<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 001-13731
Friedman, Billings, Ramsey Group, Inc.
(Exact name of Registrant as specified in its charter)
Virginia 54-1837743
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Nineteenth Street North
Arlington, VA 22209
(Address of principal executive offices) (Zip code)
(703) 312-9500
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Title Outstanding
Class A Common Stock 16,215,271 shares as of October 31, 2000
Class B Common Stock 33,070,029 shares as of October 31, 2000
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Page Number (s)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - (unaudited)
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets-
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations-
Three Months Ended September 30, 2000 and 1999 4
Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Changes in Information About Market Risk 18-19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 19
EXHIBIT INDEX 19
</TABLE>
2
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 40,638 $ 43,743
Receivables:
Investment banking 5,441 4,273
Asset management fees 1,777 3,112
Affiliates 4,345 1,339
Other 4,272 1,698
Due from clearing broker 19,574 13,472
Marketable trading securities, at market value:
Corporate equities 6,695 4,193
Corporate bonds 2,264 1,944
Long-term investments 196,882 135,723
Deferred tax asset - 2,402
Prepaid expenses and other assets 694 3,149
Furniture, equipment, software and leasehold improvements,
net of accumulated depreciation and amortization of
$9,403 and $5,798, respectively 10,944 11,308
-------- --------
Total assets $293,526 $226,356
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Trading account securities sold but not yet purchased,
at market value:
Corporate equities $ 7,316 $ 3,015
Corporate bonds 99 14
Accounts payable and accrued expenses 8,717 8,869
Accrued compensation and benefits 64,674 24,130
Long-term secured loans 926 1,359
-------- --------
Total liabilities 81,732 37,387
-------- --------
Commitments and contingencies (Note 9) - -
Shareholders' equity:
Preferred Stock, $0.01 par value, 15,000,000 shares authorized,
none issued and outstanding - -
Class A Common Stock, $0.01 par value, 150,000,000 shares
authorized, 16,625,906 and 14,304,026 issued, respectively 166 143
Class B Common Stock, $0.01 par value, 100,000,000 shares authorized,
33,733,529 and 35,799,729 issued and outstanding, respectively 337 358
Additional paid-in capital 210,287 208,678
Treasury stock, at cost, 1,077,135 and 1,143,027 shares, respectively (7,858) (8,341)
Accumulated other comprehensive loss (1,911) (5,991)
Retained earnings (deficit) 10,773 (5,878)
-------- --------
Total shareholders' equity 211,794 188,969
-------- --------
Total liabilities and shareholders' equity $293,526 $226,356
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
Three Months
Ended September 30,
-------------------
2000 1999
------- --------
<S> <C> <C>
Revenues:
Investment banking:
Underwriting $ 4,928 $ 4,026
Corporate finance 7,264 2,024
Investment gains 1,453 15
Institutional brokerage:
Principal transactions 7,019 4,721
Agency commissions 4,989 3,372
Asset management:
Base management fees 2,504 2,714
Incentive allocations 7,751 62
Net investment income 5,780 (10,572)
Interest, dividends and other 3,014 2,560
------- --------
Total revenues 44,702 8,922
------- --------
Expenses:
Compensation and benefits 24,809 16,318
Business development and professional services 5,974 9,662
Clearing and brokerage fees 1,483 1,098
Occupancy and equipment 2,657 1,738
Communications 1,300 1,246
Interest expense 424 159
Other operating expenses 1,862 1,762
------- --------
Total expenses 38,509 31,983
------- --------
Net income (loss) before taxes 6,193 (23,061)
Income tax provision 1,239 -
------- --------
Net income (loss) $ 4,954 $(23,061)
======= ========
Basic earnings (loss) per share $.10 $(.47)
======= ========
Diluted earnings (loss) per share $.10 $(.47)
======= ========
Weighted average shares outstanding:
Basic 49,229 48,882
======= ========
Diluted 50,360 48,882
======= ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months
Ended September 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Investment banking:
Underwriting $ 16,639 $ 16,442
Corporate finance 22,195 10,721
Investment gains 1,453 2,163
Institutional brokerage:
Principal transactions 25,808 17,586
Agency commissions 15,292 9,940
Asset management:
Base management fees 6,884 7,030
Incentive allocations 52,203 605
Net investment income 6,648 (1,326)
Interest, dividends and other 7,359 8,209
-------- --------
Total revenues 154,481 71,370
-------- --------
Expenses:
Compensation and benefits 96,241 52,665
Business development and professional services 14,982 18,164
Clearing and brokerage fees 4,589 3,307
Occupancy and equipment 7,353 4,722
Communications 3,748 3,083
Interest expense 965 1,160
Other operating expenses 5,789 5,436
-------- --------
Total expenses 133,667 88,537
-------- --------
Net income (loss) before taxes 20,814 (17,167)
Income tax provision 4,163 -
-------- --------
Net income (loss) $ 16,651 $(17,167)
======== ========
Basic earnings (loss) per share $.34 $(.35)
======== ========
Diluted earnings (loss) per share $.33 $(.35)
======== ========
Weighted average shares outstanding:
Basic 49,119 48,869
======== ========
Diluted 50,787 48,869
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months
Ended September 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 16,651 $(17,167)
Non-cash items included in earnings--
Incentive allocations and net investment income
from long-term investments (52,017) 144
Depreciation and amortization 3,695 1,780
Deferred income taxes 4,163 -
Other - (321)
Changes in operating assets:
Receivables--
Investment banking (1,168) 43
Asset management fees 1,379 (1,028)
Income taxes - 7,495
Affiliates (382) (469)
Other (1,767) 92
Due from clearing broker (6,102) (2,919)
Marketable trading securities (2,086) 2,193
Prepaid expenses and other assets 652 675
Changes in operating liabilities:
Trading account securities sold but not
yet purchased 4,386 (1,324)
Accounts payable and accrued expenses (152) 3,232
Accrued compensation and benefits 40,544 3,681
-------- --------
Net cash provided by (used in) operating activities 7,796 (3,893)
-------- --------
Cash flows from investment activities:
Purchases of fixed assets (3,289) (4,126)
Purchases of long-term investments, net (9,273) (12,976)
-------- --------
Net cash used in investing activities (12,562) (17,102)
-------- --------
Cash flows from financing activities:
Repayments of long-term secured loans (433) (411)
Proceeds from issuance of common stock 1,611 -
Issuance of treasury stock 483 -
Purchases of treasury stock - (1,634)
-------- --------
Net cash provided by (used in) financing activities 1,661 (2,045)
-------- --------
Net decrease in cash and cash equivalents (3,105) (23,040)
Cash and cash equivalents, beginning of period 43,743 46,827
-------- --------
Cash and cash equivalents, end of period $ 40,638 $ 23,787
======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
1. Basis of Presentation:
The consolidated financial statements of Friedman, Billings, Ramsey Group,
Inc. and subsidiaries (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Therefore, they do not include all
information required by generally accepted accounting principles for complete
financial statements. The interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
presented. All significant intercompany accounts and transactions have been
eliminated in consolidation. The results of operations for interim periods are
not necessarily indicative of the results for the entire year. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 1999 included on
Form 10-K filed by the Company under the Securities Exchange Act of 1934.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform to the current period presentation.
2. Comprehensive Income:
The components of comprehensive income are (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------ -------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss) $4,954 $(23,061) $16,651 $(17,167)
Other comprehensive income (loss):
Net change in unrealized investment losses related
to available-for-sale securities and investment
in FBR Asset Investment Corporation 2,657 6,131 4,080 2,822
------ -------- ------- --------
Comprehensive income (loss) $7,611 $(16,930) $20,731 $(14,345)
====== ======== ======= ========
</TABLE>
3. Long-Term Investments, Incentive Allocations and Net Investment Income:
Long-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
Venture capital and other proprietary
investment partnerships $143,502 $ 69,988
FBR Asset Investment Corporation 29,073 24,194
Private debt and preferred equity investments 17,837 25,380
Available-for-sale securities 6,470 16,161
-------- --------
$196,882 $135,723
======== ========
</TABLE>
7
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
3. Long-Term Investments, Incentive Allocations and Net Investment Income,
continued:
FBR Technology Venture Partners, L.P. ("TVP")
---------------------------------------------
As of September 30, 2000, TVP's investments include equity investments in
securities of development-stage and early-stage, privately and publicly held
technology companies. The disposition of the privately held investments is
generally restricted due to the lack of a ready market and may remain restricted
for a period of time even if a company becomes public. TVP's investments may
represent significant portions of the issuer's equity and they may carry
special contractual privileges, as well as certain restrictions, not applicable
to other security holders. As a result, precise valuation for the private and
restricted investments is a matter of judgment and the determination of fair
value must be considered only an approximation. Public company investments are
valued based on the September 30, 2000 closing price less discounts averaging
15% to reflect restrictions on liquidity including the size of the fund's
holdings relative to the public market float and marketability.
FBR Asset Investment Corporation ("FBR-Asset")
----------------------------------------------
During the quarter ended September 30, 2000, the Company recorded $1,275 of
net investment income in the statement of operations for its proportionate share
of FBR-Asset's increase in net book value. The Company also recorded, in other
comprehensive income, $1,077 of unrealized investment gains for its
proportionate share of FBR-Asset's net unrealized gains related to available-
for-sale securities. As of September 30, 2000, the net unrealized loss related
to FBR-Asset and included in the Company's accumulated other comprehensive loss
has been reduced to $(463).
Available-For-Sale Securities
-----------------------------
As of September 30, 2000, the unrealized losses related to available-for-
sale securities has decreased to $(1,448) and are included in accumulated other
comprehensive loss.
4. Summarized Income Statement Information:
The Company's investment in FBR Technology Venture Partners, L.P. ("TVP") of
$90,855 represents 46% of the Company's total long-term investments and 31% of
the Company's total assets as of September 30, 2000. The following table
summarizes TVP's income statement information (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Investment income (loss) $ (35) $ 23 $ 88 $ 43
Total expenses 320 609 968 1,344
-------- ------ -------- -------
Net investment loss (355) (586) (880) (1,301)
Unrealized appreciation (depreciation)
of investments (12,718) 3,806 170,878 47,187
Net realized gains on investments 28,916 -- 68,737 --
-------- ------ -------- -------
Net income $ 15,843 $3,220 $238,735 $45,886
======== ====== ======== =======
</TABLE>
8
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
4. Summarized Income Statement Information, continued:
The Company's investment in FBR Asset Investment Corporation ("FBR-Asset") of
$29,073 represents 15% of the Company's total long-term investments and 10% of
the Company's total assets as of September 30, 2000. The following table
summarizes FBR-Asset's income statement information (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Gross revenues $5,594 $4,603 $17,831 $15,188
Total expenses 3,255 2,198 9,910 6,996
------ ------ ------- -------
Net income before net investment gains (losses) 2,339 2,405 7,921 8,192
Net investment gains (losses) 57 331 (4,922) 1,074
------ ------ ------- -------
Net income $2,396 $2,736 $ 2,999 $ 9,266
====== ====== ======= =======
</TABLE>
5. Executive Officer Compensation:
During 2000, certain of the Company's executive officers are eligible for
bonuses under the Key Employee Incentive Plan (the "Plan"). As of September 30,
2000, the Company accrued $5,883 of executive officer compensation, in
accordance with the Plan, representing 22.4% of the Company's pre-tax income
(before executive officer compensation accruals). Compensation, if any, related
to the Plan will be paid subsequent to December 31, 2000.
6. Income Taxes:
As of September 30, 2000, the Company has net operating losses ("NOL") for
tax purposes of approximately $53,450 that expire through 2020. The Company
maintains a partial valuation allowance against the NOL and other deferred tax
assets in general, because, based on the weight of available evidence, it is
more likely than not that a portion of the deferred tax assets may not be
realized. The valuation allowance includes consideration for the deferred tax
asset related to unrealized losses on available-for-sale securities recorded in
accumulated other comprehensive loss. During the nine months ended September
30, 2000, the Company utilized $4,794 of the valuation allowance.
7. Net Capital Requirements:
The Company's U.S. broker-dealer subsidiaries are subject to the Securities
and Exchange Commission's Uniform Net Capital Rule which requires the
maintenance of minimum net capital and requires the ratio of aggregate
indebtedness to net capital, both as defined by the rule, not to exceed 15 to 1.
The Company's U.K. broker-dealer subsidiary is subject to the net capital rules
of the Securities and Futures Authority. As of September 30, 2000, the broker-
dealer subsidiaries had aggregate net capital of $29,147, which exceeded the
requirements by $27,405.
8. Earnings (Loss) Per Share:
Basic earnings per share is computed by dividing net income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. The diluted earnings per share calculation also includes the
impact of dilutive options.
9
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
8. Earnings (Loss) Per Share, continued:
As of September 30, 2000 and 1999, respectively, 8,211,062 and 6,551,705
options to purchase shares of common stock were outstanding. As of September
30, 2000, 5,523,660 of the total outstanding options were included in the fully
diluted calculation. As of September 30, 1999, no outstanding options were
included in the fully diluted calculation.
9. Commitments and Contingencies:
As of September 30, 2000, the Company is not a defendant or plaintiff in any
lawsuits or arbitrations that are expected to have a material adverse effect on
the Company's financial condition. The Company is a defendant in a small number
of civil lawsuits and arbitrations (together "litigation") relating to its
various businesses. In addition, the Company is subject to regulatory oversight
relating to its various businesses. There can be no assurances that these
matters will not have a material adverse effect on the Company's financial
condition or results of operations in a future period. However, based on
management's review with counsel, including a review of the reserves set aside
for litigation, resolution of these matters is not expected to have a material
adverse effect on the Company's financial condition or results of operations.
Many aspects of the Company's business involve substantial risks of liability
and litigation. Underwriters, broker-dealers and investment advisers are
exposed to liability under Federal and state securities laws, other Federal and
state laws and court decisions, including decisions with respect to
underwriters' liability and limitations on indemnification, as well as with
respect to the handling of customer accounts. For example, underwriters may be
held liable for material misstatements or omissions of fact in a prospectus used
in connection with the securities being offered and broker-dealers may be held
liable for statements made by their securities analysts or other personnel. In
certain circumstances, broker-dealers and asset managers may also be held liable
by customers and clients for losses sustained on investments. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. The Company is
also subject to the risk of litigation, including litigation that may be without
merit. As the Company intends actively to defend such litigation, significant
legal expenses could be incurred. An adverse resolution of any future
litigation against the Company could materially affect the Company's operating
results and financial condition.
10. Segment Information:
The Company considers its capital markets, asset management operations and
online financial services to be three separate reportable segments. Parent
company assets, liabilities, income and expenses, such as cash equivalents,
income taxes, interest income and executive officer compensation are not
allocated to the segments and, therefore, are included in the "Other" column in
1999. During 2000, the Company has developed systems and methodologies to
allocate overhead costs to its business units and, accordingly, has presented
segment information consistent with internal management reporting. There are no
significant revenue transactions between the segments. The following table
illustrates the financial information for its segments for the periods presented
(in thousands):
10
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
10. Segment Information, continued:
<TABLE>
<CAPTION>
Online
Capital Asset Financial Consolidated
Markets Management Services Other Totals
----------- ----------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Three Months Ended September 30, 2000
---------------------------------------
Total revenues $27,046 $17,459 $ 197 $ - $ 44,702
Pre-tax income (loss) (101) 7,267 (973) - 6,193
Three Months Ended September 30, 1999
---------------------------------------
Total revenues 16,141 (7,087) 24 (156) 8,922
Pre-tax loss (8,229) (9,852) (4,725) (255) (23,061)
<CAPTION>
Online
Capital Asset Financial Consolidated
Markets Management Services Other Totals
----------- ----------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 2000
---------------------------------------
Total revenues 85,014 68,777 690 - 154,481
Pre-tax income (loss) 5,041 19,892 (4,119) - 20,814
Nine Months Ended September 30, 1999
---------------------------------------
Total revenues 62,159 8,608 24 579 71,370
Pre-tax income (loss) (9,125) 626 (5,808) (2,860) (17,167)
</TABLE>
11. Subsequent Events:
The volatility of TVP's venture capital portfolio is illustrated by the
fluctuation in value of TVP's publicly traded securities through October 31,
2000. For example, the total public market value of these securities was
approximately $415.7 million on September 30, 2000 and was $225.9 million on
October 31, 2000. These valuations exclude amounts distributed of $49.3
million and $161.3 million as of September 30, 2000 and October 31, 2000,
respectively. As explained in footnote 3, the valuation, for financial
reporting purposes, of these securities reflects a discount from the public
market value.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis of the consolidated financial condition and results of
operations of Friedman, Billings, Ramsey Group, Inc. (the "Company") should be
read in conjunction with the unaudited Consolidated Financial Statements as of
September 30, 2000 and 1999, and the Notes thereto and the Company's 1999 Annual
Report on Form 10-K.
BUSINESS ENVIRONMENT
Our principal business activities (capital raising, securities sales and
trading, merger and acquisition and advisory services, venture capital,
proprietary investments and asset management services) are linked to the capital
markets. In addition, our business activities are primarily focused on small
and mid-cap stocks in the Internet and information technology, bank, financial
services, energy and real estate sectors. By their nature, our business
activities are highly competitive and are not only subject to general market
conditions, volatile trading markets and fluctuations in the volume of market
activity, but also to the conditions affecting the companies and markets in our
areas of focus.
Our revenues, particularly from venture capital and private equity
activities, capital raising, and asset management activities, are subject to
substantial positive and negative fluctuations due to a variety of factors that
cannot be predicted with great certainty, including the overall condition of the
economy and the securities markets as a whole and of the sectors on which we
focus. In the third quarter, there was an increase in underwritten transactions
and the secondary markets remained volatile. A significant portion of the
performance based or incentive revenues that we recognize from our venture
capital, private equity and asset management activities is based on the increase
in value of securities held by the funds we manage. These increases in value
included unrealized gains that may be reduced or reversed from one period to
another. When market conditions permit, we take steps to realize or lock-in
gains on these securities. These securities are often illiquid and, therefore,
the value of these securities is subject to increased market risk. Fluctuations
in revenues also occur due to the level of market activity which, among other
things, affects the flow of investment dollars and the size, number and timing
of transactions. As a result, net income and revenues in any particular period
may not be representative of full-year results and may vary significantly from
year to year and from quarter to quarter.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, as well as significant growth in competition in the market for on-
line trading and investment banking services. The relaxation of banks' barriers
to entry into the securities industry and expansion by insurance companies into
traditional brokerage products, coupled with the repeal of laws separating
commercial and investment banking activities in the future, have increased the
number and size of companies competing for a similar customer base.
In order to compete in this increasingly competitive environment, we
continually evaluate each of our businesses across varying market conditions for
competitiveness, profitability and alignment with our long-term strategic
objectives, including the diversification of revenue sources. As a result, we
may chose, from time to time, to reallocate resources based on the opportunities
for profitability and revenue growth for each of our businesses relative to our
commitment of resources. We believe that it is important to diversify and
strengthen our revenue base by increasing the segments of our business that
offer a recurring and more predictable source of revenue.
RESULTS OF OPERATIONS
Three months ended September 30, 2000 compared to three months ended September
30, 1999
The Company's revenues increased 401% from $8.9 million in 1999 to $44.7
million in 2000 primarily due to an increase in asset management revenues,
particularly incentive allocations related to FBR Technology Venture Partners,
L.P. ("TVP"), investment banking revenues and institutional brokerage.
12
<PAGE>
RESULTS OF OPERATIONS, continued
Three months ended September 30, 2000 compared to three months ended September
30, 1999, continued
Underwriting revenue increased 22% from $4.0 million in 1999 to $4.9 million
in 2000. During the quarter ended September 30, 1999, the Company managed six
public offerings raising $294 million and generating $4.0 million in revenues.
During the third quarter of 2000, the Company managed seven transactions raising
$954.9 million and generating $4.9 million in revenues. The average size of
underwritten transactions for which we were a lead or co-manager increased from
$49.0 million in 1999 to $136.4 million in 2000.
Corporate finance revenue increased significantly from $2.0 million in 1999
to $7.3 million in 2000 due primarily to an increase in the number of private
placement and M&A transactions completed. In 1999, the Company completed one
private placement generating $0.6 million in revenues compared to two completed
transactions in 2000 that generated $1.4 million in revenues. M&A and advisory
fee revenue also increased from $1.4 million in 1999 to $5.9 million in 2000 due
to an increase in the number of deals completed. Additionally, in 2000, the
Company exercised warrants that had been previously received as part of a
private capital raising transaction resulting in a gain of $1.5 million
reflected in the investment gains line under investment banking.
Institutional brokerage revenue from principal transactions increased 49%
from $4.7 million in 1999 to $7.0 million in 2000 primarily due to an increase
in the Company's penetration of large institutional accounts and to the
Company's ability, as a market maker for its own account, to take advantage of
an increase in market volatility in the technology sector.
Institutional brokerage agency commissions increased 48% from $3.4 million in
1999 to $5.0 million in 2000 primarily due to increased customer trading,
particularly in the technology sector, due to, among other things, volatility in
the markets. In addition, we believe we have achieved greater penetration of
institutional accounts through broader research coverage and sales and trading
services.
Asset management incentive allocations increased significantly from $0.1
million in 1999 to $7.8 million in 2000. Incentive allocations in 2000 are from
several partnerships, primarily TVP, and represent unrealized gains and
realization events related to our partnership interests and underlying
securities. Under the terms of TVP's partnership agreement, after allocations
have been made to the limited partners in amounts totaling their commitments, we
are entitled to receive special allocations in an amount equal to 20% of the
realized and unrealized gains allocated to the limited partners. To the extent
that TVP holds securities of public companies that are restricted as to resale
due to contractual "lock-ups", regulatory requirements including Rule 144
holding periods, or for other reasons, these securities are generally valued by
reference to the public market price, subject to discounts to reflect the
restrictions on liquidity. As the restriction period decreases over time, the
amount of the discount is generally reduced. All such securities reflect the
September 30, 2000 closing price less discounts averaging 15% to reflect
restrictions on liquidity and marketability. We review these valuations and
discounts quarterly and make adjustments as appropriate.
Asset management net investment income (loss) increased significantly from
$(10.6) million in 1999 to $5.8 million in 2000. Net investment income in 2000
included $4.9 million of net investment income from investments in our managed
partnerships and $1.3 million of net investment income generated from our
investment in FBR-Asset offset by a $(0.4) million write-down on an available
for sale security. Net investment losses in 1999 included $(6.5) million of
"other than temporary" impairment related to an available-for-sale investment
accounted for under Financial Accounting Standard No. 115 and $(4.7) million
related to the Company's investments in proprietary investment partnerships.
Unrealized losses related to our investments that are included in "accumulated
other comprehensive loss" in our balance sheet totaled $(1.9) million as of
September 30, 2000. If and when we liquidate these or determine that the decline
in value of these investments is "other than temporary", a portion or all of the
losses will be recognized as investment losses in the statement of operations
during the period in which the liquidation or determination is made. Our
investment portfolio is also exposed to future downturns in the markets and
private debt and equity investments are exposed to deterioration of credit
quality, defaults and downward valuations. We periodically review the valuations
of our private debt
13
<PAGE>
RESULTS OF OPERATIONS, continued
Three months ended September 30, 2000 compared to three months ended
September 30, 1999, continued
and equity investments. If and when we determine that the net realizable value
of these investments is less than our carrying value, we will reflect the
reduction as an investment loss.
Net interest, dividends, and other revenue (net of interest expense)
increased 8% from $2.4 million in 1999 to $2.6 million in 2000 primarily due to
$0.2 million of miscellaneous income recorded in 2000. Interest income (net of
interest expense) increased from $1.6 million in 1999 to $2.0 million in 2000
due to reduced interest expense on our trading accounts.
Total expenses increased 20% from $32.0 million in 1999 to $38.5 million in
2000 due primarily to an increase in variable compensation expense associated
with increased revenue.
Compensation and benefits expense increased 52% from $16.3 million in 1999 to
$24.8 million in 2000. This increase was due to an increase in investment
banking compensation, executive officer compensation, and compensation
associated with our venture capital funds. The fund management team for the
venture capital funds has an agreement with the Company to receive a percentage
of the incentive allocations. For TVP, the fund management team earns 60% of the
incentive allocations and this amount is recorded as compensation expense at the
time the incentive allocations are recorded.
Business development and professional services decreased 38% from $9.7
million in 1999 to $6.0 million in 2000 primarily due to a decrease in
advertising and other promotional expenses incurred in 1999 related to fbr.com.
Clearing and brokerage fees increased 35% from $1.1 million in 1999 to $1.5
million in 2000 due to an increase in the volume of sales and trading activity.
As a percentage of institutional brokerage revenue, clearing and brokerage fees
decreased from 14% in 1999 to 12% in 2000 due primarily to the increase in
principal transactions.
Occupancy and equipment expense increased 53% from $1.7 million in 1999 to
$2.7 million in 2000 primarily due to the increase in depreciation and
amortization expense related to software, computer and telecommunications
equipment for fbr.com's operations and, to a lesser extent, an increase
associated with opening new offices. Depreciation and amortization expense
increased $0.6 in 2000 compared to 1999.
Communications expense increased 4% from $1.2 million in 1999 to $1.3 million
in 2000 due to an increase in costs associated with an additional Internet
service provider and increased cellular phone usage.
Other operating expenses increased 6% from $1.8 million in 1999 to $1.9
million in 2000 due to the increase in litigation accruals.
Nine months ended September 30, 2000 compared to nine months ended
September 30, 1999
The Company's revenues increased 116% from $71.4 million in 1999 to $154.5
million in 2000 primarily due to an increase in asset management revenues,
particularly incentive allocations related to FBR Technology Venture Partners,
L.P. ("TVP"), corporate finance revenue and institutional brokerage.
Underwriting revenue increased 1% from $16.4 million in 1999 to $16.6 million
in 2000. During 1999, the Company managed seventeen public offerings raising
$1.1 billion and generating $16.4 million in revenues. During 2000, the Company
completed nineteen transactions raising $3.9 billion and generating $16.6
million in revenues. The average size of underwritten transactions for which we
were a lead or co-manager increased from $64.0 million in 1999 to $205.3 million
in 2000.
14
<PAGE>
RESULTS OF OPERATIONS, continued
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999, continued
Corporate finance revenue increased significantly from $10.7 million in 1999
to $22.2 million in 2000 due primarily to an increase in the transaction size of
private placement and M&A transactions. In 1999, the Company completed five
private placements generating $3.6 million in revenues compared to four
completed transactions in 2000 that generated $6.2 million in revenues. M&A and
advisory fee revenue also increased from $7.1 million in 1999 to $16.0 million
in 2000 due to an increase in the number of deals completed. Additionally, in
2000, the Company exercised warrants that had been previously received as part
of a private capital raising transaction resulting in a gain of $1.5 million
compared to $2.2 million in 1999 reflected in the investment gains line under
investment banking.
Institutional brokerage revenue from principal transactions increased 47%
from $17.6 million in 1999 to $25.8 million in 2000 primarily due to an increase
in the Company's penetration of large institutional accounts and to the
Company's ability, as a market maker for its own account, to take advantage of
an increase in market volatility in the technology sector.
Institutional brokerage agency commissions increased 54% from $9.9 million in
1999 to $15.3 million in 2000 primarily due to increased customer trading,
particularly in the technology sector, due to, among other things, volatility in
the markets. In addition, we believe we have achieved greater penetration of
institutional accounts through broader research coverage and sales and trading
services.
Asset management incentive allocations increased significantly from $0.6
million in 1999 to $52.2 million in 2000. Incentive allocations in 2000 are from
several partnerships, primarily TVP, and represent unrealized gains and
realization events related to our partnership interests and underlying
securities. Under the terms of TVP's partnership agreement, after allocations
have been made to the limited partners in amounts totaling their commitments, we
are entitled to receive special allocations in an amount equal to 20% of the
realized and unrealized gains allocated to the limited partners. To the extent
that TVP holds securities of public companies that are restricted as to resale
due to contractual "lock-ups", regulatory requirements including Rule 144
holding periods, or for other reasons, these securities are generally valued by
reference to the public market price, subject to discounts to reflect the
restrictions on liquidity. As the restriction period decreases over time, the
amount of the discount is generally reduced. All such securities reflect the
September 30, 2000 closing price less discounts averaging 15% to reflect
restrictions on liquidity and marketability. We review these valuations and
discounts quarterly and make adjustments as appropriate.
Asset management net investment income (loss) increased significantly from
$(1.3) million in 1999 to $6.6 million in 2000. Net investment income in 2000
included $12.3 million of net investment income from investments in our managed
partnerships and $5.0 million of net investment income generated from our
investment in FBR-Asset offset by $(7.9) million in write-downs of our private
debt instruments and $(2.8) million of "other than temporary" impairments
related to available-for-sale equity investments. Net investment losses in 1999
included $1.9 million of net investment income from investments in our managed
partnerships and $3.3 million of net investment income generated from our
investment in FBR-Asset offset by $(6.5) million of "other than temporary"
impairments related to our available-for-sale equity investments. Unrealized
losses related to our investments that are included in "accumulated other
comprehensive loss" in our balance sheet totaled $(1.9) million as of September
30, 2000. If and when we liquidate these or determine that the decline in value
of these investments is "other than temporary", a portion or all of the losses
will be recognized as investment losses in the statement of operations during
the period in which the liquidation or determination is made. Our investment
portfolio is also exposed to future downturns in the markets and private debt
and equity investments are exposed to deterioration of credit quality, defaults
and downward valuations. We periodically review the valuations of our private
debt and equity investments. If and when we determine that the net realizable
value of these investments is less than our carrying value, we will reflect the
reduction as an investment loss.
15
<PAGE>
RESULTS OF OPERATIONS, continued
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999, continued
Net interest, dividends and other revenue (net of interest expense) decreased
9% from $7.0 million in 1999 to $6.4 million in 2000 primarily due to $0.7
million of miscellaneous income recorded in 1999. Interest income (net of
interest expense) increased from $5.0 million in 1999 to $5.6 million in 2000
due to reduced interest expense on our trading accounts.
Total expenses increased 51% from $88.5 million in 1999 to $133.7 million in
2000 due primarily to an increase in variable compensation expense associated
with increased revenue.
Compensation and benefits expense increased 83% from $52.7 million in 1999 to
$96.2 million in 2000. This increase was primarily due to increased compensation
associated with our venture capital funds and, to a lesser extent, an increase
in investment banking compensation and executive officer compensation. The fund
management team for the venture capital funds has an agreement with the Company
to receive a percentage of the incentive allocations. For TVP, the fund
management team earns 60% of the incentive allocations and this amount is
recorded as compensation expense at the time the incentive allocations are
recorded.
Business development and professional services decreased 18% from $18.2
million in 1999 to $15.0 million in 2000 primarily due to a decrease in
advertising and other promotional expenses incurred in 1999 related to fbr.com.
Clearing and brokerage fees increased 39% from $3.3 million in 1999 to $4.6
million in 2000 due to an increase in the volume of sales and trading activity.
As a percentage of institutional brokerage revenue, clearing and brokerage fees
decreased from 12% in 1999 to 11% in 2000 due to the increase in principal
transactions.
Occupancy and equipment expense increased 56% from $4.7 million in 1999 to
$7.4 million in 2000 primarily due to the increase in depreciation and
amortization expense related to software, computer and telecommunications
equipment for fbr.com's operations and, to a lesser extent, an increase
associated with opening new offices. Depreciation and amortization expense
increased $1.9 in 2000 compared to 1999.
Communications expense increased 22% from $3.1 million in 1999 to $3.7
million in 2000 due to an increase in costs associated with an additional
Internet service provider and increased cellular phone usage.
Other operating expenses increased 6% from $5.4 million in 1999 to $5.8
million in 2000 due to the increase in litigation accruals.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity and regulatory capital needs
through three primary sources: (1) internally generated funds; (2) equity
capital contributions; and (3) credit provided by banks, clearing brokers, and
affiliates of our principal clearing broker. We have required the use, and may
continue the use, of temporary subordinated loans in connection with regulatory
capital requirements to support our underwriting activities. We have no material
long-term debt.
Our principal assets consist of cash and cash equivalents, receivables,
securities held for trading purposes and long-term investments. As of September
30, 2000, liquid assets consisted primarily of cash and cash equivalents of
$40.6 million and a $19.6 million receivable for cash on deposit with the
Company's clearing broker. Cash equivalents of $40.6 million consist primarily
of money market funds invested in debt obligations of the U.S. government. We
also held $9.0 million in marketable securities in our trading accounts.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, continued
We had borrowing capacity (borrowing against security positions) from FBRC's
clearing broker of approximately $2.0 million as of September 30, 2000 and a
total of $40.0 million in a committed subordinated revolving loan from an
affiliate of the Company's clearing broker that is allowable for net capital
purposes. The Company intends to replace this agreement upon expiration in
December 2000.
Long-term investments consist primarily of investments in managed
partnerships, including venture capital funds in which we serve as managing
partner, available-for-sale securities, our investment in FBR-Asset and long-
term debt and equity investments in privately held companies. Although the
investments in venture capital funds and other limited partnerships are for the
most part illiquid, the underlying investments of such entities are mostly in
publicly traded, equity and debt securities, some of which may be restricted due
to contractual "lock-up" requirements. The Company is continually evaluating and
implementing various strategies designed to minimize its risk of loss from
potential market declines of securities underlying its long-term investments.
As of September 30, 2000, a majority, by value, of the underlying assets of
the investment partnerships and the REIT were equity securities of domestic,
publicly traded companies or, in the case of the REIT, mortgage-backed
securities. These underlying investments are marked to market, subject to
liquidity discounts in the case of securities that are subject to contractual
"lock-up" requirements or regulatory restrictions (including Rule 144) or
otherwise not readily marketable, and we record our proportionate share of
unrealized gains and losses. To the extent the underlying investments in the
investment partnerships, venture funds, REIT and direct investments are not
marketable securities, they are valued at estimated fair values. In 2000, we
recorded net realized and unrealized losses from our investments of $6.6
million and incentive allocations that represent unrealized gains and
realization events related to our partnership interests and underlying
securities of $52.2 million. We also maintain, as a separate component of
shareholders' equity, $1.9 million of accumulated other comprehensive loss,
representing $(1.4) million of unrealized losses on our direct investments and
$(0.5) million of unrealized losses representing our proportionate share of the
REIT. As of September 30, 2000, the recorded value of our long-term investment
securities was $196.9 million. The net potential loss in fair value, using a 10%
hypothetical decline in reported value, was $19.7 million.
FBRC and FBR Investment Services, Inc. ("FBRIS", a division of which does
business as fbr.com) as broker-dealers, are registered with the Securities and
Exchange Commission ("SEC") and are members of the National Association of
Securities Dealers, Inc. As such, they are subject to the minimum net capital
requirements promulgated by the SEC. FBRC's and FBRIS' regulatory net capital
has historically exceeded these minimum requirements. As of September 30, 2000,
FBRC was required to maintain minimum regulatory net capital of $1.0 million and
had total regulatory net capital of $26.7 million which was $25.7 million in
excess of its requirement. As of September 30, 2000, FBRIS was required to
maintain minimum regulatory net capital of $0.1 million and had total regulatory
net capital of $1.2 million which was $1.1 million in excess of its requirement.
Regulatory net capital requirements increase when FBRC and FBRIS are involved in
underwriting activities based upon a percentage of the amount being underwritten
by FBRC and FBRIS. Friedman, Billings, Ramsey International Limited ("FBRIL") as
a U.K. broker-dealer, is subject to the net capital rules of the Securities and
Futures Authority. As of September 30, 2000, FBRIL was required to maintain
minimum regulatory net capital of $0.6 million and had total regulatory net
capital of $1.2 million which was $0.6 million in excess of its requirement.
As of September 30, 2000, we had net operating losses ("NOL") for tax
purposes of $53.5 million that expire through 2020. We maintain a partial
valuation allowance related to the NOL and deferred tax assets, in general
because, based on the weight of available evidence, it is more likely than not
that a portion of the net deferred tax assets may not be realized.
We believe that the Company's current level of equity capital and committed
line of credit, including funds generated from operations, are adequate to meet
our liquidity and regulatory capital requirements and other activities. We may,
however, seek debt or equity financing, in public or private transactions, or
otherwise re-deploy assets, to provide capital for corporate purposes and/or to
fund strategic business opportunities, including possible acquisitions, joint
ventures, alliances or other business arrangements which
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, continued
could require substantial capital outlays. Our policy is to evaluate strategic
business opportunities, including acquisitions and divestitures, as they arise.
We constantly review our capital needs and sources, the cost of capital and
return on equity, and we seek strategies to provide favorable returns on
capital. In evaluating our anticipated capital needs and current cash resources
during 1998, our Board of Directors authorized a share repurchase program of up
to 2.5 million shares of our Company's Class A Common Stock. Since announcing
the share repurchase program, the Company purchased 1,468,027 shares as of
September 30, 2000. 390,892 of the purchased shares were reissued to employees
pursuant to our Employee Stock Purchase Plan.
WARRANTS
In connection with various public and private capital raising transactions,
we have received and we hold the following warrants for stock of the issuing
corporation. The exercise price for each warrant is set at the offering price
of the underlying stock in the relevant capital raising transaction. Due to the
restrictions on the warrants and the underlying securities, we carry the
warrants at nominal values, and recognize profits, if any, only when realized.
<TABLE>
<CAPTION>
Number of Exercise September 30, 2000 Expiration
Warrants Price Closing Price Date
--------- -------- ------------------ ----------
<S> <C> <C> <C> <C>
Access Data 199,964 $ 1.650 * 03/29/05
Capital Automotive REIT 894,464 15.000 $13.000 12/12/03
Local Financial Corporation 382,000 10.000 9.500 09/08/02
PlanetClick, Inc. 50,764 3.200 * 06/30/04
Styling Technology Corporation 71,050 12.000 ** 11/21/01
FBR Asset Investment Corporation 970,805 20.000 15.500 12/11/07
Xypoint Corporation 285,107 2.100 * 07/10/03
Vcampus Corporation (formerly UOLP) 18,500 4.625 3.625 09/16/03
Resource Asset Investment Trust 99,292 15.000 12.600 01/08/03
American Home Mortgage Holdings, Inc. 125,000 7.800 5.250 09/30/04
Ultraprise Corporation 234,427 2.533 * 12/22/04
The Bancorp.com 28,093 10.000 * 11/01/04
World Web, Ltd. 233,334 1.500 * 12/13/04
Total Funding.com 521,400 3.000 * 02/11/05
James Martin 60,000 13.000 * 05/26/10
PocketScript 114,000 1.500 * 01/27/07
Synchrologic 61,534 6.650 * 08/25/05
</TABLE>
* The underlying unregistered security does not have a ready market. We
received the warrants in a private placement transaction.
** This security was not trading on September 30, 2000.
MATTERS RELATED TO YEAR 2000
Over the past several years, we have addressed the potential hardware,
software and other computer and technology issues and related concerns
associated with the transition to the Year 2000 and have confirmed that our
service providers took similar measures. As a result of those efforts, we have
not experienced any disruptions in our operations in connection with, or
following, the transition to the Year 2000.
Item 3. Changes in Information About Market Risk
None.
18
<PAGE>
Forward-Looking Statements
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Some of the forward-looking
statements can be identified by the use of forward-looking words such as
"believes", "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates" or "anticipates" or the negative of those words
or other comparable terminology. Such statements include, but are not limited
to, those relating to the effects of growth, our principal investment
activities, levels of assets under management and our current equity capital
levels. Forward-looking statements involve risks and uncertainties. You should
be aware that a number of important factors could cause our actual results to
differ materially from those in the forward-looking statements. These factors
include, but are not limited to, competition among venture capital firms and the
high degree of risk associated with venture capital investments, the effect of
demand for public offerings, mutual fund and 401(k) and pension plan inflows or
outflows, volatility of the securities markets, available technologies,
government regulation, economic conditions and competition for business and
personnel in the business areas in which we focus, fluctuating quarterly
operating results, the availability of capital to us and risks related to online
commerce. We will not necessarily update the information presented or
incorporated by reference in this Form 10-Q if any of these forward-looking
statements turn out to be inaccurate. For a more detailed discussion of the
risks affecting our business see our Form 10-K for 2000 and especially the
section "Business--Factors Affecting Our Business, Operating Results and
Financial Condition".
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial data schedule
(b) Reports on Form 8-K
. October 27, 2000: third quarter 2000 results
. November 2, 2000: third quarter 2000 Financial and Statistical
Supplement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Friedman, Billings, Ramsey Group, Inc.
11/14/00 By: /s/ Kurt R. Harrington
---------------- ----------------------
Date Kurt R. Harrington, Senior Vice President and
Chief Financial Officer (Principal Financial and
Accounting Officer)
EXHIBIT INDEX
EXHIBIT 27.01 Financial Data Schedule
19
