-----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, N9UXHEEaA3ckoDwZsycyYbzZdsO45HyidM9xohzP0CUlbP7BKcFFRmEugC/tswxb 9ZV5F1qo7jB6fZvM7z0GvQ== 0000928385-00-001529.txt : 20000515 0000928385-00-001529.hdr.sgml : 20000515 ACCESSION NUMBER: 0000928385-00-001529 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 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: 541837743 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13731 FILM NUMBER: 629470 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, 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 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 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
(Unaudited) March 31, December 31, 2000 1999 -------- -------- 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 ======== ========
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, ----------------- 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 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 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 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 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 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 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 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 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 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 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 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.
Number of Exercise March 31, 2000 Expiration Warrants Price Closing Price Date --------- -------- -------------- ---------- 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
* 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 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 EX-27 2 EXHIBIT 27
BD 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. 1,000 3-MOS DEC-31-2000 JAN-03-2000 MAR-31-2000 34,229 52,282 0 0 177,635 12,159 279,458 0 64,955 0 0 15,223 1,217 0 0 210,019 (11,956) 279,458 6,001 1,993 5,676 16,696 38,777 222 46,223 8,556 8,556 0 0 6,417 0.13 0.12
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