<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 March 31, 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 15,331,384 shares as of April 30, 2000
Class B Common Stock 33,764,729 shares as of April 30, 2000
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
Page Number (s)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - (unaudited)
Consolidated Balance Sheets-
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations-
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Item 3. Changes in Information about Market Risk 15
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
EXHIBIT INDEX 16
2
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 34,229 $ 43,743
Receivables:
Investment banking 12,723 4,273
Asset management fees 4,363 3,112
Affiliates 5,763 1,339
Other 2,031 1,698
Due from clearing broker 27,402 13,472
Marketable trading securities, at market value:
Corporate equities 3,583 4,193
Corporate bonds 3,232 1,944
Long-term investments 170,820 135,723
Deferred tax asset 263 2,402
Prepaid expenses and other assets 2,890 3,149
Furniture, equipment, software and leasehold improvements,
net of accumulated depreciation and amortization of
$6,913 and $5,798, respectively 12,159 11,308
-------- --------
Total assets $279,458 $226,356
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Trading account securities sold but not yet purchased, at market value:
Corporate equities $ 14,540 $ 3,015
Corporate bonds 683 14
Accounts payable and accrued expenses 8,946 8,869
Accrued compensation and benefits 56,009 24,130
Long-term secured loans 1,217 1,359
-------- --------
Total liabilities 81,395 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, 15,270,811 and 14,304,026 shares issued, respectively 153 143
Class B Common Stock, $0.01 par value, 100,000,000 shares authorized,
34,968,329 and 35,799,729 shares issued and outstanding, respectively 350 358
Additional paid-in capital 209,516 208,678
Treasury stock, at cost, 1,143,027 shares (8,341) (8,341)
Accumulated other comprehensive loss (4,154) (5,991)
Retained earnings (deficit) 539 (5,878)
-------- --------
Total shareholders' equity 198,063 188,969
-------- --------
Total liabilities and shareholders' equity $279,458 $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)
(Unaudited)
Three Months
Ended March 31,
-----------------
2000 1999
------- -------
Revenues:
Investment banking:
Underwriting $10,506 $ 3,171
Corporate finance 6,190 2,877
Institutional brokerage:
Principal transactions 6,001 6,061
Agency commissions 5,676 2,819
Asset management:
Base management fees 2,174 2,264
Incentive allocations 36,603 73
Net investment gains (losses) (2,900) 2,261
Interest, dividends and other 1,993 2,543
------- -------
Total revenues 66,243 22,069
------- -------
Expenses:
Compensation and benefits 46,223 14,238
Business development and professional services 4,617 2,594
Clearing and brokerage fees 1,567 1,014
Occupancy and equipment 2,323 1,562
Communications 1,181 924
Interest expense 222 507
Other operating expenses 1,554 1,185
------- -------
Total expenses 57,687 22,024
------- -------
Net income before taxes 8,556 45
Income tax provision 2,139 --
------- -------
Net income $ 6,417 $ 45
======= =======
Basic earnings per share $ 0.13 $ 0.00
======= =======
Diluted earnings per share $ 0.12 $ 0.00
======= =======
Weighted average shares outstanding:
Basic 49,021 49,034
======= =======
Diluted 51,353 49,214
======= =======
See notes to consolidated financial statements.
4
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months
Ended March 31,
-------------------
2000 1999
-------- -------
Cash flows from operating activities:
Net income $ 6,417 $ 45
Non-cash items included in earnings--
Incentive allocations and net investment gains
(losses) from long-term investments (33,703) (2,334)
Depreciation and amortization 1,163 575
Deferred income taxes 2,139 --
Other -- (267)
Changes in operating assets:
Receivables--
Investment banking (8,450) (242)
Asset management fees (1,206) 81
Income taxes -- 7,495
Affiliates (4,424) 85
Other 406 339
Due from clearing broker (13,930) (8,626)
Marketable trading securities (678) 804
Prepaid expenses and other assets 259 100
Changes in operating liabilities:
Trading account securities sold but not
yet purchased 12,194 (417)
Accounts payable and accrued expenses 77 (2,281)
Accrued compensation and benefits 31,879 1,635
-------- -------
Net cash used in operating activities (7,857) (3,008)
-------- -------
Cash flows from investment activities:
Purchases of fixed assets (2,014) (161)
Purchases of long-term investments, net (341) (2,677)
-------- -------
Net cash used in investing activities (2,355) (2,838)
-------- -------
Cash flows from financing activities:
Repayments of long-term secured loans (142) (135)
Proceeds from issuance of common stock 840 --
Purchases of treasury stock -- (2,415)
-------- -------
Net cash provided by (used in) financing activities 698 (2,550)
-------- -------
Net decrease in cash and cash equivalents (9,514) (8,396)
Cash and cash equivalents, beginning of period 43,743 46,827
-------- -------
Cash and cash equivalents, end of period $ 34,229 $38,431
======== =======
See notes to consolidated financial statements.
5
<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):
Three Months
Ended March 31,
2000 1999
------ ------
Net income $6,417 $ 45
Other comprehensive income:
Net change in unrealized investment losses related
to available-for-sale securities and investment
in FBR Asset Investment Corporation 1,837 --
------ -----
Comprehensive income $8,254 $ 45
====== =====
3. Long-Term Investments, Incentive Allocations and Net Investment Gains
(Losses):
Long-term investments consist of the following (in thousands):
March 31, December 31,
2000 1999
-------- --------
Venture capital and other proprietary
investment partnerships $121,199 $ 69,988
FBR Asset Investment Corporation 25,551 24,194
Private debt and preferred equity investments 17,500 25,380
Available-for-sale securities 6,570 16,161
-------- --------
$170,820 $135,723
======== ========
6
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
3. Long-Term Investments, Incentive Allocations and Net Investment Gains
(Losses), continued:
FBR Technology Venture Partners, L.P. ("TVP")
---------------------------------------------
As of March 31, 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 proportions 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 March 31, 2000 closing price less discounts averaging 60% to
reflect restrictions on liquidity including the size of the fund's holdings
relative to the public market float and marketability. During the quarter ended
March 31, 2000, the Company recorded incentive allocations of $36,661 and net
investment gains of $4,326 related to its investment in TVP.
FBR Asset Investment Corporation ("FBR-Asset")
----------------------------------------------
During the quarter ended March 31, 2000, the Company recorded $1,834 of net
investment gains 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, $599 of unrealized investment gains for its proportionate
share of FBR-Asset's net unrealized gains related to available-for-sale
securities. As of March 31, 2000, net unrealized loss related to FBR-Asset and
included in the Company's accumulated other comprehensive loss has been reduced
to $(2,406).
Private Debt and Preferred Equity Investments
---------------------------------------------
The Company holds private debt and preferred equity investments related to
the formation of a business trust designed to extend financing to "middle-
market" businesses in need of subordinated debt or mezzanine financing. During
the quarter ended March 31, 2000, the Company recorded $(2,000) of investment
losses related to a private debt investment. The Company also recorded $(5,880)
of investment losses related to a preferred equity investment.
Available-For-Sale Securities
-----------------------------
During the quarter ended March 31, 2000, the Company recorded $(550) of
"other than temporary" loss in the statement of operations related to one
available-for-sale investment. The Company also sold $10,278 of available-for-
sale securities at a net realized investment loss of $(1,814). As of March 31,
2000, the unrealized losses related to available-for-sale securities are
$(1,748) and are included in accumulated other comprehensive loss.
7
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
4. Summarized Income Statement Information:
The Company's investment in FBR Technology Venture Partners, L.P. ("TVP") of
$80,076 represents 47% of the Company's total long-term investments and 29% of
the Company's total assets as of March 31, 2000. The following table summarizes
TVP's income statement information (in thousands):
Three Months
Ended March 31,
2000 1999
-------- -------
Investment income $ 37 $ 9
Total expenses 323 351
-------- -------
Net investment loss (286) (342)
Unrealized appreciation (depreciation) of investments 183,567 (901)
Realized gains 11,159 --
-------- -------
Net income (loss) $194,440 $(1,243)
======== =======
The Company's investment in FBR Asset Investment Corporation ("FBR-Asset") of
$25,551 represents 15% of the Company's total long-term investments and 9% of
the Company's total assets as of March 31, 2000. The following table summarizes
FBR-Asset's income statement information (in thousands):
Three Months
Ended March 31,
2000 1999
------- ------
Gross revenues $ 6,323 $5,165
Total expenses 3,590 2,457
------- ------
Net income before net investment losses 2,733 2,708
Net investment losses (4,861) --
------- ------
Net income (loss) $(2,128) $2,708
======= ======
5. Executive Officer Director Compensation:
During 2000, the Company's executive officer directors are eligible for
bonuses under the Key Employee Incentive Plan (the "Plan"). During the quarter
ended March 31, 2000, the Company recorded $2,139 of executive officer director
compensation, in accordance with the Plan, representing 20% of the Company's
pre-tax income (before executive officer compensation accruals) for the quarter.
Compensation, if any, related to the Plan will be paid subsequent to December
31, 2000.
6. Income Taxes:
As of March 31, 2000, the Company has net operating losses ("NOL") for tax
purposes of approximately $43,000 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 quarter ended March 31, 2000,
the Company reversed $1,516 of the valuation allowance recorded through
earnings.
8
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
7. Net Capital Requirements:
The Company's U.S. broker-dealer subsidiaries are subject to the Securities
and Exchange Commission's Uniform Net Capital Rule which requires the
maintenance of minimum net capital and requires the ratio of aggregate
indebtedness to net capital, both as defined, not to exceed 15 to 1. As of
March 31, 2000, the broker-dealer subsidiaries had aggregate net capital of
$23,818, which exceeded the requirement by $22,654.
8. Earnings Per Share and Options:
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.
As of March 31, 2000 and 1999, respectively, 8,897,615 and 3,929,020 options
to purchase shares of common stock were outstanding. As of March 31, 2000,
614,612 of the total outstanding options were exercisable. As of March 31,
1999, no outstanding options were exercisable.
9. Commitments and Contingencies:
As of March 31, 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. 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, 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.
9
<PAGE>
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)-(Unaudited)
10. Segment Information:
The Company considers its capital markets and asset management operations to
be two 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 below. There are no significant revenue
transactions between the segments. The following table illustrates the
financial information for both segments for the periods presented (in
thousands):
Capital Asset Consolidated
Markets Management Other Totals
------- ---------- ----- ------------
Three Months Ended March 31, 2000
- ---------------------------------
Total revenues $30,236 $35,980 $ 27 $66,243
Pre-tax income (loss) (1,094) 12,271 (2,621) 8,556
Three Months Ended March 31, 1999
- ---------------------------------
Total revenues 16,456 5,501 112 22,069
Pre-tax income (loss) (2,262) 2,895 (588) 45
11. Subsequent Event:
Volatility of Venture Capital Portfolio
---------------------------------------
The volatility of TVP's venture capital portfolio is illustrated by the
decline in value of TVP's publicly traded securities from March 31, 2000 to May
10, 2000. The total public market value of these securities was approximately
$1.0 billion on March 31, 2000 and was $463.4 million on May 10, 2000.
10
<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
March 31, 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 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 the we
focus. 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. These securities are often illiquid and
therefore, the value of these securities is subject to increased market risk.
Fluctuations also occur due to the level of market activity, which, among other
things, affects the flow of investment dollars and the size, number and timing
of transactions. As a result, net income and revenues in any particular period
may not be representative of full-year results and may vary significantly from
year to year and from quarter to quarter.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, as well as significant growth in competition in the market for on-
line trading 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 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 March 31, 2000 compared to three months ended March 31, 1999
Total revenues increased 200% from $22.1 million in 1999 to $66.2 million in
2000 primarily due to an increase in asset management revenue, particularly
incentive allocations related to FBR Technology Venture Partners, L.P. ("TVP"),
an increase in underwriting revenue, due to the completion of more managed
transactions, and an increase in corporate finance revenues earned from merger
and acquisition ("M&A") transactions.
11
<PAGE>
RESULTS OF OPERATIONS, continued
Three months ended March 31, 2000 compared to three months ended March 31, 1999,
continued
Underwriting revenue increased 231% from $3.2 million in 1999 to $10.5
million in 2000. The increase is attributed to more managed transactions
completed in 2000 and an increase in the average dollars raised from those
transactions. During 2000, we managed 10 public offerings raising $2.8 billion
and generating $10.5 million in revenues. During 1999, we managed 4
transactions raising $278.9 million and generating $3.2 million in revenues.
The average size of underwritten transactions for which we were a lead or co-
manager increased from $69.7 million in 1999 to $282.8 million in 2000.
Corporate finance revenue increased 115% from $2.9 million in 1999 to $6.2
million in 2000. This increase was primarily due to more M&A and other advisory
services activity which generated revenues of $0.6 million in 1999 compared to
$5.3 million in 2000. During the first quarter of 2000, we earned $3.0 million
from the completion of one M&A transaction. This increase in M&A and other
advisory services revenues was offset by a decrease in private placement
revenue. In 1999, we completed 2 private placement transactions generating $2.3
million in revenues compared to the completion of 1 transaction in 2000 with
revenues of $0.9 million.
Agency commissions increased 101% from $2.8 million in 1999 to $5.7 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 with our current
institutional accounts through broader research coverage and sales services.
Incentive allocations increased significantly from $0.1 million in 1999 to
$36.6 million in 2000. Incentive allocations in 2000 are almost entirely
related to TVP and primarily represent unrealized gains allocated as carried
interest to our capital account in TVP. 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. Thereafter, we are entitled to an allocation of 20% of the
partnership's realized and unrealized gains and the remaining 80% is allocated
to the limited partners on a pro-rata basis. 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
March 31, 2000 closing price less discounts averaging 60% to reflect
restrictions on liquidity and marketability. We review these valuations and
discounts quarterly.
Net investment gains (losses) changed from $2.3 million in 1999 to $(2.9)
million in 2000. During 1999, $1.7 million of net investment gains were
generated from investments in our managed partnerships and $0.6 million of net
investment gains were generated from our investment in FBR Asset Investment
Corporation ("FBR-Asset"). Net investment gains in 2000 include gross gains of
$8.1 million offset by losses of $(11.0) million as follows: $5.5 million of
gains related to investments in our managed partnerships, of which $4.3 million
related to our investment in TVP; $(7.9) million of unrealized losses related to
private, mezzanine investments in preferred stock and debt; $1.8 million of
gains related to our investment in FBR-Asset; $(1.8) million of realized losses
related to the sale of available-for-sale securities; and $(0.5) million of
"other than temporary" unrealized depreciation related to an available-for-sale
security. Unrealized losses related to our investments that are included in
"accumulated other comprehensive loss" in our balance sheet totaled $(4.2)
million as of March 31, 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 securities 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.
12
<PAGE>
RESULTS OF OPERATIONS, continued
Three months ended March 31, 2000 compared to three months ended March 31, 1999,
continued
Net interest and dividends (net of interest expense) decreased 13% from $2.0
million in 1999 to $1.8 million in 1999. This decrease is primarily due to a
decrease in our trading inventory from which dividend income may be earned.
During 1999, we recorded $0.3 million of dividend income compared to none in
2000 due to the decrease in inventory.
Total expenses increased 162% from $22.0 million in 1999 to $57.7 million in
2000 due primarily to an increase in compensation and benefits expense described
below.
Compensation and benefits expense increased 225% from $14.2 million in 1999
to $46.2 million in 2000. This increase was primarily due to increased
compensation associated with our venture capital funds, higher executive officer
bonus accruals, and higher compensation related to the increase in investment
banking and sales activity. During 2000, we recorded $36.7 million of incentive
allocations related to our investment in TVP. 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. Also during 1999, we recorded
bonus accruals of $0.8 million for our three executive officer directors
compared to $2.1 million in 2000.
Business development and professional services increased 78% from $2.6
million in 1999 to $4.6 million in 2000 primarily due to an increase in travel
and consulting expenses associated primarily with the increase in investment
banking activity.
Clearing and brokerage fees increased 55% from $1.0 million in 1999 to $1.6
million in 2000 due to the increase in the volume of sales activity, primarily
listed and agency trades. As a percentage of principal sales credits and agency
commissions revenue, clearing and brokerage fees increased from 10.0% in 1999 to
12.1% in 2000 due primarily to higher total fees paid to fbr.com's clearing
broker (as a percentage of institutional brokerage revenue).
Occupancy and equipment expense increased 49% from $1.6 million in 1999 to
$2.3 million in 2000 primarily due to the increase in depreciation expense
related to software, computer and telecommunications equipment and furniture for
fbr.com's operations. Depreciation and amortization expense increased $0.6
million in 2000 compared to 1999.
Communications expense increased 28% from $0.9 million in 1999 to $1.2
million in 2000 due to a $0.2 million increase in telecommunications expenses
and a $0.1 million increase in costs associated with an upgrade of our broker-
dealer trading system.
Other operating expenses increased 31% from $1.2 million in 1999 to $1.6
million in 2000 due to an increase in expenses associated with the maintenance
and operation of software and office equipment. In addition, in 1999, we
reduced $0.2 million of bad debt expense due to a change in the status of an
unsecured customer account.
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.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, continued
Our principal assets consist of cash and cash equivalents, receivables,
securities held for trading purposes and long-term investments. As of March 31,
2000, liquid assets consisted primarily of cash and cash equivalents of $34.2
million and a receivable for cash on deposit with Friedman, Billings, Ramsey &
Co.'s ("FBRC") clearing broker. Cash equivalents consist primarily of money
market funds invested in debt obligations of the U.S. government. We also held
$6.8 million in marketable securities in our trading accounts. We had borrowing
capacity (borrowing against security positions) from FBRC's clearing broker of
approximately $6.0 million as of March 31, 2000 and a total of $40.0 million in
a committed subordinated revolving loan from an affiliate of FBRC's clearing
broker that is allowable for net capital purposes. The agreement expires 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.
FBRC and FBR Investment Services, Inc. ("FBRIS") 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 March 31, 2000, FBRC was required to maintain minimum
regulatory net capital of $1.1 million and had total regulatory net capital of
$23.0 million which was $21.9 million in excess of its requirement. As of March
31, 2000, FBRIS was required to maintain minimum regulatory net capital of $0.1
million and had total regulatory net capital of $0.8 million which was $0.7
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.
As of March 31, 2000, we had net operating losses ("NOL") for tax purposes of
$43.0 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 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 March
31, 2000. 325,000 of the purchased shares were reissued to employees pursuant
to our Employee Stock Purchase Plan.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES, continued
As of March 31, 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, in earnings, net realized and unrealized losses from our investments
of $2.9 million and incentive allocations from realized and unrealized gains in
investment partnerships, including venture capital, of $36.7 million. We also
maintain, as a separate component of shareholders' equity, $4.2 million of
accumulated other comprehensive loss, representing $1.8 million of unrealized
losses on our direct investments and $2.4 million of unrealized losses related
to our investment in the REIT. As of March 31, 2000, the recorded value of our
long-term investment securities was $170.8 million. The net potential loss in
fair value, using a 10% hypothetical decline in reported value, was $17.1
million.
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 March 31, 2000 Expiration
Warrants Price Closing Price Date
--------- -------- -------------- ----------
<S> <C> <C> <C> <C>
Capital Automotive REIT 894,464 $15.000 $12.0000 02/12/03
East West Bank 232,500 10.000 11.0625 06/12/03
Local Financial Corporation 382,000 10.000 8.5625 09/08/02
PlanetClick, Inc. 125,000 3.200 * 06/30/04
Styling Technology Corporation 71,050 12.000 ** 11/21/01
FBR Asset Investment Corporation 970,805 20.000 11.0000 12/11/07
Xypoint Corporation 285,107 2.100 * 07/10/03
Vcampus Corporation (formerly UOLP) 36,500 4.625 10.7500 09/16/03
Resource Asset Investment Trust 99,292 15.000 10.7500 01/08/03
American Home Mortgage Holdings, Inc. 125,000 7.800 6.3750 09/30/04
Ultraprise Corporation 394,742 2.533 * 12/22/04
The Bancorp.com 28,093 10.000 * 10/13/04
World Web, Ltd. 593,333 1.500 * 12/13/04
</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 March 31, 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.
15
<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
. April 20, 2000: First quarter 2000 results
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.
05/12/00 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
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of March 31, 2000 and the Consolidated Statement
of Operations for the three months ended March 31, 2000, which are contained in
the body of the accompanying Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-03-2000
<PERIOD-END> MAR-31-2000
<CASH> 34,229
<RECEIVABLES> 52,282
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 177,635
<PP&E> 12,159
<TOTAL-ASSETS> 279,458
<SHORT-TERM> 0
<PAYABLES> 64,955
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 15,223
<LONG-TERM> 1,217
0
0
<COMMON> 210,019
<OTHER-SE> (11,956)
<TOTAL-LIABILITY-AND-EQUITY> 279,458
<TRADING-REVENUE> 6,001
<INTEREST-DIVIDENDS> 1,993
<COMMISSIONS> 5,676
<INVESTMENT-BANKING-REVENUES> 16,696
<FEE-REVENUE> 38,777
<INTEREST-EXPENSE> 222
<COMPENSATION> 46,223
<INCOME-PRETAX> 8,556
<INCOME-PRE-EXTRAORDINARY> 8,556
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,417
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.12
</TABLE>
