<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 1-15049
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FBR ASSET INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1873198
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
Potomac Tower (901) 580-6000
1001 Nineteenth Street North (Registrant's telephone number
Arlington, Virginia 22209 including area code)
(Address of principal executive offices)
(zip code)
N/A
(former name)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such short period that the
Registrant was required to file such report), and (ii) has been subject to such
filing requirements for the past 90 days:
Yes: No X (The Registrant has not been subject to such filing
----- -----
requirements for the past 90 days)
As of September 30, 1999, the latest practicable date, there were 6,949,036
shares of FBR Asset Investment Corporation's common stock outstanding.
<PAGE>
FBR ASSET INVESTMENT CORPORATION
INDEX
REPORT: FORM 10-Q Page
----
PART I. FINANCIAL INFORMATION
Selected Financial Data as of, and for the quarter
and nine months ended, September 30, 1999............................. 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 2
Financial Statements and Notes...........................................F-1
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................F-15
Item 2. Changes in Securities and Use of Proceeds......................F-15
Item 3. Defaults Upon Senior Securities................................F-15
Item 4. Submission of Matters to Vote of Security Holders..............F-15
Item 5. Other Information..............................................F-15
Item 6. Exhibits and Reports on Form 8-K...............................F-15
SIGNATURES
i
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FBR ASSET INVESTMENT CORPORATION
CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
1998 1999 1998 1999
-------------- ---------------- ----------------- ---------------
Statement of Operations Data: (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income ................................... $ 9,527,657 $ 10,654,590 $ 4,710,088 $ 2,909,012
Dividend income ................................... 2,880,624 4,533,206 2,046,875 1,694,354
Interest expense .................................. 3,187,418 4,921,530 2,634,635 1,539,401
Management Fee expense ............................ 926,726 975,252 457,587 296,546
Other expense ..................................... 262,430 1,099,287 98,675 362,531
Net realized gains (losses) ....................... -- 1,074,077 -- 330,724
Net income ........................................ 8,031,707 9,265,804 $ 3,566,066 2,735,612
Basic and diluted income per share ................ $ 0.78 $ 1.19 $ 0.35 $ 0.38
Dividends declared per share(1) ................... $ 0.855 $ 1.105 $ 0.360 $ 0.400
Weighted average basic and diluted shares ......... 10,353,821 7,773,157 10,264,055 7,111,727
<CAPTION>
As of As of
December 31, 1998 September 30, 1999
------------------- ---------------------------------
Selected Balance Sheet Data: (unaudited)
<S> <C> <C>
Mortgage-backed securities, at fair value ......... $ 161,418,739 $ 133,366,809
Cash and cash equivalents ......................... 41,144,326 4,425,808
Investments in equity securities, at fair value ... 70,983,050 70,092,655
Notes receivable .................................. 19,082,921 36,919,559
Total assets ...................................... 295,930,620 246,839,054
Repurchase agreements ............................. 128,550,000 114,076,000
Total liabilities ................................. 145,026,041 123,892,919
Accumulated other comprehensive loss(2) ........... (9,800,530) (18,074,812)
Shareholders' equity .............................. 150,904,579 122,946,135
Book value per share .............................. $ 17.66 $ 17.69
Common shares issued and outstanding(3) ........... 8,543,527 6,949,036
<CAPTION>
For the For the
Nine Months Ended Three Months Ended
September 30, 1999 September 30, 1999
----------------------- --------------------------------
Other Selected Data (unaudited) (unaudited)
<S> <C> <C>
Weighted average daily borrowings ................. $ 120,984,601 $ 110,020,022
Average equity .................................... 134,650,636 124,905,406
</TABLE>
(1) Dividends are calculated and declared based on estimates of FBR Asset's
taxable income.
(2) Accumulated other comprehensive loss includes unrealized net gain on
mortgage-backed securities of $713,499 as of December 31, 1998, unrealized
net loss on mortgage-backed securities of $3,252,888 as of September 30,
1999, and unrealized net loss on investments in equity securities of
$10,514,029 as of December 31, 1998, and $14,821,924 as of September 30,
1999.
(3) Reflects 1,872,300 and 3,466,791 shares of treasury stock repurchased as of
December 31, 1998 and September 30, 1999, respectively.
1
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
FBR Asset targets investments in real estate assets and real estate-related
companies. FBR Asset has invested, and intends to continue investing in, whole-
pool mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae, mortgage loans, mortgage-backed securities, real property, and
joint ventures formed to own real property. FBR Asset invests in some of these
assets indirectly through its investments in and loans made to REITs and other
companies.
As of September 30, 1999, FBR Asset had:
. mortgage-backed securities totaling $133.4 million, which were financed
with repurchase agreements totaling $114.1 million;
. investments in equity and debt securities of 10 companies with an original
total cost basis of $84.6 million and a total market value of $70.1
million; and
. loans to 2 companies totaling $36.9 million.
A summary of FBR Asset's current investments, cash and cash equivalents is set
forth at the end of this discussion.
Results of Operations
The following discussion sets forth the significant components of FBR Asset's
net income for the nine month periods ended September 30, 1999 and 1998 and the
three month periods ended September 30, 1999 and 1998.
Net Income
Nine Months Ended September 30, 1999
FBR Asset's sources of income since inception have been (i) quarterly dividend
earnings on its REIT holdings, (ii) interest earnings on its mortgage-backed
securities, notes receivable, and cash and cash equivalents and (iii) gains on
the sale of mortgage-backed securities and equity investments. FBR Asset's
primary sources of interest income to date have been its investments in fixed-
rate mortgage-backed securities and outstanding loans. 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 or defaults on the mortgage loans underlying the mortgage-backed
securities. Generally, as interest rates fall, prepayment rates may increase
significantly. Accordingly, FBR Asset's interest income for any given period
may not be indicative of that for future interim or annual periods.
Net income for the nine months ended September 30, 1999, was $9.3 million, or
$1.19 per share. This is an increase of 16.3% over net income of $8.0 million
for the nine months ended September 30, 1998, or $0.78 per share. The increase
is primarily due to gains on the sale of equity investments and increased
interest income and dividend income. Interest income, including interest earned
on mortgage-backed securities, notes receivable, outstanding
2
<PAGE>
loans, and cash and cash equivalents for the nine months ended September 30,
1999, was $10.7 million compared to $9.5 million for the nine months ended
September 30, 1998. This represents an increase of 12.6%. FBR Asset did not
begin investing in mortgage- backed securities until the second quarter of 1998.
For the nine months ended September 30, 1999, the weighted average annual yield
on FBR Asset's mortgage-backed securities was 6.25%. As of September 30, 1999,
FBR Asset had investments in 33 mortgage-backed securities.
For the nine months ended September 30, 1999, based on interest and dividend
income accrued on, and the weighted average carrying value of, equity securities
and promissory notes, the weighted average annual yield on FBR Asset's equity
securities and promissory notes was 9.58%, compared to 8.62% for the nine months
ended September 30, 1998. The increase reflects the increase in investment of
cash in higher yielding promissory notes and the increase in the number of
dividend-paying equity securities.
Dividend income for the nine months ended September 30, 1999, was $4.5 million,
compared to $2.9 million for the nine months ended September 30, 1998. The
increase is due to increased investments by FBR Asset in REIT securities that
pay dividends.
FBR Asset did not begin to leverage its mortgage portfolio until May 1998. FBR
Asset anticipates that its cost of borrowed funds will continue to comprise the
largest portion of its total expenses in future periods.
FBR Asset incurred interest expense of $4.9 million for the nine months ended
September 30, 1999. This represents 70.3% of the total expenses for the period.
FBR Asset incurred interest expense of $3.2 million for the nine months ended
September 30,1998. This represents 72.8% of the total expenses for the period.
Management fees for the nine months ended September 30, 1999, were $975,252
compared to $926,726 for the nine months ended September 30, 1998. The increase
is due to increased assets under management.
Professional fees consist primarily of legal and accounting fees. Professional
fees were $608,974 for the nine months ended September 30, 1999, and $157,228
for the nine months ended September 30, 1998. The increased fees are
attributable to legal and audit fees related to the recent registration
statement of FBR Asset's stock and to costs associated with the acquisition of
assets.
Three Months Ended September 30, 1999
FBR Asset's net income for the three months ended September 30, 1999 was $2.7
million, or $0.38 per share, compared to $3.6 million or $0.35 per share for the
corresponding period in 1998. The decrease in net income reflects the reduction
in interest income from mortgage-backed securities that were sold during the
fourth quarter of 1998.
The reduction in FBR Asset's interest income and dividend income from $6.8
million for the three months ended September 30, 1998 to $4.6 million for the
three months ended September 30, 1999 is primarily attributable to the reduction
in the company's investments. The increased average annual yield on investments
from 6.84% to 7.06% reflects the reduction in cash and cash equivalents as a
percentage of total investments. The 42.3% reduction in interest expense from
$2.6 million in the 1998 quarter to $1.5 million in the 1999 quarter primarily
reflects then 38.4% reduction in weighted average borrowings
3
<PAGE>
under repurchase agreements from $178.7 million to $110.0 million. Management
fees were less in the 1999 quarter than in 1998 quarter because of the reduction
in investments.
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 for
the nine months and the three months ended September 30, 1998 and 1999.
Information is based on daily average balances during the period.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
Weighted
Weighted Average
Interest/Dividend Average Annual
Income Balance Yield
---------------------- --------------- -------------
<S> <C> <C> <C>
Mortgage securities available for sale $ 6,907,357 $147,662,937 6.25%
Investment in equity securities and
promissory notes(1)(2) 7,469,179 104,294,070 9.58%
Cash and cash equivalents 811,260 22,765,555 4.76%
---------------------- --------------- --------------
Total(2) $15,187,796 $274,722,562 7.39%
====================== =============== ==============
<CAPTION>
Nine Months Ended September 30, 1998
Interest/Dividend Average Annualized
Income Balance Yield
---------------------- --------------- --------------
<S> <C> <C> <C>
Mortgage securities available for sale $ 4,300,216 $158,769,005 6.38%
Investment in equity securities and
promissory notes(1)(2)(3) 4,437,262 74,129,319 8.62%
Cash and cash equivalents 4,038,424 92,325,137 5.51%
---------------------- --------------- --------------
Total(2) $12,775,902 $325,223,461 6.64%
====================== =============== ==============
<CAPTION>
Three Months Ended September 30, 1999
Weighted
Weighted Average
Interest/Dividend Average Annual
Income Balance Yield
---------------------- --------------- --------------
<S> <C> <C> <C>
Mortgage securities available for sale $2,205,750 $139,793,527 6.26%
Investment in equity securities and
promissory notes(1)(2) 2,201,887 104,080,157 8.39%
Cash and cash equivalents 195,729 14,892,034 5.21%
---------------------- --------------- --------------
Total(2) $4,603,366 $258,765,718 7.06%
====================== =============== ==============
<CAPTION>
Three Months Ended September 30, 1998
Interest/Dividend Average Annualized
Income Balance Yield
---------------------- --------------- --------------
<S> <C> <C> <C>
Mortgage securities available for sale $3,277,425 $211,941,897 6.14%
Investment in equity securities
and promissory notes(1)(2)(3) 2,491,459 90,977,448 9.06%
Cash and cash equivalents 792,987 53,607,364 5.87%
---------------------- --------------- --------------
Total(2) $6,561,871 $356,526,709 6.84%
====================== =============== ==============
</TABLE>
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital and Brookdale and for all periods except the three
months ended September 30, 1999, Kennedy-Wilson. Such amounts are included
as interest income in FBR Asset's statements of income included in its
financial statements.
(2) FBR Asset accrues dividend income based on declared dividends for the
periods presented.
(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 may not match reported dividend income and is
presented solely to determine annualized yield information.
4
<PAGE>
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>
Weighted Weighted
Interest Average Average
Expense Balance Expense
-------------- --------------- -------------
<S> <C> <C> <C>
Nine Months Ended
September 30, 1999 $4,921,530 $120,984,601(1) 5.44%
Nine Months Ended
September 30, 1998 $3,187,418 $136,059,560(2) 6.06%
Three Months Ended
September 30, 1999 $1,539,401 $110,020,022(1) 5.55%
Three Months Ended
September 30, 1998 $2,634,635 $178,713,375(2) 5.35%
</TABLE>
(1) At September 30, 1999, FBR Asset had $114,076,000 outstanding under
repurchase agreements, with a weighted-average remaining maturity of 20
days.
(2) At September 30, 1998, FBR Asset had $176,252,157 outstanding under
repurchase agreements, with a weighted-average remaining maturity of 47
days.
Changes in Financial Condition
Mortgage-Backed Securities Available for Sale
FBR Asset invests in mortgage-backed securities that are agency pass-through
securities representing a 100% interest in the underlying conforming mortgage
loans. Conforming loans comply with the underwriting requirements for purchase
by Fannie Mae, Freddie Mac, and Ginnie Mae. These securities bear little risk of
credit loss due to defaults because they are guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac, among other assets.
FBR Asset held mortgage-backed securities of $133.4 million as of September 30,
1999. FBR Asset held mortgage-backed securities of $211.5 million on September
30, 1998. At December 31, 1998, FBR Asset held mortgage-backed securities equal
to $161.4 million.
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, 1999, the amount of unamortized premium recorded in FBR Asset's
statement of financial condition was $2.2 million. At December 31, 1998, the
amount of unamortized premium recorded in FBR Asset's statement of financial
condition was $2.7 million.
Given FBR Asset'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, FBR Asset's net interest
income would decrease during the life of the mortgage-backed securities, as FBR
Asset would be required to amortize its net premium balance into income over a
shorter time
5
<PAGE>
period. Similarly, if mortgage principal repayment rates decrease over the life
of the mortgage-backed securities, all other factors being equal, FBR Asset's
net interest income would increase during the life of the mortgage- backed
securities, as FBR Asset would be required to amortize its net premium balance
over a longer time period.
FBR Asset received mortgage principal repayments equal to $23.5 million for the
nine months ended September 30, 1999.
At September 30, 1999, $14.8 million of net unrealized losses on equity
securities and $3.3 million of net unrealized losses on mortgage-backed
securities were included in FBR Asset's statement of financial condition as
accumulated other comprehensive loss. At December 31, 1998, $10.5 million of
net unrealized losses on equity securities and $0.7 million of net unrealized
gains on mortgage-backed securities were included in FBR Asset's statement of
financial condition as accumulated other comprehensive loss. See "Stockholders'
Equity" elsewhere in "Management's Discussion and Analysis" and Note 8 of Notes
to Financial Statements for further discussion.
Repurchase Agreements
To date, FBR Asset's debt has consisted mainly of borrowings collateralized by
a pledge of most of FBR Asset's mortgage-backed securities. FBR Asset has
obtained, and believes it will be able to continue to obtain, short-term
financing in amounts and at interest rates consistent with FBR Asset's financing
objectives.
FBR Asset had $114.1 million outstanding under repurchase agreements with
several financial institutions on September 30, 1999. FBR Asset had $128.6
million outstanding under repurchase agreements on December 31, 1998. At
September 30, 1999, the ratio of the company's repurchase agreement to
shareholder's equity was .93 to 1.
At September 30, 1999, the term to maturity of FBR Asset's borrowings had been
limited to 30 days with a weighted average remaining maturity of 20 days and a
weighted average cost of funds on outstanding borrowings of 5.37%.
At December 31, 1998, the term to maturity of FBR Asset's borrowings had been
limited to 92 days with a weighted average remaining maturity of 73 days and a
weighted average cost of funds on outstanding borrowings of 5.08%.
Contractual Commitments
FBR Asset is a party to an interest rate swap agreement to offset the potential
adverse effects of rising interest rates under some of its short-term repurchase
agreements. That agreement is with Salomon Brothers Holding Company Inc.
Salomon Smith Barney Holdings, Inc., the parent company of Salomon Brothers
Holding Inc., has a long-term debt rating of "A" by S&P. Under the swap
agreement with Salomon, FBR Asset receives quarterly payments of interest based
on three-month LIBOR and remits semi-annual payments based on a fixed interest
rate of approximately 5.9% based upon the $50 million notional amount of the
swap.
The swap became effective on June 1, 1998, and matures on June 1, 2001. At
September 30, 1999, the interest rate payable to FBR Asset by Salomon was 5.52%.
At December 31, 1998, the interest rate payable to FBR Asset by Salomon was
5.07%. The timing of quarterly receipts under the swap approximates the timing
of the repricing dates for the repurchase
6
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agreements. The payments received under the swap agreement have substantially
offset the interest payments under the repurchase agreements. In some
circumstances, FBR Asset 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, 1999
and December 31, 1998, $0.5 million of collateral was required under the
interest rate swap agreement.
Capital Resources and Liquidity
Liquidity is a measurement of FBR Asset'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 or principal payments on
mortgage-backed and equity securities, and proceeds from sales of those
securities. To date, proceeds from the issuance of common stock and repurchase
agreements have provided FBR Asset with sufficient funding for its investment
needs. Potential future sources of liquidity for FBR Asset include existing
cash balances, borrowing capacity through margin accounts, and future issuances
of common, preferred stock or debt. FBR Asset believes that its existing cash
balances, borrowing capacity through margin accounts and borrowing capacity
under collateralized repurchase agreements will be sufficient to meet its
investment objectives and fund operating expenses for at least the next twelve
months. FBR Asset may, however, seek debt or equity financings, in public or
private transactions, to provide capital for corporate purposes and/or strategic
business opportunities. There can be no assurance that FBR Asset will be able
to generate sufficient funds from future operations, or raise sufficient debt or
equity on acceptable terms, to take advantage of investment opportunities that
become available. Should FBR Asset's needs ever exceed these sources of
liquidity, management believes FBR Asset's mortgage-backed securities could be
sold, in most circumstances, to provide cash.
For the nine months ended September 30, 1999, FBR Asset's operating activities
resulted in net cash flows of 13.0 million. The primary source of operating
cash flow was interest on mortgage-backed securities, interest on notes
receivable and dividends from REIT investments. For the nine months ended
September 30, 1998, FBR Asset's operating activities provided net cash flows of
$8.9 million.
For the nine months ended September 30, 1999, FBR Asset's investing activities
resulted in net cash used of $6.5 million compared to net cash used for the nine
months ended September 30, 1998, of $291.0 million. The decrease in net cash
used is primarily attributable to a decrease in new investments in mortgage-
backed securities.
For the nine months ended September 30, 1999, net cash used in FBR Asset's
financing activities was $43.2 million compared to net cash provided by
financing activities for the nine months ended September 30, 1998, of $162.2
million. The decrease in cash provided from financing activities is primarily
attributable to the decrease in net proceeds from repurchase agreements.
Shareholders' Equity
FBR Asset accounts for its investments in mortgage-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, FBR Asset 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.
7
<PAGE>
Also in accordance with SFAS 115, management must regularly evaluate whether
declines in the market value of its securities available-for-sale are other than
temporary. In performing this evaluation, FBR Asset looks to the financial
condition and business performance of each investment relative to that expected
at the time of purchase. FBR Asset also evaluates overall economic and
industry-specific conditions.
If FBR Asset determines that declines are other than temporary, it records a
charge against income for the difference between an investment's cost basis and
its estimated fair value. For the year ended December 31, 1998, FBR Asset
recorded a charge to reflect the decline in value of its investment in Chastain,
which FBR Asset determined was other than temporary. That determination
resulted, in substantial part, from Chastain's announcement that it was
suspending its dividend for the fourth quarter of 1998.
As of December 31, 1998, the value of the equity securities in FBR Asset's
portfolio had declined from $87.8 million from the date the investments were
made to $71.0 million. As of September 30, 1999, the value of the equity
securities in FBR Asset's portfolio had declined from $84.6 million as of the
date the investments were made to $70.1 million. Declines have been recorded as
accumulated other comprehensive income in the statement of financial condition,
except that for the year ended December 31, 1998, FBR Asset realized and charged
to income a loss of $6.6 million on its investment in Chastain. See Note 8 of
Notes to Financial Statements and "Developments since September 30, 1999."
With respect to each of FBR Asset's other equity investments, management
believes that, as of September 30, 1999 and December 31, 1998, their decline in
fair value was temporary. That belief is based on several facts, including the
following:
. None of the other REITs has suspended their dividends.
. Each of the equity securities has increased in fair value since the worst
of the liquidity crisis in September 1998.
. Each of the REIT securities owned has experienced pricing movements similar
to the Morgan Stanley REIT Index for the past nine months. This similar
movement indicates that the entire industry has declined and not just one
specific company.
. The sharpest movements within the REIT sector track similar declines and
subsequent increases in the Dow Jones Index (serving as a leading indicator
by several weeks) and the Russell 2000 Index.
Based on these factors, FBR Asset believes that the declines are not persistent
declines in market value, but rather reflect general market and REIT sector
pricing movements, and are therefore temporary changes. Further, FBR Asset has
the intent and ability to hold each of its investments to allow for the
anticipated recovery in stock prices. There can be no assurance, however, that
other charges will not be required in future periods.
As a result of "mark-to-market" accounting treatment, the book value and book
value per share of FBR Asset are likely to fluctuate far more than those of
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.
In June 1998, FBR Asset's Board of Directors authorized a program to repurchase
up to 2,000,000 shares of FBR Asset's common stock. On March 30, 1999, FBR
Asset's Board authorized the repurchase of up
8
<PAGE>
to 2,000,000 additional shares of FBR Asset's common stock. Between September
1998 and September 1999, FBR Asset repurchased 3,466,791 shares of its common
stock at an average price of $12.92 per share.
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of December 31, 1998,
and September 30, 1999.
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------
Amount Percentage
Shares Percent of Market Increase
Owned(7) Ownership(7) Investment Value (Decrease)
-------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Mortgage-Backed Securities N/A N/A $160,705,240 $161,418,739 0.44%
------------ ------------
Equity Investments(1)(2)
Anthracite Capital, Inc.
(AHR) 1,581,846 7.53% $ 18,334,496 $ 12,358,170 (32.60%)
Capital Automotive REIT
(CARS) 1,792,115 7.23% 25,000,000 26,657,711 6.63%
Chastain Capital Corporation
(CHAS)(3) 700,000 9.53% 9,765,000 3,150,000 (67.74%)
Imperial Credit Commercial
Mortgage Inv. Corp. (ICMI)
900,000 3.09% 13,050,230 8,437,500 (35.35%)
Imperial Credit Industries,
Inc. (ICII pfd). 400,000(9) -- -- -- --
Prime Retail, Inc. (PRT) 123,500 0.29% 1,201,317 1,211,844 0.88%
Prime Retail, Inc., pfd
(PRT pfd) 78,400 0.18% -- -- --
Resource Asset Investment
Trust (RAS) 344,575 5.59% 5,292,516 3,790,325 (28.38%)
Building One Services
Corporation (BOSS) 202,659 0.46% 10,000,000 10,437,500 4.38%
East-West Bancorp, Inc.
(EWBC) 311,000 2.19% 5,200,000 4,940,000 (5.00%)
------------ ------------ ------
Total Equity Investments $ 87,843,559 $ 70,983,050 (19.20%)
------------ ------------ ------
Promissory Notes(2)
Prime Capital Holding,
LLC(4) N/A N/A $ 12,504,334 $ 12,504,334 N/A
Prime Retail, L.P. N/A N/A -- -- N/A
Kennedy-Wilson, Inc.(5) N/A N/A 7,525,479 7,525,479 N/A
------------ ------------
Total Promissory Notes $ 20,029,813 $ 20,029,813 N/A
------------ ------------
Cash and Cash Equivalents N/A N/A $ 41,144,326 $ 41,144,326 N/A
------------ ------------
Total Investments & Cash
and Cash Equivalents $309,722,938 $293,575,928 (5.21%)
============ ============ ======
<CAPTION>
As of September 30, 1999
-------------------------------------------------------------
Amount Percentage
of Market Increase
Investment Value (Decrease)(6)
----------------- ----------------- -----------------
<S> <C> <C> <C>
Mortgage-Backed Securities $ 136,619,697 $ 133,366,809 (2.38%)
-------------- --------------
Equity Investments(1)(2)
Anthracite Capital, Inc.
(AHR) $ 18,334,496 $ 10,875,191 (40.68%)
Capital Automotive REIT
(CARS) 25,000,000 22,177,422 (11.29%)
Chastain Capital Corporation
(CHAS)(3) 3,150,000 4,900,000 55.56%
Imperial Credit Commercial
Mortgage Inv. Corp. (ICMI)
13,050,230 9,900,000 (24.14%)
Imperial Credit Industries,
Inc. (ICII pfd). 10,000,000 10,000,000 0.00%
Prime Retail, Inc. (PRT) 1,201,317 910,813 (24.18%)
Prime Retail, Inc., pfd
(PRT pfd) 1,454,320 1,332,800 (8.36%)
Resource Asset Investment
Trust (RAS) 5,292,516 3,833,397 (27.57%)
Building One Services
Corporation (BOSS) 4,053,180 2,469,907 (39.06%)
East-West Bancorp, Inc.
(EWBC) 3,110,000 3,693,125 18.75%
-------------- --------------
Total Equity Investments $ 84,646,059(8) $ 70,092,655(8) (17.19%)(8)
-------------- --------------
Promissory Notes(2)
Prime Capital Holding,
LLC(4) $ 16,949,966 $ 16,949,966 N/A
Prime Retail, L.P. 20,000,000 20,000,000 N/A
Kennedy-Wilson, Inc.(5) -- -- N/A
-------------- --------------
Total Promissory Notes $ 36,949,966 $ 36,949,966 N/A
-------------- --------------
Cash and Cash Equivalents $ 4,425,808 $ 4,425,808 N/A
-------------- --------------
Total Investments & Cash
and Cash Equivalents $ 262,641,530 $ 244,835,238 (6.78%)
============== ==============
</TABLE>
(1) The symbols in parentheses next to the company names are the symbols of
those companies on Nasdaq or a national securities exchange. Each of these
companies is a reporting company under the Securities Exchange Act of 1934.
Information is available about these companies on the SEC's website,
www.sec.gov.
(2) FBR has underwritten or privately placed the securities of these companies
or their affiliates.
(3) FBR Asset realized an other than temporary loss on its investment in
Chastain as of December 31, 1998, equal to $6,615,000.
(4) Includes principal of $11,557,442 as of December 31, 1998 and $16,919,559
as of September 30, 1999, and accrued interest receivable of $946,892 as of
December 31, 1998, and $30,407 as of September 30, 1999.
(5) Includes principal of $7,500,000 and accrued interest receivable of $25,479
as of December 31, 1998.
(6) The amount by which the market value at September 30, 1999, differs from
the amount of FBR Asset's original investment, except for the realized loss
recorded in 1998 on FBR Asset's investment in Chastain, which is discussed
in footnote 3.
(7) As of september 30, 1999.
(8) This represents 33.33% of the issued and outstanding Series B Cumulative
Preferred Stock of Imperial Credit industries, Inc.
9
<PAGE>
The following table shows, for the calendar year 1998 and for the first nine
months of 1999, FBR Asset's investments and cash and cash equivalents,
including, with respect to its investments, the weighted average cost of each
investment based on the number of days from January 1, 1998, to December 31,
1998, and January 1, 1999 to September 30, 1999, and the gross income from each
investment for the year ended December 31, 1998, and for the nine months ended
September 30, 1999.
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
December 31, 1998 September 30, 1999
------------------------------------- ---------------------------------------
Weighted Gross Weighted Gross
Average Cost Income Average Cost Income
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $169,564,932 $7,101,326 $147,662,937 $6,907,357
------------ ---------- ------------ ----------
Equity Investments
Anthracite Capital, Inc. $ 10,356,129 $ 739,613 $ 18,334,496 $1,834,941
Capital Automotive REIT 21,986,301 1,569,893 25,000,000 1,200,717
Chastain Capital Corporation 6,581,342 287,000 3,150,000 --
Imperial Credit Commercial
Mortgage Inv. Corp. 13,050,230 1,062,000 13,050,230
Imperial Credit Industries, Inc. -- -- 3,369,964 347,083
Prime Retail, Inc. 374,166 36,433 1,201,317 109,298
Prime Retail, Inc., preferred -- -- 868,330 102,900
Resource Asset Investment Trust 4,329,152 576,466 5,292,516 351,467
Building One Services Corporation 10,000,000 -- 6,906,782 --
East-West Bancorp, Inc. 2,621,370 -- 5,200,000 46,800
----------- ---------- ----------- ----------
Total Equity Investments &
Dividends $69,298,690 $4,271,405 $82,373,635 $4,533,206
----------- ---------- ----------- ----------
Promissory Notes
Prime Capital Holding, LLC $ 7,947,365 $1,248,707 $11,080,244 $1,684,330
Prime Group -- -- 4,076,923 494,742
Prime Retail, L.P. 73,260 20,763
Kennedy-Wilson Inc. 5,506,849 749,264 4,693,671 511,411
Brookdale Living Communities -- -- 1,996,337 224,727
----------- ---------- ----------- ----------
Total Promissory Notes $13,454,214 $1,997,971 $21,920,435 $2,935,973
----------- ---------- ----------- ----------
Cash & Cash Equivalents $84,496,947 $4,556,800 $22,765,555 $ 811,260
----------- ---------- ----------- ----------
Total Investments and
Cash & Cash Equivalents $336,814,783 $17,427,502 $274,722,562 $15,187,796
============ ============ ============= ===========
</TABLE>
Year 2000 Compliance
FBR Asset's software and information systems are Year 2000 compliant. However,
FBR Asset places significant reliance on the technologies of BlackRock.
Management has inquired of BlackRock and has been provided information regarding
the status of BlackRock's Year 2000 readiness. BlackRock has identified its
critical technology areas and systems with Year 2000 exposure. Those systems
and the areas identified by BlackRock that may affect FBR Asset include
BlackRock's internally developed trading and analytical systems, the accounting
and reporting systems for fixed income securities including mortgage-backed
investments, and relationships with daily market pricing and data providers,
asset custodians and clearing brokers. BlackRock has indicated that it has
completed all testing, remediation, and validation of its internal systems.
Furthermore, BlackRock has received written assurances from all of its critical
vendors that their products or systems are Year 2000 compliant. In addition, in
excess of 90% of BlackRock's other vendors have represented in writing that
their products
10
<PAGE>
or systems are Year 2000 compliant. To date, BlackRock has not received any
responses from vendors indicating that they will not be Year 2000 compliant by
the end of 1999. There is no assurance, however, that either BlackRock's
internal systems or the external systems it uses will work properly on or after
January 1, 2000.
BlackRock has completed developing its contingency plans related to this issue.
BlackRock expects that those plans will be fully implemented by the end of 1999.
BlackRock has estimated that the aggregate cost of its Year 2000 compliance
efforts will not exceed $500,000, although the cost may be higher.
To a lesser extent, FBR Asset also relies on the technologies of FBR Management.
That reliance primarily relates to information technology systems, more
specifically, the general ledger applications and to a lesser degree the
brokerage and trading information and market data systems. These systems are
commercially provided and widely-used. FBR and FBR Management have contacted
all material third parties and have received written responses from 100% of the
key external vendors whose software and hardware supports the systems material
to FBR Asset's operations, acknowledging that the software and hardware used by
FBR and FBR Management is Year 2000 compliant. FBR and FBR Management has also
received written responses from the suppliers of building services for the
office space occupied by FBR and FBR Management, acknowledging that their
underlying computer systems are Year 2000 compliant. Because of the relatively
low volume of FBR Asset's monthly trading and accounting transactions, FBR Asset
believes that if FBR Management were unable to provide these services because of
Year 2000 problems, FBR Asset could obtain comparable, Year 2000 compliant
services elsewhere. Management has, however, inquired of FBR Management and FBR
and has been provided the following information regarding the status of FBR's
Year 2000 readiness.
Both FBR Management and FBR are currently in the process of finalizing their own
internal testing, remediation and validation of all vendor supported critical
systems, including those related to FBR Asset. FBR Management and FBR finalized
their contingency plans for Year 2000. FBR Management and FBR have represented
to FBR Asset that the total cost to complete their Year 2000 compliance efforts
is estimated to be less than $350,000.
FBR Asset has finalized its contingency plan alternatives, particularly with
respect to its reliance on the information systems provided by BlackRock and FBR
Management.
The Company has and will continue to assess its Year 2000 risk and its Year 2000
plan, including it's contingency efforts.
There can be no assurance that the systems on which FBR Asset currently relies
will be operationally effective by the end of 1999. If those systems are not
Year 2000 compliant, their failure could have a material adverse effect on FBR
Asset's operations. Furthermore, the failure of banking and securities systems
in general--although an unlikely occurrence and one totally beyond our control--
could have a material adverse effect on FBR Asset's operations. In the worst
case, FBR Asset could be required to establish its ownership of assets and its
entitlement to interest and dividend payments on those assets. FBR Asset
maintains trade tickets and other written documentation that it believes would
be adequate to establish its ownership of those assets.
Market Risk
Market risk generally represents the risk of loss that can result from a change
in the prices of equity securities in the equity market, a change in the value
of financial instruments as a result of changes in interest rates, a change in
the volatility of interest rates or, a change in the credit rating of an issuer.
FBR
11
<PAGE>
Asset is exposed to the following market risks as a result of its investments in
mortgage-backed securities and equity investments. None of these investments are
held for trading purposes.
Interest Rate Risk
- ------------------
FBR Asset is subject to interest rate risk as a result of its investments in
mortgage-backed securities and its financing with repurchase agreements, all of
which are interest rate sensitive financial instruments. FBR Asset is exposed
to interest rate risk that fluctuates based on changes in the level or
volatility of interest rates and mortgage prepayments and in the shape and slope
of the yield curve. FBR Asset attempts to hedge a portion of its exposure to
interest rate risk primarily through the use of interest rate swaps.
FBR Asset's primary risk is related to changes in both short and long term
interest rates, which affect the company in several ways. As interest rates
increase, the market value of the mortgage-backed securities may be expected to
decline, prepayment rates may be expected to go down and durations may be
expected to extend. An increase in interest rates is beneficial to the market
value of FBR Asset's swap position as the cash flows from the floating rate
portion increase under this scenario. The reverse is true for mortgage-backed
securities and the swap if interest rates decline.
The fair value of interest rate swap agreements that qualify as hedges is not
recorded for accounting purposes. The differential between amounts paid and
received under the swap agreements is recorded as an adjustment to the interest
expense incurred under the repurchase agreements. In the event of early
termination of a swap agreement, a gain or loss is recorded and the company
receives or makes a payment based on the fair value of the swap agreement.
The table that follows shows the expected change in market value for FBR Asset's
current mortgage-backed securities and interest rate swaps under several
interest rate "shocks." Interest rates are defined by the U.S. Treasury yield
curve. The changes in rates are assumed to occur instantaneously. It is
further assumed that the changes in rates occur uniformly across the yield curve
and that the level of LIBOR changes by the same amount as the yield curve.
Actual changes in market conditions are likely to be different from these
assumptions.
Changes in value are measured as percentage changes form their respective values
presented in the column labeled "Value at 9/30/99." Actual results could differ
significantly from these estimates.
The change in value of the mortgage-backed securities also incorporates
assumptions regarding prepayments, which are based on a proprietary model. This
model forecasts prepayment speeds based, in part, on each security's issuing
agency (Fannie Mae, Ginnie Mae or Freddie Mac), coupon, age, prior exposure to
refinancing opportunities, the interest rate distribution of the underlying
loans, and an overall analysis of historical prepayment patterns under a variety
of past interest rate conditions.
12
<PAGE>
<TABLE>
<CAPTION>
Value at
Value at 9/30/99
9/30/99 with with 100
100 basis basis point
point decrease in
Value at increase in Percent interest Percent
9/30/99(1) interest rates Change rates Change
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Mortgage securities $ 133,366,809 $ 128,720,816 (3.48%) $ 137,329,803 2.97%
Other 113,472,245 113,472,245 113,472,245
-------------- -------------- --------------
Total Assets $ 246,839,054 $ 242,193,061 (1.88%) $ 250,802,048 1.61%
============== ============== ==============
Liabilities
Interest rate swap $ 617,292 $ 96,000(2)) $ (1,347,000)(2)
Other 123,892,919 123,892,919 123,892,919
-------------- -------------- --------------
Total Liabilities $ 124,510,211 $ 123,988,919 (0.42%) $ 122,545,919 1.58%
-------------- -------------- --------------
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,097,193 194,097,193 194,097,193
Accumulated other
comprehensive income
(loss) $ (18,692,104) $ (22,816,805) (22.07%) (12,764,818) 31.71%
Retained earnings
(deficit) (8,383,758) (8,383,758) (8,383,758)
Treasury stock $ (44,796,646) $ (44,796,646) (44,796,646)
-------------- ------------- --------------
Total Shareholders'
Equity $ 122,328,843(2) $ 118,204,142 (3.37%) $ 128,256,129 4.85%
-------------- ------------- --------------
Total Liabilities and
Shareholders' Equity $ 246,839,054 $ 242,193,061 (1.88%) $ 250,802,048 1.61%
============== ============= ==============
</TABLE>
(1) Includes Accrued Interest.
(2) In accordance with GAAP, the fair value of interest rate swaps accounted
for as hedges is not recorded. Accordingly, the carrying value of the
interest rate swap in the company's financial statements is $0. See Note 3
to Notes to Financial Statements. The fair value of the interest rate swap
is based on quoted market prices as of September 30, 1999. As of September
30, 1999, interest payments received under the swap agreement were based on
an interest rate of 5.52% while interest payments made were based on an
interest rate of 5.96%.
As shown above, the portfolio generally will benefit less from a decline in
interest rates than it will be adversely affected by a similar-scale increase.
This effectively may limit investors' upside potential in a market rally.
The value of FBR Asset's investments in other companies is also likely to be
affected by significant changes in interest rates. First, many of the companies
are exposed to risks similar to those identified above as being applicable to
FBR Asset's direct investments. Second, the REITs in which FBR Asset has
invested tend to trade on a yield basis. As interest rates increase, the yield
required by investors in REITs, thrifts and other financial institutions
increases with the result that market values decline. Finally, changes in
interest rates often affect market prices of equity securities generally.
Because each of the companies in which FBR Asset invests has its own interest
rate risk management process, it is not feasible for us to quantify the
potential impact that interest rate changes would have on the stock price or the
future dividend payments by any of the companies in which FBR Asset has
invested.
Equity Price Risk
- -----------------
FBR Asset is exposed to equity price risk as a result of its investments in
equity securities of REITs and other real estate related companies. Equity
price risk changes as the volatility of equity prices changes or the values of
corresponding equity indices change.
While it is impossible to project with any exactitude what factors may affect
the prices of equity sectors and how much that might be, the table below
illustrates the impact a ten percent increase and a ten
13
<PAGE>
percent decrease in the price of the equities held by FBR Asset would have on
the value of the total assets and the book value of FBR Asset as of September
30, 1999.
<TABLE>
<CAPTION>
Value at Value at
September 30, 1999 with September 30, 1999
Value at 10% increase Percent with 10% decrease Percent
September 30, 1999 in price Change in price Change
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Equity securities $ 70,092,655 $ 77,101,921 10.00% $ 63,083,390 -10.00%
Other 176,746,399 176,746,399 176,746,399
------------ ------------ ------------
Total Assets $246,839,054 $253,848,320 2.84% $239,829,789 -2.84%
Liabilities $123,892,919 $123,892,919 $123,892,919
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,097,193 194,097,193 194,097,193
Accumulated comprehensive
income (loss) (18,074,812) (11,065,546) 38.78% (25,084,077) -38.78%
Retained earnings
(deficit) (8,383,758) (8,383,758) (8,383,758)
Treasury stock (44,796,646) (44,796,646) (44,796,646)
------------ ------------ ------------
Total Shareholders' Equity $122,946,135 $129,955,401 5.70% $115,936,870 -5.70%
Total Liabilities and
Shareholders' Equity $246,839,054 $253,848,320 2.84% $239,829,789 -2.84
============ ============ ============
Book value per share $17.69 $18.70 5.70% $16.68 -5.70%
============ ============ ============
</TABLE>
Except to the extent that FBR Asset sells its equity investments, an increase or
decrease in the market value of those assets will not directly affect FBR
Asset's earnings, although an increase or decrease in interest rates would
affect the market value of the assets owned by the companies in which FBR Asset
invests. Consequently, if those companies' earnings are affected by changes in
the market value of their assets, that could in turn impact their ability to pay
dividends, which could in turn affect FBR Asset's earnings. If FBR Asset had
sold all of its equity investments on September 30, 1999, the company would have
incurred a loss of approximately $14.6 million which would have been charged to
earnings.
Developments Since September 30, 1999
As of September 30, 1999, FBR Asset held a $20 million note of Prime Retail,
L.P., that bore interest at a rate of 11% per annum and matured on June 10,
2000. FBR Asset and Prime Retail have entered into an agreement pursuant to
which Prime Retail paid $7.5 million of principal down on the note and FBR
Asset made an additional $20 million loan to Prime Retail. FBR Asset now owns
(i) a note of Prime Retail in the principal amount of $12.5 million that bears
interest at a rate of 11% per annum and matures June 10, 2000, and (ii) a
subordinated note of Prime Retail in the principal amount of $20 million that
bears interest at a rate of 15% per annum and matures December 31, 1999.
FBR Asset has extended the maturity date on the $9.9 million balance of its loan
to Prime Capital Holding, LLC (the "PCH Mezzanine Loan") until November 16,
1999. Further, FBR Asset has lent an additional $7,000,000 to Prime Capital
Holding, LLC secured by the same collateral that secures the PCH Mezzanine Loan
(the "PCH Subordinated Loan"). On November 10, 1999, Prime Capital Holding, LLC
prepaid approximately $1.3 million of the PCH Mezzanine Loan.
14
<PAGE>
On July 22, 1999 Imperial Credit Commercial Mortgage and Imperial Credit
Industries announced a merger agreement under which Imperial Credit Industries
would acquire all of the outstanding shares of Imperial Credit Mortgage for a
cash purchase price of $11.50 per share, subject to increase under certain
circumstances. Completion of the merger is conditioned on, among other things,
approval by the shareholders of Imperial Credit Mortgage. On October 25, 1999,
after expiration of the tender offer period on October 22, 1999 during which
Imperial Credit Mortgage explored alternative transactions more favorable to its
shareholders, Imperial Credit Industries reported that the merger consideration
had been increased from $11.50 per share to approximately $11.57 per share. The
merger is expected to close in an early year 2000. In the absence of other
offers at more favorable prices, management expects to record a $2.6 million
charge to earnings for the transaction in the fourth quarter representing the
difference between Imperial Credit Industries' most recent tender offer and FBR
Asset's cost basis.
On November 5th and 10th Imperial Credit Industries redeemed the 400,000 shares
of Series B 14.5% cumulative preferred held by FBR Asset for $10.5 million.
On November 8, 1999, Chastain Capital Corp. announced that its Board had
declared an initial $7.45 per share distribution to stockholders under a plan to
liquidate itself. Chastain still has one real estate asset remaining, a retail
property Chastain is trying to sell.
Beginning September 30, through October 25, 1999, FBR Asset sold 520,000 shares
of common stock in East West Bancorp for $5,988,838 or $11.52 average per share.
On October 29, 1999, FBR Asset completed a transaction through BlackRock
Financial Management for the purchase of $136.0 million face amount agency
mortgage-backed securities bearing a weighted average yield of 6.38% and a $32.0
million face amount 6.00% short-term treasury note. FBR Asset financed this
purchase with repurchase agreements totaling $164.1 million and also established
a short position for $101.0 million in 7.00% Ginnie Mae agency mortgage-backed
securities.
15
<PAGE>
FINANCIAL STATEMENTS
Index to Financial Statements
Page
----
Statements of Financial Condition
as of December 31, 1998
and as of September 30, 1999 (unaudited)..................................F-2
Statements of Income for the
Nine and Three Months Ended
September 30, 1998 and 1999 (unaudited)...................................F-3
Statements of Changes in Shareholders'
Equity for the Nine Months ended
September 30, 1998, the Three Months
ended December 31, 1998 and the Nine
Months ended September 30, 1999 (unaudited)...............................F-5
Statements of Cash Flows for the
Nine Months Ended
September 30, 1998 and 1999 (unaudited)...................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
FBR Asset Investment Corporation
Statements of Financial Condition as of December 31, 1998, and September 30,
1999 (unaudited)*
================================================================================
<TABLE>
<CAPTION>
As of December 31, 1998 As of September 30, 1999
----------------------------- ------------------------------
(unaudited)
<S> <C> <C>
Assets
Mortgage-backed securities, at fair value $161,418,739 $133,366,809
Cash and cash equivalents 41,144,326 4,425,808
Investments in equity securities, at
fair value 70,983,050 70,092,655
Notes receivable 19,082,921 36,919,559
Dividends receivable 870,477 805,819
Prepaid expenses 454,746 385,399
Organization costs, net of accumulated
amortization of $5,329 and $6,526 6,313 5,116
Interest receivable 1,970,048 837,889
----------------------------- ------------------------------
Total assets $295,930,620 $246,839,054
============================= ==============================
Liabilities and Shareholders' Equity
Liabilities:
Repurchase agreements $128,550,000 $114,076,000
Interest payable 310,096 922,502
Dividends payable 2,563,058 2,779,614
Management fees payable 1,275,514 130,340
Accounts payable and accrued expenses 224,933 199,676
Due to custodian-mortgage securities 11,929,614 -
Due to broker -- 5,496,189
Deferred revenue 172,826 288,598
----------------------------- ------------------------------
Total liabilities 145,026,041 123,892,919
----------------------------- ------------------------------
Shareholders' equity:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized -- --
Common stock, par value $.01 per share,
200,000,000 shares authorized, 10,415,827 shares
issued as of December 31, 1998, and September 30,
1999, respectively
104,158 104,158
Additional paid-in capital 194,097,193 194,097,193
Accumulated other comprehensive loss (9,800,530) (18,074,812)
Retained earnings (deficit) (9,425,579) (8,383,758)
Treasury stock, at cost, 1,872,300 shares and
3,466,791 shares as of December 31, 1998 and
September 30, 1999 (24,070,663) (44,796,646)
----------------------------- ------------------------------
Total shareholders' equity 150,904,579 122,946,135
----------------------------- ------------------------------
Total liabilities and shareholders' equity $295,930,620 $246,839,054
============================= ==============================
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
F-2
<PAGE>
FBR Asset Investment Corporation
Statements of Income for the Nine Months Ended September 30, 1998 and 1999
(unaudited)*
<TABLE>
<CAPTION>
======================================================================================================
Nine Months Ended September 30,
--------------------------------
1998 1999
------------- --------------
(unaudited) (unaudited)
<S> <C> <C>
Income:
Interest $ 9,527,657 $10,654,590
Dividends 2,880,624 4,533,206
Total Income 12,408,281 15,187,796
------------- --------------
Expenses:
Interest expense 3,187,418 4,921,530
Management fee expense 926,726 975,252
Professional fees 157,228 608,974
Insurance 39,576 18,413
Amortization of stock options issued to manager -- 341,060
Amortization of organization costs 1,197 1,197
Other 64,429 129,643
Total expenses 4,376,574 6,996,069
Realized gain on sale of equity investments -- 1,074,077
Net income $ 8,031,707 $ 9,265,804
============= ==============
Basic and diluted earnings per share $0.78 $1.19
============= ==============
Weighted-average common and equivalent shares 10,353,821 7,773,157
============= ==============
*The accompanying notes are an integral part of these statements.
======================================================================================================
</TABLE>
F-3
<PAGE>
FBR Asset Investment Corporation
===========================================================================
Statements of Income for the Three Months Ended September 30, 1998 and 1999
(unaudited)*
===========================================================================
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
1998 1999
-------------- --------------
Income: (unaudited) (unaudited)
<S> <C> <C>
Interest $ 4,710,088 $2,909,012
Dividends 2,046,875 1,694,354
----------- ----------
Total Income 6,756,963 4,603,366
----------- ----------
Expenses:
Interest expense 2,634,635 1,539,401
Management fee expense 457,587 296,546
Professional fees 25,193 194,194
Insurance 13,192 997
Amortization of stock options issued to manager -- 113,687
Amortization of organization costs 399 399
Other 59,891 53,254
----------- ----------
Total expenses 3,190,897 2,198,478
----------- ----------
Realized gain on sale of equity investments -- 330,724
Net income $ 3,566,066 $2,735,612
=========== ==========
Basic and diluted earnings per share $0.35 $0.38
=========== ==========
Weighted-average common and equivalent shares 10,264,055 7,111,727
=========== ==========
</TABLE>
*The accompanying notes are an integral part of these statements.
================================================================================
F-4
<PAGE>
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Nine Months Ended
September 30, 1998, the Three Months Ended December 31, 1998 and the Nine Months
Ended September 30, 1999 (unaudited)*
================================================================================
<TABLE>
<CAPTION>
Additional Retained
Paid in Earnings
Common Stock Capital (Deficit) Treasury Stock
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $102,190 $189,528,668 $ 135,971 $ --
------------ ------------ ----------- --------------
Issuance of common stock 1,968 3,659,033 -- --
Repurchase of common stock -- -- -- (12,013,990)
Net income -- -- 8,031,707 --
Other comprehensive income (loss)
Change in unrealized gain on available
for sale securities -- -- -- --
Comprehensive income (loss)
Dividends -- -- (5,206,929) --
------------ ------------ ----------- ------------
Balance, September 30, 1998 104,158 193,187,701 2,960,749 (12,013,990)
------------ ------------ ----------- ------------
Repurchase of common stock -- -- -- (12,056,673)
Options issued to manager -- 909,492 -- --
Net income (loss) -- -- (6,443,472) --
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities -- -- -- --
Comprehensive income (loss)
Dividends -- -- (5,942,856) --
------------ ------------ ----------- ------------
Balance, December 31, 1998 104,158 194,097,193 (9,425,579) (24,070,663)
------------ ------------ ----------- ------------
Repurchase of common stock -- -- -- (20,725,983)
Net Income -- -- 9,265,804 --
Other comprehensive income (loss)--
Change in unrealized loss on
available- for-sale securities -- -- -- --
Comprehensive income (loss) -- -- -- --
Dividends -- -- (8,223,983) --
------------ ----------- ------------
Balance, September 30, 1999 $104,158 $194,097,193 $(8,383,758) $(44,796,646)
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive
Income (Loss) Comprehensive
Total Income (Loss)
-----------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1997 $ -- $ 189,766,829
------------------ -------------
Issuance of common stock -- 3,661,001
Repurchase of common stock -- (12,013,990)
Net income (Loss) -- 8,031,707 $ 8,031,707
Other comprehensive income
Change in unrealized gain on available
for sale securities (19,016,397) (19,016,397) (19,016,397)
------------
Comprehensive income (loss) $(10,984,690)
============
Dividends -- (5,206,929)
------------ -------------
Balance, September 30, 1998 (19,016,397) 165,222,221
------------ -------------
Repurchase of common stock -- (12,056,673)
Options issued to manager -- 909,492
Net income (Loss) -- (6,443,472) $ (6,443,472)
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities 9,215,867 9,215,867 9,215,867
------------
Comprehensive income $ 2,772,395
============
Dividends -- (5,942,856)
------------ -------------
Balance, December 31, 1998 (9,800,530) 150,904,579
------------ -------------
Repurchase of common stock -- (20,725,983)
Net Income -- 9,265,804 $ 9,265,804
Other comprehensive income (loss)--
Change in unrealized loss on
available- for-sale securities (8,274,282) (8,274,282) ------------
(8,274,282)
------------
Comprehensive income (loss) -- -- $ 991,522
============
Dividends -- (8,223,983)
------------ -------------
Balance, September 30, 1999 $(18,074,812) $ 122,946,135
============ =============
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
F-5
<PAGE>
FBR Asset Investment Corporation
Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1999
==============================================================================
(unaudited)*
============
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
------------------------------------------
1998 1999
------------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,031,707 $ 9,265,804
Adjustments to reconcile net income to net cash (used in) provided by operating
activities-- - (1,074,077)
Realized gain on equity securities
Amortization of organization costs and stock options issued to manager 1,197 342,257
Premium amortization on mortgage-backed securities 526,846 552,258
Changes in operating assets and liabilities:
Due from affiliate 545,609 -
Dividends receivable (940,278) 64,658
Interest receivable (1,777,141) 1,132,159
Prepaid expenses (13,193) (271,713)
Management fees payable 665,499 (1,145,174)
Accounts payable and accrued expenses 44,673 (25,257)
Interest payable 1,988,594 612,406
Due to custodian - (2,041,230)
Due to broker 5,496,189
Deferred revenue (167,912) 115,772
------------------- ----------------
Net cash provided by operating activities 8,905,601 13,024,052
Cash flows from investing activities:
Purchase of mortgage-backed securities (221,156,240) (9,888,384)
Investments in equity securities (64,476,342) (11,454,320)
Investments in notes receivable, net of repayments (17,443,385) (17,836,638)
Proceeds from sale of equity securities - 9,110,897
Receipt of principal payments on mortgage-backed securities 12,099,608 23,533,286
------------------- ----------------
Net cash used in investing activities (290,976,359) (6,535,159)
------------------- ----------------
Cash flows from financing activities:
Repurchase of common stock (12,013,990) (20,725,983)
Proceeds from issuance of common stock 3,661,001 -
Proceeds from (repayments of) repurchase agreements, net 176,252,157 (14,474,000)
Dividends paid (5,717,879) (8,007,428)
------------------- ----------------
Net cash provided by (used in) financing activities 162,181,289 (43,207,411)
------------------- ----------------
Net decrease in cash and cash equivalents (119,889,469) (36,718,518)
Cash and cash equivalents, beginning of the period 163,223,199 41,144,326
------------------- ----------------
Cash and cash equivalents, end of the period $ 43,333,730 $ 4,425,808
---------------------- ----------------
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Notes to Financial Statements
(Information as of and for the nine month period ended September 30, 1999 is
unaudited.)
Note 1 Basis of Presentation
The financial statements of FBR Asset Investment Corp. (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Therefore, they
do not include all information required by generally accepted accounting
principles for complete financial statements. The interim financial statements
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
results for the periods presented. The results of operations for interim
periods are not necessarily indicative of the results for the entire year.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 Organization and Nature of Operations
FBR Asset Investment Corporation ("FBR Asset" or the "Company") was incorporated
in Virginia on November 10, 1997. FBR Asset commenced operations on December
15, 1997, upon the closing of a private placement of equity capital (the
"Private Placement") (see Note 5).
FBR Asset is organized as a real estate investment trust ("REIT") whose primary
purpose is to invest in mortgage loans and mortgage-backed securities issued or
guaranteed by instrumentalities of the U.S. Government or by private issuers
that are secured by real estate (together the "Mortgage Assets"). FBR Asset
also acquires indirect interests in those and other types of real estate-related
assets by investing in public and private real estate companies, subject to the
limitations imposed by the various REIT qualification requirements. Funds not
immediately allocated will generally be temporarily invested in readily
marketable, interest-bearing securities. To create yields commensurate with its
investment objectives, FBR Asset leverages its assets and mortgage loan
portfolio primarily with collateralized borrowings. FBR Asset uses derivative
financial instruments to hedge a portion of the interest rate risk associated
with its borrowings.
Note 3 Summary of Significant Accounting Policies
Investments in Mortgage-Backed Securities
FBR Asset invests primarily in mortgage pass-through certificates that represent
a 100 percent interest in the underlying conforming mortgage loans and are
guaranteed by the Government National Mortgage Association ("Ginnie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), and the Federal National
Mortgage Association ("Fannie Mae").
F-7
<PAGE>
Mortgage-backed security transactions are recorded on the date the securities
are purchased or sold. Any amounts payable for unsettled trades are recorded as
"due to custodian--mortgage securities" in FBR Asset's Statement of Financial
Condition.
FBR Asset 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 FBR Asset to classify its investments as either trading, available-for-
sale or held to maturity. FBR Asset does not hold its mortgage-backed
securities for trading purposes, but may not hold such investments to maturity,
and has classified these investments as available-for-sale. Securities
classified as available for sale are reported at fair value, with temporary
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Realized gains and losses on mortgage-backed
securities transactions are determined on the specific identification basis.
Unrealized losses on mortgage-backed securities that are determined to be other
than temporary are recognized in income. Management regularly reviews its
investment portfolio for other than temporary impairment. There were no such
adjustments for mortgage-backed investments.
The fair value of FBR Asset's mortgage-backed securities are based on market
prices provided by certain dealers who make markets in these financial
instruments. The fair values reported reflect estimates and may not necessarily
be indicative of the amounts FBR Asset could realize in a current market
transaction.
Income from investments in mortgage-backed securities is recognized using the
effective interest method, using the expected yield over the life of the
investment. Income includes contractual interest accrued and 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 prepayments. Changes in the yield that result from
changes in the anticipated cash flows and prepayments are recognized over the
remaining life of the investment with recognition of a cumulative catch-up at
the date of change from the date of original investment.
The following table summarizes FBR Asset's mortgage-backed securities as of
September 30, 1999:
<TABLE>
<CAPTION>
Total Mortgage
Freddie Mac Fannie Mae Ginnie Mae Assets
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Mortgage-backed securities,
available for sale-principal $81,943,039 $39,694,176 $12,789,418 $134,426,633
Unamortized premium 396,991 1,118,303 677,771 2,193,065
----------- ----------- ----------- ------------
Amortized cost 82,340,030 40,812,479 13,467,189 136,619,698
Gross unrealized gains - - - -
Gross unrealized losses (1,940,036) (914,442) (398,411) (3,252,889)
----------- ----------- ----------- ------------
Estimated fair value $80,399,994 $39,898,037 $13,068,778 $133,366,809
=========== =========== =========== ============
</TABLE>
Repurchase Agreements
FBR Asset has entered into short-term repurchase agreements to finance a
significant portion of its mortgage-backed investments. The repurchase
agreements are secured by FBR Asset's mortgage-backed securities and bear
interest at rates that have historically related closely to LIBOR for a
corresponding
F-8
<PAGE>
period. As of December 31, 1998, FBR Asset had $128.6 million outstanding under
repurchase agreements with a borrowing rate of 5.08% as of the end of the period
and a weighted-average remaining maturity of 73 days. At December 31, 1998,
mortgage-backed securities pledged had an estimated fair value of $136.2
million. At December 31, 1998, the repurchase agreements had remaining
maturities of between 69 and 74 days.
At September 30, 1999, FBR Asset had $114.1 million outstanding under repurchase
agreements with a weighted average borrowing rate of 5.37% as of the end of the
period and a remaining term to maturity of 20 days. At September 30, 1999,
mortgage-backed securities pledged had an estimated fair value of $120.3
million.
Interest Rate Swaps
FBR Asset has entered into two interest rate swap agreements to offset the
potential adverse effects of rising interest rates under certain short-term
repurchase agreements. The interest rate swap agreements are structured such
that FBR Asset receives payments based on a variable interest rate and makes
payments based on a fixed interest rate. The variable interest rate on which
payments are received is calculated based on the three-month LIBOR. The
Company's repurchase agreements, which generally have maturities of 60 to 90
days, carry interest rates that correspond to LIBOR rates for those same
periods. The swap agreements effectively fix the Company's borrowing cost and
are not held for speculative or trading purposes. As a result of these factors,
the Company has accounted for these agreements as hedges.
The fair value of interest rate agreements that qualify as hedges are not
recorded. The differential between amounts paid and received under the interest
rate swap agreements is recorded as an adjustment to the interest expense
incurred under the repurchase agreements. In the event of early termination of
an interest rate agreement, a gain or loss is recorded and the Company receives
or makes a payment based on the fair value of the interest rate agreement on the
date of termination.
At September 30, 1999, FBR Asset was party to an interest rate swap agreement
that has a notional amount of $50 million, a fair value of $(910,535) and
$(617,292) at December 31, 1998, and September 30, 1999, respectively, and
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 which no sale was reported
are stated at the mean between the closing "bid" and "asked" price on the day of
valuation. Other securities for which quotations are not readily available are
valued at fair value as determined by FBR Asset's investment adviser, Friedman,
Billings, Ramsey Investment Management, Inc. ("FBR Management"). FBR Management
may use methods of valuing securities other than those described above if it
believes the alternative method is preferable in determining the fair value of
such securities.
Consistent with the intention to have the Company operate as a REIT, management
concluded that its investments are being held for long-term yield, capital
appreciation, and cash flow. Accordingly, management has classified such
investments as available for sale.
F-9
<PAGE>
Realized gains and losses are recorded on the date of the transaction using the
specific identification method. The difference between the purchase price and
market price (or fair value) of investments in securities is reported as an
unrealized gain or loss and a component of comprehensive income.
Management regularly reviews any declines in the market value of its equity
investments for declines and impairments that are other than temporary. Such
declines are recorded in operations when determined.
Notes Receivable
FBR Asset has extended the maturity date on the $9.9 million balance of its loan
to Prime Capital Holding, LLC (the "PCH Mezzanine Loan") until November 16,
1999. On November 10, 1999, Prime Capital Holding, LLC prepaid approximately
$1.3 million of the PCH Mezzanine Loan. Further, FBR Asset has lent an
additional $7,000,000 to Prime Capital Holding, LLC secured by the same
collateral that secures the PCH Mezzanine Loan (the "PCH Subordinated Loan").
Credit Risk
FBR Asset has limited its exposure to credit losses on its mortgage-backed
portfolio of mortgage-backed securities by purchasing securities only from
Freddie Mac, Fannie Mae, or Ginnie Mae. The payment of principal and interest
on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by
those respective agencies and the payment of principal and interest on the
Ginnie Mae mortgage-backed securities is backed by the full-faith-and-credit of
the U.S. Government. At December 31, 1998, and September 30, 1999, all of FBR
Asset's mortgage-backed securities have an implied "AAA" rating.
Cash and Cash Equivalents
All investments with original maturities of less than three months are cash
equivalents. As of December 31, 1998, cash and cash equivalents consisted of
$14.4 million of cash deposited in two commercial banks and $26.7 million in two
separate domestic money market funds. As of September 30, 1999, cash and cash
equivalents consisted of $4.0 million of cash deposited in two commercial banks
and $0.4 million in two separate domestic money market funds. The money market
funds invest primarily in obligations of the U.S. Government. The carrying
amount of cash equivalents approximates their fair value.
Comprehensive Income
During 1998, FBR Asset adopted SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 requires the reporting of comprehensive income in
addition to net income from operations. Comprehensive income is a financial
reporting methodology that includes certain financial information that
historically has not been recognized in the calculation of net income. FBR
Asset's only component of other comprehensive income is the net unrealized loss
on investments classified as available for sale in accordance with SFAS No. 115.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). This statement is effective for all
fiscal years beginning after June 15, 2000, and generally requires that an
entity recognize derivative financial instruments as assets or liabilities and
measure them at fair value. Management is currently evaluating the impact of
adopting the requirements of SFAS 133.
F-10
<PAGE>
Net Income Per Share
FBR Asset presents net income per share in accordance with Statement of
Financial Accounting Standards 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 potential dilution and is
computed by dividing income available to common shareholders by the weighted-
average number of common shares outstanding for the period. Diluted earnings
per share reflects the dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that would share in earnings. The
potentially dilutive securities did not impact the computation of earnings per
share for any period presented.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Income Taxes
FBR Asset has elected to be taxed as a REIT under the Internal Revenue Code. To
qualify for tax treatment as a REIT, FBR Asset must meet certain income and
asset tests and distribution requirements. FBR Asset generally will not be
subject to federal income tax at the corporate level to the extent that it
distributes at least 95 percent of its taxable income to its shareholders and
complies with certain other requirements. Failure to meet these requirements
could have material adverse impact on FBR Asset's results or financial
condition. Furthermore, because FBR Asset's investments include stock in other
REITs, failure of those REITs to maintain their REIT status could jeopardize FBR
Asset's qualification as a REIT. No provision has been made for income taxes in
the accompanying financial statements, as FBR Asset believes it has met the
prescribed distribution and other requirements.
Note 4 - Due to Broker
FBR Asset maintains a prime brokerage account which holds its equity and debt
securities. The company periodically borrows funds against these securities at
an interest rate equivalent to the Federal Funds Rate plus three-quarters of
one-percent. At September 30, 1999 the interest due on borrowed funds was 5.95%.
Note 5 Stockholders' Equity
On December 15, 1997, FBR Asset completed a private placement of equity capital.
FBR Asset received net proceeds of $189.7 million from the issuance of
10,218,999 shares of common stock.
On January 15, 1998, FBR purchased 196,828 shares of FBR Asset for $3.7 million
pursuant to a stock option awarded in connection with the private placement
offering.
FBR Asset has paid in 1999 the following dividends:
Declaration Date Payable Date Dividend
---------------- ------------ --------
December 31, 1998 January 15, 1999 $.300
March 31, 1999 April 14, 1999 $.325
June 14, 1999 July 15, 1999 $.380
September 16, 1999 October 15, 1999 $.400
In September 1998, the Board of Directors authorized the repurchase of up to
2,000,000 shares of FBR Asset's common stock. Through December 31, 1998, FBR
Asset had repurchased 1,872,300 shares for a cost of $24 million, or $12.86
average cost per share. On March 30, 1999, the Board of Directors authorized
the repurchase of up to an additional 2,000,000 shares of FBR Asset's common
stock.
F-11
<PAGE>
Between December 31, 1998 and September 30, 1999, the Company repurchased an
additional 1,594,491 shares of its common stock at an average price of $13.00
per share.
FBR Asset had outstanding, as of December 31, 1998, and September 30, 1999,
1,021,900 options to purchase common stock. These options have terms of eight
to ten years and have an exercise price of $20 per share.
Note 6 Management and Performance Fees
FBR Asset has entered into a management agreement with Friedman, Billings,
Ramsey Investment Management, Inc. ("FBR Management"), for an initial term
expiring on December 15, 1999. FBR Management will perform portfolio management
services on behalf of FBR Asset. Such services shall include, but are not
limited to, consulting with FBR Asset on purchase and sale opportunities,
collection of information and submission of reports pertaining to FBR Asset's
assets, interest rates, and general economic conditions, and periodic review and
evaluation of the performance of FBR Asset's portfolio of assets.
FBR Management is entitled to a quarterly "base" management fee equal to the sum
of (1) 0.25 percent per annum (adjusted to reflect a quarterly period) of the
average invested mortgage assets of FBR Asset during each calendar quarter and,
(2) 0.75 percent per annum (adjusted to reflect a quarterly period) of the
remainder of the average invested assets of FBR Asset during each calendar
quarter. FBR Management also received 1,021,900 options to purchase FBR Asset's
common stock at $20 per share. The estimated value of these options is
$909,492, based on a discounted Black-Scholes valuation, and is being amortized
over the initial term of the Management Agreement. FBR Management assigned
options to acquire 51,045 shares to Blackrock in connection with the execution
of the sub-management agreement. The unamortized value of these options has
been recorded as prepaid expenses in the accompanying statements of financial
condition. In addition, FBR Management agreed to the rescission of 155,000
options to purchase common shares in connection with the establishment of FBR
Asset's stock incentive plan.
FBR Management is also entitled to receive incentive compensation based on the
performance of FBR Asset. On December 31, 1998, and each subsequent year
thereafter, FBR Management is entitled to an incentive fee calculated as: funds
from operations (as defined), plus net realized gains or losses from asset
sales, less the threshold amount (all computed on a weighted average share
outstanding basis), multiplied by 25 percent. The threshold amount is
calculated as the weighted average per share price of all equity offerings of
FBR Asset, multiplied by a rate equal to the ten-year U.S. Treasury rate plus
five percent per annum.
FBR Management has engaged BlackRock Financial Management, Inc. ("BlackRock") to
manage FBR Asset's mortgage asset investment program (the "Mortgage Portfolio")
as a sub-adviser. BlackRock is a majority owned subsidiary of PNC Bank
Corporation who is a 4.9 percent owner of FBR Management's parent company. As
compensation for rendering services, BlackRock will be entitled to share the
management fees of FBR Management, calculated based on the average gross asset
value managed by BlackRock, with a minimum annual fee of $100,000, payable
quarterly. The agreement may be terminated by either party with thirty days
advance notice.
F-12
<PAGE>
Note 7 Related Parties
As of December 31, 1998, a wholly-owned subsidiary of Friedman, Billings,
Ramsey Group, Inc. ("FBR Group") owned 1,344,086 shares or 15.73% of the
outstanding common stock of FBR Asset. As of September 30, 1999, that same
subsidiary owned 1,344,086 or 19.34% of the outstanding common stock of FBR
Asset. FBR Group is the parent company of FBR Management and FBR & Co.
Note 8 Equity Investments
As of December 31, 1998, the Company's equity investments had an aggregate cost
basis of $81.2 million, fair value of $71.0 million, unrealized losses of $12.3
million, recognized losses of $6.6 million, and unrealized gains of $2.1
million.
At September 30, 1999, the Company's equity investments had an aggregate cost
basis of $84.6 million, a fair value of $70 million, unrealized losses of $16.9
million and unrealized gains of $2.3 million.
<TABLE>
<CAPTION>
Amount of Market Value at Market Value at
Equity Investments Investment/(1)/ December 31, 1998 September 30, 1999
- ----------------------------- --------------------- ----------------------- ------------------------
<S> <C> <C> <C>
Anthracite Capital, Inc. $18,334,496 $12,358,170 $10,875,191
Capital Automotive REIT 25,000,000 26,657,711 22,177,422
Chastain Capital Corporation(2) 3,150,000 3,150,000 4,900,000
Imperial Credit Commercial Mortgage Inv. Corp. 13,050,230 8,437,500 9,900,000
Imperial Credit Industries, Inc.(3) 10,000,000 - 10,000,000
Prime Retail, Inc. 1,201,317 1,211,844 910,813
Prime Retail, Inc., pfd(3) 1,454,320 - 1,332,800
Resource Asset Investment Trust 5,292,516 3,790,325 3,833,397
Building One Services Corporation(4) 4,053,180 10,437,500 2,469,907
East-West Bank(5) 3,110,000 4,940,000 3,693,125
----------------------- ----------------------- ------------------------
Total $84,646,059 $70,983,050 $70,092,655
======================= ======================= ========================
</TABLE>
(1) As of September 30, 1999
(2) Reflects recognized loss of $6.6 million recorded in 1998 for other than
temporary impairment in the value of Chastain Capital Corporation
(3) Purchased in 1999.
(4) In April 1999, FBR Asset sold 297,341 shares of Building One Services
Corporation and realized a gain of $743,353.
(5) In September, FBR Asset sold 209,000 shares of East-West Bank and realized
a gain of $330,724.
Chastain Capital Corporation ("CHAS")
On April 29, 1998, FBR Asset purchased 700,000 shares of common stock in 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.
In 1998, FBR Asset recorded a charge to operations in the amount of $6,615,000
to reflect management's determination that the decline in the market value of
the stock was other than temporary. On May 14, 1999, CHAS announced that its
Board of Directors had voted to sell all of CHAS' assets, either through a plan
of liquidation or through a sale of the company. See Note 9 -- Subsequent
Events.
East-West Bancorp ("EWB")
On June 30, 1998, FBR Asset purchased, through a private placement offering,
520,000 shares of EWB, 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
F-13
<PAGE>
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. In September
FBR Asset sold 209,000 shares of its EWB common shares for a price of $11.58 per
share or $2.4 million.
Prime Retail, Inc. ("PRT")
In September 1998, FBR Asset purchased an aggregate of 122,300 shares of PRT,
for a total of $1,191,832, or $9.74 average cost per share. On October 18,
1998, FBR Asset purchased an additional 1,200 shares of PRT's common stock for
$9,485 or $7.90 per share. PRT 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.
On April 22, 1999, FBR Asset purchased 78,400 shares of PRT's preferred stock
for a cost of $1,454,320 or $18.55 average cost per share. PRT's preferred
stock is publicly traded.
Kennedy-Wilson, Inc. ("KWIC")
FBR Asset owns warrants to acquire 131,096 shares of Kennedy-Wilson common stock
at a price of $7.5526 per share. The warrants expire in June 2003.
Imperial Credit Industries, Inc. ("ICII")
On June 30, 1999, FBR Asset privately purchased 400,000 shares of ICII's
preferred stock for $25.00 per share. ICII is a commercial and consumer finance
holding company specializing in non-conforming residential mortgage banking,
business and consumer lending and commercial leasing.
Note 9 Subsequent Events
As of September 30, 1999, FBR Asset held a $20 million note of Prime Retail,
L.P., that bore interest at a rate of 11% per annum and matured on June 10,
2000. FBR Asset and Prime Retail have entered into an agreement pursuant to
which Prime Retail paid $7.5 million of principal down on the note and FBR
Asset made an additional $20 million loan to Prime Retail. FBR Asset now owns
(i) a note of Prime Retail in the principal amount of $12.5 million that bears
interest at a rate of 11% per annum and matures June 10, 2000, and (ii) a
subordinated note of Prime Retail in the principal amount of $20 million that
bears interest at a rate of 15% per annum and matures December 31, 1999.
FBR Asset has extended the maturity date on the $9.9 million balance of its loan
to Prime Capital Holding, LLC (the "PCH Mezzanine Loan") until November 16,
1999. Further, FBR Asset has lent an additional $7,000,000 to Prime Capital
Holding, LLC secured by the same collateral that secures the PCH Mezzanine Loan
(the "PCH Subordinated Loan"). On November 10, 1999, Prime Capital Holding, LLC
prepaid approximately $1.3 million of the PCH Mezzanine Loan.
On July 22, 1999 Imperial Credit Commercial Mortgage and Imperial Credit
Industries announced a merger agreement under which Imperial Credit Industries
would acquire all of the outstanding shares of Imperial Credit Mortgage for a
cash purchase price of $11.50 per share, subject to increase under certain
circumstances. Completion of the merger is conditioned on, among other things,
approval by the shareholders of Imperial Credit Mortgage. On October 25, 1999,
after expiration of the tender offer period on October 22, 1999 during which
Imperial Credit Mortgage explored alternative transactions more favorable to its
shareholders, Imperial Credit Industries reported that the merger consideration
had been increased from $11.50 per share to approximately $11.57 per share. The
merger is expected to close in an early year 2000. In the absence of other
offers at more favorable prices, management expects to record a $2.6 million
charge to earnings for the transaction in the fourth quarter representing the
difference between Imperial Credit Industries' most recent tender offer and FBR
Asset's cost basis.
On November 5th and 10th Imperial Credit Industries redeemed the 400,000 shares
of Series B 14.5% cumulative preferred held by FBR Asset for $10.5 million.
On November 8, 1999, Chastain Capital Corp. announced that its Board had
declared an initial $7.45 per share distribution to stockholders under a plan to
liquidate itself. Chastain still has one real estate asset remaining, a retail
property Chastain is trying to sell.
Beginning September 30, through October 25, 1999, FBR Asset sold 520,000 shares
of common stock in East West Bancorp for $5,988,838 or $11.52 average per share.
On October 29, 1999, FBR Asset completed a transaction through BlackRock
Financial Management for the purchase of $136.0 million face amount agency
mortgage-backed securities bearing a weighted average yield of 6.38% and a $32.0
million face amount 6.00% short-term treasury note. FBR Asset financed this
purchase with repurchase agreements totaling $164.1 million and also established
a short position for $101.0 million in 7.00% Ginnie Mae agency mortgage-backed
securities.
F-14
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The registrant's stock became registered under the Securities and
Exchange Act of 1934 on September 27, 1999. The common stock is listed on the
American Stock Exchange and its symbol is "FB."
FBR Asset has extended the maturity date on the $9.9 million balance of
its loan to Prime Capital Holding, LLC (the "PCH Mezzanine Loan") until November
16, 1999. On November 10, 1999, Prime Capital Holding, LLC prepaid
approximately $1.3 million of the PCH Mezzanine Loan. Further, FBR Asset has
lent an additional $7,000,000 to Prime Capital Holding, LLC secured by the same
collateral that secures the PCH Mezzanine Loan (the "PCH Subordinated Loan").
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
F-15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FBR ASSET INVESTMENT CORPORATION
(Registrant)
Date: November 15, 1999 By: /s/ William R. Swanson
---------------------------------------
William R. Swanson
Executive Vice President
By: /s/ Kurt R. Harrington
---------------------------------------
Kurt R. Harrington
Chief Financial Officer, Treasurer and
Secretary
F-16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 41,144,326 4,425,808
<SECURITIES> 232,401,789 203,459,464
<RECEIVABLES> 19,082,921 36,919,559
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 295,930,620 246,839,054
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 295,930,620 246,839,054
<CURRENT-LIABILITIES> 145,026,041 123,892,919
<BONDS> 0 0
0 0
0 0
<COMMON> 104,158 104,158
<OTHER-SE> 150,800,421 122,841,977
<TOTAL-LIABILITY-AND-EQUITY> 295,930,620 246,839,054
<SALES> 0 0
<TOTAL-REVENUES> 12,408,281 16,261,873
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,189,156 2,074,539
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,187,418 4,921,530
<INCOME-PRETAX> 8,031,707 9,265,804
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,031,707 9,265,804
<EPS-BASIC> 0.78 1.19
<EPS-DILUTED> 0.78 1.19
</TABLE>
