-----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, PxMrsKeSToyR9pXGtITAqWtKz3L1MDJWpRQdiMk84BRbSydjVklZuYIZIq+ZJiqe 6QCT3NX7Gc0GDfciuRwCAg== 0000928385-99-002608.txt : 19990817 0000928385-99-002608.hdr.sgml : 19990817 ACCESSION NUMBER: 0000928385-99-002608 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692242 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 June 30, 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 12,608,888 shares as of July 31, 1999 Class B Common Stock 36,272,929 shares as of July 31, 1999 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 INDEX
Page Number (s) Part I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets- June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations- Three Months Ended June 30, 1999 and 1998 4 Six Months Ended June 30, 1999 and 1998 5 Consolidated Statements of Cash Flows- Six Months Ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-17 Item 3. Changes in Information About Market Risk 18 Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 18-19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 19 EXHIBIT INDEX 19
2 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
(Unaudited) June 30, December 31, 1999 1998 -------- -------- ASSETS Cash and cash equivalents $ 38,094 $ 46,827 Receivables: Investment banking 4,280 3,075 Asset management fees 6,483 5,108 Income taxes 1,300 8,795 Affiliates 7,224 6,871 Other 1,371 967 Due from clearing broker 29,305 10,721 Marketable trading securities, at market value: Corporate equities 5,618 8,709 Corporate bonds 3,062 4,441 Long-term investments 123,214 97,157 Deferred tax asset 2,402 2,402 Furniture, equipment, software and leasehold improvements, net of accumulated depreciation and amortization of $4,144 and $3,467, respectively 6,516 6,946 Prepaid expenses and other assets 2,852 3,097 -------- -------- Total assets $231,721 $205,116 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Trading account securities sold but not yet purchased, at market value: Corporate equities $ 2,495 $ 2,527 Corporate bonds 135 365 Due to issuer 19,700 - Accounts payable and accrued expenses 12,414 8,226 Accrued compensation and benefits 7,486 5,185 Long-term secured loans 1,639 1,911 -------- -------- Total liabilities 43,869 18,214 -------- -------- Commitments and contingencies (Note 10) - - 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, 13,756,071 and 13,716,571 issued, respectively 137 137 Class B Common Stock, $0.01 par value, 100,000,000 shares authorized, 36,272,929 and 36,312,429 issued and outstanding, respectively 363 363 Additional paid-in capital 208,180 208,525 Treasury stock, at cost, 1,147,183 and 910,037 shares, respectively (8,371) (7,081) Accumulated other comprehensive loss (19,445) (16,136) Retained earnings 6,988 1,094 -------- -------- Total shareholders' equity 187,852 186,902 -------- -------- Total liabilities and shareholders' equity $231,721 $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 June 30, ------------------------ 1999 1998 ----------- --------- Revenues: Investment banking: Underwriting $ 9,245 $16,313 Corporate finance 5,820 29,615 Institutional brokerage: Principal sales credits 6,952 7,639 Agency commissions 3,749 4,336 Gains and losses, net: Trading (148) (8,316) Investment 9,863 (242) Asset management 2,522 2,306 Interest and dividends 2,376 5,683 ------- ------- Total revenues 40,379 57,334 ------- ------- Expenses: Compensation and benefits 22,109 28,899 Business development and professional services 5,908 8,259 Clearing and brokerage fees 1,195 1,649 Occupancy and equipment 1,422 900 Communications 913 877 Interest expense 494 1,468 Other operating expenses 2,489 2,689 ------- ------- Total expenses 34,530 44,741 ------- ------- Net income before taxes 5,849 12,593 Income tax provision - 5,160 ------- ------- Net income $ 5,849 $ 7,433 ======= ======= Basic and diluted earnings per share $ 0.12 $ 0.15 ======= ======= Weighted average shares outstanding: Basic 48,692 50,029 ======= ======= Diluted 49,703 50,029 ======= =======
See notes to consolidated financial statements. 4 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) (Unaudited)
Six Months Ended June 30, ------------------------ 1999 1998 ----------- --------- Revenues: Investment banking: Underwriting $12,416 $ 64,023 Corporate finance 8,697 33,276 Institutional brokerage: Principal sales credits 14,229 16,673 Agency commissions 6,568 8,044 Gains and losses, net: Trading (1,364) (14,237) Investment 12,124 2,762 Asset management 4,859 5,475 Interest and dividends 4,919 9,302 ------- -------- Total revenues 62,448 125,318 ------- -------- Expenses: Compensation and benefits 36,347 57,242 Business development and professional services 8,502 15,065 Clearing and brokerage fees 2,209 2,992 Occupancy and equipment 2,984 1,664 Communications 1,837 1,703 Interest expense 1,001 3,127 Other operating expenses 3,674 5,196 ------- -------- Total expenses 56,554 86,989 ------- -------- Net income before taxes 5,894 38,329 Income tax provision - 15,317 ------- -------- Net income $ 5,894 $ 23,012 ======= ======== Basic and diluted earnings per share $ 0.12 $ 0.46 ======= ======== Weighted average shares outstanding: Basic 48,862 50,029 ======= ======== Diluted 49,564 50,029 ======= ========
See notes to consolidated financial statements. 5 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Six Months Ended June 30, ------------------ 1999 1998 ------- -------- Cash flows from operating activities: Net income $ 5,894 $ 23,012 Non-cash items included in earnings-- Income and incentive income on long-term investments (10,351) (4,751) Depreciation and amortization 1,093 484 Deferred income taxes - 2,012 Other (321) - Changes in operating assets: Receivables-- Investment banking (1,205) (2,333) Asset management fees (1,096) (1,472) Income taxes 7,495 4,509 Affiliates 9 (1,816) Other 396 (6,373) Due from clearing broker (18,584) (35,971) Marketable trading securities 4,470 (59,207) Prepaid expenses and other assets 245 (2,024) Changes in operating liabilities: Due to issuer - 23,183 Trading account securities sold but not yet purchased (262) 2,491 Net repayments on short-term subordinated loans - (40,000) Accounts payable and accrued expenses 4,188 (6,031) Accrued compensation and benefits 2,301 11,199 -------- --------- Net cash used in operating activities (5,728) (93,088) -------- --------- Cash flows from investment activities: Purchases of fixed assets (954) (3,205) Purchases of investments, net (145) (15,905) -------- --------- Net cash used in investing activities (1,099) (19,110) -------- --------- Cash flows from financing activities: Repayments of long-term secured loans (272) (247) Purchases of treasury stock (1,634) - Dividends - (24,000) -------- --------- Net cash used in financing activities (1,906) (24,247) -------- --------- Net decrease in cash and cash equivalents (8,733) (136,445) Cash and cash equivalents, beginning of period 46,827 207,691 -------- --------- Cash and cash equivalents, end of period $ 38,094 $ 71,246 ======== =========
Non-cash transaction: On June 30, 1999, the Company purchased a $19.7 million investment that settled subsequent to the trade date (Note 4). The payable for the investment has been recorded in "Due to issuer" in the Company's balance sheet. See notes to consolidated financial statements. 6 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 $24.0 million represents 19% of the Company's total investments and 10% of the Company's total assets as of June 30, 1999. The following table summarizes FBR Asset Investment Corporation's income statement information for the periods presented (in thousands):
Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 ------- ------- ------- ------- Gross revenues $ 5,420 $ 3,102 $10,585 $ 5,652 Total expenses (2,341) (1,033) (4,798) (1,186) ------- ------- ------- ------- Net income before investment gains 3,079 2,069 5,787 4,466 Investment gains 743 - 743 - ------- ------- ------- ------- Net income $ 3,822 $ 2,069 $ 6,530 $ 4,466 ======= ======= ======= =======
3. Comprehensive Income: The components of comprehensive income are as follows (in thousands):
Three Months Six Months Ended June 30, Ended June 30, 1999 1998 1999 1998 -------- -------- -------- -------- Net income $ 5,849 $7,433 $ 5,894 $23,012 Other comprehensive income (loss): Net unrealized investment gains (losses) on available-for-sale securities and investment in FBR Asset Investment Corporation 4,347 - (3,309) - ------- ------ ------- ------- Comprehensive income $10,196 $7,433 $ 2,585 $23,012 ======= ====== ======= =======
7 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Imperial Credit Industries, Inc. Investment: On June 30, 1999, the Company purchased 800,000 shares of Series B, 11.5%, $25 liquidation value per share, cumulative preferred stock of Imperial Credit Industries, Inc. ("ICII") in a private transaction. The Company paid $19.7 million for this investment. With respect to rights to receive dividends and other distributions, the Series B preferred stock ranks senior to any other class or series of shares issued by ICII. The investment earns dividends according to the following annual rate schedule: Period Coupon ------ ------ July 1, 1999 - December 31, 1999 11.5% January 1, 2000 - March 31, 2000 14.5% April 1, 2000 - June 30, 2000 17.5% July 1, 2000 - September 30, 2000 20.5% October 1, 2000 - December 31, 2000 23.5% January 1, 2001 - April 30, 2007 25.0% Dividends will be declared quarterly. The Series B preferred stock shall be redeemable at any time, at the option of ICII, at 103% of the sum of the liquidation preference (if redemption occurs on or before December 31, 1999) plus unpaid accrued dividends. At any time after December 31, 1999, the redemption price shall be 105% of the sum of the liquidation preference plus unpaid accrued dividends. On May 1, 2007, the mandatory redemption date, ICII shall be required to redeem all outstanding Series B preferred stock at $25 plus accrued dividends. The Company carries the investment at estimated market value. Unrealized gains and/or losses will be recorded in earnings. 5. Sale of Warrants: During the quarter ended June 30, 1999, the Company sold warrants to purchase the common stock of Building One Services Corporation ("BOSS") to Boss Investment L.L.C. The Company received the warrants in 1997 when it acted as the lead manager in the initial public offering of BOSS' predecessor company's stock. The Company recorded $2.1 million of investment gains related to the sale of these warrants in the quarter ended June 30, 1999. 6. 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 $6.0 million. Eligibility for the $6.0 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 three and six months ended June 30, 1999, the Company recorded $2.6 million and $3.4 million of compensation expense, respectively, related to the Plan. During the three and six months ended June 30, 1998, the Company recorded $3.2 million and $9.6 million of compensation expense, respectively, related to the 1997 Stock and Annual Incentive Plan. 8 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Income Taxes: As of June 30, 1999, the Company had net operating losses ("NOL") for tax purposes of approximately $19.0 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 an additional $7.3 million in taxable net income. 8. 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 June 30, 1999, the broker-dealer subsidiaries had aggregate net capital of $28.1 million, which exceeded the requirement by $25.7 million. 9. 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 calculations:
For the Three For the Six Months Ended Months Ended June 30, 1999 June 30, 1999 ------------- ------------- Weighted average common shares-basic 48,691,961 48,861,969 Effect of dilutive securities: Stock options 2,079,030 and 2,054,030 shares, respectively 1,010,664 701,582 ------------- ------------- Weighted average common shares-diluted 49,702,625 49,563,551 ============= =============
In addition to the options disclosed above, options to purchase 3,945,850 and 4,257,400 shares of common stock were outstanding, as of June 30, 1999 and 1998, respectively, but were not included in the computations of diluted earnings per share because their effect would be anti-dilutive. 10. Commitments and Contingencies: As of June 30, 1999, 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 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. During the quarter ended June 30, 1999, the Company recorded $1.0 million in other operating costs representing management's estimate of the Company's aggregate increase in exposure related to pending and threatened litigation. 9 FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Commitments and Contingencies, continued: 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. 11. Employee Stock Purchase Plan: On June 30, 1999, the Company issued 194,789 shares of previously repurchased Class A Common Stock to employees, in accordance with the 1997 Employee Stock Purchase Plan. The shares were issued at a per share price of $5.53, representing 85% of the market value of the Company's common stock on January 1, 1999 (the first day of the offering period). The excess of the average cost of treasury stock issued of $7.30 over the issuance price of $5.53 totaled $344,777 and was charged to additional paid-in capital. 12. 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 periods presented (in thousands):
Capital Asset Consolidated Markets Management Other Totals ------- ---------- ----- ------ Three Months Ended June 30, 1999 - -------------------------------- Total revenues $29,562 $10,194 $ 623 $40,379 Pre-tax income (loss) 283 7,583 (2,017) 5,849 Three Months Ended June 30, 1998 - ---------------------------------- Total revenues 53,741 2,943 650 57,334 Pre-tax income 10,854 1,591 148 12,593 Six Months Ended June 30, 1999 - ------------------------------ Total revenues 46,018 15,695 735 62,448 Pre-tax income (loss) (1,979) 10,478 (2,605) 5,894 Six Months Ended June 30, 1998 - ------------------------------ Total revenues 114,578 9,041 1,699 125,318 Pre-tax income 31,805 5,815 709 38,329
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 June 30, 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 capital raising, merger and acquisition (M&A) and advisory services, 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. In order to remain flexible with the ever-changing securities industry, the Company is continuing to seek to diversify its businesses, which includes enhancing its asset management segment through the creation of new venture funds and other proprietary investment partnerships. RECENT DEVELOPMENTS fbr.com - ------- In the last two years, procedures for conducting trading and other securities transactions have changed dramatically due to the rise of online trading over the Internet. Industry market reports estimate that one in every seven equity trades is made online. The underwriting of securities increasingly involves the use of the Internet. In order to capitalize on these trends and enhance its core business via the Internet, during the second quarter of 1999, the Company introduced fbr.com, an online investment bank and electronic brokerage. fbr.com is a division of FBR Investment Services, Inc. ("FBRIS"), a wholly owned broker- dealer subsidiary of the Company, formed in February 1997 and registered as a broker-dealer under the name FBR Direct, Inc. in June 1997. Management believes it can leverage its strengths in underwriting, research and proprietary investment vehicles by offering these services online via fbr.com. Since announcing fbr.com on April 15, 1999, the Company has offered shares of five equity offerings online. The Company may incur significant marketing, compensation, and technology costs related to fbr.com operations. During the quarter ended June 30, 1999, the Company hired new personnel, principally customer service representatives, and plans to hire additional employees throughout the remainder of 1999. Costs related to fbr.com start-up and operations amounted to $1.8 million during the quarter ended June 30, 1999, of which $1.0 million were expensed in the Company's Statement of Operations and $0.8 million were capitalized as software and equipment costs. The Company will amortize/depreciate the software and equipment costs over their estimated useful lives. Subsequent to June 30, 1999, the Company leased commercial office space near its headquarters for an 80-seat customer service call center, continued the development of its online trading systems with third-party developers and initiated a marketing effort. Management estimates that costs related to the development, execution and marketing of fbr.com may significantly increase during the remainder of the year, and, in turn, the Company's profits during 1999 may be reduced or eliminated. Management believes that brand awareness is vitally important in the online securities industry. In July, 1999, the Company engaged a national advertising agency with experience in the financial services industry to develop and execute a brand awareness campaign for fbr.com. The Company may spend up to $25 million over the next several quarters related to this campaign, which includes print and broadcast advertising costs. 11 RECENT DEVELOPMENTS, continued Strategic Alliance with Fidelity Investments - -------------------------------------------- On August 12, 1999, the Company announced a strategic alliance with Fidelity Investments ("Fidelity") in which Fidelity will participate in the distribution of securities underwritten by the Company. Under the alliance, the Company will invite Fidelity to participate as a selling group member in selected offerings underwritten by the Company. Initially, the two firms will focus their efforts on certain industry sectors that make up the Company's core research and underwriting capabilities and include technology, real estate, regional banks, thrifts, specialty finance companies, energy and healthcare. In the future, both firms may explore potential business relationships in other business areas, including asset management, research and electronic trading of securities. RESULTS OF OPERATIONS Three months ended June 30, 1999 compared to three months ended June 30, 1998 The Company's revenues decreased 30% from $57.3 million in 1998 to $40.4 million in 1999. Net income decreased 21% from $7.4 million in 1998 to $5.8 million in 1999. The Company's basic and diluted earnings per share decreased 20% from $0.15 in 1998 to $0.12 in 1999. The decrease in net income was primarily related to lower investment banking activity offset by an increase in investment gains and a decrease in trading losses. In addition, during 1999, the Company increased litigation accruals and incurred fbr.com start-up costs. Underwriting revenue decreased 43% from $16.3 million in 1998 to $9.2 million in 1999. During the quarter ended June 30, 1999, the Company managed seven public offerings raising $513 million and generating $9.2 million in revenues. During the second quarter of 1998, the Company completed ten transactions raising $1.2 billion and generating $16.3 million in revenues. The average size of transactions managed decreased from $119.4 million in 1998 to $73.3 million in 1999. The decrease in underwriting revenue is attributed to (1) the decline in the size of completed transactions and the size of the Company's proportionate fee and (2) fewer completed deals attributed to the continuation of lower prices and reduced activity in the markets for securities of companies in the financial services and real estate sectors, two of the Company's primary areas of focus. Corporate finance revenue decreased 80% from $29.6 million in 1998 to $5.8 million in 1999 due primarily to a decrease in the number of private placement transactions completed. In 1999, the Company completed two private placements generating $0.7 million in revenues compared to five completed transactions in 1998 that generated $22.3 million in revenues. In the second quarter of 1998, the Company completed one of the largest private placement transactions in its history from which it generated revenues of $17.8 million. M&A and advisory fee revenue also decreased from $7.3 million in 1998 to $5.1 million in 1999 due to a decline in the number of deals completed and retainer fees earned. Principal sales credits decreased 9% from $7.6 million in 1998 to $7.0 million in 1999. This decrease was attributed to lower volumes in the Company's NASDAQ trading, notably, in the real estate and financial services sectors, two of the Company's primary industries. In addition, the Company completed fewer underwriting transactions during 1999 than in 1998, resulting in less secondary trading following the completion of deals. Agency commissions decreased 14% from $4.3 million in 1998 to $3.7 million in 1999. This decrease was attributed to the decline in securities transaction volume due, in part, to the completion of fewer managed transactions, discussed above. Net trading losses decreased 98% from $(8.3) million in 1998 to $(0.1) million in 1999. The decrease in trading losses is attributed to a significant management effort to reduce broker-dealer 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 future downturns in the markets. 12 RESULTS OF OPERATIONS, continued Three months ended June 30, 1999 compared to three months ended June 30, 1998, continued Net investment gains/(losses) changed from $(0.2) million in 1998 to $9.9 million in 1999. Investment gains in 1999 include: $2.1 million resulting from the sale of Building One Services Corporation warrants; $4.9 million related to the Company's investments in proprietary investment partnerships; and $2.0 million related to the Company's investment in FBR Asset Investment Corporation. Investment gains increased in 1999 due, in part, to higher returns generated by two of the Company's investments in proprietary investment partnerships. Although the Company realized investment gains during 1999, unrealized losses related to the Company's investments totaled $19.4 million as of June 30, 1999. If and when management determines that the decline in value of these investments is "other than temporary", a portion or all of the losses will be realized as investment losses in the Statement of Operations during the period in which the determination is made. The Company's investment portfolio is also exposed to future downturns in the markets and preferred and debt securities are exposed to deterioration of credit and credit defaults. Asset management revenue increased 9% from $2.3 million in 1998 to $2.5 million in 1999. This increase was due primarily to an increase in base management fees earned from technology venture capital funds. During 1999, the Company completed the close of a second technology venture capital fund. The Company recorded $0.2 million in base management fees in 1999 related to this fund. Interest and dividends decreased 58% from $5.7 million in 1998 to $2.4 million in 1999. This decrease is due primarily to a decrease in the Company's trading inventory from which dividend income may be earned. During 1998, the Company recorded $2.0 million of dividend income, including two dividends totaling $1.0 million, from two significant trading positions, compared to $0.1 million in 1999. Net interest revenue (net of interest expense) decreased 18% from $2.2 million in 1998 to $1.8 million in 1999 due to a decrease in the Company's invested net assets in income-producing vehicles. Total expenses decreased 23% from $44.7 million in 1998 to $34.5 million in 1999 due primarily to lower variable compensation expense and lower investment banking expenses associated with the decrease in investment banking revenues, and a decrease in the amount of executive compensation due, in part, to the decline in profits. Compensation and benefits expense decreased 23% from $28.9 million in 1998 to $22.1 million in 1999. This decrease was primarily due to a decline in variable investment banking compensation, directly related to the decrease in investment banking revenues, offset by a $1.4 million reduction of 1997 bonus accruals in 1998. Executive officer bonus compensation also declined from $3.2 million in 1998 to $2.6 million in 1999. Business development and professional services decreased 28% from $8.3 million in 1998 to $5.9 million in 1999 primarily due to a $1.2 million decrease in legal costs and a $1.1 million decrease in travel and meals expenses associated with lower investment banking activity. This decrease is offset by $0.6 million of professional fees and other promotional expenses in 1999 related to the launch of fbr.com. Clearing and brokerage fees decreased 28% from $1.6 million in 1998 to $1.2 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 from 13.8% in 1998 to 11.2% in 1999 due to lower rates charged by the Company's principal clearing broker. Occupancy and equipment expense increased 58% from $0.9 million in 1998 to $1.4 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. As a result of the expansion, office rent expense increased $0.2 million in 1999 compared to 1998, and depreciation and amortization expense increased $0.2 million in 1999 compared to 1998. 13 RESULTS OF OPERATIONS, continued Three months ended June 30, 1999 compared to three months ended June 30, 1998, continued Other operating expenses decreased 7% from $2.7 million in 1998 to $2.5 million in 1999 due to the reduction or elimination of certain non-revenue- producing expenses and other overhead costs such as printing and copying and other office expenses, offset by a $1.0 million charge for litigation accruals. Six months ended June 30, 1999 compared to six months ended June 30, 1998 The Company's revenues decreased 50% from $125.3 million in 1998 to $62.4 million in 1999. Net income decreased 74% from $23.0 million in 1998 to $5.9 million in 1999. The Company's basic and diluted earnings per share decreased 74% from $0.46 in 1998 to $0.12 in 1999. The decrease in net income was primarily related to lower investment banking activity offset by an increase in investment gains and a decrease in trading losses. In addition, during 1999, the Company increased litigation accruals and incurred fbr.com start-up costs. Underwriting revenue decreased 81% from $64.0 million in 1998 to $12.4 million in 1999. During 1999, the Company managed eleven public offerings raising $791.9 million and generating $12.4 million in revenues. During 1998, the Company completed twenty-one transactions raising $2.6 billion and generating $64.0 million in revenues. In 1998, the Company completed one of the largest public offerings in its history from which it earned $22.9 million in revenues. The average size of transactions managed decreased from $123.4 million in 1998 to $72.0 million in 1999. The decrease in underwriting revenue is attributed to (1) the decline in the size of completed transactions and the size of the Company's proportionate fee and (2) fewer completed deals attributed to the continuation of lower prices and reduced activity in the markets for securities of companies in the financial services and real estate sectors, two of the Company's primary areas of focus. Corporate finance revenue decreased 74% from $33.3 million in 1998 to $8.7 million in 1999 due primarily to a decrease in the number of private placement transactions completed and a decrease in M&A and other advisory fee revenue. In 1999, the Company completed four private placements generating $3.0 million in revenues compared to seven completed transactions in 1998 that generated $23.9 million in revenues. In 1998, the Company completed one of the largest private placement transactions in its history from which it generated revenue of $17.8 million. M&A and advisory fee revenue also decreased from $9.4 million in 1998 to $5.7 million in 1999 due to a decline in the number of deals completed and retainer fees earned. Principal sales credits decreased 15% from $16.7 million in 1998 to $14.2 million in 1999. This decrease was due to lower volumes in the Company's NASDAQ trading, notably, in the real estate and financial services sectors, two of the Company's primary industries. In addition, the Company completed fewer underwriting transactions during 1999 than in 1998, resulting in less secondary trading following the completion of deals. Agency commissions decreased 18% from $8.0 million in 1998 to $6.6 million in 1999. This decrease was attributed to the decline in securities transaction volume due, in part, to the completion of fewer managed transactions, discussed above. Net trading losses decreased 90% from $(14.2) million in 1998 to $(1.4) million in 1999. The decrease in trading losses 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 future downturns in the markets. 14 RESULTS OF OPERATIONS, continued Six months ended June 30, 1999 compared to six months ended June 30, 1998, continued Net investment gains increased 339% from $2.8 million in 1998 to $12.1 million in 1999. Investment gains in 1998 were generated solely from the Company's investments in proprietary investment partnerships. Investment gains in 1999 include: $2.1 million resulting from the sale of Building One Services Corporation warrants; $6.6 million related to the Company's investments in proprietary investment partnerships; and $2.6 million related to the Company's investment in FBR Asset Investment Corporation. Investment gains increased in 1999 due, in part, to higher returns generated by two of the Company's investments in proprietary investment partnerships. Although the Company realized investment gains during 1999, unrealized losses related to the Company's investments totaled $19.4 million as of June 30, 1999. If and when management determines that the decline in value of these investments is "other than temporary", a portion or all of the losses will be realized as investment losses in the Statement of Operations during the period in which the determination is made. The Company's investment portfolio is also exposed to future downturns in the markets and preferred and debt securities are exposed to deterioration of credit and credit defaults. Asset management decreased 11% from $5.5 million in 1998 to $4.9 million in 1999. In 1998, the Company earned $1.9 million in incentive income related to one proprietary investment partnership compared to none in 1999. Also in 1998, the Company earned $0.8 million in advisory fees related to its mutual funds compared to $0.3 million in 1999 due to a decline in the average net assets of the mutual funds. However, base management fees earned from proprietary investment partnerships increased 56% from $2.6 million in 1998 to $4.0 million in 1999 due to the change in the mix of assets under management to higher base- fee partnerships, in particular, technology venture capital funds. Interest and dividends decreased 47% from $9.3 million in 1998 to $4.9 million in 1999. This decrease is due primarily to a decrease in the Company's trading inventory from which dividend income may be earned. During 1998, the Company recorded $2.3 million of dividend income, including two dividends totaling $1.0 million, from two significant trading positions, compared to $0.3 million in 1999. Net interest revenue (net of interest expense) decreased 8% from $3.9 million in 1998 to $3.6 million in 1999 due to a decrease in the Company's invested net assets in income-producing vehicles. Total expenses decreased 35% from $87.0 million in 1998 to $56.6 million in 1999 due primarily to lower variable compensation expense and lower investment banking expenses associated with the decrease in investment banking revenues and a decrease in the amount of executive compensation due, in part, to the decline in profits. Compensation and benefits expense decreased 37% from $57.2 million in 1998 to $36.3 million in 1999. This decrease was primarily due to a decline in variable investment banking compensation, directly related to the decrease in investment banking revenues, offset by a $7.3 million reduction of 1997 bonus accruals in 1998. Executive officer bonus compensation also declined from $9.6 million in 1998 to $3.4 million in 1999. Business development and professional services decreased 44% from $15.1 million in 1998 to $8.5 million in 1999 primarily due to a decrease in legal costs and travel and meals expenses associated with lower investment banking activity. This decrease is offset by an increase in professional fees and other promotional expenses in 1999 related to the launch of fbr.com. Clearing and brokerage fees decreased 26% from $3.0 million in 1998 to $2.2 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 from 12.1% in 1998 to 10.6% in 1999 due to lower rates charged by the Company's principal clearing broker. 15 RESULTS OF OPERATIONS, continued Six months ended June 30, 1999 compared to six months ended June 30, 1998, continued Occupancy and equipment expense increased 79% from $1.7 million in 1998 to $3.0 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. As a result of the expansion, office rent expense increased $0.5 million in 1999 compared to 1998, and depreciation and amortization expense increased $0.6 million in 1999 compared to 1998. Other operating expenses decreased 29% from $5.2 million in 1998 to $3.7 million in 1999 due to the reduction or elimination of certain non-revenue- producing expenses and other overhead costs such as printing and copying and other office expenses, offset by a $1.0 million charge for litigation accruals. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 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 $38.1 million and a receivable for cash on deposit with the Company's clearing broker of $29.3 million. As of June 30, 1999, long-term investments consist of the following: $24.0 million investment in FBR Asset Investment Corporation; $33.3 million of investments in proprietary investment partnerships managed by the Company; $27.2 million of debt or preferred instruments issued in non-public transactions by four companies, including three instruments held by FBR Business Development Fund; $19.7 million Imperial Credit Industries, Inc. investment; and $19.0 million of available-for-sale securities. Subsequent to June 30, 1999, the Company paid for the Imperial Credit Industries, Inc. investment with available cash. Long-term investments have increased by $26.1 million from December 31, 1998 to June 30, 1999. This increase was due primarily to investment gains and accrued incentive income of $10.4 million, net of unrealized decreases in the value of available for sale securities of $3.3 million, and the $19.7 million purchase of the Imperial Credit Industries, Inc. investment. With respect to long-term investment risk, the Company's primary exposure is to debt and equity price changes and the resulting impact on the Company's long- term investments. The effect of these changes was particularly evident in the volatility of the capital markets in the second half of 1998, as the Company recorded $16.1 million of unrealized investment losses in shareholders' equity, related to its investments in long-term marketable securities and FBR Asset Investment Corporation. As of June 30, 1999, these unrealized investment losses had increased to $19.4 million. To the extent these price declines are determined to be "other than temporary", any resulting losses would be recognized in earnings. In addition, the Company's long-term investments in private debt and preferred equity instruments are subject to credit/concentration risks, which could result in losses recognized in earnings. As of June 30, 1999, the potential loss in the fair value of all of the Company's long-term investments, using a hypothetical 10% decline in reported value, is $12.3 million. Friedman, Billings, Ramsey & Co., Inc. ("FBRC") and FBR Investment Services, Inc. ("FBRIS") are wholly owned broker-dealer subsidiaries of the Company and are registered with the SEC and are members of the NASD. As such, they are subject to minimum net capital requirements. As of June 30, 1999, FBRC and FBRIS were required to maintain minimum regulatory net capital of $2.2 million and $0.1 million and had total regulatory net capital of $27.5 million and $0.5 million which was $25.3 million and $0.4 million, respectively, in excess of their requirements. 16 LIQUIDITY AND CAPITAL RESOURCES, continued The Company is currently funding costs associated with the start up of fbr.com with operating cash and working capital. 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 and other Company activities, including those associated with fbr.com. The Company may, however, seek debt or equity financing, in public or private transactions, to provide capital for corporate purposes and/or to fund fbr.com and other 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 strategic business 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 has purchased 1,468,027 shares as of June 30, 1999. 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 granted certain economic rights, related to these warrants, to certain key employees, subject to vesting provisions that require continued employment with the Company for a period of time. As of June 30, 1999, the Company's warrants, after grants to employees and assuming 100% vesting, are as follows:
Number of Exercise June 30, 1999 Expiration Warrants Price Closing Price Date -------- ------- ------------- ----------- American Capital Strategies, Ltd. 307,335 $15.00 $ 18.250 08/29/02 Capital Automotive REIT 894,464 15.00 13.250 02/12/03 East West Bank 232,500 10.00 10.0625 06/12/03 Local Financial Corporation 382,000 10.00 9.875 09/08/02 Styling Technology Corporation 71,050 12.00 13.000 11/21/01 FBR Asset Investment Corporation 970,805 20.00 *13.530 12/11/07 Xypoint Corporation 285,107 2.10 *2.000 07/10/03 UOL Publishing, Inc. 36,500 4.625 7.250 09/16/03 Resource Asset Investment Trust 99,292 15.00 12.625 01/08/03
During 1999, the Company granted and sold all of its warrants related to Building One Services Corporation common stock. The Company recorded $2.1 million of investment gains related to the sale of these warrants in the quarter ended June 30, 1999. * Represents the market price of the underlying unregistered security in recent Rule 144A transaction trading. 17 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. Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on May 20, 1999 at which shareholders took the following actions: 1. The election of five directors nominated to serve until the next Annual Meeting, 2. The approval of amendments to the 1997 Stock and Annual Incentive Plan to place an annual limit of one million shares on the number of shares of Common Stock that may be allocated to a Plan participant and to specify certain performance criteria for Plan awards; and 3. The ratification of the appointment of Arthur Andersen LLP as the Company's independent auditors for 1999. The results of the voting in connection with the preceding items were as follows: 1. Election of Directors: A total of 47,683,851 votes were received for this item. For Against Abstain --- ------- ------- Emanuel J. Friedman 47,621,912 61,939 - Eric F. Billings 47,621,912 61,939 - W. Russell Ramsey 47,621,912 61,939 - Wallace L. Timmeny 47,621,912 61,939 - Mark R. Warner 47,621,912 61,939 - 18 Item 4. Submission of Matters to a Vote of Security Holders, continued: 2. Approval of Amendments to 1997 Stock and Annual Incentive Plan: A total of 47,683,851 votes were received for this item. For Against Abstain --- ------- ------- 44,918,000 526,496 2,239,355 3. Ratification of the Appointment of Arthur Andersen LLP: A total of 47,683,851 votes were received for this item. For Against Abstain --- ------- ------- 45,444,047 14,679 2,225,125 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10) Memorandum of Understanding (27) Financial data schedule (b) Reports on Form 8-K . April 15, 1999: launch of fbr.com . April 29, 1999: first quarter 1999 results . July 29, 1999: second quarter 1999 results . August 12, 1999: strategic alliance with Fidelity Investments 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. 08/16/99 By: /s/ Eric Y. Generous ---------------- --------------------------------------------- Date Eric Y. Generous, Chief Financial Officer (Principal Financial Officer) 08/16/99 By: /s/ Kurt R. Harrington ---------------- --------------------------------------------- Date Kurt R. Harrington, Treasurer (Principal Accounting Officer) EXHIBIT INDEX EXHIBIT 10.01 Memorandum of Understanding EXHIBIT 27.01 Financial Data Schedule 19 EX-10.01 2 EXHIBIT 10.01 MEMORANDUM OF UNDERSTANDING FRIEDMAN, BILLINGS, RAMSEY GROUP, INC. (together with its subsidiaries, "FBR") and Fidelity Capital Markets, a division of National Financial Services Corporation ( "Fidelity") hereby set forth their current intentions to establish an ongoing strategic relationship in this non-binding Memorandum of Understanding. 1. The parties hereto intend to establish an ongoing strategic business relationship with respect to selected capital markets and other activities. The relationship between the parties shall remain on an arm's-length business basis, subject to termination at will by either party at any time, and shall in no manner be construed to constitute a joint venture, partnership or other fiduciary relationship. Neither party shall exercise controlling influence over any aspect of the other party's business or corporate affairs. Each party shall exercise full independent discretion in the operation of its own business affairs and shall have full legal responsibility for its own affairs and any consequences resulting therefrom. Neither party shall have any financial obligation to the other party pursuant to the terms of this Memorandum of Understanding, except to the extent such obligations arise pursuant to independent arm's-length business transactions that the parties may engage in as contemplated hereunder. 2. FBR and Fidelity will have a strategic alliance in the interest of the efficient distribution of securities in initial public offerings of equity securities and other offerings of securities. (a) FBR will invite Fidelity to participate as a selling group member in selected offerings in which FBR is acting as lead or co-managing underwriter on a case-by-case basis as FBR and Fidelity deem appropriate, subject in all instances to the suitability to the issuer's needs and such issuer's consent. Fidelity may extend such invitations to correspondent firms of its clearing business with FBR's consent with respect to each such firm. (b) Fidelity will refer potential underwriting transactions to FBR on a case-by-case basis as Fidelity and FBR deem appropriate, subject in all instances to the issuer's needs and such issuer's consent. 3. FBR and Fidelity intend to focus their efforts under their strategic relationship initially on certain industry sectors (the "Initial Sectors"), including: Regional Banks Thrifts Specialty Finance Companies Real Estate Technology Energy Healthcare 1 4. FBR and Fidelity will explore potential strategic relationships in other business lines, including, without limitation, merchant banking and venture capital activities, asset management, research, and electronic trading of securities. 5. Distribution and referral arrangements shall be determined by mutual agreement between FBR and Fidelity on a case-by-case basis, and shall in all instances be established on an independent arm's-length basis. 6. FBR and Fidelity intend to cooperate in seeking potential investment banking transactions, where appropriate. To that end (i) FBR and Fidelity will each use its best efforts to indicate to the other as promptly as practicable whether (in the case of Fidelity) it intends to participate as a selling group member in a transaction in which it is invited to participate under paragraph 2(a) or (in the case of FBR) it intends to pursue an underwriting transaction referred to it under paragraph 2(b); and (ii) Fidelity intends to participate in presentations (subject to personnel availability) in transactions which it has referred to FBR, and in other transactions in which it intends to participate as a selling group member, and does not intend to participate in such presentations with respect to such transactions with other underwriters. With respect to transactions in the Initial Sectors, Fidelity does not intend to participate in presentations to prospective clients, without providing prior notice to FBR. 7. Each of FBR and Fidelity will provide the other with prior written notice of any proposed strategic alliances into which it intends to enter in any of the business lines discussed after the date of this agreement. 8. In the event of termination pursuant to paragraph 1 hereof (i) such termination shall not affect any legally binding agreements that may be in effect at the date of such termination, which agreements shall remain in full force and effect and (ii) the parties will undertake a good faith effort to resolve any pending transactions as to which no legally binding agreements are in effect at the date of such termination, in a commercially reasonable manner. 9. It is the intention of Fidelity and FBR to discuss the progress, status and potential next steps of their alliance on or before November 5, 1999. 2 * * * IN WITNESS WHEREOF the party's have executed this memorandum on the date set forth below: FRIEDMAN, BILLINGS, RAMSEY FIDELITY CAPITAL MARKETS, GROUP, INC., a Virginia corporation a division of National Financial Services Corporation By: /s/ Emanuel J. Friedman By: /s/ Robert P. Mazzarella ------------------------------- -------------------------------------- Name: Emanuel J. Friedman Name: Robert P. Mazzarella Title: Chairman and Chief Title: President Executive Officer Dated: August 11, 1999 Dated: August 6, 1999 ---------------------------- ------------------------------------ 3 EX-27.01 3 FINANCIAL DATA SCHEDULE
BD This schedule contains summary financial information extracted from the unaudited Consolidated Balance Sheet as of June 30, 1999 and the unaudited Consolidated Statement of Operations for the six months ended June 30, 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 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 38,094 49,963 0 0 131,894 6,516 231,721 0 39,600 0 0 2,630 1,639 0 0 208,680 (20,828) 231,721 12,865 4,919 6,568 21,113 4,859 1,001 36,347 5,894 5,894 0 0 5,894 0.12 0.12
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