UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2011
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number: 001-33518
FBR & Co.
(Exact name of registrant as specified in its charter)
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Virginia
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20-5164223
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(State or other jurisdiction of
Incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1001 Nineteenth Street North,
Arlington, VA
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22209
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(Address of principal executive offices)
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(Zip Code)
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(703) 312-9500
(Registrants telephone number, including area code)
Securities
registered pursuant to section 12(b) of the act:
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Title of Each Class
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Name of Each Exchange on which Registered
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Common Stock, Par Value $0.001
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The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market
SM
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Securities registered pursuant to section 12(g) of the act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act: Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act: Yes
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No
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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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large Accelerated
Filer
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Accelerated
Filer
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Non-Accelerated
Filer
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Smaller Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act): Yes
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No
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The aggregate market value of FBR & Co.s outstanding common stock held by non-affiliates as of June 30, 2011 was
approximately $172.4 million. In determining this figure, the registrant has excluded all shares of common stock beneficially owned by its directors and executive officers and each person who beneficially owns 10% or more of FBR &
Co.s outstanding common stock. By doing so, the registrant does not admit that such persons are affiliates within the meaning of Rule 405 of the Securities Act of 1933, as amended, or for any other purpose.
On February 29, 2012, there were 55,437,873 shares of FBR & Co. common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Document
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Where Incorporated
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FBR & Co. 2011 Proxy Statement (to be filed with the Securities and Exchange Commission on or before April 29,
2012)
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Part III, Items 10,
11, 12, 13 and 14
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TABLE OF CONTENTS
FO
RWARD-LOOKING STATEMENTS
Some of the statements contained in or incorporated by reference in this Form 10-K are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements are predictive in nature
and can be identified by the use of forward-looking words such as anticipate, believe, could, estimate, expect, intend, may, plan, goal,
objective, potential, project, should, will and would or the negative of these terms or other comparable terminology. Statements concerning projections, future performance
developments, events, revenues, expenses, earnings, run rates, and any other guidance on present or future periods constitute forward-looking statements. Such statements include, but are not limited to, those relating to the effects of growth, our
principal investing 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 forward-looking statements. These factors include, but are not limited to:
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the risks identified under the section captioned Risk Factors in this Form 10-K;
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general volatility of the capital markets and the possibility that an active public trading market for our common stock cannot be sustained;
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deterioration in the business environment in the specific sectors of the economy in which we focus or a decline in the market for securities of
companies within these sectors;
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substantial fluctuations in our financial results;
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our ability to retain our senior professionals;
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pricing and other competitive pressures;
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changes in laws and regulations and industry practices that adversely affect our sales and trading business;
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incurrence of losses in the future;
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the singular nature of our capital markets and strategic advisory engagements;
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competition among financial services firms for business and personnel;
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larger and more frequent capital commitments in our trading and underwriting businesses;
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limitations on our access to capital;
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malfunctioning or failure in our operations and infrastructure;
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our entry into new business areas, including entry through strategic investments, acquisitions and joint ventures;
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failure to achieve and maintain effective internal controls;
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declines in the market value of our principal investments;
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the loss of our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (the 1940 Act);
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the overall environment for interest rates;
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changes in our business strategy; and
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availability, terms and deployment of capital.
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We will not necessarily update the information presented or incorporated by reference in this Form 10-K if any of these forward-looking statements turn out to be inaccurate, and there are no guarantees
about our performance. This Form 10-K, including the consolidated financial statements and notes thereto and the documents incorporated by reference, should be read for a complete understanding of our business, an investment in our company and the
risks and other uncertainties associated with that business or an investment in our company.
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AVAILABLE INFORMATION
FBR & Co. (we, us, our company or the Company) files annual, quarterly and
current reports, proxy statements, information statements and other information with the United States Securities and Exchange Commission (the SEC). You may read and copy any document we file with the SEC at the SECs Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains annual, quarterly and current
reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our electronic SEC filings are available to the public at
http://www.sec.gov
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Our public internet site is
http://www.fbr.com
. We make available free of charge through our public internet site our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. We also make available through our public internet site statements of beneficial ownership of our equity securities filed by our directors, officers, 10% or greater shareholders and
others under Section 16 of the Exchange Act.
We also make available on
http://www.fbr.com
(i) our Corporate
Governance Guidelines, (ii) Statement of Business Principles (our code of business conduct and ethics), including any waivers, if any, therefrom granted to executive officers or directors, and (iii) the charters of the Audit, Compensation,
and Nominating and Corporate Governance Committees of our Board of Directors. These documents are also available in print without charge to any person who requests them by writing or telephoning:
FBR & Co.
1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 312-9500
Attention: Corporate Secretary
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PART I
Overview
FBR & Co. is a full-service investment banking, institutional brokerage and asset management firm with a
customer-focused and innovative approach to meeting our clients needs. In addition, we make principal investments, including merchant banking investments, with our own capital. We were formed in June 2006, and we completed the initial public
offering of our common stock in June 2007. Since the founding of certain predecessor companies, we have grown from a boutique investment bank with primary expertise in financial institutions into a full-service U.S. investment bank for middle-market
companies.
Through our principal operating subsidiaries, FBR Capital Markets & Co. (FBRCM.), an
SEC-registered broker-dealer, and FBR Fund Advisers, Inc. (FBR Fund Advisers), an SEC-registered investment adviser, we have focused our business on providing:
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capital raising services, including underwriting and placement of public and private equity and debt;
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financial advisory services, including merger and acquisition (M&A) advisory, restructuring, liability management, recapitalization and
strategic alternative analysis;
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institutional sales and trading services focused on equities, equity-linked securities, listed options, high-yield bonds, senior debt and bank loans;
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asset management services through a family of mutual funds; and
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principal investment returns to our shareholders through merchant banking and other direct investments that we make utilizing our own capital.
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We focus our capital markets business (investment banking and institutional brokerage) in the following
industry sectorsconsumer, diversified industrials, energy and natural resources, financial institutions, insurance, real estate, and technology, media and telecommunications (TMT).
Our asset management business manages a family of mutual funds. As of December 31, 2011, we had approximately $1.7 billion in mutual
fund assets under management.
We are a Virginia corporation that was initially formed as a consolidated
subsidiary of Arlington Asset Investment Corp. (Arlington Asset), a separate publicly-traded corporation that invests primarily in mortgage-related assets. In July 2006, Arlington Asset contributed the subsidiaries that had historically
conducted its capital markets and asset management business to us and we sold shares of our common stock in a private offering and a concurrent private placement to Crestview Partners (Crestview), a New York-based private equity firm. In
this Form 10-K, we refer to this private offering and the concurrent private placement to Crestview as our July 2006 private offering. Since our July 2006 private offering, we have operated as an independent company with a separate board
of directors. We became a publicly-traded company listed on The NASDAQ Global Select Market
SM
(NASDAQ: FBRC) in June 2007. In May 2009, we repurchased shares of our common stock from Arlington Asset and, in October 2009, Arlington Asset sold its remaining shares of our common stock in a secondary
public offering.
We are headquartered in Arlington, Virginia and also have offices in Boston, Dallas, Houston, Irvine, New
York and San Francisco. The address of our principal executive offices is 1001 Nineteenth Street North, Arlington, Virginia 22209. Our telephone number is (703) 312-9500.
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Business Segments
Our business comprises three separate segments: capital markets, which includes investment banking and institutional brokerage and
research; asset management; and principal investing, which includes merchant banking.
Financial information concerning our
company for the fiscal years ended December 31, 2011, 2010, and 2009, including the amount of net revenues contributed by each segment in such periods, is set forth in our consolidated financial statements and the notes thereto in Part II,
Item 8, of this Form 10-K. Information with respect to our operations by business segment is set forth under the captions Managements Discussion and Analysis of Financial Condition and Results of OperationsExecutive
Overview in Part II, Item 7, of this Form 10-K and in Note 14 to our consolidated financial statements in Part II, Item 8, of this Form 10-K.
Capital Markets
Our capital markets business is conducted by our
investment banking and institutional brokerage professionals through our broker-dealer subsidiary. These professionals provide investment banking services, including capital raising and financial advisory services for our corporate issuer clients,
and institutional brokerage services including sales, trading, and research services, to our institutional investor clients. We believe the capital markets transactions sourced by our investment banking professionals create the types of investment
opportunities that our institutional brokerage clients seek, while our institutional brokerage clients provide demand for our investment banking clients securities issues, thus helping to provide these corporate issuers with the ability to
meet their corporate financing needs. Since January 2008, we have reduced our total number of employees and made adjustments to our variable cost structure to better align our overall cost structure with current market conditions, while at the same
time adding capabilities in convertible securities sales and trading, loan trading, restructuring and liability management advisory services, and high yield debt and listed options sales and trading.
Investment Banking
Our investment banking professionals, backed by their industry knowledge and our strong distribution platform, seek to establish and maintain relationships with our corporate clients and to provide them
with capital raising and financial advisory services. We provide capital raising services in industry specific investment banking teams that focus on the consumer, diversified industrials, energy and natural resources, financial institutions,
insurance, real estate, and TMT industries. These teams work closely with our equity, equity-linked and debt capital markets personnel in originating and executing capital markets transactions. In addition to our industry specific teams, our
financial sponsors investment banking group delivers investment banking products and solutions to the private equity community and their portfolio companies, our M&A investment banking group delivers a broad range financial advisory services to
our investment banking clients, and our restructuring finance and advisory group focuses on accessing the debt and equity capital markets to deliver client solutions inside and outside of insolvency proceedings.
As an investment bank with an ability to raise equity in the private capital markets, we are involved with companies early in their
formation in order to establish relationships that will provide us with ongoing revenues as these companies corporate finance and financial advisory needs grow. We seek to provide our investment banking clients with the financing and advisory
services that they will need at all stages of their corporate lifecycle. We have made, and expect to continue making, opportunistic acquisitions to complement our investment banking platform to increase our product offerings and add to the coverage
in our core industry groups.
Capital Raising
. We have developed a strong market presence, primarily in a book-managing
role, as a leading underwriter of equity securities in the United States. We base our decision to underwrite an offering of a clients securities on company and industry fundamentals, managements track record, historical financial
results,
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financial projections, and other factors, all backed by extensive due diligence. We offer a wide range of financial products and services designed to serve the needs of our investment banking
clients, including private equity offerings, initial public, follow-on, and secondary offerings of common equity, convertible debt offerings, public and private preferred equity offerings, and high yield debt offerings and bank-loan syndication.
Strategic Advisory Services
. Our financial advisory practice builds on our capital markets expertise and focuses on
helping our investment banking clients to assess strategic alternatives, including advice on M&A, liability management and financial restructuring, and strategic partnerships. In addition, we provide valuation advice, fairness opinions, market
comparable valuation analysis and other corporate finance advice, including advice with respect to dividend policies and evaluations of stock repurchase programs.
Institutional Brokerage and Research
Through our institutional
brokerage professionals, we provide research and institutional sales and trading services to institutional investors such as mutual funds, insurance companies, hedge funds, banks, money managers and pension and profit-sharing plans. Our ability to
work on multiple securities classes with clients enhances our overall brokerage relationships with our clients. We currently operate desks that cover the trading of equity securities, convertible securities, high-yield debt securities, loan products
and listed options.
Institutional Brokerage
. We believe our institutional brokerage professionals are distinguished by
their in-depth understanding of the companies and industries in which we focus. Our traders and salespeople are required to develop detailed knowledge and relationships and provide trade execution and sales and trading services to a diverse
institutional client base. Many of our institutional clients have been long-standing investors in transactions that our investment banking teams have brought to the capital markets and have continued a close relationship with us as they have grown
in size and assets under management.
Our sales professionals work closely with our research analysts and our trading desks to
provide the most up-to-date information to our institutional clients. Our sales, trading, and research professionals work together to maintain regular contact with the specialized portfolio managers and buy-side analysts of each institutional
client. We make markets in NASDAQ and other securities, we trade listed securities and loan products, and we service the trading desks of major institutions in the United States, Europe and elsewhere.
Research
. We understand the importance of research and the role quality research plays in the institutional brokerage process,
particularly for accounts that do not maintain a large in-house research team. We seek to differentiate ourselves through originality of perspective, depth of insight, and our ability to uncover industry trends. We believe our unique viewpoint has
helped us develop relationships with investor clients in both our primary distribution and secondary trading businesses.
Our
research analysts operate under three guiding principles: (i) to provide objective, independent analysis of securities, their issuers, and their place in the capital markets; (ii) to identify attractive investment opportunities in the
capital markets; and (iii) to communicate effectively the fundamentals of these investment opportunities to potential investors. To achieve these objectives, we believe that industry specialization is necessary and, as a result, we organize our
research staff along industry lines. Each industry team works together to identify and evaluate industry trends and developments. Within industry groups, analysts are further subdivided into specific areas of focus so that they can maintain and
apply specific industry knowledge to each investment opportunity they address.
After initiating coverage on a company, our
analysts seek to maintain a long-term relationship with that company and a long-term commitment to ensure that new developments are effectively communicated to our sales force and institutional investors. Our research team analyzes major trends,
publishes original research on new areas of growth, provides fundamental, company-specific coverage and works with our institutional clients to identify and evaluate public equity investment opportunities.
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Asset Management
Our SEC registered investment adviser subsidiary manages a family of mutual funds. As of December 31, 2011, we had $1.7 billion in assets under management.
At December 31, 2011, we managed client assets through our ten mutual fund product lines that cover a range of sectors and asset
classes. Through strict attention to relative valuation and careful security selection, our actively managed mutual funds strive both to participate in rising markets and preserve capital in down markets.
Principal Investing
Our
principal investing activity consists primarily of investments in merchant banking investments, investments in publicly traded companies, and investments in short-term liquid instruments. We have historically made merchant banking investments in
selected transactions that our investment banking group underwrites. This strategy involves putting our capital to work alongside the capital of our institutional clients.
Accounting, Administration and Operations
Our accounting, administration
and operations personnel are responsible for financial controls, internal and external financial reporting, human resources and personnel services, office operations, information technology and telecommunications systems, the processing of
securities transactions, and corporate communications. With the exception of payroll processing, which is performed by an outside service bureau, and customer account processing, which is performed by our clearing brokers, most data processing
functions are performed internally. We believe that future growth will require implementation of new and enhanced communications and information systems and training of our personnel to operate such systems.
Compliance, Legal, and Risk Management
Our compliance, legal and risk management personnel (together with other appropriate personnel) are responsible for our compliance procedures with regard to the legal and regulatory requirements of our
company and for our procedures with regard to our exposure to market, credit, operations, liquidity, compliance, legal, reputational and equity ownership risk. In addition, compliance personnel test for compliance by our personnel with our policies
and procedures. Our legal personnel also provide legal service throughout our company, including advice on managing legal risk. The supervisory personnel in these areas have direct access to, and meet regularly with, our executive management and
with the Audit Committee of our Board of Directors to ensure their independence in performing these functions. In addition to our internal compliance, legal, and risk management personnel, we outsource particular functions to outside consultants and
attorneys for their particular expertise.
Competition
In recent years, the financial services industry has undergone a dramatic reshaping, as several major financial institutions
consolidated, were forced to merge, declared bankruptcy, received substantial government assistance or were placed into conservatorship, all of which has resulted in significant upheaval in the competitive environment. These events accelerated a
longstanding trend toward consolidation among companies in the financial services industry and created an environment of uncertainty among financial services firms of all sizes. As a full-service investment banking, institutional brokerage and asset
management firm, all aspects of our business are intensely competitive. Our competitors are other traditional and online brokerage firms, investment banking firms, merchant banks and financial advisory firms. Some of our competitors have
fundamentally changed their respective business models over the past several years, including, in certain cases, becoming commercial banks, and there has been significant movement of personnel, both among firms as well as out of the
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industry altogether. We compete with some of our competitors nationally and with others on a regional, product or business line basis. Many of our competitors have substantially greater capital
and resources than we do and offer a broader range of financial products and services, and recent developments could result in our remaining competitors gaining even greater capital and other resources. We believe that the principal factors that
allow us to compete effectively include the strength and extent of our client relationships, our reputation, the abilities of our professionals, our market focus and the relative quality and price of our services and products.
We have experienced intense price competition in some areas of our capital markets businesses, in particular, discounts in large block
trades and trading commissions and spreads. The ability to execute trades electronically, through the Internet and through other alternative trading systems, has increased the pressure on trading commissions and spreads. We believe that this trend
toward alternative trading systems will continue. We may experience competitive pressures in these and other areas in the future as some of our competitors seek to increase market share by reducing prices.
In our asset management business, we compete with many of the same firms as we do in the investment banking and brokerage businesses as
well as with venture capital firms, large mutual fund companies, commercial banks and smaller niche players, including private hedge funds.
Competition is also intense for the recruitment and retention of qualified professionals. The performance of our business is in a large part dependent on the skills, expertise and performance of our
employees. Our ability to continue to compete effectively in our businesses will depend upon our continued ability to attract new professionals and retain and motivate our existing professionals.
Risk Management
In conducting our business, we are exposed to a range of risks including, without limitation:
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Market risk.
Market risk is the risk that a change in the level of one or more market prices, rates, indices, or other market factors, such as
market liquidity, will result in losses for a position or portfolio.
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Credit risk.
Credit risk is the risk of loss due to an individual customers or institutional counterpartys unwillingness or
inability to pay its obligations.
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Operations risk.
Operations risk is the risk of loss resulting from systems failure, inadequate controls, human error, fraud or unforeseen
catastrophes.
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Liquidity risk.
Liquidity risk is the risk that we may be unable to meet our obligations as they come due because of our inability to liquidate
assets or obtain funding. Liquidity risk also includes the risk of having to sell assets at a loss to generate liquid funds.
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Regulatory risk.
Regulatory risk is the risk of loss, including fines, penalties or restrictions in our activities, from failing to comply with
federal, state or local laws, rules and regulations pertaining to financial services activities.
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Legal risk.
Legal risk is the risk of loss, disruption or other negative effect on our operations or condition that arises from unenforceable
contracts, lawsuits, adverse judgments, or adverse governmental or regulatory proceedings, or the threat thereof.
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Reputational risk.
Reputational risk is the risk that negative publicity regarding our practices, whether true or not, will cause a decline in
the customer base, resulting in costly litigation, or reduce our revenues.
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We monitor market and business
risk, including credit risk, operations, liquidity, regulatory, legal, and reputational risk through a number of control procedures designed to identify and evaluate the various risks to which our businesses and investments are exposed. We have
established various committees to assess and manage risk associated with our investment banking, merchant banking and other activities. We review, among
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other things, business and transactional risks associated with investment banking potential clients and engagements. We seek to manage the risks associated with our investment banking and
merchant banking activities by review and approval of transactions by the relevant committee, prior to accepting an engagement or pursuing a material investment transaction. Although we believe that our risk management program and our internal
controls are appropriately designed to address the risks to which we are exposed, we cannot provide assurance that our risk management program or our internal controls will prevent or reduce such risks.
Insurance
We maintain insurance in types and amounts and with deductibles that management believes are customary for companies of similar size and
engaged in similar businesses. However, the insurance market is volatile, and there can be no assurance that any particular coverage will be available in the future on terms acceptable to us.
Employees
As of December 31, 2011, we had 295 employees, in comparison to the 501 employees we had as of December 31, 2010. Our employees
are not subject to any collective bargaining agreement and we consider our relationship with our employees to be good.
Regulation
Our business, as well as the financial services industry generally, is subject to extensive regulation in the United States and elsewhere. As a matter of public policy, regulatory bodies in the United
States and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of customers participating in those markets. In light of current conditions in the financial
markets and the economy, regulators have increased their focus on the regulation of the financial services industry. Proposals for legislation that could substantially intensify the regulation of the financial services industry are expected to be
introduced in the U.S. Congress, in state legislatures and around the world. In the U.S., the SEC is the federal agency responsible for the administration of the federal securities laws. FBRCM and FBR Investment Services, Inc (FBRIS) are
registered as broker-dealers with the SEC and the Financial Industry Regulatory Authority, Inc. (FINRA), a self-regulatory organization, and in all 50 states, Puerto Rico and the District of Columbia. Accordingly, FBRCM and FBRIS are
subject to regulation and oversight by the SEC and FINRA, which is itself subject to oversight by the SEC and which adopts and enforces rules governing the conduct, and examines the activities, of its member firms, including FBRCM and FBRIS, and
their registered representatives. State securities regulators also have regulatory or oversight authority over FBRCM and FBRIS. Our business may also be subject to regulation by non-U.S. governmental and regulatory bodies and self-regulatory
authorities in other countries where we operate.
FBR Fund Advisers is a SEC-registered investment advisers. Registered
investment advisers are subject to regulations under the Investment Advisers Act of 1940, as amended. Regulations under the Investment Advisers Act of 1940 relate to, among other things, recordkeeping and reporting requirements, disclosure
requirements, limitations on agency cross and principal transactions between an adviser and advisory clients, as well as general anti-fraud prohibitions. In addition, certain investment funds that we manage are registered investment companies under
the Investment Company Act of 1940, as amended. Those funds and the entities that serve as the funds investment advisers are subject to that act and the rules and regulations promulgated by the SEC under that act, which, among other things,
regulate the relationship between a registered investment company and its investment adviser and prohibit or severely restrict principal transactions and joint transactions.
Broker-dealers are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of customers funds and
securities, capital structure, record-keeping, the financing of customers purchases and the conduct and qualifications of directors,
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officers and employees. In particular, as a registered broker-dealer and member of various self-regulatory organizations, FBRCM and FBRIS are subject to the SECs uniform net capital rule,
Rule 15c3-1. Rule 15c3-1 specifies the minimum level of net capital a broker-dealer must maintain and also requires that a significant part of its assets be kept in relatively liquid form. The SEC and various self-regulatory organizations
impose rules that require notification when net capital falls below certain predefined criteria, limit the ratio of subordinated debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to
expand its business under certain circumstances. Additionally, the SECs uniform net capital rule imposes certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior
notice to the SEC for certain withdrawals of capital.
Compliance with regulatory net capital requirements could limit those
operations that require the intensive use of capital, such as underwriting and trading activities, and also could restrict our ability to withdraw capital from our affiliated broker-dealers, which in turn could limit our ability to pay dividends,
repay debt and redeem or repurchase shares of our outstanding capital stock.
We believe that at all times FBRCM and FBRIS
have been in compliance in all material respects with the applicable minimum net capital rules of the SEC and FINRA. A failure of a U.S. broker-dealer to maintain its minimum required net capital would require it to cease executing customer
transactions until it came back into compliance, and could cause it to lose its FINRA membership, its registration with the SEC or require its liquidation. Further, the decline in any of our broker-dealer subsidiaries net capital below certain
early warning levels, even though above minimum net capital requirements, could cause material adverse consequences to us and to our broker-dealer subsidiary.
FBRCM and FBRIS also are subject to Risk Assessment Rules imposed by the SEC which require, among other things, that certain broker-dealers maintain and preserve certain information, describe
risk management policies and procedures and report on the financial condition of certain affiliates whose financial and securities activities are reasonably likely to have a material impact on the financial and operational condition of the
broker-dealer. Certain material associated persons (as defined in the Risk Assessment Rules) of the broker-dealer and the activities conducted by such material associated persons may also be subject to regulation by the SEC. In addition,
the possibility exists that, on the basis of the information it obtains under the Risk Assessment Rules, the SEC could seek authority over our unregulated subsidiaries either directly or through its existing authority over our regulated
subsidiaries.
The research areas of investment banks have been and remain the subject of increased regulatory scrutiny. In
2002 and 2003, acting in part pursuant to a mandate contained in the Sarbanes-Oxley Act of 2002, the SEC, the NYSE and the NASD (now FINRA) adopted rules imposing heightened restrictions on the interaction between equity research analysts and
investment banking personnel at member securities firms. In addition, in 2003 and 2004, several securities firms in the United States reached a settlement with certain federal and state securities regulators and self-regulatory organizations to
resolve investigations into their equity research analysts alleged conflicts of interest. Under this settlement, the firms have been subject to certain restrictions and undertakings. As part of this settlement, restrictions have been imposed
on the interaction between research and investment banking departments, and these securities firms are required to fund the provision of independent research to their customers. In connection with the research settlement, we have also subscribed to
a voluntary initiative imposing restrictions on the allocation of shares in initial public offerings to executives and directors of public companies.
The effort to combat money laundering and terrorist financing is a priority in governmental policy with respect to financial institutions. The USA PATRIOT Act of 2001, as amended (the PATRIOT
Act), contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers and other financial services companies, including standards for verifying client
identification at account opening, and obligations to monitor client transactions and report suspicious activities. Through these and other provisions, the PATRIOT Act seeks to promote the identification of parties
9
that may be involved in terrorism or money laundering. Anti-money laundering laws outside the United States contain some similar provisions. The obligation of financial institutions, including
us, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, has required the
implementation and maintenance of internal practices, procedures and controls which have increased, and may continue to increase, our costs, and any failure with respect to our programs in this area could subject us to serious regulatory
consequences, including substantial fines, and potentially other liabilities.
Certain of our businesses are subject to
compliance with laws and regulations of U.S. federal and state governments, non-U.S. governments, their respective agencies and/or various self-regulatory organizations or exchanges relating to the privacy of client information, and any failure to
comply with these regulations could expose us to liability and/or reputational damage.
Additional legislation, changes in
rules promulgated by the SEC and self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules, either in the United States or elsewhere, may directly affect the mode of our operation and profitability.
Our broker-dealer business is also subject to regulation by various foreign governments and regulatory bodies. FBRCM is
registered with and subject to regulation by a number of provincial securities regulators in Canada. Foreign regulation may govern all aspects of the investment business, including regulatory capital, sales and trading practices, conflicts of
interest, research, use and safekeeping of customer funds and securities, record-keeping, margin practices and procedures, registration standards for individuals, periodic reporting and settlement procedures.
Prior to December 2011, our subsidiary FBR Capital Markets International, Ltd. (FBRIL) located in the United Kingdom was an
introducing broker-dealer registered with the Financial Services Authority (FSA) of the United Kingdom. In the fourth quarter of 2011, we initiated the process to cease activities at FBRIL and terminate FBRILs registration with the
FSA. Subsequent to these actions, subject to regulatory limitations, institutional brokerage and investment banking activity with European clients is conducted by FBRCM.
The U.S. and non-U.S. government agencies and self-regulatory organizations, as well as state securities commissions in the United States, are empowered to conduct administrative proceedings that can
result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or its directors, officers or employees. Occasionally, FBR & Co. has been subject to investigations and proceedings, and
sanctions have been imposed for infractions of various regulations relating to its activities.
The Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) was enacted in 2010. Among other things, the legislation expands the authority of our existing regulators; broadens the reporting and regulation of executive compensation; and expand the standards
for market participants in dealing with clients and customers.
10
You should
carefully consider the following risks and all of the other information contained in this Form 10-K, including the consolidated financial statements and the notes thereto included in Part II, Item 8, of this Form 10-K. If any of the risks,
uncertainties, events or developments described below occurs, our business, financial condition or results of operation could be negatively impacted. In connection with the forward-looking statements that appear in this Form 10-K, you should also
carefully review the cautionary statements included under the caption Forward-Looking Statements.
Risks Related
to Adverse Market Conditions
Our businesses have been and may in the future be materially and adversely affected by financial
market conditions and economic conditions generally.
As an investment bank, risk is an inherent part of our business.
Our businesses are materially affected by conditions in the financial markets, particularly the equity capital markets, and economic conditions generally. Market valuations fluctuated throughout 2011 and the liquidity seen in the markets prior to
2008 has not yet returned. Lower levels of liquidity continue to have a negative effect on trading volumes, particularly in the equity market, which has a direct negative impact on our cash equities trading business.
Our financial performance is highly dependent on the environment in which our businesses operate. A favorable business environment is
generally characterized by, among other factors, high global gross domestic product growth, stable geopolitical conditions, transparent and efficient capital markets, liquid markets with active investors, low inflation, high business and consumer
confidence and strong business earnings. Slowing growth, contraction of credit, increasing energy prices, declines in business or investor confidence or risk tolerance, increases in inflation, higher unemployment, outbreaks of hostilities or other
geopolitical instability, corporate, political or other scandals that reduce investor confidence in capital markets and natural disasters, among other things, can affect the global financial markets. In addition, economic or political pressures in a
country or region may cause local market disruptions and currency devaluations, which may also affect markets generally. In the event of changes in market conditions, such as interest or foreign exchange rates, equity, fixed income, commodity or
real estate valuations, liquidity, availability of credit or volatility, our businesses could be adversely affected in many ways.
Our investment banking revenues are directly related to the number and size of the transactions in which we participate. The second half of 2011 was marked by a significantly diminished volume of equity
capital raising activity as compared to the first half, and future market downturns that affect the size and number of capital raising transactions will likely have a similar negative impact on our investment banking business. Sustained market
downturns and credit market dislocations and liquidity issues in the future would also likely lead to a decline in the volume of secondary market trading that we execute for our institutional brokerage clients and, therefore, to a decline in the
revenues we receive from commissions and spreads earned from the trades we execute for our clients. In addition, because the fees that we charge for managing our mutual fund product lines are based on the value of assets under management, a market
downturn that reduces the value of assets under management would reduce the revenues we receive from our asset management business. Heightened risk aversion among investors may cause them to shift their trading activity to higher quality and more
liquid products, which are generally somewhat less profitable for us.
Risks Related to Our Business
Our financial results may fluctuate substantially from quarter to quarter.
We have experienced, and expect to experience in the future, significant quarterly variations in our revenues and results of operations.
These variations may be attributed in part to the fact that our investment banking revenues are typically earned upon the successful completion of a transaction, the timing of which is uncertain
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and beyond our control. In most cases, we receive little or no payment for investment banking engagements that do not result in the successful completion of a transaction. As a result, our
business is highly dependent on market conditions as well as the decisions and actions of our clients and interested third parties. For example, a clients securities offering may be delayed or terminated because of adverse market conditions,
failure to obtain necessary regulatory approvals or unexpected financial or other problems in the clients business. If the parties fail to complete an offering in which we are participating as an underwriter or placement agent, we will earn
little or no revenue from the transaction. This risk may be intensified by our focus on early-stage companies in certain sectors, as the market for securities of these companies may experience significant variations in the number and size of equity
offerings as well as the after-market trading volume and prices of newly issued securities. More companies initiating the process of an initial public offering are simultaneously exploring M&A exit opportunities. Our investment banking revenues
would be adversely affected in the event that an initial public offering for which we are acting as an underwriter is preempted by the companys sale if we are not engaged as a strategic advisor in such sale. As a result, we are unlikely to
achieve steady and predictable earnings on a quarterly basis.
We are dependent on our executive management team, and we may not be able
to execute our business plan in the event that members of our executive management team are no longer available to us and we are unable to find suitable replacements for them or the members of our executive management team do not dedicate a
sufficient amount of their professional time to our endeavors.
Generally, members of our executive management team do
not have employment agreements with us. We have no assurance that the services of our executive management team will continue to be available to the full extent of our needs. We believe that our success depends to a significant extent upon the
experience of our executive management team, whose continued service is not guaranteed. If certain members of our executive management team leave our company or are otherwise no longer available to us or are not available to the full extent of our
needs, we may not be able to replace them with suitable management and may be unable to execute our business plan.
We encounter intense
competition for qualified professionals from other investment banking firms and from businesses outside the investment banking industry, such as hedge, private equity and venture capital funds, and our failure to hire qualified professionals and
retain our existing professionals may materially impede the success and growth of our business.
Our people are our
most valuable resource. Our ability to secure and maintain investment banking engagements depends upon the reputation, judgment, business generation capabilities and project execution skills of our professionals. Our professionals reputations
and relationships with our clients are a critical element in obtaining and executing client engagements. Generally, we do not have employment or non-competition agreements with any of our professionals. We encounter intense competition for qualified
professionals from other companies in the investment banking industry and from businesses outside the investment banking industry, such as hedge, private equity and venture capital funds. The headcount reductions we undertook as part of our
restructuring actions in 2010 have made us more dependent on the professionals that we continue to employ. We may experience losses of investment banking, brokerage, research and other professionals and our failure to hire qualified professionals
and retain our existing professionals may materially impede our success and growth. While we believe that we will continue to be able to retain and recruit qualified professionals, the departure or other loss of our key professionals who manage
substantial client relationships or who possess substantial experience and expertise could impair our ability to secure or successfully complete engagements, which could materially adversely affect our business and results of operations. Any
negative financial performance that results in lower compensation levels may exacerbate this risk. In addition, if any of our investment bankers or members of our executive management team were to join an existing competitor or form a competing
company, some of our clients could choose to use the services of that competitor instead of our services. We may not be able to prevent our key professionals or the members of our executive management team from resigning to join our competitors or
from forming a competing company.
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We depend on relatively few industries to generate a significant percentage of our revenue, which may
limit our revenues and net income and may adversely affect our operating results.
We are dependent on revenues related
to securities issued by companies in specific industry sectors. The diversified industrials, energy and natural resources, and financial institutions sectors account for the majority of our investment banking, asset management, institutional trading
and research activities. Therefore, any downturn in the market for the securities of companies in these industry sectors, or factors affecting such companies, could adversely affect our operating results and financial condition. Additionally, the
frequency and size of securities offerings can vary significantly from industry to industry due to economic, legislative, regulatory and political factors.
Underwriting and other capital raising transactions, strategic advisory engagements and related trading activities in the industries on which we focus represent a significant portion of our businesses.
This concentration of activity exposes us to the risk of substantial declines in revenues in the event of downturns in these industries. Future downturns in the industries on which we focus could result in a decrease in the size or number of
transactions we complete, which would reduce our investment banking revenues.
We also derive a significant portion of our
revenues from institutional sales and trading transactions related to the securities of companies in these sectors. Our revenues from such institutional sales and trading transactions may decline when underwriting activities in these industry
sectors decline, the volume of trading on the NASDAQ, the New York Stock Exchange (NYSE) or any other securities market or exchange declines, or when industry sectors or individual companies report results below investors
expectations.
We have incurred losses in recent periods and may incur losses in the future.
We have incurred losses in recent periods. For the year ended December 31, 2011, we had a net loss of $49.6 million. We may
incur losses in future periods. If we are unable to fund future losses, those losses may have a significant effect on our liquidity as well as our ability to operate.
In addition, we may incur significant expenses in connection with any expansion of our capital markets and asset management businesses or in connection with strategic acquisitions and investments.
Accordingly, we will need to increase our revenues at a rate greater than our expenses to achieve and maintain profitability. If our revenues do not increase sufficiently, or even if our revenues increase but we are unable to manage our expenses, we
will not achieve and maintain profitability in future periods.
Pricing and other competitive pressures may impair the revenues and
profitability of our institutional brokerage business.
We derive a significant portion of our revenues from our
institutional brokerage business. Along with other firms, we have experienced intense price competition in this business in recent years. In particular, the ability to execute trades electronically and through alternative trading systems has
increased the pressure on trading commissions and spreads. We expect pricing pressures in the business to continue. We believe we may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain
market share by competing on the basis of price or use their own capital to facilitate client trading activities. In addition, we face pressure from our larger competitors, which may be better able to offer a broader range of complementary products
and services to clients in order to win their trading business. If we are unable to compete effectively in these areas, the revenues from our sales and trading business may decline, and our business and results of operations may be adversely
affected. Our research and institutional brokerage business also may be adversely affected by changes in laws and regulations and industry practices.
Our institutional brokerage revenues may decline due to competition from alternative trading systems.
Securities and futures transactions are now being conducted through the internet and other alternative, non-traditional trading systems, and it appears that the trend toward alternative trading systems
will continue and probably accelerate. A dramatic increase in computer-based or other electronic trading may adversely affect our
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institutional brokerage revenues. The NYSEs adoption of its hybrid market for trading securities may increase pressure on our institutional brokerage business as customers execute more of
their NYSE-related trades electronically. Even if we were to develop our own electronic trading systems, we cannot assure you that the revenues generated by these systems will yield an adequate return on our investment, particularly given the
relatively lower commissions arising from electronic trades. As a result, our institutional brokerage revenues could decline in the future, which would negatively impact our cash flows and the value of our common stock.
We face strong competition from larger firms, some of which have greater resources and name recognition, which may impede our ability to grow our
business.
The brokerage and investment banking industries are intensely competitive and we expect them to remain so.
We compete on the basis of a number of factors, including client relationships, reputation, the abilities of our professionals, market focus and the relative quality and price of our services and products. We have experienced intense price
competition in some of our businesses, in particular discounts in large block trades and trading commissions and spreads. In addition, pricing and other competitive pressures in investment banking, including the trends toward increased focus by many
larger investment banking companies on institutional equity offerings pursuant to Rule 144A, multiple book runners, co-managers and multiple financial advisors handling transactions, have continued and could adversely affect our revenues, even as
the volume and number of investment banking transactions have started to increase. We believe we may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by competing on the
basis of price.
Many of our competitors in the brokerage and investment banking industries have a broader range of products
and services, greater financial and marketing resources, larger customer bases, greater name recognition, more senior professionals to serve their clients needs, greater global reach and more established relationships with clients than we
have. These larger and better capitalized competitors may be better able to respond to changes in the brokerage and investment banking industries, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete
for market share generally.
The scale of our competitors has increased in recent years as a result of substantial
consolidation among companies in the brokerage and investment banking industries. In addition, a number of large commercial banks, insurance companies and other broad-based financial services firms have established or acquired underwriting or
financial advisory practices and broker-dealers or have merged with other financial institutions. These firms have the ability to offer a wider range of products than we do, which may enhance their competitive position. They also have the ability to
support investment banking with commercial banking, insurance and other financial services in an effort to gain market share, which has resulted, and could further result, in pricing pressure in our businesses. In particular, the ability to provide
financing has become an important advantage for some of our larger competitors and, because we do not provide such financing, we may be unable to compete as effectively for clients in a significant part of the brokerage and investment banking
market.
If we are unable to compete effectively with our competitors, our business, financial condition and results of
operations will be adversely affected.
Our capital markets and strategic advisory engagements are singular in nature and our failure to
obtain new engagements may harm our operating results.
Our investment banking clients generally retain us on a
short-term, engagement-by-engagement basis in connection with specific capital markets or M&A transactions, rather than on a recurring basis under long-term contracts. As these transactions are typically singular in nature and our engagements
with these clients may not recur, we must continuously seek out new engagements when our current engagements are successfully completed or are terminated. As a result, high activity levels in any period are not necessarily indicative of continued
high levels of activity in any subsequent period. If we are unable to generate a substantial number of new engagements that generate fees from the successful completion of transactions, our business and results of operations would likely be
adversely affected.
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Larger and more frequent capital commitments in our trading and underwriting business increase the
potential for us to incur significant losses.
We commit our capital to maintain trading positions in the equity,
convertible securities, debt and listed options markets. We may enter into large transactions in which we commit our own capital as part of our client trading activities. The number and size of these large transactions may materially affect our
results of operations in a given period. Although, as discussed below, we take measures to manage market risk, we may also incur significant losses from our trading activities due to market fluctuations and volatility in our results of operations.
To the extent that we own assets,
i.e
., have long positions, in any of those markets, a downturn in the value of those assets or in those markets could result in losses. Conversely, to the extent we have sold assets we do not own,
i.e.
, have short positions, in any of those markets, an upturn in those markets could expose us to potentially large losses as we attempt to cover our short positions by acquiring assets in a rising market.
We use a number of quantitative measures to manage our exposure to market risk, including inventory position limits, scenario analysis,
and value at risk, or VaR. VaR is a model that quantifies potential losses using historical data. Because the historical market prices used in our VaR analysis may not be an accurate measure of future market events and conditions, especially in
highly stressful market environments, and because our VaR model measures the risk of a current net trading position and does not take into account future position changes arising from transaction and/or hedging activity, we could incur losses that
are materially greater than our reported VaR, and our business, financial condition and results of operations could be adversely affected.
Many financial services firms commit their own capital as part of their business activities. For example, in order to win business, investment banks may commit to purchase large blocks of stock from
publicly traded issuers or significant shareholders, instead of the more traditional marketed underwriting process, in which marketing is typically completed before an investment bank commits to purchase securities for resale. We have committed
capital in this way, and expect in the future that we will continue to do so from time to time. As a result, we will be subject to risk as we commit capital to facilitate primarily client-driven business and, therefore, may suffer losses even when
economic and market conditions are generally favorable for others in the industry.
Limitations on our access to capital could impair
our liquidity and our ability to conduct our businesses.
Liquidity, or ready access to funds, is essential to
financial services firms. Failures of financial institutions have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our trading business and perceived liquidity issues may affect our
clients and counterparties willingness to engage in brokerage transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that
affects our trading clients, third parties or us. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.
FBRCM and FBRIS, which are U.S. registered broker-dealers, are subject to the net capital requirements of the SEC and various
self-regulatory organizations of which they are members. These requirements typically specify the minimum level of net capital a broker-dealer must maintain and also mandate that a significant part of its assets be kept in relatively liquid form.
Any failure to comply with these net capital requirements could impair our ability to conduct our core business as a brokerage firm.
Furthermore, FBRCM and FBRIS are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from them to us. As a holding company, we will depend on dividends, distributions and
other payments from our subsidiaries to fund our obligations, including debt obligations. As a result, regulatory actions could impede access to funds that we need to make payments on our obligations, including debt obligations.
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We are highly dependent on communications, information and other systems and third parties, and any
systems failures could significantly disrupt our business.
Our business is highly dependent on communications,
information and other systems, including systems provided by our clearing broker and by and for other third parties. Any failure or interruption of our systems, the systems of our clearing broker or third-party trading or information systems could
cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock.
In addition, our clearing broker provides elements of our principal disaster recovery system. We cannot assure you that we or our
clearing broker will not suffer any systems failure or interruption, including one caused by a hurricane, earthquake, fire, other natural disaster, power or telecommunications failure, act of God, act of war, terrorist attack, pandemic or other
emergency situation, or that our or our clearing brokers back-up procedures and capabilities in the event of any such failure or interruption will be adequate. The occurrence of any failures or interruptions could significantly harm our
business.
Secure processing, storage and transmission of confidential and other information in our internal and third-party
computer systems and networks also is critically important to our business. We take protective measures and endeavor to modify them as circumstances warrant. However, our computer systems, software and networks may be vulnerable to unauthorized
access, computer viruses or other malicious code, inadvertent, erroneous or intercepted transmission of information (including by e-mail), and other events that could have an information security impact. If one or more of such events occur, this
potentially could jeopardize our or our clients or counterparties confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in
our, our clients, our counterparties or third parties operations. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures,
and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.
Our risk management policies and procedures may leave us exposed to unidentified or unanticipated risk, which could harm our business.
We have devoted significant resources to develop our risk management strategies and techniques and expect to continue to do so in the
future. However, our risk management strategies and techniques may not be fully effective in mitigating our risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated.
We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These
parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure, breach of contract or other reasons. We are also subject to the risk that our rights against third parties may not be enforceable in all
circumstances. Although we regularly review credit exposures to specific clients and counterparties and to specific industries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are
difficult to detect or foresee. In addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect us. If any of the variety of
instruments, processes and strategies we utilize to manage our exposure to various types of risk are not effective, we may incur losses.
Strategic investments or acquisitions and joint ventures may result in additional risks and uncertainties in our business.
We may grow our core businesses through both internal expansion and through strategic investments, acquisitions or joint ventures. To the
extent we make strategic investments or acquisitions or enter into joint ventures, we face numerous risks and uncertainties combining or integrating the relevant businesses and systems,
16
including the need to combine accounting and data processing systems and management controls and to integrate relationships with customers and business partners. In the case of joint ventures, we
are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control. In addition, conflicts or
disagreements between us and our joint venture partners may negatively impact our businesses.
Our due diligence may not reveal all of a
portfolio companys liabilities and may not reveal other weaknesses in a portfolio companys business.
Before we make merchant banking investments, we assess the strength and skills of an entitys management and other factors that we
believe will determine the success of the investment. In making the assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, an investigation by third parties. This process is
particularly important and subjective with respect to newly-organized entities because there may be little or no information publicly available about the company. We cannot assure you that our due diligence processes will uncover all relevant facts
or risks about a company in which we make a merchant banking investment, or that any such investment will be successful. Any unsuccessful merchant banking investments may have a material adverse effect on our financial condition and results of
operation.
In any potential merchant banking investment, we depend on management and have limited ability to influence management of
portfolio companies.
We generally do not control the management, investment decisions or operations of the enterprises
in which we make merchant banking investments. Management of those enterprises may decide to change the nature of their assets or business plan, or management may otherwise change in a manner that is not satisfactory to us. We typically have no
ability to affect these management decisions, and as noted below, may have only limited ability to dispose of these investments.
We may
make merchant banking investments that have limited liquidity, which may reduce the return on those investments to our stockholders.
The equity securities of a new publicly-held or privately-held entity in which we make a merchant banking investment are likely to be restricted as to resale and may otherwise be highly illiquid. We
expect that there will be restrictions on our ability to resell the securities of any private or newly-public company that we acquire for a period of at least one year after we acquire those securities. Thereafter, a public market sale may be
subject to volume limitations or dependent upon securing a registration statement for a secondary offering of the securities.
The securities of newly-public entities may trade less frequently and in smaller volume than securities of companies that are more widely
held and have more established trading patterns. Sales of these securities may cause their values to fluctuate more sharply. Because we have made and expect to make merchant banking investments through an affiliate of FBRCM, a registered
broker-dealer in the U.S., our ability to invest in companies may be constrained by applicable securities laws and regulations and the rules of FINRA and similar self-regulatory organizations. FBR & Co.s investment and trading
activities are regulated by the SEC, FINRA and other governmental authorities. As a result, the rules of the SEC, FINRA, and other governmental authorities and self-regulatory organizations may limit our ability to invest in the securities of
companies whose securities are underwritten or privately placed by our broker-dealer affiliates.
Prices of the equity
securities of new entities in which we make merchant banking investments may be volatile. We may make merchant banking investments that are significant relative to the portfolio companys overall capitalization, and resales of significant
amounts of these securities might adversely affect the market and the sales price for the securities.
The disposition value
of our merchant banking investments is dependent upon general and specific market conditions which could result in a decline of the value of these investments.
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Even if we make an appropriate investment decision based on the intrinsic value of an
enterprise, we cannot assure you that the market value of the investment will not decline, perhaps materially, as a result of general market conditions. For example, an increase in interest rates, a general decline in the stock markets, or other
market conditions adverse to companies of the type in which we invest could result in a decline in the value of our investments.
Our
capital markets business is dependent on cash inflows to the mutual fund industry and other pooled investment vehicles, which could result in our experiencing operating losses if cash flows slow.
A slowdown or reversal of cash inflows to the mutual fund industry and other pooled investment vehicles could lead to lower capital
markets revenues for us since mutual funds and other pooled investment vehicles purchase a significant portion of the securities offered in public offerings underwritten by our broker-dealer subsidiaries and subsequently traded in the secondary
markets. Demand for new equity offerings has been driven in part by institutional investors, particularly large mutual funds and hedge funds, seeking to invest on behalf of their investors. The public may redeem mutual funds as a result of a decline
in the market generally or as a result of a decline in mutual fund net asset values. To the extent that a decline in cash inflows into mutual funds reduces demand by fund managers for initial public or secondary offerings, our capital markets
business and results of operations could be materially adversely affected. Moreover, a slowdown in investment activity by mutual funds may have an adverse effect on the securities markets generally.
Declines in the market values of our investments may adversely affect periodic reported results and credit availability, which may reduce earnings.
We make merchant banking and principal investments that are classified for accounting purposes as
available-for-sale. Changes in the market values of those assets will be directly charged or credited to stockholders equity. As a result, a further decline in market value of our investment securities may further reduce the book
value of our assets. Moreover, if the decline in value of an available-for-sale security is other-than-temporary, such decline will reduce earnings, as will a decline in the value of securities not classified as available-for-sale for accounting
purposes.
A decline in the market value of our assets may adversely affect us particularly in instances where we have
borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we would have
to sell the assets at a time when we might not otherwise choose to do so. A reduction in credit available may reduce our earnings.
Changes in interest rates could negatively affect the value of investments we make with our excess capital, which could result in reduced earnings
or losses.
We invest our excess capital from time to time in highly liquid investments. Investments that are sensitive
to interest rate fluctuations will decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us.
In addition, changes in interest rates may impact some of our merchant banking and/or principal equity investments in companies whose business models are sensitive to interest rates.
If we become subject to the registration requirements of the 1940 Act as a result of our principal investing activities, our ability to operate our
business as contemplated would be impaired, our operating results would be adversely affected.
The 1940 Act and the
rules thereunder contain detailed parameters for the organization and operations of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions
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with affiliates, impose limitations on the issuance of debt and equity securities, prohibit the issuance of stock options, and impose certain governance requirements. We intend to conduct our
operations so that we will not be deemed to be an investment company under 1940 Act. However, if anything were to happen which would cause us to be deemed to be an investment company under the 1940 Act, requirements imposed by the 1940 Act,
including limitations on our capital structure, ability to transact business with affiliates and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and
arrangements between and among us and our subsidiary, FBR & Co., and materially adversely affect our business, financial condition and results of operations.
We are a holding company and are dependent on our subsidiaries for funds.
Since we are a holding company, our cash flow and consequent ability to pay dividends and satisfy our obligations under securities we issue are dependent upon the earnings of our subsidiaries and the
distribution of those earnings as dividends or loans or other payments by those subsidiaries to us. Our broker-dealer subsidiaries are subject to various capital adequacy requirements promulgated by the regulatory and other authorities of the
countries in which they operate. These regulatory rules may restrict our ability to withdraw capital from our subsidiaries by dividends, loans or other payments. Additionally, our ability to participate as an equity holder in any distribution of
assets of any subsidiary upon liquidation is generally subordinate to the claims of creditors of the subsidiary.
Our exposure to legal
liability is significant, and damages that we may be required to pay and the reputational harm that could result from legal action against us could materially adversely affect our businesses.
We face significant legal risks in our businesses and, in recent years, the volume of claims and amount of damages sought in litigation
and regulatory proceedings against financial institutions have been increasing. These risks include potential liability under securities or other laws for materially false or misleading statements made in connection with securities offerings and
other transactions, potential liability for fairness opinions and other advice we provide to participants in strategic transactions and disputes over the terms and conditions of complex trading arrangements. We are also subject to claims
arising from disputes with employees for alleged discrimination or harassment, among other things.
As a brokerage and
investment banking firm, we depend to a large extent on our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, it may be more damaging in our
business than in other businesses. Moreover, our role as advisor to our clients on important underwriting or M&A transactions involves complex analysis and the exercise of professional judgment, including rendering fairness opinions
in connection with mergers and other transactions. Therefore, our activities may subject us to the risk of significant legal liabilities to our clients and aggrieved third parties, including stockholders of our clients who could bring securities
class actions against us. Our investment banking engagements typically include broad indemnities from our clients and provisions to limit our exposure to legal claims relating to our services, but these provisions may not protect us or may not be
enforceable in all cases. Furthermore, there is no assurance that an investment banking client will be able to satisfy its indemnity or contribution obligations when due. As a result, we may incur significant legal and other expenses in defending
against litigation and may be required to pay substantial damages for settlements and adverse judgments. Substantial legal liability or significant regulatory action against us could have a material adverse effect on our results of operations or
cause us significant reputational harm, which could seriously harm our business and prospects. See Part I, Item 4, Litigation of this Form 10-K for additional information concerning litigation in which we are involved.
Our ability to use net capital loss carryovers to reduce our taxable income may be limited.
On October 22, 2009, as a result of the sale by Arlington Asset of all of the remaining shares of our common stock then beneficially
owned by it, we had an ownership change as defined in Internal Revenue Code
19
section 382. Section 382 limits tax deductions for net operating losses (NOL), net capital losses (NCL) and net unrealized built-in losses after there is a
substantial change in ownership in a corporations stock involving a 50 percentage point increase in ownership by 5% or larger stockholders over the relevant testing period.
Under the provisions of Section 13 of the Worker, Homeownership, and Business Act of 2009, enacted on November 6, 2009, we
elected to use a five year carryback period for the domestic federal NOL incurred in 2008. As a result, we do not have any domestic federal NOL carryover that would be subject to limitations of section 382. As of the end of 2011, we had NCL
carryovers and certain built-in losses that would be subject to an annual section 382 limitation.
The Section 382
limitation is equal to the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt rate applicable to the calendar month of the ownership change. In general, the long-term tax-exempt
rate is a rate determined monthly by the Internal Revenue Service that approximates the yield on a tax-exempt bond that would be equivalent to the market yield on long-term U.S. Treasury securities. The long-term tax-exempt rate for an
ownership change occurring in October 2009 was 4.48%. Any NCLs that exceed the Section 382 limitation in any year will continue to be allowed as carryforwards for the remainder of the carryforward period and such losses can be used to offset
taxable income for years within the carryforward period subject to the Section 382 limitation (and other applicable limitations) in each year. However, if the carryforward period for any NCL were to expire before that loss had been fully
utilized, the unused portion of that loss would be lost. The carryforward period for NCLs is five years from the year in which the losses giving rise to the NCL were incurred. Our use of new NOLs or NCLs arising after the date of the ownership
change would not be affected by the Section 382 limitation, unless another ownership change were to occur after those new losses arose.
Risks Related to Use of Estimates and Valuations
We make various estimates that
affect reported amounts and disclosures.
We make various estimates that affect reported amounts and disclosures.
Broadly, those estimates are used in measuring fair value of certain financial instruments, accounting for identifiable intangible assets, establishing provisions for potential losses that may arise from litigation, regulatory proceedings and tax
examinations, assessing our ability to realize deferred taxes and valuing equity-based compensation awards. Estimates are based on available information and judgment. Therefore, actual results could differ from our estimates and that difference
could have a material effect on our consolidated financial statements.
See Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies and Estimates and Note 2 to our consolidated financial statements in Part II, Item 8, of this Form 10-K for additional information
concerning our use of estimates and valuation methodologies.
Risks Related to Our Relationship with Crestview
Pursuant to the Amended and Restated Voting Agreement (as defined below) among Arlington Asset, FBR TRS Holdings, Crestview and us,
Crestview has the right to designate two representatives to serve on our board of directors and therefore has the ability to influence any action taken or recommended by our board of directors. If the interests of Crestview are in conflict with the
interests of our other stockholders, Crestviews ability to influence our board of directors could result in a conflict of interest for members of our board.
In connection with the Repurchase Agreement, we entered into the Amended and Restated Voting Agreement with Arlington Asset, FBR TRS Holdings and Crestview (the Amended and Restated Voting
Agreement) that provides Crestview, among other things, with the right to designate two representatives for election to our board of directors. Subject to certain conditions, Crestview also has the right to designate one
20
representative to serve on each of the committees of our board of directors, to the extent permitted by law and the applicable regulations of the NASDAQ Global Select Market (or, if not so
permitted, such designee(s) will have certain observation rights). Accordingly, Crestview may have the ability to influence any action taken or recommended by our board of directors. If the interests of Crestview are in conflict with the interests
of our other stockholders, the ability of Crestview to influence our board of directors could result in a conflict of interest for members of our board.
Crestview has certain registration rights with respect to the shares of our common stock owned by it and the exercise of these rights could affect the trading market for our common stock.
As of December 31, 2011, Crestview, directly and indirectly, beneficially owned approximately 19.4% of the
outstanding shares of our common stock, including stock options issued to them. We entered into a registration rights agreement with Crestview, dated as of July 20, 2006, with respect to the shares of our common stock beneficially owned by
Crestview. The registration rights agreement contains certain demand and piggyback registration rights.
If Crestview
exercises its registration rights with respect to some or all of its shares of our common stock, this could have an adverse effect on the market price of our common stock. Crestview could sell its stake in us to one or more third parties that may
not be favorable to our stockholders. In addition, the existence of these rights may make it more difficult to effect a business combination or increase the cost of a target business in the event that we are unable to complete a business combination
solely with cash, as the stockholders of a particular target business may be discouraged from entering into a business combination with us or will request a higher price for their securities as a result of these registration rights and the potential
future effect their exercise may have on the trading market for our common stock.
We may not be successful in capturing the benefit of
our ongoing strategic advisory relationship with an affiliate of Crestview which may impede our growth and negatively impact our operating results.
We have agreed, subject to the modification described below, to pay Crestview Advisors, L.L.C., an affiliate of Crestview, a $1.0 million annual strategic advisory fee and reimburse Crestview Advisors,
L.L.C. for reasonable out-of-pocket expenses in exchange for ongoing strategic advice and assistance. This fee is payable for as long as Crestview beneficially owns at least 50% of the shares of our common stock that the Crestview affiliates
purchased in our 2006 private offering. In September 2008, we granted Crestview Advisors, L.L.C. options to purchase 502,268 shares of our common stock at a price of $5.30 per share in lieu of cash payments for the strategic advisory fee for the
period from October 1, 2008 through December 31, 2009. In June 2010, the Company and Crestview agreed to amend the professional services agreement to allow Crestview the ability to elect to receive a portion of their fee in restricted
stock and/or options to purchase shares of the Companys common stock. Based on Crestviews election, in June 2011 and 2010, the Company issued 168,067 and 153,846, respectively, such options to Crestview Advisors, L.L.C. valued at $0.2
million. The remaining $0.8 million of the 2011 and 2010 strategic advisory fee will be payable in cash. Crestview Advisors, L.L.C. is not required to provide specified services to us or our affiliates, and we cannot assure you that this
agreement will result in increased opportunities for any of our businesses or in the establishment of new relationships with potential clients or investors. To the extent that we do not capture the anticipated benefit of these services, our payment
obligations under this agreement may impede our growth and negatively impact our operating results.
Risks Related to Our
Industry
Significantly expanded corporate governance and public disclosure requirements may result in fewer initial public
offerings and distract existing public companies from engaging in capital market transactions which may reduce the number of investment banking opportunities available to pursue.
Highly-publicized financial scandals in recent years have led to investor concerns over the integrity of the U.S. financial markets, and
have prompted the United States Congress, the SEC, the NYSE and NASDAQ to
21
significantly expand corporate governance and public disclosure requirements. To the extent that private companies, in order to avoid becoming subject to these new requirements, decide to forgo
initial public offerings, our equity underwriting business may be adversely affected. In addition, provisions of the Sarbanes-Oxley Act of 2002 and the corporate governance rules imposed by self-regulatory organizations have diverted many
companies attention away from capital market transactions, including securities offerings and acquisition and disposition transactions. In particular, companies that are or are planning to be public are incurring significant expenses in
complying with the SEC and accounting standards relating to internal control over financial reporting, and companies that disclose material weaknesses in such controls under the new standards may have greater difficulty accessing the capital
markets. These factors, in addition to adopted or proposed accounting and disclosure changes, may have an adverse effect on our business.
Financial services firms have been subject to increased scrutiny over the last several years, increasing the risk of financial liability and
reputational harm resulting from adverse regulatory actions.
As a participant in the financial services industry, we
are subject to extensive regulation under federal and state laws in the U.S. and under the laws of other countries in which we do business. We are also regulated by a number of self-regulatory organizations. The industry has experienced increased
scrutiny from a variety of regulators, including the SEC, NYSE, FINRA, and state attorneys general. Penalties and fines sought by regulatory authorities have increased substantially over the last several years. This regulatory and enforcement
environment has created uncertainty with respect to a number of transactions that had historically been entered into by financial services firms and that were generally believed to be permissible and appropriate. We may be adversely affected by
changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. The specific impact of the Dodd-Frank Act on our businesses, our clients and the markets in which we operate
will depend on the manner in which the relevant agencies develop and implement the required rules and the reaction of market participants to these regulatory developments over the next several years. We also may be adversely affected as a result of
new or revised legislation or regulations imposed by the SEC, other United States or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets, including FINRA. Among other things, we could be
fined, prohibited from engaging in some of our business activities or subject to limitations or conditions on our business activities. Substantial legal liability or significant regulatory action against us could have material adverse financial
effects or cause significant reputational harm to us, which could seriously harm our business prospects.
In addition,
financial services firms are subject to numerous conflicts of interests or perceived conflicts. The SEC and other federal and state regulators have increased their scrutiny of potential conflicts of interest. We have adopted various policies,
controls and procedures to address or limit actual or perceived conflicts and regularly seek to review and update our policies, controls and procedures. However, appropriately dealing with conflicts of interest is complex and difficult and our
reputation could be damaged if we fail, or appear to fail, to deal appropriately with conflicts of interest. Our policies and procedures to address or limit actual or perceived conflicts may also result in increased costs, additional operational
personnel and increased regulatory risk. Failure to adhere to these policies and procedures may result in regulatory sanctions or client litigation. For example, the research areas of investment banks have been and remain the subject of heightened
regulatory scrutiny which has led to increased restrictions on the interaction between equity research analysts and investment banking personnel at securities firms.
Employee misconduct could harm us and is difficult to detect and deter.
Our reputation is critical in maintaining our relationship with clients, investors, regulators and the general public and is a key focus in our risk management efforts. In recent years, there have been a
number of highly publicized cases involving fraud, conflicts of interest or other misconduct by employees in the financial services industry, and we run the risk that employee misconduct could occur at our company. For example, misconduct by
employees could involve the improper use or disclosure of confidential information, which could result in
22
regulatory sanctions and serious reputational or financial harm. Misconduct by employees could include binding us to transactions that exceed authorized limits or present unacceptable risks, or
hiding from us unauthorized or unsuccessful activities, which, in either case, may result in unknown and unmanaged risks or losses. Employee misconduct could also involve the improper use or disclosure of confidential information, which could result
in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. As a result, we could
suffer significant reputational harm for any misconduct by our employee. In addition, in certain circumstances our reputation could be damaged by activities of our clients or of hedge funds or other entities in which we invest, over which we have
little or no control.
I
TEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
Our principal
executive offices are located at Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209. We carry out all aspects of our operations related to our capital markets, asset management and principal investing segments at that location.
We lease with our affiliates six floors of our headquarters building in Arlington, Virginia. We also lease office space with our affiliates in the following locations where we conduct certain portions of our operations as indicated: Boston,
Massachusetts (capital markets and asset management); Dallas, Texas (capital markets); Houston, Texas (capital markets); Irvine, California (capital markets); New York, New York (capital markets); and San Francisco, California (capital
markets). We believe that the present facilities, together with current options to extend lease terms and occupy additional space, are adequate for our current and presently projected needs.
ITEM 3.
|
LEGAL PROCEEDINGS
|
As of
December 31, 2011, except as described below, the Company was neither a defendant nor plaintiff in any lawsuits or arbitrations nor involved in any governmental or self-regulatory organization matters that are expected to have a material
adverse effect on its financial condition, results of operations or liquidity. The Company has been named as a defendant in a small number of civil lawsuits relating to its various businesses. In addition, the Company is subject to various reviews,
examinations, investigations and other inquiries by governmental agencies and self regulatory organizations. There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on the Companys
financial condition, results of operations, or liquidity in a future period. However, based on managements review with counsel, resolution of these matters is not expected to have a material adverse effect on the Companys financial
condition, results of operations or liquidity.
Many aspects of the Companys 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. FBRCM has been named as a defendant in a small number of securities claims involving investment banking clients of
FBRCM as a result of FBRCMs role as an underwriter. In these cases, the underwriting agreement provides, subject to certain conditions, that the investment banking client is required to indemnify FBRCM against certain claims or liabilities,
including claims or liabilities under the Securities Act of 1933, as amended (the Securities Act), or contribute to payments which FBRCM is required to make as a result of the litigation. There can be no assurance that such
indemnification or contribution will ultimately be available to the Company or that an investment banking client will be able to satisfy its indemnity or contribution obligations when due.
23
In May 2008, the lead plaintiff in a previously filed and consolidated
action filed an amended consolidated class action complaint that, for the first time, named Friedman, Billings, Ramsey & Co., Inc. (now FBRCM) and eight other underwriters as defendants. The lawsuit, styled In Re Thornburg Mortgage, Inc.
Securities Litigation and pending in the United States District Court for the District of New Mexico, was originally filed in August 2007 against Thornburg Mortgage, Inc. (TMI), and certain of its officers and directors, alleging
material misrepresentations and omissions about, inter alia, the financial position of TMI. The amended complaint included claims under Sections 11 and 12 of the Securities Act against nine underwriters relating to five separate offerings (May
2007, June 2007, September 2007 and two offerings in January 2008). The allegations against FBRCM related only to its role as underwriter or member of the syndicate that underwrote TMIs total of three offerings in September 2007 and
January 2008each of which occurred after the filing of the original complaintwith an aggregate offering price of approximately $818 million. The plaintiffs sought restitution, unspecified compensatory damages and reimbursement of certain
costs and expenses. Although FBRCM is contractually entitled to be indemnified by TMI in connection with this lawsuit, TMI filed for bankruptcy on May 1, 2009 and this likely will decrease or eliminate the value of the indemnity that FBRCM
receives from TMI. On June 2, 2011 the Court granted FBRCMs motion to dismiss the consolidated class action complaint as to FBRCM and then entered final judgment for FBRCM on July 25, 2011. Plaintiffs filed a timely notice of
appeal to the 10
th
Circuit Court of Appeals, challenging
the District Courts findings; briefing on the appeal is currently expected to be complete in June 2012.
FBRCM has been
named as a defendant in a case relating to its role as an underwriter in residential mortgage-backed securities (RMBS) offerings. FBRCM is among dozens of underwriter, securitization trust and depositor defendants in an individual action
filed by Cambridge Place Investment Management, Inc. in Massachusetts state court (Cambridge Place Investment Management Inc. v. Morgan Stanley et al). Cambridges complaint relates to the more than $2.4 billion in RMBS purchases it made in
numerous underwritten offerings (of which the claims concerning FBRCM are limited to Cambridges purchases of a combined $22 million of RMBS in two separate offerings) and alleges that each of the defendants made misrepresentations and
omissions relating to, among other things, loan-to-value ratios, appraisals, and underwriting standards, in violation of state securities laws. FBRCM has contractual indemnification claims against the RMBS issuers and contribution claims
against co-underwriters involved in the two offerings for which claims have been made against it.
FBRCM has been named a
defendant in the putative class action lawsuit MHC Mutual Conversion Fund, L.P. v. United Western Bancorp, Inc., et al. pending in the United States District Court for the District of Colorado. The complaint, filed in March 2011 against United
Western Bancorp, Inc. (the Bank), its officers and directors, underwriters and outside auditors, alleges material misrepresentations and omissions in the registration statement and prospectus issued in connection with the Banks
September 2009 offering. The complaint alleges claims under Sections 11 and 12 of the Securities Act against the lead underwriter of the offering and FBRCM as a member of the underwriting syndicate. Although FBRCM is contractually entitled to be
indemnified by the Bank in connection with this lawsuit, the Banks negative financial condition will decrease or eliminate the value of the indemnity that FBRCM receives from the Bank.
FBRCM has been named a defendant in four putative class action lawsuits all alleging substantially identical claims
against Imperial Holdings, Inc. (Imperial), its officers and directors and underwriters for material misrepresentations and omissions in the registration statement and prospectus issued in connection with Imperials February 2011
initial public offering. The cases of Martin J. Fuller v. Imperial Holdings, Inc., et al. and City of Roseville Employees Retirement System v. Imperial Holdings, et al, filed in the Circuit Court of the 15
th
Judicial Circuit in and for Palm Beach County, Florida, have been
removed to the United States District Court, Southern District of Florida. Subsequently, two additional complaints, alleging substantially identical claims, have been filed in the Southern District of Florida (Sauer v. Imperial Holdings, et al. and
Pondick v. Imperial Holdings, et al.) The complaints, alleging claims under Sections 11 and 12 of the Securities Act against the lead underwriters of the offering will likely be consolidated. Imperial has assumed its contractual obligation
to indemnify the underwriters.
24
Although these cases involving FBRCM are at a preliminary stage, based on managements
review with counsel and present information currently known by management, resolution of such matters is not expected to have a material effect on the Companys financial condition, results of operations, or liquidity.
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 and actions by government agencies and self regulatory organizations 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 to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future
litigation against the Company could materially affect its financial condition, operating results and liquidity.
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
25
PART II
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Price Range of Common Stock
Our common stock is listed on The NASDAQ Global Select Market
SM
under the symbol FBRC. As of February 29, 2012, there were 55,437,873 shares of our common stock outstanding and approximately 27 holders of record. The table below shows the high and
low sales prices for our common stock on The NASDAQ Global Select Market
SM
for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Price Range of
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
Year Ended December 31, 2011:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
3.09
|
|
|
$
|
1.87
|
|
Third Quarter
|
|
|
3.45
|
|
|
|
2.27
|
|
Second Quarter
|
|
|
3.88
|
|
|
|
3.11
|
|
First Quarter
|
|
|
4.13
|
|
|
|
3.49
|
|
|
|
|
|
Price Range of
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
Year Ended December 31, 2010:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
4.10
|
|
|
$
|
3.14
|
|
Third Quarter
|
|
|
3.76
|
|
|
|
3.13
|
|
Second Quarter
|
|
|
4.80
|
|
|
|
3.33
|
|
First Quarter
|
|
|
6.65
|
|
|
|
4.43
|
|
Dividends
Our board of directors has not authorized and we have not declared or paid any cash dividends on our common stock. We do not anticipate that we will pay any cash dividends on our common stock in the
foreseeable future as we currently intend to retain all available funds and any future earnings to fund the development and growth of our business and, where appropriate, repurchase shares.
26
Share Repurchases
During 2011, we repurchased 2.1 million shares of our common stock in open market transactions at weighted average share prices of $3.48 per share, for a total cost of $7.3 million. During 2011, we
completed two tender offers to repurchase shares of our stock. Pursuant to these modified Dutch auction tender offers, we repurchased 6.1 million shares of our common stock at weighted average share prices of $2.55 per share for a
total cost, including transaction costs, of $15.9 million. The following table provides information on the Companys share repurchases during the fourth quarter of 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
Shares Purchased
|
|
|
Average Price Paid
per Share
|
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
(1)
|
|
|
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or
Programs
|
|
October 1 to October 31, 2011
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
3,316,933
|
|
November 1 to November 30, 2011
|
|
|
192,212
|
|
|
|
2.06
|
|
|
|
192,212
|
|
|
|
3,124,721
|
|
December 1 to December 31, 2011
|
|
|
4,682
|
(2)
|
|
|
2.00
|
|
|
|
|
|
|
|
3,124,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
196,894
|
|
|
$
|
2.06
|
|
|
|
192,212
|
|
|
|
3,124,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
On July 27, 2010, the Board of Directors of the Company approved a 5,000,000 share increase to the number shares of common stock that the Company is authorized to
repurchase. This directive increased the total number of shares authorized to repurchase to 5,650,500 shares of which 3,124,721 remains as authorized to be repurchased.
|
(2)
|
In December 2011, the Company announced a tender offer to repurchase up to 5,000,000 shares of its stock at a price between $1.80 and $2.00. Pursuant to this tender
offer, the Company repurchased 4,682 shares of its common stock at a share of $2.00 per share through a modified Dutch auction.
|
27
ITEM 6.
|
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Consolidated Statements of Operations (dollars in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital raising
|
|
$
|
42,862
|
|
|
$
|
98,768
|
|
|
$
|
121,007
|
|
|
$
|
76,377
|
|
|
$
|
289,545
|
|
Advisory
|
|
|
15,284
|
|
|
|
19,505
|
|
|
|
17,716
|
|
|
|
20,573
|
|
|
|
34,063
|
|
Institutional brokerage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
|
18,081
|
|
|
|
22,227
|
|
|
|
40,271
|
|
|
|
20,261
|
|
|
|
10,152
|
|
Agency commissions
|
|
|
60,376
|
|
|
|
77,864
|
|
|
|
92,864
|
|
|
|
118,314
|
|
|
|
104,633
|
|
Asset management fees
|
|
|
14,941
|
|
|
|
14,097
|
|
|
|
13,244
|
|
|
|
15,883
|
|
|
|
23,950
|
|
Net investment (loss) income
|
|
|
(9,696
|
)
|
|
|
9,218
|
|
|
|
1,577
|
|
|
|
(81,335
|
)
|
|
|
(4,497
|
)
|
Interest, dividends & other
|
|
|
5,303
|
|
|
|
4,908
|
|
|
|
5,806
|
|
|
|
24,292
|
|
|
|
27,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
147,151
|
|
|
|
246,587
|
|
|
|
292,485
|
|
|
|
194,365
|
|
|
|
484,896
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
252
|
|
|
|
12,457
|
|
|
|
5,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue, net of interest expense
|
|
|
147,151
|
|
|
|
246,587
|
|
|
|
292,233
|
|
|
|
181,908
|
|
|
|
479,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
106,014
|
|
|
|
182,430
|
|
|
|
193,017
|
|
|
|
227,114
|
|
|
|
287,752
|
|
Professional services
|
|
|
12,202
|
|
|
|
18,529
|
|
|
|
23,971
|
|
|
|
34,895
|
|
|
|
45,303
|
|
Business development
|
|
|
12,066
|
|
|
|
14,936
|
|
|
|
13,770
|
|
|
|
30,057
|
|
|
|
37,356
|
|
Clearing and brokerage fees
|
|
|
11,928
|
|
|
|
13,129
|
|
|
|
13,945
|
|
|
|
14,010
|
|
|
|
12,373
|
|
Occupancy and equipment
|
|
|
19,936
|
|
|
|
25,595
|
|
|
|
33,655
|
|
|
|
33,244
|
|
|
|
33,197
|
|
Communications
|
|
|
16,999
|
|
|
|
20,067
|
|
|
|
21,304
|
|
|
|
24,183
|
|
|
|
22,434
|
|
Impairment of goodwill and intangible assets
|
|
|
5,882
|
|
|
|
|
|
|
|
5,350
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
12,003
|
|
|
|
13,563
|
|
|
|
16,210
|
|
|
|
16,625
|
|
|
|
15,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
197,030
|
|
|
|
288,249
|
|
|
|
321,222
|
|
|
|
380,128
|
|
|
|
454,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(49,879
|
)
|
|
|
(41,662
|
)
|
|
|
(28,989
|
)
|
|
|
(198,220
|
)
|
|
|
25,276
|
|
Income tax (benefit) provision
|
|
|
(230
|
)
|
|
|
(4,104
|
)
|
|
|
(1,338
|
)
|
|
|
(3,490
|
)
|
|
|
20,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(49,649
|
)
|
|
$
|
(37,558
|
)
|
|
$
|
(27,651
|
)
|
|
$
|
(194,730
|
)
|
|
$
|
5,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share
|
|
$
|
(0.82
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(3.09
|
)
|
|
$
|
0.08
|
|
Weighted-average shares (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
60,841
|
|
|
|
63,546
|
|
|
|
60,094
|
|
|
|
63,056
|
|
|
|
64,123
|
|
Diluted
|
|
|
60,841
|
|
|
|
63,546
|
|
|
|
60,094
|
|
|
|
63,056
|
|
|
|
64,187
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Consolidated Balance Sheet Data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
135,792
|
|
|
$
|
236,077
|
|
|
$
|
275,506
|
|
|
$
|
207,801
|
|
|
$
|
383,558
|
|
Mortgage-backed securities, at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
454,339
|
|
|
|
|
|
Financial instruments owned, at fair value
|
|
|
100,634
|
|
|
|
86,400
|
|
|
|
104,124
|
|
|
|
31,209
|
|
|
|
57,496
|
|
Other investment, at cost
|
|
|
25,744
|
|
|
|
45,224
|
|
|
|
33,974
|
|
|
|
27,919
|
|
|
|
45,637
|
|
Due from brokers, dealers, and clearing organizations
|
|
|
6,048
|
|
|
|
15,463
|
|
|
|
96,477
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
29,865
|
|
|
|
48,303
|
|
|
|
46,244
|
|
|
|
79,101
|
|
|
|
122,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
298,083
|
|
|
$
|
431,467
|
|
|
$
|
556,325
|
|
|
$
|
800,369
|
|
|
$
|
608,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased, at fair value
|
|
$
|
35,496
|
|
|
$
|
55,444
|
|
|
$
|
51,669
|
|
|
$
|
8,325
|
|
|
$
|
206
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416,037
|
|
|
|
|
|
Accounts payable and other liabilities
|
|
|
31,040
|
|
|
|
77,209
|
|
|
|
94,989
|
|
|
|
69,271
|
|
|
|
94,274
|
|
Due to brokers, dealers, and clearing organizations
|
|
|
6,250
|
|
|
|
7,323
|
|
|
|
90,168
|
|
|
|
3,009
|
|
|
|
7,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
72,786
|
|
|
|
139,976
|
|
|
|
236,826
|
|
|
|
496,642
|
|
|
|
101,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
225,297
|
|
|
|
291,491
|
|
|
|
319,499
|
|
|
|
303,727
|
|
|
|
506,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
298,083
|
|
|
$
|
431,467
|
|
|
$
|
556,325
|
|
|
$
|
800,369
|
|
|
$
|
608,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Statistical Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total employees
(1)
|
|
|
295
|
|
|
|
501
|
|
|
|
595
|
|
|
|
568
|
|
|
|
758
|
|
Net revenue per employee
(2)
|
|
$
|
362
|
|
|
$
|
450
|
|
|
$
|
503
|
|
|
$
|
274
|
|
|
$
|
657
|
|
Compensation and benefits expense as a
percentage of net revenues
|
|
|
72
|
%
|
|
|
74
|
%
|
|
|
66
|
%
|
|
|
125
|
%
|
|
|
60
|
%
|
(1)
|
As of end of the period reported
|
(2)
|
Based on average of employees as of the end of each quarter.
|
29
ITEM 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
We are a full-service investment banking, institutional brokerage
and asset management firm with a customer-focused and innovative approach to meeting our clients needs. In addition, we make principal investments, including merchant banking investments, with our own capital. We were formed in June 2006, and
we completed the initial public offering of our common stock in June 2007. Since the founding of certain predecessor companies, we have grown from a boutique investment bank with primary expertise in financial institutions into a full-service U.S.
investment bank for middle-market companies.
Through our principal operating subsidiaries, FBR Capital Markets & Co.
(FBRCM) and FBR Fund Advisers, Inc. (FBR Fund Advisers), an SEC-registered investment adviser, we have focused our business on providing:
|
|
|
capital raising services, including underwriting and placement of public and private equity and debt;
|
|
|
|
financial advisory services, including merger and acquisition (M&A), advisory, restructuring, liability management, recapitalization
and strategic alternative analysis;
|
|
|
|
institutional sales and trading services focused on equity, equity-linked securities, high-yield bonds, senior debt and bank loans;
|
|
|
|
asset management services through a family of mutual funds; and
|
|
|
|
principal investment returns to our shareholders through merchant banking and other direct investments that we make utilizing our own capital.
|
We focus our capital markets business (investment banking and institutional brokerage) in the following
industry sectorsconsumer, diversified industrials, energy and natural resources, financial institutions, insurance, real estate, and technology, media and telecommunications (TMT).
On the asset management side of our business, through FBR Fund Advisers, we provide clients with a range of investment choices through
The FBR Funds, a family of mutual funds. As of December 31, 2011, we had $1.7 billion in mutual fund assets under management.
Our business is comprised of three separate segments: capital markets, which includes investment banking and institutional brokerage (including institutional sales and trading and research); asset
management; and principal investing (including merchant banking).
Business Environment
The capital markets have been affected by the global economic challenges facing the U.S. and many nations in the Eurozone and instability
in investor confidence. Weak flows into equity mutual funds, a reticence among investors to put capital at risk through new investments, and a decrease in trading volumes for both equity and fixed income securities resulted in high volatility in the
capital markets and significantly diminished volume of equity capital markets activity in the second half of 2011. Despite these challenges, the beginning of 2012 has seen a recovery in U.S. equity markets, and issuers demand for raising
capital continues to grow as evidenced by an increase in registrations for public equity offerings. There remains a fair amount of uncertainty in the timing and execution of these transactions in future periods, as the outlook for the remainder of
2012 is still unclear and marked by significant risks, including; high levels of unemployment, the overhang of foreclosed and unsold homes, world-wide sovereign debt challenges and political instability in many regions around the world.
30
Executive Summary
For the year ended December 31, 2011, our total net revenues were $147.2 million with a net loss of $49.6 million, compared to total net revenues of $246.6 million and a net loss of $37.6 million for
the year ended December 31, 2010. For the year ended December 31, 2009, our total revenues, net of interest expense, were $292.2 million and our net loss was $27.7 million.
The increase in our net loss in 2011 as compared to 2010 is primarily the result of reduced revenues from investment banking and
institutional brokerage activities and the net investment loss recognized in our principal investment segment. The impact of these reduced revenues was partially offset by steps the Company has taken to reduce fixed costs and changes made to the
Companys variable compensation programs. The reduction in our revenues during 2011 reflects the difficult domestic equity market environment, particularly during the second half of the year when our total revenues decreased 52% as compared to
the first half of 2011. In response to these conditions, in the fourth quarter of 2011 we implemented a restructuring plan intended to reduce our fixed expenses by 35%, principally through headcount reduction. Our 2011 net loss includes $4.1 million
of severance and restructuring-related costs and a $5.9 million goodwill impairment charge recorded as a result of the Companys annual assessment of goodwill. This impairment was the result of various factors, including the significant decline
in revenues during the second half of 2011, the restructuring plan noted above and the length of time the Companys market capitalization has been below its carrying value.
While we have made significant changes to our headcount over the past two years, we do not believe that these actions have changed the
fundamental composition or strength of our franchise. Rather, we believe that the changes to our cost structure better position the Company to perform in the different types of markets that we have experienced since the financial crisis began in
2008. In addition, we continue to maintain a strong liquid and transparent balance sheet with high levels of capital. As of December 31, 2011 we had $136 million in cash and no debt.
The following is an analysis of our operating results by segment for the years ended December 31, 2011, 2010 and 2009.
31
Capital Markets
Our capital markets segment includes investment banking and institutional sales, trading and research. These business units operate as a
single integrated segment to deliver capital raising, advisory and sales and trading services to corporate and institutional clients. Our investment banking and institutional brokerage businesses are focused on the consumer, diversified industrials,
energy and natural resources, financial institutions, insurance, real estate and TMT sectors. By their nature, our capital markets business activities are highly competitive and are subject to market conditions as well as to the conditions affecting
the companies and markets in our areas of focus. As a result, our capital markets revenues and profits are subject to significant volatility from period to period. The following table provides a summary of our results within the capital markets
segment (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Revenues, net of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
58,146
|
|
|
$
|
118,273
|
|
|
$
|
138,723
|
|
Institutional brokerage
|
|
|
78,457
|
|
|
|
100,091
|
|
|
|
132,629
|
|
Net interest income, dividends, and other
|
|
|
3,237
|
|
|
|
2,102
|
|
|
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
139,840
|
|
|
|
220,466
|
|
|
|
272,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
40,766
|
|
|
|
95,429
|
|
|
|
116,159
|
|
Fixed
|
|
|
135,049
|
|
|
|
173,354
|
|
|
|
176,103
|
|
Impairment of goodwill
|
|
|
5,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(1)
|
|
|
181,697
|
|
|
|
268,783
|
|
|
|
292,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss
|
|
$
|
(41,857
|
)
|
|
$
|
(48,317
|
)
|
|
$
|
(19,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the years ended December 31, 2011, 2010, and 2009, total operating expenses includes the allocation of corporate overhead costs of $33,778, $46,305, and
$55,213, respectively.
|
The pre-tax loss from our capital markets segment decreased to $41.9 million in 2011
from $48.3 million in 2010 despite a decrease in revenues of $80.6 million or 37% in 2011. This decrease in pre-tax loss was attributable to a decrease in both variable and fixed costs, partially offset by the goodwill impairment charge in 2011 that
isnt comparable to 2010. Variable expenses decreased $54.7 million, or 57.3%, in 2011 reflecting a decrease in variable compensation and costs related to investment banking transactions. The decrease in variable compensation was attributable
to a reduction in employees since the end of the third quarter of 2010, changes made to our variable compensation programs in 2011 and the reduction in net revenues as compared to 2010. The decrease in costs related to investment banking
transactions in 2011 was directly related to the decrease in transaction volumes in 2011. Fixed expenses decreased $38.3 million, or 22.1%, in 2011. This decrease was attributable to both the reduction in employees noted above and the impact of
other non-compensation cost reduction initiatives.
Investment banking revenues decreased $60.2 million to $58.1 million in
2011 from $118.3 million in 2010. The lower volume of capital raising revenue for 2011 is representative of an industry-wide decrease in equity capital raising activity due to continued economic challenges affecting investor confidence and
volatility in the capital markets. The results in 2010 include fees earned from a private placement that in-total raised in excess of $1.2 billion of equity capital. There were no comparable transactions in 2011.
Our institutional brokerage revenues decreased $21.6 million to $78.5 million in 2011 from $100.1 million in 2010. This decrease was
primarily a result of a decrease in overall industry-wide equity trading volume during 2011 and a decrease in principal transaction revenues from our convertible and credit desks.
32
The pre-tax loss from our capital markets segment increased $28.7 million to $48.3 million
in 2010 from $19.6 million in 2009. This increase was primarily attributable to a decrease in institutional brokerage and investment banking revenues offset partially by a decrease in both variable and fixed costs. Institutional brokerage sales and
trading revenues decreased $32.5 million as a result of reduced trading volumes industry-wide in equity and convertible markets during 2010.
Our investment banking revenues decreased $20.4 million to $118.3 million in 2010 from $138.7 million in 2009. This decrease was primarily attributable to our completion of a lower volume of sole-managed
private placements in 2010 as compared to 2009. Our results for 2010 included the realization of $16.1 million of contingent revenue related to two capital raising transactions completed in 2009. During 2009, we completed three significant
sole-managed private placement transactions raising approximately $2.0 billion for our clients associated with the recapitalization of the banking industry. While banking recapitalization transactions decreased during 2010, we partially offset this
decrease by completing private placement transactions in the airline leasing, energy and diversified industrials industries.
Variable expenses in our capital markets segment decreased $20.7 million, or 17.8% in 2010, as a result of a comparable decrease in net
revenues. This decrease was comprised primarily of a decrease in variable compensation of $21.4 million as well as clearing costs related to the decrease in trading volume. This decrease was partially offset by an increase in investment banking
transaction costs due to the nature of certain transactions executed during the current year. Fixed expenses decreased $2.7 million, or 1.6% in 2010, which was attributable to a reduction in non-compensation costs of $12.6 million resulting from
cost reduction initiatives including a decrease in leased office space and other costs directly attributable to the number of employees. These decreases were partially offset by severance charges of $6.0 million and a $1.1 million impairment charge
related to leasehold improvements for office space that had been subleased to a third party.
Asset Management
Our asset management segment consists primarily of the management of The FBR Funds, a family of mutual funds. Our
mutual fund assets under management increased 6.3% to $1.7 billion at December 31, 2011from $1.6 billion at December 31, 2010. Our mutual fund assets under management increased 23.1% to $1.6 billion at December 31, 2010 from $1.3
billion at December 31, 2009. The increase in 2011of mutual fund assets under management is primarily the result of net inflows of $62.7 million, as well as a 2% increase in market value. The following tables provide a summary of our results
within the asset management segment (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Revenues, net of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees
|
|
$
|
14,941
|
|
|
$
|
14,097
|
|
|
$
|
13,244
|
|
Net interest income and other
|
|
|
(14
|
)
|
|
|
88
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
14,927
|
|
|
|
14,185
|
|
|
|
13,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
6,596
|
|
|
|
7,118
|
|
|
|
8,839
|
|
Fixed
|
|
|
8,373
|
|
|
|
9,908
|
|
|
|
13,027
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
5,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(1)
|
|
|
14,969
|
|
|
|
17,026
|
|
|
|
27,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss
|
|
$
|
(42
|
)
|
|
$
|
(2,841
|
)
|
|
$
|
(13,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the years ended December 31, 2011, 2010, and 2009, total operating expenses includes the allocation of corporate overhead costs of $1,494, $2,772, and $2,703,
respectively.
|
33
The pre-tax loss from our asset management segment decreased to $0.04 million in 2011 from
$2.8 million in 2010. The decrease in pre-tax loss was attributable to an increase in asset management fees as a result of an increase in our average assets under management during 2011 as compared to 2010 as well as a decrease in fixed
expenses due to compensation and non-compensation cost reduction initiatives undertaken during the second half of 2010.
The
pre-tax loss from our asset management segment decreased to $2.8 million in 2010 compared to a pre-tax loss of $13.4 million in 2009. This decrease was primarily attributable to a $5.4 million impairment of an intangible asset related to the
management contract for a money market mutual fund in 2009. The decrease in pre-tax loss was also a result of decreases in both fixed and variable expenses, as well as increased asset management fees. The decreases in fixed and variable expenses
were the result of cost reduction initiatives, which included the decision to terminate a sub-advisory agreement related to the FBR Focus Fund in August 2009 and a reduction in employees associated with the elimination of our private client group in
May 2009. Fixed expenses for 2010 include $0.4 million of severance. The increase in asset management fees was a direct result of an increase in our average assets under management for year ended December 31, 2010 compared to the prior year.
The following provides details relating to our mutual fund assets under management (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
Equity
|
|
$
|
1,526.1
|
|
|
$
|
1,470.6
|
|
Balanced and fixed income
|
|
|
158.7
|
|
|
|
112.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,684.8
|
|
|
$
|
1,582.7
|
|
|
|
|
|
|
|
|
|
|
Our asset management revenues and net income (loss) are subject to fluctuations due to a variety of
factors that are unpredictable, including the overall condition of the economy and the securities markets as a whole. These conditions can have a material effect on the inflows and outflows of assets under management, and the performance of our
asset management funds.
Principal Investing
As of December 31, 2011, our principal investing activity consists of investments in merchant banking and other equity investments
and investment funds. The following tables provide a summary of our results within the principal investing segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Revenues, net of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
$
|
(9,665
|
)
|
|
$
|
9,162
|
|
|
$
|
1,577
|
|
Net interest income, dividends, and other
|
|
|
2,049
|
|
|
|
2,774
|
|
|
|
4,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(7,616
|
)
|
|
|
11,936
|
|
|
|
5,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
6
|
|
|
|
276
|
|
|
|
109
|
|
Fixed
|
|
|
358
|
|
|
|
2,164
|
|
|
|
1,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
(1)
|
|
|
364
|
|
|
|
2,440
|
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income
|
|
$
|
(7,980
|
)
|
|
$
|
9,496
|
|
|
$
|
4,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Substantially all of the operating expense for the years ending December 31, 2011, 2010, and 2009 represent allocated corporate overhead and other allocated costs.
|
34
The following table details the components of net investment income/loss for the periods
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Income (loss) on merchant banking and other equity investments and investment funds
|
|
$
|
(2,104
|
)
|
|
$
|
9,162
|
|
|
$
|
3,079
|
|
Other-than-temporary impairment losses on merchant banking and other equity investments
|
|
|
(7,561
|
)
|
|
|
|
|
|
|
|
|
Realized loss on sales of mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
(1,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9,665
|
)
|
|
$
|
9,162
|
|
|
$
|
1,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pre-tax loss from our principal investing segment was $8.0 million in 2011 compared to pre-tax income
of $9.5 million in 2010. The pre-tax loss in 2011 was primarily attributable to other-than-temporary impairment losses of $7.6 million related to two equity investments recognized in the second and fourth quarters of 2011 due to the severity of the
decline in fair value of these investments below our cost basis. In addition, our 2011 results include $5.9 million in net unrealized losses on trading securities held for investment purposes, offset partially by $3.8 million in net realized gains
from the sale of several equity investments and settlement of derivatives held for investment purposes in 2011. Net interest income, dividends and other also decreased $0.7 million during 2011 due to a reduction in dividend income as compared to
2010.
The pre-tax income from our principal investing activities increased to $9.5 million for 2010 as compared to $4.0
million in 2009. This increase is primarily attributable to $9.2 million of net investment income during 2010 as compared to $1.6 million of net investment income for 2009, partially offset by a decrease in net interest income and dividends. For the
year ended December 31, 2010, our net investment income consisted primarily of realized gains from the sales of equity investments.
Investments
The total value of our investment portfolio was $52.1 million
as of December 31, 2011. Of this total, $25.7 million was held in non-public investments recorded at cost associated with our merchant banking portfolio, $25.3 million was held in marketable equity securities and $1.1 million was held in
investment funds.
The following table provides additional detail regarding our merchant banking and other long-term
investments as of December 31, 2011 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Number
of Shares
|
|
|
Carrying Value/
Fair Value
|
|
Investments, at cost:
|
|
|
|
|
|
|
|
|
NBH Holdings Corp.
(1)
|
|
|
1,049,906
|
|
|
$
|
20,472
|
|
North American Financial Holdings, Inc.
(1)
|
|
|
257,499
|
|
|
|
4,955
|
|
Institutional Financial Markets, Inc. (Note)
|
|
|
n/a
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
25,744
|
|
Marketable equity securities, at fair value
|
|
|
|
|
|
|
25,272
|
|
Investment funds, at fair value
|
|
|
|
|
|
|
1,107
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
$
|
52,123
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of December 31, 2011, these shares represent investments in non-public securities in which the sale of these shares was subject to restrictive covenants.
|
35
Results of Operations
Revenues
Our revenues consist primarily of capital raising and
advisory fees in investment banking; agency commissions, principal transactions, including trading gains and losses, in institutional brokerage; base management fees and 12b-1 fees in asset management, and with respect to principal investing
activities, net investment income, including realized gains or losses, and dividends from merchant banking investments, earnings from investment funds, and net interest income from principal investing activities.
Revenue from capital raising transactions is substantially dependent on the market for public and private offerings of equity and debt
securities within the industries in which we focus our efforts. Agency commissions are dependent on the level of overall market trading volume and penetration of our institutional client base by our research, sales, and trading staff. Principal
brokerage transactions are dependent on these same factors and on trading volume and spreads in the securities of such companies; net trading gains and losses are dependent on the market performance of securities held, as well as our decisions as to
the level of market exposure we accept in these securities. Asset management revenues are dependent on the level of the capital on which our base management fees are calculated. Our asset management funds are subject to market risk in the markets in
which they would seek to sell or buy financial instruments. Accordingly, our revenues in these areas have fluctuated in the past, and we anticipate that they are likely to continue to fluctuate in the future, based on these factors.
In our principal investing activities, merchant banking and other investments are subject to market risk, as well as, any number of
specific additional risks related to each investment. As a result, net investment income and dividends generated from these investments will vary and cannot be accurately predicted. Also, during the quarter ended March 31, 2009, our principal
investing revenues included the results of mortgage-backed securities that were financed by repurchase agreement borrowings were subject to market risk and risks related to the terms and conditions of the financing agreements. During the first
quarter of 2009, we sold our remaining leveraged mortgage-backed securities and retired the related repurchase agreement borrowings used to finance these securities.
Investment Banking
Capital raising revenue consists of underwriting
discounts, selling concessions, management fees and reimbursed expenses associated with underwriting activities and private equity placements. We act in varying capacities in our capital raising activities, which, based on the underlying economics
of each transaction, determine our ultimate revenues from these activities. When we are engaged as lead-manager of an underwriting, we generally bear more risk and earn higher revenues than if engaged as a co-manager, an underwriter (syndicate
member) or a broker-dealer included in the selling group.
Advisory revenue consists primarily of advisory fees and reimbursed
expenses associated with such activities. Advisory fees have fluctuated in the past, and are likely to continue to fluctuate, based on the number and size of our completed transactions.
Institutional Brokerage
Principal transactions consist of a portion of dealer spreads attributed to our securities trading activities as principal in listed and other equity securities, convertible debt securities, listed
options and various credit-related instruments and are primarily derived from our customer trading activities. Trading gains and losses on equity securities, convertible debt securities and other instruments are combined and reported on a net basis
as part of principal transactions. Gains and losses result primarily from market price fluctuations that occur while holding positions in our trading security inventory.
Agency commissions consist of revenue resulting from the execution of exchange-listed securities and other transactions as agent.
36
Asset Management
We receive asset management revenue in our capacity as the investment manager and administrator to The FBR Funds, a family of mutual
funds. In addition, we include revenues for 12b-1 fees related to the distribution of our mutual funds.
Net Investment
Income
Net investment income includes net realized gains or losses on sale of equity securities and mortgage-backed
securities, impairment losses related to investments in marketable and non-public equity securities, realized and unrealized gains and losses on investments held at broker-dealer subsidiaries and other investments designated as trading as well as
income from investment funds.
We record in net investment income in our statements of operations changes in the net asset
value of investment funds, including mutual funds managed by us, in which we have made investments.
Interest,
Dividends & Other Income
Interest income and dividends includes amounts earned from positions held on our trading
desk and from treasury management investments, which includes interest-bearing accounts and securities and dividends on merchant banking and other equity investments. Other income primarily includes other miscellaneous fees generated from non-core
business activities.
Expenses
Interest expense includes the costs of repurchase agreement borrowings.
Compensation and benefits expense includes base salaries, non-cash expenses associated with all stock-based awards granted to employees,
and incentive compensation. Incentive compensation varies primarily based on revenue production. Salaries, payroll taxes and employee benefits are relatively fixed in nature. In addition, severance charges related to reductions in our workforce are
included in this amount.
Professional services expenses include legal fees, primarily associated with investment banking
transactions, consulting fees, and recruiting fees. Legal fees associated with investment banking transactions are, to a large extent, variable with revenue.
Business development expenses include travel and entertainment expenses related to investment banking transactions, costs of investor conferences, sponsorships and advertising. Expenses that are directly
related to investment banking transactions are variable with revenue.
Clearing and brokerage fees include trade processing
expenses that we pay to our clearing broker, and execution fees that we pay to floor brokers and electronic communication networks. These expenses are almost entirely variable based on our revenue.
Occupancy and equipment includes rental costs for our facilities, depreciation and amortization of equipment, software and leasehold
improvements and expenses. These expenses are largely fixed in nature.
Communications expenses include voice, data and
Internet service fees, and data processing costs. While variable in nature, these do not tend to vary with revenue.
Other
operating expenses include professional liability and property insurance, amortization of certain intangible assets, printing and copying, business licenses and taxes, offices supplies, interest related to taxes, penalties and fees, charitable
contributions and other miscellaneous office expenses.
37
The following table sets forth financial data as a percentage of net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital raising
|
|
|
29.1
|
%
|
|
|
40.1
|
%
|
|
|
41.4
|
%
|
Advisory
|
|
|
10.4
|
%
|
|
|
7.9
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
39.5
|
%
|
|
|
48.0
|
%
|
|
|
47.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional brokerage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
|
12.3
|
%
|
|
|
9.0
|
%
|
|
|
13.8
|
%
|
Agency commissions
|
|
|
41.0
|
%
|
|
|
31.6
|
%
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
53.3
|
%
|
|
|
40.6
|
%
|
|
|
45.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees
|
|
|
10.2
|
%
|
|
|
5.7
|
%
|
|
|
4.5
|
%
|
Net investment (loss) income
|
|
|
(6.6
|
)%
|
|
|
3.7
|
%
|
|
|
0.5
|
%
|
Interest, dividends & other
|
|
|
3.6
|
%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.1
|
%
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
72.0
|
%
|
|
|
74.0
|
%
|
|
|
66.0
|
%
|
Professional services
|
|
|
8.3
|
%
|
|
|
7.5
|
%
|
|
|
8.2
|
%
|
Business development
|
|
|
8.2
|
%
|
|
|
6.1
|
%
|
|
|
4.7
|
%
|
Clearing and brokerage fees
|
|
|
8.1
|
%
|
|
|
5.3
|
%
|
|
|
4.8
|
%
|
Occupancy and equipment
|
|
|
13.5
|
%
|
|
|
10.4
|
%
|
|
|
11.5
|
%
|
Communications
|
|
|
11.6
|
%
|
|
|
8.1
|
%
|
|
|
7.3
|
%
|
Impairment of goodwill and intangible assets
|
|
|
4.0
|
%
|
|
|
|
|
|
|
1.8
|
%
|
Other operating expenses
|
|
|
8.2
|
%
|
|
|
5.5
|
%
|
|
|
5.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
133.9
|
%
|
|
|
116.9
|
%
|
|
|
109.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(33.9
|
)%
|
|
|
(16.9
|
)%
|
|
|
(9.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the Years Ended December 31, 2011 and 2010
Net loss increased to $49.6 million in 2011 from $37.6 million in 2010. The increase in net loss was primarily the result of the reduction
in revenues from investment banking and institutional brokerage and the net investment loss of $9.7 million. Our 2011 results include a goodwill impairment charge of $5.9 million that is not comparable to 2010. Our income tax benefit was $0.2
million in 2011 compared to a tax benefit of $4.1 million in 2010. Our pre-tax loss increased to $49.9 million in 2011 from $41.7 million in 2010.
The pre-tax loss from our capital markets segment decreased to $41.9 million in 2011 from $48.3 million in 2010 despite a decrease in revenues of $80.6 million or 37% in 2011. This decreased loss is
attributable to a decrease in variable costs related to the decrease in revenues and a decrease in fixed operating expenses associated with the reduction in headcount during both years offset partially by the goodwill impairment of $5.9 million. The
pre-tax loss in our asset management segment decreased to $0.04 million in 2011 from $2.8 million in 2010 due to a reduction in operating expenses, as well as an increase in asset management fees due to increased average assets under management. The
pre-tax loss from our principal investing segment was $8.0 million during 2011 compared to pre-tax income of $9.5 million during 2010. The results for 2011 reflect other than temporary impairment losses from two merchant banking investments and
unrealized losses on trading securities held for investment purposes, partially offset by gains on the sale of certain investments.
38
Revenues
Our net revenues decreased 40.3% to $147.2 million during 2011 from $246.6 million during 2010 due to the changes in revenues discussed below.
Capital raising revenues decreased 56.6% to $42.9 million in 2011 from $98.8 million in 2010. The decrease was attributable to a decrease
in sole managed private placements. Our revenues from private placements during 2011 were $26.3 million compared to $79.6 million in 2010. The lower volume of capital raising revenue in 2011 is representative of an industry-wide decrease in equity
capital raising activity due to continued economic challenges affecting investor confidence and volatility in the capital markets.
Advisory revenues decreased 21.5% to $15.3 million in 2011 from $19.5 million generated in 2010. We completed 14 assignments in 2011 as compared to 20 assignments in 2010.
Institutional brokerage revenues from agency commissions and principal transactions decreased 21.6% to $78.5 million in 2011 from
$100.1 million in 2010. The decrease was primarily a result of a decrease in overall industry-wide equity trading volume during 2011 and a decrease in principal transaction revenues from our convertible and credit desks.
Asset management fees increased 5.7% to $14.9 million in 2011 from $14.1 million in 2010. The increase was primarily attributable to an
increase in average mutual fund assets under management. Our mutual fund assets under management increased 6.3% to $1.7 billion at December 31, 2011from $1.6 billion at December 31, 2010. The increase in 2011of mutual fund assets under
management is primarily the result of net inflows of $62.7 million, as well as a 2% increase in market value.
Net investment
loss was $9.7 million in 2011 compared to income of $9.2 million in 2010. Net investment loss for 2011 was due to other-than-temporary impairment losses of $7.6 million related to two equity investments, $5.9 million in net unrealized losses on
trading securities held for investment purposes, offset partially by $3.8 million in net realized gains from the sale of several equity investments and the settlement of derivatives held for investment purposes during 2011. Net investment income for
2010 consisted of income from investment funds due to fund performance and the sale of certain merchant banking investments, partially offset by losses on short positions in certain exchange-traded funds that were intended to hedge the fund
investments.
Net interest income, dividends and other revenues increased 8.2% to $5.3 million in 2011 from $4.9 million in
2010. This increase is primarily attributable to an increase in interest income from our convertible and credit securities positions as a result of an increase in the average balance held on our trading desks for 2011 as compared to 2010.
Expenses
Total non-interest expenses decreased 31.6% to $197.0 million in 2011 from $288.2 million in 2010. This decrease was caused by the changes in non-interest expenses described below.
Compensation and benefits expenses decreased 41.9% to $106.0 million in 2011 from $182.4 million in 2010. Variable compensation decreased
$49.1 million due to a decrease in net revenues, a reduction in headcount since third quarter 2010 and changes in our variable compensation programs in 2011. Fixed compensation decreased $27.3 million due to the reduction in headcount previously
noted and a reduction in stock compensation expense reflecting a decrease in stock-based awards over the past two years. As a result of the reduction in headcount in 2011 and 2010, we have incurred severance charges of $4.7 million and $6.5 million,
respectively.
Professional services expenses decreased 34.1% to $12.2 million in 2011 from $18.5 million in 2010 primarily
due to decreased expenses related to investment banking transactions in 2011 as compared to 2010. Also contributing to the decrease were lower costs related to recruiting, legal and consulting fees.
39
Business development expenses decreased 18.8% to $12.1 million in 2011 from
$14.9 million in 2010. This decrease is primarily the result of decreased costs associated with our investment banking transactions.
Clearing and brokerage fees decreased 9.2% to $11.9 million in 2011 from $13.1 million in 2010. This decrease is primarily the result of a lower volume of trading activity, particularly related to our
equity trading desk.
Occupancy and equipment expenses decreased 22.3% to $19.9 million in 2011 from $25.6 million in 2010.
The decrease in occupancy costs was primarily the result of reductions in depreciation expense associated with reduced capital expenditures over the past two years and reductions in our leased office space. In addition, we incurred a $1.0 million
charge in 2011 associated with the consolidation of office space in our Arlington headquarters. This charge is comparable to a $1.1 million charge in 2010 associated with the reduction in leased space in our London office.
Communications expenses decreased 15.4% to $17.0 million in 2011 from $20.1 million in 2010. The decrease in these expenses is primarily
due to decreased costs related to market data and customer trading services as a result of the reduction in our headcount.
In
our annual assessment of goodwill as of December 31, 2011, as discussed in Note 7.
Goodwill and Intangible Assets
included in our financial statements attached to this Form 10-K, the Company determined that an impairment to goodwill was
necessary. The impairment was the result of various factors, including the significant decline in revenues during the second half of 2011 as well as the restructuring plan implemented by the Company in the fourth quarter of 2011 in response to the
decline in revenues and uncertain market conditions. Based on that assessment, the Company determined that the asset was fully impaired. During 2011, we recognized an impairment to goodwill of $5.9 million.
Other operating expenses decreased 11.8% to $12.0 million in 2011 from $13.6 million in 2010. The decrease in expenses is primarily due
to a decrease in license and registration fees as a result of the reduction in our headcount as well as reductions in our corporate insurance costs and printing, postage and office supplies.
Our income tax benefit decreased to $0.2 million in 2011 from $4.1 million in 2010 due to the change in pre-tax income and impact of the
valuation allowance related to tax benefits attributable to losses that are not realizable through loss carrybacks. The income tax benefits for 2010 included the tax benefits realized from utilization of $3.2 million of federal net operating losses.
Our effective tax rate was 0.5% in 2011 as compared to 9.8% in 2010. In addition to the effects of the valuation allowance, our effective tax rates during these periods differed from statutory rates primarily due to the discrete period reporting of
the tax effects of restricted stock vesting, as required under Financial Accounting Standards Boards (FASB) Accounting Standard Codification (ASC) 718, Compensation-Stock Compensation (ASC 718)
as restricted stock awards vested at share prices lower than original grant date prices as well as the effect of permanent differences in relation to our operating results. Without these and other discrete items, our effective income tax rate would
have been 38.4% and 36.4%, respectively, for the years ended December 31, 2011 and 2010.
At December 31, 2011, our
net deferred tax assets totaled $102.0 million. We have established a full valuation allowance against these deferred tax assets based on the criteria in ASC 740, Income Taxes (ASC 740).
Comparison of the Years Ended December 31, 2010 and 2009
Net loss increased to $37.6 million in 2010 from $27.7 million in 2009. Income tax benefit increased to $4.1 million in 2010 from $1.3 million tax benefit in 2009 due to the change in pre-tax income and
impact of the valuation allowance related to tax benefits attributable to losses that are not realizable through loss carrybacks.
40
Our pre-tax loss increased to $41.7 million in 2010 from $29.0 million in 2009. Pre-tax loss
from our capital markets segment increased to $48.3 million in 2010 from $19.6 million in 2009 due to decreases in our institutional brokerage and investment banking revenues, partially offset by decreases in our operating expenses due to the impact
of decreased revenues on variable costs and cost reduction initiatives. The pre-tax loss in our asset management segment decreased to $2.8 million in 2010 from $13.4 million in 2009 due to a $5.4 million impairment of an intangible asset related to
a money market mutual fund management contract in 2009 that is not comparable to 2010, as well as increased management fee revenues and reductions in operating expenses. Pre-tax income from our principal investing segment increased to $9.5 million
in 2010 from $4.0 million in 2009, reflecting an increase in net investment income, partially offset by a decrease in dividend income.
Revenues
Our net
revenues decreased 15.6% to $246.6 million in 2010 from $292.2 million in 2009 due to the changes in revenues and interest expense discussed below.
Capital raising revenues decreased 18.3% to $98.8 million in 2010 from $121.0 million in 2009. Our revenues from private placements in 2010 were $79.6 million compared to $100.5 million in 2009. Our
results for 2010 include the realization of $16.1 million of contingent revenue related to two transactions completed in 2009. During 2009, we completed three significant sole-managed private placement transactions raising approximately $2.0 billion
for our clients associated with the recapitalization of the banking industry. While banking recapitalization transactions decreased during 2010, we partially offset this decrease by completing private placement transactions in the airline leasing,
energy and diversified industrials industries.
Advisory revenues increased 10.2% to $19.5 million in 2010 from $17.7 million
in 2009. We completed 20 assignments in 2010 as compared to 19 assignments in 2009.
Institutional brokerage revenues from
agency commissions and principal transactions decreased 24.8% to $100.1 million in 2010 from $133.1 million in 2009. The decrease is primarily attributable to a reduction in revenues from our convertible securities and equities trading desks in
2010 partially offset by increased revenues from our listed-options trading desk in 2010 following the launch of this business during the second half of 2009. The decrease in our brokerage revenues was primarily the result of reduced trading volumes
industry-wide in the equity and convertible markets during 2010.
Asset management fees increased 6.8% to $14.1 million in
2010 from $13.2 million in 2009. The increase is primarily attributable to an increase in average mutual fund assets under management. The increase in average assets under management was attributable to the overall performance of the funds and the
addition of assets from the acquisition of mutual fund operations of the Armed Forces Benefits Association 5 Star Funds in the first quarter of 2010.
Net investment income was $9.2 million in 2010 compared to $1.6 million in 2009. Net investment income for 2010 includes gains related to sale of certain merchant banking investments and income from
investment funds due to fund performance, partially offset by losses on short positions in certain exchange-traded funds that are intended to hedge the fund investments. Net investment income for 2009 includes income from investment funds as a
result of fund performance and gains from the sale of certain merchant banking investments.
Net interest income, dividends
and other revenues decreased to $4.9 million in 2010 from $5.6 million in 2009. This decrease is primarily attributable to decreased dividend income from certain merchant banking investments that declared lower dividends per share in 2010, offset
partially by increased interest income from our convertible and credit trading positions.
Expenses
Total non-interest expenses decreased 10.3% to $288.2 million in 2010 from $321.2 million in 2009. This decrease was caused by the changes
in non-interest expenses described below.
41
Compensation and benefits expenses decreased 5.5% to $182.4 million in 2010 from $193.0
million in 2009. This decrease is primarily attributable to a decrease in variable compensation of $20.6 million as a result of a decrease in net revenues in our capital markets segment. This decrease is partially offset by severance costs of $6.5
million relating to headcount reductions.
Professional services expenses decreased 22.9% to $18.5 million in 2010 from $24.0
million in 2009 primarily due to decreased expenses related to corporate legal costs and consultant fees. Also contributing to the decrease, is the reduction in sub-advisory fees related to our management of mutual funds as a result of our
termination of the sub-advisory agreement related to the FBR Focus Fund in August 2009. Partially offsetting these decreases was an increase in expenses related to investment banking transactions in 2010 as compared to 2009 due to the nature of
certain transactions executed during 2010.
Business development expenses increased 8.0% to $14.9 million in 2010 from
$13.8 million in 2009. This increase is primarily the result of increased costs associated with the development of new client relationships and our investment banking transactions, partially offset by a decrease in costs associated with our golf
event sponsorship in 2009.
Clearing and brokerage fees decreased 5.8% to $13.1 million in 2010 from $13.9 million in 2009.
This decrease is primarily the result of decreased equity trading volumes, offset partially by the initiation of non-exchange traded product lines with higher clearing costs during the second half of 2009.
Occupancy and equipment expenses decreased 24.0% to $25.6 million in 2010 from $33.7 million in 2009. The decrease in occupancy costs is
a result of reductions in our leased office space along with other cost reduction initiatives. We incurred charges of $1.2 million in 2010 associated with lease terminations and the subleasing of certain office space compared to $3.0 million of
similar charges in 2009.
Communications expenses decreased 5.6% to $20.1 million in 2010 from $21.3 million in 2009. The
decrease in these expenses is primarily due to the effects of cost reduction initiatives during 2010 and decreased costs related to market data and customer trading services.
During 2009, we recognized a $5.4 million impairment of an intangible asset related to a money market fund managed by us. The impairment was the result of factors such as significantly reduced yields on
short-term government investments and the requirement for us to both waive our management fees and reimburse certain expenses of the fund resulting in the management contract becoming unprofitable for us in the period.
Other operating expenses decreased 16.0% to $13.6 million in 2010 from $16.2 million in 2009. The decrease in expenses is primarily due
to a decrease in corporate insurance costs as well as a decrease in intangible asset amortization.
The income tax benefit
increased to $4.1 million in 2010 from $1.3 million in 2009 due to the change in pre-tax income and impact of the valuation allowance related to tax benefits attributable to losses that are not realizable through loss carrybacks. The income tax
benefits for 2010 and 2009, include the benefit for federal net operating losses utilized as a result of carryback of $3.2 million and $6.9 million, respectively. Our effective tax rate was 9.8% in 2010 as compared to 4.6% in 2009. In addition to
the effects of the valuation allowance, our effective tax rates during these periods differed from statutory rates primarily due to the discrete period reporting of the tax effects of restricted stock vesting, as required under ASC 718 as restricted
stock awards vested at share prices lower than original grant date prices as well as the effect of permanent differences in relation to our operating results. The effective tax rate for 2009 also differed from the statutory rate due to the expected
tax liability related to domestic operations. Without these and other discrete items, our effective income tax rate would have been 36.4% and 33.2%, respectively, for the years ended December 31, 2010 and 2009.
42
At December 31, 2010, our net deferred tax assets totaled $88.4 million. We have
established a full valuation allowance against these deferred tax assets based on the criteria in ASC 740. We reflect a net deferred tax liability of $0.2 million related to an indefinite-lived intangible which cannot serve as a source of future
income for determination of our valuation allowance.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing funding for investments, and for other
general business purposes. Regulatory requirements applicable to our broker-dealer subsidiaries require minimum capital levels for these entities. The primary sources of funds for liquidity consist of existing cash balances (i.e., available liquid
capital not invested in our operating businesses), proceeds from sales of securities, internally generated funds, dividends on equity securities that we own, and credit provided by margin accounts, banks, clearing brokers, and affiliates of our
principal clearing broker. Potential future sources of liquidity for us include internally generated funds, borrowing capacity through margin accounts, corporate lines of credit and other credit facilities which we may enter into in the future, and
future issuances of common stock, preferred stock or debt securities.
Cash Flows
As of December 31, 2011, our cash and cash equivalents totaled $135.8 million representing a net decrease of $100.3 million for the
year ended December 31, 2011. The decrease is attributable to $65.5 million of cash used in operating activities, $12.3 million of cash used in investing activities and $22.5 million of cash used in financing activities. Due to the
cyclical nature of our industry and the industries in which we provide services, we maintain liquid capital to cover potential cash outflows in periods of decreased revenues and earnings.
Net cash used in our operating activities of $65.5 million during 2011, compares to $33.4 million of cash used in operating activities
during 2010. The cash used in operating activities for 2011 reflects net operating losses, an increase in our capital invested in net long positions on our trading desks, and payment of previously accrued compensation associated with our 2010
operating results. For 2010, the cash used in operating activities reflected the net operating losses incurred over that period and our payment of previously accrued compensation associated with our 2009 operating results partially offset by
decreased capital invested in our net long positions on our trading desks.
Net cash used in investing activities of $12.3
million during 2011 compares to net cash provided by investing activities of $7.7 million during 2010, reflecting the difference in investing activity during the periods. The activity for both periods reflects the purchase and sale of certain equity
securities held for investment purposes. Also, the 2011 activity includes the settlement of derivatives held for investment purposes.
Net cash used in financing activities of $22.5 million during 2011, compares to net cash used in financing activities of $13.7 million during 2010. The 2011 and 2010 activity primarily represents the
repurchase of 8.2 million and 3.2 million shares of our common stock, respectively. Of the activity during 2011, 2.1 million shares were repurchased through open market transactions for $7.3 million and the remaining 6.1 million
shares were repurchased as part of two modified Dutch auction tender offers for an aggregate purchase price, including transaction costs, of $15.9 million. The 2010 share repurchases were made in open market transactions at a cost of
$15.9 million.
As of December 31, 2010, our cash and cash equivalents totaled $236.1 million representing a net decrease
of $39.4 million for the year ended December 31, 2010. The decrease is primarily attributable cash used in operating activities of $33.4 million, which includes a cash operating loss of $31.0 million and $2.4 million of net changes in operating
assets and liabilities. Cash used in financing activities of $13.7 million, primarily associated with the repurchase of our common stock, was partially offset by $7.7 million of cash provided by investing activities.
43
Net cash used in operating activities of $33.4 million during 2010, compares to net cash
provided by operating activities of $9.3 million during 2009. The cash used in operating activities for 2010 reflects net operating losses and our payment of previously accrued compensation associated with prior year operating results partially
offset by decreased capital investment in our net long positions.
Net cash provided by investing activities of $7.7 million
during 2010 compares to $456.0 million provided during 2009. The 2010 activity reflects the purchase and sale of certain merchant banking investments while the 2009 activity reflects the sale of the remaining mortgage-backed securities held as of
December 31, 2008.
Net cash used in financing activities of $13.7 million during 2010 compares to $397.6 million used
during 2009. The 2010 activity primarily represents the repurchase of 3.2 million shares of our common stock for $15.9 million. The 2009 activity reflects the sale of mortgage-backed securities and repayment of related repurchase agreement
financings, as well as the net effects of repurchasing 16.7 million shares of our common stock for $72.5 million from Arlington Asset, our former majority owner, and completing a follow-on offering of 20.0 million shares of our common
stock for $90.1 million.
Sources of Funding
We believe that our existing cash and cash equivalents balances (totaling $135.8 million at December 31, 2011) comprised primarily of investments in money market funds investing in short-term U.S.
Treasury securities, cash flows from operations, borrowing capacity, other sources of liquidity and execution of our financing strategies will be sufficient to meet our cash requirements. We have obtained, and believe we will be able to continue to
obtain, short-term financing, such as margin financing and temporary subordinated financing, in amounts and at interest rates consistent with our financing objectives. We may, however, seek debt or equity financings, in public or private
transactions, to provide capital for corporate purposes and/or 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. There can be no assurance that we will be able to generate sufficient funds from future operations, or raise sufficient debt or equity on
acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity, we believe that most of our investments could be sold, in most circumstances, to provide cash.
We monitor and manage our leverage and liquidity risk through various committees and processes we have established. We assess
our leverage and liquidity risk based on considerations and assumptions of market factors, as well as factors specific to us, including the amount of our available liquid capital (i.e., the amount of our cash and cash equivalents not invested in our
operating business). At December 31, 2011, we had no outstanding borrowings.
Assets
As of December 31, 2011, our principal assets consisted of cash and cash equivalents, receivables, trading securities and
investments. As of December 31, 2011 and December 31, 2010, liquid assets consisted primarily of cash and cash equivalents of $135.8 million and $236.1 million, respectively.
The decrease in our total assets to $298.1 million as of December 31, 2011 compared to $431.5 million as of December 31, 2010,
was primarily the result of a $100.3 million decrease in cash and cash equivalents discussed previously, a $20.5 million decrease in receivables, and the full impairment of our goodwill balance of $5.9 million.
Our due from and to brokers, dealers, and clearing organizations balances primarily represent unsettled trades associated with our credit
sales and trading platform. These transactions include corporate bond and syndicated loan trades. A decrease in unsettled trades outstanding associated with these activities was the primary
44
reason for the decrease in the receivable from and corresponding payable to brokers, dealers and clearing organizations. The total amount of outstanding unsettled trade receivables and payables
related to these instruments was $5.0 million and $6.3 million, respectively, as of December 31, 2011 compared to $11.4 million and $7.3 million, respectively, as of December 31, 2010. Due to the extended settlement nature of most par and
distressed bank loan transactions, we are subject to certain market and counterparty credit risks. See our discussion related to these risks included in the
Quantitative and Qualitative Disclosures about Market Risk
. The remaining components
of the due from and to brokers, dealers, and clearing organizations includes receivables related to commissions and receivables and payables related to unsettled trades that are settled on a regular basis.
As of December 31, 2011, our $52.1 million of investments primarily consisted of investments in non-public equity securities,
marketable equity securities and investment funds. These investments are funded in cash and are not financed with debt. Accordingly, a decline in value of these assets, should it occur, would impact our return on our investment, however, it would
not impact our current liquidity requirements.
Regulatory Capital
FBRCM, our principal U.S. broker-dealer, is registered with the SEC and is a member of the FINRA. As such, FBRCM is subject to the minimum
net capital requirements promulgated by the SEC. As of December 31, 2011, FBRCM had total regulatory net capital of $57.0 million, which exceeded its required net capital of $3.8 million by $53.2 million. Regulatory net capital requirements
increase when the broker-dealers are involved in underwriting activities based upon a percentage of the amount being underwritten.
Share Repurchases
During 2011, we repurchased 2.1 million shares of our
common stock in open market transactions at weighted average share prices of $3.48 per share, for a total cost of $7.3 million. As of December 31, 2011, we have a remaining authority to repurchase up to 3.1 million additional shares.
During 2011, we completed two tender offers to repurchase shares of our stock. Pursuant to these modified Dutch
auction tender offers, we repurchased 6.1 million shares of our common stock at weighted average share prices of $2.55 per share for a total cost, including transaction costs, of $15.9 million.
Contractual Obligations
We have contractual obligations to make future payments in connection with non-cancelable lease agreements and other contractual commitments as well as uncalled capital commitments to an investment
partnership that may be called over the next four years. The following table sets forth these contractual obligations by fiscal year (dollars in thousands):
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2012
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2013
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2014
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2015
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2016
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Thereafter
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Total
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Minimum rental commitments
(1)
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$
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9,778
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|
$
|
8,813
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|
|
$
|
8,363
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|
|
$
|
2,032
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|
|
$
|
1,637
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|
|
$
|
1,935
|
|
|
$
|
32,558
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|
Capital commitments and other
(2)
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Total Contractual Obligations
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|
$
|
9,778
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|
|
$
|
8,813
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|
|
$
|
8,363
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|
|
$
|
2,032
|
|
|
$
|
1,637
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|
|
$
|
1,935
|
|
|
$
|
32,558
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(1)
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These commitments are for operating leases of the Company. The Company currently has no commitments associated with capital leases. The Company has entered into
sublease agreements with multiple third parties. For the years ended December 31, 2012, 2013, and 2014, contractual sublease receipts to be received by us are $2.3 million, $2.3 million, and $2.2 million, respectively.
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(2)
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The table above excludes $0.4 million of uncalled capital commitments to an investment partnership that may be called over the next four years. This amount was excluded
because the Company cannot currently determine when, if ever, the commitments will be called. Also, the table above does not include reserves for income taxes of $1.6 million that are not contractual obligations by nature. We cannot determine, with
any degree of certainty, the amount that would be payable or the period of cash settlement to the respective taxing jurisdiction.
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45
Quantitative and Qualitative Disclosures about Market Risk
Overall Risk Management
We monitor market and business risk, including credit risk, operations, liquidity, compliance, legal, and reputational risk through a number of control procedures designed to identify and evaluate the
various risks to which our business and investments are exposed. We have established various committees and processes to assess and to manage risk associated with our investment banking, trading, and merchant banking activities. We review, among
other things, business and transactional risks associated with potential investment banking clients and engagements as well as our capital subjected to risk through our trading activities. We seek to manage the risks associated with our investment
banking and merchant banking activities by review and approval of transactions by the relevant committee, prior to accepting an engagement or pursuing a material investment transaction.
Market Risk
Market risk is the risk that a change in the level of one or more market prices, rates, indices, or other market factors, such as market liquidity, will result in losses for a position or portfolio. Our
activities as an underwriter, market maker and principal investor, as well as our activities as a financial intermediary in customer trading transactions, expose us to market risk.
We use a number of quantitative measures to manage our exposure to market risk in our trading businesses. These measures include:
Inventory position limitswe establish inventory position limits on gross and net positions, at both the trading desk and
individual position level, and we monitor exposures against limits on a daily basis.
Scenario analysiswe apply stress
tests and scenario analysis to estimate the potential impact on our trading revenues of highly stressful market environments in both the credit and equity markets.
Value at Riskwe utilize a statistical measure of potential trading loss, called Value at Risk (VaR), to estimate the potential loss from adverse market moves in an ordinary market
environment. We also establish VaR limits, as appropriate.
Value at Risk
. We calculate VaR for our trading businesses
using a historical simulation model that isolates various risk elements associated with each of our trading positions over a one-day time horizon and at a 95% confidence level. The simulation is based on data for the previous twelve months. This
approach assumes that historical changes in market values are representative of future changes.
46
Using the results of this simulation, VaR measures the potential gains and losses on net
trading positions at a 95% confidence level over a one-day time horizon. A 95% confidence level implies that, on average, we anticipate that 5% of the time we may realize trading losses in excess of our VaR amount. Our one-day 95% VaR at
December 31, 2011 was approximately $385 thousand.
VaR is a model that quantifies potential losses using historical data. We could incur losses greater
than the reported VaR because the historical market prices used may not be an accurate measure of future market events and conditions, especially in highly stressful market environments. In addition, the VaR model measures the risk of the current
net trading positions and does not take into account future position changes arising from transaction and/or hedging activity. Our VaR includes positions actively managed and held by our trading desks and does not include positions associated with
investment banking transactions that may be held on our trading desk in order to facilitate distribution. In most instances, these positions are held only for a short period and sold at or above our costs. To the extent we hold these positions on a
long-term basis, they are reflected as long-term investments and risk related to these positions are discussed below under
Equity Price Risk
.
47
The comparison of actual daily trading revenue fluctuations with a daily VaR estimate is the
primary method used to test the reasonableness of the VaR measure. The following table provides the distribution of daily trading revenues and losses during the year ended December 31, 2011. The table shows data reflecting that the average
lowest 5 percentile daily trading revenues during the year ended December 31, 2011 was net losses of $21 thousand. Over the same period, the worst one-day trading revenues were net losses of $272 thousand which is less than the $484 thousand
daily trading loss implied by the average one-day VaR for the year ended December 31, 2011.
Equity Price Risk
. Equity price risk represents the potential loss in value of a position due
to adverse changes in the level or volatility of equity prices. We generally attempt to limit exposure to equity price risk on securities held as a result of our daily equity trading activities by limiting our intra-day and overnight inventory of
trading securities to that needed to provide the appropriate level of liquidity in the securities for which we are a market maker. We also seek to manage these risks by diversifying exposures, controlling position sizes, and establishing economic
hedges in related securities, principally through short sale transactions.
While it is impossible to project exactly what
factors may affect the prices of equity securities and how much the effect might be, the impact of a ten percent increase and a ten percent decrease in the price of equities held by us would be as follows as of December 31, 2011. The fair value
of the $24.0 million of trading equity securities held at our broker-dealer subsidiaries would increase or decrease to $26.4 million and $21.6 million, respectively, and the fair value of the $51.0 million of other equity investments would increase
or decrease to $56.1 million and $45.9 million, respectively.
Except to the extent that we sell our equity securities
designated as available-for-sale or our cost method equity investments, or a decrease in their fair value is deemed to be other-than-temporary, an increase or decrease in the fair value of those assets will not directly affect our earnings. However,
an increase or decrease in the value of trading securities held by broker-dealer subsidiaries, investment securities designated as trading, or investment funds will directly affect our earnings.
Credit Risk.
Our broker-dealer subsidiaries clear all of their securities transactions through a clearing broker on a fully
disclosed basis. Pursuant to the terms of the agreements between our broker-dealer subsidiaries and the clearing broker, the clearing broker has the right to charge us for losses that result from a counterpartys failure to fulfill its
contractual obligations. As the right to charge us has no maximum amount and applies to all trades executed through the clearing broker, we believe there is no maximum amount assignable to this right. At December 31, 2011 and December 31,
2010, we have recorded no liabilities with regard to this right. During the year ended December 31, 2011 and 2010, amounts paid to the clearing broker related to these guarantees have been immaterial. In addition, we have the right to pursue
collection of performance from the counterparties who do not perform under their contractual obligations. We monitor the credit standing of the clearing broker and all counterparties with which we conduct business.
We attempt to limit our credit spread risk by offsetting long or short positions in various related securities, but may also hedge credit
risk exposure through the use of credit derivatives such as credit default swaps.
48
Our due from and to brokers, dealers and clearing organizations balances primarily represent
unsettled trades associated with our credit sales and trading platform. These transactions include corporate bonds and syndicated loan trades. As part of this activity, we incur market and counterparty credit risk due to the extended settlement
nature of most par and distressed bank loan transactions. Par loan and distressed bank loan trades have extended settlement periods due to the administrative and legal requirements associated with transferring title of such instruments. During this
period whereby a trade has been executed but not settled, we are at risk if one of our counterparties defaults on a trade obligation and we have to meet this obligation at market prices that are adverse relative to the original trade. We manage this
exposure by calculating the current and potential default exposure on each trade and maintaining risk limits for each counterparty with whom we have outstanding bank loan trades.
The securities industry is subject to numerous risks, including the risk of loss associated with the underwriting, ownership, and trading
of securities, and the risk of reduced revenues in periods of reduced demand for security offerings and activity in secondary trading markets. Changing economic and market trends may negatively impact the liquidity and value of our investments and
the level of security offerings underwritten by us, which may adversely affect our revenues and profitability.
Our equity and
debt investments include non-investment grade securities of privately held issuers with no ready markets. The concentration and illiquidity of these investments expose us to a higher degree of risk than associated with readily marketable securities.
Interest Rate Risk.
Interest rate risk represents the potential loss in value of a position or portfolio from adverse
changes in market interest rates. We are exposed to interest rate risk through our trading activities in convertible and fixed income securities, however, based on our daily monitoring of this risk, we believe we currently have limited exposure to
interest rate risk in these activities.
Off-Balance Sheet Arrangements
Through indemnification provisions in agreements with clearing organizations, customer activities may expose us to off-balance sheet
credit risk. Financial instruments may have to be purchased or sold at prevailing market prices in the event a customer fails to settle on a trade on its original terms or in the event cash and securities in customer margin accounts are not
sufficient to fully cover customer obligations. We seek to manage the risks associated with customer activities through customer screening and selection procedures as well as through requirements on customers to maintain margin collateral in
compliance with various regulations and clearing organization policies.
Critical Accounting Policies and Estimates
Our financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (GAAP) and follow
general practices within the industries in which we operate. The preparation of our financial statements requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although we base our estimates and assumptions on historical experience, when available, market information, and on various other factors that
we believe to be reasonable under the circumstances, management exercises significant judgment in the final determination of our estimates. Actual results may differ from these estimates.
Our significant accounting policies are presented in Note 2 to our consolidated financial statements. Our most critical policies that are
both very important to the portrayal of our financial condition and results of operations and require managements most difficult, subjective or complex judgments or estimates are discussed below.
49
Fair Value of Financial Instruments
ASC 820 Fair Value Measurements and Disclosures (ASC 820) defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as
described below:
Level 1 InputsUnadjusted quoted prices in active markets for identical
assets or liabilities that are accessible by the Company;
Level 2 InputsQuoted prices in
markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
Level 3 InputsUnobservable inputs for the asset or liability, including significant assumptions of the Company and other market participants.
The Company determines fair values for the following assets and liabilities:
Equity securities and listed options
The Company classifies marketable equity securities
and listed options within Level 1 of the fair value hierarchy because quoted market prices are used to value these securities. Non-public equity securities are classified within Level 3 of the fair value hierarchy if enterprise values are used to
value these securities. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable over-the-counter market trading activity
.
Convertible and fixed income debt instruments
The Company classifies convertible and fixed income debt
instruments within Level 2 of the fair value hierarchy as they are valued using quoted market prices provided by a broker or dealer, or alternative pricing services that provide reasonable levels of price transparency.
Other
The Company invests in proprietary investment funds that are valued at net asset value (NAV)
determined by the fund administrator. Investments in mutual funds are classified within Level 1 of the fair value hierarchy because investments within the funds are primarily exchange-traded securities and no restrictions exist on the redemption of
the amounts invested by the Company. For investments in non-registered investment companies (private equity and fund of funds), the Company classifies these investments within Level 3 as the underlying securities held by these investment companies
are primarily private-equity securities and restrictions exist on the redemption of amounts invested by the Company. As a practical expedient, the Company relies on the NAV of these investments as their fair value. The NAVs that have been provided
by investees are derived from the fair values of the underlying investments as of the reporting date.
As of December 31,
2011, our financial instruments, valued at fair value, classified as Level 1, Level 2, and Level 3 were $47.0 million, $45.3 million, and $8.3 million, respectively. As of December 31, 2011, for financial instruments measured and reported at
fair value on a recurring basis and classified within Level 3 were 2.8% of our total assets.
Securities and Principal
Investments
Trading securities and investments owned by our broker-dealer subsidiaries and securities sold but not yet
purchased are recorded on a trade-date basis and carried at fair value. Realized and unrealized gains and losses from trading securities are reflected in principal transactions in the statements of operations. Realized and unrealized losses from
such other investments are reflected in net investment income in the statements of operations.
50
Marketable equity, debt, and asset-backed securities held for investment purposes at
non-broker-dealer subsidiaries are designated as either available-for-sale or trading investments pursuant to ASC 320, InvestmentsDebt and Equity Securities (ASC 320). These investments are carried at fair value with
resulting unrealized gains and losses on available-for-sale securities reflected in accumulated other comprehensive income (loss) in the balance sheets and unrealized gains and losses on trading securities reflected in net investment income in the
statements of operations. Investments in equity securities of non-public companies that are held in non-broker dealer subsidiaries are carried at cost.
We evaluate available-for-sale securities and investments in securities of non-public companies carried at cost for other-than-temporary impairment at least on a quarterly basis, and more frequently when
economic or market concerns warrant such evaluation. The value of our investments in marketable equity securities designated as available-for-sale can fluctuate significantly. The value of our investments in securities of non-public companies can
also fluctuate significantly. Such values may be based on unobservable inputs, including significant assumptions by us and consideration of the liquidity and size of our position. In evaluating these investments for other-than-temporary impairment,
consideration is given to (1) the length of time and the extent to which the fair value has been lower than carrying value, (2) the severity of the decline in fair value, (3) the financial condition and near-term prospects of the
issuer, and (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. If it is determined that an investment impairment is other-than-temporary then
the amount that the fair value is below its current basis is recorded as an impairment charge and recorded through earnings in net investment income (loss) in the statement of operations.
For unrealized losses that are determined to be temporary, we continue to evaluate these at each reporting date. If we determine at a
future date that an impairment of a marketable equity security is other-than-temporary, the applicable unrealized loss will be reclassified from accumulated other comprehensive income and recognized as an other-than-temporary impairment loss at the
time the determination is made.
Realized gains and losses on sales of non-asset-backed securities are determined using the
specific identification method. The Company held mortgage-backed securities for the period ended February 2009, realized gains and losses on these mortgage-backed securities transactions were determined based on average cost.
As of December 31, 2011, we held $25.3 million of investments in marketable equity securities accounted for under ASC 320 and $25.7
million of non-public equity securities held in non-broker dealer subsidiaries. As of December 31, 2011, we evaluated our portfolio of available-for-sale securities and investments in securities of non-public companies carried at cost for
other-than-temporary impairments. Based on this evaluation, we do not consider any of our investments in loss positions to be other-than-temporarily impaired.
Accounting for Income Taxes
Deferred tax assets and liabilities
represent the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on our evaluation and our
consideration of the guidance in ASC 740, it is more likely than not that they will not be realized. Our 2011 tax benefit reflects a full valuation allowance on tax benefits attributable to losses that are not realizable through loss carrybacks. At
December 31, 2011, our net deferred tax assets totaled $102.0 million offset by a full valuation allowance.
Intangible Assets
Our intangible assets have consisted of goodwill from a business combination and intangible assets with finite useful lives. Goodwill is not amortized but is tested annually for impairment (during the
fourth quarter) or more frequently if an adverse event occurs that may indicate impairment. The assessment of goodwill is performed at the reporting unit level. In our annual assessment of goodwill as of December 31, 2011, as
51
discussed in Note 7.
Goodwill and Intangible Assets
included in our financial statements attached to this Form 10-K, the Company determined that an impairment to goodwill was necessary.
The impairment was the result of various factors, including the significant decline in revenues during the second half of 2011 as well as the restructuring plan implemented by the Company in the fourth quarter of 2011 in response to the decline in
revenues and uncertain market conditions. Based on that assessment, the Company determined that the asset was fully impaired. For the year ended December 31, 2011, we recognized an impairment to goodwill of $5.9 million.
The values of the intangible assets with finite useful lives are amortized in proportion to their expected economic benefit over their
estimated useful life or straight-line if the economic benefit cannot be reliably determined. These intangible assets are periodically tested for impairment by comparing expected future gross cash flows to the assets carrying amount. If the
expected gross cash flows are less than the carrying amount, the asset is impaired and is written-down to its fair value. The carrying value of intangible assets with finite useful lives was $2.1 million as of December 31, 2011. As of
December 31, 2011, there were no significant indicators of impairment relating to the intangible assets with finite useful lives.
Recently Issued Accounting Pronouncements
See Note 2.
Summary of Significant Accounting Policies
Recent Accounting Pronouncements
included in our financial statements attached to this Form 10-K.
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
See Part II, Item 7, of this Form 10-K Managements Discussion and Analysis of Financial Condition and Results of OperationsQuantitative and Qualitative Disclosures about Market
Risk.
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
The information required by Part II, Item 8, of this Form 10-K appears in a subsequent section of this report. See Index to Audited Consolidated Financial Statements of FBR & Co.
on page F-1.
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Evaluation of
Disclosure Controls and Procedures
As of the end of the period covered by this report on Form 10-K, our management carried
out an evaluation, with the participation of our Chief Executive Officer, Richard J. Hendrix, and our Chief Financial Officer, Bradley J. Wright, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of
the Securities Exchange Act of 1934, as amended (the Exchange Act)) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures, as of December 31, 2011, are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding disclosure.
52
Managements Annual Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act). The Companys internal control over financial reporting is designed under the supervision of the firms Chief Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Companys financial statements for external purposes in accordance with generally accepted accounting principles.
The Companys internal control over financial reporting includes policies and procedures that pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use or disposition of the Companys assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As of December 31, 2011, management conducted an assessment of the effectiveness of the Companys internal control over
financial reporting based on the framework established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded
that the Company maintained effective internal control over financial reporting as of December 31, 2011.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the Companys internal
control over financial reporting as of December 31, 2011, as stated in their report which appears on F-2.
Changes in Internal Control Over
Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended
December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our companys internal control over financial reporting.
ITEM 9B.
|
OTHER INFORMATION
|
None.
53
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by Part III, Item 10, of this report on Form 10-K will be provided in our 2011 Proxy Statement and is hereby incorporated by reference.
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The information required by Part III, Item 11, of this report on Form 10-K will be provided in our 2011 Proxy Statement and is hereby
incorporated by reference.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|
The information required by Part III, Item 12, of this report on Form 10-K will be provided in our 2011 Proxy Statement and is hereby
incorporated by reference.
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by Part III, Item 13, of this report on Form 10-K will be provided in our 2011 Proxy Statement and is hereby incorporated by reference.
ITEM
14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required by Part III, Item 14, of this report on Form 10-K will be provided in our 2011 Proxy Statement and is hereby incorporated by reference.
54
PART IV
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
We have filed the following documents as part of this report on Form 10-K:
1.
Financial Statements
. The audited consolidated financial statements of FBR & Co. required by Part II, Item 8, of this report on Form 10-K, which are listed on page F-1 of this report on Form 10-K, including the notes
thereto and the report of PricewaterhouseCoopers LLP, our independent registered public accounting firm, thereon.
2.
Financial Statement Schedules
. We have not filed any financial statement schedules as part of this report on Form 10-K because these schedules are not required or because the information required to be included in these schedules has been
included in the audited consolidated financial statements of FBR & Co. or the notes thereto.
3.
Exhibits
. The
following exhibits have been filed as part of or incorporated by reference in this report on Form 10-K:
|
|
|
Exhibit
Number
|
|
Description
|
3.1
|
|
Amended and Restated Articles of Incorporation of the Registrant.(15)
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant.(16)
|
|
|
4.1
|
|
Form of Certificate for Common Stock.(3)
|
|
|
4.2
|
|
Registration Rights Agreement, dated as of July 20, 2006, between the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)
|
|
|
4.3
|
|
Registration Rights Agreement, dated January 26, 2009, between the Registrant and Friedman, Billings, Ramsey Group, Inc.(8)
|
|
|
4.4
|
|
Form of Amended and Restated Voting Agreement, dated as of May 20, 2009, between Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., FBR Capital Markets Corporation,
Forest Holdings LLC and Forest Holdings (ERISA) LLC.(9)
|
|
|
4.5
|
|
Form of Senior Indenture.(11)
|
|
|
4.6
|
|
Form of Subordinated Indenture.(11)
|
|
|
4.7
|
|
Form of Subscription Agreement by and between FBR Capital Markets Corporation and purchasers of common stock of FBR Capital Markets Corporation in connection with the closing of the
transactions contemplated by the Watch Hill Purchase Agreement.(12)
|
|
|
10.1
|
|
2006 Long-Term Incentive Plan (as Amended and Restated Effective June 3, 2010).(13)
|
|
|
10.2
|
|
Form of Incentive Stock Option Agreement.(1)
|
|
|
10.3
|
|
Form of Non-Qualified Stock Option Agreement.(1)
|
|
|
10.4
|
|
Tax Sharing Agreement, dated as of July 20, 2006, between FBR TRS Holdings, Inc. and the Registrant.(1)
|
|
|
10.5
|
|
Investment Agreement, dated as of July 19, 2006, among the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)
|
|
|
10.6
|
|
Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings LLC.(1)
|
55
|
|
|
Exhibit
Number
|
|
Description
|
|
|
10.7
|
|
Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings (ERISA) LLC.(1)
|
|
|
10.8
|
|
Professional Services Agreement, dated as of July 20, 2006, between the Registrant and Crestview Advisors, L.L.C.(1)
|
|
|
10.9
|
|
Amendment No. 2 to Professional Services Agreement, dated June 14, 2010, between Registrant and Crestview Advisors, L.L.C.(14)
|
|
|
10.10
|
|
Form of Subscription Agreement with respect to the Registrants Director Stock Purchase Plan.(2)
|
|
|
10.11
|
|
2007 Employee Stock Purchase Plan, amended as of June 1, 2011.(2)
|
|
|
10.12
|
|
Form of resolution of the Registrants Board of Directors with respect to the Registrants Director Stock Purchase Plan.(2)
|
|
|
10.13
|
|
Description of the Registrants 2008 Incentive Compensation Program.(4)
|
|
|
10.14
|
|
Retention Incentive Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(5)
|
|
|
10.15
|
|
Employment Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(5)
|
|
|
10.16
|
|
Form of Amendment to Original 2008 Performance RSU Award Agreement.(6)
|
|
|
10.17
|
|
Form of August 2008 Performance RSU Award Agreement.(6)
|
|
|
10.18
|
|
Form of Stock Option Agreement.(6)
|
|
|
10.19
|
|
Form of Restrictive Covenant Agreement.(6)
|
|
|
10.20
|
|
Retirement Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(7)
|
|
|
10.21
|
|
Director Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(7)
|
|
|
10.22
|
|
Stock Repurchase Agreement, dated as of May 18, 2009, by and among the Registrant, Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.), and FBR TRS
Holdings, Inc.(9)
|
|
|
10.23
|
|
Form of Transition Services Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.24
|
|
Form of Assignment and Assumption Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.25
|
|
Form of Trademark and Copyright Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.26
|
|
Form of Domain Name Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.27
|
|
Form of Trademark License Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.28
|
|
Form of LTIP RSU Award Agreement.(10)
|
|
|
10.29
|
|
RSU Award Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(10)
|
|
|
10.30
|
|
Stock Option Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(10)
|
56
|
|
|
Exhibit
Number
|
|
Description
|
|
|
10.31
|
|
FBR Capital Markets Corporation 2010 Partner Leveraged Stock Purchase Program, as amended and restated.(10)
|
|
|
10.32
|
|
FBR & Co. Retention and Incentive Plan (Effective February 8, 2012).(17)
|
|
|
10.33
|
|
Form of Retention and Incentive Plan Award Letter.(17)
|
|
|
10.34
|
|
Form of RSU Award Letter.(17)
|
|
|
12.1
|
|
Statement regarding Computation of Ratio of Earnings to Fixed Charges.*
|
|
|
21.1
|
|
Subsidiaries of the Registrant.*
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP.*
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
101
|
|
The following financial information from the Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i)
the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Shareholders Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated
Financial Statements, tagged as blocks of text.
|
(1)
|
Previously filed as an exhibit to the Registrants Registration Statement on Form S-1 (Registration No. 333-138824), which was filed with the SEC on
November 17, 2006, and incorporated by reference herein.
|
(2)
|
Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 10, 2007, and incorporated by reference herein.
|
(3)
|
Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 21, 2007, and incorporated by reference herein.
|
(4)
|
Incorporated herein by reference to the description of such program included in Item 5.02 of the Registrants Current Report on Form 8-K, which was filed with
the SEC on February 26, 2008.
|
(5)
|
Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, which was filed with the SEC
on May 12, 2008, and incorporated herein by reference.
|
(6)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on August 21, 2008, and incorporated herein by
reference.
|
(7)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on December 22, 2008, and incorporated herein by
reference.
|
(8)
|
Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009, which was filed with the SEC
on May 8, 2009, and incorporated herein by reference.
|
(9)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on May 19, 2009, and incorporated herein by
reference.
|
(10)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on February 16, 2010, and incorporated herein by
reference.
|
(11)
|
Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-159415), which was
initially filed with the SEC on May 22, 2009, and incorporated herein by reference.
|
57
(12)
|
Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-161416), which was
initially filed with the SEC on August 18, 2009, as amended, and incorporated herein by reference.
|
(13)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on June 8, 2010, and incorporated herein by
reference.
|
(14)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on June 14, 2010, and incorporated herein by
reference.
|
(15)
|
Previously filed as an exhibit to the Registrants Registration Statement on Form S-8 (Registration No. 333-175088
,
which was filed with the SEC on June 23,
2011, and incorporated by reference herein.
|
(16)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the Commission on June 23, 2011, and incorporated by reference
herein.
|
(17)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the Commission on February 14, 2012, and incorporated by
reference herein.
|
|
Management contract or compensatory plan or arrangement.
|
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
|
|
|
|
|
FBR & CO.
|
|
|
|
|
Date: March 15, 2012
|
|
|
|
By:
|
|
/
S
/ R
ICHARD
J. H
ENDRIX
|
|
|
|
|
|
|
Richard J. Hendrix
|
|
|
|
|
|
|
Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
/
S
/ R
ICHARD
J.
H
ENDRIX
RICHARD J. HENDRIX
|
|
Chief Executive Officer and Director
(principal executive officer)
|
|
March 15, 2012
|
|
|
|
/
S
/ B
RADLEY
J.
W
RIGHT
BRADLEY J. WRIGHT
|
|
Executive Vice President, Chief Financial Officer and Chief Administrative Officer
(principal financial officer)
|
|
March 15, 2012
|
|
|
|
/
S
/ R
OBERT
J.
K
IERNAN
ROBERT J. KIERNAN
|
|
Senior Vice President, Controller and Chief Accounting Officer
(principal accounting officer)
|
|
March 15, 2012
|
|
|
|
/
S
/ E
RIC
F.
B
ILLINGS
ERIC F. BILLINGS
|
|
Chairman and Director
|
|
March 15, 2012
|
|
|
|
/
S
/ D
R
. R
EENA
A
GGARWAL
REENA AGGARWAL
|
|
Director
|
|
March 15, 2012
|
|
|
|
/
S
/ T
HOMAS
J. H
YNES
,
J
R
.
THOMAS J. HYNES, JR.
|
|
Director
|
|
March 15, 2012
|
|
|
|
/
S
/ A
DAM
J.
K
LEIN
ADAM J. KLEIN
|
|
Director
|
|
March 15, 2012
|
|
|
|
/
S
/ R
ICHARD
A.
K
RAEMER
RICHARD A. KRAEMER
|
|
Director
|
|
March 15, 2012
|
|
|
|
/
S
/ R
ALPH
S. M
ICHAEL
,
III
RALPH S. MICHAEL, III
|
|
Director
|
|
March 15, 2012
|
|
|
|
/
S
/ T
HOMAS
S. M
URPHY
,
J
R
.
THOMAS S. MURPHY, JR.
|
|
Director
|
|
March 15, 2012
|
|
|
|
/
S
/ A
RTHUR
J.
R
EIMERS
ARTHUR J. REIMERS
|
|
Director
|
|
March 15, 2012
|
59
F
BR & Co.
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of
FBR & Co.:
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of operations, of changes in shareholders equity and of cash flows present fairly, in all material respects, the financial position of FBR & Co. and its subsidiaries (the Company) at
December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these
financial statements and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 15, 2012
F-2
FBR & Co.
Consolidated Balance Sheets
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
135,792
|
|
|
$
|
236,077
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Due from brokers, dealers and clearing organizations
|
|
|
6,048
|
|
|
|
15,463
|
|
Customers
|
|
|
3,937
|
|
|
|
10,280
|
|
Other
|
|
|
6,854
|
|
|
|
11,635
|
|
Financial instruments owned, at fair value
|
|
|
100,634
|
|
|
|
86,400
|
|
Other investments, at cost
|
|
|
25,744
|
|
|
|
45,224
|
|
Goodwill
|
|
|
|
|
|
|
5,882
|
|
Intangible assets, net
|
|
|
2,121
|
|
|
|
2,583
|
|
Furniture, equipment, software, and leasehold improvements, net of accumulated depreciation and amortization
|
|
|
6,162
|
|
|
|
9,741
|
|
Prepaid expenses and other assets
|
|
|
10,791
|
|
|
|
8,182
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
298,083
|
|
|
$
|
431,467
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased, at fair value
|
|
$
|
35,496
|
|
|
$
|
55,444
|
|
Accrued compensation and benefits
|
|
|
15,760
|
|
|
|
53,305
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
15,280
|
|
|
|
23,904
|
|
Due to brokers, dealers and clearing organizations
|
|
|
6,250
|
|
|
|
7,323
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
72,786
|
|
|
|
139,976
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 par value 100,000,000 authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 300,000,000 shares authorized, 54,981,135 and 61,717,837 shares issued and outstanding,
respectively
|
|
|
55
|
|
|
|
62
|
|
Additional paid-in capital
|
|
|
413,224
|
|
|
|
424,641
|
|
Employee stock loan receivable, including accrued interest (103,450 and 115,950 shares, respectively)
|
|
|
(673
|
)
|
|
|
(706
|
)
|
Restricted stock units
|
|
|
29,013
|
|
|
|
34,239
|
|
Accumulated other comprehensive income (loss), net of taxes
|
|
|
19
|
|
|
|
(53
|
)
|
Accumulated deficit
|
|
|
(216,341
|
)
|
|
|
(166,692
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
225,297
|
|
|
|
291,491
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
298,083
|
|
|
$
|
431,467
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
FBR & Co.
Consolidated Statements of Operations
(Dollars in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital raising
|
|
$
|
42,862
|
|
|
$
|
98,768
|
|
|
$
|
121,007
|
|
Advisory
|
|
|
15,284
|
|
|
|
19,505
|
|
|
|
17,716
|
|
Institutional brokerage:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
|
18,081
|
|
|
|
22,227
|
|
|
|
40,271
|
|
Agency commissions
|
|
|
60,376
|
|
|
|
77,864
|
|
|
|
92,864
|
|
Asset management fees
|
|
|
14,941
|
|
|
|
14,097
|
|
|
|
13,244
|
|
Net investment (loss) income
|
|
|
(9,696
|
)
|
|
|
9,218
|
|
|
|
1,577
|
|
Interest income, dividends, and other
|
|
|
5,303
|
|
|
|
4,908
|
|
|
|
5,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
147,151
|
|
|
|
246,587
|
|
|
|
292,485
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest expense
|
|
|
147,151
|
|
|
|
246,587
|
|
|
|
292,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
106,014
|
|
|
|
182,430
|
|
|
|
193,017
|
|
Professional services
|
|
|
12,202
|
|
|
|
18,529
|
|
|
|
23,971
|
|
Business development
|
|
|
12,066
|
|
|
|
14,936
|
|
|
|
13,770
|
|
Clearing and brokerage fees
|
|
|
11,928
|
|
|
|
13,129
|
|
|
|
13,945
|
|
Occupancy and equipment
|
|
|
19,936
|
|
|
|
25,595
|
|
|
|
33,655
|
|
Communications
|
|
|
16,999
|
|
|
|
20,067
|
|
|
|
21,304
|
|
Impairment of goodwill and intangible assets
|
|
|
5,882
|
|
|
|
|
|
|
|
5,350
|
|
Other operating expenses
|
|
|
12,003
|
|
|
|
13,563
|
|
|
|
16,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
197,030
|
|
|
|
288,249
|
|
|
|
321,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(49,879
|
)
|
|
|
(41,662
|
)
|
|
|
(28,989
|
)
|
Income tax benefit
|
|
|
(230
|
)
|
|
|
(4,104
|
)
|
|
|
(1,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(49,649
|
)
|
|
$
|
(37,558
|
)
|
|
$
|
(27,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.82
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding (in thousands)
|
|
|
60,841
|
|
|
|
63,546
|
|
|
|
60,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
FBR & Co.
Consolidated Statements of Changes in Shareholders Equity
(Dollars and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
Shares
|
|
|
Common
Stock
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Restricted
Stock
Units
|
|
|
Employee
Stock
Loan
Receivable
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
Comprehensive
Loss
|
|
Balances at December 31, 2008
|
|
|
59,792
|
|
|
$
|
60
|
|
|
$
|
396,059
|
|
|
$
|
9,309
|
|
|
$
|
|
|
|
$
|
(218
|
)
|
|
$
|
(101,483
|
)
|
|
$
|
303,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,651
|
)
|
|
|
(27,651
|
)
|
|
$
|
(27,651
|
)
|
Contribution from FBR TRS Holdings, Inc.
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
Issuance of common stock, net of forfeitures
|
|
|
20,940
|
|
|
|
21
|
|
|
|
100,852
|
|
|
|
(1,540
|
)
|
|
|
(391
|
)
|
|
|
|
|
|
|
|
|
|
|
98,942
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(16,667
|
)
|
|
|
(17
|
)
|
|
|
(73,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,472
|
)
|
|
|
|
|
Stock compensation expense for options granted to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
5,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,562
|
|
|
|
|
|
Issuance of restricted stock
units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,210
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale investment securities, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(27,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009
|
|
|
64,065
|
|
|
$
|
64
|
|
|
$
|
429,052
|
|
|
$
|
19,979
|
|
|
$
|
(391
|
)
|
|
$
|
(71
|
)
|
|
$
|
(129,134
|
)
|
|
$
|
319,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,558
|
)
|
|
|
(37,558
|
)
|
|
$
|
(37,558
|
)
|
Issuance of common stock, net of forfeitures
|
|
|
850
|
|
|
|
1
|
|
|
|
6,655
|
|
|
|
(4,453
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
1,888
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(3,197
|
)
|
|
|
(3
|
)
|
|
|
(15,902
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,905
|
)
|
|
|
|
|
Stock compensation expense for options granted to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
4,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,836
|
|
|
|
|
|
Issuance of restricted stock
units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,713
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale investment securities, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
18
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(37,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010
|
|
|
61,718
|
|
|
$
|
62
|
|
|
$
|
424,641
|
|
|
$
|
34,239
|
|
|
$
|
(706
|
)
|
|
$
|
(53
|
)
|
|
$
|
(166,692
|
)
|
|
$
|
291,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,649
|
)
|
|
|
(49,649
|
)
|
|
$
|
(49,649
|
)
|
Issuance of common stock, net of forfeitures
|
|
|
1,507
|
|
|
|
1
|
|
|
|
10,242
|
|
|
|
(12,070
|
)
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
(1,794
|
)
|
|
|
|
|
Repurchase of common stock
|
|
|
(8,242
|
)
|
|
|
(8
|
)
|
|
|
(23,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,238
|
)
|
|
|
|
|
Stock compensation expense for options granted to purchase common stock
|
|
|
|
|
|
|
|
|
|
|
1,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,571
|
|
|
|
|
|
Issuance of restricted stock
units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,844
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on available-for-sale investment securities, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
72
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(49,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2011
|
|
|
54,981
|
|
|
$
|
55
|
|
|
$
|
413,224
|
|
|
$
|
29,013
|
|
|
$
|
(673
|
)
|
|
$
|
19
|
|
|
$
|
(216,341
|
)
|
|
$
|
225,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FBR & Co.
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(49,649
|
)
|
|
$
|
(37,558
|
)
|
|
$
|
(27,651
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,023
|
|
|
|
7,471
|
|
|
|
10,983
|
|
Income tax provisiondeferred
|
|
|
(213
|
)
|
|
|
149
|
|
|
|
356
|
|
Net investment loss (income) from investments and mortgage-backed securities.
|
|
|
9,696
|
|
|
|
(9,218
|
)
|
|
|
(1,577
|
)
|
Stock compensation
|
|
|
8,096
|
|
|
|
20,237
|
|
|
|
20,200
|
|
Impairment of goodwill and intangible assets
|
|
|
5,882
|
|
|
|
|
|
|
|
5,350
|
|
Securities received in lieu of cash
|
|
|
|
|
|
|
(14,068
|
)
|
|
|
|
|
Other
|
|
|
1,968
|
|
|
|
1,955
|
|
|
|
1,704
|
|
Changes in operating assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokers, dealers and clearing organizations
|
|
|
9,415
|
|
|
|
81,014
|
|
|
|
(96,476
|
)
|
Customers
|
|
|
5,622
|
|
|
|
(4,821
|
)
|
|
|
(3,573
|
)
|
Affiliates
|
|
|
619
|
|
|
|
36
|
|
|
|
2,506
|
|
Interest, dividends and other
|
|
|
4,166
|
|
|
|
(2,137
|
)
|
|
|
17,108
|
|
Trading account securities
|
|
|
6,536
|
|
|
|
12,708
|
|
|
|
(76,525
|
)
|
Prepaid expenses and other assets
|
|
|
(2,396
|
)
|
|
|
(1,434
|
)
|
|
|
7,167
|
|
Changes in operating liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account securities sold but not yet purchased
|
|
|
(19,948
|
)
|
|
|
11,331
|
|
|
|
35,788
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(11,737
|
)
|
|
|
(1,488
|
)
|
|
|
(4,495
|
)
|
Accrued compensation and benefits
|
|
|
(36,537
|
)
|
|
|
(14,770
|
)
|
|
|
31,282
|
|
Brokers, dealers and clearing organizations
|
|
|
(1,073
|
)
|
|
|
(82,845
|
)
|
|
|
87,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(65,530
|
)
|
|
|
(33,438
|
)
|
|
|
9,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities and other investments
|
|
|
(35,353
|
)
|
|
|
(32,855
|
)
|
|
|
(10,150
|
)
|
Proceeds from sales of and distributions from investments
|
|
|
27,856
|
|
|
|
51,672
|
|
|
|
12,009
|
|
Settlement of derivatives held for investment purposes
|
|
|
(3,472
|
)
|
|
|
|
|
|
|
|
|
Purchases of furniture, equipment, software, and leasehold improvements
|
|
|
(1,304
|
)
|
|
|
(2,777
|
)
|
|
|
(1,336
|
)
|
Securities sold but not yet purchased, net
|
|
|
|
|
|
|
(7,812
|
)
|
|
|
5,933
|
|
Acquisition of net assets
|
|
|
|
|
|
|
(488
|
)
|
|
|
(3,311
|
)
|
Proceeds from sales of mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
450,396
|
|
Receipt of principal payments on mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(12,273
|
)
|
|
|
7,740
|
|
|
|
455,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(23,238
|
)
|
|
|
(15,905
|
)
|
|
|
(73,472
|
)
|
Proceeds from sales of common stock
|
|
|
696
|
|
|
|
2,140
|
|
|
|
91,926
|
|
Proceeds from repayment of employee stock purchase plan.
|
|
|
60
|
|
|
|
34
|
|
|
|
|
|
(Repayment of) proceeds from repurchase agreements, net
|
|
|
|
|
|
|
|
|
|
|
(416,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(22,482
|
)
|
|
|
(13,731
|
)
|
|
|
(397,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(100,285
|
)
|
|
|
(39,429
|
)
|
|
|
67,705
|
|
Cash and cash equivalents, beginning of period
|
|
|
236,077
|
|
|
|
275,506
|
|
|
|
207,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
135,792
|
|
|
$
|
236,077
|
|
|
$
|
275,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flows disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$
|
138
|
|
|
$
|
5,077
|
|
|
$
|
25
|
|
Interest payments
|
|
|
|
|
|
|
|
|
|
|
255
|
|
Non-cash operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities received in exchange for services provided, fair value at receipt date
|
|
$
|
|
|
|
$
|
14,068
|
|
|
$
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
FBR & Co.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Note 1. Organization and Nature of Operations:
Organization
FBR & Co., formerly known as FBR Capital Markets Corporation (the Company), a Virginia corporation, is a holding Company of which the principal operating companies are FBR Capital
Markets & Co. (FBRCM), FBR Capital Markets LT, Inc. (FBRLT), FBR Fund Advisers, Inc. (FBRFA), FBR Investment Services, Inc. (FBRIS) and FBR Capital Markets PT, Inc. (FBRPT).
FBRCM is an SEC-registered broker-dealer and member of Financial Industry Regulatory Authority Inc. (FINRA).
FBRCM acts as an introducing broker and forwards all transactions to a clearing broker on a fully disclosed basis. FBRCM does not hold funds or securities for, nor owe funds or securities to, customers. In addition, FBRCM provides capital raising
and advisory services. The Company conducts its syndicated loan trading activity at FBRLT.
FBRFA is an SEC-registered
investment adviser that manages The FBR Funds, a family of mutual funds. FBRIS, an SEC-registered broker-dealer and member of FINRA, is the Distributor of The FBR Funds.
FBRPT holds and manages the Companys portfolio of investments which includes certain merchant banking investments.
Prior to December 2011, the Companys subsidiary FBR Capital Markets International, Ltd. (FBRIL) located in the United Kingdom was an introducing broker-dealer registered with the
Financial Services Authority (FSA) of the United Kingdom. In the fourth quarter of 2011, the Company initiated the process to cease activities at FBRIL and terminate FBRILs registration with the FSA. Subsequent to these actions,
subject to regulatory limitations, institutional brokerage and investment banking activity with European clients is conducted by FBRCM.
Prior to May 2009, the Company was a majority-owned subsidiary of Arlington Asset Investment Corp. (Arlington Asset), a separate publicly-traded corporation (NYSE:AI). In May 2009, the Company
repurchased 16,667,000 of its common stock at a share price of $4.35 from Arlington Asset. Subsequent to this share repurchase, Arlington Asset was no longer the majority-owner of the Company.
In October 2009, Arlington Asset sold its remaining 14,755,017 shares of the Companys common stock at $6.00 per share in a
secondary public offering. As a result of the repurchase and secondary offering of shares of the Companys common stock, Arlington Asset no longer maintains any ownership interest in the Company.
Nature of Operations
The Companys principal business activities, including capital raising, securities sales and trading, merger, acquisition and advisory services, proprietary investments, and asset management
services, are all linked to the capital markets.
The Companys investment banking and institutional brokerage business
activities are primarily focused on small- and mid-cap stocks in the following industry sectors: consumer, diversified industrials, energy and natural resources, financial institutions, insurance, real estate, and technology, media and
telecommunications (TMT) sectors. By their nature, the Companys business activities are conducted in markets which are highly competitive and are subject to general market conditions, volatile trading markets and fluctuations in
the volume of market activity, as well as conditions affecting the companies and markets in the Companys areas of focus.
F-7
The Companys revenues from investment banking and fees from asset management are
subject to substantial 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 Company focuses.
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 may vary significantly from
period-to-period and year-to-year.
In the fourth quarter of 2011, in response to adverse market conditions, the Company
implemented a restructuring plan intended to reduce fixed costs by approximately 35%, principally through headcount reduction. In connection with the restructuring plan, the Company reduced its headcount by 30% as compared to September 30,
2011. The Company incurred cash severance charges related to these actions of $3,496. The Company believes that these actions will not change the fundamental composition or strength of its franchise.
Concentration of Risk
A substantial portion of the Companys investment banking revenues may be derived from a small number of transactions or issues or may be concentrated in a particular industry. For the years ended
December 31, 2011, 2010 and 2009 investment banking revenue accounted for 39.5%, 48.0% and 47.5%, respectively, of the Companys revenues, net of interest expense.
Note 2. Summary of Significant Accounting Policies:
Principles of Consolidated Financial Statements
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of the Companys financial statements, in conformity with accounting principles generally accepted in the United
States of America, requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Although, the Company bases its estimates and assumptions on historical experience and market information (when available) and on various other factors that it believes to be reasonable under the circumstances, management exercises significant
judgment in the final determination of its estimates. Actual results may differ from these estimates.
Cash Equivalents
Cash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original
maturities of three months or less that are not held for sale in the ordinary course of business. As of December 31, 2011 and 2010, approximately 48% and 38%, respectively, of the Companys cash equivalents were invested in money market
funds that invest primarily in U.S. Treasuries and other securities backed by the U.S. government.
F-8
Fair Value of Financial Instruments
ASC 820 Fair Value Measurements and Disclosures (ASC 820) defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as
described below:
|
|
|
|
|
Level 1 Inputs
|
|
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company;
|
Level 2 Inputs
|
|
|
|
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly;
|
Level 3 Inputs
|
|
|
|
Unobservable inputs for the asset or liability, including significant assumptions of the Company and other market participants.
|
The Company determines fair values for the following assets and liabilities:
Equity securities and listed options
The Company classifies marketable equity securities
and listed options within Level 1 of the fair value hierarchy because quoted market prices are used to value these securities. Non-public equity securities are classified within Level 3 of the fair value hierarchy if enterprise values are used to
value these securities. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate the value, including where applicable over-the-counter market trading activity
.
Convertible and fixed income debt instruments
The Company classifies convertible and fixed income debt
instruments within Level 2 of the fair value hierarchy as they are valued using quoted market prices provided by a broker or dealer, or alternative pricing services that provide reasonable levels of price transparency.
Other
The Company invests in proprietary investment funds that are valued at net asset value (NAV)
determined by the fund administrator. Investments in mutual funds are classified within Level 1 of the fair value hierarchy because investments within the funds are primarily exchange-traded securities and no restrictions exist on the redemption of
the amounts invested by the Company. For investments in non-registered investment companies (private equity and fund of funds), the Company classifies these investments within Level 3 as the underlying securities held by these investment companies
are primarily private-equity securities and restrictions exist on the redemption of amounts invested by the Company.
As a practical expedient, the Company relies on the NAV of these investments as their fair value. The NAVs that have been provided by investees are derived from the fair values of the underlying
investments as of the reporting date.
The estimated fair values of the Companys financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
135,792
|
|
|
$
|
135,792
|
|
|
$
|
236,077
|
|
|
$
|
236,077
|
|
Non-interest bearing receivables
|
|
|
10,791
|
|
|
|
10,791
|
|
|
|
21,915
|
|
|
|
21,915
|
|
Financial instruments owned, at fair value
|
|
|
100,634
|
|
|
|
100,634
|
|
|
|
86,400
|
|
|
|
86,400
|
|
Other investments, at cost
|
|
|
25,744
|
|
|
|
21,622
|
|
|
|
45,224
|
|
|
|
45,224
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased, at fair value
|
|
|
35,496
|
|
|
|
35,496
|
|
|
|
55,444
|
|
|
|
55,444
|
|
F-9
Securities and Principal Investments
Trading securities and investments owned by the Companys broker-dealer subsidiaries and securities sold but not yet purchased are
recorded on a trade-date basis and carried at fair value. Realized and unrealized gains and losses from trading securities are reflected in principal transactions in the statements of operations. Realized and unrealized losses from such long term
investments are reflected in net investment income in the statements of operations.
Marketable equity, debt, and asset-backed
securities held for investment purposes at non-broker-dealer subsidiaries are designated as either available-for-sale or trading investments pursuant to Accounting Standards Codification (ASC) 320 InvestmentsDebt and Equity
Securities (ASC 320). These investments are carried at fair value with resulting unrealized gains and losses on available-for-sale securities reflected in accumulated other comprehensive income (loss) in the balance sheets and
unrealized gains and losses on trading securities reflected in net investment income in the statements of operations. Investments in equity securities of non-public companies that are held in non-broker dealer subsidiaries are carried at cost.
The Company evaluates available-for-sale securities and investments in securities of non-public companies carried at cost for
other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The value of our investments in marketable equity securities designated as available-for-sale can fluctuate
significantly. The value of our investments in securities of non-public companies can also fluctuate significantly. Such values may be based on unobservable inputs, including significant assumptions of the Company and consideration of the liquidity
and size of the Companys position. In evaluating these investments for other-than-temporary impairment, consideration is given to (1) the length of time and the extent to which the fair value has been lower than carrying value,
(2) the severity of the decline in fair value, (3) the financial condition and near-term prospects of the issuer, and (4) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. If it is determined that an investment impairment is other-than-temporary then the amount that the fair value is below its current basis is recorded as an impairment charge and recorded through earnings in net
investment income (loss) in the statement of operations.
For unrealized losses that are determined to be temporary, we
continue to evaluate these at each reporting date. If we determine at a future date that an impairment of a marketable equity security is other-than-temporary, the applicable unrealized loss will be reclassified from accumulated other comprehensive
income and recognized as an other-than-temporary impairment loss at the time the determination is made.
Realized gains and
losses on sales of equity securities are determined using the specific identification method. The Company held mortgage-backed securities during the year ended December 31, 2008 and through the period ended February 2009, realized gains and
losses on these mortgage-backed securities transactions were determined based on average cost.
For restricted shares,
including private company shares, these investments by their nature have limited or no price transparency. Adjustments to carrying value may be based on third-party transactions evidencing a change in value and output from the Companys
valuation models and estimates of fair value. In reaching that determination, the Company may consider factors such as, but not limited to, the financial performance of the companies relative to projections, trends within sectors, underlying
business models and expected exit timing and strategy.
The Companys investments in proprietary investment funds
includes mutual funds, private equity and fund of funds. These investments are comprised of registered and non-registered investment companies that report NAV to investors representing the fair value of the underlying investments held by the funds.
The Company reflects the increase/decrease in NAV (including realized and unrealized gains and losses) in net investment income in the statement of operations.
F-10
The private investment funds are non-registered investment companies that record their
investments in securities at fair value. Investments of these funds may include securities of development-stage and early-stage privately and publicly held companies. The disposition of these investments may be restricted due to the lack of a ready
market or due to contractual or regulatory restrictions on disposition. In addition, these securities may represent significant portions of the issuers equity and carry special contractual privileges not available to other security holders. As
a result of these factors, precise valuation for the restricted public securities and private company securities is a matter of judgment, and the determination of fair value must be considered only an approximation and may vary significantly from
the amounts that could be realized if the investment were sold or from the value that would have been used had a ready market existed for the securities and those differences could be material.
Due from/to Brokers, Dealers, and Clearing Organizations
The Company clears all of its proprietary and customer transactions through another broker-dealer on a fully disclosed basis. Based on the
terms and conditions of the Companys agreements with its clearing broker, the amount receivable from the clearing broker represents proceeds from unsettled securities sold less amounts payable for unsettled securities purchased by the Company.
The amounts payable are collateralized by securities owned by the Company. In addition, these balances include unsettled trades associated with our credit sales and trading platform. These transactions include trades in certain sectors of the
corporate bond and syndicated loan markets.
Intangible Assets
The Companys intangible assets consist of goodwill and intangible assets with finite useful lives. Goodwill is not amortized but is
tested annually for impairment (during the fourth quarter) or more frequently if an adverse event occurs that may indicate impairment. The assessment of goodwill is performed at the reporting unit level. The values of the intangible assets with
finite useful lives are amortized in proportion to their expected economic benefit over their estimated useful life or straight-line if the economic benefit cannot be reliably determined. These intangible assets are periodically tested for
impairment by comparing expected future gross cash flows to the assets carrying amount. If the expected gross cash flows are less than the carrying amount, the asset is impaired and is written-down to its fair value. See Note 7 regarding the
Companys current year assessment of goodwill and the resulting $5,882 impairment charge recorded during the year ended December 31, 2011.
Furniture, Equipment, Software and Leasehold Improvements
Furniture
and equipment are depreciated using the straight-line method over their estimated useful lives of three to five years. Amortization of purchased software is recorded over the estimated useful lives of three to five years. Leasehold improvements are
amortized using the straight-line method over the shorter of the useful life or lease term.
Investment Banking Revenues
Capital raising revenues represent fees earned from private placements and from public offerings of securities in
which the Company acts as placement agent or underwriter. These revenues consist of selling concessions, underwriting fees, and management fees. Advisory revenues represent fees earned from mergers and acquisitions, mutual conversions, financial
restructuring and other advisory services provided to clients. Capital raising revenues are recorded as revenue at the time the private placement or underwriting is completed. Advisory fees are recorded as revenue when the related service has been
rendered and the client is contractually obligated to pay. Certain fees received in advance of services rendered are deferred and recognized as revenue over the service period.
F-11
Institutional Brokerage Agency and Principal Revenues
Agency commissions consist of commissions earned from executing the trade of stock exchange-listed securities and other transactions as an
agent and principal transactions consist of sales credits and trading gains or losses from securities transactions. Revenues generated from securities transactions and related commission income and expenses are recorded on a trade-date basis.
Asset Management Revenues
The Company receives fees for the management, administration, and distribution of mutual funds based upon the amount of assets under management. This revenue is recognized over the period in which
services are performed and is recorded in asset management fees in the Companys statement of operations.
Compensation and Benefits
Compensation and benefits includes base salaries, incentive compensation, stock-based compensation, employee benefit costs, and employer taxes. Incentive compensation is a significant component of
compensation expense and is accrued based on the Companys performance and the contribution of key business units, in certain limited cases, using pre-defined formulas. The Companys compensation accruals are reviewed and evaluated on a
quarterly basis. The Company recognizes stock-based compensation expense in the statement of operations based on the grant-date fair value of awards of equity instruments issued to employees. The expense is recognized over the period during which
employees are required to provide service. The expense is recorded using an estimated forfeiture rate for awards on the date of grant.
Income Taxes
Deferred tax assets and liabilities represent the
differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates. The measurement of net deferred tax assets is adjusted by a valuation allowance if, based on our evaluation and our consideration of
the criteria in ASC 740, Income Taxes (ASC 740), it is more likely than not that they will not be realized. The Companys policy for recording interest and penalties associated with uncertain tax positions is to record
such items as a component of other operating expenses in the statement of operations.
Other Comprehensive Income
Comprehensive income includes net income as currently reported by the Company on the consolidated statements of
operations adjusted for other comprehensive income. Other comprehensive income for the Company represents changes in unrealized gains and losses related to the Companys investment securities accounted for as available-for-sale with changes in
fair value recorded through shareholders equity.
F-12
Earnings Per Share
Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted earnings per share includes the impact of dilutive securities such as stock options, unvested shares of restricted stock and restricted stock units (RSUs), all
of which are subject to forfeiture. Due to the Companys reported net loss for the years ended December 31, 2011, 2010 and 2009, all stock options, unvested shares of restricted stock and unvested RSUs were considered anti-dilutive for
these periods. The following table presents the computations of basic and diluted earnings per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2011
|
|
|
Year Ended
December 31, 2010
|
|
|
Year Ended
December 31, 2009
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock (in thousands)
|
|
|
60,841
|
|
|
|
60,841
|
|
|
|
63,546
|
|
|
|
63,546
|
|
|
|
60,094
|
|
|
|
60,094
|
|
Stock options, unvested restricted stock and RSUs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding (in thousands)
|
|
|
60,841
|
|
|
|
60,841
|
|
|
|
63,546
|
|
|
|
63,546
|
|
|
|
60,094
|
|
|
|
60,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock
|
|
$
|
(49,649
|
)
|
|
$
|
(49,649
|
)
|
|
$
|
(37,558
|
)
|
|
$
|
(37,558
|
)
|
|
$
|
(27,651
|
)
|
|
$
|
(27,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
$
|
(0.82
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table present the number of antidilutive stock options, unvested restricted stock and RSUs
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Stock OptionsEmployees and directors
|
|
|
7,069
|
|
|
|
7,979
|
|
|
|
7,477
|
|
Stock OptionsNon-employee
|
|
|
3,424
|
|
|
|
3,256
|
|
|
|
3,102
|
|
Restricted Stock, unvested
|
|
|
265
|
|
|
|
658
|
|
|
|
1,361
|
|
Restricted Stock Units, unvested
|
|
|
5,528
|
|
|
|
8,231
|
|
|
|
7,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16,286
|
|
|
|
20,124
|
|
|
|
19,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (FASB) amended its fair value measurement guidance in order to improve
the comparability of fair value measurements presented and disclosed in financial statements between U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). Although
many of the changes for U.S. GAAP purposes are clarifications of existing guidance or wording changes to align with IFRS, additional disclosures about fair value measurements would be required. These amendments will result in the following
additional disclosures: (i) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (ii) the valuation processes used and the sensitivity of fair value measurements related to investments categorized
within Level 3 of the hierarchy of fair value measurements to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any, and (iii) the categorization by level of the fair value hierarchy for items that
are not measured at fair value in the statement of financial condition but for which the fair value is required to be disclosed. These changes are effective for interim and annual periods beginning after December 15, 2011. Early application is
not permitted. The Company does not anticipate that the adoption of the amended fair value measurement guidance will have a material impact on the Companys consolidated financial statements.
F-13
In June 2011, the FASB amended its guidance regarding the presentation of comprehensive
income, which it states was designed to improve comparability, consistency and transparency and to increase the prominence of items reported in other comprehensive income. The amendment eliminates the option to present components of other
comprehensive income as part of the statement of changes in shareholders equity allowable under current U.S. GAAP. Entities will be required to present all changes in comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. This amendment is to be applied retrospectively and is effective with interim and annual periods beginning after December 15, 2011, with early adoption permitted. In October
2011, the FASB voted to propose a deferral of the new requirement to present reclassifications of other comprehensive income on the face of the income statement. Companies would still be required to adopt the other requirements contained in the new
accounting standard for the presentation of comprehensive income.
In September 2011, the FASB amended its guidance for
goodwill impairment testing. The amendment allows for an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining
whether to perform the two-step goodwill impairment tests as described by previous guidance. Under the amended guidance an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely
than not that the fair value is less than the carrying amount. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 31, 2011. However, early adoption is permitted.
Adoption of the amended goodwill impairment testing guidance will not have a material impact on the Companys consolidated financial statements.
In December 2011, the FASB amended its guidance for disclosure of assets and liabilities netted for financial statement purposes. The amendment is designed to enhance disclosures by requiring improved
information about financial instruments and derivative instruments that are either offset in accordance with current standards or subject to an enforceable master netting arrangement or similar agreement. The disclosure enhancements include
providing in the notes to the financial statements the gross assets and gross liabilities recognized on the balance sheet, those amounts netted in accordance with current standards, those net positions subject to an enforceable master netting
arrangement or similar agreement, and the net positions presented on the balance sheet. This information should be presented in a tabular format. This amendment is effective for annual reporting periods beginning January 1, 2013 and interim
periods within those annual reporting periods.
Note 3. Related-Party Transactions:
In July 2006, the Company entered into various inter-company and other contractual arrangements with Arlington Asset
and Crestview Partners, L.P., a New York-based private equity firm (Crestview), including a professional services agreement and other related party contractual arrangements.
In May 2009, the Company entered into a stock repurchase agreement with Arlington Asset (Repurchase Agreement) pursuant to
which, among other things, the Company repurchased 16,667,000 shares of its common stock at a share price of $4.35. As a result of this transaction, Arlington Asset ceased being the majority shareholder of the Company. Concurrently, the Company and
Arlington Asset agreed to terminate various inter-company and other contractual arrangements between them.
In October 2009,
Arlington Asset and related affiliates (collectively, the Companys former majority shareholder), sold 14,755,017 shares of the Companys common stock in an underwritten public offering. As a result of this sale, Arlington Asset no longer
maintains an ownership interest in the Company. Subsequent to this sale, the Companys relationship with Arlington Asset has been limited to subleasing certain office space to Arlington Asset at a market rate. The paragraphs that follow provide
additional detail regarding our historical relationship with Arlington Asset, including amounts reflected in our 2009 financial statements.
F-14
Services Agreement
Under the services agreement with Arlington Asset, the Company was to provide or cause one or more of its subsidiaries to provide to
Arlington Asset certain services, including various corporate overhead services, for fees based on costs incurred by the Company and its subsidiaries in providing the services. Similarly, Arlington Asset was to provide to the Company and its
subsidiaries under the same services agreement certain services, including certain asset management services, for fees based on costs incurred by Arlington Asset in providing the services. The costs being allocated under each of these agreements
primarily consisted of total compensation and benefits of the employees providing the services, professional services, including consulting and legal fees, and facility costs for the employees providing the services.
This services agreement was terminated in connection with the Repurchase Agreement in May 2009 and replaced by a transition services
agreement pursuant to which the Company agreed to provide Arlington Asset certain services for a fixed dollar amount. The services that the Company agreed to provide included the following: employee benefit services, human resources and financial
related services, data and network services and infrastructure, and facilities services, in each case subject to reductions in services (and associated costs) as requested by Arlington Asset. Arlington Asset agreed to use all commercially reasonable
efforts to transition away from the services provided by the Company as soon as practicable and, in any event, no later than one year after the date of agreement. As of December 31, 2009, all such services had been transitioned between the
entities.
In connection with the services agreement and the transition services agreement, during the year ended
December 31, 2009, the Companys operating expenses are reported net of $370 representing overhead costs allocated to Arlington Asset.
Corporate Agreement
Under the corporate agreement with Arlington
Asset, Arlington Asset agreed to indemnify the Company against claims related to the businesses contributed to the Company prior to the contribution of those businesses in July 2006 and that arose out of actions or events that occurred prior to the
contribution. During the year ended December 31, 2009, Arlington Asset incurred costs of $34, net of taxes, pursuant to these indemnification provisions. The Company includes such amounts in its consolidated statements of operations and
reflects a corresponding capital contribution from Arlington Asset. This agreement was terminated in connection with the Repurchase Agreement.
Professional Services Agreement
Under the professional services
agreement with Crestview, the Company agreed to pay Crestview Advisors, L.L.C. a $1,000 annual strategic advisory fee plus reimbursement of reasonable out-of-pocket expenses as long as Crestview continues to own at least 50% of the shares purchased
by certain Crestview affiliates in our 2006 private offering. In June 2010, the Company and Crestview agreed to amend the professional services agreement to allow Crestview the ability to elect to receive a portion of their fee in restricted stock
and/or options to purchase shares of the Companys common stock. If elected, stock options would be issued with a strike price equal to the prevailing market price per share as of the grant date and with an expiration of 4 years. Based on
Crestviews election, in June 2011 and 2010, the Company issued 168,067 and 153,846, respectively, such options to Crestview Advisors, L.L.C. valued at $200. The remaining $800 of the respective 2011 and 2010 strategic advisory fees were paid
in cash. During the years ended December 31, 2011 and 2010, the Company recognized $1,000 of expense associated with this agreement.
In September 2008, the Company and Crestview agreed to issue 502,268 options to purchase common shares of the Company to Crestview Advisors L.L.C. in lieu of cash payments for the strategic advisory fee
for the period beginning October 1, 2008 through December 31, 2009. During the year ended December 31, 2009, the Company recognized $944 of non-cash expense associated with these options.
F-15
Receivables and Payables
From time to time, the Company has made advances to affiliates that were used for general operating purposes and are settled in cash on a
regular basis. Receivables from affiliates totaled $82 and $701 as of December 31, 2011 and 2010, respectively.
Capital Markets Activity
In October 2009, Arlington Asset and related affiliates, the Companys former majority shareholder, sold 14,755,017 shares of the Companys common stock in an underwritten public offering. FBRCM
acted as a book-running manager for this offering and earned investment banking revenues of $2,735.
In May 2009, Arlington
Asset and related affiliates sold 1,500,000 shares of the Companys common stock in an underwritten public offering. FBRCM acted as a book-running manager for this offering and earned investment banking revenues of $349.
Note 4. Investments:
Fair Value Hierarchy
The following tables set forth, by level within the fair value hierarchy, financial instruments and long-term investments accounted for under ASC 820 as of December 31, 2011 and 2010, respectively.
As required by ASC 820, assets and liabilities that are measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Items Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial instruments owned, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments held for trading activities at broker-dealer subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-public equity securities
|
|
$
|
24,043
|
|
|
$
|
20,966
|
|
|
$
|
|
|
|
$
|
3,077
|
|
Listed options
|
|
|
4,930
|
|
|
|
4,930
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
45,282
|
|
|
|
|
|
|
|
45,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,255
|
|
|
|
25,896
|
|
|
|
45,282
|
|
|
|
3,077
|
|
Financial instruments held for investment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-public equity securities
|
|
|
25,107
|
|
|
|
20,358
|
|
|
|
|
|
|
|
4,749
|
|
Designated as available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
165
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,272
|
|
|
|
20,523
|
|
|
|
|
|
|
|
4,749
|
|
Other
|
|
|
1,107
|
|
|
|
591
|
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,634
|
|
|
$
|
47,010
|
|
|
$
|
45,282
|
|
|
$
|
8,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
24,414
|
|
|
$
|
24,414
|
|
|
$
|
|
|
|
$
|
|
|
Listed options
|
|
|
7,062
|
|
|
|
7,062
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
4,020
|
|
|
|
|
|
|
|
4,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,496
|
|
|
$
|
31,476
|
|
|
$
|
4,020
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
As of December 31, 2011, financial assets measured and reported at fair value on a
recurring basis and classified within Level 3 were $8,342 or 2.8% of the Companys total assets at that date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial instruments owned, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments held for trading activities at broker-dealer subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable and non-public equity securities
|
|
$
|
14,165
|
|
|
$
|
9,703
|
|
|
$
|
|
|
|
$
|
4,462
|
|
Listed options
|
|
|
2,474
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
65,215
|
|
|
|
|
|
|
|
65,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,854
|
|
|
|
12,177
|
|
|
|
65,215
|
|
|
|
4,462
|
|
Financial instruments held for investment activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated as trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
3,484
|
|
|
|
3,484
|
|
|
|
|
|
|
|
|
|
Designated as available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
139
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,623
|
|
|
|
3,623
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
923
|
|
|
|
368
|
|
|
|
|
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,400
|
|
|
$
|
16,168
|
|
|
$
|
65,215
|
|
|
$
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
34,448
|
|
|
$
|
34,448
|
|
|
$
|
|
|
|
$
|
|
|
Listed options
|
|
|
887
|
|
|
|
887
|
|
|
|
|
|
|
|
|
|
Convertible and fixed income debt instruments
|
|
|
20,109
|
|
|
|
|
|
|
|
20,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,444
|
|
|
$
|
35,335
|
|
|
$
|
20,109
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, financial assets measured and reported at fair value on a recurring basis
and classified within Level 3 were $5,017 or 1.2% of the Companys total assets at that date.
Level 3 Gains and
Losses
The tables below set forth a summary of changes in the fair value of the Companys Level 3 financial assets
that are measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010. As of December 31, 2011 and 2010, the Company did not have any net unrealized gains (losses) included in accumulated other comprehensive
income on Level 3 financial assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Securities
|
|
|
Other
|
|
|
Total
|
|
Beginning balance, January 1, 2011
|
|
$
|
4,462
|
|
|
$
|
555
|
|
|
$
|
5,017
|
|
Total net losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
723
|
|
|
|
(85
|
)
|
|
|
638
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
625,865
|
|
|
|
150
|
|
|
|
626,015
|
|
Sales/Distributions
|
|
|
(620,601
|
)
|
|
|
(104
|
)
|
|
|
(620,705
|
)
|
Transfers out of Level 3
|
|
|
(2,623
|
)
|
|
|
|
|
|
|
(2,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2011
|
|
$
|
7,826
|
|
|
$
|
516
|
|
|
$
|
8,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date
|
|
$
|
(652
|
)
|
|
$
|
(85
|
)
|
|
$
|
(737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading
Securities
|
|
|
Other
|
|
|
Total
|
|
Beginning balance, January 1, 2010
|
|
$
|
15,481
|
|
|
$
|
914
|
|
|
$
|
16,395
|
|
Total net losses (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
42
|
|
|
|
(19
|
)
|
|
|
23
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
215,466
|
|
|
|
|
|
|
|
215,466
|
|
Sales/Distributions
|
|
|
(225,011
|
)
|
|
|
(340
|
)
|
|
|
(225,351
|
)
|
Transfers out of Level 3
|
|
|
(1,516
|
)
|
|
|
|
|
|
|
(1,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, December 31, 2010
|
|
$
|
4,462
|
|
|
$
|
555
|
|
|
$
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date
|
|
$
|
50
|
|
|
$
|
(19
|
)
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers of securities in to, or out of, Level 2 financial assets during the years ended
December 31, 2011 and 2010. During the years ended December 31, 2011 and 2010, transfers were made out of Level 3 and into Level 1 for equity securities that were previously non-public equity securities and during the periods became
publicly traded.
Gains and losses from Level 3 financial assets that are measured at fair value on a recurring basis, that
are included in earnings for the years ended December 31, 2011, 2010, and 2009, are reported in the following line descriptions on the Companys statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Total gains and losses included in earnings for the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
259
|
|
|
$
|
42
|
|
|
$
|
55
|
|
Net investment income (loss)
|
|
|
464
|
|
|
|
(19
|
)
|
|
|
192
|
|
Change in unrealized gains or losses relating to assets still held at the end of the respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal transactions
|
|
$
|
(1,116
|
)
|
|
$
|
50
|
|
|
$
|
363
|
|
Net investment income (loss)
|
|
|
464
|
|
|
|
(19
|
)
|
|
|
163
|
|
Items Measured at Fair Value on a Non-Recurring Basis
In addition, the Company also measures certain financial assets and other assets at fair value on a non-recurring basis. Adjustments to
the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or impairments of individual assets. Due to the nature of these assets, unobservable inputs are used to value these assets. In determining the
fair value, the Company analyzes various financial, performance, and market factors to estimate the fair value, including where applicable, market activity. As a result, these assets are classified within Level 3 of the fair value hierarchy.
The following table presents the change in carrying value of those assets measured at fair value on a non-recurring basis,
for which a change in fair value was recognized in 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Year Ended
December 31, 2011
|
|
|
|
|
|
|
Gains (Losses)
|
|
Goodwill
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(5,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
In the Companys annual assessment of goodwill as of December 31, 2011, as
discussed in Note 7, the Company determined that its goodwill balance was fully impaired.
The following table presents the
change in carrying value of those assets measured at fair value on a non-recurring basis, for which a change in fair value was recognized in 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Year Ended
December 31, 2010
|
|
|
|
|
|
|
Gains (Losses)
|
|
Leasehold improvements
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In assessing certain leasehold improvements as of December 31, 2010, as discussed in Note 5, the
Company determined that as a result of the Company executing a new lease agreement in December 2010 for its office located in London, UK, including a sublease of its existing office space, that a fair value assessment of its leasehold improvements
located at the current office space was required. Based on that assessment, the Company determined that these assets were fully impaired.
The following table presents the change in carrying value of those assets measured at fair value on a non-recurring basis, for which a change in fair value was recognized in 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Year Ended
December 31, 2009
|
|
|
|
|
|
|
Gains (Losses)
|
|
Intangible assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(5,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the management contract intangible assets as of June 30, 2009, as discussed in Note 7,
the Company determined that adverse market conditions had resulted in a triggering event requiring assessment of the fair value of the intangible asset related to a money market mutual fund managed by the Company that is included in the
Companys asset management segment. Based on that assessment, the Company determined that the asset was fully impaired.
Financial
Instruments Held for InvestmentDesignated as Trading
As of December 31, 2011 and 2010, the Company has certain
investments in marketable equity securities held by other than the Companys broker-dealer subsidiaries that are classified as trading securities. These investments are designated as trading based on the Companys intent at the time of
designation. In accordance with ASC 320, these securities are carried at fair value with resulting realized and unrealized gains and losses reflected as net investment income (loss) in the statements of operations. Net gains and losses on these
securities as of the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Net gains (losses) recognized on trading securities
|
|
$
|
(5,410
|
)
|
|
$
|
10,018
|
|
|
$
|
|
|
Less: Net (gains) losses recognized on trading securities
sold
during the period
|
|
|
(377
|
)
|
|
|
(8,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) recognized on trading securities
still held
at the reporting date
|
|
$
|
(5,787
|
)
|
|
$
|
1,134
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2009, the Company did not hold financial instruments held for
investment that were designated as trading securities.
F-19
Financial Instruments Held for InvestmentDesignated as Available-for-Sale
As of December 31, 2011 and 2010, the Company has certain investments in marketable equity securities held by other than the
Companys broker-dealer subsidiaries that are classified as available-for-sale securities. These investments are designated as available-for-sale due to the Companys intent at the time of designation to hold these securities for
investment purposes over an extended period, however, they are available to be sold should economic conditions warrant such a transaction. In accordance with ASC 320, these securities are carried at fair value with resulting unrealized gains and
losses reflected as other comprehensive income or loss. Gross unrealized gains and losses on these securities as of the dates indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Cost
Basis
|
|
|
Unrealized
|
|
|
Fair Value
|
|
|
|
Gains
|
|
|
Losses
|
|
|
Marketable equity securities
|
|
$
|
146
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Cost
Basis
|
|
|
Unrealized
|
|
|
Fair Value
|
|
|
|
Gains
|
|
|
Losses
(1)
|
|
|
Marketable equity securities
|
|
$
|
192
|
|
|
$
|
|
|
|
$
|
(53
|
)
|
|
$
|
139
|
|
(1)
|
Duration of unrealized losses is less than 12 months
|
The following provides detail of the amounts included in accumulated other comprehensive income and reclassified to earnings during the specified periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2011
|
|
|
|
|
2010
|
|
|
|
|
2009
|
|
Beginning balance
|
|
|
|
$
|
(53
|
)
|
|
|
|
$
|
(71
|
)
|
|
|
|
$
|
(218
|
)
|
Net unrealized investment gains (losses) during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses), net of taxes
|
|
|
|
|
1,312
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
(71
|
)
|
Reclassification adjustment for recognized (gains) losses included in net income, net of taxes
|
|
|
|
|
(1,240
|
)
|
|
|
|
|
36
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
|
$
|
19
|
|
|
|
|
$
|
(53
|
)
|
|
|
|
$
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates its portfolio of marketable equity securities for impairment as of each reporting
date. For the securities with unrealized losses, the Company will review the underlying cause for the impairments, as well as the severity and duration of the impairments. If the impairment is determined to be other-than-temporary, the Company will
recognize an other-than-temporary impairment loss in its statement of operations. During the years ended December 31, 2011, 2010 and 2009, the Company recorded other-than-temporary impairment losses of $7,561, $-0-, and $-0-, respectively, in
the statements of operations relating to marketable equity securities. The Company recognized the impairment losses in 2011 due to the severity of the decline in the fair value of these securities below its cost basis during the second and fourth
quarters of 2011. These results include an impairment loss of $7,416 in the second quarter of 2011 related to an entity operating in the maritime transportation industry. This entity completed a secondary public offering in June 2011 that
significantly diluted previous shareholders and severely impacted the market value of the entitys shares. The carrying value of the security after the recognition of the impairment loss was $8,054. Subsequent to the recognition of this
impairment loss, based on the increased liquidity of the shares resulting from the offering and the Companys intentions with respect to the investment, the Company elected to transfer the security from designated as available-for-sale to
designated as trading.
During the years ended December 31, 2011, 2010, and 2009, the Company received $6,360, $206, and
$1,084, respectively, from sales of marketable equity securities resulting in gross gains of $1,386, $9, and $116, respectively.
F-20
During the year ended December 31, 2009, the Company received $450,396 from sales of
mortgage-backed securities, which had been previously impaired as of December 31, 2008, resulting in additional gross losses of $1,502.
Other Investments, at Cost
Other investments consisted of the
following as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Non-public equity securities
|
|
$
|
25,427
|
|
|
$
|
44,907
|
|
Note receivable
|
|
|
317
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,744
|
|
|
$
|
45,224
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates its portfolio of non-public equity securities, carried at cost, for impairment as
of each reporting date. This evaluation includes consideration of the operating performance of the respective companies, their financial condition and their near-term and long-term prospects. Based on its evaluations, including consideration of the
severity and duration of factors affecting the fair values of these investments in non-public equity securities, the Company recorded no impairment losses during the years ended December 31, 2011, 2010, and 2009.
During 2011, the Company received $8,403 from sales of, or distributions from, non-public equity securities, resulting in gross gains and
losses of $5,500 and $22, respectively. During 2010, the Company received $11,916 from sales of, or distributions from, non-public equity securities, resulting in gross gains and losses of $286 and $963, respectively. During 2009, the Company
received $5,278 from sales of, or distributions from, non-public equity securities, resulting in gross gains of $1,805.
Note 5. Furniture, Equipment, Software and Leasehold Improvements:
Furniture, equipment, software and leasehold improvements, summarized by major classification, were:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Furniture and equipment
|
|
$
|
20,233
|
|
|
$
|
21,031
|
|
Software
|
|
|
15,024
|
|
|
|
15,276
|
|
Leasehold improvements
|
|
|
18,715
|
|
|
|
21,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,972
|
|
|
|
57,882
|
|
Less: Accumulated depreciation and amortization
|
|
|
(47,810
|
)
|
|
|
(48,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,162
|
|
|
$
|
9,741
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2011, 2010 and 2009, depreciation expense was $3,561, $7,024 and
$9,227, respectively. For the years ended December 31, 2011, 2010 and 2009, the Company incurred losses of $1,323, $1,135, and $1,370, respectively, related to the write-off of leasehold improvements as a result of lease terminations. For the
year ended December 31, 2011, the charge represents the impairment of certain leasehold improvements related to office space that had been subleased to a third party in July 2011 in which the sublease covers the remaining period of the
Companys original lease agreement. For the year ended December 31, 2010, the charge of $1,135 represents the impairment of certain leasehold improvements related to office space that had been subleased to a third party effective in
February 2011. Based on the lack of transferability of these assets and no anticipated salvage value of the assets, the Company assessed the fair value of these assets as $-0- as of December 31, 2010. For the year ended December 31, 2009,
the charge of $1,370 represents the write-off of
F-21
certain leasehold improvements related to office space that was subleased during the year in which the sublease covers the remaining period of the Companys original lease agreement.
Note 6. Acquisitions:
On August 31, 2009, the Company acquired Watch Hill Partners, LLC (Watch Hill) for a total purchase
price of $6,419. The purchase price was comprised of $3,368 of cash and the issuance of 563,685 shares of the Companys common stock with a fair value of $3,051. Through the acquisition of Watch Hill, the Company added 14 professional employees
specializing in corporate advisory services. The allocation of purchase price based on the fair value of net assets acquired is as follows:
|
|
|
|
|
|
|
|
|
Purchase Price:
|
|
|
|
|
|
|
|
|
Cash paid
|
|
$
|
3,368
|
|
|
|
|
|
Fair value of common shares issued
|
|
|
3,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
6,419
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Assets Acquired:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
57
|
|
|
|
|
|
Accounts receivable
|
|
|
245
|
|
|
|
|
|
Intangible assets related to a pipeline of engagements
|
|
|
705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
1,007
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Liabilities Assumed:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
134
|
|
|
|
|
|
Excess of current lease commitment over market rates
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
470
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired (Total fair value of assets acquired less total fair value of liabilities assumed)
|
|
|
|
|
|
$
|
537
|
|
|
|
|
|
|
|
|
|
|
Remaining purchase price allocated to goodwill (Total purchase price less net assets acquired)
|
|
|
|
|
|
$
|
5,882
|
|
|
|
|
|
|
|
|
|
|
The goodwill balance of $5,882 was included in the Companys capital markets segment (see Note 7
regarding the Companys assessment of goodwill impairment). Of this balance, $5,546 of goodwill is expected to be deductible for tax purposes. As part of the acquisition, the Company acquired certain intangible assets related to engagements
initiated by Watch Hill, all of which have been fully amortized as of December 31, 2009. The Company expensed $604 in transaction costs associated with the acquisition for the year ended December 31, 2009.
F-22
Note 7. Goodwill and Intangible Assets:
Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Balance as of January 1:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
5,882
|
|
|
$
|
5,882
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,882
|
|
|
|
5,882
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during year
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
(5,882
|
)
|
|
|
|
|
Balance as of December 31:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,882
|
|
|
|
5,882
|
|
Accumulated impairment losses
|
|
|
(5,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
5,882
|
|
|
|
|
|
|
|
|
|
|
The Company performs its annual assessment of goodwill impairment during the fourth quarter of each year.
Goodwill has been assigned to the Companys capital markets segment. Managements assessment process includes determining the fair value of its reporting units (considered its business segments) based on current market information,
including industry comparatives and relevant recent transactions, and comparing such fair value to the carrying value of the respective reporting units. In addition, the Company compares the sum of the fair values of its reporting units to its total
market capitalization and considers other qualitative factors impacting the Companys operations. Based on the Companys assessments, no impairment charges were recognized during the years ended December 31, 2010 and 2009. However,
based on the results of the Companys assessment in the fourth quarter of 2011, the Company determined that the goodwill was impaired and recognized an impairment charge of $5,882. The impairment recorded in 2011 was the result of various
factors, including the significant decline in revenues during the second half of 2011 as well as the restructuring plan implemented by the Company in the fourth quarter of 2011 in response to the revenue decline and uncertain market conditions.
These factors coupled with the extended period in which the Companys market capitalization has been below its carrying value resulted in the Company determining that an impairment to goodwill was necessary.
Intangible Assets
The following table reflects the components of intangible assets as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Management contracts and customer relationships associated with asset management activities
|
|
$
|
6,144
|
|
|
$
|
6,144
|
|
Accumulated amortization
|
|
|
(4,023
|
)
|
|
|
(3,561
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
2,121
|
|
|
$
|
2,583
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2011, 2010 and 2009, amortization expense recognized was $462, $447
and $1,756, respectively.
F-23
Estimated amortization expense for each of the next five years is as follows:
|
|
|
|
|
|
|
Amount
|
|
2012
|
|
$
|
462
|
|
2013
|
|
|
462
|
|
2014
|
|
|
462
|
|
2015
|
|
|
462
|
|
2016
|
|
|
195
|
|
During the years ended December 31, 2011, 2010 and 2009, the Company recognized impairment charges
of $-0-, $-0-, and $5,350, respectively, in the statements of operations relating to the management contracts and customer relationships associated with the asset management segment.
For the impairment charge of $5,350 recognized during the year ended December 31, 2009, factors such as significantly reduced yields
on short term government investments and the requirement for the Company to both waive its management fees and reimburse certain expenses of a money market fund resulted in one of its management contracts becoming unprofitable for the Company during
the first half of 2009. In determining the fair value of this intangible asset, the Company concluded that based on the cost structure of the money market fund, a forecasted continuation of a low rate environment for short term government
investments and the forecasted ongoing waiver of its management fees and the resulting negative cash flows of these conditions, the intangible asset should be valued at zero as of June 30, 2009.
Note 8. Borrowings:
Repurchase Agreements
Prior to February 2009, the Company had entered into repurchase agreements with various financial institutions that had been used in conjunction with the Companys investments in agency
mortgage-backed securities. As of and for the years ended December 31, 2011 and 2010, the Company had no outstanding repurchase agreement borrowings.
During the year ended December 31, 2009, interest expense related to repurchase agreement borrowings totaled $252.
In January and February 2009, the Company sold its remaining mortgage-backed securities and related interest-rate caps held as of December 31, 2008. Concurrent with the sale of these securities, the
Company repaid all outstanding repurchase agreements used to finance these securities.
Note 9. Income Taxes:
The (benefit) provision for income taxes consists of the following for the years ended December 31, 2011, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Federal
|
|
$
|
(169
|
)
|
|
$
|
(3,884
|
)
|
|
$
|
(3,169
|
)
|
State
|
|
|
(61
|
)
|
|
|
(198
|
)
|
|
|
1,711
|
|
Foreign
|
|
|
|
|
|
|
(22
|
)
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(230
|
)
|
|
$
|
(4,104
|
)
|
|
$
|
(1,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(17
|
)
|
|
$
|
(4,253
|
)
|
|
$
|
(1,694
|
)
|
Deferred
|
|
|
(213
|
)
|
|
|
149
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(230
|
)
|
|
$
|
(4,104
|
)
|
|
$
|
(1,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
The federal tax benefit includes a benefit for domestic federal net operating losses of
$-0-, $3,233 and $6,862 for the years ended December 31, 2011, 2010 and 2009, respectively. The benefits of these net operating losses were realized through carryback of losses to offset income in prior years.
On November 6, 2009, the opportunity to elect an extended carryback period for net operating losses was added by Section 13 of
the Worker, Homeownership, and Business Act of 2009. The provision allowed taxpayers to elect to carry back an applicable net operating loss for a period of three, four or five years. The provision also suspended the 90-percent alternative minimum
tax credit limitation for the carried back net operating loss. As a result of this provision, the Company utilized all of its losses generated in 2008 to offset prior year taxable income without paying alternative minimum tax respective to the
carryback years and therefore, reflected an additional federal tax benefit of $6,862 in tax year ended December 31, 2009. During 2010, the Company filed claims to carry back its losses from tax year 2008 to prior periods including periods in
which it was part of the FBR TRS Holdings, Inc.s (a subsidiary of Arlington Asset) consolidated group and received the incremental benefit of the net operating loss carryback, pursuant to its tax sharing agreement with FBR TRS Holdings, Inc.
Deferred tax assets and liabilities consisted of the following as of December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
Net operating loss, Domestic
|
|
$
|
31,513
|
|
|
$
|
12,025
|
|
Net operating loss, Foreign
(1)
|
|
|
7,556
|
|
|
|
7,160
|
|
Capital loss carry forward
|
|
|
24,626
|
|
|
|
26,221
|
|
Stock-based compensation
|
|
|
21,802
|
|
|
|
29,334
|
|
Other-than-temporary investment write downs
|
|
|
8,851
|
|
|
|
5,662
|
|
Depreciation and amortization
|
|
|
7,321
|
|
|
|
7,327
|
|
Goodwill amortization
|
|
|
1,918
|
|
|
|
|
|
Other, net
|
|
|
(1,620
|
)
|
|
|
676
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
101,967
|
|
|
|
88,405
|
|
Valuation allowance
|
|
|
(101,967
|
)
|
|
|
(88,405
|
)
|
Goodwill amortization
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
The Companys foreign net operating losses related to FBRIL and its operations in the United Kingdom may be carried forward indefinitely to offset future income of
FBRIL. However, it is expected, given the changes in the Companys business activity in the United Kingdom, that these losses will be written-off in 2012.
|
The net deferred tax liability as of December 31, 2010 is included in other liabilities in the consolidated balance sheet.
At December 31, 2011, the Companys net deferred tax assets totaled $101,967. The Company has established a full valuation allowance against these assets since the Company believes that, based
on the criteria in ASC 740, it is more likely than not that the benefits of these assets will not be realized in the future. As of December 31, 2010, the company reflected a net deferred tax liability related to an indefinite-lived intangible
which could not serve as a source of future income for determination of the Companys valuation allowance. During the years ended December 31, 2011 and 2010, the Companys valuation allowance increased by $13,562 and $6,044,
respectively.
As of December 31, 2011, the Company has domestic federal net operating losses of $66,704 which include
tax windfalls of $870 resulting from stock vestings. The tax benefits of the net operating losses related to these windfalls will be recognized as additional paid-in capital when the losses are utilized in the future. The Company has state net
operating loss carryovers of $13,115 on a tax-effected basis, excluding the effect of federal offset. The state net operating losses include $82 of tax benefit related to windfalls from stock vestings which will be
F-25
recognized as additional paid-in capital when these losses are utilized in the future. The federal net operating losses of $23,959 and $42,745 will expire in years 2030 and 2031 respectively. The
state net operating losses begin to expire in 2013.
As of December 31, 2011, the Company has pre-tax capital loss
carryovers of $18,597, $31,630, and $13,001 which will expire in years 2013, 2014, and 2015, respectively.
Internal Revenue
Code Section 382 limits tax deductions for net operating losses, capital losses and net unrealized built-in losses after there is a substantial change in ownership in a corporations stock involving a 50 percentage point increase in
ownership by 5% or larger stockholders. On October 22, 2009 as a result of the sale by Arlington Asset of the Companys stock, the Company incurred an ownership change as defined in Section 382. The ownership change will cause the
future utilization of capital losses incurred before the change date to be subject to an annual limitation of $17,201 plus any cumulative unused 382 limitation from post-change tax years.
The Companys effective tax rate for the years ended December 31, 2011, 2010 and 2009 was 0.46%, 9.85% and 4.62% respectively.
The provision for income taxes results in effective tax rates that differ from the Federal statutory rates. The reconciliation of the Companys reported amount of income tax (benefit) provision attributable to continuing operations to the
amount of income tax expense that would result from applying domestic federal statutory tax rates to income from continuing operations was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Federal income tax benefit, at statutory rate
|
|
$
|
(17,458
|
)
|
|
$
|
(14,591
|
)
|
|
$
|
(10,146
|
)
|
State income taxes benefit, net of Federal benefit
|
|
|
(2,259
|
)
|
|
|
(1,383
|
)
|
|
|
(261
|
)
|
Effect of rates different than statutory
|
|
|
188
|
|
|
|
923
|
|
|
|
428
|
|
Nondeductible expenses
|
|
|
594
|
|
|
|
797
|
|
|
|
972
|
|
Effect of stock-based compensation
|
|
|
1,970
|
|
|
|
4,296
|
|
|
|
2,748
|
|
Partnership deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
(1,192
|
)
|
Other, net
|
|
|
(69
|
)
|
|
|
(190
|
)
|
|
|
448
|
|
Valuation allowance
|
|
|
16,804
|
|
|
|
6,044
|
|
|
|
5,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax benefit
|
|
$
|
(230
|
)
|
|
$
|
(4,104
|
)
|
|
$
|
(1,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of losses before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
United States
|
|
$
|
(47,167
|
)
|
|
$
|
(35,642
|
)
|
|
$
|
(22,482
|
)
|
United Kingdom
|
|
|
(2,712
|
)
|
|
|
(6,020
|
)
|
|
|
(6,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(49,879
|
)
|
|
$
|
(41,662
|
)
|
|
$
|
(28,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table displays the change in unrecognized tax benefits for the years ended
December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of period
|
|
$
|
(2,130
|
)
|
|
$
|
(1,989
|
)
|
Increases to tax positions for prior years
|
|
|
(353
|
)
|
|
|
(162
|
)
|
Increases to tax positions for current year
|
|
|
(42
|
)
|
|
|
|
|
Decreases to tax positions for prior years
|
|
|
|
|
|
|
21
|
|
Settlements
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(1,642
|
)
|
|
$
|
(2,130
|
)
|
|
|
|
|
|
|
|
|
|
F-26
The amount of unrecognized tax benefits that would provide a benefit to the effective tax
rate, if recognized, is $832. If the Company continues to maintain in a full valuation allowance against its net deferred tax assets, the recognition of $415 of temporary tax differences that are unrecognized tax benefits would provide a benefit to
the effective rate indirectly through the release of the related valuation allowance. In addition, $367 of unrecognized tax benefits, if recognized, would be recorded in equity. It is reasonably possible that the Company could have a significant
decrease in unrecognized tax benefits in the next 12 months.
The Company records interest and penalties in other operating
expenses and other revenue respectively in the consolidated statements of operations. The total amount of interest related to tax uncertainties recognized in the statement of operations for the periods ended December 31, 2011, 2010 and 2009 was
$57, $147 and $51, respectively. The total amount of accrued interest related to uncertain tax positions was $212 and $239 as of December 31, 2011 and 2010, respectively.
The Internal Revenue Service completed its examination of the returns for tax years 2006 to 2008 resulting in net favorable adjustments to taxable income in these years. As of December 31, 2011, tax
years subsequent to December 31, 2005 remain effectively open under the federal statute of limitations, as well as for the Companys significant state jurisdictions of California, Massachusetts, New York, Virginia and Texas. The Company is
currently not under audit in any jurisdiction.
Note 10. Regulatory Capital Requirements:
FBRCM is registered with the SEC and is a member of FINRA. As such, FBRCM is subject to the minimum net capital
requirements promulgated by the SEC. As of December 31, 2011 and 2010, FBRCM had net capital of $57,032 and $58,951, respectively, that was $53,189 and $54,387, respectively, in excess of its required net capital of $3,843 and $4,564,
respectively.
Note 11. Commitments and Contingencies:
Contractual Obligations
The Company has contractual obligations to make future payments in connection with non-cancelable lease agreements and other contractual commitments as well as an uncalled capital commitment to an
investment partnership that may be called over the next four years. The following table sets forth these contractual obligations by fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Thereafter
|
|
|
Total
|
|
Minimum rental commitments
(1)
|
|
$
|
9,778
|
|
|
$
|
8,813
|
|
|
$
|
8,363
|
|
|
$
|
2,032
|
|
|
$
|
1,637
|
|
|
$
|
1,935
|
|
|
$
|
32,558
|
|
Capital commitments
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations
|
|
$
|
9,778
|
|
|
$
|
8,813
|
|
|
$
|
8,363
|
|
|
$
|
2,032
|
|
|
$
|
1,637
|
|
|
$
|
1,935
|
|
|
$
|
32,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These commitments are for operating leases of the Company. The Company currently has no commitments associated with capital leases. The Company has entered into
sublease agreements related to certain of its leased office space with multiple third parties. For the years ended December 31, 2012, 2013, and 2014, contractual sublease receipts to be received by the Company are $2,309, $2,271, and $2,151,
respectively. Equipment and office rent expense for the years ended December 31, 2011, 2010 and 2009 was $8,378, $9,314 and $13,935, respectively.
|
(2)
|
The table above excludes a $400 uncalled capital commitment to an investment partnership that may be called over the next four years. This amount was excluded because
the Company cannot currently determine when, if ever, the commitment will be called.
|
F-27
Clearing Broker
Our broker-dealer subsidiaries clear all of their securities transactions through a clearing broker on a fully disclosed basis. Pursuant
to the terms of the agreements between our broker-dealer subsidiaries and their respective clearing brokers, the clearing broker has the right to charge our broker-dealer subsidiaries for losses that result from a counterpartys failure to
fulfill its contractual obligations.
As the right to charge our broker-dealer subsidiaries has no maximum amount and applies
to all trades executed through the clearing broker, the Company believes there is no maximum amount assignable to this right. At December 31, 2011 and 2010, the Company has recorded no liabilities, and during the years ended December 31,
2011, 2010 and 2009, the Company did not incur any significant costs, with regard to this right.
Litigation
As of December 31, 2011, except as described below, the Company was neither a defendant nor plaintiff in any
lawsuits or arbitrations nor involved in any governmental or self-regulatory organization matters that are expected to have a material adverse effect on its financial condition, results of operations or liquidity. The Company has been named as a
defendant in a small number of civil lawsuits relating to its various businesses. In addition, the Company is subject to various reviews, examinations, investigations and other inquiries by governmental agencies and self regulatory organizations.
There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on the Companys financial condition, results of operations, or liquidity in a future period. However, based on managements
review with counsel, resolution of these matters is not expected to have a material adverse effect on the Companys financial condition, results of operations or liquidity.
Many aspects of the Companys 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. FBRCM has been named as a defendant in a small number of securities claims involving investment banking clients of FBRCM as a result of FBRCMs role as an underwriter.
In these cases, the underwriting agreement provides, subject to certain conditions, that the investment banking client is required to indemnify FBRCM against certain claims or liabilities, including claims or liabilities under the Securities Act of
1933, as amended (the Securities Act), or contribute to payments which FBRCM is required to make as a result of the litigation. There can be no assurance that such indemnification or contribution will ultimately be available to the
Company or that an investment banking client will be able to satisfy its indemnity or contribution obligations when due.
In
May 2008, the lead plaintiff in a previously filed and consolidated action filed an amended consolidated class action complaint that, for the first time, named Friedman, Billings, Ramsey & Co., Inc. (now FBRCM) and eight other underwriters
as defendants. The lawsuit, styled In Re Thornburg Mortgage, Inc. Securities Litigation and pending in the United States District Court for the District of New Mexico, was originally filed in August 2007 against Thornburg Mortgage, Inc.
(TMI), and certain of its officers and directors, alleging material misrepresentations and omissions about, inter alia, the financial position of TMI. The amended complaint included claims under Sections 11 and 12 of the Securities Act
against nine underwriters relating to five separate offerings (May 2007, June 2007, September 2007 and two offerings in January 2008). The allegations against FBRCM related only to its role as underwriter or member of the syndicate that
underwrote TMIs total of three offerings in September 2007 and January 2008each of which occurred after the filing of the original complaintwith an aggregate offering price of approximately $818,000. The plaintiffs sought
restitution, unspecified compensatory damages and reimbursement of certain costs and expenses. Although FBRCM is contractually entitled to be indemnified by TMI in connection with this lawsuit, TMI filed for bankruptcy on
F-28
May 1, 2009 and this likely will decrease or eliminate the value of the indemnity that FBRCM receives from TMI. On June 2, 2011 the Court granted FBRCMs motion to dismiss the
consolidated class action complaint as to FBRCM and then entered final judgment for FBRCM on July 25, 2011. Plaintiffs filed a timely notice of appeal to the 10
th
Circuit Court of Appeals, challenging the District Courts findings; briefing on the appeal is currently expected
to be complete in June 2012.
FBRCM has been named as a defendant in a case relating to its role as an underwriter in
residential mortgage-backed securities (RMBS) offerings. FBRCM is among dozens of underwriter, securitization trust and depositor defendants in an individual action filed by Cambridge Place Investment Management, Inc. in Massachusetts
state court (Cambridge Place Investment Management Inc. v. Morgan Stanley et al). Cambridges complaint relates to the more than $2,400,000 in RMBS purchases it made in numerous underwritten offerings (of which the claims concerning FBRCM are
limited to Cambridges purchases of a combined $22,000 of RMBS in two separate offerings) and alleges that each of the defendants made misrepresentations and omissions relating to, among other things, loan-to-value ratios, appraisals, and
underwriting standards, in violation of state securities laws. FBRCM has contractual indemnification claims against the RMBS issuers and contribution claims against co-underwriters involved in the two offerings for which claims have been made
against it.
FBRCM has been named a defendant in the putative class action lawsuit MHC Mutual Conversion Fund, L.P. v. United
Western Bancorp, Inc., et al. pending in the United States District Court for the District of Colorado. The complaint, filed in March 2011 against United Western Bancorp, Inc. (the Bank), its officers and directors, underwriters and
outside auditors, alleges material misrepresentations and omissions in the registration statement and prospectus issued in connection with the Banks September 2009 offering. The complaint alleges claims under Sections 11 and 12 of the
Securities Act against the lead underwriter of the offering and FBRCM as a member of the underwriting syndicate. Although FBRCM is contractually entitled to be indemnified by the Bank in connection with this lawsuit, the Banks negative
financial condition will decrease or eliminate the value of the indemnity that FBRCM receives from the Bank.
FBRCM has been named a defendant in four putative class action lawsuits all alleging substantially identical claims against Imperial Holdings, Inc. (Imperial), its officers and directors and
underwriters for material misrepresentations and omissions in the registration statement and prospectus issued in connection with Imperials February 2011 initial public offering. The cases of Martin J. Fuller v. Imperial Holdings, Inc., et al.
and City of Roseville Employees Retirement System v. Imperial Holdings, et al, filed in the Circuit Court of the
15
th
Judicial Circuit in and for Palm Beach County,
Florida, have been removed to the United States District Court, Southern District of Florida. Subsequently, two additional complaints, alleging substantially identical claims, have been filed in the Southern District of Florida (Sauer v. Imperial
Holdings, et al. and Pondick v. Imperial Holdings, et al.) The complaints, alleging claims under Sections 11 and 12 of the Securities Act against the lead underwriters of the offering will likely be consolidated. Imperial has assumed its
contractual obligation to indemnify the underwriters.
Although these cases involving FBRCM are at a preliminary stage, based
on managements review with counsel and present information currently known by management, resolution of such matters is not expected to have a material effect on the Companys financial condition, results of operations, or liquidity.
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 and actions by government agencies and self regulatory organizations 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 to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any
future litigation against the Company could materially affect its financial condition, operating results and liquidity.
F-29
Note 12. Shareholders Equity:
Equity Offering
In June 2009, the Company completed a public follow-on equity offering of 20,000,000 shares of its common stock at a per share price of $4.65. As result of the offering, the Company received proceeds of
$90,143, net of $2,857 in transaction costs.
Share Repurchases
During the year ended December 31, 2011, the Company repurchased 2,096,790 shares of its common stock in open market transactions at
a weighted average share price of $3.48 per share for a total cost of $7,299. As a result of the repurchases during the year ended December 31, 2011, the Company has remaining authority to repurchase 3,124,721 additional shares under the Board
of Directors July 2010 directive.
During the year ended December 31, 2011, the Company completed two tender offers
to repurchase shares of its stock. Pursuant to these modified Dutch auction tender offers, the Company repurchased 6,145,521 shares of its common stock at weighted average share prices of $2.55 per share for a total cost, including
transaction costs, of $15,939.
As of January 1, 2010, the Company had authority to repurchase up to 3,418,885 shares of
common stock. In July 2010, the Board of Directors of the Company approved a 5,000,000 share increase to the number of shares of the Companys common stock that the Company is authorized to repurchase. During the year ended December 31,
2010, the Company repurchased 3,197,374 shares, of its common stock in open market transactions at a weighted average share price of $4.97 per share, for a total cost of $15,905.
In May 2009, the Company entered into a Repurchase Agreement with Arlington Asset and Arlington Assets direct, wholly-owned
subsidiary, FBR TRS Holdings, Inc., pursuant to which, among other things, the Company repurchased 16,667,000 shares of its common stock at a share price of $4.35 for a total cost of $72,501 plus transaction-related expenses of $971. Along with this
agreement, the companies agreed to terminate all of the agreements then in place between Arlington Asset and the Company, other than a Voting Agreement, dated as of July 20, 2006, by and among the Company and certain of its subsidiaries,
Arlington Asset and certain of its subsidiaries, and certain affiliates of Crestview, which agreement was amended and restated. At the same time, the Company entered into the following agreements with Arlington Asset: a Transition Services
Agreement, an Assignment and Assumption Agreement, a Trademark and Copyright Assignment, a Domain Name Assignment and a Trademark License Agreement.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan
(Purchase Plan), eligible employees may purchase common stock through payroll deductions at a price that is 85% of the lower of the market value of the common stock on the first day of the offering period or the last day of the offering
period. In accordance with the provisions of ASC 718, the Company is required to recognize compensation expense relating to shares offered under the Purchase Plan. For the years ended December 31, 2011, 2010 and 2009, the Company recognized
compensation expense of $245, $378, and $465, respectively, related to the Purchase Plan.
Partner Leveraged Stock
Purchase Program
The Company initiated the Partner Leveraged Stock Purchase Program (PLSPP) in December
2009. Under the PLSPP, non-executive officer employees who are members of the Companys Partnership Group as well as the Companys Chief Financial Officer and General Counsel were granted the right to purchase shares of the Companys
common stock on four specific offering dates during the fourth quarter of 2009 and the first half
F-30
of 2010. Each participant was initially granted the right to purchase up to either 25,000 shares or 50,000 shares. The Company offered to provide a full recourse loan at market rates and terms to
each non-executive officer participant for up to 50% of the aggregate purchase price, collateralized by the shares purchased, bearing interest at market rates, and maturing three years from the date of issuance. For each share purchased by the
participant, the Company would grant two options (three options in the case of each of the Companys Chief Financial Officer and General Counsel) to purchase the Companys common stock under the FBR & Co. Long-Term Incentive Plan
(described below) that are subject to a 3-year cliff vesting requirement. For the years ended December 31, 2010 and 2009, participants purchased 264,535 and 210,500, respectively, for an aggregate purchase price of $1,286 and $1,431,
respectively. As of December 31, 2011 and 2010, the Company had loans outstanding to participants of $673 and $706, respectively. The employee stock loan receivable balance is included in shareholders equity on the balance sheet.
Stock Compensation Plans
FBR & Co. 2006 Long-Term Incentive Plan (FBR & Co. Long-Term Incentive Plan)
Under the FBR & Co. Long-Term Incentive Plan, as amended, the Company may grant options to purchase stock, stock appreciation rights, performance awards, restricted and unrestricted stock and
RSUs for up to an aggregate of 22,069,985 shares of common stock, subject to increase under certain provisions of the plan, to eligible participants. Participants include employees, officers and directors of the Company and its subsidiaries. The
FBR & Co. Long-Term Incentive Plan has a term of 10 years and options granted may have an exercise period of up to 10 years. Options may be incentive stock options, as defined by Section 422 of the Internal Revenue Code, or
nonqualified stock options.
The Company grants options to purchase stock, restricted shares of common stock and RSUs to
employees that vest based on meeting specified service conditions of three to five years and in certain cases achievement of specified market conditions. The following table presents compensation expense related to these awards for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Stock Options
|
|
$
|
1,126
|
|
|
$
|
3,937
|
|
|
$
|
5,096
|
|
Restricted shares
|
|
|
635
|
|
|
|
2,939
|
|
|
|
5,153
|
|
RSUs
|
|
|
5,792
|
|
|
|
11,749
|
|
|
|
9,088
|
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. Due to the relatively short period in which the Company has been publicly-traded, the Company has not based its volatility assumption solely on historical data. The Company has used a combination of its historical volatility,
historical industry comparisons, and other market data in order to determine the volatility assumption. The risk-free interest rate is based on the rates of the U.S. Treasury with similar maturities as the expected life of the award. The expected
life of the awards is based on the length of time from the grant date to the midpoint of the vesting date and the contractual expiration date of the award. The Company uses this methodology for determining expected life as the Company does not have
sufficient historical data to estimate an expected life as a majority of the initial stock options issued by the Company since its inception became exercisable in the year. The dividend yield is based on the expected dividend payout over the
expected life of the award. The following weighted average assumptions used for options granted for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Volatility
|
|
|
39.8
|
%
|
|
|
45.0
|
%
|
|
|
56.8
|
%
|
Risk-free interest rate
|
|
|
1.6
|
%
|
|
|
2.5
|
%
|
|
|
2.3
|
%
|
Expected life (years)
|
|
|
4.5
|
|
|
|
5.1
|
|
|
|
5.1
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value
|
|
$
|
1.27
|
|
|
$
|
2.19
|
|
|
$
|
2.55
|
|
F-31
The fair value of each RSU with a market condition is estimated on the date of grant using a
lattice-pricing model. The methodology for determining the assumptions used for these valuations is similar to those described above for stock options. The Company did not grant any RSUs with a market condition during the year ended
December 31, 2011. The assumptions used for 76,000 RSUs with a market condition granted during the year ended December 31, 2010 were a volatility of 45.0%, risk-free interest rate of 1.4% and an expected term based on the applicable
service condition. The assumptions used for 64,002 RSUs with a market condition granted during the year ended December 31, 2009 were a volatility of 56.8%, risk-free interest rates between 1.9% 3.0% and an expected term based on the
applicable service condition.
The following table presents the unrecognized compensation related to unvested options to
purchase stock, restricted shares of common stock, and RSUs and the weighted average vesting period in which the expense will be recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
Stock
Options
|
|
|
Restricted
Shares
|
|
|
RSUs
|
|
Unrecognized compensation
|
|
$
|
2,407
|
|
|
$
|
380
|
|
|
$
|
9,859
|
|
Unvested awards
|
|
|
3,497,147
|
|
|
|
265,277
|
|
|
|
5,528,001
|
|
Weighted average vesting period
|
|
|
1.6 years
|
|
|
|
0.6 years
|
|
|
|
2.1 years
|
|
Stock Options
A summary of option activity under the FBR & Co. Long Term Incentive Plan as of December 31, 2011, and changes during the years ended December 31, 2011, 2010, and 2009 are presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-average
Exercise Prices
|
|
|
Weighted-average
Remaining
Contractual Life
|
|
Share Balance as of December 31, 2008
|
|
|
5,911,960
|
|
|
$
|
11.03
|
|
|
|
5.2
|
|
Granted
|
|
|
2,589,026
|
|
|
|
5.16
|
|
|
|
|
|
Forfeitures
|
|
|
(1,023,833
|
)
|
|
|
14.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2009
|
|
|
7,477,153
|
|
|
$
|
8.52
|
|
|
|
5.1
|
|
Granted
|
|
|
1,513,530
|
|
|
|
5.14
|
|
|
|
|
|
Forfeitures
|
|
|
(1,011,500
|
)
|
|
|
8.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2010
|
|
|
7,979,183
|
|
|
$
|
7.93
|
|
|
|
4.3
|
|
Granted
|
|
|
318,066
|
|
|
|
3.62
|
|
|
|
|
|
Forfeitures
|
|
|
(1,227,973
|
)
|
|
|
8.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2011
|
|
|
7,069,276
|
|
|
$
|
7.71
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable as of December 31, 2011
|
|
|
3,572,129
|
|
|
$
|
10.19
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
Restricted Stock
A summary of unvested restricted stock awards as of December 31, 2011, and changes during the years ended December 31, 2011,
2010, and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-average
Grant-date Fair
Value
|
|
|
Weighted-average
Remaining Vested
Period
|
|
Share Balance as of December 31, 2008
|
|
|
1,625,769
|
|
|
$
|
14.68
|
|
|
|
2.9
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestings
|
|
|
(110,040
|
)
|
|
|
12.49
|
|
|
|
|
|
Forfeitures
|
|
|
(154,897
|
)
|
|
|
15.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2009
|
|
|
1,360,832
|
|
|
$
|
14.86
|
|
|
|
1.9
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestings
|
|
|
(613,835
|
)
|
|
|
15.65
|
|
|
|
|
|
Forfeitures
|
|
|
(88,793
|
)
|
|
|
16.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2010
|
|
|
658,204
|
|
|
$
|
13.96
|
|
|
|
1.4
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestings
|
|
|
(338,441
|
)
|
|
|
13.39
|
|
|
|
|
|
Forfeitures
|
|
|
(54,486
|
)
|
|
|
16.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2011
|
|
|
265,277
|
|
|
$
|
14.09
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
A summary of unvested restricted stock units as of December 31, 2011, and changes during the years ended December 31, 2011, 2010, and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-average
Grant-date Fair
Value
|
|
|
Weighted-average
Remaining Vested
Period
|
|
Share Balance as of December 31, 2008
|
|
|
5,579,544
|
|
|
$
|
5.61
|
|
|
|
4.1
|
|
Granted
|
|
|
2,203,388
|
|
|
|
4.85
|
|
|
|
|
|
Vestings
|
|
|
(171,005
|
)
|
|
|
5.20
|
|
|
|
|
|
Forfeitures
|
|
|
(274,242
|
)
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2009
|
|
|
7,337,685
|
|
|
$
|
5.38
|
|
|
|
3.5
|
|
Granted
|
|
|
2,778,592
|
|
|
|
5.27
|
|
|
|
|
|
Vestings
|
|
|
(417,123
|
)
|
|
|
5.48
|
|
|
|
|
|
Forfeitures
|
|
|
(1,468,489
|
)
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2010
|
|
|
8,230,665
|
|
|
$
|
5.34
|
|
|
|
2.8
|
|
Granted
|
|
|
1,789,206
|
|
|
|
3.61
|
|
|
|
|
|
Vestings
|
|
|
(1,673,269
|
)
|
|
|
5.60
|
|
|
|
|
|
Forfeitures
|
|
|
(2,818,601
|
)
|
|
|
4.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2011
|
|
|
5,528,001
|
|
|
$
|
5.04
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Compensation Awards
In addition, as part of the Companys satisfaction of incentive compensation earned for past service under the Companys
variable compensation programs, employees may receive restricted shares of common stock or RSUs in lieu of cash payments. These shares and RSUs are issued to an irrevocable trust for the benefit of the employees and are not returnable to the
Company. For the years ended December 31, 2011, 2010, and 2009, the
F-33
Company granted such stock-based awards with an aggregate fair value upon grant date of $1,052, $6,975, and $3,048, respectively. A summary of restricted stock irrevocable trust awards as of
December 31, 2011, and changes during the years ended December 31, 2011, 2010, and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-average
Grant-date Fair
Value
|
|
|
Weighted-average
Remaining Vested
Period
|
|
Share Balance as of December 31, 2008
|
|
|
1,169,334
|
|
|
$
|
9.86
|
|
|
|
1.9
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestings
|
|
|
(412,806
|
)
|
|
|
10.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2009
|
|
|
756,528
|
|
|
$
|
9.64
|
|
|
|
0.9
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestings
|
|
|
(413,600
|
)
|
|
|
10.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2010
|
|
|
342,928
|
|
|
$
|
8.77
|
|
|
|
0.7
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Vestings
|
|
|
(241,972
|
)
|
|
|
8.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2011
|
|
|
100,956
|
|
|
$
|
9.89
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of restricted stock unit awards held in the irrevocable trust as of December 31, 2011, and
changes during the years ended December 31, 2011, 2010, and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-average
Grant-date Fair
Value
|
|
|
Weighted-average
Remaining Vested
Period
|
|
Share Balance as of December 31, 2008
|
|
|
218,950
|
|
|
$
|
5.67
|
|
|
|
2.6
|
|
Granted
|
|
|
888,569
|
|
|
|
3.43
|
|
|
|
|
|
Vestings
|
|
|
(113,127
|
)
|
|
|
5.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2009
|
|
|
994,392
|
|
|
$
|
3.74
|
|
|
|
2.1
|
|
Granted
|
|
|
1,238,881
|
|
|
|
5.63
|
|
|
|
|
|
Vestings
|
|
|
(513,587
|
)
|
|
|
4.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2010
|
|
|
1,719,686
|
|
|
$
|
4.94
|
|
|
|
1.8
|
|
Granted
|
|
|
293,784
|
|
|
|
3.58
|
|
|
|
|
|
Vestings
|
|
|
(643,694
|
)
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Balance as of December 31, 2011
|
|
|
1,369,776
|
|
|
$
|
4.81
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Financial Instruments with Off-Balance-Sheet Risk and Credit Risk:
Financial Instruments
The Companys trading and investment activities include equity securities, convertible debt securities, corporate debt securities, bank loans, and listed equity options that are primarily traded in
United States markets. The Company previously invested in mortgage-backed securities and partially funded its investments through repurchase agreement borrowings. Accordingly, the Company was subject to leverage and interest rate risk prior to the
sale of its remaining mortgage-backed securities and repayment of the related repurchase agreements in the first quarter of 2009.
The Companys investment funds that are advised by our asset management subsidiaries trade and invest in public and non-public securities. As of December 31, 2011 and 2010, the Company had not
entered into any transactions involving financial instruments that would expose the Company to significant related off-balance-sheet risk.
In addition, as part of its market making activities, the Company sells equity and debt securities it does not currently own (securities sold, not yet purchasedsee Note 4). When the Company sells a
security short and borrows the security to make a delivery, a gain, limited to the price at which the Company sold the security short, or a loss, unlimited in size, will be realized upon the termination of the short sale.
F-34
Market Risk
The securities industry is subject to numerous risks, including the risk of loss associated with the underwriting, ownership, and trading
of securities, and the risk of reduced revenues in periods of reduced demand for security offerings and activity in secondary trading markets. Changing economic and market trends may negatively impact the liquidity and value of the Companys
investments and the level of security offerings underwritten by the Company, which may adversely affect the Companys revenues and profitability.
Market risk is primarily caused by movements in market prices of the Companys trading and investment account securities and changes in value of the underlying securities of the investment funds in
which the Company invests. The Companys trading securities and investments are also subject to interest rate volatility and possible illiquidity in markets in which the Company trades or invests. The Company seeks to manage market risk through
monitoring procedures. The Companys principal transactions are primarily long and short equity and convertible debt transactions.
Positions taken and commitments made by the Company, including those made in connection with investment banking activities, may result in substantial amounts of exposure to individual issuers and
businesses, including non-investment grade issuers, securities with low trading volumes and those not readily marketable. These issuers and securities may expose the Company to a higher degree of risk than associated with investment grade
instruments.
Credit Risk
The Companys broker-dealer subsidiaries function as introducing brokers that place and execute customer orders. The orders are then settled by an unrelated clearing organization that maintains
custody of customers securities and provides financing to customers.
The Companys broker-dealer subsidiaries
clear all of their securities transactions through a clearing broker on a fully disclosed basis. Pursuant to the terms of the agreements between the Companys broker-dealer subsidiaries and the clearing broker, the clearing broker has the right
to charge the Company for losses that result from a counterpartys failure to fulfill its contractual obligations. As the right to charge our broker-dealer subsidiaries has no maximum amount and applies to all trades executed through the
clearing broker, the Company believes there is no maximum amount assignable to this right. At December 31, 2011 and 2010, the Company has recorded no liabilities, and during the years ended December 31, 2011, 2010 and 2009, the Company did
not incur any significant costs, with regard to this right.
The due from and to brokers, dealers, and clearing organizations
balances primarily represent unsettled trades associated with the Companys credit sales and trading platform. These transactions include corporate bonds and syndicated loan trades. As part of this activity, the Company incurs counterparty
credit risk due to the extended settlement nature of most par and distressed bank loan transactions. Par loan and distressed loan trades have extended settlement periods due to the administrative and legal requirements associated with transferring
title of such instruments. During this period whereby a trade has been executed but not settled, the Company is at risk if one of its counterparties defaults on a trade obligation and the Company has to meet this obligation at market prices that are
adverse relative to the original trade. The Company manages this exposure by calculating the current and potential default exposure on each trade and by maintaining risk limits for each counterparty with whom it has outstanding bank loan trades.
In addition, the Company has the right to pursue collection of performance from the counterparties who do not perform under
their contractual obligations. The Company monitors the credit standing of the clearing broker and all counterparties with which it conducts business.
We attempt to limit our credit spread risk by offsetting long or short positions in various related securities, but from time to time may also hedge credit risk exposure through the use of credit
derivatives such as credit default swaps.
F-35
Through indemnification provisions in agreements with clearing organizations, customer
activities may expose the Company to off-balance-sheet credit risk. Financial instruments may have to be purchased or sold at prevailing market prices in the event a customer fails to settle a trade on its original terms or in the event cash and
securities in customer margin accounts are not sufficient to fully cover customer obligations. The Company seeks to manage the risks associated with customer activities through customer screening and selection procedures as well as through
requirements on customers to maintain margin collateral in compliance with various regulations and clearing organization policies.
The Companys equity and debt securities held for trading and investment purposes include non-investment grade securities of privately held issuers with no ready markets. The concentration and
illiquidity of these investments expose the Company to a higher degree of risk than associated with readily marketable securities.
Note 14. Segment Information:
The Company considers its capital markets, asset management and principal investing operations to be separate
reportable segments. The capital markets segment includes the Companys investment banking and institutional sales, trading and research operations. These businesses operate as a single integrated unit to deliver capital raising, advisory and
sales and trading services to corporate and institutional clients. Asset management includes the Companys fee-based asset management operations. Principal investing includes investments in merchant banking and other investments.
The Company has developed systems and methodologies to allocate overhead costs to its business units and, accordingly, presents segment
information consistent with internal management reporting. Revenue generating transactions between the individual segments have been included in the net revenue and pre-tax income of each segment. The Companys revenues from foreign operations
totaled $3,935, $9,331, and $12,233 for the years ended December 31, 2011, 2010 and 2009, respectively. The following tables illustrate the financial information for the Companys segments for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2011
|
|
|
|
Capital
Markets
|
|
|
Asset
Management
|
|
|
Principal
Investing
|
|
|
Total
|
|
Revenues, net of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
58,146
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
58,146
|
|
Institutional brokerage
|
|
|
78,457
|
|
|
|
|
|
|
|
|
|
|
|
78,457
|
|
Asset management fees
|
|
|
|
|
|
|
14,941
|
|
|
|
|
|
|
|
14,941
|
|
Net investment loss
|
|
|
|
|
|
|
(31
|
)
|
|
|
(9,665
|
)
|
|
|
(9,696
|
)
|
Net interest income, dividends, and other
|
|
|
3,237
|
|
|
|
17
|
|
|
|
2,049
|
|
|
|
5,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
139,840
|
|
|
|
14,927
|
|
|
|
(7,616
|
)
|
|
|
147,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
40,766
|
|
|
|
6,596
|
|
|
|
6
|
|
|
|
47,368
|
|
Fixed
|
|
|
135,049
|
|
|
|
8,373
|
|
|
|
358
|
|
|
|
143,780
|
|
Impairment of goodwill
|
|
|
5,882
|
|
|
|
|
|
|
|
|
|
|
|
5,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
181,697
|
|
|
|
14,969
|
|
|
|
364
|
|
|
|
197,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss
|
|
$
|
(41,857
|
)
|
|
$
|
(42
|
)
|
|
$
|
(7,980
|
)
|
|
$
|
(49,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
20,078
|
|
|
$
|
2,826
|
|
|
$
|
1
|
|
|
$
|
22,905
|
|
Fixed
|
|
|
78,733
|
|
|
|
4,182
|
|
|
|
194
|
|
|
|
83,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
98,811
|
|
|
$
|
7,008
|
|
|
$
|
195
|
|
|
$
|
106,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
209,886
|
|
|
$
|
9,886
|
|
|
$
|
78,311
|
|
|
$
|
298,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
139,144
|
|
|
$
|
7,843
|
|
|
$
|
78,310
|
|
|
$
|
225,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2010
|
|
|
|
Capital
Markets
|
|
|
Asset
Management
|
|
|
Principal
Investing
|
|
|
Total
|
|
Revenues, net of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
118,273
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
118,273
|
|
Institutional brokerage
|
|
|
100,091
|
|
|
|
|
|
|
|
|
|
|
|
100,091
|
|
Asset management fees
|
|
|
|
|
|
|
14,097
|
|
|
|
|
|
|
|
14,097
|
|
Net investment income
|
|
|
|
|
|
|
56
|
|
|
|
9,162
|
|
|
|
9,218
|
|
Net interest income, dividends, and other
|
|
|
2,102
|
|
|
|
32
|
|
|
|
2,774
|
|
|
|
4,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
220,466
|
|
|
|
14,185
|
|
|
|
11,936
|
|
|
|
246,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
95,429
|
|
|
|
7,118
|
|
|
|
276
|
|
|
|
102,823
|
|
Fixed
|
|
|
173,354
|
|
|
|
9,908
|
|
|
|
2,164
|
|
|
|
185,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
268,783
|
|
|
|
17,026
|
|
|
|
2,440
|
|
|
|
288,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income
|
|
$
|
(48,317
|
)
|
|
$
|
(2,841
|
)
|
|
$
|
9,496
|
|
|
$
|
(41,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
68,040
|
|
|
$
|
3,697
|
|
|
$
|
244
|
|
|
$
|
71,981
|
|
Fixed
|
|
|
103,886
|
|
|
|
5,268
|
|
|
|
1,295
|
|
|
|
110,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
171,926
|
|
|
$
|
8,965
|
|
|
$
|
1,539
|
|
|
$
|
182,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
277,601
|
|
|
$
|
17,321
|
|
|
$
|
136,545
|
|
|
$
|
431,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
139,914
|
|
|
$
|
15,315
|
|
|
$
|
136,262
|
|
|
$
|
291,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, 2009
|
|
|
|
Capital
Markets
|
|
|
Asset
Management
|
|
|
Principal
Investing
|
|
|
Total
|
|
Revenues, net of interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking
|
|
$
|
138,723
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
138,723
|
|
Institutional brokerage
|
|
|
132,629
|
|
|
|
|
|
|
|
|
|
|
|
132,629
|
|
Asset management fees
|
|
|
|
|
|
|
13,244
|
|
|
|
|
|
|
|
13,244
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
1,577
|
|
|
|
1,577
|
|
Net interest income, dividends, and other
|
|
|
1,358
|
|
|
|
525
|
|
|
|
4,177
|
|
|
|
6,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
272,710
|
|
|
|
13,769
|
|
|
|
5,754
|
|
|
|
292,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
116,159
|
|
|
|
8,839
|
|
|
|
109
|
|
|
|
125,107
|
|
Fixed
|
|
|
176,103
|
|
|
|
13,027
|
|
|
|
1,635
|
|
|
|
190,765
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
5,350
|
|
|
|
|
|
|
|
5,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
292,262
|
|
|
|
27,216
|
|
|
|
1,744
|
|
|
|
321,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income
|
|
$
|
(19,552
|
)
|
|
$
|
(13,447
|
)
|
|
$
|
4,010
|
|
|
$
|
(28,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
89,404
|
|
|
$
|
3,128
|
|
|
$
|
97
|
|
|
$
|
92,629
|
|
Fixed
|
|
|
94,046
|
|
|
|
5,815
|
|
|
|
527
|
|
|
|
100,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,450
|
|
|
$
|
8,943
|
|
|
$
|
624
|
|
|
$
|
193,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
369,739
|
|
|
$
|
20,689
|
|
|
$
|
165,897
|
|
|
$
|
556,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net assets
|
|
$
|
142,917
|
|
|
$
|
18,241
|
|
|
$
|
158,341
|
|
|
$
|
319,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
Note 15. Quarterly Data (Unaudited):
The following tables set forth selected information for each of the fiscal quarters during the years ended
December 31, 2011 and 2010. The selected quarterly data is derived from unaudited financial statements of the Company and has been prepared on the same basis as the annual, audited financial statements to include, in the opinion of management,
all adjustments (consisting of only normal recurring adjustments) necessary for fair statement of the results for such periods.
Note: The sum of quarterly earnings per share amounts may not equal full year earnings per share amounts due to differing average
outstanding shares amounts for the respective periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
Net
(Loss) Income
Before
Income
Taxes
|
|
|
Net
(Loss) Income
|
|
|
Basic
(Loss) Earnings
Per Share
|
|
|
Diluted
(Loss) Earnings
Per Share
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
50,098
|
|
|
$
|
(1,970
|
)
|
|
$
|
(1,905
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
Second Quarter
|
|
|
49,182
|
|
|
|
(2,938
|
)
|
|
|
(2,727
|
)
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
Third Quarter
|
|
|
20,134
|
|
|
|
(25,763
|
)
|
|
|
(26,136
|
)
|
|
|
(0.43
|
)
|
|
|
(0.43
|
)
|
Fourth Quarter
|
|
|
27,737
|
|
|
|
(19,208
|
)
|
|
|
(18,881
|
)
|
|
|
(0.33
|
)
|
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Year
|
|
$
|
147,151
|
|
|
$
|
(49,879
|
)
|
|
$
|
(49,649
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
44,217
|
|
|
$
|
(24,541
|
)
|
|
$
|
(8,262
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.13
|
)
|
Second Quarter
|
|
|
69,706
|
|
|
|
(12,155
|
)
|
|
|
(25,767
|
)
|
|
|
(0.41
|
)
|
|
|
(0.41
|
)
|
Third Quarter
|
|
|
57,394
|
|
|
|
(7,593
|
)
|
|
|
(6,611
|
)
|
|
|
(0.10
|
)
|
|
|
(0.10
|
)
|
Fourth Quarter
|
|
|
75,270
|
|
|
|
2,627
|
|
|
|
3,082
|
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Year
|
|
$
|
246,587
|
|
|
$
|
(41,662
|
)
|
|
$
|
(37,558
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
EXHIBIT INDEX
|
|
|
Exhibit
Number
|
|
Description
|
3.1
|
|
Amended and Restated Articles of Incorporation of the Registrant.(15)
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Registrant.(16)
|
|
|
4.1
|
|
Form of Certificate for Common Stock.(3)
|
|
|
4.2
|
|
Registration Rights Agreement, dated as of July 20, 2006, between the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)
|
|
|
4.3
|
|
Registration Rights Agreement, dated January 26, 2009, between the Registrant and Friedman, Billings, Ramsey Group, Inc.(8)
|
|
|
4.4
|
|
Form of Amended and Restated Voting Agreement, dated as of May 20, 2009, between Friedman, Billings, Ramsey Group, Inc., FBR TRS Holdings, Inc., FBR Capital Markets Corporation,
Forest Holdings LLC and Forest Holdings (ERISA) LLC.(9)
|
|
|
4.5
|
|
Form of Senior Indenture.(11)
|
|
|
4.6
|
|
Form of Subordinated Indenture.(11)
|
|
|
4.7
|
|
Form of Subscription Agreement by and between FBR Capital Markets Corporation and purchasers of common stock of FBR Capital Markets Corporation in connection with the closing of the
transactions contemplated by the Watch Hill Purchase Agreement.(12)
|
|
|
10.1
|
|
2006 Long-Term Incentive Plan (as Amended and Restated Effective June 3, 2010).(13)
|
|
|
10.2
|
|
Form of Incentive Stock Option Agreement.(1)
|
|
|
10.3
|
|
Form of Non-Qualified Stock Option Agreement.(1)
|
|
|
10.4
|
|
Tax Sharing Agreement, dated as of July 20, 2006, between FBR TRS Holdings, Inc. and the Registrant.(1)
|
|
|
10.5
|
|
Investment Agreement, dated as of July 19, 2006, among the Registrant, Forest Holdings LLC and Forest Holdings (ERISA) LLC.(1)
|
|
|
10.6
|
|
Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings LLC.(1)
|
|
|
10.7
|
|
Option Agreement, dated as of July 20, 2006, between the Registrant and Forest Holdings (ERISA) LLC.(1)
|
|
|
10.8
|
|
Professional Services Agreement, dated as of July 20, 2006, between the Registrant and Crestview Advisors, L.L.C.(1)
|
|
|
10.9
|
|
Amendment No. 2 to Professional Services Agreement, dated June 14, 2010, between the Registrant and Crestview Advisors, L.L.C.(14)
|
|
|
10.10
|
|
Form of Subscription Agreement with respect to the Registrants Director Stock Purchase Plan.(2)
|
|
|
10.11
|
|
2007 Employee Stock Purchase Plan, amended as of April 23, 2007.(2)
|
|
|
10.12
|
|
Form of resolution of the Registrants Board of Directors with respect to the Registrants Director Stock Purchase Plan.(2)
|
|
|
10.13
|
|
Description of the Registrants 2008 Incentive Compensation Program.(4)
|
|
|
10.14
|
|
Retention Incentive Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(5)
|
|
|
10.15
|
|
Employment Agreement, dated April 30, 2008, by and between the Registrant and Richard J. Hendrix.(5)
|
|
|
10.16
|
|
Form of Amendment to Original 2008 Performance RSU Award Agreement.(6)
|
|
|
|
Exhibit
Number
|
|
Description
|
|
|
10.17
|
|
Form of August 2008 Performance RSU Award Agreement.(6)
|
|
|
10.18
|
|
Form of Stock Option Agreement.(6)
|
|
|
10.19
|
|
Form of Restrictive Covenant Agreement.(6)
|
|
|
10.20
|
|
Retirement Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(7)
|
|
|
10.21
|
|
Director Agreement between the Registrant and Eric F. Billings, dated December 21, 2008.(7)
|
|
|
10.22
|
|
Stock Repurchase Agreement, dated as of May 18, 2009, by and among the Registrant, Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.), and FBR TRS
Holdings, Inc.(9)
|
|
|
10.23
|
|
Form of Transition Services Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.24
|
|
Form of Assignment and Assumption Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.25
|
|
Form of Trademark and Copyright Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.26
|
|
Form of Domain Name Assignment by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.27
|
|
Form of Trademark License Agreement by and between the Registrant and Friedman, Billings, Ramsey Group, Inc. (d/b/a Arlington Asset Investment Corp.).(9)
|
|
|
10.28
|
|
Form of LTIP RSU Award Agreement.(10)
|
|
|
10.29
|
|
RSU Award Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(10)
|
|
|
10.30
|
|
Stock Option Agreement, dated February 9, 2010, between the Registrant and Richard J. Hendrix.(10)
|
|
|
10.31
|
|
FBR Capital Markets Corporation 2010 Partner Leveraged Stock Purchase Program, as amended and restated.(10)
|
|
|
10.32
|
|
FBR & Co. Retention and Incentive Plan (Effective February 8, 2012).(17)
|
|
|
10.33
|
|
Form of Retention and Incentive Plan Award Letter.(17)
|
|
|
10.34
|
|
Form of RSU Award Letter.(17)
|
|
|
12.1
|
|
Statement regarding Computation of Ratio of Earnings to Fixed Charges.*
|
|
|
21.1
|
|
Subsidiaries of the Registrant.*
|
|
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP.*
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
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101
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The following financial information from the Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i)
the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Shareholders Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated
Financial Statements, tagged as blocks of text.
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(1)
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Previously filed as an exhibit to the Registrants Registration Statement on Form S-1 (Registration No. 333-138824), which was filed with the SEC on
November 17, 2006, and incorporated by reference herein.
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(2)
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Previously filed as an exhibit to Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 10, 2007, and incorporated by reference herein.
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(3)
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Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form S-1/A (Registration No. 333-141987),
which was filed with the SEC on May 21, 2007, and incorporated by reference herein.
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(4)
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Incorporated herein by reference to the description of such program included in Item 5.02 of the Registrants Current Report on Form 8-K, which was filed with
the SEC on February 26, 2008.
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(5)
|
Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008, which was filed with the SEC
on May 12, 2008, and incorporated herein by reference.
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(6)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on August 21, 2008, and incorporated herein by
reference.
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(7)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on December 22, 2008, and incorporated herein by
reference.
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(8)
|
Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009, which was filed with the SEC
on May 8, 2009, and incorporated herein by reference.
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(9)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on May 19, 2009, and incorporated herein by
reference.
|
(10)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on February 16, 2010, and incorporated herein by
reference.
|
(11)
|
Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-159415), which was
initially filed with the SEC on May 22, 2009, and incorporated herein by reference.
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(12)
|
Previously filed as an exhibit to Amendment No. 1 to the Registrants Registration Statement on Form S-3/A (Registration No. 333-161416), which was
initially filed with the SEC on August 18, 2009, as amended, and incorporated herein by reference.
|
(13)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on June 8, 2010, and incorporated herein by
reference.
|
(14)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the SEC on June 14, 2010, and incorporated herein by
reference.
|
(15)
|
Previously filed as an exhibit to the Registrants Registration Statement on Form S-8 (Registration No. 333-175088
,
which was filed with the SEC on
June 23, 2011, and incorporated by reference herein.
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(16)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the Commission on June 23, 2011, and incorporated by
reference herein.
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(17)
|
Previously filed as an exhibit to the Registrants Current Report on Form 8-K, which was filed with the Commission on February 14, 2012, and incorporated by
reference herein.
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Management contract or compensatory plan or arrangement.
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