<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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 PER UNIT PRICE (1) FEE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
par value $0.01 per
share................ 7,793,579 shares $20 $155,871,580 $53,748.82
</TABLE>
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- -------------------------------------------------------------------------------
(1) 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 Inside Front Cover Page; Outside
Prospectus............................................ 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
Outside Front Cover Page;
5. Determination of Offering Price..................... Underwriting
6. Dilution............................................ Dilution
Principal and Selling
7. Selling Security Holders............................ 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; Certain
Transactions; 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 OCTOBER 30, 1997
PROSPECTUS
7,793,579 SHARES
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CLASS A COMMON STOCK
Of the 7,793,579 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"),
5,000,000 are being issued and sold by the Company and 2,793,579 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. The Company has
applied for the listing of the Class A Common Stock on the New York Stock
Exchange, Inc. ("NYSE") under the symbol " ."
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 convertible into Class A Common Stock
upon sale or transfer to certain third parties not affiliated with the Company.
See "Description of Capital Stock--Common Stock."
Up to 779,356 shares of Class A Common Stock are being reserved for sale to
certain existing shareholders and other employees of the Company at the initial
public offering price less underwriting discount (the "Direct Offering"). See
"Direct Offering."
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
AT PAGE .
--------------
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.
(2) Not including expenses payable by the Company, estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,169,037 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.___________________LAZARD FRERES & CO. LLC
, 1997
<PAGE>
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."
<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 leverages this research
perspective with its capital markets expertise to provide value for its
clients. Using this approach, FBR has achieved a 48% compounded annualized
growth rate in revenues since its inception in 1989. 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 October 17, 1997, FBR was ranked fourth in terms
of lead managed U.S. issuer initial public offering ("IPO") dollar volume
behind Goldman, Sachs & Co., Merrill Lynch & Co., and Morgan Stanley & Co., and
for the period from January 1, 1996 until October 17, 1997 was ranked #1 in
aftermarket performance of domestic IPOs, according to CommScan EquiDesk.
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 it is as a result of this culture that FBR
has experienced less than 3% in professional employee turnover 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 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 $3.2
2
<PAGE>
billion in mergers and $10.3 billion in capital raising transactions which span
a wide range of geographic regions and security types and a growing variety of
industry sectors. FBR's current capital raising backlog of transactions in
process represents a potential transaction value equal to $4 to $5 billion.
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 45% gross and 36.6% net to its limited partners through
September 30, 1997. FBR's three public mutual funds have provided total net
return for the nine months ended September 30, 1997 of 34.2%, 41.6% and 39.2%.
The amount of assets under management have grown from $119.3 million at the
beginning of 1996 to over $414 million as of September 30, 1997, representing
247% growth.
FBR's revenues grew from $57.2 million for the year ended December 31, 1995,
to $109.9 million, representing an increase of 92% for the year ended December
31, 1996, and from $58.2 for the nine months ended September 30, 1996, to
$134.9 million for the nine months ended September 30, 1997, representing an
increase of 132%. 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. ("PNC"), a diversified financial services
company headquartered in Pittsburgh, pursuant to which PNC has agreed to
acquire 4.9% of the outstanding Common Stock upon the closing of the Offering,
and FBR and PNC will 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. See "Business -- Strategic Business Relationship with PNC Bank
Corp."
3
<PAGE>
RECENT DEVELOPMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the year to date through October 31, 1996, and through October 31, 1997,
the Company's results of operations were:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
OCTOBER 31,
--------------------------
PRO FORMA
1996 1997(1) 1997(2)
------- -------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
REVENUES:
Investment banking(3).............................. $30,714 $102,660 $102,660
Corporate finance fees............................. 4,371 40,807 40,807
Principal transactions............................. 20,458 15,046 15,046
Agency commissions................................. 5,880 9,316 9,316
Asset management fees(4)........................... 2,841 6,268 6,268
Interest and dividends............................. 2,617 3,872 3,872
------- -------- --------
Total revenues................................... 66,881 177,969 177,969
EXPENSES:
Compensation and benefits(2)....................... 33,304 112,532 97,883
Brokerage and clearance............................ 2,685 3,477 3,477
Occupancy and equipment............................ 1,227 2,151 2,151
Communications..................................... 926 1,710 1,710
Interest........................................... 2,206 2,601 2,601
Other.............................................. 7,785 20,935 20,935
------- -------- --------
Total expenses................................... 48,133 143,406 128,757
------- -------- --------
NET INCOME BEFORE TAXES.............................. 18,748 34,563 49,212
Pro forma tax provision............................ 7,668 14,188 20,201
------- -------- --------
Pro forma net income............................... $11,080 $ 20,375 $ 29,011
======= ======== ========
Pro forma earnings per share....................... $ 0.28 $ 0.51 $ 0.73
======= ======== ========
</TABLE>
(1) Amounts as of October 31, 1997, based on information available as of
October 30, 1997.
(2) Pro forma information assumes that certain compensation programs to be
adopted following the Offering had been implemented in the period
presented.
(3) Does not include unrealized appreciation of $4.9 million on warrants
obtained in 1997 investment banking transactions, which would result in a
$2.2 million profit contribution.
(4) Does not include performance fees of approximately $11.0 million as of
October 31, 1997 which would be payable at December 31, 1997 at current
performance levels, which would result in a $4.9 million profit
contribution.
Net income before taxes increased $15.8 million, or 84% over the comparable
1996 period. The increase in revenues was due to an increase in investment
banking and corporate finance fee revenues. Revenues for the ten months ended
October 31, 1997 increased $111.1 million, or 166% over the comparable 1996
period.
4
<PAGE>
THE OFFERING
Class A Common Stock
offered by the Company..... 5,000,000 shares
Class A Common Stock
offered by the Selling 2,793,579 shares
Shareholders...............
Class A Common Stock to be
outstanding after the 10,000,000 shares (1)
Offering...................
Class B Common Stock to be
outstanding after the 35,029,000 shares
Offering...................
Total Common Stock to be
outstanding after the 45,029,000 shares
Offering...................
Use of Proceeds............. General corporate purposes and potentially
repayment of certain indebtedness. The Company
will not receive any of the proceeds from the
sale of shares by the Selling Shareholders. See
"Use of Proceeds."
Proposed NYSE Symbol........ " "
- --------------------
(1) Excludes shares of Class A Common Stock reserved for issuance
under the Company's stock plans. Includes 2,206,421 shares of Class A
Common Stock to be issued pursuant to an agreement between FBR and PNC in a
secondary offering. See "Management" and "Business--Strategic Business
Relationship with PNC Bank Corp."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
--------------------------------
SUPPLEMENTAL
PRO-
YEAR ENDED DECEMBER 31, ACTUAL FORMA(2)
----------------------------------------------- ------------------ ------------
1992 1993 1994 1995 1996 1996 1997 1997
------- -------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
REVENUES(3)
Investment banking (4)... $ 1,771 $ 35,232 $ 30,579 $ 16,075 $ 55,159 $ 25,615 $ 67,091 $ 67,091
Corporate finance fees... 50 75 14,427 7,224 10,361 4,370 38,618 38,618
Principal transactions... 17,202 19,417 9,903 20,078 25,466 18,157 11,994 11,994
Agency commissions....... 2,268 2,908 1,935 4,483 7,555 5,060 7,898 7,898
Asset management fees
(5)..................... 116 1,164 444 6,747 7,808 2,635 6,256 6,256
Interest and dividends... 315 456 1,713 2,558 3,554 2,382 3,061 3,061
------- -------- -------- -------- -------- -------- -------- --------
Total revenues........... 21,722 59,252 59,001 57,165 109,903 58,219 134,918 134,918
EXPENSES
Compensation and benefits
(6)..................... 11,824 24,269 23,456 27,623 55,004 28,604 85,138 74,205
Brokerage and clearance.. 1,186 1,025 1,474 2,350 3,484 2,314 3,138 3,138
Occupancy and equipment.. 406 554 944 1,187 1,683 1,103 1,934 1,934
Communications........... 284 354 764 823 1,109 799 1,536 1,536
Interest................. 73 316 1,773 1,523 2,665 2,039 2,301 2,301
Other (7)................ 1,077 3,353 13,049 8,362 14,620 6,584 17,041 17,041
------- -------- -------- -------- -------- -------- -------- --------
Total expenses........... 14,850 29,871 41,460 41,868 78,565 41,443 111,088 100,155
INCOME BEFORE PRO-RATA
SUBCHAPTER "S"
CORPORATION STOCKHOLDER
DISTRIBUTIONS............ 6,872 29,381 17,541 15,297 31,338 16,776 23,830 34,763
Pro-rata subchapter S
corporation stockholder
distributions (8)....... 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 $ 34,763
======= ======== ======== ======== ======== ======== ======== ========
PRO FORMA STATEMENTS OF OPERATIONS
DATA (UNAUDITED)(9)
Net income (loss), as
reported................ $ (275) $ (538) $ (1,814) $ 9,439 $ 24,838 $ 16,776 $ 23,830 $ 34,763
Pro-rata S corporation
distribution............ 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) (9,783) (14,270)
Other pro forma
adjustment.............. -- -- -- -- (1,416) -- (1,416) (1,416)
------- -------- -------- -------- -------- -------- -------- --------
Pro forma net income..... $ 4,039 $ 17,317 $ 10,194 $ 9,614 $ 17,294 $ 9,914 $ 12,631 $ 19,077
======= ======== ======== ======== ======== ======== ======== ========
Pro forma earnings per
share................... $ 0.11 $ 0.48 $ 0.28 $ 0.26 $ 0.44 $ 0.25 $ 0.32 $ 0.48
======= ======== ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding (10)........ 35,756 36,303 36,592 37,311 39,475 39,458 39,850 39,850
OPERATING DATA (UNAUDITED)
Total employees (11)..... 41 65 92 112 175 138 230 230
Revenue per average
employee (in thousands). $564 $1,118 $752 $560 $766 $621 $888 $888
Annualized return on
average equity.......... 353% 461% 143% 82% 87% 69% 59% 78%
Compensation and benefits
expense as a percentage
of revenues............. 54.4% 41.0% 39.8% 48.3% 50.0% 49.1% 63.1% 55.0%
Income before pro rata
subchapter
S corporation stockholder
distributions as a
percentage of revenues
(6)..................... 31.6% 49.6% 29.7% 26.8% 28.5% 28.8% 17.7% 25.8%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED(12)
-------- ---------------
<S> <C> <C>
CONSOLIDATED
BALANCE SHEET
DATA
Total assets................. $119,215 $207,565
Total liabilities............ 61,097 68,580
Total Shareholders' equity... 58,118 137,567
Book value per common share
outstanding................. $ 1.45 $ 3.06
</TABLE>
- --------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the basis of presentation.
6
<PAGE>
(2) Pro forma information assumes that certain compensation programs to be
adopted following the Offering had been implemented in the period
presented.
(3) 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."
(4) Amount excludes unrealized appreciation of $5.9 million on warrants
obtained in 1997 investment banking transactions which are carried at $1.
(5) Does not include unrealized performance fees and special profit allocations
of approximately $12.9 million as of September 30, 1997.
(6) Excludes pro rata subchapter S corporation stockholder distributions.
(7) Includes business development, professional services and other operating
expenses.
(8) Represents pro rata compensation paid to shareholders based on ownership
interest as of the end of each period.
(9) 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 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.
(10) See Note 2 of Notes to Consolidated Financial Statements for discussion of
the computation of weighted average shares outstanding.
(11) As of end of the period reported.
(12) Adjusted to give effect to (i) the sale by the Company of 5 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 $7.5 million to
the Company's current shareholders representing estimated subchapter S
shareholder tax liability as of September 30, 1997, all of which has been
reflected as accrued dividends payable; 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.
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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 FACTORS SHOULD
BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS BEFORE PURCHASING THE CLASS A COMMON STOCK OFFERED HEREBY:
RISKS ASSOCIATED WITH SECURITIES BUSINESS GENERALLY
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.
RISKS OF REDUCED REVENUES DURING PERIODS OF DECLINING PRICES OR REDUCED
ACTIVITY IN MARKET FOR PUBLIC OFFERINGS
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.
RISKS OF 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; inflows and outflows of funds into and out of mutual and pension
funds; and availability of short-term and long-term funding and capital.
RISKS OF 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
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trading activities and commissions. Lower price levels of securities may also
result in a reduced volume of 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.
RISKS OF 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.
Under federal securities laws, other statutes and court decisions, an
underwriter may be subject to substantial liability for material misstatements
or omissions in prospectuses and other communications with respect to
underwritten offerings, and may be exposed to claims and litigation arising
from such offerings. Further, 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."
RISKS OF 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.
Financial services, technology and real estate investment trust ("REIT")
transactions 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
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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 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 a merger or acquisition transaction 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."
DEPENDENCE ON ABILITY TO RETAIN AND RECRUIT 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 long-term deferred compensation plans, and grants of options 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."
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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, the Shareholder 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 it has historically
experienced. See "Description of Capital Stock--Voting Trust Agreement and
Shareholders Agreement."
SIGNIFICANT COMPETITION
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.
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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."
RISK OF 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. The Company
has in place compliance procedures designed to ensure that such inside
information is not used for making investment decisions on behalf of the hedge
funds. See "Business Asset--Management."
RISKS 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. 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."
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.
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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 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. 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
reduce 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.
Any difficulty or significant delay in the implementation or operation of
existing or new systems 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
The Company's business is highly dependent on communications and information
systems. Any failure or interruption of the Company's systems, or of the
systems of the Company's clearing broker, 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. There can be no assurance
that the Company or its clearing broker will not suffer any such systems
failure or interruption, including those 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 back-up procedures and capabilities in the
event of any such failure or interruption will be adequate. See "Business--
Accounting, Administration and Operations."
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TERMINATION OF SUBCHAPTER S CORPORATION STATUS; PAYMENT OF SUBSTANTIAL
OFFERING PROCEEDS TO CURRENT STOCKHOLDERS
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 closing of this Offering,
the Company will terminate its status as an S corporation (the "Termination
Date") and will declare a dividend to Existing Shareholders (as defined
below). The dividend will be at least equal to the total amount of federal and
state taxes payable by the Existing Shareholders on the Company's 1997
earnings (this amount being the "Tax Amount"), and may be in an amount greater
than the Tax Amount (the total amount of the distribution being the "S
Corporation Distribution"). As of September 30, 1997, the Company's
undistributed S corporation earnings equaled approximately $40 million. The
Company estimates that the Tax Amount will be between $16 million and $40
million. The S Corporation Distribution may be in an amount up to $
million. The S Corporation Distribution will be paid using cash on hand,
borrowings under the Company's existing line of credit and, if necessary,
additional short-term borrowings. Any amounts so borrowed may be repaid using
a portion of the net proceeds of the Offering. Purchasers of Class A Common
Stock in this 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 "S
Corporation Distribution and Termination of S Corporation Status" and "Use of
Proceeds."
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. In addition, the Company will make the S
Corporation Distribution prior to the date of the Offering, thereby reducing
the Company's available funds. 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 "Regulation," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview,"
"Certain Transactions Occurring Prior to the Offering," "S Corporation
Distribution and Termination of S Corporation Status" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
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 potential payment of indebtedness (if
any) that may be incurred in conjunction with the S Corporation Distribution
or principal investments. Accordingly, management will have significant
flexibility in applying the net proceeds of the Offering. See "Use of
Proceeds."
DUAL CLASS STOCK AND VOTING TRUST AGREEMENT
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 26 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 % of the voting power
of the Company following the Offering ( % if the Over-allotment Option is
exercised in full) and will be able to control the outcome of all corporate
actions requiring shareholder approval. Accordingly, prospective investors
should realize that their ownership of Class
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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 the "Principal and Selling Shareholders."
CONTROL OF THE COMPANY; ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS
The Company's Articles of Incorporation and By-Laws, 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 By-
Laws 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 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.
SHARES ELIGIBLE FOR FUTURE SALE
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. There will be 10 million shares
of Class A Common Stock outstanding immediately after completion of the
Offering and the PNC Transaction of which 7,795,579 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 ("Securities Act"). All of the 40,029,000 shares outstanding
immediately prior to the Offering (other than the shares offered by the
Selling Shareholders hereby) will be subject to lockup restrictions (the
"Lockup"), unless released by all of the Underwriters. The Lockup prohibits
the disposition of any such shares until the date 180 days after the date of
this Prospectus. 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 $15.94 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."
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FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements may be deemed to
include the Company's plans to identify emerging trends and industries, expand
the range of services it offers, increase the number of its investors and
clients, increase its principal investment activities, expand its facilities
and increase the number of its personnel. Actual results could differ from
those projected in any forward-looking statements for the reasons detailed in
the other sections of this "Risk Factors" section of this Prospectus.
CERTAIN TRANSACTIONS OCCURRING PRIOR TO THE OFFERING
CREATION OF HOLDING COMPANY STRUCTURE
On January 1, 1997, Friedman, Billings, Ramsey Group, Inc., a Delaware
corporation which had made an election under subchapter S ("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 automatically converts to Class A Common Stock upon the sale or
transfer to certain third parties not affiliated with the Company. 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.
Prior to the Offering, the Board of Directors intends to declare a dividend
to the Existing Shareholders. The dividend will be at least equal to the Tax
Amount, and may be in an amount greater than the Tax Amount. As of September
30, 1997, undistributed S corporation earnings approximated $40 million. The
Company estimates that the Tax Amount will be between $16 million and $40
million. The S Corporation Distribution may be in an amount up to $[ ]
million. The Company will pay approximately 90% of the estimated amount of the
S Corporation Distribution on the Termination Date using cash on hand,
borrowings under the existing line of credit and, if necessary, additional
short-term borrowings. Any amounts so borrowed may be repaid using a portion
of the net proceeds of the Offering. The balance of the S Corporation
Distribution will be paid when the actual amount is calculated. See "Risk
Factors--Termination of Subchapters S Corporation Status; Payments of
Substantial Offering Proceeds to Current Stockholders" and "Use of Proceeds."
16
<PAGE>
The Company intends to structure the S Corporation Distribution so that no
deferred tax liability will be recorded in connection with the S corporation
status at September 30, 1997. Had the Company terminated its S corporation
status at September 30, 1997, the amount of such deferred tax liability would
have been immaterial.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Class A
Common Stock offered hereby (assuming exercise of the Over-allotment Option),
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 approximately $88.4 million. The proceeds will
be used for general corporate purposes. In addition, a portion of the proceeds
may be used to repay certain indebtedness (if any) that may be incurred in
conjunction with the S Corporation Distribution. Pending such use, the
proceeds will be invested in short-term securities. 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.
17
<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, none authorized, actual; par
value $0.01,
10 million shares authorized, no shares issued
and outstanding(3)............................... -- --
Class A Common Stock, par value $0.01 per share,
40 million shares authorized, 10,000,000 shares
issued and outstanding, pro forma as adjusted(3). -- 100
Class B Common Stock, par value $0.01 per share,
50 million shares authorized, 40,029,000 shares
issued and outstanding, actual(3) 35,029,000,
pro forma as adjusted(3)......................... 400 350
Additional paid-in capital......................... 22,479 110,779
Stock subscriptions receivable..................... (355) (355)
Retained earnings(4)............................... 35,594 26,693
------- --------
Total Shareholders' equity........................ 58,118 137,567
------- --------
Total long-term debt and Shareholders' equity..... $59,787 $139,236
======= ========
</TABLE>
- ---------------------
(1) Gives effect to: (i) a distribution of approximately $7.5 million to the
Company's current stockholders as described in "S Corporation 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 5,000,000 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 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) as discussed in Note 1,
the issuance of 5 million of Class A Common Stock offered for sale by the
Company; and (iv) the conversion of 5 million shares of Class B Common
Stock into the same number of shares of Class A Common Stock upon sale by
the Selling Stockholders.
(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).
18
<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 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 $7.5 million to the Company's current shareholders for
estimated subchapter S corporation shareholder tax liability and (ii) the
recording of compensation expense associated with book value stock issued
within twelve months of the offering date, would have been $1.23 per share.
After giving effect to the sale of an aggregate 5 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 $3.06 per share. This represents an
immediate increase of $1.83 per share to Existing Shareholders and an
immediate dilution of $15.94 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.............. (0.22)
Increase per share attributable to new investors............ 1.83
-----
Pro forma as adjusted net tangible book value per share af- 3.06
ter the Offering........................................... ------
Dilution per share to new investors......................... $15.94
======
</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 89% $ 22,879,000 19% $0.57
New Investors(1).............. 5,000,000 11 95,000,000 81 19.00
---------- --- ------------ ---
Total....................... 45,029,000 100% $117,879,000 100%
========== === ============ ===
</TABLE>
- ---------------------
(1) Before deducting estimated underwriting discount and commission and
offering expenses.
The foregoing computations exclude 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 held by its the Existing
Shareholders to 35,029,000 shares or approximately 77.8% of the total number
of shares of Common Stock outstanding immediately after the Offering and will
increase the number of shares held by new investors to 10,000,000, or 22.2% of
the total number of shares of Common Stock outstanding immediately after this
the Offering. See "Principal and Selling Stockholders."
19
<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, are derived from the audited
consolidated financial statements of the Company. The selected consolidated
financial data for the nine months ended September 30, 1996 and 1997, and the
consolidated balance sheet data as of September 30, 1997, are derived from
unaudited financial statements of the Company and have been prepared on the
same basis as the audited consolidated 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.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, (UNAUDITED)
--------------------------------
SUPPLEMENTAL
YEAR ENDED DECEMBER 31, ACTUAL PRO-FORMA(2)
---------------------------------------------- ------------------ ------------
1992 1993 1994 1995 1996 1996 1997 1997
--------------------------- ------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
REVENUES(3)
Investment banking (4). $ 1,771 $ 35,232 $30,579 $16,075 $ 55,159 $ 25,615 $ 67,091 $ 67,091
Corporate finance fees. 50 75 14,427 7,224 10,361 4,370 38,618 38,618
Principal transactions. 17,202 19,417 9,903 20,078 25,466 18,157 11,994 11,994
Agency commissions..... 2,268 2,908 1,935 4,483 7,555 5,060 7,898 7,898
Asset management fees
(5)................... 116 1,164 444 6,747 7,808 2,635 6,256 6,256
Interest and dividends. 315 456 1,713 2,558 3,554 2,382 3,061 3,061
-------- -------- ------- ------- -------- -------- -------- --------
Total revenues......... 21,722 59,252 59,001 57,165 109,903 58,219 134,918 134,918
EXPENSES
Compensation and
benefits (6).......... 11,824 24,269 23,456 27,623 55,004 28,604 85,138 74,205
Brokerage and
clearance............. 1,186 1,025 1,474 2,350 3,484 2,314 3,138 3,138
Occupancy and
equipment............. 406 554 944 1,187 1,683 1,103 1,934 1,934
Communications......... 284 354 764 823 1,109 799 1,536 1,536
Interest............... 73 316 1,773 1,523 2,665 2,039 2,301 2,301
Other (7).............. 1,077 3,353 13,049 8,362 14,620 6,584 17,041 17,041
-------- -------- ------- ------- -------- -------- -------- --------
Total expenses......... 14,850 29,871 41,460 41,868 78,565 41,443 111,088 100,155
Income before pro-rata
subchapter S
corporation
stockholder
distributions......... 6,872 29,381 17,541 15,297 31,338 16,776 23,830 34,763
Pro-rata subchapter S
corporation
stockholder
distributions (8)..... 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 $ 34,763
======== ======== ======= ======= ======== ======== ======== ========
PRO FORMA STATEMENTS OF OPERATIONS DATA
(UNAUDITED)(9)
Net Income (loss), as
reported.............. $ (275) $ (538) $(1,814) $ 9,439 $ 24,838 $ 16,776 $ 23,830 $ 34,763
Pro-rata S corporation
distribution.......... 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) (9,783) (14,270)
Other pro forma
adjustment............ -- -- -- -- (1,416) -- (1,416) (1,416)
-------- -------- ------- ------- -------- -------- -------- --------
Pro forma net income... $ 4,039 $ 17,317 $10,194 $ 9,614 $ 17,294 $ 9,914 $ 12,631 $ 19,077
======== ======== ======= ======= ======== ======== ======== ========
Pro forma income per
share................. $ 0.11 $ 0.48 $ 0.28 $ 0.26 $ 0.44 $ 0.25 $ 0.32 $ 0.48
======== ======== ======= ======= ======== ======== ======== ========
Weighted average shares
outstanding (10)...... 35,756 36,303 36,592 37,311 39,475 39,458 39,850 39,850
OPERATING DATA
(UNAUDITED)
Total employees (11)... 41 65 92 112 175 138 230 230
Revenue per average
employee (in
thousands)............ $564 $1,118 $752 $560 $766 $621 $888 $888
Annualized return on
average equity........ 353% 461% 143% 82% 87% 69% 59% 78%
Compensation and
benefits expense as a
percentage of
revenues.............. 54.4% 41.0% 39.8% 48.3% 50.0% 49.1% 63.1% 55.0%
Income before pro rata
subchapter S
corporation
stockholder
distributions as a
percentage of
revenues (6).......... 31.6% 49.6% 29.7% 26.8% 28.5% 28.8% 17.7% 25.8%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
--------------------------------------- -------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED (12)
------ ------- ------- ------- -------- -------- ----------------
<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 $207,565
Total liabilities...... 807 2,536 7,030 55,640 76,379 61,097 68,580
Total shareholders'
equity................ 2,264 10,491 13,888 23,271 49,059 58,118 137,567
Book value per common
share outstanding..... $ 0.07 $ 0.31 $ 0.40 $ 0.66 $ 1.31 $ 1.45 $ 3.06
</TABLE>
- -------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the basis of presentation.
(2) Pro forma information assumes that certain compensation programs to be
adopted following the Offering had been implemented in the period
presented.
(3) 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."
(4) Amount excludes unrealized appreciation of $5.9 million on warrants
obtained in 1997 investment banking transactions which are carried at $1.
(5) Does not include unrealized performance fees and special profit
allocations of approximately $12.9 million as of September 30, 1997.
(6) Excludes pro rata subchapter S corporation stockholder distributions.
(7) Includes business development, professional services and other operating
expenses.
(8) Represents pro rata compensation paid to shareholders based on ownership
interest as of the end of each period.
(9) 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 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.
21
<PAGE>
(10) See Note 2 of Notes to Consolidated Financial Statements for discussion of
the computation of weighted average shares outstanding.
(11) As of end of the period reported.
(12) Adjusted to give effect to (i) the sale by the Company of 5 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 $7.5 million to
the Company's current shareholders representing estimated subchapter S
shareholder tax liability as of September 30, 1997, all of which has been
reflected as accrued dividends payable; 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.
22
<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.
23
<PAGE>
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, and salaries, payroll taxes and employee benefits, which 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.
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 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 net income annually to charities and
intends to continue doing so in the future.
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
------ ------ ------ ------ ------ -------- --------
(UNAUDITED)
<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
SUBCHAPTER S CORPORATION
STOCKHOLDER
DISTRIBUTIONS............ 31.6% 49.6% 29.7% 26.8% 28.5% 28.8% 17.7%
</TABLE>
- ---------------------
(1) Excludes pro rata subchapter S corporation stockholder distributions.
(2) Includes business promotion, investment banking and other expenses.
24
<PAGE>
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%. The Company managed 20
public offerings during the first nine months of 1997 compared to 14 during
the first nine months of 1996.
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 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 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 125 in the first nine
months of 1996 compared to 203 in the first nine months of 1997.
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
25
<PAGE>
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 security 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 29 public offerings during 1996 compared to six
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, 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.
26
<PAGE>
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 security 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 six public offerings during 1995 compared to 15
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.
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
27
<PAGE>
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 for
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.
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, most of the Company's trading and investment
securities are readily marketable. At December 31, 1996, the Company had $55.0
million in securities in its trading and investment accounts. Additionally,
the Company had an unsecured bank line of credit in the amount of $10.0
million, of which $3.0 million was available.
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. Loans of $15.0 million were outstanding at December 31, 1996. The
Company's balance sheet as of December 31, 1996, reflects a ratio of debt to
equity of approximately 0.04:1.
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, most 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.
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. The Company's balance sheet as of September 30, 1997 reflects a
ratio of debt to equity of approximately 0.03:1.
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
28
<PAGE>
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 the foreseeable future.
29
<PAGE>
BUSINESS
INDUSTRY BACKGROUND
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. 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.
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 to succeed.
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 leverages this
research perspective with its capital markets expertise to provide value for
its clients. Using this approach FBR has achieved a 48% compounded annualized
growth rate in revenues since its inception in 1989. 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 October 17, 1997, FBR was ranked fourth in
terms of lead managed U.S. issuer initial public offering ("IPO") dollar
volume behind Goldman, Sachs & Co., Merrill Lynch & Co., and Morgan Stanley &
Co., and for the period from January 1, 1996 until October 17, 1997 was ranked
#1 in aftermarket performance of domestic IPOs, according to CommScan
EquiDesk.
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 it is as a result of this
culture that FBR has experienced less than 3% in professional employee
turnover 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 industry. For each industry
on which the Company is focused, the Company offers significant underwriting
30
<PAGE>
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 $3.2 billion in mergers and $10.3 billion in capital raising
transactions which span a wide range of geographic regions and security types
and a growing variety of industry sectors. FBR's current capital raising
backlog of transactions in process represents a potential transaction value
equal to $4 to $5 billion.
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 45% gross and 36.6% net to its limited partners through
September 30, 1997. FBR's three public mutual funds have provided a total net
return for the nine months ended September 30, 1997 of 34.2%, 41.6% and 39.2%.
The amount of assets under management have grown from $119.3 million at the
beginning of 1996 to over $414 million as of September 30, 1997, representing
247% 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 $58.2 for the nine months ended September 30, 1996
to $134.9 million for the nine months ended September 30, 1997, representing
an increase of 132%. 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 230 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 will 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 unique
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
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<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) at a price per share of Class A Common Stock equal to
96% of the price at which shares are sold in the Offering (the "PNC
Transaction"). The closing of this transaction is anticipated to occur
substantially contemporaneously with the closing of the Offering. 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. Additionally, 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, upon the receipt by PNC of full tier 2 equity powers.
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 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.
32
<PAGE>
INVESTMENT BANKING AND CORPORATE FINANCE
FBR's investment banking activities consist of a broad range of services,
including public and private offerings of a wide variety of securities,
financial advisory services in merger, acquisition and strategic partnering
transactions. Since commencing investment banking activities in late 1992, FBR
has completed or advised on 155 investment banking and corporate finance
transactions totalling $13.5 billion, with $10.3 billion in capital raising
transactions and $3.2 billion in merger and acquisition advisory transactions.
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 successfully
execute every underwriting assignment. 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 September 30, 1997, FBR was
ranked number one and number three 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
<CAPTION>
Manager Aftermarket Rankings
(12 months ending 9/30/97)
- -------------------------------------------------------------------------------------------------
Avg. %
# Chg. IPO to
Lead Manager Name Issues Current
- -------------------------------------------------------------- --------------- --------------
<S> <C> <C>
1. BT Alex. Brown Incorporated 27 61.4
2. Donaldson, Lufkin & Jenrette Securities Corporation 19 52.8
3. Friedman, Billings, Ramsey & Co., Inc. 13 50.1
4. Prudential Securities Incorporated 10 43.6
5. Credit Suisse First Boston Corporation 19 41.9
</TABLE>
Source: Securities Data Company. Performance as of 10/28/97. Includes only firms
with ten or more issues lead-managed during period.
The successful execution of an underwritten transaction is predominantly
determined by the lead manager. As a result, to further enhance 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 141 capital raising
transactions FBR has completed since inception, raising $10.3 billion, FBR has
acted as lead or sole manager in 105 transactions involving $7.3 billion or
more than 70% of such transaction. FBR has increased its percentage of sole or
lead managed transactions (measured by dollar volume) from 74% for 1993 to 87%
for 1996. The Company was the lead or sole underwriter in 81% of its 1997
transactions through the date hereof. From January 1, 1977 to October 17,
1997, FBR has ranked number four in terms of U.S. issuer IPO volume (including
over allotments).
33
<PAGE>
LEAD MANAGER LEAGUE TABLE
1997 YEAR TO DATE AS OF OCTOBER 17, 1997--U.S. ISSUER IPOS
<TABLE>
<CAPTION>
US AMOUNT+
OVER-
ALLOT.
POSITION MANAGER ($MM) NO. % SHARE
-------- ------- ---------- --- -------
<C> <S> <C> <C> <C>
1 Goldman, Sachs & Co. ........................ 4,024.46 17 16.19
2 Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................... 3,822.57 19 15.37
3 Morgan Stanley & Co. Incorporated............ 2,697.83 19 10.85
4 FRIEDMAN, BILLINGS, RAMSEY & CO., INC. ...... 1,336.68 8 5.38
5 J.P. Morgan Securities, Inc. ................ 1,111.15 3 4.47
6 BT Alex. Brown Incorporated.................. 1,012.62 19 4.07
7 Credit Suisse First Boston Corporation. ..... 887.62 9 3.57
8 NationsBanc Montgomery Securities Inc. ...... 856.99 23 3.45
9 Donaldson, Lufkin & Jenrette Securities
Corporation................................ 800.51 11 3.22
10 Bear, Stearns & Co., Inc. ................... 779.06 7 3.13
11 Salomon Brothers Inc. ....................... 775.18 7 3.12
12 Prudential Securities Incorporated........... 715.98 8 2.88
13 Lehman Brothers Inc. ........................ 714.46 11 2.87
14 Smith Barney Inc. ........................... 544.48 11 2.19
15 J.C. Bradford & Co. ......................... 537.16 4 2.16
16 BancAmerica Robertson Stephens............... 411.61 9 1.66
17 Hambrecht & Quist LLC........................ 403.16 12 1.62
18 PaineWebber Incorporated..................... 369.02 5 1.48
19 SBC Warburg Dillon Read Inc. ................ 314.92 2 1.27
20 Raymond James & Associates, Inc. ............ 250.61 5 1.01
</TABLE>
- --------
Source: CommScan EquiDesk
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 141 capital-raising transactions FBR has completed in 1997
through the date hereof, 25.5% have been in the mid-Atlantic region, 18.4 %
have been in the West, 23.4% have been in the South East, 9.2% have been in
the North East, and 23.5% 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 11 in 1996 and to 13 for 1997 through
the date hereof. For 1997, FBR managed 10 equity and high-yield debt
underwriting transactions above $100 million of which 7 were sole or lead-
managed by FBR.
FBR's strategy is to maintain long-term relationships with its corporate
clients by serving their capital raising needs beyond the initial capital
raising. FBR has completed follow-on capital transactions for 24% 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.
34
<PAGE>
List of Capital Raising Clients
<TABLE>
<CAPTION>
EQUITY
------
ISSUE
DATE COMPANY ISSUE AMOUNT
-------- ------- ----- --------------
<C> <S> <C> <C>
10/16/97 Imperial Credit Commercial
Mortgage Investment Corp. . Common--IPO $ 517,500,000
10/15/97 BankUnited Financial
Corporation............... Common $ 40,800,000
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 $ 49,680,000
9/12/97 First Alliance Corporation. Common $ 94,990,000
9/8/97 Local Financial
Corporation............... Private Placement $ 197,000,000
8/29/97 American Capital
Strategies................ Common--IPO $ 144,900,000
8/27/97 Prime Retail, Inc. ........ Common $ 161,000,000
8/6/97 Ocwen Financial
Corporation............... Common $ 130,500,000
7/15/97 Thornburg Mortgage Asset
Corp. .................... Common $ 47,512,500
5/15/97 First Sierra Financial,
Inc. ..................... Common--IPO $ 16,000,000
5/14/97 Ocwen Asset Investment
Corp. .................... Common--IPO $ 276,000,000
5/1/97 Brookdale Living
Commmunities, Inc. ....... Common--IPO $ 59,512,500
4/29/97 Long Beach Financial
Corporation............... Common--IPO $ 162,500,000
3/24/97 Criimi Mae Inc. ........... Common $ 70,312,500
3/17/97 Colonial Downs Holdings,
Inc. ..................... Common--IPO $ 40,375,000
2/20/97 American Business Financial
Services.................. Common $ 23,000,000
2/14/97 Prime Retail, Inc. ........ Common $ 26,000,000
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. .... Comon Stock Secondary $ 21,528,000
11/26/96 UOL Publishing, Inc. ...... Common--IPO $ 18,590,000
11/25/96 First Washington Realty
Trust..................... Common Stock Secondary $ 37,518,750
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 $ 8,500,000
11/1/96 Allin Communications
Corp. .................... Common--IPO $ 34,500,000
10/30/96 Ugly Duckling Corporation.. Common Stock Secondary $ 69,000,000
10/17/96 Digex, Inc................. Common--IPO $ 52,422,750
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 $ 4,036,500
7/25/96 First Alliance Corp........ Common--IPO $ 68,425,000
6/27/96 Prime Retail............... Common Stock 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 Stock 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 $ 19,999,994
2/22/96 BankUnited Financial
Corporation............... Common Stock Secondary $ 24,955,000
11/9/95 Bank Plus Corporation
(Fidelity Federal Bank)... Common Stock Secondary $ 94,000,000
10/23/95 Imperial Thrift and Loan
Assoc..................... Common--IPO $ 52,000,000
6/27/95 First Washington Realty
Trust..................... Common Stock Secondary $ 25,737,500
12/15/94 First Washington Realty
Trust..................... Common $ 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 $ 25,454,548
10/22/93 Riggs National Corporation. Common Stock 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 $ 282,000,000
7/27/93 BNH Bancshares............. Common Stock Rights
Offering $ 13,004,880
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
--------------
$5,174,776,324
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD AND PREFERRED
------------------------
ISSUE
DATE COMPANY ISSUE AMOUNT
-------- ------- ----- --------------
<C> <S> <C> <C>
10/14/97 Mego Mortgage
Corporation............. PP--Senior Subordinated Notes $ 40,000,000
9/8/97 Local Financial
Corporation............. Private--Senior Notes $ 80,000,000
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 Bank United Financial
Corp.................... Private--Trust Preferred $ 50,000,000
12/23/96 Walden Residential...... Prefered Stock with Warrants $ 100,000,000
12/19/96 Wilshire Financial...... Debt $ 84,245,000
12/10/96 Riggs National
Corporation............. Private--Trust Preferred $ 150,000,000
11/26/96 Chevy Chase Savings
Bank.................... 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.............. Preferred--Convertible $ 60,375,000
7/1/96 Confia.................. 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 $ 300,703,000
6/28/94 Community Bank.......... Preferred Stock with Warrants $ 20,000,000
6/27/94 First Washington Realty
Trust.................. Preferred--Convertible $ 73,000,000
6/22/94 RiverBank America....... Preferred $ 35,000,000
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 $ 14,030,000
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
5/11/93 Telebanc Financial...... Convt. Sub. Debt $ 15,000,000
--------------
$4,452,485,000
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
THRIFT CONVERSIONS
------------------
ISSUE
DATE COMPANY ISSUE AMOUNT
------- ------- ----- ---------------
<C> <S> <C> <C>
2/12/97 Pulaski Savings Bank....... Mutual Conversion $ 9,520,000
9/30/96 Westwood Homestead Mutual Conversion $ 28,434,000
Financial Corp. ..........
7/15/96 Pennwood Savings Bank...... Mutual Conversion $ 6,101,280
7/3/96 Kenwood Bancorp............ Mutual Holding Co. 2nd $ 1,576,510
Step
7/2/96 Home Financial Bancorp..... Mutual Conversion $ 5,059,260
6/17/96 Commonwealth Bancorp, Mutual Holding Co. 2nd $ 98,700,000
Inc. ..................... Step
6/15/96 First Federal Financial Mutual Conversion $ 6,717,830
Bancorp...................
4/1/96 Heritage Financial Corp. .. Mutual Conversion $ 4,932,200
4/1/96 London Financial Corp. .... Mutual Conversion $ 5,290,000
3/29/96 Crazy Woman Creek Bancorp.. Mutual Conversion $ 10,580,000
3/21/96 North Central Bancshares, Mutual Conversion $ 26,255,000
Inc. .....................
3/12/96 Washington Bancorp......... Mutual Conversion $ 6,575,190
1/9/96 Broadway Financial Mutual Conversion $ 8,926,880
Corporation...............
11/1/95 American National Bank..... Mutual Holding Co. 2nd $ 21,800,000
Step
10/7/95 Charter Financial.......... Mutual Conversion $ 33,396,210
10/5/95 Klamath First Bancorp...... Mutual Conversion $ 122,300,000
9/29/95 Hardin Bancorp............. Mutual Conversion $ 10,580,000
9/29/95 First Defiance Financial... Mutual Holding Co. 2nd $ 64,769,140
Step
7/20/95 Perpetual State Bank....... Mutual Conversion $ 1,320,000
7/5/95 First Mutual Bancorp....... Mutual Conversion $ 47,150,000
6/30/95 HF Financial............... Mutual Conversion $ 52,880,000
6/28/95 Fort Thomas Financial...... Mutual Conversion $ 15,740,000
6/28/95 Northeast Indiana Bancorp.. Mutual Conversion $ 21,800,000
4/7/95 ISB Financial.............. Mutual Conversion $ 73,800,000
3/15/95 Horizon Bancorp............ Mutual Conversion $ 3,684,212
9/30/93 Meritrust Federal Savings Mutual Conversion $ 5,000,000
Bank......................
8/13/93 Cardinal Bancshares, Inc. . Mutual Conversion $ 10,910,625
7/23/93 Albion Banc Corp. ......... Mutual Conversion $ 2,610,000
---------------
$ 706,408,337
TOTAL CAPITAL TRANSACTIONS......................... $10,333,669,661
</TABLE>
37
<PAGE>
Mergers and Acquisitions Advisory Services
FBR seeks to leverage 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. FBR has provided merger and acquisition advisory services
in transactions valued at $3.2 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. FBR has 34 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 universe 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, 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 and notes 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. In addition, FBR's investors can
receive analyst comments through electronic media such as Multex and First
Call.
SALES AND TRADING
The Company focuses on institutional sales and trading services to 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 September 30, 1997, FBR had 47 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 overseas. FBR's 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 and
frequent updates to research reports.
38
<PAGE>
FBR trading professionals facilitate trading in equity and high-yield
securities. FBR has 12 trading professionals, involved in market making in
Nasdaq and other OTC securities, trading listed securities, sales trading 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 September 30, 1997, FBR made a market in 347 securities. During
the period, 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.
39
<PAGE>
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 100 institutions.
Executive Services
On October 30, 1997, FBR established a Private Client Group ("PCG")
consisting of 4 professionals. PGC offers 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 PGC
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 a 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.
During the year ended December 31, 1996, and to date in 1997, the Syndicate
department directed FBR's participation in 29 offerings lead or co-managed and
22 managed offerings, respectively.
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 September 30, 1997,
the Company had assets under management of more than $414.2 million, including
more than $56.5 million in separately managed accounts. The amount of assets
under management has grown by 247% since January 1, 1996.
Hedge and Offshore Funds
At September 30, 1997, the Company's hedge and offshore funds had $250.0
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 September 30, 1997, FBR
Ashton, Limited Partnership delivered average annualized total returns of
45.0% (gross), calculated in accordance with AIMR and before accrual of fees
and expenses, and special allocations to 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 36.6%.
Private Equity and Venture Capital
At September 30, 1997, the Company's private equity and venture capital
funds had approximately $52.5 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 September 30, 1997, it was fully
invested. FBR
40
<PAGE>
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 September 30, 1997, total assets included in The FBR Family of Funds
were approximately $55 million. Total returns for the three months ended
September 30, 1997 and for the nine months ended September 30, 1997,
respectively, and comparable market indicators are shown below:
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
SEPT. 30, 1997 SEPT. 30, 1997
-------------- --------------
<S> <C> <C>
FBR FINANCIAL SERVICES............................ 13.30% 34.17%
Lipper Financial Services Index................. 13.48% 37.20%
S&P 500 Index................................... 7.49% 29.64%
FBR SMALL CAP FINANCIAL........................... 16.77% 41.58%
Lipper Financial Services Index................. 13.48% 37.20%
Russell 2000 Index.............................. 14.85% 26.52%
FBR SMALL CAP GROWTH/VALUE........................ 22.79% 39.17%
Lipper Small Cap Index.......................... 15.25% 22.21%
Russell 2000 Index.............................. 14.85% 26.52%
</TABLE>
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 "--Employees."
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
41
<PAGE>
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 September 30, 1997, the Company had a total of 230 full-time employees,
of whom 34 were engaged in research, 62 in investment banking, 73 in sales,
trading and syndicate, 15 in venture capital, principal investment and asset
management activities and 46 in accounting, administration and operations. The
Company also had 28 interns. Of these employees, 141 were classified as
professionals and 89 were in support positions. None of the Company's
employees are subject to a collective bargaining agreement. The Company
believes that its relations with its employees are excellent.
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 only 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
42
<PAGE>
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 has entered 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 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 which are subject to changes in value and 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 loans, activities which 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 through the real-time monitoring of
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 that
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 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
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("SROs"), principally the NASD (and its subsidiaries NASD/R 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
New York Stock Exchange, Inc. (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 Review Board.
FBR Direct, Inc. ("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, and its application for membership in the NASD is pending.
As a result of federal and state registration and SRO memberships, FBRC is
subject to overlapping schemes of regulation which cover all aspects of its
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
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.
Friedman, Billings, Ramsey Investment Management, Inc. ("FBRIM"), FBR
Offshore Management, Inc. ("FBR Offshore"), FBR Fund Advisers, Inc. ("FBR Fund
Advisers") and FBR Venture Capital Managers, Inc., the general partner of FBR
Technology Venture Partners, L.P., 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
44
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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's affiliates and the hedge funds and venture capital funds which they
manage are relying on exemptions from registration under the Investment
Company Act of 1940, and 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.
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 (whose membership application with the NASD is pending)
are subject to the capital requirements of the SEC and the NASD. FBR
International is subject to the net 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
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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 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 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
September 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.... 44 Treasurer and Chief Accounting Officer
[ ]............. [ ] Director
[ ]............. [ ] Director
</TABLE>
Emanuel J. Friedman
Mr. Friedman is Chairman and Chief Executive Officer of FBR and its
principal subsidiary, FBRC. He has continuously served as Chairman and Chief
Executive Officer of those entities and their predecessors 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. Mr.
Friedman holds a B.A. from University of North Carolina at Chapel Hill and a
J.D. from Georgetown University.
Eric F. Billings
Mr. Billings is Vice Chairman and Chief Operating Officer of FBR and its
principal subsidiary, FBRC. He has continuously served as Vice Chairman and
Chief Operating Officer of those entities and their predecessors 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. Mr. Billings holds a B.A. from the University
of Maryland.
W. Russell Ramsey
Mr. Ramsey is President of FBR and its principal subsidiary, FBRC. He has
continuously served as President of those entities and their predecessors
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 holds a B.A. from The George Washington University.
Eric Y. Generous
Mr. Generous is Chief Financial Officer and Executive Vice President of FBR
and its principal subsidiary, FBRC. He has continuously served as an officer
of those entities and their predecessors since joining the
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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 as a Senior Vice President.
Mr. Generous holds a B.A. from McGill University.
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 in 1986. Mr. Nichols holds a B.A. from The George Washington
University and a J.D. from the George Mason University.
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, L.L.P., where he had been in practice since 1986, counseling (among
other clients) the Company since its inception in 1989. Mr. Smith formerly
practiced as a lawyer in the United Kingdom from 1982-1985. Mr. Smith holds an
L.L.B. and Dip. L.P. from Edinburgh University in Scotland, and an L.L.M. from
the University of Virginia.
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 holds a
B.S. from Nichols College and is a Certified Public Accountant.
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 $100,000 for the year
ended December 31, 1996 (collectively, the "Named Executive Officers").
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL
PRINCIPAL POSITION SALARY($) 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 distributions made 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
The Company's Board of Directors has established two committees: an Audit
Committee and a Compensation Committee.
Audit Committee
The Audit Committee meets with management to consider the adequacy of the
internal controls and the objectivity of financial reporting. The Audit
Committee also meets with the independent auditors and with appropriate
financial personnel of the Company regarding these matters. The Audit
Committee recommends 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 periodically meet alone with the
Audit Committee and have unrestricted access to the Audit Committee. The Audit
Committee consists of and , neither of whom is an employee of the
Company, with serving as Chair.
Compensation Committee
The Compensation Committee's functions include administering management
incentive compensation plans and making recommendations to the Company's Board
with respect to the compensation of directors and officers of the Company. The
Compensation Committee also supervises the Company's employee benefit plans.
The Compensation Committee consists of and , with serving as
Chair.
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.
COMPENSATION OF DIRECTORS
Each non-employee director receives a single annual retainer ("Annual
Retainer") of $ for service on the Company's Board. All non-employee
directors also receive a fee of $ for each in person meeting of the
Company's Board that they attend and a fee of $ 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
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the Audit Committee receives an additional annual retainer of $ .
Directors who are employees of the Company or any subsidiary of the Company do
not receive additional compensation for service as directors.
THE NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
FBR has adopted the FBR Director Stock Compensation Plan (the "Director
Stock Plan"). The purposes of the Director Stock Plan are to (i) promote a
greater identity of interest 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
stockholder 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 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 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 following his or her appointment or election to the Company's
Board and thereafter on the day after each annual meeting of shareholders
during such director's term, each Eligible Director shall be granted options
("Director Options") for shares of Class A Common 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. Each Director
Option will become vested and excisable on the first anniversary of the date
of grant of such Director Option. Each Director Option shall terminate no
later than the 10th anniversary of the date of grant. Any unvested Director
Options terminate and are cancelled as of the first anniversary of the date
the optionee's service as a Director ceases for any reason (including death,
disability, retirement, removal from office or otherwise). All Director
Options become fully vested and exercisable upon a Change of Control.
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Transferability
Grants and awards under the Director Stock Plan are nontransferable other
than by will or laws of descent and distribution, or pursuant to qualified
domestic relations order or by 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 legal representative.
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 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.
THE 1997 STOCK INCENTIVE PLAN
FBR has adopted the Friedman, Billings, Ramsey Group, Inc. 1997 Stock
Incentive Plan (the "1997 Stock Incentive Plan"). The 1997 Stock Incentive Plan
is designed to promote the success and enhance the value of FBR by linking the
interests of certain of the full-time employees of FBR ("Participants") to
those of FBR's shareholders and by providing Participants with an incentive for
outstanding performance. The 1997 Stock 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 of
the Company's Board, or any other designated committee of the Company's Board
(the "Committee"), FBR employees, including employees who are members of the
Company's Board, are eligible to participate in the 1997 Stock Incentive Plan.
Non-employee directors are not eligible to participate in the 1997 Stock
Incentive Plan. The 1997 Stock 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 Incentive Plan will be administered by the Committee and
provides for the grant of stock options (both non-qualified and incentive stock
options) ("Options" or "Awards").
The 1997 Stock Incentive Plan provides that the total number of shares of
Class A Common Stock available for grant under the 1997 Stock Incentive Plan
may not exceed shares.
The 1997 Stock 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 Internal Revenue Code of 1986, as
amended (the "Code").
The term of Options granted under the 1997 Stock Incentive Plan may not
exceed 10 years. Unless otherwise determined by the Committee, Options will
vest ratably on each of the first five anniversaries of the grant date.
A Participant exercising an Option may pay the exercise price in full in
cash, or, if approved by the Committee, with previously acquired shares of
Class A Common Stock or in a combination thereof. The Committee, in its
discretion, may allow cashless exercises of Options.
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<PAGE>
Options are nontransferable other than by will or laws of descent and
distribution (and, in the case of a nonqualified Option, pursuant to a domestic
relations order or by gift to members of the holder's immediate family, whether
directly or indirectly or by means of a trust or partnership or LLC), or any
transferee described above, and, during the Participant's lifetime, may be
exercised only by the Participant or his or her legal representative.
In the event of a Change of Control (as described below), any Option that is
not then exercisable and vested will become fully exercisable and vested. The
1997 Stock Incentive Plan defines a change of control ("Change of Control") as
(i) the acquisition of 20% 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 and (iv) approval by FBR's
shareholders of a liquidation, dissolution or sale of substantially all of the
assets of FBR.
During the 60-day period following a Change of Control, 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) and (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" under Section 422 of the Code, 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 cancelled.
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Amendments
The Company's Board may at any time terminate, amend, or modify the 1997
Stock 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.
Federal Income Tax Considerations
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
Incentive Plan.
Two types of stock options may be granted under the 1997 Stock Incentive
Plan: nonqualified stock options ("NQOs") and incentive stock options ("ISOs").
The grant of an Award 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 or actual receipt of an Award.
CASH INCENTIVE PLANS
The cash incentive plans described below are intended to reward eligible
employees with a cash payment if the performance goals set forth in the plans
or set by the Committee pursuant to the terms of the plans are met. Each plan
has been approved by FBR's shareholders.
The cash incentive plans described below will become effective upon the
Offering, and will be applicable to 1997 and subsequent years unless and until
terminated by the Company's Board.
The Senior Executive Short-Term Cash Incentive Plan
The Senior Executive Short-Term Cash Incentive Plan (the "Senior Executive
Incentive Plan") is an annual cash bonus plan which covers FBR's Chief
Executive Officer and the other Named Executive Officers as well as certain
other employees as specified in the Senior Executive Incentive Plan. Each
fiscal year (a "Performance Year"), a pool equal to of FBR's pre-tax net
income will be established for participants in the Senior Executive Plan. The
Committee will determine the allocation of such pool; provided that each of
Messrs. , and would be allocated at least %
of the pool.
53
<PAGE>
Key Employee Incentive Plan
All key employees who are not participants in the Senior Executive Incentive
Plan shall be eligible to participate in an annual bonus plan (the "Key
Employee Incentive Plan"). Awards under the Key Employee Incentive Plan will be
determined by the Committee upon recommendations from FBR's Chief Executive
Officer.
Payments
All awards will be paid within 60 days after the last day of the Performance
Year to which the award relates. A participant shall not receive an award if
the participant's employment terminates before the last day of the Performance
Year or performance period for any reason other than death, disability or
retirement or the sale or other disposition of the business unit in which the
participant is employed. If termination of employment occurs because of the
occurrence of one of the preceding events, a pro rated award will be paid.
Administration
Each cash incentive plan will be administered by the Committee.
Amendment and Termination
The Company's Board may amend or terminate either of the cash incentive plans
at any time as it deems appropriate; provided that no amendment or termination
of a plan after the end of a Performance Year may decrease the awards for the
Performance Year just ended and no amendment during a Performance Year may
decrease the specified award percentages or pool under the Senior Executive
Incentive Plan.
Deferrals
Awards under the cash incentive plans may be deferred by participants
pursuant to a deferral election; provided that any awards deferred by a Named
Executive Officer must be deferred at least until such time as he is no longer
a Named Executive Officer. Deferrals may be credited to a cash account or a
stock unit account set up as bookkeeping entries by FBR. The cash account would
be credited each quarter with interest at the prime rate as set forth in The
Wall Street Journal as of the first business day of such quarter. The stock
unit account would be credited with a number of whole shares of Class A Common
Stock, equal to the portion of the bonus deferred into the stock unit account
divided by the average closing prices of Class A Common Stock during the last
10 business days of the year with respect to which the bonus is earned. Any
fractional shares will be deferred into the cash account. The stock unit
account will be credited with dividends in the same manner as if each phantom
unit were a share of Class A Common Stock.
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 Plan will become effective at the
consummation of the Offering. A copy of the Purchase Plan is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
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. The Purchase Plan reserves shares of
Class A Common Stock for issuance and sale under the plan. Unless sooner
terminated at the discretion of the Board of Directors, the plan will terminate
when participants become entitled to purchase a number of shares greater than
the remaining number of reserved shares available for purchase.
54
<PAGE>
Eligibility
All employees of FBR are 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.
General Description
A participant in the Purchase Plan may authorize monthly salary deductions of
a maximum of 15% and a minimum of 2% of monthly base compensation. 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 commencing . 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 plan will
be held in separate accounts for each participant.
Participants may increase or decrease their payroll deductions at any time
but not more than twice during any 12-month period. Participants may also
withdraw from participation in the Purchase Plan at any time. If a participant
withdraws from the Plan, he or she may elect to have his or her shares sold and
the proceeds, less selling expenses, remitted to him or her or he or she may
elect to have a certificate for the full shares credited to his or her account
forwarded to him or her. A participant who has withdrawn may not participate in
the Purchase Plan again for six months.
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.
Future 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 materially (i) increase the benefits accruing
to participants under the Purchase Plan, (ii) increase the number of securities
that may be issued under the Purchase Plan, or (iii) modify the requirements as
to eligibility for participation in the Purchase Plan.
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
deferred 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.
55
<PAGE>
SECURITIES TRADING FOR EMPLOYEES
From time to time, directors, officers and other employees of the Company may
buy or sell securities to or from FBRC 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 full extent that
Virginia law permits, the limitation or elimination of the liability of
directors and officers, they will not be liable to FBR or its shareholders for
any money damages in excess of one dollar. 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 or any federal or state securities
law.
56
<PAGE>
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
made a party to any proceeding because he or she was or is a director or
officer of FBR against any liability, including reasonable expenses and legal
fees, incurred in the proceeding. Under the Company's Articles of
Incorporation, "proceeding" is broadly defined to include pending, threatened
or completed actions of all types, including actions by or in the right of
FBR. 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. FBR must indemnify any person who is or was
serving at the written request of FBR as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, to the full 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 nor 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.
57
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of Common Stock as of September 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 BENEFICIALLY SHARES TO BE
OWNED PRIOR BENEFICIALLY OWNED
NAME TO OFFERING AFTER OFFERING
---- ---------------------- ------------------
DIRECTORS, NAMED NUMBER OF
EXECUTIVE OFFICERS AND SHARES
5% BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
---------------------- ----------- ----------- --------- ------------------
<S> <C> <C> <C> <C> <C>
Emanuel J. Friedman.....
Eric F. Billings........
W. Russell Ramsey.......
Eric Y. Generous........
Nicholas J. Nichols.....
Jonathan Billings.......
All executive officers
and directors as a
group ( persons)....
Other Selling Sharehold-
ers....................
</TABLE>
--------
(1) 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 voting and 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.
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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 40 million shares of Class A Common Stock, 50 million
shares of Class B Common Stock, and 10 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 held of record by any shareholders 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, together with any other class or
series of stock conferred with general class voting rights by the Company's
Articles of Incorporation. After the completion of the Offering, the officers
and directors of the Company will beneficially own, in the aggregate,
approximately % of the outstanding Common Stock. In addition, all of the
outstanding shares of Class B Common Stock held by the Existing Shareholders
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 % of the
voting power of the Company following the Offering ( % if the Overallotment
Option is exercised in full) and will be able to control the outcome of all
corporate actions requiring shareholder approval, including elections of
directors. See "Risk Factors--Dual Class Stock and Voting Trust Agreement,"
"Description of Capital Stock--Common Stock," "--Voting Trust Agreement and
Shareholders Agreement" 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 automatically to shares of Class A Common
Stock upon the sale or transfer of such shares to certain third parties not
affiliated with the Company.
PREFERRED STOCK
The Company's Articles of Incorporation authorizes 10 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 and to
fix the rights, preferences, privileges 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
stockholder 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
59
<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 of the Company. Upon consummation of the
Offering, the shares in the Voting Trust will constitute approximately % of
the voting power of the Company ( % 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. 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. Pursuant to its terms, 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 Company's Articles of Incorporation 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 Company's Articles of Incorporation authorizes
the Company's Board to designate and issue Preferred Stock as described above.
The Company will be subject to the affiliated transaction provisions of
Sections 13.1-725 through 13.1-725 of the Virginia Stock Corporation Act (the
"VSCA"). These affiliated transaction provisions prohibit a Virginia
corporation with more than 300 shareholders from engaging in an "affiliated
transaction" with an "interested shareholder" for a period of three years after
the date of the transaction in which the person became an interested
shareholder, unless the affiliated transaction is approved in a prescribed
manner. "Affiliated transactions" include mergers, asset sales and certain
other transactions between or among the corporation and an interested
shareholder. Subject to certain exceptions, an "interested shareholder" is a
person who, together with affiliates and associates, owns, or within the
preceding three years did own, 10% or more of any class of the corporation's
voting stock.
The Company will also be subject to the control share acquisition provisions
of Section 13.1-728.1 through 13.1-728.9 of the VSCA. Pursuant to these control
share acquisition provisions, shares of a corporation with more than 300
shareholders acquired in a "control share acquisition" generally have no voting
rights unless such rights are conferred on the acquiror by a vote of non-
interested shareholders. A "control share acquisition" is defined, generally,
as the direct or indirect acquisition of beneficial ownership of voting shares
which would cause the acquiror to have the power to vote or direct the voting
shares having voting power within the following ranges in an election of
directors: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more, of such votes. If
voting rights are conferred on the acquiror by the shareholders of the target
corporation, the acquisition of additional voting shares by the acquiror is not
an additional control share acquisition unless such acquisition gives the
acquiror voting rights in excess of the range in which voting rights had
previously been granted.
The Company's Bylaws also provide that a special meeting of shareholders may
be called only by the Company's Chief Executive officer, the Chairman of the
Board, a majority of the members of the Company's Board of Directors or
shareholders holding shares entitled to cast ten percent of the votes at a
meeting.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock is American
Stock Transfer and Trust Company.
60
<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 7,793,579
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 ) or PNC will be subject to the resale
limitations contained in Rule 144. Of the Company's outstanding shares other
than the shares offered hereby, 2,206,421 shares of Class A Common Stock and
35,029,000 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
shares as of the date of this Prospectus) 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 40,029,000 shares of Class B Common Stock outstanding immediately
prior to the Offering and not sold in the Offering will be subject to the
Lockup unless released by all of the Representatives. The Lockup prohibits the
disposition of any such shares until the date 180 days from the date of this
Prospectus. Any shares subject to the Lockup may be released at any time with
or without notice to the public.
Pursuant to the Stock Purchase Agreement between FBR and PNC, PNC has
demanded and "piggyback" registration rights with respect to the shares of
Class A Common Stock which it will acquire. PNC may not exercise these
registration rights until the date 180 days from the date of this Prospectus.
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.
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement between the
Company and the Underwriters (the "Underwriting Agreement"), the Underwriters
named below, through their Representatives, Friedman, Billings, Ramsey & Co.,
Inc. and Lazard Freres & Co. LLC, have severally agreed to purchase from the
Company the following respective numbers of shares of Class A Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ............................
Lazard Freres & Co. LLC............................................
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 has granted to the Underwriters an Over-allotment Option,
exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 1,169,037 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
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 has 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
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.
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<PAGE>
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 % 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 paid it a fee of $ . See "Summary--Strategic
Business Relationship with PNC Bank Corp." and "Business--Strategic
Relationship with PNC Bank Corp."
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
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.
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
63
<PAGE>
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 180-day period commencing 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. The Underwriters may allocate up to
shares of the Class A Common Stock offered hereby for purchase by Existing
Shareholders, other employees of the Company, and members of their respective
immediate families. The restrictions of Rule 2720(m) of the NASD Conduct Rules
would apply to such shares. 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
Concurrently with the Offering, the Company is, by means of this Prospectus,
making the Direct Offering of up to 779,356 shares of Class A Common Stock to
certain existing shareholders and other employees of the Company at a price
equal to per share less the underwriting concession with respect to the
shares offered to the public. 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. Such investors have agreed not to resell any shares so
purchased by them for at least 180 days from the date of this Prospectus
without the consent of the Underwriters. 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.
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 . Each
of these firms has in the past represented and continues to represent, the
Company 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
64
<PAGE>
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.
65
<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 (unaudited) ................................................ 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
and 1997 (unaudited)..................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended Decem-
ber 31, 1994, 1995 and 1996 and the Nine Month Periods Ended September
30, 1997 (unaudited) .................................................... 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
and 1997 (unaudited)..................................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
The financial statements included herein have been adjusted to give effect
to the anticipated reincorporation and merger discussed in Note 1 of the Notes
to the Consolidated Financial Statements. We expect to be in a position to
render the following audit report upon the effectiveness of such events,
assuming from October 29, 1997, to the effective date of such events, no other
events will have occurred that would affect the accompanying financial
statements or notes thereto.
Arthur Andersen LLP
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 the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the companies' 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 the Friedman, Billings, Ramsey Group, Inc., as of December 31, 1995 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Washington, D.C.
October 29, 1997
F-2
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
----------- ------------ -------------
(UNAUDITED)
<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
STOCKHOLDERS' 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.............. -- -- -- 7,483,772
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 68,580,298
----------- ------------ ------------ ------------
Commitments and
contingencies (Note
12).................... -- -- -- --
Stockholders' equity:
Preferred Stock, $0.01
par value, 10,000,000
shares authorized,
none issued and
outstanding.......... -- -- -- --
Class A Common Stock,
$0.01 par value,
40,000,000 shares
authorized, none
issued and
outstanding.......... -- -- -- --
Class B Common Stock
$.01 par value,
50,000,000 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 22,478,710
Stock subscriptions
receivable........... (67,444) (294,895) (355,173) (355,173)
Retained earnings..... 6,397,104 30,335,189 35,594,324 26,693,838
----------- ------------ ------------ ------------
Total stockholders'
equity............. 23,271,468 49,059,049 58,118,151 49,217,665
----------- ------------ ------------ ------------
Total liabilities
and stockholders'
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
distribution......... 6,500,000 --
Pro forma income tax
provision............ (12,628,000) (9,782,381)
Other pro forma ad-
justment (Note 2).... (1,416,000) (1,416,000)
------------ ------------
Pro forma net income.. $ 17,294,085 $ 12,631,336
============ ============
Pro forma net income
per share............ $ 0.44 $ 0.32
============ ============
Weighted average
shares outstanding... 39,474,617 39,850,487
============ ============
</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 STOCKHOLDERS' 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 (unaudited). -- -- -- -- 23,829,717 23,829,717
Issuance of common
stock (unaudited)..... 2,574,000 25,740 3,658,123 (292,111) -- 3,391,752
Capital contributions
(unaudited)........... -- -- 176,382 -- -- 176,382
Repayment of stock
subscription
receivable
(unaudited)........... -- -- -- 231,833 -- 231,833
Distributions
(unaudited)........... -- -- -- -- (18,570,582) (18,570,582)
---------- -------- ----------- ---------- ------------ ------------
Balances, September 30,
1997 (unaudited)....... 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 PERIODS ENDED SEPTEMBER 30, 1996 AND
1997, 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 sole 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".
Effective January 1, 1997, all of the shareholders of the Operating Entities
exchanged all of their outstanding stock in the Operating Entities for all of
the outstanding stock of the Old Holding Company. 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 substantially the same proportion. At least 75 percent
of the outstanding stock of the Operating Entities was, at all times prior to
the exchange, owned by the same three shareholders. After the exchange, the
same shareholder group owned all of the outstanding stock of the Old Holding
Company, in substantially the same proportion to their interests in the
Operating Entities. No new minority interests were created in the exchange. In
addition, prior and subsequent to the exchange, the Operating Entities were
operated by substantially the same management group. As a result of the common
ownership and management 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, without revaluation.
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"), a limited
liability company formed in Virginia in 1996.
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 SEPTEMBER 30, 1996 AND 1997, 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.
Recapitalization
Immediately prior to the effectiveness of the proposed offering contemplated
by this prospectus, the Old Holding Company and its subsidiaries intend to
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. Prior to the
Conversion, the Old Holding Company will be 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
will receive 330 shares of Class B Common Stock of the Company for each share
in the Old Holding Company.
The effects of the proposed reorganization have been given retroactive
application in the consolidated financial statements for all periods
presented.
The Company has authorized the issuance of up to 50 million shares of Class
B Common Stock, par value $0.01 per share; 40 million shares of Class A Common
Stock, par value $0.01 per share; and 10 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 automatically into
shares of Class A Common Stock upon sale or transfer of such shares to certain
third parties not affiliated with the Company. 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 SEPTEMBER 30, 1996 AND 1997, 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 approximately 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 approximately $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 balance sheet as of September 30, 1997, and
the accompanying consolidated statements of operations, changes in
stockholders' equity, and cash flows for the nine months ended September 30,
1996 and 1997, 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.
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.
Pro forma net income per share also gives effect to $1.4 million of
F-10
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)
compensation expense that the Company will record upon the effectiveness of the
offering for the termination of the book value stock repurchase provisions
related to shares issued in January of 1997.
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.
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 $7,483,772 million
distribution for estimated federal and state taxes payable by existing
shareholders on the Company's earnings through September 30, 1997. 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 approximately $1.4
million of compensation expense in conjunction with the termination of the book
value stock repurchase provisions related to shares issued in January of 1997.
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 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.
F-11
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)
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.
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.
F-12
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)
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 an 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.
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.
F-13
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)
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 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
F-14
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)
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 July 1998; $10,000,000 in October 1998; and $15,000,000 in
December 1997. 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.
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 rate 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
F-15
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)
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.
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 approximately $656,000, $773,000, and $941,000,
respectively, and approximately $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.
F-16
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)
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.
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.
F-17
<PAGE>
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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.
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
----
Prospectus Summary........................................................ 3
<S> <C>
Risk Factors.............................................................. 7
The Company............................................................... 14
Background of the Offering................................................ 15
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 21
Business.................................................................. 28
Management................................................................ 42
Principal and Selling Shareholders........................................ 54
Description of Capital Stock.............................................. 54
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 57
Legal Matters............................................................. 58
Experts................................................................... 58
Additional Information.................................................... 58
Index to Consolidated Financial Statements F-1
</TABLE>
UNTIL , 1997 (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.
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
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.
LAZARD FRERES & CO. LLC
, 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 AMOUNT TO BE
PAID BY PAID BY THE
THE COMPANY SELLING STOCKHOLDERS
------------ --------------------
<S> <C> <C>
SEC registration fee................... $ $
NASD filing fee........................
New York Stock Exchange listing fee....
Printing and engraving.................
Legal fees and expenses................
Accounting fees and expenses...........
Blue sky fees and expenses.............
Transfer agent and registrar fees and
expenses..............................
Miscellaneous..........................
------ ------
Total.................................. $ $
====== ======
</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
entirely prevails in the defense of any proceeding to which he is a party
because he 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 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 --Voting Trust Agreement.*
2.02 --Shareholders Agreement.*
3.01 --Registrant's Articles of Incorporation.*
3.02 --Registrant's Bylaws.*
4.01 --Form of Specimen Certificate for Registrant's Class A Common Stock.*
5.01 --Form of Opinion of .*
10.01 --Merger Agreement for Reincorporation Merger.*
10.02 --Stock Plans; Material Contracts, Leases, Etc.
11.01 --Computation of Per Share Earnings.*
12.01 --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.
</TABLE>
- ---------------------
* To be provided by amendment.
(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.
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.
II-2
<PAGE>
(3) To provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter 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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Arlington, Commonwealth
of Virginia, on the day of 1997.
Friedman, Billings, Ramsey Group,
Inc.
By:
-------------------------------
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
day of , 1997.
SIGNATURE TITLE
/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)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <C> <S>
1.01 -- Form of Underwriting Agreement.*
2.01 -- Voting Trust Agreement.*
2.02 -- Shareholders Agreement.*
3.01 -- Registrant's Articles of Incorporation.*
3.02 -- Registrant's Bylaws.*
Form of Specimen Certificate for Registrant's Class A Common
4.01 -- Stock.*
5.01 -- Form of Opinion of .*
10.01 -- Merger Agreement.*
10.02 -- Stock Plans; Material Contracts, Leases, Etc.
11.01 -- Computation of Per Share Earnings.
Letter from Arthur Andersen, LLP regarding unaudited interim
15.01 -- financial information.*
12.01 -- 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.
</TABLE>
- ---------------------
* To be provided by amendment.
II-5
<PAGE>
EXHIBIT 23.10
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.
October 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 20,680,757 27,568,469
<SECURITIES> 55,012,848 25,718,813
<RECEIVABLES> 9,240,877 7,924,836
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 114,429,988 105,839,107
<PP&E> 4,417,121 5,461,090
<DEPRECIATION> 1,314,118 1,997,703
<TOTAL-ASSETS> 125,438,147 119,214,677
<CURRENT-LIABILITIES> 74,294,916 66,760,263
<BONDS> 0 0
0 0
0 0
<COMMON> 374,550 400,290
<OTHER-SE> 48,684,499 57,717,861
<TOTAL-LIABILITY-AND-EQUITY> 125,438,147 119,214,677
<SALES> 0 0
<TOTAL-REVENUES> 55,158,579 67,091,288
<CGS> 0 0
<TOTAL-COSTS> 85,064,977 111,088,210
<OTHER-EXPENSES> 3,139,007 3,646,373
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,665,171 2,301,035
<INCOME-PRETAX> 24,838,085 23,829,717
<INCOME-TAX> 12,628,000 9,782,381
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,294,085 12,631,336
<EPS-PRIMARY> 0 0
<EPS-DILUTED> .44 .32
</TABLE>
