-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HO9vi/GWOCIVADwI+HVjuugZu0kDuYa7vckdofoBECS4s2phOxmmAvZ9Fk29n/FA ZDkfSK3xItNLI5bQ5h0NnQ== 0000928385-99-001815.txt : 19990518 0000928385-99-001815.hdr.sgml : 19990518 ACCESSION NUMBER: 0000928385-99-001815 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIEDMAN BILLINGS RAMSEY GROUP INC CENTRAL INDEX KEY: 0001048750 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 541870350 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13731 FILM NUMBER: 99627242 BUSINESS ADDRESS: STREET 1: 1001 19TH STREET N. CITY: ARLINGTON STATE: VA ZIP: 22209 BUSINESS PHONE: 7033129500 MAIL ADDRESS: STREET 1: 1001 NINETEENTH ST N CITY: ARLINGTON STATE: VA ZIP: 22209 10-Q 1 FORM 10-Q 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, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 001-13731 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. (Exact name of Registrant as specified in its charter) Virginia 54-1837743 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1001 Nineteenth Street North Arlington, VA 22209 (Address of principal executive offices) (Zip code) (703) 312-9500 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Title Outstanding Class A Common Stock 12,381,099 shares as of April 30, 1999 Class B Common Stock 36,305,929 shares as of April 30, 1999 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 INDEX Page Number (s) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - (UNAUDITED) Consolidated Balance Sheets- March 31, 1999 and December 31, 1998 3 Consolidated Statements of Operations- Three Months Ended March 31, 1999 and 1998 4 Consolidated Statements of Cash Flows- Three Months Ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6-8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12 ITEM 3. CHANGES IN INFORMATION ABOUT MARKET RISK 12 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON 8-K 13 SIGNATURES 13 EXHIBIT INDEX 13 2 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS)
(UNAUDITED) MARCH 31, DECEMBER 31, 1999 1998 ---------- ------------ ASSETS Cash and cash equivalents $ 38,431 $ 46,827 Receivables: Investment banking 3,317 3,075 Asset management fees 5,305 5,108 Income taxes 1,300 8,795 Affiliates 7,149 6,871 Other 1,354 967 Due from clearing broker 19,347 10,721 Marketable trading securities, at market value: Corporate equities 6,935 8,709 Corporate bonds 5,411 4,441 Long-term investments 93,702 97,157 Deferred tax asset 2,402 2,402 Furniture, equipment and leasehold improvements, net of accumulated depreciation and amortization of $3,631 and $3,467, respectively 6,242 6,946 Prepaid expenses and other assets 2,997 3,097 -------- -------- TOTAL ASSETS $193,892 $205,116 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Trading account securities sold but not yet purchased, at market value: Corporate equities $ 2,475 $ 2,527 Corporate bonds - 365 Accounts payable and accrued expenses 5,945 8,226 Accrued compensation and benefits 6,820 5,185 Long-term secured loans 1,776 1,911 -------- -------- Total liabilities 17,016 18,214 -------- -------- Commitments and contingencies (Note 8) - - SHAREHOLDERS' EQUITY: Preferred Stock, $0.01 par value, 15,000,000 shares authorized, none issued and outstanding - - Class A Common Stock, $0.01 par value, 150,000,000 shares authorized, 13,723,071 and 13,716,571 issued, respectively 137 137 Class B Common Stock, $0.01 par value, 100,000,000 shares authorized, 36,305,929 and 36,312,429 issued and outstanding, respectively 363 363 Additional paid-in capital 208,525 208,525 Treasury stock, at cost, 1,295,872 and 910,037 shares, respectively (9,496) (7,081) Accumulated other comprehensive loss (23,792) (16,136) Retained earnings 1,139 1,094 -------- -------- Total shareholders' equity 176,876 186,902 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $193,892 $205,116 ======== ========
See notes to consolidated financial statements. 3 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------- 1999 1998 ------- ------- REVENUES: Underwriting $ 3,171 $47,710 Corporate finance 2,877 3,661 Principal sales credits 7,277 9,034 Agency commissions 2,819 3,708 Trading gains and losses, net (1,216) (5,921) Investment gains and losses, net 2,261 3,004 Asset management 2,337 3,169 Interest and dividends 2,543 3,619 ------- ------- Total revenues 22,069 67,984 ------- ------- EXPENSES: Compensation and benefits 14,238 28,343 Business development and professional services 2,594 6,806 Clearing and brokerage fees 1,014 1,343 Occupancy and equipment 1,562 764 Communications 924 826 Interest expense 507 1,659 Other operating expenses 1,185 2,507 ------- ------- Total expenses 22,024 42,248 ------- ------- NET INCOME BEFORE TAXES 45 25,736 Income tax provision - 10,157 ------- ------- NET INCOME $ 45 $15,579 ======= ======= Basic and diluted earnings per share $ 0.00 $ 0.31 ======= ======= Weighted average shares outstanding: Basic 49,034 50,029 ======= ======= Diluted 49,214 50,029 ======= =======
See notes to consolidated financial statements. 4 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------- 1999 1998 ------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 45 $ 15,579 Noncash items included in earnings-- Income and incentive income on long-term investments (2,334) (4,551) Depreciation and amortization 575 168 Deferred income taxes - 10,079 Other (267) - Changes in operating assets: Receivables-- Investment banking (242) (704) Asset management fees 81 (1,038) Income taxes 7,495 - Affiliates 85 (764) Other 339 1,059 Due from clearing broker (8,626) (180,741) Marketable trading securities 804 (7,871) Prepaid expenses and other assets 100 (2,552) Changes in operating liabilities: Due to issuer-underwriting - 129,560 Trading account securities sold but not yet purchased (417) 57,043 Net repayments on short-term subordinated loans - (40,000) Accounts payable and accrued expenses (2,281) (4,383) Accrued compensation and benefits 1,635 3,684 ------- --------- Net cash used in operating activities (3,008) (25,432) ------- --------- CASH FLOWS FROM INVESTMENT ACTIVITIES: Purchases of fixed assets (161) (234) Purchases of long-term investments, net (2,677) (8,866) ------- --------- Net cash used in investing activities (2,838) (9,100) ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term secured loans (135) (122) Purchases of treasury stock (2,415) - Dividends - (24,000) ------- --------- Net cash used in financing activities (2,550) (24,122) ------- --------- Net decrease in cash and cash equivalents (8,396) (58,654) Cash and cash equivalents, beginning of period 46,827 207,691 ------- --------- Cash and cash equivalents, end of period $38,431 $ 149,037 ======= =========
See notes to consolidated financial statements. 5 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The consolidated financial statements of Friedman, Billings, Ramsey Group, Inc. and subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Therefore, they do not include all information required by generally accepted accounting principles for complete financial statements. The interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for interim periods are not necessarily indicative of the results for the entire year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1998 included on Form 10-K filed by the Company under the Securities Exchange Act of 1934. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. 2. SUMMARIZED INCOME STATEMENT INFORMATION: The Company's investment in FBR Asset Investment Corporation of $22.7 million represents 24% of the Company's total investments and 12% of the Company's total assets as of March 31, 1999. The following table summarizes FBR Asset Investment Corporation's income statement information for the three months ended March 31, 1999 and 1998 (in thousands):
Three Months Ended March 31, 1999 1998 -------- ------- Gross revenues $ 5,165 $ 2,550 Total expenses 2,457 153 ------- ------- Net income $ 2,708 $ 2,397 ======= =======
3. COMPREHENSIVE INCOME (LOSS): The components of comprehensive income (loss) are as follows (in thousands):
Three Months Ended March 31, 1999 1998 ------- ------ Net income $ 45 $15,579 Other comprehensive income (loss): Net unrealized investment losses on available-for-sale securities and investment in FBR Asset Investment Corporation (7,656) - ------- ------- Comprehensive income (loss) $(7,611) $15,579 ======= =======
6 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. EXECUTIVE OFFICER COMPENSATION: During 1999, the Company's Executive Officer Directors are eligible for bonuses under the 1997 Key Employee Incentive Plan (the "Plan") based on two components. First, Executive Officer Directors are eligible to participate in a bonus pool of up to 20% of the Company's pre-tax income (before payment of the bonuses), adjusted for certain expense items that are excluded from pre-tax income. The 20% pool is subject to a cap related to the ratio of compensation expense (excluding certain items) to total revenues. Second, Executive Officer Directors are eligible to participate in a bonus pool of $6 million. Eligibility for the $6 million pool is based on a formula tied to the performance of the Company's principal broker-dealer's trading operations without reference to the overall profitability of the Company. During the quarter ended March 31, 1999, the Company recorded $750,000 of compensation expense related to the Plan. 5. INCOME TAXES: As of March 31, 1999, the Company had net operating losses ("NOL") for tax purposes of approximately $23.7 million that expire through 2018. The Company maintains a partial valuation allowance related to the NOL because, based on the weight of available evidence, it is more likely than not that a portion of the NOL may not be realized. As a result of recording the valuation allowance, based on current evidence, the Company estimates that no income tax provision will be recorded in the Statement of Operations until the Company earns more than $13.5 million in taxable net income. 6. EARNINGS 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 securities. The following is a reconciliation of the basic and diluted share calculation for the quarter ended March 31, 1999: Weighted average common shares-basic 49,033,867 Effect of dilutive securities: Stock options - 2,078,560 shares 180,331 ---------- Weighted average common shares-diluted 49,214,198 ========== Options to purchase 3,929,020 and 4,336,400 shares of common stock were outstanding, as of March 31, 1999 and 1998, respectively, but were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the common shares. 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, 1999, the broker-dealer subsidiaries had aggregate net capital of $46.5 million, which exceeded the requirement by $45.6 million. 7 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. COMMITMENTS AND CONTINGENCIES: The Company is not currently a defendant or plaintiff in any material lawsuits or arbitration. The Company is a defendant in a small number of civil lawsuits relating to its various businesses. There can be no assurances that these matters will not have a material adverse effect on the Company's results of operations in a future period, depending in part on the results for such period. However, based on management's review with counsel, resolution of these matters is not expected to have a material adverse effect on the consolidated financial condition or results of operations of the Company. Many aspects of the Company's business involve substantial risks of liability, litigation and arbitration. 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. 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 lawsuits against the Company could materially affect the Company's operating results and financial condition. 9. SUBSEQUENT EVENT: In April 1999, the Company announced the formation of fbr.com, a division of FBR Investment Services, Inc. ("FBRIS"), engaged in online investment banking activities. FBRIS is a wholly owned broker-dealer subsidiary of the Company. The Company is currently allocating a portion of its initial public offering stock allocations to online investors. In the near future, the Company also intends to offer venture capital investments online. 10. SEGMENT INFORMATION: The Company considers its capital markets and asset management operations to be two separate reportable segments. Parent company interest income, income taxes and administration expenses are not allocated to the segments and, therefore, are included in the "Other" column below. There are no significant revenue transactions between the segments. The following table illustrates the financial information for both segments for the three months ended March 31, 1999 and 1998 (in thousands):
Capital Asset Consolidated Markets Management Other Totals ------- ---------- ----- ------------ March 31, 1999 - -------------- Total revenues $ 16,456 $ 5,501 $ 112 $ 22,069 Pre-tax income (loss) (2,262) 2,895 (588) 45 March 31, 1998 - -------------- Total revenues 60,837 6,098 1,049 67,984 Pre-tax income 20,951 4,224 561 25,736
8 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, 1999 and 1998, and the Notes thereto and the Company's 1998 Annual Report on Form 10-K. BUSINESS ENVIRONMENT The Company's business activities are linked to the capital markets, particularly capital raising, and to securities sales and trading activities which are, by their nature, highly competitive and subject to general market conditions. These activities include merger and acquisition (M&A) and advisory services, capital-raising, proprietary investments and asset management services. Revenue generated from these activities, by nature, tends to be unpredictable. Consequently, the Company's net income and revenues have been, and are likely to continue to be, subject to wide fluctuations, reflecting the impact of many factors beyond the Company's control, including the state of the economy, securities market conditions, competitive conditions and the size and timing of transactions. General market conditions improved considerably during the first quarter of 1999, however, the market for securities of companies in the major industries on which the Company focuses, such as the real estate and financial services sectors, did not show significant improvement. As a result, the Company's revenues, in particular, investment banking, and profits continued to be negatively impacted. However, subsequent to the end of the quarter, the Company has begun to see increased capital markets activity. RECENT DEVELOPMENTS On April 15, 1999, the Company announced the formation of fbr.com, a division of a broker-dealer subsidiary of the Company. With fbr.com, the Company believes it is the first leading public IPO underwriter to make the individual online investor a major focus of its IPO strategy. The Company intends to place a portion of all its IPO stock allocations in the hands of online investors. On May 12, 1999, the Company completed its first online public offering by selling 55% of its allocation of shares of the CareerBuilder, Inc. underwriting transaction to online investors. In the near future, the Company plans to add brokerage services, financial news and other related content to the IPOs and research that it has already made available online. Additionally, fbr.com will make venture capital and private investment partnerships available to sophisticated, accredited investors. The Company may incur substantial costs during the remainder of the year related to the organization and initial business operations of fbr.com. On May 4, 1999, the Company engaged in its first major transaction in the energy industry by lead managing a $165 million public equity offering for Key Energy Services, Inc., the world's largest land-based well servicing firm. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 The Company's net income and basic and diluted earnings per share decreased 100% from $15.6 million and $0.31, respectively, for the quarter ended March 31, 1998, to $45,000 and $0.00, respectively, for the quarter ended March 31, 1999. Total revenues decreased 68% from $68.0 million in 1998 to $22.1 million in 1999 primarily due to decreased underwriting activity. 9 RESULTS OF OPERATIONS, CONTINUED THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998, CONTINUED Underwriting revenue decreased 93% from $47.7 million in 1998 to $3.2 million in 1999. During the quarter ended March 31, 1999, the Company managed four public offerings raising $279 million and generating $3.2 million in revenues. During the first quarter of 1998, the Company completed eleven transactions, including one of the largest offerings in the Company's history that generated $22.9 million in revenues. The average size of security transactions managed decreased from $127 million in 1998 to $70 million in 1999. The decrease in underwriting revenue is attributed to (1) the decline in the size of transactions, (2) the continuation of declining prices and inactivity in the markets for securities of companies in the financial services and real estate sectors, two of the Company's primary areas of focus and (3) the decline in the Company's average allocation of shares sold in each deal from 45% in 1998 to 18% in 1999, due to the fact that the Company completed fewer lead managed deals in 1999. Corporate finance revenue decreased 21% from $3.7 million in 1998 to $2.9 million in 1999 due to a decrease in M&A and other advisory fee revenue that generated $2.1 million in revenues in 1998 and $0.6 million in 1999, offset by an increase in the revenue earned from private placement transactions. In the first quarter of 1999, the Company completed two private placements generating $2.3 million compared to two transactions during the first quarter of 1998 with revenues of $1.6 million. Principal sales credits decreased 19% from $9.0 million in 1998 to $7.3 million in 1999. This decrease was due to lower volumes of activity in the Company's NASDAQ trading, in addition to lower spreads. Due to the fact that the Company completed fewer managed transactions in the fourth quarter of 1998 and the first quarter of 1999, secondary trading related to deals also decreased. Agency commissions decreased 24% from $3.7 million in 1998 to $2.8 million in 1999. This decrease was due to the decline in securities transaction volume due, in part, to the completion of fewer managed transactions, discussed above. Net trading and investment gains/(losses) changed from $(2.9) million in 1998 to $1.0 million in 1999. This change is attributed to a significant management effort to reduce trading inventories to an amount needed to provide the appropriate level of liquidity in securities for which the Company is a market maker. This reduction has limited exposure of the Company's broker-dealer trading inventories to downturns in the markets for these securities resulting in a 79% decrease in trading losses. During the first quarter of 1999, the Company also recorded $1.7 million of revenues related to its investments in private investment partnerships compared to $3.0 million in the first quarter of 1998. In 1999, investment gains related to the Company's investment in FBR Asset Investment Corporation, a real estate investment trust ("REIT"), were $0.6 million. Asset management revenue decreased 26% from $3.2 million in 1998 to $2.3 million in 1999. In 1998, the Company earned $1.6 million in incentive income related to one private investment partnership compared to none in 1999. However, base management fees increased 44% from $1.6 million in 1998 to $2.3 million in 1999 due to the change in the mix in assets under management to higher base-fee vehicles. Interest and dividends decreased 30% from $3.6 million in 1998 to $2.5 million in 1999. This decrease is due primarily to a decrease in the Company's invested net assets in income-producing vehicles. As of March 31, 1998, the Company had $149 million invested in money market securities and short-term interest-bearing securities compared to $38 million as of March 31, 1999. Total expenses decreased 48% from $42.2 million in 1998 to $22.0 million in 1999 due primarily to lower variable compensation expense associated with lower investment banking revenue and a decrease in the amount of executive compensation. Compensation and benefits expense decreased 50% from $28.3 million in 1998 to $14.2 million in 1999 primarily due to a decline in variable investment banking compensation, directly related to the decrease in investment banking revenues, offset by a $5.9 million reduction of 1997 bonus accruals in 1998. Executive officer bonus compensation also declined from $6.4 million in 1998 to $750,000 in 1999. 10 RESULTS OF OPERATIONS, CONTINUED THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998, CONTINUED Business development and professional services decreased 62% from $6.8 million in 1998 to $2.6 million in 1999 primarily due to lower investment banking expenses related to the decline in transactions. Clearing and brokerage fees decreased 24% from $1.3 million in 1998 to $1.0 million in 1999 due to a decline in the volume of sales and trading activity. As a percentage of principal sales credits and agency commissions revenue, clearing and brokerage fees decreased slightly from 10.5% in 1998 to 10.0% in 1999. Occupancy and equipment expense increased 104% from $0.8 million in 1998 to $1.6 million in 1999 due to the expansion of office space and an increase in depreciation expense related to computer and telecommunications equipment and furniture for the expanded facilities. Interest expense decreased 69% from $1.7 million in 1998 to $0.5 million in 1999 due to a decline in margin interest expense attributable to the significant decrease in securities trading inventories. Other expenses decreased 53% from $2.5 million in 1998 to $1.2 million in 1999 due to management's efforts to reduce or eliminate non-revenue-producing expenses and other overhead expenses. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1999, the Company's principal assets consist of cash and cash equivalents, receivables, including a receivable from its clearing broker, securities held for trading purposes and long-term investments. Liquid assets consist primarily of cash and cash equivalents of $38.4 million and a receivable for cash on deposit with the Company's clearing broker of $19.3 million. Long-term investments consist of a $22.7 million investment in FBR Asset Investment Corporation, a REIT, $28.0 million of investments in private investment partnerships, $25.1 million of FBR Business Development Fund investments, $13.9 million of available-for-sale securities and $4.0 million of debt in privately held companies. Although investments in the private investment partnerships are for the most part illiquid, the underlying investments of such partnerships are mostly in publicly traded, liquid equity and debt securities. Friedman, Billings, Ramsey & Co., Inc. ("FBRC"), a wholly owned broker-dealer subsidiary of the Company, is registered with the SEC and is a member of the NASD. As such, it is subject to minimum net capital requirements. As of March 31, 1999, FBRC was required to maintain minimum regulatory net capital of $0.9 million and had total regulatory net capital of $46.1 million which was $45.2 million in excess of its requirement. The Company's other broker-dealer subsidiaries were in compliance with all applicable regulatory capital requirements as of March 31, 1999. Management believes that the Company's current level of equity capital and committed line of credit, combined with funds anticipated to be generated from operations, are adequate to meet its liquidity and regulatory capital requirements associated with its broker-dealer activities. The Company may, however, seek debt or equity financing 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. The Company's policy is to evaluate acquisition opportunities as they arise. The Company constantly reviews its capital needs and sources, the cost of capital and return on equity, and seeks strategies to provide favorable returns on capital. In evaluating the Company's anticipated capital needs and current cash resources during 1998, the Company's Board of Directors authorized a share repurchase program of up to 2.5 million shares of the Company's Class A Common Stock. Since announcing the share repurchase program, the Company purchased 1,421,927 shares as of March 31, 1999. 11 WARRANTS In connection with certain capital raising transactions, the Company has received and holds warrants for stock of the issuing corporation generally exercisable at the corporation's respective offering price. Due to the restrictions on the warrants and the underlying securities, the Company carries the warrants at a nominal value, and will recognize any potential, future revenues and profits, if any, only when realized. In 1999, the Company may grant options, related to the underlying securities of the warrants, to certain key employees, subject to vesting provisions that require continued employment with the Company for a period of time. As of March 31, 1999, details of the warrants are as follows:
Number of Exercise March 31, 1999 Expiration Warrants Price Closing Price Date --------- -------- -------------- ---------- American Capital Strategies, Ltd. 442,751 $15.00 $17.1250 08/29/02 Capital Automotive REIT 1,277,794 15.00 12.4375 02/12/03 Building One Services Corporation 1,130,000 20.00 17.1875 11/25/01 East West Bank 375,500 10.00 8.9375 06/12/03 Local Financial Corporation 591,000 10.00 9.3125 09/08/02 Styling Technology Corporation 101,500 12.00 12.6875 11/21/01 FBR Asset Investment Corporation 970,805 20.00 *13.0000 12/11/07 Xypoint Corporation 285,107 2.10 *2.0000 07/10/03 UOL Publishing, Inc. 36,500 4.625 4.0000 09/16/03 Resource Asset Investment Trust 141,667 15.00 11.7500 01/08/03
* Represents the market price of the underlying unregistered security in recent Rule 144a transaction trading. ITEM 3. CHANGES IN INFORMATION ABOUT MARKET RISK None. FORWARD-LOOKING STATEMENTS The Company has made in this report, and from time to time may otherwise make in its public filings, press releases and discussions with Company management, forward-looking statements concerning the Company's operations, economic performance and financial condition. Such statements include, but are not limited to, those relating to growth, new business initiatives, principal investment activities, levels of activity, levels of assets under management and capital levels and availability. Such statements are subject to various risks and uncertainties and the Company cautions readers that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance and there is no assurance that results for any present or future period will be consistent with such statements or comparable to those attained in any prior period. Actual results could differ materially from those currently anticipated due to a number of factors, including: (i) general economic and market conditions, (ii) competitive conditions within the securities industry, (iii) changes in demand for investment banking and securities brokerage services, (iv) changes in the industries in which the Company is active, (v) changes in interest rates, loan delinquency rates, stock market volume and prices, and mutual fund, 401(k) and pension plan inflows or outflows, (vi) changes in the securities and banking laws and regulations, (vii) trading and principal investment activities, (viii) availability of adequate financing to support the Company's business, (ix) potential restrictions on the withdrawal of capital from certain subsidiaries of the Company due to net capital requirements, (x) failure of the Company, its vendors or other third parties to achieve year 2000 compliance, (xi) the Company's ability to recruit and retain key employees, (xii) the availability of technology and the Company's ability to implement necessary technologies, and (xiii) litigation and arbitration. For a more detailed explanation of these and other risks and uncertainties, refer to "Business - Factors Affecting the Company's Business, Operating Results and Financial Condition" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market and Business Risk and - Matters Related to Year 2000" in the Company's Annual Report on Form 10-K for 1998, incorporated herein by reference. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise. 12 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 Press release regarding fbr.com on 4/15/99 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. 05/14/99 By: /s/ Eric Y. Generous ---------------- ---------------------------------------------------- Date Eric Y. Generous, Chief Financial Officer (Principal Financial Officer) 05/14/99 By: /s/ Kurt R. Harrington ---------------- ---------------------------------------------------- Date Kurt R. Harrington, Treasurer (Principal Accounting Officer) EXHIBIT INDEX EXHIBIT 27.01 Financial Data Schedule. 13 EX-27 2 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999, WHICH ARE CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 38,431 37,772 0 0 106,048 6,242 193,892 0 12,765 0 0 2,475 1,776 0 0 209,025 (32,149) 193,892 6,061 2,543 2,819 6,048 2,337 507 14,238 45 45 0 0 45 0.00 0.00
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