As filed with the Securities and Exchange Commission on November 16, 1998
Registration No. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------
FBR ASSET INVESTMENT CORPORATION (MARYLAND)
(Exact Name of Registrant as Specified in its Governing
Instruments)
<TABLE>
<S> <C> <C>
Maryland 6798 54-1873198
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
Potomac Tower, 1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 469-1000
(Address, Including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
---------------
Robert S. Smith, Esq.
FBR Asset Investment Corporation (Maryland)
Potomac Tower, 1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 469-1000
(703) 312-9756 (Telecopy)
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
---------------
COPY TO:
Randolph F. Totten, Esq.
Hunton & Williams
Riverfront Plaza, East Tower
951 E. Byrd Street
Richmond, Virginia 23219-4074
(804) 788-8200
(804) 788-8218 (Telecopy)
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|_______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|_______________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Being Amount Being Offering Price Per Aggregate Offering Amount of
Registered Registered Share Price (2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share 9,150,000 shares (1) $17.00 $155,550,000 $45,888
===================================================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of shares of
common stock of the Registrant that are expected to be issued in connection with
the transactions described herein.
(2) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(a). There is no public market for the common stock of
FBR Asset Investment Corporation, the securities to be canceled in the
reorganization. Therefore, the registration fee has been calculated based on the
unaudited book value per share of FBR Asset Investment Corporation as of
November 6, 1998, the latest practicable date prior to the filing of this
Registration Statement.
---------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act, or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
================================================================================
<PAGE>
FBR ASSET INVESTMENT CORPORATION (MARYLAND)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Number of Form S-4 Location in Proxy Statement/Prospectus
- ----------------------- --------------------------------------
<S> <C> <C>
A. Information About the Transaction
---------------------------------
1. Forepart of Registration Statement and Outside Cover page
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover
Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges Risks Associated with an Investment in the Company
and Other Information
4. Terms of the Transaction The Merger
5. ProForma Financial Information N/A
6. Material Contacts With the Company Being Acquired The Merger
7. Additional Information Required for Reoffering by N/A
Persons and Parties Deemed to be Underwriters
8. Interests of Named Experts and Counsel N/A
9. Disclosure of Commission's Position on Part II, Item 22(a)
Indemnification for Securities Act Liabilities
B. Information About the Registrant
--------------------------------
10. Information with Respect to S-3 Registrants N/A
11. Incorporation of Certain Information by Reference N/A
12. Information with Respect to S-2 or S-3 Registrants N/A
13. Incorporation of Certain Information by Reference N/A
14. Information with Respect to Registrants Other The Company's Business; Index to Financial Statements;
than S-2 or S-3 Registrants Selected Financial Data; Management's Discussion &
Analysis
C. Information About the Company being Acquired
--------------------------------------------
15. Information with Respect to S-3 Companies N/A
16. Information with Respect to S-2 or S-3 Companies N/A
17. Information with Respect to Companies other than The Company's Business; Index to Financial Statements;
S-2 or S-3 Companies Selected Financial Data; Management's Discussion &
Analysis
D. Voting and Management Information
---------------------------------
18. Information if Proxies, Consents or Cover page; Questions & Answers about the Meeting
Authorizations are to be Solicited
19. Information if Proxies, Consents or N/A
Authorizations are not to be Solicited,
or in an Exchange Offer
</TABLE>
- --------------------
* Omitted because the Item is inapplicable or the answer thereto is negative.
** Indicates that the registrant has departed from the Item in certain
respects by virtue of the "plain English" format of the Proxy
Statement/Prospectus.
<PAGE>
- -------------------------------------------------------------------------------
Proxy Statement
FBR Asset Investment Corporation
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospectus
FBR Asset Investment Corporation (Maryland)
9,150,000 Shares of Common Stock
- -------------------------------------------------------------------------------
Special Shareholders Meeting
Merger and Stock Incentive Plan Proposed--
Your Vote is Very Important
FBR Asset's Board of Directors has unanimously approved the merger of the
Company into a newly organized corporation, FBR Asset Investment Corporation
(Maryland), for the purpose of moving the Company's state of incorporation from
Virginia to Maryland. The Board has also approved the adoption of a stock
incentive plan, which permits the Board to grant stock options and other
stock-based awards to the Company's directors, officers, and employees and to
other persons directly responsible for the Company's success. The Board believes
that the merger and the stock incentive plan, together with the other changes
described in this document, will make the Company's shares more marketable, will
strengthen the Company's ability to protect itself from unwanted takeovers, and
will generally bring the Company's corporate governance more in line with other
REITs.
The reorganization will not effect any change in your ownership percentage in
the Company or in the Company's business. The merger will, however, change the
structure of the Company's Board and alter the corporate law that governs your
rights as a shareholder. The Board of Directors has determined that the merger
and the stock incentive plan are in your and the Company's best interests. The
Board therefore recommends that you vote to approve the merger and stock
incentive plan.
At the special shareholders meeting, we will ask you to approve the Plan of
Merger attached to this document as Appendix A and the Stock Incentive Plan
attached as Appendix B. The affirmative vote of two-thirds of the Company's
outstanding shares is required to approve the Plan of Merger. A majority vote of
a quorum of the Company's outstanding shares is required to approve the Stock
Incentive Plan.
The date, time, and place of the special meeting are:
January ___, 1999
10:00 a.m., local time
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia
This proxy statement/prospectus provides detailed information about the Plan of
Merger and Stock Incentive Plan. We encourage you to read this document, and the
other documents to which it refers, in their entirety.
================================================================================
The risks associated with an investment in the Company are discussed on pages 18
to 23.
================================================================================
Any shareholder entitled to vote at the meeting has the right to dissent from
the Plan of Merger and to receive payment of the fair value of his shares upon
compliance with Article 15 of the Virginia Stock Corporation Act. A summary of
Article 15 and its full text are attached to this document as Appendix C.
No public market currently exists for FBR Asset Maryland's common stock. If,
however, you are not an "affiliate" of the Company, the shares of FBR Asset
Maryland that you receive in the merger will be freely transferable by you,
subject to the restrictions set forth in FBR Asset Maryland's Charter. FBR Asset
Maryland has applied for listing of its common stock on the New York Stock
Exchange under the symbol "____."
Please take the time to vote by completing and mailing the enclosed proxy card
to us. On behalf of the Company's Board of Directors, we urge you to vote "FOR"
the merger and "FOR" the stock incentive plan.
- ------------------------------
Emanuel J. Friedman
Chairman of the Board
- ------------------------------
Eric F. Billings
Vice Chairman of the Board &
Chief Executive Officer
================================================================================
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
proxy statement/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
================================================================================
The date of this proxy statement/prospectus is January __, 1999.
We expect to mail this document to FBR Asset Virginia's shareholders
on or about the same date.
<PAGE>
================================================================================
This Proxy Statement/Prospectus incorporates by reference other documents that
contain important business or financial information about FBR Asset Virginia and
FBR Asset Maryland. You may request copies of those documents, free of charge,
by calling or writing Elaine Clancy at FBR Asset Investment Corporation, Potomac
Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209, (703) 469-1000.
To ensure timely delivery of requested documents, Ms. Clancy must receive your
request before [date that is five days before investors must make final
decisions].
================================================================================
Table of Contents
THE SPECIAL SHAREHOLDERS MEETING......................1
QUESTIONS AND ANSWERS ABOUT THE MEETING............2
THE MERGER.........................................5
Overview.........................................5
The Companies....................................5
Board Recommendation.............................5
Effective Date...................................5
Effect of the Merger.............................5
Income Tax Consequences..........................6
Resales of Shares Received in the Merger.........6
Conditions to the Merger.........................6
Indemnification..................................6
Benefits to Directors and Officers...............6
Shareholders'Rights of Dissent & Fair Appraisal..6
Changes in the Company's Corporate Governance....6
THE STOCK INCENTIVE PLAN..........................10
General.........................................10
Board Recommendation............................10
Options.........................................10
Other Awards....................................11
Change of Control...............................11
Federal Income Tax Issues Relating to Options...11
Amendments & Termination........................12
Options Granted.................................12
PRINCIPAL SHAREHOLDERS............................13
THE COMPANY AND ITS BUSINESS AFTER THE MERGER........14
THE COMPANY.......................................15
General.........................................15
Recent Developments.............................15
ORGANIZATION & RELATIONSHIPS......................17
RISKS ASSOCIATED WITH AN INVESTMENT IN
THE COMPANY.......................................18
Conflicts of Interest May Result In
Decisions That Do Not Fully Reflect
Shareholders'Best Interests..................18
Limited Operating History; Lack of REIT
Experience...................................18
Decline in Market Values of Investment
Assets May Adversely Affect Credit
Availability and Periodic Reported Results...18
Dependence on the Manager; Termination
of Management Agreement......................18
Risk of Loss on Real Estate-Related
Investments..................................19
Interest Rate and Market Value Leverage
Risk.......................................19
Mortgage Loan Interest and Prepayment
Rate Risk..................................19
Risk in Hedging Against Interest Rate
Exposure...................................19
Mortgage Loan Credit Risk..................19
Leveraged Mortgage Credit Risk.............19
Leveraged Mortgage Loan Prepayment Risk....20
Risks Related to Multifamily and
Commercial Real Estate.....................20
Taxable Income May Exceed Cash Flow........20
Risks Relating to Investments in REIT
Equity Securities............................20
Risk of Inadequate Due Diligence...........20
Dependence on Management of Other Entities.21
Limited Liquidity of Investments...........21
Disposition Value of Investments
Dependent Upon General and Specific
Market Conditions..........................21
Other Risks................................21
Adverse Changes in General Economic
Conditions Can Adversely Affect
Company's Business...........................21
Tax Risks....................................21
Loss of Investment Company Act
Exemption Would Adversely Affect
The Company..................................22
Ownership Limitation May Restrict Change
of Control or Business Combination
Opportunities................................22
The Three-Year Staggered Terms of the
Company's Directors Will Make it More
Difficult for Shareholders to Change the
Board's Composition..........................22
Board of Directors May Change Policies
Without Shareholder Consent..................23
FBR & THE MANAGER.................................24
Certain Transactions............................24
The Manager's Executive Officers................25
The Management Agreement........................25
The Manager's Responsibilities...............26
The Management Fee...........................27
Options Owned by the Manager.................27
Expenses.....................................28
Limits of Responsibility.....................28
Term of Management Agreement.................28
CONFLICTS OF INTEREST.............................29
THE COMPANY'S BUSINESS............................31
Investments in Mortgage Assets..................31
Hedging......................................32
Interest Rate Management.....................32
i
<PAGE>
Management of Mortgage Assets................32
Mortgage Asset Investments...................32
Investments in Real Estate-Related Companies....33
Investment Policies & Strategies.............33
Investments in REITs or Other Companies
Before an FBR-Lead Initial or Secondary
Offering.....................................33
Private Investments in Public Companies......33
Undervalued Publicly Traded Securities.......33
Other Investments............................33
Current Investments..........................33
Leverage........................................37
Repurchase Agreements........................38
Bank Credit Facilities.......................38
Dividends & Distribution Policy.................38
SELECTED FINANCIAL DATA...........................40
MANAGEMENT'S DISCUSSION & ANALYSIS................41
Overview........................................41
Overview of Market Conditions...................41
Equity Market Conditions.....................41
Interest Rate Environment....................42
Results of Operations...........................43
Net Income...................................43
Funds from Operations........................44
Interest Income..............................44
Interest Expense.............................45
Dividends Declared and Distributions in
Excess of Earnings...........................45
Changes in Financial Condition..................45
Securities Available for Sale................45
Repurchase Agreements........................46
Contractual Commitments......................46
Capital Resources and Liquidity..............46
Stockholders'Equity..........................47
Year 2000 Compliance.........................47
MANAGEMENT AFTER THE MERGER.......................48
The Board of Directors..........................48
The Directors...................................49
Executive Officers Who Are Not Directors........50
Time Required of Directors & Executive Officers.51
Executive Compensation & Other Benefits.........51
Directors'Fees...............................51
Salaries.....................................51
Certain Transactions.........................52
CAPITAL STOCK AFTER THE MERGER....................53
General.........................................53
Common Stock....................................53
Preferred Stock.................................53
Book-Entry, Delivery, and Form..................53
Certificated Securities.........................54
Same-Day Settlement and Payment.................54
Restrictions on Ownership and Transfer..........55
Transfer Agent & Registrar......................57
Reports to Shareholders.........................57
Certain Provisions of the Company's Charter
and Bylaws......................................57
FEDERAL INCOME TAX LAWS APPLICABLE TO
REITS AND REIT SHAREHOLDERS.......................58
Tax Consequences of the Merger..................58
Taxation of FBR Asset Maryland..................58
Requirements for Qualification...............60
Failure to Qualify...........................65
Taxation of Taxable U.S. Shareholders...........65
Taxation of U.S. Shareholders on the
Disposition of the Common Stock..............67
Capital Gains and Losses.....................67
Information Reporting Requirements and
Backup Withholding...........................68
Taxation of Tax-Exempt Shareholders.............68
Taxation of Non-U.S. Shareholders...............69
Other Tax Consequences..........................71
ERISA CONSIDERATIONS..............................72
OTHER MATTERS.....................................74
Legal...........................................74
Experts.........................................74
Expenses........................................74
Additional Information..........................74
Index to Financial Statements....................F-1
Appendix A Plan of Merger........................A-1
Appendix B Stock Incentive Plan..................B-1
Appendix C-1 Summary of Dissenters' Rights.....C-1-1
Appendix C-2 Statutory Provisions for
Dissenters..................................C-2-1
================================================================================
FBR Asset Virginia has not authorized anyone to give you any information other
than that which is included in this document. FBR Asset Virginia has not
authorized anyone to make any representations to you other than those that are
included in this document. If anyone gives you additional information, or makes
additional representations, you must not rely on them at all.
This proxy statement/prospectus is not an offer to sell or the solicitation of
an offer to buy any securities other than those to which it relates, nor is it
an offer or solicitation of any person in any jurisdiction to whom it would be
unlawful to make such an offer or solicitation.
The delivery of this proxy statement/prospectus at any time does not imply that
the information herein is correct as of any time after [date of prospectus].
================================================================================
ii
<PAGE>
Part I
The Special Shareholders Meeting
<PAGE>
Questions and Answers about the Meeting
The answers provided in this section highlight only some of the facts that you
will need to make an informed decision about the Plan of Merger and the Stock
Incentive Plan. We encourage you to read this entire document, and the other
documents to which it refers, very carefully.
References to "FBR Asset Virginia" refer to FBR Asset Investment Corporation,
the current Virginia corporation. References to "FBR Asset Maryland" refer to
the newly formed Maryland corporation, which will be the surviving entity in the
merger. References to "the Company" may refer to one or both of the corporations
and are used when no distinction need be made between the entities. References
to "we," "us," and "our," refer to the management of both entities, which
consists of the same people.
Proxy Solicitation
Question: Why is the Board soliciting proxies?
Answer: The Board is soliciting proxies in order to secure shareholder approval
of the Plan of Merger attached hereto as Appendix A and the Stock Incentive Plan
attached as Appendix B.
Question: Who is entitled to notice of and to vote at the meeting?
Answer: Only those shareholders of record as of ___________, 1998, are entitled
to notice of and to vote at the meeting. As of that date, there were _________
shares of FBR Asset Virginia's common stock outstanding.
Question: How many of FBR Asset Virginia's outstanding shares are owned by the
Company's Manager, its affiliates, and the Company's directors, officers, or
employees?
Answer: As of November 13, 1998, those persons owned 1,608,686 shares of FBR
Asset Virginia's common stock. Each of those persons has indicated that they
intend to vote in favor of the Plan of Merger and the Stock Incentive Plan. See
"Principal Shareholders."
The Merger
Question: Why is the Board proposing to reorganize the Company?
Answer: The Board believes that the merger, together with the other changes
described in this document, will make the Company's shares more marketable, will
strengthen the Company's ability to protect itself from takeover threats, and
will otherwise bring the Company's governance more in line with that of other
REITs.
Question: What changes in the Company will be effected by the merger?
Answer: First, the members of the Company's Board will serve staggered
three-year terms instead of the annual terms that they currently serve. Second,
Maryland law instead of Virginia law will govern the Company's operations and
shareholders' rights. Finally, the shares issued in the merger will be freely
transferable by non-affiliates of the Company, subject only to restrictions
contained in the Company's Charter. See "The Merger--Changes in the Company's
Governance."
Question: Will the merger cause any changes in the Company's management or
business operations and strategies?
Answer: No. The merger will not cause any changes in the Company's management,
investment strategies, investment holdings, or business operations. See "The
Company's Business."
Question: If the merger is approved, what will I receive in exchange for my
shares in FBR Asset Virginia?
Answer: Each share of FBR Asset Virginia common stock will be replaced by one
share of FBR Asset Maryland common stock. There will be no change in your
ownership percentage in the Company (except that your ownership percentage will
increase to the extent shareholders exercise their dissenters' rights). There
will also be no change in the Company's dividend policy. You will not owe any
federal income tax as a result of the share exchange. See "The Merger--Effect of
the Merger" and "--Income Tax Consequences"
Question: What about dissenters' rights?
2
<PAGE>
Answer: If you do not vote in favor of the merger and if you comply with notice
requirements and other statutory procedures, you will have the right to dissent
and be paid the "fair value" of your shares. If you choose to receive cash for
your dissenting shares, you will recognize gain or loss for federal income tax
purposes. See "Appendix C" for the statutory provisions governing your
dissenters' rights.
Question: Are there any conditions to the merger?
Answer: The completion of the merger is conditioned upon the holders of at least
two-thirds of FBR Asset Virginia's common stock approving the Plan of Merger and
the holders of not more than 5% of FBR Asset Virginia's common stock exercising
their dissenters' rights.
The Stock Incentive Plan
Question: How many options may be granted under the Stock Incentive Plan?
Answer: Options to purchase up to 500,000 shares of the Company's common stock
(adjusted to reflect stock splits and similar events) may be granted under the
plan. See "The Stock Incentive Plan."
Question: To whom may options be granted?
Answer: Under the Stock Incentive Plan, options may be granted to persons who
are directors, officers, or employees of, or who otherwise provide services to,
the Company, its subsidiaries, and its affiliates, and who are responsible for
the success of those entities.
Question: Who is authorized to grant options under the plan?
Answer: The Company's Board or a committee of the board designated for that
purpose.
Question: At what price will the options be granted?
Answer: The Board of Directors has authority to determine the option price, but
in order for option holders to qualify for favorable tax treatment, the purchase
price per share must be not less than the fair market value of a share of the
Company's stock on the date of grant.
Question: Have any options been granted pursuant to the Stock Incentive Plan?
Answer: Yes, on November __, 1998, the Company's Board of Directors granted
options to ____ individuals to acquire ___ shares of the Company's common stock
at a price of $_________ per share.
Question: Why is the Board seeking shareholder approval of the Stock Incentive
Plan?
Answer: Under applicable income tax rules, shareholder approval of the plan is
required in order for option holders to avoid recognizing income when the option
is exercised. The Board believes that qualified tax status for the options
enhances the likelihood of continued ownership of the Company's stock by persons
exercising options.
Question: If stockholders do not approve the Stock Incentive Plan, will the
outstanding options be cancelled?
Answer: No, but the outstanding options will not be qualified options for
federal income tax purposes.
Question: Can any other types of awards be granted under the Stock Incentive
Plan?
Answer: Yes. In addition to options, other types of stock-based compensation may
be granted under the Stock Incentive Plan. The total number of shares of the
Company's common stock that can be issued under the Stock Incentive Plan,
whether on the exercise of options or as another type of award, is 500,000.
Voting
Question: What do I need to do now?
Answer: Please complete and mail the enclosed proxy card to us as soon as
possible. Properly executed proxy cards received and not revoked before the
meeting will be voted in accordance with the instructions on the proxy card. If
you sign, date and mail your proxy card without indicating how you wish to vote,
your proxy will be counted as a vote "FOR" the Plan of Merger and the Stock
Incentive Plan. If you fail to return your proxy card and fail to vote at the
meeting, the effect will be a vote "AGAINST" the merger. A properly executed
proxy card marked "ABSTAIN" will not be voted.
Question: Can I revoke my proxy and change my vote?
3
<PAGE>
Answer: Yes, you may revoke your proxy at any time before its use by delivering
to the Company's secretary a signed notice of revocation or a later-date signed
proxy, or by attending the meeting and voting in person. Attendance at the
meeting will not in and of itself constitute the revocation of a proxy.
Question: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
Answer: Yes, if you provide your broker with instructions on how to vote your
shares. If, however, you do not provide your broker with instructions, your
broker will not be permitted to vote your shares.
Question: If I return my proxy card, how will my shares be voted on any other
matters presented at the meeting?
Answer: If any other matters are properly presented for consideration at the
meeting, the persons named in the proxy card will have discretionary authority
to vote on those matters. If necessary, and unless the shares represented by the
proxy are voted against the Plan of Merger or the Stock Incentive Plan, the
holders of proxies granted by shareholders may also vote in favor of a proposal
to adjourn the meeting to permit further solicitation of proxies in order to
obtain sufficient votes for approval of those matters.
More Information
Question: Will a representative of the Company's independent auditors, Arthur
Andersen, be available at the meeting to answer questions?
Answer: Yes.
Question: Whom should I call with questions?
Answer: If you have any questions about the Plan of Merger or the Stock
Incentive Plan, you may call the Company's Chief Financial Officer, Elaine
Clancy, at (703) 469-1000. In addition, representatives from the Company will be
available to answer questions at the meeting.
4
<PAGE>
The Merger
Overview
FBR Asset Virginia will be merged with and into FBR Asset Maryland. FBR Asset
Maryland will be the surviving corporation of the merger. Following the merger,
shareholders' rights will be governed by Maryland corporation law and the
provisions of FBR Asset Maryland's Charter. See "The Merger--Changes in the
Company's Corporate Governance."
The Companies
The mailing address and phone number of the principal executive offices of FBR
Asset Virginia and FBR Asset Maryland are Potomac Tower, 1001 Nineteenth Street
North, Arlington, Virginia, 22209, (703) 469-1000.
FBR Asset Virginia
FBR Asset Virginia is a Virginia corporation that was formed in November 1997 to
invest in real estate-related assets, including
o mortgage loans,
o mortgage-backed securities, and
o securities of companies engaged in real estate-related activities.
FBR Asset Virginia has elected to be taxed as a REIT under the federal tax laws.
Friedman, Billings, Ramsey Investment Management, Inc. (the "Manager") manages
FBR Asset Virginia's day-to-day operations, subject to the direction and
oversight of FBR Asset Virginia's Board of Directors. The Manager has engaged
BlackRock Financial Management, Inc. ("BlackRock"), a subsidiary of PNC Bank
Corp., to sub-manage FBR Asset Virginia's mortgage portfolio. That portfolio
currently contains mortgage-backed securities guaranteed by U.S. government
agencies.
The Manager is a wholly-owned subsidiary of Friedman, Billings, Ramsey Group,
Inc. ("FBR Group"), an investment banking and asset management firm that focuses
on research, underwriting, brokerage and asset management activities in various
sectors, including real estate, banks, thrifts, specialty finance, technology,
and consolidation. FBR Group, together with its other subsidiaries ("FBR"),
presents FBR Asset Virginia with opportunities to invest in real estate-related
and other companies. Those transactions often involve numerous conflicts of
interest because the Manager, FBR, and FBR Asset Virginia share many of the same
directors and officers. To moderate those conflicts, FBR Asset Virginia's
independent directors must review and approve any transaction in which the
Manager or its Affiliates has a material financial interest. In conducting their
review, however, the independent directors rely in large part on information
given to them by the Manager. See "Management After the Merger--The Board of
Directors" for a more detailed discussion of the independent directors.
FBR Asset Maryland
FBR Asset Maryland is a Maryland corporation that we formed in November 1998 for
purposes of this reorganization. FBR Asset Virginia's Chief Financial Officer
currently owns all of FBR Asset Maryland's outstanding stock, and the Company's
management has made all decisions concerning FBR Asset Maryland's organization
and structure. FBR Asset Maryland's current directors and executive officers are
the same as FBR Asset Virginia's current directors and executive officers.
FBR Asset Maryland has not conducted any activities other than those incident to
its formation and its involvement in the Plan of Merger.
Board Recommendation
FBR Asset Virginia's Board of Directors believes that the Plan of Merger is in
the shareholders' and the Company's best interests. The Board has unanimously
approved the Plan of Merger and recommends that FBR Asset Virginia's
shareholders vote in favor of the Plan of Merger.
Effective Date
We plan for the merger to become effective as soon as practicable after approval
of the Plan of Merger by shareholders.
Effect of the Merger
Upon completion of the merger, each outstanding share of FBR Asset Virginia's
common stock, other than those shares held by persons who perfect their
dissenters' rights, will be converted into one share of FBR Asset Maryland's
common stock. Your shares of FBR Asset Maryland will represent the same
ownership percentage in FBR Asset
5
<PAGE>
Maryland that your shares of FBR Asset Virginia represent in FBR Asset Virginia
(except that your ownership percentage will increase to the extent shareholders
exercise their dissenters' rights). The merger will not cause any material
changes in the Company's business operations or investment strategies.
Income Tax Consequences
The Company will receive an opinion from Hunton & Williams that neither you nor
the Company will recognize any gain or loss in connection with the merger,
except that you will recognize gain or loss for federal income tax purposes if
you exercise and perfect your dissenters' rights. See "Federal Income Tax Laws
Applicable to REITs and REIT Shareholders."
Resales of Shares Received in the Merger
If you are not an "affiliate" of the Company (as defined under Rule 144
promulgated under the Securities Act), you may sell shares issued in the merger
without restriction under the Securities Act. The Company has applied for
listing of its common stock on the New York Stock Exchange under the symbol
"___."
Conditions to the Merger
The consummation of the merger is conditioned on the holders of at least
two-thirds of FBR Asset Virginia's outstanding stock approving the transaction
and the holders of not more than 5% of FBR Asset Virginia's common stock
exercising their dissenters' rights.
Indemnification
FBR Asset Maryland has agreed to indemnify the employees, agents, directors, and
executive officers of FBR Asset Virginia to the fullest extent permitted by law
with respect to matters occurring before the merger's effective date.
Benefits to Directors and Officers
The merger will not directly provide any substantive benefits to FBR Asset
Virginia's directors or officers.
Shareholders' Rights of Dissent & Fair Appraisal
If you do not vote in favor of the Plan of Merger and if you comply with
statutory notice requirements and other procedures, you will have the right to
dissent and be paid the "fair value" of your shares. The "fair value," as
determined in accordance with statutory procedures, may be more or less than the
value to be received by shareholders under the Plan of Merger. The applicable
Virginia statutory provisions and a summary of those procedures are attached as
Appendix C.
================================================================================
If you do not precisely follow the statutory procedures for dissenting, you may
lose your appraisal rights.
================================================================================
Changes in the Company's Corporate Governance
This section discusses the changes in the Company that will be effected by the
merger. This section is a summary only; it is not a complete list or description
of the changes or the differences between FBR Asset Virginia and FBR Asset
Maryland, and you should not rely on it as if it were. This discussion is
qualified in its entirety by reference to the Maryland General Corporation Law,
the Virginia State Corporation Act, and the Charter and Bylaws of FBR Asset
Virginia and FBR Asset Maryland. You may obtain copies of the Charter and Bylaws
of both corporations by following the document request procedures described in
"Other Matters--Additional Information." We encourage you to read each of those
documents in their entirety.
Board of Directors Classification & Terms of Directors
- ------------------------------------------------------
The Company's Board currently has five members, with each director serving a
one-year term. After the merger, the Company's Board will continue to have five
members, but the members will be divided into three-classes, with each class
serving a three-year term. The terms of the classes will be "staggered," and
thus, only one class of the Company's Board will be elected each year.
Because the shareholders will be able to elect only a minority of directors at
any one time, the division of the Company's Board into classes will make it more
difficult for shareholders to change the Board's composition. The class division
is intended to
6
<PAGE>
discourage third parties from accumulating the Company's stock in order to gain
control. Under some circumstances, however, a change in control might be
beneficial to the Company or its shareholders, and the class division could
deprive shareholders of opportunities to sell their shares at higher prices than
might otherwise be available.
Removal of Directors
- --------------------
The Company's shareholders can currently remove directors at any time, WITH or
WITHOUT cause, by the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of directors. After the merger, shareholders
will be able to remove the Company's directors only WITH cause, and then only
with the affirmative vote of at least two-thirds of the votes entitled to be
cast in the election of directors. Thus, the circumstances under which
shareholders will be able to remove the Company's directors after the merger
will be more limited than the circumstances under which they can currently
remove directors.
Independent Directors
- ---------------------
Thirty percent (30%) of the Company's directors must be "independent." A person
is currently disqualified from serving as one of the Company's independent
directors if that person has, within the past two years, directly or indirectly:
1. owned an interest in the Manager or its Affiliates;
2. been employed by the Manager or its Affiliates;
3. been an officer or director of the Manager or its Affiliates; or
4. performed services for the Manager or its Affiliates.
After the merger, a person will be similarly disqualified from serving as one of
the Company's independent directors if he falls within categories 2 or 3 above,
but as to categories 1 and 4, that person can be disqualified only if he has
owned a "material" interest in, or performed "material" services for, the
Manager or its Affiliates. Thus, after the merger, a person who owns a small
number of shares of the Manager's stock or who performs some services for the
Manager may still serve as one of the Company's independent directors despite
his relationship with the Manager. For a more detailed description of what
constitutes a "material interest" or "material services," see "Management After
the Merger--The Board of Directors."
Capital Stock
Authorized Shares
- -----------------
The merger will not cause any change in the number of the Company's authorized
shares. See "Capital Stock after the Merger--General."
Preemptive Rights, Common Stock, Preferred Stock, and Restrictions on Transfer
- ------------------------------------------------------------------------------
The merger will not cause any significant change in shareholders' preemptive
rights, the Company's common stock or preferred stock, or the restrictions on
ownership of the Company's capital stock. See "Capital Stock After the Merger."
Director Standard of Care
Under Virginia law, the Company's directors must currently discharge their
duties with good faith business judgment as to the best interests of the
corporation. After the merger, under Mayland law, the Company's directors will
be required to perform their duties in good faith, in a manner the directors
reasonably believe is in the Company's best interests and with the degree of
care an ordinarily prudent person in a like position and under similar
circumstances would employ.
Indemnification Before the Merger
- ---------------------------------
FBR Asset Virginia's Charter permits indemnification to the fullest extent
allowed by Virginia law of current and former directors, officers, employees or
agents, but no indemnification is available for willful misconduct or a knowing
violation of criminal law.
After the Merger
- ----------------
FBR Asset Maryland's Charter permits indemnification to the fullest extent
allowed by Maryland law of directors, officers, employees or agents with respect
to any legal proceeding, including a derivative proceeding, but no
indemnification is available for actions committed in bad faith or involving the
actual receipt of an improper personal benefit. Indemnification is also not
available for criminal proceedings pertaining to misconduct that the person
should have known was unlawful.
Derivative Litigation
Both Virginia and Maryland law require shareholders to demand that the Company
take action on its own behalf before instituting derivative litigation.
7
<PAGE>
Dissenters' Rights
FBR Asset Maryland has applied to list its common stock on the New York Stock
Exchange. Neither Virginia nor Maryland law give shareholders dissenters' rights
with respect to shares listed on a national securities exchange.
Mergers, Share Exchanges and Sales of Assets Before the Merger
- --------------------------------------------------------------
FBR Asset Virginia's Charter requires that any merger, share exchange or sale of
substantially all of the assets of a corporation (not in the ordinary course of
business) be approved by at least two-thirds of the votes entitled to be cast by
each voting group entitled to vote.
After the Merger
- ----------------
FBR Asset Maryland's Charter requires that any merger, share exchange or sale of
substantially all the Company's assets need only be approved by a majority of
the votes entitled to be cast on the matter.
Anti-takeover Statutes Before the Merger
- ----------------------------------------
Virginia's statute contains provisions governing affiliated transactions,
including transactions in which an interested shareholder increases his
percentage of voting shares by more than five percent. Such transactions may
include mergers, share exchanges, material dispositions of corporate assets not
in the ordinary course of business, dissolution of the corporation as proposed
by or on behalf of an interested shareholder, or any reclassification,
recapitalization or merger of the corporation with its subsidiaries.
For three years following the time that an interested shareholder becomes an
owner of 10 percent of the outstanding voting shares, a Virginia corporation
cannot engage in an affiliated transaction without the approval of two-thirds of
the voting shares (not including the interested shareholders shares) and the
majority approval of the disinterested directors. A disinterested director
means, with respect to a particular interested shareholder, a member of the
board of directors who was (a) a member of the board on the date on which an
interested shareholder became an interested shareholder and (b) recommended for
election by a majority of the disinterested directors then on the board.
At the expiration of the three-year period, an interested shareholder may engage
in an affiliated transaction with the corporation if a majority of the
disinterested directors or two-thirds of the disinterested shareholders approve
the transaction. However, this voting requirement is not necessary if the
transaction satisfies a fair-price requirement. In general, the fair-price
requirement provides that, in a two-step acquisition transaction, the interested
shareholder must pay the shareholders in the second step either the same amount
of cash or the same amount and type of consideration paid to acquire the
Virginia corporation's shares in the first step.
The requirements of Virginia's statute do not apply to a transaction with an
interested shareholder (a) whose acquisition of shares making such person an
interested shareholder was approved by a majority of the Virginia corporation's
disinterested directors or (b) who was an interested shareholder on the date the
corporation became subject to the affiliated transaction provisions by virtue of
its having 300 shareholders of record. In addition, the statute provides that,
by affirmative vote of a majority of the voting shares (not including the shares
owned by an interested shareholder), a corporation can adopt an amendment to its
articles of incorporation or bylaws providing that the affiliated transaction
provisions in the Virginia statute shall not apply to the corporation. FBR Asset
Virginia has not "opted out" of the affiliated transaction provisions.
Virginia's statute also contains provisions regulating certain control share
acquisitions, which are transactions where a person acquires shares of a
Virginia public corporation that causes that person's voting strength to meet or
exceed certain threshold percentages (20 percent, 33 1/3 percent or 50 percent)
of the total votes entitled to be cast for the election of directors. Shares
acquired in a control share acquisition have no voting rights unless (a) the
majority vote of all outstanding shares, other than those held by the acquiring
person and any officers or employee directors of the corporation, grant voting
rights, or (b) the articles of incorporation or bylaws of the corporation
provide that these Virginia law provisions do not apply to acquisitions of the
corporation's shares. The acquiring person may require that a special meeting of
the shareholders be held to consider the grant of voting rights to the shares
acquired in the control share acquisition. These provisions were designed to
deter certain takeovers of Virginia public corporations. FBR Asset Virginia has
not adopted an amendment to its articles of incorporation or bylaws making these
provisions inapplicable to acquisition of its shares.
8
<PAGE>
Although permitted under Virginia law, FBR Asset Virginia has not adopted a
shareholders' rights plan (or "poison pill").
After the Merger
- ----------------
Maryland has two statutes addressing corporate takeovers. Maryland's Business
Combination Statute prohibits, without exception, a publicly-held Maryland
corporation from entering into any business combination or significant
transaction with a person who becomes a 10 percent shareholder (without the
prior approval of a majority of the corporation's disinterested directors) for a
period of five years following such shareholder's acquisition of his 10 percent
interest. After five years, the transaction may proceed only if the board of
directors recommends the transaction and (a) the transaction meets certain fair
price requirements, or (b) 80 percent of the outstanding voting shares approve
the transaction and two-thirds of the shares (excluding the shares owned by the
10 percent shareholder) vote in favor of the transaction.
Maryland's Control Share Act provides that certain shareholders cannot vote any
shares they acquire 90 days before or 90 days after a control share acquisition.
A control share acquisition means any transaction by which a shareholder comes
to own 20 percent, 33 1/3 percent or more than 50 percent of the voting shares
of a publicly-held Maryland corporation. However, if the other shareholders
approve it by referendum, the shareholder may vote those shares despite the
statutory prohibition. For a valid referendum, two-thirds of the outstanding
shares, excluding the control-acquisition shares or shares held by any officer
or employee-director of the corporation, must vote in favor of granting voting
rights to the control-acquisition shares.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of shareholders to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does
not deliver a statement regarding the control share acquisition as required by
the statute, then the corporation may redeem any or all of the control
acquisition shares (except those for which voting rights have previously been
approved) for fair value, subject to certain conditions and limitations. The
value of the shares does not reflect the lack of voting rights for the control
shares. The date for determining the value is the date of the last control share
acquisition by the acquirer or the date of any meeting of shareholders at which
the voting rights of such shares are not approved.
If voting rights for control shares are approved at a shareholders meeting and
the acquirer becomes entitled to vote a majority of the shares entitled to vote,
all other shareholders may exercise appraisal rights. The fair value of the
shares as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquirer in the control share
acquisition.
Maryland's Control Share Act does not apply (a) to shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the
transaction, or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The bylaws of FBR Asset Maryland contain a provision exempting shares acquired
by FBR and the Manager from Control Share Act.
Although no specific provision of the Maryland statute provides for the use of a
shareholders' rights plan (or "poison pill"), the statute generally condones
their use. The board of directors of a Maryland corporation may set the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of non-issued stock. By statute, such terms and conditions may be
made dependent upon facts ascertainable outside the corporation's charter and
may vary among shareholders.
9
<PAGE>
The Stock Incentive Plan
General
In connection with FBR Asset Virginia's organization, the Company granted the
Manager an option to acquire 1,021,900 shares of the Company's common stock at a
price of $20 per share. The option expires on December 16, 2007, and may be
exercised in whole or in part at any time.
The Board of Directors and the Manager believe that it is desirable to give
stock ownership incentives to individuals directly responsible for the Company's
success. To that end, the Manager has agreed to the cancellation of its right to
acquire 500,000 shares pursuant to its option. The Company will use the shares
released from the Manager's option to form the Stock Incentive Plan.
The Stock Incentive Plan provides that the total number of shares of common
stock available for issuance under the plan may not exceed 500,000 shares. The
stock incentive plan will be administered by the Company's Board of Directors or
a committee appointed by the Board.
The Stock Incentive Plan is designed to promote the success and enhance the
value of the Company by linking the interests of officers, employees, directors,
and other persons who provide services to the Company, its subsidiaries, or
affiliates ("Participants") with the interests of the Company's shareholders,
and by providing Participants with an incentive for outstanding performance. The
Stock Incentive Plan is further intended to provide flexibility to the Company
in its ability to motivate, attract and retain Participants upon whose judgment,
interest, and special efforts the Company's successful operation is largely
dependent. Officers, employees (including those who are also directors) and
non-employee directors of the Company, its subsidiaries and affiliates, as well
as other persons who provide services to the Company, its subsidiaries and
affiliates, are eligible to participate in the Stock Incentive Plan. The Board
will determine which officers, employees, and service providers (other than
non-employee directors) will be Participants and will set the terms of such
persons' awards. The Board will also determine the participation of non-employee
directors and will set the terms of their awards. The Stock Incentive Plan is
intended to remain in effect for 10 years (until 2008). This is intended as a
summary of material terms only. Capitalized terms used in this section but not
defined shall have the meanings given them in the Stock Incentive Plan, which is
attached hereto as Appendix B.
Board Recommendation
FBR Asset Virginia's Board believes that the Stock Incentive Plan is in the
shareholders' and the Company's best interests. The Board has unanimously
approved the Stock Incentive Plan and recommends that FBR Asset's shareholders
vote in favor of the Stock Incentive Plan.
Options
The Stock Incentive Plan provides for the grant of stock options (both
nonqualified stock options and "incentive stock options," within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"))
("Options"), and other types of awards discussed below.
The Stock Incentive Plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and is not
qualified under Section 401(a) of the Code.
The term of Options granted under the Stock Incentive Plan may not exceed 10
years. Unless otherwise determined by the Board, Options will generally vest
ratably on each of the first five anniversaries after the grant date. Unless
otherwise determined by the Board, Options will have a fair market value
exercise price.
A Participant exercising an Option may pay the exercise price in full in cash,
or, if approved by the Board, with previously acquired shares of common stock or
a combination thereof. The Board, in its discretion, may allow cashless
exercises of Options.
Options are nontransferable other than by will or laws of descent and
distribution, or in the Board's discretion, pursuant to a written beneficiary
designation (and, in the case of a nonqualified Option, pursuant to a domestic
relations order, or in the Board's discretion, pursuant to a gift to members of
the holder's immediate family, whether directly or indirectly, or by means of a
trust, partnership, or limited liability company). During the Participant's
lifetime, Options may be exercised only by the Participant, any permitted
transferee, or a guardian, legal representative, or beneficiary.
10
<PAGE>
During the 60-day period following a change of control of the Company, unless
the Board determines otherwise, any Participant will have the right to surrender
all or part of any Option held by the Participant in lieu of payment of the
exercise price, and to receive cash (or stock, if necessary to preserve pooling
of interests accounting for the change of control) in an amount equal to the
excess of (a) the higher of the price received for common stock in connection
with the change of control and the highest reported sales price of a share of
common stock on a national exchange or on Nasdaq during the 60-day period prior
to and including the date of a change of control (the "Change of Control
Price"), over (b) the exercise price, multiplied by the number of shares of
common stock granted in connection with the exercise of such Option; provided
that, if the Option is an incentive stock option, the Change of Control Price
will equal the fair market value of a share of common stock on the date, if any,
that such Option is exercised.
Other Awards
A stock appreciation right ("SAR") permits a Participant to receive in cash an
amount equal to the excess of the fair market value of a share of common stock
on the date of exercise over the SAR exercise price, times the number of shares
with respect to which the SAR is exercised. Restricted stock may be granted
subject to performance or service-based goals. Unrestricted shares of common
stock may also be granted. Performance units will be subject to performance
goals and restrictions and will be payable in cash or shares of common stock (or
a combination) as determined by the Board. The Board may grant dividend and
interest equivalents with respect to awards.
Change of Control
In the event of a change of control, any Option that is not then exercisable
will become fully exercisable, Restricted stock will vest and performance units
will be earned. The Stock Incentive Plan defines a change of control as
generally (i) the acquisition of 50% or more of the common stock or voting
securities of the Company by a person or group, (ii) a change in a majority of
the Company's Board, unless approved by the incumbent directors, (iii) the
approval by the Company's shareholders of certain mergers involving the Company,
or (iv) approval by the Company's shareholders of a liquidation, dissolution or
sale of substantially all of the assets of the Company.
Federal Income Tax Issues Relating to Options
The following brief summary of the federal income tax rules currently applicable
to nonqualified stock options and incentive stock options is not intended to be
specific tax advice to Participants under the Stock Incentive Plan.
Two types of stock options may be granted under the Stock Incentive Plan:
nonqualified stock options ("NQOs") and incentive stock options ("ISOs"). The
grant of an Option generally has no immediate tax consequences to the
Participant or the Company. Generally, Participants will recognize ordinary
income upon the exercise of NQOs, and the Company will receive a corresponding
deduction. In the case of NQOs, the amount of income and deduction recognized is
measured by the difference between the exercise price and the fair market value
of the common stock on the date of exercise. A Participant generally does not
recognize income upon the exercise of an ISO, and the exercise has no tax
consequences to the Company. The difference between the exercise price and the
fair market value of the common stock on the date of exercise of an ISO is an
adjustment to income for computing alternative minimum tax liability.
Participants generally will recognize a capital gain on the disposition of
shares required. Participants may, in certain circumstances, recognize ordinary
income upon the disposition of shares acquired by exercise of an ISO, depending
upon how long such shares were held prior to disposition. Special rules apply to
shares acquired by exercise of ISOs for previously held shares. In addition,
special tax rules may result in the imposition of a 20% excise tax on any
"excess parachute payments" that result from the acceleration of the vesting or
exercisability of Awards, including Options, upon a change of control.
The Company is generally required to withhold applicable income and payroll
taxes ("employment taxes") from ordinary income that a Participant recognizes on
the exercise or receipt of an Award. The Company thus may either require
Participants to pay to the Company an amount equal to the employment taxes the
Company is required to withhold or retain or sell without notice a sufficient
number of the shares to cover the amount required to be withheld.
The Company generally will be entitled to a deduction for the amount includible
in a Participant's gross income for federal income tax purposes upon the
exercise of an NQO, or upon a disposition of shares acquired upon
11
<PAGE>
exercise of an ISO that results in ordinary income recognition by the
Participant, i.e., a disposition within two years of the date of grant or one
year of the date of exercise of the ISO.
Amendments & Termination
The Company's Board may at any time terminate, amend, or modify the Stock
Incentive Plan; provided that no termination, amendment, or modification will be
made that will impair the rights of Award holders, and no amendment will be made
without the approval of the Company's shareholders to the extent such approval
is required by law or stock exchange rules.
No Awards may be granted under the Stock Incentive Plan after November 12, 2008.
Awards granted before that date shall remain valid in accordance with their
terms.
Options Granted
On November __, 1998, the Company's Board granted options to acquire an
aggregate of ___ shares of the Company's common stock to persons it deemed to be
key personnel. Information about the grants is set forth in the following table:
<TABLE>
<CAPTION>
=========================================================================================================================
Number of Percent of Total
Shares Options Granted To Present Value
Underlying Individuals In Exercise Of Expiration Of Grant At Date
Name Option Fiscal Year Base Price Date of Grant
- ---- ------ ----------- ---------- ---- --------
<S> <C> <C> <C> <C> <C>
==========================================================================================================================
</TABLE>
12
<PAGE>
Principal Shareholders
The following table sets forth certain information as of November 6, 1998,
relating to the beneficial ownership of the Company's common stock:
================================================================================
Principal Shareholders
Name and Address of
Beneficial Owner Shares Beneficially Owned
---------------- -------------------------
Number Percent
------ -------
Orkney Holdings, Inc.(1) 1,344,086 14.8%
FBR Holdings, Inc.(1)
Potomac Tower
100 Nineteenth Street North
Arlington, VA 22209
Boston Partners Asset Management 808,500 8.9%
One Financial Center
43rd Floor
Boston, MA 02111
Franklin Mutual 750,000 8.3%
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Keefe Managers
375 Park Avenue
New York, NY 10021 743,000 8.2%
Oppenheimer Funds 550,000 6.1%
Two World Trade Center
New York, NY 10048
- ---------------
(1) Orkney Holdings Inc. and FBR Holdings, Inc. are subsidiaries of FBR Group.
Orkney Holdings owns 806,452 shares and FBR Holdings owns 537,634 shares.
In addition, the Manager holds options to acquire 470,805 shares and its
officers and employees hold options to acquire ____ shares. The Manager,
FBR, and their employees have each indicated that they intend to vote in
favor of the Plan of Merger and the Stock Incentive Plan.
Management Stockholdings
Name Shares Beneficially Owned(2)
---- ----------------------------
Number Percent
------ -------
Stephen D. Harlan 0 0%
Webb Hayes 0 0%
Emanuel J. Friedman 0 0%
Eric F. Billings 46,900 (3)
W. Russell Ramsey 0 0%
William R. Swanson 60,000 (3)
Elaine M. Clancy 2,500 (3)
George Abraham 1,250 (3)
Robert Smith 1,000 (3)
Kurt R. Harrington 750 0%
John M. Blassingame 0 0%
- ---------------
(2) Does not include shares as to which options are held. See "Stock Incentive
Plan--Options Granted.
(3) Less than 1%.
================================================================================
13
<PAGE>
Part II
The Company and Its Business After the Merger
<PAGE>
The Company
General
FBR Asset Virginia was organized by FBR on November 15, 1997, and initially
funded with $10 million from FBR. On December 15, 1997, the Company received
$189.7 million of net proceeds from a private placement of 10,218,999 shares of
its common stock. FBR acted as the initial purchaser in the private placement
and acquired the stock at a 7% discount from the price offered to investors. On
January 15, 1998, the Company received additional proceeds of $3.7 million from
a private placement of 196,828 shares of its common stock upon the exercise of
an option by FBR to purchase additional shares.
The Company has pursued an investment strategy under which a majority of the
Company's assets are invested in mortgage loans, mortgage-backed securities
issued or guaranteed by instrumentalities of the U.S. Government or by private
issuers that represent the entire ownership of a pool of mortgage loans, and
other qualifying interests in real estate. Under this strategy, the Company
invests the remainder of its assets in investments that the Manager believes
have the potential for substantially higher returns than that of mortgage
assets, such as direct lending to existing and newly-formed public or private
REITs, private investments in public companies, direct asset investments, and
investments in publicly traded securities. The Company expects to generate
income for distribution to its stockholders primarily from the net earnings
derived from its investments in real estate-related assets.
As of September 30, 1998, the Company had (i) purchased $211.5 million of
mortgage securities classified as available for sale, of which $176.3 million
were financed with equity repurchase agreements, (ii) invested $87.5 million in
the securities of six REITs and two corporations, and (iii) invested $20.4
million in the convertible notes receivables of two real estate corporations.
The Manager has subcontracted with BlackRock to manage the Company's mortgage
assets. Through BlackRock, the Company has access to market expertise and risk
management systems to actively monitor and manage the mortgage portfolio's
exposure to interest and mortgage prepayment risks. Through BlackRock, the
Company also has a greater capability to assess credit risk, risk of capital
loss, the availability and cost of financing, and yield spread movements on
mortgage assets.
The Company seeks to generate growth in earnings and dividends per share under
various strategies, including (i) seeking to improve productivity by increasing
the size of the balance sheet at a rate faster than the rate of increases in
operating expenses, (ii) continually reviewing the mix of its investments on the
balance sheet in an effort to improve risk-adjusted returns, (iii) maximizing
leverage and the creation of yields commensurate with its investment objectives
through the use of its mortgage assets and (iv) increasing the size of its
balance sheet when opportunities in the market for its targeted investments are
likely to allow growth in earnings per share.
The Company intends to continue its election to be taxed as a REIT and to comply
with the REIT provisions of the Code. Accordingly, the Company will not be
subjected to federal income tax on its earnings to the extent that it
distributes those earnings to its shareholders and as long as certain asset,
income, stock ownership and minimum distribution tests are met. The Company may,
however, be subject to tax at normal corporate rates on net income or capital
gains not distributed to shareholders.
The Company intends to conduct its business so as not to become regulated as an
investment company under the Investment Company Act of 1940, as amended.
The operating results of the Company reflected in the financial statements
included in this document should be interpreted in light of the Company's short
operating history and are not necessarily indicative of future results. The
following discussion should be read in conjunction with the Financial Statements
and related Notes included herein.
Recent Developments
Due to a tightening of credit markets, and the resulting widening of spreads, as
of November 6, 1998, the value of the equity securities in the Company's
portfolio has declined by $21.7 million. Declines are recorded as accumulated
other comprehensive income in the statement of stockholders' equity. (See Note 3
of Notes to Financial Statements.) The Company has not recognized any loss in
its statements of income from the decline in value of its equity securities.
15
<PAGE>
In October 1998, the Company agreed to sell mortgage assets that were originally
acquired for approximately $52.5 million, providing principal and interest
payments of approximately $6.4 million and net proceeds of approximately $47.5
million. The sale will conclude on or about November 17, 1998. Concurrently with
the October sale of the mortgage securities, the Company terminated one of its
interest rate hedge contracts. As a result of the hedge termination, the Company
will recognize a loss of $2.7 million in the fourth quarter.
On September 9, 1998, the Company's Board of Directors authorized a program to
repurchase up to 1,000,000 shares of the Company's common stock. On September
18, 1998, the Company's Board authorized the repurchase of an additional
1,000,000 shares of the Company's common stock. Through November 11, 1998, the
Company had repurchased 1,338,500 shares of its common stock pursuant to the
program at an average price of $12.40 per share. An additional 661,500 shares
are currently authorized for potential repurchase in the future.
16
<PAGE>
Organization & Relationships
[CHART OMITTED]
17
<PAGE>
Risks Associated with an Investment in the Company
The merger will not change the nature of the business enterprise in which you
have invested. We want to remind you, however, that an investment in the Company
involves various risks, including the risk that you might lose your entire
investment. The results of the Company's operations are dependent upon many
factors, including the availability of opportunities for the acquisition of
assets, the level and volatility of interest rates, the cost and availability of
short- and long-term credit, financial market conditions, and general economic
conditions. The Company will strive to attain its objectives through, among
other things, the Manager's research and portfolio management skills, but there
is no guarantee that the Company will perform successfully, meet its objectives,
or achieve positive returns. The following risks are interrelated, and you
should treat them as a whole.
Conflicts of Interest May Result In Decisions That Do Not Fully Reflect
Shareholders' Best Interests
The Company is subject to various potential conflicts of interest arising from
its relationship with the Manager and the other businesses of the Manager and
its Affiliates. See "Conflicts of Interest."
Limited Operating History; Lack of REIT Experience
The Company was organized in November 1997 and has a limited operating history.
Before November 1997, none of the Company's or the Manager's officers had ever
managed a REIT. The Manager has no experience in managing a REIT other than its
experience with the Company. There can be no assurance that the past experience
of the Manager will be sufficient to successfully manage the Company's business.
Further, the Manager's past performance is not indicative of the Company's
future results.
Decline in Market Values of Investment Assets May Adversely Affect Credit
Availability and Periodic Reported Results
The Company's assets are primarily mortgage assets and investments in other
companies that are classified for accounting purposes as "available-for-sale."
Changes in the market values of these assets are directly charged or credited to
the Company's stockholders' equity. As a result, a general decline in trading
market values may reduce the book value of the Company's assets even though
there may have been no change in the inherent value of those assets.
A decline in market value of the Company's assets may adversely affect the
Company in instances where the Company has borrowed money based on the market
value of those assets. In those cases, the lender may require that additional
collateral be posted to support the loan. If the Company is unable to post the
additional collateral, the assets may have to be sold at a time that is
disadvantageous for the Company.
Dependence on the Manager; Termination of Management Agreement
The Company can gain access to good investment opportunities only to the extent
that they become known or otherwise available to the Manager. Gaining access to
good investment opportunities is a highly competitive business. FBR, the
Manager, and the Company compete with other companies that have greater capital,
more long-standing relationships, broader product offerings, and other
advantages.
The Company is heavily dependent for the selection, structuring, and monitoring
of its investments on the diligence and skill of the Manager's officers and
employees, primarily those named under "Management After the Merger" herein. The
Company does not anticipate having employment agreements with its senior
officers or requiring the Manager to employ specific personnel or dedicate
employees solely to the Company. The Manager in turn is dependent on the efforts
of senior management personnel. While the Company believes that the Manager
could find replacements for its key executives, the loss of their services could
have an adverse effect on the operations of the Manager and the Company.
Either of the Company or the Manager may terminate, or decline to renew the term
of, the Management Agreement without cause after the first two years upon 60
days' written notice. The Company will be obligated to pay the
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Manager a substantial termination fee in the event the Company terminates the
Management Agreement, except in the case of a termination for cause. See "FBR &
the Manager -- The Management Agreement." Payment of this termination fee could
have an adverse effect on the Company's financial condition, cash flows, and
results of operations and could reduce the amount of funds available for
distribution to shareholders.
Risk of Loss on Real Estate-Related Investments
The Company invests primarily in real estate-related assets, including mortgage
loans, mortgage-backed securities and real estate equity. The Company may invest
directly in real estate-related assets or may invest in other entities such as
REITs or real estate partnerships that themselves invest in real estate-related
assets. Investments in real estate-related assets are subject to a variety of
general, regional and local economic risks, as well as the following risks:
Interest Rate and Market Value Leverage Risk
- --------------------------------------------
If a company borrows funds to finance mortgage loan investments, the effect of a
decline in value resulting from an interest rate increase will be exaggerated.
For example, assume a company borrows $90 million to acquire $100 million of 8%
mortgage certificates for $100 million. If prevailing interest rates increase
from 8% to 9%, the value of the mortgage loans may decline to a level below the
amount required to be maintained under the terms of the borrowing. Market values
of mortgage loans and mortgage-backed securities may decline without any general
increase in interest rates for any of a variety of reasons as was the case with
commercial mortgage loans in the wake of the CRIIMI Mae, Inc. bankruptcy filing.
If the mortgage assets were then sold, the company would have to find funds from
another source to repay the borrowing.
Mortgage Loan Interest and Prepayment Rate Risk
- -----------------------------------------------
An investment in fixed-rate mortgage loans will decline in value if long-term
interest rates increase. An investment in adjustable-rate mortgage loans is
likely to decline in value if short-term interest rates increase.
In the case of residential mortgage loans, there are seldom any restrictions on
the borrower's ability to prepay a loan. As a consequence, homeowners tend to
prepay mortgage loans faster when interest rates decline and when owners of the
loans do not want them to be prepaid. Correspondingly, homeowners tend not to
prepay mortgage loans when interest rates increase and when owners of the loans
want them to be prepaid.
Risk in Hedging Against Interest Rate Exposure
- ----------------------------------------------
A company may enter into interest rate hedging transactions to protect itself
from the effect of changes in interest rates. The company may not be protected
and may be adversely affected by interest rate hedging because, among other
things:
o interest rate hedging can be expensive, particularly during periods of
rising and volatile interest rates;
o available interest rate hedging may not correspond directly with the
interest rate risk for which protection is sought;
o the amount of income that a REIT may earn from hedging transactions (to
offset interest rate losses) is limited by federal tax provisions
governing REITs; and
o the party owing money in the hedging transaction may default in its
obligation to pay.
Mortgage Loan Credit Risk
- -------------------------
Owners of uninsured mortgage loans are subject to the risk that the borrowers on
the mortgage loans will not pay principal and interest on their loans as it
becomes due. Generally, in the event of a default, the owner of the mortgage
loan will incur loss to the extent the value of the property securing the
mortgage loan is less than the amount of the mortgage loan. And, defaults on
mortgage loans often coincide with declines in real estate values.
Borrowers become unable to pay mortgage loans for a wide variety of reasons,
including general, regional, local and personal economics and declines in
business activity or real estate values.
Leveraged Mortgage Credit Risk
- ------------------------------
Mortgage REITs often invest in mortgage loans that are subject to the senior
claim of mortgage-backed debt securities. In those cases, losses on the
underlying mortgage loans are charged to the REIT on a leveraged basis. For
example, assume a REIT invests $10 million to acquire a $100 million pool of
mortgage loans subject to $90 million of mortgage-backed securities debt. If
thereafter, there are $7 million of losses on the $100 million of loans (7%),
there will be a 70% loss of principal on the mortgage REIT's investment.
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Leveraged Mortgage Loan Prepayment Risk
- ---------------------------------------
Mortgage REITs may also invest in mortgage-backed securities or retain
investments in mortgage loans that entitle them to receive interest only on the
outstanding principal amount of the underlying mortgage loans. The value of
these interest-only securities can be adversely affected if the underlying
mortgage loans are prepaid faster than anticipated. For example, an
interest-only security may entitle a REIT to 1% on the outstanding principal
amount of a pool of residential mortgage loans with an initial principal amount
of $100 million. The mortgage REIT may anticipate that 10% of the loans will
prepay at the end of each year, whereas the actual experience is that 20% of the
loans prepay at the end of each year. In that case, the anticipated and actual
cash paid to the REIT would be:
Year Anticipated Actual
- ---- ----------- ------
1 $1,000,000 $1,000,000
2 900,000 800,000
3 800,000 600,000
4 700,000 400,000
5 600,000 200,000
6 500,000 --
7 400,000 --
8 300,000 --
9 200,000 --
10 100,000 --
===================================================
Total $5,500,000 $3,000,000
===================================================
Some interest-only securities bear interest at a floating rate that varies
inversely with, and at a multiple of, a specified floating interest rate index,
such as LIBOR. The yield on these securities is sensitive not only to
prepayments, but also to changes in the related index. An example would be a 1%
increase in LIBOR causing the interest rate on an investment to decline from 10%
to 5%.
Risks Related to Multifamily and Commercial Real Estate
- -------------------------------------------------------
Any investment that is dependent on the ability of real estate to generate
income or on the maintenance or increase in value of real estate is subject to a
wide variety of risks. Among these are:
o the value of real estate may be significantly affected by general,
regional and local economic conditions, and other factors beyond the
investor's control;
o the value of real estate may be significantly affected by unknown
environmental problems;
o the value of real estate may be significantly affected by changes in
applicable zoning or land use restrictions or other applicable laws; and
o particularly in the case of commercial real estate, the ability of
property managers to obtain tenants at economic rents and otherwise
maintain and operate the properties on a profitable basis.
Taxable Income May Exceed Cash Flow
- -----------------------------------
Mortgage REITs may invest in subordinated mortgage-backed securities and
participating or distressed mortgage loans that may be deemed to have original
issue discount ("OID"). OID generally is equal to the difference between an
obligation's issue price and its redemption price. A REIT must include in its
income for a taxable year the portion of the OID that accrues during that year.
Such OID will increase the amount that the REIT must distribute in order to
avoid corporate income tax and/or the excise tax on undistributed income,
notwithstanding the fact that the REIT may not have received a corresponding
distribution of cash. In addition, a REIT's right to receive cash on mortgage
loans that it has securitized will be subject to the prior payment of principal
and interest due on the related mortgage-backed debt securities. Excess
inclusion income produced by REMIC residual interests, and to the extent
provided by future Treasury Regulations, some taxable income produced by
non-REMIC retained ownership interests also may cause a REIT's shareholders to
suffer adverse tax consequences. See "Federal Income Tax Laws Applicable to
REITs and REIT Shareholders."
Risks Relating to Investments in REIT Equity Securities
The Company has invested and intends to invest in equity securities issued by
REITs or other business entities. Securities to be acquired by the Company may
not be freely transferable. In addition to the risks described above,
investments in other enterprises carry the following risks:
Risk of Inadequate Due Diligence
- --------------------------------
Before making an investment in equity securities issued by another REIT or
business entity, the Company will assess what it considers to be the facts and
factors that will determine the success of its investment. In making its
assessment and otherwise conducting its customary
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due diligence, the Company will rely on the resources available to the Manager
and, in some cases, an investigation by third parties. Because there may be
little or no relevant information that is publicly available, this process is
particularly important and subjective with respect to newly-organized entities
with new and to-be-acquired assets and a management that may not be familiar
with the business and operations of the new or expanded enterprise. New REITs
often have limited investments, and investment opportunities may be dependent
upon a limited management group subject to significant competition. The
securities of newly public entities may trade less frequently and in smaller
volume than more widely held securities and their values may fluctuate more
sharply. Against this background, no assurance can be given that the due
diligence processes of the Manager will uncover all the relevant facts or that
any investment will be successful.
Dependence on Management of Other Entities
- ------------------------------------------
As a general matter, the Company will not control the management, investment
decisions, or operations of an enterprise in which it invests. After an
investment is made, circumstances and management may change in a manner that is
not satisfactory to the Company. Yet the Company may have no ability to affect
management decisions, and as noted below, the Company may have only limited
ability to dispose of its investment.
Limited Liquidity of Investments
- --------------------------------
The equity securities of a new entity in which the Company invests are likely to
be restricted as to resale and may otherwise be highly illiquid. The Company
expects that for a period of one year there will be restrictions on its ability
to resell the securities of any newly public company that it acquires.
Thereafter, a public market sale may be dependent upon securing a registration
statement for a secondary offering of the securities. In any event, the Company
expects to make investments in amounts significant enough that a resale might
adversely affect the market and hence the sales price for the securities.
Disposition Value of Investments Dependent Upon General and Specific Market
Conditions
- ----------------------------------------------------------------------------
Even if the Company makes an appropriate investment decision based on the
intrinsic value of an enterprise, no assurance can be given that the trading
market value of the investment will not decline, perhaps materially, as a result
of general market conditions (e.g., an increase in interest rates and a general
decline in the stock markets) or in specific market conditions for companies of
the type in which the Company has invested.
Other Risks
- -----------
Investments in REITs are subject to a variety of other risks, including
conflicts of interest, loss of Investment Company Act exempt status, loss of
REIT status for federal income tax purposes, and competition.
Adverse Changes in General Economic Conditions Can Adversely Affect Company's
Business
The Company's success is dependent upon the general economic conditions
in the geographic areas in which the Company's direct or indirect investments
will be located. Adverse changes in national economic conditions or in the
economic conditions of the regions in which the Company conducts substantial
business likely would have an adverse effect on real estate values, interest
rates and, accordingly, the Company's business.
Tax Risks
The Company has operated and intends to continue to operate following the merger
in a manner so as to qualify as a REIT for federal income tax purposes. Certain
of the Company's investments are in equity securities of REITs, which are REIT
qualified investments. Failure of investee REITs to maintain their REIT status
could jeopardize the Company's own REIT status.
If the Company fails to qualify as a REIT in any taxable year, the Company would
be required to pay federal income tax on its taxable income. The Company might
need to borrow money or sell assets in order to pay such tax. The Company's
payment of income tax would decrease the amount of its income available to be
paid to its shareholders. In addition, to the extent that the Company meets the
95% distribution requirement, but distributes less than all of its taxable
income on an annual basis, it will be required to pay income tax on
undistributed income. Furthermore, the Company no longer would be required to
distribute substantially all of its taxable income to its shareholders. Unless
its failure to qualify as a REIT is excused under federal income tax laws, the
Company could not re-elect REIT status until the fifth calendar year following
the year in which it fails to qualify.
In order to qualify as a REIT, each year the Company must distribute to its
shareholders at least 95% of its taxable income (other than any net capital
gain). In addition, the Company will incur a 4% nondeductible
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excise tax if the actual amount it pays out to its shareholders in a calendar
year is less than a minimum amount specified under federal income tax law. See
"Federal Income Tax Laws Applicable to REITs and REIT Shareholders--Requirements
for Qualification--Distribution Requirements." The Company has distributed and
intends to continue to distribute all of its taxable income to its shareholders
on an annual basis so that it will satisfy the 95% test and avoid both corporate
income tax and the 4% excise tax.
The Company may invest in assets that generate taxable income in excess of
economic income ("phantom income") during certain periods or cause the Company's
shareholders to suffer certain adverse tax consequences. Although certain types
of phantom income are excluded in determining the 95% distribution requirement,
the Company will incur corporate income tax and the 4% excise tax with respect
to those phantom income items if it does not distribute those items on a current
basis. As a result of the foregoing, the Company may have less cash than is
necessary to distribute all of its taxable income. As a result, the Company may
have to incur debt or liquidate assets at rates or times that it regards as
unfavorable in order to distribute all of its taxable income and thereby avoid
corporate income tax. See "Federal Income Tax Laws Applicable to REITs and REIT
Shareholders."
Loss of Investment Company Act Exemption Would Adversely Affect The Company
The Company believes that it is not, and intends to conduct its operations so as
not to become, regulated as an investment company under the Investment Company
Act because it is "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate."
If the Company fails to qualify for that exemption, it could be required to
restructure its activities. Such a restructuring could, among other things,
require the sale of a substantial amount of the Company's assets at a time when
it would not otherwise do so. The sale could occur under adverse market
conditions and cause losses.
Ownership Limitation May Restrict Change of Control or Business Combination
Opportunities
In order for the Company to qualify as a REIT, not more than 50%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities), during the last half of any taxable year (other than its
first REIT taxable year). For the purpose of preserving the Company's REIT
qualification, the Company's Charter generally prohibits (A) shareholders (other
than FBR and certain mutual funds) from directly or indirectly owning more than
9.9% of the number of outstanding shares of common stock or any series of
preferred stock, (B) FBR from directly or indirectly owning more than 20% of the
outstanding common stock or preferred stock of any series, and (C) certain
mutual funds and pension plans from directly or indirectly owning more than 15%
of the outstanding common stock or preferred stock of any series (the "Ownership
Limitation"). The Ownership Limitation could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
common stock might receive a premium for their shares over the then prevailing
market price or which such holders might believe to be otherwise in their best
interests. See "Capital Stock After the Merger--Restrictions on Transfer" and
"Federal Income Tax Laws Applicable to REITs and REIT Shareholders--Requirements
for Qualification."
The Three-Year Staggered Terms of the Company's Directors Will Make it More
Difficult for Shareholders to Change the Board's Composition
The staggered board provisions of FBR Asset Maryland's Charter will make it more
difficult for shareholders to change the composition of the Company's Board
because only a minority of directors will be elected in any one year. The
classification provisions could also discourage a third party from attempt to
gain control of the Company even though the attempt might otherwise be
beneficial to the Company and some, or a majority, of the Company's
shareholders. Under certain circumstances, shareholders might be deprived of an
opportunity to sell their shares at a higher price than might otherwise be
available.
Board of Directors May Change Policies Without Shareholder Consent
The Company's major policies, including its investment policy and other policies
with respect to acquisitions, financing, growth, operations, debt and
distributions, are determined by its Board of Directors. The Board may amend or
revise these and other policies, or approve transactions that deviate from these
policies, from time to time without a vote of the common shareholders. The
effect of any such changes may be positive or negative.
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<PAGE>
The Company's Charter also authorizes the Board of Directors to issue up to
50,000,000 shares of preferred stock and to establish the preferences and rights
of any shares of preferred stock issued. Although the Company has no current
intention to issue any series of preferred stock in the foreseeable future, the
issuance of any series of preferred stock could have the effect of (i)
increasing the investment risk associated with the ownership of common stock,
(ii) delaying or preventing a change in control of the Company, or (iii)
otherwise changing the nature of an investment in the common stock.
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<PAGE>
FBR & the Manager
The Manager is a registered investment adviser under the Investment Advisers Act
of 1940. As of September 30, 1998, the Manager and its affiliates had more than
$723.5 million of assets under their management, including more than $227.4
million in separately managed accounts (including the Company). FBR's investment
management services include more traditional management services for individual
accounts, management of pooled investment vehicles, including four open-end
mutual funds, management of hedge and offshore funds, and management of private
equity and venture capital funds. Two of FBR's mutual funds seek capital
appreciation through investments in financial services companies, while the
third invests in the equity securities of small cap companies that FBR believes
to be undervalued and the fourth invests in REITs and other real estate-related
securities.
The Manager is a wholly-owned subsidiary of FBR Group, a full-service investment
banking and asset management firm. FBR makes a market in more than 375
securities and provides research coverage on more than 400 publicly traded
companies. FBR completed an initial public offering in December 1997, and its
stock is listed on the New York Stock Exchange. Management and employees own a
majority of FBR's stock.
FBR's strategy since its inception in 1989 has been to target specific industry
sectors. Real estate is among the sectors on which FBR currently focuses. FBR
currently provides research coverage on 29 REITs, homebuilders and other real
estate and real estate-related companies, and is a market maker in 6 securities
of such companies. FBR is one of the leading underwriters of REIT IPOs in the
U.S., acting as sole or lead underwriter of REIT IPOs that raised $541.8 million
and $979.8 million in 1997 and 1998 through November 6, respectively.
On December 29, 1997, PNC Bank Corp. purchased 4.9% of FBR Group's outstanding
shares of common stock. PNC is the majority owner of BlackRock and also owns
less than 5% of Anthracite, one of the companies in which the Company has
invested. Pursuant to a non-binding Memorandum of Understanding entered into
between FBR and PNC in October 1997, FBR and PNC have established a strategic
business relationship with respect to selected capital markets and related
activities. The understanding provides a framework pursuant to which FBR and PNC
work together on an arms-length basis to refer potential business to each other.
FBR and PNC have also agreed to work together to provide enhanced derivatives,
asset securitization, bridge lending, and other bank financing products to FBR's
clients.
Certain Transactions
Because of its extensive involvement in real estate securities, FBR and its
affiliates may have material direct and indirect interests in companies in which
the Company also has an interest. FBR's interests may complement or conflict
with the Company's interests. For example, the Company may purchase equity
securities of a company whose securities have been or will be underwritten by
FBR or of a company for which FBR provides ongoing research and/or market making
services. Any such purchase of securities by the Company may indirectly benefit
FBR and its directors, officers, and owners.
The Company has made the following investments in companies with which FBR has a
relationship:
In connection with the organization of Building One Services Corporation, the
Company agreed to acquire 500,000 shares of Building One for $10,000,000. At the
time of the acquisition, the Company was a wholly-owned subsidiary of FBR. FBR
was the lead underwriter of a $480 million initial public offering by Building
One that closed in December 1997. At the time of purchase, the Company agreed to
not sell the shares purchased until after November 25, 1998. The public offering
price was $20 per share and the underwriting discount was 7%. W. Russell Ramsey
is a director of Building One.
FBR was the lead underwriter in February 1998 of an initial public offering by
Capital Automotive REIT of 20 million shares at a public offering price of $15
per share. The underwriting discount was 7%. In a privately negotiated
transaction that closed at the same time, the Company purchased from Capital
Automotive 1,792,115 shares for $25 million ($13.95 per share). At the time of
purchase, the Company agreed to not sell the shares purchased until after
February 12, 1999. William R. Swanson is a director of Capital Automotive.
FBR was the lead underwriter in March 1998 of an initial public offering by
Anthracite Capital, Inc., of 20 million shares at a public offering price of $15
per shares. The underwriting discount was 7%. In a privately negotiated
transaction that closed at the same time, the Company
24
<PAGE>
purchased from Anthracite 716,846 shares for $10 million ($13.95 per share). At
the time of purchase, the Company agreed to not sell the shares purchased until
after March 24, 1999.
FBR was the lead underwriter in April 1998 of an initial public offering by
Chastain Capital Corporation of 7,380,000 shares at a public offering price of
$15 per share. The underwriting discount was 7%. In a privately negotiated
transaction that closed at the same time, the Company purchased from Chastain
Capital 700,000 shares for $9,765,000 ($13.95 per share). At the time of
purchase, the Company agreed to not sell the shares purchased until after April
15, 1998.
Since 1994, FBR has provided underwriting and other investment banking services
to Prime Group Inc. and its affiliates. Between January 1, 1997, and September
30, 1998, FBR acted as lead underwriter or co-manager, or provided advisory
services to affiliates of Prime Group Inc., in connection with $507.5 million of
capital raising and $936 million of merger transactions. The Company has
acquired 123,500 shares of Prime Retail, Inc. in open-market transactions.
On December 23, 1997, the Company entered into an interim financing and security
agreement with Prime Capital Holdings, Inc. for up to $20 million. As of
November 6, 1998, approximately $12.3 million had been drawn against this loan.
The note accrues at a rate of 12% per annum and is payable monthly on the last
day of the month. The agreement called for the repayment of the advanced
principal amount on October 31, 1998. Prime has extended the termination until
December 31, 1998, by paying an additional 0.5% in consideration for such
extension.
On June 30, 1998, the Company purchased from selling shareholders 520,000 shares
of East-West Bank common stock for a purchase price of $5.2 million in a $237.8
million private transaction. FBR acted as placement agent in the transaction and
for its services received a fee of 7%.
In June 1998, FBR entered into an agreement with Kennedy Wilson Inc. to
underwrite an offering of common shares of Kennedy Wilson to obtain capital for
the expansion of its business. At the same time, the Company loaned Kennedy
Wilson $10 million that is due and payable in December 1998. The loan bears
interest at 12% per annum and entitles the Company to warrants to acquire
Kennedy Wilson stock.
FBR was the lead underwriter in October 1997 of an initial public offering by
Imperial Credit Commercial Corporation of 30 million shares of common stock at a
public offering price of $15 per share. The underwriting discount was 7%.
Beginning in December 1997, the Company has purchased 900,000 shares of Imperial
Credit common stock at an average price per share of $14.50.
FBR was the lead underwriter in January 1998 of an initial public offering by
Resource Asset Investment Trust of 2,833,334 shares at a public offering price
of $15 per share. The underwriting discount was 7%. Beginning in February 1998,
the Company has purchased in open-market transactions 344,575 shares of Resource
common stock at an average price per share of $15.36.
The Manager's Executive Officers
The following table sets forth certain information about the executive officers
of the Manager. The Manager's executive officers are also directors of the
Company. No executive officer is related by blood, marriage, or adoption to any
other director or executive officer of the Company, FBR, or any of their
respective affiliates.
Name Age Position(s) Held
- ---- --- ----------------
Emanuel J. Friedman 52 Chairman & Chief
Executive Officer
Eric F. Billings 46 Vice Chairman & Chief
Operating Officer
W. Russell Ramsey 38 President & Secretary
For biographical information on Messrs. Friedman, Billings and
Ramsey, see "Management After the Merger--The Board of Directors."
The Management Agreement
The Company and the Manager entered into a Management Agreement on December 17,
1997.
The following section summarizes certain provisions of the Management Agreement.
This section does not completely describe the Management Agreement, and you
should not rely on it as if it did. You may obtain a complete copy of the
Management Agreement by following the document request procedures set forth in
the "Additional Information" section of this document.
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The Manager's Responsibilities
The Manager has only the authority that the Company's Board of Directors
delegates to it. The Manager is at all times subject to the Board's supervision.
Generally, the Manager performs (or causes to be performed) the services
necessary to keep the Company running on a day-to-day basis. Such services
include:
1. consulting with the Company on the formulation of investment criteria
and guidelines;
2. representing the Company in connection with
a. the purchase and sale of assets,
b. commitments to purchase and sell assets, and
c. the maintenance and administration of the Company's asset portfolio;
3. furnishing reports and collecting information relating to the Company's
assets, interest rates, and general economic conditions;
4. furnishing reports regarding the Company's activities and the services
performed for the Company by the Manager;
5. monitoring and providing the Board of Directors with price information
and other data obtained from certain nationally recognized dealers that
maintain markets in certain assets identified by the Board, and
providing data and advice to the Board of Directors in connection with
the identification of such dealers;
6. providing executive and administrative personnel, office space, and
office services required in rendering services to the Company;
7. administering the Company's day-to-day operations and performing and
supervising the performance of such other necessary administrative
functions as may be agreed upon by the Manager and the Board of
Directors, including
a. the collection of revenues,
b. the payment of the Company's debts and obligations, and
c. the maintenance of appropriate computer services to perform such
administrative functions;
8. communicating on behalf of the Company with the holders of the
Company's securities as required to satisfy the reporting and other
requirements of any governmental bodies or agencies or trading markets
and to maintain effective relations with such holders;
9. to the extent not otherwise subject to an agreement executed by the
Company, designating servicers for mortgage loans sold to the Company
and arranging for the monitoring and administering of such services;
10. counseling the Company in connection with policy decisions to be made
by the Board of Directors;
11. engaging in hedging activities on the Company's behalf, consistent with
the Company's status as a REIT;
12. upon request by and in accordance with the directions of the Board of
Directors, investing or reinvesting any of the Company's money;
13. counseling the company regarding the maintenance of its exemption from
the Investment Company Act and monitoring compliance with the various
requirements for such status;
14. counseling the Company regarding the maintenance of its status as a
REIT and monitoring compliance with the various REIT qualification
tests; and
15. performing portfolio management services on behalf of the Company
pursuant to the Management Agreement, including without limitation:
a. consulting with the Company on purchase and sale opportunities,
b. periodic review and evaluation of the performance of the Company's
portfolio of assets,
c. acting as liaison between the Company and banking, mortgage banking,
investment banking and other parties with respect to the purchase,
financing and disposition of assets, and
d. other customary functions related to portfolio management.
26
<PAGE>
The Manager has engaged BlackRock to advise it on the management of the
Company's mortgage portfolio and may enter into subcontracts with other parties,
including its Affiliates, to provide any other services to the Company.
The Management Fee
Base Management Fee
- -------------------
The Manager is entitled to receive a quarterly base management fee equal to the
sum of:
o .25% per annum of the average book value of the Company's mortgage
assets during each calendar quarter, and
o .75% per annum of the average book value of the remainder of the
Company's invested assets during each calendar quarter. Book value
includes the Company's proportionate share of the assets of all of its
direct and indirect subsidiaries, before reserves for depreciation or
bad debts or other similar noncash reserves. The Board of Directors may
adjust the base management fee in the future if necessary to align the
fee more closely with the actual costs of such services, and by
agreement with the Manager, may reduce the base management fee to the
extent the Company incurs costs internally.
Incentive Compensation
- ----------------------
The Manager is also entitled to receive incentive compensation based on the
Company's performance. At the end of 1998, the Manager will be entitled to
receive the Incentive Calculation Amount for the period from December 17, 1997,
through December 31, 1998. For each calendar quarter thereafter beginning with
the quarter ended March 31, 1999, the Manager will be entitled to receive 25% of
the Incentive Calculation Amount for the 12 month period ending with the end of
that calendar quarter.
As used herein, the Incentive Calculation Amount for any 12 month period means
an amount equal to the product of (A) 25% of the dollar amount by which (1)(a)
Funds from Operations (before the incentive fee) of the Company per share of
common stock (based on the weighted average number of shares outstanding) plus
(b) gains (or minus losses) from debt restructuring and sales of property per
share (based on the weighted average number of shares outstanding), exceed (2)
an amount equal to (a) the weighted average of the price per share at the
initial offering price ($20) and the price per share at any secondary offerings
by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus five
percent per annum multiplied by (B) the weighted average number of common shares
outstanding during such period.
"Funds from Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability to
make distributions. Per share Funds from Operations for the period December 17,
1997, through September 30, 1998, were $0.84.
As used in calculating the Manager's compensation, the term "Ten-Year U.S.
Treasury Rate" means the arithmetic average of the weekly average yield to
maturity for actively traded current coupon U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of ten years) published by the
Federal Reserve Board during a quarter. The "Ten-Year U.S. Treasury Rate" for
the quarter ended March 31, 1998, was 5.65% per annum, for the quarter ended
June 30, 1998, was 5.45%, and for the quarter ended September 30, 1998, was
4.42%.
Options Owned by the Manager
On consummation of the merger, (1) the Manager will hold options to acquire
470,805 shares of the Company's stock at an option price of $20 per share and
(2) BlackRock will hold options to acquire 51,095 shares of the Company's stock
at an option price of $20 per share. The options will be exercisable in whole or
in part at any time before December 17, 2007.
These options are in addition to options that have been and may be granted
pursuant to the Stock Incentive Plan described above under "The Stock Incentive
Plan."
Expenses
Because the Manager's employees will perform certain due diligence tasks that
purchasers of real estate typically hire outside consultants to perform, the
Manager will be reimbursed for the Manager's out of pocket costs in performing
due diligence on assets purchased or
27
<PAGE>
considered for purchase by the Company. Moreover, the Manager tracks the time
its employees spend in performing such due diligence tasks and is entitled to
reimbursement for the allocated portion of the salary and benefits of such
employees. However, (i) the amount of due diligence costs for which the Manager
receives reimbursement with respect to any asset may not exceed an arm's length
due diligence fee for such asset and (ii) the Manager is not entitled to
reimbursement for any due diligence or employee time costs associated with
investments in securities being underwritten or placed by FBR.
Limits of Responsibility
Under the Management Agreement, the Manager does not assume any responsibility
other than to render the services called for and is not responsible for any
action of Board of Directors in following or declining to follow its advice or
recommendations. The Company has agreed to indemnify the Manager, its
Affiliates, and their directors and officers with respect to all expenses,
losses, damages, liabilities, demands, charges, and claims arising from acts of
the Manager not constituting bad faith, willful misconduct, gross negligence, or
reckless disregard of duties, performed in good faith in accordance with and
pursuant to the Management Agreement.
The Management Agreement does not limit or restrict the right of the Manager or
any of its officers, directors, employees, or Affiliates from engaging in any
business or rendering services of any kind to any other person, including the
purchase of, or the rendering of advice to others purchasing REIT or other
securities or other real estate-related assets that meet the Company's policies
and criteria.
Term of Management Agreement
The Management Agreement has an initial term expiring on December 17, 1999. The
Company may terminate, or decline to extend the term of, the Management
Agreement without cause at any time after December 17, 1999, upon 60 days
written notice by a majority vote of the Company's independent directors or by a
vote of the holders of a majority of the outstanding common shares. Upon such
termination the Manager shall be entitled to all fees accrued through the date
of termination and, as a termination fee, shall be entitled to an amount equal
to the sum of the base management fee and incentive management fee earned during
the twelve months preceding the final day of the calendar quarter last ending
prior to the date of termination. In addition, the Company has the right to
terminate the Management Agreement upon the occurrence of certain specified
events, including a material breach by the Manager of any provision contained in
the Management Agreement, without the payment of any termination fee.
28
<PAGE>
Conflicts of Interest
The Company is subject to various potential conflicts of interest arising from
its relationship with FBR, including the following:
o The Company's investments in equity securities have been and are
expected to be primarily investments in companies whose securities have
been underwritten or placed by FBR. FBR and its employees are paid
substantial fees for underwriting and placement agent services, and to
the extent that the success of a new offering depends upon a significant
investment by the Company, the Manager may have a significant conflict
of interest in recommending that investment to the Company. In those
instances, the Company's shareholders will be relying on the investment
decision of the independent directors, who will in part be relying on
information provided by the Manager.
o FBR manages other funds that are authorized to invest in the same assets
that the Company may invest in. In particular, FBR manages funds, and
may in the future manage other funds that invest in private equity
securities and in REITs and other real estate-related securities. There
may be investment opportunities that are favorable to each of the
Company and the other funds managed by FBR. In that case, FBR will
allocate investment opportunities among the potential investors based
upon primary investment objectives, applicable investment restrictions,
and such other factors as FBR deems appropriate and fair under the
circumstances.
o BlackRock, the mortgage portfolio manager, has significant discretionary
authority with respect to the Company's investment in mortgage assets.
BlackRock manages other funds and accounts (including Anthracite) that
have similar investment objectives and may have other relationships that
may involve a conflict of interest with the Company.
o The incentive portion of the management fee, which is based on the
Company's income, may create an incentive for the Manager to recommend
investments that have greater income or appreciation potential but are
generally more speculative than if the management fee did not include a
performance component.
o Although the Board of Directors will include two independent directors,
the remaining directors, which constitute a majority of the Board, and
each of the Company's executive officers also serve as executive
officers or employees of FBR and devote substantial time to FBR.
o Inside directors, officers and employees of the Manager have other
responsibilities to FBR. These persons will devote such time and
attention to the Company's business as they, in their discretion, deem
necessary, but conflicts may arise in allocating management time,
services or functions among the Company and other affiliates of FBR.
o FBR may provide a broad range of financial services to enterprises in
which the Company has invested or with which it otherwise does business.
For these services FBR will be paid fees or otherwise receive
compensation. Under these circumstances, a variety of conflicts might
arise, including conflicts that might arise because of restrictions on
the use of confidential information.
With a view toward protecting the interests of the Company's shareholders, the
Company's Charter requires that, except in the case of a vacancy, at least 30%
of the members of the Board of Directors will be independent directors.
A majority of the independent directors must approve (i) any transaction in
which the Company seeks to acquire securities that are being underwritten or
placed by FBR and (ii) any transaction involving the Company in which FBR has a
material financial interest, including but not limited to, any decisions
concerning the termination or renewal of the Management Agreement. In making
their decisions, the independent directors will consider information provided by
the Manager and such other information as they deem appropriate to determine
whether such transactions will be in the Company's best interests. The
independent directors will not otherwise participate in the Company's daily
operations. The independent directors will, however, review transactions engaged
in by the Company on a quarterly basis and will review the Company's investment
policies annually. Investors should be aware that, in conducting these
29
<PAGE>
reviews, the independent directors will rely primarily on information provided
to them by the Manager.
30
<PAGE>
The Company's Business
Investments in Mortgage Assets
The Company's plan is to invest a majority of its assets in mortgage loans or
mortgage-backed securities that represent the entire ownership interest in a
pool of mortgage loans. The Company's current mortgage assets consist of
whole-pool mortgage-backed securities that were issued or guaranteed by FHLMC,
FNMA, or GNMA. In the future, however, the Company's mortgage assets may also
include:
o fixed or adjustable-rate single family, multifamily, or commercial
mortgage loans;
o whole-pool mortgage-backed securities issued or guaranteed by private
issuers, including subordinated interests in commercial mortgage- backed
securities, but only when such securities are collateralized by pools of
first mortgage loans; or
o other direct interests in real estate.
The Company's policy is to acquire mortgage assets that it believes will
generate the highest risk-adjusted returns on capital invested. To determine
which mortgage assets are likely to provide those returns, the Company
considers:
o the amount and nature of anticipated cash flows from the asset;
o the Company's ability to pledge the asset to secure collateralized
borrowings;
o the capital requirements for purchasing and financing the asset;
o the potential for appreciation and depreciation of the asset's value;
and
o the cost of financing, hedging and managing the asset.
Example
Following is a simple example of how to compute the return on equity capital
invested in a hypothetical mortgage-backed security:
- ---------------------------------------------------------
1. Amount invested in mortgage-backed
security.......................... $10,000,000
2. Annual interest rate on
mortgage-backed security.......... 7.25%
3. Income from mortgage-backed
security (1 x 2)*................ $ 725,000
4. Amount borrowed to finance
investment in mortgage-backed
security.......................... $8,000,000
5. Interest rate on amount borrowed.. 5.50%
6. Interest expense (4 x 5).......... $ 440,000
7. Equity capital invested (1 - 4)... $2,000,000
8. Management fee (0.25% x
$10,000,000)...................... $ 25,000
9. Hedging expense (4 x 1%).......... $ 80,000
10. Total expenses (6 + 8 + 9)........ $ 545,000
11. Net income on mortgage-backed
security (3-10)................... $ 180,000
12. Return on equity capital invested
(11 / 7).......................... 9.00%
- ---------------------------------------------------------
* The numbers in parentheses, unless otherwise specified, refer to the
paragraph numbers on the far left.
In the foregoing example, the Company uses borrowed funds to increase the
initial yield on its investment from 7.25% to 9.0%. The Company's plan is to
effect this type of yield increase by arranging loans in which it pledges its
assets as collateral to secure its repayment obligations. Some of those loans
may be margin loans in which a decline in the pledged assets' market value could
trigger an early repayment of the Company's obligations. The Company also may
leverage its mortgage assets through the issuance of long-term borrowings,
repurchase agreements, warehouse lines of credit, or other borrowing
arrangements.
The Company intends to use the proceeds from borrowings to invest in mortgage
assets and to repeat this process of borrowing and investing until it has
significantly leveraged its portfolio of mortgage assets. If changes in market
conditions cause the cost of the Company's financing to increase relative to the
income that the Company can earn from the purchased mortgage assets, the Company
may reduce the amount of leverage it utilizes, as it did in October 1998.
31
<PAGE>
Hedging
The Company acquires derivative financial instruments to hedge all or a portion
of the interest rate risk associated with its borrowings. The Company does not
intend to acquire derivative instruments for speculative purposes. The Company's
hedging activities may include entering into interest rate swaps and caps and/or
options to purchase swaps and caps. Under the tax laws applicable to REITs, the
Company generally may enter into interest rate swap or cap agreements, options,
futures contracts, forward rate agreements, or similar financial instruments to
hedge indebtedness that the Company may incur, or plans to incur, to acquire or
carry "real estate assets." Nevertheless, the applicable tax provisions may
limit the Company's ability to enter into hedging transactions. If so, the
Company may conduct hedging activities through a to-be-formed subsidiary that is
fully subject to income tax.
Interest Rate Management
The Company engages in a variety of interest rate management techniques to
manage the effective maturity or interest rate of its assets. The Company may
also use these techniques to attempt to protect itself against declines in the
market value of its assets that result from general trends in debt markets.
These techniques are risky, and the Company's use of them may limit the
Company's potential earnings on its mortgage assets. The Company's techniques
may include:
o puts and calls on securities or indices of securities;
o Eurodollar futures contracts and options on such contracts;
o interest rate swaps (the exchange of fixed-rate payments for
floating-rate payments); or
o other similar transactions.
REIT tax rules may limit the Company's ability to use these techniques, except
through a corporate subsidiary that is fully subject to corporate income
taxation. The Company cannot give any assurances that it can successfully
implement its investment and leverage strategies.
Management of Mortgage Assets
The Manager has engaged BlackRock to manage the Company's portfolio of mortgage
assets. BlackRock, a majority-owned subsidiary of PNC Bank Corp., specializes in
advising entities about mortgage asset investments, managing portfolios of
mortgage asset and fixed income investments, and financing mortgage asset
investments. Through BlackRock, the Company has access to considerable market
expertise and sophisticated risk management systems that enable the Company to
actively monitor and manage its mortgage portfolio's exposure to interest and
mortgage prepayment rates, credit risk, changing yield spreads, and risk of
capital loss. The Company uses these systems to emphasize relative value asset
selection, as well as liability structuring and the use of hedging instruments,
to manage the differential risks inherent in the mortgage portfolio's asset
liability structure.
Mortgage Asset Investments
As of September 30, 1998, the Company was invested in forty two mortgage-backed
securities that represented the entire interest in pools of single-family
mortgage loans. The mortgage-backed securities are summarized below. Premium is
the amount by which the purchase price exceeded the outstanding principal amount
of the mortgage-backed security.
Original Investment Premium
Term Interest (in (in
Issuer (Years) Rate thousands) thousands)
- ------ ------ ---- --------- ---------
FHLMC 15 6.50% $72,789 $452
FNMA 15 6.50 23,457 153
FNMA 15 7.00 53,318 1,077
FHLMC 15 7.00 5,061 99
FHLMC 30 8.00 4,829 185
FNMA 30 7.50 16,425 564
FNMA 30 9.00 17,719 1,024
GNMA 30 7.95 20,951 935
FHLMC 15 6.50 6,607 55
-------- ------
$221,156 $4,544
The Company paid a premium to acquire the mortgage-backed securities because the
interest rate payable on the securities was higher than rates prevailing at the
time of its acquisition. The weighted average yield on the Company's mortgage
assets at September 30, 1998, was approximately 7.04%. The yield is based on the
anticipated life of the securities. If the actual life of the security is
reduced below its anticipated life, the yield would be reduced. The actual life
of the mortgage-backed securities is reduced if the mortgage loans underlying
the securities are prepaid faster than anticipated at the time the securities
were acquired. See Notes to Financial Statements for a discussion of accounting
principles applicable to the Company's investments in mortgage assets.
32
<PAGE>
Investments in Real Estate-Related Companies
Investment Policies & Strategies
The Company relies upon professionals employed by FBR to evaluate opportunities
for investment in other companies. Since 1989, FBR has sought to identify
rapidly changing industries and those that are not fully understood or
appropriately valued by the market.
In the recent past, FBR has specialized in underwriting offerings of REIT
securities, particularly REITs that invest primarily in mortgage loans and
mortgage-backed securities. Since 1994, FBR has served as managing underwriter
on the public issuance of $2.8 billion of REIT and real estate equity
securities, including $1.3 billion of mortgage and hybrid REITs.
The Company believes that there is a global trend towards the securitization of
most types of real estate and real estate-related assets and that this trend is
represented by the increased formation of non-traditional REITs. The Company
also believes:
o that, notwithstanding the recent decline in the mortgage REIT market,
additional REITs or companies will be organized in the future that will
invest in residential mortgage loans, commercial mortgage loans,
commercial real estate, mortgage-backed securities, or other real
estate-related assets, and
o that FBR will continue to be active in underwriting the equity
securities offered by those types of entities.
Investments in REITs or Other Companies Before an FBR-Lead Initial or Secondary
Offering
The Company has relied on its affiliation with FBR to invest in
companies intending to sell securities to the public before or at the time of
the public offering at a price that is net of underwriting discounts and selling
concessions. The Company believes that the ability to invest in these companies
before their public offerings and net of underwriting fees can provide value to
its shareholders.
Equity securities acquired in the manner described above are subject to transfer
restrictions, and the Company makes such investments on the assumption that the
securities cannot be sold or otherwise disposed of for a period of at least one
year after the public offering. Whether the securities might thereafter be sold
will be based upon ongoing determinations by the Manager on the course of action
that will best serve the interests of the Company, which will be based upon,
among other things, price, estimates of intrinsic value, and the availability of
alternative investments. Furthermore, the Company's ability to invest in
companies in this manner may be constrained by rules of the SEC and the National
Association of Securities Dealers, Inc.
Private Investments in Public Companies
From time to time, the Company anticipates having the opportunity to make
private investments in publicly held companies. These opportunities may arise
when time frame or other public market conditions restrict access to the public
capital markets, but when the Manager believes there exists significant
appreciation potential for its investment.
Undervalued Publicly Traded Securities
In addition, the Company may invest in public companies with outstanding
business fundamentals that the Manager believes the public markets are valuing
inappropriately. In these instances, the Manager will base its investment
decision, in part, on the industry knowledge and expertise of FBR's employees.
Other Investments
The Company's ability to invest in non-mortgage or non-real estate-related
assets will be restricted by provisions of the Code and the Investment Company
Act. Subject to applicable restrictions, the Company may, however, invest in
other opportunities that the Manager believes would be beneficial for the
Company.
Current Investments
The Company's current holdings include the equity securities of six different
REITs. See "FBR & the Manager -- Certain Transactions." Four of those REITs
recently conducted FBR-lead initial or secondary public offerings. Through its
relationship with FBR, the Company was able to invest in those REITs either
before or at the same time that the REIT offered its stock to the public.
The Company has also acquired the equity securities of two companies that are
not taxed as REITs and the promissory notes of two companies that carry with
them the right to acquire stock of those companies in the event they make public
offerings of their stock. The
33
<PAGE>
Company's investments in other companies as of November 6, 1998 are summarized
below:
<TABLE>
<CAPTION>
========================================================================================================================
Market Value at
Amount of November 6, Percentage
Number of Percent Investment 1998 Increase
Company (Symbol) Shares Owned Ownership (thousands) (thousands) (Decrease)
---------------- ------------ --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Common Stock
- ------------
Anthracite Capital, Inc. (AHR) 1,581,846 3.95% $18,334 $10,480 -42.8%
Capital Automotive REIT (CARS) 1,792,115 8.22% 25,000 25,090 .4%
Chastain Capital Group (CHAS) 700,000 8.64% 9,765 2,756 -71.8%
Imperial Credit Commercial Mortgage 900,000 2.86% 13,050 7,988 -38.8%
Inv. Corp. (ICM)
Prime Retail, Inc. (PRT) 123,500 0.18% 1,200 1,258 4.8%
Resource Asset Investment Trust (RAS) 344,575 5.62% 5,293 4,479 -15.4%
Building One Services Corporation 500,000 1.66% 10,000 7,188 -28.1%
(BOSS)
East-West Bank 520,000 2.19% 5,200 4,160 -20.0%
----------------------------------------------------------------------------
Total 6,462,036 $87,842 $63,399 -27.8%
============================================================================
Promissory Notes
- ----------------
Prime Capital Holding 12,475
Kennedy Wilson International (KWI) 10,000
----------------------------------------------------------------------------
Total $22,475
============================================================================
===================================================================================================================
</TABLE>
As the table above shows, the aggregate market value of investments made by the
Company in other enterprises has declined significantly since the dates that the
Company made them. The Company attributes this decline in market value primarily
to the general decline in the market price of REIT stocks. A brief description
of each enterprise in which the Company has invested is set forth below.
Anthracite Capital, Inc.
- ------------------------
Anthracite Capital, Inc., is a REIT incorporated in Maryland that 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 U.S. and non-U.S. markets. Anthracite is managed by
BlackRock, subject to the direction and oversight of Anthracite's Board of
Directors. BlackRock is a registered investment adviser under the Investment
Advisers Act of 1940 and is one of the largest fixed income investment firms in
the United States. Anthracite 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 those assets and/or liabilities. Anthracite's
common stock is publicly traded.
The officers and directors of Anthracite and the officers and directors of its
manager, BlackRock, recently purchased 169,200 shares of Anthracite's common
stock in open market purchases at an average price of approximately $7.73 per
share.
On October 30, 1998, Anthracite reported that its funds from operations for the
third quarter ended September 30, 1998, were $6.5 million, or $0.31 per share on
a fully diluted basis. In response to market conditions subsequent to the third
quarter that resulted in reduced liquidity in the financing markets and spread
widening in the credit-sensitive sectors of the debt markets, Anthracite has
sold approximately $622 million in market value of assets since September 30,
1998. The proceeds from those sales were applied to reduce amounts borrowed
under Anthracite's existing reverse repurchase agreements and to increase its
cash position. As a result of these transactions, Anthracite's debt to equity
ratio has declined from 4.2 to 1 at September 30, 1998, to approximately 2.0 to
1 as of October 30, 1998.
The Company received $546,065 from Anthracite in dividends on October 15, 1998.
34
<PAGE>
Capital Automotive REIT
- -----------------------
Capital Automotive REIT ("CARS") is a self-administered and self-managed
Maryland REIT that was 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's common stock is publicly traded.
During the third quarter, CARS completed $149 million in acquisitions, bringing
total year-to-date acquisitions to $413 million. CARS reports that it has fully
invested the proceeds of its February 1998, initial public offering. CARS
remains the dominant multi-franchise automobile dealership REIT, particularly
after its October 1, 1998, acquisition of the majority of assets of a large
competitor, Automotive Realty Trust of America.
CARS announced a stock buyback program on September 8, 1998, to purchase three
million shares. According to CARS, substantially all of the three million
authorized shares were purchased at prices ranging from $9 1/8 to $11 7/8 per
share. CARS is presently conducting a second share buyback program for up to
three million additional shares.
On October 26, 1998, CARS announced that its funds from operations for the third
quarter ended September 30, 1998, were $8.5 million, or $0.28 per share on a
fully diluted basis. The Board of Directors of CARS has approved a dividend of
$0.27 per common share payable on November 20, 1998. The Company will receive
$483,871 from this distribution.
Chastain Capital Corporation
- ----------------------------
Chastain Capital Corporation is a Georgia REIT that 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.
Chastain is managed by Lend Lease Real Estate Investments, Inc., a global real
estate investment management firm with approximately $29.3 billion in real
estate assets under management on five continents, subject to the direction and
oversight of Chastain's Board of Directors. Chastain emphasizes, in particular,
origination of commercial mortgage loans for the purpose of securitizing and
retaining subordinated interests in these loans. Chastain's common stock is
publicly traded. The Company holds 700,000 shares of Chastain common stock and
is a significant shareholder.
The Company received $224,000 from Chastain in dividends on October 15, 1998.
On October 23, 1998, Chastain Capital Corporation announced that it was in
default on its tangible net worth covenant with three of its lenders, Morgan
Guaranty Trust Co., Merrill Lynch Mortgage Capital, and Morgan Stanley Mortgage
Capital. According to Chastain, the default had a cure period equal to ten
business days. Chastain stated that its portfolio had lost $32 million due to
spread widening in the credit market and had lost $13.5 million from terminating
its interest rate hedge. Chastain indicated that it was negotiating with its
lenders and with other sources of capital to provide liquidity to cure the
default and fund its obligations, including its outstanding whole loan
commitments, which total approximately $111 million. Chastain's board of
directors directed Chastain to discontinue new investment activity and concluded
that Chastain should restructure its balance sheet.
On October 30, 1998, Chastain reported results for the third quarter ended
September 30, 1998, its second quarter of operations. Of the $32 million loss,
$24 million was recognized in the third quarter and $8 million will be
recognized in the fourth quarter. Of the $13.5 million loss from terminating its
interest rate hedge, $15.7 million was recognized in the third quarter, and
thus, a $2.3 million gain will be recognized in the fourth quarter due to the
movement in Treasury rates between September 30, 1998, and the date the hedges
were terminated. On November 13, 1998, Chastain announced that it reached an
agreement with its lenders to restructure its credit facilities and dispose of
certain assets to reduce the size and stabilize the volatility of its overall
portfolio. Under the new agreement, Chastain's credit facilities have been
reduced by $10 million, and certain covenants were renegotiated to reflect the
reduced size of Chastain's portfolio; the facilities now expire on January 31,
1999, and March 31, 1999. Chastain also announced that one of its manager's
affiliates has agreed to provide it with up to $40 million of unsecured
indebtedness. An initial advance of $17 million was drawn on November 13, 1998,
and the remaining funds can be drawn through maturity at March 31, 1999.
Concurrently with the restructuring, Chastain announced that it would incur $8.7
million in mark-to-market losses on its portfolio and $1.7 million in expenses
related to the restructuring of its credit facilities. In addition, Chastain
announced that it intends to suspend its quarterly dividend for the fourth
quarter. The Company is currently evaluating its investment in Chastain.
Imperial Credit Commercial Mortgage Investment Corporation
- ----------------------------------------------------------
Imperial Credit Commercial Mortgage Investment Corporation is a Maryland
corporation that has elected
35
<PAGE>
REIT status. It invests primarily in performing multifamily and commercial term
loans and interests in commercial and residential mortgage-backed securities.
Imperial Credit also invests in various classes of non-investment grade
mortgage-backed securities. Imperial Credit's common stock is publicly traded.
On September 21, 1998, Imperial announced that it had rejected an unsolicited
merger proposal from Wilshire Real Estate Investment Trust. Imperial determined
that the proposed combination was not beneficial for shareholders due to the
proposed consideration, the highly-leveraged nature of Wilshire's assets, and
other factors. Friedman, Billings, Ramsey & Co., an affiliate of the Company and
the Manager, served as financial advisor to Imperial's Board of Directors during
this transaction.
On November 3, 1998, Imperial reported that its funds from operations for the
third quarter ended September 30, 1998, were $2.9 million, or $0.09 per share on
a fully diluted basis. Operating results were reported after certain non-cash
charges of $6.4 million, or $0.20 per share. The non-cash charges include a
write down of Imperial's commercial mortgage-backed interest-only securities to
estimated fair value based on current market conditions and estimated prepayment
speeds and an increase in the allowance for loan losses on mortgage loans to
address increased delinquencies on a multifamily and commercial loan portfolio
acquired from an unaffiliated third party. The Company received $297,000 from
Imperial in dividends on October 14, 1998.
Prime Retail, Inc.
- ------------------
Prime Retail, Inc., is a self-administered and self-managed Maryland REIT that
develops, acquires, owns and operates factory outlet centers in the United
States. Based upon industry publications, Prime Retail believes it is the
largest owner and operator of factory outlet centers in the United States. Prime
Retail strives to differentiate itself from competitors in the outlet center
industry by owning and operating larger outlet centers with highly accessible
locations, a larger and more diverse merchandising mix, extensive food and
recreational amenities and quality architecture and landscaping, all designed to
create an upscale environment in which to showcase merchandise and encourage
shopping. Prime Retail believes that the considerable size of its outlet
centers, coupled with Prime Retail's established merchant base of national and
international manufacturers of designer and brand-name merchandise,
significantly enhances the competitive position of Prime Retail's outlet
centers. Prime Retail's common stock is publicly traded.
After successfully completing its merger with Horizon Group on June 15, 1998,
Prime Retail integrated 22 of Horizon's top-performing outlet centers into its
existing portfolio and established itself as the largest owner/operator and
developer of factory outlet centers in the world. During November 1998, Prime
Retail expects to open an additional 316,000 square feet of gross leaseable area
in time for the holiday shopping season, including new phases in Ellenton, FL;
Hagerstown, MD; and Lodi, OH. On October 29, 1998, Prime Retail announced that
it plans to build a 410,000 square foot upscale outlet center in Pleasantville,
NJ, that will become the first outlet center servicing the New Jersey Shore
resort area near Atlantic City. This center will be built on 53 acres that Prime
Retail has under contract between exits 2 and 4 along the north side of the
Atlantic City Expressway and in close proximity to the Garden City Parkway.
The Company has purchased 123,500 shares of Prime Retail's common stock in the
public market as of November 6, 1998, for an average purchase price of $8.69 per
share.
On October 26, 1998, Prime Retail announced that its funds from operations for
the third quarter ended September 30, 1998, were $27.2 million, or $0.38 per
share. The Board of Directors of Prime Retail has approved a dividend of $0.295
per common share payable on November 16, 1998. The Company will receive $36,432
from this distribution.
Resource Asset Investment Trust
- -------------------------------
Resource Asset Investment Trust is a Maryland REIT that was formed in August
1997. Resource'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
institutional lenders or sources that provide financing through securitization.
Resource believes that its anticipated financing activity provides it with an
underserved niche market in the real estate industry. Resource's common stock is
publicly traded.
On October 14, 1998, Resource reported that its funds from operations for the
third quarter ended September 30, 1998, were $3.4 million, or $0.54 per share on
a fully diluted basis. The Company received $175,733 from Resource in dividends
on September 30, 1998.
36
<PAGE>
Building One Services Corporation
- ---------------------------------
Building One Services Corporation (formerly Consolidation Capital Corporation)
is a Delaware Corporation that was founded in February 1997 to build
consolidated enterprises through the acquisition and integration of multiple
businesses in one or more fragmented industries. Building One has undertaken to
consolidate facilities management companies and may select companies in this or
related industries in which to make future investments. Building One's common
stock is publicly traded.
On November 2, 1998, Building One announced that it will acquire Watson
Electrical Construction Co., a leading provider of electrical installation and
maintenance services in the Southeast, with revenues in excess of $100 million.
Total purchase consideration consisted of $24.0 million in cash and 1,500,000
shares of stock plus an earnout opportunity based upon improved earnings
performance in the future.
On November 3, 1998, Building One announced that its net income for the third
quarter ended September 30, 1998, was $16.7 million, or $0.37 per share on a
fully diluted basis. Building One is presently conducting a share buyback
program under which it has repurchased 2.27 million shares of the 3.1 million
shares authorized for repurchase.
East West Bank
- --------------
On June 30, 1998, the Company purchased, in a $237.8 million private placement
offering, 520,000 shares of East West Bank, a Southern California commercial
bank, for a cost of $5.2 million or $10.00 per share. The bank's strategy is to
become the premier commercial bank in California serving the unique personal and
business banking needs of customers engaged in businesses and having family ties
with or origins from the Asia Pacific region with experienced personnel having
language capability and cultural sensitivity appropriate for the region.
Prime Capital Holding, Inc.
- ---------------------------
Prime Capital Holdings, Inc., is a Delaware limited liability company formed in
August 1997 and is an early stage mortgage origination entity focused primarily
in the business of originating, investing in, and securitizing a broad range of
real estate finance products. The main focus of Prime Capital's operations to
date has been in the commercial real estate finance business. It also provides
selected real estate-based consumer finance products on a wholesale and retail
basis. Prime Capital's strategy is to aggressively pursue finance markets
undergoing substantial change or turmoil. In those markets, Prime Capital seeks
to offer products with an attractive risk/reward profile, generally including
the ability to sell the entire end loan either in the asset-backed securities
market or as a whole loan realizing a cash gain on sale. Prime Capital has
established origination, underwriting and servicing procedures and capabilities,
which it believes will enable it to take advantage of the changing condition of
a broad range of markets. Prime Capital is a private company whose common stock
is not traded.
On December 23, 1997, the Company entered into an interim financing and security
agreement with Prime Capital. The agreement allows for up to a $20,000,000
capital loan from the Company to Prime. The loan accrues interest at an
annualized rate of 12 percent and is payable monthly. As of November 6, 1998,
$12.4 million had been drawn against the loan. The Loan matures on December 31,
1998.
Kennedy Wilson International
- ----------------------------
On June 3, 1998, the Company entered into a promissory note agreement with
Kennedy Wilson International for $10 million. The note accrues interest at a
rate of 12 percent per annum and is payable monthly on the last day of the
month. The agreement calls for the repayment of the advanced principal amount on
the first to occur of the closing of a public offering of common stock by
Kennedy Wilson or December 31, 1998. Kennedy Wilson is a U.S. real estate
marketing and investment firm specializing in innovative marketing programs for
various types of properties and financial instruments. Kennedy Wilson's stock is
publicly traded, although the market for its stock is thin.
Leverage
The Company had a debt-to-equity ratio of 1.1 to 1 at September 30, 1998. The
actual ratio will change from time to time depending upon market conditions and
other factors that the Manager deems relevant. The actual debt-to-equity ratio
will depend on the Manager's assessment of acceptable risk consistent with the
nature of the assets then held by the Company. The Company's organizational
documents do not limit the amount of indebtedness the Company may incur.
Instead, the Board of Directors has an indebtedness policy that delegates
significant investment and borrowing discretion to the Manager. The Board,
however, may change this policy at any time.
Generally, leverage creates interest expense that can exceed the revenue the
Company earns from its financed assets. To the extent that revenue derived from
those assets exceeds the interest expense, the Company's net income will be
greater than if the Company had not
37
<PAGE>
borrowed funds. Conversely, if the revenue from those assets does not
sufficiently cover the expense, the Company's net income will be less than if
the Company had not borrowed funds.
Repurchase Agreements
The Company borrows funds by entering into repurchase agreements. Under these
agreements, the Company sells assets to a third party with the commitment to
repurchase the same assets at a fixed price on an agreed date. The repurchase
price reflects the purchase price plus an agreed upon market rate of interest.
The Company accounts for repurchase agreements as loans, secured by the
underlying assets, that the Company owes to the third party.
Repurchase agreements typically require the Company to deposit additional
collateral or reduce borrowed amounts if the market value of pledged collateral
declines. These requirements could cause the Company to sell assets under
adverse market conditions in order to maintain liquidity. Although the Company
intends to maintain an equity cushion sufficient to provide liquidity in the
event of interest rate movements or other changes in market conditions, there
can be no assurance that the Company will be able to safeguard against having to
sell mortgage assets when it would not otherwise choose to do so.
As of September 30, 1998, the Company had borrowed approximately $176.3 million
pursuant to repurchase agreements and pledged mortgage-backed securities with a
market value of approximately $185.3 million to secure the borrowings.
Bank Credit Facilities
The Company may borrow money through various bank credit facilities, which will
have varying maturities and varying fixed or adjustable interest rates. To date,
the Company has not established any bank credit lines.
Dividends & Distribution Policy
To maintain its status as a REIT for federal income tax purposes, the Company is
required to distribute substantially all its taxable income (taxable income does
not ordinarily equal income calculated in accordance with generally accepted
accounting principles) to its shareholders each year. In order to satisfy such
requirement, the Company intends to declare regular quarterly dividends and to
distribute any taxable income remaining at the end of a year with a first
quarter dividend in the following year.
The Board of Directors may change the dividend policy at any time. The Board of
Directors will declare dividends based on:
o the taxable income of the Company;
o the financial condition of the Company;
o the distributions required to maintain REIT status; and
o other factors that the Board of Directors considers relevant.
To date, the Company has declared the following dividends:
For the Period Total Per Share
-------------- ----- ---------
02/01/97 - 12/31/97 $ 562,045(1) 0.055
01/01/97 - 03/31/98 2,083,165 0.200
04/01/98 - 06/30/98 3,072,669 0.295
07/01/98 - 09/30/98 3,379,798(2) 0.360
--------- -----
$9,097,677 $0.91
(1) Includes $0.05 dividend declared in June 1998 and paid in July 1998 for
shareholders of record as of December 31, 1997.
(2) Dividend declared and paid in October 1998.
All dividends have been paid out of the Company's current and accumulated
earnings and profits and, therefore, none constitutes a return of capital. The
level of quarterly dividends is based on a number of factors and should not be
deemed indicative of taxable income for the quarter in which declared or future
quarters or of income calculated in accordance with GAAP.
Distributions to shareholders will generally be subject to tax as ordinary
income, although in appropriate circumstances a portion of any distribution may
be designated by the Company as capital gain or may be determined to be a
tax-free return of capital. The Company does not intend to declare dividends
that would result in a return of capital. The Company will furnish annually to
each shareholder a statement setting forth distributions paid during the
preceding year and their characterization as ordinary income, capital gain or
return of capital. For a discussion of the federal income tax treatment of
distributions by the Company, see "Federal Income Tax Laws Applicable to REITs
and REIT Shareholders--Taxation of Taxable U.S. Shareholders."
The Company has repurchased shares of its own stock. See "The Company--Recent
Developments."
38
<PAGE>
Selected Financial Data
The selected financial data set forth below should be read in conjunction with
"Management's Discussion & Analysis" and the Financial Statements and Notes
thereto included elsewhere in this registration statement. The selected balance
sheet and statement of operations data as and for the six months ended June 30,
1998, has been derived from the audited financial statements. The selected
balance sheet data and statement of operations data as of and for the three- and
nine-month periods ended September 30, 1998, has been derived from unaudited
financial statements of the Company and has been prepared on the same basis as
the audited financial statements to include, in the opinion of management, all
adjustments (consisting of only of normal recurring adjustments) necessary for a
fair presentation of the results of operations and the Company's financial
condition for such periods. The results for the six months ended June 30, 1998,
or for the three- and nine-month periods ended September 30, 1998, are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1998, or for any future interim or annual period.
<TABLE>
<CAPTION>
===========================================================================================================================
(Dollars in thousands, except for per share data)
Six Months Three Months Nine Months
Ended Ended Ended
June 30, 1998 September 30, 1998 September 30, 1998
------------- ------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Dividend income................................ $ 834 $ 2,046 $ 2,880
Interest income................................ 4,817 4,711 9,528
Interest expense............................... 553 2,634 3,187
Management Fee Expense......................... 469 458 927
Other Expense.................................. 163 99 262
Net Income..................................... 4,466 3,566 8,032
Basic and diluted income per share............. $ 0.43 $ 0.35 $ 0.78
Weighted average basic and diluted shares...... 10,400 10,264 10,354
June 30, 1998 September 30, 1998
------------- ------------------
(unaudited)
Selected Balance Sheet Data:
Mortgage-backed Securities, at fair value....... $218,685 $ 211,492
Cash and cash equivalents....................... 60,611 43,334
Investments in Equity Securities, at fair value. 78,074 65,816
Total Assets.................................... 377,602 344,266
Repurchase agreements........................... 181,288 176,252
Total liabilities............................... 185,524 179,044
Accumulated Other Comprehensive Income (1)...... (609) (19,016)
Stockholders' Equity............................ 192,078 165,222
Book Value Per Share............................ 18.44 17.44
Common shares outstanding (2)................... 10,416 9,473
For the Six Months For the Nine Months
Ended Ended
June 30, 1998 September 30, 1998
------------- ------------------
(unaudited)
Other Selected Data
Average total assets (3) ....................... $233,401 $ 274,356
Average daily borrowings (4).................... $ 55,975 $ 136,060
Average equity (3).............................. $198,366 $ 191,382
Funds from operations........................... $ 4,466 $ 8,032
Management Fees as a percentage of average total 0.20% 0.34%
assets..........................................
Management Fees as a percentage of average total 0.24% 0.48%
equity..........................................
===========================================================================================================================
</TABLE>
(1) As of June 30, 1998, Accumulated Other Comprehensive Income includes
unrealized depreciation on mortgage-backed securities of $.1 million
unrealized depreciation on investments in equity securities of $.5 million.
As of September 30, 1998, Accumulated Other Comprehensive Income includes
unrealized appreciation on mortgage-backed securities of $3 million and
unrealized depreciation on equity investments of $22 million.
(2) Reflects 942,500 shares of treasury stock repurchased in September 1998.
(3) Represents monthly average for each period.
(4) Repurchase agreements were entered into on May 13, 1998.
39
<PAGE>
Management's Discussion & Analysis
Overview
In December 1997, the Company raised $189.7 million in a private placement of
common stock. The Company raised an additional $3.7 million in January 1998. The
Company was formed to invest in the following:
o A majority of the Company's assets will consist of mortgage loans or
mortgage-backed securities issued or guaranteed by instrumentalities of
the U.S. Government or by private issuers
o Equity investments in public or private REITs and other companies that
intend to go public
o Equity investments in undervalued publicly traded securities
o Real estate assets
o Private investments in public companies.
To date, the Company has relied on BlackRock Financial Management, Inc. to
invest in and manage its mortgage assets and has relied on Friedman Billings
Ramsey Investment Management, Inc., to invest in and manage its other assets. As
of September 30, 1998, the Company had mortgage assets totaling $211.5 million
financed with repurchase agreements totaling $176.3 million; original
investments in equity securities of eight companies totaling $87.5 million; and
loans to two companies totaling $20.4 million.
Overview of Market Conditions
The Company relies upon the Manager and its affiliates to provide investment
opportunities. The ability of the Manager and its affiliates to provide
investment opportunities is subject to a number of factors including the market
for REIT initial public offerings, the availability of credit to finance the
acquisition of assets and the level of interest at which the company could
finance its purchases.
Equity Market Conditions
Since January 1, 1998, in the U.S. equity markets, there have been sixteen REIT
initial public offerings, which raised a total of $2.1 billion. Of the sixteen
REIT initial public offerings, seven were mortgage REITs, which raised $84.8
million. Of the seven mortgage REIT initial public offerings, the Company
invested $33.3 million in three. The Company invested $25 million in one equity
REIT initial public offering.
The market for initial public offerings and secondary stock offerings of REIT
securities was robust during the first and second quarters. However, the market
essentially evaporated during the third and fourth quarters. The table below
summarizes public equity raised by REITs through November 4, 1998.
<TABLE>
<CAPTION>
=======================================================================================================================
IPO Secondary
------------------------------------ ------------------------------------
Mortgage Equity Mortgage Equity
($ In Millions) REITS REITS Total REITS REITS Total
- --------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 522.3 $ 657.4 $ 1,179.7 $ 71.6 $ 4,937.0 $ 5,008.6
Second Quarter 325.7 557.3 883.0 44.1 3,634.2 3,678.3
Third Quarter 12.0 12.0 100.9 100.9
Fourth Quarter (to 11/4/98) - - - 66.6 66.6
------- --------- --------- ------- --------- ---------
Total Year-to-Date $ 848.0 $ 1,226.7 $ 2,074.7 $ 115.7 $ 8,738.7 $ 8,854.4
======= ========= ========= ======= ========= =========
=======================================================================================================================
</TABLE>
Source: CommScan Equidesk, Inc.
40
<PAGE>
The Company's ability to raise additional equity capital is dependent on the
general market conditions for REIT equity offerings.
The value of the Company's equity investments are subject to factors that affect
the Companies in which it has invested. Many of the companies the Company owns
invest in commercial mortgage-backed securities (CMBS). One of the largest
buyers of CMBS, CRIIMI Mae, Inc., filed for Chapter 11 bankruptcy protection on
October 5, 1998, citing its inability to meet collateral calls from its lenders.
CRIIMI Mae's bankruptcy, global financial turmoil and tightening credit markets
have resulted in even greater liquidity risks for the CMBS market, affecting the
Company and the companies in which the Company has invested. The Company does
not and have not owned any of the securities of CRIIMI Mae.
As a further example, Chastain Capital Corporation, a mortgage REIT in which the
Company has invested a total of $9.8 million through September 30, 1998,
announced on October 23, 1998 that it was in default on its tangible net worth
covenant with its lenders. On November 13, 1998, Chastain announced that it
reached an agreement with its lenders to restructure its credit facilities.
Concurrently with the restructuring, Chastain announced that it would incur $8.7
million in market-to-market losses on its portfolio and $1.7 million in expenses
related to the restructuring of its credit facilities. As of September 30, 1998,
the Company has recorded approximately $2.2 million in unrealized losses
associated with its Chastain investment. This unrealized loss has been recorded
as accumulated comprehensive income in stockholders' equity. See "Changes in
Financial Condition" and "Stockholders' Equity" elsewhere in Management's
Discussion and Analysis, and Note 3 in Notes to Financial Statements for further
discussion.
Interest Rate Environment
The Company's earnings depend, in part, on the relationship between long-term
interest rates and short-term interest rates. The Company's investments bear
interest at fixed rates determined by reference to the yields of medium- or
long-term U.S. Treasury securities or at adjustable rates determined by
reference (with a log) to the yields on various short-term instruments.
Since January 1, 1998, interest rates on U.S. Government bonds have declined, in
part, as a reaction to global financial disarray. U.S. and international
investors have reduced their exposure to foreign government and corporate bonds
and increased their investments in U.S. Treasury backed bonds. This has resulted
in higher prices for bonds and lower yields. As a result, the yield curve has
inverted such that short-term rates exceed long-term rates.
The following table summarizes the relationship between the yield on the London
Interbank Offer Rate (LIBOR) and the ten-year U.S. Treasury. The Company's
borrowings typically bear interest rates that have historically moved in close
relationship to LIBOR. The Company's Management incentive fee is indexed to the
ten-year U.S. Treasury.
<TABLE>
<CAPTION>
======================================================================================================================
Yield
---------------------------------------------------------------------------------------------
High Low Average
---------------------------- ---------------------------- -----------------------------
10-Year LIBOR Net Spread 10-Year LIBOR Net Spread 10-Year LIBOR Net Spread
------- ----- ---------- ------- ----- ---------- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 5.78% 5.72% 0.06% 5.30% 5.59% -0.23% 5.58% 5.65%
Second Quarter 5.81% 5.69% 0.12% 5.35% 5.64% -0.29% 5.59% 5.66% -0.07%
Third Quarter 5.52% 5.66% -0.14% 4.42% 5.34% -0.92% 5.20% 5.62% -0.42%
Fourth Quarter (to 4.94% 5.44% -0.50% 4.16% 5.22% -1.06% 4.60% 5.30% -0.71%
11/10/98) ------- ------ ------- ------- ------ ------ ------- ------ ------
Year-to-Date Average 5.51% 5.63% -0.11% 4.82% 5.45% -0.62% 5.24% 5.56% -0.32%
======= ====== ======= ======= ====== ====== ====== ====== ======
Year-to-Date -0.84% 0.28% -1.20% -0.37% -0.99% -0.34%
Increase/(Decrease)
Year-to-Date Percentage -14.53% -4.92% -22.39% -6.56% -17.66% -6.07%
Increase/(Decreases)
======================================================================================================================
Source: Bloomberg
</TABLE>
41
<PAGE>
As of November 10, 1998, the average yield on the ten-year U.S. Treasury had
decreased from 5.58% to 4.60% and LIBOR decreased 6.1% from 5.65% to 5.30%.
The decreasing yields of U.S. Treasuries have adversely impacted the spreads in
the CMBS market. As a result, many lenders who financed CMBS assets with
repurchase agreements have asked for the borrowers to meet margin calls based on
the declining value of CMBS assets. The Company's portfolio of mortgage assets
is insured by GNMA, FNMA or FHLMC and is not leveraged to the fullest extent
possible. There can be no assurance that the Company can obtain additional
leverage, that margin calls will not be made, or that replacement financing will
be available if certain lenders rescinded their repurchase agreements.
For the mortgage REITs in which the Company has invested, the inversion of the
yield curve, coupled with the highest yields commanded by investors in CMBS,
made it less profitable or unprofitable to acquire and finance commercial
mortgage loan portfolios priced at a fixed spread to corresponding treasury
rates.
Results of Operations
The Company's fiscal year commenced on January 1, 1998, and will conclude on
December 31, 1998. Operations from the date of inception, December 15, 1997
through December 31, 1997, were not material.
Net Income
Net income for the six-month period ended June 30, 1998, was approximately $4.5
million or $0.43 per share (basic and diluted). Net income for the three-month
and nine-month periods ended September 30, 1998, was $3.6 million or $0.35 per
share (basic and diluted) and $8.0 million or $0.78 per share (basic and
diluted), respectively. Net income per share is computed by dividing net income
by the weighted average number of shares of outstanding common stock during the
period.
The Company's sole sources of income since inception have been quarterly
dividend earnings on its REIT holdings and interest earnings on its
mortgage-backed securities, notes receivable, and cash and cash equivalents.
In order to maintain preferential tax treatment, qualified REITs must distribute
not less than 95% of their estimated taxable income. Distributions are generally
made on a quarterly basis. Accordingly, the Company has and expects to continue
to receive such distributions from their equity investments in qualified REITs.
However, dependent on the specific nature of the underlying business of the
Company's REIT investments, quarterly and annual taxable income may vary. As a
result, dividend distributions for any one quarterly or annual period may not be
indicative of receipts for future interim or annual periods. Dividend income for
the six-month period ended June 30, 1998, was approximately $834,000. Dividend
income for the three- and nine-month periods ended September 30, 1998, was
approximately $2.0 million and $2.9 million, respectively.
The Company's primary source of interest income to date has been its investments
in fixed-rate mortgage-backed securities. Interest income is recorded based on
contractual rates of interest and amortization of any premium or discount
associated with the original purchase. The amount of future contractual interest
income received may be adversely affected in the event of prepayments of the
underlying mortgage loans. Generally, as interest rates fall, prepayment rates
may increase significantly. Accordingly, the Company's interest income for any
given period may not be indicative of that for future interim or annual periods.
Interest income for the six-months ended June 30, 1998, was approximately $4.8
million. The Company began investing in mortgage-backed securities in the second
quarter of 1998. Interest income for the three- and nine-month periods ended
September 30, 1998, was approximately $4.7 million and $9.5 million,
respectively.
For the nine month period ended September 30, 1998, the estimated current
average yield on the Company's mortgage securities was approximately 6.14% at
September 30, 1998. For that same period the estimated average yield on cash and
cash equivalents was approximately 5.87%.
Interest expense attributable to the Company's repurchase agreements accounted
for 73% of the Company's total expenses for the nine months ended September 30,
1998. The Company did not begin to leverage its investment portfolio until May
1998. The Company anticipates that its cost of borrowed funds will continue to
account as the largest proportional share of its total expenses in future
periods. The Company has borrowed funds under repurchase agreements of which
$176.3 million was outstanding as of September 30, 1998. Accrued interest
expense on these agreements, including net amounts payable under interest rate
swap agreements, was $2.0 million. The weighted average borrowing rate on
amounts outstanding as of September 30, 1998 was approximately 5.59%.
Management fees for the six-month period ended June 30, 1998, were approximately
$469,000. Management fees were approximately $458,000 for the three-month period
ended September 30, 1998 and approximately $927,000 for the nine-month period
ended September 30, 1998. The Company's Manager
42
<PAGE>
receives a quarterly fee based on the Company's average invested assets. The
Company has subcontracted with a mortgage portfolio manager, BlackRock, to
manage the Company's mortgage portfolio. BlackRock receives a fee based on the
average gross asset value of the Company's mortgage portfolio (see Note 5 of
Notes to Financial Statements). The Company's Manager is also entitled to
receive an annual incentive fee if Funds from Operations exceeds certain
thresholds. Through September 30, 1998, the Company's Funds from Operations did
not exceed the threshold amounts.
Professional fees consist primarily of legal and accounting fees. Professional
fees were approximately $132,000 for the six-month period ended June 30, 1998,
and $71,000 and $203,000 for the three- and nine-month periods ended September
30, 1998, respectively. The legal fees are attributable to the costs associated
with the acquisition of assets and the private placement. Accounting fees are
primarily attributable to the audits related to this filing.
The net proceeds of the Company's initial sale of privately placed common stock
have been invested over time. Accordingly, the effect of the Company's use of
proceeds is not fully reflected in the results of operations for the nine-month
period ended September 30, 1998.
Funds from Operations
Most industry analysts, including the Company, consider FFO an appropriate
supplementary measure of operating performance of a REIT. In general, FFO
adjusts net income for non-cash charges such as depreciation, certain
amortization expenses and most non-recurring gains and losses. However, FFO does
not represent cash provided by operating activities in accordance with generally
accepted accounting principles ("GAAP") and should not be considered an
alternative to net income as an indication of the results of the Company's
performance or to cash flows as a measure of liquidity. In 1995, the National
Association of Real Estate Investment Trusts ("NAREIT") established new
guidelines clarifying its definition of FFO and requested that REITs adopt this
new definition beginning in 1996. The Company computes FFO in accordance with
the definition recommended by NAREIT. The Company's FFO for the nine-month
period ended September 30, 1998, was $8.0 million or $0.78 per share (basic and
diluted). FFO for the three-month period ended September 30, 1998, was $3.6
million or $0.35 per share (basic and diluted). Because the Company does not
presently own depreciable assets, its current FFO under the NAREIT definition is
the same as its net income.
Interest and Dividend Income
The following tables set forth information regarding the total amount of income
from interest and dividend earning assets and the resultant average yields.
Information is based on daily average balances during the reported periods.
<TABLE>
<CAPTION>
=============================================================================================================
Three Months Ended September 30, 1998
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ ----------
<S> <C> <C> <C>
Mortgage Securities Available for $ 3,277,425 $211,941,897 6.14%
sale
Investment in equity securities (2),(3) 2,491,459 90,977,448 9.06%
Cash and Cash Equivalents 792,987 53,607,364 5.87%
---------- ------------ ----
Total (3) $6,561,871 $356,526,709 6.84%
========== ============ ====
Nine Months Ended September 30, 1998
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------- ----------
Mortgage Securities Available for $ 4,300,216 $158,769,005 6.38%
sale (1)
Investment in equity securities (2),(3) 4,437,262 74,129,319 8.62%
Cash and Cash Equivalents 4,038,424 92,325,137 5.51%
----------- ------------ ----
Total (3) $12,775,902 $325,223,461 6.64%
=========== ============ ====
=============================================================================================================
</TABLE>
(1) Mortgage assets were held for 155 days.
(2) Includes accrued interest and amortized commitment fees on convertible loans
to Prime Capital and Kennedy Wilson International. Such amounts are included
as interest income in the Company's statements of income included in its
finanical statements.
(3) In tracking its annualized yields, the Company accrues dividend income based
on declared dividends or projected dividends for the periods presented
(where such dividend has yet to be declared); hence, dividend income in
these tables does not match reported dividend income and is presented solely
to determine annualized yield information.
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Interest Expense
The following table sets forth information regarding the total amount of
interest expense from repurchase agreements (including the net amount payable
under the interest rate swap agreement) and the resultant average yields.
Information is based on daily average balances during the reported periods
<TABLE>
<CAPTION>
=================================================================================================================
Three Months Ended September 30, 1998
Interest Average Annualized
Expense (1) Balance Yield
----------- ------- ----------
<S> <C> <C> <C>
Repurchase agreements $ 2,634,635 $ 178,713,375 5.85%
=========== ============= ====
Nine Months Ended September 30, 1998
Interest Average Annualized
Expense (1) Balance Yield
------------ ------- ----------
Repurchase agreements (2) $ 3,187,418 $ 136,059,560 6.06%
=========== ============= ====
=================================================================================================================
</TABLE>
(1) Interest Expense includes expenses related to the interest-rate swap
agreements. As a result, annualized yields reported in the above tables are
higher than the actual weighted average borrowing rate. At June 30, 1998,
and September 30, 1998, the Company had $181,287,958 and $176,252,157
outstanding under repurchase agreements, with a weighted-average borrowing
rate of 5.61% and 5.59%, respectively, and with a weighted-average
remaining maturity of 21 days and 47 days, respectively.
(2) Repurchase agreements were entered into on May 13, 1998.
Dividends Declared and Distributions in Excess of Earnings
On October 13, 1998, the Company declared dividends to its stockholders totaling
$3.4 million or $0.36 per share. These dividends were paid on October 20, 1998,
to stockholders of record on October 14, 1998. These dividends covered the
Company's undistributed tax basis income for the period July 1, 1998, through
September 30, 1998. For Federal income tax purposes, all dividends paid to date
are ordinary income to the Company's stockholders.
Changes in Financial Condition
Securities Available for Sale
At September 30, 1998, an aggregate of approximately $19.0 million of net
unrealized losses on mortgage-backed and equity securities classified as
available for sale were included as an accumulated other comprehensive income in
stockholders' equity. See "Stockholders' Equity" elsewhere in "Management's
Discussion and Analysis" and Note 3 in the Company's financial statements for
further discussion.
At September 30, 1998, the Company had mortgage assets equal to $211.5 million.
All of the Company's mortgage-backed securities at September 30, 1998, were
agency pass-through securities that represent a 100% interest in the underlying
conforming mortgage loans. Conforming loans comply with the underwriting
requirements for purchase by the Federal Home Loan Mortgage Corporation (FHLMC),
the Federal National Mortgage Association (FNMA), and the Government National
Mortgage Association (GNMA). These securities do not bear the risk of credit
loss due to defaults as they are guaranteed by the agencies. GNMA is a wholly
owned corporate instrumentality of the U.S. Government within the U.S.
Department of Housing and Urban Development (HUD), and therefore, its guarantee
is backed by the full faith and credit of the U.S. Government. FNMA and FHLMC
are government-sponsored agencies that are not backed by the full faith and
credit of the U.S. Government, although they have implicit guarantees.
Premium balances associated with the purchase of mortgage-backed securities are
amortized as a decrease in interest income over the life of the security. At
September 30, 1998, the Company had on it's balance sheet a total of
approximately $4.0 million of unamortized premium representing the difference
between the remaining
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principal value and the current historical amortized cost of mortgage-backed
securities acquired.
Mortgage principal repayments received were approximately $12.1 million for the
nine-month period ended September 30, 1998. Given the Company's current
portfolio composition, if mortgage principal repayment rates increase over the
life of the mortgage-backed securities comprising the current portfolio, all
other factors being equal, the Company's net interest income should decrease
during the life of such mortgage-backed securities, as the Company will be
required to amortize its net premium balance into income over a shorter time
period. Similarly, if mortgage principal repayment rates decrease over the life
of such mortgage-backed securities, all other factors being equal, the Company's
net interest income should increase during the life of such mortgage-backed
securities, as the Company will amortize its net premium balance over a longer
time period.
Repurchase Agreements
On September 30, 1998, the Company had $176.3 million outstanding under various
repurchase agreements with several financial institutions. To date, the
Company's debt has consisted entirely of borrowings collateralized by a pledge
of most of the Company's mortgage-backed securities. The Company has obtained,
and believes it will be able to continue to obtain, short-term financing in
amounts and at interest rates consistent with the Company's financing
objectives. The Company limits its borrowings, and thus its potential asset
growth, in order to maintain unused borrowing capacity, and thus increase the
liquidity and strength of its balance sheet. The Company's debt-to-equity ratio
on its mortgage loan portfolio was roughly .83 to 1 at September 30, 1998.
For the nine-month period ended September 30, 1998, the term to maturity of the
Company's borrowings has been limited to 92 days with a weighted average
remaining maturity as of September 30, 1998, of 47 days and a weighted average
cost of funds on outstanding borrowings of approximately 5.59%.
Contractual Commitments
On May 28, 1998, the Company entered into two interest rate swap transactions
with a notional amount of $50 million each. Under the interest rate swap
agreement, the Company will receive quarterly payments of interest based on
three-month LIBOR and will remit semi-annual payments based on a fixed interest
rate of approximately 6.0% and 5.9%, respectively, and in each case based upon
the notional amount of the swap. The swaps became effective on June 1, 1998, and
will terminate on June 1, 2003, and June 1, 2001, respectively. In certain
circumstances, the Company may be required to provide collateral to secure its
obligations under the interest rate swap agreement or may be entitled to receive
collateral from the counterparty to the swap agreement. At September 30, 1998,
no collateral was required under the interest rate swap agreement. At September
30, 1998, the interest rate payable to the Company by the counterparty to the
swap transaction was approximately 5.70%.
In October 1998, the Company terminated one of its interest rate swap
agreements. As a result of the hedge termination, the Company lost $2.7 million
that will be recognized as a charge to income in the fourth quarter. On the
remaining interest rate swap agreement that expires on June 1, 2001, and the
Company had a fair value of $(2.3) million as of October 31, 1998.
Capital Resources and Liquidity
Liquidity is a measurement of the Company's ability to meet potential cash
requirements including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities, and for other general
business purposes. The primary sources of funds for liquidity consist of
repurchase agreements and maturities, distributions, and/or principal payments
on mortgage-backed and equity securities, and proceeds from sales thereof. To
date, proceeds from the issuance of common stock and repurchase agreements have
provided the Company funding for its investment needs. Potential future sources
of liquidity for the Company include existing cash balances, unused borrowing
capacity, and future issuances of common or preferred stock. Should the
Company's needs ever exceed these sources of liquidity, management believes the
Company's mortgage-backed securities could be sold, in most circumstances, to
provide cash.
For the nine-month period ended September 30, 1998, the Company's operating
activities provided net cash flows of $8.9 million. The primary source of
operating flow was interest on mortgage-backed securities and cash equivalents
and dividends from REIT investments. For the same period, the Company's
investing activities resulted in net cash out flows totaling $114.7 million.
During the foregoing period, cash flows from investing
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<PAGE>
activities including net borrowings under repurchase agreements were used
primarily to purchase mortgage-backed and equity securities. The Company's
financing activities resulted in net cash out flows of $14.1 million during the
nine-month period ended September 30, 1998 and consisted primarily of funds used
to repurchase the Company's common stock and fund shareholder distributions,
partially offset by proceeds from the issuance of 196,828 shares of common
stock. There can be no assurance that the Company will be able to generate
sufficient funds from future operations, or raise sufficient debt or equity to
take advantage of investment opportunities that become available.
Stockholders' Equity
The Company accounts for its investments in mortgaged backed securities and
other equity instruments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS 115, the Company 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 stockholders' equity as
accumulated other comprehensive income.
Also in accordance with SFAS 115, management must evaluate multiple factors to
determine if declines in the market value of available for sale securities are
other than temporary. When such declines are deemed to be other than temporary,
the Company will record a charge against income for the difference between an
investment's cost basis and its estimated fair value. For the nine-month period
ended September 30, 1998, there were no such charges recorded. However, there
can be no assurances that such charges will not be required in future periods.
As a result of the "mark-to-market" accounting treatment, the book value and
book value per share of the Company are likely to fluctuate far more than the
companies who do not make investments in marketable and non-marketable debt and
equity securities. As a result, comparisons with these companies may not be
meaningful.
Year 2000 Compliance
The Company's software and information systems are Year 2000 compliant. However,
the Company places significant reliance on certain technologies of its mortgage
asset portfolio manager, BlackRock. Management has inquired of BlackRock
regarding the state of its own readiness regarding Year 2000 compliance.
BlackRock is currently testing its systems and expects to finalize the
certification of its own internal systems in 1998.
In the event that BlackRock does not successfully achieve Year 2000 compliance
in a timely manner, the Company's ability to effectively manage its mortgage
asset portfolio could be adversely affected.
46
<PAGE>
Management After the Merger
FBR Asset Maryland's principal executive offices are located in Arlington,
Virginia, at Potomac Tower, 1001 Nineteenth Street
North. The phone number is (703) 469-1000.
FBR Asset Maryland's current directors and executive officers are the same as
FBR Asset Virginia's current directors and executive officers.
The Board of Directors
Composition of the Board
FBR Asset Maryland's Board is divided into three classes, Class I, II, and III.
Each class serves for a three-year term, and the directors hold office until
their successors are elected and qualified. The first term of the Class I
directors will expire at the annual meeting in 1999; of the Class II directors
at the annual meeting in 2000; and of the Class III directors at the annual
meeting in 2001.
FBR Asset Maryland's Board consists of five members. Two of the five directors
are independent directors. The remaining three directors are Affiliates of the
Manager.
An "independent director" is a person who has not, in the past two years:
1. owned a material interest in the Manager or any of its Affiliates;
2. been employed by the Manager or any of its Affiliates;
3. been an officer or director of the Manager or any of its Affiliates; or
4. performed any material services for the Manager or any of its
Affiliates.
An "Affiliate" of the Manager is any person, including a corporation or other
entity, that:
1. the Manager directly or indirectly controls;
2. directly or indirectly controls the Manager;
3. is under common control with the Manager;
4. is an officer of, partner in, or director of the Manager, or serves in a
similar capacity with respect to the Manager; or
5. directly or indirectly, beneficially owns, controls or holds, with the
power to vote, more than 10% of any class of the Manager's equity
securities.
Affiliates of the Manager also include those persons, including corporations and
other entities:
1. for which the Manager serves as an officer, partner, or director, or
serves in some similar capacity; or
2. of which the Manager beneficially owns, controls or holds, with the
power to vote, directly or indirectly, more than 10% of a class of that
person's equity securities.
For purposes of determining who may be classified as an independent director:
1. the Company is not considered an Affiliate of the Manager;
2. an "interest" is deemed material if it
a. exceeds 5% of a person's outstanding voting securities; or
b. 5% of a person's net worth on a fair market value basis; and
3. "services" are deemed material if the gross revenue derived from them
exceeds 5% of a person's
a. annual gross revenue from all sources in either of the past two
years; or
b. net worth on a fair market value basis.
No person will be disqualified from serving as an independent director solely
because (a) that person maintains a discretionary brokerage account with the
Manager or its Affiliates or because (b) the Manager or the Affiliates perform
other services for such person, whether material or not.
Executive Committee
The Executive Committee consists of Messrs. Friedman, Billings,
and Ramsey. Mr. Billings serves as the Executive Chairman. When
the Board is not in session, the Executive Committee will
exercise all of the authority of the Board, provided, however,
that unless otherwise authorized by the Company's Bylaws, the
Executive Committee will not have the authority to elect
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<PAGE>
directors, declare dividends or distributions on stock, recommend to
shareholders any action that requires shareholder approval, amend or repeal the
Bylaws of the Company, approve any merger or share exchange that does not
require shareholder approval, authorize the issuance of stock, or approve
transactions that require the approval of the independent directors.
Audit Committee
The Audit Committee consists solely of the Company's independent directors,
Messrs. Harlan and Hayes. The Audit Committee will meet with management to
consider the adequacy of the internal controls and the objectivity of financial
reporting. The Audit Committee also will meet with the independent auditors and
with appropriate financial personnel of the Company regarding these matters. The
Audit Committee will recommend to the Board the appointment of independent
auditors, subject to ratification by the Company's shareholders at the annual
meeting. The independent auditors will periodically meet alone with the Audit
Committee and will have unrestricted access to the Audit Committee.
Contracts Committee
The Contracts Committee consists solely of the Company's independent directors,
Messrs. Harlan and Hayes. The Contracts Committee will assist the Board in
reviewing any contract that the Company may propose to enter into with the
Manager or its Affiliates, including without limitation, the Management
Agreement, and shall monitor on an ongoing basis the performance of the Manager
or any of its Affiliates pursuant to any such contract.
Nominating Committee
The Nominating Committee consists solely of the Company's independent directors,
Messrs. Harlan and Hayes. The Nominating Committee will assist the Board in
establishing processes for director nominations, including the criteria for
selecting nominees, and will identify and recommend nominees for election to the
Board.
The Directors
The Company's directors are as follows:
The Independent Directors
Name Age Class Position(s) Held
- ---- --- ----- ----------------
Stephen D. Harlan 64 III Director
Webb Hayes 50 II Director
Directors Affiliated with the Manager
Name Age Class Position(s) Held
- ---- --- ----- ----------------
Emanuel J. Friedman 52 II Chairman of the
Board
Eric F. Billings 46 III Vice Chairman &
Chief Executive
Officer
W. Russell Ramsey 38 I President &
Secretary
The principal occupation for the last five years of each director, as well as
certain other information, is set forth below.
Stephen D. Harlan is Chairman of H.G. Smithy Company, a specialized real estate
firm that provides mortgage banking, finance, investment, advisory, and property
management services to commercial real estate investors. Before joining H.G.
Smithy in 1993, Mr. Harlan was Vice Chairman of KPMG Peat Marwick, where he also
served on KPMG's International Council, Board of Directors, and Management
Committee. In June 1995, President Clinton appointed Mr. Harlan to the District
of Columbia Financial Responsibility and Management Assistance Authority, for
which he previously served as Vice Chairman. Mr. Harlan is Treasurer, chairs the
Finance Committee, and is a member of the Board of Directors of the Medlantic
Healthcare Group. He (i) serves on the Boards of Directors of the Executive
Council on Foreign Diplomacy and the Mary and Daniel Loughran Foundation, Inc.,
(ii) is a member of the Senior Council of the Greater Washington Board of Trade,
and (iii) is a Trustee and member of the Executive Committee of the Carnegie
Endowment for International Peace.
Webb Hayes is a Director and Vice Chairman of United Bank of Virginia, a
subsidiary of United Bankshares. Mr. Hayes was Executive Vice President of
George Mason Bankshares, Inc., and President and CEO of George Mason Bank, N.A.
until its merger with United Bankshares in 1998. Previously, Mr. Hayes was
Chairman and CEO of Palmer National Bankcorp. and Palmer National Bank until its
merger with George Mason Bankshares in 1996. Mr. Hayes serves as a Director of
CERBCO, Inc., and Insituform East, Inc., both public companies headquartered in
Landover, Maryland. He also serves on the Executive Committee
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<PAGE>
of the American Bankers Association Government Relations Council and served as a
Director of the Federal Reserve Bank of Richmond from 1991-1995. Mr. Hayes
received a B.A. from the University of North Carolina and an executive
management degree from Columbia University School of Business.
Emanuel J. Friedman is Chairman and Chief Executive Officer of FBR Group. He has
continuously served as Chairman and Chief Executive Officer of FBR Group since
co-founding FBR in 1989. As of November 6, 1998, Mr. Friedman owns 21.47% of the
outstanding common stock of FBR Group. Mr. Friedman is involved in FBR
investment banking, research, brokerage, and asset management activities. He
also manages private investment funds sponsored by the Manager. Mr. Friedman
founded the Friedman, Billings, Ramsey Foundation, a charitable foundation, in
1993 and currently serves as one of its directors. 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, DC brokerage
firm.
Eric F. Billings is Vice Chairman and Chief Operating Officer of FBR Group. He
has continuously served as Vice Chairman and Chief Operating Officer of FBR
Group since co-founding FBR in 1989. As of November 6, 1998, Mr. Billings owns
17.78% of the outstanding common stock of FBR Group. Mr. Billings is involved in
FBR's investment banking, research, brokerage, and asset management activities.
He also manages private investment funds sponsored by the Manager and is a
director and executive officer of The FBR Family of Funds. Mr. Billings entered
the securities industry in 1982, when he joined Legg Mason Wood Walker & Co.,
Inc., and from 1984 until 1989, he was Senior Vice President in the
institutional sales group at Johnston, Lemon & Co., Incorporated, a Washington,
DC brokerage firm. Mr. Billings is also a director of The FBR Family of Funds.
W. Russell Ramsey is President of FBR Group. He has continuously served as
President of FBR Group and their predecessors since co-founding FBR in 1989. As
of November 6, 1998, Mr. Ramsey owns 11.95% of the outstanding common stock of
FBR Group. Mr. Ramsey is involved in FBR investment banking, research,
brokerage, and asset management activities. Before co-founding FBR, Mr. Ramsey
served as Vice President in the institutional sales group at Johnston, Lemon &
Co., Incorporated, a Washington, DC brokerage firm. Mr. Ramsey is a directors of
Building One Services Corporation.
Executive Officers Who Are Not Directors
All of the Company's executive officers are Affiliates of the Manager. All
officers serve at the discretion of the Company's Board of Directors.
Name Age Position(s) Held
- ---- --- ----------------
William R. Swanson 50 Executive Vice
President & Chief
Operating Officer
Elaine M. Clancy 33 Senior Vice
President & Chief
Financial Officer
George Abraham 34 Senior Vice
President
Robert Smith 39 Senior Vice
President &
General Counsel
Kurt R. Harrington 46 Treasurer
John M. Blassingame, Jr. 35 Controller
The principal occupation for the last five years of each executive officer, as
well as certain other information, is set forth below.
William R. Swanson is a Managing Director of FBR & Co.'s real estate investment
banking group. Mr. Swanson joined FBR Group in February, 1994. Before that, Mr.
Swanson served as president of H.G. Smithy Company, Inc., a specialized real
estate firm that provides mortgage banking, finance, investment, advisory, and
property management services to commercial real estate investors. Before working
at H.G. Smithy, Mr. Swanson served as a managing director at LaSalle Partners,
Ltd. While with LaSalle Partners, Mr. Swanson managed and directed the firm's
acquisition and development activities for the southeastern region of the United
States. Mr. Swanson received a Bachelor of Science in accounting from the
University of Illinois at Urbana-Champaign and is a Certified Public Accountant.
Mr. Swanson is a director of Capital Automotive REIT.
49
<PAGE>
Elaine M. Clancy is a Senior Vice President of FBR & Co.'s real estate
investment banking group. Ms. Clancy joined FBR in 1994. Prior to joining FBR &
Co., Ms. Clancy was a Manager of Finance for Combined Properties, Inc., a real
estate firm in Washington, DC, which owns shopping centers. Before Combined
Properties, Ms. Clancy was a financial analyst with La Salle Partners. Ms.
Clancy received a Masters in Management from the J.L. Kellogg Graduate School of
Management at Northwestern University and a Bachelor of Business Administration
from James Madison University.
George Abraham is a Managing Director of the Manager. Mr. Abraham is responsible
for marketing, administration, and investor relations for several of the
Manager's private investment partnerships. He joined FBR at its inception in
1989 and has been involved in its investment management business since 1992. Mr.
Abraham received his Masters of Business Administration in Marketing from
Southeastern University and a Bachelor of Engineering from B.I.E.T. in India.
Robert S. Smith is Executive Vice President and General Counsel of FBR Group and
the Manager. Prior to joining FBR in January 1997, Mr. Smith was a partner in
the law firm of McGuire, Woods, Battle & Boothe, LLP, where he had been in
practice since 1986, and represented FBR from its inception in 1989. Mr. Smith
formerly practiced as a lawyer in the United Kingdom from 1982-1985. Mr. Smith
received his Masters in Law from the University of Virginia and his diploma in
legal practice and a Bachelor of Laws from the University of Edinburgh.
Kurt R. Harrington joined FBR Group in March 1997, as Vice President,
Finance/Treasurer. 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 that 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.
John M. Blassingame, Jr., joined FBR Group in February 1998, as a Senior
Accountant. From 1993 to 1998, Mr. Blassingame was a Senior Accountant at
Capital Real Estate Investment where he supervised a REIT portfolio consisting
of approximately 5,000 apartment units, with approximately $50 million in yearly
gross revenues. From 1988 to 1993, Mr. Blassingame was a Senior Public Fund
Accountant at Oxford Realty Services Corp. where he supervised the SEC filings
for Oxford Residential Properties. Mr. Blassingame received a Bachelor of
Business Administration in Accounting from The University of the District of
Columbia.
Time Required of Directors & Executive Officers
The Company requires its directors and executive officers to devote only so much
of their time to the Company's affairs as is necessary or required for the
effective conduct and operation of the Company's business. Because the Manager
assumes principal responsibility for managing the Company's affairs, the Company
does not expect its officers, in their capacities as such, to devote substantial
portions of their time to the Company. However, in their capacities as officers
or employees of the Manager or its Affiliates, they will devote such portion of
their time to the Company's affairs as is required to perform the Manager's
duties under the Management Agreement.
Executive Compensation & Other Benefits
Directors' Fees
Each independent director will receive an annual director's fee of $20,000.
After the Board's first four meetings, each independent director will receive
$1,000 for each additional Board meeting that he personally attends. Directors
who are Affiliates of the Manager will not receive separate compensation from
the Company. The Company will, however, reimburse all directors, including
affiliated directors, for the costs and expenses of attending all Board
meetings.
Salaries
The Company has not paid, and does not expect to pay, any cash compensation to
those executive officers who are also executive officers or employees of the
Manager or any of its Affiliates. That policy may change, however, if at any
time, the Manager ceases to conduct the Company's day-to-day operations.
Certain Transactions
The Company has made investments in companies with which FBR has a relationship.
See "FBR & the Manager -- Certain Transactions."
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Capital Stock after the Merger
The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and Bylaws, copies of which are available
upon request to the Company.
General
The Company's Charter provides that the Company may issue up to 250,000,000
shares of capital stock, consisting of 200,000,000 shares of common stock, $.01
par value per share, and 50,000,000 shares of preferred stock, $.01 par value
per share. If the merger is completed, the Company will have a number of shares
outstanding equal to the number of shares outstanding before the merger minus
the number of shares as to which shareholders' exercise their dissenters'
rights. After the merger, the Company will have ______ shares of common stock
reserved for issuance upon exercise of options. No preferred stock will be
issued or outstanding.
The Company may issue additional shares at any time without shareholder consent.
Shareholders will not have any preemptive rights, and shareholders could
experience dilution in connection with additional issuances of stock. No
prediction can be made as to the effect, if any, that future sales of shares, or
the availability of shares for future sale, will have on the market price
prevailing from time to time. Sales of substantial numbers of the Company's
common shares, or the perception that such sales could occur, may adversely
affect prevailing market prices for the common stock.
Common Stock
After the merger, all of the Company's outstanding common shares will be duly
authorized, fully paid, and nonassessable. Subject to the preferential rights of
any other shares or series of shares of capital stock, the Company's common
shareholders are entitled (a) to receive dividends if and when authorized and
declared by the Board out of assets legally available therefor and (b) to share
ratably in the assets legally available for distribution to shareholders in the
event of liquidation, dissolution, winding-up, after payment of, or adequate
provision for, all known debts and liabilities of the Company.
The holders of the Company's common stock are entitled to one vote for each
share on all matters submitted to a vote of common shareholders. The Company
does not permit cumulative voting, and accordingly, the holders of a majority of
the Company's outstanding shares have the power to elect all directors to be
elected in any given year.
Preferred Stock
The Company may issue preferred stock, in one or more series, as authorized by
the Board. Because the Board has the power to establish the preferences and
rights of any class or series of preferred stock, it may afford the holders of
such stock preferences, powers and rights, voting or otherwise, senior to the
rights of common shareholders. The Board can also authorize the issuance of
preferred stock with terms and conditions that would have the effect of
discouraging takeovers or other transactions that holders of some, or even a
majority, of common shares might believe to be in their best interests or in
which holders of some, or a majority, of common shares might receive a premium
for their shares over the then prevailing market price. As of the date hereof,
the Company does not have any preferred stock outstanding or any present plans
to issue any.
Book-Entry, Delivery, and Form
The Company's common stock will be issued in the form of global securities. The
global securities will be deposited with, or on behalf of, The Depository Trust
Company ("DTC") and registered in the name of DTC or its nominee. Except as set
forth below, the global securities may be transferred, in whole and not in part,
only to DTC or another nominee of DTC. Investors may hold their beneficial
interests in the global securities directly through DTC if they are participants
in such system or indirectly through organizations that are participants in such
system.
DTC is a limited purpose trust company that was created to hold securities for
its participating organizations (collectively, the "Participants") and to
facilitate the clearance and settlement of transactions in such securities
between Participants through electronic book-entry changes in accounts of its
Participants. DTC's Participants include securities brokers and dealers,
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<PAGE>
banks and trust companies, clearing corporations and certain other
organizations. Access to DTC's system is also available to other entities such
as banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through DTC's
Participants or DTC's Indirect Participants.
The Company expects that pursuant to procedures established by DTC (i) upon the
issuance of the global securities, DTC will credit the accounts of Participants
designated by the Company with portions of the principal amount of the global
securities and (ii) ownership of the common shares evidenced by the global
securities will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC (with respect to the interests
of DTC's Participants). Prospective purchasers are advised that the laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own. Consequently, the ability to transfer common shares
evidenced by the global securities will be limited to such extent.
So long as the global security holder is the registered owner of any common
shares, the global security holder will be considered the sole holder of any
common shares evidenced by the global securities. Beneficial owners of common
shares evidenced by the global securities will not be considered the owners or
holders thereof for any purpose, including with respect to the giving of any
directions, instructions or approvals to DTC thereunder. The Company will not
have any responsibility or liability for any aspect of the records of DTC or for
maintaining, supervision or reviewing any records of DTC relating to the common
shares.
Payments on any common shares registered in the name of the global security
holder on the applicable record date will be payable by the Company to or at the
direction of the global security holder in its capacity as the registered
holder. The Company may treat the persons in whose names common shares,
including the global securities, are registered as the owners thereof for the
purpose of receiving such payments. Consequently, the Company will not have any
responsibility or liability for the payment of such amounts to beneficial owners
of common shares. The Company believes, however, that it is currently the policy
of DTC to immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records of DTC. Payments by
Participants and Indirect Participants to the beneficial owners of common shares
will be governed by standing instructions and customary practice and will be the
responsibility of Participants or Indirect Participants.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in the
global securities may, upon request to the Company, exchange such beneficial
interest for common shares in certificated form, with such certificates bearing
a legend containing the restrictions on transfer described herein and in the
Company's Charter. Upon any such issuance, the Company is required to register
such Certificated Securities in the name of, and cause the same to be delivered
to, such person or persons (or the nominee of any thereof). In addition, if DTC
notifies the Company in writing that it is no longer willing or able to act as a
depositary and the Company elects to cause the issuance of common shares in the
form of Certificated Securities, then, upon surrender by the global security
holder of the global securities, common shares in such form will be issued to
each person that the global security holder and DTC identify as being the
beneficial owner of the related common shares.
The Company will not be liable for any delay by the global security holder or
DTC in identifying the beneficial owners of common shares, and the Company may
conclusively rely on, and will be protected in relying on, instructions from the
global security holder or DTC for all purposes.
Same-Day Settlement and Payment
Payments in respect of the common shares represented by the global securities
will be made by wire transfer of immediately available funds to the accounts
specified by the global security holder. With respect to certificated
securities, the Company will make all payments by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. The common shares represented by the global securities are expected to
be eligible to trade
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in DTC's Same-Day Funds Settlement System, and any permitted secondary market
trading activity in such common shares will, therefore, be required by DTC to be
settled in immediately available funds. The Company expects that secondary
trading in the certificated securities also will be settled in immediately
available funds.
Restrictions on Ownership and Transfer
For the Company to qualify as a REIT under the federal tax laws, it must meet
certain requirements concerning the ownership of its outstanding shares of
capital stock. Consequently, the Company's Charter contains provisions to ensure
that the Company meets those requirements. Specifically, the Company's Charter
provides that not more than 50% in value of the Company's outstanding capital
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year (other than its first REIT taxable year). In addition, the Company
must have at least 100 beneficial owners of its shares of stock during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year (other than its first REIT taxable year). See "Federal
Income Tax Laws Applicable to REITs and REIT Shareholders--Requirements for
Qualification."
Subject to certain exceptions and waivers described below, the Company's Charter
restricts the ownership and transfer of the Company's outstanding stock.
Specifically, the Charter prohibits any person from owning, or being deemed to
own by virtue of the attribution provisions of the Code, more than 9.9% of the
number of outstanding shares of common stock or the number of outstanding shares
of preferred stock of any series (the "Ownership Limitation"). However, FBR may
own up to 20% of the Company's outstanding common stock and preferred stock of
any series, and certain mutual funds may own up to 15% of the Company`s
outstanding common stock and preferred stock of any series. The Company's Board
of Directors has exempted FBR from the 20% limit applicable to FBR under the
Ownership Limitation. The exemption allow FBR to own up to 30% of the Company's
common stock.
In order to prevent the Company from incurring an entity-level tax if and when
it accrues phantom taxable income ("Excess Inclusion") from REMIC residual
interests, the Company's Charter, subject to certain waivers described below,
also contains provisions designed to prevent a "Disqualified Organization" (as
defined in "Federal Income Tax Laws Applicable to REITs and REIT
Shareholders--Taxation of FBR Asset Maryland") from owning the Company's shares.
Subject to certain exceptions described below, shares of common stock or
preferred stock the purported transfer of which would
1. result in any person owning, directly or indirectly, common stock or
preferred stock in excess of the Ownership Limitation,
2. result in the Company's capital stock being owned by fewer than 100
persons (determined without reference to any rules of attribution),
3. result in the Company being "closely held" within the meaning of section
856(h) of the Code,
4. cause the Company to own, actually or constructively, 10% or more of the
ownership interests in a tenant of its real property, within the meaning
of section 856(d)(2)(B) of the Code, or
5. cause any common stock or preferred stock to be owned by a "Disqualified
Organization" (as defined in "Federal Income Tax Laws Applicable to
REITs and REIT Shareholders--Taxation of FBR Asset Maryland")
will be designated as "Shares-in-Trust" and transferred automatically to a trust
(the "Trust") effective on the day before the purported transfer of such common
stock or preferred stock.
The record holder of the shares of common stock or preferred stock that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of shares of common stock or preferred stock to the Company
for registration in the name of the Trust. The Company will designate a trustee
of the Trust (the "Trustee") that is not affiliated with the Company. The
beneficiary of the Trust (the "Beneficiary") will be one or more charitable
organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding shares and will be entitled
to the same rights and privileges as all other shares of the same class or
series. The Trustee will receive all dividends and distributions on the
Shares-in-Trust and will hold such dividends or
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distributions in trust for the benefit of the Beneficiary. The Trustee will vote
all Shares-in-Trust. The Trustee will designate a permitted transferee of the
Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to repay
to the Trustee the amount of any dividends or distributions received by the
Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii) the
record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee
the lesser of (a) the price per share such Prohibited Owner paid for the shares
that were designated as Shares-in-Trust (or, in the case of a gift or devise,
the Market Price (as defined below) per share on the date of such transfer) or
(b) the price per share received by the Trustee from the sale of such
Shares-in-Trust. Any amounts received by the Trustee in excess of the amounts to
be paid to the Prohibited Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the Company,
or its designee, at a price per share equal to the lesser of (a) the price per
share in the transaction that created such Shares-in-Trust (or, in the case of a
gift or devise, the Market Price per share on the date of such transfer) or (b)
the Market Price per share on the date that the Company, or its designee,
accepts such offer. The Company will have the right to accept such offer for a
period of ninety days after the later of (i) the date of the purported transfer
that resulted in such Shares-in-Trust or (ii) the date the Company determines in
good faith that a transfer resulting in such Shares-in-Trust occurred.
The "Market Price" on any date means the average of the "closing price" of the
Company's stock for the five previous consecutive trading days ending on such
date. The "Closing price" on any date means:
1. the last sale price for such shares, as reported on the New York Stock
Exchange, NASDAQ, or other principal national securities exchange on
which the stock is listed; or
2. if no such sale takes place on the day, the average of the closing bid
and asked prices for the stock, as reported on the New York Stock
Exchange, NASDAQ, or other principal national securities exchange on
which the stock is listed; or
3. if the stock is not listed on any such exchange, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Company's stock selected by the Company's Board
of Directors; or
4. in the event that no trading price is available for such stock, the fair
market value of the share, as determined in good faith by the Company's
Board of Directors.
Any person who acquires or attempts to acquire common stock or preferred stock
in violation of the restrictions set forth in the Company's Charter, or any
person who owned common stock or preferred stock that was transferred to a
Trust, will be required (i) to give immediately written notice to the Company of
such event and (ii) to provide to the Company such other information as it may
request in order to determine the effect, if any, of such transfer on the
Company's status as a REIT.
The Ownership Limitation generally will not apply to the acquisition of common
stock or preferred stock by an underwriter that participates in a public
offering of such shares. In addition, the Company's Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person from
the Ownership Limitation or the restrictions on transfer set forth in the
Charter. As discussed above, the Company's Board of Directors has exempted FBR
from the 20% limit applicable to FBR under the Ownership Limitation.
The foregoing restrictions will not be removed until (A)(i) such restrictions
are no longer required in order to qualify as a REIT, and (ii) the Board of
Directors determines that it is no longer in the best interests of the Company
to retain such restrictions; or (B)(i) the Board of Directors determines that it
is no longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT, and (ii) there is an affirmative vote of 80% of
the members of the Board of Directors, or in the absence of such 80% vote, there
is an affirmative vote of at least two-thirds of the holders of the Company's
outstanding shares of common stock.
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All certificates representing the Company's common or preferred stock will bear
a legend referring to the restrictions described above.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding the Company's common stock and preferred stock must, within 30 days
after January 1 of each year, provide to the Company a written statement or
affidavit stating the name and address of such direct or indirect owner, the
number of shares owned directly or indirectly, and a description of how such
shares are held. In addition, each direct or indirect shareholder shall provide
to the Company such additional information as the Company may request in order
to determine the effect, if any, of such ownership on the Company's status as a
REIT and to ensure compliance with the Ownership Limitation and the other
restrictions on ownership and transfer set forth in the Company's Charter.
The Ownership Limitation could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of the shares of
common stock might receive a premium for their shares over the then prevailing
market price or which such holders might believe to be otherwise in their best
interest.
Transfer Agent & Registrar
American Stock Transfer & Trust Company serves as the transfer agent and
registrar for FBR Asset Maryland's common stock.
Reports to Shareholders
The Company will furnish its shareholders with annual reports containing audited
financial statements certified by independent public accountants and such other
periodic reports as it may determine to furnish or as may be required by law.
Certain Provisions of the Company's Charter and Bylaws
Notice of Shareholder Proposals
The Company's Bylaws govern shareholder proposals. To advance a proposal, a
shareholder must give written notice of the proposal to the Company's Secretary.
The Secretary must receive the notice at least 90 days before the annual
meeting. The notice must (a) describe briefly the proposal with supporting
reasoning, (b) contain the shareholder's name and address, (c) state the number
of each class of shares the shareholder beneficially owns, and (d) disclose any
material interest the shareholder has in the proposed business.
Charter Amendments
The Company's charter provides that a majority of outstanding shares of common
stock must approve an amendment to the Charter. However, as discussed in
previous sections, the voting requirements are greater for amending those
provisions addressing the number and composition of the Board of Directors and
the restrictions pertaining to stock ownership and transfer.
Amendments to Bylaws
Except as set forth below, the Company's Bylaws may be amended by majority vote
of the Company's Board or its shareholders. The provisions addressing (a) the
number, tenure and qualifications of directors, (b) changes in the numbers of
directors, (c) the removal of directors, (d) the quorum requirement for director
votes and (e) the majority approval for certain transactions involving the
Manager require the vote of 80% of the Board of Directors, or two-thirds of the
outstanding shares.
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Federal Income Tax Laws
Applicable to REITs and
REIT Shareholders
This section summarizes the federal income tax issues that you, as a
shareholder, may consider relevant. Hunton & Williams, our counsel ("Counsel"),
has reviewed this section and has given us an opinion that this section
correctly describes the relevant law and fairly summarizes the federal income
tax issues that may be material to FBR Asset Maryland and its shareholders.
Because this section is a summary, it does not address all of the tax issues
that may be important to you. In addition, this section does not address the tax
issues that may be important to certain types of shareholders that are subject
to special treatment under the federal income tax laws, such as insurance
companies, tax-exempt organizations (except to the extent discussed in
"--Taxation of Tax-Exempt Shareholders" below), financial institutions or
broker-dealers, and non-U.S. individuals and foreign corporations (except to the
extent discussed in "--Taxation of Non-U.S. Shareholders" below).
The statements in this section and the opinion of Counsel are based on the
current federal income tax laws governing qualification as a REIT. We cannot
assure you that new laws, interpretations thereof, or court decisions, any of
which may take effect retroactively, will not cause any statement in this
section to be inaccurate.
We urge you to consult your own tax advisor regarding the specific tax
consequences to you of investing in the Common Stock and of the Company's
election to be taxed as a REIT. Specifically, you should consult your own tax
advisor regarding the federal, state, local, foreign, and other tax consequences
of such investment and election, and regarding potential changes in applicable
tax laws.
Tax Consequences of the Merger
Counsel has delivered an opinion to the Company that the merger of FBR Asset
Virginia into FBR Asset Maryland will be treated as a tax-free reorganization
under the federal income tax laws. Accordingly, neither FBR Asset Virginia, nor
FBR Asset Maryland, nor you will recognize gain or loss upon the merger. You
will receive a tax basis in your FBR Asset Maryland stock equal to your tax
basis in your FBR Asset Virginia stock.
Taxation of FBR Asset Maryland
FBR Asset Virginia elected to be taxed as a REIT under the federal income tax
laws commencing with its short taxable year ended December 31, 1997. FBR Asset
Virginia has operated in a manner intended to qualify as a REIT since its
formation in November 1997, and FBR Asset Maryland intends to so operate
following the merger. This section discusses the laws governing the federal
income tax treatment of a REIT and its shareholders, which laws are highly
technical and complex.
Counsel has given us an opinion that FBR Asset Virginia qualified to be taxed as
a REIT under the federal income tax laws beginning with its taxable year ended
December 31, 1997, and FBR Asset Maryland's organization and proposed method of
operation will enable it qualify as a REIT. You should be aware that Counsel's
opinion is based on current law and is not binding upon the Internal Revenue
Service (the "Service") or any court. In addition, Counsel's opinion is based on
certain assumptions and on our factual representations, all of which are
described in Counsel's opinion.
FBR Asset Maryland's qualification as a REIT depends on its ability to meet on a
continuing basis certain qualification tests set forth in the federal tax laws.
Those qualification tests involve the percentage of income that FBR Asset
Maryland earns from specified sources, the percentage of its assets that falls
within certain categories, the diversity of its share ownership, and the
percentage of its earnings that it distributes. We describe the REIT
qualification tests in more detail below. Counsel will not review FBR Asset
Maryland's compliance with those tests on a continuing basis. Accordingly,
neither we nor Counsel can assure you that FBR Asset Maryland will satisfy those
tests in the future. For a discussion of the tax treatment of FBR Asset Maryland
and its shareholders if FBR Asset Maryland fails to qualify as a REIT, see
"--Failure to Qualify."
If FBR Asset Maryland qualifies as a REIT, it generally will not be subject to
federal income tax on the taxable
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income that it distributes to its shareholders. The benefit of that tax
treatment is that it avoids the "double taxation" (i.e., at both the corporate
and shareholder levels) that generally results from owning stock in a
corporation. However, FBR Asset Maryland will be subject to federal tax in the
following circumstances:
o FBR Asset Maryland will pay federal income tax on taxable income
(including net capital gain) that it does not distribute to its
shareholders during, or within a specified time period after, the
calendar year in which the income is earned.
o FBR Asset Maryland may be subject to the "alternative minimum tax" on
any items of tax preference that it does not distribute or allocate to
its shareholders.
o FBR Asset Maryland will pay income tax at the highest corporate rate on
(i) net income from the sale or other disposition of property acquired
through foreclosure ("foreclosure property") that it holds primarily for
sale to customers in the ordinary course of business and (ii) other
non-qualifying income from foreclosure property.
o FBR Asset Maryland will pay a 100% tax on net income from certain sales
or other dispositions of property (other than foreclosure property) that
it holds primarily for sale to customers in the ordinary course of
business ("prohibited transactions").
o If FBR Asset Maryland fails to satisfy the 75% gross income test or the
95% gross income test (as described below under "--Requirements for
Qualification--Income Tests"), and nonetheless continues to qualify as a
REIT because it meets certain other requirements, it will pay a 100% tax
on (i) the gross income attributable to the greater of the amounts by
which it fails the 75% and 95% gross income tests, multiplied by (ii) a
fraction intended to reflect its profitability.
o If FBR Asset Maryland fails to distribute during a calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, it will pay a 4% excise
tax on the excess of such required distribution over the amount it
actually distributed.
o FBR Asset Maryland may elect to retain and pay income tax on its net
long-term capital gain.
o If FBR Asset Maryland acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a merger
or other transaction in which it acquires a "carryover" basis in the
asset (i.e., a basis determined by reference to the C corporation's
basis in the asset), it will pay tax at the highest regular corporate
rate applicable if it recognizes gain on the sale or disposition of such
asset during the 10-year period after it acquires such asset. The amount
of gain on which it will pay tax is the lesser of (i) the amount of gain
that it recognizes at the time of the sale or disposition and (ii) the
amount of gain that it would have recognized if it had sold the asset at
the time it acquired the asset. The rule described in this paragraph
will apply assuming that FBR Asset Maryland makes an election under IRS
Notice 88-19 upon its acquisition of an asset from a C corporation.
o FBR Asset Maryland will pay tax at the highest corporate rate on the
portion of any phantom taxable income that it derives from REMIC
residual interests ("Excess Inclusion") equal to the percentage of its
stock held by "Disqualified Organizations." A "Disqualified
Organization" includes the United States, any state or political
subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any
other tax-exempt organization (other than a farmer's cooperative
described in section 521 of the Code that is exempt both from income
taxation and from taxation under the unrelated business taxable income
provisions of the Code, or any rural electrical or telephone
cooperative. For this reason, FBR Asset Maryland's Charter prohibits
Disqualified
Organizations from owning stock of FBR Asset Maryland.
o FBR Asset Maryland also may be subject to tax at the highest corporate
rate on the portion of its allocable share of any Excess Inclusion that
a REIT in which it owns an equity interest derives from REMIC residual
interests, equal to the percentage of its stock that is held by
Disqualified Organizations. For this reason, FBR Asset Maryland's
Charter prohibits Disqualified
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Organizations from owning the stock of FBR Asset Maryland.
Requirements for Qualification
A REIT is a corporation, trust, or association that meets the following
requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial interest;
3. it would be taxable as a domestic corporation, but for sections 856
through 860 of the Code;
4. it is neither a financial institution nor an insurance company subject
to certain provisions of the Code;
5. at least 100 persons are beneficial owners of its shares or ownership
certificates;
6. not more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during
the last half of any taxable year (the "5/50 Rule");
7. it elects to be a REIT (or has made such election for a previous taxable
year) and satisfies all relevant filing and other administrative
requirements established by the Service that must be met to elect and
maintain REIT status;
8. it uses a calendar year for federal income tax purposes and complies
with the recordkeeping requirements of the Code and the Treasury
regulations thereunder (the "Treasury Regulations"); and
9. it meets certain other qualification tests, described below, regarding
the nature of its income and assets.
FBR Asset Maryland must meet requirements 1 through 4 during its entire taxable
year and must meet requirement 5 during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months. Requirements 5 and 6 apply to FBR Asset Maryland beginning with its 1998
taxable year. If FBR Asset Maryland complies with all the requirements for
ascertaining the ownership of its outstanding shares in a taxable year and has
no reason to know that it violated the 5/50 Rule, it will be deemed to have
satisfied the 5/50 Rule for such taxable year. For purposes of determining share
ownership under the 5/50 Rule, an "individual" generally includes a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under Code section 401(a), and
beneficiaries of such a trust will be treated as holding shares of FBR Asset
Maryland in proportion to their actuarial interests in the trust for purposes of
the 5/50 Rule.
FBR Asset Virginia issued, and FBR Asset Maryland will issue, sufficient Common
Stock with sufficient diversity of ownership to satisfy requirements 5 and 6 set
forth above. In addition, FBR Asset Maryland's Charter restricts the ownership
and transfer of the Common Stock so that FBR Asset Maryland should continue to
satisfy requirements 5 and 6. The provisions of the Charter restricting the
ownership and transfer of the Common Stock are described in "Description of FBR
Asset Maryland's Capital Stock---Restrictions on Ownership and Transfer."
FBR Asset Maryland currently does not have corporate subsidiaries, but may have
corporate subsidiaries in the future. A corporation that is a "qualified REIT
subsidiary" is not treated as a corporation separate from its parent REIT. All
assets, liabilities, and items of income, deduction, and credit of a "qualified
REIT subsidiary" are treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, all of the capital stock of which is owned by the REIT. Thus, in
applying the requirements described herein, any "qualified REIT subsidiary" of
FBR Asset Maryland will be ignored, and all assets, liabilities, and items of
income, deduction, and credit of such subsidiary will be treated as assets,
liabilities, and items of income, deduction, and credit of FBR Asset Maryland.
In the case of a REIT that is a partner in a partnership, the REIT is treated as
owning its proportionate share of the assets of the partnership and as earning
its allocable share of the gross income of the partnership for purposes of the
applicable REIT qualification tests. FBR Asset Maryland is not currently a
partner in any partnership, but it may become a partner in the future.
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Income Tests
- ------------
FBR Asset Maryland must satisfy two gross income tests annually to maintain its
qualification as a REIT. First, at least 75% of its gross income (excluding
gross income from prohibited transactions) for each taxable year must consist of
defined types of income that it derives, directly or indirectly, from
investments relating to real property or mortgages on real property or temporary
investment income (the "75% gross income test"). Qualifying income for purposes
of the 75% gross income test includes "rents from real property," interest on
debt secured by mortgages on real property or on interests in real property, and
dividends or other distributions on and gain from the sale of shares in other
REITs. Second, at least 95% of its gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of income that is
qualifying income for purposes of the 75% gross income test, dividends, other
types of interest, gain from the sale or disposition of stock or securities, or
any combination of the foregoing (the "95% gross income test"). The following
paragraphs discuss the specific application of these tests to FBR Asset
Maryland.
Interest on debt secured by mortgages on real property or on interests in real
property generally is qualifying income for purposes of the 75% gross income
test. However, if the highest principal amount of a loan outstanding during a
taxable year exceeds the fair market value of the real property securing the
loan as of the date FBR Asset Maryland acquired the loan, a portion of the
interest income from such loan will not be qualifying income for purposes of the
75% gross income test (but will be qualifying income for purposes of the 95%
gross income test). The portion of the interest income that will not be
qualifying income for purposes of the 75% gross income test will be equal to the
portion of the principal amount of the loan that is not secured by real
property.
The term "interest," as defined for purposes of the 75% and 95% gross income
tests, generally excludes any amount that is based in whole or in part on the
income or profits of any person. However, the term "interest" generally does not
exclude an amount solely because it is based on a fixed percentage or
percentages of receipts or sales. The term "interest" also generally does not
exclude an amount solely because it is based on the income or profits of a
debtor, as long as the debtor derives substantially all of its income from the
related property from leasing such property, to the extent that the amounts
received by the debtor would be characterized as "rents from real property" if a
REIT received such amounts. Furthermore, if a loan contains a provision that
entitles a REIT to a percentage of the borrower's gain upon the sale of the
secured property or a percentage of the appreciation in the property's value as
of a certain date (a "shared appreciation provision"), income attributable to
such provision will be treated as gain from the sale of the secured property,
which generally is qualifying income for purposes of the 75% and 95% gross
income tests.
Rent that FBR Asset Maryland receives from real property that it owns and leases
to tenants will qualify as "rents from real property" (which is qualifying
income for purposes of the 75% and 95% gross income tests) only if several
conditions are met. First, the rent must not be based, in whole or in part, on
the income or profits of any person. However, "rents from real property"
generally does not exclude an amount solely because it is based on a fixed
percentage or percentages of receipts or sales. Second, neither FBR Asset
Maryland nor a direct or indirect owner of 10% or more of its stock may own,
actually or constructively, 10% or more of a tenant from whom it receives rent.
Third, all of the rent received under a lease of real property will not qualify
as "rents from real property" unless the rent attributable to the personal
property leased in connection with such lease is no more than 15% of the total
rent received under the lease. Finally, FBR Asset Maryland generally must not
operate or manage its real property or furnish or render services to its
tenants, other than through an "independent contractor" who is adequately
compensated and from whom FBR Asset Maryland does not derive revenue. However,
FBR Asset Maryland need not provide services through an "independent
contractor," but instead may provide services directly, if the services are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant." In
addition, FBR Asset Maryland may render a de minimis amount of "non-customary"
services to the tenants of a property, other than through an independent
contractor, as long as its income from the services does not exceed 1% of its
income from the related property.
We believe that FBR Asset Maryland's income from stock in other REITs is
qualifying income for purposes of the 75% and 95% gross income tests. However,
if a REIT in which FBR Asset Maryland owns stock fails to
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qualify as a REIT in any year, its income from such REIT will be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test. In addition to stock, FBR Asset Maryland may own debt securities issued by
other REITs. Interest income from such debt securities will be qualifying income
for purposes of the 95% gross income test. Such interest income will not be
qualifying income for purposes of the 75% gross income test unless such debt
securities are secured by mortgages on real property or on interests in real
property.
We also believe that the interest and original issue discount ("OID") income
that FBR Asset Maryland receives from mortgage-backed securities ("MBS") and
other mortgage-related assets (together, "Mortgage Assets") generally is
qualifying income for purposes of the 75% and 95% gross income tests. In some
cases, however, the loan amount of a mortgage loan owned by FBR Asset Maryland
(a "Mortgage Loan") may exceed the value of the real property securing the loan.
That scenario will cause a portion of the income from the loan to be qualifying
income for purposes of the 95% gross income test, but not the 75% gross income
test. It also is possible that, in some instances, the interest income from a
Mortgage Loan may be based in part on the borrower's profits or net income. That
scenario generally will cause the income from the loan to be non-qualifying
income for purposes of both the 75% and the 95% gross income tests. We have
represented that we will manage FBR Asset Maryland's Mortgage Assets so that
substantially all of the income from those assets will be qualifying income for
purposes of those tests. Furthermore, we have represented that we will manage
FBR Asset Maryland's real property so that the rent it receives from such
property qualifies as "rents from real property." In summary, we believe that
FBR Asset Maryland will be able to satisfy the 75% and 95% gross income tests on
a continuing basis. However, FBR Asset Maryland may receive income not described
above that is not qualifying income for purposes of the gross income tests. We
will monitor the amount of non-qualifying income that its assets produce and we
will manage its portfolio to comply at all times with the gross income tests.
REITs generally will incur tax at the maximum corporate rate on any income from
foreclosure property (other than income that would be qualifying income for
purposes of the 75% gross income test), less expenses directly connected with
the production of such income. "Foreclosure property" is any real property
(including interests in real property) and any personal property incident to
such real property that meets the following requirements:
o a REIT acquires the property when the REIT bids in such property at
foreclosure, or otherwise reduces such property to ownership or
possession by agreement or process of law, after a default (or imminent
default) on a lease of such property or on a debt owed to the REIT that
such property secured;
o the REIT acquired the related loan when default was not imminent or
anticipated; and
o the REIT elects to treat the property as foreclosure property.
We do not anticipate that FBR Asset Maryland will receive any income from
foreclosure property that is not qualifying income for purposes of the 75% gross
income test, but if it does receive any such income, we will make an election to
treat the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the REIT acquired the related loan when
default was imminent or anticipated, income the REIT receives with respect to
such Ineligible Property may not be qualifying income for purposes of the 75% or
95% gross income test. We anticipate that any income FBR Asset Maryland receives
with respect to Ineligible Property will be qualifying income for purposes of
the 75% and 95% gross income tests.
A REIT will incur a 100% tax on the net income derived from any "prohibited
transaction." A "prohibited transaction" generally is a sale or other
disposition of property (other than foreclosure property) that the REIT holds
primarily for sale to customers in the ordinary course of a trade or business.
We believe that none of FBR Asset Maryland's assets is held for sale to
customers and that a sale of any such asset would not be in the ordinary course
of its business. Whether a REIT holds an asset "primarily for sale to customers
in the ordinary course of a trade or business" depends, however, on the facts
and circumstances in effect from time to time, including those related to a
particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the Code prescribing when an asset sale will not be
characterized as a prohibited
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transaction. We cannot provide assurance, however, that we can comply with such
safe-harbor provisions or that FBR Asset Maryland will avoid owning property
that may be characterized as property that it holds "primarily for sale to
customers in the ordinary course of a trade or business."
From time to time, FBR Asset Maryland may enter into hedging transactions with
respect to one or more of its assets or liabilities. Its hedging activities may
include entering into interest rate swaps, caps, and floors (or options to
purchase such items), and futures and forward contracts. To the extent that FBR
Asset Maryland enters into an interest rate swap or cap contract, option,
futures contract, forward rate agreement, or any similar financial instrument to
hedge its indebtedness incurred to acquire or carry "real estate assets," any
periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. To the extent that FBR Asset Maryland hedges with other types
of financial instruments, or in other situations, it is not entirely clear how
the income from those transactions will be treated for purposes of the gross
income tests. We intend to structure any hedging transactions in a manner that
does not jeopardize FBR Asset Maryland's status as a REIT.
If FBR Asset Maryland fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT for
such year if it qualifies for relief under certain provisions of the Code. Those
relief provisions generally will be available if its failure to meet such tests
is due to reasonable cause and not due to willful neglect, we attach a schedule
of the sources of its income to its tax return, and any incorrect information on
the schedule was not due to fraud with intent to evade tax. We cannot predict,
however, whether in all circumstances FBR Asset Maryland would qualify for the
relief provisions. In addition, as discussed above in "--Taxation of FBR Asset
Maryland," even if the relief provisions apply, FBR Asset Maryland would incur a
100% tax on the gross income attributable to the greater of the amounts by which
it fails the 75% and 95% gross income tests, multiplied by a fraction intended
to reflect its profitability.
Asset Tests
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To maintain its qualification as a REIT, FBR Asset Maryland also must satisfy
two asset tests at the close of each quarter of each taxable year. First, at
least 75% of the value of its total assets must consist of cash or cash items
(including certain receivables), government securities, "real estate assets," or
qualifying temporary investments (the "75% asset test"). Qualifying temporary
investments are investments in stock or debt instruments during the one-year
period following FBR Asset Maryland's receipt of new capital that it raises
through equity or long-term (at least five-year) debt offerings.
The term "real estate assets" includes stock in other REITs, interests in real
property, interests in mortgages on real property, and regular or residual
interests in a REMIC. However, if less than 95% of the assets of a REMIC
consists of "real estate assets" (determined as if FBR Asset Maryland held such
assets), FBR Asset Maryland will be treated as holding directly its
proportionate share of the assets of such REMIC. For purposes of the 75% asset
test, the term "interest in real property" includes an interest in mortgage
loans or land and improvements thereon, such as buildings or other inherently
permanent structures (including items that are structural components of such
buildings or structures), a leasehold of real property, and an option to acquire
real property (or a leasehold of real property). To the extent that the fair
market value of the real property securing a loan equals or exceeds the
outstanding principal balance of the loan, the loan will qualify as a real
estate asset. However, if the outstanding principal balance of a loan exceeds
the fair market value of the real property securing the loan, the portion of
such loan in excess of the value of the associated real property likely will not
be a qualifying "real estate asset."
The second asset test has two components. First, of FBR Asset Maryland's
investments not included in the 75% asset class, the value of its interest in
any one issuer's securities (which does not include its stock in other REITs or
in any qualified REIT subsidiary) may not exceed 5% of the value of its total
assets (the "5% asset test"). Second, FBR Asset Maryland may not own more than
10% of any one issuer's outstanding voting securities (which does not include
its stock in other REITs or in any qualified REIT subsidiary) (the "10% asset
test").
We believe that FBR Asset Maryland's stock in other REITs is a qualifying asset
for purposes of the 75% asset test. However, if a REIT in which it owns stock
fails to qualify as a REIT in any year, the stock in such
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REIT will not be a qualifying asset for purposes of the 75% asset test. Instead,
FBR Asset Maryland would be subject to the 5% and 10% asset tests described
above with respect to its investment in such disqualified REIT. To the extent
that FBR Asset Maryland owns debt securities issued by other REITs that are not
secured by mortgages on real property, such securities will not be qualifying
assets for purposes of the 75% asset test. Instead, FBR Asset Maryland would be
subject to the 5% and 10% asset tests with respect to such debt securities.
We also believe that FBR Asset Maryland's Mortgage Assets are qualifying assets
for purposes of the 75% asset test. However, if the outstanding principal
balance of a Mortgage Loan exceeds the fair market value of the real property
securing the loan, a portion of such loan will not be a qualifying "real estate
asset." The non-qualifying portion of such Mortgage Loan will be equal to the
portion of the loan amount that exceeds the value of the associated real
property. We will monitor the status of FBR Asset Maryland's assets for purposes
of the various asset tests and we will manage its portfolio to comply at all
times with such tests.
If FBR Asset Maryland should fail to satisfy the asset tests at the end of a
calendar quarter, it would not lose its REIT status if (i) it satisfied the
asset tests at the close of the preceding calendar quarter and (ii) the
discrepancy between the value of its assets and the asset test requirements
arose from changes in the market values of its assets and was not wholly or
partly caused by the acquisition of one or more non-qualifying assets. If FBR
Asset Maryland did not satisfy the condition described in clause (ii) of the
preceding sentence, it still could avoid disqualification as a REIT by
eliminating any discrepancy within 30 days after the close of the calendar
quarter in which the discrepancy arose.
Distribution Requirements
- -------------------------
Each taxable year, FBR Asset Maryland must distribute dividends (other than
capital gain dividends and deemed distributions of retained capital gain) to its
shareholders in an aggregate amount at least equal to (i) the sum of (A) 95% of
its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain or loss) and (B) 95% of its net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
non-cash income. FBR Asset Maryland must pay such distributions in the taxable
year to which they relate, or in the following taxable year if it declares the
distribution before it timely files its federal income tax return for such year
and pays the distribution on or before the first regular dividend payment date
after such declaration.
FBR Asset Maryland will pay federal income tax on taxable income (including net
capital gain) that it does not distribute to shareholders. Furthermore, if it
fails to distribute during a calendar year (or, in the case of distributions
with declaration and record dates falling in the last three months of the
calendar year, by the end of January following such calendar year) at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain income for such year, and (iii) any undistributed taxable income
from prior periods, it will incur a 4% nondeductible excise tax on the excess of
such required distribution over the amounts it actually distributed. FBR Asset
Maryland may elect to retain and pay income tax on the net long-term capital
gain it receives in a taxable year. See "--Taxation of Taxable U.S.
Shareholders." If it so elects, it will be treated as having distributed any
such retained amount for purposes of the 4% excise tax described above. FBR
Asset Virginia has made, and FBR Asset Maryland intends to continue to make,
timely distributions sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, FBR Asset Maryland may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, FBR Asset Maryland
may not deduct recognized capital losses from its "REIT taxable income." In
addition, FBR Asset Maryland will recognize taxable income in advance of the
related cash flow if any of its subordinated MBS or Mortgage Loans are deemed to
have OID. FBR Asset Maryland generally must accrue OID based on a constant yield
method that takes into account projected prepayments but that defers credit
losses until they are actually incurred. For example, pursuant to Treasury
Regulations, FBR Asset Maryland may be required to recognize the amount of any
payment projected to be made pursuant to a shared appreciation provision in a
Mortgage Loan over the term of the related loan using the constant yield method.
FBR Asset Maryland also may recognize taxable market discount income when it
receives the proceeds from the disposition of, or principal payments on, loans
that are "market discount
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bonds" (i.e., obligations with a stated redemption price at maturity that is
greater than its tax basis in such obligations), although such proceeds often
will be used to make non-deductible principal payments on related borrowings.
FBR Asset Maryland also may recognize Excess Inclusion or other "phantom"
taxable income from REMIC residual interests and non-REMIC retained ownership
interests. Furthermore, FBR Asset Maryland may recognize taxable income without
receiving a corresponding cash distribution if it forecloses on or makes a
"significant modification" (as defined in Treasury Regulations section 1.1001-3)
to a loan, to the extent that the fair market value of the underlying property
or the principal amount of the modified loan, as applicable, exceeds its basis
in the original loan. Finally, although certain types of non-cash income are
excluded in determining the annual distribution requirement, FBR Asset Maryland
will incur corporate income tax and the 4% excise tax with respect to those
non-cash income items if it does not distribute those items on a current basis.
As a result of the foregoing, FBR Asset Maryland may have less cash than is
necessary to distribute all of its taxable income and thereby avoid corporate
income tax and the excise tax imposed on certain undistributed income. In such a
situation, it may need to borrow funds or issue Preferred Stock or additional
Common Stock.
Under certain circumstances, FBR Asset Maryland may be able to correct a failure
to meet the distribution requirement for a year by paying "deficiency dividends"
to its shareholders in a later year. FBR Asset Maryland may include such
deficiency dividends in its deduction for dividends paid for the earlier year.
Although FBR Asset Maryland may be able to avoid income tax on amounts
distributed as deficiency dividends, it will be required to pay interest to the
Service based upon the amount of any deduction it takes for deficiency
dividends.
Recordkeeping Requirements
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FBR Asset Maryland must maintain certain records in order to qualify as a REIT.
In addition, to avoid a monetary penalty, it must request on an annual basis
certain information from its shareholders designed to disclose the actual
ownership of its outstanding stock. FBR Asset Virginia has complied, and FBR
Asset Maryland intends to continue to comply, with such requirements.
Failure to Qualify
If FBR Asset Maryland failed to qualify as a REIT in any taxable year, and no
relief provision applied, it would be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. In calculating its taxable income in a year in which it failed
to qualify as a REIT, FBR Asset Maryland would not be able to deduct amounts
paid out to shareholders. In fact, FBR Asset Maryland would not be required to
distribute any amounts to shareholders in such year. In such event, to the
extent of its current and accumulated earnings and profits, all distributions to
shareholders would be taxable as ordinary income. Subject to certain limitations
of the Code, corporate shareholders might be eligible for the dividends received
deduction. Unless FBR Asset Maryland qualified for relief under specific
statutory provisions, it also would be disqualified from taxation as a REIT for
the four taxable years following the year during which it ceased to qualify as a
REIT. We cannot predict whether in all circumstances FBR Asset Maryland would
qualify for such statutory relief.
Taxation of Taxable U.S. Shareholders
As long as FBR Asset Maryland qualifies as a REIT, a taxable "U.S. Shareholder"
must take into account distributions out of FBR Asset Maryland's current or
accumulated earnings and profits (and that it does not designate as capital gain
dividends or retained long-term capital gain) as ordinary income. A U.S.
Shareholder will not qualify for the dividends received deduction generally
available to corporations. As used herein, the term "U.S. Shareholder" means a
holder of Common Stock that for U.S. federal income tax purposes is
o a citizen or resident of the United States,
o a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of an political subdivision
thereof,
o an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or business
within the United States, or
o any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or
more U.S. persons have the authority to control all substantial
decisions of the trust.
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A U.S. Shareholder will recognize distributions that FBR Asset Maryland
designates as capital gain dividends as long-term capital gain (to the extent
they do not exceed FBR Asset Maryland's actual net capital gain for the taxable
year) without regard to the period for which the U.S. Shareholder has held its
Common Stock. Subject to certain limitations, FBR Asset Maryland will designate
its capital gain dividends as either 20% or 25% rate distributions. A corporate
U.S. Shareholder, however, may be required to treat up to 20% of certain capital
gain dividends as ordinary income.
FBR Asset Maryland may elect to retain and pay income tax on the net long-term
capital gain that it receives in a taxable year. In that case, a U.S.
Shareholder would be taxed on its proportionate share of FBR Asset Maryland's
undistributed long-term capital gain. The U.S. Shareholder would receive a
credit or refund for its proportionate share of the tax FBR Asset Maryland paid.
The U.S. Shareholder would increase the basis in its stock by the amount of its
proportionate share of FBR Asset Maryland's undistributed long-term capital
gain, minus its share of the tax FBR Asset Maryland paid.
A U.S. Shareholder will not incur tax on a distribution in excess of FBR Asset
Maryland's current and accumulated earnings and profits if such distribution
does not exceed the adjusted basis of the U.S. Shareholder's Common Stock.
Instead, such distribution will reduce the adjusted basis of such Common Stock.
A U.S. Shareholder will recognize a distribution in excess of both FBR Asset
Maryland's current and accumulated earnings and profits and the U.S.
Shareholder's adjusted basis in its Common Stock as long-term capital gain (or
short-term capital gain if the Common Stock has been held for one year or less),
assuming the Common Stock is a capital asset in the hands of the U.S.
Shareholder. In addition, if FBR Asset Maryland declares a distribution in
October, November, or December of any year that is payable to a U.S. Shareholder
of record on a specified date in any such month, such distribution shall be
treated as both paid by FBR Asset Maryland and received by the U.S. Shareholder
on December 31 of such year, provided that FBR Asset Maryland actually pays the
distribution during January of the following calendar year. We will notify U.S.
Shareholders after the close of FBR Asset Maryland's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income or capital gain dividends.
FBR Asset Maryland's investments may cause it under certain circumstances to
recognize taxable income in excess of its economic income ("phantom income") and
to experience an offsetting excess of economic income over its taxable income in
later years. As a result, U.S. Shareholders may from time to time be required to
pay federal income tax on distributions that economically represent a return of
capital, rather than a dividend. Such distributions would be offset in later
years by distributions representing economic income that would be treated as
returns of capital for federal income tax purposes. Accordingly, if FBR Asset
Maryland receives phantom income, its U.S. Shareholders may incur federal income
tax with respect to such income on an accelerated basis (i.e., before the U.S.
Shareholders realize such income in an economic sense). Taking into account the
time value of money, such an acceleration of federal income tax liabilities
would cause shareholders to receive an after-tax rate of return on an investment
in the Common Stock that would be less than the after-tax rate of return on an
investment with an identical before-tax rate of return that did not generate
phantom income. We will consider the potential effects of phantom income on FBR
Asset Maryland's taxable U.S. Shareholders in managing FBR Asset Maryland's
investments.
To the extent that FBR Asset Maryland owns REMIC residual interests, its U.S.
Shareholders likely may not offset certain portions of the dividend income they
receive from FBR Asset Maryland with their current deductions or net operating
loss carryovers or carrybacks. This limitation would apply to the portion of a
U.S. Shareholder's dividends equal its allocable share of any Excess Inclusion
FBR Asset Maryland derives with respect to its REMIC residual interests. FBR
Asset Maryland's Excess Inclusion for any calendar quarter will equal the excess
of its income from REMIC residual interests over its "daily accruals" with
respect to such interests for the calendar quarter. Daily accruals for a
calendar quarter are computed by allocating to each day on which a REMIC
residual interest is owned a ratable portion of the product of (i) the "adjusted
issue price" of the REMIC residual interest at the beginning of the quarter and
(ii) 120% of the long-term federal interest rate (adjusted for quarterly
compounding) on the date of issuance of the REMIC residual interest. The
adjusted issue price of a REMIC
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residual interest at the beginning of a calendar quarter equals the original
issue price of the interest, increased by the amount of daily accruals for prior
quarters and decreased by all prior distributions FBR Asset Maryland receives
with respect to the REMIC residual interest. To the extent provided in future
Treasury Regulations, if FBR Asset Maryland owns a REMIC residual interest that
does not have significant value, the Excess Inclusion that it derives from such
REMIC residual interest will be deemed to be equal to the entire amount of
income it derives from such REMIC residual interest. Furthermore, if FBR Asset
Maryland owns stock in other REITs that own REMIC residual interests, a portion
of the dividends that it receives from such REITs may be treated as Excess
Inclusion. Those dividends may cause a portion of the dividends that FBR Asset
Maryland pays to its shareholders also to be treated as Excess Inclusion.
If FBR Asset Maryland (or a qualified REIT subsidiary) issues debt obligations
secured by its Mortgage Loans in Non-REMIC Transactions, FBR Asset Maryland or
such Mortgage Loans may be treated as a "taxable mortgage pool" under the Code
if the payments on the debt obligations bear a relationship to the payments on
the underlying Mortgage Loans. In such a case, to the extent provided in future
Treasury Regulations, a portion or all of the taxable income generated by FBR
Asset Maryland's retained ownership interest in the Mortgage Loans constituting
a taxable mortgage pool may be characterized as Excess Inclusion and allocated
pro rata among its U.S. Shareholders. U.S. Shareholders would not be permitted
to offset certain portions of their dividend income that are attributable to the
Non-REMIC Transactions with their current deductions or net operating loss
carryovers or carrybacks. Although the U.S. Treasury Department has not yet
issued applicable Treasury Regulations, we cannot assure you that it will not
issue such regulations in the future. We also cannot assure you that, if issued,
such regulations will not be retroactive and will not prevent U.S. Shareholders
from offsetting some portion of their dividend income with deductions or losses
from other sources.
Taxation of U.S. Shareholders on the Disposition of the Common Stock
In general, a U.S. Shareholder who is not a dealer in securities must treat any
gain or loss realized upon a taxable disposition of the Common Stock as
long-term capital gain or loss if the U.S. Shareholder has held the Common Stock
for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. Shareholder must treat any loss upon a sale or exchange of
Common Stock held by such shareholder for six months or less (after applying
certain holding period rules) as a long-term capital loss to the extent of
capital gain dividends and other distributions from FBR Asset Maryland that such
U.S. Shareholder treats as long-term capital gain. All or a portion of any loss
a U.S. Shareholder realizes upon a taxable disposition of the Common Stock may
be disallowed if the U.S. Shareholder purchases other shares of Common Stock
within 30 days before or after the disposition.
Capital Gains and Losses
A taxpayer generally must hold a capital asset for more than one year for gain
or loss derived from its sale or exchange to be treated as long-term capital
gain or loss. The highest marginal individual income tax rate is 39.6%. The
maximum tax rate on long-term capital gain applicable to non-corporate taxpayers
is 20% for sales and exchanges of assets held for more than one year. The
maximum tax rate on long-term capital gain from the sale or exchange of "section
1250 property" (i.e., depreciable real property) is 25% to the extent that such
gain would have been treated as ordinary income if the property were "section
1245 property." With respect to distributions that FBR Asset Maryland designates
as capital gain dividends and any retained capital gain that it is deemed to
distribute, FBR Asset Maryland may designate (subject to certain limits) whether
such a distribution is taxable to its non-corporate shareholders at a 20% or 25%
rate. Thus, the tax rate differential between capital gain and ordinary income
for non-corporate taxpayers may be significant. In addition, the
characterization of income as capital gain or ordinary income may affect the
deductibility of capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income only up to a
maximum annual amount of $3,000. A non-corporate taxpayer may carry forward
unused capital losses indefinitely. A corporate taxpayer must pay tax on its net
capital gain at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
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Information Reporting Requirements and Backup Withholding
FBR Asset Maryland will report to its shareholders and to the Service the amount
of distributions it pays during each calendar year, and the amount of tax it
withholds, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
unless such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide FBR Asset Maryland
with its correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, FBR Asset Maryland
may be required to withhold a portion of capital gain distributions to any
shareholders who fail to certify their non-foreign status to FBR Asset Maryland.
The Treasury Department has issued final regulations regarding the backup
withholding rules as applied to Non-U.S. Shareholders. Those regulations alter
the current system of backup withholding compliance and are effective for
distributions made after December 31, 1999. See "--Taxation of Non-U.S.
Shareholders."
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts and annuities ("Exempt
Organizations"), generally are exempt from federal income taxation. However,
they are subject to taxation on their unrelated business taxable income
("UBTI"). While many investments in real estate generate UBTI, the Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the exempt employee
pension trust does not otherwise use the shares of the REIT in an unrelated
trade or business of the pension trust. Based on that ruling, amounts that FBR
Asset Maryland distributes to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization were to finance its
acquisition of the Common Stock with debt, a portion of the income that they
receive from FBR Asset Maryland would constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions that they receive from FBR Asset Maryland as UBTI. Finally, in
certain circumstances, a qualified employee pension or profit sharing trust that
owns more than 10% of FBR Asset Maryland's stock is required to treat a
percentage of the dividends that it receives from FBR Asset Maryland as UBTI
(the "UBTI Percentage"). The UBTI Percentage is equal to the gross income FBR
Asset Maryland derives from an unrelated trade or business (determined as if it
were a pension trust) divided by its total gross income for the year in which it
pays the dividends. The UBTI rule applies to a pension trust holding more than
10% of FBR Asset Maryland's stock only if:
o the UBTI Percentage is at least 5%;
o FBR Asset Maryland qualifies as a REIT by reason of the modification of
the 5/50 Rule that allows the beneficiaries of the pension trust to be
treated as holding FBR Asset Maryland's stock in proportion to their
actuarial interests in the pension trust; and
o FBR Asset Maryland is a "pension-held REIT" (i.e., either (i) one
pension trust owns more than 25% of the value of its stock or (ii) a
group of pension trusts individually holding more than 10% of the value
of its stock collectively owns more than 50% of the value of its stock).
An Exempt Organization may be required to treat the portion of its dividends
that is allocable to Excess Inclusion that FBR Asset Maryland derives from REMIC
residual interests (or that FBR Asset Maryland derives from owning stock in
other REITs that own such residual interests) as UBTI. In addition, FBR Asset
Maryland will incur tax at the highest marginal corporate rate on the portion of
any such Excess Inclusion that is allocable to the portion of its stock owned by
Disqualified Organizations (as defined above in "--Taxation of FBR Asset
Maryland"). FBR Asset Maryland could deduct the amount of any such tax from its
income that is not Excess Inclusion. Furthermore, if FBR Asset Maryland derives
Excess Inclusion from
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REMIC residual interests, shareholders who are (i) pass-through entities (i.e.,
partnerships, estates, trusts, regulated investment companies, REITs, common
trust funds, and certain types of cooperatives (including farmers' cooperatives
described in Code section 521)) in which a Disqualified Organization is a record
holder of shares or interests and (ii) nominees who hold Common Stock on behalf
of Disqualified Organizations might incur a tax similar to the tax that FBR
Asset Maryland would incur as described above in this paragraph. Consequently, a
brokerage firm that holds Common Stock in a "street name" account for a
Disqualified Organization may incur federal income tax on the Excess Inclusion
attributable to such Common Stock. In addition, FBR Asset Maryland may incur tax
at the highest corporate rate on the portion of its allocable share of any
Excess Inclusion that a REIT in which it owns stock derives from REMIC residual
interests, equal to the percentage of FBR Asset Maryland's stock owned by
Disqualified Organizations. FBR Asset Maryland's Charter prohibits Disqualified
Organizations from owning FBR Asset Maryland's stock.
The U.S. Treasury Department has the authority to issue Treasury Regulations
regarding a REIT's issuance of debt obligations in Non-REMIC Transactions. If
the Treasury Department issues such Treasury Regulations in the future and such
regulations prevent taxable U.S. Shareholders from offsetting some percentage of
their dividends with deductions or losses from other sources, that same
percentage of an Exempt Organization's dividends would be treated as UBTI. See
"--Taxation of Taxable U.S. Shareholders."
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex. This section
is only a summary of such rules. We urge Non-U.S. Shareholders to consult their
own tax advisors to determine the impact of federal, state, and local income tax
laws on ownership of the Common Stock, including any reporting requirements.
A Non-U.S. Shareholder that receives a distribution that is not attributable to
gain from FBR Asset Maryland's sale or exchange of U.S. real property interests
(as defined below) and that FBR Asset Maryland does not designate as a capital
gain dividend or retained capital gain will recognize ordinary income to the
extent that FBR Asset Maryland pays such distribution out of its current or
accumulated earnings and profits. A withholding tax equal to 30% of the gross
amount of the distribution ordinarily will apply to such distribution unless an
applicable tax treaty reduces or eliminates the tax. However, if a distribution
is treated as effectively connected with the Non-U.S. Shareholder's conduct of a
U.S. trade or business, the Non-U.S. Shareholder generally will be subject to
federal income tax on the distribution at graduated rates, in the same manner as
U.S. Shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that
is a non-U.S. corporation). FBR Asset Maryland plans to withhold U.S. income tax
at the rate of 30% on the gross amount of any such distribution paid to a
Non-U.S. Shareholder unless (i) a lower treaty rate applies and the Non-U.S.
Shareholder files the required form evidencing eligibility for that reduced rate
with FBR Asset Maryland or (ii) the Non-U.S. Shareholder files an IRS Form 4224
with FBR Asset Maryland claiming that the distribution is effectively connected
income. The U.S. Treasury Department has issued final regulations that modify
the manner in which FBR Asset Maryland will comply with the withholding
requirements. Those regulations are effective for distributions made after
December 31, 1999.
If FBR Asset Maryland derives Excess Inclusion from REMIC residual interests, a
Non-U.S. Shareholder may not qualify for exemption from the 30% withholding tax
or a reduced treaty rate with respect to the portion of its dividends that is
allocable to the Excess Inclusion. In addition, the U.S. Treasury Department has
the authority to issue regulations regarding a REIT's issuance of debt
obligations in Non-REMIC Transactions. If the Treasury Department issues such
Regulations in the future and they prevent taxable U.S. Shareholders from
offsetting some percentage of their dividends with deductions or losses from
other sources, that same percentage of a Non-U.S. Shareholder's dividends would
not be eligible for exemption from the 30% withholding tax or a reduced treaty
rate. See "--Taxation of Taxable U.S. Shareholders."
A Non-U.S. Shareholder will not incur tax on a distribution in excess of FBR
Asset Maryland's current and accumulated earnings and profits if such
distribution does not exceed the adjusted basis of its Common Stock.
67
<PAGE>
Instead, such a distribution will reduce the adjusted basis of such Common
Stock. A Non-U.S. Shareholder will be subject to tax on a distribution that
exceeds both FBR Asset Maryland's current and accumulated earnings and profits
and the adjusted basis of its Common Stock, if the Non-U.S. Shareholder
otherwise would be subject to tax on gain from the sale or disposition of its
Common Stock, as described below. Because FBR Asset Maryland generally cannot
determine at the time it makes a distribution whether or not the distribution
will exceed its current and accumulated earnings and profits, it normally will
withhold tax on the entire amount of any distribution at the same rate as it
would withhold on a dividend. However, a Non-U.S. Shareholder may obtain a
refund of amounts that FBR Asset Maryland withholds if it later determines that
a distribution in fact exceeded its current and accumulated earnings and
profits.
FBR Asset Maryland must withhold 10% of any distribution that exceeds its
current and accumulated earnings and profits. Consequently, although it intends
to withhold at a rate of 30% on the entire amount of any distribution, to the
extent that it does not do so, it will withhold at a rate of 10% on any portion
of a distribution not subject to withholding at a rate of 30%.
For any year in which FBR Asset Maryland qualifies as a REIT, a Non-U.S.
Shareholder will incur tax on distributions that are attributable to gain from
its sale or exchange of "U.S. real property interests" under the provisions of
the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). The term
"U.S. real property interests" includes certain interests in real property and
stock in corporations at least 50% of whose assets consists of interests in real
property, but excludes mortgage loans and MBS. Under FIRPTA, a Non-U.S.
Shareholder is taxed on distributions attributable to gain from sales of U.S.
real property interests as if such gain were effectively connected with a U.S.
business of the Non-U.S. Shareholder. A Non-U.S. Shareholder thus would be taxed
on such a distribution at the normal capital gain rates applicable to U.S.
Shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of a nonresident alien individual). A
non-U.S. corporate shareholder not entitled to treaty relief or exemption also
may be subject to the 30% branch profits tax on distributions subject to FIRPTA.
FBR Asset Maryland must withhold 35% of any distribution that it could designate
as a capital gain dividend. A Non-U.S. Shareholder may receive a credit against
its FIRPTA tax liability for the amount FBR Asset Maryland withholds.
A Non-U.S. Shareholder generally will not incur tax under FIRPTA on gain from
the sale of its Common Stock as long as FBR Asset Maryland is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period non-U.S. persons held, directly or
indirectly, less than 50% in value of the stock. We cannot assure you that FBR
Asset Maryland is or will remain a "domestically controlled REIT." Furthermore,
a Non-U.S. Shareholder will incur tax on gain not subject to FIRPTA if (i) the
gain is effectively connected with the Non-U.S. Shareholder's U.S. trade or
business, in which case the Non-U.S. Shareholder will be subject to the same
treatment as U.S. Shareholders with respect to such gain, or (ii) the Non-U.S.
Shareholder is a nonresident alien individual who was present in the U.S. for
183 days or more during the taxable year and has a "tax home" in the United
States, in which case the Non-U.S. Shareholder will incur a 30% tax on his
capital gains. However, a Non-U.S. Shareholder that owned, actually or
constructively, 5% or less of the Common Stock at all times during a specified
testing period will not incur tax under FIRPTA if the Common Stock is "regularly
traded" on an established securities market. If the gain on the sale of the
Common Stock were taxed under FIRPTA, a Non-U.S. Shareholder would be taxed in
the same manner as U.S. Shareholders with respect to such gain (subject to
applicable alternative minimum tax, a special alternative minimum tax in the
case of nonresident alien individuals, and the possible application of the 30%
branch profits tax in the case of non-U.S. corporations).
Other Tax Consequences
FBR Asset Maryland and/or you may be subject to state and local tax in various
states and localities, including those states and localities in which FBR Asset
Maryland or you transact business, own property, or reside. The state and local
tax treatment in such jurisdictions may differ from the federal income tax
treatment described above. Consequently, you should consult your own tax advisor
regarding the effect of state and local tax laws upon an investment in the
Common Stock.
68
<PAGE>
ERISA Considerations
This section only discusses certain issues relevant under the "Plan Asset
Regulations" (as defined below) and, as a result, does not address all of the
issues that may be important to you under of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and section 4975 of the Code. The
discussion contained in this section is based on current federal law and
interpretations thereof. We cannot assure you that new laws or interpretations
thereof, which may take effect retroactively, will not cause any statement in
this section to be inaccurate.
This section is only a summary of certain relevant law and is not a substitute
for careful planning with a professional.
A fiduciary deciding whether to buy common stock on behalf of an employee
benefit plan, a tax-qualified retirement plan, or an IRA should consult its own
legal advisor regarding the specific considerations arising under ERISA, section
4975 of the Code, and state law with respect to an investment in the common
stock by such plan or IRA. A fiduciary also should consider the entire
discussion under the heading "Federal Income Tax Laws Applicable to REITs and
REIT Shareholders," because the discussion in that section is relevant to a plan
or IRA's decision to purchase common stock.
Department of Labor Regulations defining "plan assets" (the "Plan Asset
Regulations") generally provide that when an "ERISA Investor" acquires an equity
interest in an entity, the ERISA Investor's assets include both the equity
interest and an undivided interest in each of the underlying assets of the
issuer of such equity interest, unless one or more exceptions specified in the
Plan Asset Regulations are satisfied. An "ERISA Investor" includes:
o a pension, profit sharing, or other employee benefit plan subject to
Title I of ERISA;
o a qualified retirement plan not subject to Title I of ERISA because it
is a governmental or church plan or because it does not cover common law
employees; and
o an individual retirement account or an individual retirement annuity.
One exception under the Plan Asset Regulations provides that an ERISA Investor's
assets will not include any of the underlying assets of an entity if at all
times ERISA Investors own less than 25% of the value of each class of equity
interests in the entity (the "Insignificant Participation Exception"). Another
exception provides that an ERISA Investor's assets will not include the
underlying assets of an entity if the class of equity interests in which the
ERISA Investor invests is "publicly-offered" (i.e., meets the following
requirements):
o it is widely held (i.e., held by 100 or more investors who are
independent of the issuer and each other);
o it is freely transferable; and
o it is part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended (the "1934
Act").
The Plan Asset Regulations provide that certain restrictions on transfer,
including any restriction on or prohibition against a transfer that would result
in the termination or reclassification of an entity for federal or state tax
purposes, ordinarily will not prevent securities from being "freely
transferable."
FBR Asset Maryland's Charter provides that before the date that either (i) the
common stock is "publicly offered" or (ii) FBR Asset Maryland qualifies for
another exception to the Plan Asset Regulations (other than the Insignificant
Participation Exception), ERISA Investors must own, in the aggregate, less than
25% of the value of each class of FBR Asset Maryland's stock. The common stock
is "widely held." In addition, we believe that the restrictions on transfer of
the common stock imposed under FBR Asset Maryland's Charter do not prevent the
common stock from being "freely transferable." Furthermore, this proxy
statement/prospectus registers the common stock under Section 12(g) of the 1934
Act. Accordingly, the common stock should be "publicly offered" securities, and
FBR Asset Maryland's assets should not be deemed to be "plan assets" of any
ERISA Investor that owns common stock. As a result, as of the date of this Proxy
Statement/Prospectus, the restriction described above on ownership of Common
Stock by ERISA Investors no longer will apply. However, if at any time FBR Asset
Maryland fails to qualify for an exception from the Plan
69
<PAGE>
Asset Regulations, the assets of an ERISA Investor that invests in the common
stock will include an undivided interest in FBR Asset Maryland's assets. In such
event, FBR Asset Maryland's assets, transactions involving its assets, and the
persons with authority or control over and that provide services with respect to
its assets would be subject to the fiduciary responsibility provisions of Title
I of ERISA and the prohibited transaction provisions of section 4975 of the
Code.
70
<PAGE>
Other Matters
Legal
Hunton & Williams, Richmond, Virginia, will pass upon the validity of the shares
issued in the merger for the Company. In addition, we have based the description
of federal income tax consequences in "Federal Income Tax Laws Applicable to
REITs and REIT Shareholders" upon the opinion of Hunton & Williams.
A condition to the consummation of the merger is the delivery to FBR Asset
Virginia and FBR Asset Maryland by Hunton & Williams of an opinion concerning
certain federal income tax consequences of the merger. See "Federal Income Tax
Laws Applicable to REITs and REIT Shareholders."
Experts
The audited financial statements included in this proxy statement/prospectus
have been audited by Arthur Andersen LLP, independent public accountants, to the
extent and for the periods stated in their reports and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
Expenses
FBR Asset Virginia will bear all expenses from this solicitation of proxies. In
addition to solicitation by mail, directors and executive officers of FBR Asset
Virginia may solicit proxies by telephone, telegram, or personal interviews.
Those persons will receive no additional compensation for their services. FBR
Asset Virginia may retain a proxy solicitation firm to assist in the
solicitation of proxies at a fee estimated not to exceed $10,000. FBR Asset
Virginia will request brokerage houses, nominees, fiduciaries, and other
custodians to forward proxy solicitation materials to the beneficial owners of
shares held of record by them and will reimburse those persons for their
reasonable expenses.
Additional Information
From FBR Asset Virginia
You can obtain complete copies of the documents to which we refer in this proxy
statement/prospectus, free of charge, by writing or calling:
Elaine Clancy, Chief Financial Officer
FBR Asset Investment Corporation
1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 469-1000 phone
(703) 312-9602 fax
To ensure timely delivery of your requested documents, we must receive your
request before _________, 1999.
From the SEC
This proxy statement/prospectus is part of a Registration Statement that we have
filed with the SEC. You can read and copy that Registration Statement, and the
exhibits attached to it, at the SEC's public reference rooms in Washington, DC,
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for more information about the public reference rooms.
After the merger, we will file annual, quarterly and special reports, proxy
statements and other information with the SEC. You will be able to read and copy
those documents at the SEC's public reference rooms too.
You can also obtain copies of all documents that we file with the SEC on the
SEC's website (http://www.sec.gov).
71
<PAGE>
Index to Financial Statements
Page
----
Report of Independent Public Accountants...................................F-2
Financial Statements:
Statements of Financial Condition
As of December 31, 1997,
June 30, 1998, and September 30, 1998 (unaudited).....................F-3
Statements of Income for the Period from December
15, 1997 (Inception), Through December 31, 1997,
the Six Months Ended June 30, 1998 and the
Nine Months Ended September 30, 1998 unaudited)....................F-4
Statements of Changes in Stockholders' Equity for
the Period from December 15, 1997 (Inception),
Through December 31, 1997, the Six Months Ended
June 30, 1998 and the Three Months Ended September
30, 1998 (unaudited)...............................................F-5
Statements of Cash Flows for the Period from
December 15, 1997 (Inception), Through
December 31, 1997, the Six Months Ended
June 30, 1998 and the Nine Months Ended
September 30, 1998 (unaudited).....................................F-6
Notes to Financial Statements..............................................F-7
F-1
<PAGE>
Report of Independent Public Accountants
To the Board of Directors
FBR Asset Investment Corporation:
We have audited the accompanying statements of financial condition of FBR Asset
Investment Corporation (the "Company", a Virginia corporation) as of December
31, 1997, and June 30, 1998, and the related statements of income, changes in
stockholders' equity and cash flows for the period from December 15, 1997
(inception), through December 31, 1997, and the six months ended June 30, 1998.
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 generally accepted auditing
standards. 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, 1997 and June 30, 1998, and the results of its
operations and its cash flows for the period from December 15, 1997 (inception),
through December 31, 1997, and the six months ended June 30, 1998, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, D.C.
November 16, 1998
F-2
<PAGE>
FBR Asset Investment Corporation
Statements of Financial Condition As of December 31, 1997, June 30, 1998, and
September 30, 1998 (unaudited)*
<TABLE>
<CAPTION>
==================================================================================================================================
September 30,
December 31, June 30, 1998
Assets: 1997 1998 (unaudited)
------------ ------- -----------
<S> <C> <C> <C>
Mortgage-backed securities, at fair value $ - $218,685,253 $211,492,181
Cash and cash equivalents 163,223,199 60,610,545 43,333,730
Investments in equity securities, at fair value 23,318,750 78,074,474 65,816,300
Notes receivable 3,000,000 18,038,320 20,443,385
Due from affiliate 545,827 218 218
Dividends receivable 434,717 256,548 1,374,995
Prepaid expenses - 26,385 13,193
Organization costs, net of accumulated amortization
of $3,733 and $4,930, respectively 7,909 7,111 6,712
Interest receivable 8,000 1,903,099 1,785,141
------------ ------------ ------------
Total assets $190,538,402 $377,601,953 $344,265,855
============ ============ ============
Liabilities and Stockholders' Equity
Liabilities:
Repurchase agreements $ - $181,287,958 $176,252,157
Interest Payable - 552,783 1,988,594
Dividends payable 510,950 3,123,764 -
Management fees payable 58,623 266,535 724,122
Accounts payable and accrued expenses 12,000 81,349 56,673
Due to clearing broker - 167,402 -
Deferred revenue 190,000 44,660 22,088
------------ ------------ ------------
Total liabilities 771,573 185,524,451 179,043,634
------------ ------------ ------------
Stockholders' 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, 10,218,999, 10,415,827 and 10,415,827
shares issued as of December 31, 1997, June 30, 1998, and
September 30, 1998, respectively 102,190 104,158 104,158
Additional paid-in capital 189,528,668 193,187,701 193,187,701
Accumulated other comprehensive income - (609,040) (19,016,397)
Retained earnings (deficit) 135,971 (605,317) 2,960,749
Treasury stock, at cost 942,500 shares - - (12,013,990)
------------ ------------ ------------
Total stockholders' equity 189,766,829 192,077,502 165,222,221
------------ ------------ ------------
Total liabilities and stockholders' equity $190,538,402 $377,601,953 $344,265,855
============ ============ ============
===============================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-3
<PAGE>
FBR Asset Investment Corporation
Statements of Income For the Period from December 15, 1997 (Inception), Through
December 31, 1997, the Six Months Ended June 30, 1998, and the Nine Months Ended
September 30, 1998 (unaudited)*
<TABLE>
<CAPTION>
=================================================================================================================================
December 15, 1997
(Inception) Six Months Ended Nine Months Ended
through June 30, September 30, 1998
December 31, 1997 1998 (unaudited)
----------------- --------------- -----------------
<S> <C> <C> <C>
Income:
Dividends $ 434,717 $ 833,749 $ 2,880,624
Interest 18,040 4,817,569 9,527,657
Other income 268,520 - -
----------- ------------ ----------
Total income 721,277 5,651,318 12,408,281
----------- ------------ ----------
Expenses:
Interest expense - 552,783 3,187,418
Management fee expense 58,623 469,139 926,726
Professional fees 12,000 132,035 203,228
Insurance - 26,384 39,576
Amortization expense 3,733 798 1,197
Other - 4,538 18,429
----------- ------------ -----------
Total expenses 74,356 1,185,677 4,376,574
----------- ------------ -----------
Net income $ 646,921 $ 4,465,641 $ 8,031,707
=========== ============ ===========
Basic and diluted earnings per share $ 0.06 $ 0.43 $ 0.78
=========== ============ ===========
Weighted-average common and equivalent shares 10,218,999 10,399,515 10,353,821
=========== ============ ===========
===============================================================================================================================
</TABLE>
* The accompanying notes are an integral part of these statements.
F-4
<PAGE>
FBR Asset Investment Corporation
Statements of Changes in Stockholders' Equity For the Period from December 15,
1997 (Inception), Through December 31, 1997, the Six Months Ended June 30, 1998
and the Three Months Ended September 30, 1998 (unaudited)*
<TABLE>
<CAPTION>
====================================================================================================================================
Additional Accumulated
Paid Retained Other
Common In Earnings Treasury Comprehensive Comprehensive
Stock Capital (Deficit) Stock Income Total Income
----- ------- --------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 15, 1997 $ - $ - $ - $ - $ - $ -
Issuance of common stock 102,190 189,528,668 - - - 189,630,858
Net income - - 646,921 - - 646,921 $ 646,921
Other comprehensive income-
Unrealized gain (loss) on
available-for-sale - - - - - - -
securities -----------
Comprehensive income $ 646,921
===========
Dividends declared $.05 per
share - - (510,950) - - (510,950)
-------- ------------ ---------- ----------- ----------- -----------
Balance, December 31, 1997 102,190 189,528,668 135,971 - - 189,766,829
Issuance of common stock 1,968 3,659,033 - - - 3,661,001
Net income - - 4,465,641 - - 4,465,641 4,465,641
Other comprehensive income-
Change in unrealized loss
on available-for-sale - - - - (609,040) (609,040) (609,040)
securities -----------
Comprehensive income 3,856,601
===========
Dividends paid $.20 per - - (2,083,165) - - (2,083,165)
share
Dividends paid $.30 per - - (3,123,764) - - (3,123,764)
share
-------- ------------ ---------- ----------- ----------- -----------
Balance, June 30, 1998 104,158 193,187,701 (605,317) - (609,040) 192,077,502
Repurchase of common stock
(unaudited) (12,013,990) (12,013,990)
Net income (unaudited) - - 3,566,066 - - 3,566,066 3,566,066
Other comprehensive income-
Change in unrealized loss
on available-for-sale - - - - (18,407,357) (18,407,357) (18,407,357)
securities (unaudited) ------------
Comprehensive income
(unaudited) $(14,841,291)
-------- ------------ ----------- ------------ ------------ ------------ ============
Balance, September 30, 1998
(unaudited) $104,158 $193,187,701 $ 2,960,749 $(12,013,990) $(19,016,397) $165,222,221
======== ============ =========== ============ ============= ============
====================================================================================================================================
</TABLE>
* The accompanying notes are an integral part of these statements.
F-5
<PAGE>
FBR Asset Investment Corporation
Statements of Cash Flows For the Period From December 15, 1997 (Inception),
Through December 31, 1997, the Six Months Ended June 30, 1998, and the Nine
Months Ended September 30, 1998 (unaudited)*
<TABLE>
<CAPTION>
================================================================================================================================
Nine Months
Inception Six Months Ended
through Ended September 30, 1998
December 31, 1997 June 30, 1998 (unaudited)
----------------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 646,921 $ 4,465,641 $ 8,031,707
Adjustments to reconcile net income to net cash
(used in) provided by operating activities-
Amortization of organization costs 3,733 798 1,197
Premium amortization on mortgage-backed securities - 137,518 526,846
Unrealized gain on investments (268,520) - -
Changes in assets and liabilities:
Due from affiliate (545,827) 545,609 545,609
Dividends receivable (434,717) 178,169 (940,278)
Prepaid expenses - (26,385) (13,193)
Interest receivable (8,000) (1,895,099) (1,777,141)
Organization costs (11,642) - -
Management fees payable 58,623 207,912 665,499
Accounts payable and accrued expenses 12,000 69,349 44,673
Interest payable - 552,783 1,988,594
Due to clearing broker - 167,402 -
Deferred revenue 190,000 (145,340) (167,912)
----------- ------------- ------------
Net cash (used in) provided by operating
activities (357,429) 4,258,357 8,905,601
----------- ------------ ------------
Cash flows from investing activities:
Investments in equity securities and notes receivable,
net of repayments on notes receivable (26,050,230) (70,295,840) (81,919,727)
Proceeds from repurchase agreements - 181,287,958 176,252,157
Purchase of mortgage-backed securities - (221,156,240) (221,156,240)
Receipt of principal payments - 2,226,225 12,099,608
----------- ------------ ------------
Net cash used in
investing activities (26,050,230) (107,937,897) (114,724,202)
----------- ------------ ------------
Cash flows from financing activities:
Repurchase of common stock - - (12,013,990)
Proceeds from issuance of common stock 189,630,858 3,661,001 3,661,001
Dividends paid - (2,594,115) (5,717,879)
------------ ------------- -------------
Net cash provided by (used in) financing
activities 189,630,858 1,066,886 (14,070,868)
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 163,223,199 (102,612,654) (119,889,469)
Cash and cash equivalents, beginning of the period - 163,223,199 163,223,199
------------ ------------- -------------
Cash and cash equivalents, end of the period $163,223,199 $ 60,610,545 $ 43,333,730
============ ============= =============
=================================================================================================================================
</TABLE>
* The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Notes to Financial Statements
Note 1 Organization and Nature of Operations
FBR Asset Investment Corporation (the "Company") was incorporated in Virginia on
November 10, 1997. The Company commenced operations on December 15, 1997, upon
the closing of a private placement of equity capital (the "Private Placement")
(see Note 4).
The Company is organized as a real estate investment trust ("REIT") whose
primary purpose is to invest in mortgage loans and mortgage-backed securities
issued and guaranteed by instrumentalities of the U.S. Government or by private
issuers that are secured by real estate (together the "Mortgage Assets"). The
Company makes investments in other qualifying interests including existing
private or public REIT's. The Company also makes debt and equity investments in
public and private companies, subject to its limitations as a REIT. Funds not
immediately allocated will generally be temporarily invested in readily
marketable, interest-bearing securities. To create yields commensurate with its
investment objectives, the Company leverages its assets and mortgage loan
portfolio primarily with collateralized borrowings. The Company uses derivative
financial instruments to hedge all or a portion of the interest rate risk
associated with its borrowings.
Note 2 Risk Factors
The Company's investments are concentrated in mortgage-backed investments and
other readily marketable and non-marketable, REIT related issues. Market risk to
the Company is caused by volatility and illiquidity in the markets in which the
Company would seek to sell the securities in which it has invested. The
Company's concentration of investments may result in significant exposure to
risk of loss from factors such as changes in prevailing interest rates, which is
greater than it would be if the Company mitigated such risks through a greater
diversification of investments and the holding of all readily marketable
securities.
Currently the Company's primary investments have been in fixed rate,
mortgage-backed securities. An increase in fixed interest rates will adversely
affect the value of the Company's mortgage-backed portfolio. The Company also
employs leverage to fund portfolio investments, and interest rates on such
borrowings are generally based on short-term indices. To the extent any of these
borrowings bear interest rates based on indices different from that used for the
related mortgage portfolio, the spread between these interest rates may
adversely effect results of operations.
The investments in mortgage-backed securities are generally pledged as
collateral against the related borrowings. Should the value of the collateral
decline below agreed upon levels, due to factors such as a change in prevailing
interest rates, the Company could be forced to satisfy such deficiencies. This
could cause the Company to sell the underlying collateral and incur significant
losses.
Prepayment rates on mortgages underlying the Company's mortgage-backed
investments will vary from time to time as prevailing interest rates change and
may cause significant changes in the amount of the Company's net interest
income. The Company seeks to reduce prepayment risk through a variety of means,
including structuring a diversified portfolio with a variety of prepayment
characteristics and balancing assets purchased at a premium with assets
purchased at a discount.
Furthermore other equity and debt investments made by the Company may involve
substantial amounts relative to its net assets and create significant exposure
to individual issuers and are generally concentrated in the REIT industry. Such
amounts may include non-investment grade and privately held issuers whose
securities have no ready markets. Such factors expose the Company to a
significantly higher degree of risk than is associated with more diversified
investment grade or readily marketable securities.
The Company has elected to qualify as a REIT for tax purposes. To qualify for
tax treatment as a REIT under the Internal Revenue Code, the Company must meet
certain income and asset tests and distribution requirements. Failure to meet
these requirements could have a material adverse impact on the Company's results
and financial condition. Furthermore, as certain of the Company's investments
are themselves qualifying REIT issues, failure of such investments to maintain
their REIT status could jeopardize the Company's qualification as a REIT.
F-7
<PAGE>
Note 3 Summary of Significant Accounting Policies
Investments in Mortgage-backed Securities
The Company invests primarily in mortgage pass-through certificates which
represent a 100 percent interest in the underlying conforming mortgage loans and
are guaranteed by the Government National Mortgage Association ("GNMA"), the
Federal Home Loan Mortgage Corporation ("FHLMC"), and the Federal National
Mortgage Association ("FNMA"). Mortgage-backed security transactions are
recorded on the date the securities are purchased or sold.
The Company accounts for its investments in mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires the Company to classify its investments as either trading investments,
available-for-sale investments or held to maturity investments. The Company does
not hold its mortgage-backed securities for trading purposes but may not hold
such investments to maturity. Accordingly, the Company 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 stockholders' 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 in nature are recognized, as identified, in income. Management
regularly reviews its investment portfolio for other than temporary impairment.
There were no such adjustments for the six or nine month periods ending June 30,
and September 30, 1998, respectively.
The fair values of the Company'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 the Company could realize in a current market
exchange.
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 the amortization or
accretion of any premium or discount recorded upon purchase. Changes in
anticipated yields result primarily from the changes in actual and projected
cash flows and estimated prepayment speeds. Changes in the yield that result
from changes in the anticipated cash flows and prepayment speeds 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.
The following two tables summarize the Company's mortgage-backed securities as
of June 30, 1998, and September 30, 1998. As of June 30, 1998, the Company's
mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
==========================================================================================================================
Federal Home Federal National Government
Loan Mortgage Mortgage National Mortgage Total Mortgage
Corporation Association Association Assets
----------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Mortgage-backed securities, gross $88,390,596 $107,082,990 $18,912,095 $214,385,681
Unamortized premium 775,286 2,736,453 895,077 4,406,816
----------- ------------ ----------- ------------
Amortized cost 89,165,882 109,819,443 19,807,172 218,792,497
Gross unrealized gains 109,664 82,344 -- 192,008
Gross unrealized losses (77,845) (165,554) (55,853) (299,252)
----------- ------------ ----------- ------------
Estimated fair value $89,197,701 $109,736,233 $19,751,319 $218,685,253
=========== ============ =========== ============
==========================================================================================================================
</TABLE>
F-8
<PAGE>
As of September 30, 1998, the Company's mortgage-backed securities consisted of
the following:
<TABLE>
<CAPTION>
==========================================================================================================================
Federal Home Federal National Government
Loan Mortgage Mortgage National Mortgage Total Mortgage
Corporation Association Association Assets
----------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Mortgage-backed securities, gross $86,361,936 $100,477,102 $17,673,260 $204,512,298
Unamortized premium 720,944 2,455,078 841,466 4,017,488
----------- ------------ ----------- ------------
Amortized cost 87,082,880 102,932,180 18,514,726 208,529,786
Gross unrealized gains 1,377,557 1,044,596 577,918 3,000,071
Gross unrealized losses - (37,676) - (37,676)
----------- ------------ ----------- ------------
Estimated fair value $88,460,437 $103,939,100 $19,092,644 $211,492,181
=========== ============ =========== ============
==========================================================================================================================
</TABLE>
Repurchase Agreements
The Company has entered into short-term repurchase agreements to finance a
significant portion of its mortgage-backed investments. The repurchase
agreements are secured by the Company's mortgage-backed securities and bear
interest rates that have historically related closely to LIBOR for a
corresponding period. As of June 30, 1998 and September 30, 1998, the Company
had approximately $181.3 million and $176.3 million outstanding under repurchase
agreements with a weighted-average borrowing rate of 5.61 and 5.59 percent as of
the end of each period and a weighted-average remaining maturity of 21 days and
47 days, respectively. At June 30, 1998 and September 30, 1998, mortgage-backed
securities actually pledged had an estimated fair value of approximately $186.6
million and $185.3 million, respectively.
At September 30, 1998 the repurchase agreements had the following remaining
maturities:
Within 30 days $ 17,200,000
30 to 59 days $159,052,157
To the extent that the value of the collateral under the Company's repurchase
agreements declines below agreed upon levels, the Company will be required to
satisfy such deficiencies. This could cause the Company to sell securities under
adverse price conditions. Accordingly, the Company closely monitors its level of
net equity in the collateralized repurchase agreements.
Interest Rate Swaps
The Company has entered into interest rate swap agreements to partially limit
the adverse effects of rising interest rates on its short-term repurchase
agreements. The interest rate swap agreements are structured such that the
Company receives payments based on a variable interest rate and pays interest
based on a fixed interest rate. The differential between amounts paid or
received under the contract is recorded as an adjustment to interest expense.
None of the agreements are held for trading purposes and, accordingly have been
accounted for as hedges. As such, the fair value of the interest rate swap
agreements are not included in the financial statements. As of September 30,
1998, the Company had entered into two interest rate swap agreements with
notional amounts of $50 million and $50 million, and approximate fair values of
$(2.1) million and $(2.5) million, respectively. In October of 1998, the Company
terminated one of its interest rate swap agreements at a loss of $2.7 million.
The remaining agreement matures on June 1, 2001.
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
F-9
<PAGE>
which no sale was reported on that date 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 the Company's investment adviser Friedman, Billings, Ramsey
Investment Management, Inc. ("FBRIM"). FBRIM's management may use methods of
valuing securities other than described above if it believes the alternative
method is preferable in determining the fair value of such securities.
At December 31, 1997, the Company classified certain of its portfolio
investments as trading securities in accordance with SFAS No. 115. In 1998,
management concluded that these investments were now being held for purposes
other than short-term re-sale, and reclassified such investments as available
for sale. The transfer of these securities between categories was accounted for
at fair value. There was no change to the Company's net assets as a result of
this change in classification.
For financial reporting purposes, realized gains and losses are recorded on the
date of the transaction utilizing 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.
Notes Receivable
On December 23, 1997, the Company entered into an Interim Financing and Security
Agreement with Prime Holding, LLC ("Prime"). The agreement allows for up to a
$20 million bridge loan from the Company to Prime. The note accrues interest at
an annualized rate of 12 percent and is payable monthly. All amounts due under
the bridge loan are due on December 31, 1998. As of September 30, 1998,
approximately $10.4 million had been drawn against the bridge loan. From
inception through September 30, 1998, approximately $620,000 in interest income
has been recorded by the Company. Prime is a Delaware limited liability company
formed in August 1997 and is an early stage mortgage origination entity.
On June 3, 1998, the Company entered into a promissory note agreement with
Kennedy Wilson International for $10 million. The note accrues interest at a
rate of 12 percent per annum, and is payable monthly on the last day of the
month. The agreement calls for the repayment of the advanced principal amount on
the first to occur of, the closing of a public offering of common stock by KWI,
or December 31, 1998. KWI is a U.S. real estate marketing and investment firm
specializing in innovative marketing programs for various types of properties
and financial instruments. From inception through September 30, 1998, interest
income of approximately $385,000 has been recorded on this note.
Credit Risk
The Company has limited its exposure to credit losses on its mortgage-backed
portfolio of mortgage-backed securities by only purchasing securities from the
FHLMC, FNMA, or GNMA. The payment of principal and interest on the FHLMC and
FNMA mortgage-backed securities are guaranteed by those respective agencies and
the payment of principal and interest on the GNMA mortgage-backed securities are
backed by the full-faith-and-credit of the U.S. government. At September 30,
1998, all of the Company's mortgage-backed securities have an implied "AAA"
rating.
Cash and Cash Equivalents
The Company considers all investments with original maturities of less than
three months to be cash equivalents. As of September 30, 1998, cash and cash
equivalents consisted of approximately $4.7 million and $10.2 million of cash
deposited in two commercial banks, and $17.3 million and $10.7 million in two
separate domestic money market funds. The money market fund invests primarily in
obligations of the U.S. Government. The carrying amount of cash equivalents
approximates their fair value.
Accounts Receivable and Organization Costs
In connection with the Private Placement, the Company's placement agent,
Friedman, Billings, Ramsey & Co., Inc. ("FBRC") withheld $1 million of the net
proceeds to cover offering costs of the Private Placement and certain
organizational costs of the Company paid initially by FBRC. Ultimately,
approximately $450,000 was paid for such costs. The remaining balance of
approximately $550,000 was recorded as a due from affiliate and paid in full in
1998.
F-10
<PAGE>
New Accounting Pronouncements
During the period, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the reporting of comprehensive income in addition
to net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes disclosure of certain financial
information that historically has not been recognized in the calculation of net
income. The Company's only component of other comprehensive income represents
the net unrealized loss on investments classified as available for sale in
accordance with SFAS No. 115.
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133 (SFAs No. 133) "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
years beginning after June 15, 1999 and generally requires that an entity
recognize derivative financial instruments as assets or liabilities and measure
them at fair value. Management is currently evaluating the impact of adopting
the requirements of SFAS 133.
Net Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128
requires the presentation of basic and diluted earnings per share. SFAS No. 128
specifies that basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted earnings per share reflects
the potential 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 then shared in the earnings of the entity. The
computation of the Company's diluted earnings per share for all periods
presented does not take into account 1,021,900 options to purchase common stock
as these options had either no impact on the computation of diluted earnings per
share or were anti-dilutive.
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 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
The Company has elected to be taxed as a REIT under the Internal Revenue Code.
As a result, the Company 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 stockholders and complies with certain other requirements.
No provision has been made for income taxes in the accompanying financial
statements, as the Company believes it has met the prescribed distribution and
other requirements.
Reclassifications
Certain amounts in the financial statements as of December 31, 1997, have been
reclassified to conform with 1998 presentation.
Note 4 Stockholders' Equity
On December 15, 1997, the Company completed a private placement of equity
capital. The Company received net proceeds of approximately $189.7 million from
the issuance of 10,218,999 shares of common stock.
On December 31, 1997, the Company declared a dividend of $.05 per share to
stockholders of record on December 31, 1997. The dividend was paid on January
22, 1998.
On January 15, 1998, FBRC purchased 196,828 shares of the Company for
approximately $3.7 million pursuant to a stock option awarded in connection with
the private placement offering.
On April 6, 1998, the Company declared a 1998 first quarter dividend of $.20 per
share to stockholders of record on April 6, 1998. The dividend was paid on April
22, 1998.
On June 24, 1998, the Company declared a 1998 second quarter dividend of $.295
per share to stockholders of record as of June 24, 1998. The Company also
declared a $0.05 distribution of undistributed December 31, 1997, earnings. Both
dividends were paid on July 14, 1998.
F-11
<PAGE>
In September 1998, the Board of Directors authorized the repurchase of up to
2,000,000 shares of the Company's common stock. Through September 30, 1998, the
Company had repurchased 942,500 shares for of cost of approximately $12.0
million or $12.75 average cost per share. In October 1998, the Company
repurchased an additional 396,000 shares of stock for a cost of approximately
$4.6 million.
On October 13, 1998, the Company declared a 1998 third quarter dividend of $.36
per share to shareholders of record as of October 14, 1998. The dividend was
paid on October 20, 1998.
The Company has outstanding, as of September 30, 1998, 1,021,900 options to
purchase common stock. These options, which were issued in a single grant, have
a term of ten years, and have an exercise price of $20 per share. On November
13, 1998, 500,000 of such options were rescinded.
Note 5 Management and Performance Fees
The Company has entered into a management agreement with Friedman, Billings,
Ramsey Investment Management, Inc. ("FBRIM"), for an initial term expiring on
December 15, 1999. FBRIM will perform portfolio management services on behalf of
the Company. Such services shall include, but are not limited to, consulting
with the Company on purchase and sale opportunities, collection of information
and submission of reports pertaining to the Company's assets, interest rates,
and general economic conditions, and periodic review and evaluation of the
performance of the Company's portfolio of assets.
FBRIM 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 the Company 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 the Company during each calendar quarter.
FBRIM is also entitled to receive incentive compensation based on the
performance of the Company. On December 31, 1998, and each subsequent year
thereafter, FBRIM is entitled to an incentive fee calculated as; funds from
operations, as defined, (before the incentive fee, but after management fees),
added to net realized gains or losses from asset sales, less a 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 the Company, multiplied by a rate equal to the
ten-year U.S. Treasury rate plus five percent per annum.
FBRIM has engaged Blackrock Financial Management, Inc. ("Blackrock") to manage
the Company'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 FBRIM's parent company. As compensation for
rendering services, Blackrock will be entitled to share the management fees of
FBRIM, calculated based on the average gross asset value managed by Blackrock,
with a minimum annual fee of $100,000, payable quarterly. The agreement may be
terminated by either party with thirty days advance notice.
Note 6 Related Parties
As of September 30, 1998, Friedman, Billings, Ramsey Group, Inc.
("FBRG") owns 1,344,086 shares or approximately 14.2 percent of
the outstanding common stock of the Company. FBRG is the parent
company of FBRIM and FBRC.
Note 7 Equity Investments
Imperial Credit Commercial Corporation ("ICMI")
The Company purchased 900,000 shares of ICMI common stock in December 1997. ICMI
is a Maryland corporation that has elected REIT status. It 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.
Building One Services Corporation ("BOSS")
The Company purchased 500,000 shares of BOSS (formerly Consolidated Capital
Corporation) common stock in December 1997. BOSS is a Delaware corporation that
was founded in February 1997 to
F-12
<PAGE>
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.
Capital Automotive REIT ("CARS")
On February 13, 1998, the Company acquired 1,792,115 shares of common stock in
Capital Automotive REIT ("CARS") in a private transaction, concurrent with
CARS's initial public stock offering at a price of $13.95 per share. CARS is a
self-administered and self-managed Maryland REIT formed to invest in the real
property and improvements used by operators of multisite, multifranchised 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's
common stock is publicly traded.
Resource Asset Investment Trust ("RAS")
On February 19, 1998, the Company acquired 300,000 shares of common stock in
Resource Asset Investment Trust ("RAS") a Maryland REIT, for a cost of
$4,599,000 or $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 believes that its anticipated financing activity
provides it with an underserved niche market in the real estate industry. RAS's
common stock is publicly traded.
On June 24th and 25th, 1998, the Company acquired an additional 44,575 shares of
RAS for a cost of $693,141 or $15.55 average cost per share.
Anthracite Capital, Inc. ("AHR")
On March 27, 1998, the Company purchased 716,468 shares of common stock in
Anthracite Capital, Inc. ("AHR") a Maryland REIT, for a cost of approximately
$10 million or $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. Anthracite 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.
On September 3rd and 4th, 1998, the Company purchased an additional 800,000
shares of AHR for $8,026,993 or $10.03 average cost per share.
Chastain Capital, Inc. ("CHAS")
On April 29, 1998, the Company purchased 700,000 shares of common stock in
Chastain Capital, Inc. ("CHAS") a Georgia REIT, for a cost of $9,765,000 or
$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. CHAS emphasizes, in
particular, origination of commercial mortgage loans for the purpose of
securitizing and the retainage of subordinated interests in these loans.
East West Bank ("EWB")
On June 30, 1998, the Company purchased, through a private placement offering,
520,000 shares of East West Bank, a Southern California commercial bank, for a
cost of $5,200,000 or $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.
Prime Retail, Inc. ("PRT")
On September 8, 1998, the Company purchased an aggregate of 122,300 shares of
Prime Retail, Inc. for a total of $1,191,802, or $9.74 average cost per share.
Prime is a Maryland REIT that is engaged primarily in the ownership,
development, construction, acquisition, leasing, marketing and management of
factory outlet centers. PRT's common stock is publicly traded.
F-13
<PAGE>
Appendix A Plan of Merger
PLAN OF MERGER
OF
FBR ASSET INVESTMENT CORPORATION
WITH AND INTO
FBR ASSET INVESTMENT CORPORATION (MARYLAND)
Section 1. Corporations Proposing to Merge and Surviving Corporation.
FBR Asset Investment Corporation ("FBR Asset"), a Virginia corporation,
shall be merged (the "Merger") with and into the FBR Asset Investment
Corporation (Maryland) ("FBR Asset Maryland"), a Maryland corporation, pursuant
to the terms and conditions of this Plan of Merger (this "Plan of Merger"). The
effective time of the Merger (the "Effective Time") shall be set forth in the
articles of merger to be filed with the Virginia State Corporation Commission
and the State Department of Assessment and Taxation of the State of Maryland.
FBR Asset Maryland shall continue as the surviving corporation (the "Surviving
Corporation") in the Merger and, following the Effective Time, the separate
corporate existence of FBR Asset shall cease.
Section 2. Effects of the Merger.
The Merger shall have the effects set forth in Section 13.1-721.A of
the Virginia Stock Corporation Act (the "Virginia Code") and Section 3-114 of
the Maryland General Corporation Law (the "Maryland Code").
Section 3. Corporate Organizational Documents.
The Charter of the Surviving Corporation Time shall be as set forth in
Exhibit A attached hereto.
Section 4. Conversion of Shares.
At the Effective Time, each share of issued and outstanding FBR Asset
common stock, $.01 par value, ("FBR Asset Common Stock"), shall be converted
into and become one share of FBR Asset Maryland common stock, $.01 par value,
("FBR Asset Maryland Common Stock").
At the Effective Time, all such shares of FBR Asset Common Stock shall
no longer be outstanding and shall automatically be canceled and retired and all
rights with respect thereto shall cease to exist, except the right to receive
FBR Asset Maryland Common Stock, without interest.
Section 5. Conditions.
The completion of the Merger is conditioned upon the approval of
shareholders representing two-thirds of the FBR Asset Common Stock, with no more
than 5 percent exercising any dissenter's rights. The Merger is furthered
conditioned upon the New York Stock Exchange, Inc.'s listing of the FBR Asset
Maryland Common Stock on its exchange.
Section 6. Indemnification.
With respect actions taken to consummate the Merger, FBR Asset Maryland
will indemnify directors, officers, employees and agents of FBR Asset to the
fullest extent permitted by law of the Commonwealth of Virginia or the State of
Maryland for a period not less than six years after the Effective Date.
A-1
<PAGE>
Section 7. Termination.
Either corporation, by action of their respective Board of Directors,
may terminate and abandon this Plan of Merger, notwithstanding approval of the
Plan of Merger by the shareholders of FBR Asset.
Section 8. Amendment.
At any time before the Effective Time, this Plan of Merger may be
amended, provided that: (i) any such amendment is approved by the Boards of
Directors for both parties; and (ii) no such amendment made subsequent to the
submission of this Plan of Merger to the shareholders of FBR Asset shall (a)
alter or change the amount or kind of shares to be received in exchange for or
in conversion of all or any of the shares of FBR Asset; (b) alter or change any
of the terms and conditions of this Plan of Merger if such alteration or change
would adversely affect the shares of FBR Asset Common Stock; or (c) alter or
change any term of the Surviving Corporation's charter or bylaws.
A-2
<PAGE>
Exhibit A to Plan of Merger
Articles Of Incorporation
The undersigned, being a natural person and acting as an incorporator,
does hereby adopt the following Articles of Incorporation for the purpose of
forming a business corporation in the State of Maryland, pursuant to the
provisions of the Maryland General Corporation Law. These Articles of
Incorporation, as they may be amended, supplemented or restated from time to
time, are referred to as the "Charter."
ARTICLE I
INCORPORATOR
The undersigned, Randolph F. Totten, whose address is Hunton &
Williams, Riverfront Plaza, East Tower, 951 E. Byrd Street, Richmond, Virginia,
being at least 18 years of age, does hereby form a corporation under the general
laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") is:
FBR Asset Investment Corporation (Maryland)
ARTICLE III
PURPOSE
The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the general
laws of the State of Maryland as now or hereafter in force.
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND AND RESIDENT AGENT
The address of the Corporation's principal office in the State of
Maryland is c/o The Corporation Trust Inc., 300 E. Lombard Street, Baltimore,
Maryland, 21202. The name and address of the Corporation's resident agent is The
Corporation Trust Inc., 300 E. Lombard Street, Baltimore, Maryland, 21202. The
resident agent is a Maryland corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number and Classification of Directors.
5.1.1 Number of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation shall be five. The number of directors
may be increased or decreased by resolution adopted by the affirmative vote of
at least 80% of the members of the Board of Directors, but shall never be (i)
less than the minimum number required by the general laws of the State of
Maryland now or hereafter in force or (ii) more than nine. The names of the
directors who shall serve the terms set forth below and until their successors
are elected and qualified are W. Russell Ramsey (Class I), Emanuel J. Friedman
(Class II), Webb Hayes (Class II), Eric F. Billings (Class III), and Stephen D.
Harlan (Class III).
5.1.2 Classification of Directors. The directors shall be
divided into three classes, Class I, II and III, whose terms shall be as
follows:
A-3
<PAGE>
Class I: Until the 1999 annual meeting of stockholders
and until their successors are elected and
qualified, and thereafter, for a term of three
years.
Class II: Until the 2000 annual meeting of stockholders
and until their successors are elected and
qualified, and thereafter, for a term of three
years.
Class III: Until the 2001 annual meeting of stockholders and
until their successors are elected and qualified,
and thereafter, for a term of three years.
If the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain, as nearly as possible,
an equal number of directors in each class. A director elected by stockholders
shall hold office until the annual meeting in which his term expires and until
his successor is elected and qualified, subject however, to prior death
resignation, retirement, disqualification or removal from office.
5.1.3 Election by Preferred Stockholders. Whenever the holders
of any one or more series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the Board of Directors shall consist of said directors so elected
in addition to the number of directors fixed as provided in paragraph 5.1.1 of
this Article V or in the Bylaws. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
Section 5.2 Independent Directors.
5.2.1 Number of Independent Directors. Notwithstanding anything
herein to the contrary, at all times from and after the Initial Offering (as
defined in Section 7.1.1) (except during a period not to exceed sixty (60) days
following the death, resignation, incapacity or removal from office of a
director prior to expiration of the director's term of office), at least 30% of
the members of the Board of Directors shall be "Independent Directors."
"Independent Director" shall mean any director who within the past two years has
not directly or indirectly (i) owned a material interest in the Manager (as
defined below) or any of its Affiliates (as defined below), (ii) been employed
by the Manager or any of its Affiliates, (iii) been an officer or director of
the Manager or any of its Affiliates, or (iv) performed any material services
for the Manager or any of its Affiliates.
5.2.2 Manager. For purposes of this Charter, the term "Manager"
means the Person engaged by the Corporation pursuant to a Management Agreement
(as that term is defined in Section 5.12) to advise the Board of Directors and
be responsible for directing the day-to-day business affairs of the Corporation,
including any Person to which the Person so engaged subcontracts substantially
all such functions.
5.2.3 Affiliate. For purposes of this Charter, "Affiliate" of a
Person shall mean (i) any Person who directly or indirectly controls, is
controlled by, or is under common control with such Person, (ii) any Person who
directly or indirectly owns, controls or holds, with the power to vote, 10% or
more of such Person's outstanding voting securities, (iii) any Person who is an
officer of, partner in, or director of such Person, or serves in a similar
capacity with respect to such Person, (iv) any Person for which such Person
serves as an officer, partner or director, or serves in some similar capacity,
or (v) any Person 10% of whose outstanding voting securities are directly or
indirectly owned, controlled or held, with the power to vote, by such Person.
Notwithstanding anything herein to the contrary, for purposes of determining who
may serve as an "Independent Director," the Corporation shall not be considered
an Affiliate of the Manager.
5.2.4 Indirect Relationship. For purposes of this Charter, an
"indirect relationship" shall include circumstances in which a director's
spouse, children, parents, siblings or mothers-, fathers-, sisters- or
brothers-in-law is or has been associated with the Manager or any of its
Affiliates.
5.2.5 Materiality. For purposes of Section 5.2.1, (i) an
"interest" shall be deemed material per se if it (a) exceeds 5% of a Person's
outstanding voting securities or (b) 5% of a Person's net worth on a fair market
value
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basis and (ii) "services" shall be deemed material per se if the gross revenue
derived by the director from the Manager and its Affiliates exceeds 5% of such
director's (a) annual gross revenue from all sources in either of the past two
years or (b) net worth on a fair market value basis. No person shall be
disqualified from serving as an Independent Director solely because (a) that
person maintains a discretionary brokerage account with the Manager or its
Affiliates or because (b) the Manager or its Affiliates perform other services
for such person, whether material or not.
5.2.6 Person. For purposes of this Charter, "Person" means and
includes any natural person, corporation, partnership, association, trust,
limited liability, company or any other legal entity.
Section 5.3 Amendment to Section 5.2. Notwithstanding any other
provisions of this Charter or the Bylaws of the Corporation (and notwithstanding
that some lesser percentage may be specified by law, this Charter or the Bylaws
of the Corporation), the provisions of Sections 5.2 and 5.3 shall not be
amended, altered, changed or repealed without the affirmative vote of at least
80% of the members of the Board of Directors and the affirmative vote of not
less than two-thirds of all of the votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
Section 5.4 Extraordinary Actions. Notwithstanding any provision of law
requiring the authorization of any action by a greater proportion than a
majority of the total number of shares of all classes of capital stock or of the
total number of shares of any class of capital stock, such action shall be valid
and effective if authorized by an affirmative vote of the holders of a majority
of the total number of shares of all classes outstanding and entitled to vote
thereon, except as otherwise provided in this Charter.
Section 5.5 Authorization by Board of Stock Issuance. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in this Charter or the Bylaws.
Section 5.6 Preemptive Rights. No holder of any stock or any other
securities of the Corporation, whether now or hereafter authorized, shall have
any preemptive or preferential right to subscribe to or purchase (i) any shares
of any class of the Corporation, whether now or hereafter authorized, (ii) any
warrants, rights, or options to purchase any such shares, or (iii) any
securities or obligations convertible into any such shares or into warrants,
rights, or options to purchase any such shares.
Section 5.7 Indemnification.
5.7.1 The Corporation shall indemnify and hold harmless, and
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition of
any proceeding to (A) its present and former directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
Bylaws and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such actions as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time any bylaws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law.
5.7.2 Any indemnification, or payment of expenses in advance of
the final disposition of any proceeding, shall be made promptly, and in any
event within 60 days, upon the written request of the director, officer or other
party entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation
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denies such request, in whole or in part, or (ii) no disposition thereof is made
within 60 days. The Indemnified Party's costs and expenses incurred in
connection with successfully establishing his or her right to indemnification,
in whole or in part, in any such action shall also be reimbursed by the
Corporation. It shall be a defense to any action for advance for expenses that
(a) a determination has been made that the facts then known to those making the
determination would preclude indemnification or (b) the Corporation has not
received both (i) an undertaking as required by law to repay such advances in
the event it shall ultimately be determined that the standard of conduct has not
been met and (ii) a written affirmation by the Indemnified Party of such
Indemnified Party's good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met.
5.7.3 No amendment of this Charter or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal.
Section 5.8 Determinations by Board. The determinations as to any of
the following matters made in good faith by or pursuant to the direction of the
Board of Directors consistent with this Charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which such reserves or charges
shall have been created shall have been paid or discharged); the fair value, or
any sale, bid or asked price to be applied in determining the fair value, of any
asset owned or held by the Corporation; any matters relating to the acquisition,
holding and disposition of any assets by the Corporation; whether and to what
extent and at what times and places and under what conditions and regulations
the books, accounts and documents of the Corporation shall be open to the
inspection of stockholders, except as otherwise provided by statute or by the
Bylaws. Except as provided by statute or by the Bylaws, no stockholder shall
have any right to inspect any book, account or document of the Corporation
unless authorized to do so by resolution of the Board of Directors.
Section 5.9 REIT Qualification. The Corporation shall seek to elect and
maintain status as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"). The Board of Directors shall use
its reasonable best efforts to ensure that the Corporation satisfies the
requirements for qualification as a REIT under the Code, including, but not
limited to, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount and timing of distributions to its
stockholders. The Board of Directors may revoke the Corporation's election to be
taxed as a REIT upon the affirmative vote of 80% of the members of the Board of
Directors. In the absence of such 80% vote, the Board of Directors shall take no
action to disqualify the Corporation as a REIT or to otherwise revoke the
Corporation's election to be taxed as a REIT without the affirmative vote of not
less than two-thirds of all of the votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
Section 5.10 Removal of Directors. Any director may be removed from
office at any time, but only for cause, and then only by the affirmative vote of
not less than two-thirds of all of the votes ordinarily entitled to be cast in
the election of directors, voting together as a single class.
Section 5.11 Dissolution. The dissolution of the Corporation shall be
approved by the affirmative vote of not less than two-thirds of all of the votes
ordinarily entitled to be cast in the election of directors, voting together as
a single class.
Section 5.12 Management Agreements. Subject to such approval of the
Independent Directors and other conditions, if any, as may be required by any
applicable statute, rule or regulation, the Board of Directors may engage a
Manager to advise the Board of Directors and be responsible for directing the
day-to-day affairs of the Corporation pursuant to a written agreement (a
"Management Agreement"). The approval of any Management
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Agreement and the renewal or termination thereof shall require the affirmative
vote of a majority of the Independent Directors.
Section 5.13 Amendment of Certain Provisions. Notwithstanding any other
provision of this Charter or the Bylaws of the Corporation, the provisions of
Sections 5.9, 5.10, 5.11, 5.12 and 5.13 shall not be amended, altered, changed
or repealed without the affirmative vote of not less than two-thirds of all of
the votes ordinarily entitled to be cast in the election of directors, voting
together as a single class.
ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The total number of shares of stock of
all classes that the Corporation has authority to issue is 250,000,000 shares of
capital stock (par value $.01 per share), amounting in aggregate par value to
$2,500,000. 200,000,000 of such shares are initially classified as "Common
Stock," and 50,000,000 of such shares are "Preferred Stock." The Board of
Directors may classify and reclassify any unissued shares of capital stock by
setting or changing in any one or more respects the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of capital
stock.
Section 6.2 Common Stock. Subject to Article VII, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the Corporation:
6.2.1 Voting Rights. Each share of Common Stock shall have one
vote, and except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock. Shares of Common
Stock shall not have cumulative voting rights.
6.2.2 Dividends. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid ratably on the Common Stock at such time and in
such amounts as the Board of Directors may deem advisable.
6.2.3 Distribution Upon Dissolution. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Common Stock shall be entitled, together with
the holders of any other class of stock hereafter classified or reclassified not
having a preference on distributions in the liquidation, dissolution or winding
up of the Corporation, to share ratably in the net assets of the Corporation
remaining after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any class
of stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation
shall be entitled.
Section 6.3 Classification/Reclassification.
6.3.1 Powers of the Board of Directors. Subject to Article VII
and the foregoing, the power of the Board of Directors to classify and
reclassify any of the shares of capital stock shall include, without limitation,
subject to the provisions of this Charter, authority to classify or reclassify
any unissued shares of such stock into a class or classes of preferred stock,
preference stock, special stock or other stock, and to divide and classify
shares of any class into one or more series of such class, by determining,
fixing, or altering one or more of the following:
(a) The distinctive designation of such class or series
and the number of shares to constitute such class or series;
provided that, unless otherwise prohibited by the terms of such or
any other class or series, the number of shares of any class or
series may be decreased by the Board of Directors in connection
with any classification or reclassification of unissued shares and
the number of shares of such class or series may be increased by
the Board of Directors in connection with any such
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classification or reclassification, and any shares of any class or
series that have been redeemed, purchased, otherwise acquired or
converted into shares of Common Stock or any other class or series
shall become part of the authorized capital stock and be subject
to classification and reclassification as provided in this
subparagraph.
(b) Whether or not and, if so, the rates, amounts and
times at which, and the conditions under which, dividends shall be
payable on shares of such class or series, whether any such
dividends shall rank senior or junior to, or on a parity with, the
dividends payable on any other class or series of stock, and the
status of any such dividends as cumulative, cumulative to a
limited extent or non-cumulative and as participating or
non-participating.
(c) Whether or not shares of such class or series shall
have voting rights, in addition to any voting rights provided by
law and, if so, the terms of such voting rights.
(d) Whether or not shares of such class or series shall
have conversion or exchange privileges and, if so, the terms and
conditions thereof, including provision for adjustment of the
conversion or exchange rate in such events or at such times as the
Board of Directors shall determine.
(e) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they
shall be redeemable and the amount per share payable in case of
redemption, which amount may vary under different conditions and
at different redemption dates; and whether or not there shall be
any sinking fund or purchase account in respect thereof, and if
so, the terms thereof.
(f) The rights of the holders of shares of such class or
series upon the liquidation, dissolution or winding up of the
affairs of, or upon any distribution of the assets of, the
Corporation, which rights may vary depending upon whether such
liquidation, dissolution or winding up is voluntary or involuntary
and, if voluntary, may vary at different dates, and whether such
rights shall risk senior or junior to or on a parity with such
rights of any other class or series of stock.
(g) Whether or not there shall be any limitations
applicable, while shares of such class or series are outstanding,
upon the payment of dividends or making of distributions on, or
the acquisition of, or the use of moneys for purchase or
redemption of, any stock of the Corporation, or upon any other
action of the Corporation, including action under this
subparagraph, and, if so, the terms and conditions thereof.
(h) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of
such class or series, not inconsistent with law and this Charter.
6.3.2 Ranking. For the purposes hereof and of any articles
supplementary to this Charter providing for the classification or
reclassification of any shares of capital stock or of any other Charter document
of the Corporation (unless otherwise provided in any such articles or document),
any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to another class or series either as to dividends or
upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on
liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of such other class or series;
(b) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in
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proportion to their respective dividend rates or redemption or
liquidation prices, without preference or priority over the holders of
such other class or series; and
(c) junior to another class or series either as to dividends
or upon liquidation, if the rights of the holders of such class or
series shall be subject or subordinate to the rights of the holders of
such other class or series in respect of the receipt of dividends or
the amounts distributable upon liquidation, dissolution or winding up,
as the case may be.
Section 6.4 Charter and Bylaws. All persons who shall acquire stock in
the Corporation shall acquire the same subject to the provisions of this Charter
and the Bylaws of the Corporation.
ARTICLE VII
Section 7.1 Restrictions on Transfer.
7.2.1 Definitions. For purposes of this Article VII, the
following terms shall have the following meanings:
(a) "Beneficial Ownership" shall mean ownership of shares of
Equity Stock by a Person who would be treated as an owner of such
shares of Equity Stock either directly or indirectly through the
application of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially
Owns," and "Beneficially Owned" shall have correlative meanings.
(b) "Beneficiary" shall mean, with respect to any Trust, one
or more organizations described in each of Section 170(b)(1)(A) (other
than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code
that are named by the Corporation as the beneficiary or beneficiaries
of such Trust, in accordance with the provisions of Section 7.2.1. No
Beneficiary shall be the beneficiary of more than one Trust at any
time.
(c) "Board of Directors" shall mean the Board of Directors of
the Corporation.
(d) "Closing Price" on any date shall mean the last sale price
for such shares of Equity Stock, regular way, or, in case no such sale
takes place on such a day, the average of the closing bid and asked
prices, regular way, for such shares of Equity Stock, in either case as
reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the New
York Stock Exchange or, if such shares are not listed or admitted to
trading on the New York Stock Exchange, as reported on the principal
consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which such
shares are listed or admitted to trading or, if such shares are not
listed or admitted to trading on any national securities exchange, the
last quoted price, or, if transaction prices are not reported, the
average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System, or, if such system is no longer in
use, the principal other automated quotation system that may then be in
use or, if such shares are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a
professional market maker making a market in such shares selected by
the Corporation's Board of Directors or, in the event that no trading
price is available for such shares, the fair market value of the
shares, as determined in good faith by the Corporation's Board of
Directors.
(e) "Constructive Ownership" shall mean ownership of shares of
Equity Stock by a Person who would be treated as an owner of such
shares of Equity Stock either directly or indirectly through the
application of Section 318 of the Code, as modified by Section
856(d)(5) of the Code. The terms "Constructive Owner," "Constructively
Owns," and "Constructively Owned" shall have correlative meanings.
(f) "Disqualified Person" means (i) the United States, any
State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of
the
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foregoing, (ii) any tax exempt organization (other than a farmers'
cooperative described in Section 521 of the Code) that is exempt both
from income taxation and from taxation under the unrelated business
taxable income provisions of the Code, and (iii) any rural electrical
or telephone cooperative.
(g) "Equity Stock" shall mean the Common Stock and the
Preferred Stock of the Corporation, including the Common Stock and the
Preferred Stock of the Corporation that are held as Shares-in-Trust in
accordance with the provisions of Section 7.2.
(h) "FBR" shall mean Friedman, Billings, Ramsey Group, Inc.,
and its Affiliates.
(i) "FBR Limit" shall mean (a) 20% of the number of
outstanding shares of Common Stock and (b) 20% of the number of
outstanding shares of any class or series of Preferred Stock.
(j) "Initial Offering" means the sale of shares of Common
Stock pursuant to the Corporation's first effective registration
statement for such shares of Common Stock filed under the Securities
Act of 1933, as amended.
(k) "Look-Through Entity" shall mean either (i) a pension
trust that qualifies for look-through treatment under Section 856(h)(3)
of the Code or (ii) an entity that qualifies as a regulated investment
company under Section 851 of the Code, as long as each beneficial owner
of such entity would satisfy the Ownership Limit if such beneficial
owner owned directly its proportionate share of the shares of Equity
Stock that are held by the Look-Through Entity.
(l) "Look-Through Entity Limit" shall mean (a) 15% of the
number of outstanding shares of Common Stock and (b) 15% of the number
of outstanding shares of any class or series of Preferred Stock.
(m) "Market Price" on any date shall mean the average of the
Closing Price for the five consecutive Trading Days ending on such
date.
(n) "Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership
Limit, the FBR Limit or the Look-Through Entity Limit, as applicable,
including, but not limited to, the granting of any option or entering
into any agreement for the sale, transfer or other disposition of
shares of Equity Stock or the sale, transfer, assignment or other
disposition of any securities or rights convertible into or
exchangeable for shares of Equity Stock.
(o) "Ownership Limit" shall mean the restriction on ownership
(or deemed ownership by virtue of the attribution provisions of the
Code) of more than 9.9% of the outstanding shares of Common Stock or
any series of Preferred Stock by any stockholder.
(p) "Permitted Transferee" shall mean any Person designated as
a Permitted Transferee in accordance with the provisions of Section
7.2.5.
(q) "Person" shall mean an individual, corporation,
partnership, estate, trust, a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity and
also includes a "group" as that term is used for purposes of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended.
(r) "Prohibited Owner" shall mean, with respect to any
purported Transfer or Non-Transfer Event, any Person who, but for the
provisions of Section 7.1.3, would own record title to shares of Equity
Stock.
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(s) "Restriction Termination Date" shall mean the first day
after the date of the Initial Offering on which (i) the Corporation's
election to be taxed as a REIT is revoked pursuant to Section 5.9
hereof Board of Directors determines that it is no longer in the best
interests of the Corporation to attempt to, or continue to, qualify as
a REIT or (ii) the restrictions contained in Sections 7.1.2(a) through
(e) hereof are removed pursuant to 7.1.8 hereof.
(t) "Shares-in-Trust" shall mean any shares of Equity Stock
designated Shares-in-Trust pursuant to Section 7.1.3.
(u) "Trading Day" shall mean any day other than a Saturday, a
Sunday or a day on which banking institutions in the State of New York
are authorized or obligated by law or executive order to close.
(v) "Transfer" (as a noun) shall mean any sale, transfer,
gift, assignment, devise or other disposition of shares of Equity
Stock, whether voluntary or involuntary, whether of record,
constructively or beneficially and whether by operation of law or
otherwise. "Transfer" (as a verb) shall not have the correlative
meaning.
(w) "Trust" shall mean any separate trust created pursuant to
Section 7.1.3 and administered in accordance with the terms of Section
7.2 hereof, for the exclusive benefit of any Beneficiary. A separate
trust shall be created for each transfer to Section 7.1.3 hereof.
(x) "Trustee" shall mean any Person or entity unaffiliated
with both the Corporation and any Prohibited Owner, such Trustee to be
designated by the Corporation to act as trustee of any Trust, or any
successor trustee thereof.
7.1.2 Restriction on Transfers.
(a) Except as provided in Section 7.1.7, from the date of the
Initial Offering and prior to the Restriction Termination Date, (i) no Person
may Beneficially Own or Constructively Own outstanding shares of Equity Stock in
excess of the Ownership Limit, other than (A) FBR, which may not Beneficially
Own or Constructively Own outstanding shares of Equity Stock in excess of the
FBR Limit, and (B) a Look-Through Entity, which may not Beneficially Own or
Constructively Own outstanding shares of Equity Stock in excess of the
Look-Through Entity Limit, and (ii) any Transfer that, if effective, would
result in any Person Beneficially Owning or Constructively Owning shares of
Equity Stock in excess of the Ownership Limit, the FBR Limit, or the
Look-Through Entity Limit, as applicable, shall be void ab initio as to the
Transfer of that number of shares of Equity Stock which would be otherwise
Beneficially Owned or Constructively Owned by such Person in excess of the
Ownership Limit, the FBR Limit, or the Look-Through Entity Limit, as applicable,
and the intended transferee shall acquire no rights in such excess shares of
Equity Stock.
(b) Except as provided in Section 7.1.7, from the date of the
Initial Offering and prior to the Restriction Termination Date, any Transfer
that, if effective, would result in shares of Equity Stock being beneficially
owned by fewer than 100 Persons (determined without reference to any rules of
attribution) shall be void ab initio as to the Transfer of that number of shares
which would be otherwise beneficially owned (determined without reference to any
rules of attribution) by the transferee, and the intended transferee shall
acquire no rights in such shares of Equity Stock.
(c) Except as provided in Section 7.1.7, from the date of the
Initial Offering and prior to the Restriction Termination Date, any Transfer of
shares of Equity Stock that, if effective, would result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code shall be void ab
initio as to the Transfer of that number of shares of Equity Stock which would
cause the Corporation to be "closely held" within the meaning of Section 856(h)
of the Code, and the intended transferee shall acquire no rights in such shares
of Equity Stock.
(d) Except as provided in Section 7.1.7., from the date of the
Initial Offering and prior to the
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Restriction Termination Date, any Transfer of shares of Equity Stock that, if
effective, would cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's real property, within the
meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as to the
Transfer of that number of shares of Equity Stock which would cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in
such excess shares of Equity Stock.
(e) Except as provided in Section 7.1.7, from the date of the
Initial Offering and prior to the Restriction Termination Date, any Transfer
that, if effective, would result in shares of Equity Stock being beneficially
owned by a Disqualified Person shall be void ab initio as to the Transfer of
that number of shares which would be otherwise beneficially owned by the
transferee, and the intended transferee shall acquire no rights in such shares
of Equity Stock.
7.1.3 Transfer to Trust.
(a) If, notwithstanding the other provisions contained in
this Section 7.1, at any time after the Initial Offering and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit, the FBR Limit or the
Look-Through Entity Limit, as applicable, then, (i) except as otherwise provided
in Section 7.1.7 or 7.1.8, the purported transferee shall acquire no right or
interest (or, in the case of a Non-Transfer Event, the Person holding record
title to the shares of Equity Stock Beneficially Owned or Constructively Owned
by such Beneficial Owner or Constructive Owner, shall cease to own any right or
interest) in such number of shares of Equity Stock which would cause such
Beneficial Owner or Constructive Owner to Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit, the FBR Limit or the
Look-Through Entity Limit, as applicable, (ii) such number of shares of Equity
Stock in excess of the Ownership Limit, the FBR Limit or the Look-Through Entity
Limit, as applicable, (rounded up to the nearest whole share) shall be
designated Shares-in-Trust and, in accordance with the provisions of Section 7.2
hereof, transferred automatically and by operation of law to a Trust to be held
in accordance with that Section 7.2, and (iii) the Prohibited Owner shall submit
such number of shares of Equity Stock to the Corporation for registration in the
name of the Trustee. Such transfer to a Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in this
Section 7.1, at any time after the Initial Offering and prior to the Restriction
Termination Date, there is a purported Transfer or Non-Transfer Event that, if
effective, would (i) result in the shares of Equity Stock being beneficially
owned by fewer than 100 Persons (determined without reference to any rules of
attribution), (ii) result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, (iii) result in shares of Equity Stock
being Beneficially Owned by a Disqualified Person, or (iv) cause the Corporation
to Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Section 856(d)(2)(B) of the
Code, then (x) the purported transferee shall not acquire any right or interest
(or, in the case of a Non-Transfer Event, the Person holding record title of the
shares of Equity Stock with respect to which such Non-Transfer Event occurred,
shall cease to own any right or interest) in such number of shares of Equity
Stock, the ownership of which by such purported transferee or record holder
would (A) result in the shares of Equity Stock being beneficially owned by fewer
than 100 Persons (determined without reference to any rules of attribution), (B)
result in the Corporation being "closely held" within the meaning of Section
856(h) of the Code, (C) result in the shares of Equity Stock being beneficially
owned by a Disqualified Person, or (D) cause the Corporation to Constructively
Own 10% or more of the ownership interests in a tenant of the Corporation's real
property, within the meaning of Section 856(d)(2)(B) of the Code, (y) such
number of shares of Equity Stock (rounded up to the nearest whole share) shall
be designated Shares-in-Trust and, in accordance with the provisions of Section
7.2, transferred automatically and by operation of law to a Trust to be held in
accordance with that Section 7.2, and (z) the Prohibited Owner shall submit such
number of shares of Equity Stock to the Corporation for registration in the name
of the Trustee. Such transfer to a Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event, as the case may be.
7.1.4 Remedies For Breach. If the Corporation, or its
designees, shall at any time determine in
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good faith that a Transfer has taken place in violation of Section 7.1.2 or that
a Person intends to acquire or has attempted to acquire Beneficial Ownership or
Constructive Ownership of any shares of Equity Stock in violation of Section
7.1.2, the Corporation shall take such action as it deems advisable to refuse to
give effect to or to prevent such Transfer or acquisition, including, but not
limited to, refusing to give effect to such Transfer on the books of the
Corporation or instituting proceedings to enjoin such Transfer or acquisition.
7.1.5 Notice of Restricted Transfer. Any Person who acquires
or attempts to acquire shares of Equity Stock in violation of Section 7.1.2, or
any Person who owned shares of Equity Stock that were transferred to the Trust
pursuant to the provisions of Section 7.1.3, shall immediately give written
notice to the Corporation of such event and shall provide to the Corporation
such other information as the Corporation may request in order to determine the
effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on
the Corporation's status as a REIT.
7.1.6 Owners Required To Provide Information. From the date of
the Initial Offering and prior to the Restriction Termination Date:
(a) Every Beneficial Owner or Constructive Owner of more than
5%, or such lower percentages as required pursuant to regulations under
the Code, of the outstanding shares of all classes of capital stock of
the Corporation shall, within 30 days after January 1 of each year,
provide to the Corporation a written statement or affidavit stating the
name and address of such Beneficial Owner or Constructive Owner, the
number of shares of Equity Stock Beneficially Owned or Constructively
Owned, and a description of how such shares are held. Each such
Beneficial Owner or Constructive Owner shall provide to the Corporation
such additional information as the Corporation may request in order to
determine the effect, if any, of such Beneficial Ownership or
Constructive Ownership on the Corporation's status as a REIT and to
ensure compliance with the Ownership Limit, the FBR Limit, the
Look-Through Entity Limit, and the restrictions in Section 7.1.2
hereof.
(b) Each Person who is a Beneficial Owner or Constructive
Owner of shares of Equity Stock and each Person (including the
stockholder of record) who is holding shares of Equity Stock for a
Beneficial Owner or Constructive Owner shall provide to the Corporation
a written statement or affidavit stating such information as the
Corporation may request in order to determine the Corporation's status
as a REIT and to ensure compliance with the Ownership Limit, the FBR
Limit, the Look-Through Entity Limit, and the restrictions in Section
7.1.2 hereof.
7.1.7 Exception. The Ownership Limit, the FBR Limit, and the
Look-Through Entity Limit shall not apply to the acquisition of shares of Equity
Stock by an underwriter that participates in a public offering of such shares
for a period of 90 days following the purchase by such underwriter of such
shares provided that the restrictions contained in Section 7.1.2 will not be
violated following the distribution by such underwriter or placement agent of
such shares. In addition, the Board of Directors, upon receipt of a ruling from
the Internal Revenue Service or an opinion of counsel in each case to the effect
that the restrictions contained in Section 7.1.2(b) through (d) hereof will not
be violated, may exempt a Person from the Ownership Limit provided that (i) the
Board of Directors obtains such representations and undertakings from such
Person as are reasonably necessary to ascertain that no individual's Beneficial
Ownership or Constructive Ownership of shares of Equity Stock will cause the
Corporation to lose its REIT status as a result of the exemption and (ii) such
Person agrees in writing that any violation or attempted violation will result
in such transfer to the Trust of shares of Equity Stock pursuant to Section
7.1.3.
The Board of Directors, upon receipt of a ruling from the
Internal Revenue Service or an opinion of counsel in each case to the effect
that a tax will not be imposed on the Corporation as a result of the exemption,
may exempt a Disqualified Organization from the restriction contained in Section
7.1.2(e) if either (i) the Disqualified Organization agrees to reimburse the
Corporation for any tax it incurs as a result of having such Disqualified
Organization as a shareholder or (ii) each of the following requirements is met:
(A) the record holder of the shares of Equity Stock Beneficially Owned by the
Disqualified Organization is a nominee of such Disqualified Organization, (B)
the nominee is not itself a Disqualified Organization, (C) the nominee agrees
not to transfer record
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ownership of such shares of Equity Stock to a Disqualified Organization, and (D)
the Board of Directors obtains such representations and undertakings from such
Disqualified Organization and nominee as are reasonably necessary to ascertain
the foregoing.
7.1.8 Removal of Ownership Limit. The restrictions contained
in Sections 7.1.2(a) through (e) will not be removed until (i) (a) such
restrictions are no longer required in order to qualify as a REIT and (b) the
Board of Directors determines that it is no longer in the best interests of the
Company to retain such restrictions, or (ii)(a) the Board of Directors
determines that it is no longer in the best interests of the Corporation to
attempt to qualify, or to continue to qualify, as a REIT and (b) the
Corporation's election to be taxed as a REIT is revoked pursuant to Section 5.9.
Section 7.2 Shares-in-Trust.
7.2.1 Trust. Any shares of Equity Stock transferred to a Trust
and designated Shares-in-Trust pursuant to Section 7.1.3 hereof shall be held
for the exclusive benefit of the Beneficiary. The Corporation shall name a
Beneficiary for each Trust within five days after discovery of the existence
thereof. Any transfer to a Trust, and subsequent designation of shares of Equity
Stock as Shares-in-Trust, pursuant to Section 7.1.3 shall be effective as of the
close of business on the business day prior to the date of the Transfer or
Non-Transfer Event that results in the transfer to the Trust. Shares-in-Trust
shall remain issued and outstanding shares of Equity Stock of the Corporation
and shall be entitled to the same rights and privileges on identical terms and
conditions as are all other issued and outstanding shares of Equity Stock of the
same class and series. When transferred to a Permitted Transferee in accordance
with the provisions of Section 7.2.5, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
7.2.2 Dividend Rights. The Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors on such shares of Equity Stock and
shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to
the Trust the amount of any dividends or distributions received by it that (i)
are attributable to any shares of Equity Stock designated Shares-in-Trust and
(ii) the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
Owned or Constructively Owned by the Person who, but for the provisions of
Section 7.1.3, would Constructively Own or Beneficially Own the Shares-in-Trust;
and, as soon as reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Trust for the benefit of the
Beneficiary the dividends so received or withheld, as the case may be.
7.2.3 Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled
to receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class and series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section 7.2.3 in excess of, in the case of a purported
Transfer in which the Prohibited Owner gave value for shares of Equity Stock and
which Transfer resulted in the transfer of the shares to the Trust, the price
per share, if any, such Prohibited Owner paid for the shares of Equity Stock
and, in the case of a Non-Transfer Event or Transfer in which the Prohibited
Owner did not give value for such shares (e.g., if the shares were received
through a gift or devise) and which Non-Transfer Event or Transfer, as the case
may be, resulted in the transfer of shares to the Trust, the price per share
equal to the Market Price on the date of such Non-Transfer Event or Transfer.
Any remaining amount in such Trust shall be distributed to the Beneficiary.
7.2.4 Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Prohibited Owner
shall be deemed to have given, as of the close of business on the
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business day prior to the date of the purported Transfer or Non-Transfer Event
that results in the transfer to the Trust of shares of Equity Stock under
Section 7.1.3, an irrevocable proxy to the Trustee to vote the Shares-in-Trust
in the manner in which the Trustee, in its sole and absolute discretion,
desires.
7.2.5 Designation of Permitted Transferee. The Trustee shall
have the exclusive and absolute right to designate a Permitted Transferee of any
and all Shares-in-Trust. In an orderly fashion so as not to materially adversely
affect the Market Price of the Shares-in-Trust, the Trustee shall designate any
Person as Permitted Transferee, provided, however, that (i) the Permitted
Transferee so designated purchases for valuable consideration (whether in a
public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition resulting
in a transfer to a Trust and the redesignation of such shares of Equity Stock so
acquired as Shares-in-Trust under Section 7.1.3. Upon the designation by the
Trustee of a Permitted Transferee in accordance with the provisions of this
Section 7.2.5, the Trustee shall (i) cause to be transferred to the Permitted
Transferee that number of Shares-in-Trust acquired by the Permitted Transferee,
(ii) cause to be recorded on the books of the Corporation that the Permitted
Transferee is the holder of record of such number of shares of Equity Stock,
(iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the
Beneficiary any and all amounts held with respect to the Shares-in-Trust after
making that payment to the Prohibited Owner pursuant to Section 7.2.6.
7.2.6 Compensation to Record Holder of Shares of Equity Stock
that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 7.2.5 or following the acceptance of the
offer to purchase such shares in accordance with Section 7.2.7) to receive from
the Trustee following the sale or other disposition of such Shares-in-Trust the
lesser of (i) in the case of (a) a purported Transfer in which the Prohibited
Owner gave value for shares of Equity Stock and which Transfer resulted in the
transfer of the shares to the Trust, the price per share, if any, such
Prohibited Owner paid for the shares of Equity Stock, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer, and (ii) the price per share received by
the Trustee from the sale or other disposition of such Shares-in-Trust in
accordance with Section 7.2.5. Any amounts received by the Trustee in respect of
such Shares-in-Trust and in excess of such amounts to be paid the Prohibited
Owner pursuant to this Section 7.2.6 shall be distributed to the Beneficiary in
accordance with the provisions of Section 7.2.5. Each Beneficiary and Prohibited
Owner waive any and all claims that they may have against the Trustee and the
Trust arising out of the disposition of Shares-in-Trust, except for claims
arising out of the gross negligence or willful misconduct of, or any failure to
make payments in accordance with this Section 7.2, by such Trustee or the
Corporation.
7.2.7 Purchase Right in Shares-in-Trust. Shares-in-Trust shall
be deemed to have been offered for sale to the Corporation, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or
its designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
Non-Transfer Event or purported Transfer that resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-In-Trust has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 7.1.5.
Section 7.3 Remedies Not Limited. Nothing contained in this Article VII
shall limit the authority of the Corporation to take such other action as it
deems necessary or advisable to protect the Corporation and the interests of its
stockholders by preservation of the Corporation's status a s REIT and to ensure
compliance with the Ownership Limit.
Section 7.4 Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article VII, including any definition contained
in Section 7.1.1, the Board of Directors shall have the power to determine the
application of the provisions of this Article VII with respect to any situation
based on the facts known to it.
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Section 7.5 Legend. From the date of the Initial Offering and prior to
the Restriction Termination Date, each certificate for shares of Equity Stock
shall bear the following legend:
"The shares of Common or Preferred Stock represented by this
certificate are subject to restrictions on transfer for the purpose of
the Corporation's maintenance of its status as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code").
No Person may (i) Beneficially Own or Constructively Own shares of
Common Stock in excess of 9.9% of the number of outstanding shares of
Common Stock other than (A) FBR, which may not Beneficially Own or
Constructively Own shares of Common Stock in excess of 20% of the
number of outstanding shares of Common Stock, and (B) a Look-Through
Entity, which may not Beneficially Own or Constructively Own shares of
Common Stock in excess of 15% of the number of outstanding shares of
Common Stock, (ii) Beneficially Own or Constructively Own shares of any
class or series of Preferred Stock in excess of 9.9% of the number of
outstanding shares of such class or series of Preferred Stock, other
than (A) FBR, which may not Beneficially Own or Constructively Own
shares of Common Stock in excess of 20% of the number of outstanding
shares of Common Stock, and (B) a Look-Through Entity, which may not
Beneficially Own or Constructively Own shares of Common Stock in excess
of 15% of the number of outstanding shares of Common Stock (iii)
Beneficially Own hares of Equity Stock that would result in the shares
of Equity Stock being Beneficially Owned by fewer than 100 Persons
(determined without reference to any rules of attribution), (iv)
Beneficially Own shares of Equity Stock that would result in the shares
of Equity Stock being Beneficially Owned by a Disqualified
Organization, (v) Beneficially Own shares of Common or Preferred Stock
that would result in the Corporation being "closely held" under Section
856(h) of the Code, or (vi) Constructively Own shares of Equity Stock
that would cause the Corporation to Constructively Own 10% or more of
the ownership interests in a tenant of the Corporation's real property,
within the meaning of Section 856(d)(2)(B) of the Code. Any Person who
attempts to Beneficially Own or Constructively Own shares of Equity
Stock in excess of the above limitations must immediately notify the
Corporation in writing. If the restrictions above are violated, the
shares of Common or Preferred Stock represented hereby will be
transferred automatically and by operation of law to a Trust and shall
be designated Shares-in-Trust. All capitalized terms in this legend
have the meanings defined in the Corporation's Charter, as the same may
be further amended from time to time, a copy of which, including the
restrictions on transfer, will be sent without charge to each
stockholder who so requests."
Section 7.6 Severability. If any provision of this Article VII or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
Section 7.7 Exchange Transactions. Nothing in this Article VII or this
Charter shall prohibit the settlement of any transaction entered into through
the facilities of any national securities exchange registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or of the
national market system of a national securities association registered under the
Exchange Act. The fact that the settlement of any transaction is so permitted
shall not negate the effect of any other provision of this Article VII and any
transferee in such a transaction shall be subject to all of the provisions and
limitations set forth in this Article VII.
Section 7.8 Enforcement. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
Section 7.9 Non-Waiver. No delay or failure on the part of the
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Section 7.10 Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of the provision hereof.
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Section 7.11 Amendment. Notwithstanding any other provision of this
Charter or the Bylaws of the Corporation, the provisions of this Article VII
shall not be amended, altered, changed or repealed without the affirmative vote
of not less than two-thirds of all of the votes ordinarily entitled to be cast
in the election of directors, voting together as a single class.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendments of this Charter which may not or hereafter be authorized by law,
including any amendments changing the terms of contract rights, as expressly set
forth in this Charter, or any of its outstanding stock by classification,
reclassification or otherwise but, no such amendment which changes such terms or
contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
aggregate number of votes entitled to be cast thereon.
ARTICLE IX
LIMITATION OF LIABILITY
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of the Corporation shall
be personally liable to the Corporation or its stockholders for money damages.
No amendment of this Charter or repeal of any of its provisions shall limit or
eliminate the limitation on liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
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Appendix B Stock Incentive Plan
STOCK INCENTIVE PLAN
SECTION 1. Purpose; Definitions
The purpose of the Plan is to give the Company a competitive advantage
in attracting, retaining and motivating officers, employees, non-employee
directors and other service providers 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, Performance Unit or other award
granted under this Plan.
c. "Board" means the Board of Directors of the Company.
d. [Intentionally left blank]
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 10(b) and (c), respectively.
g. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.
h. "Committee" means the Board or, if the Board appoints it, a
committee of two or more non-employee directors selected by the Board.
i. "Common Stock" means the common stock, par value $0.01 per
share, of the Company.
j. "Company" means FBR Asset Investment Corporation, 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.
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m. "Fair Market Value" means, as of any given date, the
average of the highest and lowest sales prices of the Common Stock
reported on the New York Stock Exchange Composite Tape for such date,
or if the Common Stock was not traded on the New York Stock Exchange on
such date, then on the last preceding date on which the Common Stock
was traded (or, if not listed on such exchange, the average of the
highest and lowest sales prices on any other national securities
exchange on which the Common Stock is listed or on NASDAQ). 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.
p. "Performance Goals" means the performance goals established
by the Committee in connection with the grant of Restricted Stock or
Performance Units.
q. "Performance Units" means an Award granted under Section 8.
r. "Plan" means the FBR Asset Investment Corporation 1998
Stock Incentive Plan, as set forth herein and as hereinafter amended
from time to time.
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, or service as an officer, non-employee
director or other service provider of, the Company and any Subsidiary
or Affiliated Company notwithstanding that service as a non-employee
director or other service provider may not constitute "employment" for
other purposes. A participant employed by or serving as a non-employee
director or other service provider of 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, director or service provider
of the Company or another Subsidiary or Affiliated Company. Temporary
absences from employment or other service 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.
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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; and provided, further, that the full Board shall have the sole
authority to grant Awards to non-employee directors, and any reference to the
Committee shall be a reference to the Board with respect to all such Awards.
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,
employees, non-employee directors or other service providers of the Company and
its Subsidiaries and Affiliated Companies.
Among other things, the Committee shall have the authority, subject to
the terms of the Plan:
(a) To select the officers, employees, non-employee directors
and service providers 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 500,000 shares. Shares subject to Awards under the Plan may be
authorized and unissued shares or may be treasury shares, or both.
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
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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, employees, and non-employee directors of and other persons
who provide services to 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.
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.
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. Unless otherwise determined by the Committee, the
term of each Stock Option shall be 10 years. 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.
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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.
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 of 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
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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
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 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.
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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:
(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,
employees, non-employee directors and other service providers to whom and the
time or times at which grants of unrestricted shares of Common Stock and
Restricted
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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.
(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.
(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
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(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, employees, non-employee directors and other service providers 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 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. 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.
(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.
(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
(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
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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.
SECTION 11. 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 12. 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 13. 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.
No Award may be granted under this plan after November 12, 1998. Awards
granted before that date shall remain valid in accordance with their terms.
SECTION 14. 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
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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 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 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.
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SECTION 15. Effective Date of Plan
The Plan shall be effective November 13, 1998.
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Appendix C-1 Summary of Dissenters' Rights
Shareholders' Rights of Dissent & Appraisal
Each holder of FBR Asset Virginia common stock entitled to vote on
approval of the Plan of Merger will be entitled to have the fair value of his
shares immediately before consummation of the merger paid to him in cash,
together with interest, if any, by complying with the provisions of Article 15
of the Virginia Statute ("Article 15"). Under Article 15, the determination of
the fair value of a dissenter's shares excludes any appreciation or depreciation
in the value of such shares in anticipation of the merger, unless such exclusion
is inequitable.
If you wish to exercise your dissenters' rights, you must send written
notice of intent to demand payment for your common stock to FBR Asset Virginia
(attention: Secretary) before the taking of the vote on the Plan of Merger.
Voting against, abstaining from voting, or failing to vote on approval of the
Plan of Merger will not constitute written notice of an intent to demand payment
within the meaning of Article 15.
If you elect to exercise your dissenters' rights, you must not vote for
the Plan of Merger with respect to your shares. Voting for the Plan of Merger or
delivering a proxy in connection with the special meeting (unless the proxy
specifies a vote against, or an abstention from, voting on the Plan of Merger),
will constitute a waiver of your dissenters' rights with respect to your shares
and will nullify any written notice of an intent to demand payment submitted by
you with respect to your shares.
A holder of record of shares of common stock that are beneficially
owned by others may assert dissenters' rights as to less than all of such shares
only if the holder dissents with respect to all shares of common stock
beneficially owned by any one person and notifies FBR Asset Virginia in writing
of the name and address of each person on whose behalf the holder is asserting
dissenters' rights. The rights of a partial dissenter under Article 15 are
determined as if the shares as to which the holder dissents and the holder's
other shares were registered in the names of different stockholders.
A beneficial holder of common stock may assert dissenters' rights as to
shares of common stock held on his behalf only if he: (i) submits to FBR Asset
Virginia the record holder's written consent to the dissent not later than the
time the beneficial holder asserts dissenters' rights and (ii) does so with
respect to all shares of common stock of which he is the beneficial holder or
over which he has the power to direct the vote.
If the merger is consummated, FBR Asset Virginia will, within ten days
after the merger's effective date, deliver a dissenters' notice to all holders
who satisfied the requirements of Article 15. The dissenters' notice will state
where payment demand is to be sent and where and when certificates for shares of
dissenting stockholders are to be deposited; (ii) supply a form for demanding
payment that includes the date of the first announcement to news media of the
merger and requires that the person asserting dissenters' rights certify whether
or not such person acquired beneficial ownership of such persons' dissenting
shares before or after such date; (iii) set a date by which FBR Asset Virginia
must receive the payment demand, which date may not be less than 30 nor more
than 60 days after the date of delivery of the dissenters' notice; and (iv) be
accompanied by a copy of Article 15.
A stockholder who is sent a dissenters' notice shall demand payment in
accordance with the procedures set forth in the notice and certify that he
acquired beneficial ownership of his dissenting shares before, on or after
_________. A stockholder who does not demand payment by the date set forth in
the dissenters' notice is not entitled to payment for such holder's shares under
Article 15.
Except as provided below with respect to after-acquired shares, within
30 days after receipt of a payment demand, FBR Asset Virginia shall pay the
dissenter the amount that FBR Asset Virginia estimates to be the fair value of
the dissenter's shares, plus accrued interest. The obligation of FBR Asset
Virginia to make such payment may be enforced: (i) by the Circuit Court for the
City of Richmond, Virginia; or (ii) at the election of any dissenter residing or
having its principal office in Virginia, by the circuit court in the city or
county where the dissenter resides or has such office. The payment by FBR Asset
Virginia will be accompanied by: (i) FBR Asset Virginia's balance
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sheet as of the end of a fiscal year ended not more than 16 months before the
merger's effective date, an income statement for that year, a statement of
changes in stockholders' equity for that year and the latest available interim
financial statements, if any; (ii) an explanation of how FBR Asset Virginia
estimated the fair value of the dissenting shares and of how the interest was
calculated; (iii) a statement of the dissenter's right to demand payment as
described below; and (iv) a copy of Article 15.
FBR Asset Virginia may elect to withhold payment from a dissenter
unless the dissenter was the beneficial owner of the dissenting shares on
___________, in which case FBR Asset Virginia will estimate the fair value of
such after-acquired shares, plus accrued interest, and will offer to pay such
amount to each dissenter who agrees to accept it in full satisfaction of such
dissenter's demand. FBR Asset Virginia will send with such offer an explanation
of how it estimated the fair value of the shares and of how the interest was
calculated, and a statement of the dissenter's right to demand payment as
described below.
Within 30 days after FBR Asset Virginia makes or offers payment as
described above, a dissenter may notify FBR Asset Virginia in writing of the
dissenter's own estimate of the fair value of the dissenting shares and the
amount of interest due, and demand payment of such estimate (less any payment by
FBR Asset Virginia) or reject FBR Asset Virginia's offer and demand payment of
such estimate. Failure to do so is deemed a waiver of the dissenter's right to
demand payment under Article 15.
If any such demand for payment remains unsettled, within 60 days after
receiving the payment demand, FBR Asset Virginia will petition the Circuit Court
for the City of Richmond, Virginia, to determine the fair value of the shares
and the accrued interest and make all dissenters whose demands remain unsettled
parties to such proceeding, or pay each dissenter whose demand remains unsettled
the amount demanded. Each dissenter made a party to such proceeding is entitled
to a judgment for: (i) the amount, if any, by which the court finds that the
fair value of the dissenting shares, plus interest, exceeds the amount paid by
FBR Asset Virginia, or (ii) the fair value, plus accrued interest, of the
dissenter's after-acquired shares for which FBR Asset Virginia elected to
withhold payment. The court will determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers appointed by
the court and assess the costs against FBR Asset Virginia, or against all or
some of the dissenters to the extent the court finds the dissenters did not act
in good faith in demanding payment.
================================================================================
The foregoing is only a summary of the rights of a dissenting holder of common
stock and is qualified in its entirety by reference to the statutory provisions
attached as Appendix C. Any holder of common stock who intends to dissent from
the merger should carefully review the text of the statutory provisions and
should also consult with such holder's attorney. The failure of a holder of
common stock to follow precisely the procedures summarized above, and set forth
in Appendix C, may result in the loss of such holder's dissenters' rights. No
further notice of the events giving rise to dissenters' rights or any steps
associated therewith will be furnished to holders of common stock, except as
indicated above or otherwise required by law.
================================================================================
In general, any dissenting stockholder who perfects his right to be
paid the fair value of his common stock in cash will recognize taxable gain or
loss for federal income tax purposes upon receipt of such cash. See "Federal
Income Tax Laws Applicable to REITs and REIT Shareholders."
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Appendix C-2 Statutory Provisions for Dissenters
Article 15 of the Virginia Stock Corporation Act
Dissenters' Rights
ss. 13.1-729. Definitions.
In this article:
"Corporation" means the issuer of the shares held by a dissenter before
the corporate action, except that (i) with respect to a merger, "corporation"
means the surviving domestic or foreign corporation or limited liability company
by merger of that issuer, and (ii) with respect to a share exchange,
"corporation" means the acquiring corporation by share exchange, rather than the
issuer, if the plan of share exchange places the responsibility for dissenters'
rights on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from
corporate action under ss. 13.1-730 and who exercises that right when and in the
manner required by ss.ss. 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
ss. 13.1-730. Right to dissent.
A. A shareholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of, any of the following corporate
actions:
1. Consummation of a Plan of Merger to which the corporation is a
party (i) if shareholder approval is required for the merger by ss.
13.1-718 or the articles of incorporation and the shareholder is
entitled to vote on the merger or (ii) if the corporation is a
subsidiary that is merged with its parent under ss. 13.1-719;
2. Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan;
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3. Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation if the shareholder was entitled to
vote on the sale or exchange or if the sale or exchange was in
furtherance of a dissolution on which the shareholder was entitled to
vote, provided that such dissenter's rights shall not apply in the case
of (i) a sale or exchange pursuant to court order, or (ii) a sale for
cash pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholders within one
year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to
a Plan of Merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the Plan of Merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such
shares provide otherwise;
2. In the case of a Plan of Merger or share exchange, the holders of
the class or series are required under the Plan of Merger or share
exchange to accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership
interests and cash in lieu of fractional shares (i) of the surviving
or acquiring corporation or limited liability company or (ii) of any
other corporation or limited liability company which, at the record
date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the Plan of Merger or share
exchange is to be acted on, were either listed subject to notice of
issuance on a national securities exchange or held of record by at
least 2,000 record shareholders or members; or
c. A combination of cash and shares or membership interests as
set forth in subdivisions 2 a and 2 b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and
is not approved by a majority of "disinterested directors" as such
terms are defined in ss. 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of
the corporation.
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ss. 13.1-731. Dissent by nominees and beneficial owners.
A. A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
1. He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
2. He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the vote.
ss. 13.1-732. Notice of dissenters' rights.
A. If proposed corporate action creating dissenters' rights under ss.
13.1-730 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
B. If corporate action creating dissenters' rights under ss. 13.1-730
is taken without a vote of shareholders, the corporation, during the ten-day
period after the effectuation of such corporate action, shall notify in writing
all record shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in ss. 13.1-734.
ss. 13.1-733. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights under ss.
13.1-730 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights (i) shall deliver to the corporation before
the vote is taken written notice of his intent to demand payment for his shares
if the proposed action is effectuated and (ii) shall not vote such shares in
favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A
of this section is not entitled to payment for his shares under this article.
ss. 13.1-734. Dissenters' notice.
A. If proposed corporate action creating dissenters' rights under ss.
13.1-730 is authorized at a shareholders' meeting, the corporation, during the
ten-day period after the effectuation of such corporate action, shall deliver a
dissenters' notice in writing to all shareholders who satisfied the requirements
of ss. 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and
when certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand
is received;
3. Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the terms
of the proposed corporate action and requires that the person
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asserting dissenters' rights certify whether or not he acquired
beneficial ownership of the shares before or after that date;
4. Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty nor more than sixty
days after the date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
ss. 13.1-735. Duty to demand payment.
A. A shareholder sent a dissenters' notice described in ss. 13.1-734
shall demand payment, certify that he acquired beneficial ownership of the
shares before or after the date required to be set forth in the dissenters'
notice pursuant to subdivision 3 of subsection B of ss. 13.1-734, and, in the
case of certificated shares, deposit his certificates in accordance with the
terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection A of
this section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
ss. 13.1-736. Share restrictions.
A. The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
ss. 13.1-737. Payment.
A. Except as provided in ss. 13.1-738, within thirty days after receipt
of a payment demand made pursuant to ss. 13.1-735, the corporation shall pay the
dissenter the amount the corporation estimates to be the fair value of his
shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the effective date of the
corporate action creating dissenters' rights, an income statement for
that year, a statement of changes in shareholders' equity for that
year, and the latest available interim financial statements, if any;
2. An explanation of how the corporation estimated the fair value of
the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under ss.
13.1-739; and
4. A copy of this article.
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ss. 13.1-738. After-acquired shares.
A. A corporation may elect to withhold payment required by ss. 13.1-737
from a dissenter unless he was the beneficial owner of the shares on the date of
the first publication by news media or the first announcement to shareholders
generally, whichever is earlier, of the terms of the proposed corporate action,
as set forth in the dissenters' notice.
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under ss. 13.1-739.
ss. 13.1-739. Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any payment under ss. 13.1-737), or reject the
corporation's offer under ss. 13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under ss. 13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection A
of this section within thirty days after the corporation made or offered payment
for his shares.
ss. 13.1-740. Court action.
A. If a demand for payment under ss. 13.1-739 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the circuit court in the city or county described in
subsection B of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
sixty-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents
of this Commonwealth, whose demands remain unsettled parties to the proceeding
as in an action against their shares and all parties shall be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters are
entitled to the same discovery rights as parties in other civil proceedings.
C-2-5
<PAGE>
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or (ii)
for the fair value, plus accrued interest, of his after-acquired shares for
which the corporation elected to withhold payment under ss. 13.1-738.
ss. 13.1-741. Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under ss. 13.1-740
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters did not act in good faith in demanding
payment under ss. 13.1-739.
B. The court may also assess the reasonable fees and expenses of
experts, excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of ss.ss. 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees
and expenses are assessed did not act in good faith with respect to the
rights provided by this article.
C. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, the court
may award to these counsel reasonable fees to be paid out of the amounts awarded
the dissenters who were benefited.
D. In a proceeding commenced under subsection A of ss. 13.1-737 the
court shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
C-2-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Officers and Directors
The Maryland General Corporation Law permits a Maryland corporation to
include in its Charter a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty established
by a final judgment as being material to the cause of action. The Charter of the
Registrant contains such a provision that eliminates such liability to the
maximum extent permitted by Maryland law.
The Charter of the Registrant authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer or (b) any individual who, while a
director of the Registrant and at the request of the Registrant, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason or his status as a present or former
director or officer of the Registrant. The Bylaws of the Registrant obligate it,
to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer who is a made a party to the
proceeding by reason of his service in that capacity or (b) any individual who,
while a director of the Registrant and at the request of the Registrant serves
or has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise who is made a party to the proceeding by reason of his service
in that capacity. The Charter and Bylaws also permit the Registrant to indemnify
and advance expenses to any person who served a predecessor of the Registrant in
any of the capacities described above and to any employee or agent of the
Registrant or a predecessor of the Registrant.
The Maryland General Corporation Law requires a corporation (unless its
Charter provides otherwise, which the Registrant's Charter does not) to
indemnify a director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in that capacity. That Maryland General Corporation Law
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the Maryland General Corporation Law, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the Maryland General
Corporation Law permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the corporation and (b) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
II-1
<PAGE>
2 Plan of Merger, dated as of _______ ___, 1998, among
Registrant and FBR Asset Investment Corporation
(attached to the Proxy Statement/Prospectus as
Appendix A)
3.1 Charter of Registrant
3.2 Bylaws of Registrant
5 Opinion of Hunton & Williams with respect to legality*
8 Opinion of Hunton & Williams with respect to tax
consequences of the merger*
10.1 Management Agreement, dated December 17, 1997, by and
between FBR Asset Investment Corporation and Friedman,
Billings, Ramsey Investment Management, Inc.
10.2 License Agreement, dated December 17, 1997 by and
between FBR Asset Investment Corporation and Friedman,
Billings, Ramsey Group, Inc.
10.3 Stock Option Agreement, dated December 17, 1997, by
and between FBR Asset Investment Corporation and
Friedman, Billings, Ramsey Investment Management, Inc.
10.4 Sub-management Agreement, dated as of December 17,
1997, by and between Friedman, Billings, Ramsey
Investment Management, Inc., and BlackRock Financial
Management, Inc.
10.5 Assignment Agreement, dated as of December 17, 1998,
by and between Friedman, Billings, Ramsey Investment
Management, Inc., and BlackRock Financial Management,
Inc.
10.6 Stock Incentive Plan of FBR Asset Investment
Corporation (attached to the Proxy
Statement/Prospectus as Appendix B)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Hunton & Williams (included in Exhibit 5
and Exhibit 8)*
25 Power of Attorney of Officers and Directors of
Registrant (included on signature pages of the
Registration Statement)
27.1 Financial Data Schedule
99 Form of Proxy*
* To be filed by amendment.
Item 22. Undertakings
(a) The undersigned Registrant hereby undertakes as
follows:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement.
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement is
on Form S-3 or Form S-8, and the information required to
be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the
II-2
<PAGE>
registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment will be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time will
be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
4. That prior to any public reoffering of the securities
registered hereunder through the use of a prospectus which is a part of
this registration statement, by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c), the Registrant
undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
5. That every prospectus (i) that is filed pursuant to the
paragraph immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as
part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for the purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment will be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time will be deemed to be the initial bona
fide offering thereof.
6. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of
the post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Arlington,
Commonwealth of Virginia, on November 13, 1998.
FBR ASSET INVESTMENT CORPORATION
(MARYLAND) (Registrant)
By /s/ Eric F. Billings
---------------------------------------
Eric F. Billings
Vice Chairman and Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 13, 1998. Each of the directors and/or officers
of FBR Asset Investment Corporation (Maryland) whose signature appears below
hereby appoints Eric F. Billings and Elaine M. Clancy, and both of them
severally, as his attorney-in-fact to sign in his name and behalf, in any and
all capacities stated below and to file with the Commission, any and all
amendments, including post-effective amendments to this registration statement,
making such changes in the registration statement as appropriate, and generally
to do all such things in their behalf in their capacities as officers and
directors to enable FBR Asset Investment Corporation (Maryland) to comply with
the provisions of the Securities Act of 1933, and all requirements of the
Securities and Exchange Commission.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Emanuel J. Friedman Chairman of the Board of Directors
- -------------------------------------
Emanuel J. Friedman
/s/ Eric F. Billings Vice Chairman, Chief Executive Officer
- ------------------------------------- and Director (Principal Executive Officer)
Eric F. Billings
/s/ W. Russell Ramsey President, Secretary and Director
- -------------------------------------
W. Russell Ramsey
/s/ Elaine M. Clancy Chief Financial Officer
- ------------------------------------- (Principal Financial Officer)
Elaine M. Clancy
/s/ Stephen D. Harlan Director
- -------------------------------------
Stephen D. Harlan
/s/ Webb Hayes Director
- -------------------------------------
Webb Hayes
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit Page
-------------- ------- ----
<S> <C> <C>
2 Plan of Merger, dated as of _______ ___, 1998, among
Registrant and FBR Asset Investment Corporation
(attached to the Proxy Statement/Prospectus as
Appendix A)
3.1 Charter of Registrant
3.2 Bylaws of Registrant
5 Opinion of Hunton & Williams with respect to legality*
8 Opinion of Hunton & Williams with respect to tax
consequences of the merger*
10.1 Management Agreement, dated December 17, 1997, by and
between FBR Asset Investment Corporation and Friedman,
Billings, Ramsey Investment Management, Inc.
10.2 License Agreement, dated December 17, 1997 by and
between FBR Asset Investment Corporation and Friedman,
Billings, Ramsey Group, Inc.
10.3 Stock Option Agreement, dated December 17, 1997, by
and between FBR Asset Investment Corporation and
Friedman, Billings, Ramsey Investment Management, Inc.
10.4 Sub-management Agreement, dated as of December 17,
1997, by and between Friedman, Billings, Ramsey
Investment Management, Inc., and BlackRock Financial
Management, Inc.
10.5 Assignment Agreement, dated as of December 17, 1998,
by and between Friedman, Billings, Ramsey Investment
Management, Inc., and BlackRock Financial Management,
Inc.
10.6 Stock Incentive Plan of FBR Asset Investment
Corporation (attached to the Proxy
Statement/Prospectus as Appendix B)
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
<PAGE>
23.2 Consent of Hunton & Williams (included in Exhibit 5
and Exhibit 8)
25 Power of Attorney of Officers and Directors of
Registrant (included on signature pages of the
Registration Statement)
99 Form of Proxy*
</TABLE>
* To be filed by amendment.
Exhibit 3.1
FBR ASSET INVESTMENT CORPORATION (MARYLAND)
ARTICLES OF INCORPORATION
The undersigned, being a natural person and acting as an incorporator,
does hereby adopt the following Articles of Incorporation for the purpose of
forming a business corporation in the State of Maryland, pursuant to the
provisions of the Maryland General Corporation Law. These Articles of
Incorporation, as they may be amended, supplemented or restated from time to
time, are referred to as the "Charter."
ARTICLE I
INCORPORATOR
The undersigned, Randolph F. Totten, whose address is Hunton &
Williams, Riverfront Plaza, East Tower, 951 E. Byrd Street, Richmond, Virginia,
being at least 18 years of age, does hereby form a corporation under the general
laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") is:
FBR Asset Investment Corporation (Maryland)
ARTICLE III
PURPOSE
The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the general
laws of the State of Maryland as now or hereafter in force.
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND AND RESIDENT AGENT
The address of the Corporation's principal office in the State of
Maryland is c/o The Corporation Trust Inc., 300 E. Lombard Street, Baltimore,
Maryland, 21202. The name and address of the Corporation's resident agent is The
Corporation Trust Inc., 300 E. Lombard Street, Baltimore, Maryland, 21202. The
resident agent is a Maryland corporation.
<PAGE>
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number and Classification of Directors.
5.1.1 Number of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation shall be five. The number of directors
may be increased or decreased by resolution adopted by the affirmative vote of
at least 80% of the members of the Board of Directors, but shall never be (i)
less than the minimum number required by the general laws of the State of
Maryland now or hereafter in force or (ii) more than nine. The names of the
directors who shall serve the terms set forth below and until their successors
are elected and qualified are W. Russell Ramsey (Class I), Emanuel J. Friedman
(Class II), Webb Hayes (Class II), Eric F. Billings (Class III), and Stephen W.
Harlan (Class III).
5.1.2 Classification of Directors. The directors shall be
divided into three classes, Class I, II and III, whose terms shall be as
follows:
Class I: Until the 1999 annual meeting of stockholders
and until their successors are elected and
qualified, and thereafter, for a term of three
years.
Class II: Until the 2000 annual meeting of stockholders
and until their successors are elected and
qualified, and thereafter, for a term of three
years.
Class III: Until the 2001 annual meeting of
stockholders and until their successors are
elected and qualified, and thereafter, for a term
of three years.
If the number of directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain, as nearly as possible, an
equal number of directors in each class. A director elected by stockholders
shall hold office until the annual meeting in which his term expires and until
his successor is elected and qualified, subject however, to prior death
resignation, retirement, disqualification or removal from office.
5.1.3 Election by Preferred Stockholders. Whenever the holders
of any one or more series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the Board of Directors shall consist of said directors so elected
in addition to the number of directors fixed as provided in paragraph 5.1.1 of
this Article V or in the Bylaws. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
2
<PAGE>
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
Section 5.2 Independent Directors.
5.2.1 Number of Independent Directors. Notwithstanding
anything herein to the contrary, at all times from and after the Initial
Offering (as defined in Section 7.1.1) (except during a period not to exceed
sixty (60) days following the death, resignation, incapacity or removal from
office of a director prior to expiration of the director's term of office), at
least 30% of the members of the Board of Directors shall be "Independent
Directors." "Independent Director" shall mean any director who within the past
two years has not directly or indirectly (i) owned a material interest in the
Manager (as defined below) or any of its Affiliates (as defined below), (ii)
been employed by the Manager or any of its Affiliates, (iii) been an officer or
director of the Manager or any of its Affiliates, or (iv) performed any material
services for the Manager or any of its Affiliates.
5.2.2 Manager. For purposes of this Charter, the term
"Manager" means the Person engaged by the Corporation pursuant to a Management
Agreement (as that term is defined in Section 5.12) to advise the Board of
Directors and be responsible for directing the day-to-day business affairs of
the Corporation, including any Person to which the Person so engaged
subcontracts substantially all such functions.
5.2.3 Affiliate. For purposes of this Charter, "Affiliate" of
a Person shall mean (i) any Person who directly or indirectly controls, is
controlled by, or is under common control with such Person, (ii) any Person who
directly or indirectly owns, controls or holds, with the power to vote, 10% or
more of such Person's outstanding voting securities, (iii) any Person who is an
officer of, partner in, or director of such Person, or serves in a similar
capacity with respect to such Person, (iv) any Person for which such Person
serves as an officer, partner or director, or serves in some similar capacity,
or (v) any Person 10% of whose outstanding voting securities are directly or
indirectly owned, controlled or held, with the power to vote, by such Person.
Notwithstanding anything herein to the contrary, for purposes of determining who
may serve as an "Independent Director," the Corporation shall not be considered
an Affiliate of the Manager.
5.2.4 Indirect Relationship. For purposes of this Charter, an
"indirect relationship" shall include circumstances in which a director's
spouse, children, parents, siblings or mothers-, fathers-, sisters- or
brothers-in-law is or has been associated with the Manager or any of its
Affiliates.
5.2.5 Materiality. For purposes of Section 5.2.1, (i) an
"interest" shall be deemed material per se if it (a) exceeds 5% of a Person's
outstanding voting securities or (b) 5% of a Person's net worth on a fair market
value basis and (ii) "services" shall be deemed material per se if the gross
revenue derived by the director from the Manager and its Affiliates exceeds 5%
of such director's (a) annual gross revenue from all sources in either of the
past two years or (b) net worth on a fair market value basis. No person shall be
disqualified from serving as an Independent Director solely because (a) that
3
<PAGE>
person maintains a discretionary brokerage account with the Manager or its
Affiliates or because (b) the Manager or its Affiliates perform other services
for such person, whether material or not.
5.2.6 Person. For purposes of this Charter, "Person" means and
includes any natural person, corporation, partnership, association, trust,
limited liability, company or any other legal entity.
Section 5.3 Amendment to Section 5.2. Notwithstanding any other
provisions of this Charter or the Bylaws of the Corporation (and notwithstanding
that some lesser percentage may be specified by law, this Charter or the Bylaws
of the Corporation), the provisions of Sections 5.2 and 5.3 shall not be
amended, altered, changed or repealed without the affirmative vote of at least
80% of the members of the Board of Directors and the affirmative vote of not
less than two-thirds of all of the votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
Section 5.4 Extraordinary Actions. Notwithstanding any provision of law
requiring the authorization of any action by a greater proportion than a
majority of the total number of shares of all classes of capital stock or of the
total number of shares of any class of capital stock, such action shall be valid
and effective if authorized by an affirmative vote of the holders of a majority
of the total number of shares of all classes outstanding and entitled to vote
thereon, except as otherwise provided in this Charter.
Section 5.5 Authorization by Board of Stock Issuance. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in this Charter or the Bylaws.
Section 5.6 Preemptive Rights. No holder of any stock or any other
securities of the Corporation, whether now or hereafter authorized, shall have
any preemptive or preferential right to subscribe to or purchase (i) any shares
of any class of the Corporation, whether now or hereafter authorized, (ii) any
warrants, rights, or options to purchase any such shares, or (iii) any
securities or obligations convertible into any such shares or into warrants,
rights, or options to purchase any such shares.
Section 5.7 Indemnification.
5.7.1 The Corporation shall indemnify and hold harmless, and
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition of
any proceeding to (A) its present and former directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
4
<PAGE>
extent as shall be authorized by the Board of Directors or the Corporation's
Bylaws and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such actions as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time any bylaws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law.
5.7.2 Any indemnification, or payment of expenses in advance
of the final disposition of any proceeding, shall be made promptly, and in any
event within 60 days, upon the written request of the director, officer or other
party entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be reimbursed by the Corporation. It shall
be a defense to any action for advance for expenses that (a) a determination has
been made that the facts then known to those making the determination would
preclude indemnification or (b) the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met and (ii)
a written affirmation by the Indemnified Party of such Indemnified Party's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met.
5.7.3 No amendment of this Charter or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal.
Section 5.8 Determinations by Board. The determinations as to any of
the following matters made in good faith by or pursuant to the direction of the
Board of Directors consistent with this Charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which such reserves or charges
shall have been created shall have been paid or discharged); the fair value, or
any sale, bid or asked price to be applied in determining the fair value, of any
asset owned or held by the Corporation; any matters relating to the acquisition,
holding and disposition of any assets by the Corporation; whether and to what
extent and at what times and places and under what conditions and regulations
the books, accounts and documents of the Corporation shall be open to the
inspection of stockholders, except as otherwise provided by statute or by the
Bylaws. Except as provided by statute or by the Bylaws, no stockholder shall
5
<PAGE>
have any right to inspect any book, account or document of the Corporation
unless authorized to do so by resolution of the Board of Directors.
Section 5.9 REIT Qualification. The Corporation shall seek to elect and
maintain status as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"). The Board of Directors shall use
its reasonable best efforts to ensure that the Corporation satisfies the
requirements for qualification as a REIT under the Code, including, but not
limited to, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount and timing of distributions to its
stockholders. The Board of Directors may revoke the Corporation's election to be
taxed as a REIT upon the affirmative vote of 80% of the members of the Board of
Directors. In the absence of such 80% vote, the Board of Directors shall take no
action to disqualify the Corporation as a REIT or to otherwise revoke the
Corporation's election to be taxed as a REIT without the affirmative vote of not
less than two-thirds of all of the votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
Section 5.10 Removal of Directors. Any director may be removed from
office at any time, but only for cause, and then only by the affirmative vote of
not less than two-thirds of all of the votes ordinarily entitled to be cast in
the election of directors, voting together as a single class.
Section 5.11 Dissolution. The dissolution of the Corporation shall be
approved by the affirmative vote of not less than two-thirds of all of the votes
ordinarily entitled to be cast in the election of directors, voting together as
a single class.
Section 5.12 Management Agreements. Subject to such approval of the
Independent Directors and other conditions, if any, as may be required by any
applicable statute, rule or regulation, the Board of Directors may engage a
Manager to advise the Board of Directors and be responsible for directing the
day-to-day affairs of the Corporation pursuant to a written agreement (a
"Management Agreement"). The approval of any Management Agreement and the
renewal or termination thereof shall require the affirmative vote of a majority
of the Independent Directors.
Section 5.13 Amendment of Certain Provisions. Notwithstanding any other
provision of this Charter or the Bylaws of the Corporation, the provisions of
Sections 5.9, 5.10, 5.11, 5.12 and 5.13 shall not be amended, altered, changed
or repealed without the affirmative vote of not less than two-thirds of all of
the votes ordinarily entitled to be cast in the election of directors, voting
together as a single class.
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ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The total number of shares of stock of
all classes that the Corporation has authority to issue is 250,000,000 shares of
capital stock (par value $.01 per share), amounting in aggregate par value to
$2,500,000. 200,000,000 of such shares are initially classified as "Common
Stock," and 50,000,000 of such shares are "Preferred Stock." The Board of
Directors may classify and reclassify any unissued shares of capital stock by
setting or changing in any one or more respects the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of capital
stock.
Section 6.2 Common Stock. Subject to Article VII, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the Corporation:
6.2.4 Voting Rights. Each share of Common Stock shall have one
vote, and except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock. Shares of Common
Stock shall not have cumulative voting rights.
6.2.2 Dividends. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid ratably on the Common Stock at such time and in
such amounts as the Board of Directors may deem advisable.
6.2.3 Distribution Upon Dissolution. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Common Stock shall be entitled, together with
the holders of any other class of stock hereafter classified or reclassified not
having a preference on distributions in the liquidation, dissolution or winding
up of the Corporation, to share ratably in the net assets of the Corporation
remaining after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any class
of stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation
shall be entitled.
Section 6.3 Classification/Reclassification.
6.3.1 Powers of the Board of Directors. Subject to Article VII
and the foregoing, the power of the Board of Directors to classify and
reclassify any of the shares of capital stock shall include, without limitation,
subject to the provisions of this Charter, authority to classify or reclassify
any unissued shares of such stock into a class or classes of preferred stock,
preference stock, special stock or other stock, and to divide and classify
shares of any class into one or more series of such class, by determining,
fixing, or altering one or more of the following:
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(a) The distinctive designation of such class or
series and the number of shares to constitute such class or series; provided
that, unless otherwise prohibited by the terms of such or any other class or
series, the number of shares of any class or series may be decreased by the
Board of Directors in connection with any classification or reclassification of
unissued shares and the number of shares of such class or series may be
increased by the Board of Directors in connection with any such classification
or reclassification, and any shares of any class or series that have been
redeemed, purchased, otherwise acquired or converted into shares of Common Stock
or any other class or series shall become part of the authorized capital stock
and be subject to classification and reclassification as provided in this
subparagraph.
(b) Whether or not and, if so, the rates, amounts and
times at which, and the conditions under which, dividends shall be payable on
shares of such class or series, whether any such dividends shall rank senior or
junior to, or on a parity with, the dividends payable on any other class or
series of stock, and the status of any such dividends as cumulative, cumulative
to a limited extent or non-cumulative and as participating or non-participating.
(c) Whether or not shares of such class or series
shall have voting rights, in addition to any voting rights provided by law and,
if so, the terms of such voting rights.
(d) Whether or not shares of such class or series
shall have conversion or exchange privileges and, if so, the terms and
conditions thereof, including provision for adjustment of the conversion or
exchange rate in such events or at such times as the Board of Directors shall
determine.
(e) Whether or not shares of such class or series
shall be subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall be
redeemable and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates; and
whether or not there shall be any sinking fund or purchase account in respect
thereof, and if so, the terms thereof.
(f) The rights of the holders of shares of such class
or series upon the liquidation, dissolution or winding up of the affairs of, or
upon any distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or winding up is voluntary
or involuntary and, if voluntary, may vary at different dates, and whether such
rights shall risk senior or junior to or on a parity with such rights of any
other class or series of stock.
(g) Whether or not there shall be any limitations
applicable, while shares of such class or series are outstanding, upon the
payment of dividends or making of distributions on, or the acquisition of, or
the use of moneys for purchase or redemption of, any stock of the Corporation,
or upon any other action of the Corporation, including action under this
subparagraph, and, if so, the terms and conditions thereof.
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(h) Any other preferences, rights, restrictions,
including restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and this Charter.
6.3.2 Ranking. For the purposes hereof and of any articles
supplementary to this Charter providing for the classification or
reclassification of any shares of capital stock or of any other Charter document
of the Corporation (unless otherwise provided in any such articles or document),
any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable on liquidation,
dissolution or winding up, as the case may be, in preference or priority to
holders of such other class or series;
(b) on a parity with another class or series either
as to dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation price per share thereof be different
from those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and
(c) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of such class or
series shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the amounts
distributable upon liquidation, dissolution or winding up, as the case may be.
Section 6.4 Charter and Bylaws. All persons who shall acquire stock in
the Corporation shall acquire the same subject to the provisions of this Charter
and the Bylaws of the Corporation.
ARTICLE VII
Section 7.1 Restrictions on Transfer.
7.1.5 Definitions. For purposes of this Article VII, the
following terms shall have the following meanings:
(a) "Beneficial Ownership" shall mean ownership of
shares of Equity Stock by a Person who would be treated as an owner of such
shares of Equity Stock either directly or indirectly through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The
terms "Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall
have correlative meanings.
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(b) "Beneficiary" shall mean, with respect to any
Trust, one or more organizations described in each of Section 170(b)(1)(A)
(other than clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code
that are named by the Corporation as the beneficiary or beneficiaries of such
Trust, in accordance with the provisions of Section 7.2.1. No Beneficiary shall
be the beneficiary of more than one Trust at any time.
(c) "Board of Directors" shall mean the Board of
Directors of the Corporation.
(d) "Closing Price" on any date shall mean the last
sale price for such shares of Equity Stock, regular way, or, in case no such
sale takes place on such a day, the average of the closing bid and asked prices,
regular way, for such shares of Equity Stock, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if such shares
are not listed or admitted to trading on the New York Stock Exchange, as
reported on the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which such
shares are listed or admitted to trading or, if such shares are not listed or
admitted to trading on any national securities exchange, the last quoted price,
or, if transaction prices are not reported, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System, or, if such
system is no longer in use, the principal other automated quotation system that
may then be in use or, if such shares are not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a professional
market maker making a market in such shares selected by the Corporation's Board
of Directors or, in the event that no trading price is available for such
shares, the fair market value of the shares, as determined in good faith by the
Corporation's Board of Directors.
(e) "Constructive Ownership" shall mean ownership of
shares of Equity Stock by a Person who would be treated as an owner of such
shares of Equity Stock either directly or indirectly through the application of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive Owner," "Constructively Owns," and "Constructively Owned" shall
have correlative meanings.
(f) "Disqualified Person" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (ii) any tax exempt organization (other than a farmers' cooperative
described in Section 521 of the Code) that is exempt both from income taxation
and from taxation under the unrelated business taxable income provisions of the
Code, and (iii) any rural electrical or telephone cooperative.
(g) "Equity Stock" shall mean the Common Stock and
the Preferred Stock of the Corporation, including the Common Stock and the
Preferred Stock of the Corporation that are held as Shares-in-Trust in
accordance with the provisions of Section 7.2.
(h) "FBR" shall mean Friedman, Billings, Ramsey
Group, Inc., and its Affiliates.
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(i) "FBR Limit" shall mean (a) 20% of the number of
outstanding shares of Common Stock and (b) 20% of the number of outstanding
shares of any class or series of Preferred Stock.
(j) "Initial Offering" means the sale of shares of
Common Stock pursuant to the Corporation's first effective registration
statement for such shares of Common Stock filed under the Securities Act of
1933, as amended.
(k) "Look-Through Entity" shall mean either (i) a
pension trust that qualifies for look-through treatment under Section 856(h)(3)
of the Code or (ii) an entity that qualifies as a regulated investment company
under Section 851 of the Code, as long as each beneficial owner of such entity
would satisfy the Ownership Limit if such beneficial owner owned directly its
proportionate share of the shares of Equity Stock that are held by the
Look-Through Entity.
(l) "Look-Through Entity Limit" shall mean (a) 15% of
the number of outstanding shares of Common Stock and (b) 15% of the number of
outstanding shares of any class or series of Preferred Stock.
(m) "Market Price" on any date shall mean the average
of the Closing Price for the five consecutive Trading Days ending on such date.
(n) "Non-Transfer Event" shall mean an event other
than a purported Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit, the
FBR Limit or the Look-Through Entity Limit, as applicable, including, but not
limited to, the granting of any option or entering into any agreement for the
sale, transfer or other disposition of shares of Equity Stock or the sale,
transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for shares of Equity Stock.
(o) "Ownership Limit" shall mean the restriction on
ownership (or deemed ownership by virtue of the attribution provisions of the
Code) of more than 9.9% of the outstanding shares of Common Stock or any series
of Preferred Stock by any stockholder.
(p) "Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with the provisions of
Section 7.2.5.
(q) "Person" shall mean an individual, corporation,
partnership, estate, trust, a portion of a trust permanently set aside for or to
be used exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity and also includes a "group" as that
term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended.
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(r) "Prohibited Owner" shall mean, with respect to
any purported Transfer or Non-Transfer Event, any Person who, but for the
provisions of Section 7.1.3, would own record title to shares of Equity Stock.
(s) "Restriction Termination Date" shall mean the
first day after the date of the Initial Offering on which (i) the Corporation's
election to be taxed as a REIT is revoked pursuant to Section 5.9 hereof Board
of Directors determines that it is no longer in the best interests of the
Corporation to attempt to, or continue to, qualify as a REIT or (ii) the
restrictions contained in Sections 7.1.2(a) through (e) hereof are removed
pursuant to 7.1.8 hereof.
(t) "Shares-in-Trust" shall mean any shares of Equity
Stock designated Shares-in-Trust pursuant to Section 7.1.3.
(u) "Trading Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close.
(v) "Transfer" (as a noun) shall mean any sale,
transfer, gift, assignment, devise or other disposition of shares of Equity
Stock, whether voluntary or involuntary, whether of record, constructively or
beneficially and whether by operation of law or otherwise. "Transfer" (as a
verb) shall not have the correlative meaning.
(w) "Trust" shall mean any separate trust created
pursuant to Section 7.1.3 and administered in accordance with the terms of
Section 7.2 hereof, for the exclusive benefit of any Beneficiary. A separate
trust shall be created for each transfer to Section 7.1.3 hereof.
(x) "Trustee" shall mean any Person or entity
unaffiliated with both the Corporation and any Prohibited Owner, such Trustee to
be designated by the Corporation to act as trustee of any Trust, or any
successor trustee thereof.
7.1.6 Restriction on Transfers.
(a) Except as provided in Section 7.1.7, from the
date of the Initial Offering and prior to the Restriction Termination Date, (i)
no Person may Beneficially Own or Constructively Own outstanding shares of
Equity Stock in excess of the Ownership Limit, other than (A) FBR, which may not
Beneficially Own or Constructively Own outstanding shares of Equity Stock in
excess of the FBR Limit, and (B) a Look-Through Entity, which may not
Beneficially Own or Constructively Own outstanding shares of Equity Stock in
excess of the Look-Through Entity Limit, and (ii) any Transfer that, if
effective, would result in any Person Beneficially Owning or Constructively
Owning shares of Equity Stock in excess of the Ownership Limit, the FBR Limit,
or the Look-Through Entity Limit, as applicable, shall be void ab initio as to
the Transfer of that number of shares of Equity Stock which would be otherwise
Beneficially Owned or Constructively Owned by such Person in excess of the
Ownership Limit, the FBR Limit, or the Look-Through Entity Limit, as applicable,
and the intended transferee shall acquire no rights in such excess shares of
Equity Stock.
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(b) Except as provided in Section 7.1.7, from the
date of the Initial Offering and prior to the Restriction Termination Date, any
Transfer that, if effective, would result in shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution) shall be void ab initio as to the Transfer of that
number of shares which would be otherwise beneficially owned (determined without
reference to any rules of attribution) by the transferee, and the intended
transferee shall acquire no rights in such shares of Equity Stock.
(c) Except as provided in Section 7.1.7, from the
date of the Initial Offering and prior to the Restriction Termination Date, any
Transfer of shares of Equity Stock that, if effective, would result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code shall be void ab initio as to the Transfer of that number of shares of
Equity Stock which would cause the Corporation to be "closely held" within the
meaning of Section 856(h) of the Code, and the intended transferee shall acquire
no rights in such shares of Equity Stock.
(d) Except as provided in Section 7.1.7., from the
date of the Initial Offering and prior to the Restriction Termination Date, any
Transfer of shares of Equity Stock that, if effective, would cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, shall be void ab initio as to the Transfer of that
number of shares of Equity Stock which would cause the Corporation to
Constructively Own 10% or more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Section 856(d)(2)(B) of the
Code, and the intended transferee shall acquire no rights in such excess shares
of Equity Stock.
(e) Except as provided in Section 7.1.7, from the
date of the Initial Offering and prior to the Restriction Termination Date, any
Transfer that, if effective, would result in shares of Equity Stock being
beneficially owned by a Disqualified Person shall be void ab initio as to the
Transfer of that number of shares which would be otherwise beneficially owned by
the transferee, and the intended transferee shall acquire no rights in such
shares of Equity Stock.
7.1.7 Transfer to Trust.
(a) If , notwithstanding the other provisions
contained in this Section 7.1, at any time after the Initial Offering and prior
to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would either Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit, the
FBR Limit or the Look-Through Entity Limit, as applicable, then, (i) except as
otherwise provided in Section 7.1.7 or 7.1.8, the purported transferee shall
acquire no right or interest (or, in the case of a Non-Transfer Event, the
Person holding record title to the shares of Equity Stock Beneficially Owned or
Constructively Owned by such Beneficial Owner or Constructive Owner, shall cease
to own any right or interest) in such number of shares of Equity Stock which
would cause such Beneficial Owner or Constructive Owner to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit, the
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FBR Limit or the Look-Through Entity Limit, as applicable, (ii) such number of
shares of Equity Stock in excess of the Ownership Limit, the FBR Limit or the
Look-Through Entity Limit, as applicable, (rounded up to the nearest whole
share) shall be designated Shares-in-Trust and, in accordance with the
provisions of Section 7.2 hereof, transferred automatically and by operation of
law to a Trust to be held in accordance with that Section 7.2, and (iii) the
Prohibited Owner shall submit such number of shares of Equity Stock to the
Corporation for registration in the name of the Trustee. Such transfer to a
Trust and the designation of shares as Shares-in-Trust shall be effective as of
the close of business on the business day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions
contained in this Section 7.1, at any time after the Initial Offering and prior
to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would (i) result in the shares of Equity
Stock being beneficially owned by fewer than 100 Persons (determined without
reference to any rules of attribution), (ii) result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code, (iii) result in
shares of Equity Stock being Beneficially Owned by a Disqualified Person, or
(iv) cause the Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the Corporation's real property, within the meaning of
Section 856(d)(2)(B) of the Code, then (x) the purported transferee shall not
acquire any right or interest (or, in the case of a Non-Transfer Event, the
Person holding record title of the shares of Equity Stock with respect to which
such Non-Transfer Event occurred, shall cease to own any right or interest) in
such number of shares of Equity Stock, the ownership of which by such purported
transferee or record holder would (A) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (B) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, (C) result in the shares of
Equity Stock being beneficially owned by a Disqualified Person, or (D) cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, (y) such number of shares of Equity Stock (rounded up
to the nearest whole share) shall be designated Shares-in-Trust and, in
accordance with the provisions of Section 7.2, transferred automatically and by
operation of law to a Trust to be held in accordance with that Section 7.2, and
(z) the Prohibited Owner shall submit such number of shares of Equity Stock to
the Corporation for registration in the name of the Trustee. Such transfer to a
Trust and the designation of shares as Shares-in-Trust shall be effective as of
the close of business on the business day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
7.1.8 Remedies For Breach. If the Corporation, or its
designees, shall at any time determine in good faith that a Transfer has taken
place in violation of Section 7.1.2 or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Equity Stock in violation of Section 7.1.2, the Corporation shall take
such action as it deems advisable to refuse to give effect to or to prevent such
Transfer or acquisition, including, but not limited to, refusing to give effect
to such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or acquisition.
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7.1.9 Notice of Restricted Transfer. Any Person who acquires
or attempts to acquire shares of Equity Stock in violation of Section 7.1.2, or
any Person who owned shares of Equity Stock that were transferred to the Trust
pursuant to the provisions of Section 7.1.3, shall immediately give written
notice to the Corporation of such event and shall provide to the Corporation
such other information as the Corporation may request in order to determine the
effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on
the Corporation's status as a REIT.
7.1.10 Owners Required To Provide Information. From the date
of the Initial Offering and prior to the Restriction Termination Date:
(a) Every Beneficial Owner or Constructive Owner of
more than 5%, or such lower percentages as required pursuant to regulations
under the Code, of the outstanding shares of all classes of capital stock of the
Corporation shall, within 30 days after January 1 of each year, provide to the
Corporation a written statement or affidavit stating the name and address of
such Beneficial Owner or Constructive Owner, the number of shares of Equity
Stock Beneficially Owned or Constructively Owned, and a description of how such
shares are held. Each such Beneficial Owner or Constructive Owner shall provide
to the Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership or
Constructive Ownership on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit, the FBR Limit, the Look-Through Entity
Limit, and the restrictions in Section 7.1.2 hereof.
(b) Each Person who is a Beneficial Owner or
Constructive Owner of shares of Equity Stock and each Person (including the
stockholder of record) who is holding shares of Equity Stock for a Beneficial
Owner or Constructive Owner shall provide to the Corporation a written statement
or affidavit stating such information as the Corporation may request in order to
determine the Corporation's status as a REIT and to ensure compliance with the
Ownership Limit, the FBR Limit, the Look-Through Entity Limit, and the
restrictions in Section 7.1.2 hereof.
7.1.11 Exception. The Ownership Limit, the FBR Limit, and the
Look-Through Entity Limit shall not apply to the acquisition of shares of Equity
Stock by an underwriter that participates in a public offering of such shares
for a period of 90 days following the purchase by such underwriter of such
shares provided that the restrictions contained in Section 7.1.2 will not be
violated following the distribution by such underwriter or placement agent of
such shares. In addition, the Board of Directors, upon receipt of a ruling from
the Internal Revenue Service or an opinion of counsel in each case to the effect
that the restrictions contained in Section 7.1.2(b) through (d) hereof will not
be violated, may exempt a Person from the Ownership Limit provided that (i) the
Board of Directors obtains such representations and undertakings from such
Person as are reasonably necessary to ascertain that no individual's Beneficial
Ownership or Constructive Ownership of shares of Equity Stock will cause the
Corporation to lose its REIT status as a result of the exemption and (ii) such
Person agrees in writing that any violation or attempted violation will result
in such transfer to the Trust of shares of Equity Stock pursuant to Section
7.1.3.
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The Board of Directors, upon receipt of a ruling from the
Internal Revenue Service or an opinion of counsel in each case to the effect
that a tax will not be imposed on the Corporation as a result of the exemption,
may exempt a Disqualified Organization from the restriction contained in Section
7.1.2(e) if either (i) the Disqualified Organization agrees to reimburse the
Corporation for any tax it incurs as a result of having such Disqualified
Organization as a shareholder or (ii) each of the following requirements is met:
(A) the record holder of the shares of Equity Stock Beneficially Owned by the
Disqualified Organization is a nominee of such Disqualified Organization, (B)
the nominee is not itself a Disqualified Organization, (C) the nominee agrees
not to transfer record ownership of such shares of Equity Stock to a
Disqualified Organization, and (D) the Board of Directors obtains such
representations and undertakings from such Disqualified Organization and nominee
as are reasonably necessary to ascertain the foregoing.
7.1.12 Removal of Ownership Limit. The restrictions contained
in Sections 7.1.2(a) through (e) will not be removed until (i) (a) such
restrictions are no longer required in order to qualify as a REIT and (b) the
Board of Directors determines that it is no longer in the best interests of the
Company to retain such restrictions, or (ii)(a) the Board of Directors
determines that it is no longer in the best interests of the Corporation to
attempt to qualify, or to continue to qualify, as a REIT and (b) the
Corporation's election to be taxed as a REIT is revoked pursuant to Section 5.9.
Section 7.2 Shares-in-Trust.
7.2.1 Trust. Any shares of Equity Stock transferred to a Trust
and designated Shares-in-Trust pursuant to Section 7.1.3 hereof shall be held
for the exclusive benefit of the Beneficiary. The Corporation shall name a
Beneficiary for each Trust within five days after discovery of the existence
thereof. Any transfer to a Trust, and subsequent designation of shares of Equity
Stock as Shares-in-Trust, pursuant to Section 7.1.3 shall be effective as of the
close of business on the business day prior to the date of the Transfer or
Non-Transfer Event that results in the transfer to the Trust. Shares-in-Trust
shall remain issued and outstanding shares of Equity Stock of the Corporation
and shall be entitled to the same rights and privileges on identical terms and
conditions as are all other issued and outstanding shares of Equity Stock of the
same class and series. When transferred to a Permitted Transferee in accordance
with the provisions of Section 7.2.5, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
7.2.2 Dividend Rights. The Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors on such shares of Equity Stock and
shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to
the Trust the amount of any dividends or distributions received by it that (i)
are attributable to any shares of Equity Stock designated Shares-in-Trust and
(ii) the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
16
<PAGE>
Owned or Constructively Owned by the Person who, but for the provisions of
Section 7.1.3, would Constructively Own or Beneficially Own the Shares-in-Trust;
and, as soon as reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Trust for the benefit of the
Beneficiary the dividends so received or withheld, as the case may be.
7.2.3 Rights Upon Liquidation. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled
to receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class and series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section 7.2.3 in excess of, in the case of a purported
Transfer in which the Prohibited Owner gave value for shares of Equity Stock and
which Transfer resulted in the transfer of the shares to the Trust, the price
per share, if any, such Prohibited Owner paid for the shares of Equity Stock
and, in the case of a Non-Transfer Event or Transfer in which the Prohibited
Owner did not give value for such shares (e.g., if the shares were received
through a gift or devise) and which Non-Transfer Event or Transfer, as the case
may be, resulted in the transfer of shares to the Trust, the price per share
equal to the Market Price on the date of such Non-Transfer Event or Transfer.
Any remaining amount in such Trust shall be distributed to the Beneficiary.
7.2.4 Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Prohibited Owner
shall be deemed to have given, as of the close of business on the business day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the transfer to the Trust of shares of Equity Stock under Section 7.1.3, an
irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in
which the Trustee, in its sole and absolute discretion, desires.
7.2.5 Designation of Permitted Transferee. The Trustee shall
have the exclusive and absolute right to designate a Permitted Transferee of any
and all Shares-in-Trust. In an orderly fashion so as not to materially adversely
affect the Market Price of the Shares-in-Trust, the Trustee shall designate any
Person as Permitted Transferee, provided, however, that (i) the Permitted
Transferee so designated purchases for valuable consideration (whether in a
public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition resulting
in a transfer to a Trust and the redesignation of such shares of Equity Stock so
acquired as Shares-in-Trust under Section 7.1.3. Upon the designation by the
Trustee of a Permitted Transferee in accordance with the provisions of this
Section 7.2.5, the Trustee shall (i) cause to be transferred to the Permitted
Transferee that number of Shares-in-Trust acquired by the Permitted Transferee,
(ii) cause to be recorded on the books of the Corporation that the Permitted
Transferee is the holder of record of such number of shares of Equity Stock,
(iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the
17
<PAGE>
Beneficiary any and all amounts held with respect to the Shares-in-Trust after
making that payment to the Prohibited Owner pursuant to Section 7.2.6.
7.2.6 Compensation to Record Holder of Shares of Equity Stock
that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 7.2.5 or following the acceptance of the
offer to purchase such shares in accordance with Section 7.2.7) to receive from
the Trustee following the sale or other disposition of such Shares-in-Trust the
lesser of (i) in the case of (a) a purported Transfer in which the Prohibited
Owner gave value for shares of Equity Stock and which Transfer resulted in the
transfer of the shares to the Trust, the price per share, if any, such
Prohibited Owner paid for the shares of Equity Stock, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer, and (ii) the price per share received by
the Trustee from the sale or other disposition of such Shares-in-Trust in
accordance with Section 7.2.5. Any amounts received by the Trustee in respect of
such Shares-in-Trust and in excess of such amounts to be paid the Prohibited
Owner pursuant to this Section 7.2.6 shall be distributed to the Beneficiary in
accordance with the provisions of Section 7.2.5. Each Beneficiary and Prohibited
Owner waive any and all claims that they may have against the Trustee and the
Trust arising out of the disposition of Shares-in-Trust, except for claims
arising out of the gross negligence or willful misconduct of, or any failure to
make payments in accordance with this Section 7.2, by such Trustee or the
Corporation.
7.2.7 Purchase Right in Shares-in-Trust. Shares-in-Trust shall
be deemed to have been offered for sale to the Corporation, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or
its designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
Non-Transfer Event or purported Transfer that resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-In-Trust has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 7.1.5.
Section 7.3 Remedies Not Limited. Nothing contained in this Article VII
shall limit the authority of the Corporation to take such other action as it
deems necessary or advisable to protect the Corporation and the interests of its
stockholders by preservation of the Corporation's status a s REIT and to ensure
compliance with the Ownership Limit.
Section 7.4 Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article VII, including any definition contained
in Section 7.1.1, the Board of Directors shall have the power to determine the
application of the provisions of this Article VII with respect to any situation
based on the facts known to it.
18
<PAGE>
Section 7.5 Legend. From the date of the Initial Offering and prior to
the Restriction Termination Date, each certificate for shares of Equity Stock
shall bear the following legend:
"The shares of Common or Preferred Stock represented by this
certificate are subject to restrictions on transfer for the purpose of
the Corporation's maintenance of its status as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code").
No Person may (i) Beneficially Own or Constructively Own shares of
Common Stock in excess of 9.9% of the number of outstanding shares of
Common Stock other than (A) FBR, which may not Beneficially Own or
Constructively Own shares of Common Stock in excess of 20% of the
number of outstanding shares of Common Stock, and (B) a Look-Through
Entity, which may not Beneficially Own or Constructively Own shares of
Common Stock in excess of 15% of the number of outstanding shares of
Common Stock, (ii) Beneficially Own or Constructively Own shares of any
class or series of Preferred Stock in excess of 9.9% of the number of
outstanding shares of such class or series of Preferred Stock, other
than (A) FBR, which may not Beneficially Own or Constructively Own
shares of Common Stock in excess of 20% of the number of outstanding
shares of Common Stock, and (B) a Look-Through Entity, which may not
Beneficially Own or Constructively Own shares of Common Stock in excess
of 15% of the number of outstanding shares of Common Stock (iii)
Beneficially Own hares of Equity Stock that would result in the shares
of Equity Stock being Beneficially Owned by fewer than 100 Persons
(determined without reference to any rules of attribution), (iv)
Beneficially Own shares of Equity Stock that would result in the shares
of Equity Stock being Beneficially Owned by a Disqualified
Organization, (v) Beneficially Own shares of Common or Preferred Stock
that would result in the Corporation being "closely held" under Section
856(h) of the Code, or (vi) Constructively Own shares of Equity Stock
that would cause the Corporation to Constructively Own 10% or more of
the ownership interests in a tenant of the Corporation's real property,
within the meaning of Section 856(d)(2)(B) of the Code. Any Person who
attempts to Beneficially Own or Constructively Own shares of Equity
Stock in excess of the above limitations must immediately notify the
Corporation in writing. If the restrictions above are violated, the
shares of Common or Preferred Stock represented hereby will be
transferred automatically and by operation of law to a Trust and shall
be designated Shares-in-Trust. All capitalized terms in this legend
have the meanings defined in the Corporation's Charter, as the same may
be further amended from time to time, a copy of which, including the
restrictions on transfer, will be sent without charge to each
stockholder who so requests."
Section 7.6 Severability. If any provision of this Article VII or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
19
<PAGE>
Section 7.7 Exchange Transactions. Nothing in this Article VII or this
Charter shall prohibit the settlement of any transaction entered into through
the facilities of any national securities exchange registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or of the
national market system of a national securities association registered under the
Exchange Act. The fact that the settlement of any transaction is so permitted
shall not negate the effect of any other provision of this Article VII and any
transferee in such a transaction shall be subject to all of the provisions and
limitations set forth in this Article VII.
Section 7.8 Enforcement. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
Section 7.9 Non-Waiver. No delay or failure on the part of the
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Section 7.10 Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of the provision hereof.
Section 7.11 Amendment. Notwithstanding any other provision of this
Charter or the Bylaws of the Corporation, the provisions of this Article VII
shall not be amended, altered, changed or repealed without the affirmative vote
of not less than two-thirds of all of the votes ordinarily entitled to be cast
in the election of directors, voting together as a single class.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendments of this Charter which may not or hereafter be authorized by law,
including any amendments changing the terms of contract rights, as expressly set
forth in this Charter, or any of its outstanding stock by classification,
reclassification or otherwise but, no such amendment which changes such terms or
contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
aggregate number of votes entitled to be cast thereon.
ARTICLE IX
LIMITATION OF LIABILITY
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of the Corporation shall
20
<PAGE>
be personally liable to the Corporation or its stockholders for money damages.
No amendment of this Charter or repeal of any of its provisions shall limit or
eliminate the limitation on liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation
acknowledging the same to be my act, on November 12, 1998.
WITNESS:
/s/ Tina Locatelli /s/ Randolph F. Totten
- ----------------------------- -----------------------------------
Tina Locatelli Randolph F. Totten
21
Exhibit 3.2
BYLAWS
OF
FBR ASSET INVESTMENT CORPORATION
(Maryland)
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I.................................................................. 1
ARTICLE II................................................................. 1
Section 1. Principal Office...................................... 1
Section 2. Additional Offices.................................... 1
Section 3. Fiscal and Taxable Years.............................. 1
ARTICLE III................................................................ 2
Section 1. Place................................................. 2
Section 2. Annual Meeting........................................ 2
Section 3. Special Meetings...................................... 2
Section 4. Notice................................................ 3
Section 5. Scope of Notice....................................... 3
Section 6. Organization.......................................... 3
Section 7. Quorum................................................ 4
Section 8. Voting................................................ 4
Section 9. Proxies............................................... 5
Section 10. Voting of Shares by Certain Holders.................. 5
Section 11. Inspectors........................................... 6
Section 12. Fixing Record Date................................... 7
Section 13. Action Without a Meeting............................. 7
Section 14. Voting by Ballot..................................... 8
Section 15. Voting List.......................................... 8
Section 16. Shareholder Proposals................................ 8
ARTICLE IV................................................................. 10
Section 1. General Powers........................................ 10
Section 2. Change in Number; Vacancies........................... 10
Section 3. Resignations.......................................... 11
Section 4. Annual and Regular Meetings........................... 11
Section 5. Special Meetings...................................... 11
Section 6. Notice................................................ 11
Section 7. Quorum................................................ 12
Section 8. Voting................................................ 12
Section 9. Telephone Meetings.................................... 13
Section 10. Action Without a Meeting............................. 13
Section 11. Compensation......................................... 13
Section 12. Policies and Resolutions............................. 13
Section 13. Nominations.......................................... 14
<PAGE>
ARTICLE V.................................................................. 15
Section 1. Committees of the Board............................... 15
Section 2. Telephone Meetings.................................... 16
Section 3. Action By Committees Without a Meeting................ 17
ARTICLE VI................................................................. 17
Section 1. General Provisions.................................... 17
Section 2. Subordinate Officers, Committees and Agents........... 18
Section 3. Removal and Resignation............................... 18
Section 4. Vacancies............................................. 18
Section 5. General Powers........................................ 18
Section 6. Duties of the President............................... 19
Section 7. Duties of the Chief Executive Officer................. 19
Section 8. Duties of the Treasurer............................... 19
Section 9. Duties of the Secretary............................... 20
Section 10. Other Duties of Officers............................. 20
Section 11. Salaries............................................. 20
ARTICLE VII................................................................ 21
Section 1. Contracts............................................. 21
Section 2. Checks and Drafts..................................... 21
Section 3. Deposits.............................................. 21
ARTICLE VIII............................................................... 21
Section 1. Certificates of Stock................................. 21
Section 2. Lost Certificate...................................... 22
Section 3. Transfer Agents and Registrars........................ 22
Section 4. Transfer of Stock..................................... 23
Section 5. Stock Ledger.......................................... 23
ARTICLE IX................................................................. 24
Section 1. Declaration........................................... 24
Section 2. Contingencies......................................... 24
ARTICLE X.................................................................. 24
Section 1. Seal.................................................. 24
Section 2. Affixing Seal......................................... 25
ARTICLE XI................................................................. 25
Waiver of Notice.................................................. 29
ARTICLE XII................................................................ 25
Section 1. By Directors.......................................... 25
Section 2. By Shareholders....................................... 26
- ii -
<PAGE>
BYLAWS
OF
FBR ASSET INVESTMENT CORPORATION (MARYLAND)
The Board of Directors of FBR Asset Investment Corporation (Maryland)
(the "Corporation") hereby sets out the Bylaws of the Corporation in their
entirety, as follows:
ARTICLE I
Definitions
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned them in the Charter.
ARTICLE II
Offices
Section 1. Principal Office. The principal office of the Corporation
shall be located at 1001 Nineteenth Street, North, Arlington, Virginia 22209, or
at any other place or places as the Board of Directors may designate.
Section 2. Additional Offices. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
Section 3. Fiscal and Taxable Years. The fiscal and taxable years of
the Corporation shall begin on January 1 and end on December 31.
<PAGE>
ARTICLE III
Meetings of Shareholders
Section 1. Place. All meetings of shareholders shall be held at 1001
Nineteenth Street, North, Arlington, Virginia 22209, or at such other place
within the United States as shall be stated in the notice of the meeting.
Section 2. Annual Meeting. The President or the Board of Directors may
fix the time of the annual meeting of the shareholders for the election of
Directors and the transaction of any business as may be properly brought before
the meeting, but if no such date and time is fixed by the President or the Board
of Directors, the meeting for any calendar year shall be held on the fourth
Thursday in May, if that day is not a legal holiday. If that day is a legal
holiday, the annual meeting shall be held on the next succeeding business day
that is not a legal holiday.
Section 3. Special Meetings. The President, a majority of the Board of
Directors, or a majority of the Independent Directors may call special meetings
of the shareholders. Special meetings of shareholders also shall be called by
the Secretary upon the written request of the holders of shares entitled to cast
not less than twenty-five percent (25%) of all the votes entitled to be cast at
such meeting. Such request shall state the purpose of such meeting and the
matters proposed to be acted on at such meeting. The Secretary shall inform such
shareholders of the reasonably estimated cost of preparing and mailing notice of
the meeting and, upon payment to the Corporation of such costs, the Secretary
shall give notice to each shareholder entitled to notice of the meeting. Unless
requested by shareholders entitled to cast a majority of all the votes entitled
to be cast at such meeting, a special meeting need not be called to consider any
matter that is substantially the same as a matter voted on at any annual or
special meeting of the shareholders held during the preceding twelve months.
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<PAGE>
Section 4. Notice. Not less than ten (10) nor more than ninety (90)
days before each meeting of shareholders, the Secretary shall give to each
shareholder entitled to vote at such meeting and to each shareholder not
entitled to vote who is entitled to notice of the meeting, written or printed
notice stating the time and place of the meeting and, in the case of a special
meeting or as otherwise may be required by statute, the purpose for which the
meeting is called, either by mail or by presenting it to such shareholder
personally or by leaving it at his residence or usual place of business. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the shareholder at his post office address as it
appears on the records of the Corporation, with postage thereon prepaid.
Section 5. Scope of Notice. No business shall be transacted at a
special meeting of shareholders except that specifically designated in the
notice of the meeting. Subject to the provisions of Section 16 of this Article
III, any business of the Corporation may be transacted at the annual meeting
without being specifically designated in the notice, except such business as is
required by statute to be stated in such notice.
Section 6. Organization. At every meeting of the shareholders, the
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting and act as Chairman in the
order stated: the Vice Chairman of the Board, if there be one, the President,
the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer,
or a Chairman chosen by the shareholders entitled to cast a majority of the
votes that all shareholders present in person or by proxy are entitled to cast.
The Secretary, or, in his absence, an assistant secretary, or in the absence of
both the Secretary and assistant secretaries, a person appointed by the Chairman
shall act as Secretary.
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<PAGE>
Section 7. Quorum. At any meeting of shareholders, the presence in
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this Section
7 shall not affect any requirement under any statute, the Charter or these
Bylaws for the vote necessary for the adoption of any measure. If such quorum
shall not be present at any meeting of the shareholders, the shareholders
representing a majority of the shares entitled to vote at such meeting, present
in person or by proxy, may vote to adjourn the meeting from time to time to a
date not more than 120 days after the original record date without notice other
than announcement at the meeting until such quorum shall be present. At such
adjourned meeting at which a quorum shall be present, any business may be
transacted that might have been transacted at the meeting as originally
notified. Any meeting at which Directors are to be elected shall be adjourned
only from day to day, as may be directed by shareholders representing a majority
of the shares who are present in person or by proxy and who are entitled to vote
on the election of Directors.
Section 8. Voting. A plurality of all the votes cast at a meeting of
shareholders duly called and at which a quorum is present shall be sufficient to
elect a Director. There shall be no cumulative voting. Each share of stock may
be voted for as many individuals as there are Directors to be elected and for
whose election the share is entitled to be voted. A majority of the votes cast
at a meeting of shareholders duly called and at which a quorum is present shall
be sufficient to approve any matter that may properly come before the meeting,
unless more than a majority of the votes cast is required by statute, by the
Charter or by these Bylaws. Each shareholder of record shall have the right, at
every meeting of shareholders, to one vote for each share held.
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<PAGE>
Section 9. Proxies. A shareholder may vote the shares of stock owned of
record by him, either in person or by proxy executed in writing by the
shareholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
Section 10. Voting of Shares by Certain Holders. Shares registered in
the name of another corporation, if entitled to be voted, may be voted by the
president, a vice president or a proxy appointed by the president or a vice
president of such other corporation, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the board
of directors of such other corporation presents a certified copy of such bylaw
or resolution, in which case such person may vote such shares. Any fiduciary may
vote shares registered in his name as such fiduciary, either in person or by
proxy.
Shares of its own stock indirectly owned by this Corporation shall not
be voted at any meeting and shall not be counted in determining the total number
of outstanding shares entitled to be voted at any given time, unless they are
held by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
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<PAGE>
The Board of Directors may adopt by resolution a procedure by which a
shareholder may certify in writing to the Corporation that any shares of stock
registered in the name of the shareholder are held for the account of a
specified person other than the shareholder. The resolution shall set forth the
class of shareholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure that the
Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the shareholder of record of
the specified stock in place of the shareholder who makes the certification.
Section 11. Inspectors. At any meeting of shareholders, the Chairman of
the meeting may, or upon the request of any shareholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all shareholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
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<PAGE>
Section 12. Fixing Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of the shareholders
or any adjournment thereof, or entitled to receive payment for any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than ninety
(90) days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section such determination shall
apply to any adjournment thereof.
Section 13. Action Without a Meeting. Any action required or permitted
to be taken at a meeting of shareholders may be taken without a meeting if a
consent in writing, setting forth such action, is signed by each shareholder
entitled to vote on the matter and any other shareholder entitled to notice of a
meeting of shareholders (but not to vote thereat) has waived in writing any
right to dissent from such action, and such consent and waiver are filed with
the minutes of proceedings of the shareholders.
Section 14. Voting by Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
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<PAGE>
Section 15. Voting List. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten (10)
days before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. Such list, for a period of ten (10) days
prior to such meeting, shall be kept on file at the registered office of the
Corporation or at its principal place of business or at the office of its
transfer agent or registrar and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting. The
original stock transfer books shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders. If the requirements of this section have not been
substantially complied with, the meeting shall, on the demand of any shareholder
in person or by proxy, be adjourned until the requirements are complied with.
Section 16. Shareholder Proposals. To be properly brought before an
annual meeting of shareholders, business must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (iii) otherwise properly brought before
the meeting by a shareholder. In addition to any other applicable requirements,
for business to be properly brought before an annual meeting by a shareholder,
the shareholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
given, either by personal delivery or by United States mail, postage prepaid, to
the Secretary of the Corporation not later than ninety (90) days in advance of
- 8 -
<PAGE>
the annual meeting. A shareholder's notice to the Secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting (including the specific proposal to be presented) and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of the shareholder proposing such business, (iii) the class and number of shares
of the Corporation that are beneficially owned by the shareholder, and (iv) any
material interest of the shareholder in such business.
In the event that a shareholder attempts to bring business before an
annual meeting without complying with the provisions of this Section 16, the
Chairman of the meeting shall declare to the meeting that the business was not
properly brought before the meeting in accordance with the foregoing procedures,
and such business shall not be transacted.
No business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Section 16, provided, however,
that nothing in this Section 16 shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting.
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ARTICLE IV
Directors
Section 1. General Powers. The Board of Directors shall have full power
to conduct, manage, and direct the business and affairs of the Corporation, and
all powers of the Corporation, except those specifically reserved or granted to
the shareholders by statute, by the Charter or by these Bylaws, shall be
exercised by, or under the authority of, the Board of Directors. Unless
otherwise agreed between the Corporation and the Director, each individual
Director, including each Independent Director, may engage in other business
activities of the type conducted by the Corporation and is not required to
present to the Corporation any investment opportunities presented to them even
though the investment opportunities may be within the scope of the Corporation's
investment policies.
Section 2. Changes in Number; Vacancies.
Any vacancy occurring on the Board of Directors may be filled by a
majority of the remaining members of the Board of Directors, although such
majority is less than a quorum; provided, however, that a majority of
Independent Directors shall nominate replacements for vacancies among the
Independent Directors, which replacements must be elected by a majority of the
Directors. If the shareholders of any class or series are entitled separately to
elect one or more Directors, a majority of the remaining Directors elected by
that class or series or the sole remaining Director elected by that class or
series may fill any vacancy among the number of Directors elected by that class
or series. A Director elected by the Board of Directors to fill a vacancy shall
be elected to hold office until the next annual meeting of shareholders or until
his successor is elected and qualified. The Board of Directors may declare
vacant the office of a Director who has been declared of unsound mind by an
order of court, who has pled guilty or nolo contendere to, or been convicted of,
a felony involving moral turpitude, or who has willfully violated the
Corporation's Charter or these Bylaws.
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<PAGE>
Section 3. Resignations. Any Director or member of a committee may
resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein, or if no time be specified, at the time of
the receipt by the Chairman of the Board, the President, or the Secretary.
Section 4. Annual and Regular Meetings. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice other than this bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without notice other than such resolution.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the President, a majority of the Board of
Directors, or a majority of the Independent Directors then in office. The person
or persons authorized to call special meetings of the Board of Directors may fix
any place, either within or without the State of Maryland, as the place for
holding any special meeting of the Board of Directors called by them.
Section 6. Notice. Notice of any special meeting of the Board of
Directors shall be given by written notice delivered personally, telegraphed,
telecopied or mailed to each Director at his business or resident address.
Personally delivered, telegraphed or telecopied notices shall be given at least
two days prior to the meeting. Notice by mail shall be given at least five days
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prior to the meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail properly addressed, with postage thereon
prepaid. If given by telegram, such notice shall be deemed to be given when the
telegram is delivered to the telegraph company. Neither the business to be
transacted at, nor the purpose of, any annual, regular or special meeting of the
Board of Directors need be stated in the notice, unless specifically required by
statute or these Bylaws.
Section 7. Quorum. Subject to the provisions of Section 8 of this
Article IV, a majority of the entire Board of Directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a quorum is present at said meeting, a majority of
the Directors present may adjourn the meeting from time to time without further
notice.
Subject to the provisions of Section 10 of this Article IV, the
Directors present at a meeting that has been duly called and convened may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough Directors to leave less than a quorum.
Section 8. Voting. (a) Except as provided in subsection (b) of this
Section 10, the action of the majority of the Directors present at a meeting at
which a quorum is present shall be the action of the Board of Directors, unless
the concurrence of a greater proportion is required for such action by the
Charter, these Bylaws, or applicable statute.
(b) Notwithstanding anything in these Bylaws to the contrary,
a majority of the Independent Directors or the holders of a majority of the
outstanding common stock of the Corporation must approve (i) any transaction
pursuant to which the Company would invest in any securities that are being
underwritten or placed by the Manager or any Affiliate of the Manager and (ii)
any transaction involving the Corporation in which the Manager or an Affiliate
of the Manager has a material financial interest.
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<PAGE>
Section 9. Telephone Meetings. Members of the Board of Directors may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
Section 10. Action Without a Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting, if a consent in writing to such action is signed by each Director and
such written consent is filed with the minutes of proceedings of the Board of
Directors.
Section 11. Compensation. Directors shall receive such reasonable
compensation for their services as Directors as the Board of Directors may fix
or determine from time to time; such compensation may include a fixed sum,
shares of capital stock of the Corporation and reimbursement of reasonable
expenses incurred in traveling to and from or attending regular or special
meetings of the Board of Directors or of any committee thereof.
Section 12. Policies and Resolutions. It shall be the duty of the Board
of Directors to insure that the purchase, sale, retention and disposal of the
Corporation's assets, the investment policies and the borrowing policies of the
Corporation and the limitations thereon or amendment thereof are at all times:
(a) consistent with such policies, limitations and
restrictions as are contained in these Bylaws, or in the Corporation's Charter,
subject to revision from time to time at the discretion of the Board of
Directors without shareholder approval unless otherwise required by law; and
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<PAGE>
(b) in compliance with the restrictions applicable to real
estate investment trusts pursuant to the Internal Revenue Code of 1986, as
amended.
Section 13. Nominations. Subject to the rights of holders of any class
or series of stock having a preference over the common stock as to dividends or
upon liquidation, nominations for the election of Directors shall be made by the
Corporation's notice of the meeting of shareholders for such election, the Board
of Directors, or by any shareholder entitled to vote in the election of
Directors generally. However, any shareholder entitled to vote in the election
of Directors generally may nominate one or more persons for election as
Directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
not later than (i) with respect to an election to be held at an annual meeting
of shareholders, ninety (90) days in advance of such meeting, and (ii) with
respect to an election to be held at a special meeting of shareholders for the
election of Directors, the close of business on the seventh (7th) day following
the date on which notice of such meeting is first given to shareholders. Each
notice shall set forth: (a) the name and address of the shareholder who intends
to make the nomination and of the person or persons to be nominated; (b) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
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<PAGE>
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (d) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (e) the consent of each nominee to serve as a Director of the Corporation if
so elected. The Chairman of the meeting may refuse to acknowledge the nomination
of any person not made in compliance with the foregoing procedure.
ARTICLE V
Committees
Section 1. Committees of the Board. The Board of Directors may appoint
from among its members an executive committee and other committees comprised of
two or more Directors. The Board of Directors may delegate to any committee any
of the powers of the Board of Directors except the power to elect Directors,
declare dividends or distributions on stock, recommend to the shareholders any
action that requires shareholder approval, amend or repeal these Bylaws, approve
any merger or share exchange that does not require shareholder approval, or
issue stock. However, if the Board of Directors has given general authorization
for the issuance of stock, a committee of the Board of Directors, in accordance
with a general formula or method specified by the Board of Directors by
resolution or by adoption of a stock option plan, may fix the terms of stock,
subject to classification or reclassification, and the terms on which any stock
may be issued.
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<PAGE>
Notice of committee meetings shall be given in the same manner as
notice for special meetings of the Board of Directors.
One-third, but not less than two, of the members of any committee shall
be present in person at any meeting of such committee in order to constitute a
quorum for the transaction of business at such meeting, and the act of a
majority present shall be the act of such committee. The Board of Directors may
designate a chairman of any committee, and such chairman or any two members of
any committee may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any such
committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
Director to act at the meeting in the place of such absent or disqualified
members; provided, however, that in the event of the absence or disqualification
of an Independent Director, such appointee shall be an Independent Director.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Directors at the meeting next succeeding, and any
action by the committees shall be subject to revision and alteration by the
Board of Directors, provided that no rights of third persons shall be affected
by any such revision or alteration.
Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative members to replace any absent or
disqualified member, or to dissolve any such committee.
Section 2. Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
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<PAGE>
Section 3. Action By Committees Without a Meeting. Any action required
or permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
ARTICLE VI
Officers
Section 1. General Provisions. The officers of the Corporation may
consist of a Chairman of the Board, a Vice Chairman of the Board, a President, a
Chief Executive Officer, A Chief Operating Officer, a Chief Financial Officer,
one or more Managing Directors, a Treasurer, one or more assistant treasurers, a
Secretary, one or more assistant secretaries, and such other officers as may be
elected in accordance with the provisions of Section 2 of this Article VI. The
officers of the Corporation shall be elected annually by the Board of Directors
at the first meeting of the Board of Directors held after each annual meeting of
shareholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as may be convenient. Each
officer shall hold office until his successor is elected and qualifies or until
his death, resignation or removal in the manner hereinafter provided. Any two or
more offices may be held by the same person. In its discretion, the Board of
Directors may leave unfilled any office except that of President, Secretary and
Treasurer. Election or appointment of an officer or agent shall not of itself
create contract rights between the Corporation and such officer or agent.
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<PAGE>
Section 2. Subordinate Officers, Committees and Agents. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees, other agents as the business of the Corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these Bylaws, or as the Board of
Directors may from time to time determine. The Directors may delegate to any
officer or committee the power to elect subordinate officers and to retain or
appoint employees or other agents.
Section 3. Removal and Resignation. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Any resignation shall take effect at the time
specified therein or, if the time when it shall become effective is not
specified therein, immediately upon its receipt. The acceptance of a resignation
shall not be necessary to make it effective unless otherwise stated in the
resignation.
Section 4. Vacancies. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 5. General Powers. All officers of the Corporation as between
themselves and the Corporation shall, respectively, have such authority and
perform such duties in the management of the property and affairs of the
Corporation as may be determined by resolution of the Board of Directors, or in
the absence of controlling provisions in a resolution of the Board of Directors,
as may be provided in these Bylaws.
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Section 6. Duties of the President. The President shall be primarily
responsible for the execution of policies of the Board of Directors. He shall
have authority over the general management and direction of the business and
operations of the Corporation and its divisions, if any, subject only to the
ultimate authority of the Board of Directors. In the absence of the Chairman of
the Board, or if there are no such officers, the President shall preside at all
corporate meetings. He may sign and execute in the name of the Corporation share
certificates, deeds, mortgages, bonds, contracts or other instruments except in
cases where the signing and the execution thereof shall be expressly delegated
by the Board of Directors or by these Bylaws to some other officer or agent of
the Corporation or shall be required by law otherwise to be signed or executed.
In addition, he shall perform all duties incident to the office of the President
and such other duties as from time to time may be assigned to him by the Board
of Directors.
Section 7. Duties of the Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer, and Managing Directors ("Managing Officers").
Each Managing Officer, if any, shall have such powers and duties as may from
time to time be assigned to him by the President or the Board of Directors. Any
Managing Officer may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments authorized by the Board of
Directors, except where the signing and execution of such documents shall be
expressly delegated by the Board of Directors or the President to some other
officer or agent of the Corporation or shall be required by law or otherwise to
be signed or executed.
Section 8. Duties of the Treasurer. The Treasurer shall have such
powers and duties as may be assigned to him by the President of the Board of
Directors. The Treasurer may sign and execute in the name of the Corporation
share certificates, deeds, mortgages, bonds, contracts or other instruments,
except in cases where the signing and the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer or
agent of the Corporation or shall be required by law or otherwise to be signed
or executed.
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<PAGE>
Section 9. Duties of the Secretary. The Secretary shall act as
secretary of all meetings of the Board of Directors, the Executive Committee and
all other Committees of the Board and shareholders of the Corporation. He shall
keep and preserve the minutes of all such meetings in the proper book or books
provided for that purpose. He shall see that all notices required to be given by
the Corporation are duly given and served; shall have custody of the seal of the
Corporation and shall affix the seal or cause it to be affixed to all documents
the execution of which on behalf of the Corporation under its corporate seal is
duly authorized in accordance with law or the provisions of these Bylaws; shall
have custody of all deeds, leases, contracts and other important corporate
documents; shall have charge of the books, records and papers of the Corporation
relating to its organization and management as a Corporation; shall see that all
reports, statements and other documents required by law (except tax returns) are
properly filed; and shall, in general perform, all the duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him by the Board of Directors or the President.
Section 10. Other Duties of Officers. Any officer of the Corporation
shall have, in addition to the duties prescribed herein or by law, such other
duties as from time to time shall be prescribed by the Board of Directors or the
President.
Section 11. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
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ARTICLE VII
Contracts, Notes, Checks and Deposits
Section 1. Contracts. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Corporation and such authority may be general
or confined to specific instances.
Section 2. Checks and Drafts. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall from time to time be
determined by the Board of Directors.
Section 3. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
ARTICLE VIII
Shares of Stock
Section 1. Certificates of Stock. Each shareholder shall be entitled to
a certificate or certificates that shall represent and certify the number of
shares of each kind and class of shares held by him in the Corporation. Each
certificate shall be signed by the Chairman of the Board or the President or a
Managing Officer and countersigned by the Secretary or an assistant secretary or
the Treasurer or an assistant treasurer and may be sealed with the corporate
seal.
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The signatures may be either manual or facsimile. Certificates shall be
consecutively numbered; and if the Corporation shall, from time to time, issue
several classes of stock, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing stock that
is restricted as to its transferability or voting powers, which is preferred or
limited as to its dividends or as to its share of the assets upon liquidation or
which is redeemable at the option of the Corporation, shall have a statement of
such restriction, limitation, preference or redemption provision, or a summary
thereof, plainly stated on the certificate. In lieu of such statement or
summary, the Corporation may set forth upon the face or back of the certificate
a statement that the Corporation will furnish to any shareholder, upon request
and without charge, a full statement of such information.
Section 2. Lost Certificate. The Board of Directors may direct a new
certificate to be issued in place of any certificate previously issued by the
Corporation alleged to have been lost, stolen or destroyed upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing the issuance of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or his legal representative to advertise the same in such manner as
it shall require and/or to give bond, with sufficient surety, to the Corporation
to indemnify it against any loss or claim which may arise as a result of the
issuance of a new certificate.
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<PAGE>
Section 3. Transfer Agents and Registrars. The Board of Directors may
appoint one or more banks or trust companies in such city or cities as the Board
of Directors may deem advisable, from time to time, to act as transfer agents
and/or registrars of the shares of stock of the Corporation; and, upon such
appointments being made, no certificate representing shares shall be valid until
countersigned by one of such transfer agents and registered by one of such
registrars.
Section 4. Transfer of Stock. No transfers of shares of stock of the
Corporation shall be made if (i) void ab initio pursuant to any provision of the
Corporation's Charter or (ii) the Board of Directors, pursuant to any provision
of the Corporation's Charter, shall have refused to permit the transfer of such
shares. Permitted transfers of shares of stock of the Corporation shall be made
on the stock records of the Corporation only upon the instruction of the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and upon surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, as to any transfers not prohibited by any provision of
the Corporation's Charter or by action of the Board of Directors thereunder, it
shall be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
Section 5. Stock Ledger. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate stock ledger containing the name and address of each
shareholder and the number of shares of stock of each class held by such
shareholder.
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<PAGE>
Section 6. Control Share Acquisition Statute. Shares acquired by FBR
shall not be subject to the restrictions or other provisions of Maryland's
Control Share Act, as in effect from time to time.
ARTICLE IX
Dividends
Section 1. Declaration. Dividends upon the shares of stock of the
Corporation may be declared by the Board of Directors, subject to applicable
provisions of law and the Charter. Dividends may be paid in cash, property or
shares of the Corporation, subject to applicable provisions of law and the
Charter.
Section 2. Contingencies. Before payment of any dividends, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the Board of Directors may from time to time, in its absolute
discretion, think proper as a reserve fund for contingencies, for equalizing
dividends, for repairing or maintaining the property of the Corporation, its
subsidiaries or any partnership for which it serves as general partner, or for
such other purpose as the Board of Directors shall determine to be in the best
interests of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
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ARTICLE X
Seal
Section 1. Seal. The Corporation may have a corporate seal, which may
be altered at will by the Board of Directors. The Board of Directors may
authorize one or more duplicate or facsimile seals and provide for the custody
thereof.
Section 2. Affixing Seal. Whenever the Corporation is required to place
its corporate seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a corporate seal to
place the word "(SEAL)" adjacent to the signature of the person authorized to
execute the document on behalf of the Corporation.
ARTICLE XI
Waiver of Notice
Whenever any notice is required to be given pursuant to the Charter or
these Bylaws of the Corporation or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
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ARTICLE XII
Amendment of Bylaws
Section 1. By Directors. The Board of Directors shall have the power to
adopt, alter or repeal any Bylaws of the Corporation and to make new Bylaws,
except that the Board of Directors shall not alter or repeal this Article XII or
any Bylaws made by the shareholders and provided that any amendment to Section
2, Section 7, or Section 8(b) of Article IV requires the affirmative vote of 80%
of the entire Board of Directors, including a majority of the Independent
Directors.
Section 2. By Shareholders. The shareholders shall have the power to
adopt, alter or repeal any Bylaws of the Corporation and to make new Bylaws,
provided that any amendment to Section 2, Section 7, or Section 8(b) of Article
IV requires the affirmative vote of the holders of two-thirds (2/3) of all the
outstanding shares entitled to vote on the election of Directors, voting
together as a single class.
Dated: November 12, 1998
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Exhibit 10.1
MANAGEMENT AGREEMENT
This Management Agreement ("Agreement") is made and entered into as of
December 17, 1997, by and between FBR Asset Investment Corporation, a Virginia
corporation (the "Company"), and Friedman, Billings, Ramsey Investment
Management, Inc., a Delaware corporation (the "Manager").
RECITALS
WHEREAS, the Company intends to conduct its business in the manner
described in the Private Offering Memorandum, dated December 11, 1997 (the
"Memorandum") and expects to qualify for the tax benefits accorded by Sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, the Company desires to retain the Manager to acquire, sell and
otherwise manage the investments of the Company and to perform administrative
services for the Company in the manner and on the terms set forth herein;
NOW THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used herein but not otherwise
defined shall have the respective meanings assigned them in the Memorandum. In
addition, the following terms shall have the meanings assigned them.
(a) "Agreement" means this Management Agreement, as amended
from time to time.
(b) "Closing Date" means the date of closing of the Company's
initial offering of common stock pursuant to the Memorandum.
(c) "Governing Instruments" means the articles of
incorporation and bylaws of a corporation.
SECTION 2. Duties of the Manager.
(a) Administration and Operation of the Company. The Manager at all
times will be subject to the supervision of the Company's Board of Directors and
will have only such functions and authority as stated in this Agreement or as
the Company may delegate to it. The Manager will be responsible for the
day-to-day operations of the Company and will perform (or cause to be performed)
such services and activities relating to the assets and operations of the
Company as may be appropriate, including:
<PAGE>
(i) serving as the Company's consultant with respect to
formulation of investment criteria and policy guidelines;
(ii) representing the Company in connection with the purchase
and commitment to purchase assets, the sale and commitment to sell
assets, and the maintenance and administration of its portfolio of
assets;
(iii) furnishing reports and statistical and economic research
to the Company regarding the Company's activities and the services
performed for the Company by the Manager;
(iv) monitoring and providing to the Board of Directors on an
ongoing basis price information and other data, obtained from certain
nationally recognized dealers that maintain markets in assets
identified by the Board of Directors from time to time, and providing
data and advice to the Board of Directors in connection with the
identification of such dealers;
(v) providing certain executive and administrative personnel,
office space and office services required in rendering services to the
Company;
(vi) administering the day-to-day operations of the Company
and performing and supervising the performance of such other
administrative functions necessary in the management of the Company as
may be agreed upon by the Manager and the Board of Directors, including
the collection of revenues and the payment of the Company's debts and
obligations and maintenance of appropriate computer services to perform
such administrative functions;
(vii) communicating on behalf of the Company with the holders
of any equity or debt securities of the Company as required to satisfy
the reporting and other requirements of any trading markets or any
governmental bodies or agencies and to maintain effective relations
with such holders;
(viii) to the extent not otherwise subject to an agreement
executed by the Company, designating a servicer for mortgage loans sold
to the Company and arranging for the monitoring and administering of
such servicers;
(ix) counseling the Company in connection with policy
decisions to be made by the Board of Directors;
(x) counseling the Company regarding the maintenance of its
status as a REIT and monitoring compliance with the various REIT
qualification tests and other rules set out in the Code and regulations
thereunder;
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(xi) engaging in hedging activities on behalf of the Company,
consistent with the Company's status as a REIT;
(xii) upon request by and in accordance with the directions of
the Board of Directors, investing or reinvesting any money of the
Company; and
(xiii) counseling the Company regarding the maintenance of its
exemption from the Investment Company Act and monitoring compliance
with the various requirements for such exemption.
(b) Portfolio Management. The Manager will perform portfolio management
services on behalf of the Company with respect to the Company's investments.
Such services will include, but not be limited to, consulting with the Company
on purchase and sale opportunities; collection of information and submission of
reports pertaining to the Company's assets, interest rates, and general economic
conditions; periodic review and evaluation of the performance of the Company's
portfolio of assets; acting as liaison between the Company and banking, mortgage
banking, investment banking and other parties with respect to the purchase,
financing and disposition of assets; and other customary functions related to
portfolio management. The Manager may enter into subcontracts with other
parties, including its Affiliates, to provide any such services to the Company.
(c) Reasonable Best Efforts. The Manager agrees to use its reasonable
best efforts at all times in performing services for the Company hereunder.
SECTION 3. Additional Activities of Manager. Nothing herein shall
prevent the Manager or any of its Affiliates from engaging in other businesses
or from rendering services of any kind to any other person or entity, including
investment in, or advisory service to others investing in, any type of real
estate investment, including investments that meet the principal investment
objectives of the Company.
The Manager will allocate investment opportunities among investors for
whom the Manager and its Affiliates manage assets based upon primary investment
objectives, applicable investment restrictions, and such other factors as the
Manager deems appropriate and fair under the circumstances.
Directors, officers, employees and agents of the Manager or its
Affiliates may serve as directors, officers, employees, agents, nominees or
signatories for the Company, to the extent permitted by the Company's Governing
Instruments, as from time to time amended, or by any resolutions duly adopted by
the Board of Directors pursuant to the Company's Governing Instruments. When
executing documents or otherwise acting in such capacities for the Company, such
persons shall use their respective titles in the Company.
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SECTION 4. Commitments. In order to meet the investment requirements of
the Company, as determined by the Board of Directors from time to time, the
Manager agrees, at the direction of the Board of Directors, to issue on behalf
of the Company commitments on such terms as are established by the Board of
Directors for the purchase of investments.
SECTION 5. Bank Accounts. At the direction of the Board of Directors,
the Manager may establish and maintain one or more bank accounts in the name of
the Company, and may collect and deposit into any such account or accounts, and
disburse funds from any such account or accounts, under such terms and
conditions as the Board of Directors may approve; and the Manager shall from
time to time render appropriate accountings of such collections and payments to
the Board of Directors and, upon request, to the auditors of the Company.
SECTION 6. Records; Confidentiality. The Manager shall maintain
appropriate books of accounts and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company at any time during normal business
hours. The Manager shall keep confidential any and all information obtained in
connection with the services rendered hereunder and shall not disclose any such
information to nonaffiliated third parties except with the prior written consent
of the Board of Directors.
SECTION 7. Obligations of Manager.
(a) The Manager shall require each seller or transferor of investments
to the Company to make such representations and warranties regarding such
investments as may, in the judgment of the Manager, be necessary and
appropriate. In addition, the Manager shall take such other action as it deems
necessary or appropriate with regard to the protection of the Company's
investments.
(b) The Manager shall refrain from any action that, in its sole
judgment made in good faith, would adversely affect the status of the Company as
a REIT or that, in its sole judgment made in good faith, would violate any law,
rule or regulation of any governmental body or agency having jurisdiction over
the Company or that would otherwise not be permitted by the Company's Governing
Instruments. If the Manager is ordered to take any such action by the Board of
Directors, the Manager shall promptly notify the Board of Directors of the
Manager's judgment that such action would adversely affect such status or
violate any such law, rule or regulation, or the Governing Instruments.
Notwithstanding the foregoing, the Manager, its directors, officers,
stockholders and employees shall not be liable to the Company, the Independent
Directors, or the Company's stockholders or partners for any act or omission by
the Manager, its directors, officers, stockholders or employees except as
provided in Section 10 of this Agreement.
SECTION 8. Compensation.
(a) Commencing with the first calendar quarter ending after the Closing
Date, the Company shall pay to the Manager, for services rendered under this
Agreement, a quarterly base management fee in an amount equal to the sum of (a)
1/4 of 1% per annum (adjusted to reflect a quarterly period) of the Average
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Invested Mortgage Assets of the Company during each calendar quarter (or a pro
rata amount based on the number of days elapsed during any partial calendar
quarter) and (b) 3/4 of 1% per annum of the remainder of the Average Invested
Assets of the Company during each calendar quarter (or a pro rata amount based
on the number of days elapsed during any partial calendar quarter). After the
end of each calendar year (beginning with 1998), the Manager may, and at the
request of the Company shall, provide an analysis of the costs of providing
services under this Agreement during such calendar year. This information may be
used by the Company to adjust the base management fee in order to align it more
closely with the actual costs of such services, or with the consent of the
Manager, to reduce the base management fee to the extent the Company incurs
costs internally. No more than one such adjustment may be made in any calendar
year.
(b) The Manager shall be entitled to receive incentive compensation
based on the performance of the Company. At the end of 1998, the Manager will be
entitled to receive the Incentive Calculation Amount for the period from the
Closing Date through December 31, 1998. For each calendar quarter thereafter
beginning with the quarter ended March 31, 1999, the Manager will be entitled to
receive 25% of the Incentive Calculation Amount for the 12 month period ending
with the end of that calendar quarter.
As used herein, the Incentive Calculation Amount for any period
means an amount equal to the product of (A) 25% of the dollar amount by which
(1)(a) Funds from Operations (before the incentive fee but after the base
management fee) of the Company per share (based on the weighted average number
of shares outstanding) plus (b) gains (or minus losses) from debt restructuring
and sales of property per share (based on the weighted average number of shares
outstanding), exceed (2) an amount equal to (a) the weighted average of the
price per share at the Offering Price and the prices per share at any secondary
offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus
five percent per annum multiplied by (B) the weighted average number of Common
Shares outstanding during such period.
"Funds from Operations" shall be computed in accordance with the
definition thereof adopted by the National Association of Real Estate Investment
Trusts ("NAREIT") and shall mean net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures.
As used in calculating the Manager's compensation, the term "Ten
Year U.S. Treasury Rate" means the arithmetic average of the weekly average
yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to constant maturities of ten years)
published by the Federal Reserve Board during a quarter, or if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency or
department of the federal government selected by the Company. If the Company
determines in good faith that the Ten Year U.S. Treasury Rate cannot be
calculated as provided above, then the rate shall be the arithmetic average of
the per annum average yields to maturities, based upon closing asked prices on
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each business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less than
eight nor more than twelve years from the date of the closing asked prices as
chosen and quoted for each business day in each such quarter in New York City by
at least three recognized dealers in U.S. government securities selected by the
Company.
(c) The Manager shall compute the compensation payable under Sections
8(a) and 8(b) of this Agreement within 45 days after the end of each calendar
quarter. A copy of the computations made by the Manager to calculate its
compensation shall thereafter promptly be delivered to the Company and, upon
such delivery, payment of the compensation earned under Sections 8(a) and 8(b)
of this Agreement shown therein shall be due and payable within 60 days after
the end of such calendar quarter.
(d) The Manager may charge the Company for any out of pocket expenses
that the Manager incurs in connection with any due diligence on assets
considered for purchase by the Company. Moreover, the Manager shall document the
time spent by the Manager's employees in performing such due diligence and shall
be entitled to reimbursement for the allocable portion of such employees'
salaries and benefits provided, however, that (i) the amount of due diligence
costs for which the Manager receives reimbursement with respect to any asset
shall not exceed an arm's length due diligence fee for such asset and (ii) the
Manager shall not be entitled to reimbursement for any due diligence or employee
time costs associated with investments in securities being underwritten or
placed by an Affiliate of the Manager.
SECTION 9. Calculations of Expenses. Expenses incurred by the Manager
on behalf of the Company shall be reimbursed quarterly to the Manager within 60
days after the end of each quarter. The Manager shall prepare a statement
documenting the expenses of the Company and those incurred by the Manager on
behalf of the Company during each quarter, and shall deliver such statement to
the Company within 45 days after the end of each quarter.
SECTION 10. Limits of Manager Responsibility. The Manager assumes no
responsibility under this Agreement other than to render the services called for
hereunder in good faith and shall not be responsible for any action of the
Company in following or declining to follow any advice or recommendations of the
Manager, including as set forth in Section 7(b) of this Agreement. The Manager,
its Affiliates, and their respective directors, officers, stockholders and
employees will not be liable to the Company, any subsidiary, the Independent
Directors or the Company's or any subsidiary's shareholders, creditors, or
partners for any acts or omissions by the Manager, its Affiliates, and their
respective directors, officers, stockholders or employees under or in connection
with this Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties. The Manager
may consult with and rely upon counsel in any case where it appears to the
Manager to be necessary or desirable with respect to its authority and
obligations under this Agreement. Additionally, the Manager may rely and act
upon any certificates or other instruments believed in good faith by the Manager
to be genuine and to have been signed by any person duly authorized. The Company
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shall reimburse, indemnify and hold harmless the Manager, its stockholders,
directors, officers and employees of and from any and all expenses, losses,
damages, liabilities, demands, charges and claims of any nature whatsoever,
(including attorneys' fees) in respect of or arising from any acts or omissions
of the Manager, its stockholders, directors, officers and employees made in good
faith in the performance of the Manager's duties under this Agreement and not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.
SECTION 11. No Joint Venture. The Company and the Manager are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
SECTION 12. Term; Termination. This Agreement shall commence on the
Closing Date and shall continue in force until the second anniversary of the
Closing Date, and thereafter, it may be extended only with the consent of the
Manager and by the affirmative vote of a majority of the Board of Directors of
the Company, including a majority vote of the Independent Directors.
Each extension shall be executed in writing by the parties and shall be
dated as of the expiration of this Agreement or any extension thereof. Each such
extension shall not exceed twelve months.
Notwithstanding any other provision to the contrary, this Agreement, or
any extension hereof, may be terminated by the Company without cause, upon 60
days written notice, by a majority vote of the Independent Directors or by
majority vote of the holders of the outstanding Common Shares; provided that the
base management fee and incentive management fee earned during the twelve months
preceding such termination, will be due.
If this Agreement is terminated pursuant to this Section 12, such
termination shall be without any further liability or obligation of either party
to the other, except as provided in Section 16 of this Agreement.
SECTION 13. Assignments.
(a) Except as set forth in subsection (b) of this Section 13, this
Agreement shall terminate automatically in the event of its assignment, in whole
or in part, by the Manager, unless such assignment is consented to in writing by
the Company with the consent of a majority of the Independent Directors. Any
such assignment shall bind the assignee hereunder in the same manner as the
Manager is bound. In addition, the assignee shall execute and deliver to the
Company a counterpart of this Agreement naming such assignee as Manager. This
Agreement shall not be assigned by the Company without the prior written consent
of the Manager, except in the case of assignment by the Company to another
Company or other organization that is a successor (by merger, consolidation or
purchase of assets) to the Company, in which case such successor organization
shall be bound hereunder and by the terms of such assignment in the same manner
as the Company is bound hereunder.
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(b) Notwithstanding any provision of this Agreement, the Manager may
subcontract and assign any or all of its responsibilities under Sections 2(a)
and 2(b) of this Agreement to any of its Affiliates or to Blackrock Financial
Management, Inc., and the Company hereby consents to any such assignment and
subcontracting.
SECTION 14. Termination by Company for Cause. At the option of the
Company, this Agreement shall be and become terminated upon 60 days' written
notice of termination from a majority of the Independent Directors to the
Manager, without payment of any termination fee, if any of the following events
shall occur:
(a) if the Manager shall violate any material provision of
this Agreement and, after notice of such violation, shall not cure such
violation within 30 days; or
(b) there is entered an order for relief or similar decree or
order with respect to the Manager by a court having competent
jurisdiction in an involuntary case under the federal bankruptcy laws
as now or hereafter constituted or under any applicable federal or
state bankruptcy, insolvency or other similar laws; or the Manager (i)
ceases, or admits in writing its inability to pay its debts as they
become due and payable, or makes a general assignment for the benefit
of, or enters into any composition or arrangement with, creditors; (ii)
applies for, or consents (by admission of material allegations of a
petition or otherwise) to the appointment of a receiver, trustee,
assignee, custodian, liquidator or sequestrator (or other similar
official) of the Manager or of any substantial part of its properties
or assets, or authorizes such an application or consent, or proceedings
seeking such appointment are commenced without such authorization,
consent or application against the Manager and continue undismissed for
30 days; (iii) authorizes or files a voluntary petition in bankruptcy,
or applies for or consents (by admission of material allegations of a
petition or otherwise) to the application of any bankruptcy,
reorganization, arrangement, readjustment of debt, insolvency,
dissolution, liquidation or other similar law of any jurisdiction, or
authorizes such application or consent, or proceedings to such end are
instituted against the Manager without such authorization, application
or consent and are approved as properly instituted and remain
undismissed for 30 days or result in adjudication of bankruptcy or
insolvency; or (iv) permits or suffers all or any substantial part of
its properties or assets to be sequestered or attached by court order
and the order remains undismissed for 30 days.
If any of the events specified in this Section 14 shall occur, the
Manager shall give prompt written notice thereof to the Board of Directors upon
the happening of such event.
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SECTION 15. Action Upon Termination. From and after the effective date
of termination of this Agreement pursuant to Sections 12, 13, or 14 of this
Agreement, the Manager shall not be entitled to compensation for further
services hereunder, but shall be paid all compensation accruing to the date of
termination and, if terminated by the Company pursuant to Section 12, the
applicable termination fee. Upon such termination, the Manager shall forthwith:
(a) after deducting any accrued compensation and reimbursement
for its expenses to which it is then entitled, pay over to the Company
all money collected and held for the account of the Company pursuant to
this Agreement;
(b) deliver to the Company a full accounting, including a
statement showing all payments collected by it and a statement of all
money held by it, covering the period following the date of the last
accounting furnished to the Board of Directors with respect to the
Company; and
(c) deliver to the Company all property and documents of the
Company then in the custody of the Manager.
SECTION 16. Release of Money or Other Property Upon Written Request.
The Manager agrees that any money or other property of the Company held by the
Manager under this Agreement shall be held by the Manager as custodian for the
Company, and the Manager's records shall be appropriately marked clearly to
reflect the ownership of such money or other property by the Company. Upon the
receipt by the Manager of a written request signed by a duly authorized officer
of the Company requesting the Manager to release to the Company any money or
other property then held by the Manager for the account of the Company under
this Agreement, the Manager shall release such money or other property to the
Company within a reasonable period of time, but in no event later than 60 days
following such request. The Manager shall not be liable to the Company, any
subsidiary, the Independent Directors, or the Company's or a subsidiary's
stockholders or partners for any acts performed or omissions to act by the
Company in connection with the money or other property released to the Company
in accordance with this Section. The Company shall indemnify the Manager, its
directors, officers, stockholders and employees against any and all expenses,
losses, damages, liabilities, demands, charges and claims of any nature
whatsoever, which arise in connection with the Manager's release of such money
or other property to the Company in accordance with the terms of this Section
16. Indemnification pursuant to this provision shall be in addition to any right
of the Manager to indemnification under Section 10 of this Agreement.
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SECTION 17. Representations and Warranties.
(a) The Company hereby represents and warrants to the Manager as
follows:
(i) The Company is duly organized, validly existing and in
good standing under the laws of the Commonwealth of Virginia, has the
corporate power to own its assets and to transact the business in which
it is now engaged and is duly qualified as a foreign corporation and in
good standing under the laws of each jurisdiction where its ownership
or lease of property or the conduct of its business requires such
qualification, except for failures to be so qualified, authorized or
licensed that could not in the aggregate have a material adverse effect
on the business operations, assets or financial condition of the
Company and its subsidiaries, taken as a whole. The Company does not do
business under any fictitious business name.
(ii) The Company has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations
required hereunder and has taken all necessary corporate action to
authorize this Agreement on the terms and conditions hereof and the
execution, delivery and performance of this Agreement and all
obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the
Company, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required by the Company
in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each
instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of the Company, and this
Agreement constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder will not
violate any provision of any existing law or regulation binding on the
Company, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Company, or the
Governing Instruments of, or any securities issued by the Company or of
any mortgage, indenture, lease, contract or other agreement, instrument
or undertaking to which the Company is a party or by which the Company
or any of its assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or financial
condition of the Company and its subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien
on any of its property, assets or revenues pursuant to the provisions
of any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company as
follows:
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(i) the Manager is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its formation, has
the corporate power to own its assets and to transact the business in
which it is now engaged and is duly qualified to do business and is in
good standing under the laws of each jurisdiction where its ownership
or lease of property or the conduct of its business requires such
qualification, except for failures to be so qualified, authorized or
licensed that could not in the aggregate have a material adverse effect
on the business operations, assets or financial condition of the
Manager and its subsidiaries, taken as a whole. The Manager does not do
business under any fictitious business name.
(ii) The Manager has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations
required hereunder and has taken all necessary corporate action to
authorize this Agreement on the terms and conditions hereof and the
execution, delivery and performance of this Agreement and all
obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the
Manager, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required by the Manager
in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each
instrument or document required hereunder will be, executed and
delivered by a duly authorized agent of the Manager, and this Agreement
constitutes, and each instrument or document required hereunder when
executed and delivered hereunder will constitute, the legally valid and
binding obligation of the Manager enforceable against the Manager in
accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement and the documents or instruments required hereunder, will not
violate any provision of any existing law or regulation binding on the
Manager, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Manager, or the
partnership agreement of, or any securities issued by the Manager or of
any mortgage, indenture, lease, contract or other agreement, instrument
or undertaking to which the Manager is a party or by which the Manager
or any of its assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or financial
condition of the Manager and its subsidiaries, taken as a whole, and
will not result in, or require, the creation or imposition of any lien
on any of its property, assets or revenues pursuant to the provisions
of any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
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SECTION 18. Notices. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Company:
FBR Asset Investment Corporation
1001 Nineteenth Street, North
Arlington, Virginia 22209
Attention: Secretary
with a copy given in the manner prescribed
above, to:
George C. Howell, III, Esquire
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219-4074
(b) If to the Manager:
Friedman, Billings, Ramsey Investment Management, Inc.
1001 Nineteenth Street, North
Arlington, Virginia 22209
Attention: Secretary
with a copy given in the manner prescribed
above, to:
George C. Howell, III, Esquire
Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219-4074
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section 18 for the giving of notice.
SECTION 19. Binding Nature of Agreement; Successors and Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
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SECTION 20. Entire Agreement. This Agreement contains the entire
agreement and understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter hereof. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
SECTION 21. Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement shall be governed
by and construed, interpreted and enforced in accordance with the laws of the
Commonwealth of Virginia, notwithstanding any Virginia or other conflict-of-law
provisions to the contrary.
SECTION 22. Indulgences, Not Waivers. Neither the failure nor any delay
on the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
SECTION 23. Costs and Expenses. Each party hereto shall bear its own
costs and expenses (including the fees and disbursements of counsel and
accountants) incurred in connection with the negotiations and preparation of and
the closing under this Agreement, and all matters incident thereto.
SECTION 24. Titles Not to Affect Interpretation. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 25. Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
SECTION 26. Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
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SECTION 27. Computation of Interest. Interest will be computed on the
basis of a 360-day year consisting of twelve months of thirty days each.
SIGNATURE PAGE FOLLOWS
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IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement as of the date first written above.
FBR ASSET INVESTMENT CORPORATION
By: /s/ W. Russell Ramsey
--------------------------------
Name: W. Russell Ramsey
Title: President
FRIEDMAN, BILLINGS, RAMSEY
INVESTMENT MANAGEMENT, INC.
By: /s/ Emanuel J. Friedman
--------------------------------
Name: Emanuel J. Friedman
Title: Chief Executive Officer
Exhibit 10.2
LICENSE AGREEMENT
This License Agreement ("Agreement") is entered into as of the 17th day
of December, 1997, by and between Friedman, Billings, Ramsey Group, Inc., a
Virginia corporation ("FBR Group"), and FBR Asset Investment Corporation, a
Virginia corporation ("FBRAIC").
RECITALS
WHEREAS, FBR Group owns the name and mark "FBR", as used in connection
with financial management, investment brokerage, and associated services, in
both its typed word format (the "FBR Word Mark") and in the design format show
in Exhibit A hereto (the "FBR Design Mark") (together, the "FBR Marks");
WHEREAS, FBR Group owns the name and mark "Friedman, Billings, Ramsey &
Co., Inc." as used in connection with financial management, investment
brokerage, and associated services (the "Friedman, Billings Mark");
WHEREAS, FBR Group has an application pending in the United States
Patent & Trademark Office for federal registration of the FBR Word Mark, the FBR
Design Mark, and the Friedman, Billings Mark as service marks (Application
Serial Nos. 75-275,555; 75-275, 266; 75-275,261);
WHEREAS, Friedman, Billings, Ramsey Investment Management, Inc. ("FBR
Investment Management"), a wholly-owned subsidiary of FBR Group, has entered
into a Management Agreement, dated December 17, 1997, with FBRAIC (the
"Management Agreement"), pursuant to which FBR Investment Management has agreed
to manage the assets and operations of FBRAIC;
WHEREAS, FBRAIC intends to conduct its business in a manner described
in the Private Placement Memorandum, dated December 11, 1997, attached hereto as
Exhibit B (the "Memorandum");
WHEREAS, in connection with the operation of its business, FBRAIC
wishes to identify and promote itself under the FBR Word Mark and the FBR Design
Mark;
WHEREAS, FBR Group has not assigned to FBRAIC the FBR Marks; and
WHEREAS, FBR Group and FBRAIC wish to set forth the terms and
conditions pursuant to which FBRAIC may use the FBR Marks;
NOW, THEREFORE, in consideration of the Recitals set forth above and of
the covenants, conditions, and agreements set forth below, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
<PAGE>
1. License. FBR Group hereby grants to FBRAIC a non-exclusive, no-fee
license to use the FBR Marks, whether separate, together, or as part of the name
"FBR Asset Investment Corporation", in connection with its operations as such
are described in the Memorandum. FBRAIC understands and acknowledges that this
license pertains only to the FBR Marks and does not include any other mark. In
particular, FBRAIC understands and acknowledges that it acquires no right or
license hereunder to use the Friedman, Billings Mark.
2. Quality Control. The services that FBRAIC provides under the FBR
Marks shall be of a first-rate nature and shall reflect well on FBR Group and
the goodwill that FBR Group has developed in connection with the FBR Marks.
3. Compliance with Applicable Laws. FBRAIC's operations under the FBR
Marks shall comply with all applicable statutes, regulations, ordinances, and
other laws.
4. Trademark Notice. FBRAIC shall utilize proper trademark notice in
connection with the FBR Marks whenever the FBR Marks appear in printed and
published advertising and promotional pieces.
5. Ownership of FBR Mark. FBR Group is and shall at all times remain
the owner of all right, title, and interest in and to the FBR Marks. As the
exclusive owner, FBR Group shall have the exclusive right to apply for, own, and
maintain federal, state, or other registrations on the FBR Marks or similar
marks. Upon request FBRAIC shall provide FBR Group with reasonable assistance in
applying for and maintaining any such registrations of the FBR Marks, including
providing trademark specimens. FBRAIC shall not, at any time during or after the
Term of this Agreement, dispute or contest, directly or indirectly, FBR Group's
exclusive right and title to the FBR Marks or any registrations thereof. All
goodwill resulting from FBRAIC's use of the FBR Mark shall inure to the benefit
of FBR Group. Nothing in this agreement shall restrict or limit FBR Group's
right and ability to use or to license others to use the FBR Marks.
6. Assignment; Sublicensing. FBRAIC shall not assign, license, or
sublicense any of its rights or obligations under this Agreement without the
express prior written approval of FBR Group, and such approval may be granted or
withheld at FBR Group's discretion.
7. Indemnification.
A. By FBR Group. FBR Group shall indemnify and hold FBRAIC harmless
from and against, and shall defend and reimburse FBRAIC for, any and all losses
that FBRAIC may at any time suffer or incur, or become subject to, as a result
of claims, actions, or proceedings alleging that FBRAIC's use of the FBR Marks
in accordance with this Agreement infringes upon a prior, valid trademark right
or similar proprietary right.
2
<PAGE>
B. By FBRAIC. FBRAIC shall indemnify and hold FBR Group harmless
from and against, and shall defend and reimburse FBR Group for, any and all
losses that FBR Group may at any time suffer or incur, or become subject to, as
a result of any acts or omissions relating to FBRAIC's use of the FBR Marks not
in accordance with this Agreement.
8. Assistance in Enforcement of Trademark Rights. In the event that
FBRAIC becomes aware of any actual or potential infringements of the FBR Marks
by third parties, FBRAIC shall promptly notify FBR Group of such actual or
potential infringements. FBR Group shall have the right to control any action to
enforce its rights in the FBR Marks, including but not limited to litigation,
arbitration, mediation, negotiation, or settlement. Such enforcement actions
shall be at FBR Group's expense. FBRAIC shall provide FBR Group with reasonable
assistance in any such actions. In the event that FBRAIC requests to control any
such enforcement actions, and FBR Group grants such request, then the expenses
of such enforcement actions shall be borne by FBRAIC.
9. Relationship. Nothing in this Agreement shall render FBRAIC a
franchisee or agent of FBR Group.
10. Term. This Agreement shall remain in effect until the date upon
which any Affiliate of FBR Group, as defined in the Memorandum, ceases to be the
manager of FBRAIC.
11. Termination. Either party may terminate this Agreement in the event
of a material breach of this Agreement, or any provision hereof, by the other
party, provided that the breaching party is given written notice of the breach
and fails to cure the breach within sixty (60) days after receipt of such
written notice.
12. Cessation of Use. Within 90 days of the expiration or termination
of this Agreement pursuant to Sections 10 or 11 hereof, FBRAIC shall cease all
use of the FBR Marks, including its use of the FBR Marks as part of the name
"FBR Asset Investment Corporation", and shall use its good faith reasonable
efforts to remove the FBR Marks from its Certificate of Incorporation.
13. Remedies. FBRAIC acknowledges that any use of the FBR Marks in
excess of the license granted hereunder will cause irreparable harm to FBR Group
and that, in addition to being entitled to exercise all rights granted to it by
law, FBR Group will be entitled to seek preliminary and permanent injunctive
relief to enforce this Agreement.
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<PAGE>
14. Entire Agreement; Amendment; No Waiver. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions of the parties, whether oral or written, pertaining
to the subject matter hereof. No amendment, supplement, modification, waiver, or
termination of this Agreement shall be binding unless executed in writing by the
party to be bound thereby. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision of this
Agreement, whether or not similar; nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
15. Governing Law. This Agreement shall be construed and interpreted
according to the substantive laws of the Commonwealth of Virginia without regard
to the conflicts of law rules thereof.
16. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.
17. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
18. Severability. In case any provision of this Agreement shall be
invalid, illegal, or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SIGNATURE PAGE FOLLOWS
4
<PAGE>
IN WITNESS HEREOF, each party hereto has caused this License Agreement
to be duly executed and delivered as of the day and year first written above.
FRIEDMAN, BILLINGS, RAMSEY GROUP, INC.
By: /s/ Emanuel J. Friedman
-------------------------------------
Name: Emanuel J. Friedman
Title: Chairman
FBR ASSET INVESTMENT CORPORATION
By: /s/ W. Russell Ramsey
-------------------------------------
Name: W. Russell Ramsey
Title: President
5
<PAGE>
EXHIBIT A
FBR DESIGN MARK ("Pegasus" logo)
6
Exhibit 10.3
FBR Asset Investment Corporation
Stock Option Agreement
No. of shares subject to option: 1,021,900
THIS AGREEMENT dated as of the 17th day of December, 1997,
between FBR ASSET INVESTMENT CORPORATION, a Virginia corporation (the
"Company"), and FRIEDMAN, BILLINGS, RAMSEY INVESTMENT MANAGEMENT, INC.
(the "Manager"), provides as follows:
1. Grant of Option. The Company, on December 17, 1997 (the
"Date of Grant"), granted to the Manager, subject to the terms and conditions
herein set forth, the right and option to purchase from the Company all or any
part of an aggregate of 1,021,900 shares of common stock of the Company ("Common
Stock") at the option price of $20 per share (the "Option"). This Option is not
intended to be a statutory stock option under Sections 421 and 422 of the
Internal Revenue Code of 1986, as amended, (the "Code"). This Option will be
exercisable as hereinafter provided.
2. TERMS and CONDITIONS. This Option is subject to the
following terms and conditions:
(a) Expiration Date. This Option shall expire at 11:59 p.m. on
December 16, 2007 (the "Expiration Date").
(b) Exercise of Option. This Option shall be exercisable with
respect to all or part of the shares of Common Stock subject
to this Option on the Date of Grant. This Option shall
continue to be exercisable until the Expiration Date. A
partial exercise of this Option shall not affect the Manager's
right to exercise this Option with respect to the remaining
shares, subject to the conditions of this Agreement.
(c) Method of Exercise and Payment for Shares. This Option
shall be exercised by written notice delivered to the
attention of the Company's Secretary at the Company's
principal office in Arlington, Virginia. The exercise date
shall be (i) in the case of notice by mail, the date of
postmark, or (ii) if delivered in person, the date of
delivery. Such notice shall be accompanied by payment of the
option price in full, in cash or cash equivalent acceptable to
the Company, or by the surrender of shares of common stock
with an aggregate fair market value (determined as of the
preceding business day) which, together with any cash or cash
equivalent paid by the Manager, is not less than the option
price of the number of shares of Common Stock for which the
Option is being exercised.
(d) Transferability. The Manager may transfer this Option, in
whole or in part, to one or more employees of the Manager, one
or more persons (including Blackrock Financial Management,
Inc., the Mortgage Portfolio Manager) who provide services to
<PAGE>
the Manager in connection with the management of the Company,
or a combination thereof (each such transferee a "Holder").
The Holder of this Option shall be subject to the terms and
conditions of this Agreement as if the Holder were the Manager
(other than the right to transfer this Option pursuant to the
preceding sentence) and such other terms and conditions that
are not inconsistent with this Agreement as may be prescribed
by the Manager. The Holder of this Option may not assign or
otherwise transfer his rights under this Option except that if
permitted by the Manager, the Holder may transfer his rights
under this Option by will or the laws of descent and
distribution. Except as provided in the preceding sentences,
this Option is nontransferable.
3. Compliance With Law, Etc. This Option shall not be
exercisable, no Common Stock shall be issued, no certificates for shares of
Common Stock shall be delivered, and no payment shall be made hereunder except
in compliance with all applicable federal and state laws and regulations, and
the rules of all domestic stock exchanges on which the Company's shares may be
listed. The Company shall have the right to rely on the opinion of its counsel
as to such compliance. Any share certificate issued to evidence Common Stock for
which this Option is exercised may bear such legends and statements as the
Company's Board of Directors may deem advisable or desirable. This Option shall
not be exercisable, no Common Stock shall be issued, no certificate for shares
shall be delivered, and no payment shall be made hereunder until the Company has
obtained such consent or approval as the Company's Board of Directors may deem
advisable from regulatory bodies having jurisdiction over such matters.
4. Shareholder Rights. The Manager shall not have any rights
as a shareholder of the Company except to the extent that this Option is
exercised and the Option price is paid to the Company.
5. Fractional Shares. Fractional shares shall not be issuable
hereunder, and when any provision hereof may entitle the Manager to a fractional
share such fraction shall be disregarded.
6. No Right to Continued Service. This Option does not confer
upon the Manager any right with respect to continuance of service to the
Company, nor shall it interfere in any way with the right of the Company to
terminate its service at any time.
7. Change in Capital Structure. The terms of this Option shall
be adjusted as the Company's Board of Directors determines in good faith is
equitably required in the event the Company effects one or more stock dividends,
stock split-ups, subdivisions or consolidations of shares or other similar
changes in capitalization.
8. Governing Law. This Agreement shall be governed by the laws
of the Commonwealth of Virginia.
<PAGE>
9. Binding Effect. Subject to the limitations stated above,
this Agreement shall be binding upon and inure to the benefit of the assignees
and successors of the Manager, the successors of the Company and the legatees,
distributees and personal representatives of each Holder.
SIGNATURE PAGE FOLLOWS
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Stock Option
Agreement to be signed by a duly authorized officer, and the Manager has affixed
its signature hereto.
FBR ASSET INVESTMENT CORPORATION FRIEDMAN, BILLINGS, RAMSEY
INVESTMENT MANAGEMENT, INC.
By: /s//William R. Swanson By: /s/ Nicholas J. Nichols
---------------------------- ---------------------------
Name: William R. Swanson Name: Nicholas J. Nichols
Title: Chief Operating Officer Title: Managing Director
CONSENTED TO:
FBR Holdings, Inc., as the holder of all the outstanding Common Stock
of FBR Asset Investment Corporation.
By: /s/ Eric Y. Generous
---------------------------
Name: Eric Y. Generous
Title: Chief Financial Officer
Exhibit 10.4
MORTGAGE INVESTMENTS
SUB-MANAGEMENT AGREEMENT
THIS AGREEMENT is made and entered into as of December 17, 1997, by and
between BLACKROCK FINANCIAL MANAGEMENT, INC. (the "Sub-Manager") and FRIEDMAN,
BILLINGS, RAMSEY INVESTMENT MANAGEMENT, INC. (the "Manager").
RECITALS
WHEREAS, FBR Asset Management Corporation (the "Company") is scheduled
to close the sale of shares of its common stock and acquire approximately $200
million that is to be invested from time to time; and
WHEREAS, the Company has retained the Manager to manage its business
and affairs including the investment of assets of the Company; and
WHEREAS, the Sub-Manager has expertise in acquiring and managing a
portfolio of mortgage loans and mortgage securities ("mortgage investments");
and
WHEREAS, the Company intends to conduct its business in a manner that
will permit it to qualify for the tax benefits accorded by Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Manager with the consent of the Company desires to retain
the Sub-Manager to acquire and otherwise manage a portfolio of mortgage
investments for the account of the Company in such amounts from time to time as
may be determined by the Manager in consultation with the Sub-Manager; and
WHEREAS, the Sub-Manager is willing to provide such services on the
terms and conditions set forth below;
NOW THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. Appointment and Acceptance.
The Manager hereby appoints the Sub-Manager as an "Investment Manager."
The Manager represents and warrants that (a) it has all requisite authority to
appoint the Sub-Manager hereunder, (b) the terms of the Agreement do not
conflict with any obligations by which the Manager or the Company is bound,
whether arising by contract, operation of law or otherwise and (c) this
Agreement has been duly authorized by appropriate corporate action. The
Sub-Manager does hereby accept said appointment and by its execution of this
Agreement the Sub-Manager represents and warrants that it is registered as an
investment adviser under the Investment Advisers Act of 1940.
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<PAGE>
SECTION 2. Duties of the Sub-Manager.
(a) The Sub-Manager at all times will be subject to the supervision of
the Manager and will have only such functions and authority as the Manager may
delegate to it. The Sub-Manager will be responsible for the day-to-day
operations of the Company with respect to its mortgage investments. The
Sub-Manager will be responsible for the investment and reinvestment of those
assets designated by the Manager as subject to the Sub-Manager's management
(which assets, together with all additions, substitutions, and alterations
thereto are hereinafter called the "Portfolio"). The Portfolio may include
investments and instruments described in the guidelines for mortgage investments
for the account of the Company. Until modified by the Manager, these guidelines
shall be those set forth in Appendices A and A-1. The Company and the Manager
hereby delegate to the Sub-Manager all of its powers, duties and
responsibilities with regard to such investment and reinvestment and hereby
appoints the Sub-Manager as its agent in fact with full authority to buy, sell
or otherwise effect investment transactions involving investments in its name
for the Portfolio. Said powers, duties and responsibilities shall be exercised
by the Sub-Manager pursuant to and in accordance with this Agreement.
Notwithstanding the foregoing, the Manager shall have full authority to direct
the Sub-Manager with respect to the investments in the Portfolio.
(b) The Sub-Manager will perform (or cause to be performed) such
services and activities relating to mortgage investments of the Company as may
be appropriate, including:
(i) serving as the Company's consultant with respect to
formulation of mortgage investment criteria and preparation of mortgage
investment policy guidelines;
(ii) furnishing reports to the Manager regarding the Company's
mortgage investments and the services performed for the account of the
Company by the Sub-Manager;
(iii) monitoring and providing to the Manager on an ongoing
basis price information and other data, obtained from certain
nationally recognized dealers that maintain markets in mortgage
investments from time to time, and providing data and advice to the
Manager in connection with the identification of such dealers;
(iv) performing and supervising the performance of such
administrative functions necessary in the management of the Company's
mortgage investments as may be agreed upon by the Sub-Manager and the
Manager, including the maintenance of appropriate computer services to
perform such administrative functions;
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<PAGE>
(v) to the extent not otherwise subject to an agreement
executed by the Manager or the Company, designating a servicer for
mortgage loans sold to the Company by originators and arranging for the
monitoring and supervision of such servicers;
(vi) counseling the Manager in connection with policy
decisions relating to mortgage investments to be made by the Company;
(vii) consulting with the Manager regarding the maintenance of
the Company's status as a REIT and assisting the Manager in monitoring
compliance with the various REIT qualification tests and other rules
set out in the Code and regulations thereunder;
(viii) engaging in hedging activities relating to the Company's
mortgage investments and consulting with the Manager to assure that
such activities are consistent with maintaining the Company's status as
a REIT;
(ix) upon request by and in accordance with the mortgage
investment policy guidelines or with the direction of the Manager,
investing or reinvesting any money of the Company; and
(x) consulting with the Manager regarding the maintenance of
the Company's exemption from the Investment Company Act and assisting
the Manager in monitoring compliance with the various requirements for
such exemption.
(c) Portfolio Management. The Sub-Manager will perform portfolio
management services on behalf of the Manager with respect to the Company's
mortgage investments. Such services will include, but not be limited to,
consulting with the Manager on purchase and sale policies, collection of
information and submission of reports pertaining to the Company's mortgage
investments, periodic review and evaluation of the performance of the Company's
portfolio of mortgage investments, acting as liaison between the Company and
banking, mortgage banking, investment banking and other parties with respect to
the purchase, financing and disposition of mortgage investments, and other
customary functions related to mortgage investment portfolio management.
(d) Reasonable Best Efforts. The Manager agrees to use its reasonable
best efforts at all times in performing services for the Manager and the Company
hereunder.
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<PAGE>
SECTION 3. Additional Activities of Sub-Manager. Nothing herein shall
prevent the Sub-Manager or any of its Affiliates from engaging in other
businesses or from rendering services of any kind to any other person or entity,
including investment in, or advisory service to others investing in, any type of
mortgage investment, including investments that meet the principal investment
objectives of the Company. It is specifically understood and agreed that the
Sub-Manager may directly or indirectly supply services of any nature, including
investment advice and portfolio administration, to other companies seeking to
qualify as a REIT, including companies sponsored or organized by it, that may be
in direct or indirect competition with the Company. The Sub-Manager will not be
required to resolve any conflicts of interest that may arise in connection with
such competing services in favor of the Company, although employees performing
services for multiple accounts will seek to allocate investment and disposition
opportunities available to and appropriate for the accounts in a manner that is
reasonably fair over time to each such account. The Manager agrees that the
Sub-Manager may refrain from rendering any advice or services concerning
securities of companies of which any of the Sub-Manager's, or affiliates of the
Sub-Manager's officers, directors, or employees are directors or officers, or
companies for which the Sub-Manager or any of the Manager's affiliates or the
officers, directors and employees of any of them has any substantial economic
interest, unless the Sub-Manager either determines in good faith that it may
appropriately do so without disclosing such conflict to the Manager or discloses
such conflict to the Manager prior to rendering such advice or services with
respect to the Company's mortgage investments. From time to time, when
determined by the Sub-Manager in its capacity of a fiduciary to be in the best
interest of the Company, the Sub-Manager may on behalf of the Company purchase
securities from or sell securities to an account managed by the Sub-Manager at
prevailing market levels in accordance with the procedure under section 17(a)(7)
of the Investment Company Act of 1940.
SECTION 4. Commitments. In order to meet the investment requirements of
the Company, as determined by the Manager from time to time, the Sub-Manager
agrees, at the direction of the Manager, to issue on behalf of the Company
commitments for the purchase of mortgage investments.
SECTION 5. Bank Accounts. At the direction of the Manager, the
Sub-Manager may establish and maintain one or more bank accounts in the name of
the Company, and may collect and deposit into any such account or accounts, and
disburse funds from any such account or accounts, under such terms and
conditions as the Manager may approve; and the Sub-Manager shall from time to
time render appropriate accountings of such collections and payments to the
Manager, the Company and, upon request, to the auditors of the Manager and the
Company.
SECTION 6. Records; Confidentiality. The Sub-Manager shall maintain
appropriate books of accounts and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Manager and the Company at any time during
normal business hours. The Sub-Manager shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated third parties except
with the prior written consent of the Manager.
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<PAGE>
SECTION 7. Obligations of Sub-Manager.
(a) At the sole cost and expense of the Company, the Sub-Manager shall
require each seller or transferor of mortgage investments to the Company to make
such representations and warranties regarding such investments as may, in the
judgment of the Sub-Manager, be necessary and appropriate. In addition, the
Sub-Manager shall take such other action as it deems necessary or appropriate
with regard to the protection of the Company's mortgage investments.
(b) The Sub-Manager shall refrain from any action that, to the best of
its knowledge, in its sole judgment made in good faith, would adversely affect
the status of the REIT as a REIT or that, to the best of its knowledge, in its
sole judgment made in good faith, would violate any law, rule or regulation of
any governmental body or agency having jurisdiction over the Company or the
Manager or that would otherwise not be permitted by the Company's charter or
by-laws. If the Sub-Manager is ordered to take any such action by the Manager,
the Sub-Manager shall promptly notify the Manager of the Sub-Manager's judgment
that such action would adversely affect such status or violate any such law,
rule or regulation, or the Company's charter or by-laws and shall not be
required to take such action. Notwithstanding the foregoing, the Sub-Manager,
its directors, officers, stockholders and employees shall not be liable to the
Manager, the Company, or the Company's stockholders for any act or omission by
the Sub-Manager, its directors, officers, stockholders or employees except as
provided in Section 10 of this Agreement.
SECTION 8. Compensation. For services hereunder, the Manager shall be
compensated in accordance with Exhibit B, attached hereto. If this agreement
terminates at any time other than the end of a calendar quarter, the last
quarterly fee shall be prorated based on the portion of such calendar quarter
during which this Agreement was in force.
SECTION 9. Custodian. Securities representing Company mortgage
investments shall be held by a custodian duly appointed by the Company, and the
Sub-Manager is authorized to give instructions to the custodian with respect to
all investment decisions regarding such mortgage investments. Except as provided
in Paragraph 2 above, nothing contained herein shall be deemed to authorize the
Sub-Manager to take or receive physical possession of any of the mortgage
investments for the account of the Company, it being intended that sole
responsibility for safekeeping thereof (in such investments as the Sub-Manager
may direct) and the consummation of all purchases, sales, deliveries and
investments made pursuant to the Sub-Manager's direction shall rest upon the
custodian.
The Sub-Manager is authorized to enter into Tri-Party Repurchase
Agreements and sign the standard PSA tri-party agreement (the "Tri-Party
Agreement") on behalf of the Company and the subcustodian thereunder is
authorized to act as a subcustodian for the Company mortgage investments
involved in any tri-party repurchase agreement pursuant to such Tri-Party
agreement.
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<PAGE>
SECTION 10. Limits of Sub-Manager Responsibility. The Sub-Manager
assumes no responsibility under this Agreement other than to render the services
called for hereunder in good faith and shall not be responsible for any action
of the Manager or the Company in following or declining to follow any advice or
recommendations of the Sub-Manager, including as set forth in Section 7 of this
Agreement. The Sub-Manager, its directors, officers, stockholders and employees
will not be liable to the Manager, the Company, or the Company's or any
subsidiary's shareholders for any acts or omissions by the Sub-Manager, its
directors, officers, stockholders or employees under or in connection with this
Agreement, except by reason of acts constituting bad faith, willful misconduct,
negligence or reckless disregard of their duties. The Manager shall reimburse,
indemnify and hold harmless the Sub-Manager, its stockholders, directors,
officers and employees of and from any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever, (including
attorneys' fees) in respect of or arising from any acts or omissions of the
Sub-Manager, its stockholders, directors, officers and employees made in good
faith in the performance of the Sub-Manager's duties under this Agreement and
not constituting bad faith, willful misconduct, negligence or reckless disregard
of its duties.
SECTION 11. No Joint Venture. The Manager and the Sub-Manager are not
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
SECTION 12. Resignation or Removal of the Sub-Manager. The Sub-Manager
may be removed by the Manager or may resign upon 30 days' notice in writing. On
the effective date of the removal or resignation of the Sub-Manager or as close
to such date as is reasonably possible, the Sub-Manager shall provide the
Manager with a final report containing such information concerning the Company's
mortgage investments as the Manager may reasonably request.
SECTION 13. Assignment, Changes in Organization of Sub-Manager. Unless
the Manager expressly consents thereto in writing, any assignment (as defined in
the Investment Advisers Act of 1940) by the Sub-Manager of this Agreement shall
automatically terminate this Agreement. If the Sub-Manager hereunder is
converted into, merges or consolidates with or sells or transfers substantially
all of its assets or business to another entity, the resulting entity or the
entity to which such sale or transfer has been made shall notify the Manager of
such sale or transfer and shall become the Sub-Manager hereunder only if the
Manager specifically so consents in writing.
SECTION 14. Release of Money or Other Property Upon Written Request.
The Sub-Manager agrees that any money or other property of the Company held by
the Sub-Manager under this Agreement shall be held by the Sub-Manager as
custodian for the Company, and the Sub-Manager's records shall be appropriately
marked clearly to reflect the ownership of such money or other property by the
Company. Upon the receipt by the Sub-Manager of a written request signed by a
duly authorized officer of the Company or the Manager requesting the Sub-Manager
to release to the Company any money or other property then held by the
Sub-Manager for the account of the Company under this Agreement, the Sub-Manager
shall release such money or other property to the Company within a reasonable
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<PAGE>
period of time, but in no event later than 30 days following such request. The
Sub-Manager shall not be liable to the Manager, Company, or the Company's or a
subsidiary's stockholders for any acts performed or omissions to act by the
Company or the Manager in connection with the money or other property released
to the Company in accordance with this Section. The Company shall indemnify the
Sub-Manager, its directors, officers, stockholders and employees against any and
all expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, which arise in connection with the Sub-Manager's release of
such money or other property to the Company in accordance with the terms of this
Section 14. Indemnification pursuant to this provision shall be in addition to
any right of the Sub-Manager to indemnification under Section 10 of this
Agreement.
SECTION 15. Notices. Unless expressly provided otherwise herein, all
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Manager or the Company:
Friedman, Billings, Ramsey Investment Management, Inc.
1001 Nineteenth Street, North
Arlington, Virginia 22209
Attention: Robert S. Smith, Esq.
or by facsimile to (703) 312-9756
(b) If to the Sub-Manager:
BlackRock Financial Management, Inc.
345 Park Avenue, 30th Floor
New York, NY 10154
Attention: Henry Gabbay, Chief Operating Officer
or by facsimile to (212) 935-1370
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section 19 for the giving of notice.
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<PAGE>
SECTION 16. Binding Nature of Agreement; Successors and Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
SECTION 17. Entire Agreement. This Agreement contains the entire
agreement and understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter hereof. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
SECTION 18. Controlling Law. This Agreement and all questions relating
to its validity, interpretation, performance and enforcement shall be governed
by and construed, interpreted and enforced in accordance with the laws of the
Commonwealth of Virginia, notwithstanding any Virginia or other conflict-of-law
provisions to the contrary.
SECTION 19. Indulgences, Not Waivers. Neither the failure nor any delay
on the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege preclude any other or
further exercise of the same or of any other right, remedy, power or privilege,
nor shall any waiver of any right, remedy, power or privilege with respect to
any occurrence be construed as a waiver of such right, remedy, power or
privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
SECTION 20. Costs and Expenses. Each party hereto shall bear its own
costs and expenses incurred in connection with the negotiations and preparation
of and the closing under this Agreement, and all matters incident thereto.
SECTION 21. Titles Not to Affect Interpretation. The titles of
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part of this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 22. Execution in Counterparts. This Agreement may be executed
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
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<PAGE>
SECTION 23. Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
SECTION 24. Investment Manager Brochure. The Manager hereby
acknowledges that it has received from the Sub-Manager a copy of the ADV Form,
Part II, as currently filed, at least forty-eight hours prior to entering into
this Agreement.
SIGNATURE PAGE FOLLOWS
- 9 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement as of the date first written above.
BLACKROCK FINANCIAL
MANAGEMENT, INC.
By: /s/ Lawrence D. Fink
------------------------------------------
Name: Lawrence D. Fink
Title: Chairman and Chief Executive Officer
FRIEDMAN, BILLINGS, RAMSEY
INVESTMENT MANAGEMENT, INC.
By: /s/ Nicholas J. Nichols
------------------------------------------
Name: Nicholas J. Nichols
Title: Principal
Agreed to:
FBR ASSET INVESTMENT CORPORATION
By: /s/ William R. Swanson
------------------------------------------
Name: William R. Swanson
Title: Chief Operating Officer
- 10 -
<PAGE>
Appendix A
MORTGAGE LOAN PORTFOLIO
Proposed Investment Guidelines
The Portfolio................ The Mortgage Loan Portfolio (the Portfolio) is a
separate account managed by BlackRock Financial
Management (BFM) for the benefit of the FBR
Asset Investment Corporation (the Corporation).
Investment Objective......... The Portfolio will consist of qualifying REIT
mortgage assets that will earn both a positive
spread to their funding costs and an attractive
return on capital. Once the Corporation is fully
invested in REIT securities, approximately 15%
of the Corporation's total equity will be
allocated to the Portfolio. This equity will be
levered in order to meet the 55% qualifying
"Non-RIC" asset requirement.
Duration Guidelines.......... The Portfolio will be managed with a very low
duration target.
Asset Guidelines............. Following are eligible investments:
Loans secured by residential properties and
agency and non-agency mortgage-backed securities
backed by loans secured by residential and
multifamily properties including, but not
limited to 1) pass-throughs, 2) project loans,
and 3) adjustable rate mortgages (further
details follow in Appendix A1);
The Portfolio may only invest in U.S. dollar
denominated securities.
The Portfolio may use interest rate swaps and/or
exchange traded options for purposes of yield
curve management and maintaining a target
duration.
The Portfolio may purchase private placement or
Rule 144A securities.
- 11 -
<PAGE>
Credit Criteria.............. Securities must be rated investment grade or
better by a national recognized credit rating
agency at the time of purchase.
In the event that a Portfolio investment is
downgraded below these credit quality
guidelines, the Investment Manager shall notify
the Corporation and provide an evaluation and a
recommended course of action.
Leverage..................... The Portfolio may enter into reverse repurchase
agreements. Other financing strategies will be
used from time to time with the prior approval
of the Company.
Reinvestment of Income....... All investment income of the Portfolio and
capital gains, if any, will be added to the
assets of the Portfolio.
Custodian.................... As selected by the Corporation.
- 12 -
<PAGE>
Appendix A1
DESCRIPTION OF MORTGAGE LOAN PORTFOLIO
Overview
BlackRock Financial Management (BlackRock) will be the sub-advisor on the
Mortgage Portfolio. The investment objective of the Mortgage Portfolio is to
manage a portfolio of qualifying REIT mortgage assets that will earn both a
positive spread to their funding costs and an attractive return on capital.
BlackRock intends to invest primarily in the following three sectors of the
mortgage market:
1. Whole-pool agency pass-through securities
2. Non-conforming residential mortgage loans
3. Project loans.
These sectors are described below.
Agency Pass-Through Securities
BlackRock will buy agency pass-through securities that represent 100% interest
in the underlying conforming mortgage loans ("whole pools"). Most of the loans
will fully amortize over the terms of their mortgages, but some may require a
"balloon" payment upon maturity. Conforming loans comply with the underwriting
requirements for purchase by one of the following agencies: Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), and
Government National Mortgage Association (GNMA). Under current requirements,
conforming loans must be secured by first liens on single-family residential
properties that comply with requirements governing original outstanding
principal balances, loan-to-value ratios, and various other underwriting
criteria.
These securities do not bear the risk of credit loss due to defaults as they are
guaranteed by the agencies. GNMA is a wholly owned corporate instrumentality of
the U.S. Government within the U.S. Department of Housing and Urban Development
(HUD) and, therefore, its guarantee is backed by the full faith and credit of
the U.S. Government. FNMA and FHLMC are government-sponsored agencies that are
not backed by the full faith and credit of the U.S. Government, although they
have implicit government guarantees.
- 13 -
<PAGE>
Agency securities may be collateralized by either fixed or adjustable coupons.
Fixed-rate mortgage loans have a constant coupon over the life of the loan,
generally 15 or 30 years. BlackRock will generally buy seasoned, short
weighted-average maturity ("WAM"), fixed-rate securities. BlackRock will also
invest in securities backed by adjustable-rate mortgage ("ARM") loans, which
provide for the periodic adjustment of the coupon. The coupon is set as the sum
of a fixed margin and an index, subject to certain periodic and life-time
interest-rate caps. The most common reference indices for ARMs are the
Constant-Maturity Treasury Indices (CMT), LIBOR, and the CD rate. Agency
securities may also include hybrid ARMs, which are securities that have an
adjustable coupon for an initial period and thereafter a fixed coupon.
Mortgage loans are subject to prepayment risks. The rate at which prepayments
occur on mortgage loans will be affected by a variety of factors, including
current interest rates and economic, demographic, tax, social, legal, and other
factors. Generally, prepayments increase when interest rates fall and decrease
when interest rates rise. To the extent that actual prepayment rates are
different than originally anticipated, the yield on and duration of investments
in mortgage loans may be adversely affected. This may adversely affect the
expected rate of return on the investments. BlackRock will seek to manage this
risk through constant monitoring of the portfolio and an active funding and
hedging program.
The markets for all of these assets are very liquid and BlackRock intends to
purchase them from various Wall Street broker/dealers.
Non-Conforming or "Whole-Loan" Mortgages
BlackRock will also buy non-conforming adjustable-rate and hybrid mortgage loans
and securities collateralized by such loans. Non-conforming mortgage loans are
loans secured by first liens on single-family residential properties that do not
qualify for purchase by FHLMC, FNMA, or GNMA. Non-conforming loans generally
have outstanding principal balances in excess of agency-program guidelines or
are issued based upon different underwriting criteria than those required by the
agencies.
Pass-through securities collateralized by non-conforming loans (private
pass-through securities) are issued by originators of and investors in mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks, and special-purpose subsidiaries of those instruments.
Although these securities are generally structured similarly to the GNMA, FNMA,
and FHLMC securities, they typically are not guaranteed by an entity having the
credit status of one of the agencies and, therefore, generally offer higher
yield than their agency counterparts. Although some credit risk does exist for
both whole loans and whole loan-backed securities, historical losses from
well-underwritten loan packages are extremely small.
While less liquid, there are active markets for both whole loans and securities
collateralized by these loans. BlackRock intends to purchase these assets from
various Wall Street dealers and mortgage originators. As an example, BlackRock
has identified for purchase loans originated by Merrill Lynch as an attractive
source of product. These loans are uncapped adjustable-rate mortgage loans that
Merrill Lynch offers to its brokerage clients ("Prime First" Program).
- 14 -
<PAGE>
Putable and Non-Putable FHA/GNMA Project Loans
Project loans are government-insured (via FHA insurance or GNMA guarantee)
two-part financing vehicles that (i) finance the construction or rehabilitation
of multifamily residential housing and healthcare facilities and (ii) provide
permanent financing for the project once construction is completed. The loans
can have final maturities as long as forty years and, unlike single-family
mortgage loans, often contain explicit call protection in the form of prepayment
lock-outs or prepayment penalties that can last up to ten years. Project loans
are sold as either single-loan participation or multiple-loan pools. Many
project loans issued prior to 1984 contain a put-option provision which permits
the loans to be assigned to HUD after twenty years.
Project loans are administratively complex, demanding significant knowledge of
the project loans and the mortgage market in general. As a result of their
complexity and various operational concerns, the market for these loans is less
liquid than traditional mortgage loans.
Default risk is largely mitigated with project loans, since the FHA and GNMA
insures the loans against default. FHA-insured project loans are effectively 99%
insured, while GNMA-backed project loans are 100% insured.
One major advantage of these securities, relative to residential loans and
securities, is that their cash flows are generally more stable. Non-putable
project loans exhibit very stable cash flows over the first ten years of their
term, owing to the explicit call protection of the loans. At the end of the
call-protection period, the loans are fully prepayable. However, the greater
costs associated with refinancing multifamily housing are a disincentive, even
for loans at above market rates. The long maturity of the loans poses extension
risk in the event of a significant rise in rates.
Putable project loans do not possess significant extension risk due to the
ability to assign the loans to HUD. However, the loans generally do not possess
significant call protection, because most of the loans are seasoned and,
therefore, well into their lock-out period. Most putable project loans are
lower-coupon issues, providing little incentive for the mortgagor to refinance
based on changes in interest rates.
Project loans offer a significantly higher yield than single-family mortgage
loans and, as mentioned above, these loans offer more stable cash flows than
single-family mortgage loans due to their explicit prepayment protection, making
them a unique asset class in the mortgage market. The value of the
call-protection feature has increased as the single-family market has become
more efficient in exercising imbedded refinancing options. On an
option-adjusted-spread (OAS) basis, project loans are estimated to be at least
thirty basis points cheaper than single-family mortgage loans.
- 15 -
<PAGE>
BlackRock intends to purchase these assets from various Wall Street
broker/dealers and mortgage originators.
Sample Portfolio of November 10, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Allocation Range Yield Range Duration Range
Asset Class
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-WAM Pools 8-12% 6.25-6.75% 2.00-2.50
- ---------------------------------------------------------------------------------------------
Agency ARMs 15-25% 6.00-6.50% 0.50-1.00
- ---------------------------------------------------------------------------------------------
Hybrid ARMs 8-12% 6.75-7.25% 1.75-2.25
- ---------------------------------------------------------------------------------------------
Whole-Loan ARMs (ML Prime First) 8-12% 6.75-7.25% 0.25-0.75
- ---------------------------------------------------------------------------------------------
Whole-Loan ARMs 15-25% 6.25-6.75% 0.50-1.00
- ---------------------------------------------------------------------------------------------
Putable Project Loans 8-12% 6.25-6.75% 2.50-3.50
- ---------------------------------------------------------------------------------------------
Non-Putable Project Loans 15-25% 6.50-7.50% 4.50-5.50
- ---------------------------------------------------------------------------------------------
Total Portfolio 100% 6.25-7.00% 1.50-2.50
- ---------------------------------------------------------------------------------------------
</TABLE>
Timing of Investments
It is anticipated that once the Company is fully invested in equity REIT
securities, approximately 15% of the Company's total equity capital will be
allocated to the Mortgage Loan Portfolio. This equity will be levered in order
to meet the 55% qualifying "Non-RIC" asset requirement. Assuming total equity
capital of $300 million, approximately $45 million will be allocated to the
Mortgage Loan portfolio. Once fully invested, the portfolio will typically have
leverage in the range of 6:1 to 9:1 (debt to equity), implying a total Mortgage
Loan Portfolio of $300 million to $450 million.
In order to build a portfolio of this size, BlackRock will begin to invest in
these securities as soon as possible after the closing date. While all of the
sectors discussed above have fairly liquid markets, BlackRock would begin by
investing in the most liquid sectors (agency securities), and slowly building
toward our target allocations over a six-to-nine month time frame. The timing of
investments and the amount of leverage in the portfolio will ultimately be a
function of not only the availability of appropriate product, but also the
timing and leverage of the non-Mortgage Loan Portfolio.
- 16 -
<PAGE>
Funding/Hedging Strategy
The portfolio will be funded with equity, as well as with LIBOR-based
collateralized borrowings. Derivatives may be used to effectively lock in
longer-term funding costs to better match the maturities of the liabilities with
the maturities of the assets. BlackRock will seek to manage the interest-rate
risk of the portfolio's mark-to-market and net interest margin through the use
of derivatives, as well as the asset-liability structure of the portfolio. One
such measure of this risk is "duration," which measures the portfolio's
sensitivity to changes in interest rates. The duration target of the portfolio's
net assets (total assets less liabilities) will generally be set at very low
levels.
Some of the derivatives used to manage interest-rate risk will include
interest-rate swaps and caps. Interest-rate swaps are arrangements whereby
parties "swap" interest payments. The most common type of swap is one in which
the two parties exchange fixed- for floating-rate payments. For example, if the
rate to swap 5-year fixed for 3-month LIBOR is ten percent, the fixed payer will
make fixed payments equal to ten percent per annum and receive 3-month LIBOR.
Swaps will be used for asset-liability management in that they will allow
investors to swap floating-rate liabilities into a fixed rate.
Interest-rate caps, also referred to as interest-rate ceilings, allow the
purchaser to "cap" the contractual rate associated with a floating-rate
liability. The seller of the cap pays the purchaser any amount above the
periodic capped rate on the settlement date. As mentioned above, the coupons of
adjustable-rate mortgages are usually subject to certain periodic and life-time
interest-rate caps. Purchasing caps allows the investor to effectively uncap the
portfolio's ARM positions or, alternatively, to cap the portfolio's liability
costs.
- 17 -
<PAGE>
Sample Asset-Liability Position as of November 10, 1997
Leverage Ratio: 7:1 (debt to equity)
- ------------------------------------------------------------------------------
AMOUNT NET YIELD DURATION
- ------------------------------------------------------------------------------
Assets $360,000 6.40% 2.00
Liabilities $315,000 6.00% 0.25
including hedge 6.25% 2.00
- ------------------------------------------------------------------------------
Net Assets $45,000 7.45% 0.00
- ------------------------------------------------------------------------------
- 18 -
<PAGE>
Appendix B
As compensation for rendering services under the Investment Manager Agreement,
the Sub-Manager shall be paid a quarterly management fee in arrears at the
annual rate of 0.20% based on the average gross asset value of each calendar
quarter (calculated as the average of the beginning and ending gross asset value
of the calendar quarter) with a minimum annual fee of $100,000. The Sub-Manager
will be reimbursed for reasonable out-of-pocket expenses incurred in connection
with managing the Mortgage Assets, including travel, meals, hotels, and other
miscellaneous expenses. The Sub-Manager agrees that the aggregate amount of such
expenses shall not exceed $15,000 annually, without the prior approval of the
Manager. The Sub-Manager shall also receive options equal to 1/2% of common
shares outstanding on the closing date of the initial private placement of the
Company. The options will have a strike price of $20.00 (the initial price),
have a ten year term and may be exercised at any time at the Sub-Manager's
discretion.
- 19 -
Exhibit 10.5
ASSIGNMENT
ASSIGNMENT, made as of the 17th day of December 1997, by Friedman,
Billings, Ramsey Investment Management, Inc. (the "Manager") to Blackrock
Financial Management, Inc. (the "Sub-Manager").
RECITALS
WHEREAS, the Manager is a party to that certain Management Agreement,
dated December 17, 1997, by and between the Manager and FBR Asset Investment
Corporation, a Virginia corporation ("FBRAIC"), whereby the Manager has agreed
to acquire, sell, and otherwise manage the investments of FBRAIC and to perform
administrative services for FBRAIC;
WHEREAS, the Manager is a party to that certain Stock Option Agreement,
dated December 17, 1997, by and between the Manager and FBRAIC (the "Stock
Option Agreement"), whereby FBRAIC has granted the Manager a ten-year option to
acquire 1,021,900 shares of FBRAIC's common stock;
WHEREAS, Section 2(d) of the Stock Option Agreement permits the Manager
to transfer its option, in whole or in part, to one or more persons who provide
services to the Manager in connection with the management of FBRAIC;
WHEREAS, the Manager has entered into a Sub-Management Agreement with
the Sub-Manager, dated December 12, 1997, for the purpose of engaging the
Sub-Manager to provide certain services in connection with the management of
FBRAIC; and
WHEREAS, pursuant to the Sub-Management Agreement, the Sub-Manager is
entitled to receive options to purchase a certain number of shares of FBRAIC's
common stock;
NOW, THEREFORE, the Manager, for and in consideration of the services
set forth in the Sub-Management Agreement, and for other good and valuable
consideration, the sufficiency of which is hereby acknowledged, does hereby
convey, assign, and transfer to the Sub-Manager, without recourse, free and
clear of any liens, claims, or encumbrances, all of its right, title, and
interest in and to the option to purchase 51,095 shares of FBRAIC's common stock
pursuant to the terms and conditions set forth in the Stock Option Agreement.
<PAGE>
IN WITNESS WHEREOF, Friedman, Billings, Ramsey Investment Management,
Inc. has caused this Assignment to be executed by a duly authorized Officer as
of the date first above written.
FRIEDMAN, BILLINGS, RAMSEY
INVESTMENT MANAGEMENT, INC.
By: /s/ Eric F. Billings
----------------------------------------------
Name: Eric F. Billings
Title: Vice Chairman & Chief Executive Officer
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
- -----------------------------
Washington, D.C.
November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS DATED DECEMBER 31, 1997 AND THE UNAUDITED
FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001073208
<NAME> FBR ASSET INVESTMENT CORPORATION (MARYLAND)
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> DEC-15-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 SEP-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 163,223,199 43,333,730
<SECURITIES> 23,318,750 277,308,481
<RECEIVABLES> 3,996,453 23,623,644
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 190,538,402 344,265,855
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 190,538,402 344,265,855
<CURRENT-LIABILITIES> 771,573 179,043,634
<BONDS> 0 0
0 0
0 0
<COMMON> 102,190 104,158
<OTHER-SE> 189,664,639 165,118,063
<TOTAL-LIABILITY-AND-EQUITY> 0 0
<SALES> 0 0
<TOTAL-REVENUES> 721,277 12,408,281
<CGS> 0 0
<TOTAL-COSTS> 74,356 1,170,727
<OTHER-EXPENSES> 0 18,429
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 3,187,418
<INCOME-PRETAX> 646,921 8,031,707
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 646,921 8,031,707
<EPS-PRIMARY> 0.06 0.78
<EPS-DILUTED> 0.06 0.78
</TABLE>
