As filed with the Securities and Exchange Commission on February 17, 1999
Registration No. 333-67343
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 1
to
FORM S-11
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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FBR ASSET INVESTMENT CORPORATION (MARYLAND)
(Exact Name of Registrant as Specified in its Governing Instruments)
Potomac Tower, 1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 469-1000
(Address, Including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
---------------
Robert S. Smith, Esq.
FBR Asset Investment Corporation
Potomac Tower, 1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 469-1000
(703) 312-9756 (Telecopy)
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
---------------
COPY TO:
Randolph F. Totten, Esq.
Hunton & Williams
Riverfront Plaza, East Tower
951 E. Byrd Street
Richmond, Virginia 23219-4074
(804) 788-8200
(804) 788-8218 (Telecopy)
---------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act, or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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<PAGE>
FBR Asset Investment Corporation
____________ Shares
Common Stock
FBR Asset Investment Corporation is a real estate investment trust that invests
in mortgages, mortgage-backed securities and other real estate-related assets,
both directly and indirectly through investments in other companies. The selling
shareholders identified in this prospectus are offering and selling up to ______
shares of FBR Asset's common stock. FBR Asset will not receive any proceeds from
the sale of those shares.
No public market currently exists for FBR Asset's common stock; the stock is not
listed on any securities exchange. The selling shareholders may offer their
shares of common stock in public or private transactions in the over-the-counter
markets, on or off any stock exchange on which the shares may be listed at the
time of sale, at prevailing market prices, or at privately negotiated prices.
The selling shareholders may engage brokers or dealers who may receive
commissions or discounts from the selling shareholders.
You should consider the risk factors discussed on pages 4-14 before investing in
FBR Asset. In particular, you should consider that:
o the conflicts of interest caused by FBR Asset's relationship with its
manager, Friedman, Billings, Ramsey Investment Management, Inc., may
result in FBR Management recommending actions that are not in
shareholders' best interests;
o fluctuations in interest rates, mortgage prepayments, and
borrower defaults may adversely affect the value of FBR Asset's
direct investments in mortgages and mortgage-backed securities;
o fluctuations in interest rates, mortgage prepayments, and
borrower defaults also may adversely affect the mortgages and
mortgage-backed securities held by companies in which FBR Asset
invests, which in turn, may cause declines in the value of FBR
Asset's investments in those companies;
o interest rate hedging may fail to protect FBR Asset from the
adverse effects of interest rate changes and may adversely
affect FBR Asset's operating results;
o declines in the market values of FBR Asset's investments may
adversely affect FBR Asset's operating results and its ability
to obtain credit; and
o FBR Asset's management has had no experience operating a REIT
other than FBR Asset and has operated FBR Asset only since
November 1997.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
thisprospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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This prospectus is dated ________, 1999.
<PAGE>
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This prospectus incorporates by reference exhibits to the registration statement
that we have filed with the SEC. You may request copies of those exhibits, free
of charge, by calling or writing Ms. Elaine Clancy at FBR Asset Investment
Corporation, Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia
22209, (703) 469-1000.
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Table of Contents
SUMMARY........................................1
FBR Asset....................................1
FBR Asset's Business.........................1
FBR & FBR Management.........................2
Summary Financial Information................3
RISKS OF INVESTING IN FBR ASSET................4
Conflicts of Interest May Result In
Decisions That Do Not Fully Reflect
Shareholders'Best Interests..................4
Limited Operating History Does Not
Indicate Future Results......................5
Manager's Lack of REIT Experience May
Affect Performance...........................5
Decline in Market Values of Assets May
Adversely Affect Credit Availability
and Periodic Reported Results................5
Dependence on FBR Management.................6
Fee Payable Upon Termination of Manager......6
Leverage Risk................................6
Real Estate-Related Investments May
Incur Losses.................................7
Interest Rate and Market Value
Leverage Risk.............................7
Mortgage Loan Interest and
Prepayment Rate Risk......................7
Competition in the Purchase, Sale
and Financing of Mortgage Assets..........8
Risk in Hedging Against Interest
Rate Exposure.............................8
Mortgage Loan Credit Risk.................8
Increased Credit Risk Associated
with Investment in Subordinate
Interests in Mortgage Pools...............9
Prepayment Sensitivity of
Investments in Interest-Only
Securities................................9
Multifamily and Commercial Real
Estate May Lose Value and Fail to
Operate Profitably.......................10
Indirect Nature of Investments Exposes
FBR Asset to Additional Risks...............10
Obstacles to Success May Remain
Hidden if Due Diligence is
Inadequate...............................11
Dependence on Management of Other
Entities.................................11
Limited Liquidity of Equity
Security Investments.....................11
Volatility of Prices.....................11
Disposition Value of Investments
Dependent Upon General and Specific
Market Conditions........................11
Tax Requirements May Restrict FBR
Asset's Operations..........................12
Loss of Investment Company Act
Exemption Would Adversely Affect FBR
Asset.......................................13
Ownership Limitation May Restrict
Change of Control or Business
Combination Opportunities...................13
Board of Directors May Change Policies
Without Shareholder Consent.................14
Shares Not Listed on Securities Exchange....14
ORGANIZATION & RELATIONSHIPS..................15
FBR & FBR MANAGEMENT..........................16
Related Party Transactions..................16
FBR Management's Executive Officers.........19
The Management Agreement....................19
FBR ASSET'S BUSINESS..........................24
Operating Policies & Strategies.............24
Current Investments.........................25
Agency Mortgage-Backed Securities........25
Commercial Mortgage Loans & CMBS.........32
Real Estate..............................34
Real Estate-Related Businesses...........35
Summary of Current Investments..............36
Dividends & Distribution Policy.............37
SELECTED FINANCIAL DATA.......................39
MANAGEMENT'S DISCUSSION & ANALYSIS............40
Overview....................................40
Market Conditions...........................40
Equity Market Conditions.................40
REIT and Real Estate Market Conditions...41
Interest Rate Environment................44
Market Risk..............................45
Results of Operations.......................46
Net Income...............................47
Interest and Dividend Income.............48
Interest Expense.........................49
Dividends Declared and
Distributions in Excess of Earnings......49
Changes in Financial Condition..............49
Securities Available for Sale............49
Repurchase Agreements....................50
Contractual Commitments..................51
Capital Resources and Liquidity..........51
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Shareholders'Equity......................52
Developments Since December 31, 1998........52
Year 2000 Compliance........................53
FBR ASSET'S DIRECTORS & OFFICERS..............54
The Board of Directors......................54
The Directors...............................56
Executive Officers Who Are Not Directors....58
Time Required of Directors & Executive
Officers....................................59
Executive Compensation & Other Benefits.....60
FBR ASSET'S CAPITAL STOCK.....................62
General.....................................62
Common Stock................................62
Preferred Stock.............................62
Restrictions on Ownership and Transfer......62
Transfer Agent & Registrar..................65
Reports to Shareholders.....................66
FBR Asset's Charter and Bylaws..............66
ANTI-TAKEOVER EFFECT OF MARYLAND LAWS.........67
CAPITALIZATION................................69
COMMON STOCK AVAILABLE FOR FUTURE SALE........69
PRINCIPAL SHAREHOLDERS........................70
FEDERAL INCOME TAX CONSEQUENCES OF FBR
ASSET'S STATUS AS A REIT......................71
Taxation of FBR Asset.......................71
Requirements for Qualification..............73
Recordkeeping Requirements..................82
Failure to Qualify..........................82
Taxation of Taxable U.S. Shareholders.......82
Taxation of U.S. Shareholders on the
Disposition of the Common Stock.............84
Capital Gains and Losses....................84
Information Reporting Requirements and
Backup Withholding..........................85
Taxation of Tax-Exempt Shareholders.........85
Taxation of Non-U.S. Shareholders...........86
Other Tax Consequences......................88
ERISA CONSIDERATIONS..........................89
SELLING SHAREHOLDERS..........................91
USE OF PROCEEDS...............................91
PLAN OF DISTRIBUTION..........................92
OTHER MATTERS.................................94
Legal.......................................94
Independent Accountants.....................94
Additional Information......................94
Index to Financial Statements................F-1
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Neither FBR Asset nor the selling shareholders have authorized anyone to give
you any information other than that which is included in this document. Neither
FBR Asset nor the selling shareholders have authorized anyone to make any
representations to you other than those that are included in this document. If
anyone gives you additional information, or makes additional representations,
you must not rely on them at all.
This prospectus is not an offer to sell or the solicitation of an offer to buy
any securities other than those to which it relates, nor is it an offer or
solicitation of any person in any jurisdiction to whom it would be unlawful to
make such an offer or solicitation.
The delivery of this prospectus at any time does not imply that the information
herein is correct as of any time after _________, 1999.
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ii
<PAGE>
Summary
This summary highlights only a few of the facts that you will need to make an
informed decision about investing in FBR Asset. We encourage you to read this
entire prospectus, and the other documents to which it refers, very carefully.
References to "we," "us," and "our" indicate the management of FBR Asset.
FBR Asset
FBR Asset is a Maryland corporation that recently succeeded, by merger, to all
of the assets and liabilities of a Virginia corporation also named FBR Asset
Investment Corporation. We formed the Maryland corporation in November 1998 for
the purpose of moving the Virginia corporation's state of incorporation to
Maryland. The merger effected no changes in the company's business, and we have
operated the company in substantially the same manner since we formed the
Virginia corporation in November 1997.
FBR Asset's Business
FBR Asset invests in:
o whole-pool mortgage-backed securities issued or guaranteed by Fannie Mae,
Freddie Mac, or Ginnie Mae;
o residential and commercial mortgage-backed securities;
o residential and commercial mortgage loans;
o residential and commercial real property; and
o other real estate-related assets.
FBR Asset invests in some of these assets directly by buying the assets and
invests in others by buying equity interests in, or making loans to, REITs and
other companies engaged in real estate-related businesses. In the future, FBR
Asset may enter into joint ventures or partnerships that will also invest in
these assets.
FBR Asset expects to generate income primarily from the net earnings derived
from its investments. FBR Asset also seeks to generate growth in earnings and
dividends per share by:
o increasing the income generated from new assets at a rate faster than the
rate of increases in operating expenses;
o increasing the size of its balance sheet when opportunities in the market
for its targeted investments are likely to allow growth in earnings per
share;
o continually reviewing the mix of its investments in an effort to improve
and enhance returns; and
o using leverage to create greater equity returns for shareholders.
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FBR Asset has elected to be taxed as a REIT under the federal tax laws and
intends to continue operating as a REIT. Accordingly, FBR Asset will not incur
federal income tax on its earnings to the extent that it distributes those
earnings to its shareholders, and as long as the asset, income, stock ownership
and minimum distribution tests of the federal tax laws are met. FBR Asset will,
however, be subject to tax at normal corporate rates on net income or capital
gains not distributed to shareholders.
FBR Asset intends to continue operating its business so as not to become
regulated as an investment company under the Investment Company Act of 1940.
For more information about FBR Asset's business, see "FBR Asset's Business" on
page 24.
FBR & FBR Management
Friedman, Billings, Ramsey Investment Management, Inc. manages FBR Asset's
day-to-day operations, subject to the direction and oversight of FBR Asset's
Board of Directors. FBR Management is a wholly-owned subsidiary of Friedman,
Billings, Ramsey Group, Inc., an investment banking firm that focuses on
research, underwriting, brokerage, and asset management activities in various
sectors, including real estate, financial services, specialty finance,
technology, insurance, and consumer products. FBR Group, together with its other
subsidiaries ("FBR"), has presented FBR Asset with opportunities to invest in
other companies, including REITs, that invest in or manage real estate and
companies that provide services to real estate owners and operators.
FBR Management has engaged BlackRock Financial Management, Inc., a subsidiary of
PNC Bank Corp., to sub-manage FBR Asset's mortgage portfolio. Through BlackRock,
FBR Asset has access to market expertise and risk management systems that allow
FBR Asset actively to monitor and manage its mortgage portfolio's exposure to
interest and prepayment risks. FBR Management has retained BlackRock to assist
it in assessing credit risk, risk of capital loss, the availability and cost of
financing, and yield spread movements on FBR Asset's mortgage assets.
For more information about FBR, FBR Management, and BlackRock, see "FBR & FBR
Management" on page 16.
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Summary Financial Information
The summary financial data set forth below should be read in conjunction with
"Management's Discussion & Analysis" and the Financial Statements and Notes
thereto included elsewhere in this prospectus. The selected balance sheet data
as of December 31, 1997 and 1998, and the statement of operations data for the
period from December 15, 1997 (Inception) to December 31, 1997, and for the year
ended December 31, 1998, has been derived from the audited financial statements
included elsewhere in this prospectus. The results for the year ended December
31, 1998, are not necessarily indicative of the results to be expected for any
future period.
<TABLE>
<CAPTION>
December 15, 1997
(Inception) For the Year
through Ended
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Statement of Operations Data
Interest income................................... $ 18,040 $ 13,656,097
Dividend income................................... 434,717 4,271,405
Net income before realized gains and losses....... 646,921 9,958,042
Net realized losses............................... - (8,369,807)
Net income after realized gains and losses........ 646,921 1,588,235
Basic and diluted income per share................ $ 0.06 $ 0.16
Dividends declared per share(1)................... $ 0.05 $ 1.16
<CAPTION>
As of As of
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Selected Balance Sheet Data
Mortgage-backed securities, at fair value......... $ - $161,418,739
Cash and cash equivalents......................... 163,223,199 41,144,326
Investments in equity securities, at fair value... 23,318,750 70,983,050
Total assets...................................... 190,538,402 295,930,620
Total liabilities................................. 771,573 145,026,041
Accumulated other comprehensive income(2)......... - (9,800,530)
Shareholders' equity.............................. 189,766,829 150,904,579
Book value per share.............................. $ 18.57 $ 17.66
</TABLE>
(1) Dividends declared are based upon FBR Asset's taxable income. Net
realized losses are not included in FBR Asset's ordinary taxable income.
(2) As of December 31, 1998, accumulated other comprehensive income includes
unrealized net gain on mortgage-backed securities of $713,499 and
unrealized net loss on investments in equity securities of $10,514,029.
3
<PAGE>
Risks of Investing in FBR Asset
Investing in FBR Asset involves various risks, including the risk that you might
lose your entire investment. The results of FBR Asset's operations depend upon
many factors, including the availability of opportunities to acquire assets, the
level and volatility of interest rates, the cost and availability of short- and
long-term credit, financial market conditions, and general economic conditions.
FBR Asset will strive to attain its objectives through, among other things, FBR
Management's research and portfolio management skills. There is no guarantee,
however, that FBR Asset will perform successfully, meet its objectives, or
achieve positive returns. The following risks are interrelated, and you should
treat them as a whole.
Conflicts of Interest May Result In Decisions That Do Not Fully Reflect
Shareholders' Best Interests
FBR Asset is subject to various conflicts of interest arising from its
relationship with FBR. These conflicts include the following:
o FBR Asset acquires indirect interests in real estate, commercial mortgage
loans and commercial mortgage-backed securities by investing in companies
whose securities have been underwritten or placed by FBR. At December 31,
1998, the total market value of FBR Asset's investments in securities
underwritten or placed by FBR had declined 19.2% since FBR Asset acquired
the securities. At February 5, 1999, the total market value of those same
investments had declined further, for a total decline of 27.82% since FBR
Asset acquired the securities. FBR and its employees are paid substantial
fees for underwriting and placement agent services, and to the extent that
the success of a new offering depends upon a significant investment by FBR
Asset, FBR Management will have a conflict of interest in recommending that
investment to FBR Asset. In those instances, FBR Asset's shareholders will
rely on the investment decision of FBR Asset's independent directors, who
will in part rely on information provided by FBR Management.
o FBR manages other funds that are authorized to invest in assets similar to
those in which FBR Asset invests. In particular, FBR manages mutual and
private equity funds, and may in the future manage other funds, that invest
in private equity securities and in REITs and other real estate-related
securities. There may be investment opportunities that are favorable to
each of FBR Asset and the other funds managed by FBR. In that case, FBR
will allocate investment opportunities among funds based upon primary
investment objectives, applicable investment restrictions, and any other
factors that FBR deems appropriate and fair under the circumstances.
o BlackRock, the mortgage portfolio manager, manages other funds and accounts
that have similar investment objectives and has other relationships that
involve conflicts of interest with FBR Asset.
o The incentive portion of the management fee, which is based on FBR Asset's
income, may create an incentive for FBR Management to recommend investments
that have greater potential for income or appreciation, but that are
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generally more speculative than if the management fee did not include a
performance component.
o Although FBR Asset's Board of Directors includes two independent directors,
the remaining directors, which constitute a majority of the Board, and each
of FBR Asset's executive officers, also serve as executive officers or
employees of FBR and devote substantial time to FBR.
o Inside directors, officers and employees of FBR Asset have other
responsibilities to FBR. These persons will devote such time and attention
to FBR Asset's business as they, in their discretion, deem necessary, but
conflicts may arise in allocating management time, services or functions
between FBR Asset and FBR.
o FBR may provide a broad range of financial services to enterprises in which
FBR Asset has invested or with which it otherwise does business. For these
services, FBR will be paid fees or will otherwise receive compensation.
Under these circumstances, a variety of conflicts might arise, including
conflicts arising from restrictions on the use of confidential information.
Limited Operating History Does Not Indicate Future Results
FBR Asset was organized in November 1997 and has a limited operating history.
Because of this limited history, investors should be especially cautious before
drawing conclusions about the company's future. FBR Asset's past performance,
particularly given its short operating history, is not necessarily indicative of
future results.
Manager's Lack of REIT Experience May Affect Performance
Before November 1997, none of FBR Asset's or FBR Management's officers had ever
managed a REIT. FBR Management has no experience in managing a REIT other than
its experience with FBR Asset. There can be no assurance that the limited past
experience of FBR Management will enable it successfully to manage FBR Asset's
business.
Decline in Market Values of Assets May Adversely Affect Credit Availability and
Periodic Reported Results
FBR Asset's assets are primarily real estate and mortgage assets, including
indirect holdings through investments in other companies. These assets are
classified for accounting purposes as "available-for-sale." Changes in the
market values of these assets are directly charged or credited to FBR Asset's
shareholders' equity. As a result, a general decline in trading market values
may reduce the book value of FBR Asset's assets even though there may have been
no change in the inherent value of those assets.
A decline in the market value of FBR Asset's assets may adversely affect FBR
Asset in instances where FBR Asset has borrowed money based on the market value
of those assets. At December 31, 1998, FBR Asset had $128.6 million in
outstanding repurchase agreements that were based specifically on the market
value of its assets. If the market value of those assets declines, the lender
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may require FBR Asset to post additional collateral to support the loan. If FBR
Asset is unable to post the additional collateral, it may have to sell the
assets at a time when it would not otherwise choose to do so.
Dependence on FBR Management
FBR Asset can gain access to good investment opportunities only to the extent
that they become known to FBR Management. Gaining access to opportunities is a
highly competitive business. FBR, FBR Management, and FBR Asset compete with
other companies that have greater capital, more long-standing relationships,
broader product offerings, and other advantages. Competitors include, but are
not limited to, Merrill Lynch, Morgan Stanley Dean Witter, GE Capital, Ocwen
Asset Investment Corp., Imperial Credit Commercial Mortgage Investment
Corporation, and General Motors Acceptance Corporation.
FBR Asset is heavily dependent for the selection, structuring, and monitoring of
its investments on the diligence and skill of FBR Management's officers and
employees, primarily those named under "FBR Asset's Directors & Officers." FBR
Asset does not have employment agreements with its senior officers or require
FBR Management to employ specific personnel or dedicate employees solely to FBR
Asset. FBR Management in turn is dependent on the efforts of senior management
personnel. Although FBR Asset believes that FBR Management could find
replacements for its key executives, the loss of their services could have an
adverse effect on the operations of FBR Management and FBR Asset.
Fee Payable Upon Termination of Manager
Either FBR Asset or FBR Management may terminate the Management Agreement
without cause after December 17, 1999. The Management Agreement requires FBR
Asset to pay FBR Management a substantial termination fee in the event that FBR
Asset terminates the agreement, except in the case of a termination for cause.
The termination fee would equal twelve months of base and incentive fees, as
further explained under "FBR & FBR Management -- The Management Agreement." For
example, if FBR Asset had terminated the Management Agreement in January 1999,
the termination fee would have been $1.52 million, the amount of the base fee
expensed in 1998. Because no incentive fee was earned in 1998, no additional
termination fee would have been due. Payment of a termination fee could have an
adverse effect on FBR Asset's financial condition, cash flows, and results of
operations and could reduce the amount of funds available for distribution to
shareholders. In the event of termination, if it does not have sufficient cash
to pay the termination fee, FBR Asset may have to sell assets even though it
would not otherwise choose to do so.
Leverage Risk
At December 31, 1998, FBR Asset's outstanding indebtedness for borrowed money
was 0.85 times the amount of its equity based on book values. The Board has the
authority to increase or decrease the company's debt-to-equity ratio at any time
and has not placed any limits on the amount FBR Asset may borrow. During 1998,
FBR Asset's debt-to-equity ratio ranged from 0.10 to 1 to 1.2 to 1. If FBR Asset
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borrows more funds, the possibility that it would be unable to meet its debt
obligations as they come due would increase.
Of FBR Asset's $161.4 million mortgage-backed securities at December 31, 1998,
$128.6 million were financed with repurchase agreements. As of December 31,
1998, FBR Asset's portfolio of mortgage-backed securities was leveraged at a 4
to 1 ratio, based on book values. Financing assets through repurchase agreements
exposes FBR Asset to the risk that margin calls will be made and that FBR Asset
will not be able to meet those margin calls. Although FBR Asset does not borrow
the maximum amount available against its portfolio, there can be no assurance
that it can avoid margin calls.
Real Estate-Related Investments May Incur Losses
FBR Asset invests primarily in real estate-related assets, including mortgage
loans, mortgage-backed securities and real property. FBR Asset invests directly
in real estate-related assets and in other entities, such as REITs, that
themselves invest in real estate-related assets. These investments are subject
to a variety of general, regional and local economic risks, as well as the
following risks:
Interest Rate and Market Value Leverage Risk
FBR Asset and several of the REITs in which FBR Asset has invested borrow funds
to finance mortgage loan investments, which can exaggerate the effect of a
decline in value resulting from an interest rate increase. For example, assume
FBR Asset or a REIT in which FBR Asset has invested borrows $90 million to
acquire $100 million of 8% mortgage certificates for $100 million. If prevailing
interest rates increase from 8% to 9%, the value of the mortgage loans may
decline to a level below the amount required to be maintained under the terms of
the borrowing. If the mortgage assets were then sold, FBR Asset or the REIT that
owned the mortgage assets would have to find funds from another source to repay
the borrowing.
Market values of mortgage loans and mortgage-backed securities may decline
without any general increase in interest rates for any number of reasons, as was
the case with commercial mortgage loans in the wake of bankruptcy filing in
September 1998 by CRIIMI Mae, Inc., a mortgage REIT.
Mortgage Loan Interest and Prepayment Rate Risk
FBR Asset has invested indirectly in mortgage loans by purchasing
mortgage-backed securities and equity securities in REITs that own mortgage
loans and mortgage-backed securities. An investment in fixed-rate mortgage loans
will decline in value if long-term interest rates increase. An investment in
adjustable-rate mortgage loans is likely to decline in value if short-term
interest rates increase.
In the case of residential mortgage loans, there are seldom any restrictions on
the borrower's ability to prepay a loan. As a consequence, homeowners tend to
prepay mortgage loans faster when interest rates decline and when owners of the
loans, such as FBR Asset or the REITs in which FBR Asset has invested, do not
7
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want them to be prepaid. Correspondingly, homeowners tend not to prepay mortgage
loans when interest rates increase and when owners of the loans want them to be
prepaid.
Competition in the Purchase, Sale and Financing of Mortgage Assets
FBR Asset invests indirectly in subordinated interests and commercial
mortgage-backed securities assets by acquiring securities of mortgage REITs.
Mortgage REITs derive their net income, in large part, from their ability to
acquire mortgage assets having yields above those companies' borrowing costs. In
1997 and 1998, increased competition for subordinated interests developed as new
mortgage REITs entered the market. This competition resulted in higher prices
for subordinated interests, lowering the yields and narrowing the spread of
those yields over the companies' borrowing costs. FBR Asset's competitors
include newer mortgage REITs, such as Imperial Credit Commercial Mortgage
Investment Corporation, Anthracite Capital, Inc., and AMRESCO Capital Trust, and
other investors, such as Lennar Corporation and Starwood Financial.
Risk in Hedging Against Interest Rate Exposure
FBR Asset has entered into interest rate swap agreements to limit the adverse
effects of rising interest rates on its short-term repurchase agreements. The
companies in which FBR Asset has invested also enter into interest rate hedging
transactions to protect themselves from the effect of changes in interest rates.
Interest rate hedging may fail to protect or adversely affect a company because,
among other things:
o interest rate hedging can be expensive, particularly during periods of
rising and volatile interest rates;
o available interest rate hedging may not correspond directly with the
interest rate risk for which protection is sought;
o the duration of the hedge may not match the duration of the related
liability;
o the amount of income that a REIT may earn from hedging transactions to
offset interest rate losses is limited by federal tax provisions governing
REITs; and
o the party owing money in the hedging transaction may default on its
obligation to pay.
In October 1998, FBR Asset sold mortgage assets, repaid certain outstanding
repurchase agreements, and terminated a related hedge transaction, resulting in
a $1.9 million recorded loss in the fourth quarter of 1998. Similarly, in
October 1998, Chastain Capital Corporation, a REIT of which FBR Asset owns
9.15%, lost $13.5 million when it terminated an interest rate hedge.
Mortgage Loan Credit Risk
Although FBR Asset currently has no direct investments in uninsured mortgage
loans, several of the REITs in which FBR Asset has invested own uninsured
mortgage loans. Owners of uninsured mortgage loans are subject to the risk that
the borrowers will not pay principal or interest on their mortgage loans as it
becomes due. Borrowers become unable to pay mortgage loans for a wide variety of
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reasons, including general, regional, local and personal economics and declines
in business activity or real estate values.
Generally, if a borrower defaults, the owner of the mortgage loan will incur a
loss to the extent the value of the property securing the mortgage loan is less
than the amount of the mortgage loan. Defaults on mortgage loans often coincide
with declines in real estate values, which can create greater losses than
anticipated. Increased exposure to losses on uninsured mortgage loans can reduce
the value of the equity securities FBR Asset owns. For example, because of
increased delinquencies on its uninsured mortgage loans, Imperial Credit
Commercial Mortgage Investment Corporation, a REIT of which FBR Asset owns 3.2%,
recently revised its estimates of potential losses. For this reason, and because
it wrote down its interest-only securities to their fair market value based
primarily upon prepayments on the underlying mortgage loans, Imperial Credit
reflected a non-cash charge of $6.4 million in its financial statements for the
third quarter of 1998.
Increased Credit Risk Associated with Investing in Subordinate Interests in
Mortgage Pools
Through its ownership of shares in Anthracite Capital, Inc., Chastain Capital
Corporation and Imperial Credit Commercial Mortgage Investment Corporation, FBR
Asset has invested, indirectly, in subordinated classes of commercial
mortgage-backed securities and mortgage loans that are subject to the senior
claim of mortgage-backed debt securities. Losses on the underlying mortgage
loans may be significant to the company that owns a subordinated interest in
those loans because the investments are leveraged. For example, assume a REIT
acquires a $10 million principal amount subordinated interest in a $100 million
pool of mortgage loans that is subject to $90 million of senior mortgage-backed
securities. If thereafter there are $7 million of losses on the $100 million of
loans (7%), there will be a 70% loss of principal on the REIT's investment.
Prepayment Sensitivity of Investments in Interest-Only Securities
FBR Asset also has indirectly invested, through its ownership of stock in
mortgage REITs, in mortgage-backed securities that entitle the holder to receive
only interest on the outstanding principal amount of the underlying mortgage
loans, and no principal. The value of these interest-only securities can be
adversely affected if the underlying mortgage loans are prepaid faster than
anticipated. For example, an interest-only security with an initial notional
amount of $100 million may entitle a holder to interest equal to 1% on the
outstanding notional amount. The holder may anticipate that 10% of the loans
will prepay at the end of each year; however the actual experience is that 20%
of the loans prepay at the end of each year. In that case, the anticipated and
actual cash paid to the holder would be:
9
<PAGE>
Year Anticipated Actual
---- ----------- ------
1 $1,000,000 $1,000,000
2 900,000 800,000
3 800,000 600,000
4 700,000 400,000
5 600,000 200,000
6 500,000 --
7 400,000 --
8 300,000 --
9 200,000 --
10 100,000 --
---------- ----------
Total $5,500,000 $3,000,000
========== ==========
Some interest-only securities pay interest based on a floating rate that varies
inversely with, and at a multiple of, a specified floating interest rate index,
such as LIBOR. The yield on these securities is sensitive not only to
prepayments, but also to changes in the related index. For example, a security
might bear interest at a rate equal to forty percent minus the product of five
and LIBOR, or 40% - (5 X LIBOR). An increase in LIBOR by only 1%, from 6% to 7%,
would cause the interest rate on the investment to decline from 10% to 5%.
Multifamily and Commercial Real Estate May Lose Value and Fail to Operate
Profitably
Prime Retail Inc., Capital Automotive REIT, and Kennedy-Wilson, Inc., three
companies in which FBR Asset has invested, own commercial real estate. These
investments and other similar investments are dependent on the ability of the
real estate to generate income. Investing in real estate is subject to many
risks. Among these are:
o property managers may not have the ability to attract tenants willing to
pay rents that sustain the property and to maintain and operate the
properties on a profitable basis;
o the value of real estate may be significantly affected by general, regional
and local economic conditions, and other factors beyond the investor's
control;
o the value of real estate may be significantly affected by unknown or
undetected environmental problems; and
o the value of real estate may be significantly affected by changes in zoning
or land use regulations or other applicable laws.
Indirect Nature of Investments Exposes FBR Asset to Additional Risks
FBR Asset has invested and intends to continue investing indirectly in real
estate, commercial mortgage loans and commercial mortgage-backed securities by
purchasing equity securities issued by REITs and other business entities.
Securities acquired by FBR Asset may not be freely transferable. In addition to
the risks described above, holding real estate and mortgage related assets
indirectly through investments in other enterprises carries the following risks:
10
<PAGE>
Obstacles to Success May Remain Hidden if Due Diligence is Inadequate
Before making an investment in another REIT or business entity, FBR Asset will
assess the strength and skills of the entity's management and other factors that
FBR Asset believes will determine the success of its investment. In making its
assessment and otherwise conducting its customary due diligence, FBR Asset will
rely on the resources available to FBR Management and, in some cases, an
investigation by third parties. Because there may be little or no publicly
available information, this process is particularly important and subjective
with respect to newly-organized entities that have new and to-be-acquired assets
and a management that may not be familiar with the business and operations of
the new or expanded enterprise. Against this background, FBR Asset can give no
assurance that the due diligence processes of FBR Management will uncover all
relevant facts or that any investment will be successful.
Dependence on Management of Other Entities
As a general matter, FBR Asset will not control the management, investment
decisions, or operations of an enterprise in which it invests. After an
investment is made, management of the enterprise may decide to change the nature
of its assets, or management may otherwise change in a manner that is not
satisfactory to FBR Asset. FBR Asset generally will have no ability to affect
these management decisions, and as noted below, FBR Asset may have only limited
ability to dispose of its investment.
Limited Liquidity of Equity Security Investments
The equity securities of a new entity in which FBR Asset invests are likely to
be restricted as to resale and may otherwise be highly illiquid. FBR Asset
expects that there will be restrictions on its ability to resell the securities
of any newly public company that it acquires for one year after it acquires
those securities. Thereafter, a public market sale may be subject to volume
limitations or dependent upon securing a registration statement for a secondary
offering of the securities. The securities of newly public entities may trade
less frequently and in smaller volume than securities of companies that are more
widely held and have more established trading patterns. Thus, sales of these
securities may cause their values to fluctuate more sharply. Furthermore, and
because of its affiliation with FBR, FBR Asset's ability to invest in companies
may be constrained by rules of the SEC and the National Association of
Securities Dealers, Inc.
Volatility of Prices
Prices of the equity securities of new entities in which FBR Asset invests are
likely to be volatile, particularly when FBR Asset decides to sell those
securities. FBR Asset makes investments in significant amounts, and resales of
significant amounts of securities might adversely affect the market and the
sales price for the securities.
Disposition Value of Investments Dependent Upon General and Specific Market
Conditions
Even if FBR Asset makes an appropriate investment decision based on the
intrinsic value of an enterprise, FBR Asset has no assurance that the trading
market value of the investment will not decline, perhaps materially, as a result
of general market conditions. For example, an increase in interest rates, a
11
<PAGE>
general decline in the stock markets, or other market conditions adverse to
companies of the type in which FBR Asset has invested could result in a decline
in the value of the securities.
At December 31, 1998, the total market value of FBR Asset's investments in
equity securities had declined 19.2%. At February 5, 1998, the total market
value of those same investments had declined 27.82%. See "Summary of Current
Investments" on page 36. FBR Asset believes that much of the decline in value of
these investments is attributable to market turmoil during the third and fourth
quarters of 1998. See "Management's Discussion & Analysis--Market Conditions" on
page 40.
Tax Requirements May Restrict FBR Asset's Operations
FBR Asset has operated and intends to continue operating in a manner so as to
qualify as a REIT for federal income tax purposes. Qualifying as a REIT requires
FBR Asset to meet certain tests regarding the nature of its assets and its
income on an ongoing basis. Some of FBR Asset's investments are in equity
securities of REITs, which are qualifying assets and produce qualifying income
for purposes of those REIT qualification tests. The failure of the REITs in
which FBR Asset invests to maintain their REIT status, however, could jeopardize
FBR Asset's own REIT status.
In order to qualify as a REIT, FBR Asset also must distribute to its
shareholders, each calendar year, at least 95% of its taxable income, other than
any net capital gain. To the extent that FBR Asset meets the 95% distribution
requirement, but distributes less than 100% of its taxable income, it will be
required to pay income tax on its undistributed income. In addition, FBR Asset
will incur a 4% nondeductible excise tax if the actual amount it pays out to its
shareholders in a calendar year is less than a minimum amount specified under
the federal tax laws. See "Federal Income Tax Consequences of FBR Asset's Status
as a REIT--Requirements for Qualification--Distribution Requirements." FBR Asset
has distributed and intends to continue distributing all of its taxable income
to its shareholders on an annual basis so that it will satisfy the 95% test and
avoid both corporate income tax and the 4% excise tax.
FBR Asset may invest in assets that generate taxable income in excess of
economic income or in advance of the corresponding cash flow from the assets
("phantom income") or that cause FBR Asset's shareholders to suffer adverse tax
consequences. Although some types of phantom income are excluded in determining
the 95% distribution requirement, FBR Asset will incur corporate income tax and
the 4% excise tax with respect to phantom income items if it does not distribute
those items on an annual basis. As a result of the foregoing, FBR Asset may have
less cash than is necessary to distribute all of its taxable income each year.
Consequently, FBR Asset may have to incur debt or liquidate assets at rates or
times that it regards as unfavorable in order to distribute all of its taxable
income and thereby avoid corporate income and excise tax. See "Federal Income
Tax Consequences of FBR Asset's Status as a REIT."
If FBR Asset fails to qualify as a REIT in any year, FBR Asset would be required
to pay federal income tax on its taxable income. FBR Asset might need to borrow
money or sell assets in order to pay that tax. FBR Asset's payment of income tax
would decrease the amount of its income available for distribution to
shareholders. Furthermore, FBR Asset no longer would be required to distribute
substantially all of its taxable income to its shareholders. Unless its failure
to qualify as a REIT is excused under federal tax laws, FBR Asset could not
re-elect REIT status until the fifth calendar year following the year in which
it fails to qualify.
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<PAGE>
Loss of Investment Company Act Exemption Would Adversely Affect FBR Asset
FBR Asset believes that it is not, and intends to continue operating so as not
to become, regulated as an investment company under the Investment Company Act
because it is "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate."
Specifically, FBR Asset has invested, and intends to continue investing, at
least 55% of its assets in mortgage loans or mortgage-backed securities that
represent the entire ownership in a pool of mortgage loans and at least an
additional 25% of its assets in mortgages, mortgage-backed securities,
securities of REITs, and other real estate-related assets.
If FBR Asset fails to qualify for that exemption, it could be required to
restructure its activities. For example, if the market value of FBR Asset's
investments in equity securities were to increase by an amount that resulted in
less than 55% of the company's assets being invested in mortgage loans or
mortgage-backed securities, FBR Asset might have to sell equity securities in
order to qualify for its exemption under the Investment Company Act. The sale
could occur under adverse market conditions.
Ownership Limitation May Restrict Change of Control or Business Combination
Opportunities
In order for FBR Asset to qualify as a REIT, no more than 50% in value of its
outstanding capital stock may be owned, directly or indirectly, by five or fewer
individuals during the last half of any calendar year. "Individuals" include
natural persons, private foundations, some employee benefit plans and trusts,
and some charitable trusts. In order to preserve FBR Asset's REIT status, FBR
Asset's Charter generally prohibits:
o shareholders, other than FBR and some mutual funds and pension plans, from
directly or indirectly owning more than 9.9% of the outstanding common
stock or preferred stock of any series,
o FBR from directly or indirectly owning more than 20% of the outstanding
common stock or preferred stock of any series, and
o some mutual funds and pension plans from directly or indirectly owning more
than 15% of the outstanding common stock or preferred stock of any series.
These ownership limitations could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of FBR Asset's common
stock might receive a premium for their shares over the then prevailing market
price or which holders might believe to be otherwise in their best interests.
See "FBR Asset's Capital Stock--Restrictions on Ownership and Transfer" and
"Federal Income Tax Consequences of FBR Asset's Status as a REIT--Requirements
for Qualification."
13
<PAGE>
Board of Directors May Change Policies Without Shareholder Consent
FBR Asset's major policies, including its investment policy and other policies
with respect to acquisitions, financing, growth, operations, debt and
distributions, are determined by its Board of Directors. The Board may amend or
revise these and other policies, or approve transactions that deviate from these
policies, from time to time without a vote of the common shareholders. The
effect of those changes may be positive or negative. FBR Asset's Charter also
authorizes the Board of Directors to issue up to 50,000,000 shares of preferred
stock and to establish the preferences and rights of any shares of preferred
stock issued. Although FBR Asset has no current intention to issue any series of
preferred stock, the issuance of preferred stock could increase the investment
risk associated with common stock ownership, delay or prevent a change in
control of FBR Asset, or otherwise change the nature of an investment in FBR
Asset's common stock.
Shares Not Listed on Securities Exchange
FBR Asset's shares are not listed on any national securities exchange, and FBR
Asset does not currently qualify for listing on any national securities
exchange. FBR Asset intends to apply for listing on a national securities
exchange when it meets the qualifications. There can be no assurance, however,
that it will ever meet those qualifications. Listing shares on a national
securities exchange generally increases the shares' liquidity.
14
<PAGE>
Organization & Relationships
[Organization & Relationships Graphic Omitted]
15
<PAGE>
FBR & FBR Management
FBR is a full-service investment banking firm that makes a market in more than
375 securities and provides research coverage on more than 400 publicly traded
companies.
As of December 31, 1998, FBR, including FBR Management, which is a registered
investment adviser under the Investment Advisers Act of 1940, managed more than
$688.8 million of net assets. Of those assets, more than $224.4 million were
managed in separately managed accounts, including FBR Asset's account. FBR's
investment management services include more traditional management services for
individual accounts and investment funds. These funds include four open-end
mutual funds, an offshore fund whose capital is maintained outside the United
States, and private equity and venture capital funds. Two of FBR's mutual funds
seek capital appreciation through investments in financial services companies.
The third fund invests in the equity securities of small cap companies that FBR
believes to be undervalued, and the fourth invests in REITs and other real
estate-related securities.
FBR Group, the parent company of FBR Management, completed an initial public
offering in December 1997, and its stock is listed on the New York Stock
Exchange. FBR Group's management and employees own a majority of its outstanding
stock. On December 29, 1997, PNC Bank Corp. purchased 4.9% of FBR Group's
outstanding shares of common stock. PNC is the majority owner of BlackRock, the
sub-manager of FBR Asset's mortgage portfolio, and also owns less than 5% of
Anthracite, one of the companies in which FBR Asset has invested. Pursuant to a
non-binding memorandum of understanding entered into between FBR and PNC in
October 1997, FBR and PNC have established a strategic business relationship
with respect to selected capital markets and related activities. The
understanding provides a framework pursuant to which FBR and PNC work together
on an arms-length basis to refer potential business to each other. FBR and PNC
have also agreed to work together to provide enhanced derivatives, asset
securitization, bridge lending, and other bank financing products to FBR's
clients.
Related Party Transactions
Because of its extensive involvement in real estate securities, FBR has material
direct and indirect interests in companies in which FBR Asset also has an
interest. FBR's interests may complement or conflict with FBR Asset's interests.
The interests can become complementary because FBR Asset has access to
investment opportunities through FBR and knowledge about those opportunities.
For example, FBR Asset may purchase equity securities of a company whose
securities have been or will be underwritten by FBR or of a company for which
FBR provides ongoing research or market making services. Any such purchase of
securities by FBR Asset, however, also creates a conflict because it may
indirectly benefit FBR and its directors, officers, and owners.
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<PAGE>
FBR Asset has made the following investments in companies with which FBR has a
relationship:
In connection with the organization of Building One Services Corporation, FBR
Asset agreed to acquire 500,000 shares of Building One for $10,000,000 ($20 per
share). FBR Asset also agreed not to sell the shares purchased until after
November 25, 1998. At the time of the acquisition, FBR Asset was a wholly-owned
subsidiary of FBR. FBR was the lead underwriter of a $480 million initial public
offering by Building One that closed in December 1997. The public offering price
was $20 per share and the underwriting discount was 7%. W. Russell Ramsey, one
of FBR Asset's directors and executive officers, is a director of Building One.
As of February 5, 1999, shares of Building One were selling for $16.94 per
share.
FBR was the lead underwriter in February 1998 of an initial public offering by
Capital Automotive REIT of 20 million shares at a public offering price of $15
per share. The underwriting discount was 7%. In a privately negotiated
transaction that closed at the same time, FBR Asset purchased from Capital
Automotive 1,792,115 shares for $25 million ($13.95 per share). At the time of
purchase, FBR Asset agreed to not sell the shares purchased until after February
12, 1999. William R. Swanson, one of FBR Asset's executive officers, is a
director of Capital Automotive. As of February 5, 1999, shares of Capital
Automotive were selling for $12.25 per share.
FBR was the lead underwriter in March 1998 of an initial public offering by
Anthracite Capital, Inc. of 20 million shares at a public offering price of $15
per share. The underwriting discount was 7%. In a privately negotiated
transaction that closed at the same time, FBR Asset purchased from Anthracite
716,846 shares for $10 million ($13.95 per share). At the time of purchase, FBR
Asset agreed to not sell the shares purchased until after March 24, 1999. In
September and October 1998, FBR Asset purchased an additional 865,000 shares of
Anthracite in open-market transactions for $8.3 million, or an average price per
share of $9.64. As of February 5, 1999, shares of Anthracite were selling for
$6.94 per share.
FBR was the lead underwriter in April 1998 of an initial public offering by
Chastain Capital Corporation of 7,380,000 shares at a public offering price of
$15 per share. The underwriting discount was 7%. In a privately negotiated
transaction that closed at the same time, FBR Asset purchased from Chastain
700,000 shares for $9,765,000 ($13.95 per share). At the time of purchase, FBR
Asset agreed to not sell the shares purchased until after April 15, 1999. As of
February 5, 1999, shares of Chastain were selling for $5.38 per share.
Since 1994, FBR has provided underwriting and other investment banking services
to Prime Group Inc. and its affiliates. Between January 1, 1997, and September
30, 1998, FBR acted as lead underwriter or co-manager, or provided advisory
services to affiliates of Prime Group Inc., in connection with $507.5 million of
capital raising and $936 million of merger transactions. FBR Asset has acquired
123,500 shares of Prime Retail, Inc. in open-market transactions at an average
price per share of $9.73. As of February 5, 1999, shares of Prime Retail were
selling for $8.88 per share.
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<PAGE>
On December 23, 1997, FBR Asset entered into an interim financing and security
agreement with Prime Capital Holdings, Inc. for up to $20 million. As of
December 31, 1998, approximately $12.5 million, which includes approximately $1
million of accrued interest, had been drawn against this loan. The note accrues
at a rate between 12% and 15% per annum depending upon the funding period and is
payable monthly on the last day of the month. The agreement called for the
repayment of principal on October 31, 1998. FBR Asset has agreed to extend the
maturity date on the $11,500,000 outstanding until June 30, 1999, and Prime has
agreed to pay 1% of the aggregate advance balance in consideration for that
extension.
FBR was the co-managing underwriter in November 1997 of an initial public
offering by Prime Group Realty Trust of 12,380,000 common shares at a public
offering price of $20.00 per share. FBR was the co-managing underwriter in May
1998 of an offering by Prime Group Realty of 4,000,000 preferred shares at an
offering price of $25.00 per share. On February 5, 1999, FBR Asset loaned Prime
Group Realty $7 million. The loan is secured by real property and is due and
payable on August 5, 1999. The loan bears interest at a rate of 15% per annum.
On June 30, 1998, FBR Asset purchased 520,000 shares of East-West Bancorp, Inc.
common stock from selling shareholders for a purchase price of $5.2 million ($10
per share) in a $237.8 million private transaction. FBR acted as placement agent
in the transaction and for its services received a private placement fee equal
to 7%. As of February 5, 1999, shares of East-West Bancorp were selling for
$9.44 per share.
In June 1998, FBR entered into an agreement with Kennedy-Wilson Inc. to
underwrite an offering of common shares of Kennedy-Wilson to obtain capital for
the expansion of its business. At the same time, FBR Asset loaned Kennedy-Wilson
$10 million that was due and payable in December 1998. In December 1998,
Kennedy-Wilson paid $2,500,000 principal on the loan, and the term of the
$7,500,000 balance was extended to June 3, 1999. The loan bears interest at 17%
per annum and entitles FBR Asset to five-year warrants to acquire 133,286 shares
of Kennedy-Wilson stock at a price of $5.04 per share. As of February 5, 1999,
shares of Kennedy-Wilson were selling for $13.00 per share.
FBR was the lead underwriter in October 1997 of an initial public offering by
Imperial Credit Commercial Mortgage Investment Corporation of 30 million shares
of common stock at a public offering price of $15 per share. The underwriting
discount was 7%. Beginning in December 1997, FBR Asset has purchased in
open-market transactions 900,000 shares of Imperial Credit common stock at an
average price per share of $14.50. As of February 5, 1999, shares of Imperial
Credit were selling for $9.00 per share.
FBR was the lead underwriter in January 1998 of an initial public offering by
Resource Asset Investment Trust of 2,833,334 shares at a public offering price
of $15 per share. The underwriting discount was 7%. Beginning in February 1998,
FBR Asset has purchased in open-market transactions 344,575 shares of Resource
common stock at an average price per share of $15.36. As of February 5, 1999,
shares of Resource were selling for $12.00 per share.
FBR was the lead underwriter in May 1997 of an initial public offering by
Brookdale Living Communities, Inc. of 4,500,000 common shares at a public
offering price of $11.50 per share. FBR was the lead underwriter in December
1997 of a secondary offering by Brookdale of 2,000,000 common shares at a share
price of $16.69 and was the lead underwriter in November 1998 of a secondary
offering by Brookdale of 2,000,000 common shares at a share price of $16.50. On
January 25, 1999, FBR Asset loaned Brookdale $5 million in subordinated debt
that is due and payable on April 26, 1999. The loan bears interest at 13% per
annum.
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FBR Management's Executive Officers
The following table sets forth some information about the executive officers of
FBR Management. FBR Management's executive officers are also directors of FBR
Asset. No executive officer is related by blood, marriage, or adoption to any
other director or executive officer of FBR Asset or FBR.
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
Emanuel J. Friedman 52 Chairman & Chief Executive Officer
Eric F. Billings 46 Vice Chairman & Chief Operating Officer
W. Russell Ramsey 39 President & Secretary
</TABLE>
For biographical information on Messrs. Friedman, Billings and Ramsey, see "FBR
Asset's Directors & Officers--The Board of Directors."
The Management Agreement
FBR Asset and FBR Management entered into a Management Agreement on December 17,
1997. The following section summarizes the Management Agreement. This section
does not completely describe the Management Agreement, and you should not rely
on it as if it did. You may obtain a complete copy of the Management Agreement
by following the document request procedures set forth in the "Additional
Information" section of this document.
FBR Management's Responsibilities
FBR Management has only the authority that FBR Asset's Board of Directors
delegates to it. FBR Management is at all times subject to the Board's
supervision. Generally, FBR Management performs the services necessary to keep
FBR Asset running on a day-to-day basis. These services include:
Investment Services
o representing FBR Asset in connection with
o the purchase and sale of assets,
o commitments to purchase and sell assets, and
o the maintenance and administration of FBR Asset's asset portfolio;
o engaging in hedging activities on FBR Asset's behalf, consistent with FBR
Asset's status as a REIT;
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o upon request by and in accordance with the directions of the Board of
Directors, investing or reinvesting any of FBR Asset's money;
o acting as liaison between FBR Asset and banking, mortgage banking,
investment banking and other parties with respect to the purchase,
financing and disposition of assets;
Advisory Services
o consulting with FBR Asset on the formulation of investment criteria and
guidelines;
o furnishing reports and collecting information relating to FBR Asset's
assets, interest rates, and general economic conditions;
o furnishing reports regarding FBR Asset's activities and the services
performed for FBR Asset by FBR Management;
o monitoring and providing the Board of Directors with price information and
other data obtained from nationally recognized dealers that maintain
markets in assets identified by the Board, and providing data and advice to
the Board of Directors in connection with the identification of such
dealers;
o counseling FBR Asset in connection with policy decisions to be made by the
Board of Directors;
o counseling FBR Asset regarding the maintenance of its status as a REIT and
monitoring compliance with the various REIT qualification tests;
o counseling FBR Asset regarding the maintenance of its exemption from the
Investment Company Act and monitoring compliance with the various
requirements for that status;
Administrative Services
o providing executive and administrative personnel, office space, and office
services required in rendering services to FBR Asset;
o administering FBR Asset's day-to-day operations and performing and
supervising the performance of such other necessary administrative
functions as may be agreed upon by FBR Management and the Board of
Directors, including
o the collection of revenues,
o the payment of FBR Asset's debts and obligations,
o the maintenance of appropriate computer services to perform such
administrative functions, and
o other customary functions related to portfolio management;
o communicating on behalf of FBR Asset with holders of FBR Asset's securities
as required to satisfy the reporting and other requirements of any
governmental bodies or agencies or trading markets and to maintain
effective relations those holders; and
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<PAGE>
o to the extent not otherwise subject to an agreement executed by FBR Asset,
designating servicers for mortgage loans sold to FBR Asset and arranging
for the monitoring and administering of those services.
FBR Management has engaged BlackRock to advise it on the management of FBR
Asset's mortgage portfolio and may enter into subcontracts with other parties,
including FBR, to provide other services to FBR Asset.
The Management Fee
Base Management Fee
FBR Management is entitled to receive a quarterly base management fee equal to
the sum of:
o 0.25% per annum of the average book value of FBR Asset's mortgage assets
during each calendar quarter, and
o 0.75% per annum of the average book value of the remainder of FBR Asset's
invested assets during each calendar quarter. Book value includes FBR
Asset's proportionate share of the assets of all of its direct and indirect
subsidiaries, before reserves for depreciation or bad debts or other
similar noncash reserves. The Board of Directors may adjust the base
management fee in the future if necessary to align the fee more closely
with the actual costs of services and, by agreement with FBR Management,
may reduce the base management fee to the extent FBR Asset incurs costs
internally.
For the period December 17, 1997 through December 31, 1998, the base management
fee was $1,579,348.
Incentive Compensation
FBR Management is also entitled to receive incentive compensation based on FBR
Asset's performance. For each calendar quarter beginning with the quarter ended
March 31, 1999, FBR Management will be entitled to receive 25% of the "Incentive
Calculation Amount" for the 12 month period ending with the end of that calendar
quarter.
The "Incentive Calculation Amount" for any 12 month period means an amount equal
to the product of
(A) 25% of the dollar amount by which
(1) (a) Funds from Operations (before the incentive fee) of FBR Asset
per share of common stock, based on the weighted average number of
shares outstanding, (b) plus gains or minus losses from debt
restructuring and sales of property per share, based on the weighted
average number of shares outstanding, exceed
(2) an amount equal to (a) the weighted average of the price per share
at the initial offering price ($20) and the price per share at any
secondary offerings by FBR Asset multiplied by (b) the Ten-Year U.S.
Treasury Rate plus five percent per annum multiplied by
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(B) the weighted average number of common shares outstanding during the
applicable period.
"Funds from Operations" as defined by the National Association of Real Estate
Investment Trusts means net income computed in accordance with generally
accepted accounting principles, excluding gains or losses from debt
restructuring and sales of property, plus depreciation and amortization on real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Funds from Operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
should not be considered as an alternative to net income as an indication of FBR
Asset's performance or to cash flows as a measure of liquidity or ability to
make distributions.
As used in calculating FBR Management's compensation, the term "Ten-Year U.S.
Treasury Rate" means the arithmetic average of the weekly average yield to
maturity for actively traded current coupon U.S. Treasury fixed-rate securities,
adjusted to constant maturities of ten years, published by the Federal Reserve
Board during a quarter. The Ten-Year U.S. Treasury Rate for the quarter ended
December 31, 1998, was 4.67%.
No incentive compensation had been earned by FBR Management as of December 31,
1998.
Options Owned by FBR Management
FBR Management holds options to acquire 1,021,900 shares of FBR Asset's stock at
an option price of $20 per share. In connection with the execution of the
sub-management agreement, FBR Management assigned options to acquire 51,095
shares to BlackRock. In connection with the establishment of FBR Asset's stock
incentive plan, FBR Management has agreed to rescind options to acquire 155,000
shares, which when completed, will leave FBR Management with options to acquire
815,805 shares. The options held by FBR Management and BlackRock are exercisable
in whole or in part at any time before December 17, 2007.
Expenses
Because FBR Management's employees will perform due diligence tasks that
purchasers of real estate typically hire outside consultants to perform, FBR
Management will be reimbursed for FBR Management's out of pocket costs in
performing due diligence on assets purchased or considered for purchase by FBR
Asset. Moreover, FBR Management tracks the time its employees spend in
performing such due diligence tasks and is entitled to reimbursement for the
allocated portion of the salary and benefits of such employees. However, (1) the
amount of due diligence costs for which FBR Management receives reimbursement
with respect to any asset may not exceed an arm's length due diligence fee for
such asset, and (2) FBR Management is not entitled to reimbursement for any due
diligence or employee time costs associated with investments in securities being
underwritten or placed by FBR.
Limits of Responsibility
Under the Management Agreement, FBR Management does not assume any
responsibility other than to render the services called for and is not
responsible for any action of the Board of Directors in following or declining
to follow its advice or recommendations. FBR Asset has agreed to indemnify FBR
Management, FBR, and their directors and officers with respect to all
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<PAGE>
expenses, losses, damages, liabilities, demands, charges, and claims arising
from acts not constituting bad faith, willful misconduct, gross negligence, or
reckless disregard of duties, performed in good faith in accordance with and
pursuant to the Management Agreement.
The Management Agreement does not limit or restrict the right of FBR Management
or any of its officers, directors, employees, or FBR from engaging in any
business or rendering services of any kind to any other person, including the
purchase of, or the rendering of advice to others who purchase REIT or other
securities or other real estate-related assets that meet FBR Asset's policies
and criteria.
Term of Management Agreement
The Management Agreement has an initial term expiring on December 17, 1999. FBR
Asset may terminate the Management Agreement without cause at any time after
December 17, 1999, upon 60 days written notice by a majority vote of FBR Asset's
independent directors or by a vote of the holders of a majority of the
outstanding common shares. If terminated, FBR Management will be entitled to all
fees accrued through the date of termination and, as a termination fee, will be
entitled to an amount equal to the sum of the base management fee and incentive
management fee earned during the twelve months preceding the final day of the
calendar quarter last ending prior to the date of termination. In addition, FBR
Asset has the right to terminate the Management Agreement without paying a
termination fee if FBR Management violates any material provision of the
Management Agreement and fails to cure the violation.
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<PAGE>
FBR Asset's Business
Operating Policies & Strategies
FBR Asset relies upon the professionals employed by FBR to evaluate
opportunities for investment. Since its inception in 1989, FBR has sought to
identify rapidly changing industries and industries that are not fully
understood or appropriately valued by the market. Real estate is one of the
sectors on which FBR currently focuses. Recently, FBR has specialized in
underwriting offerings of REIT securities, particularly REITs that invest in
mortgage loans and mortgage-backed securities. Since 1993, FBR has served as
managing underwriter on the public issuance of $5.3 billion of REIT and real
estate equity securities, consisting of $2.2 billion of mortgage and hybrid
REITs and $3.1 billion of equity REITs and real estate operating companies.
FBR believes that there is a global trend towards the securitization of real
estate and real estate-related assets and that this trend is represented by the
increased formation of non-traditional REITs. FBR also believes that there is a
global trend towards the consolidation of real estate owners and operators and
companies that provide services to real estate owners and operators. FBR expects
these trends to provide FBR Asset with significant opportunities for investing
in real estate-related assets. FBR also anticipates that, notwithstanding the
recent decline in the mortgage REIT market, additional REITs or real
estate-related companies will be organized in the future and that through
investments in those companies, FBR Asset can diversify and expand its
investments in the real estate market.
FBR Asset has relied on BlackRock to manage its investments in mortgage-backed
securities and has used its affiliation with FBR to generate a flow of
investment opportunities in REITs and other real-estate related businesses.
FBR Asset's policy is to acquire assets that it believes will generate the
highest returns on capital invested. To determine which assets are likely to
provide those returns, FBR Asset considers:
o the amount and nature of anticipated cash flows from the asset;
o the risks of investing in the asset;
o FBR Asset's ability to pledge the asset to secure collateralized
borrowings;
o the capital requirements for purchasing and financing the asset;
o the potential for appreciation and depreciation of the asset's value; and
o the cost of financing, hedging and managing the asset.
FBR Asset is an opportunistic investor and does not have or expect to adopt
guidelines dictating specific investment restrictions or operating restrictions.
Among other things, FBR Asset may, without the consent of its stockholders:
o borrow money up to the limit of its available credit;
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<PAGE>
o issue preferred stock that has liquidation and dividend preferences over
the outstanding common stock;
o make loans to other companies as FBR Asset has already done;
o invest in securities of other issuers as FBR Asset has already done;
o sell existing investments and make additional investments;
o offer securities in exchange for property; and
o repurchase or otherwise reacquire FBR Asset's shares as FBR Asset has
already done.
Likewise, as to specific investments, FBR Asset may invest directly or
indirectly in any type of mortgage, real estate or real estate-related assets,
as well as in other assets subject to the policy that FBR Asset maintain its
qualification as a REIT and its exemption from registration as an investment
company.
FBR Asset expects that investment opportunities will change. Based on the recent
past, FBR Asset anticipates that REITs will continue to have difficulty
accessing the public capital markets. In this environment, FBR Asset will seek
what it considers to be attractive opportunities to invest on a privately
negotiated basis. For example, FBR Asset believes there will be opportunities to
enter into joint ventures with other REITs seeking to complete planned
acquisitions, to provide mezzanine loans with equity features, and to provide
private equity financing. If an adequate amount of what FBR Asset considers to
be appropriate investments becomes available, FBR Asset intends to borrow funds
to make additional investments.
Current Investments
FBR Asset currently invests, either directly or indirectly, in whole-pool
mortgage-backed securities, commercial mortgage loans, commercial
mortgage-backed securities, commercial and residential real estate, and other
real estate-related businesses.
Agency Mortgage-Backed Securities
FBR Asset currently invests more than half of its assets in whole-pool
mortgage-backed securities. These securities represent the entire ownership
interest in pools of mortgage loans made by lenders such as savings and loan
institutions, mortgage bankers, and commercial banks. Various government,
government-related and private organizations assemble the pools of loans for
sale to investors, such as FBR Asset.
At December 31, 1998, FBR Asset owned $161.4 million of mortgage-backed
securities issued or guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae and
had borrowed $128.6 million to finance its investment in those securities. FBR
Asset also indirectly owns similar securities through its investment in
Anthracite Capital, Inc.
Mortgage-backed securities differ from other forms of traditional debt
securities, which normally provide for periodic payments of interest in fixed
amounts with principal payments at maturity or on specified call dates. Instead,
mortgage-backed securities provide for a monthly payment that consists of both
interest and principal. In effect, these payments are a "pass-through" of the
monthly interest and principal payments made by borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of the securities.
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<PAGE>
The investment characteristics of pass-through mortgage-backed securities differ
from those of traditional fixed-income securities. The major differences include
the payment of interest and principal on the mortgage-backed securities, as
described above, and the possibility that principal may be prepaid on the
mortgage-backed securities at any time due to prepayments on the underlying
mortgage loans. These differences can result in significantly greater price and
yield volatility than is the case with traditional fixed-income securities.
Mortgage prepayments are affected by factors including the level of interest
rates, general economic conditions, the location and age of the mortgage, and
other social and demographic conditions. Generally prepayments on pass-through
mortgage-backed securities increase during periods of falling mortgage interest
rates and decrease during periods of rising mortgage interest rates.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, thus affecting the yield on FBR Asset's investments.
As of December 31, 1998, FBR Asset was invested in thirty-three mortgage-backed
securities that represented the entire ownership interest in pools of
single-family mortgage loans. In connection with these investments, FBR Asset
entered into an interest rate swap and two repurchase agreements. The
mortgage-backed securities, the swap, and the repurchase agreements are
summarized on the following table:
26
<PAGE>
<TABLE>
<CAPTION>
Original Expected
Face Amount Principal Nominal Weighted Relevant
Issue Date at Amount Yield Average Life Expected Prepayment
Descriptive of 12/31/98 (in at at 12/31/98 Duration Assumption
Title(1) Securities (in thousands) thousands) 12/31/98 (years) (years) (% PAM) (2)
----- ---------- -------------- ---------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Freddie Mac
FGOLD 15 yr 5/1/98 $ 75,019 $ 79,334 6.08% 4.3 2.05 303
Fannie Mae
FNMA 15 yr 5/1/98 $ 21,887 $ 23,381 6.06% 4.4 2.05 303
Freddie Mac
FGOLD 15 yr 9/1/95 $ 4,304 $ 7,496 6.02% 2.8 0.85 382
Freddie Mac
FGOLD 15 yr 7/1/93 $ 3,952 $ 11,850 6.39% 2.3 1.61 337
Fannie Mae
30 yr 4/1/98 $ 13,348 $ 16,291 6.20% 3.6 2.23 266
Fannie Mae
30 yr 4/1/98 $ 13,151 $ 16,868 6.88% 3.0 1.65 310
Ginnie Mae
30 yr 11/1/89 $ 16,294 $ 45,874 6.02% 3.7 0.83 354
Freddie Mac
FGOLD 15 yr 9/1/98 $ 10,004 $ 10,083 5.99% 5.8 3.92 155
-------- -------- ---- --- ---- ---
Mortgage
Portfolio
Total $157,959 $211,177 6.19% 4.1 1.33 299
======== ======== ==== === ==== ===
Repurchase
Agreement
Liability 12/10/98 $ 16,405 5.08%
Repurchase
Agreement
Liability 12/15/98 $112,145 5.08%
Repurchase
Agreement
Total $128,550
========
Interest Rate
Swap Agreement 6/1/98 $50,000(3) (4) 2.07
</TABLE>
(1) All of the mortgage-backed securities are backed by pools of fixed-rate
mortgages and are principal and interest paying instruments.
(2) Prepayment assumptions are determined by BlackRock on a monthly basis and
express the relationship between the assumption for a specific pass-through
security and a prepayment assumption model ("PAM"). For example, a
prepayment assumption of 100% PAM for a 30-year mortgage assumes a
prepayment rate of 0.2% for the first month, increased by 0.2% per month
for the next 30 months, and 6% per month for the remainder of the term.
"50% PAM" means that the prepayment rate is half of "100% PAM" for that
month. "300% PAM" means that the prepayment rate is three times "100% PAM"
for that month. For more information on the risk of prepayments with
respect to mortgage investments, see "Mortgage Loan Interest and Prepayment
Rate Risk" on page 7.
(3) Notional amount.
(4) Under the interest rate swap agreement, FBR Asset receives quarterly
payments of interest based on three-month LIBOR and remits semi-annual
payments at a fixed rate of approximately 5.9% based in each case on the
$50 million notional amount.
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<PAGE>
As the table above shows, the average yield on FBR Asset's mortgage backed
securities at December 31, 1998, was approximately 6.19%. The yield is based on
the anticipated life of the securities. If the actual life of the security is
reduced below its anticipated life, the yield would be reduced. The actual life
of the mortgage-backed securities is reduced if the mortgage loans underlying
the securities are prepaid faster than anticipated at the time the securities
were acquired. See Notes to Financial Statements for a discussion of accounting
principles applicable to FBR Asset's investments in mortgage assets.
Freddie Mac Certificates
The Federal Home Loan Mortgage Corporation, better known as "Freddie Mac," is a
privately owned government-sponsored enterprise created pursuant to Title III of
the Emergency Home Finance Act of 1970. Freddie Mac's principal activities
currently consist of the purchase of mortgage loans or participation interests
in mortgage loans and the resale of the loans and participations in the form of
guaranteed mortgage-backed securities. Freddie Mac guarantees to holders of
Freddie Mac certificates, such as FBR Asset, the timely payment of interest at
the applicable pass-through rate and ultimate collection of all principal on the
holder's pro rata share of the unpaid principal balance of the underlying
mortgage loans, but does not guarantee the timely payment of scheduled principal
on the underlying mortgage loans. The obligations of Freddie Mac under its
guarantees are solely those of Freddie Mac and are not backed by the full faith
and credit of the United States. If Freddie Mac were unable to satisfy its
obligations, distributions to FBR Asset would consist solely of payments and
other recoveries on the underlying mortgage loans, and accordingly, monthly
distributions to FBR Asset would be adversely affected by delinquent payments
and defaults on those mortgage loans.
Fannie Mae Certificates
The Federal National Mortgage Association, better known as "Fannie Mae," is a
privately owned, federally chartered corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae provides funds
to the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. Fannie Mae
guarantees to registered holders of Fannie Mae certificates, such as FBR Asset,
that it will distribute amounts representing scheduled principal and interest
(at the rate provided by the Fannie Mae certificate) on the mortgage loans in
the pool underlying the Fannie Mae certificate, whether or not received, and the
full principal amount of any mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. The
obligations of Fannie Mae under its guarantees are solely those of Fannie Mae
and are not backed by the full faith and credit of the United States. If Fannie
Mae were unable to satisfy its obligations, distributions to FBR Asset would
consist solely of payments and other recoveries on the underlying mortgage
loans, and accordingly, monthly distributions to FBR Asset would be adversely
affected by delinquent payments and defaults on the mortgage loans.
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<PAGE>
Ginnie Mae Certificates
The Government National Mortgage Association, better known as "Ginnie Mae," is a
wholly owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. Title III of the National Housing
Act of 1934 authorizes Ginnie Mae to guarantee the timely payment of principal
and interest on certificates that represent an interest in a pool of mortgages
insured by the Federal Housing Administration under the Housing Act or partially
guaranteed by the Veteran's Administration under the Servicemen's Readjustment
Act of 1944 and other loans eligible for inclusion in mortgage pools underlying
Ginnie Mae certificates. Section 306(g) of the Housing Act provides that "the
full faith and credit of the United States is pledged to the payment of all
amounts that may be required to be paid under any guaranty under this
subsection." An opinion, dated December 12, 1969, of an Assistant Attorney
General of the United States provides that guarantees under section 306(g) of
Ginnie Mae certificates of the type that may be purchased by FBR Asset are
authorized to be made by Ginnie Mae and "would constitute general obligations of
the United States backed by its full faith and credit."
Single-Family and Multifamily Privately-Issued Certificates
Single-family and multifamily privately-issued certificates are pass-through
certificates that are not issued or guaranteed by one of the agencies described
above and that are backed by a pool of single-family or multifamily mortgage
loans. Single-family and multifamily privately-issued certificates are issued by
originators of, investors in, and other owners of mortgage loans, including
savings and loan associations, savings banks, commercial banks, mortgage banks,
investment banks and special purpose "conduit" subsidiaries of those
institutions.
While agency certificates are backed by the express obligation or guarantee of
one of the agencies, as described above, single-family and multifamily
privately-issued certificates are generally covered by one or more forms of
private credit enhancements. Those credit enhancements provide an extra layer of
loss coverage in the event that losses are incurred upon foreclosure sales or
other liquidations of underlying mortgaged properties in amounts that exceed the
equity holder's equity interest in the property and result in realized losses.
Forms of credit enhancements include, but are not limited to, limited issuer
guarantees, reserve funds, private mortgage guaranty pool insurance,
over-collateralization, and subordination.
FBR Asset does not currently own any non-agency mortgage-backed securities, but
it may own them in the future.
Borrowed Funds
FBR Asset may reduce its equity investments in mortgages or other assets by
funding a portion of those investments with long-term borrowings, warehouse
lines of credit, or other borrowing arrangements. Borrowing funds creates
interest expense that can exceed the revenue FBR Asset earns from its financed
assets. To the extent that revenue derived from those assets exceeds the
interest expense, FBR Asset's net income will be greater than if FBR Asset had
not borrowed funds. Conversely, if the revenue from those assets does not
sufficiently cover the expense, FBR Asset's net income will be less than if FBR
Asset had not borrowed funds.
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<PAGE>
FBR Asset also borrows funds by entering into repurchase agreements. Under these
agreements, FBR Asset sells assets to a third party with the commitment to
repurchase the same assets at a fixed price on an agreed date. The repurchase
price reflects the purchase price plus an agreed upon market rate of interest.
FBR Asset accounts for repurchase agreements as loans, secured by the underlying
assets, that FBR Asset owes to the third party.
FBR Asset intends to use the proceeds from borrowings to invest in mortgages or
other assets and to repeat this process of borrowing and investing, while
continually monitoring its use of leverage. Based on book values, the
debt-to-equity ratio as of December 31, 1998, on FBR Asset's mortgage-backed
securities portfolio was 4 to 1. Traditionally, lenders have permitted
repurchase agreement borrowings against agency mortgage-backed securities at a
debt-to-equity ratio of up to 19 to 1. FBR Asset does not currently intend to
increase this leverage ratio, although its Charter and Bylaws do not impose any
specific limits on permissible leverage.
What follows are two examples of how FBR Asset might use borrowings to increase
the yield on a hypothetical mortgage-backed security:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Example 1 Example 2
--------- ---------
<S> <C> <C> <C>
1. Amount invested in
mortgage-backed security.......... $10,000,000 $10,000,000
2. Annual interest rate on
mortgage-backed security.......... 7.25% 7.25%
3. Income from mortgage-backed
security (1 x 2)*................ $ 725,000 $ 725,000
4. Amount borrowed to finance
investment in mortgage-backed
security.......................... $ 8,000,000 $ 5,000,000
5. Interest rate on amount borrowed.. 5.50% 5.50%
6. Interest expense (4 x 5)*......... $ 440,000 $ 275,000
7. Equity capital invested (1 - 4)*.. $ 2,000,000 $ 5,000,000
8. Management fee (0.25% x
$10,000,000)...................... $ 25,000 $ 25,000
9. Hedging expense (4 x 1%)*......... $ 80,000 $ 50,000
10. Total expenses (6 + 8 + 9)*....... $ 545,000 $ 350,000
11. Net income on mortgage-backed
security (3-10)*.................. $ 180,000 $ 375,000
12. Return on equity capital
invested (11 / 7)*................ 9.00% 7.50%
----------------------------------------------------------------------------------
* The numbers in parentheses, unless otherwise specified, refer to the
paragraph numbers on the far left.
</TABLE>
In example 1 above, FBR Asset uses borrowed funds to increase the initial yield
on its investment from 7.25% to 9.0%. In example 2 above, FBR Asset borrows less
funds and increases its yield only from 7.25% to 7.50%. FBR Asset plans to
complete these types of transactions by arranging loans in which it pledges its
assets as collateral to secure its repayment obligations. Some of those loans
may be margin loans in which a decline in the pledged assets' market value could
trigger an early repayment of FBR Asset's obligations. If FBR Asset repays loans
early, then the return on equity would be reduced. As reflected above, if FBR
Asset were required to increase its equity investment by $3 million in order to
prepay $3 million of the loan, then the return on equity would be reduced from
9.00% to 7.50%.
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<PAGE>
Hedging & Interest Rate Management
FBR Asset acquires derivative financial instruments to hedge all or a portion of
the interest rate risk associated with its borrowings. FBR Asset does not intend
to acquire derivative instruments for speculative purposes. FBR Asset's hedging
activities may include entering into interest rate swaps and caps and options to
purchase swaps and caps. Under the tax laws applicable to REITs, FBR Asset
generally will be able to enter into swap or cap agreements, options, futures
contracts, forward rate agreements, or similar financial instruments to hedge
indebtedness that FBR Asset may incur, or plans to incur, to acquire or carry
real estate assets. The applicable tax provisions, however, may limit FBR
Asset's ability to enter into other types of hedging transactions. If so, FBR
Asset may conduct some or all of its hedging activities through a to-be-formed
subsidiary that is fully subject to income tax.
FBR Asset engages in a variety of interest rate management techniques that are
intended to match the effective maturity of, and the interest received on, its
assets with the effective maturity of, and the interest owed on, its
liabilities. FBR Asset generally will be able to use those techniques directly,
instead of through a corporate subsidiary that is fully subject to corporate
income taxation. FBR Asset, however, cannot give any assurances that it can
successfully implement its investment and leverage strategies. FBR Asset's
interest rate management techniques may include:
o puts and calls on securities or indices of securities;
o Eurodollar futures contracts and options on such contracts;
o interest rate swaps, which are the exchange of fixed-rate payments for
floating-rate payments; or
o other similar transactions.
FBR Asset may also use these techniques to attempt to protect itself against
declines in the market value of its assets that result from general trends in
debt markets. The inability to match closely the maturities and interest rates,
or the inability to protect adequately against declines in the market values,
could result in losses with respect to FBR Asset's mortgage assets.
At December 31, 1998, FBR Asset owned $161.4 million of long-term fixed-rate
mortgage-backed securities and was indebted for $128.6 million under short-term
repurchase agreements. The interest rate owed under the short-term borrowing
arrangements increases and decreases as short-term interest rates increase or
decrease. The interest rate on the mortgage-backed securities remains constant.
If short-term rates increased significantly above 6.19%, which is the average
yield on FBR Asset's mortgage portfolio as of December 31, 1998, the interest
owed on the borrowings would exceed the interest income payable to FBR Asset on
its mortgage-backed securities.
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<PAGE>
To limit the adverse effect of rising short-term interest rates under its
short-term repurchase agreements, FBR Asset entered into two interest rate swap
agreements pursuant to which FBR Asset paid a fixed interest rate on $100
million notional amount of borrowings and received a variable interest rate on
$100 million notional amount of borrowings. FBR Asset elected to terminate one
$50,000,000 agreement in October 1998. The remaining $50,000,000 agreement
matures on June 1, 2001.
Interest rate management techniques do not eliminate risk. For example, if both
long-term and short-term interest rates were to increase significantly, it can
be expected that:
o the weighted average life of the mortgage-backed securities would be
extended because prepayments of the underlying mortgage loans would
decrease; and
o the market value of the fixed rate mortgage-backed securities would decline
as long-term interest rates increased.
Yet, in this situation, the interest rate swap agreement would be ineffective
for periods after its June 1, 2001 termination date, and if FBR Asset sold the
fixed-rate mortgage-backed securities to pay down its short-term borrowings, it
would realize a loss because of the decline in their market value.
Commercial Mortgage Loans & CMBS
FBR Asset invests in commercial mortgage loans and commercial mortgage-backed
securities, commonly known as "CMBS." Currently, FBR Asset owns commercial loans
and CMBS indirectly through FBR Asset's investments in Anthracite Capital, Inc.,
Chastain Capital Corporation, Imperial Credit Commercial Mortgage Investment
Corporation, Resource Asset Investment Trust and East-West Bancorp. FBR acted as
lead underwriter or placement agent for each of these companies. Through its
relationship with FBR, FBR Asset was able to acquire stock in Anthracite and
Chastain before or while the companies offered their stock to the public or, in
the case of East-West Bancorp, when FBR placed the stock with private investors.
In the future, FBR Asset may invest in other companies that originate or acquire
commercial mortgage loans or CMBS. In addition, FBR Asset may purchase
commercial mortgage loans and CMBS directly.
Commercial mortgage loans are loans secured by senior or subordinate liens on
commercial or multifamily real estate. The characteristics of FBR Asset's
commercial mortgage loans vary widely.
Some of FBR Asset's commercial mortgage loan holdings are performing loans that
can be securitized. Imperial Credit, for example, invests primarily in
performing multifamily and commercial term loans. Because of the characteristics
of these commercial mortgage loans, Imperial Credit can issue CMBS secured by
these loans, retaining an equity interest with characteristics similar to a
subordinate CMBS. Similarly, Chastain originates commercial mortgage loans for
the purpose of securitizing those loans and retaining subordinate interests in
them. Chastain's target mortgage loans are located in the major metropolitan
markets in the United States. East-West Bancorp originates commercial mortgage
loans to borrowers who have ties to the Asia Pacific region.
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<PAGE>
FBR Asset also owns commercial mortgage loans that are not intended to be
securitized, primarily through its investment in Resource. For various reasons,
the loans held through Resource do not conform to the underwriting standards of
institutional lenders or sources that provide financing through securitization.
For example, Resource originates wraparound loans, in which a borrower grants
Resource a junior lien mortgage with a principal amount equal to the principal
amount owed under any existing loans plus an additional amount that Resource
actually advances to the borrower. The borrower makes all loan payments to
Resource, which in turn pays the prior lenders principal and interest on the
prior loans.
Through its investments in Anthracite and Chastain, FBR Asset indirectly owns
other commercial loans that generally cannot be securitized, including mezzanine
loans, which are loans subject to a prior lien on the property, bridge loans,
which are short-term loans that are intended to provide interim financing before
a property is sold or the loan refinanced, and loans made to facilitate
construction of new commercial properties. In addition, FBR Asset may invest in
commercial mortgage loans with borrowers who are delinquent in payments on the
loans. A lender can purchase this kind of loan at a price less than the amount
owed on the loan, which enables the lender to work out a forbearance plan or
other restructuring. If an agreement cannot be made, the lender ultimately may
foreclose on the loan, acquiring ownership of the commercial property.
In addition to investing in commercial mortgage loans, FBR Asset invests in
CMBS. Most of FBR Asset's investments in CMBS are held indirectly through
ownership in Anthracite, a REIT managed by BlackRock. Imperial Credit and
Chastain also invest in CMBS and plan to create CMBS by securitizing their
commercial mortgage loans and retaining an equity interest in the loans.
CMBS typically are divided into two or more classes, sometimes called
"tranches." Generally the most senior class or classes would be rated investment
grade, which increases the marketability of the class. The junior, or
subordinated, classes typically would include a non-investment grade rated class
and an unrated, higher-yielding credit support class.
Each class of CMBS generally is issued with a stated principal amount and a
specific fixed or variable interest rate. The principal of and interest on the
underlying mortgage loans may be allocated to the classes of CMBS in many ways,
and the credit quality of a particular class results primarily from the order
and timing of the receipt of payments on the underlying mortgage loans. For
example, subordinated classes of CMBS provide credit protection to the more
senior classes because the subordinated classes absorb all losses from loan
defaults and foreclosures before any losses are allocated to the more senior
classes. Typically, prepayments on mortgage loans are paid to the more senior
classes of CMBS for a period of time or until the senior classes are paid in
full. In some instances, subordinated classes of CMBS are not entitled to
receive any scheduled payments of principal until the more senior classes are
paid in full or until a specified time.
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<PAGE>
Some classes of CMBS are not entitled to payments of principal, or are entitled
to only nominal principal payments. These classes are known as interest-only
securities or IOs. FBR Asset owns IOs indirectly, primarily though its
investment in Imperial Credit. IOs are sensitive to prepayments on the
underlying mortgage loans and IO classes of CMBS are sensitive to losses
resulting from defaults on the underlying mortgage loans. In November 1998,
Imperial Credit reported a non-cash charge of $6.4 million, or $0.20 per share,
primarily because of a write down of Imperial Credit's IOs to estimated fair
market value. According to Imperial Credit's management, the write down was
necessary because the company revised its estimates of anticipated prepayments
and losses on the underlying loans.
To the extent that FBR Asset owns commercial mortgage loans and CMBS indirectly
through its investments in other companies, FBR Asset must rely on the
management of those other companies to make decisions with respect to the
commercial mortgage loans and CMBS. In general, FBR Asset will have no ability
to control those decisions. Moreover, management of the other companies are not
required to inform FBR Asset of their decisions, although to the extent the
companies are reporting companies under the Securities Exchange Age of 1934,
they must file reports of material events with the SEC.
Real Estate
FBR Asset seeks to invest in real property to generate income and to provide the
company with the potential for capital appreciation in the value of property
owned. FBR Asset currently owns real property through its investments in Capital
Automotive REIT, and to a lesser extent through its investments in Prime Retail
Inc., Kennedy-Wilson, Inc. and Resource Asset Investment Trust. Through its
relationship with FBR, FBR Asset was able to acquire the stock of Capital
Automotive before Capital Automotive offered its stock to the public. FBR Asset
purchased shares of Prime Retail and Resource in open-market transactions and
lent $10 million to Kennedy-Wilson.
Through its investment in Capital Automotive REIT, FBR Asset invests in the real
property and improvements used by operators of multi-site, multi-franchised
motor vehicle dealerships and motor vehicle related businesses located in major
metropolitan areas of the United States. Capital Automotive is a
self-administered and self-managed Maryland REIT that primarily acquires real
property and simultaneously leases back this property to automobile dealers.
These transactions generally have the following characteristics:
o Capital Automotive's interest in the property acquired generally includes
the land, buildings and improvements, related easements and rights and
fixtures, but not any personal property, furniture or equipment.
o The leases generally range from 8 to 11 years and may be extended for one
or two terms of 10 years at the option of the lessee.
o The leases typically require the lessee to pay substantially all expenses
associated with the operation of the real property, such as real estate
taxes and other governmental charges, insurance, utilities, service,
maintenance and, therefore are on a "triple-net" basis.
34
<PAGE>
o Upon expiration or termination of the lease, the lease generally provides
that additions, repairs, renovations and improvements become the property
of Capital Automotive.
o The leases also typically require the lessee to operate the property only
for the same purpose for which it was used on the date Capital Automotive
purchased it, unless Capital Automotive consents to a different use.
These types of "sale-leaseback" transactions generally enable Capital Automotive
to eliminate brokerage, re-leasing and similar costs and the risk of high lessee
turnover due to the general, historic long-term operation of automobile
dealerships.
Through its investment in Prime Retail, FBR Asset invests in factory outlet
centers. Prime is a self-administered and self-managed REIT that develops,
acquires, owns and operates factory outlet centers in the United States. Through
its investment in Resource, FBR Asset invests in commercial office buildings and
land. Resource is a Maryland REIT whose principal business activity is to
provide specialized commercial mortgage loans to those who do not meet the
traditional underwriting standards of other lenders, but Resource also owns real
estate. Through its investment in Kennedy-Wilson, FBR Asset invests in
commercial and residential real estate. Kennedy-Wilson is a California based
real estate operating company that owns, manages and brokers commercial and
residential real estate in the United States and Asia.
In the future, FBR Asset may invest in other companies that own real property.
In addition, FBR Asset may purchase real property directly or through joint
ventures that purchase real property directly.
Real Estate-Related Businesses
The tax rules limit FBR Asset's ability to expand its investments beyond its
core direct and indirect investments in mortgage loans, mortgage-backed
securities and real estate. Subject to those limits, however, FBR Asset invests
in businesses that provide services to real estate owners and operators.
For example, FBR Asset owns common stock in Building One Services Corporation.
Building One intends to become a national single-source provider of facilities
services. The company currently derives most of its income from providing
janitorial maintenance management services and electrical and mechanical
installation and maintenance services. Building One actively seeks to expand its
business by acquiring or merging with other facilities service providers.
FBR Management believes that additional opportunities may arise in the future
for FBR Asset to invest in businesses that provide services to real estate
owners and operators. In many cases, FBR Management believes that these
investments may provide higher returns than mortgage and real estate assets.
Accordingly, subject to the tax restrictions that apply, FBR Asset may invest in
real estate-related businesses in the future.
35
<PAGE>
Summary of Current Investments
The following table summarizes FBR Asset's investments as of December 31, 1998.
For each investment in common stock, the first column shows the number of shares
of common stock that FBR Asset owns in each entity and the second column shows
the percentage ownership that FBR Asset's investment in each company represents.
The third column shows the amount FBR Asset paid for its investment, and the
fourth column shows the market value of the investment as of December 31, 1998.
The final column shows the percentage increase or decrease in the value of FBR
Asset's investments from the dates of purchase, which vary for each investment
to December 31, 1998. The percentages in this last column have not been
annualized or adjusted to reflect the length of time FBR Asset has held the
investment.
<TABLE>
<CAPTION>
Market Value
Number of at Percentage
Shares Percent Amount of December 31, Increase
Owned Ownership Investment 1998 (Decrease)
----- --------- ---------- ---- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-Backed Securities N/A N/A $160,705,239 $161,418,739 0.44%
------------ ----
Equity Investments(1)
Anthracite Capital, Inc. 1,581,846 7.40% 18,334,496 12,358,172 -32.60%
(AHR)(2)
Capital Automotive REIT
(CARS)(2) 1,792,115 7.23% 25,000,000 26,657,711 6.63%
Chastain Capital Group 700,000 9.15% 9,765,000 3,150,000 -67.74%
(CHAS)(2)(3)
Imperial Credit Commercial
Mortgage Inv. Corp.
(ICMI)(2) 900,000 3.2% 13,050,230 8,437,500 -35.35%
Prime Retail, Inc. (PRT)(2) 123,500 0.29% 1,201,317 1,211,844 0.88%
Resource Asset Investment
Trust (RAS)(2) 344,575 5.59% 5,292,516 3,790,325 -28.38%
Building One Services
Corporation (BOSS)(2) 500,000 1.13% 10,000,000 10,437,500 4.38%
East-West Bancorp, Inc. 520,000 2.19% 5,200,000 4,940,000 -5.00%
(EWBC)(2) ------------ ------------ ------
Total $ 87,843,559 $ 70,983,052(4) -19.2%(4)
============ ============ =====
Promissory Notes
Prime Capital Holdings, Inc.(2) N/A N/A 12,504,334 12,504,334 N/A
Kennedy-Wilson, Inc. (KWIC) N/A N/A 7,525,479 7,525,479 N/A
------------ ------------
Total $ 20,029,813 $ 20,029,813
============ ============
Cash and Cash Equivalents
Cash and Cash Equivalents N/A N/A 41,144,326 41,144,326 N/A
------------ ------------
Total $ 41,144,326 $ 41,144,326
============ ============
Total Investments $309,722,937 $293,575,930 -5.21%
============ ============
</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
and information is available about these companies from the SEC's website,
www.sec.gov.
(2) FBR has underwritten or privately placed the securities of these companies
or their affiliates. See "FBR & FBR Management-Related Party Transactions"
on page 16.
(3) FBR Asset has realized a permanent loss on its investment in Chastain as of
December 31, 1998, equal to $6,615,000.
(4) As of February 5, 1999, the total market value of the identified equity
investments was approximately $63,407,800 and the percentage decrease was
-27.82%.
36
<PAGE>
The following table shows, for calendar year 1998, FBR Asset's investments,
including the weighted average cost of each investment based on the number of
days from January 1, 1998, to December 31, 1998, on which FBR Asset held each
investment, and the gross income from each investment for the year ended
December 31, 1998.
<TABLE>
<CAPTION>
Weighted
Average Gross
Investment Income
---------- ------
<S> <C> <C>
Mortgage-Backed Securities $169,564,932 $ 7,101,326
------------ -----------
Equity Investments
Anthracite Capital, Inc. (AHR) 10,356,129 739,613
Capital Automotive REIT (CARS) 21,986,301 1,569,893
Chastain Capital Group (CHAS) 6,581,342 287,000
Imperial Credit Commercial Mortgage Inv. Corp. (ICMI)
13,050,230 1,062,000
Prime Retail, Inc. (PRT) 374,166 36,433
Resource Asset Investment Trust (RAS) 4,329,152 576,466
Building One Services Corporation (BOSS) 10,000,000 -
East-West Bancorp, Inc. (EWBC) 2,621,370 -
Total Equity Investments & Dividends $ 69,298,690 $ 4,271,405
------------ -----------
Promissory Notes
Prime Capital Holdings, Inc. 7,947,365 1,248,707
Kennedy-Wilson Inc. (KWIC) 5,506,849 749,264
Total Promissory Notes $ 13,454,214 $ 1,997,971
------------ -----------
Cash and Cash Equivalents 84,496,947 4,556,800
------------ -----------
Total Investments $336,814,783 $17,927,502
============ ===========
</TABLE>
Dividends & Distribution Policy
To maintain its status as a REIT for federal income tax purposes, FBR Asset is
required to distribute substantially all its taxable income, which may differ
materially from its income calculated in accordance with generally accepted
accounting principles, to its shareholders each year. In order to satisfy this
requirement, FBR Asset intends to declare regular quarterly dividends and to
distribute any taxable income remaining at the end of a year with a first
quarter dividend in the following year.
The Board of Directors may change the dividend policy at any time. The Board of
Directors will declare dividends based on:
o the taxable income of FBR Asset;
o the financial condition of FBR Asset;
37
<PAGE>
o the distributions required to maintain REIT status and to avoid corporate
income tax and the 4% excise tax; and
o other factors that the Board of Directors considers relevant.
To date, FBR Asset has declared the following dividends:
<TABLE>
<CAPTION>
For the Period Total Per Share
-------------- ----- ---------
<S> <C> <C>
12/15/97 - 12/31/97 $ 562,045(1) 0.055
01/01/97 - 03/31/98 2,083,165 0.200
04/01/98 - 06/30/98 3,072,669 0.295
07/01/98 - 09/30/98 3,379,798(2) 0.360
10/01/98 - 12/31/98(3) 2,563,058 0.300
----------- -----
$11,660,735 $1.21
</TABLE>
(1) Includes $0.05 dividend declared in June 1998 and paid in July 1998 for
shareholders of record as of December 31, 1997.
(2) Dividend declared and paid in October 1998.
(3) Dividend paid in January 1999.
FBR Asset has paid substantially all of its dividends to date out of current or
accumulated earnings and profits; only $______ per share of the dividends is
expected to be a return of capital for 1998 federal income tax purposes. The
level of quarterly dividends is based on a number of factors and should not be
deemed indicative of taxable income for the quarter in which declared or future
quarters or of income calculated in accordance with generally accepted
accounting principles.
Distributions to shareholders will generally be subject to tax as ordinary
income, although in appropriate circumstances a portion of a distribution may be
designated by FBR Asset as capital gain or may be determined to be a tax-free
return of capital. FBR Asset generally does not intend to declare more than a de
minimis amount of dividends that are a return of capital for tax purposes,
except in those instances where companies in which FBR Asset invests determine
that a portion of their dividends are a return of capital. FBR Asset will
furnish annually to each shareholder a statement setting forth distributions
paid during the preceding year and their characterization as ordinary income,
capital gain or return of capital. For a discussion of the federal income tax
treatment of distributions by FBR Asset, see "Federal Income Tax Consequences of
FBR Asset's Status as a REIT--Taxation of Taxable U.S. Shareholders."
38
<PAGE>
Selected Financial Data
The selected financial data set forth below should be read in conjunction with
"Management's Discussion & Analysis" and the Financial Statements and Notes
thereto included elsewhere in this prospectus. The selected balance sheet data
as of December 31, 1997 and 1998, and statement of operations data for the
period from December 15, 1994 (Inception) to December 31, 1997, and for the year
ended December 31, 1998, has been derived from the audited financial statements
included elsewhere in this prospectus. The results for the year ended December
31, 1998, are not necessarily indicative of the results to be expected for any
future period.
<TABLE>
<CAPTION>
December 15, 1997
(Inception) For the Year
through Ended
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Statement of Operations Data:
Interest income................................ $ 18,040 $ 13,656,097
Dividend income................................ 434,717 4,271,405
Other income................................... 268,520 -
Interest expense............................... - 5,359,633
Management Fee expense......................... 58,623 1,520,725
Other expense.................................. 15,733 1,089,102
Net income before realized gains and losses.... 646,921 9,958,042
Net realized losses............................ - (8,369,807)
Net income after realized gains and losses..... 646,921 1,588,235
Basic and diluted income per share............. $ 0.06 $ 0.16
Dividends declared per share(1)................ $ 0.05 $ 1.16
Weighted average basic and diluted shares...... 10,218,999 10,044,483
<CAPTION>
As of As of
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Selected Balance Sheet Data:
Mortgage-backed securities, at fair value...... $ - $161,418,739
Cash and cash equivalents...................... 163,223,199 41,144,326
Investments in equity securities, at fair value 23,318,750 70,983,050
Total assets................................... 190,538,402 295,930,620
Repurchase agreements.......................... - 128,550,000
Total liabilities.............................. 771,573 145,026,041
Accumulated other comprehensive income (2)..... - (9,800,530)
Shareholders' equity........................... 189,766,829 150,904,579
Book value per share........................... $ 18.57 $ 17.66
Common shares outstanding (3).................. 10,218,999 8,543,527
<CAPTION>
As of For the Year Ended
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Other Selected Data
Average daily borrowings (5)................... - 144,793,891
Average equity (4)............................. 189,766,829 182,750,145
Management fees as a percentage of weighted
average total assets (6)....................... 0.03% 0.45%
</TABLE>
(1) Dividends are calculated and declared based on estimates of FBR Asset's
taxable income.
(2) As of December 31, 1998, accumulated other comprehensive income includes
net unrealized gain on mortgage-backed securities of $713,499 and
unrealized net losses on investments in equity securities of $10,514,029.
(3) Reflects 1,872,300 shares of treasury stock repurchased as of December 31,
1998.
(4) Represents monthly average for each period.
(5) Repurchase agreements were entered into on May 13, 1998.
(6) For the twelve months ended December 31, 1998, management fee expense for
this calculation excludes the fair value of stock options issued to FBR
Management of $454,746. Weighted average invested assets for the periods
ended December 31, 1997, and 1998 were approximately $190 million and $336
million, respectively.
39
<PAGE>
Management's Discussion & Analysis
Overview
FBR Asset targets investments in real estate and real estate-related companies.
FBR Asset invests in whole-pool mortgage-backed securities that are issued or
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 REITs and through loans made to REITs and other companies.
To date, FBR Asset has relied on BlackRock to invest in and manage its
mortgage-backed securities and has relied on FBR Management to invest in and
manage its other assets. As of December 31, 1998, FBR Asset had:
o mortgage-backed securities totaling $161.4 million, which were financed
with repurchase agreements totaling $128.6 million;
o original investments in equity securities of eight companies totaling $87.8
million; and
o loans to two companies totaling $20 million.
Market Conditions
FBR Asset relies on FBR Management and FBR to provide it with investment
opportunities. The ability of FBR Asset to make investments is dependent upon a
number of factors, including the overall health of the equity and debt capital
markets, the condition of the U.S. and foreign real estate markets, the ability
of other REITs and real estate owners and operators to access equity and debt
through the capital markets, the availability of credit to finance the
acquisition of assets, and the interest rates that FBR Asset pays to finance its
purchases.
Equity Market Conditions
1998 was a volatile year in the U.S. equity and debt markets. The Standard &
Poor's 500 Index, or "S&P 500," is a capitalization-weighted index of 500 stocks
designed to measure changes in the aggregate market value of 500 stocks that
represent all major industries. The S&P 500 began the year at 975.0 and ended
the year at 1,229.2, an increase of 26.1%. However, from July 15, 1998, to
October 21, 1998, the S&P 500 dropped approximately 200 points, a decrease equal
to 17.0%.
While the S&P 500 was up in 1998, indices that track composite prices for
small-cap and REIT stocks reflect a different performance. A key index that
tracks small-cap stocks is the Russell 2000 Index. The Russell 2000 is comprised
of the smallest 2000 companies in the Russell 3000 Index, which represents 98%
of the investable securities in the U.S. equity market. The Russell 2000 began
1998 at 436.5 and ended the year at 422.0, a decrease of 3.32%. Similar to the
mid-year drop in the S&P 500, the Russell 2000 dropped from a 1998 high on April
21, 1998, of 491.4 to a low on October 10, 1998, of 310.3, a decline of 36.9%.
The Morgan Stanley REIT Index is a total return index that tracks the most
actively traded real estate investment trusts and is designed to be a measure of
40
<PAGE>
real estate equity performance. The Morgan Stanley REIT Index began the year at
363.2 and ended the year at 302.4, a decrease of 16.7%.
FBR Asset has direct and indirect investments in REIT securities and small-cap
stock securities. Changes in the S&P 500, the Russell 2000 and the Morgan
Stanley REIT Index can affect the price of FBR Asset's common stock and the
price of the companies in which it invests.
Some of the factors that FBR Asset believes have influenced the fluctuations of
the equity markets include statements from the Chairman of the Federal Reserve
Board, Alan Greenspan, that the prices of stocks reflected an "irrational
exuberance" relative to historical price earnings ratios, a declaration from the
Russian government that it did not intend to continue current payments on its
outstanding debt obligations, general turmoil in Asia, particularly Asian
financial institutions, and currency devaluation in Brazil.
The debt markets were also affected by the factors influencing the equity
markets. In response to concerns about a potential recession in the U.S. and
events such as the Russian bond default, the Federal Reserve cut the federal
funds rate, the rate it charges on overnight borrowings by banks, on three
separate occasions in 1998. General uneasiness about the health of international
economies prompted investors to sell their investments in the debt of other
countries and invest the sales proceeds in U.S. Treasuries. As a result, prices
for U.S. Treasuries increased and yields decreased.
REIT and Real Estate Market Conditions
Through December 31, 1998, FBR Asset invested $87.8 million in equity securities
of eight companies, including six REITs and two companies that operate real
estate-related businesses. The value of FBR Asset's equity investments is
subject to factors that affect the stock prices of companies in which it has
invested. FBR Asset and the companies in which it has invested are affected by
changes in interest rates, the condition of the REIT equity and debt markets,
the availability of credit to REITs through commercial mortgage-backed
securities issuance and lending from financial institutions, and the underlying
leasing, occupancy and development trends affecting the fundamental operations
of real property.
REIT Equity Market
- ------------------
REITs, such as FBR Asset, are required to distribute to their shareholders at
least 95% of their taxable income each year. As a result, REITs have limited
ability to retain earnings for growth and must access the capital markets on a
continual basis to finance growth plans. During the period from 1995 to
mid-1998, the prices of REIT stocks steadily increased, driven by investor
expectations that REITs would use the proceeds from equity financings to acquire
additional properties. However, FBR Asset believes that as more REITs raised
more money and prices for property acquisitions increased, there were fewer
opportunities available for REITs to acquire properties that were accretive to
earnings. As a result, in mid-1998, investors began to adjust their growth
expectations for REITs, which caused REIT stock prices to decline. In addition,
just as the global financial crises caused investors to sell investments in
foreign debt issuances and invest in U.S. Treasuries, a similar phenomenon
occurred with respect to REITs. Investors began selling REIT securities to
41
<PAGE>
invest in larger, more well-capitalized stocks such as those included in the S&P
500.
FBR Asset's ability to fund its growth and find attractive investments is, in
part, dependent upon the market conditions for REITs. In 1998, there were
sixteen REIT initial public offerings, which raised a total of $2.1 billion. Of
the sixteen REIT initial public offerings, seven were mortgage REITs, which
raised $84.8 million. Of the seven mortgage REIT initial public offerings, FBR
Asset invested $33.3 million in three. Of the nine equity REIT initial public
offerings, FBR Asset invested $25 million in one.
The market for initial public offerings and secondary common stock offerings of
REIT securities was robust during the first and second quarters of 1998.
However, because of factors affecting the debt and equity markets, the market
for REIT offerings essentially closed during the third and fourth quarters. The
table below summarizes public common equity raised by REITs from January 1, 1998
to December 31, 1998.
<TABLE>
<CAPTION>
IPO Secondary
---------------------------------- ------------------------------------
($ In Millions)
Mortgage Equity Mortgage Equity
REITs REITs Total REITs REITs Total
-------- ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 522.3 $ 657.4 $1,179.7 $ 71.6 $ 4,198.3 $ 4,269.9
Second Quarter 325.7 557.3 883.0 44.1 2,395.5 2,439.6
Third Quarter 12.0 12.0 100.9 100.9
Fourth Quarter - - - 211.0 211.0
-------- -------- -------- -------- --------- ---------
Total Year-to-Date $ 848.0 $1,226.7 $2,074.7 $ 115.7 $ 6,905.7 $ 7,021.9
======== ======== ======== ======== ========= =========
</TABLE>
Source: CommScan Equidesk, Inc.
Real Estate Market
- ------------------
Despite the fluctuations of the REIT equity markets, FBR Asset believes the
underlying fundamentals in real estate have continued to improve. Overall
vacancy rates in many major U.S. real estate markets have decreased from highs
reached in the late 1980's and early 1990's to levels that historically would
have resulted in substantial increases in speculative development. However, FBR
Asset believes that REIT investors and reports by analysts who follow REITs have
effectively restrained new speculative development activity by reducing the
availability of financing for development and by analyzing and questioning the
need for new developments.
FBR Asset believes that sectors of the commercial real estate market such as
central business district office buildings, industrial warehouse facilities that
serve as national distribution centers, luxury and full service hotels,
apartments in areas where development is constrained by lack of land or
development restrictions, and assisted living facilities with strong operators
are still attractive to institutional investors.
FBR Asset is invested indirectly in office buildings and residential land
development through its loan to Kennedy-Wilson, in factory outlet malls through
its investment in Prime Retail, in multifamily housing through its investment in
42
<PAGE>
East-West Bancorp, and in assisted living facilities through its loan to
Brookdale Living Communities, Inc.
Commercial Mortgage-Backed Securities Market
- --------------------------------------------
One of the factors that has contributed to the growth in the securitization of
real estate ownership has been the development of the commercial mortgage-backed
securities market. As a result of overbuilding and loan defaults in the late
1980's and early 1990's, traditional real estate lenders, such as banks and
insurance companies, drastically cut back on their lending to real estate
owners. Beginning in the late 1980's, lending sources such as conduits funded by
Wall Street and new specialty finance companies focused on originating new loans
have replaced traditional lenders as funding sources for real estate owners.
Since 1990, the issuance of commercial mortgage-backed securities, or "CMBS,"
has grown from approximately $5 billion to approximately $45 billion in 1998.
The first loans securitized in CMBS transactions typically had loan-to-value
ratios that did not exceed 65%.
As the issuance of CMBS increased, traditional lenders and new competitors began
to enter the real estate lending markets, offering loans to borrowers with
higher loan-to-value ratios and lower interest rate spreads over underlying
market indices such as LIBOR or U.S. Treasuries. Buyers of CMBS were willing to
accept increasing loan-to-value ratios and lower spreads because they were
earning higher risk-adjusted rates on their investments in CMBS than they were
earning on comparably rated corporate securities. However, when Russia defaulted
on its bonds, the CMBS market was negatively affected. Just as investors sold
their international debt obligations and purchased U.S. Treasuries, in a "flight
to quality," so too did investors sell a portion of their CMBS to purchase U.S.
Treasuries.
One of the key reasons for the increased amount of CMBS issuance has been the
ability of the issuers to sell the tranches of CMBS with ratings from the
national bond rating agencies that were rated lower than BB. The lower tranches
of CMBS issues have the highest risk of default and loss and require a
sophisticated buyer able to step in and manage a default should a default occur.
As the market for CMBS developed, a handful of buyers for the lower tranches
began to emerge. One of those buyers was CRIIMI Mae, Inc. CRIIMI Mae is a
mortgage REIT that was formed to provide financing to multi-family housing and
other types of commercial real estate. CRIIMI Mae was one of the original
purchasers of the lower tranches of CMBS. Other early participants included
Lennar Corporation, AMRESCO, General Motors Acceptance Corporation and General
Electric Capital Corporation, none of which are REITs. CRIIMI Mae filed for
Chapter 11 bankruptcy protection on October 5, 1998, citing its inability to
meet collateral calls from its lenders. CRIIMI Mae's bankruptcy was, in part,
driven by the global financial turmoil and the flight to U.S. Treasuries. Wall
Street lenders who financed purchases of the lower tranches of CMBS began making
margin calls to other holders of the lower tranches of CMBS, including
Anthracite Capital, Inc., Chastain Capital Corporation, Ocwen Asset Investment
Corp., Imperial Credit Commercial Mortgage Investment Corporation, and Wilshire
Real Estate Investment Trust. CRIIMI Mae's bankruptcy affected these companies,
three of which FBR Asset has invested in, to the extent that the companies had
margin calls. Additionally, FBR Asset believes that companies which intend to
43
<PAGE>
invest in the lower tranches of CMBS in the future may not be able to obtain
financing on as favorable terms as those available prior to CRIIMI Mae's
bankruptcy.
Interest Rate Environment
FBR Asset's earnings depend, in part, on the relationship between long-term
interest rates and short-term interest rates. FBR Asset's investments in
mortgage-backed securities bear interest at fixed rates determined by reference
to the yields of medium- or long-term U.S. Treasury securities or at adjustable
rates determined by reference to the yields on various short-term instruments.
Since January 1, 1998, interest rates on U.S. Treasury securities have declined,
in part, as a reaction to global financial uncertainties. U.S. and international
investors have reduced their exposure to foreign government and corporate bonds
and increased their investments in U.S. Treasury securities. This has resulted
in higher prices for Treasury securities and lower yields. As a result, the
yield curve has inverted such that short-term, non-Treasury borrowing rates
exceed long-term Treasury rates.
The following table summarizes the relationship in 1998 between LIBOR and the
ten-year U.S. Treasury yield. FBR Asset's borrowings typically bear interest
rates that have historically moved in close relationship to LIBOR.
FBR Asset's incentive management fee is based on the ten-year U.S. Treasury.
<TABLE>
<CAPTION>
Yield
------------------------------------------------------------------------------------
High Low Average
------------------------ ------------------------ ---------------------------
Net Net Net
10-Year LIBOR Spread 10-Year LIBOR Spread 10-Year LIBOR Spread
------- ----- ------ ------- ----- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 5.78% 5.72% 0.06% 5.30% 5.59% -0.29% 5.58% 5.65% -0.07%
Second Quarter 5.81% 5.69% 0.12% 5.35% 5.64% -0.29% 5.59% 5.66% -0.07%
Third Quarter 5.52% 5.66% -0.14% 4.42% 5.34% -0.92% 5.20% 5.62% -0.42%
Fourth Quarter 4.94% 5.63% -0.69% 4.44% 5.03% -0.59% 4.70% 5.36% -0.66%
---- ---- ----- ---- ---- ----- ---- ---- -----
1998 Average 5.51% 5.68% -0.16% 4.88% 5.40% -0.52% 5.27% 5.57% -0.31%
==== ==== ===== ==== ==== ===== ==== ==== =====
Year-to-Date
Increase/(Decrease) -0.84% -0.09% -0.86% -0.56% -0.88% -0.29%
Year-to-Date
Percentage
Increase/(Decreases) -14.53% -1.57% -16.23% -10.02% -15.77% -5.13%
</TABLE>
Source: Bloomberg
As the table indicates, as of December 31, 1998, the average yield on the
ten-year U.S. Treasury security had decreased 15.8% during 1998, from 5.58% to
4.70%, and LIBOR decreased 5.1% from 5.65% to 5.36% during the same period.
The decline in the yields of U.S. Treasury securities have caused an increase in
the spreads in the CMBS market. Increasing spreads, in turn, have caused
declines in CMBS values. As a result, many lenders who financed CMBS assets with
repurchase agreements have required borrowers to meet margin calls resulting
from the declining value of the CMBS assets. FBR Asset's portfolio of mortgage
assets is insured by Ginnie Mae, Fannie Mae or Freddie Mac and is not leveraged
to the fullest extent possible. There can be no assurance that FBR Asset can
obtain additional leverage, that margin calls will not be made, or that
44
<PAGE>
replacement financing will be available if lenders rescind their repurchase
agreements.
For the mortgage REITs in which FBR Asset has invested, the inversion of the
yield curve, coupled with the higher yields commanded by investors in CMBS, made
it less profitable or unprofitable to acquire and finance commercial mortgage
loan portfolios priced at a spread fixed to corresponding U.S. Treasury rates.
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 Asset is exposed to the following market risks.
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.
The table below illustrates the impact a ten percent increase and a ten 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 December 31, 1998.
<TABLE>
<CAPTION>
Value at Value at
December 31, December 31,
Value at 1998 with 10% 1998 with 10%
December 31, increase in Percent decrease in Percent
1998 price Change price Change
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Equity securities 70,983,050 78,081,355 10.00% 63,884,745 (10.00%)
Other 224,947,570 224,947,570 - 224,947,570 -
----------- ----------- -----------
Total Assets 295,930,620 303,028,925 2.40% 288,832,315 (2.40%)
=========== =========== ===========
Liabilities 145,026,041 145,026,041 - 145,026,041 -
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 (9,800,530) (2,702,225) 72.43% (16,898,835) (72.43%)
Retained earnings
(deficit) (9,425,579) (9,425,579) - (9,425,579) -
Treasury stock (24,070,663) (24,070,663) - (24,070,663) -
----------- ----------- -----------
Total Shareholders' Equity 150,904,579 158,002,884 4.70% 143,806,274 (4.70%)
Total Liabilities
and Shareholders' Equity 295,930,620 303,028,925 2.40% 288,832,315 (2.40%)
=========== =========== ===========
Book value per share $17.66 $18.49 4.70% $16.83 (4.70%)
</TABLE>
Interest Rate Risk
- ------------------
FBR Asset is subject to interest rate risk as a result of its investments in
mortgage securities and its financing with repurchase agreements, all of which
are interest rate sensitive financial instruments. FBR Asset is exposed to
45
<PAGE>
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, through BlackRock and its proprietary fixed income modeling and
analytical systems, evaluates the interest rate risk of its mortgage securities
portfolio on a continual basis by correlating changes in the value of the
portfolio to market movements during the previous three months. Using its
systems, BlackRock also measures:
o the effective convexity of the portfolio, which is a measure of the
sensitivity of the portfolio to parallel shifts in the yield curve;
o the optionality of the portfolio relative to callable bonds, which is a
measure of the effect of holding mortgages that can be prepaid; and
o the effective duration of the portfolio, which is a measure of the
percentage change in price of a pool that results from an increase in the
parallel interest rate.
BlackRock also analyzes the sensitivity of each mortgage pool to eleven
different key rate points on the interest rate curve from 30 days to 30 years.
The following table summarizes the impact that an interest rate increase equal
to one percent would have on the value of the mortgage securities held by FBR
Asset at December 31, 1998. This table presents value at risk, which represents
the largest amount that FBR Asset could lose in one month, with a 95%
probability, given recent behavior in interest rates and volatility. There is a
5% probability that FBR Asset's loss would be greater than the indicated value
at risk during one month out of a twenty-month period. Because of the short-term
nature of FBR Asset's repurchase obligations, FBR Asset has concluded that those
obligations would not significantly impact the analysis below.
<TABLE>
<CAPTION>
Value at
December 31, 1998 Percent of
Descriptive Title (in thousands) Value at Risk Value at Risk
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Freddie Mac FGOLD 15 yr. $ 75,019 $ 856.44 1.14%
Fannie Mae FNMA 15 yr. 21,887 250.45 1.14%
Freddie Mac FGOLD 15 yr. 4,304 20.08 0.47%
Freddie Mac FGOLD 30 yr. 3,952 36.10 0.91%
Fannie Mae 30 yr. 13,318 177.13 1.33%
Fannie Mae 30 yr. 13,151 130.26 0.99%
Ginnie Mae 30 yr. 16,294 77.59 0.48%
Freddie Mac FGOLD 15 yr. 10,004 223.84 2.24%
-------- ---------
Total $157,959 $1,771.89 1.12%
======== =========
</TABLE>
Results of Operations
FBR Asset's fiscal year commenced on January 1, 1998, and concluded on December
31, 1998. Operations from the date of inception, December 15, 1997 through
December 31, 1997, were not material.
46
<PAGE>
Net Income
Net income for the year ended December 31, 1998, was $1.6 million, or $0.16 per
share (basic and diluted). Income before realized losses was $10 million. FBR
Asset realized net losses of $8.4 million that were charged to income as the
result of two actions. First, FBR Asset determined that there had been a
permanent impairment to the value of its investment in Chastain and charged
earnings $6.6 million to reduce the carrying value to the market value of the
Chastain stock as of December 31, 1998. Second, FBR Asset sold mortgage-backed
securities in October, and in connection with the sale, repaid certain short
term repurchase agreements and terminated an interest rate swap agreement. The
swap agreement termination charge of $1.9 million was also charged to earnings.
FBR Asset's sole sources of income since inception have been quarterly dividend
earnings on its REIT holdings and interest earnings on its mortgage-backed
securities, notes receivable, and cash and cash equivalents.
In order to maintain its preferential tax status under the federal tax laws, a
REIT must distribute at least 95% of its taxable income. REITs generally make
distributions on a quarterly basis. Accordingly, FBR Asset declared and paid
dividends for the year equal to $1.16 per share. FBR Asset has received and
expects to continue receiving quarterly distributions from its equity
investments in other REITs, except for Chastain, which suspended its quarterly
dividend for the fourth quarter of 1998. However, depending on the nature of the
underlying business of each REIT investment, quarterly distributions and annual
taxable income may vary. As a result, dividend distributions for any one
quarterly or annual period may not be indicative of receipts for future
quarterly or annual periods. Dividend income for the year ended December 31,
1998, was $4.3 million.
FBR Asset's primary source of interest income to date has been its investments
in fixed-rate mortgage-backed securities. Interest income is recorded based on
contractual rates of interest and amortization of any premium or discount
associated with the original purchase. The amount of future contractual interest
income received may be adversely affected in the event of prepayments of the
underlying mortgage loans. Generally, as interest rates fall, prepayment rates
may increase significantly. Accordingly, FBR Asset's interest income for any
given period may not be indicative of that for future interim or annual periods.
FBR Asset began investing in mortgage-backed securities in the second quarter of
1998. Interest income, including interest earned on outstanding loans, for the
year ended December 31, 1998, was approximately $13.7 million.
For the year ended December 31, 1998, the estimated current average yield on FBR
Asset's mortgage securities was 6.19%. For that same period the estimated
average yield on cash and cash equivalents was approximately 5.39%.
Interest expense attributable to FBR Asset's repurchase and interest rate swap
agreements accounted for 67.3% of FBR Asset's total expenses for the year ended
December 31, 1998. FBR Asset did not begin to leverage its investment 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
47
<PAGE>
periods. FBR Asset has borrowed funds under repurchase agreements of which
$128.6 million was outstanding as of December 31, 1998. Accrued interest expense
on these agreements, including net amounts payable under interest rate swap
agreements, was $5.4 million. As of December 31, 1998, the weighted average
borrowing rate on amounts outstanding under repurchase agreements was 5.08%.
Management fees for the year ended December 31, 1998, were approximately $1.52
million. FBR Management receives a quarterly fee based on FBR Asset's average
invested assets. FBR Management has subcontracted with a mortgage portfolio
manager, BlackRock, to manage FBR Asset's mortgage portfolio. BlackRock receives
a fee based on the average gross asset value of FBR Asset's mortgage portfolio
(see Note 5 of Notes to Financial Statements). FBR Management is also entitled
to receive an annual incentive fee if Funds from Operations, as defined on page
22, exceed certain thresholds. Through December 31, 1998, FBR Asset's Funds from
Operations did not exceed the threshold amounts.
In connection with the organization of FBR Asset, FBR Asset granted FBR
Management ten-year options to acquire 1,021,900 shares of FBR Asset common
stock at a purchase price of $20 per share. The value of the options at the date
of grant ($909,492) is being amortized over the two years ending December 31,
1999. $454,746 was charged to income for the year ended December 31, 1998; the
remaining $454,746 will be charged to income in 1999.
Professional fees consist primarily of legal and accounting fees. Professional
fees were approximately $440,185 for the year ended December 31, 1998. The legal
fees are attributable to the costs associated with the acquisition of assets and
the private placement. Accounting fees are primarily attributable to the audits
related to this filing.
FBR Asset invested the net proceeds of its initial sale of privately placed
common stock over time rather than immediately after that sale. FBR Asset's
results of operations for the year ended December 31, 1998, would have been
different if FBR Asset had been fully invested at the beginning of that period.
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 year ended December 31, 1998. Information is based on daily average balances
during the period.
48
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Weighted
Average
Interest/Dividend Weighted Average Annual
Income Balance Yield
-------------------------------------------------
<S> <C> <C> <C>
Mortgage Securities Available for $ 7,101,326 $169,564,932 6.19%
sale (1)
Investment in equity securities 6,269,376 82,752,904 7.90%
(2), (3)
Cash and Cash Equivalents 4,556,800 84,496,947 5.39%
--------------------------------------------
Total (3) $17,927,502 $336,814,783 6.41%
============================================
</TABLE>
(1) Mortgage assets were held for 247 days.
(2) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital and Kennedy Wilson International. Such amounts are
included as interest income in FBR Asset's statements of income included in
its financial statements.
(3) FBR Asset accrues dividend income based on declared dividends for the
periods presented.
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.
Year ended December 31, 1998
Weighted
Interest Average Annualized
Expense Balance (1) Yield
------------------------------------------------
Repurchase agreements (2) $ 5,359,633 $ 144,793,891 5.82%
================================================
(1) At December 31, 1998, FBR Asset had $128,550,000 outstanding under
repurchase agreements, with a weighted-average remaining maturity of 73
days.
(2) Repurchase Agreements were entered into on May 13, 1998.
Dividends Declared and Distributions in Excess of Earnings
Since its organization, FBR Asset has declared dividends in the amount of $11.7
million ($1.21 per share) as reflected in Note 4 of Notes to Financial
Statements. These dividends covered FBR Asset's undistributed taxable income for
the period from December 17, 1997, through December 31, 1998. For federal income
tax purposes, $______ per share of dividends paid to date is expected to be
ordinary income to FBR Asset's stockholders and $_____ per share is expected to
be a return of capital for 1998.
Changes in Financial Condition
Securities Available for Sale
At December 31, 1998, an aggregate of $9.8 million of net unrealized losses on
mortgage-backed and equity securities classified as available for sale were
included as an accumulated other comprehensive income in
49
<PAGE>
stockholders' equity. See "Stockholders' Equity" elsewhere in "Management's
Discussion and Analysis" and Note 3 of Notes to Financial Statements for further
discussion.
At December 31, 1998, FBR Asset had mortgage assets equal to $161.4 million. All
of FBR Asset's mortgage-backed securities at December 31, 1998, were agency
pass-through securities that represent a 100% interest in the underlying
conforming mortgage loans. Conforming loans comply with the underwriting
requirements for purchase by Fannie Mae, Freddie Mac, and Ginnie Mae. These
securities bear little risk of credit loss due to defaults because they are
guaranteed by the agencies. Ginnie Mae is a wholly owned corporate
instrumentality of the U.S. Government within the U.S. Department of Housing and
Urban Development, and therefore, its guarantee is backed by the full faith and
credit of the U.S. Government. Fannie Mae and Freddie Mac are
government-sponsored agencies whose obligations are not backed by the full faith
and credit of the U.S. Government.
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
December 31, 1998, FBR Asset had on its balance sheet a total of $2.7 million of
unamortized premium representing the difference between the remaining principal
value and the current historical amortized cost of mortgage-backed securities
acquired.
Mortgage principal repayments received were $21.2 million for the year ended
December 31, 1998. 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 will be required to amortize its net
premium balance into income over a shorter time period. Similarly, if mortgage
principal repayment rates decrease over the life of the mortgage-backed
securities, all other factors being equal, FBR Asset's net interest income would
increase during the life of such mortgage-backed securities, as FBR Asset will
amortize its net premium balance over a longer time period.
Repurchase Agreements
On December 31, 1998, FBR Asset had $128.6 million outstanding under various
repurchase agreements with several financial institutions. To date, FBR Asset's
debt has consisted entirely 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
limits its borrowings, and thus its potential asset growth, in order to maintain
unused borrowing capacity, and thereby increase the liquidity and strength of
its balance sheet. At December 31, 1998, the ratio of indebtedness for borrowed
money to shareholders' equity was 0.85 to 1.
For the year ended December 31, 1998, the term to maturity of FBR Asset's
borrowings has been limited to 92 days with a weighted average remaining
maturity as of December 31, 1998, of 73 days and a weighted average cost of
funds on outstanding borrowings of 5.08%.
50
<PAGE>
Contractual Commitments
On May 28, 1998, FBR Asset entered into an interest rate swap agreement with,
Salomon Brothers Holding Company, Inc., a subsidiary of Salomon Smith Barney
Holdings Inc. Under the interest rate swap agreement, 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. 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 December 31, 1998, no collateral was required under the
interest rate swap agreement. At December 31, 1998, the interest rate payable to
FBR Asset by Salomon was 5.07%. Salomon Smith Barney Holdings, Inc. has a
long-term debt rating of "A" by S&P.
In October 1998, FBR Asset terminated an interest rate swap agreement with
Lehman Brothers. As a result of the termination, FBR Asset realized a loss of
$1.9 million that was recognized as a charge to income.
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, and/or principal payments
on mortgage-backed and equity securities, and proceeds from sales thereof. To
date, proceeds from the issuance of common stock and repurchase agreements have
provided FBR Asset funding for its investment needs. Potential future sources of
liquidity for FBR Asset include existing cash balances, unused borrowing
capacity, and future issuances of common or preferred stock. 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. 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 year ended December 31, 1998, FBR Asset's operating activities provided
net cash flows of $11.2 million. The primary source of operating flow was
interest on mortgage-backed securities and cash equivalents and dividends from
REIT investments. For the same period, FBR Asset's investing activities, which
were primarily purchases of mortgage-backed and equity investments, resulted in
net cash out flows totaling $232.3 million. FBR Asset's financing activities
resulted in net cash in-flows of $99.0 million during the year ended December
31, 1998. Cash flows from financing activities consisted primarily of net
proceeds from short-term repurchase agreements and proceeds from the issuance of
196,828 shares of common stock, offset partially by funds used to repurchase FBR
Asset's common stock and funds distributed to shareholders.
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.
51
<PAGE>
The value of the equity securities in FBR Asset's portfolio has declined from
$87.8 million as of the date the investments were made to $71 million as of
December 31, 1998. Declines have been recorded as accumulated other
comprehensive income in the statement of stockholders' equity, except that FBR
Asset has realized and charged to income a loss of $6.6 million on its
investment in Chastain. See Note 3 of Notes to Financial Statements.
Shareholders' Equity
FBR Asset accounts for its investments in mortgaged backed securities and other
equity instruments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS 115, 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.
Also in accordance with SFAS 115, management must evaluate multiple factors to
determine if declines in the market value of available for sale securities are
other than temporary. When such declines are deemed to be other than temporary,
FBR Asset 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, one charge was recorded related to FBR Asset's investment in
Chastain. There can be no assurances that other charges will not be required in
future periods.
As a result of the "mark-to-market" accounting treatment, the book value and
book value per share of FBR Asset are likely to fluctuate far more than if
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.
FBR Asset's Board of Directors has authorized a program to repurchase up to
2,000,000 shares of FBR Asset's common stock. Through December 31, 1998, FBR
Asset had repurchased 1,872,300 shares of its common stock pursuant to the
program at an average price of $12.86 per share.
Developments Since December 31, 1998
On January 14, 1999, FBR Asset repurchased 107,000 shares under its authorized
buyback program at $13.70 per share. As of February 12, 1999, there were
8,436,527 shares outstanding.
On January 25, 1999, FBR Asset loaned Brookdale Living Communities, Inc. $5
million in subordinated debt that is due and payable on April 26, 1999. The loan
bears interest at a rate 13% per annum. See "FBR & FBR Management -- Related
Party Transactions."
On February 5, 1998, FBR Asset made a secured loan to Prime Group Realty Trust
in the amount of $7 million. The loan is due and payable on August 5, 1998, and
bears interest at a rate of 15% per annum. See "FBR & FBR Management -- Related
Party Transaction's."
52
<PAGE>
Year 2000 Compliance
FBR Asset's software and information systems are Year 2000 compliant. However,
FBR Asset places significant reliance on the technologies of FBR Management and
BlackRock. FBR Asset's reliance on FBR Management primarily relates to
information technology systems, more specifically, the general ledger
applications and to a lesser extent the brokerage and trading information
systems, including related hardware. These information systems are commercially
provided, widely-used hardware and software. FBR Management, together with FBR,
has contacted external vendors in an effort to assess the systems' readiness for
the Year 2000. FBR Management and FBR have received vendor representations that
the systems are currently Year 2000 compliant or that the vendors are in the
process of testing results. 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 are also currently finalizing their contingency planning for
Year 2000 and have represented that those plans will be completed no later than
March of 1999, with an implementation target of June 1999. 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 $150,000.
FBR Asset also places significant reliance on certain 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 represented that it expects to complete upgrades to
Year 2000 compliant versions of all major systems reliant on third party
software and that to date, it has received acceptable responses regarding
compliance with or plans to address compliance from over ninety percent of its
business partners and service providers.
BlackRock is currently in the process of developing and finalizing contingency
plans related to this issue. BlackRock has represented that such plans are
expected to be completed by April of 1999 and fully implemented by the middle of
1999. BlackRock has estimated that the aggregate cost of its Year 2000
compliance efforts will not exceed $500,000.
FBR Asset is currently evaluating its contingency plan alternatives,
particularly with respect to its reliance on the information systems provided by
BlackRock and FBR Management. FBR Asset expects to complete such plans not later
than July of 1999.
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.
53
<PAGE>
FBR Asset's Directors & Officers
FBR Asset's principal executive offices are located in Arlington, Virginia, at
Potomac Tower, 1001 Nineteenth Street North. The phone number is (703) 469-1000.
The Board of Directors
Composition of the Board
FBR Asset's Board consists of five members. All directors are elected at each
annual meeting of FBR Asset's shareholders for a term of one year. Directors
hold office until their successors are elected and qualified. Two of FBR Asset's
five directors are independent directors. The remaining three directors are
Affiliates of FBR Management.
An "independent director" is a person who has not, in the past two years:
o owned a material interest in FBR Management or any of its Affiliates;
o been employed by FBR Management or any of its Affiliates;
o been an officer or director of FBR Management or any of its Affiliates; or
o performed any material services for FBR Management or any of its
Affiliates.
For purposes of determining who may be classified as an independent director:
o FBR Asset is not considered an Affiliate of FBR Management;
o an "interest" is deemed material if it:
o exceeds 5% of a person's outstanding voting securities, or
o 5% of a person's net worth on a fair market value basis; and
o "services" are deemed material if the gross revenue derived from them
exceeds 5% of a person's:
o annual gross revenue from all sources in either of the past two years;
or
o net worth on a fair market value basis.
No person will be disqualified from serving as an independent director solely
because (a) that person maintains a discretionary brokerage account with FBR
Management or its Affiliates or (b) FBR Management or the Affiliates perform
other services for such person, whether material or not.
An "Affiliate" of FBR Management is any person, including a corporation or other
entity, that:
o FBR Management directly or indirectly controls;
o directly or indirectly controls FBR Management;
o is under common control with FBR Management;
54
<PAGE>
o is an officer of, partner in, or director of FBR Management, or serves in a
similar capacity with respect to FBR Management; or
o directly or indirectly, beneficially owns, controls or holds, with the
power to vote, more than 10% of any class of FBR Management's equity
securities.
Affiliates of FBR Management also include those persons, including corporations
and other entities:
o for which FBR Management serves as an officer, partner, or director, or
serves in some similar capacity; or
o of which FBR Management beneficially owns, controls or holds, with the
power to vote, directly or indirectly, more than 10% of a class of that
person's equity securities.
FBR Asset's Charter requires that, except in the case of a vacancy, at least 30%
of the members of the Board of Directors will be independent directors. With a
view toward protecting the interests of FBR Asset's shareholders in transactions
involving conflicts with FBR Management, a majority of the independent directors
must approve:
o any transaction in which FBR Asset seeks to acquire securities that are
being underwritten or placed by FBR; and
o any transaction involving FBR Asset in which FBR has a material financial
interest, including but not limited to, any decisions concerning the
termination or renewal of the Management Agreement.
In making their decisions, the independent directors will consider information
provided by FBR Management and such other information as they deem appropriate
to determine whether such transactions will be in FBR Asset's best interests.
The independent directors will not otherwise participate in FBR Asset's daily
operations and will have no ability to cause the company to take action or
refrain from taking action against the wishes of the inside directors. The
independent directors will, however, review transactions engaged in by FBR Asset
on a quarterly basis and will review FBR Asset's investment policies annually.
Investors should be aware that, in conducting these reviews, the independent
directors will rely primarily on information provided to them by FBR Management.
Executive Committee
The executive committee consists of Messrs. Friedman, Billings, and Ramsey. Mr.
Billings serves as the chairman of the executive committee. When the Board is
not in session, the executive committee exercises all of the Board's authority,
provided, however, that unless otherwise authorized by FBR Asset's Bylaws, the
executive committee does not have the authority to elect directors, declare
dividends or distributions on stock, recommend to shareholders any action that
requires shareholder approval, amend or repeal FBR Asset's Bylaws, approve any
merger or share exchange that does not require shareholder approval, authorize
the issuance of stock, or approve transactions that require the approval of the
independent directors.
55
<PAGE>
Audit Committee
The audit committee consists solely of FBR Asset's independent directors,
Messrs. Harlan and Hayes. The audit committee meets with management to consider
the adequacy of the internal controls and the objectivity of financial
reporting. The audit committee also meets with the independent auditors and with
appropriate financial personnel of FBR Asset regarding these matters. The audit
committee recommends to the Board the appointment of independent auditors,
subject to ratification by the shareholders at the annual meeting. The
independent auditors periodically meet alone with the audit committee and have
unrestricted access to the audit committee.
Contracts Committee
The contracts committee consists solely of FBR Asset's independent directors,
Messrs. Harlan and Hayes. The contracts committee assists the Board in reviewing
any contract that FBR Asset may propose to enter into with FBR Management or its
Affiliates, including without limitation, the Management Agreement, and monitors
on an ongoing basis the performance of FBR Management or any of its Affiliates
pursuant to any such contract.
Nominating Committee
The nominating committee consists solely of FBR Asset's independent directors,
Messrs. Harlan and Hayes. The nominating committee assists the Board in
establishing processes for director nominations, including the criteria for
selecting nominees, and identifies and recommends nominees for election to the
Board.
The Directors
FBR Asset's directors are as follows:
The Independent Directors
Name Age Position(s) Held
---- --- ----------------
Stephen D. Harlan 65 Director
Webb Hayes 50 Director
Directors Affiliated with FBR Management
Name Age Position(s) Held
---- --- ----------------
Emanuel J. Friedman 52 Chairman of the Board
Eric F. Billings 46 Vice Chairman & Chief
Executive Officer
W. Russell Ramsey 38 President & Secretary
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Stephen D. Harlan is Chairman of H.G. Smithy Company, a specialized real estate
firm that provides mortgage banking, finance, investment, advisory, and property
management services to commercial real estate investors. Before joining H.G.
Smithy in 1993, Mr. Harlan was Vice Chairman of KPMG Peat Marwick, where he also
served on KPMG's International Council, Board of Directors, and Management
Committee. In June 1995, President Clinton appointed Mr. Harlan to the District
of Columbia Financial Responsibility and Management Assistance Authority, for
which he previously served as Vice Chairman. Mr. Harlan chairs the Finance
Committee, and is a member of the Board of Directors of MedStar Health, Inc. He
(i) serves on the Board of Directors of the Mary and Daniel Loughran Foundation,
Inc., (ii) is a member of the Senior Council of the Greater Washington Board of
Trade, (iii) is a Trustee and member of the Executive Committee of the Carnegie
Endowment for International Peace, and (iv) is the Chairman of the Board of the
Counsel for Court Excellence.
Webb Hayes is a Director and Vice Chairman of United Bank of Virginia, a
subsidiary of United Bankshares. Mr. Hayes was Executive Vice President of
George Mason Bankshares, Inc., and President and CEO of George Mason Bank, N.A.
until its merger with United Bankshares in 1998. Previously, Mr. Hayes was
Chairman and CEO of Palmer National Bankcorp. and Palmer National Bank until its
merger with George Mason Bankshares in 1996. Mr. Hayes serves as a Director of
CERBCO, Inc., and Insituform East, Inc., both public companies headquartered in
Landover, Maryland. He also serves on the Executive Committee of the American
Bankers Association Government Relations Council and served as a Director of the
Federal Reserve Bank of Richmond from 1991-1995. Mr. Hayes received a B.A. from
the University of North Carolina and an executive management degree from
Columbia University School of Business.
Emanuel J. Friedman is Chairman and Chief Executive Officer of FBR Group. He has
continuously served as Chairman and Chief Executive Officer of FBR Group since
co-founding FBR in 1989. As of December 31, 1998, Mr. Friedman owned 21.4% of
the outstanding common stock of FBR Group. Mr. Friedman is involved in FBR
investment banking, research, brokerage, and asset management activities. He
also manages private investment funds sponsored by FBR Management. Mr. Friedman
founded the Friedman, Billings, Ramsey Foundation, a charitable foundation, in
1993 and currently serves as one of its directors. Mr. Friedman entered the
securities industry in 1973, when he joined Legg Mason Wood Walker & Co., Inc.,
and from 1985 until 1989, he was Senior Vice President in the institutional
sales group at Johnston, Lemon & Co., Incorporated, a Washington, DC brokerage
firm.
Eric F. Billings is Vice Chairman and Chief Operating Officer of FBR Group. He
has continuously served as Vice Chairman and Chief Operating Officer of FBR
Group since co-founding FBR in 1989. As of December 31, 1998, Mr. Billings owned
17.7% of the outstanding common stock of FBR Group. Mr. Billings is involved in
FBR's investment banking, research, brokerage, and asset management activities.
He also manages private investment funds sponsored by FBR Management and is a
director and executive officer of The FBR Family of Funds. Mr. Billings entered
the securities industry in 1982, when he joined Legg Mason Wood Walker & Co.,
Inc., and from 1984 until 1989, he was Senior Vice President in the
institutional sales group at Johnston, Lemon & Co., Incorporated, a Washington,
DC brokerage firm. Mr. Billings is also a director of The FBR Family of Funds.
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W. Russell Ramsey is President of FBR Group. He has continuously served as
President of FBR Group and their predecessors since co-founding FBR in 1989. As
of December 31, 1998, Mr. Ramsey owned 11.9% of the outstanding common stock of
FBR Group. Mr. Ramsey is involved in FBR investment banking, research,
brokerage, and asset management activities. Before co-founding FBR, Mr. Ramsey
served as Vice President in the institutional sales group at Johnston, Lemon &
Co., Incorporated, a Washington, DC brokerage firm. Mr. Ramsey is a director of
Building One Services Corporation.
Executive Officers Who Are Not Directors
All of FBR Asset's executive officers are Affiliates of FBR Management. All
officers serve at the discretion of FBR Asset's Board of Directors.
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
William R. Swanson 50 Executive Vice President & Chief Operating Officer
Elaine M. Clancy 33 Senior Vice President & Chief Financial Officer
George Abraham 34 Senior Vice President
Robert Smith 39 Senior Vice President & General Counsel
Kurt R. Harrington 46 Treasurer
John M. Blassingame, Jr. 35 Controller
</TABLE>
William R. Swanson is a Managing Director of FBR & Co.'s real estate investment
banking group. Mr. Swanson joined FBR Group in February, 1994. Before that, Mr.
Swanson served as president of H.G. Smithy Company, Inc., a specialized real
estate firm that provides mortgage banking, finance, investment, advisory, and
property management services to commercial real estate investors. Before working
at H.G. Smithy, Mr. Swanson served as a managing director at LaSalle Partners,
Ltd. While with LaSalle Partners, Mr. Swanson managed and directed the firm's
acquisition and development activities for the southeastern region of the United
States. Mr. Swanson received a Bachelor of Science in accounting from the
University of Illinois at Urbana-Champaign and is a Certified Public Accountant.
Mr. Swanson is a director of Capital Automotive REIT.
Elaine M. Clancy is a Senior Vice President of FBR & Co.'s real estate
investment banking group. Ms. Clancy joined FBR in 1994. Prior to joining FBR &
Co., Ms. Clancy was a Manager of Finance for Combined Properties, Inc., a real
estate firm in Washington, DC, which owns shopping centers. Before Combined
Properties, Ms. Clancy was a financial analyst with La Salle Partners. Ms.
Clancy received a Masters in Management from the J.L. Kellogg Graduate School of
Management at Northwestern University and a Bachelor of Business Administration
from James Madison University.
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George Abraham is a Managing Director of FBR Management. Mr. Abraham is
responsible for marketing, administration, and investor relations for several of
FBR Management's private investment partnerships. He joined FBR at its inception
in 1989 and has been involved in its investment management business since 1992.
Mr. Abraham received his Masters of Business Administration in Marketing from
Southeastern University and a Bachelor of Engineering from B.I.E.T. in India.
Robert S. Smith is Executive Vice President and General Counsel of FBR Group and
FBR Management. Before joining FBR in January 1997, Mr. Smith was a partner in
the law firm of McGuire, Woods, Battle & Boothe, LLP, where he had been in
practice since 1986, and represented FBR from its inception in 1989. Mr. Smith
formerly practiced as a lawyer in the United Kingdom from 1982-1985. Mr. Smith
received his Masters in Law from the University of Virginia and his diploma in
legal practice and a Bachelor of Laws from the University of Edinburgh.
Kurt R. Harrington joined FBR Group in March 1997, as Vice President,
Finance/Treasurer. From September 1996 to March 1997, Mr. Harrington was a
consultant to the venture capital industry. For the five years before then, Mr.
Harrington was Chief Financial Officer of Jupiter National, Inc., a
publicly-traded venture capital company, and in that capacity, served as a
director of a number of companies, including Viasoft, Inc., a publicly-held
software company from January 1994 to October 1995. Mr. Harrington is a
Certified Public Accountant.
John M. Blassingame, Jr., joined FBR Group in February 1998, as a Senior
Accountant. From 1993 to 1998, Mr. Blassingame was a Senior Accountant at
Capital Real Estate Investment where he supervised a REIT portfolio consisting
of approximately 5,000 apartment units, with approximately $50 million in yearly
gross revenues. From 1988 to 1993, Mr. Blassingame was a Senior Public Fund
Accountant at Oxford Realty Services Corp., where he supervised the SEC filings
for Oxford Residential Properties. Mr. Blassingame received a Bachelor of
Business Administration in Accounting from The University of the District of
Columbia.
Time Required of Directors & Executive Officers
FBR Asset requires its directors and executive officers to devote only so much
of their time to FBR Asset's affairs as is necessary or required for the
effective conduct and operation of FBR Asset's business. Because FBR Management
assumes principal responsibility for managing FBR Asset's affairs, FBR Asset
does not expect its officers, in their capacities as officers, to devote
substantial portions of their time to FBR Asset. However, in their capacities as
officers or employees of FBR Management or its Affiliates, they will devote such
portion of their time to FBR Asset's affairs as is required to perform FBR
Management's duties under the Management Agreement.
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Executive Compensation & Other Benefits
Directors' Fees
Each independent director receives an annual director's fee of $20,000. After
the Board's first four meetings, each independent director will receive $1,000
for each additional Board meeting that he personally attends. Directors who are
Affiliates of FBR Management will not receive separate compensation from FBR
Asset. FBR Asset will, however, reimburse all directors, including affiliated
directors, for the costs and expenses of attending all Board meetings.
Salaries
FBR Asset has not paid, and does not expect to pay, any cash compensation to
those executive officers who are also executive officers or employees of FBR
Management or any of its Affiliates. That policy may change, however, if at any
time, FBR Management ceases to conduct FBR Asset's day-to-day operations.
Indemnification
FBR Asset's Charter requires FBR Asset to indemnify its directors and officers
to the fullest extent permitted by Maryland law. FBR Asset also may indemnify
its employees and agents, to whatever extent authorized by the directors. If a
director, officer, employee or agent becomes a party to a proceeding because of
his or her position in FBR Asset, Maryland law permits the company to indemnify
that person against judgments, penalties, settlements and reasonable expenses
incurred in connection with that proceeding. However, FBR Asset may not
indemnify the person if:
o the person acted or failed to act in a material matter that led to the
proceeding, and the action or failure to act was in bad faith or the result
of active and deliberate dishonesty;
o the person received an improper personal benefit in money, property or
services; or
o in the case of criminal proceedings, the person had reasonable cause to
believe that the act or failure to act was criminal.
The SEC has expressed the opinion that public policy would prevent FBR Asset
from indemnifying its directors, officers, or any persons controlling FBR Asset
from liability under the Securities Act of 1933.
FBR Asset's Charter also limits, to the fullest extent permitted by Maryland
law, any director's or officer's personal liability for money damages. Under
current Maryland law, this means that a director or officer would owe money
damages only:
o if he or she actually received an improper personal benefit; or
o if a final decision is made that he or she acted in an active and
deliberately dishonest manner.
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Stock Options
FBR Asset has adopted a stock option plan that provides for the grant of both
tax-qualified incentive stock options and non-qualified incentive stock options.
FBR Asset's Board, or a committee appointed by the Board, administers the stock
incentive plan, which is designed to promote the success and enhance the value
of FBR Asset by linking the interests of those who provide services to FBR Asset
with the interests of FBR Asset's shareholders, and by providing those persons
with an incentive for outstanding performance. The stock incentive plan is
further intended to provide flexibility to FBR Asset in its ability to motivate,
attract and retain persons upon whose judgment, interest, and special efforts
FBR Asset's successful operation is largely dependent.
Officers, employees, and directors of FBR Asset and FBR, as well as other
persons who provide services to FBR Asset are eligible to participate in the
stock incentive plan. The Board determines which officers, employees, and
service providers will participate in the plan and sets the terms of these
persons' awards.
The stock incentive plan provides that the total number of shares of common
stock available for issuance under the plan may not exceed 155,000 shares. The
terms of options granted under the stock incentive plan may not exceed 10 years.
Unless otherwise determined by the Board, options will generally vest ratably on
each of the first five anniversaries after the grant date. Unless otherwise
determined by the Board, options will have a fair market value exercise price,
which in any event may not be less than $20. A participant exercising an option
may pay the exercise price in full in cash, or, if approved by the Board, with
previously acquired shares of common stock or a combination thereof. The Board,
in its discretion, may allow cashless exercises of options.
FBR Asset's Board may at any time terminate, amend, or modify the stock
incentive plan; provided that no termination, amendment, or modification may
impair the rights of award holders, and no amendment may be made without
shareholders' approval to the extent such approval is required by law or stock
exchange rules.
On February __, 1999, FBR Asset's Board granted options to acquire an aggregate
of 155,000 shares of the company's common stock to persons it deemed to be key
personnel. Information about the grants is set forth in the following table:
<TABLE>
<CAPTION>
Percent of Present
Number Total Options Value Of
of Shares Granted To Exercise Grant At
Underlying Individuals of Base Expiration Date of
Name Option In Fiscal Year price Date Grant
---- ------ -------------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Stephen D. Harlan 15,000
Webb Hayes 15,000
William R. Swanson 100,000
Elaine M. Clancy 25,000
</TABLE>
Related Party Transactions
FBR Asset has made investments in companies with which FBR has a relationship.
See "FBR & FBR Management--Related Party Transactions."
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<PAGE>
FBR Asset's Capital Stock
The following summary of the terms of FBR Asset's capital stock does not purport
to be complete, and you should not rely on it as if it were. We have filed
complete copies of FBR Asset's Charter and Bylaws with the SEC as exhibits to
our registration statement and are incorporating the full text of those
documents by reference. You may obtain complete copies of the Charter and Bylaws
by following the document request procedures set forth in the "Additional
Information" section. We encourage you to read each of those documents in its
entirety.
General
FBR Asset's Charter provides that FBR Asset may issue up to 250,000,000 shares
of capital stock, consisting of 200,000,000 shares of common stock, $.01 par
value per share, and 50,000,000 shares of preferred stock, $.01 par value per
share. No preferred stock is issued or outstanding.
Common Stock
All of FBR Asset's outstanding common shares are duly authorized, fully paid,
and nonassessable. Subject to the preferential rights of any other shares or
series of shares of capital stock, FBR Asset's common shareholders are entitled
(a) to receive dividends if and when authorized and declared by the Board out of
assets legally available therefor and (b) to share ratably in the assets legally
available for distribution to shareholders in the event of liquidation,
dissolution, winding-up, after payment of, or adequate provision for, all known
debts and liabilities of the company.
The holders of FBR Asset's common stock are entitled to one vote for each share
on all matters submitted to a vote of common shareholders. FBR Asset does not
permit cumulative voting, and accordingly, the holders of a majority of the
company's outstanding shares have the power to elect all directors to be elected
in any given year.
Preferred Stock
FBR Asset may issue preferred stock, in one or more series, as authorized by the
Board. Because the Board has the power to establish the preferences and rights
of any class or series of preferred stock, it may afford the holders of such
stock preferences, powers and rights, voting or otherwise, senior to the rights
of common shareholders. The Board can also authorize the issuance of preferred
stock with terms and conditions that would have the effect of discouraging
takeovers or other transactions that holders of some, or even a majority, of
common shares might believe to be in their best interests or in which holders of
some, or a majority, of common shares might receive a premium for their shares
over the then prevailing market price. FBR Asset has no preferred stock
outstanding and no plans to issue any.
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Restrictions on Ownership and Transfer
For FBR Asset to qualify as a REIT under the federal tax laws, it must meet two
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, no more than 50% in value of FBR Asset's outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
during the last half of a calendar year. Individuals include natural persons,
private foundations, some employee benefit plans and trusts, and some charitable
trusts. In addition, FBR Asset must have at least 100 beneficial owners of its
shares of stock during at least 335 days of a taxable year of 12 months or
during a proportionate part of a shorter taxable year. See "Federal Income Tax
Consequences of FBR Asset's Status as a REIT--Requirements for Qualification."
To ensure that FBR Asset meets those stock ownership requirements, subject to
the exemptions described below, FBR Asset's Charter restricts the ownership and
transfer of FBR Asset's outstanding stock. Specifically, the Charter prohibits
any person from owning, or being deemed to own by virtue of the attribution
provisions of the federal tax laws, more than 9.9% of the number of outstanding
shares of common stock or the number of outstanding shares of preferred stock of
any series. However, FBR may own up to 20% of the outstanding common stock and
the preferred stock of any series, and certain mutual funds and pension trusts
may own up to 15% of the outstanding common stock and the preferred stock of any
series. FBR Asset's Board of Directors has exempted FBR from the 20% limit
applicable to FBR. The exemption allows FBR to own up to 30% of the common
stock.
In order to prevent FBR Asset from incurring an entity-level tax if and when it
accrues phantom taxable income from REMIC residual interests, FBR Asset's
Charter, subject to the exemptions described below, also contains provisions
designed to prevent a "Disqualified Organization," as defined in "Federal Income
Tax Consequences of FBR Asset's Status as a REIT--Taxation of FBR Asset," from
owning FBR Asset's shares.
Subject to the exemptions described below, shares of common stock or preferred
stock the purported transfer of which would:
o result in any person owning, directly or indirectly, common stock or
preferred stock in excess of the limits described above;
o result in FBR Asset's capital stock being beneficially owned by fewer than
100 persons, determined without reference to any rules of attribution;
o result in FBR Asset being "closely held" within the meaning of the federal
tax laws;
o cause FBR Asset to own, actually or constructively, 10% or more of the
ownership interests in a tenant of its real property, within the meaning of
the federal tax laws; or
o cause any common stock or preferred stock to be owned by a "Disqualified
Organization," as defined in "Federal Income Tax Consequences of FBR
Asset's Status as a REIT--Taxation of FBR Asset;"
will be designated as "Shares-in-Trust" and transferred automatically to a trust
effective on the day before the purported transfer of such common stock or
preferred stock.
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The record holder of the shares of common stock or preferred stock that are
designated as Shares-in-Trust (the "Prohibited Owner") will be required to
submit such number of shares of common stock or preferred stock to FBR Asset for
registration in the name of the trust. FBR Asset will designate a trustee of the
trust that is not affiliated with FBR Asset. The beneficiary of the trust will
be one or more charitable organizations that are named by FBR Asset.
Shares-in-Trust will remain issued and outstanding shares and will be entitled
to the same rights and privileges as all other shares of the same class or
series. The trustee will receive all dividends and distributions on the
Shares-in-Trust and will hold such dividends or distributions in trust for the
benefit of the beneficiary. The trustee will vote all Shares-in-Trust. The
trustee will designate a permitted transferee of the Shares-in-Trust, provided
that the permitted transferee purchases the Shares-in-Trust for valuable
consideration and acquires the Shares-in-Trust without the acquisition resulting
in a transfer to another trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to repay
to the trustee the amount of any dividends or distributions received by the
Prohibited Owner (1) that are attributable to any Shares-in-Trust and (2) the
record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the trustee
the lesser of (a) the price per share the Prohibited Owner paid for the shares
that were designated as Shares-in-Trust, or in the case of a gift or devise, the
Market Price (as defined below) per share on the date of such transfer, or (b)
the price per share received by the trustee from the sale of the
Shares-in-Trust. Any amounts received by the trustee in excess of the amounts to
be paid to the Prohibited Owner will be distributed to the beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to FBR Asset,
or its designee, at a price per share equal to the lesser of (a) the price per
share in the transaction that created the Shares-in-Trust, or in the case of a
gift or devise, the Market Price per share on the date of the transfer, or (b)
the Market Price per share on the date that FBR Asset, or its designee, accepts
the offer. FBR Asset will have the right to accept the offer for a period of
ninety days after the later of (1) the date of the purported transfer that
resulted in the Shares-in-Trust or (2) the date FBR Asset determines in good
faith that a transfer resulting in the Shares-in-Trust occurred.
The "Market Price" on any date means the average of the "closing price" of FBR
Asset's stock for the five previous consecutive trading days ending on such
date. The "closing price" on any date means:
o the last sale price for the stock, as reported on the New York Stock
Exchange, NASDAQ, or other principal national securities exchange on which
the stock is listed; or
o if no sale takes place on the day, the average of the closing bid and asked
prices for the stock, as reported on the New York Stock Exchange, NASDAQ,
or other principal national securities exchange on which the stock is
listed; or
o if the stock is not listed on any exchange, the average of the closing bid
and asked prices as furnished by a professional market maker making a
market in FBR Asset's stock selected by FBR Asset's Board of Directors; or
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<PAGE>
o in the event that no trading price is available for the stock, the fair
market value of the stock, as determined in good faith by FBR Asset's Board
of Directors.
Any person who acquires or attempts to acquire common stock or preferred stock
in violation of the restrictions set forth in FBR Asset's Charter, or any person
who owned common stock or preferred stock that was transferred to a trust, will
be required (1) to give immediately written notice to FBR Asset of such event
and (2) to provide to FBR Asset such other information as it may request in
order to determine the effect, if any, of the transfer on FBR Asset's status as
a REIT.
The ownership limits generally will not apply to the acquisition of common stock
or preferred stock by an underwriter that participates in a public offering of
such shares. In addition, FBR Asset's Board of Directors, upon receipt of a
ruling from the IRS or an opinion of counsel that FBR Asset will not jeopardize
its REIT status by granting the exemption and upon such other conditions as the
Board of Directors may direct, may exempt a person from the ownership
limitations or the restrictions on transfer set forth in the Charter. As
discussed above, FBR Asset's Board of Directors has exempted FBR from the 20%
ownership limit applicable to FBR.
The foregoing restrictions will not be removed until:
o the restrictions are no longer required in order to qualify as a REIT, and
the Board of Directors determines that it is no longer in the best
interests of FBR Asset to retain the restrictions; or
o the Board of Directors determines that it is no longer in the best
interests of FBR Asset to attempt to qualify, or to continue to qualify, as
a REIT, and there is an affirmative vote of 80% of the members of the Board
of Directors, or in the absence of such 80% vote, there is an affirmative
vote of at least two-thirds of the holders of FBR Asset's outstanding
shares of common stock.
All certificates representing FBR Asset's common or preferred stock will bear a
legend referring to the restrictions described above.
All persons who own, directly or indirectly, more than 5%, or such lower
percentages as required pursuant to the federal tax laws, of FBR Asset's
outstanding common stock and preferred stock must, within 30 days after January
1 of each year, provide to FBR Asset a written statement or affidavit stating
the name and address of such direct or indirect owner, the number of shares
owned directly or indirectly, and a description of how the shares are held. In
addition, each direct or indirect shareholder shall provide to FBR Asset such
additional information as FBR Asset may request in order to determine the
effect, if any, of such ownership on FBR Asset's status as a REIT and to ensure
compliance with the restrictions on ownership and transfer set forth in FBR
Asset's Charter.
Transfer Agent & Registrar
American Stock Transfer & Trust Company serves as the transfer agent and
registrar for FBR Asset's common stock.
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<PAGE>
Reports to Shareholders
FBR Asset furnishes its shareholders with annual reports containing audited
financial statements certified by independent public accountants and such other
periodic reports as it determines to furnish or as is required by law.
FBR Asset's Charter and Bylaws
Notice of Shareholder Proposals
FBR Asset's Bylaws govern shareholder proposals. To advance a proposal, a
shareholder must give written notice of the proposal to the company's Secretary.
The Secretary must receive the notice at least 90 days before the annual
meeting. The notice must:
o describe briefly the proposal with supporting reasoning,
o contain the shareholder's name and address,
o state the number of each class of shares the shareholder beneficially owns,
and
o disclose any material interest the shareholder has in the proposed
business.
Charter Amendments
FBR Asset's Charter provides that a majority of outstanding shares of common
stock must approve an amendment to the Charter. However, as discussed in
previous sections, the voting requirements are greater for amending those
provisions addressing the number and composition of the Board of Directors and
the restrictions pertaining to stock ownership and transfer.
Amendments to Bylaws
Except as set forth below, FBR Asset's Bylaws may be amended by majority vote of
FBR Asset's Board or its shareholders. The provisions addressing:
o the number, tenure and qualifications of directors,
o changes in the numbers of directors,
o the removal of directors,
o the quorum requirement for director votes, and
o the majority approval for certain transactions involving FBR Management
require the vote of 80% of the Board of Directors, or two-thirds of the
outstanding shares.
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Anti-Takeover Effect of Maryland Laws
Maryland Business Combination Statute
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
shareholders" unless exemptions are applicable. An interested shareholder is any
person who beneficially owns ten percent or more of the voting power of a
company's then-outstanding voting stock. Among other things, the law prohibits
for a period of five years a merger and other similar transactions between FBR
Asset and an interested shareholder unless the Board of Directors approved the
transaction prior to the party becoming an interested shareholder. The five year
period runs from the most recent date on which the interested shareholder became
an interested shareholder. The law also requires a super-majority shareholder
vote for such transactions after the end of the five year period. This means
that the transaction must be approved by at least:
o 80% of the votes entitled to be cast by holders of outstanding voting
shares, and
o 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested shareholder with whom the
business combination is to be effected.
The business combination statute could have the effect of discouraging offers to
acquire FBR Asset and of increasing the difficulty of consummating any such
offers, even if the acquisition would be in FBR Asset's shareholders' best
interests.
Maryland Control Share Acquisition Statute
Maryland law provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a shareholder vote. Two-thirds of the shares eligible to vote must
vote in favor of granting the "control shares" voting rights. "Control shares"
are shares of stock that, taken together with all other shares of stock the
acquiror previously acquired, would entitle the acquiror to exercise at least
20% of the voting power in electing directors. Control shares do not include
shares of stock the acquiring person is entitled to vote as a result of having
previously obtained shareholder approval. A "control share acquisition" means
the acquisition of control shares, subject to certain exceptions.
If a person who has made, or proposes to make, a control share acquisition
satisfies certain conditions, including agreeing to pay expenses, he may compel
the Board of Directors to call a special meeting of shareholders to be held
within 50 days to consider the voting rights of the shares. If such a person
makes no request for a meeting, we have the option to present the question at
any shareholders' meeting.
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If voting rights are not approved at a meeting of shareholders, then FBR Asset
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value. FBR Asset will determine
the fair value of the shares, without regard to voting rights, as of the date of
either:
o the last control share acquisition, or
o any meeting where shareholders considered and did not approve voting rights
of the control shares.
If voting rights for control shares are approved at a shareholders' meeting and
the acquiror becomes entitled to vote a majority of the shares of stock entitled
to vote, all other shareholders may exercise appraisal rights. This means that
you would be able to redeem your stock back to the company for fair value. Under
Maryland law, the fair value may not be less than the highest price per share
paid in the control share acquisition. Furthermore, certain limitations
otherwise applicable to the exercise of dissenters' rights would not apply in
the context of a control share acquisition.
The control share acquisition statute would not apply to shares acquired in a
merger, consolidation or share exchange if FBR Asset were a party to the
transaction.
The control share acquisition statute could have the effect of discouraging
offers to acquire FBR Asset and of increasing the difficulty of consummating any
such offers, even if the acquisition would be in FBR Asset's shareholders' best
interests.
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Common Stock Available For Future Sale
At December 31, 1998, FBR Asset had outstanding 9,065,427 shares of common
stock, including 521,900 shares reserved for issuance upon exercise of
outstanding options. Of the outstanding shares, _________ shares of common stock
sold in this offering, will be freely tradable without restriction or further
registration under the federal securities laws, unless the shares are purchased
by "affiliates" of the company as that term is defined in Rule 144 under the
Securities Act of 1933. The remaining _________ shares have not been registered
with the SEC; accordingly, they cannot be sold except as permitted by Rule 144.
In general, under Rule 144, a person who beneficially owned shares for at least
one year may sell within any three-month period a number of shares that does not
exceed 1% of the shares of FBR Asset's common stock outstanding shares or the
average weekly trading volume in common stock during the four weeks preceding
the date on which notice of the sale is filed with the SEC. A person who is not
an affiliate of FBR Asset at any time during the three months before a sale and
who has beneficially owned shares for at least two years would be entitled to
sell such shares under Rule 144, without regard to the volume limitation
described above.
FBR Asset may issue additional shares at any time without shareholder consent.
No prediction can be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the market price
prevailing from time to time. Sales of substantial amounts of common stock, or
the perception that such sales could occur, may adversely affect prevailing
market prices of the common stock.
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Principal Shareholders
The following table sets forth some information as of February 12, 1999,
relating to the beneficial ownership of FBR Asset's common stock by (a) all
persons known by FBR Asset to beneficially own more than 5% of the company's
outstanding shares, (b) each director and named executive officer of FBR Asset,
and (c) all directors and executive officers of FBR Asset as a group:
Principal Shareholders
Shares Beneficially Owned
Name and Address of --------------------------
Beneficial Owner Number Percent(3)
---------------- ------ ---------
Friedman Billings, Ramsey Group, Inc.(1)
1001 Nineteenth Street North 2,159,891(2) 22.84%
Arlington, VA 22209
Boston Partners Asset Management
One Financial Center
43rd Floor 830,200 8.78%
Boston, MA 02111
Franklin Mutual
51 John F. Kennedy Parkway
Short Hills, NJ 07078 750,000 7.93%
Keefe Managers
375 Park Avenue
New York, NY 10021 725,500 7.67%
Oppenheimer Funds
Two World Trade Center
New York, NY 10048 540,000 5.71%
Angelo Gordon
245 Park Avenue, 26th Floor
New York, NY 10167 525,000 5.55%
Loews Corp.
667 Madison Avenue
New York, NY 10021 500,000 5.29%
Management Shareholders
Stephen D. Harlan 15,000(2) (4)
Webb Hayes 15,000(2) (4)
Emanuel J. Friedman 0(6) 0%
Eric F. Billings 139,700(5)(6) 1.48%
W. Russell Ramsey 0(6) 0%
William R. Swanson 160,000(2) 1.69%
Elaine M. Clancy 27,500(2) (4)
George Abraham 1,250 (4)
Robert Smith 1,000 (4)
Kurt R. Harrington 750 (4)
John M. Blassingame 0 0%
All directors and officers of FBR Asset
------- ----
360,200 3.81%
======= ====
(1) Held through wholly-owned subsidiaries.
(2) Includes shares as to which options are held.
(3) Assumes exercise of all options.
(4) Less than 1%.
(5) Includes 92,8000 shares held by FBR Weston, LP, as to which Mr. Billings
may be deemed to have shared voting and dispositive power. Mr. Billings
disclaims beneficial ownership of all shares held by Weston in excess of
his pecuniary interest.
(6) Does not include shares identified above for Friedman, Billings, Ramsey,
Group, Inc., of which Messrs. Friedman, Billings, and Ramsey are principal
shareholders.
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Federal Income Tax Consequences of FBR Asset's Status as a REIT
This section summarizes the federal income tax issues that you, as a
shareholder, may consider relevant. Hunton & Williams, our counsel, has reviewed
this section and has given us an opinion that this section correctly describes
the relevant law and fairly summarizes the federal income tax issues that may be
material to FBR Asset and its shareholders. Because this section is a summary,
it does not address all of the tax issues that may be important to you. In
addition, this section does not address all of the tax issues that may be
important to shareholders that are subject to special treatment under the
federal income tax laws, such as insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, and non-U.S. individuals and foreign
corporations.
The statements in this section and the opinion of Hunton & Williams are based on
the current federal income tax laws governing qualification as a REIT. We cannot
assure you that new laws, interpretations thereof, or court decisions, any of
which may take effect retroactively, will not cause any statement in this
section to become inaccurate.
We urge you to consult your own tax advisor regarding the specific tax
consequences to you of investing in the common stock and of FBR Asset's election
to be taxed as a REIT. Specifically, you should consult your own tax advisor
regarding the federal, state, local, foreign, and other tax consequences of your
investment, and regarding potential changes in applicable tax laws.
Taxation of FBR Asset
FBR Asset elected to be taxed as a REIT under the Internal Revenue Code of 1986
(the "Code") commencing with its short taxable year ended December 31, 1997. FBR
Asset has operated in a manner intended to qualify as a REIT since its formation
in November 1997, and FBR Asset intends to continue to so operate. This section
discusses the laws governing the federal income tax treatment of a REIT and its
shareholders, which laws are highly technical and complex.
Hunton & Williams has given us an opinion that FBR Asset qualified to be taxed
as a REIT under the federal income tax laws beginning with its taxable year
ended December 31, 1997, and FBR Asset's organization and current and proposed
method of operation will enable it to continue to qualify as a REIT. You should
be aware that the opinion is based on current law and is not binding upon the
IRS or any court. In addition, Hunton & Williams' opinion is based on some
assumptions and on our factual representations, all of which are described in
the opinion.
FBR Asset's qualification as a REIT depends on its ability to meet on a
continuing basis certain qualification tests set forth in the federal tax laws.
Those qualification tests involve:
o the percentage of income that FBR Asset earns from specified sources;
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o the percentage of its assets that falls within certain categories;
o the diversity of its share ownership; and
o the percentage of its earnings that it distributes.
We describe the REIT qualification tests in more detail below. Hunton & Williams
will not review FBR Asset's compliance with those tests on a continuing basis.
Accordingly, neither we nor Hunton & Williams can assure you that FBR Asset will
satisfy those tests in the future. For a discussion of the tax treatment of FBR
Asset and its shareholders if FBR Asset fails to qualify as a REIT, see
"--Failure to Qualify."
If FBR Asset qualifies as a REIT, it generally will not be subject to federal
income tax on the taxable income that it distributes to its shareholders. The
benefit of that tax treatment is that it avoids the "double taxation," or
taxation at both the corporate and shareholder levels, that generally results
from owning stock in a corporation. However, FBR Asset will be subject to
federal tax in the following circumstances:
o First, FBR Asset will pay federal income tax on taxable income, including
net capital gain, that it does not distribute to its shareholders during,
or within a specified time period after, the calendar year in which the
income is earned.
o Second, FBR Asset may be subject to the "alternative minimum tax" on any
items of tax preference that it does not distribute or allocate to its
shareholders.
o Third, FBR Asset will pay income tax at the highest corporate rate on (i)
net income from the sale or other disposition of property acquired through
foreclosure ("foreclosure property") that it holds primarily for sale to
customers in the ordinary course of business and (ii) other non-qualifying
income from foreclosure property.
o Fourth, FBR Asset will pay a 100% tax on net income from sales or other
dispositions of property (other than foreclosure property) that it holds
primarily for sale to customers in the ordinary course of business
("prohibited transactions").
o Fifth, if FBR Asset fails to satisfy the 75% gross income test or the 95%
gross income test, as described below under "--Requirements for
Qualification--Income Tests," and nonetheless continues to qualify as a
REIT because it meets certain other requirements, it will pay a 100% tax on
(i) the gross income attributable to the greater of the amounts by which it
fails the 75% and 95% gross income tests, multiplied by (ii) a fraction
intended to reflect its profitability.
o Sixth, if FBR Asset fails to distribute during a calendar year at least the
sum of (i) 85% of its REIT ordinary income for that year, (ii) 95% of its
REIT capital gain net income for that year, and (iii) any undistributed
taxable income from prior periods, it will pay a 4% excise tax on the
excess of the required distribution over the amount it actually
distributed.
o Seventh, FBR Asset may elect to retain and pay income tax on its net
long-term capital gain.
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o Eighth, if FBR Asset acquires any asset from a C corporation (i.e., a
corporation generally subject to full corporate-level tax) in a merger or
other transaction in which it acquires a "carryover" basis in the asset
(i.e., a basis determined by reference to the C corporation's basis in the
asset), it will pay tax at the highest regular corporate rate applicable if
it recognizes gain on the sale or disposition of such asset during the
10-year period after it acquires the asset. The amount of gain on which it
will pay tax is the lesser of (i) the amount of gain that it recognizes at
the time of the sale or disposition and (ii) the amount of gain that it
would have recognized if it had sold the asset at the time it acquired the
asset. The rule described in this paragraph will apply assuming that FBR
Asset makes an election under IRS Notice 88-19 upon its acquisition of an
asset from a C corporation.
o Ninth, FBR Asset will pay tax at the highest corporate rate on the portion
of any phantom taxable income that it derives from REMIC residual interests
("Excess Inclusion") equal to the percentage of its stock held by
"Disqualified Organizations." A "Disqualified Organization" includes the
United States, any state or political subdivision thereof, any foreign
government, any international organization, any agency or instrumentality
of any of the foregoing, any other tax-exempt organization (other than a
farmer's cooperative described in section 521 of the Code) that is exempt
both from income taxation and from taxation under the unrelated business
taxable income provisions of the Code, or any rural electrical or telephone
cooperative. For this reason, FBR Asset's Charter prohibits Disqualified
Organizations from owning stock of FBR Asset.
o Tenth, FBR Asset may be subject to tax at the highest corporate rate on the
portion of its allocable share of any Excess Inclusion that a REIT in which
it owns an equity interest derives from REMIC residual interests, equal to
the percentage of its stock that is held by Disqualified Organizations. For
this reason, FBR Asset's Charter prohibits Disqualified Organizations from
owning the stock of FBR Asset.
Requirements for Qualification
A REIT is a corporation, trust, or association that meets the following
requirements:
1. it is managed by one or more trustees or directors;
2. its beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial interest;
3. it would be taxable as a domestic corporation, but for sections 856
through 860 of the Code;
4. it is neither a financial institution nor an insurance company subject to
certain provisions of the Code;
5. at least 100 persons are beneficial owners of its shares or ownership
certificates;
6. not more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during
the last half of any taxable year (the "5/50 Rule");
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7. it elects to be a REIT (or has made a REIT election for a previous taxable
year) and satisfies all relevant filing and other administrative
requirements established by the IRS that must be met to elect and maintain
REIT status;
8. it uses a calendar year for federal income tax purposes and complies with
the record keeping requirements of the Code and the Treasury regulations
thereunder (the "Treasury Regulations"); and
9. it meets other qualification tests, described below, regarding the nature
of its income and assets.
FBR Asset must meet requirements 1 through 4 during its entire taxable year and
must meet requirement 5 during at least 335 days of a taxable year of 12 months,
or during a proportionate part of a taxable year of less than 12 months.
Requirements 5 and 6 apply to FBR Asset beginning with its 1998 taxable year. If
FBR Asset complies with all the requirements for ascertaining the ownership of
its outstanding shares in a taxable year and has no reason to know that it
violated the 5/50 Rule, it will be deemed to have satisfied the 5/50 Rule for
that taxable year. For purposes of determining share ownership under the 5/50
Rule, an "individual" generally includes a supplemental unemployment
compensation benefits plan, a private foundation, or a portion of a trust
permanently set aside or used exclusively for charitable purposes. An
"individual," however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under Code section 401(a), and
beneficiaries of such a trust will be treated as holding shares of FBR Asset in
proportion to their actuarial interests in the trust for purposes of the 5/50
Rule.
FBR Asset has issued sufficient common stock with sufficient diversity of
ownership to satisfy requirements 5 and 6 set forth above. In addition, FBR
Asset's Charter restricts the ownership and transfer of the common stock so that
FBR Asset should continue to satisfy requirements 5 and 6. The provisions of the
Charter restricting the ownership and transfer of the common stock are described
in "FBR Asset's Capital Stock--Restrictions on Ownership and Transfer."
FBR Asset currently does not have corporate subsidiaries, but may have corporate
subsidiaries in the future. A corporation that is a "qualified REIT subsidiary"
is not treated as a corporation separate from its parent REIT. All assets,
liabilities, and items of income, deduction, and credit of a "qualified REIT
subsidiary" are treated as assets, liabilities, and items of income, deduction,
and credit of the REIT. A "qualified REIT subsidiary" is a corporation, all of
the capital stock of which is owned by the REIT.
In the case of a REIT that is a partner in a partnership, the REIT is treated as
owning its proportionate share of the assets of the partnership and as earning
its allocable share of the gross income of the partnership for purposes of the
applicable REIT qualification tests. FBR Asset is not currently a partner in any
partnership, but it may become a partner in the future.
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Income Tests
FBR Asset must satisfy two gross income tests annually to maintain its
qualification as a REIT. First, at least 75% of its gross income (excluding
gross income from prohibited transactions) for each taxable year must consist of
defined types of income that it derives, directly or indirectly, from
investments relating to real property or mortgages on real property or temporary
investment income (the "75% gross income test"). Qualifying income for purposes
of the 75% gross income test includes:
o "rents from real property";
o interest on debt secured by mortgages on real property or on interests in
real property; and
o dividends or other distributions on and gain from the sale of shares in
other REITs.
Second, at least 95% of its gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of income that is qualifying
income for purposes of the 75% gross income test, dividends, other types of
interest, gain from the sale or disposition of stock or securities, or any
combination of the foregoing (the "95% gross income test"). The following
paragraphs discuss the specific application of these tests to FBR Asset.
Interest on debt secured by mortgages on real property or on interests in real
property generally is qualifying income for purposes of the 75% gross income
test. However, if the highest principal amount of a loan outstanding during a
taxable year exceeds the fair market value of the real property securing the
loan as of the date FBR Asset acquired the loan, a portion of the interest
income from such loan will not be qualifying income for purposes of the 75%
gross income test, but will be qualifying income for purposes of the 95% gross
income test. The portion of the interest income that will not be qualifying
income for purposes of the 75% gross income test will be equal to the portion of
the principal amount of the loan that is not secured by real property.
Interest and Rents
- ------------------
The term "interest," as defined for purposes of the 75% and 95% gross income
tests, generally any amount that is based in whole or in part on the income or
profits of any person, but includes the following:
o an amount that is based on a fixed percentage or percentages of receipts or
sales; and
o an amount that is based on the income or profits of a debtor, as long as
the debtor derives substantially all of its income from the related
property from leasing such property, and only to the extent that the
amounts received by the debtor would be qualifying income if received
directly by a REIT.
If a loan contains a provision that entitles a REIT to a percentage of the
borrower's gain upon the sale of the secured property or a percentage of the
appreciation in the property's value as of a specific date (a "shared
appreciation provision"), income attributable to the shared appreciation
provision will be treated as gain from the sale of the secured property, which
generally is qualifying income for purposes of the 75% and 95% gross income
tests.
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We believe that the interest and original issue discount income that FBR Asset
receives from mortgage-backed securities and other mortgage-related assets
generally is qualifying income for purposes of the 75% and 95% gross income
tests. However, the loan amount of a mortgage loan owned by FBR Asset may exceed
the value of the real property securing the loan. In that case, a portion of the
income from the loan will be qualifying income for purposes of the 95% gross
income test, but not the 75% gross income test. It also is possible that, in
some instances, the interest income from a mortgage loan may be based in part on
the borrower's profits or net income. That scenario generally will cause the
income from the loan to be non-qualifying income for purposes of both the 75%
and the 95% gross income tests.
We believe that FBR Asset's income from stock in other REITs is qualifying
income for purposes of the 75% and 95% gross income tests. However, if a REIT in
which FBR Asset owns stock fails to qualify as a REIT in any year, FBR Asset's
income from such REIT will be qualifying income for purposes of the 95% gross
income test, but not the 75% gross income test. We believe that FBR Asset's
income from stock in real estate-related companies that are C corporations is
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. In addition to stock, FBR Asset may own debt securities
issued by other REITs or C corporations. Interest income from such debt
securities will be qualifying income for purposes of the 95% gross income test.
Such interest income will not be qualifying income for purposes of the 75% gross
income test unless such debt securities are secured by mortgages on real
property or on interests in real property.
FBR Asset currently does not own any real property, but it may acquire real
property or an interest therein in the future. To the extent that FBR Asset
acquires real property or an interest therein, any rent that FBR Asset receives
from the tenants of such real property will qualify as "rents from real
property" (which is qualifying income for purposes of the 75% and 95% gross
income tests) only if the following conditions are met:
o First, the rent must not be based, in whole or in part, on the income or
profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.
o Second, neither FBR Asset nor a direct or indirect owner of 10% or more of
its stock may own, actually or constructively, 10% or more of a tenant from
whom it receives rent.
o Third, all of the rent received under a lease of real property will not
qualify as "rents from real property" unless the rent attributable to the
personal property leased in connection with such lease is no more than 15%
of the total rent received under the lease.
o Finally, FBR Asset generally must not operate or manage its real property
or furnish or render services to its tenants, other than through an
"independent contractor" who is adequately compensated and from whom FBR
Asset does not derive revenue. However, FBR Asset need not provide services
through an "independent contractor," but instead may provide services
directly, if the services are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant." In addition, FBR Asset may
render a de minimis amount of "non-customary" services to the tenants of a
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property, other than through an independent contractor, as long as its
income from the services does not exceed 1% of its income from the related
property.
We have represented that we will manage FBR Asset's mortgage assets so that
substantially all of the income from those assets will be qualifying income for
purposes of the 75% and the 95% gross income tests. Furthermore, we have
represented that we will manage any real property that FBR Asset acquires so
that the rent it receives from such property qualifies as "rents from real
property." In summary, we believe that FBR Asset will be able to satisfy the 75%
and 95% gross income tests on a continuing basis. However, FBR Asset may receive
income not described above that is not qualifying income for purposes of the
gross income tests. We will monitor the amount of non-qualifying income that its
assets produce and we will manage its portfolio to comply at all times with the
gross income tests.
Hedging Transactions
- --------------------
From time to time, FBR Asset may enter into hedging transactions with respect to
one or more of its assets or liabilities. Its hedging activities may include
entering into interest rate swaps, caps, and floors (or options to purchase such
items), and futures and forward contracts. To the extent that FBR Asset enters
into an interest rate swap or cap contract, option, futures contract, forward
rate agreement, or any similar financial instrument to hedge its indebtedness
incurred to acquire or carry "real estate assets," any periodic income or gain
from the disposition of such contract should be qualifying income for purposes
of the 95% gross income test, but not the 75% gross income test. To the extent
that FBR Asset hedges with other types of financial instruments, or in other
situations, it is not entirely clear how the income from those transactions will
be treated for purposes of the gross income tests. We intend to structure any
hedging transactions in a manner that does not jeopardize FBR Asset's status as
a REIT.
Failure to Satisfy Income Tests
- -------------------------------
If FBR Asset fails to satisfy one or both of the 75% and 95% gross income tests
for any taxable year, it nevertheless may qualify as a REIT for such year if it
qualifies for relief under the Code. Those relief provisions generally will be
available if:
o FBR Asset's failure to meet such tests is due to reasonable cause and not
due to willful neglect;
o we attach a schedule of the sources of its income to its tax return, and
o any incorrect information on the schedule was not due to fraud with intent
to evade tax.
We cannot predict, however, whether in all circumstances FBR Asset would qualify
for the relief provisions. In addition, as discussed above in "--Taxation of FBR
Asset," even if the relief provisions apply, FBR Asset would incur a 100% tax on
the gross income attributable to the greater of the amounts by which it fails
the 75% and 95% gross income tests, multiplied by a fraction intended to reflect
its profitability.
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Foreclosure Property Rules
- --------------------------
REITs generally will incur tax at the maximum corporate rate on any income from
foreclosure property (other than income that would be qualifying income for
purposes of the 75% gross income test), less expenses directly connected with
the production of such income. "Foreclosure property" is any real property
(including interests in real property) and any personal property incident to
such real property that meets the following requirements:
o a REIT acquires the property when the REIT bids in such property at
foreclosure, or otherwise reduces such property to ownership or possession
by agreement or process of law, after a default (or imminent default) on a
lease of such property or on a debt owed to the REIT that such property
secured;
o the REIT acquired the related loan when default was not imminent or
anticipated; and
o the REIT elects to treat the property as foreclosure property.
We do not anticipate that FBR Asset will receive any income from foreclosure
property that is not qualifying income for purposes of the 75% gross income
test, but if it does receive any such income, we will make an election to treat
the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the REIT acquired the related loan when
default was imminent or anticipated, income the REIT receives with respect to
such Ineligible Property may not be qualifying income for purposes of the 75% or
95% gross income test. We anticipate that any income FBR Asset receives with
respect to Ineligible Property will be qualifying income for purposes of the 75%
and 95% gross income tests.
Prohibited Transaction Rules
- ----------------------------
A REIT will incur a 100% tax on the net income derived from any "prohibited
transaction." A "prohibited transaction" generally is a sale or other
disposition of property (other than foreclosure property) that the REIT holds
primarily for sale to customers in the ordinary course of a trade or business.
We believe that none of FBR Asset's assets is held for sale to customers and
that a sale of any such asset would not be in the ordinary course of its
business. Whether a REIT holds an asset "primarily for sale to customers in the
ordinary course of a trade or business" depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the Code prescribing when an asset sale will not be
characterized as a prohibited transaction. We cannot provide assurance, however,
that we can comply with such safe-harbor provisions or that FBR Asset will avoid
owning property that may be characterized as property that it holds "primarily
for sale to customers in the ordinary course of a trade or business."
Asset Tests
To maintain its qualification as a REIT, FBR Asset also must satisfy two asset
tests at the close of each quarter of each taxable year. First, at least 75% of
the value of its total assets (the "75% asset test") must consist of:
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o cash or cash items (including certain receivables);
o government securities;
o "real estate assets"; or
o qualifying temporary investments (i.e., investments in stock or debt
instruments during the one-year period following FBR Asset's receipt of new
capital that it raises through equity or long-term (at least five-year)
debt offerings).
The term "real estate assets" includes the following:
o stock in other REITs;
o interests in real property, including leaseholds and options to acquire
real property and leaseholds;
o interests in mortgages on real property; and
o regular or residual interests in a REMIC. However, if less than 95% of the
assets of a REMIC consists of "real estate assets" (determined as if FBR
Asset held such assets), FBR Asset will be treated as holding directly its
proportionate share of the assets of such REMIC.
To the extent that the fair market value of the real property securing a loan
equals or exceeds the outstanding principal balance of the loan, the loan will
qualify as a real estate asset. However, if the outstanding principal balance of
a loan exceeds the fair market value of the real property securing the loan, the
portion of such loan in excess of the value of the associated real property
likely will not be a qualifying "real estate asset."
The second asset test has two components:
o First, of FBR Asset's investments not included in the 75% asset class, the
value of its interest in any one issuer's securities (which does not
include its stock in other REITs or in any qualified REIT subsidiary) may
not exceed 5% of the value of its total assets (the "5% asset test").
o Second, FBR Asset may not own more than 10% of any one issuer's outstanding
voting securities (which does not include its stock in other REITs or in
any qualified REIT subsidiary) (the "10% asset test").
We believe that FBR Asset's stock in other REITs is a qualifying asset for
purposes of the 75% asset test. However, if a REIT in which it owns stock fails
to qualify as a REIT in any year, the stock in such REIT will not be a
qualifying asset for purposes of the 75% asset test. Instead, FBR Asset would be
subject to the 5% and 10% asset tests described above with respect to its
investment in such disqualified REIT. We believe that FBR Asset satisfies the 5%
and 10% asset tests with respect to its stock in real estate-related companies
that are C corporations. To the extent that FBR Asset owns debt securities
issued by other REITs or C corporations which debt securities are not secured by
mortgages on real property, such securities will not be qualifying assets for
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purposes of the 75% asset test. Instead, FBR Asset would be subject to the 5%
and 10% asset tests with respect to such debt securities.
We also believe that FBR Asset's mortgage loans and mortgage-backed securities
are qualifying assets for purposes of the 75% asset test. However, if the
outstanding principal balance of a mortgage loan exceeds the fair market value
of the real property securing the loan, a portion of such loan will not be a
qualifying "real estate asset." The non-qualifying portion of that mortgage loan
will be equal to the portion of the loan amount that exceeds the value of the
associated real property. We will monitor the status of FBR Asset's assets for
purposes of the various asset tests and we will manage its portfolio to comply
at all times with such tests.
If FBR Asset should fail to satisfy the asset tests at the end of a calendar
quarter, it would not lose its REIT status if (i) it satisfied the asset tests
at the close of the preceding calendar quarter and (ii) the discrepancy between
the value of its assets and the asset test requirements arose from changes in
the market values of its assets and was not wholly or partly caused by the
acquisition of one or more non-qualifying assets. If FBR Asset did not satisfy
the condition described in clause (ii) of the preceding sentence, it still could
avoid disqualification as a REIT by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which the discrepancy arose.
Distribution Requirements
Each taxable year, FBR Asset must distribute dividends (other than capital gain
dividends and deemed distributions of retained capital gain) to its shareholders
in an aggregate amount at least equal to:
o the sum of (i) 95% of its "REIT taxable income" (computed without regard to
the dividends paid deduction and its net capital gain or loss) and (ii) 95%
of its net income (after tax), if any, from foreclosure property; minus
o the sum of certain items of non-cash income.
FBR Asset must pay such distributions in the taxable year to which they relate,
or in the following taxable year if it declares the distribution before it
timely files its federal income tax return for such year and pays the
distribution on or before the first regular dividend payment date after such
declaration.
FBR Asset will pay federal income tax on taxable income (including net capital
gain) that it does not distribute to shareholders. Furthermore, if it fails to
distribute during a calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January following such calendar year) at least the sum of:
o 85% of its REIT ordinary income for such year;
o 95% of its REIT capital gain income for such year; and
o any undistributed taxable income from prior periods;
it will incur a 4% nondeductible excise tax on the excess of such required
distribution over the amounts it actually distributed. FBR Asset may elect to
retain and pay income tax on the net long-term capital gain it receives in a
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taxable year. See "--Taxation of Taxable U.S. Shareholders." If it so elects, it
will be treated as having distributed any such retained amount for purposes of
the 4% excise tax described above. FBR Asset has made, and intends to continue
to make, timely distributions sufficient to satisfy the annual distribution
requirements.
It is possible that, from time to time, FBR Asset may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. Possible examples include:
o Because FBR Asset may deduct capital losses only to the extent of its
capital gains, it may have taxable income that exceeds its economic income.
o FBR Asset will recognize taxable income in advance of the related cash flow
if any of its subordinated mortgage-backed securities or mortgage loans are
deemed to have original issue discount. FBR Asset generally must accrue OID
based on a constant yield method that takes into account projected
prepayments but that defers credit losses until they are actually incurred.
o FBR Asset may be required to recognize the amount of any payment projected
to be made pursuant to a shared appreciation provision in a mortgage loan
over the term of the related loan using the constant yield method, even
though FBR Asset may not receive the related cash until the maturity of the
loan.
o FBR Asset may recognize taxable market discount income when it receives the
proceeds from the disposition of, or principal payments on, loans that are
"market discount bonds" (i.e., obligations with a stated redemption price
at maturity that is greater than its tax basis in such obligations),
although such proceeds often will be used to make non-deductible principal
payments on related borrowings.
o FBR Asset may recognize taxable income without receiving a corresponding
cash distribution if it forecloses on or makes a significant modification
to a loan, to the extent that the fair market value of the underlying
property or the principal amount of the modified loan, as applicable,
exceeds FBR Asset's basis in the original loan.
o Although several types of non-cash income are excluded in determining the
annual distribution requirement, FBR Asset will incur corporate income tax
and the 4% excise tax with respect to those non-cash income items if it
does not distribute those items on a current basis.
o FBR Asset may recognize "phantom" taxable income from any residual
interests in REMICs or retained ownership interests in mortgage loans
subject to collateralized mortgage obligation debt that it owns.
As a result of the foregoing, FBR Asset may have less cash than is necessary to
distribute all of its taxable income and thereby avoid corporate income tax and
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the excise tax imposed on undistributed income. In such a situation, it may need
to borrow funds or issue preferred stock or additional common stock.
Under some circumstances, FBR Asset may be able to correct a failure to meet the
distribution requirement for a year by paying "deficiency dividends" to its
shareholders in a later year. FBR Asset may include such deficiency dividends in
its deduction for dividends paid for the earlier year. Although FBR Asset may be
able to avoid income tax on amounts distributed as deficiency dividends, it will
be required to pay interest to the IRS based upon the amount of any deduction it
takes for deficiency dividends.
Recordkeeping Requirements
FBR Asset must maintain certain records in order to qualify as a REIT. In
addition, to avoid a monetary penalty, it must request on an annual basis
information from its shareholders designed to disclose the actual ownership of
its outstanding stock. FBR Asset has complied, and FBR Asset intends to continue
to comply, with such requirements.
Failure to Qualify
If FBR Asset failed to qualify as a REIT in any taxable year, and no relief
provision applied, it would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. In calculating its taxable income in a year in which it failed to qualify
as a REIT, FBR Asset would not be able to deduct amounts paid out to
shareholders. In fact, FBR Asset would not be required to distribute any amounts
to shareholders in such year. In such event, to the extent of its current and
accumulated earnings and profits, all distributions to shareholders would be
taxable as ordinary income. Subject to certain limitations of the Code,
corporate shareholders might be eligible for the dividends received deduction.
Unless FBR Asset qualified for relief under specific statutory provisions, it
also would be disqualified from taxation as a REIT for the four taxable years
following the year during which it ceased to qualify as a REIT. We cannot
predict whether in all circumstances FBR Asset would qualify for such statutory
relief.
Taxation of Taxable U.S. Shareholders
As long as FBR Asset qualifies as a REIT, a taxable "U.S. Shareholder" must take
into account distributions out of FBR Asset's current or accumulated earnings
and profits (and that FBR Asset does not designate as capital gain dividends or
retained long-term capital gain) as ordinary income. A U.S. Shareholder will not
qualify for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. Shareholder" means a holder of
common stock that for U.S. federal income tax purposes is:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of an political subdivision thereof;
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o an estate whose income from sources without the United States is includible
in gross income for U.S. federal income tax purposes regardless of its
connection with the conduct of a trade or business within the United
States; or
o any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or
more U.S. persons have the authority to control all substantial decisions
of the trust.
A U.S. Shareholder generally will recognize distributions that FBR Asset
designates as capital gain dividends as long-term capital gain without regard to
the period for which the U.S. Shareholder has held its common stock. Subject to
certain limitations, FBR Asset will designate its capital gain dividends as
either 20% or 25% rate distributions. A corporate U.S. Shareholder, however, may
be required to treat up to 20% of certain capital gain dividends as ordinary
income.
FBR Asset may elect to retain and pay income tax on the net long-term capital
gain that it receives in a taxable year. In that case, a U.S. Shareholder would
be taxed on its proportionate share of FBR Asset's undistributed long-term
capital gain. The U.S. Shareholder would receive a credit or refund for its
proportionate share of the tax FBR Asset paid. The U.S. Shareholder would
increase the basis in its stock by the amount of its proportionate share of FBR
Asset's undistributed long-term capital gain, minus its share of the tax FBR
Asset paid.
If a distribution (or portion thereof) exceeds FBR Asset's current and
accumulated earnings and profits but does not exceed the adjusted basis of a
U.S. Shareholder's common stock, the U.S. Shareholder will not incur tax on the
distribution (or portion thereof). Instead, such distribution (or portion
thereof) will reduce the adjusted basis of the common stock. A U.S. Shareholder
will recognize a distribution that exceeds both FBR Asset's current and
accumulated earnings and profits and the U.S. Shareholder's adjusted basis in
its common stock as long-term capital gain (or short-term capital gain if the
common stock has been held for one year or less), assuming the common stock is a
capital asset in the hands of the U.S. Shareholder. In addition, if FBR Asset
declares a distribution in October, November, or December of any year that is
payable to a U.S. Shareholder of record on a specified date in any such month,
such distribution shall be treated as both paid by FBR Asset and received by the
U.S. Shareholder on December 31 of such year, provided that FBR Asset actually
pays the distribution during January of the following calendar year. We will
notify U.S. Shareholders after the close of FBR Asset's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income or capital gain dividends.
FBR Asset's investments may cause it to recognize taxable income in excess of
its economic income ("phantom income") and to experience an offsetting excess of
economic income over its taxable income in later years. As a result, U.S.
Shareholders may from time to time be required to pay federal income tax on
distributions that economically represent a return of capital, rather than a
dividend. Such distributions would be offset in later years by distributions
representing economic income that would be treated as returns of capital for
federal income tax purposes. Accordingly, if FBR Asset receives phantom income,
its U.S. Shareholders may incur federal income tax with respect to such income
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on an accelerated basis (i.e., before the U.S. Shareholders realize such income
in an economic sense). Taking into account the time value of money, such an
acceleration of federal income tax liabilities would cause shareholders to
receive an after-tax rate of return on an investment in the common stock that
would be less than the after-tax rate of return on an investment with an
identical before-tax rate of return that did not generate phantom income. We
will consider the potential effects of phantom income on FBR Asset's taxable
U.S. Shareholders in managing FBR Asset's investments.
Although FBR Asset does not currently own REMIC residual interests or retained
ownership interests in mortgage loans subject to collateralized mortgage
obligation debt, FBR Asset could acquire assets of that type in the future. If
FBR Asset does so, its U.S. Shareholders may suffer the following adverse tax
consequences:
o Those types of assets may produce significant amounts of phantom income;
and
o Those types of assets may cause a portion of the dividends received by U.S.
Shareholders to be treated as "excess inclusion," a type of income that
generally cannot be offset by tax losses and is not subject to any
exemptions from federal income tax.
Taxation of U.S. Shareholders on the Disposition of the Common Stock
In general, a U.S. Shareholder who is not a dealer in securities must treat any
gain or loss realized upon a taxable disposition of the common stock as
long-term capital gain or loss if the U.S. Shareholder has held the common stock
for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. Shareholder must treat any loss upon a sale or exchange of
common stock held by such shareholder for six months or less (after applying
certain holding period rules) as a long-term capital loss to the extent of
capital gain dividends and other distributions from FBR Asset that such U.S.
Shareholder treats as long-term capital gain. All or a portion of any loss a
U.S. Shareholder realizes upon a taxable disposition of the common stock may be
disallowed if the U.S. Shareholder purchases other shares of common stock within
30 days before or after the disposition.
Capital Gains and Losses
A taxpayer generally must hold a capital asset for more than one year for gain
or loss derived from its sale or exchange to be treated as long-term capital
gain or loss. The highest marginal individual income tax rate is 39.6%. The
maximum tax rate on long-term capital gain applicable to non-corporate taxpayers
is 20% for sales and exchanges of assets held for more than one year. The
maximum tax rate on long-term capital gain from the sale or exchange of "section
1250 property" (i.e., depreciable real property) is 25% to the extent that such
gain would have been treated as ordinary income if the property were "section
1245 property." With respect to distributions that FBR Asset designates as
capital gain dividends and any retained capital gain that it is deemed to
distribute, FBR Asset may designate (subject to certain limits) whether such a
distribution is taxable to its non-corporate shareholders at a 20% or 25% rate.
Thus, the tax rate differential between capital gain and ordinary income for
non-corporate taxpayers may be significant. In addition, the characterization of
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income as capital gain or ordinary income may affect the deductibility of
capital losses. A non-corporate taxpayer may deduct capital losses not offset by
capital gains against its ordinary income only up to a maximum annual amount of
$3,000. A non-corporate taxpayer may carry forward unused capital losses
indefinitely. A corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only to
the extent of capital gains, with unused losses being carried back three years
and forward five years.
Information Reporting Requirements and Backup Withholding
FBR Asset will report to its shareholders and to the IRS the amount of
distributions it pays during each calendar year, and the amount of tax it
withholds, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
unless such holder either:
o is a corporation or comes within another exempt category and, when
required, demonstrates this fact; or
o provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the
applicable requirements of the backup withholding rules.
A shareholder who does not provide FBR Asset with its correct taxpayer
identification number also may be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, FBR Asset may be required to withhold a
portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to FBR Asset. The Treasury Department has issued final
regulations regarding the backup withholding rules as applied to Non-U.S.
Shareholders. Those regulations alter the current system of backup withholding
compliance and are effective for distributions made after December 31, 1999. See
"--Taxation of Non-U.S. Shareholders."
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts and annuities ("Exempt
Organizations"), generally are exempt from federal income taxation. However,
they are subject to taxation on their unrelated business taxable income
("UBTI"). While many investments in real estate generate UBTI, the IRS has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the exempt employee
pension trust does not otherwise use the shares of the REIT in an unrelated
trade or business of the pension trust. Based on that ruling, amounts that FBR
Asset distributes to Exempt Organizations generally should not constitute UBTI.
However, if an Exempt Organization were to finance its acquisition of the common
stock with debt, a portion of the income that they receive from FBR Asset would
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts, and qualified group legal services plans that are exempt from
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taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions that they receive from FBR Asset as UBTI.
Finally, in certain circumstances, a qualified employee pension or profit
sharing trust that owns more than 10% of FBR Asset's stock is required to treat
a percentage of the dividends that it receives from FBR Asset as UBTI (the "UBTI
Percentage"). The UBTI Percentage is equal to the gross income FBR Asset derives
from an unrelated trade or business (determined as if it were a pension trust)
divided by its total gross income for the year in which it pays the dividends.
The UBTI rule applies to a pension trust holding more than 10% of FBR Asset's
stock only if:
o the UBTI Percentage is at least 5%;
o FBR Asset qualifies as a REIT by reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as
holding FBR Asset's stock in proportion to their actuarial interests in the
pension trust; and
o FBR Asset is a "pension-held REIT" (i.e., either (i) one pension trust owns
more than 25% of the value of its stock or (ii) a group of pension trusts
individually holding more than 10% of the value of its stock collectively
owns more than 50% of the value of its stock).
Although FBR Asset does not currently own REMIC residual interests or retained
ownership interests in mortgage loans subject to collateralized mortgage
obligation debt, FBR Asset could acquire assets of that type in the future. If
FBR Asset does so, shareholders that are Exempt Organizations may be required to
treat a portion of their dividends as UBTI. Exempt Organizations also may suffer
those adverse tax consequences if FBR Asset acquires stock in other REITs that
own REMIC residual interests or mortgage loans subject to collateralized
mortgage debt.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex. This section
is only a summary of such rules. We urge Non-U.S. Shareholders to consult their
own tax advisors to determine the impact of federal, state, and local income tax
laws on ownership of the common stock, including any reporting requirements.
A Non-U.S. Shareholder that receives a distribution that is not attributable to
gain from FBR Asset's sale or exchange of U.S. real property interests (as
defined below) and that FBR Asset does not designate as a capital gain dividend
or retained capital gain will recognize ordinary income to the extent that FBR
Asset pays such distribution out of its current or accumulated earnings and
profits. A withholding tax equal to 30% of the gross amount of the distribution
ordinarily will apply to such distribution unless an applicable tax treaty
reduces or eliminates the tax. However, if a distribution is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
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tax on the distribution at graduated rates, in the same manner as U.S.
Shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that
is a non-U.S. corporation). FBR Asset plans to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distribution paid to a Non-U.S.
Shareholder unless either:
o a lower treaty rate applies and the Non-U.S. Shareholder files the required
form evidencing eligibility for that reduced rate with FBR Asset; or
o the Non-U.S. Shareholder files an IRS Form 4224 with FBR Asset claiming
that the distribution is effectively connected income.
The U.S. Treasury Department has issued final regulations that modify the manner
in which FBR Asset will comply with the withholding requirements. Those
regulations are effective for distributions made after December 31, 1999.
Although FBR Asset does not currently own REMIC residual interests or retained
ownership interests in mortgage loans subject to collateralized mortgage
obligation debt, FBR Asset may acquire assets of that type in the future. If FBR
Asset does so, or invests in the stock of a REIT that owns assets of that type,
a portion of the dividends that are paid by FBR Asset to Non-U.S Shareholders
may be subject to 30% withholding tax, regardless of any reduced rate that
otherwise would apply under a tax treaty.
A Non-U.S. Shareholder will not incur tax on a distribution that exceeds FBR
Asset's current and accumulated earnings and profits but does not exceed the
adjusted basis of its common stock. Instead, such a distribution will reduce the
adjusted basis of such common stock. A Non-U.S. Shareholder will be subject to
tax on a distribution that exceeds both FBR Asset's current and accumulated
earnings and profits and the adjusted basis of its common stock, if the Non-U.S.
Shareholder otherwise would be subject to tax on gain from the sale or
disposition of its common stock, as described below. Because FBR Asset generally
cannot determine at the time it makes a distribution whether or not the
distribution will exceed its current and accumulated earnings and profits, it
normally will withhold tax on the entire amount of any distribution at the same
rate as it would withhold on a dividend. However, a Non-U.S. Shareholder may
obtain a refund of amounts that FBR Asset withholds if it later determines that
a distribution in fact exceeded its current and accumulated earnings and
profits.
FBR Asset must withhold 10% of any distribution that exceeds its current and
accumulated earnings and profits. Consequently, although it intends to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that it
does not do so, it will withhold at a rate of 10% on any portion of a
distribution not subject to withholding at a rate of 30%.
For any year in which FBR Asset qualifies as a REIT, a Non-U.S. Shareholder will
incur tax on distributions that are attributable to gain from its sale or
exchange of "U.S. real property interests" under the provisions of the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). The term "U.S. real
property interests" includes certain interests in real property and stock in
corporations at least 50% of whose assets consists of interests in real
property, but excludes mortgage loans and MBS. Under FIRPTA, a Non-U.S.
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Shareholder is taxed on distributions attributable to gain from sales of U.S.
real property interests as if such gain were effectively connected with a U.S.
business of the Non-U.S. Shareholder. A Non-U.S. Shareholder thus would be taxed
on such a distribution at the normal capital gain rates applicable to U.S.
Shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of a nonresident alien individual). A
non-U.S. corporate shareholder not entitled to treaty relief or exemption also
may be subject to the 30% branch profits tax on distributions subject to FIRPTA.
FBR Asset must withhold 35% of any distribution that it could designate as a
capital gain dividend. A Non-U.S. Shareholder may receive a credit against its
FIRPTA tax liability for the amount FBR Asset withholds.
A Non-U.S. Shareholder generally will not incur tax under FIRPTA on gain from
the sale of its common stock as long as FBR Asset is a "domestically controlled
REIT." A "domestically controlled REIT" is a REIT in which at all times during a
specified testing period non-U.S. persons held, directly or indirectly, less
than 50% in value of the stock. We cannot assure you that FBR Asset is or will
remain a "domestically controlled REIT." However, a Non-U.S. Shareholder that
owned, actually or constructively, 5% or less of the common stock at all times
during a specified testing period will not incur tax under FIRPTA if the common
stock is "regularly traded" on an established securities market. If the gain on
the sale of the common stock were taxed under FIRPTA, a Non-U.S. Shareholder
would be taxed in the same manner as U.S. Shareholders with respect to such gain
(subject to applicable alternative minimum tax, a special alternative minimum
tax in the case of nonresident alien individuals, and the possible application
of the 30% branch profits tax in the case of non-U.S. corporations).
Furthermore, a Non-U.S. Shareholder will incur tax on gain not subject to FIRPTA
if either:
o the gain is effectively connected with the Non-U.S. Shareholder's U.S.
trade or business, in which case the Non-U.S. Shareholder will be subject
to the same treament as U.S. Shareholders with respect to such gain; or
o the Non-U.S. Shareholder is a nonresident alien individual who was present
in the U.S. for 183 days or more during the taxable year, in which case the
Non-U.S. Shareholder will incur a 30% tax on his capital gains.
Other Tax Consequences
FBR Asset and/or you may be subject to state and local tax in various states and
localities, including those states and localities in which FBR Asset or you
transact business, own property, or reside. The state and local tax treatment in
such jurisdictions may differ from the federal income tax treatment described
above. Consequently, you should consult your own tax advisor regarding the
effect of state and local tax laws upon an investment in the common stock.
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ERISA Considerations
This section discusses only issues relevant under the "Plan Asset Regulations"
(as defined below) and, as a result, does not address all of the issues that may
be important to you under of the Employee Retirement Income Security Act of 1974
("ERISA") and section 4975 of the Code. The discussion contained in this section
is based on current federal law and interpretations thereof. We cannot assure
you that new laws or interpretations thereof, which may take effect
retroactively, will not cause any statement in this section to become
inaccurate.
This section is only a summary of certain relevant law and is not a substitute
for careful planning with a professional.
A fiduciary deciding whether to buy common stock on behalf of an employee
benefit plan, a tax-qualified retirement plan, or an IRA should consult its own
legal advisor regarding the specific considerations arising under ERISA, section
4975 of the Code, and state law with respect to an investment in the common
stock by such plan or IRA. A fiduciary also should consider the entire
discussion under the heading "Federal Income Tax Consequences of FBR Asset's
Status as a REIT," because the discussion in that section is relevant to a plan
or IRA's decision to purchase common stock.
Department of Labor Regulations defining "plan assets" (the "Plan Asset
Regulations") generally provide that when an "ERISA Investor" acquires an equity
interest in an entity, the ERISA Investor's assets include both the equity
interest and an undivided interest in each of the underlying assets of the
issuer of such equity interest, unless one or more exceptions specified in the
Plan Asset Regulations are satisfied. An "ERISA Investor" includes:
o a pension, profit sharing, or other employee benefit plan subject to Title
I of ERISA;
o a qualified retirement plan not subject to Title I of ERISA because it is a
governmental or church plan or because it does not cover common law
employees; and
o an individual retirement account or an individual retirement annuity.
One exception under the Plan Asset Regulations provides that an ERISA Investor's
assets will not include any of the underlying assets of an entity if at all
times ERISA Investors own less than 25% of the value of each class of equity
interests in the entity (the "Insignificant Participation Exception"). Another
exception provides that an ERISA Investor's assets will not include the
underlying assets of an entity if the class of equity interests in which the
ERISA Investor invests is "publicly-offered" (i.e., meets the following
requirements):
o it is widely held (i.e., held by 100 or more investors who are independent
of the issuer and each other);
o it is freely transferable; and
o it is part of a class of securities registered under Section 12(b) or 12(g)
of the Securities Exchange Act of 1934.
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The Plan Asset Regulations list restrictions on transfer that ordinarily will
not prevent securities from being "freely transferable." Such restrictions
include any restriction on or prohibition against a transfer that would result
in the termination or reclassification of an entity for federal or state tax
purposes.
FBR Asset's Charter provides that before the date that either (i) the common
stock is "publicly offered" or (ii) FBR Asset qualifies for another exception to
the Plan Asset Regulations (other than the Insignificant Participation
Exception), FBR Asset must satisfy the Insignificant Participation Exception.
FBR Asset's common stock is "widely held." In addition, we believe that the
restrictions on transfer of the common stock imposed under FBR Asset's Charter
do not prevent the common stock from being "freely transferable." Furthermore,
FBR Asset will register its common stock under Section 12(g) of the Securities
Exchange Act at the same time that this registration statement becomes effective
under the Securities Act. Accordingly, the common stock should be "publicly
offered" securities, and FBR Asset's assets should not be deemed to be "plan
assets" of any ERISA Investor that owns common stock. As a result, the
requirement described above that FBR Asset satisfy the Insignificant
Participation Exception no longer applies. However, if at any time FBR Asset
fails to qualify for an exception from the Plan Asset Regulations, the assets of
an ERISA Investor that invests in the common stock will include an undivided
interest in FBR Asset's assets. In such event, FBR Asset's assets, transactions
involving its assets, and the persons with authority or control over and that
provide services with respect to its assets would be subject to the fiduciary
responsibility provisions of Title I of ERISA and the prohibited transaction
provisions of section 4975 of the Code.
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Selling Shareholders
The following table sets forth the name of each selling shareholder, the
aggregate number of shares of common stock beneficially owned by each selling
shareholder as of ____________, 1999, the aggregate number of shares that each
selling shareholder may offer pursuant to this prospectus, and the aggregate
number of shares of common stock that will be beneficially owned by each selling
shareholder after completion of this offering. All of the shares offered by
selling shareholders are issued and outstanding as of the date of this
prospectus. To FBR Asset's knowledge, none of the selling shareholders has had
within the past three years any material relationship with FBR Asset or any of
its affiliates.
Shares to be
Offered for the Shares
Shares Beneficially Selling Beneficially
Owned Before the Shareholder's Owned After the
Selling Shareholder Offering Account Offering
------------------- -------- ------- --------
Use of Proceeds
The shares of common stock offered hereby are being registered for the account
of the selling shareholders identified in this prospectus. All net proceeds from
the sale of the common stock will go to the shareholders who offer and sell
their shares. Accordingly, we will not receive any part of the proceeds from the
sale of these shares.
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Plan of Distribution
The selling shareholders may offer their shares of common stock directly or
through pledgees, donees, transferees or other successors in interest in one or
more of the following transactions:
o in the over-the-counter market;
o on any stock exchange on which shares of the common stock may be listed at
the time of sale;
o in negotiated transactions; or
o in a combination of any of the above transactions.
The selling shareholders may offer their shares of common stock at any of the
following prices:
o fixed prices that may be changed;
o market prices prevailing at the time of sale;
o prices related to prevailing market prices; or
o at negotiated prices.
The selling shareholders may sell their shares of common stock by one or more of
the following methods, without limitation:
o a block trade in which the broker-dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
o a broker or dealer may purchase as principal and resell for its own account
pursuant to this prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers; or
o face-to-face transactions between the selling shareholders and purchasers
without a broker-dealer.
In effecting sales, brokers or dealers engaged by selling shareholders may
arrange for other brokers or dealers to participate. The selling shareholders
may give such brokers or dealers commissions or discounts in amounts to be
negotiated immediately prior to the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act of 1933 in connection with such
sales.
In addition, any securities covered by this prospectus that qualify for sale
pursuant to Rule 144 might be sold under Rule 144 rather than pursuant to this
prospectus. The selling shareholders and any broker-dealers acting in connection
with the sale of shares of common stock hereunder may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit realized by them on the resale
of shares of common stock as principals may be deemed underwriting compensation
under the Securities Act.
92
<PAGE>
If and when a selling shareholder notifies us that he or she has entered into a
material arrangement with a broker-dealer for the sale of shares of common stock
through a block trade, special offering or secondary distribution, or a purchase
by a broker or dealer, we will file a supplemental prospectus, if required,
pursuant to Rule 424(c) under the Securities Act, disclosing (1) the name of the
selling shareholder and of the participating broker-dealer(s); (2) the number of
shares of common stock involved; (3) the price at which such shares of common
stock were sold; (4) the commissions paid or discounts or concessions allowed to
such broker-dealer(s), where applicable; (5) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this prospectus; and (6) other facts material to the transaction.
Each selling shareholder reserves the sole right to accept and, together with
any agent of the selling shareholder, to reject in whole or in part any proposed
purchase of the shares of common stock. The selling shareholder will pay any
sales commissions or other seller's compensation applicable to such
transactions.
We have not registered or qualified offers and sales of shares of the common
stock under the laws of any country, other than the United States. To comply
with certain states' securities laws, if applicable, the selling shareholders
will offer and sell their shares of common stock in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
states the selling shareholders may not offer or sell shares of common stock
unless we have registered or qualified such shares for sale in such states or we
have complied with an available exemption from registration or qualification.
Under applicable rules and regulations under the Securities Exchange Act of
1934, any person engaged in a distribution of shares of the common stock may not
simultaneously engage in market-making activities with respect to such shares of
common stock for a period of two to nine business days prior to the commencement
of such distribution. In addition, the selling shareholders and any other person
participating in a distribution will be subject to applicable provisions of the
Exchange Act and the rules and regulations under the Exchange Act, including
Rules 10b-2, 10b-6 and 10b-7. Such provisions may limit the timing of purchases
and sales of any of the shares of common stock by the selling shareholders or
any such other person. This may affect the marketability of the common stock and
the brokers' and dealers' ability to engage in market-marking activities with
respect to the common stock.
We will pay substantially all of the expenses incident to the registration of
the shares of common stock, estimated to be approximately ____________.
93
<PAGE>
Other Matters
Legal
We have based the description of federal income tax consequences in "Federal
Income Tax Consequences of FBR Asset's Status as a REIT" upon the opinion of
Hunton & Williams, Richmond, Virginia.
Independent Accountants
The audited financial statements included in this prospectus have been audited
by Arthur Andersen LLP, independent public accountants, to the extent and for
the periods stated in their reports and are included herein in reliance upon the
authority of Arthur Andersen as experts in giving those reports.
Additional Information
From FBR Asset
You can obtain complete copies of the documents to which we refer in this
prospectus, free of charge, by writing or calling:
Elaine Clancy, Chief Financial Officer
FBR Asset Investment Corporation
1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 469-1000 phone
(703) 312-9602 fax
From the SEC
This prospectus is part of a Registration Statement that we have filed with the
SEC. You can read and copy that Registration Statement, and the exhibits
attached to it, at the SEC's public reference rooms in Washington, DC, New York,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more
information about the public reference rooms.
After the offering, we will file annual, quarterly and special reports, proxy
statements and other information with the SEC. You will be able to read and copy
those documents at the SEC's public reference rooms too.
You can also obtain copies of all documents that we file with the SEC on the
SEC's website (http://www.sec.gov).
94
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.............................................F-2
Financial Statements:
Statements of Financial Condition
as of December 31, 1997 and 1998.............................................F-3
Statements of Income for the Period from December 15, 1997 (Inception),
through December 31, 1997,
and the Year Ended December 31, 1998.........................................F-4
Statements of Changes in Shareholders' Equity for the Period from December
15, 1997 (Inception), through December 31, 1997,
and the Year Ended December 31, 1998.........................................F-5
Statements of Cash Flows for the Period from December 15, 1997 (Inception),
through December 31, 1997,
and the Year Ended December 31, 1998.........................................F-6
Notes to Financial Statements........................................................F-7
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To FBR Asset Investment Corporation:
We have audited the accompanying statements of financial condition of FBR Asset
Investment Corporation (the "Company", a Virginia corporation) as of December
31, 1997 and 1998, and the related statements of income, changes in
shareholders' equity and cash flows for the period from December 15, 1997
(inception) through December 31, 1997, and the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FBR Asset Investment
Corporation as of December 31, 1997 and 1998, and the results of its operations
and its cash flows for the period from December 15, 1997 (inception), through
December 31, 1997, and the year ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Washington, D.C.
February 12, 1999
F-2
<PAGE>
<TABLE>
FBR Asset Investment Corporation
Statements of Financial Condition as of December 31, 1997 and 1998*
=====================================================================================================
As of December 31
--------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Assets
Mortgage-backed securities, at fair value $ - $161,418,739
Cash and cash equivalents 163,223,199 41,144,326
Investments in equity securities, at fair value 23,318,750 70,983,050
Notes receivable 3,000,000 19,082,921
Due from affiliate 545,827 -
Dividends receivable 434,717 870,477
Prepaid expenses - 454,746
Organization costs, net of accumulated
amortization of $3,733 and $5,329, respectively 7,909 6,313
Interest receivable 8,000 1,970,048
------------ ------------
Total assets $190,538,402 $295,930,620
============ ============
Liabilities and Shareholders' Equity
Liabilities:
Repurchase agreements $ - $128,550,000
Interest payable - 310,096
Dividends payable 510,950 2,563,058
Management fees payable 58,623 1,275,514
Accounts payable and accrued expenses 12,000 224,933
Due to custodian-mortgage securities - 11,929,614
Deferred revenue 190,000 172,826
------------ ------------
Total liabilities 771,573 145,026,041
------------ ------------
Shareholders' equity:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized - -
Common stock, par value $.01 per share, 200,000,000
shares authorized, 10,218,999, and 10,415,827
shares issued as of December 31, 1997 and 1998, 102,190 104,158
respectively
Additional paid-in capital 189,528,668 194,097,193
Accumulated other comprehensive income - (9,800,530)
Retained earnings (deficit) 135,971 (9,425,579)
Treasury stock, at cost, 1,872,300 shares - (24,070,663)
------------ ------------
Total shareholders' equity 189,766,829 150,904,579
------------ ------------
Total liabilities and shareholders' equity $190,538,402 $295,930,620
============ ============
====================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
FBR Asset Investment Corporation
Statements of Income for the Period from December 15, 1997 (Inception) through
December 31, 1997, and the Year Ended December 31, 1998*
===================================================================================================================
<CAPTION>
December 15, 1997
(Inception)
through Year Ended December
December 31, 1997 31, 1998
-------------------- ---------------------
<S> <C> <C>
Income:
Interest $ 18,040 $13,656,097
Dividends 434,717 4,271,405
Other income 268,520 -
---------- -----------
Total 721,277 17,927,502
---------- -----------
Expenses:
Interest expense - 5,359,633
Management fee expense 58,623 1,520,725
Professional fees 12,000 440,185
Insurance - 52,769
Amortization of stock options issued to manager - 454,746
Amortization of organization costs 3,733 1,596
Other - 139,806
---------- -----------
Total expenses 74,356 7,969,460
---------- -----------
Income before realized losses 646,921 9,958,042
---------- -----------
Realized gain on sale of mortgage securities - 176,048
Realized loss on equity investment - (6,615,000)
Realized loss on interest rate hedge - (1,930,855)
---------- -----------
Net income $ 646,921 $ 1,588,235
========== ===========
Basic and diluted earnings per share $ 0.06 $ 0.16
========== ===========
Weighted-average common and equivalent shares 10,218,999 10,044,483
========== ===========
===================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Period from December 15,
1997 (Inception) through December 31, 1997, and the Year Ended December 31, 1998*
====================================================================================================================================
<CAPTION>
Accumulated
Additional Retained Other
Common Paid in Earnings Treasury Comprehensive Comprehensive
Stock Capital (Deficit) Stock Income Total Income
----- ------- --------- ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 15, 1997 $ - $ - $ - $ - $ - $ - $ -
Issuance of common stock 102,190 189,528,668 - - - 189,630,858 -
Net income - - 646,921 - - 646,921
646,921
------------
Comprehensive income - - - - - - $ 646,921
============
Dividends - - (510,950) - - (510,950)
-------- ------------ ------------- ------------ ------------ ------------
Balance, December 31, 1997 102,190 189,528,668 135,971 - - 189,766,829
--------- ------------- -------------- ------------- ------------ -------------
Issuance of common stock 1,968 3,659,033 - - - 3,661,001
Stock options issued to
manager - 909,492 - - - 909,492
Repurchase of common - - - (24,070,663) - (24,070,663)
stock
Net income - - 1,588,235 - - 1,588,235 $ 1,588,235
Other comprehensive
income--
Change in unrealized
loss on
available-for-sale - - - - (9,800,530) (9,800,530) (9,800,530)
securities
------------
Comprehensive income - - - - - - $(8,212,295)
============
Dividends - - (11,149,785) - - (11,149,785)
-------- ------------ ------------ ------------ ----------- ------------
Balance, December 31, 1998 $104,158 $194,097,193 $ (9,425,579) $(24,070,663) $(9,800,530) $150,904,579
======== ============ ============= ============ =========== ============
====================================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-5
<PAGE>
<TABLE>
FBR Asset Investment Corporation
Statements of Cash Flows for the Period from December 15, 1997 (Inception)
through December 31, 1997, and the Year Ended December 31, 1998*
===================================================================================================================
<CAPTION>
December 15, 1997
(Inception)
through
December 31, 1997 Year Ended
December 31, 1998
------------------ --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 646,921 $ 1,588,235
Adjustments to reconcile net income to net cash (used in)
provided by operating activities--
Realized loss on equity securities - 6,615,000
Realized gain on sale of mortgage-backed securities - (176,048)
Unrealized gain on equity investments (268,520) -
Amortization 3,733 456,342
Premium amortization on mortgage-backed securities - 777,179
Changes in operating assets and liabilities:
Due from affiliate (545,827) 545,827
Dividends receivable (434,717) (435,760)
Interest receivable (8,000) (1,962,048)
Organization costs (11,642) -
Management fees payable 58,623 1,216,891
Accounts payable and accrued expenses 12,000 212,933
Interest payable - 310,096
Due to custodian - 2,041,230
Deferred revenue 190,000 (17,174)
------------ -------------
Net cash (used in) provided by operating (357,429) 11,172,703
activities
------------ -------------
Cash flows from investing activities:
Investments in equity securities and notes receivable, net of
repayments on notes receivable (26,050,230) (80,876,250)
Purchase of mortgage-backed securities - (221,156,241)
Proceeds from sale of mortgage-backed securities - 48,533,267
Receipt of principal payments - 21,204,987
------------ -------------
Net cash used in investing activities (26,050,230) (232,294,237)
------------ -------------
Cash flows from financing activities:
Repurchase of common stock - (24,070,663)
Proceeds from issuance of common stock 189,630,858 3,661,001
Proceeds from repurchase agreements - 128,550,000
Dividends paid - (9,097,677)
------------ -------------
Net cash provided by financing activities 189,630,858 99,042,661
------------ -------------
Net increase (decrease) in cash and cash equivalents 163,223,199 (122,078,873)
Cash and cash equivalents, beginning of the period - 163,223,199
------------ -------------
Cash and cash equivalents, end of the period $163,223,199 $ 41,144,326
============ =============
====================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Notes to Financial Statements
Note 1 Organization and Nature of Operations
FBR Asset Investment Corporation ("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 4).
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 2 Risk Factors
FBR Asset's investments are concentrated in mortgage-backed investments and
other readily marketable and non-marketable REIT related issues. FBR Asset's
market risk is caused by volatility and illiquidity in the markets in which FBR
Asset would seek to sell the securities that it owns. FBR Asset's concentration
of investments may result in significant exposure to risk of loss from factors
such as changes in prevailing interest rates, which could be mitigated through a
greater diversification of investments and the holding of all readily marketable
securities.
FBR Asset's primary investments have been in fixed rate, mortgage-backed
securities. An increase in interest rates will adversely affect the value of FBR
Asset's mortgage-backed portfolio. FBR Asset also employs leverage to fund
portfolio investments, and interest rates on such borrowings are generally based
on short-term indices. Because these borrowings bear interest rates based on
indices different from those used for the related mortgage portfolio, changes in
the spread between these interest rates may adversely effect results of
operations.
The investments in mortgage-backed securities are generally pledged as
collateral against the related borrowings. Should the value of the collateral
decline below agreed upon levels, due to factors such as a change in prevailing
interest rates, FBR Asset could be forced to sell the underlying collateral and
incur losses.
Prepayment rates on mortgages underlying FBR Asset's mortgage-backed investments
will vary from time to time as prevailing interest rates change and may cause
changes in the amount of FBR Asset's net interest income. FBR Asset reduces
prepayment risk through a variety of means, including structuring a diversified
portfolio with a variety of prepayment characteristics and balancing assets
purchased at a premium with assets purchased at a discount.
F-7
<PAGE>
Other equity and debt investments may also involve substantial amounts relative
to FBR Asset's total net assets and create exposure to issuers that are
generally concentrated in the REIT industry. These investments may include
non-investment grade and securities of privately held issuers with no ready
markets. The concentration and illiquidity of these investments expose FBR Asset
to a significantly higher degree of risk than is associated with more
diversified investment grade or readily marketable securities.
FBR Asset has elected to qualify as a REIT for tax purposes. To qualify for tax
treatment as a REIT under the Internal Revenue Code, FBR Asset must meet certain
income and asset tests and distribution requirements. Failure to meet these
requirements could have a material adverse impact on FBR Asset's results and
financial condition. Furthermore, because FBR Asset's investments include stock
in a number of other REITs, the failure of those other REITs to maintain their
REIT status could jeopardize FBR Asset's qualification as a REIT.
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"). Mortgage-backed security transactions are
recorded on the date the securities are purchased or sold.
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
exchange.
F-8
<PAGE>
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
December 31, 1998:
<TABLE>
====================================================================================================
<CAPTION>
Total Mortgage
Freddie Mac Fannie Mae Ginnie Mae Assets
----------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Mortgage-backed
securities, available
for sale-principal $93,278,879 $48,386,870 $16,294,168 $157,959,917
Unamortized premium 512,080 1,415,625 780,216 2,707,921
----------- ----------- ----------- ------------
Amortized cost 93,790,959 49,802,495 17,074,384 160,667,838
Gross unrealized gains 682,949 196,615 135,862 1,015,426
Gross unrealized losses (89,511) (156,584) (18,430) (264,525)
----------- ----------- ----------- ------------
Estimated fair value $94,384,397 $49,842,526 $17,191,816 $161,418,739
=========== =========== =========== ============
=====================================================================================================
</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 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.
Interest Rate Swaps
During 1998, FBR Asset 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.
F-9
<PAGE>
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.
In October 1998, in connection with the sale of mortgage assets and repayment of
certain repurchase agreements, the Company terminated one of its swap
agreements. The Company realized a loss of $1.9 million upon termination. The
remaining interest rate agreement has a notional amount of $50 million, a fair
value of approximately $(910,535) 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.
At December 31, 1997, FBR Asset classified its only three equity portfolio
investments as trading securities in accordance with SFAS No. 115. In January
1998, consistent with the intention to have the Company operate as a REIT,
management reevaluated its investment objectives for these investments and
concluded that these investments were being held for long-term yield, capital
appreciation, and cash flow. Accordingly, management reclassified such
investments as available for sale. The transfer of these securities between
categories was accounted for at fair value, and there was no change to FBR
Asset's net assets as a result of this change in classification.
For financial reporting purposes, realized gains and losses are recorded on the
date of the transaction 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. In 1998, management
recorded a charge to operations for $6.6 million associated with an other than
temporary decline in the value of its investment in Chastain Capital, Inc.
As of December 31, 1997, the Company's equity investments had an aggregate cost
basis of $23 million, a fair value of $23.3 million and unrealized gains of $0.3
million. 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 $12.6 million, realized losses of $6.6 million, and unrealized gains
of $2 million.
F-10
<PAGE>
Notes Receivable
On December 23, 1997, FBR Asset entered into an Interim Financing and Security
Agreement with Prime Holding, LLC ("Prime"). The agreement allows for up to a
$20 million bridge loan to Prime. The note accrues interest at an annualized
rate of 12-15% depending upon the funding period. All amounts due under the
bridge loan are due on June 30, 1999. As of December 31, 1998, $11.5 million had
been drawn against the bridge loan. From inception through December 31, 1998,
$1.0 million in interest income has been recorded by FBR Asset. Prime is a
Delaware limited liability company formed in August 1997 and is an early stage
mortgage origination company.
On February 5, 1999, FBR Asset funded an additional $7 million against the Prime
bridge loan.
On June 3, 1998, FBR Asset entered into a promissory note agreement with
Kennedy-Wilson, Inc. for $10 million. The note accrued interest at a rate of 12
percent per annum, which was payable monthly. The agreement called for the
repayment of the advanced principal amount upon the earlier of, the closing of a
public offering of common stock by Kennedy-Wilson, or December 3, 1998. On
November 30, 1998, Kennedy-Wilson paid the note down to $7,500,000, and FBR
Asset and Kennedy-Wilson entered into an amended promissory note agreement
increasing the interest rate to 17% and extending the repayment date to June 3,
1999. Kennedy-Wilson is a U.S. real estate marketing and investment firm
specializing in innovative marketing programs for various types of properties
and financial instruments. From inception through December 31, 1998, interest
income of $0.7 million has been recorded on this note.
On January 25, 1999, the Company loaned Brookdale Living Community, Inc. $5
million in subordinated debt. The debt bears interest at 13 percent per annum
and is due on April 26, 1999.
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, 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. The money market fund invests
primarily in obligations of the U.S. Government. The carrying amount of cash
equivalents approximates their fair value.
F-11
<PAGE>
New Accounting Pronouncements
During the period, FBR Asset adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 requires the reporting of comprehensive income in addition
to net income from operations. Comprehensive income is a 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.
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133 (SFAs No. 133) "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
years beginning after June 15, 1999, and generally requires that an entity
recognize derivative financial instruments as assets or liabilities and measure
them at fair value. Management is currently evaluating the impact of adopting
the requirements of SFAS 133.
Net Earnings Per Share
FBR Asset has adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires
the presentation of basic and diluted earnings per share. SFAS No. 128 specifies
that basic earnings per share excludes 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. As
a result, 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.
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.
Reclassifications
Certain amounts in the financial statements as of December 31, 1997, have been
reclassified to conform with 1998 presentation.
F-12
<PAGE>
Note 4 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 the following dividends:
Declaration Payable
Date Date Dividend
---- ---- --------
December 31, 1997 January 22, 1998 $.055(1)
April 6, 1998 April 22, 1998 $.200
June 24, 1998 July 14, 1998 $.295
October 13, 1998 October 20, 1998 $.360
December 31, 1998 January 15, 1999 $.300
(1) Includes $0.05 divided declared in June 1998 and paid in July 1998 to
shareholders of record as of December 31, 1997.
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 approximately $24 million,
or $12.86 average cost per share. In January 1999, the Company repurchased an
additional 107,000 shares of its common stock at $13.70 per share.
FBR Asset has outstanding, as of December 31, 1998, 1,021,900 options to
purchase common stock. These options, which were issued in a single grant, have
a term of ten years, and have an exercise price of $20 per share.
Note 5 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 those options 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 Company anticipates that FBR
Management will rescind options to purchase 155,000 shares in connection with
the establishment of FBR Asset's stock incentive plan.
F-13
<PAGE>
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.
Note 6 Related Parties
As of December 31, 1998, a wholly-owned subsidiary of Friedman, Billings, Ramsey
Group, Inc. ("FBR Group") owns 1,344,086 shares or approximately 15.73 percent
of the outstanding common stock of FBR Asset. FBR Group is the parent company of
FBR Management and FBR & Co.
Note 7 Equity Investments
Imperial Credit Commercial Corporation ("ICMI")
FBR Asset purchased 900,000 shares of ICMI common stock in December 1997. ICMI
is a Maryland corporation that has elected REIT status. It invests primarily in
performing multifamily and commercial term loans and interests in commercial and
residential mortgage-backed securities. ICMI also invests in various classes of
non-investment grade mortgage-backed securities. ICMI's common stock is publicly
traded.
Building One Services Corporation ("BOSS")
FBR Asset purchased 500,000 shares of BOSS (formerly Consolidated Capital
Corporation) common stock in December 1997. BOSS is a Delaware corporation that
was founded in February 1997 to build consolidated enterprises through the
acquisition and integration of multiple businesses in one or more fragmented
industries. BOSS has undertaken to consolidate facilities management companies
and may select companies in this or related industries in which to make future
investments. BOSS's common stock is publicly traded.
F-14
<PAGE>
Capital Automotive REIT ("CARS")
On February 13, 1998, FBR Asset acquired 1,792,115 shares of common stock in
Capital Automotive REIT ("CARS") in a private transaction, concurrent with
CARS's initial public stock offering at a price of $13.95 per share. CARS is a
self-administered and self-managed Maryland REIT formed to invest in the real
property and improvements used by operators of multisite, multifranchised motor
vehicle dealerships and motor vehicle related businesses located in major
metropolitan areas throughout the United States. CARS primarily acquires real
property and simultaneously leases back this property for use by dealers. CARS's
common stock is publicly traded.
Resource Asset Investment Trust ("RAS")
On February 19, 1998, FBR Asset acquired 300,000 shares of common stock in
Resource Asset Investment Trust ("RAS"), a Maryland REIT, for a cost of
$4,599,000 or $15.33 per share. RAS's principal business activity is the
acquisition and/or financing of loans secured by mortgages on real property (or
interests in such loans) in situations that, generally, do not conform to the
underwriting standards of institution lenders or sources that provide financing
through securitization. RAS believes that its anticipated financing activity
provides it with an underserved niche market in the real estate industry. RAS's
common stock is publicly traded.
On June 24th and 25th, 1998, FBR Asset acquired an additional 44,575 shares of
RAS for a cost of $693,516 or $15.55 average cost per share.
Anthracite Capital, Inc. ("AHR")
On March 27, 1998, FBR Asset purchased 716,846 shares of common stock in
Anthracite Capital, Inc. ("AHR"), a Maryland REIT, for a cost of approximately
$10 million or $13.95 per share. AHR was organized in November 1997 to invest in
a diversified portfolio of multifamily, commercial and residential mortgage
loans, mortgage-backed securities, and other real estate related assets in the
United States and non-U.S. markets. Anthracite seeks to achieve strong
investment returns by maximizing the spread of investment income earned on its
real estate assets over the cost of financing and hedging these assets and/or
liabilities. AHR's common stock is publicly traded.
During September and October, 1998, FBR Asset purchased an additional 865,000
shares of AHR for $8,334,496 or $9.64 average cost per share.
Chastain Capital, Inc. ("CHAS")
On April 29, 1998, FBR Asset purchased 700,000 shares of common stock in
Chastain Capital, Inc. ("CHAS"), a Georgia REIT, for a cost of $9,765,000 or
$13.95 per share. CHAS was organized in December 1997 to invest in commercial
and multifamily mortgage and real estate related assets located in major
metropolitan markets throughout the United States. CHAS emphasizes, in
particular, origination of commercial mortgage loans for the purpose of
securitizing and the retainage of subordinated interests in these loans.
F-15
<PAGE>
In 1998, FBR Asset recorded a charge to operations in the amount of $6,615,000
to reflect management's determination that the decline in the market value of
the stock was more than temporary.
East-West Bancorp ("EWB")
On June 30, 1998, FBR Asset purchased, through a private placement offering,
520,000 shares of East-West Bancorp, a Southern California commercial bank, for
a cost of $5,200,000 or $10.00 per share. EWB's strategy is to become the
premier commercial bank in California serving the unique personal and business
banking needs of customers engaged in business and having family ties with or
origins from the Asia Pacific region, with experienced personnel having the
language capability and cultural sensitivity appropriate for the region.
Prime Retail, Inc. ("PRT")
In September 1998, FBR Asset purchased an aggregate of 122,300 shares of Prime
Retail, Inc. 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.
F-16
<PAGE>
================================================================================
We have not authorized any dealer, salesperson or any other person to give
any information or make any representations in connection with this offering
other than those contained in this prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the company or the selling stockholders. This prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any security other than
the shares offered by this prospectus nor does it constitute an offer to sell or
a solicitation of an offer or to buy the shares offered hereby in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof or that there has not been a change in
the affairs of the company since the date hereof.
---------------
SUMMARY TABLE OF CONTENTS
Page
----
Summary...........................................1
Risks of Investing in FBR Asset...................4
Organization & Relationships.....................15
FBR & FBR Management.............................16
FBR Asset's Business.............................24
Selected Financial Data..........................39
Management's Discussion & Analysis...............40
FBR Asset's Directors & Officers.................54
FBR Asset's Capital Stock........................62
Anti-Takeover Effect of Maryland Laws............67
Capitalization...................................69
Common Stock Available For Future Sale...........69
Principal Shareholders...........................70
Federal Income Tax Consequences of FBR
Asset's Status as a REIT.........................71
ERISA Considerations.............................89
Selling Shareholders.............................91
Use of Proceeds..................................91
Plan of Distribution.............................92
Other Matters....................................94
Until __________, 1999, all dealers effecting transactions in the
registered securities whether or not participating in this distribution, may be
required to deliver a prospectus.
================================================================================
<PAGE>
================================================================================
________ Shares
FBR Asset Investment
Corporation
Common Stock
-----------------------
PROSPECTUS
-----------------------
___________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expense, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of common stock being registered. All amounts are estimates.
Amount To Be Paid
-----------------
SEC registration fee $45,888
Printing and mailing expenses $________*
Legal fees and expenses $________*
Accounting fees and expenses $________*
Transfer agent and custodian fees $________*
Miscellaneous $________*
Total $________*
==========
- --------------------
*To be included by amendment
Item 32. Sales to Special Parties.
*To be included by amendment
Item 33. Recent Sales of Unregistered Securities.
On November 19, 1998, the Registrant was formed and one share was issued to
Elaine M. Clancy for consideration of $20 in cash.
On __________, 1999, FBR Asset Investment Corporation, a Virginia corporation,
was merged into the Registrant. As part of that merger, _______ shares of common
stock in the Registrant were issued to existing shareholders in the Virginia
corporation in exchange for their shares in the Virginia corporation, on a
one-for-one basis. The transaction was exempt from registration under the
Securities Act of 1933 pursuant to Rule 145(a)(2).
Item 34. Indemnification of Officers and Directors.
The Maryland General Corporation Law permits a Maryland corporation to include
in its Charter a provision limiting the liability of its directors and officers
to the corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Registrant contains such a provision that eliminates such liability to the
maximum extent permitted by Maryland law.
II-1
<PAGE>
The Charter of the Registrant authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any or former
director or officer or (b) any individual who, while a director of the
Registrant and at the request of the Registrant, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason or his status as a present or former director or officer of
the Registrant. The Bylaws of the Registrant obligate it, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer who is a made a party to the proceeding by reason of
his service in that capacity or (b) any individual who, while a director of the
Registrant and at the request of the Registrant serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise who is made a party to
the proceeding by reason of his service in that capacity. The Charter and Bylaws
also permit the Registrant to indemnify and advance expenses to any person who
served a predecessor of the Registrant in any of the capacities described above
and to any employee or agent of the Registrant or a predecessor of the
Registrant. The Maryland General Corporation Law requires a corporation (unless
its Charter provides otherwise, which the Registrant's Charter does not) to
indemnify a director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he is made a party by
reason of his service in that capacity.
The Maryland General Corporation Law permits a corporation to indemnify its
present and former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by them
in connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the
Maryland General Corporation Law, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, the Maryland General Corporation Law permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer of
his good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on his
behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
Item 35. Treatment of Proceeds from Stock Being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements included in the prospectus.
II-2
<PAGE>
<TABLE>
<CAPTION>
(b) Exhibits
<S> <C>
3.1 Amended and Restated Charter of Registrant
3.2 Amended and Restated Bylaws of Registrant
4 Form of stock certificate
5 Form of opinion of Hunton & Williams
8 Form of opinion of Hunton & Williams with respect to tax matters
10.1 Management Agreement, dated December 17, 1997, by and between FBR Asset Investment
Corporation and Friedman, Billings, Ramsey Investment Management, Inc.*
10.2 License Agreement, dated December 17, 1997, by and between FBR Asset Investment
Corporation and Friedman, Billings, Ramsey Group, Inc.*
10.3 Stock Option Agreement, dated December 17, 1997, by and between FBR Asset Investment
Corporation and Friedman, Billings, Ramsey Investment Management, Inc.*
10.4 Sub-management Agreement, dated as of December 17, 1997, by and between Friedman,
Billings, Ramsey Investment Management, Inc., and BlackRock Financial Management, Inc.*
10.5 Assignment Agreement, dated as of December 17, 1998, by and between Friedman, Billings,
Ramsey Investment Management, Inc., and BlackRock Financial Management, Inc.*
10.6 Stock Incentive Plan of Registrant**
10.7 Form of Interest Rate Swap Agreement**
10.8 Form of Repurchase Agreement**
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Hunton & Williams (included in Exhibit 5)
25 Power of Attorney of Officers and Directors of Registrant (included on signature pages
of the Registration Statement)
27.1 Financial Data Schedule
</TABLE>
* Previously filed.
** To be filed by amendment.
Item 37. Undertakings.
(a) The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
II-3
<PAGE>
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered(if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 242(b) if, in the
aggregate, the changes in volume and price
represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed
in the registration statement or any material
change to such information in the registration
statement.
2. That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time will
be deemed to be the initial bona fide offering thereof;
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering; and
4. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Arlington, Commonwealth of Virginia, on February
17, 1999.
FBR ASSET INVESTMENT CORPORATION (Maryland)
(Registrant)
By: /s/ Elaine M. Clancy
--------------------------------------------
Elaine M. Clancy
Chief Financial Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on November 13, 1998. Each of the directors and/or officers
of FBR Asset Investment Corporation (Maryland) whose signature appears below
hereby appoints Eric F. Billings and Elaine M. Clancy, and both of them
severally, as his attorney-in-fact to sign in his name and behalf, in any and
all capacities stated below and to file with the Commission, any and all
amendments, including post-effective amendments to this registration statement,
making such changes in the registration statement as appropriate, and generally
to do all such things in their behalf in their capacities as officers and
directors to enable FBR Asset Investment Corporation to comply with the
provisions of the Securities Act of 1933, and all requirements of the Securities
and Exchange Commission.
Signature Title
--------- -----
/s/ Emanuel J. Friedman Chairman of the Board of Directors
- ------------------------------
Emanuel J. Friedman
/s/ Eric F. Billings Vice Chairman, Chief Executive Officer
- ------------------------------ and Director (Principal Executive
Eric F. Billings Officer)
/s/ W. Russell Ramsey President, Secretary and Director
- ------------------------------
W. Russell Ramsey
/s/ Elaine M. Clancy Chief Financial Officer
- ------------------------------ (Principal Financial Officer)
Elaine M. Clancy
/s/ Stephen D. Harlan Director
- ------------------------------
Stephen D. Harlan
/s/ Webb Hayes Director
- ------------------------------
Webb Hayes
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit Page
- -------------- ------- ----
<S> <C> <C>
3.1 Amended and Restated Charter of Registrant
3.2 Amended and Restated Bylaws of Registrant
4 Form of stock certificate
5 Form of opinion of Hunton & Williams
8 Form of opinion of Hunton & Williams with respect
to tax matters
10.1 Management Agreement, dated December 17, 1997, by
and between FBR Asset Investment Corporation and
Friedman, Billings, Ramsey Investment Management, Inc.*
10.2 License Agreement, dated December 17,
1997, by and between FBR Asset
Investment Corporation and Friedman,
Billings, Ramsey Group, Inc.*
10.3 Stock Option Agreement, dated December 17, 1997,
by and between FBR Asset Investment Corporation
and Friedman, Billings, Ramsey Investment
Management, Inc.*
10.4 Sub-management Agreement, dated as of
December 17, 1997, by and between
Friedman, Billings, Ramsey Investment
Management, Inc., and BlackRock
Financial Management, Inc.*
10.5 Assignment Agreement, dated as of December 17,
1998, by and between Friedman, Billings, Ramsey
Investment Management, Inc., and BlackRock
Financial Management, Inc.*
10.6 Stock Incentive Plan of Registrant**
10.7 Form of Interest Rate Swap Agreement**
10.8 Form of Repurchase Agreement**
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Hunton & Williams (included in Exhibit 5)
25 Power of Attorney of Officers and Directors of
Registrant (included on signature pages of the
Registration Statement)
27.1 Financial Data Schedule
</TABLE>
* Previously filed.
** To be filed by amendment.
Exhibit 3.1
Restated & Amended Articles of Incorporation
ARTICLE I
NAME
The name of the corporation (the "Corporation") is:
FBR Asset Investment Corporation
ARTICLE II
PURPOSE
The purpose for which the Corporation is formed is to engage in any
lawful act or activity for which corporations may be organized under the general
laws of the State of Maryland as now or hereafter in force.
ARTICLE III
PRINCIPAL OFFICE IN MARYLAND AND RESIDENT AGENT
The address of the Corporation's principal office in the State of
Maryland is c/o The Corporation Trust Inc., 300 E. Lombard Street, Baltimore,
Maryland 21202. The name and address of the Corporation's resident agent is The
Corporation Trust Inc., 300 E. Lombard Street, Baltimore, Maryland 21202. The
resident agent is a Maryland corporation.
ARTICLE IV
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 4.1 Number and Term of Directors.
4.1.1 Number of Directors. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. The
number of directors of the Corporation shall be five. The number of directors
may be increased or decreased by resolution adopted by the affirmative vote of
at least 80% of the members of the Board of Directors, but shall never be (i)
less than the minimum number required by the general laws of the State of
Maryland now or hereafter in force or (ii) more than nine.
4.1.2 Term of Directors. Directors shall each serve a one-year
term and until their successors are elected and qualified. The following persons
are the initial directors of the Corporation, to serve until their successors
are elected and qualified: Emanuel J. Friedman, Eric F. Billings, W. Russell
Ramsey, Webb Hayes and Stephen D. Harlan.
4.1.3 Election by Preferred Stockholders. Whenever the holders
of any one or more series of preferred stock of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, the Board of Directors shall consist of said directors so elected
A-1
<PAGE>
in addition to the number of directors fixed as provided in paragraph 4.1.1 of
this Article IV or in the Bylaws. Notwithstanding the foregoing, and except as
otherwise may be required by law, whenever the holders of any one or more series
of preferred stock of the Corporation shall have the right, voting separately as
a class, to elect one or more directors of the Corporation, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of stockholders.
Section 4.2 Independent Directors.
4.2.1 Number of Independent Directors. Notwithstanding anything
herein to the contrary, at all times from and after the Initial Offering (as
defined in Section 6.1.1(j)) (except during a period not to exceed sixty (60)
days following the death, resignation, incapacity or removal from office of a
director prior to expiration of the director's term of office), at least 30% of
the members of the Board of Directors shall be "Independent Directors."
"Independent Director" shall mean any director who within the past two years has
not directly or indirectly (i) owned a material interest (as defined in Section
4.2.5) in the Manager (as defined in Section 4.2.2) or any of its Affiliates (as
defined in Section 4.2.3), (ii) been employed by the Manager or any of its
Affiliates, (iii) been an officer or director of the Manager or any of its
Affiliates, or (iv) performed any material services (as defined in Section
4.2.5) for the Manager or any of its Affiliates.
4.2.2 Manager. For purposes of this Charter, the term "Manager"
means the Person engaged by the Corporation pursuant to a Management Agreement
(as that term is defined in Section 4.12) to advise the Board of Directors and
be responsible for directing the day-to-day business affairs of the Corporation,
including any Person to which the Person so engaged subcontracts substantially
all such functions.
4.2.3 Affiliate. For purposes of this Charter, "Affiliate" of a
Person shall mean (i) any Person who directly or indirectly controls, is
controlled by, or is under common control with such Person, (ii) any Person who
directly or indirectly owns, controls or holds, with the power to vote, 10% or
more of such Person's outstanding voting securities, (iii) any Person who is an
officer of, partner in, or director of such Person, or serves in a similar
capacity with respect to such Person, (iv) any Person for which such Person
serves as an officer, partner or director, or serves in some similar capacity,
or (v) any Person 10% of whose outstanding voting securities are directly or
indirectly owned, controlled or held, with the power to vote, by such Person.
Notwithstanding anything herein to the contrary, for purposes of determining who
may serve as an "Independent Director," the Corporation shall not be considered
an Affiliate of the Manager.
4.2.4 Indirect Relationship. For purposes of this Charter, an
"indirect relationship" shall include circumstances in which a director's
spouse, children, parents, siblings or mothers-, fathers-, sisters-or
brothers-in-law is or has been associated with the Manager or any of its
Affiliates.
4.2.5 Materiality. For purposes of Section 4.2.1, (i) an
"interest" shall be deemed material per se if it (a) exceeds 5% of a Person's
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outstanding voting securities or (b) 5% of a Person's net worth on a fair market
value basis and (ii) "services" shall be deemed material per se if the gross
revenue derived by the director from the Manager and its Affiliates exceeds 5%
of such director's (a) annual gross revenue from all sources in either of the
past two years or (b) net worth on a fair market value basis. No person shall be
disqualified from serving as an Independent Director solely because (1) that
person maintains a discretionary brokerage account with the Manager or its
Affiliates or (2) the Manager or its Affiliates perform other services for such
person, whether material or not.
4.2.6 Person. For purposes of this Charter, "Person" means and
includes any natural person, corporation, partnership, association, trust,
limited liability, company or any other legal entity.
Section 4.3 Amendment to Section 4.2. Notwithstanding any other
provisions of this Charter or the Bylaws of the Corporation (and notwithstanding
that some lesser percentage may be specified by law, this Charter or the Bylaws
of the Corporation), the provisions of Sections 4.2 and 4.3 hereof shall not be
amended, altered, changed or repealed without the affirmative vote of at least
80% of the members of the Board of Directors and the affirmative vote of not
less than two-thirds of all votes ordinarily entitled to be cast in the election
of directors, voting together as a single class.
Section 4.4 Extraordinary Actions. Notwithstanding any provision of law
requiring the authorization of any action by a greater proportion than a
majority of the total number of shares of all classes of capital stock, or of
the total number of shares of any class of capital stock, such action shall be
valid and effective if authorized by an affirmative vote of the holders of a
majority of the total number of shares of all classes outstanding and entitled
to vote thereon, except as otherwise provided in this Charter.
Section 4.5 Authorization by Board of Stock Issuance. The Board of
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of stock of any class or series,
whether now or hereafter authorized, for such consideration as the Board of
Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in this Charter or the Bylaws.
Section 4.6 Preemptive Rights. No holder of any stock or any other
securities of the Corporation, whether now or hereafter authorized, shall have
any preemptive or preferential right to subscribe to or purchase (i) any shares
of any class of the Corporation, whether now or hereafter authorized, (ii) any
warrants, rights, or options to purchase any such shares, or (iii) any
securities or obligations convertible into any such shares or into warrants,
rights, or options to purchase any such shares.
Section 4.7 Indemnification.
4.7.1 The Corporation shall indemnify and hold harmless, and
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition of
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any proceeding to (A) its present and former directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be authorized by the Board of Directors or the Corporation's
Bylaws and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking indemnification may
be entitled. The Board of Directors may take such actions as is necessary to
carry out these indemnification provisions and is expressly empowered to adopt,
approve and amend from time to time any bylaws, resolutions or contracts
implementing such provisions or such further indemnification arrangements as may
be permitted by law.
4.7.2 Any indemnification, or payment of expenses in advance of
the final disposition of any proceeding, shall be made promptly, and in any
event within 60 days, upon the written request of the director, officer or other
party entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be reimbursed by the Corporation. It shall
be a defense to any action for advance for expenses that (a) a determination has
been made that the facts then known to those making the determination would
preclude indemnification or (b) the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met and (ii)
a written affirmation by the Indemnified Party of such Indemnified Party's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met.
4.7.3 No amendment of this Charter or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal.
Section 4.8 Determinations by Board. The determinations as to any of
the following matters made in good faith by or pursuant to the direction of the
Board of Directors consistent with this Charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which such reserves or charges
shall have been created shall have been paid or discharged); the fair value, or
any sale, bid or asked price to be applied in determining the fair value, of any
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asset owned or held by the Corporation; any matters relating to the acquisition,
holding and disposition of any assets by the Corporation; whether and to what
extent and at what times and places and under what conditions and regulations
the books, accounts and documents of the Corporation shall be open to the
inspection of stockholders, except as otherwise provided by statute or by the
Bylaws. Except as provided by statute or by the Bylaws, no stockholder shall
have any right to inspect any book, account or document of the Corporation
unless authorized to do so by resolution of the Board of Directors.
Section 4.9 REIT Qualification. The Corporation shall seek to elect and
maintain status as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"). The Board of Directors shall use
its reasonable best efforts to ensure that the Corporation satisfies the
requirements for qualification as a REIT under the Code, including but not
limited to, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount and timing of distributions to its
stockholders. The Board of Directors may revoke the Corporation's election to be
taxed as a REIT upon the affirmative vote of 80% of the members of the Board of
Directors. In the absence of such 80% vote, the Board of Directors shall take no
action to disqualify the Corporation as a REIT or to otherwise revoke the
Corporation's election to be taxed as a REIT without the affirmative vote of not
less than two-thirds of all votes ordinarily entitled to be cast in the election
of directors, voting together as a single class.
Section 4.10 Removal of Directors. Any director may be removed from
office at any time, but only for cause, and then only by the affirmative vote of
not less than two-thirds of all votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
Section 4.11 Dissolution. The dissolution of the Corporation shall be
approved by the affirmative vote of not less than two-thirds of all votes
ordinarily entitled to be cast in the election of directors, voting together as
a single class.
Section 4.12 Management Agreements. Subject to such approval of the
Independent Directors and other conditions, if any, as may be required by any
applicable statute, rule or regulation, the Board of Directors may engage a
Manager to advise the Board of Directors and be responsible for directing the
day-to-day affairs of the Corporation pursuant to a written agreement (a
"Management Agreement"). The approval of any Management Agreement and the
renewal or termination thereof shall require the affirmative vote of a majority
of the Independent Directors.
Section 4.13 Amendment of Certain Provisions. Notwithstanding any other
provision of this Charter or the Bylaws of the Corporation, the provisions of
Sections 4.9, 4.10, 4.11, 4.12 and 4.13 shall not be amended, altered, changed
or repealed without the affirmative vote of not less than two-thirds of all
votes ordinarily entitled to be cast in the election of directors, voting
together as a single class.
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ARTICLE V
STOCK
Section 5.1 Authorized Shares. The total number of shares of stock of
all classes that the Corporation has authority to issue is 250,000,000 shares of
capital stock (par value $.01 per share), amounting in aggregate par value to
$2,500,000. 200,000,000 of such shares are initially classified as "Common
Stock," and 50,000,000 of such shares are "Preferred Stock." The Board of
Directors may classify and reclassify any unissued shares of capital stock by
setting or changing in any one or more respects the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of capital
stock.
Section 5.2 Common Stock. Subject to Article VI, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the Corporation:
5.2.1 Voting Rights. Each share of Common Stock shall have one
vote, and except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock. Shares of Common
Stock shall not have cumulative voting rights.
5.2.2 Dividends. Subject to the provisions of law and any
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid ratably on the Common Stock at such time and in
such amounts as the Board of Directors may deem advisable.
5.2.3 Distribution Upon Dissolution. In the event of any
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Common Stock shall be entitled, together with
the holders of any other class of stock hereafter classified or reclassified not
having a preference on distributions in the liquidation, dissolution or winding
up of the Corporation, to share ratably in the net assets of the Corporation
remaining after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any class
of stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation
shall be entitled.
Section 5.3 Classification/Reclassification.
5.3.1 Powers of the Board of Directors. Subject to Article VI
and the foregoing, the power of the Board of Directors to classify and
reclassify any of the shares of capital stock shall include, without limitation,
subject to the provisions of this Charter, authority to classify or reclassify
any unissued shares of such stock into a class or classes of preferred stock,
preference stock, special stock or other stock, and to divide and classify
shares of any class into one or more series of such class, by determining,
fixing, or altering one or more of the following:
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(a) The distinctive designation of such class or series
and the number of shares that constitute such class or series; provided
that, unless otherwise prohibited by the terms of such or any other
class or series, the number of shares of any class or series may be
decreased by the Board of Directors in connection with any
classification or reclassification of unissued shares and the number of
shares of such class or series may be increased by the Board of
Directors in connection with any such classification or
reclassification, and any shares of any class or series that have been
redeemed, purchased, otherwise acquired or converted into shares of
Common Stock or any other class or series shall become part of the
authorized capital stock and be subject to classification and
reclassification as provided in this subparagraph.
(b) Whether or not and, if so, the rates, amounts and
times at which, and the conditions under which, dividends shall be
payable on shares of such class or series, whether any such dividends
shall rank senior or junior to, or on a parity with, the dividends
payable on any other class or series of stock, and the status of any
such dividends as cumulative, cumulative to a limited extent or
non-cumulative and as participating or non-participating.
(c) Whether or not shares of such class or series shall
have voting rights, in addition to any voting rights provided by law
and, if so, the terms of such voting rights.
(d) Whether or not shares of such class or series shall
have conversion or exchange privileges and, if so, the terms and
conditions thereof, including provision for adjustment of the
conversion or exchange rate in such events or at such times as the
Board of Directors shall determine.
(e) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such
redemption, including the date or dates upon or after which they shall
be redeemable and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates; and whether or not there shall be any sinking fund or
purchase account in respect thereof, and if so, the terms thereof.
(f) The rights of the holders of shares of such class or
series upon the liquidation, dissolution or winding up of the affairs
of, or upon any distribution of the assets of, the Corporation, which
rights may vary depending upon whether such liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at
different dates, and whether such rights shall risk senior or junior to
or on a parity with such rights of any other class or series of stock.
(g) Whether or not there shall be any limitations
applicable, while shares of such class or series are outstanding, upon
the payment of dividends or making of distributions on, or the
acquisition of, or the use of moneys for purchase or redemption of, any
stock of the Corporation, or upon any other action of the Corporation,
including action under this subparagraph, and, if so, the terms and
conditions thereof.
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(h) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such
class or series, not inconsistent with law and this Charter.
5.3.2 Ranking. For the purposes hereof and of any articles
supplementary to this Charter providing for the classification or
reclassification of any shares of capital stock or of any other Charter document
of the Corporation (unless otherwise provided in any such articles or document),
any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to another class or series either as to
dividends or upon liquidation, if the holders of such class or series
shall be entitled to the receipt of dividends or of amounts
distributable on liquidation, dissolution or winding up, as the case
may be, in preference or priority to holders of such other class or
series;
(b) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation price per share
thereof be different from those of such others, if the holders of such
class or series of stock shall be entitled to receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as
the case may be, in proportion to their respective dividend rates or
redemption or liquidation prices, without preference or priority over
the holders of such other class or series; and
(c) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of such
class or series shall be subject or subordinate to the rights of the
holders of such other class or series in respect of the receipt of
dividends or the amounts distributable upon liquidation, dissolution or
winding up, as the case may be.
Section 5.4 Charter and Bylaws. All persons who shall acquire stock in
the Corporation shall acquire the same subject to the provisions of this Charter
and the Bylaws of the Corporation.
ARTICLE VI
Section 6.1 Restrictions on Transfer.
6.1.1 Definitions. For purposes of this Article VI, the
following terms shall have the following meanings:
(a) "Beneficial Ownership" shall mean ownership of shares
of Equity Stock by a Person who would be treated as an owner of such
shares of Equity Stock either directly or indirectly through the
application of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially
Owns," and "Beneficially Owned" shall have correlative meanings.
(b) "Beneficiary" shall mean, with respect to any Trust,
one or more organizations described in each of Section 170(b)(1)(A)
(other than clause (vii) or (viii) thereof) and Section 170(c)(2) of
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the Code that are named by the Corporation as the beneficiary or
beneficiaries of such Trust, in accordance with the provisions of
Section 6.2.1. No Beneficiary shall be the beneficiary of more than one
Trust at any time.
(c) "Board of Directors" shall mean the Board of Directors
of the Corporation.
(d) "Closing Price" on any date shall mean the last sale
price for such shares of Equity Stock, regular way, or, in case no such
sale takes place on such a day, the average of the closing bid and
asked prices, regular way, for such shares of Equity Stock, in either
case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
New York Stock Exchange or, if such shares are not listed or admitted
to trading on the New York Stock Exchange, as reported on the principal
consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which such
shares are listed or admitted to trading or, if such shares are not
listed or admitted to trading on any national securities exchange, the
last quoted price, or, if transaction prices are not reported, the
average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System, or, if such system is no longer in
use, the principal other automated quotation system that may then be in
use or, if such shares are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a
professional market maker making a market in such shares selected by
the Corporation's Board of Directors or, in the event that no trading
price is available for such shares, the fair market value of the
shares, as determined in good faith by the Corporation's Board of
Directors.
(e) "Constructive Ownership" shall mean ownership of
shares of Equity Stock by a Person who would be treated as an owner of
such shares of Equity Stock either directly or indirectly through the
application of Section 318 of the Code, as modified by Section
856(d)(5) of the Code. The terms "Constructive Owner," "Constructively
Owns," and "Constructively Owned" shall have correlative meanings.
(f) "Disqualified Person" means (i) the United States, any
State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of
the foregoing, (ii) any tax exempt organization (other than a farmers'
cooperative described in Section 521 of the Code) that is exempt both
from income taxation and from taxation under the unrelated business
taxable income provisions of the Code, and (iii) any rural electrical
or telephone cooperative.
(g) "Equity Stock" shall mean the Common Stock and the
Preferred Stock of the Corporation, including the shares of Common
Stock and Preferred Stock of the Corporation that are held as
Shares-in-Trust in accordance with the provisions of Section 6.2.
(h) "FBR" shall mean Friedman, Billings, Ramsey Group,
Inc., and its Affiliates.
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(i) "FBR Limit" shall mean (a) 20% of the number of
outstanding shares of Common Stock and (b) 20% of the number of
outstanding shares of any class or series of Preferred Stock.
(j) "Initial Offering" means the sale of shares of Common
Stock pursuant to the Corporation's first effective registration
statement for such shares of Common Stock filed under the Securities
Act of 1933, as amended.
(k) "Look-Through Entity" shall mean either (i) a pension
trust that qualifies for look-through treatment under Section 856(h)(3)
of the Code or (ii) an entity that qualifies as a regulated investment
company under Section 851 of the Code, as long as each beneficial owner
of such entity would satisfy the Ownership Limit if such beneficial
owner owned directly its proportionate share of the shares of Equity
Stock that are held by the Look-Through Entity.
(l) "Look-Through Entity Limit" shall mean (a) 15% of the
number of outstanding shares of Common Stock and (b) 15% of the number
of outstanding shares of any class or series of Preferred Stock.
(m) "Market Price" on any date shall mean the average of
the Closing Price for the five consecutive Trading Days ending on such
date.
(n) "Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock including but not limited to,
the granting of any option or entering into any agreement for the sale,
transfer or other disposition of shares of Equity Stock or the sale,
transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for shares of Equity Stock.
(o) "Ownership Limit" shall mean 9.9% of the number of
outstanding shares of Common Stock and 9.9% of the number of
outstanding shares of any class or series of Preferred Stock.
(p) "Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with the provisions
of Section 6.2.5.
(q) "Person" shall mean an individual, corporation,
partnership, estate, trust, a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity and
also includes a "group" as that term is used for purposes of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended.
(r) "Prohibited Owner" shall mean, with respect to any
purported Transfer or Non-Transfer Event, any Person who, but for the
provisions of Section 6.1.3, would own record title to shares of Equity
Stock.
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(s) "Restriction Termination Date" shall mean the first
day after the date of the Initial Offering on which (i) the
Corporation's election to be taxed as a REIT is revoked pursuant to
Section 4.9 hereof or (ii) the restrictions contained in Sections
6.1.2(a) through (e) hereof are removed pursuant to 6.1.8 hereof.
(t) "Shares-in-Trust" shall mean any shares of Equity
Stock designated Shares-in-Trust pursuant to Section 6.1.3.
(u) "Trading Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in the State
of New York are authorized or obligated by law or executive order to
close.
(v) "Transfer" (as a noun) shall mean any sale, transfer,
gift, assignment, devise or other disposition of shares of Equity
Stock, whether voluntary or involuntary, whether of record,
constructively or beneficially and whether by operation of law or
otherwise. "Transfer" (as a verb) shall have the correlative meaning.
(w) "Trust" shall mean any separate trust created pursuant
to Section 6.1.3 and administered in accordance with the terms of
Section 6.2 hereof, for the exclusive benefit of any Beneficiary. A
separate trust shall be created for each transfer pursuant to Section
6.1.3 hereof.
(x) "Trustee" shall mean any Person or entity unaffiliated
with both the Corporation and any Prohibited Owner, such Trustee to be
designated by the Corporation to act as trustee of any Trust, or any
successor trustee thereof.
6.1.2 Restriction on Transfers.
(a) Except as provided in Section 6.1.7, from the date of
the Initial Offering and prior to the Restriction Termination Date, (i)
no Person may Beneficially Own or Constructively Own outstanding shares
of Equity Stock in excess of the Ownership Limit, other than (A) FBR,
which may not Beneficially Own or Constructively Own outstanding shares
of Equity Stock in excess of the FBR Limit, and (B) a Look-Through
Entity, which may not Beneficially Own or Constructively Own
outstanding shares of Equity Stock in excess of the Look-Through Entity
Limit, and (ii) any Transfer that, if effective, would result in any
Person Beneficially Owning or Constructively Owning shares of Equity
Stock in excess of the Ownership Limit, the FBR Limit, or the
Look-Through Entity Limit, as applicable, shall be void ab initio as to
the Transfer of that number of shares of Equity Stock which would be
otherwise Beneficially Owned or Constructively Owned by such Person in
excess of the Ownership Limit, the FBR Limit, or the Look-Through
Entity Limit, as applicable, and the intended transferee shall acquire
no rights in such excess shares of Equity Stock.
(b) From the date of the Initial Offering and prior to the
Restriction Termination Date, any Transfer that, if effective, would
result in shares of Equity Stock being beneficially owned by fewer than
100 Persons (determined without reference to any rules of attribution)
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shall be void ab initio as to the Transfer of that number of shares
which would be otherwise beneficially owned (determined without
reference to any rules of attribution) by the transferee, and the
intended transferee shall acquire no rights in such shares of Equity
Stock.
(c) Except as provided in Section 6.1.7, from the date of
the Initial Offering and prior to the Restriction Termination Date, any
Transfer of shares of Equity Stock that, if effective, would result in
the Corporation being "closely held" within the meaning of Section
856(h) of the Code shall be void ab initio as to the Transfer of that
number of shares of Equity Stock which would cause the Corporation to
be "closely held" within the meaning of Section 856(h) of the Code, and
the intended transferee shall acquire no rights in such shares of
Equity Stock.
(d) Except as provided in Section 6.1.7., from the date of
the Initial Offering and prior to the Restriction Termination Date, any
Transfer of shares of Equity Stock that, if effective, would cause the
Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the Corporation's real property, within the
meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio as
to the Transfer of that number of shares of Equity Stock which would
cause the Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's real property,
within the meaning of Section 856(d)(2)(B) of the Code, and the
intended transferee shall acquire no rights in such excess shares of
Equity Stock.
(e) Except as provided in Section 6.1.7, from the date of
the Initial Offering and prior to the Restriction Termination Date, any
Transfer that, if effective, would result in shares of Equity Stock
being beneficially owned by a Disqualified Person shall be void ab
initio as to the Transfer of that number of shares of Equity Stock
which otherwise would be beneficially owned by the transferee, and the
intended transferee shall acquire no rights in such shares of Equity
Stock.
6.1.3 Transfer to Trust.
(a) If, notwithstanding the other provisions contained in
this Section 6.1, at any time after the Initial Offering and prior to
the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Person would either Beneficially Own
or Constructively Own shares of Equity Stock in excess of the Ownership
Limit, the FBR Limit or the Look-Through Entity Limit, as applicable,
then (i) except as otherwise provided in Section 6.1.7, the purported
transferee shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the Person holding record title to the shares of
Equity Stock Beneficially Owned or Constructively Owned by such
Beneficial Owner or Constructive Owner, shall cease to own any right or
interest) in such number of shares of Equity Stock that would cause
such Beneficial Owner or Constructive Owner to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership
Limit, the FBR Limit or the Look-Through Entity Limit, as applicable,
(ii) such number of shares of Equity Stock in excess of the Ownership
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Limit, the FBR Limit or the Look-Through Entity Limit, as applicable
(rounded up to the nearest whole share), shall be designated
Shares-in-Trust and, in accordance with the provisions of Section 6.2
hereof, transferred automatically and by operation of law to a Trust to
be held in accordance with that Section 6.2, and (iii) the Prohibited
Owner shall submit such number of shares of Equity Stock to the
Corporation for registration in the name of the Trustee. Such transfer
to a Trust and the designation of shares as Shares-in-Trust shall be
effective as of the close of business on the business day prior to the
date of the Transfer or Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in
this Section 6.1, at any time after the Initial Offering and prior to
the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would (i) result in the shares
of Equity Stock being beneficially owned by fewer than 100 Persons
(determined without reference to any rules of attribution), (ii) result
in the Corporation being "closely held" within the meaning of Section
856(h) of the Code, (iii) result in shares of Equity Stock being
beneficially owned by a Disqualified Person, or (iv) cause the
Corporation to Constructively Own 10% or more of the ownership
interests in a tenant of the Corporation's real property, within the
meaning of Section 856(d)(2)(B) of the Code, then (x) the purported
transferee shall not acquire any right or interest (or, in the case of
a Non-Transfer Event, the Person holding record title of the shares of
Equity Stock with respect to which such Non-Transfer Event occurred,
shall cease to own any right or interest) in such number of shares of
Equity Stock, the ownership of which by such purported transferee or
record holder would (A) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without
reference to any rules of attribution), (B) result in the Corporation
being "closely held" within the meaning of Section 856(h) of the Code,
(C) result in the shares of Equity Stock being beneficially owned by a
Disqualified Person, or (D) cause the Corporation to Constructively Own
10% or more of the ownership interests in a tenant of the Corporation's
real property, within the meaning of Section 856(d)(2)(B) of the Code,
(y) such number of shares of Equity Stock (rounded up to the nearest
whole share) shall be designated Shares-in-Trust and, in accordance
with the provisions of Section 6.2, transferred automatically and by
operation of law to a Trust to be held in accordance with that Section
6.2, and (z) the Prohibited Owner shall submit such number of shares of
Equity Stock to the Corporation for registration in the name of the
Trustee. Such transfer to a Trust and the designation of shares as
Shares-in-Trust shall be effective as of the close of business on the
business day prior to the date of the Transfer or Non-Transfer Event,
as the case may be.
6.1.4 Remedies For Breach. If the Corporation, or its
designees, shall at any time determine in good faith that a Transfer has taken
place in violation of Section 6.1.2 or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive Ownership of any
shares of Equity Stock in violation of Section 6.1.2, the Corporation shall take
such action as it deems advisable to refuse to give effect to or to prevent such
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<PAGE>
Transfer or acquisition, including, but not limited to, refusing to give effect
to such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or acquisition.
6.1.5 Notice of Restricted Transfer. Any Person who acquires
or attempts to acquire shares of Equity Stock in violation of Section 6.1.2, or
any Person who owned shares of Equity Stock that were transferred to the Trust
pursuant to the provisions of Section 6.1.3, shall immediately give written
notice to the Corporation of such event and shall provide to the Corporation
such other information as the Corporation may request in order to determine the
effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on
the Corporation's status as a REIT.
6.1.6 Owners Required To Provide Information. From the date
of the Initial Offering and prior to the Restriction Termination Date:
(a) Every Beneficial Owner or Constructive Owner of more
than 5%, or such lower percentages as required pursuant to regulations
under the Code, of the outstanding shares of all classes of capital
stock of the Corporation shall, within 30 days after January 1 of each
year, provide to the Corporation a written statement or affidavit
stating the name and address of such Beneficial Owner or Constructive
Owner, the number of shares of Equity Stock Beneficially Owned or
Constructively Owned, and a description of how such shares are held.
Each such Beneficial Owner or Constructive Owner shall provide to the
Corporation such additional information as the Corporation may request
in order to determine the effect, if any, of such Beneficial Ownership
or Constructive Ownership on the Corporation's status as a REIT and to
ensure compliance with the Ownership Limit, the FBR Limit, the
Look-Through Entity Limit, and the restrictions in Section 6.1.2
hereof.
(b) Each Person who is a Beneficial Owner or Constructive
Owner of shares of Equity Stock and each Person (including the
stockholder of record) who is holding shares of Equity Stock for a
Beneficial Owner or Constructive Owner shall provide to the Corporation
a written statement or affidavit stating such information as the
Corporation may request in order to determine the Corporation's status
as a REIT and to ensure compliance with the Ownership Limit, the FBR
Limit, the Look-Through Entity Limit, and the restrictions in Section
6.1.2 hereof.
6.1.7 Exception. The Ownership Limit, the FBR Limit, and the
Look-Through Entity Limit shall not apply to the acquisition of shares of Equity
Stock by an underwriter that participates in a public offering of such shares
for a period of 90 days following the purchase by such underwriter of such
shares provided that the restrictions contained in Section 6.1.2 will not be
violated following the distribution by such underwriter or placement agent of
such shares. In addition, the Board of Directors, upon receipt of a ruling from
the Internal Revenue Service or an opinion of counsel in each case to the effect
that Corporation will not fail to qualify as a REIT as a result of the
exemption, may exempt a Person from the Ownership Limit, the FBR Limit, the
Look-Through Entity Limit, or a restriction contained in Section 6.1.2(b), (c)
or (d), provided that (i) the Board of Directors obtains such representations
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<PAGE>
and undertakings from such Person as are reasonably necessary to ascertain that
no individual's Beneficial Ownership or Constructive Ownership of shares of
Equity Stock will cause the Corporation to lose its REIT status as a result of
the exemption and (ii) such Person agrees in writing that any violation or
attempted violation will result in a transfer to the Trust of shares of Equity
Stock pursuant to Section 6.1.3.
The Board of Directors, upon receipt of a ruling from the
Internal Revenue Service or an opinion of counsel in each case to the effect
that a tax will not be imposed on the Corporation as a result of the exemption,
may exempt a Disqualified Person from the restriction contained in Section
6.1.2(e) if each of the following requirements is met: (i) the record holder of
the shares of Equity Stock beneficially owned by the Disqualified Person is a
nominee of such Disqualified Person, (ii) the nominee is not itself a
Disqualified Person, (iii) the nominee agrees not to transfer record ownership
of such shares of Equity Stock to a Disqualified Person, and (iv) the Board of
Directors obtains such representations and undertakings from such Disqualified
Person and nominee as are reasonably necessary to ascertain the foregoing.
6.1.8 Removal of Ownership Limit. The restrictions contained
in Sections 6.1.2(a) through (e) will not be removed until (i) (a) such
restrictions are no longer required in order to qualify as a REIT and (b) the
Board of Directors determines that it is no longer in the best interests of FBR
Asset to retain such restrictions, or (ii)(a) the Board of Directors determines
that it is no longer in the best interests of the Corporation to attempt to
qualify, or to continue to qualify, as a REIT and (b) the Corporation's election
to be taxed as a REIT is revoked pursuant to Section 4.9.
Section 6.2 Shares-in-Trust.
6.2.1 Trust. Any shares of Equity Stock transferred to a Trust
and designated Shares-in-Trust pursuant to Section 6.1.3 hereof shall be held
for the exclusive benefit of the Beneficiary. The Corporation shall name a
Beneficiary for each Trust within five days after discovery of the existence
thereof. Any transfer to a Trust, and subsequent designation of shares of Equity
Stock as Shares-in-Trust, pursuant to Section 6.1.3 shall be effective as of the
close of business on the business day prior to the date of the Transfer or
Non-Transfer Event that results in the transfer to the Trust. Shares-in-Trust
shall remain issued and outstanding shares of Equity Stock of the Corporation
and shall be entitled to the same rights and privileges on identical terms and
conditions as are all other issued and outstanding shares of Equity Stock of the
same class and series. When transferred to a Permitted Transferee in accordance
with the provisions of Section 6.2.5, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
6.2.2 Dividend Rights. The Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors on such shares of Equity Stock and
shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to
the Trust the amount of any dividends or distributions received by it that (i)
are attributable to any shares of Equity Stock designated Shares-in-Trust and
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<PAGE>
(ii) the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
Owned or Constructively Owned by the Person who, but for the provisions of
Section 6.1.3, would Constructively Own or Beneficially Own the Shares-in-Trust;
and, as soon as reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Trust for the benefit of the
Beneficiary the dividends so received or withheld, as the case may be.
6.2.3 Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled
to receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class and series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section 6.2.3 in excess of, in the case of a purported
Transfer in which the Prohibited Owner gave value for shares of Equity Stock and
which Transfer resulted in the transfer of the shares to the Trust, the price
per share, if any, such Prohibited Owner paid for the shares of Equity Stock
and, in the case of a Non-Transfer Event or Transfer in which the Prohibited
Owner did not give value for such shares (e.g., if the shares were received
through a gift or devise) and which Non-Transfer Event or Transfer, as the case
may be, resulted in the transfer of shares to the Trust, the price per share
equal to the Market Price on the date of such Non-Transfer Event or Transfer.
Any remaining amount in such Trust shall be distributed to the Beneficiary.
6.2.4 Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Prohibited Owner
shall be deemed to have given, as of the close of business on the business day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the transfer to the Trust of shares of Equity Stock under Section 6.1.3, an
irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in
which the Trustee, in its sole and absolute discretion, desires.
6.2.5 Designation of Permitted Transferee. The Trustee shall
have the exclusive and absolute right to designate a Permitted Transferee of any
and all Shares-in-Trust. In an orderly fashion so as not to materially adversely
affect the Market Price of the Shares-in-Trust, the Trustee shall designate any
Person as Permitted Transferee, provided, however, that (i) the Permitted
Transferee so designated purchases for valuable consideration (whether in a
public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition resulting
in a transfer to a Trust and the redesignation of such shares of Equity Stock so
acquired as Shares-in-Trust under Section 6.1.3. Upon the designation by the
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Trustee of a Permitted Transferee in accordance with the provisions of this
Section 6.2.5, the Trustee shall (i) cause to be transferred to the Permitted
Transferee that number of Shares-in-Trust acquired by the Permitted Transferee,
(ii) cause to be recorded on the books of the Corporation that the Permitted
Transferee is the holder of record of such number of shares of Equity Stock,
(iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the
Beneficiary any and all amounts held with respect to the Shares-in-Trust after
making that payment to the Prohibited Owner pursuant to Section 6.2.6.
6.2.6 Compensation to Record Holder of Shares of Equity Stock
that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 6.2.5 or following the acceptance of the
offer to purchase such shares in accordance with Section 6.2.7) to receive from
the Trustee following the sale or other disposition of such Shares-in-Trust the
lesser of (i) in the case of (a) a purported Transfer in which the Prohibited
Owner gave value for shares of Equity Stock and which Transfer resulted in the
transfer of the shares to the Trust, the price per share, if any, such
Prohibited Owner paid for the shares of Equity Stock, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer, and (ii) the price per share received by
the Trustee from the sale or other disposition of such Shares-in-Trust in
accordance with Section 6.2.5. Any amounts received by the Trustee in respect of
such Shares-in-Trust and in excess of such amounts to be paid the Prohibited
Owner pursuant to this Section 6.2.6 shall be distributed to the Beneficiary in
accordance with the provisions of Section 6.2.5. Each Beneficiary and Prohibited
Owner waive any and all claims that they may have against the Trustee and the
Trust arising out of the disposition of Shares-in-Trust, except for claims
arising out of the gross negligence or willful misconduct of, or any failure to
make payments in accordance with this Section 6.2, by such Trustee or the
Corporation.
6.2.7 Purchase Right in Shares-in-Trust. Shares-in-Trust shall
be deemed to have been offered for sale to the Corporation, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or
its designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
Non-Transfer Event or purported Transfer that resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-In-Trust has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 6.1.5.
Section 6.3 Remedies Not Limited. Nothing contained in this Article VII
shall limit the authority of the Corporation to take such other action as it
deems necessary or advisable to protect the Corporation and the interests of its
stockholders by preservation of the Corporation's status as REIT and to ensure
compliance with the Ownership Limit, the FBR Limit and the Look-Through Entity
Limit.
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<PAGE>
Section 6.4 Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article VII, including any definition contained
in Section 6.1.1, the Board of Directors shall have the power to determine the
application of the provisions of this Article VII with respect to any situation
based on the facts known to it.
Section 6.5 Legend. From the date of the Initial Offering and prior to
the Restriction Termination Date, each certificate for shares of Equity Stock
shall bear the following legend:
"The shares of Common or Preferred Stock represented
by this certificate are subject to restrictions on transfer
for the purpose of the Corporation's maintenance of its status
as a real estate investment trust under the Internal Revenue
Code of 1986, as amended (the "Code"). No Person may (i)
Beneficially Own or Constructively Own shares of Common Stock
in excess of 9.9% of the number of outstanding shares of
Common Stock other than (A) FBR, which may not Beneficially
Own or Constructively Own shares of Common Stock in excess of
20% of the number of outstanding shares of Common Stock, and
(B) a Look-Through Entity, which may not Beneficially Own or
Constructively Own shares of Common Stock in excess of 15% of
the number of outstanding shares of Common Stock, (ii)
Beneficially Own or Constructively Own shares of any class or
series of Preferred Stock in excess of 9.9% of the number of
outstanding shares of such class or series of Preferred Stock,
other than (A) FBR, which may not Beneficially Own or
Constructively Own shares of any class or series of Preferred
Stock in excess of 20% of the number of outstanding shares of
such class or series of Preferred Stock, and (B) a
Look-Through Entity, which may not Beneficially Own or
Constructively Own shares of any class or series of Preferred
Stock in excess of 15% of the number of outstanding shares of
such class or series of Preferred Stock, (iii) beneficially
own shares of Equity Stock that would result in the shares of
Equity Stock being beneficially owned by fewer than 100
Persons (determined without reference to any rules of
attribution), (iv) beneficially own shares of Equity Stock
that would result in the shares of Equity Stock being
beneficially owned by a Disqualified Person, (v) Beneficially
Own shares of Common or Preferred Stock that would result in
the Corporation being "closely held" under Section 856(h) of
the Code, or (vi) Constructively Own shares of Equity Stock
that would cause the Corporation to Constructively Own 10% or
more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code. Any Person who attempts to
Beneficially Own or Constructively Own shares of Equity Stock
in excess of the above limitations must immediately notify the
Corporation in writing. If the restrictions set forth above
are violated, the shares of Common or Preferred Stock
represented hereby will be transferred automatically and by
operation of law to a Trust and shall be designated
Shares-in-Trust. All capitalized terms in this legend have the
meanings defined in the Corporation's Charter, as the same may
be further amended from time to time, a copy of which,
including the restrictions on transfer, will be sent without
charge to each stockholder who so requests."
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Section 6.6 Severability. If any provision of this Article VI or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
Section 6.7 Exchange Transactions. Nothing in this Article VI or this
Charter shall prohibit the settlement of any transaction entered into through
the facilities of any national securities exchange registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or of the
national market system of a national securities association registered under the
Exchange Act. The fact that the settlement of any transaction is so permitted
shall not negate the effect of any other provision of this Article VI and any
transferee in such a transaction shall be subject to all of the provisions and
limitations set forth in this Article VI.
Section 6.8 Enforcement. The Corporation is authorized specifically to
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VI.
Section 6.9 Non-Waiver. No delay or failure on the part of the
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Section 6.10 Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of the provision hereof.
Section 6.11 Amendment. Notwithstanding any other provision of this
Charter or the Bylaws of the Corporation, the provisions of this Article VI
shall not be amended, altered, changed or repealed without the affirmative vote
of not less than two-thirds of all votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
ARTICLE VII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendments of this Charter that may not or hereafter be authorized by law,
including any amendments changing the terms of contract rights, as expressly set
forth in this Charter, or any of its outstanding stock by classification,
reclassification or otherwise but, no such amendment which changes such terms or
contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
aggregate number of votes entitled to be cast thereon.
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<PAGE>
ARTICLE VIII
LIMITATION OF LIABILITY
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, no director or officer of the Corporation shall
be personally liable to the Corporation or its stockholders for money damages.
No amendment of this Charter or repeal of any of its provisions shall limit or
eliminate the limitation on liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
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Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
FBR ASSET INVESTMENT CORPORATION
(Maryland)
Dated as of February __, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I....................................................................................................... 1
ARTICLE II...................................................................................................... 1
Section 1. Principal Office........................................................................... 1
Section 2. Additional Offices......................................................................... 1
Section 3. Fiscal and Taxable Years................................................................... 1
ARTICLE III..................................................................................................... 2
Section 1. Place...................................................................................... 2
Section 2. Annual Meeting............................................................................. 2
Section 3. Special Meetings........................................................................... 2
Section 4. Notice..................................................................................... 3
Section 5. Scope of Notice............................................................................ 3
Section 6. Organization............................................................................... 3
Section 7. Quorum..................................................................................... 4
Section 8. Voting..................................................................................... 4
Section 9. Proxies.................................................................................... 5
Section 10. Voting of Shares by Certain Holders........................................................ 5
Section 11. Exemption of Certain Control Shares........................................................ 6
Section 12. Inspectors................................................................................. 6
Section 13. Fixing Record Date......................................................................... 7
Section 14. Action Without a Meeting................................................................... 8
Section 15. Voting by Ballot........................................................................... 8
Section 16. Voting List................................................................................ 8
Section 17. Shareholder Proposals...................................................................... 9
ARTICLE IV...................................................................................................... 10
Section 1. General Powers............................................................................. 10
Section 2. Change in Number; Vacancies................................................................ 10
Section 3. Resignations............................................................................... 11
Section 4. Annual and Regular Meetings................................................................ 11
Section 5. Special Meetings........................................................................... 11
Section 6. Notice..................................................................................... 11
Section 7. Quorum..................................................................................... 12
Section 8. Voting..................................................................................... 12
Section 9. Telephone Meetings......................................................................... 13
Section 10. Action Without a Meeting................................................................... 13
Section 11. Compensation............................................................................... 13
Section 12. Policies and Resolutions................................................................... 13
Section 13. Nominations................................................................................ 14
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE V....................................................................................................... 15
Section 1. Committees of the Board.................................................................... 15
Section 2. Telephone Meetings......................................................................... 16
Section 3. Action By Committees Without a Meeting..................................................... 17
ARTICLE VI...................................................................................................... 17
Section 1. General Provisions......................................................................... 17
Section 2. Subordinate Officers, Committees and Agents................................................ 18
Section 3. Removal and Resignation.................................................................... 18
Section 4. Vacancies.................................................................................. 18
Section 5. General Powers............................................................................. 18
Section 6. Duties of the President.................................................................... 19
Section 7. Duties of the Chief Executive Officer...................................................... 19
Section 8. Duties of the Treasurer.................................................................... 19
Section 9. Duties of the Secretary.................................................................... 20
Section 10. Other Duties of Officers................................................................... 20
Section 11. Salaries................................................................................... 20
ARTICLE VII..................................................................................................... 21
Section 1. Contracts.................................................................................. 21
Section 2. Checks and Drafts.......................................................................... 21
Section 3. Deposits................................................................................... 21
ARTICLE VIII.................................................................................................... 21
Section 1. Certificates of Stock...................................................................... 21
Section 2. Lost Certificate........................................................................... 22
Section 3. Transfer Agents and Registrars............................................................. 22
Section 4. Transfer of Stock.......................................................................... 23
Section 5. Stock Ledger............................................................................... 23
ARTICLE IX...................................................................................................... 24
Section 1. Declaration................................................................................ 24
Section 2. Contingencies.............................................................................. 24
ARTICLE X....................................................................................................... 24
Section 1. Seal....................................................................................... 24
Section 2. Affixing Seal.............................................................................. 25
ARTICLE XI...................................................................................................... 25
Waiver of Notice....................................................................................... 29
ARTICLE XII..................................................................................................... 25
Section 1. By Directors............................................................................... 25
Section 2. By Shareholders............................................................................ 26
</TABLE>
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<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
FBR ASSET INVESTMENT CORPORATION (MARYLAND)
Dated as of February ......, 1999
The Board of Directors of FBR Asset Investment Corporation (Maryland)
(the "Corporation") hereby sets out the Bylaws of the Corporation in their
entirety, as follows:
ARTICLE I
Definitions
Capitalized terms used herein and not otherwise defined shall have the
meanings assigned them in the Charter.
ARTICLE II
Offices
Section 1. Principal Office. The principal office of the Corporation
shall be located at 1001 Nineteenth Street, North, Arlington, Virginia 22209, or
at any other place or places as the Board of Directors may designate.
Section 2. Additional Offices. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
Section 3. Fiscal and Taxable Years. The fiscal and taxable years of
the Corporation shall begin on January 1 and end on December 31.
<PAGE>
ARTICLE III
Meetings of Shareholders
Section 1. Place. All meetings of shareholders shall be held at 1001
Nineteenth Street, North, Arlington, Virginia 22209, or at such other place
within the United States as shall be stated in the notice of the meeting.
Section 2. Annual Meeting. The President or the Board of Directors may
fix the time of the annual meeting of the shareholders for the election of
Directors and the transaction of any business as may be properly brought before
the meeting, but if no such date and time is fixed by the President or the Board
of Directors, the meeting for any calendar year shall be held on the fourth
Thursday in May, if that day is not a legal holiday. If that day is a legal
holiday, the annual meeting shall be held on the next succeeding business day
that is not a legal holiday.
Section 3. Special Meetings. The President, a majority of the Board of
Directors, or a majority of the Independent Directors may call special meetings
of the shareholders. Special meetings of shareholders also shall be called by
the Secretary upon the written request of the holders of shares entitled to cast
not less than twenty-five percent (25%) of all the votes entitled to be cast at
such meeting. Such request shall state the purpose of such meeting and the
matters proposed to be acted on at such meeting. The Secretary shall inform such
shareholders of the reasonably estimated cost of preparing and mailing notice of
the meeting and, upon payment to the Corporation of such costs, the Secretary
shall give notice to each shareholder entitled to notice of the meeting. Unless
requested by shareholders entitled to cast a majority of all the votes entitled
to be cast at such meeting, a special meeting need not be called to consider any
matter that is substantially the same as a matter voted on at any annual or
special meeting of the shareholders held during the preceding twelve months.
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<PAGE>
Section 4. Notice. Not less than ten (10) nor more than ninety (90)
days before each meeting of shareholders, the Secretary shall give to each
shareholder entitled to vote at such meeting and to each shareholder not
entitled to vote who is entitled to notice of the meeting, written or printed
notice stating the time and place of the meeting and, in the case of a special
meeting or as otherwise may be required by statute, the purpose for which the
meeting is called, either by mail or by presenting it to such shareholder
personally or by leaving it at his residence or usual place of business. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the shareholder at his post office address as it
appears on the records of the Corporation, with postage thereon prepaid.
Section 5. Scope of Notice. No business shall be transacted at a
special meeting of shareholders except that specifically designated in the
notice of the meeting. Subject to the provisions of Section 16 of this Article
III, any business of the Corporation may be transacted at the annual meeting
without being specifically designated in the notice, except such business as is
required by statute to be stated in such notice.
Section 6. Organization. At every meeting of the shareholders, the
Chairman of the Board, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the Chairman of the Board, one of the
following officers present shall conduct the meeting and act as Chairman in the
order stated: the Vice Chairman of the Board, if there be one, the President,
the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer,
or a Chairman chosen by the shareholders entitled to cast a majority of the
votes that all shareholders present in person or by proxy are entitled to cast.
The Secretary, or, in his absence, an assistant secretary, or in the absence of
both the Secretary and assistant secretaries, a person appointed by the Chairman
shall act as Secretary.
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Section 7. Quorum. At any meeting of shareholders, the presence in
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this Section
7 shall not affect any requirement under any statute, the Charter or these
Bylaws for the vote necessary for the adoption of any measure. If such quorum
shall not be present at any meeting of the shareholders, the shareholders
representing a majority of the shares entitled to vote at such meeting, present
in person or by proxy, may vote to adjourn the meeting from time to time to a
date not more than 120 days after the original record date without notice other
than announcement at the meeting until such quorum shall be present. At such
adjourned meeting at which a quorum shall be present, any business may be
transacted that might have been transacted at the meeting as originally
notified. Any meeting at which Directors are to be elected shall be adjourned
only from day to day, as may be directed by shareholders representing a majority
of the shares who are present in person or by proxy and who are entitled to vote
on the election of Directors.
Section 8. Voting. A plurality of all the votes cast at a meeting of
shareholders duly called and at which a quorum is present shall be sufficient to
elect a Director. There shall be no cumulative voting. Each share of stock may
be voted for as many individuals as there are Directors to be elected and for
whose election the share is entitled to be voted. A majority of the votes cast
at a meeting of shareholders duly called and at which a quorum is present shall
be sufficient to approve any matter that may properly come before the meeting,
unless more than a majority of the votes cast is required by statute, by the
Charter or by these Bylaws. Each shareholder of record shall have the right, at
every meeting of shareholders, to one vote for each share held.
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Section 9. Proxies. A shareholder may vote the shares of stock owned of
record by him, either in person or by proxy executed in writing by the
shareholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
Section 10. Voting of Shares by Certain Holders. Shares registered in
the name of another corporation, if entitled to be voted, may be voted by the
president, a vice president or a proxy appointed by the president or a vice
president of such other corporation, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the board
of directors of such other corporation presents a certified copy of such bylaw
or resolution, in which case such person may vote such shares. Any fiduciary may
vote shares registered in his name as such fiduciary, either in person or by
proxy.
Shares of its own stock indirectly owned by this Corporation shall not
be voted at any meeting and shall not be counted in determining the total number
of outstanding shares entitled to be voted at any given time, unless they are
held by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
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The Board of Directors may adopt by resolution a procedure by which a
shareholder may certify in writing to the Corporation that any shares of stock
registered in the name of the shareholder are held for the account of a
specified person other than the shareholder. The resolution shall set forth the
class of shareholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure that the
Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the shareholder of record of
the specified stock in place of the shareholder who makes the certification.
Section 11. Exemption of Certain Control Shares. Section 3-702 of the
Maryland General Corporate Laws ("M.G.C.L") shall not limit the voting rights
associated with shares of the Corporation's voting stock acquired by FBR in the
event that, as a result of an acquisition, FBR controls over twenty percent or
more of the then outstanding voting stock of the Corporation. FBR shall not have
to meet the requirements of Section 3-704 of the M.G.C.L. or obtain stockholder
approval before voting any of its shares.
Section 12. Inspectors. At any meeting of shareholders, the Chairman of
the meeting may, or upon the request of any shareholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all shareholders.
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Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
Section 13. Fixing Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of the shareholders
or any adjournment thereof, or entitled to receive payment for any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than ninety
(90) days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section such determination shall
apply to any adjournment thereof.
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Section 14. Action Without a Meeting. Any action required or permitted
to be taken at a meeting of shareholders may be taken without a meeting if a
consent in writing, setting forth such action, is signed by each shareholder
entitled to vote on the matter and any other shareholder entitled to notice of a
meeting of shareholders (but not to vote thereat) has waived in writing any
right to dissent from such action, and such consent and waiver are filed with
the minutes of proceedings of the shareholders.
Section 15. Voting by Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
Section 16. Voting List. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten (10)
days before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. Such list, for a period of ten (10) days
prior to such meeting, shall be kept on file at the registered office of the
Corporation or at its principal place of business or at the office of its
transfer agent or registrar and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting. The
original stock transfer books shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders. If the requirements of this section have not been
substantially complied with, the meeting shall, on the demand of any shareholder
in person or by proxy, be adjourned until the requirements are complied with.
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Section 17. Shareholder Proposals. To be properly brought before an
annual meeting of shareholders, business must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (iii) otherwise properly brought before
the meeting by a shareholder. In addition to any other applicable requirements,
for business to be properly brought before an annual meeting by a shareholder,
the shareholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
given, either by personal delivery or by United States mail, postage prepaid, to
the Secretary of the Corporation not later than ninety (90) days in advance of
the annual meeting. A shareholder's notice to the Secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting (including the specific proposal to be presented) and the reasons for
conducting such business at the annual meeting, (ii) the name and record address
of the shareholder proposing such business, (iii) the class and number of shares
of the Corporation that are beneficially owned by the shareholder, and (iv) any
material interest of the shareholder in such business.
In the event that a shareholder attempts to bring business before an
annual meeting without complying with the provisions of this Section 16, the
Chairman of the meeting shall declare to the meeting that the business was not
properly brought before the meeting in accordance with the foregoing procedures,
and such business shall not be transacted.
No business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Section 16, provided, however,
that nothing in this Section 16 shall be deemed to preclude discussion by any
shareholder of any business properly brought before the annual meeting.
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ARTICLE IV
Directors
Section 1. General Powers. The Board of Directors shall have full power
to conduct, manage, and direct the business and affairs of the Corporation, and
all powers of the Corporation, except those specifically reserved or granted to
the shareholders by statute, by the Charter or by these Bylaws, shall be
exercised by, or under the authority of, the Board of Directors. Unless
otherwise agreed between the Corporation and the Director, each individual
Director, including each Independent Director, may engage in other business
activities of the type conducted by the Corporation and is not required to
present to the Corporation any investment opportunities presented to them even
though the investment opportunities may be within the scope of the Corporation's
investment policies.
Section 2. Changes in Number; Vacancies.
Any vacancy occurring on the Board of Directors may be filled by a
majority of the remaining members of the Board of Directors, although such
majority is less than a quorum; provided, however, that a majority of
Independent Directors shall nominate replacements for vacancies among the
Independent Directors, which replacements must be elected by a majority of the
Directors. If the shareholders of any class or series are entitled separately to
elect one or more Directors, a majority of the remaining Directors elected by
that class or series or the sole remaining Director elected by that class or
series may fill any vacancy among the number of Directors elected by that class
or series. A Director elected by the Board of Directors to fill a vacancy shall
be elected to hold office until the next annual meeting of shareholders or until
his successor is elected and qualified. The Board of Directors may declare
vacant the office of a Director who has been declared of unsound mind by an
order of court, who has pled guilty or nolo contendere to, or been convicted of,
a felony involving moral turpitude, or who has willfully violated the
Corporation's Charter or these Bylaws.
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Section 3. Resignations. Any Director or member of a committee may
resign at any time. Such resignation shall be made in writing and shall take
effect at the time specified therein, or if no time be specified, at the time of
the receipt by the Chairman of the Board, the President, or the Secretary.
Section 4. Annual and Regular Meetings. An annual meeting of the Board
of Directors shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice other than this bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without notice other than such resolution.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the President, a majority of the Board of
Directors, or a majority of the Independent Directors then in office. The person
or persons authorized to call special meetings of the Board of Directors may fix
any place, either within or without the State of Maryland, as the place for
holding any special meeting of the Board of Directors called by them.
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Section 6. Notice. Notice of any special meeting of the Board of
Directors shall be given by written notice delivered personally, telegraphed,
telecopied or mailed to each Director at his business or resident address.
Personally delivered, telegraphed or telecopied notices shall be given at least
two days prior to the meeting. Notice by mail shall be given at least five days
prior to the meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail properly addressed, with postage thereon
prepaid. If given by telegram, such notice shall be deemed to be given when the
telegram is delivered to the telegraph company. Neither the business to be
transacted at, nor the purpose of, any annual, regular or special meeting of the
Board of Directors need be stated in the notice, unless specifically required by
statute or these Bylaws.
Section 7. Quorum. Subject to the provisions of Section 8 of this
Article IV, a majority of the entire Board of Directors shall constitute a
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a quorum is present at said meeting, a majority of
the Directors present may adjourn the meeting from time to time without further
notice.
Subject to the provisions of Section 10 of this Article IV, the
Directors present at a meeting that has been duly called and convened may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough Directors to leave less than a quorum.
Section 8. Voting. (a) Except as provided in subsection (b) of this
Section 10, the action of the majority of the Directors present at a meeting at
which a quorum is present shall be the action of the Board of Directors, unless
the concurrence of a greater proportion is required for such action by the
Charter, these Bylaws, or applicable statute.
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(b) Notwithstanding anything in these Bylaws to the contrary,
a majority of the Independent Directors or the holders of a majority of the
outstanding common stock of the Corporation must approve (i) any transaction
pursuant to which the Company would invest in any securities that are being
underwritten or placed by the Manager or any Affiliate of the Manager and (ii)
any transaction involving the Corporation in which the Manager or an Affiliate
of the Manager has a material financial interest.
Section 9. Telephone Meetings. Members of the Board of Directors may
participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
Section 10. Action Without a Meeting. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting, if a consent in writing to such action is signed by each Director and
such written consent is filed with the minutes of proceedings of the Board of
Directors.
Section 11. Compensation. Directors shall receive such reasonable
compensation for their services as Directors as the Board of Directors may fix
or determine from time to time; such compensation may include a fixed sum,
shares of capital stock of the Corporation and reimbursement of reasonable
expenses incurred in traveling to and from or attending regular or special
meetings of the Board of Directors or of any committee thereof.
Section 12. Policies and Resolutions. It shall be the duty of the Board
of Directors to insure that the purchase, sale, retention and disposal of the
Corporation's assets, the investment policies and the borrowing policies of the
Corporation and the limitations thereon or amendment thereof are at all times:
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(a) consistent with such policies, limitations and
restrictions as are contained in these Bylaws, or in the Corporation's Charter,
subject to revision from time to time at the discretion of the Board of
Directors without shareholder approval unless otherwise required by law; and
(b) in compliance with the restrictions applicable to real
estate investment trusts pursuant to the Internal Revenue Code of 1986, as
amended.
Section 13. Nominations. Subject to the rights of holders of any class
or series of stock having a preference over the common stock as to dividends or
upon liquidation, nominations for the election of Directors shall be made by the
Corporation's notice of the meeting of shareholders for such election, the Board
of Directors, or by any shareholder entitled to vote in the election of
Directors generally. However, any shareholder entitled to vote in the election
of Directors generally may nominate one or more persons for election as
Directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
not later than (i) with respect to an election to be held at an annual meeting
of shareholders, ninety (90) days in advance of such meeting, and (ii) with
respect to an election to be held at a special meeting of shareholders for the
election of Directors, the close of business on the seventh (7th) day following
the date on which notice of such meeting is first given to shareholders. Each
notice shall set forth: (a) the name and address of the shareholder who intends
to make the nomination and of the person or persons to be nominated; (b) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the
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person or persons specified in the notice; (c) a description of all arrangements
or understandings between the shareholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (d) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (e) the consent of each nominee
to serve as a Director of the Corporation if so elected. The Chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
ARTICLE V
Committees
Section 1. Committees of the Board. The Board of Directors may appoint
from among its members an executive committee and other committees comprised of
two or more Directors. The Board of Directors may delegate to any committee any
of the powers of the Board of Directors except the power to elect Directors,
declare dividends or distributions on stock, recommend to the shareholders any
action that requires shareholder approval, amend or repeal these Bylaws, approve
any merger or share exchange that does not require shareholder approval, or
issue stock. However, if the Board of Directors has given general authorization
for the issuance of stock, a committee of the Board of Directors, in accordance
with a general formula or method specified by the Board of Directors by
resolution or by adoption of a stock option plan, may fix the terms of stock,
subject to classification or reclassification, and the terms on which any stock
may be issued.
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Notice of committee meetings shall be given in the same manner as
notice for special meetings of the Board of Directors.
One-third, but not less than two, of the members of any committee shall
be present in person at any meeting of such committee in order to constitute a
quorum for the transaction of business at such meeting, and the act of a
majority present shall be the act of such committee. The Board of Directors may
designate a chairman of any committee, and such chairman or any two members of
any committee may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any such
committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
Director to act at the meeting in the place of such absent or disqualified
members; provided, however, that in the event of the absence or disqualification
of an Independent Director, such appointee shall be an Independent Director.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Directors at the meeting next succeeding, and any
action by the committees shall be subject to revision and alteration by the
Board of Directors, provided that no rights of third persons shall be affected
by any such revision or alteration.
Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative members to replace any absent or
disqualified member, or to dissolve any such committee.
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Section 2. Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 3. Action By Committees Without a Meeting. Any action required
or permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
ARTICLE VI
Officers
Section 1. General Provisions. The officers of the Corporation may
consist of a Chairman of the Board, a Vice Chairman of the Board, a President, a
Chief Executive Officer, A Chief Operating Officer, a Chief Financial Officer,
one or more Managing Directors, a Treasurer, one or more assistant treasurers, a
Secretary, one or more assistant secretaries, and such other officers as may be
elected in accordance with the provisions of Section 2 of this Article VI. The
officers of the Corporation shall be elected annually by the Board of Directors
at the first meeting of the Board of Directors held after each annual meeting of
shareholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as may be convenient. Each
officer shall hold office until his successor is elected and qualifies or until
his death, resignation or removal in the manner hereinafter provided. Any two or
more offices may be held by the same person. In its discretion, the Board of
Directors may leave unfilled any office except that of President, Secretary and
Treasurer. Election or appointment of an officer or agent shall not of itself
create contract rights between the Corporation and such officer or agent.
Section 2. Subordinate Officers, Committees and Agents. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees, other agents as the business of the Corporation may
require, each of whom shall hold office for such period, have such authority,
and perform such duties as are provided in these Bylaws, or as the Board of
Directors may from time to time determine. The Directors may delegate to any
officer or committee the power to elect subordinate officers and to retain or
appoint employees or other agents.
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Section 3. Removal and Resignation. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Any resignation shall take effect at the time
specified therein or, if the time when it shall become effective is not
specified therein, immediately upon its receipt. The acceptance of a resignation
shall not be necessary to make it effective unless otherwise stated in the
resignation.
Section 4. Vacancies. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 5. General Powers. All officers of the Corporation as between
themselves and the Corporation shall, respectively, have such authority and
perform such duties in the management of the property and affairs of the
Corporation as may be determined by resolution of the Board of Directors, or in
the absence of controlling provisions in a resolution of the Board of Directors,
as may be provided in these Bylaws.
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Section 6. Duties of the President. The President shall be primarily
responsible for the execution of policies of the Board of Directors. He shall
have authority over the general management and direction of the business and
operations of the Corporation and its divisions, if any, subject only to the
ultimate authority of the Board of Directors. In the absence of the Chairman of
the Board, or if there are no such officers, the President shall preside at all
corporate meetings. He may sign and execute in the name of the Corporation share
certificates, deeds, mortgages, bonds, contracts or other instruments except in
cases where the signing and the execution thereof shall be expressly delegated
by the Board of Directors or by these Bylaws to some other officer or agent of
the Corporation or shall be required by law otherwise to be signed or executed.
In addition, he shall perform all duties incident to the office of the President
and such other duties as from time to time may be assigned to him by the Board
of Directors.
Section 7. Duties of the Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer, and Managing Directors ("Managing Officers").
Each Managing Officer, if any, shall have such powers and duties as may from
time to time be assigned to him by the President or the Board of Directors. Any
Managing Officer may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments authorized by the Board of
Directors, except where the signing and execution of such documents shall be
expressly delegated by the Board of Directors or the President to some other
officer or agent of the Corporation or shall be required by law or otherwise to
be signed or executed.
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Section 8. Duties of the Treasurer. The Treasurer shall have such
powers and duties as may be assigned to him by the President of the Board of
Directors. The Treasurer may sign and execute in the name of the Corporation
share certificates, deeds, mortgages, bonds, contracts or other instruments,
except in cases where the signing and the execution thereof shall be expressly
delegated by the Board of Directors or by these Bylaws to some other officer or
agent of the Corporation or shall be required by law or otherwise to be signed
or executed.
Section 9. Duties of the Secretary. The Secretary shall act as
secretary of all meetings of the Board of Directors, the Executive Committee and
all other Committees of the Board and shareholders of the Corporation. He shall
keep and preserve the minutes of all such meetings in the proper book or books
provided for that purpose. He shall see that all notices required to be given by
the Corporation are duly given and served; shall have custody of the seal of the
Corporation and shall affix the seal or cause it to be affixed to all documents
the execution of which on behalf of the Corporation under its corporate seal is
duly authorized in accordance with law or the provisions of these Bylaws; shall
have custody of all deeds, leases, contracts and other important corporate
documents; shall have charge of the books, records and papers of the Corporation
relating to its organization and management as a Corporation; shall see that all
reports, statements and other documents required by law (except tax returns) are
properly filed; and shall, in general perform, all the duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him by the Board of Directors or the President.
Section 10. Other Duties of Officers. Any officer of the Corporation
shall have, in addition to the duties prescribed herein or by law, such other
duties as from time to time shall be prescribed by the Board of Directors or the
President.
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Section 11. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
ARTICLE VII
Contracts, Notes, Checks and Deposits
Section 1. Contracts. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Corporation and such authority may be general
or confined to specific instances.
Section 2. Checks and Drafts. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall from time to time be
determined by the Board of Directors.
Section 3. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
ARTICLE VIII
Shares of Stock
Section 1. Certificates of Stock. Each shareholder shall be entitled to
a certificate or certificates that shall represent and certify the number of
shares of each kind and class of shares held by him in the Corporation. Each
certificate shall be signed by the Chairman of the Board or the President or a
Managing Officer and countersigned by the Secretary or an assistant secretary or
the Treasurer or an assistant treasurer and may be sealed with the corporate
seal.
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The signatures may be either manual or facsimile. Certificates shall be
consecutively numbered; and if the Corporation shall, from time to time, issue
several classes of stock, each class may have its own number series. A
certificate is valid and may be issued whether or not an officer who signed it
is still an officer when it is issued. Each certificate representing stock that
is restricted as to its transferability or voting powers, which is preferred or
limited as to its dividends or as to its share of the assets upon liquidation or
which is redeemable at the option of the Corporation, shall have a statement of
such restriction, limitation, preference or redemption provision, or a summary
thereof, plainly stated on the certificate. In lieu of such statement or
summary, the Corporation may set forth upon the face or back of the certificate
a statement that the Corporation will furnish to any shareholder, upon request
and without charge, a full statement of such information.
Section 2. Lost Certificate. The Board of Directors may direct a new
certificate to be issued in place of any certificate previously issued by the
Corporation alleged to have been lost, stolen or destroyed upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing the issuance of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or his legal representative to advertise the same in such manner as
it shall require and/or to give bond, with sufficient surety, to the Corporation
to indemnify it against any loss or claim which may arise as a result of the
issuance of a new certificate.
-22-
<PAGE>
Section 3. Transfer Agents and Registrars. The Board of Directors may
appoint one or more banks or trust companies in such city or cities as the Board
of Directors may deem advisable, from time to time, to act as transfer agents
and/or registrars of the shares of stock of the Corporation; and, upon such
appointments being made, no certificate representing shares shall be valid until
countersigned by one of such transfer agents and registered by one of such
registrars.
Section 4. Transfer of Stock. No transfers of shares of stock of the
Corporation shall be made if (i) void ab initio pursuant to any provision of the
Corporation's Charter or (ii) the Board of Directors, pursuant to any provision
of the Corporation's Charter, shall have refused to permit the transfer of such
shares. Permitted transfers of shares of stock of the Corporation shall be made
on the stock records of the Corporation only upon the instruction of the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and upon surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
stock transfer power and the payment of all taxes thereon. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, as to any transfers not prohibited by any provision of
the Corporation's Charter or by action of the Board of Directors thereunder, it
shall be the duty of the Corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
-23-
<PAGE>
Section 5. Stock Ledger. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate stock ledger containing the name and address of each
shareholder and the number of shares of stock of each class held by such
shareholder.
Section 6. Control Share Acquisition Statute. Shares acquired by FBR
shall not be subject to the restrictions or other provisions of Maryland's
Control Share Act, as in effect from time to time.
ARTICLE IX
Dividends
Section 1. Declaration. Dividends upon the shares of stock of the
Corporation may be declared by the Board of Directors, subject to applicable
provisions of law and the Charter. Dividends may be paid in cash, property or
shares of the Corporation, subject to applicable provisions of law and the
Charter.
Section 2. Contingencies. Before payment of any dividends, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the Board of Directors may from time to time, in its absolute
discretion, think proper as a reserve fund for contingencies, for equalizing
dividends, for repairing or maintaining the property of the Corporation, its
subsidiaries or any partnership for which it serves as general partner, or for
such other purpose as the Board of Directors shall determine to be in the best
interests of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
-24-
<PAGE>
ARTICLE X
Seal
Section 1. Seal. The Corporation may have a corporate seal, which may
be altered at will by the Board of Directors. The Board of Directors may
authorize one or more duplicate or facsimile seals and provide for the custody
thereof.
Section 2. Affixing Seal. Whenever the Corporation is required to place
its corporate seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a corporate seal to
place the word "(SEAL)" adjacent to the signature of the person authorized to
execute the document on behalf of the Corporation.
ARTICLE XI
Waiver of Notice
Whenever any notice is required to be given pursuant to the Charter or
these Bylaws of the Corporation or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
-25-
<PAGE>
ARTICLE XII
Amendment of Bylaws
Section 1. By Directors. The Board of Directors shall have the power to
adopt, alter or repeal any Bylaws of the Corporation and to make new Bylaws,
except that the Board of Directors shall not alter or repeal this Article XII or
any Bylaws made by the shareholders and provided that any amendment to Section
2, Section 7, or Section 8(b) of Article IV requires the affirmative vote of 80%
of the entire Board of Directors, including a majority of the Independent
Directors.
Section 2. By Shareholders. The shareholders shall have the power to
adopt, alter or repeal any Bylaws of the Corporation and to make new Bylaws,
provided that any amendment to Section 2, Section 7, or Section 8(b) of Article
IV requires the affirmative vote of the holders of two-thirds (2/3) of all the
outstanding shares entitled to vote on the election of Directors, voting
together as a single class.
Dated: November 12, 1998
-26-
Exhibit 4
Incorporated Under the Laws of the State of Maryland
No.1 0 Shares
FBR ASSET INVESTMENT CORPORATION
Common Stock (par value $.01)
SEE LEGEND ON REVERSE SIDE
This Certifies that __________________________________ is the owner of ZERO (0)
Shares of the Capital Stock of FBR Asset Investment Corporation, a Maryland
corporation, fully-paid transferable only on the books of the Corporation by the
holder hereof in person or by Attorney upon surrender of this Certificate
properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ______________________ day of _______________ A.D.
_______________________ _________________________
President Secretary
<PAGE>
SEE ATTACHED LEGEND
For Value Received, __________________, hereby sell, assign and transfer
unto __________________________________________________________________________
________________________________________ Shares of the Capital Stock represented
by the within Certificate, and do hereby irrevocably constitute, and appoint
__________________________________________ Attorney to transfer the said Stock
on the books of the within named Company with full power of substitution in the
premises.
Dated _________________________________ 19_____
In presence of
_______________________________________________________________________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE TRUSTEE OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THE SHARES OF COMMON OR PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO RESTRICTIONS ON TRANSFER FOR THE PURPOSE OF THE CORPORATION'S
MAINTENANCE OF ITS STATUS AS A REAL ESTATE INVESTMENT TRUST UNDER THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). NO PERSON MAY (I) BENEFICIALLY
OWN OR CONSTRUCTIVELY OWN SHARES OF COMMON STOCK IN EXCESS OF 9.9% OF THE NUMBER
OF OUTSTANDING SHARES OF COMMON STOCK OTHER THAN (A) FBR WHICH MAY NOT
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF COMMON STOCK IN EXCESS OF 20%
OF THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK, AND (B) A LOOK-THROUGH
ENTITY, WHICH MAY NOT BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF COMMON
STOCK IN EXCESS OF 15% OF THE NUMBER OF OUTSTANDING SHARES OF COMMON STOCK, (II)
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF ANY CLASS OR SERIES OF
PREFERRED STOCK IN EXCESS OF 9.9% OF THE NUMBER OF OUTSTANDING SHARES OF SUCH
CLASS OR SERIES OF PREFERRED STOCK, OTHER THAN (A) FBR, WHICH MAY NOT
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF ANY CLASS OR SERIES OF
PREFERRED STOCK IN EXCESS OF 20% OF THE NUMBER OF OUTSTANDING SHARES OF ANY
CLASS OR SERIES OF PREFERRED STOCK, AND (B) A LOOK-THROUGH ENTITY, WHICH MAY NOT
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF ANY CLASS OR SERIES OF
PREFERRED STOCK IN EXCESS OF 15% OF THE NUMBER OF OUTSTANDING SHARES OF STOCK,
(III) BENEFICIALLY OWN SHARES OF EQUITY STOCK THAT WOULD RESULT IN THE SHARES OF
EQUITY STOCK BEING BENEFICIALLY OWNED BY FEWER THAN 100 PERSONS (DETERMINED
WITHOUT REFERENCE TO ANY RULES OF ATTRIBUTION), (IV) BENEFICIALLY OWN SHARES OF
EQUITY STOCK THAT WOULD RESULT IN THE SHARES OF EQUITY STOCK BEING BENEFICIALLY
OWNED BY A DISQUALIFIED PERSON, (V) BENEFICIALLY OWN SHARES OF COMMON OR
PREFERRED STOCK THAT WOULD RESULT IN THE CORPORATION BEING "CLOSELY HELD" UNDER
SECTION 856(H) OF THE CODE, OR (VI) CONSTRUCTIVELY OWN SHARES OF EQUITY STOCK
THAT WOULD CAUSE THE CORPORATION TO CONSTRUCTIVELY OWN 10% OR MORE OF THE
OWNERSHIP INTERESTS IN A TENANT OF THE CORPORATION'S REAL PROPERTY, WITHIN THE
MEANING OF SECTION 856(D)(2)(B) OF THE CODE. ANY PERSON WHO ATTEMPTS TO
BENEFICIALLY OWN OR CONSTRUCTIVELY OWN SHARES OF EQUITY STOCK IN EXCESS OF THE
ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION IN WRITING. IF THE
RESTRICTIONS SET FORTH ABOVE ARE VIOLATED, THE SHARES OF COMMON OR PREFERRED
STOCK REPRESENTED HEREBY WILL BE TRANSFERRED AUTOMATICALLY AND BY OPERATION OF
LAW TO A TRUST AND SHALL BE DESIGNATED SHARES-IN-TRUST. ALL CAPITALIZED TERMS IN
THIS LEGEND HAVE THE MEANINGS DEFINED IN THE CORPORATION'S CHARTER, AS THE SAME
MAY BE FURTHER AMENDED FROM TIME TO TIME, A COPY OF WHICH, INCLUDING THE
RESTRICTIONS ON TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS.
Exhibit 5
FORM OF OPINION
February __, 1999
FBR Asset Investment Corporation
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Registration Statement on Form S-11
-----------------------------------
Ladies and Gentlemen:
We have acted as counsel to FBR Asset Investment Corporation, a
Maryland corporation (the "Company"), in connection with the preparation of a
Form S-11 registration statement (No. 333-67343) (the "Registration Statement")
filed with the Securities and Exchange Commission (the "Commission") with
respect to the offer and sale from time to time of up to __________ shares (the
"Secondary Shares") of the Company's common stock, par value $.01 per share, by
certain selling shareholders named in the Registration Statement. You have
requested our opinion regarding certain Corporate Matters.
Giving this opinion, we have examined the Charter and By Laws of the
Company, the Plan of Merger, the proceedings of the Board of Directors of the
Company or a committee thereof relating to the issuance of the Shares, a
Certificate of the Secretary of the Company dated the date hereof, and such
other statutes, certificates, instruments, and documents relating to the Company
and matters of law as we have deemed necessary to the issuance of this opinion.
In such examination, we have assumed, without independent investigation, the
genuineness of all signatures, the legal capacity of all individuals who have
executed any of the aforesaid documents, the authenticity of all documents
submitted to us as originals, the conformity with originals of all documents
submitted to us as copies (and the authenticity of the originals of such
copies), no substantial change in the final documents of documents submitted to
us as drafts, and that all public records reviewed are accurate and complete. As
to factual matters, we have relied on the Certificate of the Secretary and have
not independently verified the matters stated therein.
Based upon the foregoing and having regard for such legal
considerations as we deem relevant, we are of the opinion and so advise you that
upon the completion of the merger and the issuance and delivery of the Secondary
Shares in accordance with the terms set forth in the Plan of Merger, the
Secondary Shares will have been duly and validly authorized and will be validly
issued, fully paid, and non-assessable.
<PAGE>
FBR Asset Investment Corporation
February __, 1999
Page 2
The opinion expressed is for the use of the Company in connection with
the Registration Statement. This opinion is limited to the matters set forth
herein, and no other opinion should be inferred beyond the matters expressly
stated.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Legal
Matters" in the prospectus included in the Registration Statement.
Very truly yours,
Exhibit 8
FORM OF TAX OPINION
February __, 1999
FBR Asset Investment Corporation (Maryland)
1001 Nineteenth Street North
Arlington, VA 22209
FBR Asset Investment Corporation (Maryland)
-------------------------------------------
Qualification as
----------------
Real Estate Investment Trust
----------------------------
Ladies and Gentlemen:
We have acted as counsel to FBR Asset Investment Corporation
(Maryland), a Maryland corporation (the "Company"), in connection with the
preparation of a Form S-11 registration statement (the "Registration Statement")
filed with the Securities and Exchange Commission ("SEC") on February __, 1999
(No. 333-67343), as amended through the date hereof, with respect to the offer
and sale from time to time of up to __________ shares (the "Secondary Shares")
of the common stock, par value $0.01 per share, of the Company by certain
selling shareholders named in the Registration Statement. You have requested our
opinion regarding certain U.S. federal income tax matters.
In giving this opinion letter, we have examined the following:
1. the Restated and Amended Articles of Incorporation of FBR Asset
Investment Corporation, a Virginia corporation merged into the Company
on ________ __, 1999 ("FBR Asset Virginia"), as duly filed with the
State Corporation Commission of the State of Virginia on December 16,
1997;
2. the Bylaws of FBR Asset Virginia;
<PAGE>
FBR Asset Investment Corporation
February __, 1999
Page 2
3. the Company's Articles of Incorporation and Restated and Amended
Articles of Incorporation, as duly filed with the Department of
Assessments and Taxation of the State of Maryland on ________ __, 1998
and _________ __, 1999, respectively;
4. the Company's Amended and Restated Bylaws;
5. the Registration Statement, including the prospectus contained as part
thereof (the "Prospectus"); and
6. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
In connection with the opinions rendered below, we have assumed, with
your consent, that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate,
if a copy; and has not been amended;
2. during its taxable year ending December 31, 1999 and future taxable
years, the Company will operate in a manner that will make the
representations contained in a certificate, dated February __, 1999 and
executed by a duly appointed officer of the Company (the "Officer's
Certificate"), true for such years;
3. the Company will not make any amendments to its organizational
documents after the date of this opinion that would affect its
qualification as a real estate investment trust (a "REIT") for any
taxable year; and
4. no action will be taken by the Company after the date hereof that would
have the effect of altering the facts upon which the opinions set forth
below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. Where such factual representations involve matters of law, we have
explained to the Company's representatives the relevant and material sections of
the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations thereunder (the "Regulations"),
<PAGE>
FBR Asset Investment Corporation
February __, 1999
Page 3
published rulings of the Internal Revenue Service (the "Service"), and other
relevant authority to which such representations relate and are satisfied that
the Company's representatives understand such provisions and are capable of
making such representations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Consequences of FBR Asset's
Status as a REIT" (which is incorporated herein by reference), we are of the
opinion that:
(a) the Company qualified to be taxed as a REIT pursuant to sections
856 through 860 of the Code for its taxable years ended December 31,
1997 and December 31, 1998, and the Company's organization and current
and proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Code
for its taxable year ending December 31, 1999 and in the future; and
(b) the descriptions of the law and the legal conclusions contained in
the Memorandum under the caption "Federal Income Tax Consequences of
FBR Asset's Status as a REIT" are correct in all material respects, and
the discussion thereunder fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the
Secondary Shares.
We will not review on a continuing basis the Company's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Company's operations for any given taxable year will
satisfy the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions. The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Company from qualifying as a REIT.
<PAGE>
FBR Asset Investment Corporation
February __, 1999
Page 4
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the captions "Federal Income Tax Consequences of FBR Asset's Status as a
REIT" and "Legal Matters" in the Prospectus. In giving this consent, we do not
admit that we are in the category of persons whose consent is required by
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee, and it may not be
distributed, relied upon for any purpose by any other person, quoted in whole or
in part or otherwise reproduced in any document, or filed with any governmental
agency without our express written consent.
Very truly yours,
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) including in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
------------------------------
Arthur Andersen LLP
Washington, D.C.,
February 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001073208
<NAME> FBR ASSET INVESTMENT CORPORATION (MARYLAND)
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> DEC-15-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 163,223,199 41,144,326
<SECURITIES> 23,318,750 232,401,789
<RECEIVABLES> 3,000,000 19,082,921
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 190,538,402 295,930,620
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 190,538,402 295,930,620
<CURRENT-LIABILITIES> 771,573 145,026,041
<BONDS> 0 0
0 0
0 0
<COMMON> 102,190 104,158
<OTHER-SE> 189,664,639 150,800,421
<TOTAL-LIABILITY-AND-EQUITY> 190,538,402 295,930,620
<SALES> 0 0
<TOTAL-REVENUES> 721,277 17,927,502
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 74,356 2,609,827
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 5,359,633
<INCOME-PRETAX> 646,921 9,968,042
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 646,921 1,588,235
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