc.
("FBR Offshore"), FBR Investment Management (Bermuda) Ltd. ("FBR Bermuda"),
FBR Fund Advisers, Inc. ("FBR Fund Advisers"), and FBR Venture Capital
Managers, Inc. The operating subsidiaries of FBRCM and FBRAM are hereafter
collectively referred to as the "Operating Entities". FBR International, FBR
Direct and FBR Venture Capital were formed subsequent to January 1, 1997.
Effective January 1, 1997, all of the shareholders of the then existing
Operating Entities exchanged all of their outstanding stock in the Operating
Entities for all of the outstanding stock of the Old Holding Company. In
connection with the exchange, the Old Holding Company transferred all of the
stock in those Operating Entities to FBRCM and FBRAM. As of and for all
periods prior to the exchange, each of the Operating Entities was owned
directly by the same shareholder group, consisting of the Company's officers,
directors, and key employees, in the identical proportion. After the exchange,
the same shareholder group owned all of the outstanding stock of the Old
Holding Company, in the same proportion to their interests in the Operating
Entities. As there was no change in ownership or assets as a result of the
exchange of shares, the exchange lacked economic substance. As a result and in
accordance with FASB Technical Bulletin 85-5, the assets and liabilities of
the Company are recorded at their historical carrying amounts.
As a result of the common ownership both prior and subsequent to the
exchange, the financial statements as of and prior to December 31, 1996,
include the combined operations of the Operating Entities.
The primary objectives of the restructuring were (i) to simplify the
ownership structure of the Operating Entities, (ii) to form groups of
companies concentrated in similar business activities and (iii) to facilitate
the availability and reduce the cost of capital.
FBRC is a member of the National Association of Securities Dealers, Inc.
FBRC acts as an introducing broker executing transactions primarily for
institutional customers and forwards all such transactions to clearing brokers
on a fully disclosed basis. FBRC does not hold funds or securities for, or owe
funds or securities to, customers. Any funds or securities received by FBRC
are promptly forwarded to its clearing broker.
FBRC receives investment banking revenues from underwriting public offerings
of debt and equity securities for corporations, real estate investment trusts
("REITS") and other issuers. These revenues are comprised of selling
concessions and management and underwriting fees. FBRC also receives corporate
finance fees from private placement offerings and from providing merger and
acquisition, financial restructuring, and other advisory services. FBRC
concentrates its investment banking activities primarily on bank, thrift and
specialty finance institutions, technology companies and REITS.
FBRIM is a registered investment adviser that acts as the general partner of
investment limited partnerships and also manages investment accounts. FBRIM
owns 100 percent of FBR Investments LLC ("FBR Investments").
FBR Offshore extends asset management services to non-U.S. investors. FBR
Offshore is a registered investment adviser. FBR Offshore acts as the
investment adviser to the FBR Opportunity Fund, Ltd. (the "Offshore Fund"), a
Bermuda company formed to provide a pooled investment vehicle for non-U.S.
investors. The Offshore Fund invests primarily in securities of U.S. issuers.
The Offshore Fund is managed by FBR Bermuda.
F-8
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
FBR Fund Advisers is a registered investment adviser formed to provide
investment advisory services to The FBR Family of Funds, an open end,
investment company, currently consisting of three series of mutual funds. The
funds' registration became effective on December 30, 1996, and they began
investment activities on January 2, 1997.
Reincorporation Merger
Immediately prior to the effectiveness of the proposed offering contemplated
by this prospectus, the Old Holding Company and its subsidiaries will
terminate their status as subchapter S corporations and convert to subchapter
C corporations as defined under the Internal Revenue Code (the "Conversion").
Prior to the Conversion, and as discussed in Note 2, the Old Holding Company
intends to distribute to its shareholders amounts at least equal to the total
amount of federal and state taxes payable on the Company's earnings for the
period from January 1, 1997, through the date of the Conversion. In December
1997, the Old Holding Company was merged with and into a newly formed Virginia
holding company (the "Company") with the Company as the surviving corporation.
As a result of the merger, shareholders of the Company received 330 shares of
Class B Common Stock of the Company for each share in the Old Holding Company.
The effects of the reincorporation merger have been given retroactive
application in the consolidated financial statements for all periods
presented.
The Company has authorized the issuance of up to 100 million shares of Class
B Common Stock, par value $0.01 per share; 150 million shares of Class A
Common Stock, par value $0.01 per share; and 15 million shares of undesignated
preferred stock. Holders of the Class A and Class B Common Stock are entitled
to one vote and three votes per share, respectively, on all matters voted upon
by the shareholders. Shares of Class B Common Stock convert into shares of
Class A Common Stock at the option of the Company in certain circumstances
including (i) upon sale or other transfer, (ii) at the time the holder of such
shares of Class B Common Stock ceases to be affiliated with the Company and
(iii) upon the sale of such shares in a registered public offering. The
Company's Board of Directors has the authority, without further action by the
shareholders, to issue preferred stock in one or more series and to fix the
terms and rights of the preferred stock. Such actions by the Board of
Directors could adversely affect the voting power and other rights of the
holders of common stock. Preferred stock could thus be issued quickly with
terms that could delay or prevent a change in control of the Company or make
removal of management more difficult. At present, the Company has no plans to
issue any of the preferred stock.
Nature of Operations
The Company is primarily engaged in a single line of business as a
securities firm, which comprises several types of services, such as
underwriting and investment banking, principal and agency securities trading
transactions, money management and long-term equity investing, primarily in
the United States. The operations related to the Company's foreign entities
are not material to these consolidated financial statements.
The securities industry generally and in specifically volatile or illiquid
markets, is subject to numerous risks, including the risk of losses associated
with the underwriting, ownership, and trading of securities and the risks of
reduced revenues in periods of reduced demand for security offerings and
activity in secondary trading markets. Changing or negative economic trends,
such as inflation or interest rate volatility, political trends, such as
regulatory and legislative changes, and overall or specific market trends can
influence the liquidity and value of the Company's investments, and impact the
level of security offerings underwritten by the Company, all of which could
adversely affect the Company's revenues and profitability.
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial 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 of underwriters by issuers. Underwriters may be held liable
for material misstatements or omissions of fact in a prospectus used in
connection with the securities being offered or for statements made by its
securities analysts or other personnel.
F-9
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
While the Company has never been subject to such litigation, 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 lawsuits against the Company could materially affect the Company's
operating results and financial condition.
The Company's historical revenues have been derived primarily from
investment banking transactions in the financial services, technology, and
real estate industries. As a result of the Company's dependence on specific
sectors, any downturn in the market for securities in these sectors could
adversely impact the Company's results of operations and financial condition.
A substantial portion of the Company's revenues in a year may be derived
from a small number of investment banking transactions or may be concentrated
in a particular industry. During 1996, there were no transactions which
exceeded 10 percent of the Company's revenues. Revenues derived from one
underwriting during 1995 represented approximately 15 percent of the Company's
1995 revenues. Revenues derived from two investment banking transactions for
one group of client entities during 1994 represented approximately 40 percent
of the Company's 1994 revenues. Revenues derived from two unrelated investment
banking transactions accounted for 13 percent and 11 percent of the Company's
revenues for the nine months ending September 30, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Revenues
Investment banking fees are recorded as revenue at the time the underwriting
is completed and the income is reasonably determinable. Corporate finance and
advisory fees are recorded as revenue when the related services have been
rendered and the client is contractually obligated to pay.
Commission income and expenses are recorded on a trade date basis.
Securities transactions of the Company are recorded on a trade date basis.
Trading and investment account securities are valued at fair market value.
The resulting difference between cost and fair market value is included in
income. Net unrealized gains (losses) included in principal transaction
revenues were $1,155,000 in 1994, $405,000 in 1995, $141,000 in 1996, and
$108,583 and $(474,468) for the nine month periods ended September 30, 1996
and 1997, respectively.
Interim Financial Statements
The accompanying consolidated statements of operations and cash flows for
the nine months ended September 30, 1996 have been prepared by the Company,
are unaudited, and include, in the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the interim period results. Operating results for any interim period are
not necessarily indicative of the results for any other period or for an
entire year.
F-10
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
Pro Forma Net Income (Loss) Per Share (Unaudited)
Pro forma net income (loss) is based on the assumption that the Company's
subchapter S corporation status was terminated at the beginning of each year.
Accordingly, the Company has provided income taxes on a pro forma basis as if
it were a subchapter C corporation for the periods presented. In addition
prior to the reorganization and change in tax status, from a subchapter S to C
corporation, in 1996 the Old Holding Company made payments of $6.5 million to
its shareholders based on the shareholders' relative ownership percentages.
Such payments were a component of salary expense.
Subsequent to and as a result the reincorporation of the Old Holding Company
and the Company's conversion from a subchapter S corporation to a subchapter C
corporation, no such future payments will be made. No payments were made in
1997. The Company has eliminated, in pro forma presentation, the $6.5 million
expense, as the Company believes that this information is necessary to assess
the impact of the change in the Company's reporting status.
Pro forma net income per share also gives effect to $1.4 million of
compensation expense that the Company will record upon the effectiveness of
the offering related to book value shares issued within one year of the
initial public offering. The $1.4 million represents the difference between
the fair value and book value of the stock issued on January 1, 1997. The fair
value was determined based upon an assessment of results of operations,
financial condition and other factors for the Company and a comparable group
of eight publicly traded investment banks.
The calculation of weighted average shares outstanding is based on the
weighted average shares outstanding during the period. In addition and in
accordance with SEC Staff Accounting Bulletin No. 83, weighted average shares
outstanding for all periods presented also includes those shares issued within
one year of the initial public offering date. Weighted average shares
outstanding has also been adjusted to reflect the sale of a sufficient number
of additional shares of the Company's common stock necessary to fund the
amount by which S corporation distributions through September 30, 1997
exceeded reported earnings.
Primary income or loss per share data is not presented as it would not
materially differ from the amounts presented.
Pro Forma Balance Sheet (Unaudited)
The pro forma financial information gives effect to a $54.0 million
distribution for estimated federal and state taxes payable by existing
shareholders on the Company's earnings through September 30, 1997 and
additional distributions from previously taxed and undistributed S corporation
accumulated earnings. On a pro forma basis, this amount is recorded as accrued
dividends payable. The pro forma balance sheet also gives effect for the
recognition of $1.4 million of compensation expense in conjunction with book
value stock issued within one year of the initial public offering, and a
reclassification of any remaining undistributed S corporation accumulated
earnings to paid in capital. The deferred tax liability that would have been
recorded if the Company had terminated its subchapter S corporation status as
of September 30, 1997 would not have been material.
Fair Value of Financial Instruments
The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Market Value of Financial
Instruments," requires the Company to report the fair market value of
financial instruments, as defined. Substantially all of the Company's
financial assets and liabilities are
F-11
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
carried at fair market value or contracted amounts which approximate fair
market value except for securities sold but not yet purchased from
underwriting activities. Securities sold but not yet purchased from
underwriting activities relate to unexercised underwriter's over-allotment
options and are valued at the net proceeds actually due and paid the issuers
upon the subsequent exercise of these options.
Cash Equivalents and Supplemental Cash Flow Information
The Company considers as cash equivalents all highly liquid investments,
with an original maturity of three months or less, not held for sale in the
ordinary course of business and not part of the Company's trading activities.
Cash payments for interest approximated interest expense for the years ended
December 31, 1994, 1995, and 1996, and for the nine months ended September 30,
1996 and 1997.
Short-Term Investments
Short-term investments consist primarily of U.S. Treasury obligations with
original maturities of up to six months.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are depreciated using the straight-line method over
their estimated useful lives of five years and leasehold improvements are
amortized using the straight-line method over the shorter of their useful life
or applicable lease term. Amortization of purchased software is recorded over
its estimated useful life of three years.
RENT
The Company's office leases provide that for certain periods during the
lease terms, no base rental payments are due. During these periods, the
Company accrues rent expense based on the average effective monthly base rent
over the entire lease terms.
USE OF ESTIMATES
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.
RECENT AUTHORITATIVE PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is the total of net income and all
other nonowner changes in equity.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 requires an enterprise to report certain
additional financial and descriptive information about its reportable
operating segments.
F-12
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
Management does not expect that the implementation of either SFAS No. 130 or
No. 131 will have a material impact on the Company's consolidated financial
position or results of future operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 is effective for financial statements
issued after December 15, 1997. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing net income or loss available to common
stockholders by the weighted-average number of common shares outstanding for
the period. As of September 30, 1997, there were no potentially dilutive
securities issued or outstanding. As a result, the adoption of SFAS No. 128
will have no effect on the calculation and presentation of net income (loss)
per share prior to the future issuance of potentially dilutive securities.
3. INCOME TAXES:
For Federal income tax purposes, the Company and all of its subsidiaries
including the Operating Entities, with the exception of FBR Investments, which
is a limited liability corporation ("LLC"), FBR Bermuda (a Bermuda Company)
and FBR International, (an English company), have elected by unanimous consent
of their shareholders to be taxed as subchapter S corporations under the
Internal Revenue Code. Subchapter S corporations and LLCs are not taxed on
their income; rather their income or loss pass directly through to their
shareholders (or members in the case of LLCs). As a result, there is no
provision for income taxes in these financial statements.
In connection with the proposed initial public offering and as discussed in
Notes 1 and 2, the Company will terminate its subchapter S corporation status
and will become subject to corporate income taxes. Accordingly, the
accompanying consolidated statements of operations include unaudited pro forma
adjustments for income tax expense, which would have been recorded had the
Company been subject to federal and state corporate income taxes.
4. SECURITIES OWNED AND SOLD BUT NOT YET PURCHASED:
Marketable trading and investment account securities owned and trading
account securities sold but not yet purchased as of December 31, 1995 and
1996, and September 30, 1997, consist of securities at quoted market values,
as stated below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1996 SEPTEMBER 30,1997
----------------------- ----------------------- -----------------------
SOLD SOLD SOLD
BUT NOT YET BUT NOT YET BUT NOT YET
OWNED PURCHASED OWNED PURCHASED OWNED PURCHASED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Corporate stocks........ $19,309,337 $4,962,148 $25,077,583 $ 7,042,195 $13,294,796 $ 5,950,252
Corporate bonds......... 13,212,084 1,410,262 29,935,265 32,771,616 12,424,017 5,293,064
----------- ---------- ----------- ----------- ----------- -----------
$32,521,421 $6,372,410 $55,012,848 $39,813,811 $25,718,813 $11,243,316
=========== ========== =========== =========== =========== ===========
</TABLE>
Trading account securities sold but not yet purchased represent obligations
of the Company to deliver the specified security at the contracted price, and
thereby, creates a liability to purchase the security in the market at
prevailing prices. Accordingly, these transactions result in off-balance-sheet
risk as the Company's ultimate obligation to satisfy the sale of securities
sold but not yet purchased may exceed the amount recognized in the
consolidated balance sheets.
F-13
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
5. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment and leasehold improvements, net of accumulated
depreciation and amortization, summarized by major classification are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment.......... $2,213,920 $ 3,096,838 $ 4,062,511
Leasehold improvement............ 585,772 1,320,283 1,398,579
---------- ----------- -----------
2,799,692 4,417,121 5,461,090
Less--Accumulated depreciation
and amortization................ (816,426) (1,314,118) (1,997,703)
---------- ----------- -----------
$1,983,266 $ 3,103,003 $ 3,463,387
========== =========== ===========
</TABLE>
6. INSURANCE DEPOSIT:
In 1995 and 1996, the Operating Entities purchased a directors and officers
liability and errors and omissions insurance policy. In accordance with the
terms of the policy agreement, which provides for the commutation of a portion
of the total premium back to the policy holders under certain circumstances,
the net amount of the premiums paid, less expense charges and policy claims
made, is recorded as an insurance deposit in the financial statements at
December 31, 1995 and 1996, and September 30, 1997.
7. PROFIT SHARING PLAN:
The Company maintains a qualified 401(k) profit sharing plan. Eligible
employees may defer a portion of their salary. At the discretion of the Board
of Directors, the Company may make matching contributions and discretionary
contributions from profits. Contributions totaling approximately $492,000 were
made for 1994. There were no Company contributions made in 1995 or 1996 or for
the nine-month period ended September 30, 1997.
8. INVESTMENTS IN LIMITED PARTNERSHIPS:
FBRIM is the managing partner of FBR Ashton, Limited Partnership ("Ashton"),
FBR Weston, Limited Partnership ("Weston"), FBR Braddock, L.P. ("Braddock"),
FBR Harness, L.P. ("Harness"), and FBR Private Equity Fund, L.P. ("Private
Equity," formed in 1996). All of these partnerships were formed for the
purpose of investing in securities. The assets of partnerships are principally
comprised of investments in publicly traded securities marked to market value.
The Company carries its investment in the partnerships at their fair value.
The Company's ownership interest as of September 30, 1997 in Ashton, Weston,
Braddock, Harness and Private Equity approximated 4%, 9%, 8%, 3%, and 1%,
respectively.
Certain of the Company's subsidiaries as investment advisers, receive
management fees for the management of the business and affairs of limited
partnerships or investment companies, based upon the amount of assets under
management, as well as incentive performance fees or special allocations of
net income based upon the operating results. As investment adviser to the
Offshore Fund, the Company may elect on an annual basis, to defer receipt of
its performance fee, for a ten-year period in which the deferred fee is
reinvested in the Offshore Fund and indexed to fund performance.
Asset management fees receivable represent that portion of management and
performance fees, and special allocations actually due and payable to the
Company as of December 31, 1995, 1996, and September 30, 1997. Incentive
performance fees and special allocations are calculated on at least an annual
period, which generally
F-14
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
coincides with the calendar year. As of September 30, 1997 unrecorded
performance fees and special allocations approximated $12,900,000. As the
ultimate amount of such fees may vary with future performance, these fees and
allocations are not recorded as revenue until such time as they become due and
payable.
The Company earned brokerage commissions of approximately $481,000 in 1994,
$1,435,000 in 1995, and $1,847,000 in 1996 from these investment partnerships.
Commissions for the nine-month periods ended September 30, 1996 and 1997,
approximated $1,120,000 and $935,000, respectively.
9. BORROWINGS:
The Company has three long-term subordinated loans, each requiring fixed
monthly principal and interest payments plus additional periodic principal
payments, if necessary, in order to compensate for increases in the loans'
adjustable interest rates. Each loan bears interest at an annual rate of 2.48
percent plus the one month commercial paper rate for the preceding month (7.98
percent at September 30, 1997). The loans are secured by certain furniture,
equipment and leasehold improvements of the Company and are individually
guaranteed by the Company's three largest shareholders. The loans amortize
through June 2001, October 2001, and February 2002 according to the following
scheduled principal maturities:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1997........................................................... $ 341,131
1998........................................................... 360,000
1999........................................................... 387,000
2000........................................................... 418,000
2001........................................................... 390,000
Thereafter..................................................... 18,000
----------
$1,914,131
==========
</TABLE>
During 1995 and 1996, the Company met its short-term capital needs by
drawing on two unsecured subordinated revolving loan agreements from its
clearing broker and an affiliate of its clearing broker, aggregating
$20,000,000 and $25,000,000, respectively. In addition, in December 1996, a
third unsecured subordinated revolving loan agreement in the amount of
$15,000,000 was obtained by the Company from its clearing broker, making total
available, committed subordinated revolving loans to the Company at December
31, 1996, of $40,000,000. The subordinated revolving loan agreements expire as
follows: $15,000,000 in December 1997; $15,000,000 in July 1998; and
$10,000,000 in October 1998. These loans are guaranteed by certain
shareholders of the Company.
At December 31, 1995, 1996, and September 30, 1997, $10,000,000,
$15,000,000, and $0, respectively, was outstanding under the Company's
subordinated revolving loan agreements. The interest rate on borrowings under
these agreements is equal to the Broker's Call Rate plus 2.0 percent (8.5
percent at September 30, 1997).
The subordinated borrowings are available in computing net capital under the
Securities and Exchange Commission's Uniform Net Capital Rule (the "Net
Capital Rule").
In December 1996, the Company obtained an unsecured $10,000,000 line of
credit facility from a bank, of which $7,000,000 and $8,500,000 was drawn and
outstanding at December 31, 1996 and September 30, 1997, respectively. The
line, which expires in January 1998, has a variable interest rate equal to the
London InterBank Offered Rate ("LIBOR") plus 2.25 percent (7.9 percent at
September 30, 1997). Borrowings under this line are not available in computing
net capital under the Net Capital Rule. The loan is individually guaranteed by
certain shareholders of the Company.
F-15
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
As of September 30, 1997, the Company had outstanding a $6,000,000 unsecured
note payable with an insurance company. The note payable matures on November
30, 1997 and bears interest at a rate equal to 8.25 percent per annum.
10. NET CAPITAL COMPUTATION:
FBRC is subject to the Net Capital Rule, which requires the maintenance of
minimum net capital and requires that the ratio of aggregate indebtedness to
net capital, both as defined, shall not exceed 15 to 1. At December 31, 1995,
the Company had net capital of $15,286,024, which was $14,684,024 in excess of
its required net capital of $602,000. The Company's net capital ratio was .93
to 1 at December 31, 1995. At December 31, 1996, the Company had net capital
of $14,369,605, which was $13,127,173 in excess of its required net capital of
$1,242,432. The Company's net capital ratio was 1.30 to 1 at December 31,
1996. As of September 30, 1997, FBRC had net capital of $31,523,605, which was
$29,299,200 in excess of its required net capital of $1,482,936. The Company's
net capital ratio was .71 to 1 at September 30, 1997.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK:
The securities which the Company trades are primarily traded in United
States markets. As of December 31, 1996, the Company had not entered into any
transactions involving financial instruments, such as financial futures,
forward contracts, options, or swaps or derivatives, which would expose the
Company to significant related off-balance-sheet risk.
Market risk to the Company is primarily caused by movements in interest
rates or market prices of the Company's trading and investment account
securities. Market risk is also caused by volatility and possible illiquidity
in markets in which the Company trades its financial instruments. The Company
seeks to control market risk primarily through monitoring procedures and/or
entering into offsetting positions. The Company's principal transactions are
primarily short and long debt and equity transactions in publicly traded
securities.
The Company functions as an introducing broker whereby the Company places
and executes customer orders. The orders are then settled by an unrelated
clearing organization which also maintains custody of the customer's
securities and provides financing to the customer.
Through indemnification provisions in the Company's agreements with its
clearing organizations and brokers, the Company's customer activities may
expose it to off-balance-sheet credit risk. The Company may have to purchase
or sell financial instruments at prevailing market prices in the event of the
failure of a customer to settle a trade on its original terms or in the event
cash and securities in customer margin accounts are not sufficient to fully
cover customer losses. The Company seeks to control the risks associated with
customer activities through customer screening and selection procedures as
well as through the Company's clearing organization's requirements on
customers to maintain margin collateral in compliance with various regulations
and clearing organization policies.
Positions taken and commitments made by the Company, including positions
taken and underwriting and financing commitments made in connection with its
investment banking activities, may involve substantial amounts and significant
exposure to individual issuers and businesses, including non-investment grade
issuers and issues which have low trading volumes, and expose the Company to a
higher degree of risk than is associated with investment grade instruments.
F-16
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
12. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases premises under long-term lease agreements requiring
minimum annual rental payments with annual adjustments based upon increases in
the consumer price index, plus the pass-through of certain operating and other
costs above a base amount.
Future minimum aggregate annual rentals payable under these noncancelable
leases and rentals for certain equipment leases for the years ending December
31, 1997 through 2001 and the aggregate amount thereafter, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997......................................................... $1,106,000
1998......................................................... 1,081,000
1999......................................................... 1,067,000
2000......................................................... 1,071,000
2001......................................................... 979,000
Thereafter................................................... 2,365,000
----------
$7,669,000
==========
</TABLE>
Equipment and office rent expense, including operating cost pass-throughs
for 1994, 1995, and 1996 was $656,000, $773,000, and $941,000, respectively,
and $560,000 and $886,000 for the nine month periods ended September 30, 1996
and 1997, respectively.
Underwriting Activities
In the normal course of business, the Company enters into underwriting
commitments. Any transactions relating to such commitments as of September 30,
1997, were satisfied subsequent to that date in 1997.
Stock Repurchase Agreements
All of the Company's shareholders are subject to the terms of the
Shareholders Agreement dated January 1, 1997. The Shareholder Agreement, under
certain circumstances requires the Company to repurchase the shareholder's
stock or requires that a shareholder offer his or her stock to the Company
prior to sale to a third party, at book value, which is the same as the
issuance price. These repurchase provisions will be terminated in connection
with an initial public offering.
Litigation
The Company was the defendant in litigation involving a former client. The
suit was settled in 1996. No damages or other payments except for the
Company's legal fees, were paid in connection with the settlement.
13. DISTRIBUTIONS:
At December 31, 1996, the Company declared and made distributions of
$900,000 to its shareholders, which, in turn, were contributed as equity to
affiliated entities as follows: FBRIM, $375,000; FBR Fund Advisers, $325,000;
and FBR Offshore, $200,000.
In 1997, the Company declared and made distributions totaling $9,570,572 and
$9,000,010 to its shareholders of record on December 31, 1996, and January 1,
1997, respectively.
F-17
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 IS
UNAUDITED)
14. SUBSEQUENT EVENTS:
In conjunction with and upon effectiveness of the offering, the Company
intends to adopt the following stock and option plans.
1997 Stock Incentive Plan
Under the 1997 Stock Incentive Plan the Company may grant options, stock
appreciation rights, "performance" awards and restricted and unrestricted
stock (collectively, the "Awards") to purchase up to an undetermined number of
shares of Class A Common Stock to participants in the 1997 Plan. The 1997 Plan
will have a term of 10 years. Options granted under the 1997 Plan can have an
exercise period of up to 10 years. The 1997 Plan provides for the grant of
stock options to directors, employees (including officers) and consultants of
the Company and its subsidiaries. Pursuant to the 1997 Plan, options may be
incentive stock options within the meaning of Section 422 of the Code or
nonstatutory stock options, although incentive stock options may be granted
only to employees. All incentive stock options are nontransferable other than
by will or the laws of descent and distribution.
Director Stock Compensation Plan
Under the Director Stock Compensation Plan ("the Director Plan"). The
Company may grant options or stock (in lieu of annual "Director Fees") up to
an undetermined number of shares of Class A Common Stock. Options granted
under the Director Plan will vest upon the first anniversary of the grant and
are exercisable up to 10 years from the date of grant. All options and stock
awarded under the Director Plan are nontransferable other than by will or the
laws of descent and distribution.
Employee Stock Purchase Plan
Under the 1997 Employee Stock Purchase Plan (the "Purchase Plan") an
undetermined number of shares of Class A Common Stock will be reserved for
future issuance of stock. The Purchase Plan will permit eligible employees to
purchase common stock through payroll deductions at a price equal to 85
percent of the lower of fair market value of the common stock on the first day
of the period or the last day of the offering period. The plan will not result
in compensation expense in future periods.
F-18
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
Certain Transactions Occurring Prior to the Offering...................... 18
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Consolidated Financial Data...................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 25
Business.................................................................. 32
Management................................................................ 49
Principal and Selling Shareholders........................................ 59
Description of Capital Stock.............................................. 60
Shares Eligible for Future Sale........................................... 63
Underwriting.............................................................. 64
Direct Offering........................................................... 66
Legal Matters............................................................. 67
Experts................................................................... 67
Additional Information.................................................... 67
Index to Consolidated Financial Statements................................ F-1
</TABLE>
UNTIL JANUARY , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
================================================================================
11,000,000 SHARES
[LOGO OF FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. APPEARS HERE]
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CLASS A COMMON STOCK
--------------
PROSPECTUS
--------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
LAZARD FRERES & CO. LLC
SALOMON SMITH BARNEY
December , 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
Class A Common Stock being registered.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
THE COMPANY
AND THE
SELLING STOCKHOLDER
-------------------
<S> <C>
SEC registration fee.................................. $ 88,000
NASD filing fee....................................... 30,000
New York Stock Exchange listing fee................... 200,000
Printing and engraving................................ 600,000
Legal fees and expenses............................... 800,000
Accounting fees and expenses.......................... 210,000
Blue sky fees and expenses............................ 10,000
Transfer agent and registrar fees and expenses........ 15,000
Miscellaneous......................................... 100,000
----------
Total................................................. $2,053,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia permits a
Virginia corporation to indemnify any director or officer for reasonable
expenses incurred in any legal proceeding in advance of final disposition of
the proceeding, if the director or officer furnishes the corporation a written
statement of his good faith belief that he has met the standard of conduct
prescribed by the Code, and a determination is made by the board of directors
that such standard has been met. In a proceeding by or in the right of the
corporation, no indemnification shall be made in respect of any matter as to
which an officer or director is adjudged to be liable to the corporation,
unless the court in which the proceeding took place determines that, despite
such liability, such person is reasonably entitled to indemnification in view
of all the relevant circumstances. In any other proceeding, no indemnification
shall be made if the director or officer is adjudged liable to the corporation
on the basis that personal benefit was improperly received by him.
Corporations are given the power to make any other or further indemnity,
including advance of expenses, to any director or officer that may be
authorized by the articles of incorporation or any bylaw made by the
shareholder, or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against willful misconduct or a knowing
violation of the criminal law. Unless limited by its articles of
incorporation, indemnification of a director or officer is mandatory when he
or she entirely prevails in the defense of any proceeding to which he or she
is a party because he or she is or was a director or officer.
The Articles of Incorporation of the undersigned Registrant contain
provisions indemnifying the directors and officers of the Registrant to the
full extent permitted by Virginia law. In addition, the Articles of
Incorporation of the Registrant eliminate the personal liability of the
Registrant's directors and officers to the Registrant or its shareholders for
monetary damages to the full extent permitted by Virginia law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Immediately prior to the offering contemplated hereby, the Registrant issued
an aggregate of 40,029,000 shares of its Class B Common Stock, par $.01 per
share, to the Selling Shareholders in exchange for all of their shares of
common stock of Friedman, Billings, Ramsey Group, Inc., a Delaware
corporation, which was merged with and into the Registrant immediately prior
to the offering. There were no underwriters, brokers or finders employed in
connection with these transactions. The sales of the above securities were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, or Regulation D
II-1
<PAGE>
promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving a public offering or
transactions pursuant to the compensatory benefit plans and contracts relating
to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were attached to the certificates issued in such
transactions. All recipients had adequate access to information about the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 --Form of Underwriting Agreement.
2.01 --Agreement and Plan of Merger.
3.01 --Registrant's Articles of Incorporation.
3.02 --Articles of Merger.
3.03 --Registrant's Bylaws.
4.01 --Form of Specimen Certificate for Registrant's Class A Common Stock.
5.01 --Opinion of McGuire, Woods, Battle & Boothe, LLP.
9.01 --Voting Trust Agreement.
10.01 --Amendment to the Shareholders Agreement.
10.02 --Revolving Subordinated Loan Agreement, between The Bear Stearns
Companies Inc. and Friedman, Billings, Ramsey & Co., Inc., dated
August 15, 1997.
10.03 --Revolving Subordinated Loan Agreement, between Bear, Stearns
Securities Corp. and Friedman, Billings, Ramsey & Co., dated November
21, 1996.
10.04 --Revolving Subordinated Loan Agreement, between Custodial Trust
Company and Friedman, Billings, Ramsey & Co., Inc., dated June 20,
1997.
10.05 --The 1997 Employee Stock Purchase Plan.
10.06 --The 1997 Stock and Annual Incentive Plan.
10.07 --The Non-Employee Director Stock Compensation Plan.
10.08 --The Key Employee Incentive Plan.
11.01 --Computation of Per Share Earnings.
21.01 --List of Subsidiaries of the Registrant.
23.01 --Consent of Independent Public Accountants.
23.02 --Consent of Counsel (included in Exhibit 5.01).
24.01 --Power of Attorney (see page II-4 of this Registration Statement).
27.01 --Financial Data Schedule.
99.01 --Memorandum of Understanding between the Company and PNC Bank Corp.,
dated as of
October 28, 1997.
99.02 --Consent of a Person about to become a Director for Wallace L.
Timmeny.
99.03 --Consent of a Person about to become a Director for Mark D. Warner.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Arlington, Commonwealth of Virginia, on the 22nd day of December 1997.
Friedman, Billings, Ramsey Group,
Inc.
By: /s/ W. Russell Ramsey
--------------------------------
PRESIDENT AND SECRETARY
POWER OF ATTORNEY
Know all men by these presents, that each of the undersigned does hereby
constitute and appoint Emanuel J. Friedman, Eric F. Billings and W. Russell
Ramsey, or any of them (with full power to each of them to act alone), his true
and lawful attorney-in-fact and agent, with full power of substitution, for him
and on his behalf to sign, execute and file this Registration Statement and any
or all amendments (including, without limitation, post-effective amendments and
any amendment or amendments or abbreviated registration statement increasing
the amount of securities for which registration is being sought) to this
Registration Statement, with all exhibits and any and all documents required to
be filed with respect thereto, with the Securities and Exchange Commission or
any regulatory authority, granting unto such attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he might or could
do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities on the
30th day of October, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Emanuel J. Friedman Chairman of the
------------------------------------ Board of Directors,
(EMANUEL J. FRIEDMAN) Chief Executive
Officer (Principal
Executive Officer)
/s/ Eric F. Billings Vice Chairman of
------------------------------------ the Board of
(ERIC F. BILLINGS) Directors and Chief
Operating Officer
/s/ W. Russell Ramsey President and Secretary
------------------------------------
(W. RUSSELL RAMSEY)
/s/ Eric Y. Generous CFO (Principal
------------------------------------ Financial Officer)
(ERIC Y. GENEROUS)
/s/ Kurt R. Harrington Treasurer (Principal
------------------------------------ Accounting Officer)
(KURT R. HARRINGTON)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 --Form of Underwriting Agreement.
2.01 --Agreement and Plan of Merger.
3.01 --Registrant's Articles of Incorporation.
3.02 --Articles of Merger.
3.03 --Registrant's Bylaws.
4.01 --Form of Specimen Certificate for Registrant's Class A Common Stock.
5.01 --Opinion of McGuire, Woods, Battle & Boothe, LLP.
9.01 --Voting Trust Agreement.
10.01 --Amendment to the Shareholders Agreement.
10.02 --Revolving Subordinated Loan Agreement, between The Bear Stearns
Companies, Inc. and Friedman, Billings, Ramsey & Co., dated August
15, 1997.
10.03 --Revolving Subordinated Loan Agreement, between Bear, Stearns
Securities Corp. and Friedman, Billings, Ramsey & Co., dated November
21, 1997.
10.04 --Revolving Subordinated Loan Agreement, between Custodial Trust
Company and Friedman, Billings, Ramsey & Co., dated June 20, 1997.
10.05 --The 1997 Employee Stock Purchase Plan.
10.06 --The 1997 Stock and Annual Incentive Plan.
10.07 --The Non-Employee Director Stock Compensation Plan.
10.08 --The Key Employee Incentive Plan.
11.01 --Computation of Per Share Earnings.
21.01 --List of Subsidiaries of the Registrant.
23.01 --Consent of Independent Public Accountants.
23.02 --Consent of Counsel (included in Exhibit 5.01).
24.01 --Power of Attorney (see page II-4 of this Registration Statement).
27.01 --Financial Data Schedule.
99.01 --Memorandum of Understanding between the Company and PNC Bank Corp.,
dated as of October 28, 1997.
99.02 --Consent of a Person about to become a Director for Wallace C.
Timmeny.
99.03 --Consent of a Person about to become a Director for Mark D. Warner.
</TABLE>
II-5
<PAGE>
Exhibit 3.03
BYLAWS
OF
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 PLACE AND TIME OF MEETINGS. Meetings of shareholders shall be held at
such place, either within or without the Commonwealth of Virginia, and at such
time as may be provided in the notice of the meeting or in the waiver thereof.
1.2 PROCEDURE. The Chairman or, in his absence, the Vice-Chairman shall
serve as chairman at all meetings of the shareholders. In the absence of both
of the foregoing officers or if both of them decline to serve, a majority of the
shares entitled to vote at a meeting may appoint any person entitled to vote at
the meeting to act as chairman. The Secretary or, in his absence, an Assistant
Secretary shall act as secretary at all meetings of the shareholders. In the
event that neither the Secretary nor an Assistant Secretary is present, the
chairman of the meeting may appoint any person to act as secretary of the
meeting. Any meeting may be adjourned from day to day, or from time to time,
and such adjournment may be directed without a quorum, but no business except
adjournment shall be transacted in the absence of a quorum. The chairman of the
meeting or a majority of the shares so represented may adjourn the meeting from
time to time, whether or not there is such a quorum. No notice of the time and
place of adjourned meetings need be given except as required by law. The
chairman of the meeting shall have the authority to make such rules and
regulations, to establish such procedures and to take such steps as he may deem
necessary or desirable for the proper conduct of each meeting of the
shareholders, including, without limitation, the authority to make the agenda
and to establish procedures for (i)
<PAGE>
dismissing of business not properly presented, (ii) maintaining of order and
safety, (iii) placing limitations on the time allotted to questions or comments
on the affairs of the Corporation, (iv) placing restrictions on attendance at a
meeting by persons or classes of persons who are not shareholders or their
proxies, (v) restricting entry to a meeting after the time prescribed for the
commencement thereof and (vi) commencing, conducting and closing voting on any
matter.
1.3 ANNUAL MEETING. The annual meeting of shareholders shall be held on
such date and at such time as may be fixed by resolution of the Board of
Directors.
1.4 NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS - ANNUAL MEETINGS.
Nominations of persons for election to the Board of Directors and the proposal
of business to be considered by the shareholders may be made at the annual
meeting of shareholders (i) pursuant to the Corporation's notice of the meeting,
(ii) by or at the direction of the Board of Directors or (iii) by a shareholder
of the Corporation who is a shareholder of record of a class of shares entitled
to vote on the business such shareholder is proposing, both at the time of the
giving of the shareholder's notice provided for in this Bylaw and on the record
date for such annual meeting, and who complies with the notice procedures set
forth in this Bylaw.
For nominations or other business to be properly brought before an annual
meeting by a shareholder pursuant to clause (iii) of the first sentence of this
Section 1.4, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for shareholder action. To be timely, a shareholder's notice
shall be delivered to the Secretary of the Corporation at the principal
executive offices of the Corporation not later than the close of business on the
ninetieth (90th) day nor earlier than the close of business on the one hundred
twentieth (120th) day prior to the first anniversary of the
2
<PAGE>
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than thirty (30) days before or more than
sixty (60) days after such anniversary date, notice by the shareholder to be
timely must be so delivered not earlier than the close of business on the one
hundred twentieth (120th) day prior to such annual meeting and not later than
the close of business on the later of the ninetieth (90th) day prior to such
annual meeting or the tenth (10th) day following the date on which public
announcement of the date of such meeting is first made by the Corporation. In
no event shall the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a shareholder's notice as described
above. Such shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or re-election as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11
thereunder (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (b) as to any
other business that the shareholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the shareholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such shareholder, as they appear on the books of the
Corporation, and of such beneficial owner and
3
<PAGE>
(ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such shareholder and such beneficial owner.
Notwithstanding anything in the second sentence of the immediately
preceding paragraph of this Section 1.4 to the contrary, in the event that the
number of directors to be elected to the Board of the Corporation is increased
and there is no public announcement by the Corporation naming all of the
nominees for director or specifying the size of the increased Board of Directors
at least one hundred (100) days prior to the first anniversary of the preceding
year's annual meeting, a shareholder's notice required by this Bylaw shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary of the
Corporation at the principal executive offices of the Corporation not later than
the close of business on the tenth (10th) day following the date on which such
public announcement is first made by the Corporation.
1.5 SPECIAL MEETINGS. Special meetings of the shareholders may be called
only by the Board of Directors pursuant to a resolution stating the purpose or
purposes thereof approved by a majority of the directors of the Corporation, by
the Chairman, Vice-Chairman, Chief Executive Officer or by the President. Only
business within the purpose or purposes described in the notice of the special
meeting delivered by the Corporation shall be conducted at a special meeting of
shareholders.
1.6 NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS - SPECIAL MEETINGS.
Nominations of persons for election to the Board of Directors may be made at a
special meeting of shareholders at which directors are to be elected pursuant to
the Corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of
4
<PAGE>
Directors has determined that directors shall be elected at such meeting, by any
shareholder of the Corporation who is a shareholder of record at the time of
giving of notice provided for in this Bylaw, who shall be entitled to vote at
the meeting and who complies with the notice procedures set forth in this Bylaw.
In the event the Corporation calls a special meeting of shareholders for the
purpose of electing one or more directors to the Board of Directors, any such
shareholder may nominate a person or persons (as the case may be), for election
to such position(s) as specified in the Corporation's notice of meeting, if the
shareholder's notice required by Section 1.4 shall be delivered to the Secretary
of the Corporation at the principal executive offices of the Corporation not
earlier than the close of business on the one hundred twentieth (120th) day
prior to such special meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to such special meeting or the tenth
(10th) day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a shareholder's notice as described above.
1.7 GENERAL. Except for the election of directors by the unanimous
written consent of shareholders or the filling by the Board of Directors of
vacancies on the Board of Directors as provided in Section 2.4, only such
persons who are nominated in accordance with the procedures set forth in either
Section 1.4 or 1.6 above shall be eligible to serve as directors. Only such
business shall be conducted at a meeting of shareholders as shall have been
brought before the meeting in accordance with the procedures set forth in either
Section 1.4 or 1.6 above. Neither the immediately preceeding sentence nor any
other provisions of these Bylaws, including without
5
<PAGE>
limitation Sections 1.4, 1.5, 1.6, this 1.7 or 1.8), shall limit the power of
the shareholders to act by unanimous written consent. Except as otherwise
provided by law, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in Section 1.4 or 1.6 and, if any proposed nomination or
business is not in compliance therewith, to declare that such defective proposal
or nomination shall be disregarded.
For purposes of Section 1.4 or 1.6, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
Notwithstanding the foregoing provisions of either Section 1.4 or 1.6, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in Sections 1.4 and 1.6. Nothing in Sections 1.4 and 1.6 shall be deemed
to affect any rights (i) of shareholders to request inclusion of proposals in
the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act
or (ii) of the holders of any series of Preferred Stock to elect directors under
specified circumstances.
1.8 NOTICE OF MEETINGS. Written or printed notice stating the place, day
and hour of the meeting of shareholders and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be given (except
in the case of meeting to act on the matters set forth in the following
paragraph) not less than ten (10) nor more than sixty (60) days before the date
of the meeting either personally or by mail, to each shareholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
given when deposited in first class United
6
<PAGE>
States mail with postage thereon prepaid and addressed to the shareholder at his
address as it appears on the share transfer books of the Corporation.
Notice of a shareholders' meeting to act on (i) an amendment of the
Articles of Incorporation, (ii) a plan of merger or share exchange, (iii) the
sale, lease, exchange or other disposition of all or substantially all the
property of the Corporation otherwise than in the usual and regular course of
business or (iv) the dissolution of the Corporation, shall be given, in the
manner provided above, not less than twenty-five (25) nor more than sixty (60)
days before the date of the meeting. Any notice given pursuant to this
paragraph shall state that the purpose, or one of the purposes, of the meeting
is to consider such action and shall be accompanied by (x) a copy of the
proposed amendment, (y) a copy of the proposed plan of merger or share exchange
or (z) a copy or a summary of the agreement pursuant to which the proposed
transaction will be effected. If only a summary of the agreement is sent to the
shareholders, the Corporation shall also send a copy of the agreement to any
shareholder who requests it.
If a meeting is adjourned to a different date, time or place, notice need
not be given if the new date, time or place is announced at the meeting before
adjournment. However, if a new record date for an adjourned meeting is fixed,
notice of the adjourned meeting shall be given to shareholders as of the new
record date unless a court provides otherwise.
1.9 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A shareholder may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time of the meeting that is the subject of such notice. The
waiver shall be in writing, be signed by the shareholder entitled to the notice
and be delivered to the Secretary for inclusion in the minutes or filing with
the corporate records.
7
<PAGE>
A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting unless the shareholder, at the
beginning of the meeting, objects to holding the meeting or transacting business
at the meeting and (ii) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice unless the shareholder objects to considering the matter when it
is presented.
1.10 QUORUM AND VOTING REQUIREMENTS. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter, represented in person or
by proxy, constitutes a quorum for action on that matter. Once a share is
represented for any purpose at a meeting, it is deemed present for quorum
purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or shall be set for that adjourned meeting.
If a quorum exists, action on a matter, other than the election of directors, is
approved if the votes cast favoring the action exceed the votes cast opposing
the action unless a greater number of affirmative votes is required by law or
the provisions of the Corporation's Articles or Bylaws. Directors shall be
elected by a plurality of the votes cast by the shares entitled to vote in the
election of directors at a meeting at which a quorum is present. Less than a
quorum may adjourn a meeting.
1.11 PROXIES. A shareholder may vote his shares in person or by proxy. A
shareholder may appoint a proxy to vote or otherwise act for him by signing an
appointment form, either personally or by his attorney-in-fact. An appointment
of a proxy is effective when received by the Secretary or other officer or agent
authorized to tabulate votes and is valid for eleven (11) months unless a longer
period is expressly provided in the appointment form. An appointment of
8
<PAGE>
a proxy is revocable by the shareholder unless the appointment form
conspicuously states that it is irrevocable and the appointment is coupled with
an interest.
The death or incapacity of the shareholder appointing a proxy does not
affect the right of the Corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the Secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his authority
under the appointment. An irrevocable appointment is revoked when the interest
with which it is coupled is extinguished. A transferee for value of shares
subject to an irrevocable appointment may revoke the appointment if he did not
know of its existence when he acquired the shares and the existence of the
irrevocable appointment was not noted conspicuously on the certificate
representing the shares. Subject to any legal limitations on the right of the
Corporation to accept the vote or other action of a proxy and to any express
limitation on the proxy's authority appearing on the face of the appointment
form, the Corporation is entitled to accept the proxy's vote or other action as
that of the shareholder making the appointment. Any fiduciary who is entitled
to vote any shares may vote such shares by proxy.
1.12 VOTING LIST. The officer or agent having charge of the share transfer
books of the Corporation shall make, at least ten (10) days before each meeting
of shareholders, a complete list of the shareholders entitled to vote at such
meeting or any adjournment thereof, with the address of and the number of shares
held by each. For a period of ten (10) days prior to the meeting, such list
shall be kept on file at the registered office of the Corporation or at its
principal office or at the office of its transfer agent or registrar and shall
be subject to inspection by any shareholder at any time during usual business
hours. Such list shall also be produced and kept open at the time and place of
the meeting and shall be subject to the inspection of any
9
<PAGE>
shareholder during the whole time of the meeting for the purpose thereof. The
original share transfer books shall be prima facie evidence as to which
shareholders are entitled to examine such list or transfer books or to vote at
any meeting of the shareholders. The right of a shareholder to inspect such
list prior to the meeting shall be subject to the conditions and limitations set
forth by law. If the requirements of this Section 1.12 have not been
substantially complied with, the meeting shall, on the demand of any shareholder
in person or by proxy, be adjourned until such requirements are met. Refusal or
failure to prepare or make available the shareholders' list does not affect the
validity of action taken at the meeting prior to the making of any such demand,
but any action taken by the shareholders after the making of any such demand
shall be invalid and of no effect.
1.13 INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. The Board of
Directors by resolution shall appoint one or more inspectors, which inspector or
inspectors may include individuals who serve the Corporation in other
capacities, including, without limitation, as officers, employees, agents or
representatives, to act at the meetings of shareholders and make a written
report thereof. One or more persons may be designated as alternate inspectors
to replace any inspector who fails to act. If no inspector or alternate has
been appointed to act or is able to act at a meeting of shareholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by law. The chairman of the meeting shall fix
and announce at the meeting the date and time of the opening and the closing of
the polls for each matter upon which the shareholders will vote at the meeting.
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ARTICLE II
DIRECTORS
2.1 GENERAL POWERS. The Corporation shall have a Board of Directors.
All corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Corporation managed under the direction of, the
Board of Directors.
2.2 NUMBER AND TERM. The number of directors of the Corporation shall be
three (3). This number may be changed from time to time by amendment to these
Bylaws to increase or decrease by thirty percent (30%) or less the number of
directors last elected by the shareholders, but only the shareholders may
increase or decrease the number by more than thirty percent (30%). A decrease in
number shall not shorten the term of any incumbent director. Each director shall
hold office until his death, resignation or removal or until his successor is
elected.
2.3 ELECTION. Except as provided in Section 2.4 or in the case of
elections of directors by the unanimous written consent of shareholders, the
directors shall be elected by the holders of the shares of Common Stock at each
annual meeting of shareholders and those persons who receive the greatest number
of votes shall be deemed elected even though they do not receive a majority of
the votes cast. No individual shall be named or elected as a director without
his prior consent.
2.4 VACANCIES. A vacancy on the Board of Directors, including a vacancy
resulting from death, resignation, disqualification or removal or an increase in
the number of directors, shall be filled by (i) the Board of Directors, (ii) the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors, or (iii) the shareholders and may,
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in the case of a resignation that will become effective at a specified later
date, be filled before the vacancy occurs but the new director may not take
office until the vacancy occurs.
2.5 ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of shareholders for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the Board of Directors shall designate from time to
time. If no place is designated, regular meetings shall be held at the principal
office of the Corporation.
2.6 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman, Vice Chairman, Chief Executive Officer, President or a
majority of the Directors of the Corporation and shall be held at such times and
at such places, within or without the Commonwealth of Virginia, as the person or
persons calling the meetings shall designate. If no such place is designated in
the notice of a meeting, it shall be held at the principal office of the
Corporation.
2.7 NOTICE OF MEETINGS. No notice need be given of regular meetings of
the Board of Directors. Notices of special meetings of the Board of Directors
shall be given to each director in person or delivered to his residence or
business address (or such other place as he may have directed in writing) not
less than five (5) calendar days before the meeting by mail, messenger,
telecopy, telegraph or other means of written communication or by telephoning
such notice to
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him. Neither the business to be transacted nor the purpose of any special
meeting need be specified in the notice of the meeting.
2.8 WAIVER OF NOTICE; ATTENDANCE AT MEETING. A director may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time stated in the notice and such waiver shall be equivalent
to the giving of such notice. Except as provided in the next paragraph of this
section, the waiver shall be in writing, signed by the director entitled to the
notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless the director, at the beginning of
the meeting or promptly upon his arrival, objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
2.9 QUORUM; VOTING. A majority of the number of directors fixed in these
Bylaws shall constitute a quorum for the transaction of business at a meeting of
the Board of Directors. If a quorum is present when a vote is taken, the
affirmative vote of a majority of the directors present is the act of the Board
of Directors. A director who is present at a meeting of the Board of Directors
or a committee of the Board of Directors when corporate action is taken is
deemed to have assented to the action taken unless (i) he objects, at the
beginning of the meeting or promptly upon his arrival, to holding it or
transacting specified business at the meeting or (ii) he votes against or
abstains from the action taken.
2.10 TELEPHONIC MEETINGS. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by, or conduct the
meeting through the use of, any means of communication by which all directors
participating may simultaneously hear each other
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during the meeting. A director participating in a meeting by this means is
deemed to be present in person at the meeting.
2.11 ACTION WITHOUT MEETING. Action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if the action
is taken by all members of the Board. The action shall be evidenced by one or
more written consents stating the action taken, signed by each director either
before or after the action is taken and included in the minutes or filed with
the corporate records. Action taken under this section shall be effective when
the last director signs the consent unless the consent specifies a different
effective date in which event the action taken is effective as of the date
specified therein provided the consent states the date of execution by each
director.
2.12 COMPENSATION. The Board of Directors may fix the compensation of
directors and may provide for the payment of all expenses incurred by them in
attending meetings of the Board of Directors.
ARTICLE III
COMMITTEES OF DIRECTORS
3.1 COMMITTEES. The Board of Directors may create one or more committees
and appoint members of the Board of Directors to serve on them. Each committee
shall have two or more members who serve at the pleasure of the Board of
Directors. The creation of a committee and appointment of members to it shall be
approved by a majority of all of the directors in office when the action is
taken.
3.2 AUTHORITY OF COMMITTEES. To the extent specified by the Board of
Directors, each committee may exercise the authority of the Board of Directors,
except that a committee may not
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(i) approve or recommend to shareholders action that is required by law to be
approved by shareholders, (ii) fill vacancies on the Board of Directors or on
any of its committees, (iii) amend the Articles of Incorporation, (iv) adopt,
amend, or repeal these Bylaws, (v) approve a plan of merger not requiring
shareholder approval, (vi) authorize or approve a distribution, except according
to a general formula or method prescribed by the Board of Directors or (vii)
authorize or approve the issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences, and limitations of a
class or series of shares; provided, however, that the Board of Directors may
authorize a committee, or a senior executive officer of the Corporation, to do
so within limits specifically prescribed by the Board of Directors.
3.3 EXECUTIVE COMMITTEE. The Board of Directors may appoint an Executive
Committee consisting of not less than three directors which committee shall have
all of the authority of the Board of Directors except to the extent such
authority is limited by the provisions of Section 3.2.
3.4 AUDIT COMMITTEE. The Board of Directors shall appoint an Audit
Committee consisting of not less than two directors, none of whom shall be
officers of the Corporation, which committee shall regularly review the adequacy
of the Corporation's internal financial controls, review with the Corporation's
independent public accountants the annual audit and other financial statements
and recommend the selection of the Corporation's independent public accountants.
3.5 COMMITTEE MEETINGS; MISCELLANEOUS. The provisions of these Bylaws
which govern meetings, action without meetings, notice and waiver of notice, and
quorum and voting
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requirements of the Board of Directors shall apply to committees of directors
and their members as well.
ARTICLE IV
OFFICERS
4.1 OFFICERS. The officers of the Corporation shall be a Chairman of the
Board of Directors, a Chief Executive Officer, a Vice Chairman, a President, a
Secretary, a Treasurer, and, in the discretion of the Board of Directors, one or
more Vice-Presidents, one or more Assistant Secretaries and such other officers
as may be deemed necessary or advisable to carry on the business of the
Corporation. The Chairman shall be chosen from among the directors. Any two or
more offices may be held by the same person.
4.2 ELECTION; TERM. Officers shall be elected by the Board of Directors.
Officers shall hold office, unless sooner removed, until the next annual meeting
of the Board of Directors or until their successors are elected. Any officer may
resign at any time upon written notice to the Board of Directors and such
resignation shall be effective when notice is delivered unless the notice
specifies a later effective date.
4.3 REMOVAL OF OFFICERS. The Board of Directors may remove any officer at
any time, with or without cause.
4.4 DUTIES OF THE CHAIRMAN. The Chairman shall have such powers and
perform such duties as generally pertain to that position or as may, from time
to time, be assigned to him by the Board of Directors.
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4.5 DUTIES OF THE VICE CHAIRMAN. The Vice Chairman shall have such powers
and perform such duties as generally pertain to that position or as may, from
time to time, be assigned to him by the Board of Directors.
4.6 DUTIES OF THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of
the Corporation shall have general charge of and be charged with the duty of
supervision of the business of the Corporation and shall perform such duties as
may, from time to time, be assigned to him by the Board of Directors.
4.7 DUTIES OF THE PRESIDENT. The President shall have such powers and
perform such duties as generally pertain to that position or as may, from time
to time, be assigned to him by the Board of Directors.
4.8 DUTIES OF THE SECRETARY. The Secretary shall have the duty to see
that a record of the proceedings of each meeting of the shareholders, the Board
of Directors and any committee of the Board of Directors is properly recorded
and that notices of all such meetings are duly given in accordance with the
provisions of these Bylaws or as required by law; may affix or authorize to be
affixed the corporate seal to any document the execution of which is duly
authorized, and when so affixed may attest the same; and, in general, shall
perform all duties incident to the office of secretary of a corporation, and
such other duties as, from time to time, may be assigned to him/her by the
Chairman, the President or the Board of Directors or as may be required by law.
4.9 DUTIES OF THE TREASURER. The Treasurer shall have charge of and be
responsible for all securities, funds, receipts and disbursements of the
Corporation and shall deposit or cause to be deposited, in the name of the
Corporation, all monies or valuable effects in such banks, trust
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companies or other depositories as shall, from time to time, be selected by or
under authority granted by the Board of Directors; shall be custodian of the
financial records of the Corporation; shall keep or cause to be kept full and
accurate records of all receipts and disbursements of the Corporation and shall
render to the Chairman, the President or the Board of Directors, whenever
requested, an account of the financial condition of the Corporation; and, shall
perform such duties as may be assigned to him/her by the Chairman, the President
or the Board of Directors.
4.10 DUTIES OF OTHER OFFICERS. The other officers of the Corporation shall
have such authority and perform such duties as shall be prescribed by the Board
of Directors or by officers authorized by the Board of Directors to appoint them
to their respective offices. To the extent that such duties are not so stated,
such officers shall have such authority and perform the duties which generally
pertain to their respective offices, subject to the control of the Chairman, the
President or the Board of Directors.
4.11 VOTING SECURITIES OF OTHER CORPORATIONS. Any one of the Chairman, the
Vice Chairman, the Chief Executive Officer, the President or the Treasurer shall
have the power to act for and vote on behalf of the Corporation at all meetings
of the shareholders of any corporation in which this Corporation holds stock or
in connection with any consent of shareholders in lieu of any such meeting.
4.12 BONDS. The Board of Directors may require that any or all officers,
employees and agents of the Corporation give bond to the Corporation, with
sufficient sureties, conditioned upon the faithful performance of the duties of
their respective offices or positions.
ARTICLE V
SHARE CERTIFICATES
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5.1 FORM. Except to the extent that the Board of Directors authorizes the
issuance of shares of the Corporation without certificates pursuant to Section
13.1-648 of the Virginia Stock Corporation Act ("Uncertificated Shares"), shares
of the Corporation shall, when fully paid, be evidenced by certificates. Such
certificates shall contain such information as is required by law and approved
by the Board of Directors. Certificates shall be signed (i) by the Chairman of
the Board (and if the Chairman of the Board is also serving as Chief Executive
Officer, by the Chairman of the Board in his capacity as Chairman of the Board
and Chief Executive Officer) and by the President (and if the President is also
serving as the Secretary, by the President in his capacity as President and
Secretary) or (ii) by any two officers designated by the Board of Directors.
Such certificates may (but need not) be sealed with the seal of the Corporation.
The seal of the Corporation and any or all of the signatures on a share
certificate may be facsimile. If any officer, transfer agent or registrar who
has signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar on the date of issue.
5.2 TRANSFER. The Board of Directors may make rules and regulations
concerning the issue, registration and transfer of certificates representing the
shares of the Corporation. Transfers of shares and of the certificates
representing such shares shall be made upon the books of the Corporation by
surrender of the certificates representing such shares accompanied by written
assignments given by the owners or their attorneys-in-fact.
5.3 RESTRICTIONS ON TRANSFER. A lawful restriction on the transfer or
registration of transfer of shares is valid and enforceable against the holder
or a transferee of the holder if the restriction complies with the requirements
of law and its existence is noted conspicuously on the front or back of the
certificate representing the shares or, in the case of Uncertificated Shares, is
contained in the information statement required by Section 13.1-648B of the
Virginia Stock
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Corporation Act. Unless so noted, a restriction is not enforceable against a
person without knowledge of the restriction.
5.4 LOST OR DESTROYED SHARE CERTIFICATES. The Corporation may issue a new
share certificate in the place of any certificate theretofore issued which is
alleged to have been lost or destroyed and may require the owner of such
certificate, or his legal representative, to give the Corporation a bond, with
or without surety, or such other agreement, undertaking or security as the Board
of Directors shall determine is appropriate, to indemnify the Corporation
against any claim that may be made against it on account of the alleged loss or
destruction or the issuance of any such new certificate.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 CORPORATE SEAL. The corporate seal of the Corporation shall be
circular and shall have inscribed thereon, within and around the circumference
"Friedman, Billings, Ramsey Group, Inc." In the center shall be the word
"SEAL".
6.2 FISCAL YEAR. The fiscal year of the Corporation shall be determined
in the discretion of the Board of Directors, but in the absence of any such
determination it shall be the calendar year.
6.3 AMENDMENTS. These Bylaws may be amended or repealed, and new Bylaws
may be made, at any regular or special meeting of the Board of Directors. Bylaws
made by the Board of Directors may be repealed or changed and new Bylaws may be
made by the shareholders, and the shareholders may prescribe that any Bylaw made
by them shall not be altered, amended or repealed by the Board of Directors.
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ARTICLE VII
CONTROL SHARE ACQUISITIONS
7.1 CONTROL SHARE ACQUISITIONS. The provisions of Article 14.1 of the
Virginia Stock Corporation Act relating to "control share acquisitions" shall
not apply to acquisitions of shares of the Corporation.
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Exhibit 10.06
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
1997 STOCK AND ANNUAL INCENTIVE PLAN
SECTION 1. Purpose; Definitions
The purpose of the Plan is to give the Company a competitive advantage
in attracting, retaining and motivating officers and employees and to provide
the Company and its Subsidiaries and Affiliated Companies with an incentive
compensation plan providing incentives directly linked to the profitability of
the Company's businesses and/or increases in shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Affiliated Company" means any corporation (or partnership, joint
venture, or other enterprise), of which the Company owns or controls, directly
or indirectly, 10% or more, but less than 50%, of the outstanding shares of
stock normally entitled to vote for the election of directors (or comparable
equity participation and voting power).
b. "Award" means a Stock Appreciation Right, Stock Option, Restricted
Stock, unrestricted share of Common Stock, dividend equivalent, interest
equivalent, Bonus Award or other award granted under this Plan.
c. "Board" means the Board of Directors of the Company.
d. "Bonus Award" means an annual cash bonus award under Section 10 of this
Plan.
e. "Cause" means (except as otherwise provided by the Committee in the
agreement relating to any Award) (1) conviction of a participant for committing
a felony under federal law or the law of the state in which such action
occurred, (2) dishonesty in the course of fulfilling a participant's employment
duties or (3) willful and deliberate failure on the part of a participant to
perform his employment duties in any material respect. Notwithstanding the
foregoing, if a participant is a party to an employment agreement with the
Corporation or any Subsidiary or Affiliated Company that contains a definition
of "Cause," such definition shall apply to such participant for purposes of the
Plan except to the extent otherwise provided by the Committee in the agreement
relating to any Award.
f. "Change in Control" and "Change in Control Price" have the meanings set
forth in Sections 11(b) and (c), respectively.
g. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
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h. "Committee" means a committee of two or more non-employee directors
selected by the Board provided, however, that with respect to any grants or
other determinations to be made in connection with Bonus Awards (including
without limitation the allocation of the Bonus Pool under Section 10(b)),
"Committee" shall mean the Board or the Executive Committee of the Board (unless
the Board specifically designates another committee of directors to grant and
administer Bonus Awards).
i. "Common Stock" means the Class A common stock, par value $0.01 per
share, of the Company.
j. "Company" means Friedman, Billings, Ramsey Group, Inc., a Virginia
corporation.
k. "Disability" means permanent and total disability as determined by the
Committee for purposes of the Plan.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
m. "Fair Market Value" means, as of any given date, the average of the
highest and lowest sales prices of the Common Stock reported on the New York
Stock Exchange Composite Tape for such date, or if the Common Stock was not
traded on the New York Stock Exchange on such date, then on the last preceding
date on which the Common Stock was traded (or, if not listed on such exchange,
the average of the highest and lowest sales prices on any other national
securities exchange on which the Common Stock is listed or on NASDAQ). If there
is no regular public trading market for the Common Stock, Fair Market Value
shall be determined by such other source as the Committee may select.
n. "Incentive Stock Option" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422 of
the Code.
o. "NonQualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
p. "Performance Goals" means the performance goals established by the
Committee in connection with the grant of Restricted Stock or Performance Units.
q. "Performance Units" means an Award granted under Section 8.
r. "Plan" means the Friedman, Billings, Ramsey Group, Inc. 1997 Stock and
Annual Incentive Plan, as set forth herein and as hereinafter amended from time
to time.
s. "Restricted Stock" means an Award granted under Section 7.
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t. "Retirement" means retirement from employment with the Company, a
Subsidiary or an Affiliated Company as determined by the Committee for purposes
of an Award under the Plan.
u. "Stock Appreciation Right" means an Award granted under Section 6.
v. "Stock Option" means an Award granted under Section 5.
w. "Subsidiary" means: (i) for the purpose of an Incentive Stock Option,
any corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if, at the time of the granting of the Incentive
Stock Option, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain;
and (ii) for the purposes of any other Award, any corporation (or partnership,
joint venture, or other enterprise) of which the Company owns or controls,
directly or indirectly, 50% or more of the outstanding shares of stock normally
entitled to vote for the election of directors (or comparable equity
participation and voting power).
x. "Termination of Employment" means the termination of the participant's
employment with the Company and any Subsidiary or Affiliated Company. A
participant employed by a Subsidiary or an Affiliated Company shall also be
deemed to incur a Termination of Employment if the Subsidiary or Affiliated
Company ceases to be such a Subsidiary or Affiliated Company, as the case may
be, and the participant does not immediately thereafter become an employee of
the Company or another Subsidiary or Affiliated Company. Temporary absences
from employment because of illness, vacation or leave of absence and transfers
among the Company and its Subsidiaries, or, if the Committee so determines,
among the group consisting of the Company, its Subsidiaries and Affiliated
Companies, shall not be considered Terminations of Employment.
In addition, certain other terms used in the Plan have definitions provided
to them in the first place in which they are used herein.
SECTION 2. Administration
The Plan shall be administered by the Committee; provided, that any
authority granted to the Committee under the Plan may also be exercised by the
full Board.
The Committee shall have plenary authority to grant Awards pursuant to the
terms of the Plan or, in the Committee's discretion, in connection with awards
under other bonus plans or programs of the Company, to officers and employees of
the Company and its Subsidiaries and Affiliated Companies.
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Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) To select the officers and employees to whom Awards may from time to
time be granted;
(b) To determine whether and to what extent Awards are to be granted
hereunder;
(c) To determine the number of shares of Common Stock to be covered by each
Stock Option granted hereunder;
(d) To determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section 5(a)), any
vesting condition, restriction or limitation (which may be related to the
performance of the participant, the Company or any Subsidiary or Affiliated
Company) and any vesting acceleration or forfeiture or waiver regarding any
Award and the shares of Common Stock relating thereto, based on such factors as
the Committee shall determine; and
(e) To determine under what circumstances an Award may be settled in cash
or Common Stock under Section 5(g) or Section 6(d)(ii).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any award certificate relating
thereto) and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may delegate all or a portion of the
administration of the Plan to one or more senior managers of the Company.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or any appropriate
delegate pursuant to the provisions of the Plan shall be final and binding on
all persons, including the Company and Plan participants.
SECTION 3. Common Stock Subject to Plan
Subject to adjustment as described below, the total number of shares of
Common Stock reserved and available for grant pursuant to Awards under the Plan
shall not exceed 4,900,000 shares. Shares subject to Awards under the Plan may
be authorized and unissued shares or may be treasury shares, or both.
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If any shares of Restricted Stock are forfeited, or if any Stock Option or
Stock Appreciation Right terminates without being exercised, or if any Stock
Appreciation Right (whether granted alone or in conjunction with a Stock Option)
is exercised for cash, shares subject to such Awards shall again be available
for distribution in connection with Awards under the Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, such as any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property (without regard
to the payment of any cash dividends by the Company in the ordinary course) of
the Company, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Company, the Committee or Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Plan, in the number, kind and option price, as
applicable, of shares subject to outstanding Stock Options, and in the number
and kind of shares subject to other outstanding Awards granted under the Plan,
and/or such other equitable substitution or adjustments as it may determine to
be appropriate in its sole discretion; provided, however, that the number of
shares subject to any Award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Stock
Option.
SECTION 4. Eligibility
Officers and employees of the Company, a Subsidiary or an Affiliated
Company who are responsible for or contribute to the growth and profitability
of the business of the Company, a Subsidiary or an Affiliated Company are
eligible to be granted Awards under the Plan.
SECTION 5. Stock Options
Stock Options may be granted alone or in addition to other Awards granted
under the Plan and may be of two types: Incentive Stock Options and
NonQualified Stock Options. Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, NonQualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights). Incentive Stock Options
may be granted only to employees of the Company and its Subsidiaries. To the
extent that any Stock Option is not designated as an Incentive Stock Option or,
even if so designated, does not qualify as an Incentive Stock Option, it shall
constitute a NonQualified Stock Option.
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Stock Options shall be evidenced by option award certificates, the terms
and provisions of which may differ. An option award certificate shall indicate
on its face whether it is intended to be an award certificate for an Incentive
Stock Option or a NonQualified Stock Option. The grant of a Stock Option shall
occur on the date the Committee by resolution selects an individual to be a
participant in any grant of a Stock Option, determines the number of shares of
Common Stock to be subject to such Stock Option to be granted to such individual
and specifies the terms and provisions of the Stock Option, or on such later
date as is specified by the Committee
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock purchasable
under a Stock Option shall be determined by the Committee and, unless otherwise
determined by the Committee, shall not be less than the Fair Market Value of the
Common Stock subject to the Stock Option on the date of grant. The option price
per share shall not be decreased thereafter except pursuant to Section 3 of this
Plan.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than 10 years after the
date the Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. Unless otherwise determined
by the Committee, Stock Options shall become exercisable ratably on each of the
first five anniversaries of the date of grant. In addition, the Committee may at
any time accelerate the exercisability of any Stock Option.
(d) Method of Exercise. Subject to the provisions of this Section 5,
Stock Options may be exercised, in whole or in part, at any time during the
option term by giving written notice of exercise, or notice in accordance with
such other procedures as may be established from time to time, to the Company or
its designated agent specifying the number of shares of Common Stock subject to
the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price
in cash or by certified or cashier's check or such other instrument as the
Company may accept. If approved by the Committee, payment, in full or in part,
may also be made in the form of unrestricted Common Stock already owned by the
optionee of the same class as the Common Stock subject to the Stock Option
(based on the Fair Market Value of the Common Stock on the date the Stock Option
is exercised); provided, however, that such already owned shares have been held
by the optionee for at least six months at the time of exercise unless otherwise
determined by the Committee; provided, further, that, in the case of an
Incentive Stock Option, the right to make a payment in the form of already owned
shares of Common Stock of the same class as the
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Common Stock subject to the Stock Option may be authorized only at the time the
Stock Option is granted.
In the discretion of the Committee, payment for any shares subject to a
Stock Option may also be made by delivering a properly executed exercise notice
to the Company, together with a copy of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds necessary to
pay the purchase price, and, if requested, by the amount of any federal, state,
local or foreign withholding taxes. To facilitate the foregoing, the Company
may enter into agreements for coordinated procedures with one or more brokerage
firms.
In addition, in the discretion of the Committee, payment for any shares
subject to a Stock Option may also be made by instructing the Company or its
designated agent to withhold a number of such shares having a Fair Market Value
on the date of exercise equal to the aggregate exercise price of such Stock
Option.
No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall have all of the rights of a shareholder of the
Company holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 3(a).
(e) Transferability of Stock Options. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution, or, in the Committee's discretion, pursuant to a written
beneficiary designation, (ii) pursuant to a qualified domestic relations order,
as defined in the Code or (iii) in the Committee's discretion, pursuant to a
gift to such optionee's "immediate family" members directly, or indirectly or by
means of a trust, partnership or limited liability company. All Stock Options
shall be exercisable, subject to the terms of this Plan, only by the optionee,
guardian, legal representative or beneficiary of the optionee or permitted
transferee, it being understood that the terms "holder" and "optionee" include
any such guardian, legal representative or beneficiary or transferee. For
purposes of this Section 5(e), "immediate family" shall mean, except as
otherwise defined by the Committee, the optionee's spouse, children, siblings,
stepchildren, grandchildren, parents, stepparents, grandparents, in-laws and
persons related by legal adoption. Such transferees may transfer a Stock Option
only by will or by the laws of descent and distribution.
(f) Termination by Death or Disability. Unless otherwise determined by
the Committee, if an optionee's Termination Employment is by reason of death or
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent exercisable at the time of such termination, for a period of
twelve (12) months (or such other period as the Committee may specify in the
option agreement) from the date of such termination or until the expiration of
the stated term of such Stock Option, whichever period is the shorter.
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(g) Termination by Reason of Retirement. Unless otherwise determined by
the Committee, if an optionee's Termination of Employment is by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such
Retirement, or on such accelerated basis as the Committee may determine, for a
period of five (5) years (or such other period as the Committee may specify in
the option agreement) from the date of such Termination of Employment or until
the expiration of the stated term of such Stock Option, whichever period is the
shorter; provided, however, that if the optionee dies within such period any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of twelve (12) months from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(h) Other Termination. Unless otherwise determined by the Committee, if
an optionee's Termination of Employment is for any reason other than death,
Disability or Retirement, any Stock Option held by such optionee, to the extent
then exercisable, or on such accelerated basis as the Committee may determine,
may be exercised for the lesser of three (3) months from the date of such
Termination of Employment or the balance of such Stock Option's term; provided,
however, that if the optionee dies within such three (3) month period, any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such three (3) month period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of twelve
(12) months from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is the shorter.
(i) Cashing Out of Stock Option. On receipt of written notice of
exercise, the Committee may elect to cash out all or part of the portion of the
shares of Common Stock for which a Stock Option is being exercised by paying the
optionee an amount, in cash or Common Stock, equal to the excess of the Fair
Market Value of the Common Stock over the option price times the number of
shares of Common Stock for which the Option is being exercised on the effective
date of such cash-out.
(j) Change in Control Cash-out. Notwithstanding any other provision of
the Plan, during the 60-day period from and after a Change in Control (the
"Exercise Period"), unless the Committee shall determine otherwise at the time
of grant, an optionee shall have the right, whether or not the Stock Option is
fully exercisable and in lieu of the payment of the exercise price for the
shares of Common Stock being purchased under the Stock Option and by giving
notice to the Company, to elect (within the Exercise Period) to surrender all or
part of the Stock Option to the Company and to receive cash, within 30 days of
such notice, in an amount equal to the amount by which the Change in Control
Price per share of Common Stock on the date of such election shall exceed the
exercise price per share of Common Stock under the Stock Option (the "Spread")
multiplied by the number of shares of Common Stock granted under the Stock
Option as to which the right granted under this Section 5(j) shall have been
exercised. Notwithstanding the foregoing, if any right granted pursuant to this
Section 5(j) would make a Change in Control transaction ineligible for pooling-
of-interests accounting under APB No. 16 that but for the nature
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of such grant would otherwise be eligible for such accounting treatment, the
Committee shall have the ability to substitute for the cash payable pursuant to
such right Common Stock with a Fair Market Value equal to the cash that would
otherwise be payable hereunder.
(k) Deferral of Option Shares. The Committee may from time to time
establish procedures pursuant to which an optionee may elect to defer, until a
time or times later than the exercise of an Option, receipt of all or a portion
of the shares subject to such Option and/or to receive cash at such later time
or times in lieu of such deferred shares, all on such terms and conditions as
the Committee shall determine. If any such deferrals are permitted, then
notwithstanding Section 5(d) above, an optionee who elects such deferral shall
not have any rights as a stockholder with respect to such deferred shares unless
and until certificates representing such shares are actually delivered to the
optionee with respect thereto, except to the extent otherwise determined by the
Committee.
SECTION 6. Stock Appreciation Rights
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a NonQualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. In addition, Stock Appreciation Rights may be granted without
relationship to a Stock Option to employees residing in foreign jurisdictions,
where the grant of a Stock Option is impossible or impracticable because of
securities or tax laws or other governmental regulations.
(b) Freestanding Stock Appreciation Rights. A Stock Appreciation Right
granted without relationship to a Stock Option, pursuant to Section 6(a), shall
be exercisable as determined by the Committee, but in no event after ten years
from the date of grant. The base price of a Stock Appreciation Right granted
without relationship to a Stock Option shall be the Fair Market Value of a share
of Common Stock on the date of grant. A Stock Appreciation Right granted
without relationship to a Stock Option shall entitle the holder, upon receipt of
such right, to a cash payment determined by multiplying (i) the difference
between the base price of the Stock Appreciation Right and the Fair Market Value
of a share of Common Stock on the date of exercise of the Stock Appreciation
Right, by (ii) the number of shares of Common Stock as to which such Stock
Appreciation Right shall have been exercised. A freestanding Stock Appreciation
Right may be exercised by giving written notice of exercise to the Company or
its designated agent specifying the number of shares of Common Stock as to which
such Stock Appreciation Right is being exercised.
(c) Tandem Stock Appreciation Rights. A Stock Appreciation Right granted
in conjunction with a Stock Option may be exercised by an optionee in
accordance with Section 6(d) by surrendering the applicable portion of the
related Stock Option in accordance with procedures established by the Committee.
Upon such exercise and surrender, the optionee shall be entitled to
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receive an amount determined in the manner prescribed in Section 6(d). Stock
Options which have been so surrendered shall no longer be exercisable to the
extent the related Stock Appreciation Rights have been exercised. A Stock
Appreciation Right shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option.
(d) Tandem Stock Appreciation Right Terms and Conditions. Stock
Appreciation Rights granted in conjunction with a Stock Option shall be subject
to such terms and conditions as shall be determined by the Committee, including
the following:
(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this Section
6.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash, equal to the excess of the
Fair Market Value of one share of Common Stock over the option price per
share specified in the related Stock Option multiplied by the number of
shares in respect of which the Stock Appreciation Right shall have been
exercised.
(iii) Stock Appreciation Rights shall be transferable only to
permitted transferees of the underlying Stock Option in accordance with
Section 5(e).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is related
shall be deemed to have been exercised for the purpose of the limitation
set forth in Section 3 on the number of shares of Common Stock to be issued
under the Plan, but only to the extent of the number of shares covered by
the Stock Appreciation Right at the time of exercise based on the value of
the Stock Appreciation Right at such time.
SECTION 7. Bonus Shares and Restricted Stock
(a) Administration. Awards of shares of Common Stock or Restricted Stock
may be made either alone or in addition to other Awards granted under the Plan.
In addition, a participant may receive unrestricted shares of Common Stock or
Restricted Stock in lieu of certain cash payments awarded under other plans or
programs of the Company. The Committee shall determine the officers and
employees to whom and the time or times at which grants of unrestricted shares
of Common Stock and Restricted Stock will be awarded, the number of shares to be
awarded to any participant, the conditions for vesting, the time or times within
which such Awards may be subject to forfeiture and any other terms and
conditions of the Awards, in addition to those contained in Section 7(c).
(b) Awards and Certificates. Awards of unrestricted shares of Common
Stock and Restricted Stock shall be evidenced in such manner as the Committee
may deem appropriate,
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including book-entry registration or delivery of one or more stock
certificates to the participant, or, in the case of Restricted Stock, a
custodian or escrow agent. Any stock certificate issued in respect of
unrestricted shares or shares of Restricted Stock shall be registered in the
name of such participant. The Committee may require that the stock certificates
evidencing shares of Restricted Stock be held in custody or escrow by the
Company or its designated agent until the restrictions thereon shall have lapsed
and that, as a condition of any Award of Restricted Stock, the participant shall
have delivered a stock power, endorsed in blank, relating to the Common Stock
covered by such Award.
(c) Terms and Conditions. Shares of Restricted Stock shall be subject to
the following terms and conditions:
(i) The Committee may, prior to or at the time of grant, condition
the grant or vesting, as applicable, of an award of Restricted Stock upon
the attainment of Performance Goals. The Committee may also condition the
grant or vesting of Restricted Stock upon the continued service of the
participant. The conditions for grant or vesting and the other provisions
of Restricted Stock Awards (including without limitation any applicable
Performance Goals) need not be the same with respect to each recipient. The
Committee may at any time, in its sole discretion, accelerate or waive, in
whole or in part, any of the foregoing restrictions.
(ii) Subject to the provisions of the Plan and the terms of the
Restricted Stock Award, during the period, if any, set by the Committee,
commencing with the date of such Award for which such participant's
continued service is required (the "Restriction Period"), and until the
later of (A) the expiration of the Restriction Period and (B) the date the
applicable Performance Goals (if any) are satisfied, the participant shall
not be permitted to sell, assign, transfer, pledge or otherwise encumber
shares of Restricted Stock; provided that the foregoing shall not prevent a
participant from pledging Restricted Stock as security for a loan, the
sole purpose of which is to provide funds to pay the option price for Stock
Options.
(iii) Except as provided in this paragraph (iii) and Sections 7(c)(i)
and 7(c)(ii) or the terms of the Restricted Stock Award, the participant
shall have, with respect to the shares of Restricted Stock, all of the
rights of a shareholder of the Company holding the class or series of
Common Stock that is the subject of the Restricted Stock, including, if
applicable, the right to vote the shares and the right to receive any cash
dividends. If so determined by the Committee under the applicable terms of
the Restricted Stock Award and subject to Section 15(e) of the Plan, (A)
cash dividends on the class or series of Common Stock that is the subject
of the Restricted Stock Award shall be automatically deferred and
reinvested in additional Restricted Stock, held subject to the vesting of
the underlying Restricted Stock, or held subject to meeting Performance
Goals applicable only to dividends, (B) dividends payable in Common Stock
shall be paid in the form of Restricted Stock of the same class as the
Common Stock with which such dividend was
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paid, held subject to the vesting of the underlying Restricted Stock, or
held subject to meeting Performance Goals applicable only to dividends and
(C) dividends paid in other property shall be held subject to the vesting
of the underlying Restricted Stock.
(iv) Except to the extent otherwise provided under the applicable
terms of the Restricted Stock Award and Sections 7(c)(i), 7(c)(ii), 7(c)(v)
and 11(a)(ii), upon a participant's Termination of Employment for any
reason during the Restriction Period or before the applicable Performance
Goals are satisfied, all shares still subject to restriction shall be
forfeited by the participant.
(v) Except to the extent otherwise provided in Section 11(a)(ii), in
the event of a participant's Termination of Employment by reason of
Retirement, the Committee shall have the discretion to waive, in whole or
in part, any or all remaining restrictions (other than, in the case of
Restricted Stock with respect to which a participant is a Covered Employee,
satisfaction of the applicable Performance Goals unless the participant's
employment is terminated by reason of death or Disability) with respect to
any or all of such participant's shares of Restricted Stock.
(vi) If and when any applicable Performance Goals are satisfied and
the Restriction Period expires without a prior forfeiture of the
Restricted Stock, unlegended certificates for such shares shall be
delivered to the participant upon surrender of the legended certificates,
or the restrictions on such shares shall be removed from the book-entry
registration.
SECTION 8. Performance Units
(a) Administration. Performance Units may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the officers and employees to whom, and the time or times at which, Performance
Units shall be awarded, the number of Performance Units to be awarded to any
participant, the duration of the Award cycle and any other terms and conditions
of the Award, in addition to those contained in Section 8(b).
(b) Terms and Conditions. Performance Units Awards shall be subject to the
following terms and conditions.
(i) The Committee may, prior to or at the time of the grant,
designate Performance Units, in which event it shall condition the
settlement thereof upon the attainment of Performance Goals. The Committee
may also condition the settlement thereof upon the continued service of the
participant. The provisions of such Awards (including without limitation
any applicable Performance Goals) need not be the same with respect to each
recipient. Subject to the provisions of the Plan and the Performance Units
Agreement referred to in Section 8(b)(vi), Performance Units may not be
sold, assigned, transferred, pledged or otherwise encumbered during the
Award cycle.
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(ii) Except to the extent otherwise provided in the applicable
Performance Unit Agreement and Sections 8(b)(ii) and 11(a)(iii), upon a
participant's Termination of Employment for any reason during the Award
cycle or before any applicable Performance Goals are satisfied, all rights
to receive cash or stock in settlement of the Performance Units shall be
forfeited by the participant.
(iii) Except to the extent otherwise provided in Section 11(a)(iii), in
the event that a participant's employment is terminated (other than for
Cause), or in the event of a participant's Retirement, the Committee shall
have the discretion to waive, in whole or in part, any or all remaining
payment limitations with respect to any or all of such participant's
Performance Units.
(iv) A participant may elect to further defer receipt of cash or
shares in settlement of Performance Units for a specified period or until a
specified event, subject in each case to the Committee's approval and to
such terms as are determined by the Committee (the "Elective Deferral
Period"). Subject to any exceptions adopted by the Committee, such election
must generally be made prior to commencement of the Award cycle for the
Performance Units in question.
(v) At the expiration of the Award cycle, the Committee shall
evaluate the Company's performance in light of any Performance Goals for
such Award, and shall determine the number of Performance Units granted to
the participant which have been earned, and the Committee shall then cause
to be delivered (A) a number of shares of Common Stock equal to the number
of Performance Units determined by the Committee to have been earned, or
(B) cash equal to the Fair Market Value of such number of shares of Common
Stock to the participant as determined by the Committee in its discretion
(subject to any deferral pursuant to Section 8(b)(iv)).
(vi) Each Award shall be confirmed by, and be subject to, the terms of
a Performance Unit Agreement.
SECTION 9. Dividend Equivalents and Interest Equivalents
(a) The Committee may provide that a participant to whom a Stock Option
has been awarded, which is exercisable in whole or in part at a future time for
shares of Common Stock (such shares, the "Option Shares") shall be entitled to
receive an amount per Option Share, equal in value to the cash dividends, if
any, paid per share of Common Stock on issued and outstanding shares, as of the
dividend record dates occurring during the period between the date of the Award
and the time each such Option Share is delivered pursuant to the exercise of
such Stock Option. Such amounts (herein called "dividend equivalents") may, in
the discretion of the Committee, be:
(i) paid in cash or shares of Common Stock from time to time prior to
or at the time of the delivery of such shares of Common Stock or upon
expiration of the Stock
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Option if it shall not have been fully exercised (except that payment of
the dividend equivalents on an Incentive Stock Option may not be made prior
to exercise); or
(ii) converted into contingently credited shares of Common Stock (with
respect to which dividend equivalents shall accrue) in such manner, at such
value, and deliverable at such time or times, as may be determined by the
Committee.
Such shares of Common Stock (whether delivered or contingently credited) shall
be charged against the limitations set forth in Section 3.
(b) The Committee, in its discretion, may authorize payment of interest
equivalents on any portion of any Award payable at a future time in cash, and
interest equivalents on dividend equivalents which are payable in cash at a
future time.
SECTION 10. Annual Cash Bonus Awards
(a) Bonus Pool. For each fiscal year of the Company, a bonus pool (the
"Bonus Pool") equal to up to 30% of the Company's adjusted pre-tax net income
for such fiscal year (prior to taking into account any payments under this
Section 10 for such fiscal year) will be established by the Committee.
Notwithstanding the foregoing, if the Company's aggregate compensation and
benefits expenses with respect to the fiscal year (including payments under this
Section 10) would otherwise exceed 55% of the Company's revenues for such fiscal
year (the "Maximum Expense"), the Committee shall reduce the Bonus Pool to the
greatest amount which would cause compensation and benefits expense for such
fiscal year not to exceed the Maximum Expense.
(b) Allocation of Bonus Pool. The Committee shall determine the allocation
of the Bonus Pool for each fiscal year. Such allocation may be made at any time
prior to payment of Bonus Awards. In the event the Bonus Pool is reduced
pursuant to paragraph (a) above, the Committee shall determine the required
reductions in Bonus Awards. Such reduction need not be on a pro rata basis among
the participants.
(c) Payment of Awards. Bonus Awards under the Plan shall be paid in cash
as soon as practicable following the end of the applicable fiscal year, but in
any event within 90 days following the end of such fiscal year.
(d) Termination of Employment. A participant shall not be entitled to
receive payment of a Bonus Award, unless the Committee determines otherwise, if
at any time prior to the end of the fiscal year the participant's Termination of
Employment occurs or, if at any time, following the end of the fiscal year the
participant's employment is terminated for Cause. In the event that a
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participant's Termination of Employment (other than for Cause) occurs following
the end of the applicable fiscal year, such participant shall be entitled to
receive payment of his or her Bonus Award for such fiscal year.
SECTION 11. Change in Control Provisions
(a) Impact of Event. Notwithstanding any other provision of the Plan to
the contrary, in the event of a Change in Control:
(i) Any Stock Options outstanding as of the date such Change in
Control is determined to have occurred, and which are not then exercisable
and vested, shall become fully exercisable and vested to the full extent of
the original grant.
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall become free
of all restrictions and become fully vested and transferable to the full
extent of the original grant.
(iii) All Performance Units shall be considered to be earned and
payable in full, and any other deferred or other restrictions shall lapse
and such Performance Units shall be settled in cash or Common Stock (as
determined by the Committee) as promptly as is practicable.
(iv) Unless the Board determines to continue the Bonus Pool for the
remainder of the fiscal year, Bonus Awards for the fiscal year in which the
Change of Control occurs shall be paid out based upon calculations of
adjusted pre-tax net income and Maximum Expense under Section 10 through
the Change in Control as if the fiscal year had ended on the Change in
Control date.
(b) For purposes of the Plan, a "Change in Control" shall mean the
happening of any of the following events:
(i) acquisition by any individual, entity or group (with the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more of either (A) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (B) the combined voting
power of the then outstanding voting securities of the Company entitled to
vote generally in the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that, for purposes of this
subsection (i), the following acquisitions shall not constitute a Change
of Control: (1) any acquisition directly from the Company, (2) any
acquisition by the Company, (3) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, (4) any acquisition by any
corporation pursuant to a
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transaction which complies with clauses (A), (B) and (C) of subsection
(iii) of this Section 11(b) or (5) any acquisition of beneficial ownership
by Emanual Friedman, Eric Billings, or W. Russell Ramsey (the "Founders"),
or any entity that is controlled by one or more of the Founders (the
"Founder Affiliates"); or
(ii) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease to constitute at least a majority of the
Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of
a Person other than the Board; or
(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company or the acquisition of
assets or stock of another corporation (a "Business Combination"), in each
case, unless, following such Business Combination, (A) all or sub-
stantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 60% of,
respectively, the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the
corporation resulting from such Business Combination (including, without
limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (B) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust)
of the Company or such corporation resulting from such Business
Combination or the Founders or Founder Affiliates) beneficially owns,
directly or indirectly, 50% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership
existed prior to the Business Combination and (C) at least a majority of
the members of the board of directors of the corporation resulting from
such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
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(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(c) Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular way, of
a share of Common Stock in any transaction reported on the New York Stock
Exchange Composite Tape or other national exchange on which such shares are
listed or on NASDAQ during the 60-day period prior to and including the date of
a Change in Control or (ii) if the Change in Control is the result of a tender
or exchange offer or a Corporate Transaction, the highest price per share of
Common Stock paid in such tender or exchange offer or Corporate Transaction;
provided, however, that in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, the Change in Control
Price shall be in all cases the Fair Market Value of the Common Stock on the
date such right under Section 5(j) is exercised. To the extent that the
consideration paid in any such transaction described above consists all or in
part of securities or other non-cash consideration, the value of such
securities or other non-cash consideration shall be determined in the sole
discretion of the Board.
SECTION 12. Tax Offset Bonuses
At the time an Award is made hereunder or at any time thereafter, the
Committee may grant to the participant receiving such Award the right to receive
a cash payment in an amount specified by the Committee, to be paid at such time
or times (if ever) as the Award results in compensation income to the
participant, for the purpose of assisting the participant to pay the resulting
taxes, all as determined by the Committee and on such other terms and conditions
as the Committee shall determine.
SECTION 13. Amendment and Termination
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of
participants under any Award theretofore granted without the participants'
consent. In addition, no such amendment shall be made without the approval of
the Company's shareholders to the extent such approval is required by law or
agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules as
well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.
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SECTION 14. Unfunded Status of Plan
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation
of trusts or other arrangements to meet the obligations created under the Plan
to deliver Common Stock or make payments; provided, however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 15. General Provisions
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to the distribution thereof.
The certificates for such shares may include any legend, or, in the case of
book-entry registration any notation, which the Committee deems appropriate to
reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or certificates made
pursuant thereto, the Company shall not be required to issue or deliver any
stock certificate or certificates for shares of Common Stock, or account for
such shares by book-entry registration, under the Plan prior to fulfillment of
all of the following conditions:
(1) Listing or approval for listing upon notice of issuance, of
such shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common Stock;
(2) Any registration or other qualification of such shares of the
Company under any state, federal or foreign law or regulation, or the
maintaining in effect of any such registration or other qualification which
the Committee shall, in its absolute discretion upon the advice of counsel,
deem necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any state
or federal governmental agency or foreign governmental body which the
Committee shall, in its absolute discretion after receiving the advice of
counsel, determine to be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Company or any
Subsidiary or Affiliated Company from adopting other or additional compensation
arrangements for its employees.
(c) Adoption of the Plan shall not confer upon any employee any right to
continued employment, nor shall it interfere in any way with the right of the
Company or a Subsidiary or an Affiliated Company to terminate the employment of
any employee at any time.
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<PAGE>
(d) No later than the date as of which an amount first becomes includible
in the gross income of the participant for federal income tax purposes with
respect to any Award under the Plan, the participant shall pay to the Company,
or make arrangements satisfactory to the Company regarding the payment of, any
federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Company, withholding obligations may be settled with Common Stock, including
Common Stock that is part of the Award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements, and the Company and its Subsidiaries or
Affiliated Companies shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the participant. The
Committee may establish such procedures as it deems appropriate, including
making irrevocable elections, for the settlement of withholding obligations with
Common Stock.
(e) Reinvestment of dividends in additional Restricted Stock at the time
of any dividend payment shall only be permissible if sufficient shares of
Common Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Awards).
(f) The Committee, in its sole discretion, may establish such procedures
as it deems appropriate for a participant to designate a beneficiary to whom
any amounts payable in the event of the participant's death are to be paid or by
whom any rights of the participant, after the participant's death, may be
exercised.
(g) In the case of a grant of an Award to any employee of a Subsidiary or
Affiliated Company, the Company may, if the Committee so directs, issue or
transfer the shares of Common Stock, if any, covered by the Award to the
Subsidiary or Affiliated Company, for such lawful consideration as the Committee
may specify, upon the condition or understanding that the Subsidiary or
Affiliated Company will transfer the shares of Common Stock to the employee in
accordance with the terms of the Award specified by the Committee pursuant to
the provisions of the Plan.
(h) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Virginia,
without reference to principles of conflict of laws.
SECTION 16. Effective Date of Plan
The Plan (other than Section 10, which shall be effective from and after
January 1, 1998 so long as the initial public offering of the Common Stock has
become effective by such date) shall be effective immediately prior to the date
on which the registration statement filed by the Company under the Securities
Act of 1933, as amended, registering the initial public offering of the Common
Stock is declared effective.
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<PAGE>
Exhibit 5.01
[MCQUIRE, WOODS, BATTLE & BOOTHE LLP LETTERHEAD]
December 22, 1997
Friedman, Billings, Ramsey Group, Inc.
1001 - 19th Street, North
18th Floor
Arlington, Virginia 22209
Friedman, Billings, Ramsey Group, Inc.
Initial Public Offering
Gentlemen:
Reference is made to the Registration Statement on Form S-1 (Registration
No. 333-39107), as amended, filed with the Securities and Exchange Commission
(the "Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of 12,650,000 shares of your Class A Common
Stock, par value $0.01 per share (the "Class A Common Stock"), for sale in your
initial public offering (the "Offering"). The shares consist of up to 11,500,000
shares of Class A Common Stock proposed to be sold by you in the Offering (the
"Company Shares") and up to 1,150,000 shares of Class B Common Stock, par value
$0.01 per share (the "Secondary Shares"), which are proposed to be sold by
certain selling shareholders and which under the terms of your Articles of
Incorporation convert to shares of Class A Common Stock upon their sale in the
Offering. We have acted as your special counsel for the purpose of this opinion
in connection with this matter.
It is our opinion that (i) the Company Shares, when issued, paid for and
sold to the public in the manner referred to in the Registration Statement and
in accordance with the resolutions adopted by your Board of Directors in
connection therewith, will be legally and validly issued, fully paid and
nonassessable and (ii) the Secondary Shares when transferred for disposition in
the Offering and sold to the public in the manner referred to in the
Registration Statement, will be legally and validly issued, fully paid and
nonassessable shares of Class A Common Stock.
In arriving at the foregoing opinion, we have relied, among other things,
upon our examination of such of your corporate records and certificates of your
officers and of public officials, and upon such portions of the Registration
Statement, as we have deemed appropriate.
<PAGE>
Friedman, Billings, Ramsey Group, Inc.
December 22, 1997
Page Two
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
statement made in reference to our firm under the caption "Legal Matters" in the
Prospectus which is made a part of the Registration Statement.
Very truly yours,
/s/ McGuire, Woods, Battle & Boothe, LLP
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
Arthur Andersen LLP
Washington D.C.
December 22, 1997
<PAGE>
Exhibit 99.02
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I, Wallace L. Timmeny, hereby consent to the use, in the Registration
Statement on Form S-1 of Friedman, Billings, Ramsey Group, Inc., a Virginia
corporation (the "Company"), to which this consent is filed as an exhibit
included therein, of my name as a person about to become a Director of the
Company.
/s/ Wallace L. Timmeny
----------------------------
Wallace L. Timmeny
Date: December 20, 1997
<PAGE>
Exhibit 99.03
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I. Mark D. Warner, hereby consent to the use, in the Registration
Statement on Form S-1 of Friedman, Billings, Ramsey Group, Inc., a Virginia
corporation (the "Company"), to which this consent is filed as an exhibit
included therein, of my name as a person about to become a Director of the
Company.
/s/ Mark R. Warner
----------------------------------
Mark R. Warner
Date: December 18, 1997
