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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-13731
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1837743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1001 NINETEENTH STREET NORTH
ARLINGTON, VA 22209
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(703) 312-9500
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF SECURITIES EXCHANGES ON WHICH REGISTERED
CLASS A COMMON STOCK, PAR VALUE $0.01 NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
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Aggregate market value of the voting stock held by non-affiliates of the
Registrant: $358,768,250 as of March 10, 2000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
13,554,564 shares of Class A Common Stock as of March 10, 2000 and
35,484,329 shares of Class B Common Stock as of March 10, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission no later than 120 days after the
Registrant's fiscal year ended December 31, 1999 and to be delivered to
stockholders in connection with the 2000 Annual meeting of Stockholders in Part
III, Items 10 (as related to Directors), 11, 12 and 13.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's 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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TABLE OF CONTENTS
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Page
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PART I
Item 1. Business............................................. 1
Item 2. Properties........................................... 37
Item 3. Legal Proceedings.................................... 37
Item 4. Submission of Matters to a Vote of Security Holders.. 38
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters................................. 40
Item 6. Selected Consolidated Financial Data................. 40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 41
Item 8. Financial Statements and Supplementary Data.......... 55
PART III
Item 10. Directors and Executive Officers of the Registrant... 55
Item 11. Executive Compensation............................... 55
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 55
Item 13. Certain Relationships and Related Transactions....... 55
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K.............................. 55
SIGNATURES............................................................. 58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................. F-1
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PART I
CAUTIONS ABOUT FORWARD-LOOKING INFORMATION
This Form 10-K and the information incorporated by reference in this Form
10-K include forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Some of the forward-looking statements can be
identified by the use of forward-looking words such as "believes", "expects,"
"may," "will," "should," "seeks," "approximately," "intends," "plans,"
"estimates" or "anticipates" or the negative of those words or other comparable
terminology. Such statements include, but are not limited to, those relating to
the effects of growth, our principal investment activities, levels of assets
under management and our current equity capital levels. Forward-looking
statements involve risks and uncertainties. You should be aware that a number of
important factors could cause our actual results to differ materially from those
in the forward-looking statements. These factors include, but are not limited
to, competition among venture capital firms and the high degree of risk
associated with venture capital investments, the effect of demand for public
offerings, mutual fund and 401(k) and pension plan inflows or outflows,
volatility of the securities markets, available technologies, government
regulation, economic conditions and competition for business and personnel in
the business areas in which we focus, fluctuating quarterly operating results,
the availability of capital to us and risks related to online commerce. We will
not necessarily update the information presented or incorporated by reference in
this Form 10-K if any of these forward-looking statements turn out to be
inaccurate. Risks affecting our business are described throughout this Form 10-K
and especially in the section "Business--Factors Affecting Our Business,
Operating Results and Financial Condition" (page 21). This entire Form 10-K,
including the Consolidated Financial Statements and the notes and any other
documents incorporated by reference into this Form 10-K should be read for a
complete understanding of our business and the risks associated with that
business.
ITEM 1. BUSINESS
GENERAL
Friedman, Billings, Ramsey Group, Inc. ("FBR"), is a financial services and
investment firm focused on three businesses:
(1) Investment banking and capital markets. This business is conducted
primarily through Friedman, Billings, Ramsey & Co., Inc. ("FBRC") our
principal registered broker-dealer subsidiary.
(2) Venture capital and other specialized asset management products. This
business is conducted primarily through two registered investment
adviser subsidiaries, Friedman, Billings, Ramsey Investment
Management, Inc. ("FBRIM") and FBR Venture Capital Managers, Inc.
("FBRVCM").
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(3) Online investment banking, brokerage and securities distribution
services. This business is conducted through our online investment
bank and brokerage unit, fbr.com, a division of FBR Investment
Services, Inc. ("FBRIS"), a registered broker-dealer subsidiary.
Through these businesses, we provide a broad array of financial products
and services in the following industry sectors: Internet and related information
technology, financial services, real estate and middle market consumer and
industrial companies, particularly energy and healthcare, that we believe offer
significant growth opportunities. Throughout our 10 year existence, and in
particular since late 1996, we have strengthened our business by adding new
products and services, diversifying into new industry sectors, and building a
wider customer base. We have also increased our principal investment activities,
both through investment in our own asset management products, and through direct
investment, including in new companies that we ourselves create.
We believe that our goal of building shareholder value is best achieved by
strengthening our competitive position and our financial position. In order for
us to remain competitive, it is important for us to offer a broad range of
products and services both to corporate issuers who are seeking advice and
finance, and to our brokerage and asset management customers. We also believe
it is important for us to be involved with companies early in their lifecycles
(or even to be involved in creating businesses) in order to establish
relationships that will provide us with ongoing revenues as these companies'
finance and advisory needs grow. We seek to provide our corporate clients with
the financing and advisory services that they will need at all stages of their
corporate lifecycle.
We are a Virginia corporation, and the successor company to that founded in
1989 by our Co-Chief Executive Officers, Emanuel J. Friedman, Eric F. Billings,
and W. Russell Ramsey. As of December 31, 1999, we had 390 employees engaged in
the following activities: 58 in research, 85 in corporate finance and investment
banking, 142 in sales, trading and syndicate, 26 in venture capital, private
equity and asset management and 79 in accounting, administration and operations.
Our employees are not subject to any collective bargaining agreement and we
believe that we have excellent relations with our employees.
As of December 31, 1999, our employees owned approximately 75% of our
common stock, while our three founders owned approximately 51% of our common
stock. Our principal executive offices are located at Potomac Tower, 1001
Nineteenth Street North, Arlington, Virginia 22209. We also have offices in
Reston, Virginia; Irvine and Los Angeles, California; Boston, Massachusetts;
Charlotte, North Carolina; Chicago, Illinois; Seattle, Washington; Portland,
Oregon; Vienna, Austria; and London, England.
STRATEGY
As of December 31, 1999, we had shareholders equity of $189 million and
virtually no long-term debt. We achieve operating leverage in two ways. First,
we leverage our return on investment by investing in our own asset management
funds that provide us with incentive income on all of the assets invested in the
funds by our customers. As a result, we receive a return that is
disproportionate to our investment. Second, we have a variable cost structure
that has low fixed costs, and a large variable element of compensation and other
expense related to revenue levels.
We seek to combine businesses that provide relatively predictable revenues
and moderate growth from diverse business lines and customer bases, with higher
margin businesses that have greater potential for significant growth. In the
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first category, we include our brokerage business, corporate finance advisory
business and that portion of our asset management business that generates fees
based on a percentage of assets under management. In the second category, we
include our capital raising business, that portion of our asset management
businesses that provides for incentive income based on gains above a certain
level, and our principal investing activity.
Revenues
Our goal is to maintain revenues from our base businesses at a level to
cover our fixed costs, including base compensation, and to provide bonus
compensation and significant profit margins from our other businesses. In 1999,
approximately half of our revenues were in the category that we consider our
base business, and approximately half were from venture capital and capital
raising activities.
Our revenues for the years ended December 31, 1999, 1998 and 1997 were
$139.0 million, $122.9 million and $256.1 million respectively. The increase in
revenue from 1998 to 1999 is primarily due to increased revenues from our
venture capital business that is focused on the Internet and related information
technology sectors and, to a lesser extent, to our investment banking business
in the same sectors. See the table on page 47 for the percentage of total
revenues contributed by each of our principal products and services.
We began in 1989 as an institutional brokerage firm offering specialized
research, sales and trading. We have maintained and enhanced this business, and
in 1999 it contributed about one-third of our revenues.
In late 1992, we added investment banking to our institutional brokerage.
In late 1996, we added a dedicated merger and acquisition team. Since we began
our investment banking activities, we have been involved in more than 270
capital raising, advisory and other transactions, with total transaction value
in excess of $270 billion. In 1999, investment banking contributed about one-
third of our revenues.
In late 1996, we initiated several new asset management businesses and
hired professionals to lead those efforts. Among these were our venture capital,
private equity and mutual fund businesses. Our assets under management have
increased from $119.3 million at the beginning of 1996 to $879 million at the
end of 1999. We earn base management fees at a blended rate of more than 1% on
our assets under management, and on $736 million of these assets we have the
potential to earn incentive income. We also invest in our own asset management
products, and earn a return on our investment. In 1999, asset management
(primarily venture capital) contributed about one-third of our revenues
(including unrealized gains included in incentive income).
A significant portion of our 1999 asset management revenue was from
incentive fees of up to 20% of the gains (above certain levels) of the venture
capital partnerships that we manage. We record compensation expense against
those fees. These gains include unrealized "mark to market" gains resulting from
the valuation of public securities held in the partnerships' portfolios by
reference to the public trading price of the securities, discounted to reflect
restrictions on liquidity. Accordingly, the partnerships' gains and our
incentive income may fluctuate with market prices, and may be reversed from one
period to the next. Please see footnotes 2 and 3 to our Financial Statements,
for more information about how we account for revenue from our venture capital
business, and "Factors Affecting our Business, Operating Results and Financial
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Condition" for a discussion of the risks and volatility associated with our
venture capital revenue.
We continued to diversify our businesses and related revenue streams in
1999 with the launch of fbr.com, our online investment bank, and the announced
purchase, subject to regulatory approval, of Money Management Associates, LP
("MMA") a mutual fund family of fixed income and money market funds, and its
affiliated bank, Rushmore Trust and Savings, FSB ("Rushmore"). If this
acquisition is completed as planned during 2000, we expect that it will increase
our assets under management by about $850 million to more than $1.7 billion, on
which we will earn base management fees at a rate in excess of 1%.
Industry Sectors
We began our business focussed on the middle market financial services
sector, in particular thrifts and small banks. We extended sector coverage to
the related areas of real estate and non-depository institutions during 1994 to
1996. In 1996 we began to actively expand our sector coverage to industries
with significant growth potential and capital needs, that are less closely
related to the financial sector. In doing this, we sought to build our business
in sectors that we believed would be somewhat counter-cyclical to each other,
with some providing active business opportunities to us when others are not. In
particular we focused on the Internet and related information technology
sectors. Starting in late 1997, we have also built new capabilities with the
addition of new personnel and through our strategic alliance with PNC Bank, to
expand in the middle market areas of energy, consumer and industrial growth and
healthcare.
Customer Base
The customer base of our brokerage business has historically been
primarily institutional, including large national institutions such as
well-known mutual fund complexes, as well as smaller, private investment pools.
We have built increased business from this existing base, and from new
institutional customers, by providing research, sales and trading in dedicated
teams by industry and by customer. We believe that this strategy allows us to
better serve the needs of our institutional customers, and is rewarded by
increased brokerage business from these institutions.
Starting in late 1997, we have also pursued a strategy of building our
client base of corporate and high net worth individuals through a specialized
private client group that offers brokerage and asset management services
specifically designed to meet the needs of corporate executives, major
shareholders, corporate investment offices, pension plans and foundations.
In early 1999, we completed our customer coverage by adding a retail
group for the first time. Our retail effort is entirely online, through our
fbr.com online investment bank, which we believe to be a much more efficient and
cost-effective platform to serve the needs of our retail customers than a retail
branch network of commission brokers.
Principal Investing
We invest in companies within our sectors of focus both as a partner with
our customers in the asset management vehicles that we manage, and as a direct
investor. We pursue this investing strategy to provide diversification of our
invested assets across industry sectors, and to invest strategically in sectors
and companies that can provide us with future business opportunities. As of the
end of 1999, our principal investments were primarily focused on three sectors -
Internet and related information technology, financial and real estate, with a
weighting
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towards Internet and related information technology investment as a result of
substantial appreciation in our managed technology venture capital funds.
STRATEGIC RELATIONSHIPS
In 1997, PNC Bank Corp. ("PNC") acquired slightly less than 5% of the
outstanding shares of FBR common stock as part of a strategic business
relationship between us and PNC with respect to selected capital markets and
related activities. We work with PNC on an arms-length basis to refer potential
business to each other. PNC is an investor in certain of our private equity,
venture and proprietary products.
PNC is one of the largest diversified financial services companies in the
United States. PNC offers a variety of financial products and services in its
primary geographic locations in Pennsylvania, New Jersey, Delaware, Ohio and
Kentucky and nationally through retail distribution networks and alternative
delivery channels.
We have built strategic relationships with other financial companies such
as Fidelity Investments initiated in August 1999 and Dawnay, Day, Lander, Ltd.,
a United Kingdom firm focused on capital finance and venture investing in the
Internet sector, initiated in January 2000. We have also built strategic
alliances with non-financial partners such as fbr.com's relationship with
Strategy.com, a personalized Internet information network, initiated in May
1999.
We will continue to pursue strategic partnerships as part of our strategy
to strengthen our revenue sources by increasing our product offerings and
providing increased services to our customers. In addition, we may pursue joint
ventures or other business combinations or raise additional capital in order to
build our businesses. If we choose to raise additional capital, we may do so by
selling additional stock in or issuing debt of Friedman, Billings, Ramsey Group,
Inc. or by seeking investors or partners in one particular subsidiary or sector
of our businesses.
CAPITAL MARKETS
Historically, we have derived the majority of our revenues from our
capital markets activities. We have maintained the strength of our investment
banking business in the financial services and real estate sector and expanded
our capabilities by adding research and investment banking personnel in areas
such as Internet and information technology, energy and insurance. Since 1996,
we have used our traditional investment banking and research operations and our
location in the Washington D.C. "Netplex" region, home to many Internet and
information technology companies, to build a technology investment banking
franchise with national scope. We currently provide research coverage on over 50
technology companies and have raised capital or executed merger and acquisition
("M&A") transactions for 20 technology companies in 1999. Technology-related
transactions accounted for approximately one-third of our investment banking
revenues in 1999, with financial services and all other industry groups each
accounting for a third of such revenues.
Our research activities and institutional sales and trading activities are
a part of our primary broker-dealer/investment banking subsidiary - FBRC. Our
underwriting and corporate finance activities consist of a broad range of
services, including public and private offerings of a wide variety of securities
and financial advisory services in mergers and acquisitions, mutual to stock
conversions, strategic partnering transactions and other advisory assignments.
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Capital Raising Activities
Our capital raising activities include a wide range of securities,
structures and amounts. We are a leading underwriter of securities in our areas
of focus and are dedicated to the successful completion and aftermarket
performance of each underwriting transaction we execute. Our investment banking,
research, and sales and trading professionals work as a team to execute
successfully capital raising assignments.
Our strategy is to maintain long-term relationships with our corporate
clients by serving their capital needs beyond their initial access to capital
markets. We seek to increase our base of public company clients by serving as a
lead or co-manager or syndicate member in follow-on offerings for companies that
we believe have attractive investment characteristics, whether or not we
participated as a lead or co-manager in the IPOs for such companies.
Mergers and Acquisitions Advisory Services
Our mergers and acquisitions group uses the firm's research capability,
business valuation skills and secondary market experience to evaluate merger and
acquisition candidates and opportunities for our clients. We believe that our
research capacity and capital raising activities have created a network of
relationships that enables us to identify and engineer mutually beneficial
combinations between companies. As a financial adviser, we rely upon our
experience gained through in-depth and daily involvement in the capital markets.
Financial advisory services have included advice on mergers and on
acquisitions (including ongoing review of merger and acquisition opportunities),
market comparable performance analysis, advice on dividend policy, and
evaluation of stock repurchase programs. During 1998 and 1999, FBRC provided
merger and acquisition and other advisory services in transactions valued at
$4.5 billion in the aggregate.
Research
A key part of our strategy is to support our businesses with specialized
and in-depth research. Our analysts cover a universe of over 400 companies in
our chosen industry sectors. We leverage the ideas generated by our research
teams across our entire organization, using them to attract underwriting and
institutional brokerage clients, to advise corporate finance clients, to inform
the direction of the various investment funds we advise or sponsor, and to
attract retail investors through fbr.com. We make almost all of our analyst's
research reports available online at fbr.com, making us one of the few
investment banks to allow the public direct access to its research product. In
addition, we increase our visibility to corporate clients and to investors by
holding annual investor conferences - each focused on a broad industry sector.
In 1999, these conferences featured over 150 company presentations and drew more
than 1,000 attendees over three days.
Our research analysts operate under two guiding principles: (i) to identify
undervalued investment opportunities in the capital markets and (ii) to
communicate effectively the
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fundamentals of these investment opportunities to our investment banking and
sales and trading professionals and 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.
We have focused our research efforts in some of the fastest growing and
most rapidly changing sectors of the United States and world economies. These
sectors include Internet and information technology, electronic commerce,
telecommunications, e-health, financial technology, banks, thrifts, real estate
investment trusts, specialty finance companies, energy and insurance. We believe
these industry sectors will have great demand for the products and services we
offer and will provide ample diversification opportunities for our business.
After initiating coverage on a company, our analysts seek to maintain a
long-term relationship with that company and a long-term commitment to ensuring
that new developments are effectively communicated to our sales force and
institutional investors. We produce full-length research reports, notes or
earnings estimates on the companies we cover. In addition, our analysts
distribute written updates on these issuers both internally and to our clients
through the use of daily morning meeting notes, real-time electronic mail and
other forms of immediate communication. Our clients can also receive analyst
comments through our web site (www.fbr.com) and through electronic media,
including Multex and First Call.
Sales and Trading
FBRC and our United Kingdom subsidiary, Friedman, Billings, Ramsey
International Ltd., focus on institutional sales to and trading services for
equity and high-yield investors in the United States, Europe and elsewhere. We
execute securities transactions for institutional investors such as banks,
mutual funds, insurance companies, hedge funds, money managers and pension and
profit-sharing plans. Institutional investors normally purchase and sell
securities in large quantities, which requires special marketing and trading
expertise.
Our sales professionals provide services to a nationwide institutional
client base as well as to institutional clients in Europe and elsewhere. Sales
professionals work closely with our research analysts to provide the most up-
to-date information to our institutional clients. Our sales professionals are
organized into teams that focus on particular industry sectors in order to
facilitate the communication of in-depth information to our clients. Each team
maintains regular contact with our research staff and with the specialized
portfolio managers and buy-side analysts of each institutional client.
Our trading professionals facilitate trading in equity and high-yield
securities. We are involved in market-making in Nasdaq and other OTC securities,
trading listed securities and servicing the trading desks of major institutions
in the United States and Europe. Our trading professionals have direct access to
the major stock exchanges, including the New York Stock Exchange and the
American Stock Exchange through FBRC's clearing broker. At year-end 1999, FBRC
made a market in more than 400 securities.
Private Client Group
Since our inception in 1989, we have provided services to corporate
executives and small institutions, as well as to other sophisticated high net
worth clients. In late 1997, we formed the
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Private Client Group ("PCG") to focus on the growth of this business for FBR's
growing corporate client base. Given our strong investment banking relationships
with both public and private companies, we believe that the executives of these
companies form a natural customer base for the PCG.
The PCG seeks to offer creative money management solutions and investment
ideas suited to high net worth individuals. Using a consultative approach, PCG
professionals research, interpret, evaluate and recommend sophisticated
investment strategies. PCG specializes in hedging and monetizing significant
equity positions. Additionally, PCG professionals are knowledgeable in various
aspects of the sale of restricted and control stocks, as well as the financing
of employee stock option exercises. Individuals who own restricted or control
stock receive PCG assistance with the complex regulations and paperwork required
to sell such securities. For individuals unable to sell positions, PCG offers a
number of strategies for preserving value in such assets, as well as the ability
to borrow funds at favorable rates to provide liquidity.
Internet
In April 1999, we opened an Internet securities distribution channel,
fbr.com, creating one of the world's first "online investment banks." We
account for fbr.com's operations in our capital markets segment reporting. In
addition to traditional online brokerage services such as low-cost trades,
quotes and news, fbr.com offers investors access to our own research and the
opportunity to participate in IPOs and secondary offerings in which we
participate as an underwriter. In addition, fbr.com offers online brokerage and
online access to a mutual fund supermarket with over 6,400 funds. fbr.com
currently has more than 21,000 registered users receiving offering alerts, about
25% of whom maintain accounts at fbr.com.
In August 1999, we entered into a partnership with Fidelity Investments
through which we invite Fidelity to participate in selected offerings, combining
our pipeline of IPOs and secondary offerings with Fidelity's vast retail
distribution network. In January 2000, we launched Offering MarketplaceSM, the
first service in the industry that uses Internet browser based technology for
automated customer order capture, share allocation and order execution
technologies to enable an entire offering to be distributed online.
Although fbr.com is not yet profitable on a stand-alone basis, we are using
its Internet presence across our capital markets business as part of our
strategy to leverage our strengths in research, underwriting and brokerage. We
believe that fbr.com's combination of proprietary products and services presents
a significant growth opportunity for us.
ASSET MANAGEMENT
Since 1996, we have added specialized asset management capabilities, such
as private equity and technology venture capital, as part of an effort to
diversify our revenue stream and create additional revenue opportunities by
leveraging our unique research perspectives and our "Netplex" location. We
believe that our 1999 financial results demonstrate the value of this strategy.
Assets under management increased by 28% from $689 million at year-end 1998 to
$879 million as of December 31, 1999 due to our development of new venture
capital and private equity funds. Approximately one-third of our revenues for
1999 was attributable to our asset management business.
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The successful track record of our 1997 FBR Technology Venture Partners
L.P. fund ("TVP I"), which provides early stage financing for non-public
technology companies, allowed us to create a second fund in 1999 ("TVP II") with
$150 million of committed capital that closed in May 1999. We anticipate
launching new funds during 2000 to further build on our successful venture
capital record.
In October 1999, we announced a definitive agreement to acquire MMA and its
savings bank subsidiary, Rushmore FSB. We believe that this acquisition will
allow us to provide a broader array of asset management services and products to
our clients. MMA had approximately $850 million of assets under management as of
December 31, 1999, including fixed income mutual funds and cash management
accounts that are complementary to our more specialized asset management product
offerings. MMA is the investment adviser or administrator for 20 mutual funds.
Rushmore is a federally chartered savings bank that brings traditional banking
services to our product offering (e.g., lending, deposits, cash management,
trust, transfer agency and custody services). We plan to convert Rushmore to a
federally chartered bank. The acquisition is subject to regulatory approval by
federal banking authorities. We currently expect the acquisition to be
completed in 2000.
We use the expertise of our research professionals and portfolio managers
to develop and implement investment products for institutional and high net
worth individual investors. Following is a description of our primary asset
management products.
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VENTURE CAPITAL/PRIVATE EQUITY TYPE OF INVESTMENT Year Commenced
FUNDS
<S> <C> <C>
FBR Private Equity Fund, L.P. Private equity/mezzanine financing up to 1996
("PEF") $3million
FBR Technology Venture Pre-IPO stage financings of $1-4 million 1997
Partners, L.P. ("TVP I")
FBR Financial Fund II, L.P. Financial services private equity 1998
("Fin Fund II")
FBR Technology Venture Pre-IPO stage financings of $2-10 million 1999
Partners II, L.P.
("TVP II")
INVESTMENT PARTNERSHIPS
FOCUSED ON PUBLIC EQUITY
FBR Weston, L.P. Long-term opportunistic 1989
FBR Ashton, L.P. Financial equities 1992
FBR Braddock, L.P. Long-term small cap value 1993
FBR Opportunity Fund, LLC Financial equities offshore 1995
FBR Arbitrage, LLC Merger/special situation arbitrage 1998
MUTUAL FUNDS
FBR Family of Funds Mutual Funds 1997
REIT
FBR Asset Investment Corp. Real estate related investments 1997
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Private Equity and Venture Capital Funds
At December 31, 1999, our private equity and venture capital funds had
$480.9 million in assets under management, a 208% increase over December 31,
1998. In addition to base fees, these funds provide for incentive income
(generally, 20% of the net investment gains), if certain benchmarks are met.
The following table shows our assets under management, capital committed
and current capital employed for our private equity and venture capital funds at
December 31, 1999 (dollars in millions):
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Assets Under Capital
Fund Management Commitments Current Capital Employed
- ---- ------------ ----------- ------------------------
Cost Value
---- -----
<S> <C> <C> <C> <C>
TVP I $ 222.8 $ 50.0 $ 35.5 $ 222.8
TVP II 150.0 150.0 31.8 35.1
PEF 19.9 19.9 13.9 19.9
Fin Fund II 82.4 82.4 22.5 23.0
Other 5.8
-------- -------- -------- --------
Total $ 480.9 $ 302.3 $ 103.7 $ 300.8
======== ======== ======== ========
Asset
Composition Cost Value
- ----------- ------ -------
Public Securities $ 12.7 $ 180.1
Public Merger Candidates 5.5 8.9
Public Registration 7.2 28.7
-------- --------
Private Investment 25.4 217.7
Investment Partnerships 78.3 83.1
-------- --------
Total $ 103.7 $ 300.8
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At December 31, 1999, our investment partnerships focused on private equity
had approximately $189.6 million under management. In addition to base fees,
these partnerships provide for incentive income, if certain benchmarks are met.
The largest of these partnerships uses investment strategies primarily involving
publicly-traded financial services companies' equity and fixed income
securities.
Mutual Funds
The FBR Family of Funds, an open-end management type investment company
registered under the Investment Company Act of 1940, began business in 1997 and
currently is comprised of four no-load funds: the FBR Financial Services Fund,
the FBR Small Cap Financial Services Fund, the FBR Small Cap Growth/Value Fund
and the FBR Realty Growth Fund, added in 1998. At December 31, 1999, total
assets managed in The FBR Family of Funds were $66.1 million.
FBR Asset Investment Corp.
FBR Asset Investment Corp. (FBR-Asset) is a publicly traded real estate
investment trust (FB-NYSE) that we manage and which is 23% owned by us. FBR-
Asset invests in real-estate related assets, including mortgage loans and
mortgage-backed securities, as well as securities of companies engaged in real
estate-related activities. At December 31, 1999, FBR-Asset had total assets of
$330 million, shareholders' equity of $104.5 million and book value of $18 per
share. We receive dividend income on our investment in FBR-Asset, as well as
base management fees, and are entitled to receive performance based incentive
income if certain performance benchmarks are met.
ACCOUNTING, ADMINISTRATION AND OPERATIONS
Our accounting, administration and operations personnel are responsible
for financial controls, internal and external financial reporting, office and
personnel services, management information and telecommunications systems, and
the processing of securities transactions. 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 by our management information systems
department. 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, as well as the hiring of additional personnel.
COMPETITION
We are engaged in the highly competitive financial services and investment
industries. We compete directly with large Wall Street securities firms,
securities subsidiaries of major commercial bank holding companies, U.S.
subsidiaries of large foreign institutions, major
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regional firms, venture capital firms and smaller niche players, and those
offering competitive services via the Internet. To an increasing degree, we also
compete for various segments of the financial services business with other
institutions, such as commercial banks, savings institutions, mutual fund
companies, life insurance companies and financial planning firms.
In addition to competing for customers and investments, companies in the
financial services and investment industries compete to attract and retain
experienced and productive investment professionals. See "Factors Affecting the
Our Business, Operations and Financial Condition - Competition for Retaining and
Recruiting Personnel."
Many competitors have greater personnel and financial resources than we do.
Larger competitors are able to advertise their products and services on a
national or regional basis and may have a greater number and variety of
distribution outlets for their products, including retail distribution. Discount
and Internet brokerage firms market their services through aggressive pricing
and promotional efforts. In addition, some competitors have much more extensive
investment banking activities than we do and therefore, may possess a relative
advantage with regard to access to deal flow and capital. Some of our venture
capital competitors have been established for a longer period of time and have
more established relationships, which may give them greater access to deal flow
and to capital.
Recent rapid advancements in computing and communications technology,
particularly the Internet, are substantially changing the means by which
financial services are delivered. These changes are providing consumers with
more direct access to a wide variety of financial and investment services,
including market information and on-line trading and account information.
Advancements in technology also create demand for more sophisticated levels of
client services. We are committed to using technological advancements to provide
a high level of client service to our target markets. Provision of these
services may entail considerable cost without an offsetting source of revenue.
For a further discussion of the competitive factors affecting our business,
see "Factors Affecting Our Business, Operating Results and Financial Condition".
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RISK MANAGEMENT
We have established various policies and procedures for the management of
our exposure to operating, principal and credit risk. There can be no assurance
that our risk management procedures and internal controls will prevent or reduce
any such risks. Operating risk arises out of the daily conduct of our business
and relates to the possibility that one or more of our employees could engage in
an imprudent business activity that adversely impacts us. Principal risk relates
to the fact that we hold securities, directly and through entities that we
manage and in which we invest, that are subject to changes in value, and such
changes could result in our incurring material losses. Credit risk occurs
because we extend credit through our clearing brokers to various of our
customers in the form of margin and other types of loan activities, such as
subordinated and mezzanine loans.
Operating risk is monitored by business group managers, and by the
directors of each of our operating subsidiaries. These directors review the
overall business activities of each of our subsidiaries, and issue directions to
address issues which, in the judgment of the directors, could result in material
losses.
Principal risk is managed primarily by conducting real-time monitoring of
the amount and types of securities that we hold from time to time and by
limiting our exposure to any one investment or type of investment. The most
common categories of securities owned are those related to the daily trading
activities of our brokerage operations and those which arise out of our
underwriting, asset management, venture capital and mezzanine financing
activities and other securities held for investment and available for sale. We
attempt to limit our exposure to market risk on securities held as a result of
our daily trading activities by limiting our inventory of trading securities to
the amount needed to provide the appropriate level of liquidity in the
securities for which we are a market maker.
Credit risk for our broker-dealer operations is monitored both by our
operations personnel and by our clearing brokers. Margin calls are issued if the
value of collateral declines below established margin requirements, and margin
maintenance requirements are increased in the event that the concentration in a
client's account exceeds certain levels. Credit risk for subordinated and
mezzanine loans are monitored by the portfolio managers assigned to the loans.
Regulation
In the United States, a number of federal regulatory agencies are charged
with safeguarding the integrity of the securities and other financial markets
and with protecting the interests of customers participating in those markets.
The Securities and Exchange Commission ("SEC") is the federal agency that is
primarily responsible for the regulation of broker-dealers and investment
advisers doing business in the United States, and the Federal Reserve Board
promulgates regulations applicable to securities credit (margin) transactions
involving broker-dealers and certain other institutions in the United States.
Much of the regulation of broker-dealers has been delegated to self-regulatory
organizations ("SROs"), principally the NASD (and its subsidiaries NASD
Regulation, Inc. and the Nasdaq Stock Market ("Nasdaq")), and the national
securities exchanges. These organizations (which are subject to oversight by the
SEC) that govern the industry, monitor daily activity and conduct periodic
examinations of member broker-dealers. While FBRC and our other broker-dealer
subsidiaries are not members of the New York Stock Exchange ("NYSE"), our
business is impacted by the exchange's rules and our Class A common stock is
listed for trading on the NYSE.
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Securities firms are also subject to regulation by state securities
commissions in the states in which they are required to be registered. FBRC is
registered as a broker-dealer with the SEC and in 49 states, Puerto Rico and the
District of Columbia, and is a member of, and subject to regulation by the NASD
and the Municipal Securities Rulemaking Board. FBRIS is registered as a broker-
dealer with the SEC and in all 50 states, Puerto Rico and the District of
Columbia; it is a member of the NASD.
As a result of federal and state registration and SRO memberships, FBRC
and FBRIS are subject to overlapping schemes of regulation which cover all
aspects of their securities business. Such regulations cover matters including
capital requirements, uses and safe-keeping of clients' funds, conduct of
directors, officers and employees, record-keeping and reporting requirements,
supervisory and organizational procedures intended to assure compliance with
securities laws and to prevent improper trading on material nonpublic
information, employee- related matters, including qualification and licensing of
supervisory and sales personnel, limitations on extensions of credit in
securities transactions, clearance and settlement procedures, requirements for
the registration, underwriting, sale and distribution of securities, and rules
of the SROs designed to promote high standards of commercial honor and just and
equitable principles of trade. A particular focus of the applicable regulations
concerns the relationship between broker-dealers and their customers. As a
result, many aspects of the broker-dealer customer relationship are subject to
regulation including, in some instances, "suitability" determinations as to
certain customer transactions, limitations on the amounts that may be charged to
customers, timing of proprietary trading in relation to customers' trades and
disclosures to customers.
FBRC and FBRIS are also 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-dealers. Certain "Material
Associated Persons" (as defined in the Risk Assessment Rules) of the broker-
dealers 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.
Three of our asset management subsidiaries are registered as investment
advisers with the SEC. As investment advisers registered with the SEC, they are
subject to the requirements of the Investment Advisers Act of 1940 and the SEC's
regulations thereunder. Such requirements relate to, among other things,
limitations on the ability of investment advisers to charge performance-based or
non-refundable fees to clients, record-keeping and reporting requirements,
disclosure requirements, limitations on principal transactions between an
adviser or its affiliates and advisory clients, as well as general anti-fraud
prohibitions. They may also be subject to certain state securities laws and
regulations. The state securities law requirements applicable to registered
investment advisers are in certain cases more comprehensive than those imposed
under the federal securities laws. In addition, FBR Fund Advisers, Inc. and the
mutual funds it manages are subject to the requirements of the Investment
Company Act of 1940 and the SEC's regulations thereunder.
In the event of non-compliance by us or one of our subsidiaries with an
applicable regulation, governmental regulators and one or more of the SROs may
institute administrative or judicial proceedings that may result in censure,
fine, civil penalties (including treble damages in the case of insider trading
violations), the issuance of cease-and-desist orders, the deregistration
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or suspension of the non-compliant broker-dealer or investment adviser, the
suspension or disqualification of officers or employees or other adverse
consequences. The imposition of any such penalties or orders on us or our
personnel could have a material adverse effect on our operating results and
financial condition.
Our business is also subject to regulation by various foreign governments
and regulatory bodies. FBRC is registered with and subject to regulation by the
Ontario Securities Commission in Canada. Friedman, Billings, Ramsey
International, Ltd. ("FBRIL"), our United Kingdom brokerage subsidiary, is
subject to regulation by the Securities and Futures Authority in the United
Kingdom ("SFA") pursuant to the United Kingdom Financial Services Act of 1986.
Foreign regulation may govern all aspects of the investment business, including
regulatory capital, sales and trading practices, use and safekeeping of customer
funds and securities, record-keeping, margin practices and procedures,
registration standards for individuals, periodic reporting and settlement
procedures.
In connection with much of our asset management activities, we, and the
private investment vehicles that we manage, are relying on exemptions from
registration under the Investment Company Act of 1940, and under certain state
securities laws and the laws of various foreign countries. Failure to comply
with the initial and continuing requirements of any such exemptions could have a
material adverse effect on the manner in which we and these vehicles carry on
their activities.
Additional legislation and regulations, including those relating to the
activities of broker-dealers and investment advisers, changes in rules
promulgated by the SEC or other United States or foreign governmental regulatory
authorities and SROs or changes in the interpretation or enforcement of existing
laws and rules may adversely affect our manner of operation and our
profitability. Our businesses may be materially affected not only by regulations
applicable to us as a financial market intermediary, but also by regulations of
general application. For example, the volume of our underwriting, merger and
acquisition, securities trading and asset management activities in any year
could be affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Federal Reserve Board) and changes in
interpretation or enforcement of existing laws and rules that affect the
business and financial communities.
NET CAPITAL REQUIREMENTS
As broker-dealers registered with the SEC and as member firms of the
NASD, FBRC and FBRIS are subject to the net capital requirements of the SEC and
the NASD. FBRIL is subject to the capital regulations of the SFA. These capital
requirements specify minimum levels of capital, computed in accordance with
regulatory requirements, that each firm is required to maintain and also limit
the amount of leverage that each firm is able to obtain in its respective
business.
"Net capital" is essentially defined as net worth (assets minus
liabilities, as determined under generally accepted accounting principles), plus
qualifying subordinated borrowings, less the value of all of a broker-dealer's
assets that are not readily convertible into cash (such as furniture, prepaid
expenses and unsecured receivables), and further reduced by certain percentages
(commonly called "haircuts") of the market value of a broker-dealer's positions
in securities and other financial instruments. The amount of net capital in
excess of the regulatory minimum is referred to as "excess net capital."
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The SEC's capital rules also (i) require that broker-dealers notify it,
in writing, two business days prior to making withdrawals or other distributions
of equity capital or lending money to certain related persons if those
withdrawals would exceed, in any 30-day period, 30% of the broker-dealer's
excess net capital, and that they provide such notice within two business days
after any such withdrawal or loan that would exceed, in any 30-day period, 20%
of the broker-dealer's excess net capital, (ii) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making related party
loans if, after such distribution or loan, the broker-dealer would have net
capital of less than $300,000 or if the aggregate indebtedness of the broker-
dealer's consolidated entities would exceed 1,000% of the broker-dealer's net
capital and in certain other circumstances, and (iii) provide that the SEC may,
by order, prohibit withdrawals of capital from a broker-dealer for a period of
up to 20 business days, if the withdrawals would exceed, in any 30-day period,
30% of the broker-dealer's excess net capital and if the SEC believes such
withdrawals would be detrimental to the financial integrity of the firm or would
unduly jeopardize the broker-dealer's ability to pay its customer claims or
other liabilities.
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 FBRC and FBRIS have been in compliance in all
material respects with the applicable minimum net capital rules of the SEC and
the NASD and that FBRIL has been in compliance in all material respects with the
applicable minimum net capital rules of the SFA.
A failure of a 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 NASD membership, its
registration with the SEC or require its liquidation. Further, the decline in a
broker-dealer's net capital below certain "early warning levels," even though
above minimum net capital requirements, could cause material adverse
consequences to the broker-dealer and to us.
REGULATION FOLLOWING ACQUISITION OF MMA AND RUSHMORE
Supervision and Regulation
As noted above, we have signed a definitive agreement to acquire MMA and
Rushmore. MMA is a privately-held investment adviser and is also the holding
company for Rushmore, a federally chartered and federally insured savings bank.
The consummation of the acquisition is subject to customary federal regulatory
approvals and closing conditions. We are applying to convert Rushmore into a
national bank, immediately upon acquisition, at which time we would become a
bank holding company regulated under the Bank Holding Company Act of 1956, as
amended (the "BHC Act").
If we do successfully complete the acquisition and receive the requisite
approvals, we will be subject to extensive supervision, regulation and
examination by federal banking regulatory agencies. The following description
summarizes some of the laws to which we and Rushmore will be subject upon
consummation of the acquisition.
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On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or GLB Act, which significantly changed the regulatory structure and
oversight of the financial services industry. The GLB Act amended the BHC Act
to permit a qualifying bank holding company, called a financial holding company
(an "FHC"), to engage in a full range of financial activities, including
banking, insurance, and securities activities, as well as merchant banking and
additional activities that are "financial in nature" or "incidental" to such
financial activities. In order for a bank holding company to qualify as an FHC,
all its subsidiary depository institutions must be "well-capitalized" and "well-
managed" and must also maintain at least a "satisfactory" rating under the
Community Reinvestment Act. We expect that Rushmore will meet these
qualification requirements, and we intend to file a declaration with the Federal
Reserve Board (the "Board") electing to be a FHC. Thus, we expect to be
permitted to engage in financial activities as permitted by the BHC Act, as
amended.
In general, the BHC Act and other federal laws subject all bank holding
companies, including FHC's, to restrictions on the types of activities in which
they may engage, and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and regulations.
As noted above, the GLB Act eliminated the barriers to affiliations among banks,
securities firms, insurance companies and other financial service providers, but
does not generally permit a FHC to engage in any non-financial activity. It
permits bank holding companies to become FHCs, to affiliate with securities
firms and insurance companies, and to engage in other activities that are
financial in nature. Under the GLB Act, the Board serves as the "umbrella"
regulator for FHCs and has the power to supervise, regulate and examine FHCs and
their non-banking affiliates, subject to statutory functional regulation
provisions.
Rushmore is a federally insured savings bank, the deposits of which are
insured by the Savings Association Insurance Fund of the FDIC. However, as
noted above, simultaneous with the consummation of the acquisition, we intend to
convert Rushmore into a national bank. National banks are subject to
supervision and regulation by the Office of the Comptroller of Currency ("OCC").
Because the Board will regulate the FHC parent of Rushmore, the Board also has
supervisory authority that may affect Rushmore.
Regulatory Restrictions on Dividends; Source of Strength
It is the policy of the Board that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
Under Board policy, a bank holding company is expected to act as a source
of financial strength to each of its banking subsidiaries and commit resources
to their support. Such support may be required at times when, absent this Board
policy, a holding company may not be inclined to provide it. As discussed
below, a bank holding company in certain circumstances could be required to
guarantee the capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is required
to cure immediately any deficit under any commitment by the debtor holding
company to any of the
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federal banking agencies to maintain the capital of an insured depository
institution, and any claim for breach of such obligation will generally have
priority over most other unsecured claims.
Safe and Sound Banking Practices
Bank holding companies are not permitted to engage in unsafe and unsound
banking practices. The Board's Regulation Y, for example, generally requires a
holding company to give the Board prior notice of any redemption or repurchase
of its own equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the holding company's consolidated net worth. The Board
may oppose the transaction if it believes that the transaction would constitute
an unsafe or unsound practice or would violate any law or regulation. Depending
upon the circumstances, the Board could take the position that paying a dividend
would constitute an unsafe or unsound banking practice.
The Board has broad authority to prohibit activities of bank holding
companies and their non-banking subsidiaries which represent unsafe and unsound
banking practices or which constitute violations of laws or regulations, and can
assess civil money penalties for certain activities conducted on a knowing and
reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $1.0 million for each day the
activity continues.
Anti-Tying Restrictions
Bank holding companies and their affiliates are prohibited from tying the
provision of certain services, such as extensions of credit, to other services
offered by a holding company or its affiliates.
Capital Adequacy Requirements
The Board has adopted a system using risk-based capital guidelines to
evaluate the capital adequacy of bank holding companies. Under the guidelines,
specific categories of assets are assigned different risk weights, based
generally on the perceived credit risk of the asset. These risk weights are
multiplied by corresponding asset balances to determine a "risk-weighted" asset
base. The guidelines require a minimum total risk-based capital ratio of 8.0%
(of which at least 4.0% is required to consist of Tier 1 capital elements).
Total capital is the sum of Tier 1 and Tier 2 capital.
In addition to the risk-based capital guidelines, the Board uses a leverage
ratio as an additional tool to evaluate the capital adequacy of bank holding
companies. The leverage ratio is a company's Tier 1 capital divided by its
average total consolidated assets. Certain highly-rated bank holding companies
may maintain a minimum leverage ratio of 3.0%, but other bank holding companies
may be required to maintain a leverage ratio of up to 200 basis points above the
regulatory minimum.
The OCC has also adopted regulations establishing minimum requirements for
the capital adequacy of national banks. The OCC's risk-based capital guidelines
parallel the Board's requirements for bank holding companies. As discussed
above, for us to qualify for FHC status, Rushmore must be continuously "well
capitalized" under OCC regulations: it must have at a minimum a total risk-based
capital ratio of 10%, a Tier I capital ratio of 6%, and a leverage capital ratio
of 5%.
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The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to
operate with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Board guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. As discussed above, failure of
Rushmore to maintain capital significantly in excess of these minimum ratios
will jeopardize our status as a FHC and may lead to restrictions on activities
that would adversely affect our business.
Imposition of Liability for Undercapitalized Subsidiaries
Bank regulators are required to take "prompt corrective action" to resolve
problems associated with insured depository institutions whose capital declines
below certain levels. In the event an institution becomes "undercapitalized,"
it must submit a capital restoration plan. The capital restoration plan will
not be accepted by the regulators unless each company having control of the
undercapitalized subsidiary guarantees the subsidiary's compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee
from a depository institution's holding company is entitled to a priority of
payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Board approval
of proposed dividends, or might be required to consent to a consolidation or to
divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies of Banks
The BHC Act requires every bank holding company to obtain the prior
approval of the Board before it may acquire all or substantially all of the
assets of any bank, or ownership or control of any voting shares of any bank, if
after such acquisition it would own or control, directly or indirectly, more
than 5% of the voting shares of such bank. In approving bank acquisitions by
bank holding companies, the Board is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served, and
various competitive factors.
Control Acquisitions
The Change in Bank Control Act prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Board has been notified
and has not objected to the transaction. Under a rebuttable presumption
established by the Board, the acquisition of 10% or more of a class of voting
stock of a bank holding company with a class of securities registered under
Section 12 of the Exchange Act would, under the circumstances set forth in the
presumption, constitute acquisition of control of a bank holding company.
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In addition, any company is required to obtain the prior approval of the
Board under the BHC Act before acquiring 25% (5% in the case of an acquirer that
is a bank holding company) or more of any class of outstanding voting stock of a
bank holding company, having a majority of its Board of Directors, or otherwise
obtaining control or exercising a "controlling influence" over a bank holding
company.
Restrictions on Transactions with Affiliates and Insiders
Transactions between a bank holding company and its non-banking
subsidiaries are subject to Section 23A of the Federal Reserve Act. In general,
Section 23A imposes limits on the amount of such transactions, and also requires
certain levels of collateral for loans to affiliated parties. It also limits the
amount of advances to third parties, which are collateralized by the securities
or obligations of the holding company or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between a bank
and its affiliates be on terms substantially the same, or at least as favorable
to the bank, as those prevailing at the time for comparable transactions with or
involving nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and regulations apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on
all loans to insiders and their related interests. These loans cannot exceed
the institution's total unimpaired capital and surplus, and the appropriate
federal regulator may determine that a lesser amount is appropriate. Insiders
are subject to enforcement actions for knowingly accepting loans in violation of
applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets
Capital adequacy requirements serve to limit the amount of dividends that
may be paid by a bank. Under federal law, a bank cannot pay a dividend if,
after paying the dividend, the bank will be "undercapitalized." The OCC may
declare a dividend payment to be unsafe and unsound even though the bank would
continue to meet its capital requirements after the dividend.
Because a bank holding company is a legal entity separate and distinct from
its subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of an insured depository institution, the claims
of depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company or any shareholder or creditor thereof.
Examinations
The OCC periodically examines and evaluates insured national banks. Based
upon such an evaluation, the OCC may revalue the assets of the institution and
require that it establish specific reserves to compensate for the difference
between the examination-determined value and the book value of such assets.
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Deposit Insurance Assessments
Rushmore will be required to pay assessments to the Federal Deposit
Insurance Corporation ("FDIC") for federal deposit insurance protection. The
FDIC has adopted a risk-based assessment system, under which FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification
Enforcement Powers
The OCC and the other federal banking agencies have broad enforcement
powers, including the power to terminate deposit insurance, impose substantial
fines and other civil and criminal penalties and appoint a conservator or
receiver. Failure to comply with applicable laws, regulations and supervisory
agreements could subject us or Rushmore, as well as officers, directors and
other institution-affiliated parties of these organizations, to administrative
sanctions and potentially substantial civil money penalties. The appropriate
federal banking agency may appoint the FDIC as conservator or receiver for a
banking institution if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when required to do so;
fails to submit a timely and acceptable capital restoration plan; or materially
fails to implement an accepted capital restoration plan. The OCC will also have
broad enforcement powers over Rushmore, including the power to impose orders,
remove officers and directors, impose fines and appoint supervisors and
conservators.
Community Reinvestment Act
The Community Reinvestment Act and the regulations issued thereunder are
intended to encourage insured depository institutions to help meet the credit
needs of their service area, including low and moderate income neighborhoods,
consistent with the safe and sound operations of the banks. These regulations
also provide for regulatory assessment of a bank's record in meeting the needs
of its service area when considering applications to establish branches, merger
applications and applications to acquire the assets and assume the liabilities
of another bank. Under the GLB Act, in order for an FHC to engage in new
financial activities, or to acquire, directly or indirectly, a company engaged
in new financial activities, its subsidiary insured depository institutions must
maintain at least a satisfactory rating under the CRA.
Consumer Laws and Regulations
In addition to the laws and regulations discussed herein, Rushmore will
also be subject to certain consumer laws and regulations that are designed to
protect consumers in transactions with banks. While the list set forth herein
is not exhaustive, these laws and regulations include the Truth in Lending Act,
the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, and the Fair Housing Act,
among others. In addition, the GLB Act imposes extensive privacy requirements
applicable to all financial institutions. These laws and regulations impose
certain disclosure requirements and regulate the manner in which financial
institutions must deal with nonpublic personal information of consumers and
consumer customers in connection with offering and providing financial services.
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FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
We are adversely affected by the general risks of the investment business
The financial and investment business is, by its nature, subject to
numerous and substantial risks, particularly in volatile or illiquid markets,
and in markets influenced by sustained periods of low or negative economic
growth. As a financial and investment firm, our operating results are adversely
affected by a number of factors, which include:
. the risk of losses resulting from the ownership or underwriting of
securities;
. the risks of trading securities for ourselves (i.e., principal
activities) and for our customers;
. reduced cash inflows from investors into our venture capital and asset
management businesses;
. the risk of losses from lending to small, privately-owned companies;
. counterparty failure to meet commitments;
. customer default and fraud;
. customer complaints;
. employee errors, misconduct and fraud (including unauthorized
transactions by traders);
. failures in connection with the processing of securities transactions;
. litigation and arbitration;
. the risks of reduced revenues in periods of reduced demand for public
offerings or reduced activity in the secondary markets; and
. the risk of reduced fees we receive for selling securities on behalf
of our customers (i.e., underwriting spreads).
We may experience significant losses if the value of our principal, trading and
investment activities, or the value of our venture capital funds' investments,
deteriorates.
From time to time in connection with our underwriting, asset management and
venture capital activities, we own large amounts, or have commitments to
purchase large amounts, of the securities of companies. This ownership subjects
us to significant risks.
We conduct our securities trading, market-making and investment activities
primarily for our own account, which subjects our capital to significant risks.
These risks include market, credit, leverage, real estate, counterparty and
liquidity risks, which could result in losses for us. These activities often
involve the purchase, sale or short sale of securities as principal in markets
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that may be characterized as relatively illiquid or that may be particularly
susceptible to rapid fluctuations in liquidity and price.
In addition, at December 31, 1999, our two technology venture funds valued
their investments in their portfolio companies at approximately $257.9 million.
These portfolio companies are primarily Internet and information technology
companies, the valuations of which are extremely volatile. Since these are
largely private companies, their securities are illiquid and we would generally
not be able to sell them except as part of or after an initial public offering
or in connection with the sale of a portfolio company. General market conditions
affecting the Internet and information technology sectors or conditions inherent
in these companies themselves, could cause a drop in their valuations and lead
to losses for us before we have an opportunity to lock in gains through the sale
of their securities.
We experience reduced revenues during periods of declining prices or reduced
demand for public offerings and merger and acquisition transactions or reduced
activity in the secondary markets in sectors on which we focus.
Our revenues are likely to be lower during periods of declining prices or
inactivity in the markets for securities of companies in the sectors in which we
are focused. These markets have historically experienced significant volatility
not only in the number and size of equity offerings and merger and acquisition
transactions, but also in the aftermarket trading volume and prices of
securities.
In particular, Internet and information technology company stocks, in which
we have focused in both our venture capital and investment banking activities,
are extremely volatile. Recently, our revenues have been favorably affected by
an increase in the value of the securities, based on current market prices, in
our venture capital investment portfolio. As a result, a decrease in the stock
prices of Internet and information technology companies would lead to a
reduction in the value of securities owned by us and to a significant decrease
in our revenues, which could adversely affect the price of our stock. In
addition, since we anticipate that a substantial portion of our returns from
venture capital investments will be realized through initial public offerings of
our portfolio companies, a decrease in the number of underwritten transactions
in the technology sector, particularly of initial public offerings, could
significantly hinder our ability to realize such returns. Returns may also be
realized through sales of portfolio companies, which are dependent on the
availability of strategic or financial acquirers. Acquirers may be unavailable
or available only at unattractive prices during economic downturns or periods of
declining prices in the technology sector.
A significant amount of our revenues historically has resulted from
underwritten transactions by companies in our targeted industries, from
aftermarket trading for such companies, and from proprietary investments and
fees and incentive income received from assets under management. Underwriting
activities in our targeted industries can decline for a number of reasons
including increased competition for underwriting business or periods of market
uncertainty caused by concerns over inflation, rising interest rates or related
issues. For example, during the second half of 1998, the market for equity
offerings deteriorated and the market prices of many of the securities which we
had underwritten and made a market in, and securities in which we and our asset
management vehicles were invested in, were subject to considerable volatility
and declines in price. These factors led to a significant reduction in
underwriting revenues, to significant market making losses for us, and to a
significant reduction in the stream of fees received from our asset management
vehicles. Venture capital, underwriting, brokerage
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and asset management activities can also be materially adversely affected for a
company or industry segment by disappointments in quarterly performance relative
to analysts' expectations or by changes in long-term prospects.
We experience reduced revenues due to economic, political and market conditions
Reductions in public offering, merger and acquisition, portfolio company
valuation and securities trading activities, due to any one or more changes in
economic, political or market conditions could cause our revenues from
investment banking, venture capital, trading, lending, sales and asset
management activities to decline materially. Many national and international
factors affect the amount and profitability of these activities, including:
. economic, political and market conditions;
. level and volatility of interest rates;
. legislative and regulatory changes;
. currency values;
. inflation;
. flows of funds into and out of mutual funds, pension funds and venture
capital funds; and
. availability of short-term and long-term funding and capital.
For example, in 1998, concerns about the economies of Russia and some Asian
countries adversely affected underwriting and securities trading activity in the
United States.
In addition, we have organized, and will continue to organize, regional
venture capital funds in Northern Virginia and other regions. Any of these
regions may be affected by severe economic downturns or lack of growth of
Internet and e-business, which could have an adverse effect on the availability
and profitability of investments in the region.
We experience reduced revenues due to declining market volume, price and
liquidity, which can also cause counterparties to fail to perform
Our revenues may decrease in the event of a decline in the market volume of
securities transactions, prices or liquidity. Declines in the volume of
securities transactions and in market liquidity generally result in lower
revenues from trading activities and commissions. Lower price levels of
securities may also result in a reduced volume of underwriting transactions, and
could cause a reduction in our revenues from corporate finance fees, as well as
losses from declines in the market value of securities held by us in trading and
other investment, venture capital, lending and underwriting positions, reduced
asset management fees and incentive income and withdrawals of funds under
management. Sudden sharp declines in market values of securities can result in
illiquid markets and the failure of issuers and counterparties to perform their
obligations, as well as increases in claims and litigation, including
arbitration claims from customers. In such markets, we have incurred, and may
incur in the future, reduced revenues or losses in our principal trading,
market-making, investment banking, venture capital, lending and asset management
activities.
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We may incur losses as a result of our venture capital activities.
Our venture capital funds' investments are generally in technology
companies in the early stages of their development. Our business and prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in early stages of development, particularly companies
in new and rapidly evolving markets. Moreover, our venture funds invest
primarily in privately held companies as to which little public information is
available. Accordingly, we depend on our venture capital managers to obtain
adequate information to evaluate the potential returns from investing in these
companies. Fund managers may or may not be successful in this task. Also, these
companies frequently have less diverse product lines and smaller market presence
than larger competitors. They are thus generally more vulnerable to economic
downturns and may experience substantial variations in operating results.
Venture capital investment is an inherently risky business. Many venture capital
investments are unsuccessful and the future performance of our portfolio
companies is uncertain.
We may incur losses associated with our underwriting activities.
Participation in underwritings involves both economic and regulatory risks.
As an underwriter, we may incur losses if we are unable to resell the securities
we are committed to purchase or if we are forced to liquidate our commitment at
less than the agreed purchase price. In addition, the trend, for competitive and
other reasons, toward larger commitments on the part of lead underwriters means
that, from time to time, an underwriter (including a co-manager) may retain
significant ownership of individual securities. Increased competition has eroded
and is expected to continue to erode underwriting spreads. Another result of
increased competition is that revenues from individual underwriting transactions
have been increasingly allocated among a greater number of co-managers, which
has resulted in reduced revenues per transaction. Our business will continue to
be adversely affected if this trend continues or worsens.
We may incur losses associated with our lending to small, privately-owned
businesses.
At December 31, 1999, our investments included $25.4 million in
subordinated and mezzanine loans outstanding to and securities issued by small,
privately-owned businesses. There is generally no publicly available
information about such companies and we must rely on the diligence of our
employees and agents to obtain information in connection with our investment
decisions. Small companies may be more vulnerable to economic downturns and
often need substantial additional capital to expand or compete. Such businesses
may also experience substantial variations in operating results and there will
generally be no established trading market for their securities. As a result of
our lending activities, we are exposed to:
. credit risks;
. interest rate risks;
. risks related to the illiquidity of our investments;
. leverage risks; and
. risks resulting from the competitive market for investment
opportunities.
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Our lending activities, which are conducted through FBR Business
Development Fund, one of our wholly-owned subsidiaries, are relatively new and
we cannot assure you that we will be successful in these activities.
Our focus on relatively few industries limits our revenues
We are dependent on revenues related to securities issued by companies in
specific industry sectors. The Internet and information technology, financial
services, real estate and middle market sectors, account for the majority of our
investment banking, asset management and research activities and our venture
capital business is concentrated almost exclusively in the Internet and
information technology sectors. For example, in 1999 revenues from our
technology-related investment banking transactions and our technology-based
venture capital business accounted for 41% of our total revenues. Therefore, any
downturn in the market for the securities of companies in these industries, or
factors affecting such companies, would adversely affect our operating results
and financial condition. In 1998 and 1999, the specialty finance companies,
equity real estate investment trusts ("REITs") and mortgage REITs on which we
focused experienced a significant downturn which in turn adversely affected us.
Securities offerings can vary significantly from industry to industry due to
economic, legislative, regulatory and political factors. Underwriting activities
in a particular industry can decline for a number of reasons. For example,
underwriting activities in the financial services industry decreased
significantly starting in the third quarter of calendar year 1998 and continuing
through 1999.
We also derive a significant portion of our revenues from institutional
brokerage transactions related to the securities of companies in these sectors.
In the past, our revenues from such institutional brokerage transactions have
declined when underwriting activities in these industry sectors declined, the
volume of trading on The Nasdaq Stock Market or the New York Stock Exchange
declined, or when industry sectors or individual companies reported results
below investors' expectations.
We experience significant fluctuations in our quarterly operating results due to
the nature of our business and therefore may fail to meet profitability
expectations.
Our revenues and operating results may fluctuate from quarter to quarter
and from year to year due to a combination of factors, including:
. the number of underwriting and merger and acquisition transactions
completed by our clients;
. the valuations of our principal investments, the investments of funds
we manage and our venture capital portfolio companies;
. the number of initial public offerings or sales of our venture capital
portfolio companies;
. access to public markets for companies in which we have invested as a
principal;
. the realization of profits or losses on principal investments or
warrants we hold;
. the level of institutional and retail brokerage transactions;
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. the timing of recording of asset management fees and special
allocations of income; and
. variations in expenditures for personnel, litigation expenses, and
expenses of establishing new business units, including marketing and technology
expenses.
We record our revenues from an underwriting transaction only when the
underwriting is completed. We record revenues from merger and acquisition
transactions only when we have rendered the services and the client is
contractually obligated to pay; generally, most of the fee is earned only after
the transaction closes. Accordingly, the timing of our recognition of revenue
from a significant transaction can materially affect our quarterly operating
results. We have structured our operations based on expectations of a high
level of demand for underwriting and corporate finance transactions. As a
result, we have many fixed costs. Accordingly, we could experience losses if
demand for these transactions is lower than expected.
Our revenues in 1999 were impacted favorably by increases in the valuations
of our Internet and related information technology venture capital funds'
portfolio companies. We recognize revenues and losses in this portfolio based
upon valuations of our portfolio companies that occur from time to time,
generally in connection with additional financings. Changes in these valuations
or the timing of additional financings, public offerings or sales involving our
venture capital portfolio companies can cause our quarterly operating results to
fluctuate. Due to the foregoing and other factors, we cannot assure you that we
will be able to sustain profitability on a quarterly or annual basis.
We face significant competition from larger financial services firms with
greater resources which could reduce our market share and harm our financial
performance.
We are engaged in the highly competitive financial services, venture
capital, underwriting and securities brokerage businesses. We compete directly
with large Wall Street securities firms, established venture capital funds,
securities subsidiaries of major commercial bank holding companies, major
regional firms, smaller "niche" players and those offering competitive services
via the Internet. To an increasing degree, we also compete for various segments
of the financial services business with other institutions, such as commercial
banks, savings institutions, mutual fund companies, life insurance companies and
financial planning firms. Our industry focus also subjects us to direct
competition from a number of specialty securities firms, smaller investment
banking boutiques and venture capital funds that specialize in providing
services to those industry sectors. If we are not able to compete successfully
in this environment, our business, operating results and financial condition
will be adversely affected.
There has been a significant amount of new capital invested in venture
capital funds in recent years and we expect this trend to continue. With the
amount of capital available, some companies that may have had difficulty in
obtaining venture funding in the past may be able to do so, notwithstanding that
the chances for success in these investments may be marginal. In addition,
there is likely to be an increasing amount of competition among venture capital
funds for the best investment prospects, particularly in the Internet and
information technology sectors in which we focus. Thus, our success will be
largely dependent on our ability to identify and invest in the most favorable
opportunities in a highly competitive venture capital market.
Competition from commercial banks has increased because of recent
acquisitions of securities firms by commercial banks, as well as internal
expansion by commercial banks into the
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securities business. In addition, we expect competition from domestic and
international banks to increase as a result of recent legislation and regulatory
initiatives in the United States to remove or relieve certain restrictions on
commercial banks. Our pending acquisition of a bank will lead to direct
competition from commercial banks, most of which will be larger and have greater
resources than our bank subsidiary. This competition could adversely affect our
operating results.
We also face intense competition in our asset management business from a
variety of sources, including venture capital funds, private equity funds,
mutual funds, hedge funds and other asset managers. We compete for investor
funds as well as for the opportunity to participate in transactions.
We offer many of our investment banking and brokerage services online. The
market for these services over the Internet is new, rapidly evolving and
intensely competitive. We expect competition in this area to continue and
intensify in the future. Our online brokerage services business faces direct
competition from other brokerage firms providing either touch-tone telephone or
online investing services, or both.
Many of our competitors have greater personnel and financial resources than
we do. Larger competitors are able to advertise their products and services on
a national or regional basis and may have a greater number and variety of
distribution outlets for their products, including retail distribution.
Discount brokerage firms market their services through aggressive pricing and
promotional efforts. In addition, some competitors have a much longer history
of investment activities than we do and, therefore, may possess a relative
advantage with regard to access to business and capital.
In addition, our venture capital portfolio companies will likely face
significant competition, both from other early-stage companies and from more
established companies. Early-stage competitors may have strategic capabilities
such as an innovative management team or an ability to react quickly to changing
market conditions, while more experienced companies may possess significantly
more experience and greater financial resources than our portfolio companies.
We face intense competition for personnel which could adversely affect our
business.
Our business is dependent on the highly skilled, and often highly
specialized, individuals we employ. The skills of our management personnel will
be of increasing importance to us in the future as we continue to integrate our
expanding venture capital business and our pending investment advisory and bank
acquisition into our ongoing investment activities. Retention of research,
investment banking, venture capital, sales and trading, asset management,
technology, lending and management and administrative professionals is
particularly important to our prospects. Our failure to recruit and retain
qualified employees would materially and adversely affect our future operating
results.
We are highly dependent on specially-trained individuals
The loss of professionals, particularly a senior professional with a broad
range of contacts in an industry, could materially and adversely affect our
operating results. Our strategy is to establish relationships with prospective
corporate clients in advance of any transaction, and to maintain these
relationships over their lifecycle by providing advisory services to corporate
clients in equity, debt and merger and acquisition transactions. These
relationships depend in part upon the individual employees who represent us in
our dealings with our clients. In addition, research
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professionals contribute significantly to our ability to secure a role in
managing public offerings and in executing trades in the secondary market. From
time to time, other companies in the investment industry have experienced losses
of professionals in all areas of the investment business. The level of
competition for key personnel has increased recently, particularly due to the
market entry efforts of non-brokerage U.S. and foreign financial services
companies, commercial banks, other investment banks and venture capital firms
targeting or increasing their efforts in some of the same industries that we
serve. In particular, in recent periods, competition has grown dramatically for
experienced venture capital managers of the type on which our business is highly
dependent. We cannot assure you that losses of key personnel due to competition
or otherwise will not occur.
In addition, the success of our venture capital portfolio companies will
depend in large part upon the abilities of their key personnel. Competition for
qualified personnel is intense at any stage of a company's development and high
turnover of personnel is common in Internet and information technology
companies. The loss of one or a few key managers can hinder or delay a
company's implementation of its business plan. Our portfolio companies may not
be able to attract and retain qualified personnel. Any inability to do so may
negatively affect our investment returns.
Competition results in increased compensation costs
Competition for the recruiting and retention of employees has recently
increased elements of our compensation costs, and we expect that continuing
competition will cause our compensation costs to continue to increase. We
cannot assure you that we will be able to recruit and hire a sufficient number
of new employees with the desired qualifications in a timely manner. We
regularly review our compensation policies, including stock incentives.
Nonetheless, our incentives may be insufficient in light of the increasing
competition for experienced professionals in the investment industry,
particularly if the value of our stock declines or fails to appreciate
sufficiently to be a competitive source of a portion of professional
compensation.
We are subject to extensive government regulation which could adversely affect
our results
The securities business is subject to extensive regulation under federal
and state laws in the United States, and also is subject to regulation in the
foreign countries in which we conduct our activities. Compliance with these
laws can be expensive, and any failure to comply could have a material adverse
effect on our operating results.
One of the most important regulations with which our broker-dealer
subsidiaries must continually comply is the SEC's net capital rule (Rule 15c3-1)
and a similar rule of the United Kingdom's Securities and Futures Authority.
These regulations require our broker-dealer subsidiaries to maintain minimum
levels of net capital, as defined under such regulations, and limit the amount
of leverage we can obtain in our business. Underwriting commitments require a
charge against net capital and, accordingly, our ability to make underwriting
commitments may be limited by our capital. Compliance with these regulatory net
capital requirements could limit other operations that require intensive use of
capital, such as 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.
Compliance with many of the regulations applicable to us involves a number
of risks, particularly in areas where applicable regulations may be subject to
interpretation. In the event of
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non-compliance with an applicable regulation, governmental regulators and self-
regulatory organizations such as the National Association of Securities Dealers
may institute administrative or judicial proceedings that may result in:
. censure, fines or civil penalties (including treble damages in the
case of insider trading violations);
. issuance of cease-and-desist orders;
. deregistration or suspension of the non-compliant broker-dealer or
investment adviser;
. suspension or disqualification of the broker-dealer's officers or
employees; or
. other adverse consequences.
The imposition of any such penalties or orders on us could have a material
adverse effect on our operating results and financial condition.
The regulatory environment in which we operate is also subject to change.
Our business 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 the NASD. We also may be adversely affected by
changes in the interpretation or enforcement of existing laws and rules by these
governmental authorities and the NASD.
Additional regulation, changes in existing laws and rules, or changes in
interpretations or enforcement of existing laws and rules often directly affect
the method of operation and profitability of securities firms such as ours. We
cannot predict what effect any such changes might have. Our businesses may be
materially affected not only by regulations applicable to us as a financial
market intermediary, but also by regulations of general application. For
example, the volume of our venture capital, underwriting, merger and
acquisition, asset management and principal investment businesses in a given
time period could be affected by, among other things, existing and proposed tax
legislation, antitrust policy and other governmental regulations and policies
(including the interest rate policies of the the Federal Reserve Board) and
changes in interpretation or enforcement of existing laws and rules that affect
the business and financial communities. The level of business and financing
activity in each of the industries on which we focus can be affected not only by
such legislation or regulations of general applicability, but also by industry-
specific legislation or regulations.
Furthermore, due to the increasing popularity of the Internet, legislators
and regulators may pass laws and regulations dealing with issues such as user
privacy, advertising, customer suitability, taxation and the pricing, content
and quality of products and services. Increased attention to these issues could
adversely affect the growth of the Internet, which could in turn decrease the
demand for online services such as those we and our venture capital funds
provide or could otherwise have a material adverse effect on our business,
financial condition or operating results.
If we successfully complete our pending acquisition, we will become subject to
extensive banking regulation
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With regard to our proposed acquisition of MMA and Rushmore, the
consummation of the acquisition is subject to customary approvals and closing
conditions. We cannot assure you that we will successfully complete the
acquisition. If we do not consummate the acquisition, we will be unable to
recover the financial and personnel resources that we have dedicated to this
acquisition, and we will be unable to achieve the benefits that could have
arisen from the acquisition.
If we do successfully complete the acquisition, we intend to convert
Rushmore into a national bank and we would thus become a bank holding company
regulated under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). As a bank holding company, we will be subject to extensive supervision,
regulation and examination by banking regulatory agencies. In general, the BHC
Act prohibits or restricts a bank holding company's engagement in a wide variety
of businesses, some of which are businesses in which we currently engage,
including venture capital, merchant banking and investment banking.
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley
Act, or GLB Act, which significantly changed the regulatory structure and
oversight of the financial services industry. The GLB Act permits a qualifying
bank holding company, called a financial holding company (an "FHC"), to engage
in a full range of financial activities, including banking, insurance, and
securities activities, as well as merchant banking and additional activities
that are "financial in nature" or "incidental" to such financial activities. In
order for a bank holding company to qualify as an FHC, its subsidiary depository
institutions must be "well-capitalized" and "well-managed" and have at least a
"satisfactory" Community Reinvestment Act rating. We expect that Rushmore will
meet these qualification requirements and we intend to file a declaration with
the Federal Reserve Board electing to engage in FHC activities in connection
with our application to become a bank holding company.
We currently engage in a wide variety of businesses, including venture
capital, merchant banking and investment banking, that existing law would
prohibit us from engaging in as a bank holding company in the manner in which we
currently engage in such businesses, but which the GLB Act appears to permit an
FHC to engage in a similar fashion as we do today. Although we believe that we
will be able to qualify and maintain our qualification as an FHC under the GLB
Act and continue to engage in the businesses in which we currently engage, there
can be no assurance that we will be able to do so or that we will not be
required to incur substantial costs to maintain compliance with the GLB Act. In
addition, even if we are successful in qualifying as an FHC and maintaining FHC
status, the GLB Act is a very recently enacted law and there is a great deal of
uncertainty surrounding its scope and interpretation. Currently, there are only
interim regulations clarifying or interpreting the enhanced powers granted under
the GLB Act for bank holding companies. There can be no assurance that these
regulations and subsequent interpretations will not prevent us from engaging in
one or more lines of businesses in which we currently engage or will not impose
restrictions that could limit the profitability of such businesses or otherwise
restrict our flexibility in engaging in them.
Although we do not anticipate that we will fail to qualify as an FHC, any
such failure would subject us to the existing restrictions applicable to bank
holding companies under the BHC Act. In such a case, two years from the date on
which we become a bank holding company, we will be required to conform any
activities that are not considered to be closely related to banking under the
BHC Act. This two-year period may be extended by the Federal Reserve Board for
three additional one-year periods if the Federal Reserve Board finds that such
an extension would not be detrimental to the public interest. Therefore, if we
do not qualify as a financial holding
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company under the GLB Act before the end of this period (including any
extensions), we may be required to conform our investment banking, venture
capital and merchant banking businesses to those permitted under the BHC Act or
to cease being a bank holding company subject to the BHC Act by divesting our
bank. Any such actions could result in significant losses.
In addition, as a bank holding company (whether or not we qualify as an
FHC), we will be subject to a wide variety of restrictions, liabilities and
other requirements applicable to bank holding companies, including required
capital levels, restrictions on transactions with our bank subsidiary,
restrictions on payment or receipt of dividends and community reinvestment
requirements. Federal banking regulators possess broad powers to take
supervisory action, including the imposition of potentially large fines, against
both us and Rushmore as they deem appropriate if we violate any of these
requirements or engage in unsafe or unsound practices. Such supervisory actions
could result in higher capital requirements and limitations on both our banking
and non-banking activities, any and all of which could have a material adverse
effect on our businesses and profitability. Finally, the GLB Act will impose
customer privacy requirements on any company engaged in financial activities
such as those engaged in by Rushmore and by us. Any failure to comply with such
privacy requirements could result in significant penalties or fines.
We are highly dependent upon the availability of capital and funding for our
operations
We are highly dependent upon the availability of adequate funding and
regulatory capital to operate our business and to meet applicable regulatory
requirements. Historically, we have satisfied these needs from equity
contributions, internally generated funds and loans from third parties. We
cannot assure you that any, or sufficient, funding or regulatory capital will
continue to be available to us in the future on terms that are acceptable to us.
Moreover, most of our venture capital portfolio companies will require
additional equity funding to satisfy their continuing working capital
requirements. Because of the circumstances of those companies or market
conditions, it is possible that one or more of our portfolio companies will not
be able to raise additional financing or may be able to do so only at a price or
on terms that are unfavorable to them. To date, there has been a substantial
number of initial public offerings of Internet-related companies. If the market
for such offerings were to weaken for an extended period of time, the ability of
our venture capital portfolio companies to grow and access the capital markets
would be impaired.
We have potential conflicts of interest with our employees, officers and
directors
From time to time, our executive officers, directors and employees invest,
or receive a profit interest, in investments in private or public companies or
investment funds in which we, or one of our affiliates, is or could potentially
be an investor or for which we carry out investment banking assignments, publish
research or act as a market maker. In addition, we have in the past organized
and will likely in the future organize businesses, such as our private
investment vehicles and venture capital funds, in which our employees may
acquire minority interests. There are risks that, as a result of such
investment or profit interest, a director, officer or employee may take actions
that would conflict with our best interests. There is also a risk that
investment opportunities directed to our employees through private investment
vehicles or venture capital funds could have been beneficial to our shareholders
if they had been made as our own investments. In addition, members of our
senior management are actively involved in managing investment funds and venture
capital funds operated by us which could create a conflict of interest to the
extent these officers are aware of inside information concerning potential
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investment targets or to the extent these officials wish to invest in companies
for which we are underwriting securities. We have in place compliance
procedures and practices designed to ensure that inside information is not used
for making investment decisions on behalf of the funds and to monitor funds
invested in our investment banking clients. We cannot assure you that these
procedures and practices will be effective. In addition, this conflict and
these procedures and practices may limit the freedom of these officials to make
potentially profitable investments on behalf of those funds, which could have an
adverse effect on our operations. Our asset management activities may also
preclude or delay the release of research reports on companies in which we
invest, which could negatively affect our ability to compete for underwriting
business in connection with such companies. Also, we may have conflicts among
our various subsidiaries for investment opportunities and legal or regulatory
restrictions may prevent one or more of our subsidiaries from taking action to
benefit other subsidiaries.
Litigation and potential securities laws liabilities may adversely affect our
business
Many aspects of our business involve substantial risks of liability,
litigation and arbitration, which could adversely affect us. As an underwriter,
a broker-dealer and an investment adviser we are exposed to substantial
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 the ability of issuers to indemnify underwriters, as well as
with respect to the handling of customer accounts. For example, underwriters
may be held liable for material misstatements or omissions of fact in a
prospectus used in connection with the securities being offered and broker-
dealers may be held liable for statements made by their securities analysts or
other personnel. Broker-dealers and asset managers may also be held liable by
customers and clients for losses sustained on investments if it is found that
they caused such losses. In recent years there has been an increasing incidence
of litigation involving the securities industry, including class actions that
seek substantial damages and frequently name as defendants underwriters of a
public offering and investment banks that provide advisory services in merger
and acquisition transactions. We are also subject to the risk of other
litigation, including litigation that may be without merit. As we intend
actively to defend any such litigation, we could incur significant legal
expenses. We carry very limited insurance that may cover only a portion of any
such expenses. An adverse resolution of any future lawsuits against us could
materially adversely affect our operating results and financial condition. In
addition to these financial costs and risks, the defense of litigation or
arbitration may materially divert the efforts and attention of our management
and staff from their other responsibilities.
Our charter documents also allow indemnification of our officers, directors
and agents to the maximum extent permitted by Virginia law. We have entered
into indemnification agreements with these persons. We have been, and in the
future may be, the subject of indemnification assertions under these charter
documents or agreements by our officers, directors or agents who are or may
become defendants in litigation.
Our business is dependent on cash inflows to mutual funds
A slowdown or reversal of cash inflows to mutual funds and other pooled
investment vehicles could lead to lower underwriting and brokerage revenues for
us since mutual funds purchase a significant portion of the securities offered
in public offerings and traded in the secondary markets. Demand for new equity
offerings has been driven in part by institutional investors, particularly large
mutual funds, seeking to invest cash received from the public. The public may
sell 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
32
<PAGE>
funds or a decline in net asset values of these funds reduces demand by fund
managers for initial public or secondary offerings, our 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.
We may incur losses related to the real estate portfolio of our minority-owned
REIT
At December 31, 1999, we owned 23% of the outstanding common stock of FBR-
Asset. FBR-Asset's assets are primarily real estate and mortgage assets, which
include indirect holdings through investments in other companies. FBR-Asset's
investments in real estate-related assets are subject to a variety of general,
regional and local economic risks, as well as the following:
. increases in interest rates could negatively affect the value of
FBR-Asset's mortgage loans and mortgage-backed securities;
. the borrowing of funds by FBR-Asset and several of the REITs in
which it invests to finance mortgage loan investments could
amplify declines in market value resulting from interest rate
increases;
. increases in prepayment rates during times of interest rate
decline could negatively affect the value of FBR-Asset's
mortgage-backed securities by requiring re-investment of the
prepaid funds at the lower interest rates;
. hedging against interest rate exposure may adversely affect FBR-
Asset's earnings because hedging can be expensive and may not be
effective;
. multifamily and commercial real estate, which comprise much of
the investments of the companies in which FBR-Asset has invested,
may lose value and fail to operate properly;
. investing in subordinate interests, which are owned by some of
the companies in which FBR- Asset invests, exposes FBR-Asset to
increased credit risk;
. competition in the purchase, sale and financing of mortgage
assets may limit the profitability of companies in which FBR-
Asset invests; and
. increased losses on uninsured mortgage loans can reduce the value
of FBR-Asset's equity investments.
Changes in the market values of FBR Asset's assets are directly charged or
credited to FBR-Asset's shareholders' equity. As a result, a general decline in
trading market values may also reduce the book value of FBR-Asset's assets. A
reduction in the book value of FBR-Asset's Assets would have a negative effect
on our financial results as a minority owner.
We may not be able to manage our growth effectively
Over the past several years, we have experienced significant growth in our
business activities and the number of our employees. We expect this growth to
continue as we further expand our venture capital business and integrate our
pending investment advisory and bank acquisition. This growth has required and
will continue to require increased investment in management personnel, financial
and management systems and controls and facilities, which
33
<PAGE>
could cause our operating margins to decline from historical levels, especially
in the absence of revenue growth. In addition, as is common in the securities
industry, we are and will continue to be highly dependent on the effective and
reliable operation of our communications and information systems. We believe
that our current and anticipated future growth will require implementation of
new and enhanced communications and information systems and training of our
personnel to operate such systems. In addition, the scope of procedures for
assuring compliance with applicable laws and regulations and NASD rules has
changed as the size and complexity of our business has changed. Also, if we
complete our pending acquisition and thus become a bank holding company, we will
become subject to an entirely new and extremely stringent and complex set of
regulatory requirements, for which we will have to develop compliance
procedures. As we have grown and continue to grow, we have implemented and
continue to implement additional formal compliance procedures to reflect such
growth. Any difficulty or significant delay in the implementation or operation
of existing or new systems, compliance procedures or the training of personnel
could adversely affect our ability to manage growth.
We are highly dependent on systems and third parties, so systems failures,
including those related to year 2000, could significantly disrupt our business
Our business is highly dependent on communications and information systems,
including systems provided by our clearing brokers. Any failure or interruption
of our systems, the systems of our clearing broker or third party trading
systems could cause delays or other problems in our securities trading
activities, which could have a material adverse effect on our operating results.
To date we have had no significant problems related to year 2000 issues
associated with the computer systems, software, other property and equipment we
use. We cannot guarantee, however, that year 2000 issues will not adversely
affect our business, operating results or financial condition at some point in
the future.
In addition, our clearing brokers provide our principal disaster recovery
system. We cannot assure you that we or our clearing brokers will not suffer
any systems failure or interruption, including one caused by an earthquake,
fire, other natural disaster, power or telecommunications failure, act of God,
act of war or otherwise, or that our or our clearing brokers' back-up procedures
and capabilities in the event of any such failure or interruption will be
adequate.
We may not be able to keep up with rapid technological change
Recent rapid advancements in computing and communications technology,
particularly on the Internet, are substantially changing the means by which
financial and other services are delivered. More specifically, the online
financial services industry, in which we operate, is experiencing rapid changes
in technology, changes in customer requirements, changes in service and product
offerings and evolving industry standards. In order for us to succeed in the
Internet and information technology sectors, we must be able to develop or
obtain new technologies, use these technologies effectively and enhance our
existing online services and products. Our success also depends on the ability
to develop new services and products that address the changing needs of
customers and prospective customers. If we are unable to respond to
technological advances and evolving industry standards and practices in a timely
and cost-effective manner, our operating results will be adversely affected.
34
<PAGE>
There are significant technical and financial risks in the development of
new services and products or enhanced versions of existing services and
products. We cannot assure you that we will be able to:
. develop or obtain the necessary technologies;
. effectively use new technologies;
. adapt our services and products to evolving industry standards; or
. develop, introduce and market in a profitable manner service and
product enhancements or new services and products.
If we are unable to develop and introduce enhanced or new services or
products quickly enough to respond to market or customer requirements, or if our
or their services and products do not achieve market acceptance, our business,
financial condition and operating results will be materially adversely affected.
Our online business will require substantial expense and may not be successful
Conducting investment banking operations through the Internet involves a
new approach to the securities business. In order to attract customers in the
rapidly evolving online financial services market, many companies are incurring
significant expenses in providing client service and in the marketing and
advertising of their products and services. We are committed to providing a
high level of client service to our target market of institutional and high net
worth clients. In order to compete effectively in this market, we are likely to
incur similar substantial expenses, including intensive marketing and sales
efforts to educate prospective clients about the uses and benefits of our
services and products in order to generate demand. In addition, our ability to
expand in this market may require us to find strategic partners with content or
distribution capacity or equity partners. We may not be able to identify and
reach agreements with such partners. We cannot assure you that we will be
successful in the Internet market. Our online business does not produce
revenues sufficient to cover our expenses and we cannot assure you that it will
ever do so.
We are subject to risks related to online commerce and the Internet which could
adversely affect our business
The markets for electronic investment banking and brokerage services,
particularly through the Internet, are at an early stage of development and are
rapidly evolving. It is difficult to predict demand and market acceptance for
online products, as well as the possible growth and size of these markets. We
cannot assure you that the markets for our online services will continue to
develop or become profitable. Many of these services and products will not be
successful unless the Internet is widely accepted as a marketplace for commerce
and communication. This acceptance could be hindered by a number of factors,
including government regulation and associated compliance costs, insufficient
infrastructure, insufficient or inefficient telecommunication services or
concerns about security, among others.
Inefficiencies related to traffic on the Internet and its service providers will
adversely affect our online business.
35
<PAGE>
Traffic on the Internet and the number of users gaining access through the
Internet's various service providers have grown significantly and are expected
to continue to grow. The success of our online business will depend upon the
continued ability of the Internet's infrastructure to handle this increased
volume. This will require a reliable network backbone with the necessary speed,
data capacity and security, as well as the timely development of related
products such as high-speed modems, for providing reliable and efficient
Internet access and service. If the Internet or its service providers experience
outages or delays, the level of Internet usage and the processing of
transactions on our web site will be adversely affected.
Security concerns may adversely affect our online business and the businesses of
our portfolio companies
Our networks may be vulnerable to unauthorized access, computer viruses and
other security problems. Individuals who successfully circumvent our security
measures could misappropriate proprietary information or cause interruptions or
malfunctions in our and their online operations. In addition, concerted attacks
by hackers could make our and their online services unavailable for significant
periods of time. We may be required to expend significant capital and other
resources to protect against the threat of security breaches or to alleviate
problems caused by any breaches. Although we intend to continue to implement
industry-standard security measures, these measures may be inadequate. If a
compromise of security occurs, our business, financial condition and operating
results could be materially adversely affected.
Our common stock price is highly volatile
The market price for our class A common stock has been highly volatile and
is likely to continue to be highly volatile. The trading price of our stock has
experienced significant price and volume fluctuations in recent months. These
fluctuations often have been unrelated or disproportionate to our operating
performance. The price of our class A common stock has generally traded below
our initial public offering price of $20.00 per share in December 1997 and has
ranged from $3-5/8 per share to $21-3/4 per share since that time through March
10, 2000. Any negative changes in the public's perception of the prospects for
companies in the investment, financial services or venture capital industries
could depress our stock price regardless of our results.
The following factors could contribute to the volatility of the price of
our class A common stock:
. actual or anticipated variations in our quarterly results and
those of our portfolio companies;
. new products or services offered by us, our portfolio companies
and their competitors;
. changes in our financial estimates and those of our portfolio
companies by securities analysts;
. conditions or trends in the investment, financial services or
venture capital industries in general;
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<PAGE>
. announcements by us, our portfolio companies or our competitors
of significant acquisitions, strategic partnerships, investments
or joint ventures;
. changes in the market valuations of our portfolio companies and
other technology companies;
. negative changes in the public's perception of the prospects of
investment, financial services or venture capital companies;
. general economic conditions such as a recession, or interest rate
or currency rate fluctuations;
. additions or departures of our key personnel and key personnel of
our portfolio companies; and
. additional sales of our securities.
Many of these factors are beyond our control.
Our corporate governance is controlled by insiders
As of December 31, 1999, our officers and directors directly controlled
approximately 62.3% of the voting power of our outstanding common stock.
Therefore, they are able to control the outcome of all corporate actions
requiring shareholder approval (other than actions requiring a vote of holders
of class A common stock voting as a separate class). Furthermore, our officers
and directors have control over our operations, including significant control
over compensation decisions under our benefit and compensation plans, including
plans under which they are direct beneficiaries.
ITEM 2. PROPERTIES
We lease four floors of our headquarters building totaling approximately
69,000 square feet. We also lease approximately 18,000 square feet for our other
offices. We believe that our present facilities, together with our current
options to extend lease terms and occupy additional space, are adequate for our
current and presently projected needs.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a defendant or plaintiff in any material lawsuits or
arbitrations. We are a defendant in a small number of civil lawsuits relating to
our various businesses. There can be no assurances that these matters will not
have a material adverse effect on the results of our operations in a future
period, depending in part on the results for such period. However, based on our
review of these matters with counsel, we believe that any result of these
actions against us will not have a material adverse effect on either our
consolidated financial condition or on our results of operation. For a
discussion of the litigation risks associated with our business, see "Business -
Factors Affecting Our Business, Operating Results and Financial Condition --
Litigation and potential securities laws liabilities may adversely affect our
business" (page 32).
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages as of December 31, 1999* are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
<S> <C> <C>
Emanuel J. Friedman..... 53 Chairman and Co-Chief Executive Officer; Director
Eric F. Billings........ 47 Vice Chairman and Co-Chief Executive Officer; Director
W. Russell Ramsey....... 40 President and Co-Chief Executive Officer; Director
Eric Y. Generous........ 39 Executive Vice President and Chief Financial Officer
Robert S. Smith......... 40 Executive Vice President and Chief Operating Officer
Kurt R. Harrington...... 47 Treasurer and Chief Accounting Officer
</TABLE>
Emanuel J. Friedman
Mr. Friedman is Chairman and Co-Chief Executive Officer of FBR. He has
continuously served as Chairman and Chief Executive Officer since co-founding
FBR in 1989. He serves as a director of FBR-Asset. He manages FBR Ashton,
Limited Partnership and FBR Private Equity Fund, L.P. Mr. Friedman founded the
Friedman, Billings & Ramsey Charitable Foundation, Inc., a charitable
foundation, in 1993 and currently serves as a director. Mr. Friedman entered the
securities industry in 1973 when he joined Legg Mason Wood Walker & Co., Inc.,
and from 1985 until 1989 he was Senior Vice President in the institutional sales
group at Johnston, Lemon & Co., Incorporated, a Washington, D.C. brokerage firm.
Eric F. Billings
Mr. Billings became Vice Chairman and Co-Chief Executive Officer of FBR in
December 1999. Prior to that, he had served as Vice Chairman and Chief
Operating Officer since co-founding FBR in 1989. He serves as Chief Executive
Officer and as a director of FBR-Asset. He also manages FBR Weston, Limited
Partnership. Mr. Billings entered the securities industry in 1982 when he joined
Legg Mason Wood Walker & Co., Inc., and from 1984 until 1989 served as Senior
Vice President in the institutional sales group at Johnston, Lemon & Co.,
Incorporated, a Washington, D.C. brokerage firm.
W. Russell Ramsey
Mr. Ramsey became President and Co-Chief Executive Officer of FBR in
December 1999. Prior to that, He had served as President and Secretary since co-
founding FBR in 1989. Prior to co-founding FBR, Mr. Ramsey served as Vice
President in the institutional sales group at Johnston, Lemon & Co.,
Incorporated, a Washington, D.C. brokerage firm.
______________________________
*Subsequent to December 31, 1999, in January 2000, Mr. Harrington was appointed
Senior Vice President and Chief Financial Officer and Mr. Generous was appointed
Chief Administrative Officer.
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<PAGE>
Eric Y. Generous
Mr. Generous was Chief Financial Officer and Executive Vice President of
FBR as of December 31, 1999. Subsequent to December 31, 1999, in January 2000,
Mr. Generous became Chief Administrative Officer of FBR. He had continuously
served as an officer since joining FBR at its inception in 1989. Mr. Generous
entered the securities industry in 1983 when he joined Legg Mason Wood Walker &
Co., Inc., and from 1984 until 1989 served in the institutional sales group at
Johnston, Lemon & Co., Incorporated, a Washington, D.C. brokerage firm.
Robert S. Smith
Mr. Smith became Chief Operating Officer of FBR in December 1999. Mr.
Smith joined FBR as its General Counsel in January 1997 and became Executive
Vice President in December 1997. Prior to joining FBR, Mr. Smith was a partner
of McGuire, Woods, Battle & Boothe, LLP, where he had been in practice since
1986, and represented FBR Company from its inception in 1989. Mr. Smith formerly
practiced as a lawyer in the United Kingdom from 1982-1985.
Kurt R. Harrington
Mr. Harrington joined FBR in March 1997, as Vice President,
Finance/Treasurer. Subsequent to December 31, 1999, in January 2000, Mr.
Harrington became Senior Vice President and Chief Financial Officer of FBR. From
September 1996 to March 1997, Mr. Harrington was a consultant to the venture
capital industry. For the five years prior thereto, Mr. Harrington was Chief
Financial Officer of Jupiter National, Inc., a publicly-traded venture capital
company, and in this capacity served as a director of a number of companies,
including Viasoft, Inc., a publicly-held software company from January 1994 to
October 1995. Mr. Harrington is a Certified Public Accountant.
39
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for trading our Class A common stock is the New York
Stock Exchange. Set forth below are the high and low sale prices of our Class A
common stock for each quarter for 1999 and 1998 and for the quarter ended
December 31, 1997.
HIGH LOW
1999
Fourth Quarter $ 7 15/16 $ 4 3/8
Third Quarter 14 6 3/8
Second Quarter 21 1/4 6 1/4
First Quarter 8 3/16 5 1/2
1998
Fourth Quarter 7 3/4 3 3/4
Third Quarter 16 5/16 5
Second Quarter 21 13 3/4
First Quarter 17 13/16 14
1997
Fourth Quarter* 21 3/4 17 15/16
______________________
*The effective date of our initial public offering was December 22, 1997
According to the records of our transfer agent, we had approximately 83
shareholders of record as of December 31, 1999. Because many shares are held by
brokers and other institutions on behalf of shareholders, we are unable to
estimate the total number of beneficial shareholders represented by these record
holders.
Our policy is to reinvest earnings in order to fund future growth.
Therefore, we have not paid and do not plan to declare dividends on our Class A
common stock, at this time. We repurchased 431,935 shares of our common stock in
1999 and issued 198,945 shares pursuant to our Employee Stock Purchase Plan.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL INFORMATION (1)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Revenues:
Investment banking:
Underwriting $ 22,642 $ 70,791 $142,506 $ 55,159 $ 16,075
Corporate finance 22,541 41,356 60,649 10,362 7,224
Institutional brokerage:
Principal sales credits 24,305 30,976 29,276 31,734 21,869
Agency commissions 14,988 15,308 12,395 7,554 4,483
Gains and losses, net:
Trading (2,247) (59,168) (12,630) (6,268) (1,791)
Investment 1,957 (3,943) 3,228 3,974 774
Asset management 45,312 11,397 15,766 3,834 5,973
Interest and dividends 9,468 16,151 4,945 3,554 2,558
- --------------------------------------------------------------------------------
Total revenues 138,966 122,868 256,135 109,903 57,165
Expenses:
Compensation and benefits 98,424 82,599 156,957 61,504 33,481
Clearing and brokerage fees 4,693 5,078 4,961 3,484 2,350
Occupancy and equipment 6,674 4,225 2,638 1,683 1,187
Communications 4,323 3,592 2,325 1,109 823
Interest expense 1,323 4,927 3,770 2,665 1,523
Other (2) 30,500 38,656 28,347 14,620 8,362
- --------------------------------------------------------------------------------
Total expenses 145,937 139,077 198,998 85,065 47,726
Net income (loss) before taxes (6,971) (16,209) 57,137 24,838 9,439
Income tax expense -- -- 22,855(3) 9,960(3) 3,457(3)
- --------------------------------------------------------------------------------
Net income (loss) $ (6,971) $(16,209) $ 34,282 $14,878 $ 5,982
- --------------------------------------------------------------------------------
Consolidated Balance Sheet Data
Assets:
Cash and cash equivalents $ 43,743 $ 46,827 $207,691 $ 20,681 $10,391
Marketable trading securites 6,137 13,150 78,784 55,013 32,521
Long-term investments 135,723 97,157 36,351 6,424 1,579
Other 40,753 47,982 36,501 43,320 34,420
- --------------------------------------------------------------------------------
Total assets $226,356 $205,116 $359,327 $125,438 $78,911
- --------------------------------------------------------------------------------
Liabilities:
Accounts payable and
other liabilities $ 34,358 $ 15,322 $ 52,008 $ 14,565 $36,018
Short-term debt -- -- 40,000 22,000 13,250
Accrued dividends -- -- 24,000 -- --
Trading account securities
sold short 3,029 2,892 16,673 39,814 6,372
- --------------------------------------------------------------------------------
Total liabilities 37,387 18,214 132,681 76,379 55,640
Shareholders' equity 188,969 186,902 226,646 49,059 23,271
Total liabilities and
shareholders' equity $226,356 $205,116 $359,327 $125,438 $78,911
- --------------------------------------------------------------------------------
Statistical Data
Basic and diluted earnings
(loss) per share $ (0.14) $ (0.33) $ 1.48 $ 0.67 $ 0.27
Pro forma basic and diluted
earnings per share (3) N/A N/A $ 0.85 $ 0.40 $ 0.17
Book value per share (4) $ 3.86 $ 3.81 $ 4.53 $ 1.31 $ 0.66
Total employees (4) 390 358 265 176 112
Revenue per employee $ 372 $ 394 $ 1,162 $ 766 $ 580
Pre-tax return on average equity (4)% (8)% 41% 87% 82%
Compensation and benefits
expense as a percentage
of revenues 71% 67% 61% 50% 48%
Basic and diluted weighted
average shares outstanding 48,872 49,724 40,276 37,079 34,916
(in thousands)
</TABLE>
- ---------------------
(1) See Notes 1 and 2 of Notes to Consolidated Financial Statements for an
explanation of the basis of presentation.
(2) Includes business development and professional services and other operating
expenses.
(3) Reflects pro forma Federal and state income taxes based on estimated
applicable tax rates as if we had not elected subchapter S corporation
status prior to December 21, 1997. Historical, as reported, income tax
benefit for 1997 was $2,402. Historical, as reported, net income for 1997,
1996 and 1995 was $59,539, $24,838 and $9,439, respectively.
(4) As of end of the period reported.
-40-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Friedman, Billings, Ramsey Group, Inc. is a holding company for Friedman,
Billings, Ramsey Capital Markets, Inc. ("Capital Markets Group") and FBR Capital
Management, Inc. ("Asset Management Group"). The Capital Markets Group is a
holding company whose primary subsidiaries are Friedman, Billings, Ramsey & Co.,
Inc. ("FBRC"), a U.S. investment banking firm and securities broker-dealer, and
FBR Investment Services, Inc. ("FBRIS") an electronic on-line investment bank
and securities brokerage company and mutual fund distributor. The Asset
Management Group is a holding company whose subsidiaries are engaged in
investment management and advisory services to private equity and venture
capital funds, managed accounts including a publicly-traded real estate
investment trust ("REIT"), proprietary investment partnerships, offshore funds
and mutual funds. The Asset Management Group also holds investments, as
principal, in several of the funds that it manages and other investments
acquired in connection with its business. Our company operates primarily in the
United States and Europe.
BUSINESS ENVIRONMENT
Our principal business activities (capital raising, securities sales and
trading, merger and acquisition and advisory services, venture capital,
proprietary investments and asset management services) are linked to the capital
markets. In addition, our business activities are primarily focused on small
and mid-cap stocks in the Internet and information technology, bank, financial
services and real estate sectors. By their nature, our business activities are
highly competitive and are not only subject to general market conditions,
volatile trading markets and fluctuations in the volume of market activity but
to the conditions affecting the companies and markets in our areas of focus.
During 1999, with the exception of the Internet and information technology
sectors, the sectors on which we focus have underperformed the overall
securities markets.
Our revenues, particularly from venture capital and private equity
activities, capital raising, and asset management activities, are subject to
substantial positive and negative fluctuations due to a variety of factors that
cannot be predicted with great certainty, including the overall condition of the
economy and the securities markets as a whole and of the sectors on which we
focus. A significant portion of the performance-based or incentive revenues that
we recognize from our venture capital, private equity and asset management
activities is based on the increase in value of securities held by the funds we
manage. These increases in value included unrealized gains that may be reduced
or reversed from one period to another. These securities are often illiquid and
therefore, the value of these securities is subject to increased market risk.
Fluctuations also occur due to the level of market activity, which, among other
things, affects the flow of investment dollars and the size, number and timing
of transactions. As a result, net income and revenues in any particular period
may not be representative of full-year results and may vary significantly from
year to year and from quarter to quarter.
The financial services industry continues to be affected by the
intensifying competitive environment, as demonstrated by consolidation through
mergers and acquisitions, as well as significant growth in competition in the
market for on-line trading services. The relaxation of banks' barriers to entry
into the securities industry and expansion by insurance companies into
traditional brokerage products, coupled with the repeal of laws separating
commercial and investment banking activities in the future, have increased the
number of companies competing for a similar customer base.
In order to compete in this increasingly competitive environment, we
continually evaluate our businesses across varying market conditions for
profitability and alignment with our long-term strategic objectives, including
the diversification of revenue sources. We believes that it is
41
<PAGE>
important to diversify and strengthen our revenue base by increasing the
segments of our business that offer a recurring and more predictable source of
revenue.
OPERATING GROUPS
ASSET MANAGEMENT GROUP
Our asset management activities consist of managing and investing in a broad
range of pooled investment vehicles, including venture capital funds and other
investment partnerships, FBR Asset Investment Corporation ("FBR-Asset"), mutual
funds and separate accounts. Our total assets under management ("AUM") increased
28% from $689 million at December 31, 1998 to $879 million at December 31, 1999.
As of December 31, 1999, our long-term investments totaled $135.7 million.
We generate revenue from our asset management activities in three ways:
(1) We act as investment adviser and receive management fees for the
management of investment partnerships, including venture capital
funds, mutual funds, separate accounts and FBR-Asset, based upon the
amount of capital committed or under management. This revenue is
recorded in "asset management revenue" in our statements of
operations.
(2) We receive incentive income based upon the operating results of the
venture capital funds and other partnerships. Incentive income
represents special allocations, generally 20%, of realized and
unrealized gains to our capital accounts as managing partner of the
partnerships. This special allocation is sometimes referred to as
"carried interest" and is recorded in "asset management revenue" in
our statements of operations.
(3) We record allocations, under the equity method of accounting, for
our proportionate share of the earnings or losses of the venture
funds and other partnerships and FBR-Asset. Income or loss
allocations are recorded in "net investment gains and losses" in our
statements of operations.
Asset management revenue increased 298% over the last year from
$11.4 million in 1998 to $45.3 million in 1999. This revenue has been derived
from an increasing variety of investment vehicles, in particular managed venture
capital funds. During the fourth quarter of 1999, technology venture capital
emerged as a major contributor to our asset management business. Revenue from
venture capital activity, including unrealized gains, accounted for $42.0
million of our total revenues during 1999. Venture capital assets under
management increased 646% from $50 million in 1998 to $373 million in 1999.
Base management fees are earned on all of our AUM and are determined based on
a percentage of actual or committed assets, excluding our own investment and
certain other affiliated assets. The percentages used to determine our base fee
vary from vehicle to vehicle (from 0.25% for FBR-Asset's mortgage-backed
securities to 2.5% for one of our venture capital funds). We receive base
management fees from our managed funds, in cash, quarterly or semi-annually. We
recorded $9.4 million in base management fees for the year ended December 31,
1999.
In addition to base management fees, we may earn incentive income on venture
capital and other investment partnerships that we manage and FBR-Asset.
Generally, we receive 20% of the net realized and unrealized investment gains
(if any) on the assets contributed by third parties to the investment
partnerships. Assets on which we have the potential to earn incentive income
have increased 48%, from $496 million at December 31, 1998 to $736 million as of
December 31, 1999. For the year ended December 31, 1999, we recorded $35.9
million of incentive income, of which $34.3 related to one venture capital fund,
FBR Technology Venture Partners, L.P. ("TVP") that was formed in 1997. Under the
terms of TVP's partnership agreement, after allocations have been made to the
limited partners in amounts totaling their commitments, we are entitled to
receive special allocations in an amount equal to 20% of the realized and
unrealized gains allocated to the limited partners. In succeeding periods, we
are entitled to an allocation of
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20% of the partnership's realized and unrealized gains and the remaining 80% is
allocated to the limited partners on a pro-rata basis. Our capital account in
TVP, as of December 31, 1999, reflects the allocation of this 20% carried
interest.
The value of our investments in managed investment partnerships increased to
$70.0 million as of December 31, 1999 from $26.7 million as of December 31,
1998. In 1999, we recorded net investment gains of $5.1 million and incentive
income of $35.9 million related to these partnerships. To the extent that our
managed partnerships hold securities of public companies that are restricted as
to resale due to contractual "lock-ups", regulatory requirements including Rule
144 holding periods, or for other reasons, these securities are generally valued
by reference to the public market price, subject to discounts to reflect the
restrictions on liquidity. These discounts are sometimes referred to as
"haircuts". As the restriction period runs, the amount of the discount is
generally reduced. All such securities reflect the December 31, 1999 closing
price less a discount of up to 25%, to reflect restrictions on liquidity and
marketability. We review these valuations and discounts quarterly.
In May 1998, as part of our strategy to create new asset management products
and to diversify our asset management business, we organized a business trust
designed to extend financing to "middle-market" businesses in need of
subordinated debt or mezzanine financing. In connection therewith, in July
1998, we made two loans and an equity investment totaling $24.5 million to three
unrelated businesses. The loans bear interest at an average annual rate of
12.7%. We subsequently decided not to seek outside investment for this vehicle
but continue to hold its investments as principal.
As of December 31, 1999, our long-term investments of $135.7 million included:
$49.1 million of investments in the technology sector which represented 36% of
long-term investments; $29.8 million of investments in the real estate sector
which represented 22% of long-term investments; $26.8 million of investments in
the financial services sector which represented 20% of long-term investments;
and $30.0 million of investments in middle market entities (private debt and
preferred investments) which represented 22% of long-term investments.
CAPITAL MARKETS GROUP
Our investment banking and corporate finance activities consist of a broad
range of services, including public and private transactions of a wide variety
of securities and financial advisory services in merger, acquisition and
strategic partnering transactions. During 1999, we completed or advised on 46
managed or co-managed investment banking deals and corporate finance
transactions representing $3.2 billion, with $2.4 billion in public
underwritings and private placements and $0.8 billion in merger and acquisition
("M&A") and advisory transactions. We also participated in 55 underwriting
transactions as a syndicate or selling group member.
During the year ended December 31, 1999, we managed or co-managed 10 initial
public offerings ("IPOs") and 13 secondary offerings raising approximately $2.0
billion and generating $22.6 million in revenues. The average size of
transactions managed was $85.4 million.
Corporate finance revenues include private placement fees and M&A and advisory
service fees. During the year ended December 31, 1999, we acted as placement
agent or co-placement agent in 11 non-public transactions, raising $461 million
and generating $8.0 million in revenues. We also advised on 12 M&A and other
advisory assignments generating $14.5 million in revenues.
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Over the last two years, procedures for conducting securities transactions
have changed dramatically due to the rise of online trading over the Internet.
The underwriting of securities increasingly involves the use of the Internet.
In order to capitalize on these trends and enhance our core business via the
Internet, during the second quarter of 1999, we introduced fbr.com, an online
investment bank and securities brokerage company. fbr.com is a division of
FBRIS. We can leverage our strengths in capital raising services by offering
these transactions online via fbr.com. Since announcing fbr.com on April 15,
1999, we had offered shares of 24 offerings online through December 31, 1999.
On August 12, 1999, we also announced a strategic alliance with Fidelity
Investments ("Fidelity") in which Fidelity participates in the distribution of
securities underwritten by us. Under the alliance, we invite Fidelity to
participate in selected offerings. Currently, the two firms are focusing their
efforts on certain industry sectors that make up our core research and
underwriting capabilities and include technology, real estate, regional banks,
thrifts, specialty finance companies, energy and healthcare. In the future,
both firms may explore potential business relationships in other business areas,
including asset management, research and electronic trading of securities.
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The following table shows a detail of our investment banking revenues for the
years indicated:
INVESTMENT BANKING REVENUES
(Unaudited, in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Public Underwritings
Initial Public Offerings $ 8,910 $ 50,502 $115,403 $25,997 $ 3,790
Secondary Public Offerings 12,407 15,623 20,690 7,214 7,840
High Yield Debt & Preferred 1,325 4,666 6,413 21,948 4,445
- -------------------------------------------------------------------------------
Subtotal Underwriting 22,642 70,791 142,506 55,159 16,075
- -------------------------------------------------------------------------------
Non Public Capital Raising
and M&A
High Yield Debt & Preferred 4,428 6,427 7,442 4,058 4,470
M&A and Advisory Services 14,554 15,608 9,716 3,637 2,754
Private Equity Placements 3,559 19,321 43,491 2,667 --
- -------------------------------------------------------------------------------
Subtotal Corporate Finance 22,541 41,356 60,649 10,362 7,224
- -------------------------------------------------------------------------------
Total $45,183 $112,147 $203,155 $65,521 $23,299
- -------------------------------------------------------------------------------
In addition to our capital raising activities, we also offer institutional
brokerage services to customers. Revenues related to these services are
detailed below for the years indicated:
INSTITUTIONAL BROKERAGE REVENUES
(Unaudited, in thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Principal Sales Credits $24,305 $ 30,976 $ 29,276 $31,734 $21,869
Trading Gains and Losses, Net (2,247) (59,168) (12,630) (6,268) (1,791)
Agency Commissions 14,988 15,308 12,395 7,554 4,483
- --------------------------------------------------------------------------------
Total $37,046 $(12,884) $ 29,041 $33,020 $24,561
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
REVENUES
Our revenues consist primarily of asset management revenue, underwriting
revenue, corporate finance fees, principal sales credits, agency commissions and
net gains and losses. Our managed limited partnerships are subject to market
risk caused by illiquidity and volatility in the markets in which the
partnerships would seek to sell financial instruments. Revenue earned from these
activities, including unrealized gains that are included in the incentive income
portion of our asset management revenues and net gains and losses, may fluctuate
as a result. Revenue from underwriting and corporate finance transactions is
substantially dependent on the market for public and private offerings of equity
and debt securities in the sectors within which we focus our efforts. Principal
sales credits are dependent on NASDAQ trading volume and spreads in the
securities of such companies. Agency commissions are dependent on the level of
trading volume and penetration of our institutional client base by research,
sales and trading. Net trading and investment 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. Accordingly, our
revenues have fluctuated, and are likely to continue to fluctuate, based on
these factors.
We receive asset management revenue in our capacity as the investment manager
to advisory clients and as general partner of several investment partnerships.
Management fees and incentive income on investment partnerships have been earned
from vehicles that have invested primarily in the securities of companies
engaged in the technology, financial services and real estate sectors.
Incentive income is likely to fluctuate with the performance of securities in
these sectors. A growing base of AUM in incentive vehicles coupled with
positive returns can provide significant revenues with a high net margin for our
company.
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Underwriting revenue consists of underwriting discounts, selling concessions,
management fees and reimbursed expenses associated with underwriting activities.
We act in varying capacities in our underwriting 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. As lead manager, we generally receive 50% to 60% of the total
underwriting spread and as a co-manager, we generally receive 5% to 40% of the
total underwriting spread.
Corporate finance revenues consist of M&A, private placement, mutual-to-stock
conversion and other corporate finance advisory fees and reimbursed expenses
associated with such activities. Corporate finance fees have fluctuated, and
are likely to continue to fluctuate, based on the number and size of our
completed transactions.
Principal sales credits consist of a portion of dealer spreads attributed to
the securities trading activities of FBRC as principal in NASDAQ-listed and
other over-the-counter ("OTC") securities, and are primarily derived from FBRC's
activities as a market-maker.
Trading gains and losses are combined and reported on a net basis. Gains and
losses result primarily from market price fluctuations that occur while holding
positions in our trading security inventory and the level of sales credits.
Agency commissions revenue includes revenue resulting from executing stock
exchange-listed securities and OTC transactions as agent.
Investment gains and losses are combined and reported on a net basis. Gains
and losses primarily represent our proportionate share of income or loss related
to investments in proprietary investment partnerships and FBR-Asset, in addition
to recognized losses for "other than temporary" impairment on securities held as
available-for-sale and realized gains and losses from the sale of investment
securities. As of December 31, 1999, we had $6.0 million of unrealized losses
related to available-for-sale securities including our interest in FBR-Asset's
unrealized losses, recorded in accumulated other comprehensive loss. Upon the
sale of these securities or in the event the decline in value is deemed other
than temporary, the resulting difference between the cost and market value will
be recorded as an investment loss.
EXPENSES
Compensation and benefits expense includes base salaries as well as incentive
compensation paid to sales, trading, asset management (including venture
capital), underwriting and corporate finance professionals and to executive
management. Incentive compensation (other than under the Executive Plan,
described below) varies primarily based on revenue production. Salaries,
payroll taxes and employee benefits are relatively fixed in nature. In December
1997, we adopted the 1997 Key Employee Incentive Plan under which our three
Executive Officer Directors were eligible, during 1999, to participate in a
profit sharing bonus pool, based on adjusted net income before taxes, and an
additional bonus pool, based on a formula tied to the performance of FBRC's
trading operations (the "Executive Plan"). We recorded $6.0 million of
compensation expense related to the Executive Plan in 1999. We review and
evaluate all of our compensation plans on a periodic basis.
The following table sets forth financial data as a percentage of revenues for
the years presented:
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Year Ended December 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------
REVENUES:
Investment banking:
Underwriting 16.3% 57.6% 55.6% 50.2% 28.1%
Corporate finance 16.2% 33.7% 23.7% 9.4% 12.6%
Institutional brokerage:
Principal sales credits 17.5% 25.2% 11.4% 28.9% 38.3%
Agency commissions 10.8% 12.5% 4.8% 6.9% 7.8%
Gains and losses, net-
Trading (1.6)% (48.2)% (4.9)% (5.7)% (3.1)%
Investment 1.4% (3.2)% 1.3% 3.6% 1.3%
Asset management 32.6% 9.3% 6.2% 3.5% 10.5%
Interest and dividends 6.8% 13.1% 1.9% 3.2% 4.5%
TOTAL REVENUES 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSES:
Compensation and benefits 70.8% 67.2% 61.3% 56.0% 58.6%
Clearing and brokerage fees 3.4% 4.2% 1.9% 3.2% 4.1%
Occupancy and equipment 4.8% 3.4% 1.0% 1.5% 2.1%
Communications 3.1% 2.9% 0.9% 1.0% 1.4%
Interest expense 1.0% 4.0% 1.5% 2.4% 2.7%
Other (1) 21.9% 31.5% 11.1% 13.3% 14.6%
TOTAL EXPENSES 105.0% 113.2% 77.7% 77.4% 83.5%
INCOME (LOSS) BEFORE INCOME TAXES (5.0)% (13.2)% 22.3% 22.6% 16.5%
(1) Includes business development and professional services and other
expenses.
We estimate that our fixed costs as a percentage of revenue decreased from 38%
for the year ended December 31, 1998 to 34% for the year ended December 31,
1999. This decrease is attributed to a significant decrease in our net trading
losses and a decrease in our other operating expenses, such as printing and
copying and other office expenses.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Total revenues increased 13% from $122.9 million in 1998 to $139.0 million in
1999 primarily due to an increase in asset management revenue, particularly
incentive income related to TVP, and a decrease in net trading losses attributed
to a decrease in our trading inventory.
Underwriting revenue decreased 68% from $70.8 million in 1998 to $22.6 million
in 1999. The decrease is attributed to (1) the decline in the size of completed
transactions and the size of our proportionate fee and (2) fewer completed deals
attributed to the continuation of lower prices and reduced activity in the
markets for securities of companies in the financial services and real estate
sectors, two of our areas of focus. During 1999, we managed 23 public offerings
raising $2.0 billion and generating $22.6 million in revenues. During 1998, we
managed 30 transactions raising $4.1 billion and generating $70.8 million in
revenues. In 1998, we completed one of the largest public offerings in our
history from which we earned $22.9 million in revenues. The average size of
underwritten transactions for which we were a lead or co-manager decreased from
$138.0 million in 1998 to $85.4 million in 1999.
Corporate finance revenue decreased 45% from $41.4 million in 1998 to $22.5
million in 1999. This decrease was primarily due to a 69% decrease in private
placement revenue from $25.7 million in 1998 to $8.0 million in 1999. In 1999,
we completed 11 private placement transactions compared to 8 in 1998, however,
in 1998, we completed one of the largest private placement transactions in our
history from which we earned $17.8 million in revenue. In 1999, the average
revenue earned per private placement transaction was $0.7 million.
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Principal sales credits decreased 22% from $31.0 million in 1998 to $24.3
million in 1999. This decrease was due to lower volumes in our NASDAQ trading,
notably in the real estate and financial services sectors, two of our areas of
focus.
Net trading losses decreased 96% from $59.2 million in 1998 to $2.2 million in
1999. This decrease in trading losses is attributed to our efforts to reduce
trading inventories to an amount needed to provide the appropriate level of
liquidity in securities for which we are a market maker.
Net investment gains (losses) changed from $(3.9) million in 1998 to $2.0
million in 1999. Investment losses in 1998 were generated primarily from
investments in our managed partnerships. Net investment gains in 1999 include
gross gains of $16.5 million offset by losses of $(14.5) million as follows:
$5.1 million of net gains related to investments in our managed partnerships, of
which $4.0 million related to our investment in TVP; $4.0 million of gains
related to the sale of warrants that FBRC had received in connection with
previous capital raising transactions; $4.1 million of gains related to our
investment in FBR-Asset; $(10.4) million of "other than temporary" unrealized
depreciation related to available for sale investments accounted for under
Statement of Financial Accounting Standard No. 115; $(1.8) million of unrealized
losses related to a private, mezzanine investment in a preferred stock.
Although we realized investment gains during 1999, unrealized losses related to
our investments that are included in "accumulated other comprehensive loss" in
our balance sheet totaled $(6.0) million as of December 31, 1999. If and when
we liquidate these or determine that the decline in value of these investments
is "other than temporary", a portion or all of the losses will be recognized as
investment losses in the statement of operations during the period in which the
liquidation or determination is made. Our investment portfolio is also exposed
to future downturns in the markets and private debt and equity securities are
exposed to deterioration of credit quality, defaults and downward valuations.
We periodically review the valuations of our private debt and equity
investments. If and when we determine that the net realizable value of these
investments is less than our carrying value, we will reflect the reduction as an
investment loss.
Asset management revenue increased 298% from $11.4 million in 1998 to $45.3
million in 1999. This increase was due to an 835% increase in incentive income
from $3.8 million in 1998 to $35.9 million in 1999 and a 25% increase in base
management fees from $7.6 million in 1998 to $9.4 million in 1999. Base
management fees increased due to the change in the mix of AUM toward higher base
fee partnerships, in particular technology venture capital funds. Incentive
income in 1999 is almost entirely related to TVP and primarily represents
unrealized gains allocated as carried interest to our capital account in TVP.
In the fourth quarter of 1999, we recorded $34.3 million of venture capital
incentive income which reflects our carried interest in the unrealized gains of
TVP.
Net interest and dividends (net of interest expense) decreased 27% from $11.2
million in 1998 to $8.1 million in 1999. This decrease is primarily due to a
decrease in our trading inventory from which dividend income may be earned.
During 1998, we recorded $3.7 million of dividend income compared to $1.7
million in 1999 due to the decrease in inventory.
Total expenses increased 5% from $139.1 million in 1998 to $145.9 million in
1999 due primarily to an increase in compensation and benefits expense described
below.
Compensation and benefits expense increased 19% from $82.6 million in 1998
to $98.4 million in 1999. This increase was due primarily to higher
compensation associated with our venture capital funds and higher executive
officer bonus compensation. During 1999, our three Executive Officer Directors
earned a total of $6.0 million in bonuses. No bonuses were earned by
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Executive Officer Directors in 1998. Also during 1999, we recorded $34.3 million
of incentive income related to our investment in TVP. The employees who manage
the day to day operations of TVP earn bonus compensation related to the level of
incentive income. Compensation expense related to incentive income from this
venture capital fund is recorded at a higher rate than compensation related to
our other revenues. In addition, $7.3 million of 1997 investment banking
incentive compensation accruals were reduced in 1998 due to the 1998 trading
losses attributable to capital raising transactions.
Business development and professional services decreased 20% from $29.3
million in 1998 to $23.6 million in 1999 primarily due to a decrease in legal
costs and travel and meals expenses associated with lower investment banking
activity. This decrease is offset by an increase in professional fees and other
promotional expenses in 1999 related to fbr.com's operations.
Clearing and brokerage fees decreased 8% from $5.1 million in 1998 to $4.7
million in 1999 due to the decline in the volume of sales and trading activity.
As a percentage of principal sales credits and agency commissions revenue,
clearing and brokerage fees increased from 11.0% in 1998 to 11.9% in 1999 due to
lower customer ticket volume and increased dealer-to-dealer ticket volume in
1999. Customer ticket volume decreased 7.5% in 1999 causing FBRC to pay higher
clearing rates to its clearing broker. By nature, dealer-to-dealer trades
generate clearing fees without necessarily generating institutional brokerage
revenue.
Occupancy and equipment expense increased 58% from $4.2 million in 1998 to
$6.7 million in 1999 primarily due to the expansion of office space and an
increase in depreciation expense related to software, computer and
telecommunications equipment and furniture for the expanded facilities and
fbr.com's operations. As a result of the expansion, rent expense increased $1.0
million in 1999 compared to 1998 and depreciation and amortization expense
increased $1.4 million in 1999 compared to 1998.
Communications expense increased 20% from $3.6 million in 1998 to $4.3 million
in 1999 due to a one-time increase in costs associated with an upgrade of our
broker-dealer trading system.
Other operating expenses decreased 26% from $9.3 million in 1998 to $6.9
million in 1999 due to the reduction or elimination of certain non-revenue-
producing expenses and other overheard costs such as printing and copying and
other office expenses, offset by a $1.0 million charge in 1999 for litigation
accruals.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Total revenues decreased 52% from $256.1 million in 1997 to $122.9 million in
1998 due primarily to increased trading and investment losses and decreased
underwriting and corporate finance activity in the second half of 1998 as a
result of volatile markets and changing economic and market trends.
Underwriting revenue decreased 50% from $142.5 million in 1997 to $70.8
million in 1998. This decrease in revenue was due primarily to a decrease in
the average revenue earned per transaction from $4.9 million in 1997 to $2.4
million in 1998. Most of the 1998 transactions occurred in the first half of
1998.
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Corporate finance revenue decreased 32% from $60.6 million in 1997 to $41.4
million in 1998. This decrease was due to a 49% decrease in private placement
revenue from $50.9 million in 1997 to $25.8 million in 1998, offset by a 59%
increase in M&A and other advisory activities, which generated $9.7 million in
1997, compared to $15.6 million in 1998.
Principal sales credits increased 6% from $29.3 million in 1997 to $31.0
million in 1998. This increase is a result of higher volumes of activity of
FBRC's NASDAQ trading overall, as well as increased trading activity derived
from our expansion of equity sales and trading personnel and capabilities,
offset by lower spreads.
Agency commissions increased 24% from $12.4 million in 1997 to $15.3 million
in 1998. This increase was due to the expansion of FBRC's institutional listed
equity business fostered by an increase in the number of institutional brokers
and sales traders, an increase in listed equity trading capabilities, as well as
an increase in the issuance of research reports.
Net trading and investment losses increased 571% from $9.4 million in 1997 to
$63.1 million in 1998. This increase is attributed to larger and more
concentrated corporate securities inventories in 1998, specifically in the REIT
and mortgage company sectors and the market decline related to these sectors in
the second half of 1998. Our largest losses in 1998 were principally from
holding positions in stocks in which FBRC acted as an underwriter. Net losses
were also incurred from our investment in one managed partnership.
Asset management revenue decreased 28% from $15.8 million in 1997 to $11.4
million in 1998. This decrease was due to a 70% decrease in incentive income
from $12.6 million in 1997 to $3.8 million in 1998 related to the market decline
of investments in one managed partnership, offset by a 139% increase in base
management fees from $3.2 million in 1997 to $7.6 million in 1998. Base
management fees increased due to a 7% increase in assets under management from
$641.6 million as of December 31, 1997 to $688.8 million as of December 31, 1998
and a change in the mix of AUM toward higher base fee vehicles.
Interest and dividends increased 227% from $4.9 million in 1997 to $16.2
million in 1998. This increase is due primarily to the increase in our trading
inventories during 1998.
Total expenses decreased 30% from $199.0 million in 1997 to $139.1 million in
1998 due primarily to lower variable compensation expense.
Compensation and benefits expense decreased 47% from $157.0 million in 1997 to
$82.6 million in 1998. The decrease was due primarily to lower executive
officer bonus compensation, which in 1998 was determined as a percentage of
adjusted net income, partially offset by an increase in the number of our
personnel. In addition, $7.3 million of prior year investment banking incentive
compensation accruals were reduced in 1998 due to the losses attributable to
capital raising transactions. Average employee headcount was 220 in 1997
compared to 350 in 1998. In the second half of 1998, we implemented a cost
reduction program that included staff reductions, primarily in support
positions. The effect of these reductions was to reduce employee headcount and
to reduce costs associated with the eliminated positions going forward.
Clearing and brokerage fees increased 2% from $5.0 million in 1997 to $5.1
million in 1998 due to the increase in sales and trading activities. As a
percentage of institutional brokerage revenue, clearing and brokerage fees
decreased from 12% in 1997 to 11% in 1998 due to a decrease in clearance fees
and transaction charges paid to FBRC's clearing broker.
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Occupancy and equipment expense increased 60% from $2.6 million in 1997 to
$4.2 million in 1998. This increase is due to additional office leases, an
increase in equipment rental to accommodate growth in personnel and an increase
in depreciation expense due to acquisitions of computer and telecommunications
equipment for expanded staff.
Communications expense increased 55% from $2.3 million in 1997 to $3.6 million
in 1998. This increase was due primarily to increases in telecommunications
expenses resulting from the increase in employees and expansion of facilities in
1998 and the enhancement of network technology.
Interest expense increased 31% from $3.8 million in 1997 to $4.9 million in
1998 due primarily to increased margin interest expense, which is a result of
increased securities position levels in 1998.
Business development and other operating expenses increased 36% from $28.3
million in 1997 to $38.7 million in 1998. This increase was due primarily to
increased investment banking activity, including increased investment banking
pipeline activity for transactions that were postponed or cancelled in the third
and fourth quarters of 1998 due to the volatile capital markets. Other expenses
also increased due to expenses associated with expanded office space and
increased business promotion expenses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity and regulatory capital needs
through three primary sources: (1) internally generated funds; (2) equity
capital contributions; and (3) credit provided by banks, clearing brokers, and
affiliates of our principal clearing broker. In prior years, we have required
the use, and may continue the use, of temporary subordinated loans in connection
with regulatory capital requirements to support our underwriting activities. We
have no material long-term debt.
Our principal assets consist of cash and cash equivalents, receivables,
securities held for trading purposes and long-term investments. As of December
31, 1999, liquid assets consisted primarily of cash and cash equivalents of
$43.7 million and a receivable for cash on deposit with FBRC's clearing broker
of $13.5 million. Cash equivalents consist primarily of money market funds
invested in debt obligations of the U.S. government. We also held $6.1 million
in marketable securities in our trading accounts. We had borrowing capacity
(borrowing against security positions) from FBRC's clearing broker of
approximately $7.5 million as of December 31, 1999 and a total of $40.0 million
in a committed subordinated revolving loan from an affiliate of FBRC's clearing
broker that is allowable for net capital purposes. During 1999, we had no
outstanding borrowings under this facility. The agreement expires in December
2000.
Long-term investments consist primarily of investments in managed
partnerships, including venture capital funds in which we serve as managing
partner, available-for-sale securities, our investment in FBR-Asset and long-
term debt and equity investments in privately held companies. Although the
investments in venture capital funds and other limited partnerships are for the
most part illiquid, the underlying investments of such entities are mostly in
publicly-traded, liquid equity and debt securities, some of which may be
restricted due to contractual "lock-up" requirements.
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FBRC and FBRIS, as broker-dealers, are registered with the Securities and
Exchange Commission ("SEC") and are members of the National Association of
Securities Dealers, Inc. As such, they are subject to the minimum net capital
requirements promulgated by the SEC. FBRC's and FBRIS' regulatory net capital
has historically exceeded these minimum requirements. As of December 31, 1999,
FBRC was required to maintain minimum regulatory net capital of $0.9 million and
had total regulatory net capital of $34.0 million which was $33.1 million in
excess of its requirement. As of December 31, 1999, FBRIS was required to
maintain minimum regulatory net capital of $0.1 million and had total regulatory
net capital of $1.1 million which was $1.0 million in excess of its requirement.
Regulatory net capital requirements increase when FBRC and FBRIS are involved in
underwriting activities based upon a percentage of the amount being underwritten
by FBRC and FBRIS.
As of December 31, 1999, we had net operating losses ("NOL") for tax purposes
of $38.4 million that expire through 2019. We maintain a partial valuation
allowance related to the NOL and net deferred tax assets, in general because,
based on the weight of available evidence, it is more likely than not that a
portion of the net deferred tax assets may not be realized. As a result of
recording the valuation allowance, based on current evidence, we estimate that
no income tax provision will be recorded in the Consolidated Statement of
Operations until we earn an additional $20.4 million in taxable net income.
In October 1999, we announced a definitive agreement to acquire Money
Management Associates, LP ("MMA") and Rushmore Trust and Savings, FSB, Bethesda,
Maryland. MMA is a privately-held investment adviser with approximately $850
million in assets under management as of December 31, 1999. Together, MMA and
Rushmore are the investment adviser, servicing agent or administrator for 20
mutual funds. Rushmore is a federally chartered and federally insured savings
bank that offers traditional banking services (lending, deposits, cash
management, trust services and serves as a transfer agent and custodian), along
with mutual fund accounting. Upon closing, we will have new capabilities in
traditional banking and cash management services, as well as fund
administration, to offer our customers. Under the terms of the agreement, we
will acquire MMA/Rushmore for $17.5 million in cash at closing and a $10 million
non-interest-bearing installment note payable over a ten-year period. The
transaction is subject to the approval of regulators and the shareholders of the
Rushmore Funds.
We believe that the company's current level of equity capital and committed
line of credit, including funds generated from operations, are adequate to meet
our liquidity and regulatory capital requirements and other activities. We may,
however, seek debt or equity financing, in public or private transactions, or
otherwise re-deploy assets, to provide capital for corporate purposes and/or to
fund strategic business opportunities, including possible acquisitions, joint
ventures, alliances or other business arrangements which could require
substantial capital outlays. Our policy is to evaluate strategic business
opportunities, including acquisitions and divestitures, as they arise.
We constantly review our capital needs and sources, the cost of capital and
return on equity, and we seek strategies to provide favorable returns on
capital. In evaluating our anticipated capital needs and current cash resources
during 1998, our Board of Directors authorized a share repurchase program of up
to 2.5 million shares of our company's Class A Common Stock. Since announcing
the share repurchase program, the company purchased 1,468,027 shares as of
December 31, 1999. 325,000 of the purchased shares were reissued to employees
pursuant to our Employee Stock Purchase Plan.
52
<PAGE>
HIGH YIELD AND NON-INVESTMENT GRADE DEBT AND PREFERRED SECURITIES
We underwrite, trade, invest in, and make markets in high-yield corporate debt
securities and preferred stock of below investment grade-rated companies. For
purposes of this discussion, non-investment grade securities are defined as
preferred securities or debt rated BB+ or lower, or equivalent ratings by
recognized credit rating agencies, as well as non-rated securities or debt.
Investments in non-investment grade securities generally involve greater risks
than investment grade securities due to the issuer's creditworthiness and the
comparative illiquidity of the market for such securities. Our portfolio of
such securities at December 31, 1999 and 1998 is included in trading securities
and long-term investments and had an aggregate fair value of approximately $25.3
million and $31.7 million, respectively. Our trading and investment portfolios
may, from time to time, contain concentrated holdings of selected issues. Our
largest, unhedged non-investment grade securities position was $10.0 million at
December 31, 1999 and 1998.
WARRANTS
In connection with various public and private capital raising transactions, we
have received and we hold the following warrants for stock of the issuing
corporation. The exercise price for each warrant is set at the offering price of
the underlying stock in the relevant capital raising transaction. Due to the
restrictions on the warrants and the underlying securities, we carry the
warrants at nominal values, and recognize profits, if any, only when realized.
Closing Price Expiration
Number of Exercise on December Date of
Warrants Price 31, 1999 Warrants
- ------------------------------------------------------------------------------
Capital Automotive REIT 894,464 $ 15.000 $ 12.1875 02/12/03
East West Bank 232,500 10.000 11.4375 06/12/03
Local Financial
Corporation 382,000 10.000 10.3750 09/08/02
PlanetClick, Inc. 125,000 3.200 * 06/30/04
Styling Technology
Corporation 71,050 12.000 ** 11/21/01
FBR Asset Investment
Corporation 970,805 20.000 14.0000 12/11/07
Xypoint Corporation 285,107 2.100 * 07/10/03
Vcampus Corporation
(formerly UOLP) 36,500 4.625 3.1250 09/16/03
Resource Asset Investment
Trust 99,292 15.000 10.8125 01/08/03
American Home Mortgage
Holdings, Inc. 125,000 7.800 6.6250 09/30/04
The Bancorp.com, Inc. 28,093 10.000 * 10/13/04
World Web, Ltd. 593,333 1.500 * 12/13/04
. * The underlying unregistered security does not have a ready market. We
received the warrants in a private placement transaction.
. ** This security was not trading on December 31, 1999.
MARKET AND BUSINESS RISK
We monitor market and counter-party risk on a daily basis through a number of
control procedures designed to identify and evaluate the various risks to which
our investments and securities are exposed. We have established various
committees to assess and to manage risk associated with our investment banking
and other activities. The committees review, among other things, business and
transactional risks associated with potential clients and engagements. We seek
to control the risks associated with our investment banking activities by review
and approval of transactions by the relevant committee, prior to accepting an
engagement or pursuing a material investment transaction.
53
<PAGE>
Our primary risk exposure is to equity and debt price changes and the
resulting impact on our marketable trading and long-term investments and
unrealized incentive income. Direct market risk exposure to changes in foreign
exchange rates is not material. Equity and debt price risk is managed primarily
through the daily monitoring of capital committed to various issuers and
industry segments.
TRADING SECURITIES
During the first half of 1998, we accumulated substantial trading positions in
securities for which we acted as underwriter. Many of these securities,
especially in the real estate and mortgage sectors, experienced declines in
market values during 1998, resulting in net trading losses of $59.2 million in
1998. We have reduced our exposure to such market risk through partial or
complete liquidation of our positions in many of these same securities and the
implementation of new position limits policies. We generally attempt to limit
exposure to market risk on securities held as a result of our daily 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.
At December 31, 1999, the fair value of our trading securities was $6.1
million in long positions and $3.0 million in short positions. The net
potential loss in fair value at December 31, 1999, using a 10% hypothetical
decline in reported value of long positions (offset by a 10% hypothetical
increase in reported value of short positions) was $0.3 million.
LONG-TERM INVESTMENTS
Our long-term investments consist of investments in investment partnerships,
including venture funds that we manage, an investment in a REIT that we also
manage, direct debt and equity investments in privately held companies and
direct investments in equity securities of public companies.
As of December 31, 1999, a majority, by value, of the underlying assets of the
investment partnerships and the REIT were equity securities of domestic,
publicly traded companies or, in the case of the REIT, mortgage-backed
securities. These underlying investments are marked to market, subject to
liquidity discounts in the case of securities that are subject to contractual
"lock-up" requirements or regulatory restrictions (including Rule 144) or
otherwise not readily marketable, and we record our proportionate share of
unrealized gains and losses. To the extent the underlying investments in the
investment partnerships, venture funds, REIT and direct investments are not
marketable securities, they are valued at estimated fair values. In 1999, we
recorded, in earnings, net realized and unrealized gains from our investments of
$2.0 million and incentive income from realized and unrealized gains in
investment partnerships, including venture capital, of $35.9 million. We also
maintain, as a separate component of shareholders' equity, $6.0 million of
accumulated other comprehensive loss, representing $3.0 million of unrealized
losses on our direct investments and $3.0 million of unrealized losses related
to our investment in the REIT.
As of December 31, 1999, the recorded value of our long-term investment
securities was $135.7 million. The net potential loss in fair value, using a 10%
hypothetical decline in reported value, was $13.6 million.
54
<PAGE>
MATTERS RELATED TO YEAR 2000
Over the past several years, we have addressed the potential hardware,
software and other computer and technology issues and related concerns
associated with the transition to the Year 2000 and have confirmed that our
service providers took similar measures. As a result of those efforts, we have
not experienced any disruptions in our operations in connection with, or
following, the transition to the Year 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is set forth in Item 14 of this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by this Item 10 is
incorporated by reference to our definitive Proxy Statement for our annual
meeting of shareholders to be held on May 20, 2000 under the headings "Proposal
No. 1--Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting
Compliance." Information regarding executive officers found under the Heading
"Executive Officers of the Registrant" in Part I hereof is also incorporated by
reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference to our
definitive Proxy Statement for our annual meeting of shareholders to be held on
May 20, 2000 under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference to
our definitive Proxy Statement for our annual meeting of shareholders to be held
on May 20, 2000 under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference to
our definitive Proxy Statement for our annual meeting of shareholders to be held
on May 20, 2000 under the heading "Certain Relationships and Related
Transactions."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. The following consolidated financial statements
for the year ended December 31, 1999, filed as part of this Form 10- K, are
incorporated by reference into this Item 14:
A. Friedman, Billings, Ramsey Group, Inc.
Report of Independent Public Accounts (page F-2)
Consolidated Balance Sheets - Years ended 1999 and 1998
(page F-3)
Consolidated Statements of Operations - Years ended 1999, 1998
and 1997 (page F-4)
55
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity -Years
ended 1999, 1998 and 1997 (page F-5)
Consolidated Statements of Cash Flows - Years ended 1999, 1998
and 1997 (page F-6)
Notes to Consolidated Financial Statements (pages F-7 through
F-11)
B. FBR Asset Investment Corporation Financial Statements (F-12)
C. FBR Technology Venture Partners L.P. Financial Statements (F-35)
(b) On October 21, 1999 we filed a Form 8-K announcing our third quarter 1999
financial results and the acquisition of Money Management Associates, LP and
Rushmore Trust and Savings, FSB. Financial Statements were not attached to the
Form 8-K.
2. All schedules are omitted because they are not required or because the
information is shown in the financial statements or notes thereto.
3. Exhibits identified in parenthesis below are on file with the SEC as part of
our Registration Statement on Form S-1, as amended, No. 333-39107, and are
incorporated herein by reference. Exhibits identified in brackets below are on
file with the SEC as part of our 1998 Annual Report on Form 10-K, and are
incorporated herein by reference.
56
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ---------------------
2.01 -- Purchase and Sale Agreement Between Money Management Associates
et al. And FBR dated, October 20, 1999.
3.01 -- Registrant's Articles of Incorporation. (Exhibit 3.01)
3.02 -- Registrant's Bylaws. (Exhibit 3.03)
4.01 -- Form of Specimen Certificate for Registrant's Class A Common Stock
(Exhibit 4.01)
10.01 -- Revolving Subordinated Loan Agreement, between Friedman, Billings,
Ramsey & Co., dated August Custodial Trust Company and 4,
1998.[10.01]
10.02 -- The 1997 Employee Stock Purchase Plan. (Exhibit 10.05)
10.03 -- FBR Stock and Annual Incentive Plan.
10.04 -- The Non-Employee Director Stock Compensation Plan. (Exhibit 10.07)
10.05 -- The Key Employee Incentive Plan. (Exhibit 10.08)
21.01 -- List of Subsidiaries of the Registrant
23.01 -- Consent of Independent Public Accountants
27.01 -- Financial Data Schedule.
99.01 -- Memorandum of Understanding between FBR and PNC Bank Corp., dated as
of October 28, 1997. (Exhibit 99.01)
57
<PAGE>
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.
Friedman, Billings, Ramsey Group, Inc.
March 28, 2000 By: /s/ Emanuel J. Friedman
- ----------------- ---------------------------------
Emanuel J. Friedman, Chairman of the Board of
Directors, Co-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.
March 28, 2000 By: /s/ Emanuel J. Friedman
----------------------------------------------
Emanuel J. Friedman, Chairman of the Board of
Directors, Co-Chief Executive Officer
March 28, 2000 By: /s/ Eric F. Billings
----------------------------------------------
Eric F. Billings, Vice Chairman of the Board of
Directors and Co-Chief Executive Officer
March 28, 2000 By: /s/ W. Russell Ramsey
----------------------------------------------
W. Russell Ramsey, President, Co-Chief Executive Officer and
Director
March 28, 2000 By: /s/ Kurt R. Harrington
----------------------------------------------
Kurt R. Harrington, Senior Vice President and Chief
Financial Officer (Principal Financial and Accounting
Officer)
March 28, 2000 By: /s/ Wallace L. Timmeny
----------------------------------------------
Wallace L. Timmeny, Director
March 28, 2000 By: /s/ Mark R. Warner
----------------------------------------------
Mark R. Warner, Director
58
<PAGE>
Financial Statements of Friedman, Billings, Ramsey Group, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accounts................................... F-2
Consolidated Balance Sheets - Years ended 1999 and 1998................. F-3
Consolidated Statements of Operations - Years ended 1999, 1998
and 1997.............................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity -Years
ended 1999, 1998 and 1997............................................. F-5
Consolidated Statements of Cash Flows - Years ended 1999, 1998
and 1997.............................................................. F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Friedman, Billings, Ramsey Group, Inc.:
We have audited the accompanying consolidated balance sheets of Friedman,
Billings, Ramsey Group, Inc. (a Virginia corporation) as of December 31, 1999
and 1998, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Friedman, Billings, Ramsey Group, Inc., as of December 31, 1999 and 1998, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Vienna, Virginia
January 26, 2000
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
- ---------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
<S> <C> <C>
Assets
Cash and cash equivalents $ 43,743 $ 46,827
Receivables:
Investment banking 4,273 3,075
Asset management fees 3,112 5,108
Income taxes 61 8,795
Affiliates 1,339 6,871
Other 1,637 967
Due from clearing broker 13,472 10,721
Marketable trading securities, at market value 6,137 13,150
Long-term investments 135,723 97,157
Furniture, equipment, software and leasehold
improvements, net of accumulated depreciation and
amortization of $5,798 and $3,467, respectively 11,308 6,946
Deferred tax asset 2,402 2,402
Prepaid expenses and other assets 3,149 3,097
- ---------------------------------------------------------------------------------------
Total assets $226,356 $205,116
- ---------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Liabilities:
Trading account securities sold but not yet
purchased, at market value $ 3,029 $ 2,892
Accounts payable and accrued expenses 8,869 8,226
Accrued compensation and benefits 24,130 5,185
Long-term secured loans 1,359 1,911
- ---------------------------------------------------------------------------------------
Total liabilities 37,387 18,214
- ---------------------------------------------------------------------------------------
Commitments and contingencies (Note 11) -- --
Shareholders' Equity:
Preferred Stock, $0.01 par value, 15,000,000
shares authorized, none issued and outstanding -- --
Class A Common Stock, $0.01 par value, 150,000,000
shares authorized, 14,304,026 and 13,716,571
shares issued, respectively 143 137
Class B Common Stock $0.01 par value, 100,000,000
shares authorized, 35,799,729 and 36,312,429
shares issued and outstanding, respectively 358 363
Additional paid-in capital 208,678 208,525
Treasury stock, at cost, 1,143,027 and 910,037
shares, respectively (8,341) (7,081)
Accumulated other comprehensive loss (5,991) (16,135)
Retained earnings (deficit) (5,878) 1,093
- ---------------------------------------------------------------------------------------
Total shareholders' equity 188,969 186,902
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $226,356 $205,116
- ---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
<S> <C> <C> <C>
Revenues:
Investment banking:
Underwriting $ 22,642 $ 70,791 $ 142,506
Corporate finance 22,541 41,356 60,649
Institutional brokerage:
Principal sales credits 24,305 30,976 29,276
Agency commissions 14,988 15,308 12,395
Gains and losses, net:
Trading (2,247) (59,168) (12,630)
Investment 1,957 (3,943) 3,228
Asset management 45,312 11,397 15,766
Interest and dividends 9,468 16,151 4,945
- ------------------------------------------------------------------------------------------
Total revenues 138,966 122,868 256,135
Expenses:
Compensation and benefits 98,424 82,599 156,957
Business development and
professional services 23,582 29,314 22,406
Clearing and brokerage fees 4,693 5,078 4,961
Occupancy and equipment 6,674 4,225 2,638
Communications 4,323 3,592 2,325
Interest expense 1,323 4,927 3,770
Other operating expenses 6,918 9,342 5,941
- ------------------------------------------------------------------------------------------
Total expenses 145,937 139,077 198,998
Net income (loss) before taxes (6,971) (16,209) 57,137
Income tax benefit -- -- 2,402
- ------------------------------------------------------------------------------------------
Net income (loss) $ (6,971) $ (16,209) $ 59,539
- ------------------------------------------------------------------------------------------
Basic and diluted earnings (loss)
per share $ (0.14) $ (0.33) $ 1.48
- ------------------------------------------------------------------------------------------
Weighted average shares outstanding 48,872,191 49,723,514 40,275,575
- ------------------------------------------------------------------------------------------
Pro Forma Statement of Operations data
(unaudited) (Note 2):
Net income before tax $ 57,137
Pro forma income tax provision (22,855)
- ------------------------------------------------------------------------------------------
Pro forma net income $ 34,282
- ------------------------------------------------------------------------------------------
Pro forma basic and diluted
earnings per share $ 0.85
- ------------------------------------------------------------------------------------------
Weighted average shares outstanding 40,275,575
- ------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Class A Class B Additional Accumulated
Number Class A Number Class B Paid-In Treasury Other Compre-
of Shares Amount of Shares Amount Capital Stock hensive Loss
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 -- -- 37,455,000 $374 $ 18,645 -- --
Net income -- -- -- -- -- -- --
Comprehensive income -- -- -- -- -- -- --
Issuance of common stock -- -- 2,574,000 26 3,658 -- --
Capital contributions -- -- -- -- 176 -- --
Repayment of stock
subscription receivable -- -- -- -- -- -- --
Issuance of common stock in
initial public offering,
net of offering costs 10,000,000 100 -- -- 184,947 -- --
Conversion of Class B
common stock upon
sale to third party 3,451,421 34 (3,451,421) (34) -- -- --
Compensation recorded
pursuant to book
value stock issued in 1997 -- -- -- -- 1,417 -- --
Distributions -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 13,451,421 134 36,577,579 366 208,843 -- --
Net loss -- -- -- -- -- -- --
Conversion of Class B shares to
Class A shares 265,150 3 (265,150) (3) -- -- --
Repurchase of treasury stock -- -- -- -- -- (8,062) --
Issuance of treasury stock -- -- -- -- (318) 981 --
Other comprehensive loss:
Unrealized change in
investment securities -- -- -- -- -- -- (16,135)
Comprehensive loss -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 13,716,571 137 36,312,429 363 208,525 (7,081) (16,135)
Net loss -- -- -- -- -- -- --
Conversion of Class B shares to
Class A shares 512,700 5 (512,700) (5) -- -- --
Repurchase of treasury stock -- -- -- -- -- (2,712) --
Issuance of treasury stock -- -- -- -- (345) 1,452 --
Issuance of Class A common stock 74,755 1 -- -- 498 -- --
Other comprehensive gain:
Unrealized change in
investment securities -- -- -- -- -- -- 10,144
Comprehensive gain -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 14,304,026 $143 35,799,729 $358 $208,678 $(8,341) $(5,991)
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Stock Retained Comprehensive
Subscriptions Earnings Income
Receivable (Deficit) Total (Loss)
======================================================================================================
<S> <C> <C> <C> <C>
Balances, December 31, 1996 $(295) $ 30,334 $ 49,058
Net income -- 59,539 59,539 $ 59,539
--------
Comprehensive income -- -- -- $ 59,539
========
Issuance of common stock (292) -- 3,392
Capital contributions -- -- 176
Repayment of stock
subscription receivable 587 -- 587
Issuance of common stock in
initial public offering,
net of offering costs -- -- 185,047
Conversion of Class B
common stock upon
sale to third party -- -- --
Compensation recorded
pursuant to book
value stock issued in 1997 -- -- 1,417
Distributions -- (72,571) (72,571)
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 -- 17,302 226,645
Net loss -- (16,209) (16,209) $(16,209)
Conversion of Class B shares to
Class A shares -- -- --
Repurchase of treasury stock -- -- (8,062)
Issuance of treasury stock -- -- 663
Other comprehensive loss:
Unrealized change in
investment securities -- -- (16,135) (16,135)
---------
Comprehensive loss -- -- -- $(32,344)
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 -- 1,093 186,902
Net loss -- (6,971) (6,971) $ (6,971)
Conversion of Class B shares to
Class A shares -- -- --
Repurchase of treasury stock -- -- (2,712)
Issuance of treasury stock -- -- 1,107
Issuance of Class A common stock -- -- 499
Other comprehensive gain:
Unrealized change in
investment securities __ __ 10,144 10,144
--------
Comprehensive gain -- -- -- $ 3,173
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 $ -- $ (5,878) $188,969
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (6,971) $ (16,209) $ 59,539
Non-cash items included in earnings-
(Income) loss and incentive
income on long-term investments (33,269) 101 (13,562)
Depreciation and amortization 2,749 1,390 883
Compensation recorded pursuant to book
value stock issuance -- -- 1,417
Deferred income taxes -- -- (2,402)
Other (321) -- --
Changes in operating assets:
Receivables-
Investment banking (1,198) 4,157 69
Asset management fees 1,679 (1,288) (2,989)
Income taxes 8,734 (8,795) --
Affiliates 5,895 (6,392) (208)
Other 291 1,019 (1,754)
Due from clearing broker (2,751) 4,367 (5,949)
Marketable trading securities 7,013 26,699 (23,771)
Prepaid expenses and other assets (52) (1,621) 737
Insurance deposit -- -- 9,417
Changes in operating liabilities:
Trading account securities sold
but not yet purchased 137 (13,412) (23,141)
Net proceeds from (repayments on)
short-term subordinated loans -- (40,000) 25,000
Proceeds from (repayments on)
short-term line of credit -- -- (7,000)
Accounts payable and accrued expenses 643 (22,963) 21,402
Accrued compensation and benefits 18,945 (13,837) 15,538
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 1,524 (86,784) 53,226
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of fixed assets (7,401) (4,865) (1,252)
Sales (purchases) of long-term investments, net 4,451 (37,311) (16,366)
Sales of short-term investments, net -- -- 10,268
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,950) (42,176) (7,350)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings of long-term secured loans -- -- 850
Repayments of long-term secured loans (552) (505) (348)
Proceeds from issuance of common stock,
net of repayments on stock
subscriptions receivable 499 -- 189,026
Purchases of treasury stock (2,712) (8,062) --
Issuance of treasury stock 1,107 663 --
Capital contributions -- -- 176
Distributions -- (24,000) (48,570)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities (1,658) (31,904) 141,134
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (3,084) (160,864) 187,010
Cash and cash equivalents, beginning of year 46,827 207,691 20,681
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 43,743 $ 46,827 $ 207,691
- ------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per
share amounts)
NOTE 1. ORGANIZATION and NATURE OF OPERATIONS:
Organization
Friedman, Billings, Ramsey Group, Inc., a Virginia corporation (the
"Company"), is a holding company of which the principal operating subsidiaries
are Friedman, Billings, Ramsey & Co., Inc. ("FBRC"), FBR Investment Services,
Inc. ("FBRIS"), Friedman, Billings, Ramsey Investment Management Company
("FBRIM") and FBR Venture Capital Managers, Inc. ("VCM").
FBRC and FBRIS are registered broker-dealers and members of the National
Association of Securities Dealers, Inc. They act as introducing brokers and
forward all transactions to clearing brokers on a fully disclosed basis. FBRC
and FBRIS do not hold funds or securities for, nor owe funds or securities to,
customers. During the periods presented, FBRC's underwriting and corporate
finance activities were concentrated primarily on technology and financial
services companies. During the second quarter of 1999, the Company introduced
fbr.com, an online investment bank and electronic brokerage and a division of
FBRIS.
FBRIM and VCM are registered investment advisers that manage and act as
general partners of proprietary investment limited partnerships. FBRIM also
manages separate investment accounts and FBR Asset Investment Corporation
("FBR-Asset"), a publicly-traded real estate investment trust ("REIT").
Nature of Operations
The Company's principal business activities (capital raising, securities
sales and trading, merger and acquisition and advisory services, proprietary
investments, and venture capital and other asset management services) are linked
to the capital markets. In addition, the Company's business activities are
primarily focused on small and mid-cap stocks in the technology and financial
services sectors. By their nature, the Company's business activities are highly
competitive and are not only subject to general market conditions, volatile
trading markets and fluctuations in the volume of market activity but to the
conditions affecting the companies and markets in the Company's areas of focus.
During 1999, with the exception of the technology sector, the sectors on which
the Company focuses have underperformed the overall securities markets.
The Company's revenues, particularly from capital raising, venture capital,
private equity and principal investment activities, 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 in any particular period may
vary significantly from period to period and year to year.
The financial services industry continues to be affected by the
intensifying competitive environment and by consolidation through mergers and
acquisitions, as well as significant growth in competition in the market for on-
line trading services. The relaxation of banks' barriers to entry into the
securities industry and expansion by insurance companies into traditional
brokerage products, coupled with the repeal of laws separating commercial and
investment banking activities, have increased the number of companies competing
for a similar customer base.
In order to compete in this increasingly competitive environment, the
Company continually evaluates its businesses across varying market conditions
for profitability and alignment with long-term strategic objectives, including
the diversification of revenue sources. The Company believes that it is
important to diversify and strengthen its revenue base by increasing the
segments of its business that offer a recurring and more predictable source of
revenue.
Concentration of Risk
A substantial portion of the Company's revenues in a year may be derived
from a small number of transactions or issues or may be concentrated in a
particular industry. Revenues derived from the Company's technology venture
capital and technology investment banking deals accounted for 41% of the
Company's revenues for the year ended December 31, 1999. Two unrelated
investment banking transactions accounted for 33% of the Company's revenues for
the year ended December 31, 1998. Two unrelated investment banking transactions
accounted for 24% of the Company's revenues for the year ended December 31,
1997.
F-7
<PAGE>
Concentration of Risk, continued
As of December 31, 1999, the Company's $39,413 investment in FBR Technology
Venture Partners, L.P. ("TVP") represented 29% of the Company's long-term
investments. As of December 31, 1999 and 1998, respectively, the Company's
investment in FBR-Asset of $24,194 and $23,690 represented 18% and 24% of the
Company's long-term investments. Together, these two investments represented 47%
of the Company's total investments and 28% of the Company's total assets as of
December 31, 1999. These concentrations create exposure to market risk for the
Company in the technology and real estate sectors.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
All significant intercompany accounts and transactions have been eliminated
in consolidation.
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, 1999 and 1998, respectively, approximately 65% and 80% of the Company's cash
equivalents were invested in money market funds that invest primarily in U.S.
Treasuries and other government securities, backed by the U.S. government.
Supplemental Cash Flow Information Including Non-cash Transactions
Cash payments for interest approximated interest expense for the years
ended December 31, 1999, 1998, and 1997. The Company paid $8,795 of estimated
income tax payments in 1998 and none in 1999 and 1997. There were no significant
non-cash investing and financing activities during 1999. In 1998, the Company
paid $24,000 of distributions to shareholders that were accrued as of December
31, 1997. Also in 1998, the Company transferred $38,035 of investment securities
from marketable trading securities to long-term investments (Note 4).
Securities and Principal Investments
Investments in proprietary investment partnerships, venture funds and FBR-
Asset are accounted for under the equity method and the Company's proportionate
share of income or loss ("income allocation") is reflected in investment gains
and losses in the statements of operations. Securities owned by the Company's
broker-dealer subsidiaries are valued at market and resulting unrealized gains
and losses are reflected in trading gains and losses in the statements of
operations. Other marketable securities held in non-broker-dealer entities are
classified as available-for-sale investments, in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, and are valued at market with
resulting unrealized gains and losses reflected in other comprehensive gain or
loss in the Company's balance sheet. Declines in the value of available-for-
sale investments that are "other than temporary" are recorded in investment
losses.
Substantially all financial instruments used in the Company's trading and
investing activities are carried at fair value or amounts that approximate fair
value. Fair value is based generally on listed market prices or broker-dealer
price quotations. To the extent that prices are not readily available, or if
liquidating the Company's position is reasonably expected to affect market
prices, fair value is based on internal valuation models and estimates made by
management.
In connection with certain capital raising transactions, the Company has
received and holds warrants for stock of the issuing corporation generally
exercisable at the respective offering price, with respect to the relevant
transaction. Due to the restrictions on the warrants and the underlying
securities, the Company carries the warrants at nominal values, and recognizes
profits, if any, only when realized. During 1999, the Company sold a portion of
the warrants and recorded $4,024 in investment gains related to the sales.
Furniture, Equipment, Software and Leasehold Improvements
Furniture, equipment and software are depreciated using the straight-line
method over their estimated useful lives of three to ten years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the useful life or lease term. Amortization of purchased software is recorded
over the estimated useful life of three years. The Company has capitalized
certain software development costs associated with its launch of fbr.com in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 98-1, "Accounting for Costs of Computer Software Developed or
Obtained For Internal Use." These costs are being amortized over the estimated
useful life of the software.
F-8
<PAGE>
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 the weight of available evidence, it is more
likely than not that they will not be realized.
Other Comprehensive Income or Loss
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes rules for the
reporting and display of comprehensive income and its components, however, it
has no impact on the Company's net income (loss) or total shareholders' equity.
Accumulated other comprehensive loss presented in the accompanying balance
sheets consists of the accumulated net unrealized loss on available-for-sale
investments.
Revenues
Underwriting fees are recorded as revenue at the time the underwriting is
completed (generally trade date) and the income is reasonably determinable.
Corporate finance and advisory fees are recorded as revenue when the related
services have been rendered and the client is contractually obligated to pay.
Securities transactions and related commission income and expenses are
recorded on a trade date basis.
The Company records revenue from its investments in proprietary investment
partnerships, venture capital funds, mutual funds and FBR-Asset in three ways:
(1) Certain of the Company's subsidiaries act as investment advisers and receive
management fees for the management of proprietary investment partnerships,
venture capital funds, mutual funds and FBR-Asset, based upon the amount of
capital committed or under management. This revenue is recorded in "asset
management revenue" in the Company's statements of operations. (2) The Company
also receives incentive income based upon the operating results of the
partnerships and venture capital funds. Incentive income represents a carried
interest in the gains of the partnerships and funds and is recorded in "asset
management revenue" in the statements of operations. (3) The Company also
records allocations, under the equity method of accounting, for its
proportionate share of the earnings or losses of the partnerships, venture funds
and FBR-Asset. Income or loss allocations are recorded in "net investment gains
and losses" in the Company's statements of operations.
Compensation
A significant component of compensation expense relates to incentive
bonuses. Incentive bonuses are accrued based on the contribution of key business
units using certain pre-defined formulas. Since the bonus determinations are
also based on aftermarket security performance and other factors, amounts
originally accrued may not ultimately be paid. Pursuant to this policy, the
Company reduced $7,289 of prior year bonus accruals during the year ended
December 31, 1998. The Company's compensation accruals are reviewed and
evaluated on a quarterly basis.
The fund management team for the venture capital funds has an agreement
with the Company to receive a percentage of the incentive income recorded by the
Company. For TVP, the fund management team earns 60% of the incentive income and
this amount is recorded as compensation expense at the time the incentive income
is recorded.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS
No.123, "Accounting for Stock-Based Compensation." Pursuant to SFAS No. 123, the
Company continues to apply the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25,
compensation expense is recorded for the difference, if any, between the fair
market value of the common stock on the date of grant and the exercise price of
the option. For the years ended December 31, 1999, 1998 and 1997, the exercise
prices of all options granted equaled the market prices on the dates of grants,
therefore, the Company did not record any compensation expense in 1999, 1998 and
1997 related to option grants.
The Company provides pro forma net income (loss) and pro forma earnings
(loss) per share disclosures for employee stock option grants as if the
fair-value-based method, defined in SFAS No. 123, had been applied.
F-9
<PAGE>
Earnings (Loss) Per Share
Basic earnings (loss) 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
(loss) per share includes the impact of dilutive securities such as options. For
the years ended December 31, 1999, 1998 and 1997, there were no differences
between basic and diluted historical and pro forma earnings or loss per share as
the impact of options was anti-dilutive.
Pro Forma Earnings Per Share (Unaudited)
In connection with the Company's initial public offering in December 1997,
the Company terminated its status as a subchapter S corporation. Pro forma
earnings per share for 1997 is based on the assumption that the Company's
subchapter S corporation status was terminated at the beginning of the year.
Accordingly, the Company has provided income taxes on a pro forma basis as if it
were a subchapter C corporation for 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3. MARKETABLE TRADING SECURITIES OWNED AND SECURITIES SOLD BUT NOT YET
PURCHASED:
Marketable trading securities owned and trading account securities sold but
not yet purchased consisted of securities at market values for the years
indicated (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
Sold But Not Sold But Not
Owned Yet Purchased Owned Yet Purchased
<S> <C> <C> <C> <C>
Corporate stocks $ 4,193 $ 3,015 $ 8,709 $ 2,527
Corporate bonds 1,944 14 4,441 365
------- ------- -------- -------
$ 6,137 $ 3,029 $ 13,150 $ 2,892
======= ======= ======== =======
</TABLE>
Trading account securities sold but not yet purchased represent obligations
of the Company to deliver the specified security at the contracted price, and
thereby, creates a liability to purchase the security in the market at
prevailing prices. Accordingly, these transactions result in off-balance-sheet
risk as the Company's ultimate obligation to satisfy the sale of securities sold
but not yet purchased may exceed the current value recorded in the consolidated
balance sheets.
F-10
<PAGE>
NOTE 4. LONG-TERM INVESTMENTS:
Long-term investments consisted of the following for the years indicated
(in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
<S> <C> <C>
Venture capital and other proprietary
investment partnerships $ 69,988 $ 26,671
FBR-Asset 24,194 23,690
Private debt and preferred equity investments 25,380 26,879
Available-for-sale securities 16,161 19,917
--------- --------
$ 135,723 $ 97,157
========= ========
</TABLE>
Venture Capital and Other Proprietary Investment Partnerships
VCM is the managing partner of FBR Technology Venture Partners, L.P. and
FBR Technology Venture Partners II (consisting of 5 separate limited
partnerships). FBRIM is the managing partner or member of FBR Ashton, L.P., FBR
Weston, L.P., FBR Braddock, L.P., FBR Future Financial Fund, L.P. , FBR Private
Equity Fund, L.P., FBR Arbitrage, L.L.C. and through a wholly-owned L.L.C., FBR
Financial Fund II, L.P. All of these partnerships were formed for the purpose of
investing in public and private securities, therefore, their assets principally
consist of investment securities accounted for at fair value. The Company
accounts for its investments in these partnerships under the equity method. The
following table shows the Company's investments and percentage interest on which
pro rata profit allocations (as distinct from carried interest incentive income)
are based (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
<S> <C> <C> <C> <C>
FBR Technology Venture Partners, L.P. $ 39,413 3% $ 568 3%
FBR Ashton, L.P. 10,666 19% 12,192 13%
FBR Arbitrage, L.L.C. 7,816 32% 5,949 41%
FBR Braddock, L.P. 4,628 14% 3,204 9%
FBR Private Equity Fund, L.P. 3,064 15% 2,345 12%
FBR Financial Fund II, L.P. 1,387 6% 517 5%
FBR Technology Venture Partners II 1,124 5% -- --
FBR Weston, L.P. 1,069 7% 1,290 6%
Other 821 -- 606 --
-------- --------
$ 69,988 $ 26,671
======== ========
</TABLE>
FBR Technology Venture Partners, L.P.
FBR Technology Venture Partners, L.P. ("TVP") is a limited partnership,
formed on August 12, 1997, to engage in the business of investing in securities.
FBR Venture Capital Managers, Inc., a wholly owned subsidiary of the Company, is
the corporate general partner of TVP. TVP's investments as of December 31, 1999
and 1998 included equity investments in securities of development-stage and
early-stage, privately and publicly held, technology companies. The disposition
of the privately held investments is generally restricted due to the lack of a
ready market. TVP's investments may represent significant proportions of the
issuer's equity and they may carry special contractual privileges not available
to other security holders. As a result, precise valuation for the private and
restricted investments is a matter of judgment and the determination of fair
value must be considered only an approximation. In the absence of third party
equity transactions, management has determined that cost is the best estimate of
fair value. Public company investments are valued based on the December 31, 1999
closing price less a discount of up to 25% to reflect restrictions on liquidity
and marketability. The following table summarizes TVP's financial information
(in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998 1997
<S> <C> <C> <C>
Total assets $223,685 $20,671 $6,140
Total liabilities 253 1,119 278
Total revenues 59 45 41
Total expenses 1,718 1,466 150
Unrealized appreciation of investments 186,239 1,058 15
Net income (loss) 184,580 (363) (94)
</TABLE>
F-11
<PAGE>
FBR-Asset
FBR-Asset is a REIT, formed in 1997, whose primary purpose is to invest in
mortgage loans, mortgage-backed securities and public and private real estate
companies. As of December 31, 1999, 71% and 15% of FBR-Asset's assets were
invested in mortgage-backed securities and equity securities, respectively. FBR-
Asset classifies its investments as available-for-sale in accordance with SFAS
No. 115. Accordingly, unrealized gains and losses related to securities are
reflected as other comprehensive gain or loss in FBR-Asset's equity. The Company
accounts for its investment in FBR-Asset under the equity method. As a result,
the Company recorded $4,134 and $1,109 in net investment gains in the statements
of operations for its proportionate share of FBR-Asset's 1999 and 1998 net
income, respectively. In addition, during 1999 and 1998, respectively, the
Company reduced its carrying basis of FBR-Asset for declared dividends of $2,157
and $887. The Company also recorded, in other comprehensive loss, $1,473 and
$1,532 of net unrealized loss on investments which represented its proportionate
share of FBR-Asset's net unrealized loss related to available-for-sale
securities for the year ended December 31, 1999 and 1998 respectively. As of
December 31, 1999, net unrealized loss related to FBR-Asset and included in the
Company's accumulated other comprehensive loss was $3,005. The Company's
ownership percentage of FBR-Asset was 23% as of December 31, 1999. The following
table summarizes FBR-Asset's financial information (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998 1997
<S> <C> <C> <C>
Total assets $330,180 $295,931 $190,538
Total liabilities 225,638 145,026 772
Gross revenues 23,474 17,928 721
Income before realized losses 12,792 9,958 647
Net income 5,143 1,588 647
</TABLE>
Private Debt and Preferred Equity Investments
In May 1998, the Company organized a business trust designed to extend
financing to "middle-market" businesses in need of subordinated debt or
mezzanine financing. In connection therewith, the Company loaned $17,500
to two unrelated businesses at an average annual interest rate of 12.7%. The
loans mature as follows: $7,500 in June 2003 and $10,000 in December 2005. The
Company also invested $7,000 in an unaffiliated private company. During the year
ended 1999, the Company recorded $1,820 of investment losses related to the
preferred equity investment. The loans are carried at original cost which
approximates estimated fair values.
Available-For-Sale Securities
The Company's available-for-sale securities consist primarily of equity
investments in publicly traded companies. During 1998, these securities were
transferred from FBRC's trading accounts to an asset management subsidiary of
the Company at their then fair market value of $38,035. In accordance with SFAS
No. 115, the securities are valued at market with resulting unrealized gains and
losses reflected as other comprehensive gain or loss. During 1999, the Company
recorded $10,385 of "other than temporary" loss in the statement of operations
as investment losses. The Company also sold $5,934 of other available-for-sale
securities at a realized loss of $221. As of December 31, 1999, the unrealized
losses related to these securities were $2,986 and are included in accumulated
other comprehensive loss.
NOTE 5. FURNITURE, EQUIPMENT, SOFTWARE AND LEASEHOLD IMPROVEMENTS:
Furniture, equipment, software and leasehold improvements, summarized by
major classification, were as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
<S> <C>
Furniture and equipment $ 6,471 $ 5,540
Software 6,049 394
Leasehold improvements 4,586 4,479
-------- -------
17,106 10,413
Less-Accumulated depreciation and amortization (5,798) (3,467)
-------- -------
$ 11,308 $ 6,946
======== =======
</TABLE>
F-12
<PAGE>
NOTE 6. INCOME TAXES:
Deferred tax assets and liabilities consisted of the following as of December
31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
<S> <C> <C>
Unrealized investment gains on proprietary investment
partnerships and venture funds $(17,671) $ (2,338)
Unrealized investment losses, recorded in accumulated other
comprehensive loss 2,467 6,461
Unrealized investment losses, recorded in earnings, related
to "other than temporary" declines in the value of
available-for-sale securities 4,246 --
Net operating losses 15,712 10,223
Accrued compensation 8,523 100
Other (61) (20)
-------- --------
13,216 14,426
Less-valuation allowance recorded through accumulated other
comprehensive loss (2,467) (6,461)
Less-valuation allowance recorded through earnings (8,347) (5,563)
-------- --------
Net deferred tax assets $ 2,402 $ 2,402
======== ========
</TABLE>
The Company has recorded a valuation allowance against net deferred tax
assets as of December 31, 1999 and 1998 based on its ongoing assessment of
realizability of the net benefit. The valuation allowance includes consideration
for the deferred tax asset related to unrealized losses on available-for-
sale securities, recorded in accumulated other comprehensive loss. As of
December 31, 1999, the Company had NOL tax carryforwards of $38,430 that
expire through 2019.
The benefit for income taxes results in effective tax rates that differ
from the Federal statutory rates as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998 1997
<S> <C> <C> <C>
Statutory Federal income tax rate (35)% (35)% 35%
State income taxes, net of Federal benefit (5) (5) 5
Subchapter S corporation income not taxable to the Company -- -- (31)
Recognition of deferred tax assets upon termination
of subchapter S corporation status -- -- (13)
Nondeductible expenses 11 6 --
Dividends received deduction (6) -- --
Valuation allowance 35 34 --
---- ---- ----
Effective income tax rate -- -- (4)%
==== ==== ====
</TABLE>
Through December 20, 1997, the Company and its primary subsidiaries had
elected to be taxed as subchapter S corporations under the Internal Revenue
Code. As a result, there is no provision for income taxes in these financial
statements for the period prior to December 21, 1997.
NOTE 7. PROFIT SHARING PLAN:
The Company maintains a qualified 401(k) profit sharing plan. Eligible
employees may defer a portion of their salary. At the discretion of the Board of
Directors, the Company may make matching contributions and discretionary
contributions from profits. There were no Company contributions made in 1999,
1998 or 1997.
F-13
<PAGE>
NOTE 8. BORROWINGS:
Subordinated Revolving Loans
As of December 31, 1999 and 1998, FBRC had an unsecured revolving
subordinated loan agreement ("the line"), with total available credit of
$40,000, with an affiliate of its clearing broker. The purpose of the line is to
make additional funds available to meet regulatory net capital requirements for
participation in underwriting public offerings. The expiration date of the line
is December 2000. There were no outstanding balances under the line as of
December 31, 1999 and 1998. Borrowings under the revolving subordinated loan
agreement are available in computing net capital under the SEC's Uniform Net
Capital Rule (Rule 15c3-1).
Long-Term Loans
The Company has four long-term secured loans totaling $1,359 and $1,911 as
of December 31, 1999 and 1998, respectively, requiring fixed annual principal
and interest payments totaling $673. Each loan bears interest at an annual rate
equal to the one-month commercial paper rate, as published by the Federal
Reserve Board, that equaled 7.76% and 7.48% at December 31, 1999 and 1998,
respectively. The loans are collateralized by certain furniture, equipment, and
leasehold improvements of the Company. The loans are scheduled to be entirely
repaid in June 2001, October 2001, January 2002, and November 2002,
respectively.
NOTE 9. NET CAPITAL COMPUTATION:
FBRC and FBRIS are subject to the SEC's Uniform Net Capital Rule (Rule
15c3-1) that requires the maintenance of minimum net capital and requires that
the ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1. At December 31, 1999, FBRC had net capital of $33,984, which was
$33,056 in excess of its required net capital of $928. FBRC's aggregate
indebtedness to net capital ratio was 0.3 to 1 at December 31, 1999. At December
31, 1999, FBRIS had net capital of $1,050, which was $921 in excess of its
required net capital of $129. FBRIS' aggregate indebtedness to net capital ratio
was 1.85 to 1 at December 31, 1999.
NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CREDIT RISK:
Financial Instruments
The Company's broker-dealer entities trade securities that are primarily
traded in United States markets. The Company's asset management entities trade
and invest in public and non-public securities. As of December 31, 1999 and
1998, the Company had not entered into any transactions involving financial
instruments, such as financial futures, forward contracts, options, swaps or
derivatives, that would expose the Company to significant related
off-balance-sheet risk.
Market risk is primarily caused by movements in market prices of the
Company's trading and investment account securities and changes in value of the
underlying securities of the venture capital funds and proprietary investment
partnerships in which the Company invests. The Company's 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 control market risk through monitoring procedures. The Company's principal
transactions are primarily short and long debt and equity transactions.
Positions taken and commitments made by the Company, including those made
in connection with venture capital and investment banking activities, have
resulted 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 expose
the Company to a higher degree of risk than associated with investment grade
instruments.
Credit Risk
The Company's 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.
F-14
<PAGE>
Credit Risk, continued:
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
control 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 Company's other 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 the Company to a
higher degree of risk than associated with readily marketable securities.
NOTE 11. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases premises under long-term lease agreements requiring
minimum annual rental payments with annual adjustments based upon increases in
the consumer price index, plus the pass-through of certain operating and other
costs above a base amount.
Future minimum aggregate annual rentals payable under these non-cancelable
leases and rentals for certain equipment leases for the years ending December
31, 2000 through 2004, are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000 $ 2,895
2001 2,848
2002 2,488
2003 2,377
2004 1,115
-------
$11,723
=======
</TABLE>
Equipment and office rent expense for 1999, 1998 and 1997 was $3,405,
$2,430 and $1,274, respectively.
Litigation
As of December 31, 1999, the Company was not a defendant or plaintiff in
any lawsuits or arbitrations that are expected to have a material adverse effect
on the Company's financial condition. The Company is a defendant in a small
number of civil lawsuits and arbitrations (together, "litigation") relating to
its various businesses. There can be no assurance that these matters will not
have a material adverse effect on the Company's financial condition or results
of operations in a future period. However, based on management's review with
counsel, resolution of these matters is not expected to have a material adverse
effect on the Company's financial condition or results of operations.
Many aspects of the Company's business involve substantial risks of
liability and litigation. Underwriters, broker-dealers and investment advisers
are exposed to liability under Federal and state securities laws, other Federal
and state laws and court decisions, including decisions with respect to
underwriters' liability and limitations on indemnification, as well as with
respect to the handling of customer accounts. For example, underwriters may be
held liable for material misstatements or omissions of fact in a prospectus used
in connection with the securities being offered and broker-dealers may be held
liable for statements made by their securities analysts or other personnel. In
certain circumstances, broker-dealers and asset managers may also be held liable
by customers and clients for losses sustained on investments. In recent years,
there has been an increasing incidence of litigation involving the securities
industry, including class actions that seek substantial damages. The Company is
also subject to the risk of litigation, including litigation that may be without
merit. As the Company intends actively to defend such litigation, significant
legal expenses could be incurred. An adverse resolution of any future litigation
against the Company could materially affect the Company's operating results and
financial condition.
F-15
<PAGE>
NOTE 12. EXECUTIVE OFFICER COMPENSATION:
During 1999, the Company's three Executive Officer Directors participated
in the 1997 Key Employee Incentive Plan (the "1997 Plan"). In accordance with
the 1997 Plan, Executive Officer Directors were eligible to participate in two
bonus pools. The first was a bonus pool of up to 20% of the Company's pre-tax
income (before payment of the bonuses), adjusted for certain expense items
excluded from pre-tax income. The 20% pool was subject to a cap related to the
ratio of compensation expense (excluding certain items) to total revenues. For
the year ended December 31, 1999, the Company generated adjusted income under
the 1997 Plan, however, due to the application of the cap, no bonuses were paid
under the 20% pool. The second pool comprised up to $6,000 in total bonuses
based on a formula tied to the performance of FBRC's trading operations. The
entire $6,000 pool was earned and recorded as compensation expense in 1999.
During 1998, the Company's Executive Officer Directors participated in the
Company's Stock and Annual Incentive Plan, however, no bonuses were earned due
to the net loss generated in 1998.
NOTE 13. SHAREHOLDERS' EQUITY:
The Company has authorized share capital of 100 million shares of Class B
Common Stock, par value $0.01 per share; 150 million shares of Class A Common
Stock, par value $0.01 per share; and 15 million shares of undesignated
preferred stock. Holders of the Class A and Class B Common Stock are entitled to
one vote and three votes per share, respectively, on all matters voted upon by
the shareholders. Shares of Class B Common Stock convert to shares of Class A
Common Stock at the option of the Company in certain circumstances including (i)
upon sale or other transfer, (ii) at the time the holder of such shares of Class
B Common Stock ceases to be affiliated with the Company and (iii) upon the sale
of such shares in a registered public offering. The Company's Board of Directors
has the authority, without further action by the shareholders, to issue
preferred stock in one or more series and to fix the terms and rights of the
preferred stock. Such actions by the Board of Directors could adversely affect
the voting power and other rights of the holders of common stock. Preferred
stock could thus be issued quickly with terms that could delay or prevent a
change in control of the Company or make removal of management more difficult.
At present, the Company has no plans to issue any of the preferred stock.
Stock and Annual Incentive Plan (the "Plan")
Under the Plan, the Company may grant options, stock appreciation rights,
performance awards and restricted and unrestricted stock to purchase up to 9.9
million shares of Class A Common Stock to eligible participants in the Plan.
Participants include employees and officers of the Company and its subsidiaries.
The Plan has a term of 10 years and options granted 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. Details of
stock options granted are as follows:
<TABLE>
<CAPTION>
Number Exercise
of Shares Price
<S> <C> <C>
Balance as of December 31, 1996 -- --
Granted in 1997 4,383,400 $20.00
Balance as of December 31, 1997 4,383,400 $20.00
Granted in 1998 2,160,280 $5.875 - $19.625
Forfeitures in 1998 upon departure of employees (293,200) $5.875 - $20.00
Balance as of December 31, 1998 6,250,480 $5.875 - $20.00
Granted in 1999 3,507,148 $5.1875 - $13.0625
Forfeitures in 1999 upon departure of employees (468,025) $5.875 - $20.00
Balance as of December 31, 1999 9,289,603 $5.1875 - $20.00
</TABLE>
All options granted in 1997 and 70,780 of the options granted in 1998
become exercisable as follows: 10%, 40%, and 50% at the end of three, four, and
five years, respectively. The remainder of the grants in 1998, 2,089,500
options, and all grants in 1999, become exercisable ratably over the first three
years. As of December 31, 1999, 1,040,843 of the total options outstanding were
exercisable. As of December 31, 1999 and 1998, respectively, the weighted
average exercise price was $11.84 and $15.25 and the remaining contractual life
of options outstanding was 8.9 years and 9.3 years, respectively.
F-16
<PAGE>
Stock and Annual Incentive Plan (the "Plan"), continued
The Company applies APB Opinion No. 25 in accounting for option grants
under the Plan and, accordingly, does not recognize any compensation cost
associated with the grants in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
options, under SFAS No. 123, the Company's pro forma net loss for 1999 and 1998
would have been $16,148 and $21,900, respectively. The Company's pro forma net
loss per share for 1999 and 1998 would have been $0.33 and $0.44, respectively.
Due to the proximity of 1997 grants to December 31, 1997, pro forma earnings per
share for 1997 is the same as that reported.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for options granted during 1999, 1998 and 1997, respectively:
no dividend yield, expected volatility of 75%, 65% and 50%, risk-free interest
rate of 6.1%, 4.5% and 5.7% and an expected life of five years for all grants.
The weighted average fair value of options granted during 1999, 1998 and 1997
was $4.23, $3.57 and $10.09, respectively, per share.
Director Stock Compensation Plan
Under the Director Stock Compensation Plan (the "Director Plan"), the
Company may grant options or stock (in lieu of annual director fees) up to
100,000 shares of Class A Common Stock to all non-employee directors as a group.
Options granted under the Director Plan will vest upon the first anniversary of
the grant and are exercisable up to 10 years from the date of grant. All options
and stock awarded under the Director Plan are nontransferable other than by will
or the laws of descent and distribution. During 1999, 1998 and 1997,
respectively, the Company granted 6,000, 6,000 and 40,000 options under the
Director Plan.
Employee Stock Purchase Plan
Employees began participating in the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") on September 1, 1998. Under this Purchase Plan, one million
shares of Class A Common Stock are reserved for issuance. The Purchase Plan
permits eligible employees to purchase common stock through payroll deductions
at a price equal to 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. The
Purchase Plan does not result in compensation expense. During 1999, 273,940
shares were issued under the Purchase Plan for $1,107. During 1998, 126,055
shares were issued under the Purchase Plan for $663.
Treasury Stock
In July 1998, the Company's Board of Directors approved a plan to
repurchase up to 2.5 million shares of the Company's Class A Common Stock from
time to time (the "Repurchase Plan"). In accordance with the Repurchase Plan, a
portion of the stock acquired may be used for the three stock-based compensation
plans described previously. As of December 31, 1999 and 1998, the Company's
treasury stock consists of stock purchased in the open market at cost. Treasury
stock issuances relate to issuances of common stock pursuant to the Employee
Stock Purchase Plan. Differences between the average cost of the treasury stock
and the sales price of the shares issued are charged to additional paid-in
capital. During 1999 and 1998, the Company's treasury stock transactions were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Shares Cost
<S> <C> <C>
Balance as of December 31, 1997 -- $ --
Open market purchases 1,036,092 8,062
Employee Stock Purchase Plan issuances (126,055) (981)
Balance as of December 31, 1998 910,037 7,081
Open market purchases 431,935 2,712
Employee Stock Purchase Plan issuances (198,945) (1,452)
Balance as of December 31, 1999 1,143,027 $ 8,341
</TABLE>
F-17
<PAGE>
NOTE 14. SEGMENT INFORMATION:
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company considers its capital markets
and asset management operations to be two separate reportable segments. Segment
assets are identifiable assets that can be directly associated with the
segments. Parent company assets, liabilities and income, such as cash
equivalents, income taxes and interest income are not allocated to the segments
and, therefore, are included in the "other" column in the following tables. The
accounting policies of these segments are the same as those described in Note 2.
There are no significant revenue transactions between the two segments. The
following tables illustrate the financial information for both segments for the
years indicated (in thousands):
<TABLE>
<CAPTION>
Capital Asset Consolidated
1999 Markets Management Other(1) Totals
<S> <C> <C> <C> <C>
Total revenues $ 93,471 $ 45,182 $ 313 $ 138,966
Compensation and benefits 64,175 28,069 6,180 98,424
Total expenses 108,998 31,707 5,232 145,937
Pre-tax income (loss) (15,527) 13,475 (4,919) (6,971)
Total assets 85,437 130,631 10,288 226,356
Total net assets 69,985 108,922 10,062 188,969
<CAPTION>
Capital Asset Consolidated
1998 Markets Management Other(1) Totals
<S> <C> <C> <C> <C>
Total revenues $ 111,215 $ 8,389 $ 3,264 $ 122,868
Compensation and benefits 77,171 5,428 -- 82,599
Total expenses 131,020 6,690 1,367 139,077
Pre-tax income (loss) (19,805) 1,699 1,897 (16,209)
Total assets 83,044 97,513 24,559 205,116
Total net assets 66,747 95,810 24,345 186,902
<CAPTION>
Capital Asset Consolidated
1997 Markets Management Other(1) Totals
<S> <C> <C> <C> <C>
Total revenues $ 236,998 $ 19,137 $ -- $ 256,135
Compensation and benefits 151,952 3,588 1,417 156,957
Total expenses 192,451 5,130 1,417 198,998
Pre-tax income (loss) 44,547 14,007 (1,417) 57,137
Total assets 227,621 39,536 92,170 359,327
Total net assets 122,179 38,025 66,442 226,646
</TABLE>
(1) Includes inter-company eliminations.
F-18
<PAGE>
NOTE 15. QUARTERLY DATA (UNAUDITED):
The following tables set forth selected information for each of the fiscal
quarters during the years ended December 31, 1999 and 1998 (dollars in
thousands, except per share data). 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 presentation of the results for such periods.
<TABLE>
<CAPTION>
Basic and
Net Income Diluted
Total (Loss) Before Net Income Earnings
1999 Revenues Income Taxes (Loss) (Loss) Per Share
<S> <C> <C> <C> <C>
First Quarter $ 22,069 $ 45 $ 45 $ 0.00
Second Quarter 40,379 5,849 5,849 0.12
Third Quarter 8,922 (23,061) (23,061) (0.47)
Fourth Quarter 67,596 10,196 10,196 0.21
Total Year $138,966 $ (6,971) $ (6,971) $(0.14)
<CAPTION>
Basic and
Net Income Diluted
Total (Loss) Before Net Income Earnings
1998 Revenues Income Taxes (Loss) (Loss) Per Share
<S> <C> <C> <C> <C>
First Quarter $ 67,984 $ 25,736 $ 15,579 $ 0.31
Second Quarter 57,334 12,593 7,433 0.15
Third Quarter (21,509) (50,729) (35,412) (0.71)
Fourth Quarter 19,059 (3,809) (3,809) (0.08)
Total Year $122,868 $(16,209) $(16,209) $(0.33)
</TABLE>
F-19
<PAGE>
FINANCIAL STATEMENTS OF FBR ASSET INVESTMENT CORPORATION
Index to Financial Statements
Page
----
Report of Independent Public Accountants........ F-21
Statements of Financial Condition
as of December 31, 1999 and
December 31, 1998.............................. F-22
Statements of Income for the Years
Ended December 31, 1999 and 1998 and the Period
from December 15, 1997 (Inception),
through December 31, 1997...................... F-23
Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1999,
and 1998 and the Period from December 15,
1997 (Inception), through December 31,
1997........................................... F-24
Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998 and the
Period from December 15, 1997 (Inception),
through December 31, 1997 and ................. F-25
Notes to Financial Statements................... F-26
F-20
<PAGE>
Report of Independent Public Accountants
To the Shareholders of FBR Asset Investment Corporation:
We have audited the accompanying statements of financial condition of FBR Asset
Investment Corporation (the "Company") as of December 31, 1999 and 1998, and the
related statements of income, changes in shareholders' equity and cash flows for
the years ended December 31, 1999 and 1998 and the period from December 15, 1997
(inception) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FBR Asset Investment
Corporation as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998 and the period
from December 15, 1997 (inception), through December 31, 1997, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Vienna, Virginia
February 14, 2000
F-21
<PAGE>
FBR Asset Investment Corporation
Statements of Financial Condition as of December 31, 1999 and 1998*
================================================================================
<TABLE>
<CAPTION>
As of December 31, 1999 As of December 31, 1998
----------------------- -----------------------
Assets
<S> <C> <C>
Mortgage-backed securities, at fair value $236,014,844 $161,418,739
Investments in equity securities, at
fair value 49,647,865 70,983,050
Cash and cash equivalents 13,417,467 41,144,326
Due from custodian 806,093 -
Notes receivable 27,000,000 19,082,921
Dividends receivable 1,400,897 870,477
Prepaid expenses and other assets 253,516 461,059
Interest receivable 1,639,778 1,970,048
----------------------- ----------------------
Total assets $330,180,460 $295,930,620
======================= ======================
Liabilities and Shareholders' Equity
Liabilities:
Repurchase agreements $221,714,000 128,550,000
Interest payable 487,222 310,096
Dividends payable 2,891,368 2,563,058
Management fees payable 237,167 1,275,514
Accounts payable and accrued expenses 129,677 224,933
Due to custodian - 11,929,614
Deferred revenue 178,305 172,826
----------------------- ----------------------
Total liabilities 225,637,739 145,026,041
----------------------- ----------------------
Shareholders' equity:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized - -
Common stock, par value $.01 per share,
200,000,000 shares authorized, 10,415,827 shares
issued as of December 31, 1999 and 1998,
respectively 104,158 104,158
Additional paid-in capital 194,097,193 194,097,193
Accumulated other comprehensive loss (12,982,359) (9,800,530)
Retained deficit (15,463,462) (9,425,579)
Treasury stock, at cost, 4,609,491 shares and
1,872,300 shares as of December 31, 1999 and 1998,
respectively (61,212,809) (24,070,663)
----------------------- ----------------------
Total shareholders' equity 104,542,721 150,904,579
----------------------- ----------------------
Total liabilities and shareholders' equity $330,180,460 $295,930,620
======================= ======================
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
F-22
<PAGE>
FBR Asset Investment Corporation
Statements of Income for the Years ended December 31, 1999 and 1998
and the period from December 15, 1997 (Inception) through December 31, 1997*
============================================================================
<TABLE>
<CAPTION>
December 15, 1997
(Inception) through
Year Ended December 31, December 31,
--------------- --------------- ---------------------
1999 1998 1997
--------------- --------------- ---------------------
<S> <C> <C> <C>
Income:
Interest $ 15,823,914 $13,656,097 $ 18,040
Dividends 7,649,935 4,271,405 434,717
Other income - - 268,520
--------------- --------------- ---------------------
Total Income 23,473,849 17,927,502 721,277
--------------- --------------- ---------------------
Expenses:
Interest expense 7,920,648 5,359,633 -
Management fee expense 1,329,063 1,520,725 58,623
Professional fees 755,561 436,885 12,000
Insurance 41,325 52,769 -
Amortization of stock options issued to manager 454,746 454,746 -
Other 180,957 144,702 3,733
--------------- --------------- ---------------------
Total expenses 10,682,300 7,969,460 74,356
--------------- --------------- ---------------------
Realized gain (loss) on sale of mortgage-backed securities (358,692) 176,048 -
Realized gain on sale of equity investments 3,597,190 - -
Recognized loss on available-for-sale equity securities (10,887,458) (6,615,000) -
Realized loss on interest rate hedge - (1,930,855) -
--------------- --------------- ---------------------
Net income $ 5,142,589 $ 1,588,235 $ 646,921
=============== =============== =====================
Basic and diluted earnings per share $0.68 $0.16 $0.06
=============== =============== =====================
Weighted-average common and equivalent shares 7,523,715 10,044,483 10,218,999
=============== =============== =====================
</TABLE>
============================================================================
*The accompanying notes are an integral part of these statements.
F-23
<PAGE>
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for Years Ended December 31, 1999
and 1998* and the period from December 15, 1997 (Inception) through December 31,
1997.
================================================================================
<TABLE>
<CAPTION>
Additional Retained
Common Paid in Earnings Treasury
Stock Capital (Deficit) Stock
----------------------------------------------------------------------
<C> <C> <C> <C>
Balance, December 15, 1997 $ - $ - $ - $ -
------------ -------------- --------------- ---------------
Issuance of Common Stock 102,190 189,528,668 - -
Net income - - 646,921 -
Comprehensive income - - - -
Dividends - - (510,950) -
------------ -------------- --------------- ---------------
Balance, December 31, 1997 102,190 189,528,668 135,971 -
------------ -------------- --------------- ---------------
Issuance of common stock 1,968 3,659,033 - -
Repurchase of common stock - - - (24,070,663)
Options issued to manager - 909,492 - -
Net income (Loss) - - 1,588,235 -
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities - - - -
Comprehensive income (loss)
Dividends - - (11,149,785) -
------------ -------------- --------------- ---------------
Balance, December 31, 1998 104,158 194,097,193 (9,425,579) (24,070,663)
------------ -------------- --------------- ---------------
Repurchase of common stock - - - (37,142,146)
Net Income - - 5,142,589 -
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities - - - -
Comprehensive income - - - -
Dividends - - (11,180,472) -
------------ -------------- --------------- ---------------
Balance, December 31, 1999 $104,158 $194,097,193 $(15,463,462) $(61,212,809)
============ ============== =============== ===============
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Total Income (Loss)
----------------- ------------- ---------------
<S> <C> <C> <C>
Balance, December 15, 1997 $ - $ -
---------------- -------------
Issuance of Common Stock - 189,630,858
Net income - 646,921 646,921
---------------
Comprehensive income - - $ 646,921
===============
Dividends - (510,950)
----------------- ------------
Balance, December 31, 1997 - 189,766,829
---------------- ------------
Issuance of common stock - 3,661,001
Repurchase of common stock - (24,070,663)
Options issued to manager - 909,492
Net income (Loss) - 1,588,235 $ 1,588,235
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities (9,800,530) (9,800,530) (9,800,530)
-----------
Comprehensive income (loss) $(8,212,295)
===========
Dividends - (11,149,785)
---------------- ------------
Balance, December 31, 1998 (9,800,530) 150,904,579
---------------- ------------
Repurchase of common stock - (37,142,146)
Net Income - 5,142,589 $ 5,142,589
Other comprehensive income (loss) -
Change in unrealized loss on
available-for-sale securities (3,181,829) (3,181,829)
(3,181,829)
---------------
Comprehensive income - - $ 1,960,760
===============
Dividends - (11,180,472)
---------------- ------------
Balance, December 31, 1999 $ (12,982,359) $104,542,721
================ ============
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
F-24
<PAGE>
FBR Asset Investment Corporation
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998* and
the Period December 15, 1997 (Inception), through December 31, 1997
================================================================================
<TABLE>
<CAPTION>
December 15, 1997
For the Year Ended December 31, (Inception) through
December 31,
-------------- ----------------- --------------------
1999 1998 1997
-------------- ----------------- --------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,142,589 $ 1,588,235 $ 646,921
Adjustments to reconcile net income to net cash
(used in) provided by operating activities--
Recognized loss on available-for-sale equity securities 10,887,458 6,615,000 -
Realized gain on sale of mortgage-backed and equity securities (3,238,498) (176,048) -
Unrealized gain on equity investments - - (268,520)
Amortization 456,342 456,342 3,733
Premium amortization on mortgage-backed securities 682,695 777,179 -
Changes in operating assets and liabilities:
Due from custodian (806,093) - -
Due from affiliate - 545,827 (545,827)
Dividends receivable (530,420) (435,760) (434,717)
Interest receivable 330,270 (1,962,048) (8,000)
Prepaid expenses (248,799) - (11,642)
Management fees payable (1,038,347) 1,216,891 58,623
Accounts payable and accrued expenses (95,256) 212,933 12,000
Interest payable 177,126 310,096 -
Due to custodian (2,041,230) 2,041,230 -
Deferred revenue 5,479 (17,174) 190,000
------------- ---------------- --------------------
Net cash (used in) provided by operating activities 9,683,316 11,172,703 (357,429)
============== ================= ====================
Cash flows from investing activities:
Purchase of mortgage-backed securities (282,288,201) (221,156,241) -
Investments in equity securities (11,454,320) (64,876,250) (23,050,230)
Investments in notes receivable, net of repayments (7,917,079) (16,000,000) (3,000,000)
Proceeds from sale of mortgage-backed securities 160,809,435 48,533,267 -
Proceeds from sale of equity securities 27,894,010 - -
Receipt of principal payments on mortgage-backed securities 30,376,288 21,204,987 -
-------------- ----------------- --------------------
Net cash used in investing activities (82,579,867) (232,294,237) (26,050,230)
-------------- ----------------- --------------------
Cash flows from financing activities:
Repurchase of common stock (37,142,146) (24,070,663) -
Proceeds from issuance of common stock - 3,661,001 189,630,858
Proceeds from (repayments of) repurchase agreements, net 93,164,000 128,550,000 -
Dividends paid (10,852,162) (9,097,677) -
-------------- ----------------- --------------------
Net cash provided by financing activities 45,169,692 99,042,661 189,630,858
-------------- ----------------- --------------------
Net increase (decrease) in cash and cash equivalents (27,726,859) (122,078,873) 163,223,199
Cash and cash equivalents, beginning of the period 41,144,326 163,223,199 -
-------------- ----------------- --------------------
Cash and cash equivalents, end of the period 13,417,467 41,144,326 163,223,199
-------------- ----------------- --------------------
Supplemental disclosure of non-cash investing activities:
Securities purchased but not settled $ - $ 9,888,384 $ -
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
F-25
<PAGE>
Notes to Financial Statements
Note 1 Organization and Nature of Operations
FBR Asset Investment Corporation ("FBR Asset" or the "Company") was incorporated
in Virginia on November 10, 1997. FBR Asset commenced operations on December
15, 1997, upon the closing of a private placement of equity capital (the
"Private Placement") (see Note 3).
FBR Asset is organized as a real estate investment trust ("REIT") whose primary
purpose is to invest in mortgage loans and mortgage-backed securities issued or
guaranteed by instrumentalities of the U.S. Government or by private issuers
that are secured by real estate (together the "Mortgage Assets"). FBR Asset
also acquires indirect interests in those and other types of real estate-related
assets by investing in public and private real estate companies, subject to the
limitations imposed by the various REIT qualification requirements. Funds not
immediately allocated are generally temporarily invested in readily marketable,
interest-bearing securities. To seek yields commensurate with its investment
objectives, FBR Asset leverages its assets and mortgage loan portfolio primarily
with collateralized borrowings. FBR Asset uses derivative financial instruments
to hedge a portion of the interest rate risk associated with its borrowings.
Note 2 Summary of Significant Accounting Policies
Investments in Mortgage-Backed Securities
FBR Asset invests primarily in mortgage pass-through certificates that represent
a 100 percent interest in the underlying conforming mortgage loans and are
guaranteed by the Government National Mortgage Association ("Ginnie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), and the Federal National
Mortgage Association ("Fannie Mae").
Mortgage-backed security transactions are recorded on the date the securities
are purchased or sold. Any amounts payable for unsettled trades are recorded as
"due to custodian" in FBR Asset's Statement of Financial Condition.
FBR Asset accounts for its investments in mortgage-backed securities as
available-for-sale securities. FBR Asset does not hold its mortgage-backed
securities for trading purposes, but may not hold such investments to maturity,
and has classified these investments as available-for-sale. Securities
classified as available-for-sale are reported at fair value, with temporary
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Realized gains and losses on mortgage-backed
securities transactions are determined on the specific identification basis.
Unrealized losses on mortgage-backed securities that are determined to be other
than temporary are recognized in income. Management regularly reviews its
investment portfolio for other than temporary market value decline. There were
no such adjustments for mortgage-backed investments during the periods
presented.
The fair value of FBR Asset's mortgage-backed securities are based on market
prices provided by certain dealers who make markets in these financial
instruments. The fair values reported reflect estimates and may not necessarily
be indicative of the amounts FBR Asset could realize in a current market
transaction.
Income from investments in mortgage-backed securities is recognized using the
effective interest method, using the expected yield over the life of the
investment. Income includes contractual interest accrued and
F-26
<PAGE>
the amortization or accretion of any premium or discount recorded upon purchase.
Changes in anticipated yields result primarily from changes in actual and
projected cash flows and estimated prepayments. Changes in the yield that result
from changes in the anticipated cash flows and prepayments are recognized over
the remaining life of the investment with recognition of a cumulative catch-up
at the date of change from the date of original investment.
During 1998, FBR Asset received proceeds of $48.5 million from the sale of
mortgage-backed securities. The Company recorded $176,048 in realized gains
related to this sale.
During 1999, FBR Asset received proceeds of $160.8 million from the sale of
mortgage-backed securities. The Company recorded $851,464 in realized gains
related to this sale. Concurrent with this sale FBR Asset terminated a related
hedge position and recorded a $1.2 million loss.
The following table summarizes FBR Asset's mortgage-backed securities as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Total Mortgage
December 31, 1999 Freddie Mac Fannie Mae Ginnie Mae Assets
- ----------------- ------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Mortgage-backed securities,
available-for-sale, principal $79,490,738 $107,859,276 $54,517,427 $241,867,441
Unamortized premium (discount) 359,594 (1,190,013) 829,206 (1,213)
----------- ------------ ----------- ------------
Amortized cost 79,850,332 106,669,263 55,346,633 241,866,228
Gross unrealized losses (2,797,261) (2,196,860) (857,263) (5,851,384)
----------- ------------ ----------- ------------
Estimated fair value $77,053,071 $104,472,403 $54,489,370 $236,014,844
=========== ============ =========== ============
December 31, 1998
- -----------------
Mortgage-backed securities,
available-for-sale, principal $93,278,879 $ 48,386,872 $16,294,168 $157,959,919
Unamortized premium 529,783 1,427,632 787,906 2,745,321
----------- ------------ ----------- ------------
Amortized cost 93,808,662 49,814,504 17,082,074 160,705,240
Gross unrealized gains 665,251 191,021 123,260 979,532
Gross unrealized losses (89,517) (162,997) (13,519) (266,033)
----------- ------------ ----------- ------------
Estimated fair value $94,384,396 $ 49,842,528 $17,191,815 $161,418,739
=========== ============ =========== ============
</TABLE>
Short Sales
FBR Asset has established a short position to offset the potential adverse
effects of market price fluctuations in certain of its mortgage-backed
securities. The short positions are structured and accounted for as hedge
transactions such that any gains or losses will be recognized upon termination
of the position. FBR Asset's unrealized gains or losses on its position are
recorded as an asset or liability with a corresponding increase or decrease
included in comprehensive income. At December 31, 1999, FBR Asset had
established an $88 million face amount short position in 7.00% Fannie Mae agency
mortgage-backed securities. The fair value of the short position at December 31,
1999 loss $182,188.
Repurchase Agreements
FBR Asset has entered into short-term repurchase agreements to finance a
significant portion of its mortgage-backed investments. The repurchase
agreements are secured by FBR Asset's mortgage-backed
F-27
<PAGE>
securities and bear interest at rates that have historically related closely to
LIBOR for a corresponding period.
At December 31, 1999, FBR Asset had $221.7 million outstanding under repurchase
agreements with a weighted average borrowing rate of 5.83% as of the end of the
period and a remaining weighted-average term to maturity of 45 days. At
December 31, 1999, mortgage-backed securities pledged had an estimated fair
value of $228.9 million. At December 31, 1999, the repurchase agreements had
remaining maturities of between 38 and 45 days.
As of December 31, 1998, FBR Asset had $128.6 million outstanding under
repurchase agreements with a weighted-average borrowing rate of 5.08% as of the
end of the period and a weighted-average remaining maturity of 73 days. At
December 31, 1998, mortgage-backed securities pledged had an estimated fair
value of $136.2 million. At December 31, 1998, the repurchase agreements had
remaining maturities of between 69 and 74 days.
Interest Rate Swaps
FBR Asset enters into interest rate swap agreements to offset the potential
adverse effects of rising interest rates under certain short-term repurchase
agreements. The interest rate swap agreements are structured such that FBR
Asset receives payments based on a variable interest rate and makes payments
based on a fixed interest rate. The variable interest rate on which payments
are received is calculated based on the three-month LIBOR. FBR Asset's
repurchase agreements, which generally have maturities of 30 to 90 days, carry
interest rates that correspond to LIBOR rates for those same periods. The swap
agreements effectively fix FBR Asset's borrowing cost and are not held for
speculative or trading purposes. As a result of these factors, FBR Asset has
accounted for these agreements as hedges.
The fair value of interest rate agreements that qualify as hedges are not
recorded. The differential between amounts paid and received under the interest
rate swap agreements is recorded as an adjustment to the interest expense
incurred under the repurchase agreements. In the event of early termination of
an interest rate agreement and repayment of the underlying debt, a gain or loss
is recorded and FBR Asset receives or makes a payment based on the fair value of
the interest rate agreement on the date of termination.
At December 31, 1999 and 1998, FBR Asset was party to an interest rate swap
agreement that matures on June 1, 2001 and has a notional amount of $50 million,
and a fair value of $468,422 and $(910,535) at December 31, 1999, and December
31, 1998, respectively.
Investments in Equity Securities
Investments in securities that are listed on a national securities exchange (or
reported on the Nasdaq National Market) are stated at the last reported sale
price on the day of valuation. Listed securities for which no sale was reported
are stated at the mean between the closing "bid" and "asked" price on the day of
valuation. Other securities for which quotations are not readily available are
valued at fair value as determined by FBR Asset's investment adviser, Friedman,
Billings, Ramsey Investment Management, Inc. ("FBR Management"). FBR Management
may use methods of valuing securities other than those described above if it
believes the alternative method is preferable in determining the fair value of
such securities.
Consistent with the intention to have FBR Asset operate as a REIT, management
concluded that its investments in equity securities are being held for long-term
yield, capital appreciation, and cash flow. Accordingly, management has
classified such investments as available-for-sale.
F-28
<PAGE>
Realized gains and losses are recorded on the date of the transaction using the
specific identification method. The difference between the purchase price and
market price (or fair value) of investments in securities is reported as an
unrealized gain or loss and a component of comprehensive income.
Management regularly reviews any declines in the market value of its equity
investments for declines that are other than temporary. Such declines are
recorded in operations as a "recognized loss on available-for-sale securities".
Notes Receivable
As of December 31, 1999, FBR Asset held a $20 million note from Prime Retail,
Inc. and Prime Retail, L.P., ("Prime Retail") with an interest rate of 15%
per annum, that matures on June 30, 2000 subject to automatic extension to
December 31, 2000 in the absence of a default. The loan is secured by equity
interest in five subsidiaries of Prime L.P., which subsidiaries own commercial
real estate subject to mortgage debt. As of December 31, 1999, FBR Asset also
held a Short-Term Loan and Security Agreement with Prime Capital Holding, LLC
and Prime Capital Funding, Inc., together, ("Prime Capital"), which had a $7
million outstanding balance at December 31, 1999. The note accrues interest at
an annualized rate of 17% and is due on March 31, 2000. The note is secured by
100% equity interests in subsidiaries of Prime Capital which own Commercial
mortgage loans subject to "warehouse" indebtedness. Prime Capital is an
affiliate of Prime Retail, L.P.
Credit Risk
FBR Asset is exposed to the risk of credit losses on its portfolio of mortgage -
backed securities and notes receivable, such as the notes from Prime Retail and
Prime Capital referred to above. In addition, many of FBR Assets investments in
equity securities are in companies that are also exposed to the risk of credit
losses in their businesses.
FBR Asset seeks to limit its exposure to credit losses on its portfolio of
mortgage-backed securities by purchasing securities issued and guaranteed by
Freddie Mac, Fannie Mae, or Ginnie Mae. The payment of principal and interest
on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by
those respective agencies and the payment of principal and interest on the
Ginnie Mae mortgage-backed securities is backed by the full-faith-and-credit of
the U.S. Government. At December 31, 1999 and 1998, all of FBR Asset's
mortgage-backed securities have an implied "AAA" rating. FBR Assets notes
receivable and certain mortgage backed securities and other loans of companies
in which we invest are not issued or guaranteed by Freddie Mac, Fannie Mae or
Ginnie Mae.
Concentration Risk
Equity and debt investments, such as the Prime Capital and Prime Retail notes
referred to above, may also involve substantial amounts relative to FBR Asset's
total net assets and create exposure to issuers that are generally concentrated
in the REIT industry. These investments may include non-investment grade and
securities of privately held issuers with no ready markets. The concentration
and illiquidity of these investments expose FBR Asset to a significantly higher
degree of risk than is associated with more diversified investment grade or
readily marketable securities.
Cash and Cash Equivalents
All investments with original maturities of less than three months are cash
equivalents. As of December 31, 1999, cash and cash equivalents consisted of
$3.8 million of cash deposited in two commercial banks and $9.6 million in two
separate domestic money market funds. As of December 31, 1998, cash and cash
equivalents consisted of $14.4 million of cash deposited in two commercial banks
and $26.7 million in two separate domestic money market funds. The money market
funds invest primarily in obligations of the U.S. Government. The carrying
amount of cash equivalents approximates their fair value.
Comprehensive Income
Comprehensive income is a financial reporting methodology that includes certain
financial information that historically has not been recognized in the
calculation of net income. FBR Asset's only component of other comprehensive
income is the net unrealized loss on investments classified as available for
sale.
Net Income Per Share
FBR Asset presents basic and diluted earnings per share. Basic earnings per
share excludes potential dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that would share in earnings. The potentially dilutive securities did not
impact the computation of earnings per share for any period presented.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and
F-29
<PAGE>
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
Income Taxes
FBR Asset has elected to be taxed as a REIT under the Internal Revenue Code. To
qualify for tax treatment as a REIT, FBR Asset must meet certain income and
asset tests and distribution requirements. FBR Asset generally will not be
subject to federal income tax at the corporate level to the extent that it
distributes at least 95 percent of its taxable income to its shareholders and
complies with certain other requirements. Failure to meet these requirements
could have a material adverse impact on FBR Asset's results or financial
condition. Furthermore, because FBR Asset's investments include stock in other
REITs, failure of those REITs to maintain their REIT status could jeopardize FBR
Asset's qualification as a REIT. No provision has been made for income taxes in
the accompanying financial statements, as FBR Asset believes it has met the
requirements.
Reclassifications
Certain amounts in the financial statements as of December 31, 1998, have been
reclassified to confirm with 1999 presentation.
Recent Accounting Pronouncements
In 1998, Statement on Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
statement is effective for all fiscal years beginning after June 15, 2000, and
generally requires that an entity recognize derivative financial instruments as
assets or liabilities and measure them at fair value. FBR Asset is currently
evaluating the impact of SFAS No. 133, but does not expect that the adoption
will have a material impact on its financial condition or future results of
operations based on its current hedging strategies.
Note 3 Shareholders' Equity
On December 15, 1997, FBR Asset completed a private placement of equity capital.
FBR Asset received net proceeds of $189.7 million from the issuance of
10,218,999 shares of common stock.
On January 15, 1998, Friedman, Billings, Ramsey & Co., Inc. purchased 196,828
shares of FBR Asset for $3.7 million pursuant to a stock option issued in
connection with the private placement offering.
FBR Asset declared and recorded the dividends of $.05, $1.16 and $1.605 in 1997,
1998 and 1999, respectively.
In September 1998, the Board of Directors authorized the repurchase of up to
2,000,000 shares of FBR Asset's common stock. Through December 31, 1998, FBR
Asset had repurchased 1,872,300 shares for a cost of $24 million, or $12.86
average cost per share. On March 30, 1999, the Board of Directors authorized
the repurchase of up to an additional 2,000,000 shares of FBR Asset's common
stock. On December 16, 1999, the Board of Directors authorized the repurchase
of up to an additional 1,500,000 shares of FBR Asset's common stock. Between
December 31, 1998, and December 31, 1999, FBR Asset repurchased an additional
2,737,191 shares of its common stock at an average price of $13.57 per share.
FBR Asset had outstanding, as of December 31, 1999, and December 31, 1998,
1,021,900 options to purchase common stock. These options have terms of eight
to ten years and have an exercise price of $20 per share.
Under the FBR Asset's stock option plan, FBR Asset may grant, in the aggregate,
up to 155,000 tax qualified incentive stock options and non-qualified stock
options to its employees, directors or service providers. Options granted are
generally exercisable immediately and have a term of seven to ten years. As of
December 31, 1999, FBR Asset had granted 155,000 options under its stock option
plan.
FBR Asset accounts for its stock based compensation in accordance with SFAS No.
123, "Accounting For Stock Based Compensation". Pursuant to SFAS No. 123, FBR
Asset applies the provisions of Accounting Principles Board opinion No. 25,
"Accounting For Stock Issued to Employees", (APB No. 25) for stock options
issued to employees. Under APB No. 25, compensation expense is recorded to the
extent the fair market value of FBR Asset's stock exceeds the strike price of
the option on the date of grant. In addition and in accordance with the
disclosure requirements of SFAS No. 123, FBR Asset does provide pro forma net
income disclosures for options granted to employees as if the fair value method,
as defined in SFAS No. 123, had been applied for the purpose of computing
compensation expense. The impact of the issued and outstanding employee options
under the fair value method was not material to FBR Asset's net income or basic
and diluted net income per share as reported in the statement of income for the
year ended December 31, 1999. No employee options had been issued as of December
31, 1998.
The fair value of the option grant in 1999 was estimated on the grant date using
the following assumptions: average dividend yield of 8 percent; expected
volatility of 25 percent ; risk free interest rate of 6.1 percent; and expected
lives of 8.5 years. All options issued in 1999 are fully vested, have an
exercise price of $20 and a remaining contractual life of approximately 8 years.
F-30
<PAGE>
Note 4 Management and Performance Fees
FBR Asset has a management agreement with Friedman, Billings, Ramsey
Investment Management, Inc. ("FBR Management"), for an initial term expiring on
December 17, 1999 and a renewal expiring on December 17, 2000. FBR Management
performs portfolio management services on behalf of FBR Asset. Such services
include, but are not limited to, consulting with FBR Asset on purchase and sale
opportunities, collection of information and submission of reports pertaining to
FBR Asset's assets, interest rates, and general economic conditions, and
periodic review and evaluation of the performance of FBR Asset's portfolio of
assets.
FBR Management is entitled to a quarterly "base" management fee equal to the sum
of (1) 0.25 percent per annum (adjusted to reflect a quarterly period) of the
average invested mortgage assets of FBR Asset during each calendar quarter and,
(2) 0.75 percent per annum (adjusted to reflect a quarterly period) of the
remainder of the average invested assets of FBR Asset during each calendar
quarter. FBR Management also received options to purchase 1,021,900 shares FBR
Asset's common stock at $20 per share. The estimated value of these options was
$909,492, based on a discounted Black-Scholes valuation, and was amortized over
the initial term of the Management Agreement. FBR Management assigned options to
acquire 51,045 shares to BlackRock Financial Management, Inc. ("BlackRock") (see
below) in connection with the execution of the sub-management agreement
discussed below. The value of these options has been fully amortized in the
accompanying statements of income. In addition, FBR Management agreed to the
rescission of options to purchase 155,000 common shares in connection with the
establishment of FBR Asset's stock incentive plan.
FBR Management is also entitled to receive incentive compensation based on the
performance of FBR Asset. On December 31, 1998, and each calendar quarter
thereafter, FBR Management is entitled to an incentive fee calculated by
reference to the preceding 12 month period, FBR Management is entitled to an
incentive fee calculated as: funds from operations (as defined), plus net
realized gains or losses from asset sales, less the threshold amount (all
computed on a weighted average share outstanding basis), multiplied by 25
percent. The threshold amount is calculated as the weighted average per share
price of all equity offerings of FBR Asset, multiplied by a rate equal to the
ten-year U.S. Treasury rate plus five percent per annum. No incentive
compensation was earned during the periods presented.
FBR Management previously engaged BlackRock to manage FBR Asset's mortgage asset
investment program (the "Mortgage Portfolio") as a sub-adviser. BlackRock is a
majority owned subsidiary of PNC Bank Corporation who is a 4.9 percent owner of
FBR Management's parent company. As compensation for rendering services,
BlackRock was entitled to share the management fees of FBR Management,
calculated based on the average gross asset value managed by BlackRock, with a
minimum annual fee of $100,000, payable quarterly. The agreement was terminated
by FBR Management on February 14, 2000 and FBR Management entered into a new
agreement with Fixed Income Discount Advisory Company, Inc. ("FIDAC") on
February 14, 2000, to assume management of FBR Asset's Mortgage Portfolio as
sub-advisor. See Note 9 Subsequent Events.
Note 5 Related Parties
As of December 31, 1999, a wholly-owned subsidiary of Friedman, Billings,
Ramsey Group, Inc. ("FBR Group") owned 1,344,086 shares or 23.15% of the
outstanding common stock of FBR Asset. As of December 31, 1998, that same
subsidiary owned 1,344,086 or 15.73% of the outstanding common stock of FBR
Asset. FBR Group is the parent company of FBR Management and FBR & Co.
Note 6 Equity Investments
At December 31, 1999, FBR Asset's equity investments had an aggregate cost basis
of $57.5 million, a fair value of $49.6 million and unrealized losses of $7.9
million.
F-31
<PAGE>
As of December 31, 1998, FBR Asset's equity investments had an aggregate cost
basis of $81.2 million, fair value of $71.0 million, unrealized losses of $12.3
million, recognized losses of $6.6 million, and unrealized gains of $2.1
million.
<TABLE>
<CAPTION>
Amount of Market Value at Market Value at
Equity Investments Investment(1) December 31, 1999 December 31, 1998
- ------------------ ----------------- ----------------- -------------------
<S> <C> <C> <C>
Anthracite Capital, Inc. $10,084,268 $10,084,268 $12,358,170
Capital Automotive REIT 25,000,000 21,841,402 26,657,711
Chastain Capital Corporation - - 3,150,000(2)
Imperial Credit Commercial Mortgage
Inv. Corp. 10,413,000 10,237,500 8,437,500
Prime Retail, Inc. 1,201,317 694,688 1,211,844
Prime Retail, Inc., pfd 1,454,320 1,151,696 -
Resource Asset Investment Trust 5,292,516 3,725,717 3,790,325
Building One Services Corporation(3) 4,053,180 1,912,594 10,437,500
East-West Bank(4) - - 4,940,000
----------------- ----------------- -------------------
Total $57,498,601 $49,647,865 $70,983,050
================= ================= ===================
</TABLE>
(1) As of December 31, 1999.
(2) Reflects recognized loss of $6.6 million recorded in 1998 for other than
temporary decline in the value of Chastain Capital Corporation. In November
1999, FBR Asset received a liquidating dividend of $7.45 per share on
700,000 shares of Chastain and recognized a gain of $2,065,000.
(3) In April 1999, FBR Asset sold 297,341 shares of Building One Services
Corporation and realized a gain of $743,353.
(4) In September and October 1999, FBR Asset sold 520,000 shares of East-West
Bank and realized a gain of $788,838.
Anthracite Capital, Inc. ("AHR")
On March 27, 1998, FBR Asset purchased 716,846 shares of common stock in AHR
for $13.95 per share. AHR was organized in November 1997 to invest in a
diversified portfolio of multifamily, commercial and residential mortgage loans,
mortgage-backed securities, and other real estate-related assets in the United
States and non-U.S. markets. AHR seeks to achieve strong investment returns by
maximizing the spread of investment income earned on its real estate assets over
the cost of financing and hedging these assets and/or liabilities. AHR's common
stock is publicly traded.
During September and October 1998, FBR Asset purchased an additional 865,000
shares of AHR for an average cost of $9.64 per share. In December 1999, FBR
Asset recorded a charge to operations in the amount of $8,250,228 to reflect
management's determination that the decline in the market value of the stock was
other than temporary .
Capital Automotive REIT ("CARS")
On February 13, 1998, FBR Asset acquired 1,792,115 shares of common stock in
CARS for a price of $13.95 per share. CARS is a self-administered and self-
managed REIT formed to invest in the real property and improvements used by
operators of multi-site, multi-franchised motor vehicle dealerships and motor
vehicle-related businesses located in major metropolitan areas throughout the
United States. CARS primarily acquires real property and simultaneously leases
back this property for use by dealers. CARS' common stock is publicly traded.
Chastain Capital Corporation ("CHAS")
On April 29, 1998, FBR Asset purchased 700,000 shares of common stock in CHAS
for $13.95 per share. CHAS was organized in December 1997 to invest in
commercial and multifamily mortgage and real estate related assets located in
major metropolitan markets throughout the United States.
F-32
<PAGE>
In 1998, FBR Asset recorded a charge to operations in the amount of $6,615,000
to reflect management's determination that the decline in the market value of
the stock was other than temporary. On May 14, 1999, CHAS announced that its
Board of Directors had voted to sell all of CHAS' assets, either through a plan
of liquidation or through a sale of the company. On November 8, 1999, Chastain
Capital Corp. announced that its Board had declared an initial $7.45 per share
distribution to stockholders under a plan to liquidate itself. On November 29,
1999, FBR Asset received a liquidating dividend of $5.2 million or $7.45 per
share from Chastain and recognized a gain of $2,065,000. Chastain still has one
real estate asset remaining, a retail property Chastain plans to sell.
Imperial Credit Commercial Corporation ("ICMI")
In December 1997, FBR Asset purchased 900,000 shares of ICMI common stock for a
price of $14.50 per share. ICMI invests primarily in performing multifamily and
commercial term loans and interests in commercial and residential mortgage-
backed securities. ICMI also invests in various classes of non-investment grade
mortgage-backed securities. ICMI's common stock is publicly traded.
On July 22, 1999 Imperial Credit Commercial Mortgage and Imperial Credit
Industries announced a merger agreement under which Imperial Credit Industries
would acquire all of the outstanding shares of Imperial Credit Mortgage for a
cash purchase price of $11.50 per share, subject to increase under certain
circumstances. Completion of the merger is conditioned on, among other things,
approval by the shareholders of Imperial Credit Mortgage. On October 25, 1999,
after expiration of the tender offer period on October 22, 1999, during which
Imperial Credit Mortgage explored alternative transactions more favorable to its
shareholders, Imperial Credit Industries reported that the merger consideration
had been increased from $11.50 per share to approximately $11.57 per share. The
merger is expected to close on March 27, 2000. In the absence of other offers
at more favorable prices, management recorded a $2.6 million charge to earnings
for the transaction in the fourth quarter of 1999 representing the difference
between Imperial Credit Industries' most recent tender offer and FBR Asset's
cost basis.
Prime Retail, Inc. ("PRT")
In September 1998, FBR Asset purchased an aggregate of 122,300 shares of PRT,
for an average price of $9.74 per share. On October 18, 1998, FBR Asset
purchased an additional 1,200 shares of PRT's common stock for $7.90 per share.
PRT is a REIT engaged primarily in the ownership, development, construction,
acquisition, leasing, marketing and management of factory outlet centers. PRT's
common stock is publicly traded.
On April 22, 1999, FBR Asset purchased 78,400 shares of PRT's preferred stock
for a cost of $1,454,320 or $18.55 average cost per share. PRT's preferred
stock is publicly traded.
Resource Asset Investment Trust ("RAS")
On February 19, 1998, FBR Asset acquired 300,000 shares of common stock in RAS
for $15.33 per share. RAS's principal business activity is the acquisition
and/or financing of loans secured by mortgages on real property (or interests in
such loans) in situations that, generally, do not conform to the underwriting
standards of institution lenders or sources that provide financing through
securitization. RAS's common stock is publicly traded.
On June 24th and 25th, 1998, FBR Asset acquired an additional 44,575 shares
of RAS for an average price of $15.55 per share.
F-33
<PAGE>
Building One Services Corporation ("BOSS")
In December 1997, FBR Asset purchased 500,000 shares of BOSS (formerly
Consolidated Capital Corporation) common stock for $20.00 per share. BOSS was
founded in February 1997 to build consolidated enterprises through the
acquisition and integration of multiple businesses in one or more fragmented
industries. BOSS has undertaken to consolidate facilities management companies
and may select companies in this or related industries in which to make future
investments. BOSS's common stock is publicly traded. Pursuant to BOSS's tender
offer, which expired in April 1999, FBR Asset sold 297,341 of its BOSS common
shares for a price of $22.50 per share, or $6.7 million in April 1999.
East-West Bancorp ("EWB")
On June 30, 1998, FBR Asset purchased, 520,000 shares of EWB for $10.00 per
share. EWB's strategy is to become the premier commercial bank in California
serving the unique personal and business banking needs of customers engaged in
business and having family ties with or origins from the Asia Pacific region,
with experienced personnel having the language capability and cultural
sensitivity appropriate for the region. Beginning September 30, through October
25, 1999, FBR Asset sold its 520,000 shares of common stock in East West
Bancorp for $5,988,838 or $11.52 average per share.
Kennedy-Wilson, Inc. ("KWIC")
FBR Asset owns warrants to acquire 131,096 shares of Kennedy-Wilson common stock
at a price of $7.5526 per share. The warrants expire in June 2003. As of
December 31, 1999, the market price of Kennedy-Wilson common stock was $8.00 per
share.
Imperial Credit Industries, Inc. ("ICII")
On June 30, 1999, FBR Asset purchased 400,000 shares of ICII's
preferred stock for $25.00 per share. ICII is a commercial and consumer finance
holding company specializing in non-conforming residential mortgage banking,
business and consumer lending and commercial leasing.
On November 5th and 10th, Imperial Credit Industries redeemed the 400,000 shares
of Series B 14.5% cumulative preferred held by FBR Asset for $26.25 per share or
$10.5 million.
Note 9 Subsequent Events
On January 31, 2000, FBR Asset announced that its Board of Directors had
approved a special cash dividend of $.25 per share. The dividend was paid on
February 25, 2000, to shareholders of record at February 11, 2000.
On February 14, 2000, FBR Management terminated its management agreement with
BlackRock Financial Management, Inc., and engaged Fixed Income Discount Advisory
Company, Inc. ("FIDAC") to manage FBR Asset's mortgage asset investment program
as a sub-advisor. As compensation for rendering services, FIDAC will be
entitled to share the management fees of FBR Management, calculated based on the
average gross asset value managed by FIDAC, with a minimum annual fee of
$100,000 payable quarterly. The agreement may be terminated by either party
with thirty (30) days' advance notice.
F-34
<PAGE>
Financial Statements of FBR Technology
Venture Partners, L.P.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.......................... F-36
Statements of Assets and Liabilities as of
December 31, 1999 and 1998..................................... F-37
Schedule of Investments as of December 31, 1999................... F-38
Statements of Income (Loss) for the years ended
December 31, 1999 and 1998..................................... F-39
Statements of Changes in Net Assets
for the years ended December 31, 1999 and 1998................. F-40
Statements of Cash Flows for the years ended
December 31, 1999 and 1998..................................... F-41
Notes to Financial Statements..................................... F-42
</TABLE>
F-35
<PAGE>
Report of Independent Public Accountants
To the Partners of FBR Technology Venture Partners L.P.
(A Limited Partnership):
We have audited the accompanying statements of assets and liabilities of FBR
Technology Venture Partners L.P. as of December 31, 1999 and 1998, including the
schedule of investments as of December 31, 1999, and the related statements of
income, changes in net assets and cash flows for the years then ended. These
financial statements are the responsibility of the general partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FBR Technology Venture Partners
L.P., as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Vienna, Virginia
March 17, 2000
F-36
<PAGE>
FBR Technology Venture Partners L.P.
(A Limited Partnership)
Statements of Assets and Liabilities
As of December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets
1999 1998
------------- ------------
<S> <C> <C>
Investments in securities, at fair value; identified cost of $35,492,187
and $18,698,827 in 1999 and 1998, respectively $ 222,803,441 $ 19,771,216
Cash and cash equivalents 763,435 842,322
Due from affiliates - 34,338
Due from limited partners 101,030 -
Organization costs, net of $13,000 and $7,000 of accumulated
amortization in 1999 and 1998, respectively 17,000 23,000
------------- ------------
Total assets $ 223,684,906 $ 20,670,876
============= ============
Liabilities
Management fees payable $ - $ 719,365
Due to limited partners - 371,050
Accounts payable and accrued expenses 20,577 28,705
Due to affiliates 232,289 -
------------- ------------
Total liabilities 252,866 1,119,120
------------- ------------
Net assets $ 223,432,040 $ 19,551,756
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-37
<PAGE>
FBR Technology Venture Partners L.P.
(A Limited Partnership)
Schedule of Investments
As of December 31, 1999
<TABLE>
<CAPTION>
Beneficial
Shares Value
- ---------- ------------
<S> <C> <C>
Common Stock, United States Enterprises
Technology (75.2%)
3,495,000 Network Access Solutions, Inc. (43.9%) $ 98,034,750
1,476,591 LifeMinders.com, Inc. (28.6%) 63,954,848
577,271 CareerBuilder, Inc. (1.4%) 3,158,755
23,981 Proxicom, Inc. (1.3%) 2,981,138
-------------
Total common stock (cost $8,834,168) 168,129,491
Convertible Preferred Stock, United States Enterprises
Technology (24.5%)
1,785,960 webMethods, Inc. (9.9%) $ 22,074,466
1,984,128 VarsityBooks.com, Inc. (3.0%) 6,666,667
2,215,934 Riverbed Technologies, Inc. (2.8%) 6,293,253
272,556 Pathnet, Inc. (2.7%) 5,988,055
6,251,594 Intranets.com (1.5%) 3,496,734
1,736,186 Entevo Corporation (1.2%) 2,604,279
832,128 Call Technologies, Inc. (1.0%) 2,288,352
20,200 MarketSwitch Corporation (0.9%) 2,000,000
862,500 Iconixx Corporation (0.8%) 1,725,000
571,429 XYPOINT Corporation (0.7%) 1,537,144
-------------
Total convertible preferred stock (cost $26,658,019) 54,673,950
-------------
Total investments (cost $35,492,187) $ 222,803,441
=============
</TABLE>
The accompanying notes are an integral part of this schedule.
F-38
<PAGE>
FBR Technology Venture Partners L.P.
(A Limited Partnership)
Statements of Income (Loss)
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- -----------
<S> <C> <C>
Investment income:
Interest $ 59,027 $ 44,864
------------- -----------
Total income 59,027 44,864
------------- -----------
General and administrative expenses:
Management fees 1,527,397 1,335,198
Professional fees 41,531 63,343
Interest expense 139,600 58,477
Administrative fees and other 9,080 8,905
------------- -----------
Total expenses 1,717,608 1,465,923
------------- -----------
Net investment loss (1,658,581) (1,421,059)
Unrealized appreciation of investments 186,238,865 1,058,001
------------- -----------
Net income (loss) $ 184,580,284 $ (363,058)
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
FBR Technology Venture Partners L.P.
(A Limited Partnership)
Statements of Changes in Net Assets
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Carried
Interest
Limited General Limited
Partner Partner Partners Total
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Net assets, December 31, 1997 $ 100 $ 68,711 $ 5,793,529 $ 5,862,340
Capital contributions - 89,575 13,962,899 14,052,474
Net loss - (3,793) (359,265) (363,058)
------------ ----------- ------------- -------------
Net assets, December 31, 1998 100 154,493 19,397,163 19,551,756
Capital contributions - 152,470 19,147,530 19,300,000
Net income - 1,458,185 183,122,099 184,580,284
Special allocation 34,325,685 (274,030) (34,051,655) -
------------ ----------- ------------- -------------
Net assets, December 31, 1999 $ 34,325,785 $ 1,491,118 $ 187,615,137 $ 223,432,040
============ =========== ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
FBR Technology Venture Partners L.P.
(A Limited Partnership)
Statements of Cash Flows
For the Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 184,580,284 $ (363,058)
Adjustments to reconcile net income (loss) to net
cash used in operating activities -
Amortization 6,000 6,000
Purchases of investments (16,793,360) (14,440,494)
Change in unrealized appreciation of investments (186,238,865) (1,058,001)
Changes in assets and liabilities -
Due from affiliates 34,338 (34,338)
Management fees payable (719,365) 596,230
Due to limited partners (371,050) 371,050
Due from limited partners (101,030) -
Accounts payable and accrued expenses (8,128) 3,705
Due to affiliates 232,289 (129,900)
------------- -----------
Net cash used in operating activities (19,378,887) (15,048,806)
Cash flows from financing activities:
Capital contributions 19,300,000 14,052,474
------------- -----------
Net decrease in cash and cash equivalents (78,887) (996,332)
Cash and cash equivalents, beginning of period 842,322 1,838,654
------------- -----------
Cash and cash equivalents, end of period $ 763,435 $ 842,322
============= ===========
Supplemental cash flow information:
Cash paid for interest $ 115,920 $ 58,477
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
FBR Technology Venture Partners L.P.
(A Limited Partnership)
Notes to Financial Statements
As of December 31, 1999 and 1998
1. Organization:
FBR Technology Venture Partners L.P. (the "Partnership") is a limited
partnership formed on August 12, 1997, to engage in the business of investing in
securities. The Partnership was organized under the laws of the state of
Delaware. Operations commenced on November 1, 1997. The Partnership will
continue to operate until the earlier of December 31, 2007, or the date the
Partnership is dissolved as provided for in the Partnership Agreement.
2. Management Fees and Other Transactions With Affiliates:
FBR Venture Capital Managers, Inc. ("FBRVCM") is the corporate general partner
and carried interest limited partner of the Partnership. Friedman, Billings,
Ramsey Group, Inc. ("FBRG") is the ultimate parent company of FBRVCM. In
addition, certain officers and directors of FBRG are limited partners of the
Partnership.
At the beginning of each calendar quarter, FBRVCM is entitled to receive a
management fee for management of the businesses and affairs of the Partnership.
The fee is computed as 2.5 percent (on an annualized basis) of the total funds
committed to the Partnership. For each calendar quarter beginning after the end
of the Investment Period (July 31, 2003), the fee is computed as the lesser of
2.5 percent (on an annualized basis) of the total funds committed to the
Partnership, or an amount equal to 4.0 percent (on an annualized basis) of the
aggregate acquisition costs of the portfolio investments and any bridge loans
provided by limited partners and held as of the end of the preceding quarter.
3. Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of income and expenses during the reporting periods
and the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from those estimates.
Security Valuation
The Partnership's investments as of December 31, 1999 and 1998, consisted of
equity investments in securities of development-stage and early-stage, privately
and publicly held, technology companies. The disposition of these investments
may be restricted due to lack of a ready market (in the case of privately held
companies) or due to contractual or regulatory restrictions on disposition (in
the case of publicly held companies). In addition, these securities may
represent significant proportions of the issuer's equity and carry special
contractual privileges not available to other security holders. As a result of
these factors, precise valuation for the private companies is a matter of
judgment, and the determination of fair
F-42
<PAGE>
value must be considered only an approximation and may vary from the amounts
that could be realized if the investment was sold. In the absence of additional
contemporaneous, third party equity transactions, the general partner has
determined that for investments in private companies, the cost is the best
estimate of fair value. All public companies are valued based on the December
31, 1999 closing price less a discount of up to 25% to reflect restrictions on
liquidity and marketability.
Income Recognition
For securities held, the difference between the purchase price and fair value of
investments in securities is included as unrealized appreciation or depreciation
of investments in the accompanying statements of income.
Income Taxes
No provision for income taxes is made in the Partnership's financial statements
since all taxable income and loss is allocated to the partners.
Organization Costs
Costs relating to the formation of the Partnership have been deferred and are
being amortized over five years using the straight-line method.
Cash Equivalents
For purposes of the statement of cash flows, the Partnership considers cash in
banks (including escrow accounts) and all highly liquid investments with a
maturity of three months or less to be cash equivalents.
Capital Accounts, Allocations, and Expenses
In addition to the limited partners, the general partner may, at its discretion,
and without consent of any other partners, admit employees of FBRVCM and its
affiliates as "FBR Employee Limited Partners." The capital accounts of FBR
Employee Limited Partners are treated the same as other limited partners, except
in regard to items (b) and (c), below. At the end of each fiscal quarter, the
capital account of each partner is adjusted for the allocation of partner
distributions as defined in the Partnership Agreement:
a) For each fiscal quarter all gains and losses are allocated among the
partners in accordance with their respective percentage interests.
b) Under the terms of the Partnership Agreement, after allocations to the
limited partners in amounts totaling their commitments, the general partner
is entitled to receive allocations in an amount equal to 20 percent carried
interest of the allocations received by the limited partners.
c) In succeeding periods, the carried interest limited partner receives 20
percent of the allocations of the Partnership and the remaining 80 percent
is allocated to the limited partners on a pro-rata basis.
Distributions and Withdrawals
The Partnership, at the sole discretion of the general partner, may make
distributions of cash or securities to all partners in proportion to their
respective capital accounts. The Partnership has no obligation to make any
distributions, and the Partnership made no distributions in 1999 and 1998.
F-43
<PAGE>
The limited partners have no rights to demand the return of their capital
contributions unless they have contributed in excess of their pro-rata share of
capital.
4. Partner Capital Commitments:
The limited partners initially contributed 2 percent of their respective
committed amounts in cash at the date operations of the Partnership commenced.
The limited partners have agreed, upon 15 business days written notice from the
general partner, to contribute additional cash to the Partnership (a "Capital
Call"), up to that partner's capital commitment, provided that such Capital
Calls shall apply to all limited partners, pro-rata, in proportion to their
respective partnership interests. In 1998, certain limited partners made
contributions to the Partnership not eligible for allocation to their accounts
until 1999. Accordingly, these amounts have been presented as "Due to limited
partners" in the accompanying statements of assets and liabilities.
5. Borrowings:
In July 1999, the Partnership and FBR Technology Venture Partners II (QP), L.P.
established a $12,000,000 line-of-credit with an expiration date of June 22,
2000, to better serve all of the Partnerships' borrowing needs. The interest
rate is based on the Prime Rate plus 1/2 percent per annum. During 1999, the
Partnership drew down approximately $9.7 million, which resulted in interest
expense of $139,600. As of December 31, 1999, the Partnership had no outstanding
borrowings under this line-of-credit.
6. Financial Instruments With Off-Balance-Sheet Risk and Concentrations of
Credit Risk:
The Partnership has invested primarily in the United States, and has not entered
into any transactions involving financial instruments, such as financial
futures, forward contracts, swaps and derivatives, which would expose the
Partnership to related off-balance-sheet risk.
Market risk to the Partnership is caused by illiquidity and volatility in the
markets in which the Partnership would seek to sell its financial instruments.
The Partnership's concentration of investments in the technology industry and a
limited number of companies may result in the Partnership being exposed to a
risk of loss that is greater than it would be if the Partnership mitigated such
risks through a greater diversification or investment in securities for which
there is a ready public market.
Positions taken, commitments and unrealized appreciation on investments made by
the Partnership may involve substantial amounts relative to its net assets and
significant exposure to individual issuers and businesses.
7. Subsequent Events
On January 26, 2000, Proxicom, Inc. (NASDAQ - PXCM) announced that its Board of
Directors declared a two-for-one stock split of its outstanding common shares to
be effected in the form of a stock dividend effective February 25, 2000. The
split applied to shareholders of record at the close of business on February 9,
2000. Subsequent to the split, the Partnership owned 47,962 shares of Proxicom,
Inc. common stock. All of these shares were sold by the Partnership on March 6,
2000. The proceeds from the sale were $2,224,969, resulting in a realized gain
of $2,124,969.
On February 9, 2000, a merger, treated as a pooling of interests, between
BindView Development Corporation (NASDAQ - BVEW) and Entevo Corporation was
completed. All of the 1,736,186 Entevo
F-44
<PAGE>
Corporation shares that the Partnership owned at December 31, 1999 were
exchanged for 121,856 shares of common stock in BindView Development
Corporation. Of the 121,856 shares received by the Partnership, approximately
9.9 percent, or 12,065 shares will be escrowed for one year. On January 26,
2000, BindView Development Corporation announced that its Board of Directors
declared a two-for-one stock split, effective February 17, 2000. Subsequent to
the split, the Partnership owned 243,712 shares of BindView Development
Corporation common stock, of which 24,130 shares are escrowed until February
2001. All of the Partnership's shares of common stock in BindView Development
Corporation are restricted until results covering at least 30 days of combined
operations have been published by BindView Development Corporation, in the form
of a quarterly earnings report, an effective registration statement filed with
the SEC, a report to the SEC on the Form 10-K, 10-Q or 8-K, or any other public
filing or announcement which includes the combined results of operations.
On February 10, 2000, Aether Systems (NASDAQ - AETH) announced that it had
agreed to issue approximately 5.4 million shares of its common stock in exchange
for all shares of Riverbed Technologies, Inc. On March 6, 2000, Aether Systems
announced the completion of the Riverbed acquisition. In accordance with the
terms of the agreement, the Partnership received 935,344 shares of Aether
Systems common stock in the transaction. On March 17, 2000, Aether Systems
completed a secondary offering in which the Partnership sold an aggregate of
23,384 shares. The proceeds from the sale were approximately $4,600,000,
resulting in a realized gain of approximately $4,500,000. All of the remaining
shares will be subject to an underwriter's lock-up until October 21, 2000.
On February 11, 2000 LifeMinders.com, Inc. (NASDAQ - LFMN) completed a secondary
offering in which the Partnership sold an aggregate of 147,659 shares,
representing approximately 10 percent of the Partnership's ownership in
LifeMinders.com, Inc. The proceeds from the sale were $4,629,113, resulting in a
realized gain of $4,510,986. The Partnership's remaining shares of common stock
are subject to an underwriter's lock-up until May 18, 2000.
On February 11, 2000, webMethods, Inc. (NASDAQ-WEBM) completed an Initial Public
Offering of 4,100,000 common shares at a price of $35 per share. Subsequent to
the offering, the Partnership owned 2,746,822 common shares, or 9.1 percent of
the webMethods, Inc. outstanding shares of common stock. These shares are
subject to an underwriter's lock-up until August 9, 2000.
On February 15, 2000 VarsityBooks.com, Inc. (NASDAQ - VSTY) completed an Initial
Public Offering of 4,075,000 common shares at a price of $10 per share.
Immediately after the offering, the Partnership owned 992,063 shares, or 6.4
percent, of VarsityBooks.com, Inc. common stock, subject to an underwriter's
lock-up until August 14, 2000.
F-45
<PAGE>
Exhibit 2.01
PURCHASE AND SALE AGREEMENT
by and among
MONEY MANAGEMENT ASSOCIATES, INC.,
MONEY MANAGEMENT ASSOCIATES (LP), INC.,
MONEY MANAGEMENT ASSOCIATES, L.P.,
RUSHMORE TRUST AND SAVINGS, FSB,
DANIEL L. O'CONNOR
and
THE LIMITED PARTNERS OF MONEY MANAGEMENT ASSOCIATES, L.P.
NAMED HEREIN
Dated: October 20, 1999
<PAGE>
PURCHASE AND SALE AGREEMENT
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I SALE AND PURCHASE OF INTERESTS AND STOCK......................... 2
1.1. Sale and Purchase.............................................. 2
1.2. Time and Form of Delivery...................................... 3
1.3. Pre-Closing Liquidation and Distributions Closing.............. 3
1.4. Purchase Price................................................. 3
ARTICLE II REPRESENTATIONS AND WARRANTIES OF BUYERS AND FBR................ 4
2.1. Organization and Authority..................................... 4
2.2. Authorization.................................................. 4
2.3. Accuracy of Representations and Documents...................... 5
2.4. Brokers and Finders............................................ 5
2.5. Litigation and Other Proceedings............................... 5
2.6. Certain Information Provided by Buyers......................... 6
2.7. No Unfair Burden............................................... 6
2.8. Financial Ability; Regulatory Matters.......................... 6
2.9. No Other Representations or Warranties......................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF MMA, RTS AND PRINCIPAL
SELLERS........................................................ 7
3.1. Organization and Authority..................................... 7
3.2. Authorization.................................................. 7
3.3. Capitalization of MMA; Beneficial Ownership.................... 8
3.4. Accuracy of Representations and Documents...................... 9
3.5. Certain Information Provided by MMA, RTS, each
Subsidiary and each Fund.................................... 9
3.6. Brokers and Finders............................................ 10
3.7. Contracts...................................................... 10
3.8. No Defaults under Contracts or Agreements...................... 11
3.9. Real Estate and Assets......................................... 11
3.10. Assets Under Management........................................ 13
3.11. Financial Statements........................................... 14
3.12. Taxes.......................................................... 15
3.13. Loans; Accounts Receivable..................................... 16
3.14. Absence of Certain Changes..................................... 17
3.15. Ordinary Course................................................ 18
3.16. Banking Relations.............................................. 18
i
<PAGE>
3.17. Intellectual Property.......................................... 18
3.18. Litigation..................................................... 19
3.19. Business: Registrations and Compliance with Laws............... 19
3.20. Insurance...................................................... 21
3.21. Copies of Documents............................................ 21
3.22. Transactions with Interested Persons........................... 21
3.23. Employee Benefit Programs...................................... 21
3.24. Officers and Employees......................................... 24
3.25. Non-Foreign Status............................................. 25
3.26. Transfer of Interests, Stock or Subsidiary Stock............... 25
3.27. No Unfair Burden............................................... 25
3.28. Additional Representations and Warranties relating
to each Fund................................................ 25
3.29. Absence of Certain Changes..................................... 28
ARTICLE IV ADDITIONAL REPRESENTATIONS AND WARRANTIES OF SELLERS............ 29
4.1. Ownership of Interests.......................................... 29
4.2. Authorization................................................... 30
ARTICLE V CONDUCT OF BUSINESS PRIOR TO THE CLOSING.......................... 30
5.1. Conduct Prior to Closing........................................ 30
5.2. Consents and Approvals.......................................... 34
ARTICLE VI COMPLIANCE WITH FEDERAL SECURITIES LAWS.......................... 34
6.1. Management Contract; Proxy Statement............................ 34
6.2. Required Actions................................................ 35
6.3. Section 15(f)................................................... 35
ARTICLE VII COVENANTS....................................................... 36
7.1. Current Information............................................. 36
7.2. Access.......................................................... 37
7.3. Information..................................................... 37
7.4. Qualification of each Fund...................................... 38
7.5. Forms........................................................... 38
7.6. Exclusivity..................................................... 38
7.7. Taxes........................................................... 39
7.8. Waiver.......................................................... 39
7.9. Regulatory Matters.............................................. 40
7.10. Proxy Statement................................................. 40
7.11. Press Releases, Etc............................................. 41
7.12. Minority Stock.................................................. 41
7.13. Tax Cooperation................................................. 41
ii
<PAGE>
7.14. Name Change..................................................... 41
ARTICLE VIII CONDITIONS..................................................... 42
8.1. Conditions to Each Party's Obligations to Consummate............ 42
8.2. Conditions to Obligation of Buyers to Consummate................ 43
8.3. Conditions to Obligation of MMA to Consummate................... 46
ARTICLE IX INDEMNIFICATION AND REMEDIES..................................... 48
9.1. No Waivers...................................................... 48
9.2. Indemnification................................................. 48
9.3. Claims Procedures............................................... 50
ARTICLE X TERMINATION....................................................... 52
10.1. Termination..................................................... 52
10.2. Effect of Termination and Abandonment........................... 53
ARTICLE XI GENERAL PROVISIONS............................................... 53
11.1. Survival of Representations, Warranties and Agreements.......... 53
11.2. Notices......................................................... 53
11.3. Counterparts.................................................... 54
11.4. Governing Law................................................... 54
11.5. Expenses........................................................ 55
11.6. Waiver, Amendment............................................... 55
11.7. Entire Agreement; No Third-Party Beneficiaries; Etc............. 56
11.8. Assignment...................................................... 56
11.9. Further Assurances.............................................. 56
11.10. Consent to Jurisdiction......................................... 56
11.11. Seller Representative........................................... 56
11.12. Title Insurance................................................. 58
11.13. Survey.......................................................... 58
11.14. Tenant Estoppel Certificates.................................... 59
11.15. Non-Disturbance Agreement....................................... 59
iii
<PAGE>
Schedules
- ---------
Schedule 1.1 Capitalization, Beneficial Ownership and Allocations
Schedule 3.1 Subsidiary Organization; Foreign Qualifications
Schedule 3.2(b) Noncontravention
Schedule 3.3 Capitalization; Beneficial Ownership
Schedule 3.7 Contracts and Agreements
Schedule 3.7(c) Consent for Assignment
Schedule 3.9(a) Real Estate
Schedule 3.9(b) Assets
Schedule 3.9(c) Compliance with Environmental Laws
Schedule 3.10 Assets Under Management; Mutual Fund Agreements
Schedule 3.11 Financial Statements
Schedule 3.12 Taxes
Schedule 3.13 Loans; Accounts Receivable
Schedule 3.14 Absence of Certain Changes
Schedule 3.16 Banking Relations
Schedule 3.18 Litigation
Schedule 3.19 Regulatory Agreements
Schedule 3.20 Insurance
Schedule 3.22 Transactions with Interested Persons
Schedule 3.23 Employee Benefit Programs
Schedule 3.24(a) Officers and Employees
Schedule 3.24(b) Employment Arrangements
Schedule 3.28(a) Compliance with Laws
Schedule 3.28(c) Restrictions
Schedule 3.28(h) Fund Litigation
Schedule 3.28(i) Compliance with Laws
Schedule 3.29(h) Accounting Policies
Schedule 4.1(b) Noncontravention
Schedule 6.2 Fund Service Agreements
Schedule 7.5 Broker-Dealer Registration
iv
<PAGE>
Exhibits
- --------
Exhibit 1.2(a) Form of Assignment of General Partnership Interest
Exhibit 1.2(b) Form of Assignment of Limited Partnership Interest
Exhibit 1.4 Form of Note, Escrow Agreement and Deed of Trust
Exhibit 6.1(a) Form of New Management Contract
Exhibit 6.2 Form of Fund Service Agreements
Exhibit 8.2(c) Form of Consulting and Noncompetition Agreement
Exhibit 8.2(f) Form of Opinion of Counsel to MMA and Sellers
Exhibit 8.2(g) Form of Opinion of Counsel to each Fund
Exhibit 8.3(e) Form of Opinion of Counsel to Buyers
v
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (the "Agreement"), for (i) all of the
outstanding interests ("Interests") of Money Management Associates, L.P., a
District of Columbia limited partnership ("MMA") and the controlling shareholder
of Rushmore Trust and Savings, FSB, a federal stock savings bank ("RTS"), and
(ii) all of the outstanding capital stock of RTS (the "Stock") not owned by MMA
(the "Minority Stock"), made this 20th day of October, 1999, by and among MMA,
RTS, Money Management Associates, Inc., a Delaware corporation ("MMA Buyer"),
Money Management Associates (LP), Inc., a Delaware corporation ("LP Buyer" and,
together with MMA Buyer, the "Buyers"), Daniel L. O'Connor, the sole general
partner of MMA (the "General Partner") and the owner of all of the general
partnership interest in MMA (the "General Partnership Interest"), the owners of
all of the outstanding limited partnership interests of MMA (the "Limited
Partnership Interests") named on Schedule 1.1 (collectively, the "Limited
------------
Partners" and, each individually a "Limited Partner" and, together with the
General Partner, the "Sellers" and each individually a "Seller") and, solely for
purposes of Article II and Sections 1.4, 10.2 and 11.5, Friedman, Billings,
---------- ------------------ ----
Ramsey Group, Inc., a Virginia corporation ("FBR").
Background
----------
A. MMA is registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), as an investment adviser and (i) provides or
procures advisory and/or other compliance and administrative services to The
Rushmore Fund, Inc., Fund for Tax-Free Investors, Inc., Fund for Government
Investors and American Gas Index Fund, Inc. (each a "Fund" and collectively, the
"Funds"), each of which is a registered investment company under the Investment
Company Act of 1940, as amended (the "Investment Company Act"); and (ii)
provides or procures compliance and administrative services for the Cappiello-
Rushmore Trust. MMA currently serves as investment adviser to the Funds
pursuant to management contracts between the Funds and MMA, as listed on
Schedule 3.10 (the "Management Contracts").
- -------------
B. MMA is a savings and loan holding company and is the controlling
shareholder of RTS.
C. RTS, a federal savings bank, provides, among other things,
directly or indirectly, transfer agency, shareholder servicing and custodial and
portfolio accounting services to the Funds, the Cappiello-Rushmore Trust,
Navellier Series Fund and Navellier Performance Funds, and trust and accounting
services to other entities.
D. Each of MMA and RTS is registered as a transfer agent under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
E. Sellers are the owners of all of the Interests, of which Daniel L.
O'Connor, owns 100% of the General Partnership Interest and Daniel L. O'Connor,
Martin O'Connor and
<PAGE>
John Cralle (the "Principal Sellers") own, in the aggregate,
90.0% of the Limited Partnership Interests. MMA Buyer desires to purchase from
the General Partner, and the General Partner desires to sell to MMA Buyer, 100%
of the General Partnership Interest, and LP Buyer desires to purchase from the
Limited Partners, and the Limited Partners desire to sell to LP Buyer, 100% of
the Limited Partnership Interests, all upon the terms and conditions set forth
in this Agreement. MMA is the owner of all of the Stock other than the Minority
Stock. The General Partner and certain other stockholders (the "Additional
Stockholders" and, together with MMA and the General Partner, the
"Stockholders") are the beneficial and record owners of all of the Minority
Stock. MMA Buyer desires to purchase the Minority Stock upon the terms and
conditions set forth in this Agreement.
F. MMA is the owner of all of the issued and outstanding capital
stock (the "Subsidiary Stock") of Rushmore Investment Brokers, Inc., a Delaware
corporation ("RIB") and Rushmore Services, Inc., a Maryland corporation ("RSI"
and together with RIB, the "Subsidiaries").
G. FBR has agreed to become a party to this Agreement for the limited
purposes of making certain representations and warranties and agreeing to
unconditionally guarantee (i) timely reimbursement to MMA, or direct payment, of
the MMA Transaction Expenses (as hereinafter defined), (ii) payment of MMA
Liquidated Damages (as hereinafter defined) to MMA, if any, from MMA Buyer
pursuant to this Agreement, and (iii) payment and performance of the Note (as
hereinafter defined).
Terms
-----
In consideration of the premises and the mutual promises hereinafter
set forth and intending to be legally bound, the parties hereby agree as
follows:
ARTICLE I
SALE AND PURCHASE OF INTERESTS AND STOCK
1.1. Sale and Purchase.
-----------------
Subject to the terms and conditions set forth in this Agreement, at
the closing of the transactions contemplated by this Agreement (the "Closing"),
(a) the General Partner shall sell, transfer, assign and deliver to MMA Buyer,
and MMA Buyer shall purchase from the General Partner, the General Partnership
Interest set forth on Schedule 1.1, free and clear of any liens, security
------------
interests, charges, encumbrances, claims, pledges, equities, options,
restrictions, assignments or other transfers of rights or obligations thereunder
("Liens"), (b) the Limited Partners shall sell, transfer, assign and deliver to
LP Buyer, and LP Buyer shall purchase from the Limited Partners, the Limited
Partnership Interests set forth on Schedule 1.1, which together with the General
------------
Partnership Interest represent all of the outstanding Interests, free and clear
of any Liens and (c) the General Partner shall sell, transfer, assign and
deliver to MMA Buyer, and
2
<PAGE>
MMA Buyer shall purchase from the General Partner, the Minority Stock owned by
the General Partner as set forth on Schedule 1.1, representing all of the
------------
outstanding Stock other than the Stock owned beneficially and of record by MMA
and the Additional Stockholders, free and clear of any Liens. The Stock owned by
MMA is also set forth on Schedule 1.1 and is owned beneficially and of record by
------------
MMA, free and clear of any Liens.
1.2. Time and Form of Delivery
-------------------------
The Sellers shall transfer, assign and deliver the Interests by
delivering to MMA Buyer and LP Buyer, respectively, at the Closing, duly
executed Assignments of Partnership Interest in the forms of Exhibit 1.2(a)
--------------
(General Partnership Interest) and Exhibit 1.2(b) (Limited Partnership
--------------
Interests) and such other appropriate instruments of transfer reasonably
satisfactory in form and substance to MMA Buyer and LP Buyer (as the case may
be). The General Partner and, to the extent applicable, the Additional
Stockholders shall transfer, assign and deliver the Minority Stock by delivering
to MMA Buyer at the Closing duly executed certificates representing the Minority
Stock accompanied by stock powers duly endorsed in blank or duly executed
instruments of transfer and such other appropriate instruments of transfer
reasonably satisfactory in form and substance to MMA Buyer.
1.3. Pre-Closing Liquidation and Distributions; Closing.
--------------------------------------------------
(a) Prior to the Closing, (i) MMA shall liquidate and dissolve RSI and
distribute to MMA all of RSI's then current assets including any tax
benefit relating to the net operating loss carryovers of RSI, (ii) RIB
shall distribute all of its then current assets to MMA other than $5,000 in
cash, and (iii) MMA shall distribute all of its then current assets
(including those received from RSI and RIB) to Sellers which then current
assets shall consist solely of cash, notes and accounts receivable and the
desks and computers then used by the General Partner, Martin O'Connor and
John Cralle; provided, however, no claims or rights against MMA, RTS or RIB
shall be distributed hereunder. Other than the current assets described in
the preceding sentence, Buyers shall acquire all right, title and interest
in and to all of material tangible and intangible assets of MMA used in the
business of MMA, RTS and RIB as currently conducted.
(b) The Closing shall take place at the offices of Dechert Price & Rhoads, 1775
Eye Street, N.W., Washington, D.C. at 10:00 a.m., Eastern time, on the
first business day of the calendar month next following the satisfaction or
waiver of the conditions set forth in Article VIII or at such other time as
the parties may agree (the "Closing Date"). The Closing shall be deemed
effective as of 9:00 a.m., Eastern time, on the Closing Date.
1.4. Purchase Price.
--------------
(a) On the Closing Date, Sellers shall sell, transfer and deliver to MMA Buyer
and LP Buyer, and MMA Buyer and LP Buyer, shall purchase from Sellers the
General Partnership Interest and the Limited Partnership Interests,
respectively, in exchange for an amount in immediately available funds
equal to Seventeen Million Five Hundred Thousand
3
<PAGE>
Dollars ($17,500,000) less the book value of the Minority Stock (the
"Minority Stock Purchase Price") as of the day immediately preceding the
Closing Date as reasonably determined by the parties based on the current
book value of the Minority Stock of $ , adjusted to reflect any
----------
changes occurring in the ordinary course of business (the "Initial
Payment") and an installment note of MMA Buyer (the "Note," together with
the Initial Payment, the "Purchase Price for the Interests") and
unconditionally guaranteed as to payment and performance by FBR in the
principal amount of Nine Million Seven Hundred Thousand Dollars
($9,700,000) and secured by all of the Stock pursuant to an escrow
agreement to be entered into among MMA Buyer, MMA, the Sellers and PNC
Bank, National Association, as escrow agent (the "Escrow Agreement") and by
a first indemnity deed of trust on land and improvements owned by RTS and
known as 4916, 4918, 4920 and 4922 Fairmont Avenue, Bethesda, MD (the "Deed
of Trust"). Each of the Note, the Pledge and Security Agreement and the
Deed of Trust shall be in the form attached as Exhibit 1.4.
-----------
(b) On the Closing Date, the General Partner and the Additional Stockholders,
to the extent applicable, shall sell, transfer and deliver to MMA Buyer,
and MMA Buyer shall purchase from the General Partner and the Additional
Stockholders, to the extent applicable, the Minority Stock, in exchange for
the Minority Stock Purchase Price in immediately available funds.
(c) On the Closing Date, the Purchase Price for the Interests shall be
allocated among the Sellers as set forth in Schedule 1.1.
------------
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF BUYERS AND FBR
Buyers and FBR, jointly and severally, represent and warrant to MMA and
Sellers as follows:
2.1. Organization and Authority.
--------------------------
Each of the Buyers and FBR is duly organized under the laws of and in
good standing in the jurisdiction of its incorporation, and has (i) all
necessary power, right and authority to carry out its obligations under this
Agreement, to own its properties and assets, and to conduct its business, and
(ii) all necessary governmental authorizations to own or lease its properties
and assets and to conduct its business as currently conducted.
2.2. Authorization.
-------------
(a) This Agreement and each document, agreement and instrument to be executed
by Buyers or FBR (as the case may be) pursuant to or as contemplated by
this Agreement, has been duly authorized, by Buyers or FBR (as the case may
be) and no further proceedings on the part of Buyers or FBR (as the case
may be) are necessary to authorize this Agreement and the transactions
contemplated hereby and thereby. This Agreement and each
4
<PAGE>
document, agreement and instrument to be executed by Buyers or FBR (as the
case may be) pursuant to or as contemplated by this Agreement, when so
executed and delivered, shall constitute the legal, valid and binding
obligation of each Buyer or FBR (as the case may be) enforceable against it
in accordance with its respective terms.
(b) Neither the execution, delivery and performance of this Agreement and each
document, agreement and instrument to be executed by each Buyer or FBR (as
the case may be) pursuant to or as contemplated by this Agreement nor the
consummation by each Buyer or FBR of the transactions contemplated hereby
and thereby, will (i) violate, conflict with, or result in a breach of any
provisions of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a
right of termination or acceleration under, or the creation of any Lien
upon any of the properties or assets of any Buyer or FBR under any of the
terms, conditions or provisions of (x) the organizational documents or
bylaws of any Buyer or FBR or (y) any note, bond, mortgage, indenture, deed
of trust, license, lease, agreement or other instrument or obligation to
which any Buyer or FBR may be bound, or to which any Buyer or FBR or the
properties or assets of any Buyer or FBR may be subject, or (ii) violate
any judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to any Buyer or FBR or to any of the properties or
assets of any Buyer or FBR.
(c) Except as set forth in Sections 6.1 and 6.2 or to, with or of the OTS or
--------------------
other banking or regulatory authority, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any regulatory
authority or other person is necessary for the consummation by Buyers or
FBR of the transactions contemplated by this Agreement.
2.3. Accuracy of Representations and Documents.
-----------------------------------------
No representation, warranty or certification made by or on behalf of
Buyers or FBR in this Agreement or any certificate provided for under this
Agreement is false or misleading in any material respect or contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained herein or therein not misleading.
2.4. Brokers and Finders.
-------------------
None of Buyers or FBR or any of their respective officers, directors or
employees has employed any broker or finder or incurred any liability for any
financial advisory fees, brokerage fees, commissions or finder's fees, and no
broker or finder has acted, directly or indirectly, for Buyers or FBR (or any of
their respective officers, directors or employees) in connection with this
Agreement or the transactions contemplated hereby.
2.5. Litigation and Other Proceedings.
--------------------------------
There is no litigation or action, suit, proceeding or investigation at
law or in equity pending or, to the knowledge of Buyers and FBR, threatened in
any court or before or by any federal, state, municipal or other governmental
department, commission, bureau, board,
5
<PAGE>
agency or instrumentality, regulatory or self-regulatory body, domestic or
foreign (a "Governmental Authority") or before any arbitrator, by or against any
Buyer or FBR relating to their activities, or any event, circumstance or
condition (i) affecting any Buyer or FBR which would prevent the consummation of
the transactions contemplated by this Agreement (a "Buyer Material Adverse
Effect"), or (ii) which would prevent or prohibit MMA Buyer through MMA or other
appropriately registered entity from acting as an investment adviser to each
Fund.
2.6. Certain Information Provided by Buyers.
---------------------------------------
(a) The information supplied by Buyers that is included in (i) the materials
provided to the Board of Directors/Trustees of each Fund in connection with
the approvals described in Article VI, and (ii) the proxy solicitation
----------
materials to be distributed to the shareholders of each Fund in connection
with the approvals described in Article VI, is complete in all material
----------
respects and does not contain (at the time it is distributed, filed or
provided, as the case may be) any statement which, at the time and in the
light of the circumstances under which it is made, is false or misleading
with respect to any material fact, and will not omit to state any material
fact necessary in order to make the statements therein not false or
misleading or (with respect to information supplied by Buyers and included
in proxy statements) necessary to correct any statement or any earlier
communication with respect to the solicitation of a proxy for the same
meeting or subject matter which has become false or misleading.
(b) The information supplied by Buyers or FBR that is included in any
application or notice to or filing with the OTS or other banking authority
satisfies the requirements of Sections 5(q) and 10 of the Home Owners' Loan
Act and such materials and information are complete in all material
respects and do not contain (at the time distributed or filed, as the case
may be) any statement which, at the time and in the light of the
circumstances under which it is made, is false or misleading with respect
to any material fact, and will not omit to state any material fact
necessary in order to make the statements therein not false or misleading.
2.7. No Unfair Burden.
----------------
In connection with the transactions contemplated by this Agreement,
none of Buyers or any "interested person" (as such term is defined in the
Investment Company Act) of Buyers has imposed and Buyers and their "interested
persons" do not intend to, directly or indirectly, impose, an unfair burden on
any of the Funds as a result of any such transactions, or as a result of any
express or implied terms, conditions, or understandings applicable to any such
transactions within the meaning of Section 15(f) of the Investment Company Act.
2.8. Financial Ability; Regulatory Matters. The Buyers have, or FBR will
-------------------------------------
cause the Buyers to timely have, sufficient cash to fund the Initial Payment and
the Minority Stock Purchase Price in immediately available funds at the Closing.
As of the date hereof, none of Buyers or FBR is aware of any reason that any
approvals contemplated by Section 8.1(a) will not be received on a basis
--------------
consistent with transactions of a similar nature or will be received subject to
the imposition of any non-standard condition or requirement of any non-standard
commitment
6
<PAGE>
that is unduly burdensome or any event, circumstance or condition which would
prevent or prohibit MMA Buyer through MMA or other appropriately registered
entity from acting as an investment adviser to each Fund.
2.9. No Other Representations or Warranties.
--------------------------------------
None of Buyers or FBR makes any representations or warranties to MMA
and Sellers other than as set forth above in this Article II.
----------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MMA, RTS AND PRINCIPAL SELLERS
MMA, RTS and Principal Sellers, jointly and severally, represent and
warrant to Buyers and FBR as follows:
3.1. Organization and Authority.
--------------------------
MMA is duly organized as a limited partnership and in good standing
under the laws of the District of Columbia, is duly registered as a savings and
loan holding company of RTS and is in compliance in all material respects with
all applicable rules and regulations of the OTS. RTS is duly organized as a
federal stock savings bank and is in existence under the laws of the United
States of America. RTS is a member in good standing at the Federal Home Loan
Bank of Atlanta, a qualified thrift lender in accordance with Section 10(m) of
the Home Owners' Loan Act, an insured depository institution under the Federal
Deposit Insurance Act and has received OTS approval under Section 5(q) of the
Home Owners' Loan Act to engage in each fiduciary activity in which it currently
engages. Each of the Subsidiaries is duly organized as a corporation and in
good standing under the laws of the jurisdiction of its incorporation and such
jurisdictions are listed on Schedule 3.1. Each of MMA and RTS has (i) all
------------
necessary power, right and authority to enter into and carry out its obligations
under this Agreement, to own or lease its properties and assets and to conduct
its business, and (ii) all necessary governmental authorizations to own or lease
its properties and assets and to conduct its business as currently conducted.
Each of the Subsidiaries has all necessary power, right and authority, and all
necessary governmental authorizations, to own or lease its properties and assets
and to conduct its business as currently conducted except where the failure to
have any governmental authorizations would not have an MMA Material Adverse
Effect. None of MMA, RTS or the Subsidiaries is required to qualify to do
business in any state or foreign jurisdiction where not already so qualified and
such jurisdictions are listed on Schedule 3.1 except where the failure to be so
------------
qualified would not have an MMA Material Adverse Effect.
3.2. Authorization.
-------------
(a) This Agreement and each document, agreement and instrument to be executed
by MMA or RTS (as the case may be) pursuant to or as contemplated by this
Agreement, has been duly authorized by MMA or RTS (as the case may be) and
no further
7
<PAGE>
proceedings on the part of MMA or RTS (as the case may be) are necessary to
authorize this Agreement and the transactions contemplated hereby. This
Agreement and each document, agreement and instrument to be executed by MMA
or RTS (as the case may be) pursuant to or as contemplated by this
Agreement, when so executed and delivered, shall constitute the legal,
valid and binding obligation of MMA or RTS (as the case may be),
enforceable against it in accordance with its terms.
(b) Neither the execution, delivery and performance of this Agreement and each
document, agreement and instrument to be executed by MMA pursuant to or as
contemplated by this Agreement nor the consummation by MMA of the
transactions contemplated hereby, will (i) violate, conflict with, or
result in a breach of any provisions of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or
acceleration under, or the creation of any Lien upon any of the properties
or assets of MMA, RTS, any Subsidiary or the Funds under any of the terms,
conditions or provisions of (x) the organizational documents of MMA, RTS,
any Subsidiary or any Fund, or (y) except as set forth in Schedule 3.2(b),
---------------
the Mutual Fund Agreements or agreements terminable by it without premium
or penalty upon thirty days' or less written notice or that impose an
obligation for monetary expense in an amount equal to or less than $12,000
per year, any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which MMA, RTS, any
Subsidiary or any Fund is a party or by any of them may be bound, or to
which MMA, RTS, any Subsidiary or any Fund, or the properties or assets of
MMA, RTS, any Subsidiary or any Fund, may be subject, or (ii) violate any
judgment, ruling, order, writ, injunction, decree, statute, rule or
regulation applicable to MMA, RTS or any Fund or to any of the properties
or assets of MMA, RTS, any Subsidiary or any Fund.
(c) Except as contemplated by Schedule 3.7(c), Article VI or to, with or of the
--------------- ----------
OTS or other banking or regulatory authority, no notice to, filing with,
authorization of, exemption by, or consent or approval of, any regulatory
authority or other person is necessary for the consummation by MMA, RTS,
any Subsidiary or any Fund of the transactions contemplated by this
Agreement.
(d) Except as contemplated by Article VI, no action of the shareholders of any
----------
Fund is required in connection with the transactions contemplated by this
Agreement.
3.3. Capitalization of MMA; Beneficial Ownership.
-------------------------------------------
(a) Each Seller owns beneficially and of record the Interests set forth
opposite such Seller's name on Schedule 1.1. Each Seller is the only
------------
beneficial and record holder of the Interests set forth opposite such
Seller's name on Schedule 1.1. Any and all transfers of Limited
-------------
Partnership Interests to the Limited Partners were made with the consent of
the General Partner to the extent required by MMA's partnership agreement
(the "Partnership Agreement"). Except as set forth in Schedule 3.3, there
------------
are no outstanding options, warrants, rights, commitments, preemptive
rights or agreements of any kind for the issuance or sale of, or
outstanding securities
8
<PAGE>
convertible into, any Interests. None of the Interests has been issued in
violation of any applicable federal and state securities or "blue-sky" laws
and regulations.
(b) Schedule 3.3 sets forth the authorized capital stock of RTS and the
------------
Subsidiaries including the number of shares of common stock, par value per
share, and the number of shares which are presently issued and outstanding
or held in its treasury. All of such outstanding shares have been duly
authorized, validly issued and are fully paid and nonassessable, were not
issued in violation of the terms of any agreement or other understanding
binding upon RTS and the Subsidiaries, and, to the knowledge of MMA and
Sellers, were issued in compliance with all applicable federal and state
securities or "blue-sky" laws and regulations. Except as set forth in
Schedule 3.3, there are no outstanding options, warrants, rights,
------------
commitments, preemptive rights or agreements of any kind for the issuance
or sale of, or outstanding securities convertible into, any Stock or
Subsidiary Stock.
(c) Each of MMA and the General Partner owns beneficially and of record the
Stock set forth opposite its or his name on Schedule 1.1 To the knowledge
------------
of MMA and Sellers, the Additional Stockholders own beneficially and of
record all of the Minority Stock that is not owned by the General Partner
and the number of shares of such Minority Stock owned by the Additional
Stockholders does not exceed 170 shares. The Stockholders are the only
beneficial and record holders of the Stock. MMA owns beneficially and of
record all of the Subsidiary Stock.
3.4. Accuracy of Representations and Documents.
-----------------------------------------
No representation, warranty or certification made by or on behalf of
MMA, RTS or the Principal Sellers in this Agreement, the Schedules hereto, or
any certificate provided for under this Agreement is false or misleading in any
material respect or contains any untrue statement of material fact or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading.
3.5. Certain Information Provided by MMA, RTS, each Subsidiary and each
------------------------------------------------------------------
Fund.
----
(a) The information supplied by MMA, RIB, RTS and each Fund (as the case may
be) that is included in (i) the proxy solicitation materials to be
distributed to the shareholders of each Fund in connection with the
approvals described in Article VI, and (ii) Forms ADV, ADV-Y2K, BD, BD-Y2K,
----------
TA-1 and TA-Y2K of MMA or RIB (as the case may be), and concerning MMA and
its representatives and beneficial owners, satisfy in all material respects
the requirements of Section 14 of the Exchange Act and the regulations
thereunder, Sections 15 and 20 of the Investment Company Act and the
regulations thereunder, and such Forms ADV, ADV-Y2K, BD, BD-Y2K, TA-1 and
TA-Y2K and such materials and information are and will be complete in all
material respects and do not contain (at the time distributed or filed, as
the case may be) any statement which, at the time and in the light of the
circumstances under which it is made, is false or misleading with respect
to any material fact, and will not omit to state any material fact
necessary in order to make the statements therein not false or misleading
or (with respect to information supplied by MMA, RTS, the Subsidiaries and
each
9
<PAGE>
Fund and included in proxy statements) necessary to correct any statement
or any earlier communication with respect to the solicitation of a proxy
for the same meeting or subject matter which has become false or
misleading.
(b) The information supplied by MMA and RTS that is included in any application
or notice to or filing with the OTS or other banking authority satisfies
the requirements of Sections 5(q) and 10 of the Home Owners' Loan Act and
such materials and information are complete in all material respects and do
not contain (at the time distributed or filed, as the case may be) any
statement which, at the time and in the light of the circumstances under
which it is made, is false or misleading with respect to any material fact,
and will not omit to state any material fact necessary in order to make the
statements therein not false or misleading.
3.6. Brokers and Finders.
-------------------
None of MMA, RTS, the Subsidiaries or the Sellers has employed any
broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted,
directly or indirectly, for MMA, RTS, any Subsidiary (or any of their
representatives or employees) or Sellers in connection with this Agreement or
the transactions contemplated hereby.
3.7. Contracts.
---------
(a) Other than the Mutual Fund Agreements (including the Management Contracts),
the Partnership Agreement, the real estate leases for office space in the
property located at 4916, 4918, 4920 and 4922 Fairmont Avenue, Bethesda,
MD, the deposit accounts and Federal Home Loan Bank advances of RTS, and
the other agreements described on Schedule 3.7 (with copies of such other
------------
agreements attached thereto), none of MMA, RTS or any of the Subsidiaries
is a party to any material agreement that is not terminable by it without
penalty or premium upon thirty days' or less written notice (other than the
payment of severance, accrued vacation and accrued sick pay upon
termination of an employee's service consistent with past practices). For
purposes hereof, a "material agreement" means any agreement, contract,
arrangement, commitment or understanding that (i) imposes an obligation on
MMA, RTS or any Subsidiary for a monetary expense in excess of $12,000 per
year, (ii) imposes an obligation on MMA, RTS or any Subsidiary to supply
goods, services, surety or warranty, (iii) limits the freedom of MMA, RTS
or any Subsidiary to compete either in any line of business or with any
person or entity, (iv) was not entered into in the ordinary course of
business consistent with past practice or (v) is a "material contract"
within the meaning of Item 601(b)(10) of Regulation S-K of the Securities
and Exchange Commission ("SEC").
(b) Except as set forth on Schedule 3.7, RTS is not a party to, bound by or
------------
subject to any agreement, contract, arrangement, commitment or
understanding that (i) limits the freedom of RTS to engage or compete
either in any line of business permitted by a federal savings bank or with
any person or entity, or (ii) provides any employee or consultant with the
right to continue his or her services or to the payment of severance upon
termination of
10
<PAGE>
employment (other than severance generally available consistent with
historical practices of RTS applied on a uniform basis or as set forth in
RTS' current employee handbook or manual).
(c) Other than the Mutual Fund Agreements (including the Management Contracts)
and agreements terminable by it without premium or penalty upon thirty
days' or less written notice or that impose an obligation for monetary
expense in an amount equal to or less than $12,000 per year, any contract,
agreement, lease, arrangement or understanding which requires the consent
of a party in the event of an assignment is listed on Schedule 3.7(c).
---------------
3.8. No Defaults under Contracts or Agreements.
-----------------------------------------
None of MMA, RTS, the Subsidiaries or the Funds is in default in any
material respect under any lease, contract, mortgage, promissory note, deed of
trust, loan, guaranty or other commitment or arrangement to which such person is
a party or by which it is bound, and to the knowledge of MMA and Sellers, no
other party to any of the foregoing is in default in any material respect
thereunder and, except as set forth on Schedule 3.2(b), no event has occurred or
---------------
condition exists that with notice or the passage of time would constitute such a
default.
3.9. Real Estate and Assets.
----------------------
(a) (i) Schedule 3.9(a) sets forth a list of all of the real estate owned by
---------------
MMA, RTS or any Subsidiary (such real estate, together with all
appurtenant easements and other appurtenances thereto and with all
buildings, structures and other improvements thereon and all fixtures
attached thereto or forming a part thereof, is collectively referred
to herein as the "Owned Real Estate"). Except as set forth on
Schedule 3.9(a), MMA, RTS and each Subsidiary has good, valid,
---------------
marketable and indefeasible fee simple title to the Owned Real Estate
owned by it, free and clear of all Liens, encroachments (by or onto
the Owned Real Estate), covenants, easements, mortgages, deeds of
trust, rights of first refusal, options, leases and subleases,
licenses and title defects of any nature (collectively, "Real Estate
Encumbrances"), except for the following (collectively, "Permitted
Exceptions"): (x) the Real Estate Encumbrances, listed on Schedule B-
-----------
II to Commitment for Title Insurance number 8163-11 issued by
--
Fidelity National Title Insurance Company of New York dated August
31, 1999, a copy of which attached to and hereby made a part of
Schedule 3.9(a), none of which materially interferes with the use of
---------------
the affected property or the conduct of the business therein as
currently conducted, (y) the leases (the "Lessor Leases") listed on
Schedule 3.9(a), and (z) liens for ad valorem real property taxes and
---------------
assessments not yet due and payable. The water, gas, electricity and
other utilities serving the Owned Real Estate have been and are
currently adequate to service the normal operations conducted thereon
consistent with past practice. The Sellers have made available to MMA
Buyer true, correct and complete copies of all (i) title reports,
title insurance policies and commitments therefore, (ii) surveys, and
(iii) licenses, certificates of occupancy, plans, specifications and
permits, pertaining to the Owned Real Estate that are in the
possession or control of any of MMA, RTS or any Subsidiary.
(ii) MMA, RTS or a Subsidiary is in actual, exclusive possession of the
Owned Real Estate subject only to the rights of the tenants under the
Lessor Leases. True,
11
<PAGE>
complete and accurate copies of all of the Lessor Leases have been
made available to MMA Buyer, each of the Lessor Leases is in full
force and effect and none of the Lessor Leases has been amended or
otherwise modified except as set forth in Schedule 3.9(a). No tenant
---------------
or other person has any right other than as set forth in the Lessor
Leases and the other Permitted Exceptions. All tenant improvement and
similar work to be performed under any of the Lessor Leases by MMA,
RTS or any Subsidiary or to be performed by any other person but paid
for by any of them, has been fully performed and paid for. None of
MMA, RTS or any Subsidiary is, and to knowledge of MMA and Sellers,
no other party to any Lessor Lease is, in default under any Lessor
Lease and no event has occurred which, with the giving of notice, the
passage of time or both would constitute such a default. All security
deposits required under the Lessor Leases have been posted and are
held by RTS in accordance with the Lessor Leases and are properly
reflected on the financial books and records of RTS.
(iii) All of the real estate leased by MMA, RTS and any Subsidiary is
identified in Schedule 3.9(a) (the "Leased Real Estate"). All leases
---------------
of the Leased Real Estate (collectively, the "Real Estate Leases")
are identified in Schedule 3.9(a), and true and complete copies
---------------
thereof have been made available to MMA Buyer. Each of the Real
Estate Leases has been duly executed by the parties thereto and is in
full force and effect. None of MMA, RTS or the Subsidiaries is in
default in any material respect under any of the Real Estate Leases,
nor, except as set forth in Schedule 3.2(b), has any event occurred
---------------
which, with the giving of notice or the passage of time, or both,
would give rise to such a default. To the knowledge of MMA, RTS and
Sellers, the other party to each of the Real Estate Leases is not in
default in any material respect thereunder and there is no event
which, with the giving of notice or the passage of time, or both,
would give rise to such a default.
(iv) Except as set forth in Schedule 3.9(a), MMA, RTS or a Subsidiary is
---------------
in actual, exclusive possession of the Leased Real Estate and has
good and valid leasehold title thereto, free and clear of all Real
Estate Encumbrances, except Permitted Exceptions and Real Estate
Encumbrances upon landlord's fee estate.
(v) Except as set forth on Schedule 3.9(a), during the past seven years,
---------------
none of MMA, RTS or any Subsidiary has received any written or, to
the knowledge of MMA and Sellers, oral notice or order from any
Governmental Authority, insurance company which has issued a policy
with respect to any of the Owned or Leased Real Estate or any board
of fire underwriters or other body performing similar functions or
any other person which (a) relates to or alleges a violation of or
nonconformity with any zoning, building, safety, subdivision,
wetlands or other similar law, code, rule, regulation, ordinance,
permit, license, certificate, covenant, restriction or condition with
respect to any of the Owned or Leased Real Estate, or (b) requests
the performance of any material repairs, alterations or other work
that have not yet been cured or performed, as applicable. During the
past seven years, none of MMA, RTS or any Subsidiary has received any
written notice from any Governmental Authority or other person of any
condemnation action, eminent domain proceeding or other similar
proceeding concerning any of the Owned or Leased Real Estate. To the
knowledge of MMA, RTS and the Sellers, there is no pending
condemnation, expropriation, eminent domain, or similar proceeding
affecting any
12
<PAGE>
of the Owned or Leased Real Estate and, to the knowledge of MMA, RTS
and Sellers, no such action, proceeding or litigation is threatened.
All of the buildings and improvements situated upon the Owned or
Leased Real Estate are operable and in good condition and repair,
subject to ordinary wear and tear and to the items set forth on
Schedule 3.9(a).
---------------
(vi) The Owned and Leased Real Estate include all of the real estate used
in, and is the only real estate necessary for, the conduct of the
business of MMA, RTS and the Subsidiaries as currently conducted.
(b) Except as set forth in Schedule 3.9(b), as of the date hereof, each of MMA,
---------------
RTS and each Subsidiary owns all of its material fixed assets, free and
clear of any Liens and such fixed assets include all of the fixed assets
used in, and are all of the fixed assets necessary for, the conduct of the
respective businesses of MMA, RTS and the Subsidiaries as currently
conducted.
(c) Except as set forth in Schedule 3.9(c), there are no legal, administrative,
---------------
arbitral or other proceedings, claims, actions, causes of action, private
or governmental investigations or remediation activities of any nature
seeking to impose, or that reasonably could be expected to result in the
imposition, on MMA, RTS or any Subsidiary of any liability or obligation
arising under common law or statutory standards or requirements relating to
environmental protection, human health or safety or under any local, state
or federal environmental statute, regulation or ordinance, including,
without limitation, the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (collectively, the "Environmental
Laws"), pending or, to the knowledge of MMA and Sellers, threatened,
against MMA, RTS or any Subsidiary, which liability or obligation would
have or would reasonably be expected to have an MMA Material Adverse Effect
(as hereinafter defined). To the knowledge of MMA and Sellers, there is no
reasonable basis for any such proceeding, claim, action or governmental
investigation that would impose any liability or obligation that would have
or would reasonably be expected to have an MMA Material Adverse Effect. To
the knowledge of MMA and Sellers, during or prior to the period of (i)
ownership or operation of any of current or former properties by MMA, RTS
or any Subsidiary, (ii) participation in the management of any property by
MMA, RTS or any Subsidiary, or (iii) holding of a security interest or
other interest in any property by MMA, RTS or any Subsidiary, there were no
releases or threatened releases of hazardous, toxic, radioactive or
dangerous materials or other materials regulated under Environmental Laws,
in, on, under, from or affecting any such property which would reasonably
be expected to have an MMA Material Adverse Effect. Neither MMA, RTS nor
any Subsidiary is subject to any agreement, order, judgment, decree, letter
or memorandum by or with any court, Governmental Authority, arbitrator or
third party imposing any material liability or obligation pursuant to or
under any Environmental Law that would have or would reasonably be expected
to have an MMA Material Adverse Effect.
3.10. Assets Under Management.
-----------------------
The aggregate net assets under management by MMA ("Aggregate Net
Assets") and the aggregate management fees net of discounts, rebates, fee
reimbursements and waivers
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<PAGE>
collected by MMA ("Net Management Fees") for the periods ended December 31, 1998
and June 30, 1999, are accurately set forth in Schedule 3.10. Set forth in
--------------
Schedule 3.10 is a list as of December 31, 1998, June 30, 1999 and September 30,
- -------------
1999, of all investment advisory agreements, administrative services agreements
and other service agreements, if any, to which MMA, RTS or a Subsidiary was a
party as of those dates (collectively, "Mutual Fund Agreements") setting forth
the name of the client under each such contract, the aggregate net assets
subject to each such contract, the fee schedule in effect with respect to each
such contract (and with respect to the list as of September 30, 1999, any
material adjustments to the effective fees made since June 30, 1999 (it being
understood and agreed that adjustments in excess of the lesser of 10% of the
effective fees or $100,000 are material)), the consent required for the
assignment by MMA, RTS or a Subsidiary of each such contract other than those
that by their express terms terminate upon assignment (which are so identified).
Except as set forth in Schedule 3.10 and expressly described thereon, there are
-------------
no contracts, arrangements or understandings pursuant to which MMA, RTS or a
Subsidiary has undertaken or agreed to limit, waive or reimburse any or all fees
or charges payable by any of the clients set forth in Schedule 3.10 or pursuant
to any of the contracts set forth in Schedule 3.10. Except as is set forth in
-------------
Schedule 3.10, as of the date hereof, no client of MMA, RTS or a Subsidiary has
- -------------
provided any written notice to terminate or reduce its relationship with MMA,
RTS or a Subsidiary or adjust the fee schedule with respect to any contract in a
manner which would reduce the fee to MMA, RTS or a Subsidiary.
3.11. Financial Statements.
--------------------
(a) MMA has delivered to MMA Buyer the audited balance sheets of RTS at
December 31, 1997 and December 31, 1998, and audited statements of its
operations and cash flows for each of the two (2) years then ended, copies
of which are attached to Schedule 3.11 (the "1997 and 1998 RTS Financial
-------------
Statements"). The 1997 and 1998 RTS Financial Statements have been
prepared in accordance with generally accepted accounting principles
("GAAP"), applied consistently during the periods covered thereby, present
fairly, in all material respects, the financial position of RTS at the
dates of said statements and the results of its operations for the periods
covered thereby.
(b) Except for liabilities and obligations set forth in the balance sheet to
the 1998 RTS Financial Statements or the footnotes thereto and liabilities
and obligations incurred by RTS in the ordinary course of business since
December 31, 1998, as of the date hereof, RTS does not have any
liabilities of any nature, whether accrued, absolute, contingent or
otherwise, asserted or unasserted, known or unknown (including, without
limitation, liabilities as guarantor or otherwise with respect to
obligations of others, or liabilities for taxes due or then accrued or to
become due or contingent or potential liabilities) that are required to be
reflected in an audited balance sheet or notes thereto in accordance with
GAAP.
(c) As of the close of business on the day preceding the Closing Date, neither
MMA nor any of the Subsidiaries will have any liabilities or obligations,
absolute, contingent or otherwise, except for prospective obligations and
duties under the Real Estate Leases, the Mutual
14
<PAGE>
Fund Agreements (including the Management Contracts), employment and
consulting arrangements entered into in connection with this Agreement, the
payment of compensation and benefits to employees for services on or after
the Closing Date, honoring accrued vacation and sick pay of the employees,
severance to employees who are terminated after Closing consistent with
past practices, accrued and/or unbilled MMA Transaction Expenses,
prospective obligations to reimburse RTS for services and overhead provided
by it or its employees to MMA or any Subsidiary consistent with current
practice, and obligations under contracts that are terminable on thirty
days' or less written notice without penalty or premium.
3.12. Taxes.
-----
(a) MMA, RTS and each Subsidiary has paid or caused to be paid all federal,
state, local, foreign, and other taxes, government fees or the like,
including, without limitation, income taxes, estimated taxes, alternative
minimum taxes, franchise taxes, capital stock taxes, unincorporated
business taxes, sales taxes, use taxes, ad valorem or value added taxes,
employment and payroll-related taxes, withholding taxes, property taxes
and transfer taxes, whether or not measured in whole or in part by net
income, and all deficiencies, or other additions to tax, interest, fines
and penalties (including, without limitation, all penalties relating to
information reporting) owed by it (collectively, "Taxes" and, each
individually, a "Tax"), required to be paid by it through the date hereof,
whether disputed or not. Unpaid Taxes of RTS are accrued quarterly on
their respective financial books and records in accordance with GAAP and
there are no unpaid Taxes of the Subsidiaries. All Taxes required to be
withheld by MMA, RTS or any Subsidiary including, but not limited to,
Taxes arising as a result of payments or allocations (including guaranteed
payments) to foreign persons or to employees of MMA, RTS or any Subsidiary
have been collected and withheld, and have either been paid to the
respective governmental agencies, set aside in accounts for such purpose,
or accrued, reserved against, and entered on the financial books and
records of MMA, RTS or the Subsidiaries (as the case may be).
(b) MMA, RTS and each Subsidiary has, in accordance with applicable law, filed
all federal, state, local and foreign Tax returns (including all schedules
thereto) required to be filed by it, and all such returns, to the
knowledge of MMA and Sellers, correctly and accurately set forth the
amount of any Taxes relating to the applicable period. No Seller has or
will, on a Tax return of the Seller, treat a partnership Tax item of MMA
in a manner inconsistent with the treatment of such item on a Tax return
of MMA. A list of all federal, state, local and foreign income Tax returns
filed with respect to MMA, RTS and each Subsidiary for taxable periods
ended on or after December 31, 1995, is set forth in Schedule 3.12, and
-------------
said Schedule indicates those returns that have been audited or subject to
administrative or judicial proceedings or currently are the subject of an
audit or administrative or judicial proceeding. For each taxable period of
MMA, RTS and each Subsidiary ended on or after December 31, 1995, MMA has
delivered to MMA Buyer correct and complete copies of all federal, state,
local and foreign income Tax returns, examination reports and statements
of deficiencies assessed against or agreed to by MMA, RTS and each
Subsidiary. Sellers will arrange for the preparation and timely filing of
the final partnership Tax returns for the final taxable year of MMA ending
on the
15
<PAGE>
Closing Date (including any required Internal Revenue Service ("IRS") Form
8308) and supplying required tax information to MMA, any such filings
shall be complete and correct, and Sellers shall arrange for the timely
payment of any amounts shown or required to be shown as due thereon.
(c) Neither the IRS nor any other Governmental Authority responsible for the
imposition or collection of any Tax (a "Taxing Authority") is now
asserting or, to the knowledge of MMA and Sellers, threatening to assert
against MMA, RTS or any Subsidiary any deficiency or claim for additional
Taxes or to initiate any examination or proceedings with respect to any
partnership Tax items. No claim has ever been made by a Taxing Authority
in a jurisdiction where MMA, RTS or any Subsidiary does not file reports
and returns that any of them (or any of the Sellers, by reason of their
investment in MMA) is or may be subject to taxation by that jurisdiction.
There are no liens or security interests (unrecorded or recorded) on any
of the assets of MMA, RTS or any Subsidiary that arose in connection with
any failure (or alleged failure) by MMA, RTS, any Subsidiary or any of the
Sellers to pay any Taxes. None of MMA, RTS or any Subsidiary has ever
entered into a settlement or closing agreement with the IRS or any
comparable agreement with any other Taxing Authority.
(d) No extension of time with respect to any date on which a Tax return was or
is to be filed by MMA, RTS or any Subsidiary is currently in effect, and
no waiver or agreement by MMA, RTS or any Subsidiary is currently in
effect for an extension of time for the assessment or payment of any Taxes
or adjustment of any partnership Tax items.
(e) MMA has never been (nor has it ever had any liability for unpaid Taxes
because it once was) a member of an "affiliated group" (as defined in
Section 1504(a) of the Internal Revenue Code of 1986, as amended (the
"Code")). None of RTS or the Subsidiaries has ever been (nor has RTS or
the Subsidiaries ever had any liability for unpaid Taxes because it once
was) a member of an "affiliated group" (as defined in Section 1504(a) of
the Code. None of MMA, RTS or the Subsidiaries has ever filed, nor have
they ever been required to file, a consolidated, combined or unitary tax
return with any other entity, other than tax returns with each other. None
of MMA, RTS or the Subsidiaries is a party to any tax sharing agreement.
3.13. Loans; Accounts Receivable.
--------------------------
All of the loans extended by RTS are listed on Schedule 3.13 and are
-------------
valid and enforceable in accordance with their respective terms and subject to
no setoff or counterclaim. None of MMA, RTS and each Subsidiary has any
accounts receivable or loans receivable from any person, firm or corporation or
other entity which is affiliated with MMA, RTS or any Subsidiary or from any
director, officer or employee of MMA, RTS or any Subsidiary except as disclosed
in Schedule 3.13. Nothing in this Section 3.13 is intended as a representation
------------- ------------
or warranty as to the creditworthiness of any borrower or guarantor or the
current value or collectibility of any loan.
16
<PAGE>
3.14. Absence of Certain Changes.
--------------------------
Except as disclosed in Schedule 3.14, since December 31, 1998 to the
-------------
date hereof, there has not been:
(a) with respect to MMA, RTS, any Subsidiary, any Fund or the Cappiello-
Rushmore Trust, any event, circumstance or condition (A) that has caused
or could reasonably be expected to cause a material adverse effect
(whether taken individually or in the aggregate with all other such
effects) on the financial condition or business or results of operations
of MMA, RTS, any Subsidiary or any Fund, taken as a whole, or (B)
affecting MMA, RTS, any Subsidiary or any Fund which would prevent the
consummation of the transactions contemplated by this Agreement or have a
material adverse effect on the assets of MMA, RTS, each Subsidiary or each
Fund, taken as a whole, except for (i) conditions, events or circumstances
generally affecting the economy as a whole or (ii) any decrease in
Aggregate Net Assets from market fluctuations, redemptions or otherwise
(an "MMA Material Adverse Effect");
(b) any amendment or termination or, to the knowledge of MMA and Sellers,
proposed or threatened amendment or termination, whether written or oral,
of any Mutual Fund Agreement, Partnership Agreement, Real Estate Lease or
any agreement listed in Schedule 3.7;
------------
(c) any material claim placed on any of the properties or assets of MMA, RTS
or any Subsidiary;
(d) any cancellation of any material debt or material claim owing to, or
waiver of any material right of, MMA, RTS or any Subsidiary;
(e) any purchase, sale or other disposition, or any agreement or other
arrangement for the purchase, sale or other disposition, of any of the
material properties or assets of MMA, RTS or any Subsidiary other than in
the ordinary course of business consistent with past practices;
(f) any material damage, destruction or loss, whether or not covered by
insurance, to the assets of MMA, RTS or any Subsidiary;
(g) any declaration, setting aside or payment of any dividend or distribution
by RTS or the making of any other distribution in respect of Stock or any
direct or indirect redemption, purchase or other acquisition of the
Interests, Stock or Subsidiary Stock other than distributions and
dividends made by RTS in the ordinary course and consistent with past
practices;
(h) any change in the compensation payable or to become payable by MMA, RTS or
any Subsidiary to any of its representatives, employees, agents or
independent contractors other than (x) normal increases in accordance with
its usual practices or (y) any non-recurring bonus payment or arrangement
made to or with any of such representatives, employees, agents or
independent contractors;
17
<PAGE>
(i) any obligation or liability incurred by MMA, RTS or any Subsidiary to any
of its representatives, employees, or any Seller or Stockholder or any
loans or advances made by MMA, RTS or any Subsidiary to any of its
representatives, employees, or any Seller or Stockholder except normal
compensation and expense allowances payable to representatives or
employees in the ordinary course of business consistent with past
practices and MMA Transaction Expenses;
(j) any payment or discharge of a material lien or liability of MMA, RTS or
any Subsidiary other than in the ordinary course of business consistent
with the past practices of MMA, RTS or any Subsidiary;
(k) any change in accounting methods or practices (except as required by
applicable law or GAAP), or billing or collection policies used by MMA,
RTS or any Subsidiary; or
(l) any capital expenditures incurred by RTS in excess of $25,000 in the
aggregate, other than expenditures necessary to maintain existing assets
in good repair.
(m) any agreement or understanding, whether in writing or otherwise, for MMA,
RTS or any Subsidiary to take any of the actions specified in paragraphs
(a) through (l) above.
3.15. Ordinary Course.
---------------
Except as otherwise specifically contemplated by this Agreement, since
December 31, 1998 to the date hereof, each of MMA, RTS and RSI has conducted its
business only in the ordinary course and consistently with its prior practices
and RIB has not engaged in active business.
3.16. Banking Relations.
-----------------
All of the arrangements which MMA, RTS, each Subsidiary and each Fund
has with any banking institution are, in all material respects, accurately
described in Schedule 3.16, indicating with respect to each of such arrangements
-------------
the type of arrangement maintained (such as checking account or borrowing
arrangements) and the person or persons authorized in respect thereof.
3.17. Intellectual Property.
---------------------
(a) None of MMA, RTS or any Subsidiary has any patents, copyrights, trade
secrets, trademarks, trade names, service marks, formulas, designs,
inventions or other proprietary rights (collectively, "Intellectual
Property") except for readily available Intellectual Property licensed
from others, customer lists and related data and rights in and to the
names in their areas of use of "Money Management Associates" and "Rushmore
Trust and Savings," rights in and to the logo and the service marks, and
such rights in and to the service marks are
18
<PAGE>
listed in Schedule 3.17. MMA owns the registration for each of the service
-------------
marks "Rushmore," "The Rushmore Fund, Inc." and "Rushmore Investment
Brokers, Inc." filed with the United States Patent and Trademark Office.
Neither MMA nor Sellers have knowledge of any infringement by others of
any Intellectual Property rights of MMA, RTS or any Subsidiary.
(b) The business of MMA, RTS or any Subsidiary does not, to the knowledge of
MMA and Sellers, infringe any rights of any other person in Intellectual
Property. No proceeding charging MMA, RTS or the Subsidiaries with
infringement of any Intellectual Property of any other person has been
filed or, to the knowledge of MMA and Sellers, is threatened to be filed.
None of MMA, RTS or the Subsidiaries or, to the knowledge of MMA and
Sellers, any of their respective employees have any agreements or
arrangements with any person related to confidential information or trade
secrets of such persons or restricting any such employee's ability to
engage in business activities of any nature. The activities of the
employees on behalf of MMA, RTS or any Subsidiary do not violate any such
agreements or arrangements known to MMA or Sellers.
3.18. Litigation.
----------
Except as set forth on Schedule 3.18, there is no litigation, action,
-------------
suit or proceeding pending or, to the knowledge of MMA and Sellers, threatened
against MMA, RTS or any Subsidiary or any of their assets at law or in equity,
or before any Governmental Authority (including, without limitation, any
voluntary or involuntary proceedings under the Bankruptcy Code or any action,
suit, proceeding or investigation under any federal or state securities law,
rule or regulation), in which MMA, RTS or any Subsidiary is a party, or to the
knowledge of MMA and Sellers, with which any of them is threatened. There are
no proceedings pending or, to the knowledge of MMA and Sellers, threatened,
relating to the termination of, or limitation of, the rights of MMA under its
registration under the Advisers Act as an investment adviser or under the
Exchange Act as a transfer agent, the rights of RIB under its registration under
the Exchange Act as a broker-dealer, the rights of RTS as a federal savings bank
under the Home Owners' Loan Act, as a transfer agent under the Exchange Agent or
as an FDIC insured institution under the Federal Deposit Insurance Act or any
similar or related rights under any registrations or qualifications with various
states or other jurisdictions, or under any other investment and banking laws
and regulations. There are no judgments, injunctions, orders or other judicial
or administrative mandates outstanding against or affecting MMA, RTS, any
Subsidiary or the Principal Sellers or, to the knowledge of MMA, RTS and
Sellers, any representative thereof or any Seller other than the Principal
Sellers relating to the activities of or affecting MMA, RTS or any Subsidiary.
3.19. Business: Registrations and Compliance with Laws.
------------------------------------------------
(a) MMA is duly registered as an investment adviser under the Advisers Act and
a transfer agent under the Exchange Act. RIB is duly registered as a
broker-dealer under the Exchange Act and is a member in good standing of
the National Association of Securities Dealers, Inc. ("NASD"). MMA is duly
registered, licensed and qualified as an investment adviser, RIB is duly
registered, licensed and qualified as a broker-dealer, and MMA and RTS are
19
<PAGE>
each duly registered, licensed and qualified as a transfer agent in all
jurisdictions where such registration, licensing or qualification is
required in order to conduct its business, except where the failure to be
so registered, licensed or qualified would not have an MMA Material
Adverse Effect. MMA, RTS and each Subsidiary is, and, since its inception,
has been, and all of their real properties and other assets are currently,
except for any material non-compliance prior to the date hereof which has
been cured, in compliance in all material respects with all applicable
federal, state and local laws, rules, regulations, codes, ordinances and
orders. MMA has delivered to MMA Buyer true and complete copies of its
most recent Form ADV and Form TA-1, the Form BD of RIB and the Form TA-1
of RTS, each as amended to date, and has made available copies of all
foreign and state registration forms, likewise as amended to date. The
information contained in such forms was true and complete at the time of
filing and MMA, RIB and/or RTS (as the case may be) has made all
amendments to such forms as it is required to make under any applicable
laws. None of MMA, RIB, RTS or, to the knowledge of MMA and Sellers, a
"person associated with" (as defined under Section 202(a)(17) of the
Advisers Act and Sections 3(a)(18) and 3(a)(49) of the Exchange Act) MMA,
RIB or RTS, has been convicted of any crime or is or has engaged in any
conduct that would be a basis for denial, suspension or revocation of the
registration of MMA as an investment adviser, RIB as a broker-dealer or
MMA or RTS as a transfer agent (as the case may be), and to the knowledge
of MMA and Sellers, there is no proceeding or investigation that is
reasonably likely to become the basis for any such disqualification,
denial, suspension or revocation. MMA (as investment advisor) and each
"person associated with" MMA (as defined in Section 202(a)(17) of the
Advisers Act), including any investment adviser representatives (as such
term is defined in Rule 203A-3(a) under the Advisers Act), MMA (as
transfer agent), RIB, RTS and each "person associated with" MMA, RIB or
RTS (as defined under Sections 3(a)(18) and 3(a)(19) of the Exchange Act)
and each Subsidiary has, and after giving effect to the Closing will have,
all permits, registrations, licenses, franchises, certifications and other
approvals (collectively, the "Licenses") required from, and has filed all
reports required by, Governmental Authorities in order for it to conduct
the businesses presently conducted by MMA (as investment adviser and
transfer agent), RTS or any Subsidiary (as the case may be) in the manner
presently conducted by them and to own, use and operate its properties in
the manner currently owned, used and operated, except for any such
Licenses which are required solely by reason of Buyers' participation in
the transactions contemplated hereby. None of MMA, RTS or the Subsidiaries
is subject to any limitation imposed in connection with one or more of the
Licenses which would have an MMA Material Adverse Effect.
(b) Except as set forth in Schedule 3.19, neither MMA, RTS nor any of its
-------------
Subsidiaries is subject to any cease-and-desist or other order issued by,
or is a party to any written agreement, consent agreement, supervisory
agreement or memorandum of understanding with, or is a party to any
commitment letter or similar undertaking to, or is subject to any order or
directive by, or has adopted by board resolutions at the request of (each,
whether or not set forth in Schedule 3.19, a "Regulatory Agreement"), any
-------------
Governmental Authority that restricts the conduct of its business or that
in any manner relates to its capital adequacy, its credit policies, its
management or its business, nor has MMA, RTS or any of its Subsidiaries
been advised by
20
<PAGE>
any Governmental Authority that it is considering issuing or requesting
any Regulatory Agreement.
3.20. Insurance.
---------
RTS has in full force and effect such insurance as is customarily
maintained by companies of similar size in the same or a similar business with
respect to its business, properties and assets and each of MMA, RTS and the
Subsidiaries has in full force and effect such insurance and bonds as are
required by any contract to which it is a party or applicable law, all as listed
in Schedule 3.20. None of MMA, RTS or the Subsidiaries is in material default
-------------
under any such insurance policy.
3.21. Copies of Documents.
-------------------
Except as otherwise provided herein, to the knowledge of MMA and
Sellers, MMA has or has caused to be made available for inspection and copying
by MMA Buyer and its counsel and advisors true and correct copies of all
documents referred to in this Agreement or in the Schedules delivered to MMA
Buyer in connection herewith.
3.22. Transactions with Interested Persons.
------------------------------------
Except as set forth in Schedule 3.22, none of MMA, RTS, the Subsidiaries,
-------------
any employee of any of them (as the case may be), any Seller or Stockholder, or,
to the knowledge of MMA and Sellers, any of their respective spouses or family
members, is a party to any material transaction or material contract or
arrangement with MMA, RTS or any Subsidiary or owns directly or indirectly on an
individual or joint basis any interest (excluding passive investments in the
shares of any enterprise which are publicly traded provided his or her holdings
therein, together with any holdings of his or her Affiliates and family members,
do not exceed five percent (5%) of the outstanding shares or comparable interest
in such entity) in, or serves as an officer or director or in another similar
capacity of, any competitor or client of MMA, RTS or any Subsidiary or any
organization which has a material contract or arrangement with MMA, RTS or any
Subsidiary.
3.23. Employee Benefit Programs.
-------------------------
(a) Schedule 3.23 lists every Employee Program (as defined below) that has
-------------
been maintained (as defined below) by MMA, RTS or any Subsidiary at any
time during the three-year period ending on the date of the Closing.
(b) Each Employee Program which has been maintained by MMA, RTS or any
Subsidiary during the past seven years and which has at any time been
intended to qualify under Section 401(a) or 501(c)(9) of the Code has
received a favorable determination or approval letter from the IRS
regarding its qualification under such section and no such determination
or approval letter has been revoked nor, to the knowledge of MMA and
Sellers, is there any reason for such revocation from the effective date
of such Employee Program through and including the
21
<PAGE>
Closing (or, if earlier, the date that all of such Employee Program's
assets were distributed). No event or omission has occurred which would
cause any such Employee Program to lose its qualification under the
applicable Code section.
(c) Neither MMA nor Sellers knows or has reason to know of any failure of any
party to comply in any material respect with any laws applicable to the
Employee Programs that have been maintained by MMA, RTS or any Subsidiary.
To the knowledge of MMA and Sellers, each Employee Program that has been
maintained by MMA, RTS or any Subsidiary has been maintained, operated and
administered in compliance in all material respects with its terms and
with any related documents or agreements. With respect to any Employee
Program ever maintained by MMA, RTS or any Subsidiary, there has occurred
no "prohibited transaction," as defined in Section 406 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or Section
4975 of the Code, or breach of any duty under ERISA or other applicable
law (including, without limitation, any health care continuation
requirements or any other tax law requirements, or conditions to favorable
tax treatment, applicable to such plan), which could result, directly or
indirectly, in any material taxes, penalties or other liability to Buyers,
MMA, RTS or any Subsidiary. No litigation, arbitration, or governmental
administrative proceeding (or investigation) or other proceeding (other
than those relating to routine claims for benefits) is pending or
threatened with respect to any such Employee Program.
(d) All contributions to, and payments from, any Employee Program maintained
by MMA, RTS or any Subsidiary that may have been required in accordance
with the terms of such Employee Program have been timely made or are
properly accrued, to the extent required. Any insurance premium under any
insurance policy related to an Employee Program for any period up to and
including the Closing Date shall have been paid before the Closing Date.
(e) None of MMA, RTS, any Subsidiary or any ERISA Affiliate (as defined below)
while an ERISA Affiliate (i) has, at any time after January 1, 1992,
maintained any Employee Program which has been subject to Title IV of
ERISA (including, but not limited to, any Multiemployer Plan (as defined
below)) or (ii) has ever provided health care or any other non-pension
benefits to any employees after their employment is terminated (other than
as required by part 6 of subtitle B of title I of ERISA) or has ever
promised to provide such post-termination benefits that could impose a
monetary obligation or material non-monetary obligation after Closing upon
Buyers, MMA, RTS or any Subsidiary.
(f) With respect to each Employee Program maintained by MMA, RTS or any
Subsidiary within the three (3) years preceding the Closing, complete and
correct copies of the following documents (if applicable to such Employee
Program) have previously been delivered to MMA Buyer: (i) all documents
embodying or governing such Employee Program, and any funding medium for
the Employee Program (including, without limitation, trust agreements) as
they may have been amended; (ii) the most recent IRS determination or
approval letter with respect to such Employee Program under Code Sections
401 or 501(c)(9), and any applications for determination or approval
subsequently filed with the IRS; (iii) the three (3) most recently
22
<PAGE>
filed IRS Forms 5500, with all applicable schedules and accountants'
opinions attached thereto; (iv) the summary plan description for such
Employee Program (or other descriptions of such Employee Program provided
to employees) and all modifications thereto; (v) any insurance policy
(including any fiduciary liability insurance policy) related to such
Employee Program; (vi) any documents evidencing any loan to an Employee
Program that is a leveraged employee stock ownership plan; and (vii) all
other materials reasonably necessary for MMA Buyer to perform any of its
responsibilities with respect to any Employee Program subsequent to the
Closing (including, without limitation, health care continuation
requirements).
(g) Each Employee Program listed on Schedule 3.23 may be amended, terminated,
-------------
modified or otherwise revised by MMA, RTS or any Subsidiary (as the case
may be) subject to compliance with applicable law.
(h) For purposes of this section:
(i) "Employee Program" means (A) all employee benefit plans within the
meaning of ERISA Section 3(3), including, but not limited to,
multiple employer welfare arrangements (within the meaning of ERISA
Section 3(4)), plans to which more than one unaffiliated employer
contributes and employee benefit plans (such as foreign or excess
benefit plans) which are not subject to ERISA; and (B) all stock
option plans, bonus or incentive award plans, severance pay policies
or agreements, deferred compensation agreements, supplemental income
arrangements, vacation plans, and all other employee benefit plans,
agreements, and arrangements not described in (A) above. In the case
of an Employee Program funded through an organization described in
Code Section 501(c)(9), each reference to such Employee Program shall
include a reference to such organization.
(ii) An entity "maintains" an Employee Program if such entity sponsors,
contributes to, or provides (or has promised to provide) benefits
under such Employee Program, or has any obligation (by agreement or
under applicable law) to contribute to or provide benefits under such
Employee Program, or if such Employee Program provides benefits to or
otherwise covers employees of such entity, or their spouses,
dependents, or beneficiaries.
(iii) An entity is an "ERISA Affiliate" of MMA, RTS or any Subsidiary
during any period in which it is, or was, considered a single
employer with MMA, RTS or any Subsidiary under ERISA Section 4001(b)
or part of the same "controlled group" as MMA, RTS or any Subsidiary
for purposes of Code Section 414 or ERISA Section 302(d)(8)(C).
(iv) "Multiemployer Plan" shall have the meaning set forth in ERISA Section
3(37).
23
<PAGE>
3.24. Officers and Employees.
----------------------
(a) Schedule 3.24(a) contains a true and complete list of all current officers
----------------
and employees of MMA, RTS or the Subsidiaries. In each case, such
Schedule includes the current job title and annual salary of each such
individual.
(b) Except as set forth in Schedule 3.23 or Schedule 3.24(b), none of MMA, RTS
------------- ----------------
or the Subsidiaries has any obligation, contingent or otherwise, under (a)
any collective bargaining or other similar labor agreement, (b) any
written agreement containing severance or termination pay arrangements,
(c) any deferred compensation agreement, retainer or consulting
arrangements, (d) any pension or retirement plan, any bonus or profit-
sharing plan, any stock option or stock purchase plan, or (e) any other
written non-terminable (whether with or without penalty) employment
arrangement (each an "Employment Arrangement"). None of MMA, RTS or the
Subsidiaries is in default with respect to any material term or condition
of any Employment Arrangement, nor will the Closing (or the transactions
contemplated hereby or thereby) result in any such default, including,
without limitation, after the giving of notice, lapse of time or both.
None of MMA, RTS or the Subsidiaries is delinquent in payments to any of
its employees for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed for it to the date hereof
or amounts required to be reimbursed to such employees. Except as set
forth in Schedule 3.24(b), upon termination of the employment of any of
----------------
said employees, none of MMA, RTS or the Subsidiaries could, by reason of
the transactions contemplated by this Agreement or any act or omission
occurring prior to the Closing, be liable to any of said employees for so-
called "severance pay" or any other payments. None of MMA, RTS or the
Subsidiaries is obligated to make any payments, nor is it a party to any
agreement that could obligate MMA, RTS or any Subsidiary to make any
payments, that will not be deductible under Section 280G of the Code.
Except as set forth in Schedule 3.24(b), none of MMA, RTS or the
----------------
Subsidiaries has any written policy, plan or program of paying severance
pay or any form of severance compensation in connection with the
termination of employment. MMA, RTS and each Subsidiary is in compliance
in all material respects with all applicable laws and regulations
respecting labor, employment, fair employment practices, work place safety
and health, terms and conditions of employment, and wages and hours. There
are no charges of employment discrimination or unfair labor practices
against or involving MMA, RTS or any Subsidiary. There are no grievances,
complaints or charges that have been filed against MMA, RTS or any
Subsidiary under any dispute resolution procedure that would have an MMA
Material Adverse Effect, and there is no arbitration or similar proceeding
pending and no claim therefor has been asserted. MMA, RTS and each
Subsidiary has in place all employee policies required by applicable laws,
rules and regulations, the failure of which to have in place would have an
MMA Material Adverse Effect, and there have been no material violations or
alleged violations of any of such policies. None of MMA, RTS or the
Subsidiaries has received any written notice indicating that any of its
employment policies or practices is currently being audited or
investigated by any Governmental Authority. MMA, RTS and each Subsidiary
is, and at all times since November 6, 1986 has been, in compliance with
the requirements of the Immigration Reform Control Act of 1986.
24
<PAGE>
3.25. Non-Foreign Status.
------------------
None of the Sellers, MMA, RTS or the Subsidiaries is a nonresident
alien individual or foreign corporation for purposes of Section 897 of the Code.
RTS is not a United States real property holding corporation within the meaning
of Section 897(c)(ii) of the Code.
3.26. Transfer of Interests, Stock or Subsidiary Stock.
------------------------------------------------
No current holder of Interests, Stock or Subsidiary Stock has at any
time transferred any of such Interests, Stock or Subsidiary Stock or any right
or obligation thereunder to any employee of MMA, RTS or any Subsidiary which
transfer constituted compensation for services rendered to MMA, RTS or any
Subsidiary by said employee.
3.27. No Unfair Burden.
----------------
In connection with the transactions contemplated by this Agreement,
none of MMA, RTS, the Subsidiaries, Sellers or any "interested person" (as such
term is defined in the Investment Company Act) of MMA, RTS, the Subsidiaries or
Sellers has imposed and MMA, RTS, the Subsidiaries and Sellers, and the
"interested persons" of each, do not intend to, directly or indirectly, impose,
an unfair burden on the Funds as a result of any such transactions, or as a
result of any express or implied terms, conditions, or understandings applicable
to any such transactions within the meaning of Section 15(f) of the Investment
Company Act.
3.28. Additional Representations and Warranties relating to each Fund
---------------------------------------------------------------
(a) Since inception, each Fund has been and continues to be a duly registered
investment company in material compliance with the Investment Company Act
and the rules and regulations promulgated thereunder and duly registered
or licensed and in good standing under the laws of each jurisdiction in
which such qualification is necessary. To the knowledge of MMA and
Sellers, each Fund, since its inception, has been, except for any material
non-compliance prior to the date hereof which has been cured, in
compliance in all material respects with all applicable federal and state
laws, rules, regulations and orders, except as set forth on Schedule
--------
3.28(a). Since their initial offering, shares of each Fund have been duly
-------
qualified for sale under the securities laws of each jurisdiction in which
they have been sold or offered for sale at such time or times during which
such qualification was required except where the failure to be so
registered or licensed would not have an MMA Material Adverse Effect. The
offering and sale of shares of each Fund have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), during such
period or periods for which such registration is required, the related
registration statement has become effective under the Securities Act, no
stop order suspending the effectiveness of such registration statement has
been issued and no proceedings for that purpose have been instituted or,
to the knowledge of MMA and Sellers, are contemplated. As the same pertain
to each Fund, to the knowledge of MMA and Sellers, the registration
statement of the Fund under the Investment Company Act and/or the
Securities Act has, at all times when such registration statement was
effective, complied in all material respects with the requirements of the
Investment Company Act and the Securities Act then in effect and
25
<PAGE>
neither such registration statement nor any amendments thereto contained
at the time such registration statement became effective and during which
time that the registration statement was in use, an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. Copies of the
current registration statement of each Fund under the Investment Company
Act and/or the Securities Act which was filed ____________, 199_, (the
"Registration Statement") have been made available to MMA Buyer. All
shares of each Fund were sold pursuant to an effective registration
statement to the extent required by the Securities Act and have been duly
authorized and, when issued, were validly issued, fully-paid and non-
assessable against each Fund. Each Fund's investments made since inception
have been made in all material respects in accordance with its investment
objective, investment policies and restrictions set forth in its
registration statement in effect at the time the investments were made
(except where any violation of the foregoing has been cured and the Fund
has been made whole for any resulting losses) and have been held in
accordance with its respective investment policies and restrictions, to
the extent applicable and in effect at the time such investments were
held.
(b) As to each Fund, there has been in full force and effect an investment
advisory agreement at all times since the inception of each Fund. Each
agreement pursuant to which MMA, RTS or any Subsidiary has received
compensation respecting its activities in connection with each Fund was
duly approved and has been duly renewed in accordance with the applicable
provisions of the Investment Company Act.
(c) Except as set forth on Schedule 3.28(c), there are no special
----------------
restrictions, consent judgments or SEC or judicial orders on or with
regard to any Fund currently in effect.
(d) Since its inception, each Fund has continuously elected and qualified to
be treated as a "regulated investment company" under Subsection M of the
Code and has continuously been eligible to compute, and has for each
taxable year computed, its federal income tax under Section 852 of the
Code. None of MMA, RTS, any Subsidiary or, to the knowledge of MMA and
Sellers, any Fund, has received any notice or other communication relating
to or affecting such status.
(e) At the Closing Date, each Fund will have timely filed all Tax returns,
reports and other filings (including information returns, declarations and
reports) (the "Mutual Fund Tax Returns") required to be filed by it on or
before such date, any such Mutual Fund Tax Returns shall be, to the
knowledge of MMA and Sellers, complete and correct, and each Fund will
have paid, or withheld and paid over, all Taxes shown or required to be
shown as due on such Mutual Fund Tax Returns. No such Mutual Fund Tax
Return is currently under audit, no assessment has been asserted with
respect to such Mutual Fund Tax Returns, and no requests for waivers of
the time to make any such assessment are pending. None of the Funds is
delinquent in the payment of any Tax, assessment or governmental charge.
(f) None of MMA, RTS, any Subsidiary or any person who is an "affiliated
person" (as defined in the Investment Company Act) or an "interested
person" (as defined in the Investment Company Act) of MMA, RTS or any
Subsidiary, receives or is entitled to receive any
26
<PAGE>
compensation directly or indirectly (i) from any person in connection with
the purchase or sale of securities or other property to, from or on behalf
of such Fund, other than as broker in connection with the purchase or sale
of securities in compliance with Section 17(e) of the Investment Company
Act and regulations thereunder, or (ii) from any Fund or its security
holders for other than bona fide investment advisory, administrative or
other services. Accurate and complete disclosure of all such compensation
arrangements has been made in the Registration Statement filed under the
federal securities laws.
(g) MMA has made available to MMA Buyer correct and complete copies of the
audited financial statements, prepared in accordance with GAAP, of each
Fund for the past five fiscal years, and unaudited financial statements,
prepared in accordance with GAAP, of each Fund as of its most recent semi-
annual stub period (the "1999 Unaudited Financials") (each hereinafter
referred to as a "Mutual Fund Financial Statement"). Each of the Mutual
Fund Financial Statements is consistent with the books and records of such
Fund, is complete and correct in all material respects and presents fairly
the financial position of such Fund in accordance with GAAP applied on a
consistent basis (except as otherwise noted therein) at the respective
date of such Mutual Fund Financial Statements and the results of
operations and cash flows for the respective periods indicated (except in
the case of the 1999 Unaudited Financials, the absence of footnotes and
customary year end adjustments). The Mutual Fund Financial Statements
reflect and disclose all material changes in accounting principles and
practices adopted by each Fund during the periods covered by each Mutual
Fund Financial Statement.
(h) Except as set forth on Schedule 3.28(h), there is no litigation or action,
----------------
suit, proceeding or investigation at law or in equity pending or, to the
knowledge of MMA and Sellers, threatened in any court or before or by any
Governmental Authority, or before any arbitrator, by or against each Fund,
or, to the knowledge of MMA and Sellers, any officer or director thereof,
MMA, RTS or any Subsidiary relating to the activities of any Fund, that,
if successful, would result in any disqualification of MMA under Section
9(a) of the Investment Company Act, or any event which would require MMA
to give an affirmative response to any of the questions in Item 11 of
MMA's Form ADV (or any similar or successor form) or Item 3 of the SEC
Supplement to Form TA-1 (or any similar successor form) or require an
affirmative response from RIB under Item 7 of RIB's Form BD (or any
similar or successor form) or from RSI under Item 3 of the SEC Supplement
to Form TA-1 (or any similar successor form). There are no judgments,
injunctions, orders or other judicial or administrative mandates
outstanding against or affecting any Fund or, to the knowledge of MMA and
Sellers, any officer or director thereof relating to the activities of or
affecting any Fund.
(i) Except as set forth on Schedule 3.28(i), to the knowledge of MMA and
----------------
Sellers, each Fund complies, and has been maintained in compliance, in all
material respects, with all applicable requirements, including all
reporting and disclosure requirements, prescribed by any and all
applicable laws or regulations and orders thereunder.
(j) The exhibit list in the Registration Statement includes all of the
documents that would be required to be included thereon if such
Registration Statement were being refiled.
27
<PAGE>
(k) MMA has furnished to MMA Buyer, with respect to each Fund, complete and
correct copies of (i) Annual and Semi-Annual Reports and proxy statements
of the Fund pertaining to the last five years of the Fund, each in the
form delivered to the Fund's shareholders, as well as any additional
report or other material generally delivered to such shareholders since
the delivery of such Annual Report or Semi-Annual Report, as the case may
be; (ii) all Prospectuses, together with Statements of Additional
Information of each Fund, filed with the SEC in the last five years and
(iii) all reports of each Fund on Form N-SAR together with any and all
exhibits annexed thereto from the last five years of each Fund; each in
the form filed with the SEC (all of the foregoing documents referred to in
(i), (ii) and (iii) being collectively referred to herein as the "Fund
Statements"). To the knowledge of MMA and Sellers, the information
contained in the Fund Statements does not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary in order to make any material statement made therein,
in light of the circumstances, not misleading. The financial statements,
including, without limitation, the Statement of Assets and Liabilities,
the Statement of Operations and the Statement of Changes in Net Assets,
and the notes thereto set forth in any such Annual or Semi-Annual Report
fairly present the financial position of each Fund as at the dates of such
statements and the results of its operations for the periods covered
thereby in accordance with GAAP consistently applied (except as noted
therein). Since the end of the period covered by any such Annual or Semi-
Annual Report, there has occurred no event or condition which would (i)
require any Fund to file an additional amendment, registration statement,
prospectus, prospectus supplement, report or other document with the SEC,
which document has not been so filed with the SEC and delivered to Buyers
or (ii) require any Fund to conduct a meeting of its shareholders, in each
case other than with respect to the transactions contemplated by this
Agreement.
3.29. Absence of Certain Changes.
--------------------------
Since the date of the most recent Mutual Fund Financial Statements of
each Fund to the date hereof, no event or development has occurred that has had
or would reasonably be expected to have an MMA Material Adverse Effect on any
Fund. During such period, neither MMA (as pertains to its management of each
Fund) nor any Fund has:
(a) declared, set aside, made or paid any dividend or other distribution in
respect of its capital stock or other equity interests or otherwise
purchased or redeemed, directly or indirectly, any shares of its capital
stock or other equity interests, except in the ordinary course of its
business consistent with past practice;
(b) had any action taken by the Board of Directors/Trustees of any Fund, other
than actions in the ordinary course of business;
(c) adopted, or amended in any material respect, any employment, collective
bargaining, bonus, profit-sharing, compensation, stock option, pension,
retirement, deferred compensation or other plan, agreement, trust, fund or
arrangement for the benefit of any Director/Trustee of the Funds;
28
<PAGE>
(d) amended or terminated or, to the knowledge of MMA and Sellers, proposed or
threatened amendment or termination, whether written or oral, of any
agreement or contract involved in the operation of any Fund;
(e) amended its Articles of Incorporation, Declaration of Trust or by-laws or
any other organizational documents;
(f) waived any right of material value;
(g) changed in any material respect its investment objective, policies, or
restrictions;
(h) except as set forth on Schedule 3.29(h), changed its accounting practices,
----------------
policies or principles, except as may be required under applicable law or
GAAP;
(i) operated its business in any manner other than in the ordinary course of
business consistent with past practice; or
(j) except as otherwise contemplated herein, taken any action or omitted to
take any action that is reasonably likely to result in the occurrence of,
or agreed or committed to do, any of the foregoing.
ARTICLE IV
ADDITIONAL REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller, on his or her own behalf only, represents and warrants to
Buyers as follows:
4.1. Ownership of Interests.
----------------------
(a) Each Seller (i) is the sole record and beneficial owner of the Stock
and/or Interests set forth opposite his, her or its name on Schedule 1.1,
------------
free and clear of all Liens; and (ii) has full legal right, power and
authority to enter into this Agreement and to sell such Stock and/or
Interests to Buyers without the need for the consent of any other person.
(b) Neither the execution, delivery and performance of this Agreement and each
document, agreement and instrument to be executed by Sellers pursuant to
or as contemplated by this Agreement nor the consummation by Sellers of
the transactions contemplated hereby, will (i) violate, conflict with, or
result in a breach of any provisions of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or
acceleration under, or the creation of any Lien upon any of the properties
or assets of MMA, RTS, any Subsidiary or the Funds under any of the terms,
conditions or provisions of (x) the organizational documents of MMA, RTS,
any Subsidiary or
29
<PAGE>
any Fund, or (y) except as set forth in Schedule 3.2(b) or Schedule
--------------- --------
4.1(b), any note, bond, mortgage, indenture, deed of trust, license,
------
lease, agreement or other instrument or obligation to which MMA, RTS, any
Subsidiary or any Fund is a party or by which MMA, RTS, any Subsidiary or
any Fund may be bound, or to which MMA, RTS, any Subsidiary or any Fund,
or the properties or assets of MMA, RTS, any Subsidiary or any Fund, may
be subject, or (ii) violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation of any governmental, regulatory or
self-regulatory authority applicable to MMA, RTS, any Subsidiary or any
Fund or to any of the properties or assets of MMA, RTS, any Subsidiary or
any Fund.
4.2. Authorization.
-------------
This Agreement and each document, agreement and instrument to be
executed by Sellers pursuant to or as contemplated by this Agreement, has been
duly authorized, executed and delivered by Sellers, and no further proceedings
on the part of Sellers are necessary to authorize this Agreement and the
transactions contemplated hereby. This Agreement and each document, agreement
and instrument to be executed by Sellers (as the case may be) pursuant to or as
contemplated by this Agreement, is the legal, valid and binding obligation of
Sellers, enforceable in accordance with its terms.
ARTICLE V
CONDUCT OF BUSINESS PRIOR TO THE CLOSING
5.1. Conduct Prior to Closing.
------------------------
MMA hereby covenants and agrees with Buyers that, prior to the
Closing, unless the prior written consent of MMA Buyer shall have been obtained
and except as otherwise expressly contemplated in this Agreement or requested by
MMA Buyer (and agreed to by MMA), MMA, RTS, each Subsidiary and each Fund shall
operate its business only in the usual, regular and ordinary course and in
accordance with past practice and conduct its business in a manner comporting
with the standards of service quality and compliance heretofore met by it, shall
use its best efforts to operate its business in compliance in all material
respects with applicable laws and shall use its commercially reasonable efforts
to preserve intact its business organization and assets and maintain its rights,
franchises and business and customer relations necessary to run the business as
currently run. To the extent this Section 5.1 (or any of its subsections
hereinafter set forth) is applicable to the Funds, MMA's obligation shall be
limited to not taking any action (except as directed by the governing board of a
Fund) or recommending that the Funds take any action inconsistent with the
following covenants and agreeing to promptly advise MMA Buyer of any action
taken by a Fund's officers or governing board that would be inconsistent with
the following covenants. From the date hereof until the Closing, MMA shall
ensure, subject to the foregoing, that without the prior written consent of MMA
Buyer and except as otherwise expressly contemplated by this Agreement:
30
<PAGE>
(a) MMA, RTS, each Subsidiary and each Fund shall not incur any indebtedness
for borrowed money, except in the ordinary course of business consistent
with prior practice, issue or sell any debt securities or prepay any debt;
(b) MMA, RTS, each Subsidiary and each Fund shall not, except in the ordinary
course of business consistent with past practice, sell, transfer, lease,
mortgage, pledge or hypothecate any of its properties or assets, tangible
or intangible; provided, that in any event RTS shall not sell, transfer,
lease or encumber the Owned Real Estate or any interest therein or portion
thereof or enter into any contract, agreement or understanding to do the
same;
(c) MMA, RTS, each Subsidiary and each Fund shall not, except where required
in the exercise of its fiduciary obligations, take any action (other than
in connection with the transactions contemplated hereby), other than
actions in the ordinary course of business;
(d) MMA, RTS, each Subsidiary and each Fund shall not forgive or cancel any
debts or claims, or waive any rights, or discharge any lien or liability
except for fair value or in the ordinary course of business consistent
with past practice;
(e) MMA, RTS and each Subsidiary shall not recommend that any Fund change its
investment objective, policies, or restrictions;
(f) MMA, RTS, each Subsidiary and each Fund shall not, except as provided in
Section 5.1(l) or as may be required by applicable law and after notice to
--------------
MMA Buyer, adopt, or amend in any material respect, any employment,
collective bargaining, bonus, profit-sharing, compensation, stock option,
pension, retirement, deferred compensation or other plan, agreement,
trust, fund or arrangement for the benefit of employees or officers of
MMA, RTS, any Subsidiary or the Directors/Trustees of each Fund;
(g) except (i) such changes or terminations as may be proposed by MMA Buyer
(and agreed to by MMA), (ii) as may be required by applicable law and
after notice to Buyers, (iii) as expressly provided by this Agreement or
(iv) any renewal of an expiring agreement for which MMA, RTS, each
Subsidiary and each Fund shall obtain the prior consent of MMA Buyer which
consent shall not be unreasonably withheld, MMA, RTS, each Subsidiary and
each Fund shall not amend or terminate the Partnership Agreement, any Real
Estate Lease, any agreement or contract involved in the operation of the
Funds, any material agreement, Articles of Incorporation, Declaration of
Trust or bylaws (as the case may be) or any other organizational
documents, or file any tax election, claim for refund on an amended return
(in the case of RTS or RIB only), or request for ruling or determination
with any taxing authority;
(h) MMA, RTS, each Subsidiary and each Fund shall not change in any respect
its accounting practices, policies or principles, except as may be
required by applicable law or GAAP and after notice to MMA Buyer;
(i) MMA, RTS, each Subsidiary and each Fund shall not incur any liability or
obligation (whether absolute, accrued, contingent or otherwise and whether
direct or as guarantor
31
<PAGE>
or otherwise with respect to the obligations of others), except in the
ordinary course of business consistent with past practice or as otherwise
permitted hereunder; provided, however, that in no event shall any of RTS
or the Funds incur any such debt obligations in an amount in excess of
$25,000 without providing prior notice to MMA Buyer (other than deposit
accounts or Federal Home Loan Bank advances with a term of one year or
less);
(j) MMA, RTS, each Subsidiary and each Fund shall not make any material
changes in policies or practices relating to the sale of its shares
(including accounting practices relating thereto) or in policies or
practices of employment unless required by applicable law or GAAP and
after notice to MMA Buyer;
(k) MMA, RTS, each Subsidiary and each Fund shall not enter into any type of
business not conducted as of the date of this Agreement or create or
organize any subsidiary or enter into or participate in any joint venture
or partnership;
(l) MMA, RTS, each Subsidiary and each Fund shall not make any change in the
compensation payable or to become payable to any of its representatives,
employees, agents or independent contractors except with respect to its
employees (exclusive of any of the Sellers) for (i) normal annual
increases in accordance with past practices or (ii) annual bonus payments
or arrangements in the ordinary course of business not to exceed $200,000
per year in the aggregate;
(m) RTS, each Subsidiary and each Fund shall not adjust, split, combine or
reclassify any capital stock except as set forth in Section 7.12; set any
------------
record or payment dates for the payment of any dividends or distributions,
or pay any dividend or make any distribution, on its capital stock except
in the ordinary and usual course of business consistent with past
practice; directly or indirectly redeem, purchase or otherwise acquire,
any shares of its capital stock (except with respect to the Funds as
required by the provisions of the Investment Company Act) or any
securities or obligations convertible into or exchangeable for any shares
of its capital stock or grant any stock appreciation rights or grant any
individual, corporation or other entity any right to acquire any shares of
its capital stock; MMA shall not make any transfer or distribution of its
property to the Sellers in respect of any Interests except to the extent
and in the manner provided in Section 1.3 and except that MMA shall not be
-----------
prohibited from redeeming, purchasing or otherwise acquiring the Limited
Partnership Interests of the Sellers other than the Principal Sellers;
(n) MMA, RTS, each Subsidiary and each Fund shall not, except for transactions
in the ordinary course of business consistent with past practice, make any
material acquisition or investment either by purchase of stock or
securities, merger or consolidation, contributions to capital, property
transfers, or purchases of any property or assets of any other individual,
corporation or other entity other than a wholly-owned subsidiary thereof;
provided, however, that, notwithstanding anything to the contrary
contained herein, none of MMA, RTS or the Subsidiaries shall make any
acquisition that would require it or MMA Buyer to register as a bank
holding company under the Bank Holding Company Act of 1956, as amended;
32
<PAGE>
(o) RTS shall not enter into, renew or terminate any contract or agreement,
other than loans, deposit accounts and Federal Home Loan Bank advances with
a term of one year or less made in the ordinary course of business, that
calls for aggregate annual payments in excess of $50,000 individually or
$200,000 in the aggregate and which is not either (i) terminable at will on
60 days or less notice without payment of a penalty or (ii) has a term of
one year or less; or make any material change in or terminate any of its
leases or contracts, other than renewals of contracts or leases for a term
of one year or less without materially adverse changes to the terms
thereof;
(p) RTS shall not make any capital expenditures in excess of $25,000 in the
aggregate without the prior written consent of MMA Buyer which will not be
unreasonably withheld, other than expenditures necessary to maintain
existing assets in good repair;
(q) RTS shall not make application for the opening, relocation or closing of
any, or open, relocate or close any, branch or loan production office;
(r) RTS shall not make or acquire any loan or issue a commitment for any loan
except for loans and commitments that are made in the ordinary course of
business consistent with past practice or issue or agree to issue any
letters of credit or otherwise guarantee the obligations of any other
persons except in the ordinary course of business in order to facilitate
the sale of real property acquired by foreclosure or deed in lieu of
foreclosure;
(s) RTS shall not foreclose upon or otherwise acquire (whether by deed in lieu
of foreclosure or otherwise) any real property without the prior written
consent of MMA Buyer which will not be unreasonably withheld (other than 1-
to-4 family residential properties in the ordinary course of business);
(t) RTS shall not change its investment securities portfolio policy, or the
manner in which the portfolio is classified or reported except as required
by applicable law or GAAP;
(u) RTS shall not engage in the business of making or make any Veterans'
Administration guaranteed or Federal Housing Administration insured
mortgage loans;
(v) RTS shall not enter into any contracts or agreements or amendments or
supplements thereto pertaining to any further development of specialized
software without the prior written consent of MMA Buyer which will not be
unreasonably withheld;
(w) RTS shall maintain its loan loss reserves in an amount that is not less
than the amount reflected on the 1998 RTS Financial Statements to the
extent permitted by GAAP;
(x) MMA, RTS, each Subsidiary and each Fund shall not enter into any agreement,
commitment or other transactions or make any amendment or modification to
any such agreement or agree or commit to do any of the foregoing unless it
is entered into in the ordinary course of business or required by
applicable law or GAAP and after notice to MMA Buyer.
33
<PAGE>
5.2. Consents and Approvals.
----------------------
Subject to the terms and conditions herein provided, each of the
parties hereto agrees to cooperate with the other and use its commercially
reasonable efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things necessary, proper or advisable under all applicable
laws, regulations and contractual arrangements to consummate and make effective
the transactions contemplated by this Agreement at the earliest practicable
time. The parties hereto shall take no action, and MMA shall use its
commercially reasonable efforts not to permit each Subsidiary and each Fund,
without in any way limiting the ability of the Board of Directors/Trustees of
each Fund to fulfill its fiduciary obligations, to take any action (i) with
respect to each Subsidiary and each Fund, which would render any of the
representations and warranties contained herein untrue in any material respect
at and as of the Closing Date, (ii) with respect to RTS, which would render any
of the representations and warranties of RTS untrue resulting in an RTS Material
Adverse Effect (as defined herein) at and as of the Closing Date, or (iii) which
would materially and adversely affect the ability of the parties to satisfy any
of the conditions set forth in Article VIII.
------------
ARTICLE VI
COMPLIANCE WITH FEDERAL SECURITIES LAWS
6.1. Management Contract; Proxy Statement.
------------------------------------
(a) In anticipation of the Closing, and thereafter as necessary, the parties
hereto shall cooperate, in a manner in compliance with the Investment
Company Act, with one another to obtain approvals for each Fund to enter
into a new management contract with MMA substantially the form attached
hereto as Exhibit 6.1(a) (the "New Management Contract"). MMA shall, in a
--------------
manner in compliance with the Investment Company Act, use its commercially
reasonable efforts to induce each Fund to call a meeting of its Board of
Directors/Trustees and a meeting of its shareholders to consider and
approve the entering by each Fund into the New Management Contract.
(b) If the New Management Contract is approved by the Board of
Directors/Trustees of each Fund, MMA shall assist each Fund to prepare and
file with the SEC as soon as is reasonably practicable any proxy materials
relating to the transactions contemplated by this Agreement that are
required to be prepared and filed (the "Proxy Statement"). Any material
provided by MMA or the Funds that is included in the Proxy Statement shall
comply as to form in all material respects with all applicable requirements
of federal securities laws and shall be accurate and complete and not
contain any untrue statement of material fact, or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances in which they were
made, not misleading. MMA shall assist, in a manner in compliance with the
federal securities laws and other applicable law, in the solicitation of
proxies for the required shareholder meetings and shall use its
commercially reasonable efforts to obtain approval from the shareholders
and the Board of Directors/Trustees of each Fund of the matters referred to
herein.
34
<PAGE>
6.2. Required Actions.
----------------
MMA shall use its commercially reasonable efforts, in a manner in
compliance with the Investment Company Act, to induce the Board of
Directors/Trustees of each Fund and of the Cappiello-Rushmore Trust, acting in
accordance with its fiduciary obligations to approve (i) entering into such
written fund service agreements (as comply with the Investment Company Act)
substantially in the form attached as Exhibit 6.2 and (ii) terminating the
-----------
existing agreements listed on Schedule 6.2, at the time the replacement service
------------
agreements become effective.
6.3. Section 15(f).
-------------
(a) MMA and MMA Buyer intend to structure and complete the transactions
contemplated by this Agreement, and MMA Buyer intends thereafter to conduct
the affairs of each Fund through MMA, in such a manner as to obtain the
benefits and protections of Section 15(f) of the Investment Company Act.
(b) MMA and MMA Buyer have entered into this Agreement in reliance upon the
benefits and protections provided by Section 15(f) of the Investment
Company Act, and each of MMA and MMA Buyer shall use its respective
commercially reasonable efforts to assist each Fund to solicit proxies and
otherwise take such actions as may be necessary or appropriate to induce
the Board of Directors/Trustees of each Fund to be reconstituted, to the
extent necessary, to satisfy the condition set forth in Section 15(f)(1)(A)
of the Investment Company Act on or before the Closing Date, and otherwise,
through the Closing Date, to conduct its business and the business of each
Fund.
(c) MMA Buyer covenants and agrees to use its commercially reasonable efforts
to ensure that:
(i) for a period of three years from and after the Closing Date, at least
75% of the members of the Board of Directors/Trustees of each Fund are
not interested persons of MMA Buyer, MMA or any other investment
manager of each Fund appointed after the Closing; and
(ii) for a period of two years from and after the Closing Date, there is
not imposed on the Funds an "unfair burden" as a result of the
transactions contemplated by this Agreement, any payments in
connection therewith, or understandings applicable thereto.
(d) From and after the Closing Date, MMA Buyer shall use, and shall cause MMA
to use, its commercially reasonable efforts to encourage and assist each
Fund and its Board of Directors/Trustees to conduct the business of each
Fund in accordance with Section 6.3(c).
--------------
35
<PAGE>
(e) The terms used in this Section 6.3 shall have the meanings set forth in
-----------
Section 15(f) of the Investment Company Act.
ARTICLE VII
COVENANTS
7.1. Current Information.
-------------------
(a) Prior to Closing, MMA shall promptly notify MMA Buyer of (i) any material
change in the normal course of the business of each Fund or of any
complaints from a governmental or regulatory authority or a self-regulatory
body, investigations or hearings (or communications indicating that the
same may be contemplated), or the institution or the threat of any
litigation that comes to its attention which would, in any manner,
challenge, prevent, alter or materially delay any of the transactions
contemplated hereby, and MMA will keep MMA Buyer fully informed with
respect to such events, (ii) any event which would cause or constitute a
breach or default, or would have caused or constituted a breach or default
had such event occurred or been known to MMA, RTS or Sellers prior to the
date hereof, of any of the representations, warranties or covenants of MMA,
RTS or Sellers contained in or referred to in this Agreement or any
Schedule or Exhibit referred to in this Agreement, in which case MMA shall
give detailed written notice thereof to MMA Buyer and MMA, RTS and Sellers
shall use its and their respective commercially reasonable efforts to
prevent or promptly remedy the same, and (iii) the status of regulatory
applications, third party consents, shareholder approvals and registration
amendments required pursuant to Article VI or any application or notice to
----------
or filing with the OTS or other banking authority.
(b) Prior to Closing, MMA Buyer shall promptly notify MMA of (i) any complaints
from a governmental or regulatory authority or a self-regulatory body,
investigations or hearings (or communications indicating that the same may
be contemplated), or the institution or the threat of any litigation that
comes to its attention with respect to Buyers which would, in any manner,
challenge, prevent, alter or materially delay any of the transactions
contemplated hereby, and MMA Buyer will keep MMA fully informed with
respect to such events, (ii) any event which would cause or constitute a
breach or default, or would have caused or constituted a breach or default
had such event occurred or been known to Buyers prior to the date hereof,
of any of the representations, warranties or covenants of Buyers or FBR
contained in or referred to in this Agreement or any Schedule or Exhibit
referred to in this Agreement, in which case MMA Buyer shall give detailed
written notice thereof to MMA and Buyers shall use their commercially
reasonable efforts to prevent or promptly remedy the same, and (iii) the
status of regulatory applications, third party consents, shareholder
approvals and registration amendments required pursuant to Article VI or
----------
any application or notice to or filing with the OTS or other banking
authority. MMA Buyer shall also provide to MMA prior to the filing all
proposed applications and other documents and material responses that it
intends to file with any Governmental Authority relating to any of the
transactions contemplated by this Agreement, together with copies of any
responses, comments, denials or approvals issued by any Governmental
Authority
36
<PAGE>
promptly upon its receipt thereof. Notwithstanding the foregoing, nothing
herein shall obligate MMA Buyer to provide to MMA any confidential
information to be filed or filed with the OTS or any other banking
authority, such as MMA Buyer's business plan for RTS or the financial or
biographical information of any management official or senior executive of
MMA Buyer, FBR or any of their affiliates.
7.2. Access.
------
MMA, RTS and the Subsidiaries shall upon reasonable notice afford
(and, with respect to the Funds, shall use its best efforts to make available)
to Buyers and their representatives such access during normal business hours
throughout the period prior to the Closing Date to MMA's, RTS's and each
Subsidiary's books, records and Owned and Leased Real Estate and each Fund's
books, records, properties, and to such other information as MMA Buyer may
reasonably request that pertain to the operation of MMA, RTS, each Subsidiary or
each Fund, provided, such access does not unreasonably interfere with the
business of MMA, RTS, each Subsidiary or each Fund. Without limiting the
foregoing, MMA acknowledges that MMA Buyer shall make requests necessary to
afford MMA Buyer the opportunity to complete its due diligence review of the
operations, books and records of the Funds.
7.3. Information.
-----------
Each of Buyers, MMA (on behalf of itself and the Subsidiaries) and RTS
shall hold, and shall cause its respective directors, officers, employees,
agents, consultants and advisors to hold, in strict confidence, unless
disclosure to a regulatory authority is necessary in connection with any
necessary regulatory approval or unless compelled to disclose by judicial or
administrative process or by other requirement of law or the applicable
requirements of any regulatory agency or relevant stock exchange, all nonpublic
records, books, contracts, instruments, computer data and other data and
information (collectively, the "Information") concerning Buyers, MMA, RTS, the
Subsidiaries or the Funds furnished to Buyers or MMA (as the case may be) by the
other or the Funds or their respective representatives pursuant to this
Agreement (except to the extent that such information can be shown to have been
(a) previously known by such party on a non-confidential basis, (b) in the
public domain through no fault of such party or (c) later lawfully acquired from
other sources by the party to which it was furnished), and none of Buyers, MMA
(on behalf of itself and the Subsidiaries) or RTS (as the case may be) shall
release or disclose such Information to any other person, except its auditors,
attorneys, financial advisors, other consultants and advisors and, to the extent
permitted above, regulatory authorities. In the event of the termination of
this Agreement, each of Buyers, MMA (on behalf of itself and the Subsidiaries)
and RTS shall return to the other party or destroy all information furnished to
it and its representatives and all analyses, compilations, data, studies other
documents prepared by them or their representatives containing or based in whole
or in part on any such furnished information (including information reflecting
MMA Buyer's review of each Fund). Neither Sellers on one hand nor Buyers on the
other hand shall, directly or indirectly, defame, disparage, make derogatory
statements about or attempt knowingly to create
37
<PAGE>
any negative inference regarding the business of MMA, RTS, Sellers, the Funds or
Buyers and their respective affiliates.
7.4. Qualification of each Fund.
--------------------------
Subject to applicable fiduciary duties of the Board of Directors/Trustees
of the Funds to each Fund, MMA will use its commercially reasonable efforts to
cause each Fund to take no action (i) that would prevent each Fund from
qualifying as a "regulated investment company", within the meaning of Section
851 of the Code or being eligible to compute its income under Section 852 of the
Code or so computing its income, or (ii) that would be inconsistent with each
Fund's prospectus and other offering, advertising and marketing materials.
7.5. Forms.
-----
Prior to the Closing, MMA and RTS shall, and MMA shall cause the
Subsidiaries to, cooperate with MMA Buyer in the preparation and filing of all
forms and amendments to forms, including, without limitation, Forms ADV, BD and
TA-1 of MMA Buyer to be filed with federal agencies and self-regulatory
organizations and the state securities commissions, and all other documents
required to be filed or delivered under applicable federal and state laws, and
regulations promulgated thereunder, including, without limitation, the Advisers
Act and the Exchange Act and applicable related state acts and insurance laws,
as a result of the consummation of the transactions contemplated by this
Agreement and in order to put MMA Buyer in the position to operate the business
of MMA, RTS and RIB after the Closing Date in the same manner as they are
currently conducting business. Each of MMA and RTS shall use, and MMA shall
cause RIB to use, its respective commercially reasonable efforts to obtain as
promptly as practicable all licenses, permits, approvals and authorizations, and
to complete all applications and make all filings necessary (subject to MMA
Buyer's prior approval) to (i) enable MMA Buyer to operate the business of MMA,
RTS and RIB and shall provide MMA Buyer with copies of all such materials prior
to submission and a reasonable opportunity to comment thereon and (ii) prepare
RIB's registration and license under the Exchange Act and state laws as a
broker-dealer and maintain RIB's membership in the NASD. In this regard, MMA
shall provide on Schedule 7.5 a list of all states and other jurisdictions where
------------
RIB is registered or otherwise qualified to conduct business as a broker-dealer.
After the Closing, MMA Buyer will maintain in good condition all presently
existing books, records, files and documents of MMA for the time periods and in
the locations required by the Advisers Act and the rules thereunder including,
without limitation, Rule 204-2, or by Governmental Authorities.
7.6. Exclusivity.
-----------
None of MMA (on behalf of itself and the Subsidiaries), RTS, or the
Sellers will accept, negotiate, solicit, initiate or encourage the submission of
any proposal or offer from any person other than Buyers relating to the
acquisition of all or substantially all of the Interests, Stock, Subsidiary
Stock or assets of MMA, RTS or the Subsidiaries (including any acquisition
structured as a merger, consolidation, or share exchange). Each of MMA and
Sellers shall
38
<PAGE>
promptly notify MMA Buyer of the terms of any such proposal or offer and provide
to MMA Buyer a copy of any written offer or proposal with respect to the
foregoing prior to the Closing Date.
7.7. Taxes.
-----
(a) Each Seller shall be liable for all transfer taxes which are due as a
result of his, her or its transfer of Interests and/or Stock pursuant to
this Agreement.
(b) Sellers shall cause MMA not to amend any Tax return (including any schedule
thereto) filed as of the date of this Agreement, unless required by
applicable law and disclosed in Schedule 3.12 (as such schedule may be
-------------
amended at any time prior to the Closing Date by notice to Buyers).
Sellers, on behalf of MMA, shall prepare and file the final partnership Tax
returns for the final taxable year of MMA ending on the Closing Date
required to be filed after the date hereof in a manner that such returns
shall be consistent with returns for prior years.
(c) Sellers shall cause MMA to make a timely election under Code Section 754 to
adjust the basis of partnership property in the manner provided in Code
Sections 734 and 743 for the final taxable year of MMA ending on the
Closing Date, and, in doing so, to include with the final partnership Tax
returns of MMA for such final year any "Section 754 Forms" that are
required to be so included on account of the election under Code Section
754. Sellers and Buyers shall cooperate fully, and in good faith, with
each other in making this election, determining the fair market value of
each asset of MMA and allocating the Purchase Price for the Interests among
those assets in accordance with Sections 755 and 1060(d) of the Code.
"Section 754 Forms" shall mean all returns, documents, statements, and
other forms that are required to be submitted to the IRS in connection with
a Code Section 754 election made by a partnership with respect to which
there has been an applicable asset acquisition within the meaning of Code
Section 1060(d), and any analogous forms that are required to be filed for
state or local tax purposes.
(d) Any failure by Buyers to withhold monies from the Purchase Price for the
Interests that results in Taxes being assessed against Buyers shall be
treated as taxes for which Buyers are entitled to indemnification pursuant
to this Agreement.
(e) In no event will Buyers or any of their affiliates be responsible for any
Tax liability that arises as a result of the transfer of Interests or Stock
pursuant to this Agreement, including any state or local Tax liability
resulting in connection with such transfer; any such liability shall be the
responsibility of Sellers.
7.8. Waiver.
------
Each Seller waives any and all rights under the Partnership Agreement,
including, but not limited to rights of first refusal ("ROFR") and tag along
rights ("TAR"). In addition, Seller waives any and all notice provisions and
waiting periods contemplated by the Partnership
39
<PAGE>
Agreement including, but not limited to such notice provisions and waiting
periods associated with the ROFR, TAR and sale of partnership provisions.
7.9. Regulatory Matters.
------------------
(a) The parties hereto shall cooperate with each other and use commercially
reasonable efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings,
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Authorities that are
necessary or advisable to consummate the transactions contemplated by this
Agreement and to comply with the terms and conditions of all such permits,
consents, approvals and authorizations of all such Governmental
Authorities.
(b) Except as limited by Section 7.1(b), MMA shall have the right to review in
--------------
advance all the information relating to MMA and its Subsidiaries that
appears in any filing made with, or written materials submitted to, any
third party or any Governmental Authority in connection with the
transactions contemplated by this Agreement. In exercising the foregoing
right, MMA shall act reasonably and as promptly as practicable. The
parties hereto agree that they will consult with each other with respect to
the obtaining of all permits, consents, approvals and authorizations of all
third parties and Governmental Authorities necessary or advisable to
consummate the transactions contemplated by this Agreement and each party
will keep the other apprised of the status of matters relating to
completion of the transactions contemplated herein.
(c) MMA and Buyers shall, upon request, furnish each other with all information
concerning itself, its Subsidiaries, representatives, stockholders,
partners and affiliates and such other matters as may be reasonably
necessary or advisable in connection with any other statement, filing,
notice or application made by or on behalf of Buyers, MMA, RTS or any
Subsidiary to any Governmental Authority in connection with the
transactions contemplated by this Agreement.
(d) MMA Buyer and MMA shall promptly advise each other upon receiving any
communication from any Governmental Authority whose consent or approval is
required for consummation of the transactions contemplated by this
Agreement which causes such party to believe that there is a reasonable
likelihood that any regulatory approval will not be obtained or that the
receipt of any such approval will be materially delayed.
7.10. Proxy Statement.
----------------
Prior to mailing to the shareholders of each Fund, MMA Buyer and MMA
shall prepare proxy materials which are subject to regulation under the Exchange
Act or the Investment Company Act and which are to be used for any shareholders'
meeting directly or indirectly relating to the transaction. MMA Buyer and MMA
shall use their best efforts to finalize the proxy statement to their mutual
satisfaction. If the requisite percentage of shareholders of each Fund fails to
approve any one or more of the proposals for which approval was being sought at
the shareholder meeting, and any adjournment thereof, MMA Buyer may, in
40
<PAGE>
its sole discretion, elect in writing within five days after the failure to
approve, time being of the essence, not to consummate the transaction and
terminate this Agreement. If MMA Buyer timely elects to terminate this Agreement
as provided herein, no party shall have any liability to the other hereunder.
7.11. Press Releases, Etc.
--------------------
MMA Buyer and MMA shall consult with each other as to the form,
substance and timing of any press release or other public disclosure of matters
related to this Agreement or any of the transactions contemplated hereby and no
such press release or other public disclosure shall be made without the consent
of the other party or parties, which shall not be unreasonably withheld or
delayed; provided, however, that the parties may make such disclosures as are
required by law after making reasonable efforts in the circumstances to consult
in advance with the other parties.
7.12. Minority Stock.
--------------
The General Partner shall use its good faith efforts to acquire as
promptly as practicable the Minority Stock of the Additional Stockholders. In
the event that the General Partner has not acquired all of the Minority Stock
owned by the Additional Stockholders within three months after the date hereof,
then at the request of MMA Buyer, MMA shall cause RTS to undertake a reverse
merger, reverse stock split or similar action, to the extent not prohibited by
applicable law, to convert the Minority Stock then owned by Additional
Stockholders to a right to receive cash or dissenter or appraisal rights.
7.13. Tax Cooperation.
---------------
Buyers and Sellers shall reasonably cooperate with each other in
connection with the preparation of Tax returns (including the Mutual Fund Tax
Returns) of MMA, RTS, the Subsidiaries and the Funds and MMA, RTS, RIB or the
Sellers (on behalf of RSI and themselves) shall preserve all information,
returns, books, records and documents relating to any liabilities for Taxes with
respect to a taxable period until the later of the expiration of all applicable
statutes of limitation and extensions thereof, or a final determination with
respect to Taxes for such period and shall not destroy or otherwise dispose of
any record without first providing the other party with a reasonable opportunity
to review and copy the same.
7.14. Name Change.
-----------
In the event of termination of this Agreement, as soon as practicable,
each Buyer shall change its name so that it no longer contains any reference to
the name "Money Management Associates."
41
<PAGE>
ARTICLE VIII
CONDITIONS
8.1. Conditions to Each Party's Obligations to Consummate.
----------------------------------------------------
The respective obligations of each party to consummate the
transactions contemplated by this Agreement shall be subject to the fulfillment
or waiver at or prior to the Closing Date of the following conditions:
(a) Regulatory Approvals. The transactions contemplated by this Agreement
--------------------
shall have been approved by all Governmental Authorities, the approval of
which is required to permit consummation thereof, without the imposition of
any non-standard condition or requirement of any non-standard commitment
which is unreasonably burdensome in the reasonable judgment of the parties
hereto; and all waiting periods arising under applicable law shall have
duly lapsed or been terminated.
(b) No Orders. None of Buyers, MMA, RTS, any Subsidiary or any Fund shall be
---------
subject to any order, decree or injunction of a court or agency of
competent jurisdiction which enjoins or prohibits the consummation of any
of the transactions contemplated by this Agreement or prevents MMA Buyer
from operating the business of MMA, RTS and the Subsidiaries upon Closing
in the same manner as the business is currently operating.
(c) Litigation. No action or proceeding shall have been instituted or
----------
threatened by any court, Governmental Authority, self-regulatory body or
other person or entity and remain pending before any court, governmental
body or self-regulatory body or be threatened, to restrain or prohibit or
to recover damages in respect of any or all of the transactions
contemplated by this Agreement which is reasonably likely to have a Buyer
Material Adverse Effect or an MMA Material Adverse Effect (as the case may
be) with respect to any of the parties hereto, or would hinder MMA Buyer's
ability to conduct the business of MMA, RTS and RIB upon Closing in the
same manner as the business is currently being conducted; nor shall any
Governmental Authority or other person or entity have notified any party to
this Agreement or any of its affiliates that consummation of any or all of
the transactions contemplated by this Agreement would constitute a
violation of the laws of any jurisdiction or that it intends to commence
any action or proceeding to restrain or prohibit or to recover damages in
respect of any or all of the transactions contemplated by this Agreement,
unless such Governmental Authority or other person or entity shall have
withdrawn such notice and abandoned such action or proceeding.
(d) Third Party Consents. All authorizations, consents and approvals of third
--------------------
parties and of the Boards of Directors/Trustees of the Funds and the
Cappiello-Rushmore Trust and the shareholders of each Fund that are
required to be obtained in connection with the transactions contemplated
hereby, including those specified in Sections 6.1, 6.2 and 7.9 and Schedule
----------------- --- --------
3.7(c), shall have been obtained.
------
42
<PAGE>
8.2. Conditions to Obligation of Buyers to Consummate.
------------------------------------------------
The obligation of Buyers to consummate the transactions contemplated
hereby shall be subject to the fulfillment or waiver at or prior to the Closing
Date of the following additional conditions:
(a) Representations and Warranties. The representations and warranties of MMA,
------------------------------
RTS and Sellers set forth in Articles III and IV shall be true and correct
------------ --
in all material respects (other than (i) the representations and warranties
contained in Sections 3.1, 3.2(a) and 3.3 and Article IV and the
------------ ------ --- ----------
representations and warranties qualified as to "material," "materiality" or
"MMA Material Adverse Effect" which shall, subject to such qualifications,
be true and correct in all respects, and (ii) in the case of RTS,
inaccuracies in the representations and warranties of RTS based on an event
occurring after the date hereof and prior to Closing and disclosed to MMA
Buyer (A) that has not resulted in and is not reasonably expected to result
in a material adverse effect (whether taken individually or in the
aggregate with all other such effects) on the financial condition or
business or results of operations of RTS, including, without limitation,
any cease and desist order applicable to RTS that limits its activities or
any other supervisory order applicable to RTS that limits in any material
respect its activities, (B) affecting RTS that would prevent the
consummation of the transactions contemplated by this Agreement or have a
material adverse effect on the assets of RTS, except for conditions, events
or circumstances generally affecting the economy as a whole including
changes in prevailing interest rates or changes in laws affecting insured
depository institutions, generally (an "RTS Material Adverse Effect")) as
of the Closing Date as though made at and as of the Closing Date (it being
understood that representations and warranties that speak as of a specified
date shall continue to speak only as of the date specified), and Buyers
shall have received a signed certificate of MMA from its General Partner,
of RTS from Daniel L. O'Connor and its Chief Financial Officer and of
Sellers to that effect.
(b) Performance of Obligations. MMA (on behalf of itself and any Subsidiary),
--------------------------
RTS and each Seller shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior
to the Closing Date, and Buyers shall have received a signed certificate of
MMA from its General Partner, of RTS from Daniel L. O'Connor and its Chief
Financial Officer and of Sellers to that effect.
(c) Consulting and Noncompetition Agreements. On the date hereof, Daniel L.
----------------------------------------
O'Connor, Martin O'Connor and John Cralle each shall have duly executed and
delivered a Consulting and Noncompetition Agreement substantially in the
form attached hereto as Exhibit 8.2(c), each such agreement to be effective
--------------
as of Closing.
(d) New Management Contract and Fund Services Agreements. The shareholders and
----------------------------------------------------
the Board of Directors/Trustees of each Fund shall have approved the New
Management Contract, and the New Management Contract shall have been duly
executed and delivered by each Fund, and the Board of Directors/Trustees of
each Fund or the Cappiello-Rushmore Trust, as appropriate, shall have
approved the fund service agreements attached as
43
<PAGE>
Exhibit 6.2 and the fund services agreements shall have been duly executed
-----------
and delivered by each Fund or the Cappiello-Rushmore Trust, as appropriate.
(e) Assets Under Management; Net Management Fees. As of the close of business
--------------------------------------------
two days prior to the Closing Date, MMA shall have Aggregate Net Assets
(excluding any assets with respect to which, at the time of calculation
thereof, MMA had received notice that the contract or arrangement pursuant
to which such assets were being administered was being terminated) and Net
Management Fees, respectively, of at least 80% of (i) the arithmetic daily
average of Aggregate Net Assets and Net Management Fees, respectively, for
the period from June 30, 1999 to September 30, 1999 (the "Initial Period")
plus (ii) the arithmetic daily average of Aggregate Net Assets and Net
----
Management Fees, respectively, for the period from October 1, 1999 to
December 31, 1999 (or the close of business two days prior to the Closing
Date, if earlier) divided by (iii) 2 (the "Initial Average"); provided,
----------
however, in the event that the Closing Date has not occurred by October 2,
2000, if (i) the arithmetic daily average of Aggregate Net Assets and Net
Management Fees, respectively, for the Initial Period plus (ii) the
----
arithmetic daily average of Aggregate Net Assets and Net Management Fees,
respectively, for the period from June 30, 2000 to September 30, 2000
divided by (iii) 2 (the "Final Average") is less than the Initial Average,
----------
MMA shall have Aggregate Net Assets (excluding any assets with respect to
which, at the time of calculation thereof, MMA had received notice that the
contract or arrangement pursuant to which such assets were being
administered was being terminated) and the Net Management Fees,
respectively, of 80% of the Final Average. MMA Buyer shall receive a
signed certificate of MMA certifying that Aggregate Net Assets and Net
Management Fees equal 80% of the Initial Average or, if applicable, the
Final Average.
(f) Opinion of Counsel to MMA and Sellers. Buyers shall have received the
-------------------------------------
opinion of Breyer & Associates PC, counsel to MMA and Sellers, or other
counsel reasonably acceptable to Buyers, dated the Closing Date, addressed
to Buyers substantially in the form set forth in Exhibit 8.2(f) (which
--------------
opinion may rely upon the opinion of counsel to each Fund or any other
counsel acceptable to Buyers).
(g) Opinion of Counsel to each Fund. Buyers shall have received the favorable
-------------------------------
opinion of Morrison & Foerster, LLP, special counsel to each Fund, dated
the Closing Date, addressed to Buyers substantially in the form set forth
in Exhibit 8.2(g) (which opinion may rely upon the opinion of any other
--------------
counsel acceptable to Buyers).
(h) Delivery. Sellers shall have caused to be executed and/or delivered to MMA
--------
Buyer the following:
(i) certified copies of all resolutions, consents and approvals of the
General Partner and the Limited Partners (and if any of the Limited
Partners are entities requiring such resolutions, consents and
approvals, certified copies of such resolutions, consents and
approvals) of MMA authorizing the execution of this Agreement and the
transfer of the Interests and Stock and each of the agreements,
documents and instruments contemplated hereby to which MMA is a
party;
44
<PAGE>
(ii) a copy of the Certificate of Limited Partnership and Partnership
Agreement, as amended, of MMA and a certificate issued by the
Recorder of Deeds of the District of Columbia certifying that MMA is
in good standing in the District of Columbia as of the most recent
practicable date;
(iii) true, correct and complete copies of each of the agreements,
documents and instruments contemplated hereby to which MMA, RTS and
Sellers are a party, duly executed by MMA, RTS and Sellers and all
agreements, documents, instruments and certificates delivered or to
be delivered in connection therewith by MMA;
(iv) a certificate of the General Partner on behalf of MMA certifying that
the resolutions, consents and agreement in paragraphs (i) and (ii)
above pertaining to MMA are in full force and effect and have not
been amended or modified, and that the officers of MMA are those
persons named in the certificate;
(v) a certificate issued by the United States of America and the
Secretary of State of the State of organization, as applicable, for
RTS, RIB and any Limited Partner which is an entity (together with a
copy of such entity's organizational documents) certifying that each
entity is duly organized and validly existing and (except for RTS) in
good standing in its jurisdiction of organization as of the most
recent practicable date, and an affidavit from an officer of such
entity confirming that such organizational documents are true and
complete;
(vi) the Escrow Agreement and UCC-1 Financing Statement executed by the
Sellers and the escrow agent, and
(vii) written resignations of the directors and officers of RTS, RIB and
RSI (to the extent RSI has not been previously liquidated and
dissolved in accordance with Section 1.3) and of the trustees, plan
-----------
administrators and fiduciaries of the Employee Programs and evidence
satisfactory to Buyers of the revocation of any powers of attorney or
any authorization of any person to draw on the bank accounts set
forth on Schedule 3.16.
-------------
(i) Regulated Investment Company Status.
-----------------------------------
MMA Buyer shall not have determined, applying reasonable methods and
assumptions, that any Fund would fail to qualify, for its taxable year that
includes the Closing Date, for treatment as a regulated investment company that
is eligible to compute its taxable income under Section 852 of the Code.
(j) Material Adverse Effect.
-----------------------
Since the date of this Agreement, there shall have been no event or
condition or events or conditions which, either individually or in the
aggregate, has had or could reasonably be expected to have an MMA Material
Adverse Effect, and Buyers shall be provided with a certificate from the General
Partner of MMA to that effect at the Closing.
45
<PAGE>
(k) Title Policy.
------------
MMA Buyer shall have received the Title Policy (as hereinafter
defined).
(l) Completion of MMA and Fund Due Diligence.
----------------------------------------
Buyers and their counsel shall have been afforded an opportunity to
conduct and complete a due diligence review of the operations, books and records
of MMA and the Funds to the reasonable satisfaction of Buyer, which Buyers shall
complete within forty-five days from the date Buyers have been afforded access
to the operations, books and records of MMA and the Funds; provided, however,
that such period shall not begin to run and/or shall be tolled and this
condition shall not be satisfied unless and until Buyers are provided full and
complete access to such operations, books and records.
(m) Completion of RTS Due Diligence.
-------------------------------
Buyers and their counsel, agents or other representatives shall have
been afforded an opportunity to conduct and complete a due diligence review of
RTS to ensure, and RTS shall provide information reasonably necessary for MMA
Buyer to verify, that RTS is a qualified thrift lender in accordance with
Section 10(m) of the Home Owners Loan Act including, without limitation,
providing copies to MMA Buyer of all calculations made to ensure RTS's
compliance with requirements relating to qualified thrift lenders.
(n) Further Assurances.
------------------
Buyers shall have received such other certificates and instruments
signed by MMA as Buyers may reasonably request to consummate the transactions
contemplated hereby.
8.3. Conditions to Obligation of MMA to Consummate.
---------------------------------------------
The obligation of MMA to consummate the transactions contemplated
hereby shall be subject to the fulfillment or waiver at or prior to the Closing
Date of the following additional conditions:
(a) Representations and Warranties.
------------------------------
The representations and warranties of Buyers set forth in Article II,
----------
shall be true and correct in all material respects as of the Closing Date as
though made at and as of the Closing Date (it being understood that
representations and warranties that speak as of a specified date shall continue
to speak only as of the date so specified), and MMA shall have received a signed
certificate of each Buyer to that effect.
46
<PAGE>
(b) Performance of Obligations.
--------------------------
Buyers shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the Closing
Date, and Sellers shall have received a signed certificate of an executive
officer of each Buyer to that effect.
(c) Delivery.
--------
Buyers and FBR (as the case may be) shall have caused to be executed
and/or delivered to Seller Representative the following:
(i) certified copies of resolutions of the boards of directors of Buyers
authorizing the execution of this Agreement and each of the
agreements, documents and instruments contemplated hereby to which
each Buyer is a party;
(ii) a copy of the Certificate of Incorporation and by-laws of each Buyer,
each of which is certified as of a recent date by the Secretary of
State of the State of Delaware;
(iii) a certificate issued by the Secretary of State of Delaware certifying
that each Buyer is validly existing and in good standing in Delaware
as of the most recent practicable date;
(iv) true, correct and complete copies of each of the agreements,
documents and instruments contemplated hereby to which each Buyer is
a party, and all agreements, documents, instruments and certificates
delivered or to be delivered in connection therewith by each Buyer;
(v) a certificate of the Secretary of each Buyer certifying as to MMA
Buyer and LP Buyer (as the case may be) that the resolutions,
Certificate of Incorporation and by-laws in paragraphs (i) and (ii)
above are in full force and effect and have not been amended or
modified, and that the officers of each entity are those persons
named in the certificate;
(vi) the Initial Payment, the Minority Stock Purchase Price, the Note, the
Escrow Agreement, the UCC-1 Financing Statement and the Deed of Trust
to be delivered as consideration and collateral at the Closing
pursuant to Section 1.4; and
-----------
(vii) such other certificates and documents as are required hereby or are
reasonably requested by MMA.
(d) Further Assurances.
------------------
Sellers shall have received such other certificates and instruments
signed by Buyers as Sellers shall reasonably request.
47
<PAGE>
(e) Opinion of Counsel to Buyers.
----------------------------
MMA shall have received the opinion of Dechert Price & Rhoads, counsel
to Buyers, dated the Closing Date, addressed to MMA and each Seller,
substantially in the form set forth in Exhibit 8.3(e).
--------------
ARTICLE IX
INDEMNIFICATION AND REMEDIES
9.1. No Waivers.
----------
No waiver of any breach of any covenant in this Agreement shall be
implied from any forbearance or failure of a party to take action thereon.
9.2. Indemnification.
---------------
(a) Indemnification by Principal Sellers. From and after the Closing, the
------------------------------------
Principal Sellers shall jointly and severally indemnify and hold Buyers,
MMA, RTS and RIB their respective directors, trustees, officers, registered
representatives, members and controlling persons, and their respective
successors and assigns, harmless from and against any liabilities, demands,
claims, actions or causes of action, assessments, fines, penalties, costs
(including reasonable attorneys' fee, expert witness fees and court costs),
actual damages and expenses (any and all of the foregoing being referred to
as "Losses" or individually a "Loss"), sustained or incurred by the
indemnified parties to the extent any such Loss is the subject of a Claim
(as defined below) by a party other than an indemnified party or a party
providing funding or financing solely to the extent the indemnified party
has assigned to such party its, or the funding or financing source has
succeeded in bankruptcy to such party's, right, title and interest in, to
and under this Agreement (other than a Claim by an indemnified party or its
funding or financing source for a breach of representation or warranty with
respect to ownership/title as set forth in Sections 3.3, 3.9 or 4.1 which
------------ --- ---
shall be covered by this Section 9.2) and arises out of or by virtue of (i)
-----------
any breach of a representation or warranty made by MMA, RTS and Principal
Sellers herein; (ii) any failure to perform any covenant or agreement of
MMA, RTS and Principal Sellers herein; (iii) any matters described in
Schedules 3.18 and 3.28(h), (iv) any Tax liability of MMA, any Subsidiary
-------------- --------
or any Fund (only to the extent, with respect to the Funds, that such a Tax
liability would be legally or customarily payable by the investment adviser
of, or provider of compliance or administrative services to, a Fund by
virtue of their status as investment adviser or provider of compliance or
administrative services, respectively) in each case relating to the period
prior to the Closing Date, any Tax Liability of Sellers, by reason of
transferee liability or otherwise or any Tax Liability referred to in
Section 7.7(d) hereof; and (v) (A) any wrongful or negligent act or
--------------
omission of RTS (except as specifically provided in subsection (v)(B)) or
the Funds which act or omission relates to, or arises out of the conduct of
the business prior to the Closing Date, or (B) any act or omission of MMA,
RTS (only to the extent any such act or omission results in liability that
would be legally or customarily payable by RTS in its capacity as a
provider of services to the Funds) or any Subsidiary which act or omission
relates to, or
48
<PAGE>
arises out of the conduct of the business prior to the Closing Date. In the
event any Principal Seller or any of its successors or assigns (A)
reorganizes or consolidates with or merges into or enters into another
business combination transaction with any other person or entity and it is
not the resulting, continuing or surviving corporation or entity of such
consolidation, merger or transaction, or (B) liquidates, dissolves or
transfers all or substantially all of its properties and assets to any
person or entity, then, and in each such case, proper provisions shall be
made so that the successor or assign of such Principal Seller, as the case
may be, assumes the obligations set forth in this Section 9.2(a).
--------------
(b) Limitation on Indemnification by Principal Sellers. The indemnification
--------------------------------------------------
provided in Section 9.2(a) shall not apply to any Claim for breaches of
--------------
representations and warranties pursuant to clause (i) of Section 9.2(a)
--------------
(other than those contained in Sections 3.2(a) and 3.3 and Article IV and,
--------------- --- ----------
with respect to RTS, those contained in Section 3.12 for which notice
------------
pursuant to Section 9.3 has not been received by the Seller Representative
-----------
on or before the date that is six months after the expiration of the
applicable statute of limitations) for which notice pursuant to Section 9.3
-----------
has not been received by the Seller Representative on or before the date
that is two years after the Closing Date. The Principal Sellers shall not
be required to indemnify Buyers, MMA, RTS and RIB, their respective
directors, trustees, officers, registered representatives members and
controlling persons, and their respective successors and assigns, with
respect to any Claim resulting from or arising out of matters described in
clause (i) of Section 9.2(a) (other than those contained in Sections 3.2(a)
-------------- ---------------
and 3.3 and Article IV and, with respect to RTS, those contained in Section
--- ---------- -------
3.12) unless and until the aggregate amount of all Claims against Principal
----
Sellers collectively exceed $248,600 and then only to the extent such
aggregate amount exceeds $248,600. The amount of the indemnification
liability of the Principal Sellers (other than those contained in Section
-------
9.2(a)(iv) or by virtue of a breach of Sections 3.2(a) and 3.3 and Article
---------- --------------- --- -------
IV) shall not exceed $24,860,000.
--
(c) Indemnification by Buyers. From and after the Closing, Buyers, MMA and RTS
-------------------------
shall jointly and severally indemnify and hold Sellers, their respective
affiliates and subsidiaries, their directors, trustees, officers and
controlling persons, and their successors and assigns, harmless from and
against all Losses sustained or incurred by the indemnified parties to the
extent any such Loss arises out of or by virtue of (i) any breach of a
representation or warranty made by Buyers herein; (ii) any failure to
perform any covenant or agreement of Buyers herein; or (iii) the conduct of
the business by Buyers, MMA, RTS, RIB or any Fund after the Closing. In
the event any Buyer, MMA or RTS or any of their respective successors or
assigns (A) reorganizes or consolidates with or merges into or enters into
another business combination transaction with any other person or entity
and is not the resulting, continuing or surviving corporation or entity of
such consolidation, merger or transaction, or (B) liquidates, dissolves or
transfers all or substantially all of its properties and assets to any
person or entity, then, and in each such case, proper provisions shall be
made so that the successor and assign of such Buyer, MMA, or RTS (as the
case may be) assumes the obligations set forth in this Section 9.2(c).
--------------
49
<PAGE>
(d) Limitation on Indemnification by Buyers. The indemnification pursuant to
---------------------------------------
Section 9.2(c) shall not apply to any Claim (as defined below) for breach
--------------
of representations and warranties pursuant to clause (i) of Section 9.2(c)
--------------
(other than those contained in Section 2.2(a)) for which notice pursuant to
--------------
Section 9.3 has not been received by MMA Buyer on or before the date that
-----------
is two years after the Closing Date. Buyers and MMA shall not be required
to indemnify Sellers with respect to any Claim resulting from or arising
out of matters described in clause (i) of Section 9.2(c) (other than those
--------------
contained Section 2.2(a)) unless and until the aggregate amount of all
--------------
Claims against Buyers exceed $248,600 and then only to the extent such
aggregate amount exceeds $248,600. The amount of the indemnification
liability of Buyers, MMA and RTS (other than those contained in Section
-------
2.2(a)) shall not exceed $24,860,000.
------
(e) Indemnification Changes to Representations and Warranties. For purposes of
---------------------------------------------------------
determining under Section 9.2 if any representation or warranty contained
-----------
in this Agreement has been breached, and for purposes of determining the
amount of a Claim for breach of a representation or warranty under this
Agreement (as applicable), all references to and limitations or
qualifications resulting from the terms "materiality," "MMA Material
Adverse Effect," "knowledge of MMA, RTS and/or Sellers," and "knowledge of
Buyers" shall be disregarded except as such references are used generally
in Sections 2.5, 3.12(b), 3.17(b), 3.18, 3.28(e) and 3.28(h) and as such
------------ ------- ------- ---- ------- -------
references are used with respect to third parties in Sections 3.8,
------------
3.9(a)(ii), 3.9(a)(iii) and 3.9(a)(v).
---------- ----------- ---------
(f) Recoveries. The amount of any Loss suffered by an indemnified party under
----------
this Agreement shall be net of (i) any amounts recovered or recoverable by
the indemnified party pursuant to any indemnification by or indemnification
agreement with any third party, other than any insurance policy, and (ii)
any insurance proceeds (net of associated incremental premiums) available
as an offset against such Losses.
9.3. Claims Procedures.
-----------------
(a) Notice. An indemnified party shall give written notice to an indemnifying
------
party promptly upon receipt of written notice or sixty (60) days from
discovery by the indemnified party of any claim, demand or cause of action
which may give rise to a claim for indemnification under this Agreement (a
"Claim") setting forth in detail all information that forms the basis of
such Claim. Except as otherwise set forth in Section 9.2(a) or (c), the
-------------- ---
failure to give such notice shall not affect the right of the indemnified
party to indemnity hereunder except to the extent such failure has
adversely affected the rights of the indemnifying party.
(b) Third Party Procedures. In the case of any Claim (other than a Claim by an
----------------------
indemnified party for a breach of representation or warranty with respect
to ownership/title as set forth in Sections 3.3, 3.9 or 4.1), the
------------ --- ---
indemnified party may defend, settle or otherwise compromise, or pay a
Claim unless it shall have received notice (within thirty (30) days of the
indemnifying party's receipt of the notice of such Claim from the
indemnified party) from the indemnifying party that the indemnifying party
either disputes that it has indemnification responsibility relating to such
Claim or it intends, at its sole cost and expense, to assume the defense of
any such matter, in which latter case the indemnified party shall have the
right, at no
50
<PAGE>
cost or expense to the indemnifying party, to participate in such defense;
provided, that, any legal counsel selected by the indemnifying party
pursuant to this Section 9.3(b) shall be reasonably satisfactory to the
--------------
indemnified party; and provided, further, that the indemnifying party shall
not, in the defense of such Claim, consent to the entry of any judgment or
enter into any settlement, except with the written consent of the
indemnified party (which consent shall not be unreasonably withheld or
delayed), which provides for anything other than money damages or other
money payments or which does not include as an unconditional term thereof
the giving by the claimant or the plaintiff to the indemnified party a
release from all liability in respect of such Claim. If the indemnifying
party does not assume the defense of a Claim or dispute that it has
indemnification responsibility with respect to such Claim within the time
period specified above, the indemnifying party shall pay all costs of each
indemnified party arising out of the defense until the defense is assumed.
The indemnified party shall take all appropriate action to permit and
authorize the indemnifying party fully to participate, to the extent
provided above, in the defense of any such Claim. The indemnifying party
shall keep the indemnified party fully apprised at all times as to the
status of the defense. If the indemnifying party does not assume the
defense, the indemnified party shall keep the indemnifying party reasonably
apprised as to the status of the defense. If the Claim is one that by its
nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available such information and assistance as
the indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense, at the expense of the indemnifying
party.
(c) Indemnified Party Procedures. A party which has a Claim for
----------------------------
indemnification under this Article IX, other than as described in Section
---------- -------
9.3(b), shall promptly notify the other parties hereto of such Claim. If
------
within thirty (30) days of the receipt of such notice of Claim, the parties
cannot agree on the amount of or responsibility for such Claim, the parties
agree to submit such dispute to binding arbitration to be held in Bethesda,
Maryland under the rules of the American Arbitration Association. Any such
arbitration shall be conducted by three arbitrators, one of whom shall be
selected by the Seller Representative, one of whom shall be selected by
Buyers and one of whom shall be selected by the arbitrators selected by the
Seller Representative and Buyers. The expenses of any such arbitration
shall be paid by the non-prevailing party as determined by the final order
of the arbitrators.
(d) Remedies. Absent fraud or criminal activity and except for equitable
--------
remedies, the remedies provided for in this Article IX shall constitute the
----------
sole and exclusive remedy of the parties hereto for any post-Closing claims
made for breach of this Agreement or the representations and warranties
contained herein or in connection with the transactions contemplated hereby
or any of the other matters covered by this Article IX. Nothing in this
----------
subsection is intended to affect any rights under the Note, Escrow
Agreement, Deed of Trust or UCC-1 Financing Statement.
51
<PAGE>
(e) Satisfaction of Losses. Subject to the procedures set forth above, Losses
----------------------
shall be satisfied as follows:
(i) Principal Sellers shall satisfy their liability for Losses by paying
the amount of such liability to the indemnified party or, at the
written election of either Buyers or Seller Representative, by
offsetting such amount against the outstanding balance of the Note;
provided, however, that in the event any such offset is elected by
Seller Representative prior to the due date of the next installment
otherwise payable under the Note, the amount of Loss to be offset
shall be increased by the applicable "short-term rate" per annum,
compounded annually, from the date paid by the indemnified party to a
third party or payable to the indemnified party by virtue of a breach
of Sections 3.3, 3.9 or 4.1 up to the date of the next installment
------------ --- ---
otherwise payable under the Note; and
(ii) Buyers and MMA shall satisfy their liability for Losses by paying the
amount of such liability to the Seller Representative on behalf of the
Sellers.
ARTICLE X
TERMINATION
10.1. Termination.
-----------
This Agreement may, by written notice, be terminated at any time prior
to the Closing Date:
(a) by mutual written consent of the Seller Representative and Buyers;
(b) by either MMA or Buyers at any time after March 31, 2001 by written notice
given to the other, if the Closing shall not theretofore have occurred
(provided the terminating party is not otherwise in default or in breach of
this Agreement);
(c) by either MMA or Buyers by written notice given to the other, in the event
of the breach by (i) MMA, RTS and Principal Sellers, in the case of notice
from Buyers, of any representation or warranty contained herein or in any
schedule or document delivered herewith which has resulted or is reasonably
likely to result in an MMA Material Adverse Effect, or any agreement,
covenant or obligation contained herein, which breach cannot be or has not
been cured within 30 days after written notice to MMA, or (ii) Buyers and
FBR, in the case of notice from MMA, of any representation or warranty
contained herein or in any schedule or document delivered herewith which
has resulted or is reasonably likely to result in a Buyer Material Adverse
Effect, or any agreement, covenant or obligation contained herein, which
breach cannot be or has not been cured within 30 days after written notice
to Buyers;
(d) by either MMA or Buyers if the Board/Trustees of Directors of each Fund or
the shareholders of each Fund shall have met and rejected any of the
actions or transactions contemplated hereby;
(e) by MMA Buyer pursuant to Section 7.10;
------------
52
<PAGE>
(f) by MMA Buyer by written notice given to Seller Representative (i) within
sixty days of the date hereof, in the event Buyers and their counsel have
not been afforded an opportunity to conduct and complete a due diligence
review of the operations, books and records of MMA and the Funds within
forty-five days of the date hereof or (ii) within sixty days of the date
Buyers have been afforded full and complete access to the operations, books
and records of MMA and the Funds, in the event Buyers are not reasonably
satisfied with the results of such due diligence review; or
(g) by MMA Buyer by written notice given to Seller Representative, in the event
Buyers are not reasonably satisfied with the results of the due diligence
review of RTS provided in Section 8.2(m).
--------------
10.2. Effect of Termination and Abandonment.
-------------------------------------
In the event of termination of this Agreement and abandonment of the
transactions contemplated hereby pursuant to this Article X, no party hereto (or
---------
any of its directors of officers) shall have any liability or further obligation
to any other party to this Agreement, except as provided in Section 11.5 and the
------------
provisions of this Section 10.2. In the event that the Buyers, FBR or any of
------------
them commits a willful and material breach of any of their representations,
warranties, covenants, agreements or obligations contained in this Agreement
(and for purposes hereof, failure by the Buyers to have sufficient cash to fund
the Initial Payment and the Minority Stock Purchase Price shall be deemed to be
a willful and material breach resulting in a Buyer Material Adverse Effect) and
this Agreement is thereafter terminated on account thereof pursuant to Section
-------
10.1(c), then in that event MMA Buyer shall be liable for $1,000,000 in cash
- -------
damages to MMA as agreed upon liquidated damages ("MMA Liquidated Damages")
which shall be paid by MMA Buyer to MMA within thirty days after written demand.
FBR does hereby unconditionally guarantee timely payment of MMA Liquidated
Damages. In the event that MMA, RTS or any of the Sellers commits a willful and
material breach of any of their representations, warranties, covenants,
agreements or obligations contained in this Agreement and this Agreement is
thereafter terminated on account thereof pursuant to Section 10.1(c), then in
---------------
that event MMA shall be liable for $1,000,000 plus the amount of MMA Transaction
Expenses paid by MMA Buyer or FBR or reimbursed by either of them to MMA in cash
damages to MMA Buyer as agreed upon liquidated damages which shall be paid by
MMA to MMA Buyer within thirty (30) days after written demand.
ARTICLE XI
GENERAL PROVISIONS
11.1. Survival of Representations, Warranties and Agreements.
------------------------------------------------------
All agreements of Buyers or MMA contained in this Agreement or in any
instrument delivered by Buyers or MMA pursuant to this Agreement shall survive
consummation of the transactions contemplated hereby in accordance with their
terms. The representations and warranties contained herein (other than Sections
--------
3.2(a), 3.3, and 2.2(a) and Article IV) shall terminate after a period of two
- ------ --- ------ ----------
years from such consummation or termination of this Agreement. If this
Agreement is terminated prior to the Closing Date, the respective agreements of
the parties in Sections 7.3, 10.2 and Article XI shall survive such termination.
------------------ ----------
53
<PAGE>
11.2. Notices.
-------
All notices and other communications hereunder shall be in writing and
shall be given and deemed to have been duly received (i) on the date given if
delivered personally or by telex or telecopy or (ii) on the date received if
mailed by registered or certified mail (return receipt requested), to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to MMA Buyer or FBR, to:
Friedman, Billings, Ramsey Group, Inc.
1001 19th Street North
Arlington, VA 22209
Attention: Robert S. Smith, Esq.,
General Counsel
Telecopy: (703) 312-9756
With a copy to:
Dechert Price & Rhoads
1717 Arch Street
Philadelphia, PA 19103
Attention: Christopher G. Karras, Esq.
Telecopy: (215) 994-2222
(b) if to Sellers or MMA, to:
c/o Rushmore Trust & Savings, FSB
4922 Fairmont Avenue
Bethesda, MD 20814
Attention: Daniel L. O'Connor
Telecopy:
With a copy to:
Breyer & Associates PC
1100 New York Avenue, N.W.
Suite 700 East
Washington, D.C. 20005
Attention: John F. Breyer, Jr.
Telecopy: (202) 737-7979
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11.3. Counterparts.
------------
This Agreement may be executed in any number of counterparts (including
executed counterparts delivered and exchanged by facsimile transmission) each of
which shall be deemed to constitute an original, but all of which together shall
constitute one and the same instrument.
11.4. Governing Law.
-------------
This Agreement shall be governed by, and interpreted in accordance
with, the laws of the State of Maryland without regard to its conflict of law
principles, except to the extent federal law may apply.
11.5. Expenses.
--------
All reasonable third party fees, costs and expenses incurred by
Sellers, MMA, RTS, the Subsidiaries (excluding the cost and expense of the
liquidation and dissolution of RSI) and the Funds prior to Closing shall be
borne by MMA Buyer (including, but not limited to, reasonable fees and
reasonable expenses of attorneys and accountants, filing and other fees payable
to Governmental Authorities, proxy costs and expenses, and mailing and printing
costs) incurred by them, or any of them, in connection with this Agreement, the
transactions contemplated hereby, or the performance of obligations contained
herein. All such reasonable third party fees, costs and expenses incurred by
Sellers, MMA, RTS, the Subsidiaries (excluding the cost and expense of the
liquidation and dissolution of RSI) and the Funds prior to Closing (the "MMA
Transaction Expenses") shall be paid directly by MMA Buyer, or reimbursed by MMA
Buyer to the party who has made payment thereof, within 10 days after written
demand, which written demand shall include invoices or statements of third party
providers relating to such MMA Transaction Expenses; provided however, any MMA
Transaction Expenses that are unpaid at Closing shall be paid by MMA Buyer at
Closing without any requirement for prior written notice. Notwithstanding the
foregoing, MMA Buyer shall not be liable for MMA Transaction Expenses for legal
services to Breyer & Associates PC (inclusive of fees to Silver, Freedman & Taff
LLP but excluding reimbursable expenses) in excess of $160,000 and no MMA
Transaction Expenses, other than the foregoing MMA Transaction Expenses for
legal services to Breyer & Associates PC, shall be incurred without the prior
consent of MMA Buyer, which shall not be unreasonably withheld. FBR does hereby
unconditionally guarantee timely payment or reimbursement of all MMA Transaction
Expenses subject to the thresholds set forth above.
11.6. Waiver, Amendment.
-----------------
Any provision of this Agreement may be (i) waived by the party benefited
by the provision, or (ii) amended or modified at any time (including the
structure of the transactions contemplated hereby, or any part thereof), by an
agreement in writing among the parties hereto and executed in the same manner as
this Agreement. Any waiver of any terms or conditions or of the breach of any
covenant, representation or warranty of this Agreement in one instance shall
55
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not operate as or be deemed to be construed as a further or continuing waiver of
any other breach of such term, condition, covenant, representation or warranty,
nor shall any failure or delay at any time or times to enforce or require
performance of any provision hereof operate as a waiver of or affect in any
manner such party's right at a later time to enforce or require performance of
such provision or of any provision hereof; provided, however, that no such
waiver, unless it, by its own terms, explicitly provides to the contrary, shall
be construed to effect a continuing waiver of the provision being waived and no
such waiver in any instance shall constitute a waiver in any other instance or
for any other purpose or impair the right of the party against whom such waiver
is claimed in all other instances or for all other purposes to require full
compliance.
11.7. Entire Agreement; No Third-Party Beneficiaries; Etc.
---------------------------------------------------
This Agreement represents the entire understanding of the parties hereto
with reference to the transactions contemplated hereby and supersedes any and
all other oral or written agreements heretofore made. All terms and provisions
of this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective personal representatives, heirs, successors
and permitted assigns. Nothing in this Agreement, other than Section 9.2 hereof,
-----------
is intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
11.8. Assignment.
----------
This Agreement may not be assigned by any party hereto without the
written consent of the other parties.
11.9. Further Assurances.
------------------
At and after the Closing, each of the parties hereto agrees to execute,
acknowledge and deliver such additional instruments as any other party may
reasonably request in connection with the transactions contemplated by this
Agreement.
11.10. Consent to Jurisdiction.
-----------------------
Each of the parties hereby consents to personal jurisdiction, service
of process and venue in the federal or state courts of the State of Maryland for
any claim, suit or proceeding arising under this Agreement, or in the case of a
third party claim subject to indemnification hereunder, in the court where such
claim is brought and hereby irrevocably agrees that all claims in respect of
such action or proceeding may be heard and determined in such state court or, to
the extent permitted by law, in such federal court. Each of the parties hereby
irrevocably consents to the service of process in any such action or proceeding
by the mailing by certified mail of copies of any service or copies of the
summons and complaint and any other process to such party at the address
specified in Section 11.2. The parties agree that a final judgment in any such
------------
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit or in any other manner permitted by law and shall affect
the right of a party to serve legal process or to bring any action or proceeding
in the courts of other jurisdictions. Except as provided in Article IX, the
----------
expenses of any such action or proceeding shall be paid by the non-prevailing
party as determined by the final order of the applicable federal or state court.
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11.11. Seller Representative.
---------------------
Each Seller hereby irrevocably appoints Daniel L. O'Connor ("Seller
Representative"), as such Seller's representative, attorney-in-fact and agent,
with full power of substitution to act in the name, place and stead of such
Seller with respect to the transfer of such Seller's Interests to Buyers in
accordance with the terms and provisions of this Agreement and to act on behalf
of such Seller in any litigation or arbitration involving this Agreement and to
do or refrain from doing all such further acts and things, and to execute all
such documents, as such Seller Representative shall deem necessary or
appropriate in connection with any of the transactions contemplated under this
Agreement, including, without limitation, the power:
(a) to act for such Seller with regard to matters pertaining to indemnification
referred to in this Agreement, including the power to compromise any claim
on behalf of such Seller, to bring and transact matters of litigation and
to refer matters to arbitration;
(b) to receive, hold, and deliver to Buyers the Interests accompanied by
executed stock powers, signature guarantees, and any other documents
relating thereto on behalf of such Seller;
(c) to execute and deliver all ancillary agreements, certificates, statements,
notices, approvals, extensions, waivers, undertakings, amendments and other
documents required or permitted to be given in connection with the
consummation of the transactions contemplated by this Agreement;
(d) to receive funds and give receipt for funds including in respect of the
Purchase Price for the Interests for such Seller's Interests, to distribute
to the Seller their respective share of the Purchase Price for the
Interests and to withhold from such funds a contingency reserve for the
matters referred to below;
(e) to give and receive all notices and communications to be given or received
under this Agreement and to receive service of process in connection with
any claims under this Agreement, including service of process in connection
with arbitration; and
(f) to take all actions which under this Agreement may be taken by the Seller
Representative and to do or refrain from doing any further act or deed on
behalf of such Seller which Seller Representative deems necessary or
appropriate in his sole discretion relating to the subject matter of this
Agreement as fully and completely as such Seller could do if personally
present.
If Daniel L. O'Connor dies or otherwise becomes incapacitated and
unable to serve as Seller Representative, Martin O'Connor shall become Seller
Representative. The death or incapacity of any Seller shall not terminate the
agency and power of attorney granted hereby
57
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to the Seller Representative. The appointment of Seller Representative shall be
deemed coupled with an Interest and shall be irrevocable and MMA Buyer and any
other person may conclusively and absolutely rely, without inquiry, upon any
action of Seller Representative, as the action of such Seller in all matters
referred to herein. All actions, decisions and instructions of Seller
Representative shall be conclusive and binding upon all of the Sellers and no
Seller shall have any cause of action against Seller Representative for any
action taken or not taken by Seller Representative in his role as such, except
for any action or omission taken or made fraudulently or in bad faith with
respect to such Seller. All reasonable out-of-pocket fees and expenses
(including fees payable to counsel and other professional and brokerage fees)
incurred by Seller Representative in connection with performing such function
and in connection with the transactions contemplated hereby and all payments,
damages, costs, fees and expenses in connection with any indemnification claim
by or other dispute with MMA Buyer under the Agreement shall be paid by each
Seller in proportion to his respective Interests and may be deducted by Seller
Representative from any amounts otherwise payable to any Seller hereunder.
Seller Representative may withhold from funds received on behalf of each Seller
prior to distribution of such funds to each Seller any amount which Seller
Representative deems necessary as a reserve for any such fees, expenses and
indemnification claims.
11.12. Title Insurance.
---------------
The Sellers shall and shall cause MMA, RTS and the Subsidiaries to
cooperate with MMA Buyer in obtaining, a good and valid, irrevocable ALTA title
insurance commitment (the "Title Commitment") from a title insurance company
reasonably acceptable to MMA Buyer (the "Title Company"), irrevocably committing
the Title Company (subject only to the satisfaction of any industry standard
requirements contained in the Title Commitment and reasonably acceptable to MMA
Buyer) to issuing (i) an ALTA form of title insurance policy insuring good,
valid and marketable fee simple title to the Owned Real Estate in RTS, in the
amount that MMA Buyer reasonably requests prior to Closing, or (ii) a date down
and, if required by MMA Buyer, an increased amount endorsement to the existing
title insurance policy number 95080085 issued by Chicago Title Insurance
Company, subject, in either case, to no Liens or other exceptions to title other
than Permitted Exceptions (the "Title Policy") and insuring pedestrian and
vehicular access to and from one or more legally and physically open public
rights of way satisfactory to MMA Buyer, in its sole but reasonable discretion.
The Title Commitment shall be effective as of a date occurring not earlier than
the date of this Agreement and its effective date shall be brought down to the
time of the Closing. The Title Policy shall include such endorsements thereto
as may reasonably be requested by MMA Buyer including, without limitation, a
zoning endorsement. On or prior to the Closing Date, RTS and/or the Sellers
shall execute and deliver, or cause to be executed and delivered, to the Title
Company any affidavits, standard gap indemnities and similar documents
reasonably requested by the Title Company in connection with the issuance of the
Title Commitment or the Title Policy.
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11.13. Survey.
------
At MMA Buyer's request, RTS and/or Sellers shall cooperate with Buyers
to obtain, no later than fifteen (15) days prior to Closing, an as-built survey
of the Owned Real Estate (the "Survey") in accordance with (i) the 1997 minimum
standard detail requirements for ALTA/ACSM Land Title Surveys, including,
without limitation, Table A items 2,3,4,6,7,8,9,10,11 and 13 and such additional
or different Table A Items as MMA Buyer may, in its discretion, require, (ii)
with the Accuracy Standards (as adopted by ALTA and ACSM) of an Urban Survey,
and (iii) local standards required by MMA Buyer, in its discretion, dated after
the date hereof, and showing, without limiting the foregoing, all easements and
other appurtenances benefiting and all easements and other encumbrances
burdening the Owned Real Estate. The Survey shall be certified to the Buyers,
the Title Company and any other person reasonably requested by MMA Buyer.
11.14. Tenant Estoppel Certificates.
----------------------------
At MMA Buyer's request, prior to Closing RTS and/or Sellers shall
cooperate with Buyers to obtain estoppel certificates from each of the tenants
under the Lessor Leases in form and substances reasonably satisfactory to MMA
Buyer. No such estoppel certificate shall be conditioned upon a reduction in
rent or other concession to the tenant.
11.15. Non-Disturbance Agreement.
-------------------------
At MMA Buyer's or, after the Closing, RTS' request, the beneficiary
under the Deed of Trust shall (and shall cause the trustee to) execute a
commercially reasonable non-disturbance agreement in favor of any tenant under
the Lessor Leases.
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The parties have duly executed this Agreement, all as of the date
first written above.
MONEY MANAGEMENT ASSOCIATES, INC.
By:
------------------------------------
Chairman and Chief Executive Officer
MONEY MANAGEMENT ASSOCIATES (LP), INC.
By:
------------------------------------
Chairman and Chief Executive Officer
MONEY MANAGEMENT ASSOCIATES, L.P.
By:
------------------------------------
Daniel L. O'Connor, General Partner
RUSHMORE TRUST AND SAVINGS, FSB
By:
------------------------------------
President
------------------------------------
Daniel L. O'Connor
------------------------------------
Martin O'Connor
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------------------------------------
John Cralle
------------------------------------
John Flynn
------------------------------------
Frank Odenwald
------------------------------------
Robert Baiers
61
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For Purposes of Article II and Sections 1.4, 10.2
---------- ------------------
and 11.5 only:
----
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
By:
------------------------------------
President
62
<PAGE>
Exhibit 10.03
FBR STOCK AND ANNUAL INCENTIVE PLAN
(as amended through April 26, 1999)
SECTION 1. Purpose; Definitions
The purpose of the Plan is to give Friedman, Billings, Ramsey Group,
Inc. (the "Company") a competitive advantage in attracting, retaining and
motivating officers and employees and to provide the Company and its
Subsidiaries and Affiliated Companies with an incentive compensation plan
providing incentives directly linked to the profitability of the Company's
businesses and/or increases in shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Affiliated Company" means any corporation (or partnership, joint
venture, or other enterprise), of which the Company owns or controls, directly
or indirectly, 10% or more, but less than 50% of the outstanding shares of stock
normally entitled to vote for the election of directors (or comparable equity
participation and voting power).
b. "Award" means a Stock Appreciation Right, Stock Option, Restricted
Stock, unrestricted share of Common Stock, dividend equivalent, interest
equivalent, Bonus Award or other award granted under this Plan.
c. "Board" means the Board of Directors of the Company.
d. "Bonus Award" means an annual cash bonus award under Section 10 of this
Plan.
e. "Cause" means (except as otherwise provided by the Committee in the
agreement relating to any Award) (1) conviction of a participant for committing
a felony under federal law or the law of the state in which such action
occurred, (2) dishonesty in the course of fulfilling a participant's employment
duties or (3) willful and deliberate failure on the part of a participant to
perform his employment duties in any material respect. Notwithstanding the
foregoing, if a participant is a party to an employment agreement with the
Corporation or any Subsidiary or Affiliated Company that contains a definition
of "Cause," such definition shall apply to such participant for purposes of the
Plan except to the extent otherwise provided by the Committee in the agreement
relating to any Award.
f. "Change in Control" and "Change in Control Price" have the meanings set
forth in Sections 11(b) and (c), respectively.
g. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
<PAGE>
h. "Committee" means a committee of two or more non-employee directors
selected by the Board provided, however, that with respect to any grants or
other determinations to be made in connection with Bonus Awards (including
without limitation the allocation of the Bonus Pool under Section 10(b)),
"Committee" shall mean the Board or the Executive Committee of the Board (unless
the Board specifically designates another committee of directors to grant and
administer Bonus Awards).
i. "Common Stock" means the Class A common stock, par value $0.01 per
share, of the Company.
j. "Company" means Friedman, Billings, Ramsey Group, Inc., a Virginia
corporation.
k. "Disability" means permanent and total disability as determined by the
Committee for purposes of the Plan.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
m. "Fair Market Value" means, as of any given date, the closing price of
the Common Stock reported in the Wall Street Journal for the day prior to such
date, or if the Common Stock was not traded on the New York Stock Exchange on
such day, then for the last preceding day on which the Common Stock was traded.
If there is no regular public trading market for the Common Stock, Fair Market
Value shall be determined by such other source as the Committee may select.
n. "Incentive Stock Option" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422 of
the Code. o. "NonQualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
o. "Performance Goals" means the performance goals established by the
Committee in connection with the grant of Restricted Stock or Performance p.
Units. Performance Goals may be established based on any of the following areas
of performance of the Company, or any Affiliated Company: asset growth; combined
net worth; debt to equity ratio; earnings per share; revenues; operating income;
operating cash flow; net income, before or after taxes; return on total capital,
equity, revenue or assets; total shareholder return; or changes in the market
price of the Common Stock.
q. "Performance Units" means an Award granted under Section 8.
r. "Plan" means the FBR Stock and Annual Incentive Plan, as set forth
herein and as hereinafter amended from time to time.
-2-
<PAGE>
s. "Restricted Stock" means an Award granted under Section 7.
t. "Retirement" means retirement from employment with the Company, a
Subsidiary or an Affiliated Company as determined by the Committee for purposes
of an Award under the Plan.
u. "Stock Appreciation Right" means an Award granted under Section 6.
v. "Stock Option" means an Award granted under Section 5.
w. "Subsidiary" means: (i) for the purpose of an Incentive Stock Option,
any corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if, at the time of the granting of the Incentive
Stock Option, each of the corporations other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain;
and (ii) for the purposes of any other Award, any corporation (or partnership,
joint venture, or other enterprise) of which the Company owns or controls,
directly or indirectly, 50% or more of the outstanding shares of stock normally
entitled to vote for the election of directors (or comparable equity
participation and voting power).
x. "Termination of Employment" means the termination of the participant's
employment with the Company and any Subsidiary or Affiliated Company. A
participant employed by a Subsidiary or an Affiliated Company shall also be
deemed to incur a Termination of Employment if the Subsidiary or Affiliated
Company ceases to be such a Subsidiary or Affiliated Company, as the case may
be, and the participant does not immediately thereafter become an employee of
the Company or another Subsidiary or Affiliated Company. Temporary absences
from employment because of illness, vacation or leave of absence and transfers
among the Company and its Subsidiaries, or, if the Committee so determines,
among the group consisting of the Company, its Subsidiaries and Affiliated
Companies, shall not be considered Terminations of Employment.
In addition, certain other terms used in the Plan have definitions provided
to them in the first place in which they are used herein.
SECTION 2. Administration
The Plan shall be administered by the Committee; provided, that any
authority granted to the Committee under the Plan may also be exercised by the
full Board.
The Committee shall have plenary authority to grant Awards pursuant to the
terms of the Plan or, in the Committee's discretion, in connection with awards
under other bonus plans or programs of the Company, to officers and employees of
the Company and its Subsidiaries and Affiliated Companies.
-3-
<PAGE>
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) To select the officers and employees to whom Awards may from time to
time be granted;
(b) To determine whether and to what extent Awards are to be granted
hereunder;
(c) To determine the number of shares of Common Stock to be covered by each
Stock Option granted hereunder;
(d) To determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section 5(a)), any
vesting condition, restriction or limitation (which may be related to the
performance of the participant, the Company or any Subsidiary or Affiliated
Company) and any vesting acceleration or forfeiture or waiver regarding any
Award and the shares of Common Stock relating thereto, based on such factors as
the Committee shall determine; and
(e) To determine under what circumstances an Award may be settled in cash
or Common Stock under Section 5(g) or Section 6(d)(ii).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any award certificate relating
thereto) and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may delegate all or a portion of the
administration of the Plan to one or more senior managers of the Company.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or any appropriate
delegate pursuant to the provisions of the Plan shall be final and binding on
all persons, including the Company and Plan participants.
SECTION 3. Common Stock Subject to Plan
Subject to adjustment as described below, the total number of shares of
Common Stock reserved and available for grant pursuant to Awards under the Plan
shall not exceed 9,900,000 shares. Shares subject to Awards under the Plan may
be authorized and unissued shares or may be treasury shares, or both.
-4-
<PAGE>
If any shares of Restricted Stock are forfeited, or if any Stock Option or
Stock Appreciation Right terminates without being exercised, or if any Stock
Appreciation Right (whether granted alone or in conjunction with a Stock Option)
is exercised for cash, shares subject to such Awards shall again be available
for distribution in connection with Awards under the Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, such as any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property (without regard
to the payment of any cash dividends by the Company in the ordinary course) of
the Company, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Company, the Committee or Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Plan, in the number, kind and option price, as
applicable, of shares subject to outstanding Stock Options, and in the number
and kind of shares subject to other outstanding Awards granted under the Plan,
and/or such other equitable substitution or adjustments as it may determine to
be appropriate in its sole discretion; provided, however, that the number of
shares subject to any Award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Stock
Option.
SECTION 4. Eligibility
Officers and employees of the Company, a Subsidiary or an Affiliated
Company who are responsible for or contribute to the growth and profitability
of the business of the Company, a Subsidiary or an Affiliated Company are
eligible to be granted Awards under the Plan. No more than one million
(1,000,000) shares of Common Stock may be allocated to the Awards, including the
maximum amounts payable under or with respect to any Stock Option, Stock
Appreciation Right, unrestricted Common Stock, Restricted Stock, or Performance
Unit, that are granted to any participant during any single taxable year of the
Company.
SECTION 5. Stock Options
Stock Options may be granted alone or in addition to other Awards granted
under the Plan and may be of two types: Incentive Stock Options and
NonQualified Stock Options. Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, NonQualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights). Incentive Stock Options
may be granted only to employees of the Company and its Subsidiaries. To the
extent that any Stock Option is not designated as an Incentive Stock Option or,
even if so designated, does not qualify as an Incentive Stock Option, it shall
constitute a NonQualified Stock Option.
-5-
<PAGE>
Stock Options shall be evidenced by option award certificates, the terms
and provisions of which may differ. An option award certificate shall indicate
on its face whether it is intended to be an award certificate for an Incentive
Stock Option or a NonQualified Stock Option. The grant of a Stock Option shall
occur on the date the Committee by resolution selects an individual to be a
participant in any grant of a Stock Option, determines the number of shares of
Common Stock to be subject to such Stock Option to be granted to such individual
and specifies the terms and provisions of the Stock Option, or on such later
date as is specified by the Committee.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock purchasable
under a Stock Option shall be determined by the Committee and, unless otherwise
determined by the Committee, shall not be less than the Fair Market Value of the
Common Stock subject to the Stock Option on the date of grant. The option price
per share shall not be decreased thereafter except pursuant to Section 3 of this
Plan.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than 10 years after the
date the Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. Unless otherwise determined
by the Committee, Stock Options shall become exercisable ratably on each of the
first five anniversaries of the date of grant. In addition, the Committee may at
any time accelerate the exercisability of any Stock Option.
(d) Method of Exercise. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise, or notice in accordance with such
other procedures as may be established from time to time, to the Company or its
designated agent specifying the number of shares of Common Stock subject to the
Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price
in cash or by certified or cashier's check or such other instrument as the
Company may accept. If approved by the Committee, payment, in full or in part,
may also be made in the form of unrestricted Common Stock already owned by the
optionee of the same class as the Common Stock subject to the Stock Option
(based on the Fair Market Value of the Common Stock on the date the Stock Option
is exercised); provided, however, that such already owned shares have been held
by the optionee for at least six months at the time of exercise unless otherwise
determined by the Committee; provided, further, that, in the case of an
Incentive Stock Option, the right to make a payment in the form of already owned
shares of Common Stock of the same class as the Common Stock subject to the
Stock Option may be authorized only at the time the Stock Option is granted.
-6-
<PAGE>
In the discretion of the Committee, payment for any shares subject to a
Stock Option may also be made by delivering a properly executed exercise notice
to the Company, together with a copy of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds necessary to
pay the purchase price, and, if requested, by the amount of any federal, state,
local or foreign withholding taxes. To facilitate the foregoing, the Company
may enter into agreements for coordinated procedures with one or more brokerage
firms.
In addition, in the discretion of the Committee, payment for any shares
subject to a Stock Option may also be made by instructing the Company or its
designated agent to withhold a number of such shares having a Fair Market Value
on the date of exercise equal to the aggregate exercise price of such Stock
Option.
No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall have all of the rights of a shareholder of the
Company holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 3(a).
(e) Transferability of Stock Options. No Stock Option shall be transferable
by the optionee other than (i) by will or by the laws of descent and
distribution, or, in the Committee's discretion, pursuant to a written
beneficiary designation, (ii) pursuant to a qualified domestic relations order,
as defined in the Code or (iii) in the Committee's discretion, pursuant to a
gift to such optionee's "immediate family" members directly, or indirectly or by
means of a trust, partnership or limited liability company. All Stock Options
shall be exercisable, subject to the terms of this Plan, only by the optionee,
guardian, legal representative or beneficiary of the optionee or permitted
transferee, it being understood that the terms "holder" and "optionee" include
any such guardian, legal representative or beneficiary or transferee. For
purposes of this Section 5(e), "immediate family" shall mean, except as
otherwise defined by the Committee, the optionee's spouse, children, siblings,
stepchildren, grandchildren, parents, stepparents, grandparents, in-laws and
persons related by legal adoption. Such transferees may transfer a Stock Option
only by will or by the laws of descent and distribution.
(f) Termination by Death or Disability. Unless otherwise determined by the
Committee, if an optionee's Termination Employment is by reason of death or
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent exercisable at the time of such termination, for a period of
twelve (12) months (or such other period as the Committee may specify in the
option agreement) from the date of such termination or until the expiration of
the stated term of such Stock Option, whichever period is the shorter.
(g) Termination by Reason of Retirement. Unless otherwise determined by the
Committee, if an optionee's Termination of Employment is by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such
Retirement, or on such accelerated basis as the Committee may determine, for a
period of five (5) years (or such other period as the Committee may specify in
the option
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agreement) from the date of such Termination of Employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter; provided, however, that if the optionee dies within such period any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of twelve (12) months from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(h) Other Termination. Unless otherwise determined by the Committee, if an
optionee's Termination of Employment is for any reason other than death,
Disability or Retirement, any Stock Option held by such optionee, to the extent
then exercisable, or on such accelerated basis as the Committee may determine,
may be exercised for the lesser of three (3) months from the date of such
Termination of Employment or the balance of such Stock Option's term; provided,
however, that if the optionee dies within such three (3) month period, any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such three (3) month period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of twelve
(12) months from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is the shorter.
(i) Cashing Out of Stock Option. On receipt of written notice of exercise,
the Committee may elect to cash out all or part of the portion of the shares of
Common Stock for which a Stock Option is being exercised by paying the optionee
an amount, in cash or Common Stock, equal to the excess of the Fair Market Value
of the Common Stock over the option price times the number of shares of Common
Stock for which the Option is being exercised on the effective date of such
cash-out.
(j) Change in Control Cash-out. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the "Exercise
Period"), unless the Committee shall determine otherwise at the time of grant,
an optionee shall have the right, whether or not the Stock Option is fully
exercisable and in lieu of the payment of the exercise price for the shares of
Common Stock being purchased under the Stock Option and by giving notice to the
Company, to elect (within the Exercise Period) to surrender all or part of the
Stock Option to the Company and to receive cash, within 30 days of such notice,
in an amount equal to the amount by which the Change in Control Price per share
of Common Stock on the date of such election shall exceed the exercise price per
share of Common Stock under the Stock Option (the "Spread") multiplied by the
number of shares of Common Stock granted under the Stock Option as to which the
right granted under this Section 5(j) shall have been exercised. Notwithstanding
the foregoing, if any right granted pursuant to this Section 5(j) would make a
Change in Control transaction ineligible for pooling-of-interests accounting
under APB No. 16 that but for the nature of such grant would otherwise be
eligible for such accounting treatment, the Committee shall have the ability to
substitute for the cash payable pursuant to such right Common Stock with a Fair
Market Value equal to the cash that would otherwise be payable hereunder.
(k) Deferral of Option Shares. The Committee may from time to time
establish procedures pursuant to which an optionee may elect to defer, until a
time or times later than the
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exercise of an Option, receipt of all or a portion of the shares subject to such
Option and/or to receive cash at such later time or times in lieu of such
deferred shares, all on such terms and conditions as the Committee shall
determine. If any such deferrals are permitted, then notwithstanding Section
5(d) above, an optionee who elects such deferral shall not have any rights as a
stockholder with respect to such deferred shares unless and until certificates
representing such shares are actually delivered to the optionee with respect
thereto, except to the extent otherwise determined by the Committee.
SECTION 6. Stock Appreciation Rights
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a NonQualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. In addition, Stock Appreciation Rights may be granted without
relationship to a Stock Option to employees residing in foreign jurisdictions,
where the grant of a Stock Option is impossible or impracticable because of
securities or tax laws or other governmental regulations.
(b) Freestanding Stock Appreciation Rights. A Stock Appreciation Right
granted without relationship to a Stock Option, pursuant to Section 6(a), shall
be exercisable as determined by the Committee, but in no event after ten years
from the date of grant. The base price of a Stock Appreciation Right granted
without relationship to a Stock Option shall be the Fair Market Value of a share
of Common Stock on the date of grant. A Stock Appreciation Right granted without
relationship to a Stock Option shall entitle the holder, upon receipt of such
right, to a cash payment determined by multiplying (i) the difference between
the base price of the Stock Appreciation Right and the Fair Market Value of a
share of Common Stock on the date of exercise of the Stock Appreciation Right,
by (ii) the number of shares of Common Stock as to which such Stock Appreciation
Right shall have been exercised. A freestanding Stock Appreciation Right may be
exercised by giving written notice of exercise to the Company or its designated
agent specifying the number of shares of Common Stock as to which such Stock
Appreciation Right is being exercised.
(c) Tandem Stock Appreciation Rights. A Stock Appreciation Right granted in
conjunction with a Stock Option may be exercised by an optionee in accordance
with Section 6(d) by surrendering the applicable portion of the related Stock
Option in accordance with procedures established by the Committee. Upon such
exercise and surrender, the optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(d). Stock Options which have
been so surrendered shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised. A Stock Appreciation Right shall
terminate and no longer be exercisable upon the termination or exercise of the
related Stock Option.
(d) Tandem Stock Appreciation Right Terms and Conditions. Stock
Appreciation Rights granted in conjunction with a Stock Option shall be subject
to such terms and conditions as shall be determined by the Committee, including
the following:
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(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this Section
6.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash, equal to the excess of the
Fair Market Value of one share of Common Stock over the option price per
share specified in the related Stock Option multiplied by the number of
shares in respect of which the Stock Appreciation Right shall have been
exercised.
(iii) Stock Appreciation Rights shall be transferable only to
permitted transferees of the underlying Stock Option in accordance with
Section 5(e). (iv) Upon the exercise of a Stock Appreciation Right, the
Stock Option or part thereof to which such Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 on the number of shares of Common Stock
to be issued under the Plan, but only to the extent of the number of shares
covered by the Stock Appreciation Right at the time of exercise based on
the value of the Stock Appreciation Right at such time.
SECTION 7. Bonus Shares and Restricted Stock
(a) Administration. Awards of shares of Common Stock or Restricted Stock
may be made either alone or in addition to other Awards granted under the Plan.
In addition, a participant may receive unrestricted shares of Common Stock or
Restricted Stock in lieu of certain cash payments awarded under other plans or
programs of the Company. The Committee shall determine the officers and
employees to whom and the time or times at which grants of unrestricted shares
of Common Stock and Restricted Stock will be awarded, the number of shares to be
awarded to any participant, the conditions for vesting, the time or times within
which such Awards may be subject to forfeiture and any other terms and
conditions of the Awards, in addition to those contained in Section 7(c).
(b) Awards and Certificates. Awards of unrestricted shares of Common Stock
and Restricted Stock shall be evidenced in such manner as the Committee may deem
appropriate, including book-entry registration or delivery of one or more stock
certificates to the participant, or, in the case of Restricted Stock, a
custodian or escrow agent. Any stock certificate issued in respect of
unrestricted shares or shares of Restricted Stock shall be registered in the
name of such participant. The Committee may require that the stock certificates
evidencing shares of Restricted Stock be held in custody or escrow by the
Company or its designated agent until the restrictions thereon shall have lapsed
and that, as a condition of any Award of Restricted Stock, the participant shall
have delivered a stock power, endorsed in blank, relating to the Common Stock
covered by such Award.
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(c) Terms and Conditions. Shares of Restricted Stock shall be subject to
the following terms and conditions:
(i) The Committee may, prior to or at the time of grant, condition
the grant or vesting, as applicable, of an award of Restricted Stock upon
the attainment of Performance Goals. The Committee may also condition the
grant or vesting of Restricted Stock upon the continued service of the
participant. The conditions for grant or vesting and the other provisions
of Restricted Stock Awards (including without limitation any applicable
Performance Goals) need not be the same with respect to each recipient. The
Committee may at any time, in its sole discretion, accelerate or waive, in
whole or in part, any of the foregoing restrictions.
(ii) Subject to the provisions of the Plan and the terms of the
Restricted Stock Award, during the period, if any, set by the Committee,
commencing with the date of such Award for which such participant's
continued service is required (the "Restriction Period"), and until the
later of (A) the expiration of the Restriction Period and (B) the date the
applicable Performance Goals (if any) are satisfied, the participant shall
not be permitted to sell, assign, transfer, pledge or otherwise encumber
shares of Restricted Stock; provided that the foregoing shall not prevent a
participant from pledging Restricted Stock as security for a loan, the sole
purpose of which is to provide funds to pay the option price for Stock
Options.
(iii) Except as provided in this paragraph (iii) and Sections 7(c)(i)
and 7(c)(ii) or the terms of the Restricted Stock Award, the participant
shall have, with respect to the shares of Restricted Stock, all of the
rights of a shareholder of the Company holding the class or series of
Common Stock that is the subject of the Restricted Stock, including, if
applicable, the right to vote the shares and the right to receive any cash
dividends. If so determined by the Committee under the applicable terms of
the Restricted Stock Award and subject to Section 15(e) of the Plan, (A)
cash dividends on the class or series of Common Stock that is the subject
of the Restricted Stock Award shall be automatically deferred and
reinvested in additional Restricted Stock, held subject to the vesting of
the underlying Restricted Stock, or held subject to meeting Performance
Goals applicable only to dividends, (B) dividends payable in Common Stock
shall be paid in the form of Restricted Stock of the same class as the
Common Stock with which such dividend was paid, held subject to the vesting
of the underlying Restricted Stock, or held subject to meeting Performance
Goals applicable only to dividends and (C) dividends paid in other property
shall be held subject to the vesting of the underlying Restricted Stock.
(iv) Except to the extent otherwise provided under the applicable
terms of the Restricted Stock Award and Sections 7(c)(i), 7(c)(ii), 7(c)(v)
and 11(a)(ii), upon a participant's Termination of Employment for any
reason during the Restriction Period or before the applicable Performance
Goals are satisfied, all shares still subject to restriction shall be
forfeited by the participant.
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(v) Except to the extent otherwise provided in Section 11(a)(ii), in
the event of a participant's Termination of Employment by reason of
Retirement, the Committee shall have the discretion to waive, in whole or
in part, any or all remaining restrictions (other than, in the case of
Restricted Stock with respect to which a participant is a Covered Employee,
satisfaction of the applicable Performance Goals unless the participant's
employment is terminated by reason of death or Disability) with respect to
any or all of such participant's shares of Restricted Stock.
(vi) If and when any applicable Performance Goals are satisfied and
the Restriction Period expires without a prior forfeiture of the Restricted
Stock, unlegended certificates for such shares shall be delivered to the
participant upon surrender of the legended certificates, or the
restrictions on such shares shall be removed from the book-entry
registration.
SECTION 8. Performance Units
(a) Administration. Performance Units may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the officers and employees to whom, and the time or times at which, Performance
Units shall be awarded, the number of Performance Units to be awarded to any
participant, the duration of the Award cycle and any other terms and conditions
of the Award, in addition to those contained in Section 8(b).
(b) Terms and Conditions. Performance Units Awards shall be subject to the
following terms and conditions.
(i) The Committee may, prior to or at the time of the grant,
designate Performance Units, in which event it shall condition the
settlement thereof upon the attainment of Performance Goals. The Committee
may also condition the settlement thereof upon the continued service of the
participant. The provisions of such Awards (including without limitation
any applicable Performance Goals) need not be the same with respect to each
recipient. Subject to the provisions of the Plan and the Performance Units
Agreement referred to in Section 8(b)(vi), Performance Units may not be
sold, assigned, transferred, pledged or otherwise encumbered during the
Award cycle.
(ii) Except to the extent otherwise provided in the applicable
Performance Unit Agreement and Sections 8(b)(ii) and 11(a)(iii), upon a
participant's Termination of Employment for any reason during the Award
cycle or before any applicable Performance Goals are satisfied, all rights
to receive cash or stock in settlement of the Performance Units shall be
forfeited by the participant.
(iii) Except to the extent otherwise provided in Section 11(a)(iii),
in the event that a participant's employment is terminated (other than for
Cause), or in the event of a participant's Retirement, the Committee shall
have the discretion to waive, in whole or in
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part, any or all remaining payment limitations with respect to any or all
of such participant's Performance Units.
(iv) A participant may elect to further defer receipt of cash or
shares in settlement of Performance Units for a specified period or until a
specified event, subject in each case to the Committee's approval and to
such terms as are determined by the Committee (the "Elective Deferral
Period"). Subject to any exceptions adopted by the Committee, such election
must generally be made prior to commencement of the Award cycle for the
Performance Units in question.
(v) At the expiration of the Award cycle, the Committee shall
evaluate the Company's performance in light of any Performance Goals for
such Award, and shall determine the number of Performance Units granted to
the participant which have been earned, and the Committee shall then cause
to be delivered (A) a number of shares of Common Stock equal to the number
of Performance Units determined by the Committee to have been earned, or
(B) cash equal to the Fair Market Value of such number of shares of Common
Stock to the participant as determined by the Committee in its discretion
(subject to any deferral pursuant to Section 8(b)(iv)).
(vi) Each Award shall be confirmed by, and be subject to, the terms
of a Performance Unit Agreement.
SECTION 9. Dividend Equivalents and Interest Equivalents
(a) The Committee may provide that a participant to whom a Stock Option has
been awarded, which is exercisable in whole or in part at a future time for
shares of Common Stock (such shares, the "Option Shares") shall be entitled to
receive an amount per Option Share, equal in value to the cash dividends, if
any, paid per share of Common Stock on issued and outstanding shares, as of the
dividend record dates occurring during the period between the date of the Award
and the time each such Option Share is delivered pursuant to the exercise of
such Stock Option. Such amounts (herein called "dividend equivalents") may, in
the discretion of the Committee, be:
(i) paid in cash or shares of Common Stock from time to time prior to
or at the time of the delivery of such shares of Common Stock or upon
expiration of the Stock Option if it shall not have been fully exercised
(except that payment of the dividend equivalents on an Incentive Stock
Option may not be made prior to exercise); or
(ii) converted into contingently credited shares of Common Stock
(with respect to which dividend equivalents shall accrue) in such manner,
at such value, and deliverable at such time or times, as may be determined
by the Committee.
Such shares of Common Stock (whether delivered or contingently credited) shall
be charged against the limitations set forth in Section 3.
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(b) The Committee, in its discretion, may authorize payment of interest
equivalents on any portion of any Award payable at a future time in cash,
and interest equivalents on dividend equivalents which are payable in cash
at a future time.
SECTION 10. Annual Cash Bonus Awards
(a) Bonus Pool. For each fiscal year of the Company, a bonus pool (the
"Bonus Pool") equal to up to 30% of the Company's adjusted pre-tax net income
for such fiscal year (prior to taking into account any payments under this
Section 10 for such fiscal year) will be established by the Committee.
Notwithstanding the foregoing, if the Company's aggregate compensation and
benefits expenses with respect to the fiscal year (including payments under this
Section 10) would otherwise exceed 55% of the Company's revenues for such fiscal
year (the "Maximum Expense"), the Committee shall reduce the Bonus Pool to the
greatest amount which would cause compensation and benefits expense for such
fiscal year not to exceed the Maximum Expense.
(b) Allocation of Bonus Pool. The Committee shall determine the allocation
of the Bonus Pool for each fiscal year. Such allocation may be made at any time
prior to payment of Bonus Awards. In the event the Bonus Pool is reduced
pursuant to paragraph (a) above, the Committee shall determine the required
reductions in Bonus Awards. Such reduction need not be on a pro rata basis among
the participants.
(c) Payment of Awards. Bonus Awards under the Plan shall be paid in cash as
soon as practicable following the end of the applicable fiscal year, but in any
event within 90 days following the end of such fiscal year.
(d) Termination of Employment. A participant shall not be entitled to
receive payment of a Bonus Award, unless the Committee determines otherwise, if
at any time prior to the end of the fiscal year the participant's Termination of
Employment occurs or, if at any time, following the end of the fiscal year the
participant's employment is terminated for Cause. In the event that a
participant's Termination of Employment (other than for Cause) occurs following
the end of the applicable fiscal year, such participant shall be entitled to
receive payment of his or her Bonus Award for such fiscal year.
SECTION 11. Change in Control Provisions
(a) Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) Any Stock Options outstanding as of the date such Change in
Control is determined to have occurred, and which are not then exercisable
and vested, shall become fully exercisable and vested to the full extent of
the original grant.
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(ii) The restrictions and deferral limitations applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall become free
of all restrictions and become fully vested and transferable to the full
extent of the original grant.
(iii) All Performance Units shall be considered to be earned and
payable in full, and any other deferred or other restrictions shall lapse
and such Performance Units shall be settled in cash or Common Stock (as
determined by the Committee) as promptly as is practicable.
(iv) Unless the Board determines to continue the Bonus Pool for the
remainder of the fiscal year, Bonus Awards for the fiscal year in which the
Change of Control occurs shall be paid out based upon calculations of
adjusted pre-tax net income and Maximum Expense under Section 10 through
the Change in Control as if the fiscal year had ended on the Change in
Control date.
(b) For purposes of the Plan, a "Change in Control" shall mean the
happening of any of the following events:
(i) acquisition by any individual, entity or group (with the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more of either (A) the then outstanding shares of common stock of the
Company (the "Outstanding Company Common Stock") or (B) the combined voting
power of the then outstanding voting securities of the Company entitled to
vote generally in the election of directors (the "Outstanding Company
Voting Securities"); provided, however, that, for purposes of this
subsection (i), the following acquisitions shall not constitute a Change of
Control: (1) any acquisition directly from the Company, (2) any acquisition
by the Company, (3) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, (4) any acquisition by any corporation pursuant
to a transaction which complies with clauses (A), (B) and (C) of subsection
(iii) of this Section 11(b) or (5) any acquisition of beneficial ownership
by Emanual Friedman, Eric Billings, or W. Russell Ramsey (the "Founders"),
or any entity that is controlled by one or more of the Founders (the
"Founder Affiliates"); or
(ii) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease to constitute at least a majority of the
Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority
of the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest with respect
to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than
the Board; or
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(iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company or the acquisition of
assets or stock of another corporation (a "Business Combination"), in each
case, unless, following such Business Combination, (A) all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 60% of, respectively,
the then outstanding shares of common stock and the combined voting power
of the then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all
or substantially all of the Company's assets either directly or through one
or more subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (B) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust)
of the Company or such corporation resulting from such Business Combination
or the Founders or Founder Affiliates) beneficially owns, directly or
indirectly, 50% or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such Business Combination or
the combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (C) at least a majority of the members of the
board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(c) Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular way, of
a share of Common Stock in any transaction reported on the New York Stock
Exchange Composite Tape or other national exchange on which such shares are
listed or on NASDAQ during the 60-day period prior to and including the date of
a Change in Control or (ii) if the Change in Control is the result of a tender
or exchange offer or a Corporate Transaction, the highest price per share of
Common Stock paid in such tender or exchange offer or Corporate Transaction;
provided, however, that in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, the Change in Control
Price shall be in all cases the Fair Market Value of the Common Stock on the
date such right under Section 5(j) is exercised. To the extent that the
consideration paid in any such transaction described above consists all or in
part of securities or other non-cash consideration, the value of such securities
or other non-cash consideration shall be determined in the sole discretion of
the Board.
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SECTION 12. Tax Offset Bonuses
At the time an Award is made hereunder or at any time thereafter, the
Committee may grant to the participant receiving such Award the right to receive
a cash payment in an amount specified by the Committee, to be paid at such time
or times (if ever) as the Award results in compensation income to the
participant, for the purpose of assisting the participant to pay the resulting
taxes, all as determined by the Committee and on such other terms and conditions
as the Committee shall determine.
SECTION 13. Amendment and Termination
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of
participants under any Award theretofore granted without the participants'
consent. In addition, no such amendment shall be made without the approval of
the Company's shareholders to the extent such approval is required by law or
agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules as
well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.
SECTION 14. Unfunded Status of Plan
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation
of trusts or other arrangements to meet the obligations created under the Plan
to deliver Common Stock or make payments; provided, however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 15. General Provisions
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to the distribution thereof.
The certificates for such shares may include any legend, or, in the case of
book-entry registration any notation, which the Committee deems appropriate to
reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or certificates made
pursuant thereto, the Company shall not be required to issue or deliver any
stock certificate or certificates for shares of
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Common Stock, or account for such shares by book-entry registration, under the
Plan prior to fulfillment of all of the following conditions:
(1) Listing or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common Stock;
(2) Any registration or other qualification of such shares of the
Company under any state, federal or foreign law or regulation, or the
maintaining in effect of any such registration or other qualification which
the Committee shall, in its absolute discretion upon the advice of counsel,
deem necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any state
or federal governmental agency or foreign governmental body which the
Committee shall, in its absolute discretion after receiving the advice of
counsel, determine to be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Company or any
Subsidiary or Affiliated Company from adopting other or additional compensation
arrangements for its employees.
(c) Adoption of the Plan shall not confer upon any employee any right to
continued employment, nor shall it interfere in any way with the right of
the Company or a Subsidiary or an Affiliated Company to terminate the
employment of any employee at any time.
(d) No later than the date as of which an amount first becomes includible
in the gross income of the participant for federal income tax purposes with
respect to any Award under the Plan, the participant shall pay to the Company,
or make arrangements satisfactory to the Company regarding the payment of, any
federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Company, withholding obligations may be settled with Common Stock, including
Common Stock that is part of the Award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements, and the Company and its Subsidiaries or
Affiliated Companies shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the participant. The
Committee may establish such procedures as it deems appropriate, including
making irrevocable elections, for the settlement of withholding obligations with
Common Stock.
(e) Reinvestment of dividends in additional Restricted Stock at the time of
any dividend payment shall only be permissible if sufficient shares of Common
Stock are available under Section 3 for such reinvestment (taking into account
then outstanding Stock Options and other Awards).
(f) The Committee, in its sole discretion, may establish such procedures as
it deems appropriate for a participant to designate a beneficiary to whom any
amounts payable in the event
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of the participant's death are to be paid or by whom any rights of the
participant, after the participant's death, may be exercised.
(g) In the case of a grant of an Award to any employee of a Subsidiary or
Affiliated Company, the Company may, if the Committee so directs, issue or
transfer the shares of Common Stock, if any, covered by the Award to the
Subsidiary or Affiliated Company, for such lawful consideration as the Committee
may specify, upon the condition or understanding that the Subsidiary or
Affiliated Company will transfer the shares of Common Stock to the employee in
accordance with the terms of the Award specified by the Committee pursuant to
the provisions of the Plan.
(h) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Virginia,
without reference to principles of conflict of laws.
SECTION 16. Effective Date of Plan
The Plan (other than Section 10, which shall be effective from and after
January 1, 1998 so long as the initial public offering of the Common Stock has
become effective by such date) shall be effective immediately prior to the date
on which the registration statement filed by the Company under the Securities
Act of 1933, as amended, registering the initial public offering of the Common
Stock is declared effective.
-19-
<PAGE>
Exhibit 21.01
Friedman, Billings, Ramsey Group, Inc. Direct and Indirect Wholly-owned
Subsidiaries
Friedman, Billings, Ramsey Capital Markets, Inc. - Delaware
FBR Capital Management, Inc. - Delaware
Friedman, Billings, Ramsey & Co., Inc. - Delaware
Friedman, Billings, Ramsey International, Ltd. - England
FBR Investment Services, Inc. - Delaware
Friedman, Billings, Ramsey Investment Management, Inc. - Delaware
Orkney Holdings, Inc. - Delaware
FBR Fund Advisers, Inc. - Delaware
FBR Venture Capital Managers, Inc. - Delaware
<PAGE>
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed S-8
Registration Statement File Nos. 333-69697, 333-77027 and 333-96295.
Vienna, Virginia
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1999 and the Consolidated
Statement of Operations for the year ended December 31, 1999, which are
contained in the body of the accompanying Form 10-K and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 43,743
<RECEIVABLES> 23,894
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 141,860
<PP&E> 11,308
<TOTAL-ASSETS> 226,356
<SHORT-TERM> 0
<PAYABLES> 32,999
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 3,029
<LONG-TERM> 1,359
0
0
<COMMON> 209,179
<OTHER-SE> (20,210)
<TOTAL-LIABILITY-AND-EQUITY> 226,356
<TRADING-REVENUE> 22,058
<INTEREST-DIVIDENDS> 9,468
<COMMISSIONS> 14,988
<INVESTMENT-BANKING-REVENUES> 45,183
<FEE-REVENUE> 45,312
<INTEREST-EXPENSE> 1,323
<COMPENSATION> 98,424
<INCOME-PRETAX> (6,971)
<INCOME-PRE-EXTRAORDINARY> (6,971)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,971)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
