As filed with the Securities and Exchange Commission on May 28, 1999
Registration No. 333-67343
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
AMENDMENT NO. 4
to
FORM S-11
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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FBR ASSET INVESTMENT CORPORATION
(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)
---------------
Elaine M. Clancy
Chief Financial Officer
FBR Asset Investment Corporation
Potomac Tower, 1001 Nineteenth Street North
Arlington, Virginia 22209
(703) 469-1000
(703) 312-9602 (Telecopy)
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
---------------
COPIES TO:
Randolph F. Totten, Esq. Robert S. Smith, Esq.
Hunton & Williams Friedman, Billings, Ramsey
Riverfront Plaza, East Tower Investment Management, Inc.
951 E. Byrd Street Potomac Tower
Richmond, Virginia 23219-4074 1001 Nineteenth Street North
(804) 788-8200 Arlington, VA 22209
(804) 788-8218 (Telecopy) (800) 846-5050
(703) 312-9756 (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
Common Stock
6,470,950 Shares
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
6,470,950 shares of FBR Asset's common stock. FBR Asset will not receive any
proceeds from the sale of those shares.
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. FBR Asset has applied for listing of its common stock on
the American Stock Exchange under the symbol "FB."
You should consider the risk factors discussed on pages 4-16 before investing in
FBR Asset, which include:
Significant Conflicts of Interest;
Sensitivity to Fluctuations in Interest Rates, Mortgage Prepayments,
and Borrower Defaults;
Leverage;
Riskiness of Interest Rate Hedging;
Sensitivity to Declines in Market Value of Investments;
Management's Limited Experience Operating a REIT; and
Limited Operating History.
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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 this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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This prospectus is dated May __, 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 & FBR Management ....................................................... 2
Summary Financial Information .............................................. 3
RISKS OF INVESTING IN FBR ASSET .............................................. 4
Conflicts with FBR may result in decisions that do not reflect FBR Asset's
best interests.............................................................. 4
FBR Asset's limited operating history does not indicate future results ..... 5
FBR Management's limited experience in managing a REIT may affect FBR Asset's
performance ................................................................ 6
Declines in the market values of FBR Asset's assets may adversely affect
credit availability and periodic reported results .......................... 6
FBR Asset is heavily dependent upon FBR Management ......................... 6
Use of leverage could adversely affect FBR Asset's operations .............. 7
FBR Asset's real estate-related investments may incur losses................ 7
Changes in interest rates could negatively affect the value of FBR Asset's
mortgage loans and mortgage-backed securities............................. 7
Use of leverage can amplify declines in market value resulting from
interest rate increases .................................................. 8
Prepayment rates could negatively affect the value of FBR Asset's
mortgage-backed securities................................................ 8
Hedging against interest rate exposure may adversely affect FBR Asset's
earnings.................................................................. 9
Multifamily and commercial real estate may lose value and fail to operate
profitably................................................................ 9
Investing in subordinated interests exposes FBR Asset to increased credit
risk..................................................................... 10
Competition in the purchase, sale and financing of mortgage assets may
limit the profitability of companies in which FBR Asset invests.......... 10
Increased losses on uninsured mortgage loans can reduce the value of FBR
Asset's equity investments............................................... 10
Prepayment sensitivity of investments in interest-only securities........ 11
Indirect nature of investments exposes FBR Asset to additional risks..... 12
Returns on equity investments are not directly linked to returns on
investee companies' assets............................................. 12
Obstacles to success may remain hidden if due diligence is inadequate.. 12
Dependence on management of other entities............................. 12
Limited liquidity of equity security investments....................... 12
Volatility of prices....................................................13
Disposition value of investments is dependent upon general and specific
market conditions...................................................... 13
Management Agreement requires FBR Asset to pay fee upon termination of
FBR Management ............................................................ 13
Tax requirements may restrict FBR Asset's operations ...................... 14
Loss of Investment Company Act exemption would adversely affect
FBR Asset.................................................................. 15
Ownership limitation may restrict change of control or business
combination opportunities.................................................. 15
Board of Directors may change policies without shareholder consent ........ 16
No prior market for common shares ......................................... 16
ORGANIZATION & RELATIONSHIPS ................................................ 17
FBR & FBR MANAGEMENT ........................................................ 18
Related Party Transactions ................................................ 18
FBR Management's Executive Officers ....................................... 21
The Management Agreement................................................... 22
FBR ASSET'S BUSINESS......................................................... 26
Operating Policies & Strategies............................................ 26
Current Investments........................................................ 27
Whole-Pool Mortgage-Backed Securities.................................... 28
Real Estate.............................................................. 35
Commercial Mortgage Loans & CMBS......................................... 36
Loans.................................................................... 38
Real Estate-Related Businesses........................................... 38
Summary of Current Investments & Cash and Cash Equivalents................. 39
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Dividends & Distribution Policy............................................ 40
SELECTED FINANCIAL DATA...................................................... 42
MANAGEMENT'S DISCUSSION & ANALYSIS........................................... 43
Overview................................................................... 43
Results of Operations...................................................... 43
Net Income............................................................... 43
Interest and Dividend Income............................................. 45
Interest Expense......................................................... 46
Dividends Declared and Distributions in Excess of GAAP Net Income........ 47
Changes in Financial Condition............................................. 47
Securities Available for Sale............................................ 47
Repurchase Agreements.................................................... 48
Contractual Commitments.................................................. 49
Capital Resources and Liquidity.......................................... 49
Shareholders' Equity..................................................... 50
Year 2000 Compliance....................................................... 51
Market Conditions.......................................................... 53
Equity Market Conditions................................................. 53
REIT and Real Estate Market Conditions................................... 54
Interest Rate Environment................................................ 56
Market Risk.............................................................. 58
Developments Since March 31, 1999.......................................... 61
FBR ASSET'S DIRECTORS & OFFICERS............................................. 63
The Board of Directors..................................................... 63
The Directors.............................................................. 65
Executive Officers Who Are Not Directors................................... 66
Time Required of Directors & Executive Officers............................ 68
Executive Compensation & Other Benefits.................................... 68
FBR ASSET'S CAPITAL STOCK.................................................... 71
General.................................................................... 71
Common Stock............................................................... 71
Preferred Stock............................................................ 71
Restrictions on Ownership and Transfer..................................... 72
Transfer Agent & Registrar................................................. 74
Reports to Shareholders.................................................... 74
FBR Asset's Charter and Bylaws............................................. 75
COMMON STOCK AVAILABLE FOR FUTURE SALE....................................... 76
PRINCIPAL SHAREHOLDERS....................................................... 77
FEDERAL INCOME TAX CONSEQUENCES OF FBR ASSET'S STATUS AS A REIT.............. 78
Taxation of FBR Asset...................................................... 78
Requirements for Qualification............................................. 80
Recordkeeping Requirements................................................. 88
Failure to Qualify......................................................... 89
Taxation of Taxable U.S. Shareholders...................................... 89
Taxation of U.S. Shareholders on the Disposition of the Common Stock....... 91
Capital Gains and Losses................................................... 91
Information Reporting Requirements and Backup Withholding.................. 91
Taxation of Tax-Exempt Shareholders........................................ 92
Taxation of Non-U.S. Shareholders.......................................... 93
Other Tax Consequences..................................................... 95
ERISA CONSIDERATIONS......................................................... 96
SELLING SHAREHOLDERS......................................................... 98
USE OF PROCEEDS............................................................. 100
PLAN OF DISTRIBUTION........................................................ 101
OTHER MATTERS............................................................... 103
Legal..................................................................... 103
Independent Accountants................................................... 103
Additional Information.................................................... 103
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 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 May __, 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 Virginia corporation that was formed in November 1997. FBR Asset
invests in:
o whole-pool mortgage-backed securities guaranteed by Fannie Mae, Freddie
Mac, or Ginnie Mae;
o residential and commercial real property;
o residential and commercial mortgage loans;
o residential and commercial mortgage-backed securities;
o direct loans to real estate-related companies; and
o other real estate-related assets.
FBR Asset invests in some of these assets directly by buying the assets and
invests in others indirectly 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.
We can give no assurance that FBR Asset will be able to achieve these results.
For a detailed discussion of the factors that may limit our ability to achieve
these results, see "Risks of Investing in FBR Asset," which begins on page 4.
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.
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<PAGE>
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 26.
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 18.
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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 FBR Asset's audited financial
statements, which are included elsewhere in this prospectus. The selected
balance sheet data as of March 31, 1999 and statement of operations data for the
three month periods ended March 31, 1998 and 1999, has been derived from FBR
Asset's unaudited financial statements and has been prepared on the same basis
as the audited financial statements. The unaudited financial statements include,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the financial information
set forth herein. The results for the year ended December 31, 1998, and for the
three month periods ended March 31, 1998 and 1999, are not necessarily
indicative of the results to be expected for any future annual or interim
period.
<TABLE>
<CAPTION>
December 15, For the
1997 (Inception) For the Year Three Months Ended March 31,
through Ended -----------------------------------
December 31, 1997 December 31, 1998 1998 1999
----------------- ----------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Statement of Operations Data
Interest income ........................... $ 18,040 $13,656,097 $2,253,042 $3,925,664
Dividend income ........................... 434,717 4,271,405 297,000 1,239,503
Net realized losses ....................... - (8,369,807) - -
Net income ................................ 646,921 1,588,235 2,396,618 2,708,444
Basic and diluted income per ..............
share ................................... $ 0.06 $ 0.16 $ 0.23 $ 0.32
Dividends declared per share(1) ........... $ 0.05 $ 1.16 $ 0.20 $ 0.325
<CAPTION>
As of
As of December 31 March 31,
----------------------------------------- -------------------
1997 1998 1999
------------------ ------------------ -------------------
<S> <C> <C> <C>
Selected Balance Sheet Data: (unaudited)
Mortgage-backed securities, at
fair value ............................ $ - $161,418,739 $151,732,401
Cash and cash equivalents ............... 163,223,199 41,144,326 27,802,439
Investments in equity
securities, at fair value ............. 23,318,750 70,983,050 64,948,907
Total assets ............................ 190,538,402
295,930,620 278,705,361
Repurchase agreements ................... -
128,550,000 131,619,000
Total liabilities ....................... 771,573
145,026,041 135,943,630
Accumulated other
comprehensive income(2) ............... - (9,800,530)
(16,444,050)
Shareholders' equity .................... 189,766,829
150,904,579 142,761,731
Shares issued and outstanding(3) ........ 10,218,999 8,543,527 8,436,527
Book value per share .................... $ 18.57 $ 17.66 $ 16.92
</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) Accumulated other comprehensive income includes unrealized net gain on
mortgage-backed securities of $713,499 as of December 31, 1998, and $104,122
as of March 31, 1999, and unrealized net loss on investments in equity
securities of $10,514,029 as of December 31, 1998, and $16,548,172 as of
March 31, 1999.
(3) Reflects 1,872,300 and 1,979,300 shares of treasury stock repurchased as
of December 31, 1998 and March 31, 1999.
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.
Some of the information in this prospectus contains forward-looking statements.
Those statements can be identified by the use of words like "may," "will,"
"expect," "anticipate," "estimate," or other similar words. Those statements
discuss our future expectations and contain our projections of operation results
or financial condition. When considering forward-looking statements, you should
keep in mind the risk factors discussed below and the other cautionary
statements contained in this prospectus. Those factors could cause our actual
results to differ materially from our expectations and projections.
The following risks are interrelated, and you should treat them as a whole.
Conflicts with FBR may result in decisions that do not reflect FBR Asset's best
interests.
FBR Asset is subject to various conflicts of interest arising from its
relationship with FBR. Those 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. 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. At March 31, 1999, the total market value of
FBR Asset's investments in securities underwritten or placed by FBR had
declined by approximately $22.9 million, or 26.1%, since FBR Asset acquired
the securities. Of that $22.9 million loss, approximately $6.6 million was
realized and charged to FBR Asset's earnings in 1998; the remaining $16.3
million has been charged to shareholders' equity but not to FBR Asset's
earnings. If, however, FBR Asset had sold all of its equity investments on
March 31, 1999, the company would have realized a $16.3 million loss and
that loss would have been charged directly to earnings.
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
4
<PAGE>
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, currently manages funds and
accounts, and may in the future manage other funds or accounts, that have
investment objectives similar to those of FBR Asset. There may be
investment opportunities that are favorable to each of FBR Asset and the
other funds or accounts managed by BlackRock. Although there are no
contractual requirements for BlackRock to allocate specific investment
opportunities to FBR Asset, BlackRock will allocate investment
opportunities to its accounts in a manner that is reasonably fair to each
account over time. In allocating opportunities, BlackRock may consider any
factors that it deems appropriate under the circumstances.
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
generally more speculative. If the management fee did not include a
performance component, FBR Management might not otherwise recommend those
investments because of their speculative nature.
o 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. These persons 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. The failure by these people to devote adequate time to FBR
Asset could result in FBR Asset failing to take advantage of investment
opportunities or failing to take other actions that might be in the
company's best interests.
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 and
thus might have an incentive to recommend an investment to FBR Asset when
it might not otherwise choose to do so.
o Because of its relationship with FBR, FBR Asset may obtain confidential
information about the companies in which it has invested. If FBR Asset does
possess confidential information about other companies, it may be
restricted in its ability to dispose of, increase the amount of, or
otherwise take action with respect to its investment in those companies.
FBR Asset's 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
5
<PAGE>
conclusions about the company's future. FBR Asset's past performance,
particularly given its short operating history, is not necessarily indicative of
future results.
FBR Management's limited experience in managing a REIT may affect FBR Asset's
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.
Declines in the market values of FBR Asset's assets may adversely affect
credit availability and periodic reported results.
FBR Asset's assets are primarily real estate and mortgage assets, which include
indirect holdings through investments in other companies. Those assets are
classified for accounting purposes as "available-for-sale." Changes in the
market values of those 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 March 31, 1999, FBR Asset had $131.6 million in outstanding
repurchase agreements that were based on the market value of specific mortgage
assets. The market value of those assets was $138.0 million when FBR Asset
entered into the repurchase agreements and as of March 31, 1999, was $137.8
million. If the market value of those assets declines further, the lender 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. Between January 1,
1999 and March 31, 1999, lenders required FBR Asset to post additional
collateral in an aggregate amount of $8.6 million.
FBR Asset is heavily dependent upon 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
6
<PAGE>
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.
Use of leverage could adversely affect FBR Asset's operations.
At March 31, 1999, FBR Asset's outstanding indebtedness for borrowed money was
0.92 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. During the
first quarter of 1999, FBR Asset's debt-to-equity ratio ranged from 0.87 to 0.92
to 1. If FBR Asset 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 $151.7 million mortgage-backed securities at March 31, 1999,
$131.6 million were financed with repurchase agreements. As of March 31, 1999,
FBR Asset's portfolio of mortgage-backed securities was leveraged at
approximately 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. Between
December 31, 1998, and March 31, 1999, FBR Asset had margin calls requiring it
to post additional collateral in the amount of $8.6 million. Although FBR Asset
was able to meet those margin calls, there can be no assurance that it will be
able to meet future margin calls.
On March 30, 1999, FBR Asset's Board of Directors authorized the repurchase of
up to 2,000,000 shares of FBR Asset's common stock. A repurchase of shares will
reduce stockholders' equity and increase leverage and the company's
debt-to-equity ratio. See "Management's Discussion & Analysis--Developments
Since March 31, 1999."
FBR Asset's real estate-related investments may incur losses.
FBR Asset invests in real estate-related assets and in other entities, such as
REITs, that themselves invest in real estate-related assets. Investments in real
estate-related assets are subject to a variety of general, regional and local
economic risks, as well as the following:
Changes in interest rates could negatively affect the value of FBR Asset's
mortgage loans and mortgage-backed securities.
FBR Asset has invested indirectly in mortgage loans by purchasing
mortgage-backed securities. Some of the companies in which FBR Asset has
invested also own mortgage loans and mortgage-backed securities. At December 31,
1998, and March 31, 1999, all of the mortgage-backed securities held directly by
FBR Asset were backed by pools of fixed-rate, residential mortgage loans. An
investment in fixed-rate mortgage loans or mortgage-backed securities will
decline in value if long-term interest rates increase. Although Fannie Mae,
Freddie Mac or Ginnie Mae may guarantee payments on the mortgaged-backed
securities owned directly by FBR Asset, those guarantees do not protect FBR
Asset from declines in market value caused by changes in interest rates.
7
<PAGE>
A significant risk associated with FBR Asset's current portfolio of
mortgage-backed securities is the risk that both long-term and short-term
interest rates will increase significantly. If long-term rates were to increase
significantly, the market value of FBR Asset's mortgage-backed securities would
decline and the weighted average life of the investments would increase. FBR
Asset could realize a loss if the securities were sold. At the same time, an
increase in short-term interest rates would increase the amount of interest owed
on FBR Asset's repurchase agreement borrowings. The swap agreement to which FBR
Asset is a party would ameliorate a portion of the risk associated with an
increase in short-term interest rates, but only to the extent of the $50 million
swap agreement and only until June 2001.
Use of leverage can amplify declines in market value resulting from interest
rate increases.
FBR Asset and several of the REITs in which FBR Asset has invested borrow funds
to finance mortgage loan investments, which can worsen 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 the bankruptcy filing in
September 1998 by CRIIMI Mae, Inc., a mortgage REIT.
Prepayment rates could negatively affect the value of FBR Asset's
mortgage-backed securities.
In the case of residential mortgage loans, there are seldom any restrictions on
borrowers' abilities to prepay their 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
want them to be prepaid. Consequently, owners of the loans have to reinvest the
money received from the prepayments at the lower prevailing interest rates.
Correspondingly, homeowners tend not to prepay mortgage loans when interest
rates increase and when owners of the loans want them to be prepaid.
Consequently, owners of the loans are unable to reinvest money that would have
otherwise been received from prepayments at the higher prevailing interest
rates. During 1998, FBR Asset acquired $226.6 million face amount of residential
mortgage-backed securities. Principal payments on the mortgage-backed securities
averaged $2.6 million per month for the periods that FBR Asset owned the
securities. Of that amount, approximately 90-95% were principal prepayments.
Although Fannie Mae, Freddie Mac or Ginnie Mae may guarantee payments on the
mortgage-backed securities owned directly by FBR Asset, those guarantees do not
protect investors against prepayment risks.
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Hedging against interest rate exposure may adversely affect FBR Asset's
earnings.
During 1998, FBR Asset entered into two $50 million notional amount interest
rate swap agreements to limit, or "hedge," the adverse effects of rising
interest rates on its short-term repurchase agreements. In the future, FBR Asset
may enter into other interest rate swap agreements. FBR Asset's hedging activity
varies in scope based on the level and volatility of interest rates and
principal prepayments, the type of mortgage-backed securities held, and other
changing market conditions.
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;
o the party owing money in the hedging transaction may default on its
obligation to pay; and
o the credit quality of the party owing money on the hedge may be downgraded
to such an extent that it impairs FBR Asset's ability to sell or assign its
side of the hedging transaction.
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 for the fourth quarter of 1998. Similarly, Chastain
Capital Corporation, a REIT of which FBR Asset owned 9.53% at March 31, 1999,
declared in its 1998 third quarter report a loss of $13.5 million resulting from
its termination of an interest rate hedge.
Multifamily and commercial real estate may lose value and fail to operate
profitably.
Several of the companies in which FBR Asset has invested own multifamily and
commercial real estate. In the future, FBR Asset may invest in other companies
that invest in multifamily and commercial real estate or may itself invest in
those assets. Those 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;
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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.
Investing in subordinated interests exposes FBR Asset to increased credit
risk.
Although FBR Asset does not directly own "subordinated interests," some of the
companies in which FBR Asset invests do. In the future, FBR Asset may invest in
other companies that invest in subordinated interests or may itself invest in
those interests. Subordinated interests are 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 owner of a subordinated interest 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, the
entire loss will be allocated to the owner of the subordinated interest. In
essence, a 7% loss on the loans would translate into a 70% loss of principal for
the owner of the subordinated interest.
Competition in the purchase, sale and financing of mortgage assets may limit
the profitability of companies in which FBR Asset invests.
Although FBR Asset does not directly own commercial mortgage-backed securities
or subordinated interests, some of the mortgage REITs in which FBR Asset invests
do. Mortgage REITs derive their net income, in large part, from their ability to
acquire mortgage assets that have yields above borrowing costs. In 1997 and
1998, increased competition for subordinated interests developed as new mortgage
REITs entered the market. These mortgage REITs raised funds through public
offerings and sought to invest those funds on a long-term basis. The amount of
funds available for investment, however, exceeded the amount of available
investments, which resulted in significant competition for assets. That
competition resulted in higher prices for subordinated interests, lowering the
yields and narrowing the spread of those yields over borrowing costs.
Competitors for the acquisition of mortgage assets include newer mortgage REITs,
such as Imperial Credit Commercial Mortgage Investment Corporation, Anthracite
Capital, Inc., AMRESCO Capital Trust, and other REIT and non-REIT investors,
such as Lennar Corporation and Capital Trust.
Increased losses on uninsured mortgage loans can reduce the value of FBR
Asset's equity investments.
Although the majority of FBR Asset's investments in mortgage loans are insured,
several of the companies in which FBR Asset has invested own uninsured mortgage
loans. In the future, FBR Asset may invest directly in uninsured mortgage loans.
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Owners of uninsured mortgage loans are subject to the risk that borrowers will
not pay principal or interest on their mortgage loans as it becomes due.
Borrowers become unable to pay their mortgage loans for a wide variety of
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 FBR Asset's equity
investments. For example, because of increased delinquencies on its uninsured
mortgage loans, Imperial Credit Commercial Mortgage Investment Corporation, a
REIT of which FBR Asset owned 3.16% at March 31, 1999, revised its estimates of
potential losses in 1998. 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.
Prepayment sensitivity of investments in interest-only securities
FBR Asset has no direct investments in interest-only securities. The companies
in which FBR Asset invests owned no significant amount of interest-only
securities as of December 31, 1998, but may do so in the future. FBR Asset may
also invest in other companies that invest in interest-only securities or may
invest in those securities itself. Interest-only securities are 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 and the interest stream
therefore decreases. 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:
Year Anticipated Asset
---- ----------- -----
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
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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%.
Indirect nature of investments exposes FBR Asset to additional risks.
Approximately 23% of FBR Asset's total investments, including cash and cash
equivalents, as of March 31, 1999, were investments in equity securities issued
by REITs and other business entities that own real estate, commercial mortgage
loans and commercial mortgage-backed securities. In addition to the risks
described above, obtaining interests in real estate and mortgage-related assets
indirectly by investing in other enterprises carries the following risks:
Returns on equity investments are not directly linked to returns on investee
companies' assets.
FBR Asset owns equity securities of other companies. As an equity holder, FBR
Asset's return on its investment is not directly linked to returns on any
company's assets, but will depend upon the payment of dividends and changes in
the price of the equity securities. Furthermore, as a common shareholder, FBR
Asset's claims to the assets of the companies in which it invests are junior to
those of other creditors and senior stockholders.
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. This process is particularly important and
subjective with respect to newly-organized entities because there may be little
or no information publicly available about the companies. 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
FBR Asset does not control the management, investment decisions, or operations
of the enterprises in which it has invested. Management of those enterprises may
decide to change the nature of their assets, or management may otherwise change
in a manner that is not satisfactory to FBR Asset. FBR Asset has no ability to
affect these management decisions, and as noted below, FBR Asset may have only
limited ability to dispose of its investments.
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
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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. As
of March 31, 1999, 11% of the equity securities held by FBR Asset were
restricted in this manner.
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
applicable securities laws and the rules of the National Association of
Securities Dealers, Inc. This is so because Friedman, Billings, Ramsey & Co.,
Inc., another subsidiary of FBR Group, is a registered broker-dealer and its
investment and trading activities are regulated by the SEC and NASD. For
example, the NASD's prohibition on "free-riding and withholding" may limit the
number of shares FBR Asset can acquire in a "hot issue" public offering that is
underwritten by FBR & Co.
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 is 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
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 FBR Asset's equity investments.
At March 31, 1999, the total market value of FBR Asset's investments in
securities underwritten or placed by FBR had declined by approximately $22.9
million, or 26.1%, since FBR Asset acquired the securities. Of that $22.9
million loss, approximately $6.6 million was realized and charged to FBR Asset's
earnings in 1998; the remaining $16.3 million has been charged to shareholders'
equity but not to FBR Asset's earnings. See "Summary of Current Investments &
Cash and Cash Equivalents" on page 39. 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 and the first quarter of 1999. See
"Management's Discussion & Analysis--Market Conditions" on page 43.
Management Agreement requires FBR Asset to pay fee upon termination of FBR
Management.
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
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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 FBR Asset does not have sufficient cash to pay the termination
fee, it may have to sell assets even though it would not otherwise choose to do
so.
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 the 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 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's taxable income may differ substantially from its net income as
determined based on generally accepted accounting principles because, for
example, FBR Asset may deduct capital losses in determining its GAAP income but
not its taxable income. For example, FBR Asset's net income was $0.16 per share
in 1998, but it was required to distribute $1.155 per share in order to satisfy
the 95% distribution requirement.
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
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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.
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.
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FBR Asset's Board has exempted FBR from the 20% ownership limit applicable to
it. The exemption permits FBR to own up to 30% 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."
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.
No prior market for common shares.
Prior to this offering, there has been no public market for FBR Asset's common
stock. Although the company has applied for listing on the American Stock
Exchange, we can give no assurance that FBR Asset's application will be approved
or that, if approved, an active trading market will develop.
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Organization & Relationships
[GRAPHIC OMMITTED]
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FBR & FBR Management
FBR is a full-service investment banking firm that makes a market in more than
400 securities and provides research coverage on more than 400 publicly traded
companies.
As of March 31, 1999, FBR, including FBR Management, which is a registered
investment adviser under the Investment Advisers Act of 1940, managed more than
$673 million of net assets. Of those assets, more than $229.4 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, proprietary investment partnerships, 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 may have
material direct and indirect interests in, or relationships with, companies in
which FBR Asset also has an interest. FBR's interests may conflict with FBR
Asset's interests. 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 on which FBR provides ongoing research or in whose securities FBR makes
a market. Any such purchase of securities by FBR Asset creates a conflict
because it may indirectly benefit FBR and its directors, officers, and owners.
FBR Asset has made the following investments in companies with which FBR has a
relationship:
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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 purchased in open-market
transactions 900,000 shares of Imperial Credit common stock at an average price
per share of $14.50. As of May 14, 1999, shares of Imperial Credit were selling
for $10.25 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 March 31,
1999, FBR acted as lead underwriter or co-manager, or provided advisory services
to affiliates of Prime Group Inc., in connection with $710.5 million of capital
raising and $973.1 million of merger transactions. On December 23, 1997, FBR
Asset entered into an interim financing and security agreement with Prime
Capital Holdings, LLC, an affiliate of Prime Group 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 interest at a rate between 12% and 17% per annum depending upon
the funding period, and interest is payable monthly on the twenty-fifth day of
each month. The agreement originally called for the repayment of principal on
May 31, 1998. Prime has used the proceeds of the loan to fund commercial first
mortgages and mezzanine loans. In order to give Prime sufficient time to
negotiate a sale of those loans in one or more sale or securitization
transactions, FBR Asset extended the maturity date on the $12.5 million balance
until June 30, 1999, and Prime paid 1% of the aggregate advance balance in
consideration for that extension. In accordance with the extension agreement,
and subject to the claims of some of Prime's senior lenders, Prime is required
to repay FBR Asset from the proceeds of any sale of the loans. As of April 30,
1999, the outstanding principal balance of the loan had been reduced to $10.2
million.
FBR was the co-managing underwriter in November 1997 of an initial public
offering by Prime Group Realty Trust, another affiliate of Prime Group Inc., 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.
FBR Asset acquired 123,500 common shares of Prime Retail, Inc., an affiliate of
Prime Group Inc., in open-market transactions at an average price per share of
$9.73. As of May 14, 1999, shares of Prime Retail were selling for $9.50 per
share. On April 20, 1999, FBR Asset committed to loan Prime Retail $10 million.
The loan is a contingent facility, which Prime may draw against until July 20,
1999. The loan will be a general obligation of Prime Retail and secured by
partnership interests in a factory outlet mall. The loan bears interest at 12%
per annum. On April 21, 1999, FBR Asset acquired 78,400 shares of Prime Retail's
Series A 10.5% preferred stock in open-market transactions at $18.55 per share.
As of May 14, 1999, those shares were selling for $20.75 per share.
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, or $20
per share. FBR Asset also agreed not to sell the shares purchased until after
November 25, 1998.
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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 executive officers, is a director of Building One. On May 11, 1999,
Building One Services Corporation announced the results of a tender offer that
expired on April 29, 1999. Pursuant to Building One's tender offer, FBR Asset
sold 297,341 of its Building One common shares for a price of $22.50 per share,
or $6.7 million. FBR Asset retained 202,659 shares of Building One's common
stock. As of May 14, 1999, shares of Building One were selling for $14.31 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 May 14, 1999, shares
of Resource were selling for $12.25 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, or $13.95 per share. At the time of
purchase, FBR Asset agreed not to sell the shares purchased until after February
12, 1999. William R. Swanson, one of FBR Asset's directors and executive
officers, is a director of Capital Automotive. As of May 14, 1999, shares of
Capital Automotive were selling for $13.13 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, or $13.95 per share. At the time of purchase,
FBR Asset agreed not to 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 May 14, 1999, shares of Anthracite were selling for $7.44
per share.
FBR was the lead underwriter in April 1998 of an initial public offering by
Chastain Capital Corporation of 7,380,000 common 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, or $13.95 per share. At the time of
purchase, FBR Asset agreed not to sell the shares purchased until after April
15, 1999. In the fourth quarter of 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 value of Chastain's stock was other than temporary. On
May 14, 1999, Chastain announced that its Board of Directors had voted to sell
all of Chastain's assets, either through a plan or liquidation or through a sale
of the company. As of May 14, 1999, shares of Chastain were selling for $5.75
per share.
20
<PAGE>
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 $2.5 million in principal on the loan, and the term of the
$7.5 million balance was extended to June 3, 1999. The loan bore interest at 17%
per annum and entitled FBR Asset to five-year warrants to acquire 131,096 shares
of Kennedy-Wilson stock at a price of $7.5526 per share. The entire outstanding
balance of this loan was repaid from the proceeds of an equity offering by
Kennedy-Wilson on May 17, 1999. As of May 14, 1999, shares of Kennedy-Wilson
were selling for $9.06 per share.
On June 30, 1998, FBR Asset purchased 520,000 common shares of East-West
Bancorp, Inc. from selling shareholders for a purchase price of $5.2 million, or
$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 May 14, 1999, shares of East-West Bancorp were selling for
$10.50 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 was due and payable on April 26, 1999. The loan bore interest at 13% per
annum. FBR Asset agreed to extend the maturity date on the loan to May 21, 1999,
at an interest rate of 15% per annum. On May 14, 1999, Brookdale repaid the
entire outstanding balance of the loan.
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 or
executive officers 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.
Name Age Position(s) Held
- ---- --- ----------------
Emanuel J. Friedman 52 Chairman & Chief Executive Officer
Eric F. Billings 46 Vice Chairman & Chief Operating Officer
W. Russell Ramsey 39 President & Secretary
For biographical information on Messrs. Friedman and Billings, see "FBR Asset's
Directors & Officers--The Board of Directors." For biographical information on
Mr. Ramsey, see "FBR Asset's Directors & Officers--Executive Officers Who Are
Not Directors."
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<PAGE>
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 portfolio;
o engaging in hedging activities on FBR Asset's behalf, consistent with FBR
Asset's status as a REIT;
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;
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<PAGE>
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 with those holders; and
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.
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. For the three months ended March 31, 1999, the base
management fee was $350,281.
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<PAGE>
Incentive Compensation
FBR Management is also entitled to receive incentive compensation based on FBR
Asset's performance. For each calendar quarter, FBR Management is 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) FBR Asset's Funds from Operations (before the incentive fee) 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 10-Year U.S. Treasury Rate
plus five percent per annum multiplied by
(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 "10-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 10-Year U.S. Treasury Rate for the three months
ended March 31, 1999, was 4.98%.
No incentive compensation had been earned by FBR Management as of March 31,
1999.
Options Owned by FBR Management
FBR Management received 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. FBR Management also intends to assign certain of these options
to FBR's officers and
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<PAGE>
employees. 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 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 restrict the right of FBR Management or any of
its officers, directors, employees, or FBR to engage in any business or render
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. FBR has specialized in underwriting
offerings of REIT securities, particularly REITs that invest in mortgage loans
and mortgage-backed securities. From 1993 to 1998, FBR served as managing
underwriter in 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 Asset 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 Asset 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 Asset expects these trends to provide it with significant
opportunities for investing in real estate-related assets. FBR Asset also
anticipates that, notwithstanding the late 1998 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's goal, subject to maintaining its REIT qualification, 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 or operating restrictions. Among other
things, FBR Asset may, without the consent of its stockholders:
o borrow any amount of money as FBR Asset has already done;
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;
26
<PAGE>
o sell existing investments and make additional investments as FBR Asset has
already done;
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 REIT and non-REIT investors 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 invests directly in whole-pool mortgage-backed securities, commercial
loans, and equity securities of real estate-related businesses and invests
indirectly in commercial and residential real estate, commercial mortgage loans,
and commercial mortgage-backed securities. As to FBR Asset's indirect
investments, FBR Asset holds interests in those assets through its equity
ownership of other companies. As an equity holder, FBR Asset's return on its
investment is not directly linked to returns on any company's assets, but will
depend upon the authorization and payment of dividends and changes in the price
of the company's equity securities. Furthermore, as a common stockholder, FBR
Asset's claims to the assets of the companies in which it invests are
subordinated to those of creditors and other senior stockholders.
Based upon the information provided on Form 10-Q for the quarter ended March 31,
1999, by the companies in which FBR Asset held equity securities on that date,
FBR Asset believes that at March 31, 1999, approximately 64% of FBR Asset's
assets were invested in residential mortgage-backed securities, approximately
12% were invested in commercial real estate, approximately 7% were invested in
commercial mortgage loans, approximately 4% were invested in commercial
mortgage-backed securities, and approximately 13% were loans made to other
companies.
Based upon the information provided on form 10-K for the year ended December 31,
1998, by the companies in which FBR Asset held equity securities on that date,
FBR Asset believes that at December 31, 1998, approximately 66% of FBR Asset's
assets were invested in residential mortgage-backed securities, approximately
11% were invested in commercial real estate, approximately 7% were invested in
commercial mortgage loans, approximately 3% were invested in commercial
mortgage-backed
27
<PAGE>
securities, approximately 8% were loans made to other companies, and
approximately 5% did not fit into the identified categories.
Whole-Pool Mortgage-Backed Securities
FBR Asset currently invests, and intends to continue investing, at least 55% of
its assets in whole-pool mortgage-backed securities. Those 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 March 31, 1999, FBR Asset owned mortgage-backed securities guaranteed by
Freddie Mac, Fannie Mae, or Ginnie Mae that had a market value of $151.7
million, and had borrowed $131.6 million to finance its investment in those
securities. Anthracite Capital, Inc., one of the companies in which FBR Asset
has invested, also owned similar securities at December 31, 1998, and March 31,
1999.
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.
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.
At March 31, 1999, FBR Asset owned 33 fixed rate, residential mortgage-backed
securities that represented the entire ownership interest in pools of
single-family mortgage loans. In connection with those investments, FBR Asset
entered into one interest rate swap and two repurchase agreements. The
mortgage-backed securities, the swap, and the repurchase agreements are
summarized on the following table:
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<PAGE>
<TABLE>
<CAPTION>
Effective
Original Market Nominal Weighted Relevant
Issue Face Principal Value at Yield Average Life Effective Prepayment
Descriptive Date of Amount Amount 3/31/99 at at 3/31/99 Duration Assumption
Title(1) Securities (thousands) (thousands) (thousands) 3/31/99 (years) (years) (% PAM)(2)
-------- ---------- ----------- ----------- ----------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Freddie Mac
FGOLD 15-yr. 5/1/98 $ 71,580 $ 79,334 $ 72,341 6.24% 4.83 2.66 202
Fannie Mae
FNMA 15-yr. 5/1/98 $ 21,415 $ 23,381 $ 21,602 6.24% 4.87 2.69 202
Freddie Mac
FGOLD 30-yr. 9/1/95 $ 3,680 $ 7,496 $ 3,767 6.12% 3.29 1.48 253
Freddie Mac
FGOLD 15-yr. 7/1/93 $ 3,626 $ 11,850 $ 3,762 6.14% 2.35 1.80 330
Fannie Mae
30-yr. 4/1/98 $ 12,082 $ 16,291 $ 12,463 6.38% 3.64 2.50 293
Fannie Mae
30-yr. 4/1/98 $ 11,908 $ 16,868 $ 12,634 6.52% 3.04 1.80 356
Ginnie Mae
30-yr. 11/1/89 $ 14,872 $ 45,874 $ 15,486 6.75% 4.57 1.98 273
Freddie Mac
FGOLD 15-yr. 9/1/98 $ 9,914 $ 10,083 $ 9,677 6.05% 5.69 4.01 153
------------ ------------ ---------- ----- -------- ------- -------
Mortgage
Portfolio
Total $ 149,077 $ 211,177 $ 151,732 6.30% 4.52 1.92 258
============ ============ ========== ===== ======== ======= =======
Repurchase
Agreement
Liability 03/10/98 $ 11,889 4.90%
Repurchase
Agreement
Liability 03/15/98 $ 119,730 4.88%
Repurchase
Agreement
Total $ 131,619
==========
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 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 increase of 0.2% per month for the
first 30 months, and level off at 6% 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. We can give no assurance that actual prepayments will not be
materially different from the prepayment rates assumed in the PAM. For
more information on the risk of prepayments with respect to mortgage
investments, see "Prepayment rates could negatively affect the value of
FBR Asset's mortgage-backed securities" on page 8.
(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 March 31, 1999, was approximately 6.30%. 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.
The table that follows outlines the recent prepayment experience of the
mortgage-backed securities owned by FBR Asset in terms of PAM. See footnote 2 to
the table on page 29 for a more detailed discussion of PAM. For each category of
securities in which FBR Asset owns only one pool of mortgage loans, the
prepayment history is for that specific pool. For each category of securities in
which FBR Asset holds multiple pools of mortgage loans, we have presented the
prepayment history of a representative pool.
Several securities were recently issued and thus have little prepayment history.
<TABLE>
<CAPTION>
Period from Period from
January 1999 to April 1998 to
Mortgage-Backed Securities Face Amount April 1999 April 1999
(in thousands) (% PAM) (% PAM)
-------------------- ------------------- ------------------
<S> <C> <C> <C>
Freddie Mac FGOLD 15yr. 6.5% $ 71,580 703 676
Fannie Mae 15yr. 6.5% 21,415 194 422
Freddie Mac FGOLD 15yr. 7.0% 3,680 718 411
Freddie Mac FGOLD 30yr. 8.0% 3,626 276 284
Fannie Mae 30yr. 7.5% 12,082 376 402
Fannie Mae 30yr. 9.0% 11,908 495 485
Ginnie Mae 30yr. 7.95% 14,872 554 490
Freddie Mac FGOLD 15yr. 5.5% 9,914 78 N/A
---------------
Total $ 149,077
===============
</TABLE>
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,
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<PAGE>
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.
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
Although FBR Asset does not own single-family or multifamily privately-issued
certificates, some of the companies in which it invests may own these
certificates. FBR Asset may in the future invest in other companies that invest
in these assets or may invest in them itself.
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
31
<PAGE>
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.
Borrowed Funds
FBR Asset may reduce the amount of equity capital it has invested 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.
FBR Asset has borrowed and intends to continue borrowing 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 March 31, 1999, 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 its 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:
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<PAGE>
----------------------------------------------------------------------------
Example 1 Example 2
--------- ---------
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 line
numbers on the far left.
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 the amount of equity capital it invests 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%.
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,
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<PAGE>
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 March 31, 1999, FBR Asset owned $151.7 million of long-term fixed-rate
mortgage-backed securities and was indebted for $131.6 million under short-term
repurchase agreements. These agreements expire and are renewed on a regular
basis. As of March 31, 1999, all of the repurchase agreements held by FBR Asset
except one had a stated maturity date of May 17, 1999. The other agreement had a
stated maturity date of June 17, 1999. On May 17, 1999, $117.0 million of the
expired repurchase agreements were renewed; the renewed agreements have a stated
maturity date of June 24, 1999. The interest rate received by FBR Asset 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 increase significantly above
6.30%, which is the average yield on FBR Asset's mortgage portfolio as of March
31, 1999, the interest owed on the borrowings would exceed the interest income
payable to FBR Asset on its mortgage-backed securities.
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 realized a $1.9 million
loss when it terminated 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:
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<PAGE>
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.
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. Although FBR Asset does not currently own any direct interests in real
property, it does own interests in real property through its equity investments
in Capital Automotive REIT, and to a lesser extent through its equity
investments in Prime Retail, Resource, and Imperial Credit. 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, Resource and Imperial Credit in open-market
transactions. FBR Asset has also committed to loan Prime Retail $10 million.
Capital Automotive REIT 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.
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.
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<PAGE>
Prime Retail 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. Resource 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.
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.
Commercial Mortgage Loans & CMBS
FBR Asset invests in commercial mortgage loans and commercial mortgage-backed
securities, commonly known as "CMBS." At March 31, 1999, FBR Asset owned
interests in commercial loans and CMBS indirectly through its investments in
Anthracite Capital, Inc., Chastain Capital Corporation, Imperial Credit
Commercial Mortgage Investment Corporation, Prime Capital, 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 the commercial
mortgage loans held by companies in which FBR Asset invests vary widely. Some of
those companies' commercial mortgage loan holdings are performing loans that can
be securitized. Imperial Credit, for example, invests primarily in performing
multifamily and commercial term loans. East-West Bancorp originates commercial
mortgage loans to borrowers who have ties to the Asia Pacific region. Prime
Capital originates first and mezzanine commercial loans. Chastain was organized
to originate commercial mortgage loans in the major metropolitan markets in the
United States.
Some of the companies in which FBR Asset invests also own commercial mortgage
loans that are not intended to be securitized. 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. Because the loans made by
Resource are subordinated and include an obligation by Resource to make payments
on prior loans, these loans involve different and carry more significant risk
than traditional first mortgage loans originated by institutional lenders and
thus are generally not suitable for securitization. Anthracite and Chastain own
other commercial loans that generally are not securitized because they involve a
higher degree of credit risk, they have a shorter term, or because they cannot
be grouped together easily. These loans include mezzanine loans, which are loans
subject to a prior lien on the property, bridge loans, which are short-term
loans that are intended
36
<PAGE>
to provide interim financing before a property is sold or the loan refinanced,
and loans made to facilitate construction of new commercial properties.
FBR Asset, or the companies in which it invests, 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, some of the companies in
which FBR Asset invests own CMBS. At March 31, 1999, FBR Asset owned interests
in CMBS through its equity ownership of Anthracite, Imperial Credit and
Chastain. Imperial Credit issues CMBS secured by its commercial term loans and
retains an equity interest in those loans with characteristics similar to a
subordinated CMBS. When organized, Chastain planned to create CMBS and retain
similar equity interests.
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. The market for
non-investment grade CMBS is limited, and holders of CMBS have incurred, and
might in the future incur, significant losses if required to sell them as a
result of margin calls or otherwise.
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.
Some classes of CMBS are not entitled to any payments of principal, or are
entitled to only nominal principal payments. These classes are known as
interest-only securities or "IOs." 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 its 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 holds interests in commercial mortgage loans and
CMBS 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
37
<PAGE>
and CMBS. In general, FBR Asset will have no ability to control those decisions.
Moreover, the management of those 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.
Loans
FBR Asset directly invests in real estate-based loans. Investments in 1998 were
loans to Prime Capital and Kennedy-Wilson aggregating $20 million. Since
December 31, 1998, FBR Asset has invested $12 million in loans to Brookdale
Living Communities and Prime Group Realty Trust and has committed to loan Prime
Retail $10 million. Each of these loans provides debt financing for capital
needs not covered by traditional secured and senior loans and available equity.
FBR Asset anticipates that there will be a continued demand for this type of
loan and that it will make additional, similar real estate-based loans in the
future.
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. Building One 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 applicable tax restrictions, FBR Asset may invest in
real estate-related businesses in the future.
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<PAGE>
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of December 31, 1998,
and March 31, 1999.
<TABLE>
<CAPTION>
As of December 31, 1998 As of March 31, 1999
------------------------------------- --------------------------------------
Amount Percentage Amount Percentage
Shares Percent of Market Increase of Market Increase
Owned(7) Ownership(7) Investment Value (Decrease) Investment Value (Decrease)(6)
-------- ------------ ---------- ----- ---------- ---------- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities N/A N/A $160,705,239 $161,418,739 0.44% $151,628,279 $151,732,401 0.07%
------------ ------------ ------------ ------------
Equity Investments(1)(2)
Anthracite Capital, Inc.
(AHR) 1,581,846 7.53% $ 18,334,496 $ 12,358,170 (32.60%) $ 18,334,496 $ 11,863,845 (35.29%)
Capital Automotive REIT
(CARS) 1,792,115 8.29% 25,000,000 26,657,711 (6.63%) 25,000,000 22,289,431 (10.84%)
Chastain Capital
Corporation (CHAS)(3) 700,000 9.53% 9,765,000 3,150,000 (67.74%) 3,150,000 3,762,500 19.44%
Imperial Credit Commercial
Mortgage Inv. Corp.
(ICMI) 900,000 3.16% 13,050,230 8,437,500 (35.35%) 13,050,230 8,662,500 (33.62%)
Prime Retail, Inc.
(PRT) 123,500 0.29% 1,201,317 1,211,844 0.88% 1,201,317 1,080,625 (10.05%)
Resource Asset Investment
Trust (RAS) 344,575 5.59% 5,292,516 3,790,325 (28.38%) 5,292,516 4,048,756 (23.50%)
Building One Services
Corporation (BOSS) 500,000 0.44% 10,000,000 10,437,500 4.38% 10,000,000 8,593,750 (14.06%)
East-West Bancorp, Inc.
(EWBC) 520,000 2.26% 5,200,000 4,940,000 (5.00%) 5,200,000 4,647,500 (10.63%)
------------ ------------ -------- ------------ ------------ --------
Total Equity Investments $ 87,843,559 $ 70,983,050 (19.20%) $ 81,228,559 $ 64,948,907 (20.04%)
------------ ------------ -------- ------------ ------------ --------
Promissory Notes(2)
Prime Capital Holdings,
LLC(4) N/A N/A $ 12,504,334 $12,504,334 N/A $ 12,509,251 12,509,251 N/A
Prime Group Realty Trust N/A N/A - - N/A 7,000,000 7,000,000 N/A
Kennedy-Wilson, Inc.(5) N/A N/A 7,525,479 7,525,479 N/A 7,599,947 7,599,947 N/A
Brookdale Living
Communities (BLCI) N/A N/A - - N/A 5,000,000 5,000,000 N/A
------------ ------------ ------------ ------------
Total Promissory Notes $ 20,029,813 $ 20,029,813 N/A $ 32,109,198 $ 32,109,198 N/A
------------ ------------ ------------ ------------
Cash and Cash Equivalents N/A N/A $ 41,144,326 $ 41,144,326 N/A $ 27,802,439 $ 27,802,439 N/A
------------ ------------ ------------ ------------
Total Investments & Cash
and Cash Equivalents $309,722,937 $293,575,928 (5.23%) $292,768,475 $276,592,945 (5.53%)
============ ============ ======== ============ ============ ========
</TABLE>
(1) The symbols in parentheses next to the company names are the symbols of
those companies on Nasdaq or a national securities exchange. Each of these
companies is a reporting company under the Securities Exchange Act of 1934.
Information is available about these companies on the SEC's website,
www.sec.gov.
(2) FBR has underwritten or privately placed the securities of these companies
or their affiliates. See "FBR & FBR Management--Related Party Transactions"
on page 18.
(3) FBR Asset realized a permanent loss on its investment in Chastain as of
December 31, 1998, equal to $6,615,000.
(4) Includes principal of $11,557,442 as of December 31, 1998 and March 31,
1999, and accrued interest receivable of $946,892 as of December 31, 1998,
and $951,809 as of March 31, 1999.
(5) Includes principal of $7,500,000 as of December 31, 1998 and March 31, 1999,
and accrued interest receivable of $25,479 as of December 31, 1998, and
$99,947 as of March 31, 1999.
(6) The amount by which the market value at March 31, 1999, differs from the
amount of FBR Asset's original investment, except for Chastain which is
discussed in Note 3.
(7) As of March 31, 1999.
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<PAGE>
The following table shows, for the calendar year 1998 and for the first quarter
of 1999, FBR Asset's investments and cash and cash equivalents, including, with
respect to its investments, the weighted average cost of each investment based
on the number of days from January 1, 1998, to December 31, 1998, and January 1,
1999 to March 31, 1999, on which FBR Asset held each investment, and the gross
income from each investment for the year ended December 31, 1998, and for the
three months ended March 31, 1999.
<TABLE>
<CAPTION>
For the Year Ended For the Three Months Ended
December 31, 1998 March 31, 1999
---------------------------- -----------------------------
Weighted Gross Weighted Gross
Average Cost Income Average Cost Income
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities $ 169,564,932 $ 7,101,326 $ 156,067,632 $ 2,423,063
------------- ------------ ------------- -----------
Equity Investments
Anthracite Capital, Inc. $ 10,356,129 $ 739,613 $ 18,334,496 $ 917,470
Capital Automotive REIT 21,986,301 1,569,893 25,000,000 -
Chastain Capital Corporation 6,581,342 287,000 3,150,000 -
Imperial Credit Commercial 13,050,230 1,062,000 13,050,230 270,000
Mortgage Inv. Corp.
Prime Retail, Inc. 374,166 36,433 1,201,317 36,433
Resource Asset Investment Trust 4,329,152 576,466 5,292,516 -
Building One Services Corporation 10,000,000 - 10,000,000 -
East-West Bancorp, Inc. 2,621,370 - 5,200,000 15,600
------------- ------------ ------------- ------------
Total Equity Investments &
Dividends $ 69,298,690 $ 4,271,405 $ 81,228,559 $ 1,239,503
------------- ------------ ------------- -----------
Promissory Notes
Prime Capital Holdings, LLC $ 7,947,365 $ 1,248,707 $ 12,506,028 $ 544,680
Prime Group Realty, Inc. - - 4,277,778 168,660
Kennedy-Wilson Inc. 5,506,849 749,264 7,550,220 335,211
Brookdale Living Communities - - 3,444,444 125,406
------------- ------------ ------------- ------------
Total Promissory Notes $ 13,454,214 $ 1,997,971 $ 27,778,470 $ 1,173,957
------------- ------------ ------------- -----------
Cash & Cash Equivalents $ 84,496,947 $ 4,556,800 $ 28,129,410 $ 328,644
------------- ------------ ------------- -----------
Total Investments and
Cash & Cash Equivalents $ 336,814,783 $ 17,927,502 $ 293,204,071 $ 5,165,167
============= ============ ============= ===========
</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;
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<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:
For the Period Total Per Share
- ---------------------- ------------------------ -------------------
12/15/97 - 12/31/97 $ 562,045(1) $ 0.055
01/01/98 - 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
01/01/99 - 03/31/99 2,741,872 0.325
------------------ ------------
$ 14,402,607 $ 1.535
================== ============
(1) Includes $0.005 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.
Through December 31, 1998, FBR Asset had paid substantially all of its dividends
to date out of current or accumulated earnings and profits; only 10% of those
dividends was 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."
41
<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 FBR Asset's audited financial
statements, which are included elsewhere in this prospectus. The selected
balance sheet data as of March 31, 1999 and statement of operations data for the
three month periods ended March 31, 1998 and 1999, has been derived from FBR
Asset's unaudited financial statements and has been prepared on the same basis
as the audited financial statements. The unaudited financial statements include,
in the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for the fair presentation of the financial information
set forth herein. The results for the year ended December 31, 1998, or the three
month periods ended March 31, 1998 and 1999, are not necessarily indicative of
the results to be expected for any future annual or interim period.
<TABLE>
<CAPTION>
December 15, 1997 For the For the Three Months Ended March 31,
(Inception) through Year Ended ------------------------------------
December 31, 1997 December 31, 1998 1998 1999
---------------- ------------------ ---- ----
Statement of Operations Data: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income.................. $ 18,040 $13,656,097 $ 2,253,042 $ 3,925,664
Dividend income.................. 434,717 4,271,405 297,000 1,239,503
Other income..................... 268,520 - - -
Interest expense................. - 5,359,633 - 1,724,475
Management Fee expense........... 58,623 1,520,725 127,711 350,281
Other expense.................... 15,733 1,089,102 25,713 381,967
Net realized losses.............. - (8,369,807) - -
Net income ...................... 646,921 1,588,235 2,396,618 2,708,444
Basic and diluted income per
share.......................... $ 0.06 $ 0.16 $ 0.23 $ 0.32
Dividends declared per share(1).. $ 0.05 $ 1.16 $ 0.20 $ 0.325
Weighted average basic and
diluted shares................. 10,218,999 10,044,483 10,385,209 8,451,983
</TABLE>
<TABLE>
<CAPTION>
As of December 31 As of March 31,
----------------------------------- ---------------
1997 1998 1999
------------- --------------- ---------------
Selected Balance Sheet Data: (unaudited)
<S> <C> <C> <C>
Mortgage-backed securities, at
fair value..................... $ - $ 161,418,739 $ 151,732,401
Cash and cash equivalents........ 163,223,199 41,144,326 27,802,439
Investments in equity securities,
at fair value.................. 23,318,750 70,983,050 64,948,907
Total assets..................... 190,538,402 295,930,620 278,705,361
Repurchase agreements............ - 128,550,000 131,619,000
Total liabilities................ 771,573 145,026,041 135,943,630
Accumulated other comprehensive
income (loss)(2)............... - (9,800,530) (16,444,050)
Shareholders' equity............. 189,766,829 150,904,579 142,761,731
Book value per share............. $ 18.57 $ 17.66 $ 16.92
Common shares issued and 10,218,999 8,543,527 8,436,527
outstanding(3).................
</TABLE>
<TABLE>
<CAPTION>
December 15, 1997 For the For the Three
(Inception) through Year Ended Months Ended
December 31, 1997 December 31, 1998 March 31, 1999
------------------- ----------------- ----------------
(unaudited)
<S> <C> <C> <C>
Other Selected Data
Weighted average daily borrowings $ - $144,793,891(4) $129,045,267
Average equity .................. 189,766,829 182,750,145 144,076,786
</TABLE>
(1) Dividends are calculated and declared based on estimates of FBR Asset's
taxable income.
(2) Accumulated other comprehensive loss includes net unrealized gain on
mortgage-backed securities of $713,499 as of December 31, 1998, and
$104,122 as of March 31, 1999, and unrealized net losses on investments in
equity securities of $10,514,029 as of December 31, 1998, and $16,548,172
as of March 31, 1999.
(3) Reflects 1,872,300 and 1,979,300 shares of treasury stock repurchased as of
December 31, 1998, and March 31, 1999, respectively.
(4) For May 13, 1998 through year end. Repurchase agreements were entered into
on May 13, 1998.
42
<PAGE>
Management's Discussion & Analysis
Overview
FBR Asset targets investments in real estate and real estate-related companies.
FBR Asset has invested, and intends to continue investing in, whole-pool
mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac or
Ginnie Mae, mortgage loans, mortgage-backed securities, real property, and joint
ventures formed to own real property. FBR Asset invests in some of these assets
indirectly through its investments in and loans made to REITs and other
companies.
As of March 31, 1999, FBR Asset had:
o mortgage-backed securities totaling $151.7 million, which were financed
with repurchase agreements totaling $131.6 million;
o investments in equity securities of eight companies with an original
total cost basis of $87.8 million and a total market value of $64.9
million as of March 31, 1999; and
o loans to four companies totaling $31.2 million.
Results of Operations
FBR Asset began operations on December 15, 1997. Operations from December 15,
1997 through December 31, 1997, were not material. The following discussion sets
forth the significant components of FBR Asset's net income for the three month
periods ended March 31, 1999 and 1998, and for the year ended December 31, 1998.
Net Income
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. FBR Asset's primary
sources of interest income to date have been its investments in fixed-rate
mortgage-backed securities and outstanding loans. Interest income is recorded
based on contractual rates of interest and amortization of any premium or
discount associated with the original purchase. The amount of future contractual
interest income received may be adversely affected in the event of prepayments
or defaults on the mortgage loans underlying the mortgage-backed securities.
Generally, as interest rates fall, prepayment rates may increase significantly.
Accordingly, FBR Asset's interest income for any given period may not be
indicative of that for future interim or annual periods.
Net income for the quarter ended March 31, 1999, was $2.7 million, or $0.32 per
share basic and diluted. This is an increase of 13% over net income of $2.4
million for the three months ended March 31, 1998, or $0.09 per share basic and
diluted. The increase is primarily due to increased interest income and dividend
income. Interest income, including interest earned on mortgage-backed
securities, notes receivable, outstanding loans, and cash and cash equivalents
for the three months ended March 31, 1999, was $3.9 million compared to $2.3
million for the three months ended March 31, 1998. This represents an increase
of 70%, which is attributable to increased income from mortgage-
43
<PAGE>
backed securities and notes receivable. FBR Asset did not begin investing in
mortgage-backed securities until the second quarter of 1998.
For the three months ended March 31, 1999, the weighted average annual yield on
FBR Asset's mortgage-backed securities was 6.30%. As of March 31, 1999, FBR
Asset had 33 investments in mortgage-backed securities.
For the three months ended March 31, 1999, based on interest and dividend income
accrued on, and the weighted average cost of, equity securities and promissory
notes, the weighted average annual yield on FBR Asset's equity securities and
promissory notes was 8.98%, compared to 4.95% for the three months ended March
31, 1998. The increase reflects the investment of cash in promissory notes and
dividend paying equity securities.
Net income for the year ended December 31, 1998, was $1.6 million, or $0.16 per
share (basic and diluted). Interest income, including interest earned on
mortgage-backed securities, notes receivable, and cash and cash equivalents, for
the year ended December 31, 1998, was approximately $13.7 million.
For the year ended December 31, 1998, the weighted average yield on FBR Asset's
mortgage-backed securities was 6.19%. For that same period the weighted average
yield on equity securities and cash and cash equivalents was approximately 7.90%
and 5.39%, respectively.
In order to maintain its preferential tax status under the federal income tax
laws, a REIT must distribute at least 95% of its taxable income to shareholders.
REITs generally make distributions on a quarterly basis. 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 three months ended March
31, 1999, was $1.2 million, compared to $297,000 for the three months ended
March 31, 1998. The increase is due to increased investments by FBR Asset in
REIT securities that pay dividends. Dividend income for the year ended December
31, 1998, was $4.3 million.
FBR Asset did not begin to leverage its mortgage portfolio until May 1998. FBR
Asset anticipates that its cost of borrowed funds will continue to comprise the
largest portion of its total expenses in future periods.
FBR Asset incurred interest expense of $1.7 million for the three months ended
March 31, 1999. This represents 70.2% of the total expenses for the period. At
March 31, 1999, FBR Asset had $131.6 million outstanding under repurchase
agreements, with a weighted average cost of borrowing equal to 4.88%. FBR Asset
had no outstanding borrowings at March 31, 1998.
Interest expense of $5.4 million 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. As of December 31, 1998, $128.6 million
was outstanding under repurchase agreements, with a weighted average cost of
borrowing equal to 5.82%.
44
<PAGE>
For the year ended December 31, 1998, FBR Asset recognized non-recurring
expenses of $8.5 million, resulting from two actions. First, FBR Asset
determined that there had been an other than temporary impairment to the value
of its investment in Chastain and charged earnings $6.6 million to reduce the
carrying value of the investment to the market value of the Chastain stock as of
December 31, 1998. Second, FBR Asset sold mortgage-backed securities in October
1998, 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 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 24 of this
prospectus, exceed certain thresholds. From inception through March 31, 1999,
FBR Asset's Funds from Operations did not exceed the threshold amounts.
Management fees for the three months ended March 31, 1999, were $350,281
compared to $127,711 for the three months ended March 31, 1998. The increase is
due to increased assets under management.
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.
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 was $909,492, and is being amortized over the two years ending December
31, 1999. For the year ended December 31, 1998, $454,746 was charged to income.
For the three months ended March 31, 1999, $113,687 was charged to income. The
remaining $341,059 will be charged to income in 1999.
Professional fees consist primarily of legal and accounting fees. Professional
fees were $249,763 for the three months ended March 31, 1999, and $12,121 for
the three months ended March 31, 1998. The increased fees are attributable to
legal and audit fees related to this filing.
Professional fees were approximately $440,185 for the year ended December 31,
1998 and consisted primarily of legal and accounting fees. The legal fees are
attributable to the costs associated with the acquisition of assets and FBR
Asset's private placement of its equity securities. Accounting fees are
primarily attributable to the audits related to this filing.
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 and the three months ended March 31, 1998 and
1999. Information is based on daily average balances during the period.
45
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Weighted
Weighted Average
Interest/Dividend Average Annual
Income Balance Yield
------------------ -------- --------
<S> <C> <C> <C>
Mortgage securities available for
sale(1) $7,101,326 $169,564,932 6.19%
Investment in equity securities
and promissory notes(2)(3) 6,269,376 82,752,904 7.90%
Cash and cash equivalents 4,556,800 84,496,947 5.39%
=========== ============ ====
Total(3) $17,927,502 $336,814,783 6.41%
=========== ============ ====
</TABLE>
(1) Weighted average mortgage assets were held for 247 days.
(2) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital and Kennedy-Wilson. 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.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
Weighted
Weighted Average
Interest/Dividend Average Annual
Income Balance Yield
----------------- -------- -------
<S> <C> <C> <C>
Mortgage securities available for sale $2,423,063 $156,067,632 6.30%
Investment in equity securities and
promissory notes(1)(2) 2,413,460 109,007,029 8.98%
Cash and cash equivalents 328,644 28,129,410 4.74%
========== ============ ====
Total(2) $5,165,167 $293,204,071 7.14%
========== ============ ====
</TABLE>
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital and Kennedy-Wilson. Such amounts are included as
interest income in FBR Asset's statements of income included in its
financial statements.
(2) FBR Asset accrues dividend income based on declared dividends for the
periods presented.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
Weighted
Weighted Average
Interest/Dividend Average Balance Annual
Income Yield
----------------- ---------------- -------
<S> <C> <C> <C>
Investment in equity securities and
promissory notes(1) $ 508,314 $ 41,640,195 4.95%
Cash and cash equivalents 2,041,728 152,348,654 5.44%
========== ============ ====
Total(1) $2,550,042 $193,988,849 5.33%
========== ============ ====
</TABLE>
(1) 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.
46
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Weighted Weighted
Interest Average Average
Expense Balance(1) Expense
======== ========== =======
<S> <C> <C> <C>
Repurchase agreements(2) $5,359,633 $144,793,891 5.82%
========== ============ ====
</TABLE>
(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.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
Weighted Weighted
Interest Average Average
Expense Balance(1) Expense
======== ========== ========
<S> <C> <C> <C>
Repurchase agreements $1,724,475 $129,045,267 5.42%
========== ============ =======
</TABLE>
(1) At March 31, 1999, FBR Asset had $131,619,000 outstanding under repurchase
agreements, with a weighted-average remaining maturity of 47 days.
Dividends Declared and Distributions in Excess of GAAP Net Income
For the three months ended March 31, 1999, FBR Asset declared dividends of $2.7
million, or $0.325 per share. For the period from January 1, 1998 through
December 31, 1998, FBR Asset declared dividends in the amount of $11.1 million,
or $1.155 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 January 1, 1998, through December 31, 1998, which exceeded its net income
calculated based on generally accepted accounting principles. For federal income
tax purposes, 90% per share of dividends paid in 1998 is ordinary income to FBR
Asset's stockholders, and 10% per share is a return of capital for 1998.
Changes in Financial Condition
Securities Available for Sale
FBR Asset invests in mortgage-backed securities that are agency pass-through
securities representing a 100% interest in the underlying conforming mortgage
loans. Conforming loans comply with the underwriting requirements for purchase
by Fannie Mae, Freddie Mac, and Ginnie Mae. These securities bear little risk of
credit loss due to defaults because they are guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac.
FBR Asset held mortgage-backed securities of $151.7 million as of March 31,
1999. FBR Asset held no mortgage-backed securities on March 31, 1998. At
December 31, 1998, FBR Asset held mortgage-backed securities equal to $161.4
million.
Premium balances associated with the purchase of mortgage-backed securities are
amortized as a decrease in interest income over the life of the security. FBR
Asset includes on its balance sheet unamortized premiums representing the
difference between the remaining principal value and the then current historical
amortized cost of mortgage-backed securities acquired. At March 31, 1999, the
amount of unamortized premium recorded in FBR Asset's statement of financial
condition was $2.6 million. At
47
<PAGE>
December 31, 1998, the amount of unamortized premium recorded in FBR Asset's
statement of financial condition was $2.7 million.
Given FBR Asset's current portfolio composition, if mortgage principal repayment
rates increase over the life of the mortgage-backed securities comprising the
current portfolio, all other factors being equal, FBR Asset's net interest
income would decrease during the life of the mortgage-backed securities, as FBR
Asset would be required to amortize its net premium balance into income over a
shorter time period. Similarly, if mortgage principal repayment rates decrease
over the life of the mortgage-backed securities, all other factors being equal,
FBR Asset's net interest income would increase during the life of the
mortgage-backed securities, as FBR Asset would be required to amortize its net
premium balance over a longer time period.
FBR Asset received mortgage principal repayments equal to $8.9 million for the
three months ended March 31, 1999. Mortgage principal repayments received were
$21.2 million for the year ended December 31, 1998.
At March 31, 1999, $16.5 million of net unrealized losses on equity securities
and $0.1 million of net unrealized gains on mortgage-backed securities were
included in FBR Asset's statement of financial condition as accumulated other
comprehensive loss. At December 31, 1998, $10.5 million of net unrealized losses
on equity securities and $0.7 million of net unrealized gains on mortgage-backed
securities were included in FBR Asset's statement of financial condition as
accumulated other comprehensive loss. See "Stockholders' Equity" elsewhere in
"Management's Discussion and Analysis" and Note 3 of Notes to Financial
Statements for further discussion.
Repurchase Agreements
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.
FBR Asset had $131.6 million outstanding under repurchase agreements with
several financial institutions on March 31, 1999. FBR Asset had no outstanding
borrowings on March 31, 1998. At March 31, 1999, the ratio of the company's
indebtedness for borrowed money to shareholder's equity was 0.92 to 1.
As of March 31, 1999, the term to maturity of FBR Asset's borrowings had been
limited to 78 days with a weighted average remaining maturity of 47 days and a
weighted average cost of funds on outstanding borrowings of 4.88%.
On December 31, 1998, FBR Asset had $128.6 million outstanding under various
repurchase agreements with several financial institutions. At December 31, 1998,
the ratio of the company's 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 had been limited to 92 days with a weighted average remaining
maturity as of December
48
<PAGE>
31, 1998, of 73 days and a weighted average cost of funds on outstanding
borrowings of 5.08%.
Contractual Commitments
During 1998, FBR Asset entered into two interest rate swap agreements to offset
the potential adverse effects of rising interest rates under some of its
short-term repurchase agreements, of which only one remains a commitment. That
agreement is with Salomon Brothers Holding Company Inc. Salomon Smith Barney
Holdings, Inc., the parent company of Salomon Brothers Holding Inc., has a
long-term debt rating of "A" by S&P. Under the swap agreement with Salomon, FBR
Asset receives quarterly payments of interest based on three-month LIBOR and
remits semi-annual payments based on a fixed interest rate of approximately 5.9%
based upon the $50 million notional amount of the swap.
The swap became effective on June 1, 1998, and matures on June 1, 2001. At March
31, 1999, the interest rate payable to FBR Asset by Salomon was 5.02%. At
December 31, 1998, the interest rate payable to FBR Asset by Salomon was 5.07%.
The timing of quarterly receipts under the swap approximates the timing of the
repricing dates for the repurchase agreements. The payments received under the
swap agreement have substantially offset the interest payments under the
repurchase agreements. In some circumstances, FBR Asset may be required to
provide collateral to secure its obligations under the interest rate swap
agreement or may be entitled to receive collateral from the counterparty to the
swap agreement. At March 31, 1999 and December 31, 1998, no collateral was
required under the interest rate swap agreement.
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 or principal payments on
mortgage-backed and equity securities, and proceeds from sales of those
securities. To date, proceeds from the issuance of common stock and repurchase
agreements have provided FBR Asset with sufficient funding for its investment
needs. Potential future sources of liquidity for FBR Asset include existing cash
balances, borrowing capacity through margin accounts, and future issuances of
common, preferred stock or debt. FBR Asset believes that its existing cash
balances, borrowing capacity through margin accounts and borrowing capacity
under collateralized repurchase agreements will be sufficient to meet its
investment objectives and fund operating expenses for at least the next twelve
months. There can be no assurance that FBR Asset will be able to generate
sufficient funds from future operations, or raise sufficient debt or equity on
acceptable terms, to take advantage of investment opportunities that become
available. Should FBR Asset's needs ever exceed these sources of liquidity,
management believes FBR Asset's mortgage-backed securities could be sold, in
most circumstances, to provide cash.
49
<PAGE>
For the three months ended March 31, 1999, FBR Asset's operating activities
resulted in net cash flows of $698,344. The primary source of operating cash
flow was interest on mortgage-backed securities, interest on loans receivable
and dividends from REIT investments. For the three months ended March 31, 1998,
FBR Asset's operating activities provided net cash flows of $2.4 million.
For the three months ended March 31, 1999, FBR Asset's investing activities
resulted in net cash used of $13 million compared to net cash used for the three
months ended March 31, 1998, of $41.6 million. The decrease in net cash used is
primarily attributable to a decrease in investments in equity securities.
For the three months ended March 31, 1999, net cash used in FBR Asset's
financing activities was $959,958 compared to net cash provided by financing
activities for the three months ended March 31, 1998, of $3.1 million. The
decrease in cash provided from financing activities is primarily attributable to
the expenditure of $1.5 million to repurchase FBR Asset's common stock and the
increase in dividends paid in the first quarter of 1999.
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 cash 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 securities 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 in January 1998, offset partially by
funds used to repurchase FBR Asset's common stock and funds distributed to
shareholders.
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 regularly evaluate whether
declines in the market value of its securities available-for-sale are other than
temporary. In performing this evaluation, FBR Asset looks to the financial
condition and business performance of each investment relative to that expected
at the time of purchase. FBR Asset also evaluates overall economic and
industry-specific conditions.
If FBR Asset determines that declines are other than temporary, it records a
charge against income for the difference between an investment's cost basis and
its estimated fair value. For the year ended December 31, 1998, FBR Asset
recorded a charge to reflect the decline in value of its investment in Chastain,
which FBR Asset determined is other than temporary. That determination resulted,
in substantial part, from Chastain's announcement that it was suspending its
dividend for the fourth quarter of 1998.
50
<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 $65 million and $71
million as of March 31, 1999 and December 31, 1998, respectively. Declines have
been recorded as accumulated other comprehensive income in the statement of
financial condition, except that for the year ended December 31, 1998, FBR Asset
realized and charged to income a loss of $6.6 million on its investment in
Chastain. See Note 3 of Notes to Financial Statements.
With respect to each of FBR Asset's other equity investments, management
believes that, as of March 31, 1999 and December 31, 1998, their decline in fair
value was temporary. That belief is based on several facts, including the
following:
o None of the other REITs has suspended their dividends.
o Each of the equity securities has increased in fair value since the
worst of the liquidity crisis in September 1998.
o Each of the REIT securities owned has experienced pricing movements
similar to the Morgan Stanley REIT Index for the past six months. This
similar movement indicates that the entire industry has declined and
not just one specific company.
o The sharpest movements within the REIT sector track similar declines
and subsequent increases in the Dow Jones Index (serving as a leading
indicator by several weeks) and the Russell 2000 Index.
Based on these factors, FBR Asset believes that the declines are not persistent
declines in market value, but rather reflect general market and REIT sector
pricing movements, and are therefore temporary changes. Further, FBR Asset has
the intent and ability to hold each of its investments to allow for the
anticipated recovery in stock prices. There can be no assurances that other
charges will not be required in future periods.
As a result of "mark-to-market" accounting treatment, the book value and book
value per share of FBR Asset are likely to fluctuate far more than those of
companies who do not make investments in marketable and non-marketable debt and
equity securities. As a result, comparisons with these companies may not be
meaningful.
In June 1998, FBR Asset's Board of Directors authorized a program to repurchase
up to 2,000,000 shares of FBR Asset's common stock. Between June 1998 and March
1999, FBR Asset repurchased 1,979,300 shares of its common stock at an average
price of $12.90 per share. On March 30, 1999, FBR Asset's Board authorized the
repurchase of up to 2,000,000 additional shares of FBR Asset's common stock.
Year 2000 Compliance
FBR Asset's software and information systems are Year 2000 compliant. However,
FBR Asset places significant reliance on the technologies of BlackRock.
Management has inquired of BlackRock and has been provided information regarding
the status of BlackRock's Year 2000 readiness. BlackRock has identified its
critical technology areas and systems with Year 2000 exposure. Those systems and
the areas identified by BlackRock that may affect FBR Asset include BlackRock's
internally developed trading and analytical systems, the accounting and
reporting systems for fixed income securities including mortgage-backed
investments, and relationships with daily market pricing and
51
<PAGE>
data providers, asset custodians and clearing brokers. BlackRock has indicated
that it has completed all testing, remediation, and validation of its internal
systems. Furthermore, BlackRock has received written assurances from all of its
critical vendors that their products or systems are Year 2000 compliant. In
addition, in excess of 90% of BlackRock's other vendors have represented in
writing that their products or systems are Year 2000 compliant. To date,
BlackRock has not received any responses from vendors indicating that they will
not be Year 2000 compliant by the end of 1999. There is no assurance, however,
that either BlackRock's internal systems or the external systems it uses will
work properly on or after January 1, 2000.
BlackRock has completed developing its contingency plans related to this issue.
BlackRock expects that those plans will be fully implemented by the middle of
1999. BlackRock has estimated that the aggregate cost of its Year 2000
compliance efforts will not exceed $500,000, although the cost may be higher.
To a lesser extent, FBR Asset also relies on the technologies of FBR Management.
That reliance primarily relates to information technology systems, more
specifically, the general ledger applications and to a lesser degree the
brokerage and trading information systems, including related hardware. These
systems are commercially provided, widely-used hardware and software. FBR Asset
believes that if FBR Management were unable to provide these services because of
Year 2000 problems, FBR Asset could obtain comparable, Year 2000 compliant
services elsewhere. Management has, however, inquired of FBR Management and FBR
and has been provided the following information regarding the status of FBR's
Year 2000 readiness.
FBR Management, together with FBR, has contacted key external vendors in an
effort to assess the systems' readiness for the Year 2000. Due diligence that
FBR has and is continuing to perform to evaluate the readiness of key third
party vendors includes point-to-point testing with mission critical vendors,
conducting interviews with key third party vendor Year 2000 program offices, and
analysis of compliance letters received from third party vendors. To date, FBR
has not encountered a vendor that does not expect to be fully compliant by the
end of 1999. In addition, FBR intends to continue monitoring the progress of its
third party vendors through the following activities: performing additional
point-to-point testing when third party vendors provide this capability,
reviewing status updates whenever provided by third party vendors, and reviewing
results from the Securities Industries Association when made available.
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 were completed in March of 1999, with an
implementation target of the third quarter of 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 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.
52
<PAGE>
There can be no assurance that the systems on which FBR Asset currently relies
will be operationally effective by the end of 1999. If those systems are not
Year 2000 compliant, their failure could have a material adverse effect on FBR
Asset's operations. Furthermore, the failure of banking and securities systems
in general--although an unlikely occurrence and one totally beyond our
control--could have a material adverse effect on FBR Asset's operations. In the
worst case, FBR Asset could be required to establish its ownership of assets and
its entitlement to interest and dividend payments on those assets. FBR Asset
maintains trade tickets and other written documentation that it believes would
be adequate to establish its ownership of those assets.
Market Conditions
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
The first quarter of 1999 continued to be a volatile period for the U.S. equity
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 period at 1,228.1 and ended the period at 1,286.4, an increase
of 4.75%. In contrast, the S&P 500 started January 1, 1998 at 975.0 and ended
March 31, 1998 at 1,101.8, an increase of 13.0%. The S&P 500 increased 16.8%
from March 31, 1998 to March 31, 1999.
FBR Asset has investments in REIT securities and small-cap stock securities.
While the S&P 500 was up from the first quarter of 1998 to the first quarter of
1999, 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 was at 421.3 on January 1, 1999 and 397.6
on March 31, 1999, a decrease equal to 5.6%. The Russell 2000 was at 436.5 on
January 1, 1998 and 480.7 on March 31, 1998, an increase equal to 10.1%. From
March 31, 1998 to March 31, 1999 the Russell 2000 declined by 17.3%.
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
real estate equity performance. On January 1, 1999, the Morgan Stanley REIT
Index was 306.1 and on March 31, 1999, it closed at 287.8, a decrease equal to
6.0%. For the first quarter of 1998, the Morgan Stanley REIT Index started at
363.2 and ended at 361.3, a decrease equal to 0.5%. The Morgan Stanley REIT
Index declined 20.3% from March 31, 1998 to March 31, 1999.
Some of the factors FBR Asset believes are influencing the equity markets
include strong demand for stocks of internet and technology stocks and large-cap
industrial stocks.
53
<PAGE>
1998 was a volatile year in the U.S. equity and debt markets. 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 100
points, a decrease equal to 10%. The Russell 2000 began 1998 at 436.5 and ended
the year at 422.0, a decrease of 3.32%. Similar to the mid-1998 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 began 1998 at 363.2 and ended the year at 302.4, a decrease of 16.7%.
Some of the factors that FBR Asset believes influenced the fluctuations of the
equity markets in 1998 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 March 31, 1999, 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 that would generate accretive earnings. 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, FBR Asset believes that investors began selling REIT securities to
invest in larger, more well-capitalized
54
<PAGE>
stocks such as those included in the S&P 500. See "Equity Market Conditions" for
a more detailed discussion of the factors that FBR Asset believes to have
influenced the equity markets.
FBR Asset's ability to fund its growth and find attractive investments is, in
part, dependent upon the market conditions for REITs. During the first quarter
of 1999, there was one REIT initial public offering that raised $13.7 million
and 2 secondary offerings that raised $149.1 million. This compares to 8 REIT
initial public offerings, which raised $1.2 billion during the first quarter of
1998 and 76 secondary offerings, which raised $4.3 billion. 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 $848 million. Of the seven mortgage REIT initial public offerings, FBR
Asset invested $19.8 million in contemporaneous private placements by two. Of
the nine equity REIT initial public offerings, FBR Asset invested $25 million in
a contemporaneous private placement by one.
The market for initial public offerings and secondary common stock offerings of
REIT securities was robust during the first and second quarters of 1998.
However, because of factors affecting the debt and equity markets, the market
for REIT offerings essentially closed during the third and fourth quarters. The
table below summarizes public common equity raised by REITs for each quarter
from January 1, 1998, through March 31, 1999.
<TABLE>
<CAPTION>
IPO Secondary
--------------------------------------- ----------------------------------------
($ In Millions) ($ In Millions)
Market Market
Mortgage Equity Value Mortgage Equity Value
1998 REITs REITs Total 3/31/99 REITs REITs Total 3/31/99
---- -------- ------ ----- ------- -------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 522.3 $657.4 $1,179.7 -36.4% $ 71.6 $4,250.8 $4,522.4 -22.7%
Second Quarter 325.7 557.3 883.0 -17.6% 44.1 2,395.5 2,439.6 -19.5%
Third Quarter 12.0 12.0 -43.8% - 100.0 100.0 -12.3%
Fourth Quarter - - - - - 211.0 211.0 -11.1%
Total 1998 $ 860.0 $1,214.7 $2,074.7 -28.4% $ 115.7 $6,957.3 $7,020.5 -16.36%
======= ======== ======== ====== ======= ======== ======== =======
1999
----
First Quarter - $ 13.7 $ 13.7 -43.8% - $ 149.1 $ 149.1 -8.6%
</TABLE>
Source: CommScan Equidesk, Inc.
FBR Asset's investments in REITs have experienced declines similar to the
declines in market value reflected above. See "Summary of Current Investments &
Cash and Cash Equivalents." Historically, FBR Asset has invested in REITs and
companies that propose to elect REIT status. There has been no significant
strengthening in the market for REIT stocks since December 31, 1998.
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 1980s and early 1990s 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
55
<PAGE>
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 has invested in the equity securities of Prime Retail, which invests
in factory outlet malls, and East-West Bancorp, which invests in multifamily
housing. In addition, FBR Asset has made loans to Kennedy-Wilson, Prime Capital,
Prime Group and Brookdale, as described below.
Real Estate-Based Lending Market
One of the most important factors associated with an investment in real estate
is the availability of debt to finance a significant portion of the investment.
In recent years, traditional lending sources such as banks and insurance
companies have been supplemented by capital market financing through lending
conduits. These conduits make loans and finance the loans by the sale of
securities backed by and payable from the payments on the loans. The growth of
these commercial mortgage-backed securities, or CMBS, has been significant.
The mortgage loans that can be most efficiently securitized are traditional
first mortgage loans underwritten to traditional institutional lending
standards. The CMBS that can be most easily placed at attractively low interest
rates are those that have been rated in one of the investment grade categories
by a recognized rating agency.
FBR Asset has calculated its investment in real based lending investments in
real estate based loans that are not easily securitized and, to a lesser extent,
in CMBS that is not investment grade rated. FBR Asset has made indirect
investments in commercial mortgage REITs whose business plans contemplated them
retaining subordinated mortgage loans that they originate or acquire and
securitize. The market value of those mortgage REITs has declined significantly
since the time FBR Asset made those investments, attributable in fact to the
filing in October of 1998 by CRIIMI MAE, the largest commercial mortgage REIT,
for protection under Chapter 11 of the bankruptcy code. The filing by CRIIMI MAE
and general market conditions resulted in a tightening of credit available to
mortgage REITs. This in turn made it more difficult for mortgage REITs and other
conduit lenders to originate loans and finance growth.
FBR Asset has made direct investments in real estate based loans. Investments in
1998 were loans to Prime Capital and Kennedy-Wilson aggregating $19 million.
Since December 31, 1998 has invested $12 million in loans to Brookdale Living
Communities and Prime Group Realty Trust. Each of these loans provides debt
financing for capital needs not covered by traditional secured and senior loans
and available equity. FBR Asset anticipates that there will be a continued
demand for this type of loan and that it will make additional similar real
estate based loans in the future.
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 direct investments in
mortgage-backed
56
<PAGE>
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.
From January 1, 1999 to March 31, 1999, interest rates on 10-year U.S. Treasury
securities increased for an average yield equal to 4.98%. At the same time,
one-month LIBOR decreased to an average yield for the quarter equal to 4.95%. As
a result, the yield curve flattened such that short-term, non-Treasury borrowing
rates approximately equaled long-term Treasury rates. For the same period in
1998, the average yield on 10-year U.S. Treasury securities was 5.58% and the
average yield on one-month LIBOR was 5.65%. The average yield on the 10-year
U.S. Treasury decreased by 10.75% from the first quarter of 1998 to the first
quarter of 1999. For the same period, the average yield on one-month LIBOR
decreased by 12.4%.
From January 1, 1998, to December 31, 1998, interest rates on U.S. Treasury
securities 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 resulted in higher prices for Treasury securities and lower
yields. As a result, the yield curve inverted such that short-term, non-Treasury
borrowing rates exceeded long-term Treasury rates.
FBR Asset has invested in fixed-rate long-term mortgage-backed securities and
financed a significant portion of that investment with short term borrowings at
short-term borrowing rates. As a general matter, FBR Asset's mortgage-backed
securities portfolio performs better where the spread between short-term
interest rates and long-term interest rates increases and less well as it
decreases. The following table summarizes the relationship in 1998 between
one-month LIBOR and the 10-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
--------------------------- ------------------------ ------------------------
10-Year Net 10-Year Net 10-Year Net
Treasury LIBOR Spread Treasury LIBOR Spread Treasury LIBOR Spread
-------- ----- ------ -------- ----- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 5.77% 5.72% 0.05 5.36% 5.59% -0.23 5.58% 5.65% -0.07
Second Quarter 5.81% 5.69% 0.12 5.35% 5.64% -0.29 5.60% 5.66% -0.06
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 4.16% 5.03% -0.87 4.66% 5.36% -0.70
------- ------- ------- ------- ------- ----- ------- ------- -----
1998 Average 5.51% 5.68% -0.16 4.88% 5.40% -0.52 5.27% 5.57% -0.31
======= ======= ======= ======= ======= ===== ======= ======= =====
1998
Increase/(Decrease) -0.83 -0.09 -1.2 -0.56 -0.92 -0.29
1998 Percentage
Increase/(Decreases -14.39% -1.57% -22.39% -10.02% -16.49% -5.13%
First Quarter 1999 5.42% 5.06% 0.36 4.61% 4.93% -0.32 4.98% 4.95% -0.03
</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
4.66%, and LIBOR decreased 5.13% from 5.65% to 5.36% during the same period.
57
<PAGE>
For the quarter ended March 31, 1999, the weighted average annual yield on
mortgage-backed securities owned by FBR Asset was 6.30%; the annual management
fee associated with that investment was 0.25%; and the weighted average interest
rate on FBR Asset's repurchase agreement borrowings was 5.42%. The net interest
rate spread was 0.63%.
For the year ended December 31, 1998, the weighted average annual yield on
mortgage-backed securities owned by FBR Asset was 6.19%; the annual management
fee associated with that investment was 0.25%; and the weighted average interest
rate on FBR Asset's repurchase agreement borrowings was 5.82%. The net interest
rate spread was 0.12%.
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. Unlike CMBS, the mortgage-backed
securities held directly by FBR Asset are insured by Ginnie Mae, Fannie Mae or
Freddie Mac and are 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 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 as a result of its
investments in mortgage-backed securities and equity investments. None of these
investments are held for trading purposes.
Interest Rate Risk
FBR Asset is subject to interest rate risk as a result of its investments in
mortgage-backed securities and its financing with repurchase agreements, all of
which are interest rate sensitive financial instruments. FBR Asset is exposed to
interest rate risk that fluctuates based on changes in the level or volatility
of interest rates and mortgage prepayments and in the shape and slope of the
yield curve. FBR Asset attempts to hedge a portion of its exposure to interest
rate risk primarily through the use of interest rate swaps.
FBR Asset's primary risk is related to changes in both short and long term
interest rates, which affect the company in several ways. As interest rates
increase, the market value of the mortgage-backed securities may be expected to
decline, prepayment rates may be expected to go down and durations may be
expected to extend. An increase in interest rates is beneficial to the market
value of FBR Asset's swap position as the cash flows
58
<PAGE>
from the floating rate portion increase under this scenario. The reverse is true
for mortgage-backed securities and the swap if interest rates decline.
The fair value of interest rate swap agreements that qualify as hedges is not
recorded for accounting purposes. The differential between amounts paid and
received under the swap agreements is recorded as an adjustment to the interest
expense incurred under the repurchase agreements. In the event of early
termination of a swap agreement, a gain or loss is recorded and the company
receives or makes a payment based on the fair value of the swap agreement.
The table that follows shows the expected change in market value for FBR Asset's
current mortgage-backed securities and interest rate swaps under several
interest rate "shocks." Interest rates are defined by the U.S. Treasury yield
curve. The changes in rates are assumed to occur instantaneously. It is further
assumed that the changes in rates occur uniformly across the yield curve and
that that the level of LIBOR changes by the same amount as the yield curve.
Actual changes in market conditions are likely to be different from these
assumptions.
Changes in value are measured as percentage changes form their respective values
presented in the column labeled "Value at 3/31/99." Actual results could differ
significantly from these estimates.
The change in value of the mortgage-backed securities also incorporates
assumptions regarding prepayments, which are based on a proprietary model. This
model forecasts prepayment speeds based, in part, on each security's issuing
agency (Fannie Mae, Ginnie Mae or Freddie Mac), coupon, age, prior exposure to
refinancing opportunities, the interest rate distribution of the underlying
loans, and an overall analysis of historical prepayment patterns under a variety
of past interest rate conditions.
59
<PAGE>
<TABLE>
<CAPTION>
Value at
Value at 3/31/99
3/31/99 with 100
with 100 basis point
basis point decrease in
Value at increase in Percent interest Percent
3/31/99(1) interest rates Change rates Change
---------- -------------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Assets
Mortgage securities $151,732,401 $147,134,389 (3.03%) $154,501,408 1.82%
Other 126,972,960 126,972,960 - 126,972,960 -
------------ ------------ ------------
Total Assets $278,705,361 $274,107,349 (1.65%) $281,474,368 0.99%
============ ============ ============
Liabilities
Interest rate swap 1,249,700(2) 294,000(2) (76.47%) $ 2,232,000(2) 78.60%
Other 135,943,630 135,943,630 135,943,630
------------ ------------ ------------
Total Liabilities $137,193,330 $136,237,630 (0.70%) $138,175,630 0.72%
------------ ------------ ------------
Shareholders' Equity
Common stock $ 104,158 $ 104,158 - $ 104,158 -
Paid-in-capital 194,097,193 194,097,193 - 194,097,193 -
Accumulated other
comprehensive
income (loss) (17,693,750) (21,336,062) (20.59%) (15,907,043) 10.10%
Retained earnings (9,459,007) (9,459,007) - (9,459,007) -
(deficit)
Treasury stock (25,536,563) (25,536,563) - (25,536,563) -
------------ ------------ --------------
Total
Shareholders' Equity $141,512,031(2) $ 137,869,71 (2.57%) $ 143,298,738 1.26%
------------ ------------ --------------
Total Liabilities and
Shareholders' Equity $278,705,361 $274,107,349 (1.65%) $ 281,474,368 0.99%
============ ============= ==============
</TABLE>
(1) Includes Accrued Interest.
(2) In accordance with GAAP, the fair value of interest rate swaps accounted
for as hedges is not recorded. Accordingly, the carrying value of the
interest rate swap in the company's financial statements is $0. See Note 2
to Notes to Financial Statements. The fair value of the interest rate swap
is based on quoted market prices as of March 31, 1999. As of March 31,
1999, interest payments received under the swap agreement were based on an
interest rate of 5.02% while interest payments made were based on an
interest rate of 5.9%.
As shown above, the portfolio generally will benefit less from a decline in
interest rates than it will be adversely affected by a similar-scale increase.
This effectively may limit investors' upside potential in a market rally.
The value of FBR Asset's investments in other companies is also likely to be
affected by significant changes in interest rates. First, many of the companies
are exposed to risks similar to those identified above as being applicable to
FBR Asset's direct investments. Second, the REITs in which FBR Asset has
invested tend to trade on a yield basis. As interest rates increase, the yield
required by investors in REITs, thrifts and other financial institutions
increases with the result that market values decline. Finally, changes in
interest rates often affect market prices of equity securities generally.
Because each of the companies in which FBR Asset invests has its own interest
rate risk management process, it is not feasible for us to quantify the
potential impact that interest rate changes would have on the stock price or the
future dividend payments by any of the companies in which FBR Asset has
invested.
Equity Price Risk
FBR Asset is exposed to equity price risk as a result of its investments in
equity securities of REITs and other real estate related companies. Equity price
risk changes as the volatility of equity prices changes or the values of
corresponding equity indices change.
60
<PAGE>
While it is impossible to project with any exactitude what factors may affect
the prices of equity sectors and how much that might be, the table below
illustrates the impact a ten percent increase and a ten 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 March 31, 1999.
<TABLE>
<CAPTION>
Value at Value at
March 31, March 31,
Value at 1999 with 1999 with
March 31, 10% increase Percent 10% decrease Percent
1999 in price Change in price Change
------------- -------------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Assets
Equity securities $ 64,948,907 $ 71,443,797 10.00% $ 58,454,017 (10.00%)
Other 213,756,454 213,756,454 - 213,756,454 -
------------ ------------- ------------
Total Assets $278,705,361 $285,200,251 2.33% $272,210,471 (2.33%)
============ ============ ============
Liabilities 135,943,630 135,943,630 135,943,630
------------ ------------ ------------
Shareholders' Equity
Common stock 104,158 104,158 - 104,158 -
Paid-in-capital 194,097,193 194,097,193 - 194,097,193 -
Accumulated other
comprehensive
income (loss) (16,444,050) (9,949,160) 39.49% (22,938,940) (39.49%)
Retained earnings
(deficit) (9,459,007) (9,459,007) - (9,459,007) -
Treasury stock (25,536,563) (25,536,563) - (25,536,563) -
------------ ------------ -----------
Total
Shareholders'
Equity $142,761,731 $149,256,621 4.55% $136,266,841 (4.55%)
------------ ------------ ------------
Total Liabilities
and Shareholders'
Equity $278,705,361 $285,200,251 2.33% $272,210,471 (2.33%)
============ ============ ------
Book value per share $ 16.92 $ 17.69 4.55% $ 16.15 (4.55%)
</TABLE>
Except to the extent that FBR Asset sells its equity investments, an increase or
decrease in the market value of those assets will not directly affect FBR
Asset's earnings, although an increase or decrease in interest rates would
affect the market value of the assets owned by the companies in which FBR Asset
invests. Consequently, if those companies' earnings are affected by changes in
the market value of their assets, that could in turn impact their ability to pay
dividends, which could in turn affect FBR Asset's earnings. If FBR Asset had
sold all of its equity investments on March 31, 1999, the company would have
incurred a loss of approximately $16.55 million which would have been charged to
earnings.
Developments Since March 31, 1999
Between June 30, 1998, and March 30, 1999, FBR Asset repurchased 1,979,300 of
its shares in negotiated transactions; 1,872,300 shares were purchased in 1998,
and 107,000 shares were purchased between December 31, 1998 and March 30, 1999.
On March 30, 1999, FBR Asset's Board of Directors authorized the repurchase of
up to 2,000,000 additional shares of FBR Asset common stock. At March 31, 1999,
there were 8,436,527 shares of FBR Asset common stock outstanding. As of April
30, 1999, FBR Asset had repurchased another 575,291 shares at an average price
per share of $12.72. Whether FBR Asset will repurchase additional shares of its
common stock pursuant to the Board's authorization will depend on the price at
which shares are available for
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purchase by FBR Asset, alternative investment opportunities available to FBR
Asset and FBR Asset's needs, if any, for cash to fund its investment program.
Repurchases of shares by FBR Asset would have the effect of increasing the
percentage ownership of non-selling shareholders, including FBR Group, while
decreasing shareholders' equity and funds available for additional investments,
repayment of indebtedness and distributions to shareholders.
As of April 30, 1999, the outstanding principal balance of FBR Asset's loan to
Prime Capital Holdings, LLC had been reduced to $10.2 million.
On April 20, 1999, FBR Asset committed to loan Prime Retail $10 million. The
loan is a contingent facility, which Prime may draw against until July 20, 1999.
The loan will be a general obligation of Prime Retail and secured by partnership
interests in a factory outlet mall. The loan bears interest at 12% per annum. On
April 21, 1999, FBR Asset acquired 78,400 shares of Prime Retail Inc.'s Series A
10.5% preferred stock in open-market transactions for $18.55 per share.
On May 11, 1999, Building One Services Corporation announced the results of a
tender offer that expired on April 29, 1999. Pursuant to Building One's tender
offer, FBR Asset sold 297,341 of its Building One common shares for a price of
$22.50 per share, or $6.7 million. FBR Asset retained 202,659 shares of Building
One's common stock, which at May 14, 1999, had a market value of $14.31 per
share.
On May 14, 1999, Chastain announced that its Board of Directors had voted to
sell all of Chastain's assets, either through a plan of liquidation or through a
sale of the company.
On May 14, 1999, Brookdale Living Communities repaid the entire outstanding
balance of its loan.
On May 17, 1999, Kennedy-Wilson repaid the entire outstanding balance of its
loan from the proceeds of an equity offering.
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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 an 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 services for FBR Management or any of its Affiliates.
No person will be disqualified from serving as an independent director solely
because that person maintains a discretionary brokerage account with FBR
Management or its Affiliates.
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;
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 must 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:
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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, as determined by all of the directors in their role
as fiduciaries, 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 Swanson. 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.
Audit Committee
The audit committee consists solely of FBR Asset's independent directors,
Messrs. Harlan and Lindner. 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 Lindner. 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.
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Nominating Committee
The nominating committee consists solely of FBR Asset's independent directors,
Messrs. Harlan and Lindner. 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 with FBR Asset
- ---- --- -------------------------------
Stephen D. Harlan 65 Director
Russell C. Lindner 45 Director
Directors Affiliated with FBR Management
Name Age Position(s) Held with FBR Asset
- ---- --- -------------------------------
Emanuel J. Friedman 52 Chairman of the Board
Eric F. Billings 46 Vice Chairman & Chief Executive Officer
William R. Swanson 50 Executive Vice President &
Chief Operating Officer
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.
Russell C. Lindner is Chairman of the Forge Company, the parent company of
Colonial Parking, Inc. He has continuously served as Chairman of the Forge
Company since January 1, 1994. Mr. Lindner is a former or current board member
of Riggs Bank (Board of Consultants), The National Conference of Christians and
Jews (DC), Jubilee Housing, GW Law Alumni Association, The Salvation Army (DC),
The Federal City Council, and the National Rehabilitation Hospital. Mr. Lindner
recently also served a three-year term as Chairman of the Board of The Landon
School. Mr. Lindner received a Bachelor of Arts from John Hopkins University, a
Juris Doctor from The George Washington University, and a Masters of Science
from the Massachusetts Institute of Technology.
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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 March 31, 1999, Mr. Friedman owned 21.6% of the
outstanding common stock of FBR Group. Mr. Friedman is involved in FBR's
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 March 31, 1999, Mr. Billings owned
17.9% 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.
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 also a director of Capital Automotive REIT, one of the companies
in which FBR Asset has invested.
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.
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Name Age Position(s) Held with FBR Asset
- ---- --- -------------------------------
W. Russell Ramsey 38 President & Secretary
Elaine M. Clancy 34 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
W. Russell Ramsey is President of FBR Group. He has continuously served as
President of FBR Group since co-founding FBR in 1989. As of March 31, 1999, Mr.
Ramsey owned 12.0% of the outstanding common stock of FBR Group. Mr. Ramsey is
involved in FBR's 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 also a director of Building One Services
Corporation, one of the companies in which FBR Asset has invested.
Elaine M. Clancy is a Senior Vice President of FBR & Co.'s real estate
investment banking group. Ms. Clancy joined FBR in 1994. Prior to joining FBR &
Co., Ms. Clancy was a Manager of Finance for Combined Properties, Inc., a real
estate firm in Washington, DC, which owns shopping centers. Before Combined
Properties, Ms. Clancy was a financial analyst with La Salle Partners. Ms.
Clancy received a Masters in Management from the J.L. Kellogg Graduate School of
Management at Northwestern University and a Bachelor of Business Administration
from James Madison University.
George Abraham is a Managing Director of 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
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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.
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 Articles require FBR Asset to indemnify its current and former
directors, officers, employees and agents to the fullest extent permitted by
Virginia law. If a director, officer, employee or agent becomes a party to a
proceeding because of his or her position in FBR Asset, Virginia 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 was judged liable to FBR Asset; or
o the person received an improper personal benefit in money, property or
services.
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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 Articles also limit, to the fullest extent permitted by Virginia
law, any director's or officer's personal liability for money damages. Under
current Virginia law, this means that a director or officer would owe money
damages only if the person engaged in willful misconduct or a knowing violation
of the criminal law of any federal or state securities law.
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 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, or a committee of 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
options granted under the stock incentive plan will be exercisable in whole or
in part at any time before December 17, 2007, at an option price of $20 per
share. 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.
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 May __, 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>
Number Percent of Total
of Shares Options Granted Present Value
Underlying to Individuals Exercise or Expiration of Grant at
Name Option in Fiscal Year Base Price Date Date of Grant
---- ------ -------------- ---------- ---- -------------
<S> <C> <C> <C> <C> <C>
Stephen D. Harlan 15,000 9.68% $20 12/17/2007
Russell C. Lindner 15,000 9.68% $20 12/17/2007
William R. Swanson 100,000 64.51% $20 12/17/2007
Elaine M. Clancy 25,000 16.13% $20 12/17/2007
</TABLE>
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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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FBR Asset's Capital Stock
The following summary discusses the material terms of FBR Asset's capital stock.
This summary does not purport to be a complete description of FBR Asset's
capital stock, 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 that
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 current plans to issue
any preferred stock.
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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. For this purpose, 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 the 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 preferred stock of any series. However, under FBR
Asset's Charter, 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 FBR Asset's
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 transferred automatically to a trust effective on the day before the
purported transfer of the common stock or preferred stock.
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The record holder of the shares of common stock or preferred stock that are
transferred to a trust will be required to submit the 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 the 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 and will hold those dividends or distributions in trust for the benefit
of the beneficiary. The trustee will vote all shares in the trust. The trustee
will designate a permitted transferee of the shares, provided that the permitted
transferee purchases the shares for valuable consideration and acquires the
shares without the acquisition resulting in a transfer to another trust.
The owner of shares in the trust will be required to repay to the trustee the
amount of any dividends or distributions received by the owner (1) that are
attributable to shares in the trust and (2) the record date of which was on or
after the date that the shares were transferred to the trust. The owner
generally will receive from the trustee the lesser of (a) the price per share
the owner paid for the shares in the trust, or in the case of a gift or devise,
the market price per share on the date of the transfer, or (b) the price per
share received by the trustee from the sale of the shares in the trust. Any
amounts received by the trustee in excess of the amounts to be paid to the owner
will be distributed to the beneficiary of the trust.
Shares in the 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 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 trust or (2) the date FBR Asset determines in good faith that a prohibited
transfer has occurred.
For these purposes, 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
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.
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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 that event
and (2) to provide to FBR Asset any 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
that stock. 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 an 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 any lower
percentage as set forth in 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 the 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 must provide to FBR Asset any additional
information that FBR Asset requests 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.
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.
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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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Common Stock Available For Future Sale
At March 31, 1999, FBR Asset had outstanding 8,436,527 shares of common stock,
excluding 1,021,900 shares reserved for issuance upon exercise of outstanding
options. Of the shares outstanding at March 31, 1999, 6,517,150 shares of common
stock may be sold in this offering, and if so, 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 1,344,086 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 March 31, 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:
<TABLE>
<CAPTION>
Principal Shareholders
Name and Address of Number of Shares
Beneficial Owner Beneficially Owned Percent(3)
---------------- ------------------ ----------
<S> <C> <C>
Friedman Billings, Ramsey Group, Inc.(1)
1001 Nineteenth Street North
Arlington, VA 22209 2,159,891(2) 22.84%
Boston Partners Asset Management
One Financial Center
43rd Floor 827,100 8.74%
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 695,000 7.35%
Oppenheimer Funds
Two World Trade Center
New York, NY 10048 543,500 5.75%
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)
Russell C. Lindner(7) 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%
========== ======
</TABLE>
(1) Held through wholly-owned subsidiaries.
(2) Includes shares as to which options are held.
(3) Assumes exercise of options to purchase 1,021,900 shares.
(4) Less than 1%.
(5) Includes 92,800 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.
(7) As of May __, 1999.
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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,
(except as discussed below in "--Taxation of Tax-Exempt Shareholders") financial
institutions or broker-dealers, and non-U.S. individuals and foreign
corporations (except as discussed below in "--Taxation of Non-U.S.
Shareholders").
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 federal income tax laws
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 (1)
net income from the sale or other disposition of property acquired through
foreclosure that it holds primarily for sale to customers in the ordinary
course of business and (2) other non-qualifying income from property
acquired through foreclosure.
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.
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
(1) the gross income attributable to the greater of the amounts by which it
fails the 75% and 95% gross income tests, multiplied by (2) a fraction
intended to reflect its profitability.
o Sixth, if FBR Asset fails to distribute during a calendar year at least the
sum of (1) 85% of its REIT ordinary income for that year, (2) 95% of its
REIT capital gain net income for that year, and (3) 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.
o Eighth, if FBR Asset acquires any asset from a C corporation, or a
corporation generally subject to full corporate-level tax, in a merger or
other transaction in which it acquires a basis in the asset that is
determined by reference to the C corporation's basis in the asset, it will
pay tax at the highest regular corporate rate
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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 (1) the amount of gain that it
recognizes at the time of the sale or disposition and (2) 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 excess inclusion, or phantom taxable income, that it derives from
REMIC residual interests 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 the REIT provisions
of the federal income tax laws;
4. it is neither a financial institution nor an insurance company subject to
certain provisions of the federal income tax laws;
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, including specified entities, during the last half of any
taxable year;
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 federal income tax laws; and
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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 requirement 6 above, it will be deemed to have satisfied that
requirement for that taxable year. For purposes of determining share ownership
under requirement 6, 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 the federal income tax laws, 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
requirement 6.
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.
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 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. Qualifying income for purposes of that
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.
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Second, at least 95% of its gross income for each taxable year must consist of
income that is qualifying income for purposes of the 75% gross income test
described above, dividends, other types of interest, gain from the sale or
disposition of stock or securities, or any combination of the foregoing. Gross
income from FBR Asset's sale of property that it holds primarily for sale to
customers in the ordinary course of business is excluded from both income tests.
The following paragraphs discuss the specific application of the income 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 both gross income tests,
generally excludes 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, income attributable
to that loan provision will be treated as gain from the sale of the secured
property, which generally is qualifying income for purposes of both gross income
tests.
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 both 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
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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 gross income tests.
We believe that FBR Asset's income from stock in other REITs is qualifying
income for purposes of both 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 both 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 may provide services
directly to its tenants, if the services are usually or customarily
rendered in connection with the rental of space for occupancy only and are
not considered to be provided for the tenants' convenience. In addition,
FBR Asset may provide a minimal amount of services that are not customarily
rendered to the tenants of a property, other than through an independent
contractor, as long as its income from the services does not exceed 1% of
its income from the related property.
We 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 both 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 both 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.
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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
those 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 assets that are qualifying real
estate-related assets under the federal income tax laws, 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 gross income tests for any
taxable year, it nevertheless may qualify as a REIT for such year if it
qualifies for relief under federal income tax laws. 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.
Foreclosure Property Rules
REITs generally will incur tax at the maximum corporate rate on any net income
from any real property, or an interest in real property, acquired through
foreclosure 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.
However, that tax does not apply to income that would be qualifying income for
purposes of the 75% gross income test.
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We do not anticipate that FBR Asset will receive any income from property
acquired through foreclosure 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 because the REIT acquired the related loan when default was imminent or
anticipated, income the REIT receives with respect to that 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 property that is
not eligible for a foreclosure property election will be qualifying income for
purposes of both gross income tests.
Prohibited Transaction Rules
A REIT will incur a 100% tax on the net income derived from any 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 federal income tax laws prescribing when an asset
sale will not be characterized as a sale to customers in the ordinary course of
business. 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 must consist of:
o cash or cash items, including certain receivables;
o government securities;
o investments in stock or debt instruments during the one-year period
following FBR Asset's receipt of new capital that it raises through equity
offerings or offerings of debt with at least a five-year term;
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; or
o regular or residual interests in a real estate mortgage investment conduit,
or "REMIC." However, if less than 95% of the assets of a REMIC consists of
assets that are qualifying real estate-related assets under the federal
income tax laws, 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.
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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
be a qualifying asset for purposes of the 75% asset test described above.
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
asset for purposes of the 75% asset test described above.
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 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.
For purposes of both components of the second asset test, "securities" does not
include FBR Asset's stock in other REITs or in any qualified REIT subsidiary or
its interest in any partnership.
A recent legislative proposal would allow FBR Asset to own up to 100% of the
stock in taxable REIT subsidiaries, which could perform activities unrelated to
FBR Asset's tenants, such as third-party management, development, and other
independent business activities, as well as provide "customary" and
"non-customary" services to FBR Asset's tenants. FBR Asset would be subject to
restrictions on its stock ownership of those taxable subsidiaries. The taxable
REIT subsidiary provision would be effective after the date of enactment.
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 both components of the second asset test described above with respect
to its investment in such disqualified REIT. We believe that FBR Asset satisfies
both components of the second asset test 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 purposes of the 75% asset test. Instead, FBR Asset
would be subject to both components of the second asset test 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-related asset under the federal income tax laws. 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 (1) it satisfied the asset tests
at the close of the preceding calendar quarter and (2) the discrepancy between
the value of its assets and the
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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 (2) 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 (1) 95% of its "REIT taxable income" (computed without
regard to the dividends paid deduction and its net capital gain or loss)
and (2) 95% of its after-tax net income, 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, which includes net
capital gain, that it does not distribute to shareholders. Furthermore, if it
fails to distribute during a calendar year, or by the end of January following
such calendar year, in the case of distributions with declaration and record
dates falling in the last three months of the 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
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 (1) the actual receipt of income and actual payment of
deductible expenses and (2) 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 original issue
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discount 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 provision in a mortgage loan that
entitles FBR Asset to share in the gain from the sale of or the
appreciation in the property 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 have a stated redemption price at maturity that is greater than FBR
Asset's tax basis in those loans, 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
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 Internal Revenue Service 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.
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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 and 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 federal income tax laws,
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 that are made 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;
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 (1) a U.S. court is able to exercise
primary supervision over the administration of such trust and (2) 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
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its proportionate share of FBR Asset's undistributed long-term capital gain,
minus its share of the tax FBR Asset paid.
If a distribution 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. Instead,
such distribution 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 if the common stock has been held
for more than one year, 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 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 before
they 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.
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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 generally must treat any loss upon a sale or
exchange of common stock held by such shareholder for six months or less 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
depreciable real property that is treated as "section 1250 property" under the
federal income tax laws is 25% to the extent that such gain would have been
treated as ordinary income if the property were personal property that is
treated as "section 1245 property" under the federal income tax laws. 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 generally
may designate whether such a distribution is taxable to its non-corporate
shareholders at a 20% or 25% rate. Thus, the tax rate differential between
capital gain and ordinary income for non-corporate taxpayers may be significant.
In addition, the characterization of income as capital gain or ordinary income
may affect the deductibility of capital losses. A non-corporate taxpayer may
deduct capital losses not offset by capital gains against its ordinary income
only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry
forward unused capital losses indefinitely. A corporate taxpayer must pay tax on
its net capital gain at ordinary corporate rates. A corporate taxpayer can
deduct capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years.
Information Reporting Requirements and Backup Withholding
FBR Asset will report to its shareholders and to the Internal Revenue Service
the amount of distributions it pays during each calendar year, and the amount of
tax it withholds, if any. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to
distributions unless such holder either:
o is a corporation or comes within another exempt category and, when
required, demonstrates this fact; or
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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 Internal
Revenue Service. 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, 2000. 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, generally are exempt
from federal income taxation. However, they are subject to taxation on their
unrelated business taxable income. While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute unrelated business taxable income,
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 tax-exempt shareholders
generally should not constitute unrelated business taxable income. However, if a
tax-exempt shareholder were to finance its acquisition of the common stock with
debt, a portion of the income that it receives from FBR Asset would constitute
unrelated business taxable income pursuant to the "debt-financed property"
rules. Furthermore, social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under special provisions of the federal
income tax laws are subject to different unrelated business taxable income
rules, which generally will require them to characterize distributions that they
receive from FBR Asset as unrelated business taxable income. 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 unrelated business taxable income.
The percentage of its dividends that the tax-exempt trust must treat as
unrelated business taxable income 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 unrelated business taxable income rule applies to a pension trust holding
more than 10% of FBR Asset's stock only if:
o the percentage of its dividends that the tax-exempt trust must treat as
unrelated business taxable income is at least 5%;
o FBR Asset qualifies as a REIT by reason of the modification of the rule
requiring that no more than 50% of FBR Asset's shares be owned by five or
fewer
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individuals 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 either (1) one pension trust owns more than 25% of the value of FBR
Asset's stock or (2) a group of pension trusts individually holding more
than 10% of the value of FBR Asset's stock collectively owns more than
50% of the value of FBR Asset's 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, tax-exempt shareholders may be required to treat a portion of
their dividends as unrelated business taxable income. Tax-exempt shareholders
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 are complex. This section is only a summary of such rules. We urge
those 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
tax on the distribution at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such distributions. A non-U.S.
corporation also may be subject to the 30% branch profits tax . 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, 2000.
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
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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 special provisions of the
federal income tax laws. 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 mortgage-backed securities. Under those rules, a non-U.S. shareholder is
taxed on distributions attributable to gain from sales of U.S. real property
interests as if such gain were effectively connected with a U.S. business of the
non-U.S. shareholder. A non-U.S. shareholder thus would be taxed on such a
distribution at the normal capital gain rates applicable to U.S. shareholders
and also might be subject to the alternative minimum tax. A nonresident alien
individual also might be subject to special alternative minimum tax. A non-U.S.
corporate shareholder not entitled to treaty relief or exemption also may be
subject to the 30% branch profits tax on such a distribution. 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 tax liability
for the amount FBR Asset withholds.
A non-U.S. shareholder generally will not incur tax under the provisions
applicable to distributions that are attributable to gain from the sale of U.S.
real property interests on gain from the sale of its common stock as long as at
all times non-U.S. persons hold, directly or indirectly, less than 50% in value
of FBR Asset's stock. We cannot assure you that that test will be met. 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 the provisions applicable to distributions that are attributable to gain
from the sale of U.S. real property interests if FBR Asset's common stock is
"regularly traded" on an established securities market. If the gain on the sale
of
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the common stock were taxed under those provisions, 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 the
provisions applicable to distributions that are attributable to gain from the
sale of U.S. real property interests 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 treatment 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 United States 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 the Employee Retirement Income Security Act of 1974
("ERISA") and the prohibited transaction provisions of the federal income tax
laws. 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 a summary of materially 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 individual retirement
account should consult its own legal advisor regarding the specific
considerations arising under ERISA, the prohibited transaction provisions of the
federal income tax laws, and state law with respect to an investment in the
common stock by such plan or individual retirement account. 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 individual retirement account'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 meets the following requirements and, as a result, is
"publicly-offered":
o it is held by 100 or more investors who are independent of the issuer and
each other;
o it is freely transferable; and
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o it is part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934.
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 (1) the common
stock is "publicly offered" or (2) 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 held by 100 or more shareholders who are independent
of FBR Asset and each other. 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(b) of the Securities Exchange Act of
1934 at the same time that this registration statement becomes effective under
the Securities Act of 1933. 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 as of the time that this registration
statement becomes effective under the Securities Act of 1933. 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 the federal income tax laws.
97
<PAGE>
Selling Shareholders
The shareholders listed below and the beneficial owners of the common stock and
their transferees, pledgees, donees, or other successors are the selling
shareholders under this prospectus. The following table sets forth as of a
recent practicable date, the respective number of common shares owned by each
selling shareholder that may be offered pursuant to this prospectus.
<TABLE>
<CAPTION>
Selling Shareholder Number of Shares
- ------------------- ----------------
<S> <C>
AG Long Term SuperFund, LP...................................................... 200,000
AGMM LP......................................................................... 15,000
AG SuperFund, LP................................................................ 150,000
Angelo Gordon Co., LP........................................................... 35,000
Norman and Gail Antin........................................................... 250
Don Stephen Aron................................................................ 1,250
Aqua Fund, LP................................................................... 5,000
Bay Brook Partners.............................................................. 10,000
Raymond L. Benson, IRA.......................................................... 2,500
Roger Lewis Benson, IRA......................................................... 2,500
Jacobo Benzaquen................................................................ 5,000
Paul Berger..................................................................... 5,000
Dr. Michael & Rose Bernstein.................................................... 3,000
Berl Biderman................................................................... 2,500
Boston Partners Asset Management, LP............................................ 575,500
Branchard Tucker Revocable Trust................................................ 2,500
Charles and Nancy Byrd.......................................................... 10,000
Cahnman Family Trust General Partnership........................................ 5,000
Joseph P. Cohen................................................................. 2,500
Colony Partners, A CA General Partnership....................................... 5,000
Continental Casualty Company.................................................... 483,100
Diversified Long Term Growth Fund, L.P.......................................... 5,000
Drake Associates, LP............................................................ 15,000
Elsa Benson, Inc................................................................ 3,500
Max M. Fisher Revocable Trust UAD 8/13/88....................................... 50,000
The Frances R. Ford Family Ltd. Partnership..................................... 5,000
Frank Russell Investment Company................................................ 61,200
Michael L. Gordon............................................................... 16,200
Sally Gordon.................................................................... 6,300
Gross Foundation, Inc........................................................... 35,000
Rodney L. Hale.................................................................. 5,000
David H. Hancock, IRA........................................................... 25,000
Ira Hershmann Revocable Trust UAD DTD 1/4/85.................................... 1,000
John C. Jackson................................................................. 5,000
E. Ann Marie Johnson Trust...................................................... 1,250
Edward J. Katz.................................................................. 5,000
Harry Katz...................................................................... 2,500
Lakeshore Capital, Inc.......................................................... 15,500
Richard A. Larkin, Jr., IRA, SEP................................................ 1,250
LH Rich Companies............................................................... 5,000
Lyonshare Venture Capital....................................................... 10,000
Martinique Hotel, Inc........................................................... 50,000
Dennis Mykytyn, IRA, SEP........................................................ 12,500
Eve Mykytyn, IRA, SEP........................................................... 12,500
Joseph A. Niznik................................................................ 5,000
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
Selling Shareholder Number of Shares
- ------------------- ----------------
<S> <C>
Northern Trust Co. Teachers Retirement
System of the State of Illinois.............................................. 20,000
Nutmeg Partners, LP............................................................. 80,000
Oppenheimer Capital Income Fund................................................. 500,000
Robert Potoker.................................................................. 1,250
David Roberts................................................................... 2,500
Prospect Street High Income Portfolio Inc....................................... 25,000
Provident Financial Holdings, Inc............................................... 25,000
Richard B. Stewart Family Limited Partnership................................... 5,000
Chil Scheinwexler............................................................... 2,500
Steve Schlam.................................................................... 10,000
John K. Schulte................................................................. 1,000
Peter N. Stathis................................................................ 2,500
Chaya Unger..................................................................... 5,000
Paul Von Kuster................................................................. 10,000
Lorraine V. Urethane, Employees Pension Plan.................................... 10,000
Lorraine V. Urethane, Pension Plan Allocated Acct............................... 5,000
Julia A. Wingard Trust.......................................................... 750
Donato B. Zucco................................................................. 500
Others.......................................................................... 3,890,650
---------
Total........................................................................ 6,470,950
=========
</TABLE>
To FBR Asset's knowledge, none of the selling shareholders has, or within the
past three years has had, any position, office or other material relationship
with FBR Asset or any of its predecessors or affiliates. Because the selling
shareholders may, pursuant to this prospectus, offer all or some portion of
their shares of common stock, no estimate can be given as to the number of
shares that will be held by the selling shareholder upon the termination of any
sales. In addition, the selling shareholders identified above may have sold,
transferred or otherwise disposed of all or a portion of their shares, since the
date of which they provided the information regarding their shares, in
transactions exempt from the registration requirements of the Securities Act.
See "Plan of Distribution."
Only selling shareholders identified above who beneficially own the shares set
forth opposite their name in the foregoing table on the effective date of the
Registration Statement of which this prospectus forms a part may sell the shares
pursuant to the Registration Statement. Prior to any use of this prospectus in
connection with an offering of shares by any holder not identified above, this
prospectus will be updated to set forth the name and number of shares
beneficially owned by the selling shareholder intending to sell the shares, and
the number of shares to be offered. The prospectus will also disclose whether
any selling shareholder selling in connection with this prospectus has held any
position or office with, been employed by or otherwise has had a material
relationship with, FBR Asset or any of its affiliates during the three years
prior to the date of the prospectus.
99
<PAGE>
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.
100
<PAGE>
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. The selling shareholders, 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, 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.
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
101
<PAGE>
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.
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.
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 those shares
of common stock for a period of five business days prior to the completion of
the 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
Regulation M. Those provisions may limit the timing of purchases and sales of
any of the shares of common stock by the selling shareholders or any 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 $529,500.
102
<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).
103
<PAGE>
<TABLE>
<CAPTION>
Index to Financial Statements
Page
----
<S> <C>
Report of Independent Public Accountants.............................................F-2
Financial Statements:
Statements of Financial Condition
as of December 31, 1997 and 1998
and as of March 31, 1999 (unaudited).........................................F-3
Statements of Income for the Period from December 15, 1997 (Inception),
through December 31, 1997, the Year Ended December 31, 1998,
and the Three Months Ended March 31, 1998 and 1999 (unaudited)...............F-4
Statements of Changes in Shareholders' Equity for the Period from December
15, 1997 (Inception), through December 31, 1997, the Year Ended December
31, 1998, and the Three Months Ended March 31, 1999 (unaudited)..............F-5
Statements of Cash Flows for the Period from December 15, 1997 (Inception),
through December 31, 1997, the Year Ended December 31, 1998, and the Three
Months Ended March 31, 1998 and 1999 (unaudited).............................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>
<CAPTION>
FBR Asset Investment Corporation
Statements of Financial Condition as of December 31, 1997 and 1998, and March 31,
1999 (unaudited)*
===================================================================================================================================
As of December 31 As of March 31
------------------------------------------ ----------------------
1997 1998 1999
------------------- ------------------ --------------------
(unaudited)
<S> <C> <C> <C>
Assets
Mortgage-backed securities, at fair value $ - $ 161,418,739 $ 151,732,401
Cash and cash equivalents 163,223,199 41,144,326 27,802,439
Investments in equity securities, at
fair value 23,318,750 70,983,050 64,948,907
Notes receivable 3,000,000 19,082,921 31,157,389
Due from affiliate 545,827 - -
Dividends receivable 434,717 870,477 728,735
Prepaid expenses - 454,746 348,094
Organization costs, net of
accumulated amortization of $3,733,
$5,329 and $5,728, respectively 7,909 6,313 5,914
Interest receivable 8,000 1,970,048 1,981,482
------------------- ------------------ --------------------
Total assets $ 190,538,402 $ 295,930,620 $ 278,705,361
=================== ================== ====================
Liabilities and Shareholders' Equity
Liabilities:
Repurchase agreements $ - $ 128,550,000 $ 131,619,000
Interest payable - 310,096 1,059,642
Dividends payable 510,950 2,563,058 2,741,872
Management fees payable 58,623 1,275,514 261,392
Accounts payable and accrued expenses 12,000 224,933 145,898
Due to custodian-mortgage securities - 11,929,614 -
Deferred revenue 190,000 172,826 115,826
------------------- ------------------ --------------------
Total liabilities $ 771,573 $ 145,026,041 $ 135,943,630
------------------- ------------------ --------------------
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, 10,415,827 and
10,415,827 shares issued as of
December 31, 1997 and 1998, and
March 31, 1999, respectively $ 102,190 $ 104,158 $ 104,158
Additional paid-in capital 189,528,668 194,097,193 194,097,193
Accumulated other comprehensive
income (loss) - (9,800,530) (16,444,050)
Retained earnings (deficit) 135,971 (9,425,579) (9,459,007)
Treasury stock, at cost, 1,872,300
shares and 1,979,300 shares as of
December 31, 1998 and March 31,
1999, respectively - (24,070,663) (25,536,563)
------------------- ------------------ --------------------
Total shareholders' equity $ 189,766,829 $ 150,904,579 $ 142,761,731
------------------- ------------------ --------------------
Total liabilities and shareholders'
equity $ 190,538,402 $ 295,930,620 $ 278,705,361
=================== ================== ====================
====================================================================================================================================
*The accompanying notes are an integral part of these statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
FBR Asset Investment Corporation
Statements of Income for the Period from December 15, 1997 (Inception) through
December 31, 1997, the Year Ended December 31, 1998, and the Three Months Ended
March 31, 1998 and 1999 (unaudited)*
====================================================================================================================================
December 15,
1997
(Inception)
through Year Ended, Three Months Ended March 31,
December 31, December 31 -------------------------------------
1997 1998 1998 1999
-------------- --------------- ----------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income:
Interest $ 18,040 $13,656,097 $ 2,253,042 $ 3,925,664
Dividends 434,717 4,271,405 297,000 1,239,503
Other income 268,520 - - -
-------------- --------------- ----------------- ----------------
Total Income 721,277 17,927,502 2,550,042 5,165,167
-------------- --------------- ----------------- ----------------
Expenses:
Interest expense - 5,359,633 - 1,724,475
Management fee expense 58,623 1,520,725 127,711 350,281
Professional fees 12,000 440,185 12,121 249,763
Insurance - 52,769 13,193 10,381
Amortization of stock options issued to manager - 454,746 - 113,687
Amortization of organization costs 3,733 1,596 399 399
Other - 139,806 - 7,737
-------------- --------------- ----------------- ----------------
Total expenses 74,356 7,969,460 153,424 2,456,723
-------------- --------------- ----------------- ----------------
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 $ 2,396,618 $ 2,708,444
============== =============== ================= ================
Basic and diluted earnings per share $ 0.06 $ 0.16 $ 0.23 $ 0.32
============== =============== ================= ================
Weighted-average common and equivalent shares 10,218,999 10,044,483 10,385,209 8,451,983
============== =============== ================= ================
====================================================================================================================================
*The accompanying notes are an integral part of these statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Period from December 15, 1997
(Inception) through December 31, 1997, the Year Ended December 31, 1998, and the
Three Months Ended March 31, 1999 (unaudited)*
====================================================================================================================================
Accumulated
Additional Retained Other
Common Paid in Earnings Treasury Comprehensive Comprehensive
Stock Capital (Deficit) Stock Income (Loss) Total Income (Loss)
------------ ------------ ------------- ------------ -------------- ------------ ---------------
<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
stock - - - (24,070,663) - (24,070,663)
Net income - - 1,588,235 - - 1,588,235 $ 1,588,235
Other comprehensive
income (loss)--
Change in unrealized
loss on
available-for-sale
securities - - - - (9,800,530) (9,800,530) (9,800,530)
---------------
Comprehensive loss - - - - - - $ (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
------------ ------------ ------------- ------------ -------------- -----------
Repurchase of common stock - - - (1,465,900) - (1,465,900)
Net Income - - 2,708,444 - - 2,708,444 $ 2,708,444
Other comprehensive
income (loss)--
Change in unrealized
loss on available-
for-sale securities - - - (6,643,520) (6,643,520) (6,643,520)
---------------
Comprehensive loss - - - - - - $ (3,935,076)
===========
Dividends - - (2,741,872) - - (2,741,872)
------------ ------------ ------------- ------------ ------------ --------------
Balance, March 31, 1999 $ 104,158 $194,097,193 $ (9,459,007) $(25,536,563) $(16,444,050) $142,761,731
============ ============ ============= ============ ============ ==============
====================================================================================================================================
*The accompanying notes are an integral part of these statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
FBR Asset Investment Corporation
Statements of Cash Flows for the Period from December 15, 1997 (Inception)
through December 31, 1997, the Year Ended December 31, 1998, and the Three
Months Ended March 31, 1998 and 1999 (unaudited)*
==================================================================================================================================
December 15, 1997
(Inception)
through Year Ended For the Three Months Ended March 31,
December 31, 1997 December 31, 1998 1998 1999
------------------- ---------------------- ------------------- ------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 646,921 $ 1,588,235 $ 2,396,618 $ 2,708,444
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 3,733 456,342 399 114,086
Premium amortization on
mortgage-backed securities - 777,179 - 194,382
Changes in operating assets and
liabilities:
Due from affiliate (545,827) 545,827 545,827 -
Dividends receivable (434,717) (435,760) 218,717 141,741
Interest receivable (8,000) (1,962,048) (703,454) (11,434)
Prepaid expenses - - (39,576) (7,035)
Organization costs (11,642) - - -
Management fees payable 58,623 1,216,891 127,711 (1,014,122)
Accounts payable and accrued
expenses 12,000 212,933 12,121 (79,034)
Interest payable - 310,096 - 749,546
Due to custodian - 2,041,230 - (2,041,230)
Deferred revenue 190,000 (17,174) (114,000) (57,000)
------------------- ---------------------- ------------------- ------------------
Net cash (used in) provided by
operating activities $ (357,429) $ 11,172,703 $ 2,444,363 $ 698,344
------------------- ---------------------- ------------------- ------------------
Cash flows from investing activities:
Investments in equity securities and
notes receivable, net of repayments on
notes receivable $(26,050,230) $ (80,876,250) $ (41,601,375) $(12,074,468)
Purchase of mortgage-backed securities - (221,156,241) - (9,888,384)
Proceeds from sale of mortgage-backed
securities - 48,533,267 - -
Receipt of principal payments - 21,204,987 - 8,882,579
------------------- ---------------------- ------------------- ------------------
Net cash used in investing
activities $ (26,050,230) $ (232,294,237) $ (41,601,375) $(13,080,273)
------------------- ---------------------- ------------------- ------------------
Cash flows from financing activities:
Repurchase of common stock $ - $ (24,070,663) $ - $ (1,465,900)
Proceeds from issuance of common stock 189,630,858 3,661,001 3,661,001 -
Proceeds from repurchase agreements - 128,550,000 - 3,069,000
Dividends paid - (9,097,677) (510,950) (2,563,058)
------------------- ---------------------- ------------------- ------------------
Net cash provided by financing $ 189,630,858 $ 99,042,661 $ 3,150,051 $ (959,958)
------------------- ---------------------- ------------------- ------------------
Net increase (decrease) in cash and cash
equivalents $ 163,223,199 $ (122,078,873) $ (36,006,961) $(13,341,887)
Cash and cash equivalents, beginning of
the period - 163,223,199 163,223,199 41,144,326
------------------- ---------------------- ------------------- ------------------
Cash and cash equivalents, end of the
period $ 163,223,199 $ 41,144,326 $ 127,216,238 $ 27,802,439
=================== ====================== =================== ==================
==================================================================================================================================
</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 3).
FBR Asset is organized as a real estate investment trust ("REIT") whose primary
purpose is to invest in mortgage loans and mortgage-backed securities issued or
guaranteed by instrumentalities of the U.S. Government or by private issuers
that are secured by real estate (together the "Mortgage Assets"). FBR Asset also
acquires indirect interests in those and other types of real estate-related
assets by investing in public and private real estate companies, subject to the
limitations imposed by the various REIT qualification requirements. Funds not
immediately allocated 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 Summary of Significant Accounting Policies
Investments in Mortgage-Backed Securities
FBR Asset invests primarily in mortgage pass-through certificates that represent
a 100 percent interest in the underlying conforming mortgage loans and are
guaranteed by the Government National Mortgage Association ("Ginnie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), and the Federal National
Mortgage Association ("Fannie Mae").
Mortgage-backed security transactions are recorded on the date the securities
are purchased or sold. Any amounts payable for unsettled trades are recorded as
"due to custodian--mortgage securities" in FBR Asset's Statement of Financial
Condition.
FBR Asset accounts for its investments in mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires FBR Asset to classify its investments as either trading,
available-for-sale or held to maturity. FBR Asset does not hold its
mortgage-backed securities for trading purposes, but may not hold such
investments to maturity, and has classified these investments as
available-for-sale. Securities classified as available for sale are reported at
fair value, with temporary unrealized gains and losses excluded from earnings
and reported as a separate component of shareholders' equity. Realized gains and
losses on mortgage-backed securities transactions are determined on the specific
identification basis.
Unrealized losses on mortgage-backed securities that are determined to be other
than temporary are recognized in income. Management regularly reviews its
investment
F-7
<PAGE>
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.
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.
During 1998, FBR Asset received proceeds of $48.5 million from the sale of
mortgage-backed securities. The Company recorded $176,048 in realized gains
related to this sale.
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>
The following table summarizes FBR Asset's mortgage-backed securities as of
March 31, 1999:
<TABLE>
<CAPTION>
Total Mortgage
Freddie Mac Fannie Mae Ginnie Mae Assets
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Mortgage-backed
securities, available
for sale-principal $88,800,235 $45,405,177 $14,871,928 $149,077,340
Unamortized premium 487,812 1,320,114 743,014 2,550,940
------------ ------------ ----------- -------------
Amortized cost 89,288,046 46,725,291 15,614,942 151,628,279
Gross unrealized gains 356,722 65,045 823 422,590
Gross unrealized losses (97,257) (90,841) (130,370) (318,468)
------------ ------------ ----------- -------------
Estimated fair value $89,547,511 $46,699,495 $15,485,395 $151,732,401
============ ============ =========== =============
</TABLE>
F-8
<PAGE>
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.
At March 31, 1999, FBR Asset had $131.6 million outstanding under repurchase
agreements with a weighted average borrowing rate of 4.88% as of the end of the
period and a weighted average remaining term to maturity of 47 days. At March
31, 1999, mortgage-backed securities pledged had an estimated fair value of
$137.8 million. At March 31, 1999, the repurchase agreements had remaining terms
to maturity of between 47 and 78 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.
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 $(910,535) and $(1,249,700) at December 31, 1998, and March 31, 1999,
respectively, and matures on June 1, 2001.
Investments in Equity Securities
Investments in securities that are listed on a national securities exchange (or
reported on the Nasdaq National Market) are stated at the last reported sale
price on the day of valuation. Listed securities for which no sale was reported
are stated at the mean between the closing "bid" and "asked" price on the day of
valuation. Other securities for
F-9
<PAGE>
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.
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.
Notes Receivable
On December 23, 1997, FBR Asset entered into an Interim Financing and Security
Agreement with Prime Capital Holdings, LLC ("Prime Capital"). The agreement
allows for up to a $20 million bridge loan to Prime Capital. The note accrues
interest at an annualized rate of 12-17% depending upon the funding period. All
amounts due under the bridge loan are due on June 30, 1999. As of December 31,
1998, and March 31, 1999, $11.5 million had been drawn against the bridge loan.
From inception through December 31, 1998, and for the three months ended March
31, 1999, $1.0 million and $530,508 in interest income has been recorded on this
note. Prime Capital is a Delaware limited liability company formed in August
1997 and is an early stage mortgage origination company.
On February 5, 1999, FBR Asset loaned Prime Group Realty, an affiliate of Prime
Group Inc., $7 million. The loan bears interest at a rate of 15% per annum, is
payable on August 5, 1999, and is secured by real property.
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
F-10
<PAGE>
investment firm specializing in innovative marketing programs for various types
of properties and financial instruments. From inception through December 31,
1998, and for the three months ended March 31, 1999, interest income of $0.7
million and $0.3 million, respectively, has been recorded on this note. The note
was repaid on May 17, 1999.
On January 25, 1999, the Company loaned Brookdale Living Community, Inc. $5
million in subordinated debt. The debt bore interest at 13 percent per annum and
was due on April 26, 1999. FBR Asset agreed to extend the maturity date on this
loan and was repaid on May 14, 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, and March 31, 1999, all of FBR
Asset's mortgage-backed securities have an implied "AAA" rating.
Cash and Cash Equivalents
All investments with original maturities of less than three months are cash
equivalents. As of December 31, 1998, cash and cash equivalents consisted of
$14.4 million of cash deposited in two commercial banks and $26.7 million in two
separate domestic money market funds. As of March 31, 1999, cash and cash
equivalents consisted of $8.2 million of cash deposited in two commercial banks
and $19.6 million in two separate domestic money market funds. The money market
funds invest primarily in obligations of the U.S. Government. The carrying
amount of cash equivalents approximates their fair value.
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.
F-11
<PAGE>
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. To
qualify for tax treatment as a REIT, FBR Asset must meet certain income and
asset tests and distribution requirements. FBR Asset generally will not be
subject to federal income tax at the corporate level to the extent that it
distributes at least 95 percent of its taxable income to its shareholders and
complies with certain other requirements. Failure to meet these requirements
could have material adverse impact on FBR Asset's results or financial
condition. Furthermore, because FBR Asset's investments include stock in other
REITs, failure of those REITs to maintain their REIT status could jeopardize FBR
Asset's qualification as a REIT. No provision has been made for income taxes in
the accompanying financial statements, as FBR Asset believes it has met the
prescribed distribution and other requirements.
Reclassifications
Certain amounts in the financial statements as of December 31, 1997, have been
reclassified to conform with 1998 presentation.
Note 3 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:
F-12
<PAGE>
Declaration Date Payable 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
March 31, 1999 April 14, 1999 $.325
(1) Includes $0.005 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 $24 million, or $12.86
average cost per share. On March 30, 1999, the Board of Directors authorized the
repurchase of up to an additional 2,000,000 shares of FBR Asset's common stock.
Between December 31, 1998 and March 31, 1999, the Company repurchased an
additional 107,000 shares of its common stock at $13.70 per share.
FBR Asset had outstanding, as of December 31, 1998, and March 31, 1999,
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 4 Management and Performance Fees
FBR Asset has entered into a management agreement with Friedman, Billings,
Ramsey Investment Management, Inc. ("FBR Management"), for an initial term
expiring on December 15, 1999. FBR Management will perform portfolio management
services on behalf of FBR Asset. Such services shall include, but are not
limited to, consulting with FBR Asset on purchase and sale opportunities,
collection of information and submission of reports pertaining to FBR Asset's
assets, interest rates, and general economic conditions, and periodic review and
evaluation of the performance of FBR Asset's portfolio of assets.
FBR Management is entitled to a quarterly "base" management fee equal to the sum
of (1) 0.25 percent per annum (adjusted to reflect a quarterly period) of the
average invested mortgage assets of FBR Asset during each calendar quarter and,
(2) 0.75 percent per annum (adjusted to reflect a quarterly period) of the
remainder of the average invested assets of FBR Asset during each calendar
quarter. FBR Management also received 1,021,900 options to purchase FBR Asset's
common stock at $20 per share. The estimated value of these options is $909,492,
based on a discounted Black-Scholes valuation, and is being amortized over the
initial term of the Management Agreement. FBR Management assigned options to
acquire 51,045 shares to Blackrock in connection with the execution of the
sub-management agreement. The 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.
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
F-13
<PAGE>
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 5 Related Parties
As of December 31, 1998, a wholly-owned subsidiary of Friedman, Billings, Ramsey
Group, Inc. ("FBR Group") owned 1,344,086 shares or 15.73% of the outstanding
common stock of FBR Asset. As of March 31, 1999, that same subsidiary owned
1,344,086 or 15.93% of the outstanding common stock of FBR Asset. FBR Group is
the parent company of FBR Management and FBR & Co.
Note 6 Equity Investments
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 $12.3 million, realized losses of $6.6 million, and unrealized gains
of $2.1 million.
At March 31, 1999, the Company's equity investments had an aggregate cost basis
of $81.2 million, a fair value of $64.9 million, unrealized losses of $16.9
million and unrealized gains of $0.6 million.
<TABLE>
<CAPTION>
Amount of Market Value at Market Value at
Equity Investments Investment December 31, 1998 March 31, 1999
- --------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Anthracite Capital, Inc. $ 18,334,496 $ 12,358,170 $ 11,863,845
Capital Automotive REIT 25,000,000 26,657,711 22,289,431
Chastain Capital Group 3,150,000 3,150,000 3,762,500
Imperial Credit Commercial Mortgage
Inv. Corp. 13,050,230 8,437,500 8,662,500
Prime Retail, Inc. 1,201,317 1,211,844 1,080,625
Resource Asset Investment Trust 5,292,516 3,790,325 4,048,756
Building One Services Corporation 10,000,000 10,437,500 8,593,750
East-West Bank 5,200,000 4,940,000 4,647,500
---------------- ------------------ -----------------
Total $ 81,228,559 $ 70,983,050 $ 64,948,907
================ ================== =================
</TABLE>
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.
F-14
<PAGE>
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.
Capital Automotive REIT ("CAR")
On February 13, 1998, FBR Asset acquired 1,792,115 shares of common stock in CAR
in a private transaction, concurrent with CAR's initial public stock offering at
a price of $13.95 per share. CAR 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. CAR primarily acquires real property and simultaneously leases
back this property for use by dealers. CAR'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 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 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. AHR seeks to achieve strong investment returns by maximizing
the spread of investment income earned on its real estate assets over the cost
of financing and hedging these assets and/or liabilities. AHR's common stock is
publicly traded.
During September and October, 1998, FBR Asset purchased an additional 865,000
shares of AHR for $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 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
F-15
<PAGE>
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.
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. On May 14, 1999, Chastain announced that its
Board of Directors had voted to sell all of Chastain's assets, either through a
plan of liquidation or through a sale of the company.
East-West Bancorp ("EWB")
On June 30, 1998, FBR Asset purchased, through a private placement offering,
520,000 shares of EWB, a Southern California commercial bank, for a cost of
$5,200,000 or $10.00 per share. EWB's strategy is to become the premier
commercial bank in California serving the unique personal and business banking
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 PRT,
for a total of $1,191,832, or $9.74 average cost per share. On October 18, 1998,
FBR Asset purchased an additional 1,200 shares of PRT's common stock for $9,485
or $7.90 per share. PRT is a Maryland REIT that is engaged primarily in the
ownership, development, construction, acquisition, leasing, marketing and
management of factory outlet centers. PRT's common stock is publicly traded.
Kennedy-Wilson, Inc. ("KWIC")
FBR Asset owns warrants to acquire 131,096 shares of Kennedy-Wilson common stock
at a price of $7.5526 per share. The warrants expire in June 2003.
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................................17
FBR & FBR Management........................................18
FBR Asset's Business........................................26
Selected Financial Data.....................................42
Management's Discussion & Analysis..........................43
FBR Asset's Directors & Officers............................63
FBR Asset's Capital Stock...................................71
Common Stock Available For Future Sale......................76
Principal Shareholders......................................77
Federal Income Tax Consequences of FBR Asset's Status
as a REIT...................................................78
ERISA Considerations........................................96
Selling Shareholders........................................98
Use of Proceeds............................................100
Plan of Distribution.......................................101
Other Matters..............................................103
Until __________, 1999, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FBR Asset Investment
Corporation
Common Stock
6,470,950 Shares
--------------------------------------
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
NASD filing fees $ 11,500
Printing and mailing expenses $ 10,000
Legal fees and expenses $400,000
Accounting fees and expenses $100,000
Transfer agent and custodian fees $ 5,000
Miscellaneous $ 3,000
Total $529,500
========
Item 32. Sales to Special Parties.
There are none, except to the extent that shares may be acquired pursuant to the
exercise of options as described under "FBR & FBR Management--The Management
Agreement--Options Owned by FBR Management" and "FBR Asset's Directors &
Officers--Executive Compensation & Other Benefits--Stock Options."
Item 33. Recent Sales of Unregistered Securities.
On November 25, 1999, the Registrant sold one share of common stock, $.01 par
value, to Eric F. Billings in exchange for $20. The foregoing share was sold
without registration under the Securities Act, in reliance on the exemption
provided by Section 4(2) thereof.
On December 1, 1997, the Registrant sold 537,634 shares of common stock, $.01
par value per share, to FBR Holdings, Inc., for $18.60 per share, or $10,000,000
in the aggregate. The foregoing shares were sold without registration under the
Securities Act, in reliance on the exemption provided by Section 4(2) thereof.
On December 17, 1997, the Registrant sold 9,681,365 shares of common stock, $.01
par value per share, to purchasers who were either "Qualified Institutional
Buyers," as defined in Rule 144A under the Securities Act, or "accredited
investors," as defined in Rule 501(a) under the Securities Act, or to purchasers
who were non-U.S. persons, as defined in Regulation S under the Securities Act
pursuant to offers and sales that occurred outside the United States within the
meaning of Regulation S. The foregoing shares were sold without registration
under the Securities Act in reliance on the exemption provided by Section 4(2)
thereof and Regulation D and Regulation S thereunder. The purchasers in the
offering paid $20.00 per share, or
II-1
<PAGE>
$193,627,300 in the aggregate. The shares were initially sold to Friedman,
Billings, Ramsey & Co., Inc., as the initial purchaser in the offering (the
"Initial Purchaser"), for a purchase price of $18.60 per share, or $180,073,389
in the aggregate. The Initial Purchaser's discount in the offering was $1.40 per
share, or $13,553,911 in the aggregate.
On January 22, 1998, the Registrant sold 196,828 shares of common stock, $.01
par value per share, to purchasers who were either "Qualified Institutional
Buyers," as defined in Rule 144A under the Securities Act, or "accredited
investors," as defined in Rule 501(a) under the Securities Act, or to purchasers
who were non-U.S. persons, as defined in Regulation S under the Securities Act
pursuant to offers and sales that occurred outside the United States within the
meaning of Regulation S. The foregoing shares were sold without registration
under the Securities Act in reliance on the exemption provided by Section 4(2)
thereof and Regulation D and Regulation S thereunder. The purchasers in the
offering paid $20.00 per share, or $3,936,560 in the aggregate. The shares were
initially sold to Friedman, Billings, Ramsey & Co., Inc., as the initial
purchaser in the offering (the "Initial Purchaser"), for a purchase price of
$18.60 per share, or $3,661,008.8 in the aggregate. The Initial Purchaser's
discount in the offering was $1.40 per share, or $275,559.20 in the aggregate.
Item 34. Indemnification of Officers and Directors.
The Virginia Stock Corporation Act permits a Virginia corporation to include in
its Articles a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages except for liability
resulting from willful misconduct or a knowing violation of the criminal law of
any federal or state securities law. The Articles of the Registrant contain such
a provision that eliminates such liability to the maximum extent permitted by
Virginia law.
The Articles of the Registrant authorize it, to the maximum extent permitted by
Virginia 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 Virginia Stock Corporation Act requires a corporation
(unless its Articles provides otherwise, which the Registrant's Articles do 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 Virginia Stock Corporation Act 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, when conducting themselves in good
faith, unless it is established that (a) in their official capacities, they did
not believe they acted in the best interests of the corporation, (b) in their
non-official capacities, they acted against the best interests of the
corporation 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 Virginia Stock Corporation Act, a Virginia corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of
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<PAGE>
liability on the basis that the director or officer was judged liable to the
corporation or that the director or officer received improper benefit. In
addition, the Virginia Stock Corporation Act 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, unless the individuals
making advances know that the information in (a) or (b) is false.
Item 35. Treatment of Proceeds from Stock Being Registered.
Not applicable.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements included in the prospectus.
(b) Exhibits
3.1 Amended and Restated Charter of Registrant
3.2 Bylaws of Registrant
4 Form of stock certificate
5 Opinion of Hunton & Williams
8 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)
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<PAGE>
25 Power of Attorney of Officers and Directors of
Registrant (included on signature pages of the
Registration Statement)
27.1 Financial Data Schedule
* Previously filed.
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) 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
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<PAGE>
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.
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<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 May 27,
1999.
FBR ASSET INVESTMENT CORPORATION
(Registrant)
By: /s/ 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 May 27, 1999. Each of the directors and/or officers of
FBR Asset Investment Corporation 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.
<TABLE>
<CAPTION>
Signature Title
---------- --------
<S> <C>
/s/ Emanuel J. Friedman Chairman of the Board of Directors
- --------------------------------------
Emanuel J. Friedman
/s/ Eric F. Billings Vice Chairman, Chief Executive Officer
- -------------------------------------- and Director (Principal Executive Officer)
Eric F. Billings
/s/ William R. Swanson Chief Operating Officer and Director
- --------------------------------------
William R. Swanson
/s/ Elaine M. Clancy Chief Financial Officer
- -------------------------------------- (Principal Financial Officer)
Elaine M. Clancy
/s/ Stephen D. Harlan Director
- --------------------------------------
Stephen D. Harlan
/s/ Russell C. Lindner Director
- --------------------------------------
Russell C. Lindner
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit
-------------- ---------
<S> <C>
3.1 Amended and Restated Charter of Registrant
3.2 Bylaws of Registrant
4 Form of stock certificate
5 Opinion of Hunton & Williams
8 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
* Previously filed.
</TABLE>
Exhibit 3.1
RESTATED AND AMENDED
ARTICLES OF INCORPORATION
OF
FBR ASSET INVESTMENT CORPORATION
(A Stock Corporation)
I.
The name of the corporation (which is hereinafter called the
"Corporation") is FBR Asset Investment Corporation.
II.
The purpose for which this Corporation is formed is to transact any and
all lawful business, not required to be specifically stated in these Articles,
for which corporations may be incorporated under the Virginia Stock Corporation
Act, as amended from time to time.
III.
The total number of shares of stock that the Corporation has authority
to issue is 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 holder of shares of capital stock of the Corporation 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.
The Preferred Stock may be issued from time to time by the Board of
Directors of the Corporation, in such series and with such preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications, or other provisions as may be fixed by the Board of
Directors.
IV.
The address of the Corporation's initial registered office is
Riverfront Plaza, East Tower, 951 East Byrd Street, which is in the City of
Richmond. The name and address of the initial Registered Agent is Randolph F.
Totten, who is a resident of Virginia and a member of the Virginia State Bar,
and whose business address is Riverfront Plaza, East Tower, 951 East Byrd
Street, Richmond, Virginia 23219-4074, which is in the City of Richmond.
<PAGE>
V.
A. The Corporation shall have a Board of Directors consisting of not
less than one (1) nor more than nine (9) members unless otherwise determined
from time to time by resolution adopted by the affirmative vote of at least 80%
of the members of the Board of Directors. A director need not be a shareholder.
At each annual meeting of the shareholders, the shareholders shall elect
directors to serve a one-year term and until their successors are elected and
qualify.
B. The following persons are the initial directors of the Corporation,
to serve until their successors are elected and qualified:
Name Address
---- -------
Emanuel J. Friedman 1001 Nineteenth Street, North
Arlington, Virginia 22209
Eric F. Billings 1001 Nineteenth Street, North
Arlington, Virginia 22209
W. Russell Ramsey 1001 Nineteenth Street, North
Arlington, Virginia 22209
Stephen D. Harlan 1001 Nineteenth Street, North
Arlington, Virginia 22209
Patrick J. Keeley 1001 Nineteenth Street, North
Arlington, Virginia 22209
C. 1. Notwithstanding anything herein to the contrary, at all times
beginning ninety (90) calendar days following the sale of the Corporation's
Common Stock to a Person other than FBR Group, Inc. and/or its Affiliates
(collectively, "FBR"), (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 last two years has
not directly or indirectly (i) owned an interest in the Manager or any of its
Affiliates, (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 services for the Manager or any of its Affiliates. Any person having a
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<PAGE>
discretionary brokerage account with FBR shall not be disqualified from being an
Independent Director solely for that reason.
2. For purposes of these Articles of Incorporation, "Person"
means and includes any natural person, corporation, partnership, association,
trust, limited liability company, or any other legal entity.
3. For purposes of these Articles of Incorporation,
"Affiliate" of a Person means (i) any Person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other Person, (ii) any Person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other Person, (iii) any Person
directly or indirectly controlling, controlled by, or under common control with
such other Person, (iv) any executive officer, director, trustee or general
partner of such other Person, and (v) any legal entity for which such Person
acts as an executive officer, director, trustee or general partner.
4. For purposes of these Articles of Incorporation, the term
"Manager" means the Person responsible for directing the day-to-day business
affairs of the Company, including any Person to which the Manager subcontracts
substantially all such functions.
5. For purposes of these Articles of Incorporation, 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.
D. Notwithstanding any other provisions of these Articles of
Incorporation or the Bylaws of the Corporation (and notwithstanding that some
lesser percentage may be specified by law, these Articles of Incorporation or
the Bylaws of the Corporation), the provisions of this Article V shall not be
amended, altered, changed, or repealed without the affirmative vote of at least
80% of the members of the Board of Directors or the affirmative vote of the
holders of not less than two-thirds (2/3) of the outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors, voting separately as a class.
VI.
A. In this Article:
"applicant" means the Person seeking indemnification pursuant
to this Article VI;
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<PAGE>
"expenses" includes counsel fees;
"liability" means the obligation to pay a judgment,
settlement, penalty, fine, including any excise tax assessed with respect to an
employee benefit plan, or reasonable expenses incurred with respect to a
proceeding;
"party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in a proceeding;
"proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal.
B. In any proceeding brought by or in the right of the Corporation or
brought by or on behalf of shareholders of the Corporation, no director or
officer of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages with respect to any transaction, occurrence,
or course of conduct, whether prior or subsequent to the effective date of this
Article VI, except for liability resulting from such Person's having engaged in
willful misconduct or a knowing violation of the criminal law or any federal or
state securities law.
C. The Corporation shall indemnify (i) any Person who was or is a party
to any proceeding, including a proceeding brought by a shareholder in the right
of the Corporation or brought by or on behalf of shareholders of the
Corporation, by reason of the fact that he is or was a director or officer of
the Corporation, or (ii) any director or officer who is or was serving at the
request of the Corporation as a director, trustee, partner, member or officer of
another corporation, partnership, joint venture, limited liability company,
trust, employee benefit plan, or other enterprise, against any liability
incurred by him in connection with such proceeding if his conduct in question
was in the best interests of the company and he was acting on behalf of the
Corporation or performing services for the Corporation unless he engaged in
willful misconduct or a knowing violation of the criminal law. A Person is
considered to be serving an employee benefit plan at the Corporation's request
if his duties to the Corporation also impose duties on, or otherwise involve
services by, him to the plan or to participants in or beneficiaries of the plan.
The Board of Directors is hereby empowered, by a majority vote of a quorum of
disinterested directors, to enter into a contract to indemnify any director or
officer in respect of any proceedings arising from any act or omission, whether
occurring before or after the execution of such contract.
D. The provisions of this Article VI shall be applicable to all
proceedings commenced after the adoption hereof by the Corporation, arising from
any act or omission, whether occurring before or after such adoption. No
amendment or repeal of this Article VI shall have any effect on the rights
provided under this Article with respect to any act or omission occurring prior
to such amendment or repeal. The Corporation shall promptly take
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<PAGE>
all such actions, and make all such determinations, as shall be necessary or
appropriate to comply with its obligation to make any indemnity under this
Article VI and shall promptly pay or reimburse all reasonable expenses,
including attorneys' fees, incurred by any such indemnified Person in connection
with such actions and determinations or proceedings of any kind arising
therefrom.
E. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the applicant did not meet the standard of
conduct described in Section B or C of this Article VI.
F. Any indemnification under Section C of this Article VI (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the applicant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in Section C.
The determination shall be made:
1. By the Board of Directors by a majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
2. If a quorum cannot be obtained under subsection 1 of this
Section F, by majority vote of a committee duly designated by the Board of
Directors (in which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties to the
proceeding;
3. By special legal counsel:
a. Selected by the Board of Directors or its
committee in the manner prescribed in subsection 1 or
2 of this Section F; or
b. If a quorum of the Board of Directors cannot be
obtained under subsection 1 of this Section F and a committee
cannot be designated under subsection 2 of this Section F,
selected by majority vote of the full Board of Directors, in
which selection directors who are parties may participate; or
4. By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may not be
voted on the determination.
Any evaluation as to reasonableness of expenses shall be made in the
same manner as the determination that indemnification is appropriate, except
that if the determination is
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<PAGE>
made by special legal counsel, such evaluation as to reasonableness of expenses
shall be made by those entitled under subsection 3 of this Section F to select
counsel.
Notwithstanding the foregoing, in the event there has been a change in
the composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification is claimed, any
determination as to indemnification and advancement of expenses with respect to
any claim for indemnification made pursuant to this Article VI shall be made by
special legal counsel agreed upon by the Board of Directors and the applicant.
If the Board of Directors and the applicant are unable to agree upon such
special legal counsel, the Board of Directors and the applicant each shall
select a nominee, and the nominees shall select such special legal counsel.
G. 1. The Corporation shall pay for or reimburse the reasonable
expenses incurred by any applicant who is a party to a proceeding in advance of
final disposition of the proceeding or the making of any determination under
Section C of this Article VI if the applicant furnishes the Corporation:
a. a written statement of his good faith belief
that he has met the standard of conduct described in Section C
of this Article VI; and
b. a written undertaking, executed personally or on
his behalf, to repay the advance if it is ultimately
determined that he did not meet such standard of conduct;
provided, however, that this Section G shall apply only if the
action was initiated by a third party who is not a shareholder
of the Company or if the action was initiated by a shareholder
and such advance is approved by a court of competent
jurisdiction.
2. The undertaking required by paragraph b of subsection 1 of
this Section G shall be an unlimited general obligation of the applicant but
need not be secured and may be accepted without reference to financial ability
to make repayment.
3. Authorizations of payments under this Section G shall be
made by the Persons specified in Section F of this Article VI.
H. The Board of Directors is hereby empowered, by majority vote of a
quorum consisting of disinterested directors, to cause the Corporation to
indemnify or contract to indemnify any Person not specified in Section B or C of
this Article VI who was, is or may become a party to any proceeding, by reason
of the fact that he is or was an employee or agent of the Corporation, or is or
was serving at the request of the Corporation as director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, to the same extent as if such Person were
specified as one to whom indemnification is granted in Section C of this Article
VI. The provisions of Sections D
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<PAGE>
through G of this Article VI shall be applicable to any indemnification provided
pursuant to this Section H.
I. The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it in accordance
with this Article VI and may also procure insurance, in such amounts as the
Board of Directors may determine, on behalf of any Person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against any liability asserted against or incurred by him in
any such capacity or arising from his status as such, whether or not the
Corporation would have power to indemnify him against such liability under the
provisions of this Article VI.
J. Every reference herein to directors, officers, employees or agents
shall include former directors, officers, employees and agents and their
respective heirs, executors and administrators. The indemnification hereby
provided and provided hereafter pursuant to the power hereby conferred by this
Article VI on the Board of Directors shall not be exclusive of any other rights
to which any Person may be entitled, including any right under policies of
insurance that may be purchased and maintained by the Corporation or others,
with respect to claims, issues or matters in relation to which the Corporation
would not have the power to indemnify such Person under the provisions of this
Article VI. Such rights shall not prevent or restrict the power of the
Corporation to make or provide for any further indemnity, or provisions for
determining entitlement to indemnity, pursuant to one or more indemnification
agreements, bylaws, or other arrangements (including, without limitation,
creation of trust funds or security interests funded by letters of credit or
other means) approved by the Board of Directors (whether or not any of the
directors of the Corporation shall be a party to or beneficiary of any such
agreements, bylaws, or arrangements); provided, however, that any provision of
such agreements, bylaws, or other arrangements shall not be effective if and to
the extent that it is determined to be contrary to this Article VI or applicable
laws of the Commonwealth of Virginia.
K. Each provision of this Article VI shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
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<PAGE>
VII.
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"). It shall be the duty of the Board of Directors 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 its distributions to its shareholders. 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 two-thirds (2/3) of the number of shares of
Common Stock entitled to vote on such matter at a special meeting of the
shareholders.
VIII.
A. In this Article:
"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.
"Beneficiary" shall mean, with respect to any Trust, one or
more organizations described in each of Section 170(b)(1)(A) (other than clauses
(vii) or (viii) thereof) and Section 170(c)(2) of the Code that are named by the
Corporation as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section I.1 of this Article VIII. No Beneficiary shall be
the beneficiary of more than one Trust at any time.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"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.
"Disqualified Organization" shall mean (i) the United States,
any state or political subdivision thereof, any foreign government, any
international organization, and any agency or instrumentality 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
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<PAGE>
taxation and from taxation under the unrelated business taxable income
provisions of the Code, and (iii) any rural electrical or telephone cooperative.
"Equity Stock" shall mean Preferred Stock and Common Stock of
the Corporation. The term "Equity Stock" shall include all shares of Preferred
Stock and Common Stock of the Corporation that are held as Shares-in-Trust in
accordance with the provisions of Section I of this Article VIII.
"ERISA Investor" shall mean (i) an employee benefit or other
retirement plan or arrangement that is subject to the Employee Retirement Income
Security Act of 1974, as amended, or the prohibited transaction provisions of
the Code, (ii) a person acting on behalf of a plan described in clause (i), or
(iii) a person using the assets of a plan described in clause (i).
"FBR" shall mean FBR Group, Inc., and its Affiliates.
"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.
"Initial Offering" means the date on which shares of the
Corporation are sold to Persons other than FBR Group, Inc., and/or its
Affiliates.
"Insignificant Participation Exception" shall mean the
exception to the Plan Asset Regulations which provides that an ERISA Investor's
assets will not include any of the underlying assets of an entity in which it
invests if at all times less than 25% of the value of each class of equity
interests in the entity is held by ERISA Investors.
"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.
"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.
"Market Price" on any date shall mean the average of the
valuations for a share of Common or Preferred Stock, as applicable, provided by
two independent appraisers selected by the Board of Directors.
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"Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit, the
FBR Limit, or the Look-Through Entity Limit, as applicable, including, but not
limited to, the granting of any option or entering into any agreement for the
sale, transfer or other disposition of shares of Equity Stock or the sale,
transfer, assignment or other disposition of any securities or rights
convertible into or exchangeable for shares of Equity Stock.
"Ownership Limit" shall mean (a) 9.9% of the number of
outstanding shares of Common Stock and (b) 9.9% of the number of outstanding
shares of any class or series of Preferred Stock.
"Permitted Transferee" shall mean any Person designated as a
Permitted Transferee in accordance with the provisions of Section I.5 of this
Article VIII.
"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 12(d)(3) of the Securities Exchange Act of
1934, as amended.
"Plan Asset Regulations" shall mean Section 2510.3-101 of
the regulations of the Department of Labor.
"Prohibited Owner" shall mean, with respect to any purported
Transfer or Non-Transfer Event, any Person who, but for the provisions of
Section C of this Article VIII, would own record title to shares of Equity
Stock.
"Restriction Termination Date" shall mean the first day after
the date of the Initial Offering on which either (i) the Corporation's election
to be taxed as a REIT is revoked pursuant to Article VII hereof or (ii) the
restrictions contained in Sections B.1, B.2, B.3, B.4, and B.5 of this Article
are removed pursuant to Section H of this Article.
"Shares-in-Trust" shall mean any shares of Equity Stock
designated Shares-in-Trust pursuant to Section C of this Article VIII.
"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.
"Trust" shall mean any separate trust created pursuant to
Section C of this Article VIII and administered in accordance with the terms of
Section I of this Article VIII,
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for the exclusive benefit of any Beneficiary. A separate trust shall be created
for each transfer pursuant to Section C of this Article VIII.
"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.
B. Restrictions on Transfer.
1. Except as provided in Section G of this Article VIII, 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.
2. Except as provided in Section G of this Article VIII, from
the date of the Initial Offering and prior to the Restriction Termination Date,
any Transfer that, if effective, would result in shares of Equity Stock being
Beneficially Owned by fewer than 100 Persons (determined without reference to
any rules of attribution) shall be void ab initio as to the Transfer of that
number of shares which would be otherwise Beneficially Owned (determined without
reference to any rules of attribution) by the transferee, and the intended
transferee shall acquire no rights in such shares of Equity Stock.
3. Except as provided in Section G of this Article VIII, 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.
4. Except as provided in Section G of this Article VIII, 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
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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.
5. Except as provided in Section G of this Article VIII, 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 Organization 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 Disqualified Organization, and the intended transferee
shall acquire no rights in such shares of Equity Stock.
6. Except as provided in Section G of this Article VIII, from
the date of the Initial Offering and prior to the date that either (i) each
class of Equity Stock qualifies as a class of "publicly-offered securities"
(within the meaning of section 2510.3-101(b)(2) of the Plan Asset Regulations)
or (ii) the Corporation qualifies for another exception to the Plan Asset
Regulations (other than the Insignificant Participation Exception) any Transfer
that, if effective, would result in 25% or more of any class of Equity Stock
being Beneficially Owned by one or more ERISA Investors shall be void ab initio
as to the Transfer of that number of shares of Equity Stock which would cause
25% or more of any class of Equity Stock to be Beneficially Owned by one or more
ERISA Investors, and the intended transferee shall acquire no rights in such
shares of Equity Stock.
C. Transfer to Trust.
1. If, notwithstanding the other provisions contained in
Sections A through H of this Article VIII, 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 G or H of this Article VIII, the
purported transferee shall acquire no right or interest (or, in the case of a
Non-Transfer Event, the Person holding record title to the shares of Equity
Stock Beneficially Owned or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or interest) in such number of
shares of Equity Stock which would cause such Beneficial Owner or Constructive
Owner to Beneficially Own or Constructively Own shares of Equity Stock in excess
of the Ownership Limit, the FBR Limit, or the Look-Through Entity Limit, as
applicable, (ii) such number of shares of Equity Stock in excess of the
Ownership Limit, the FBR Limit, or the Look-Through Entity Limit, as applicable,
(rounded up to the nearest whole share), shall be designated Shares-in-Trust
and, in accordance with the provisions of Section I of this Article VIII,
transferred automatically and by operation
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of law to a Trust to be held in accordance with Section I of this Article VIII,
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.
2. If, notwithstanding the other provisions contained in
Sections A through H of this Article VIII, 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) 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, or (iv) result in shares of Equity
Stock being Beneficially Owned by a Disqualified Organization, 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) 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, or (D) result in shares of Equity
Stock being Beneficially Owned by a Disqualified Organization, (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 I
of this Article VIII hereof, transferred automatically and by operation of law
to a Trust to be held in accordance with that Section I, 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.
3. If, notwithstanding the other provisions contained in
Sections A through H of this Article VIII, at any time after the Initial
Offering and prior to the date that either (i) each class of Equity Stock
qualifies as a class of "publicly-offered securities" (within the meaning of
Section 2510.3-101(b)(2) of the Plan Asset Regulations) or (ii) the Corporation
qualifies for another exception to the Plan Asset Regulations (other than the
Insignificant Participation Exception), there is a purported Transfer or
Non-Transfer event that, if effective, would cause 25% or more of any class of
Equity Stock to be Beneficially Owned by one or more ERISA Investors 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
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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 cause 25%
or more of any class of Equity Stock to be Beneficially Owned by one or more
ERISA Investors, (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 I of this Article VIII hereof, transferred
automatically and by operation of law to a Trust to be held in accordance with
that Section I, 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.
D. 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 B of this Article VIII 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 B of this Article VIII, the
Corporation shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer or acquisition, including, but not limited
to, refusing to give effect to such Transfer on the books of the Corporation or
instituting proceedings to enjoin such Transfer or acquisition.
E. Notice of Restricted Transfer. Any Person who acquires or attempts
to acquire shares of Equity Stock in violation of Section B of this Article
VIII, or any Person who owned shares of Equity Stock that were transferred to
the Trust pursuant to the provisions of Section C of this Article VIII, 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.
F. Owners Required To Provide Information. From the date of the Initial
Offering and prior to the Restriction Termination Date:
1. 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
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Limit, the FBR Limit, the Look-Through Entity Limit, and the
restrictions set forth in Sections B.2, B.3, B.4, B.5, and B.6 of this
Article.
2. 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 restriction set forth in sections B.2, B.3, B.4,
B.5, and B.6 of this Article.
G. 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 or placement agent that participates in a public or private offering
of such shares for a period of 90 days following the purchase by such
underwriter or placement agent of such shares provided that the restrictions
contained in Sections B.1, B.2, B.3, and B.4 of this Article VIII 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 to the effect that the
Corporation will not lose its status as a REIT, may, in its sole discretion,
exempt a Person from one or more of the restrictions contained in Sections B.1,
B.2, B.3, and B.4 of this Article VIII provided that (i) the Board of Directors
obtains such representations and undertakings from such Person as are reasonably
necessary to ascertain that no Person'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 of the terms of the exemption will result
in a transfer to a Trust of shares of Equity Stock pursuant to Section C of this
Article VIII.
The Board of Directors, upon receipt of a ruling from the Internal
Revenue Service or an opinion of counsel in each case to the effect that a tax
will not be imposed on the Corporation as a result of the exemption, may exempt
a Disqualified Organization from the restriction contained in Section B.5 of
this Article VIII if either (i) the Disqualified Organization agrees to
reimburse the Corporation for any tax it incurs as a result of having such
Disqualified Organization as a shareholder or (ii) each of the following
requirements is met: (A) the record holder of the shares of Equity Stock
Beneficially Owned by the Disqualified Organization is a nominee of such
Disqualified Organization, (B) the nominee is not itself a Disqualified
Organization, (C) the nominee agrees not to transfer record ownership of such
shares of Equity Stock to a Disqualified Organization, and (D) the Board of
Directors obtains such representations and undertakings from such Disqualified
Organization and nominee as are reasonably necessary to ascertain the foregoing.
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The Board of Directors, upon receipt of a ruling from the Internal
Revenue Service or an opinion of counsel in each case to the effect that the
Corporation will not fail to qualify for the Insignificant Participation
Exception or another applicable exception to the Plan Asset Regulations as a
result of the exemption, may exempt an ERISA Investor from the restriction
contained in Section B.6 of this Article VIII, provided that the Board of
Directors obtains such representations and undertakings from such ERISA Investor
as are reasonably necessary to ascertain the foregoing.
H. Removal of Ownership Limit. The restrictions contained in Sections
B.1, B.2, B.3, B.4, and B.5 of this Article VIII will not be removed until (i)
(a) such restrictions are no longer required in order to qualify as a REIT and
(b) the Board of Directors determines that it is no longer in the best interests
of the Company to retain such restrictions, or (ii)(a) the Board of Directors
determines that it is no longer in the best interests of the Corporation to
attempt to qualify, or to continue to qualify, as a REIT and (b) the
Corporation's election to be taxed as a REIT is revoked pursuant to Article VII
hereof.
I. Shares-in-Trust.
1. Trust. Any shares of Equity Stock transferred to a Trust
and designated Shares-in-Trust pursuant to Section C of this Article VIII 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 C of this Article VIII 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 subsection 5 of this Section I,
such Shares-in-Trust shall cease to be designated as Shares-in-Trust.
2. Dividend Rights. The Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors on such shares of Equity Stock and
shall hold such dividends or distributions in trust for the benefit of the
Beneficiary. The Prohibited Owner with respect to Shares-in-Trust shall repay to
the Trust the amount of any dividends or distributions received by it that (i)
are attributable to any shares of Equity Stock designated Shares-in-Trust and
(ii) the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
Owned or Constructively Owned by the Person who, but for the provisions of
Section C of this Article VIII, would Constructively Own or Beneficially Own the
Shares-in-Trust; and, as soon as reasonably practicable following the
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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.
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 subsection 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.
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 C of this
Article VIII, 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.
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 C of this Article VIII. Upon the
designation by the Trustee of a Permitted Transferee in accordance with the
provisions of this subsection 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
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any and all amounts held with respect to the Shares-in-Trust after making that
payment to the Prohibited Owner pursuant to subsection 6 of this Section I.
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 subsection 5 of this Section I or following the
acceptance of the offer to purchase such shares in accordance with subsection 7
of this Section I 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 subsection 5 of this Section I. 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 subsection 6
shall be distributed to the Beneficiary in accordance with the provisions of
subsection 5 of this Section I. 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 I, by such Trustee or the Corporation.
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 E of this Article VIII.
J. Remedies Not Limited. Nothing contained in this Article VIII 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
shareholders by preservation of the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit, the FBR Limit, and the Look-Through Entity
Limit.
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K. Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Article VIII, including any definition contained in
Section A of this Article VIII, the Board of Directors shall have the power to
determine the application of the provisions of this Article VIII with respect to
any situation based on the facts known to it.
L. Legend. 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"),
and for certain other purposes under the Code and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). 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 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 Preferred Stock in excess of 15% of the number of
outstanding shares of any 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
Corporation being "closely held" under Section 856(h) of the Code, (v)
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, (vi) Beneficially Own
shares of Equity Stock that would result in the shares of Equity Stock
being Beneficially Owned by a Disqualified Organization, or (vii)
Beneficially Own shares of Equity Stock that would result in 25% or
more of any class of the Equity Stock being Beneficially Owned by one
or more ERISA Investors. Any Person who attempts to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the above
limitations must immediately notify the Corporation in writing. If the
restrictions above are violated, the shares of [Common or Preferred]
Stock
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<PAGE>
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 Articles of Incorporation, 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 shareholder who so
requests."
M. Severability. If any provision of this Article VIII 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.
IX.
Except as provided in Section D of Article V hereof and Section H of
Article VIII hereof, and notwithstanding Section 13.1-707 of the Virginia Stock
Corporation Act, these Articles of Incorporation may be amended by an
affirmative vote of a majority of the number of shares of Common Stock entitled
to vote on such matter (and, if such amendment would affect the Preferred Stock,
a majority of the number of Preferred Stock entitled to vote on such matter) at
a regular or special meeting of the stockholders of the Corporation.
Dated: December 16, 1997
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Exhibit 3.2
BYLAWS
OF
FBR ASSET INVESTMENT CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I....................................................................................................... 1
Section 1. Principal Office........................................................................... 1
Section 2. Additional Offices......................................................................... 1
Section 3. Fiscal and Taxable Years................................................................... 1
ARTICLE II...................................................................................................... 1
ARTICLE III..................................................................................................... 3
Section 1. Place...................................................................................... 3
Section 2. Annual Meeting............................................................................. 3
Section 3. Special Meetings........................................................................... 4
Section 4. Notice..................................................................................... 4
Section 5. Scope of Notice............................................................................ 5
Section 6. Organization............................................................................... 5
Section 7. Quorum..................................................................................... 6
Section 8. Voting..................................................................................... 6
Section 9. Proxies.................................................................................... 7
Section 10. Voting of Shares by Certain Holders....................................................... 7
Section 11. Inspectors................................................................................ 8
Section 12. Fixing Record Date........................................................................ 9
Section 13. Action Without a Meeting.................................................................. 9
Section 14. Voting by Ballot.......................................................................... 10
Section 15. Voting List............................................................................... 10
Section 16. Shareholder Proposals..................................................................... 10
ARTICLE IV...................................................................................................... 12
Section 1. General Powers............................................................................. 12
Section 2. Number, Tenure and Qualifications.......................................................... 12
Section 3. Changes in Number; Vacancies............................................................... 12
Section 4. Resignations............................................................................... 13
Section 5. Removal of Directors....................................................................... 13
Section 6. Annual and Regular Meetings................................................................ 14
Section 7. Special Meetings........................................................................... 14
Section 8. Notice..................................................................................... 14
Section 9. Quorum..................................................................................... 15
Section 10. Voting.................................................................................... 15
Section 11. Telephone Meetings........................................................................ 16
Section 12. Action Without a Meeting.................................................................. 16
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 13. Compensation.............................................................................. 16
Section 14. Policies and Resolutions.................................................................. 17
Section 15. Nominations............................................................................... 17
ARTICLE V....................................................................................................... 18
Section 1. Committees of the Board.................................................................... 18
Section 2. Telephone Meetings......................................................................... 20
Section 3. Action By Committees Without a Meeting..................................................... 20
ARTICLE VI...................................................................................................... 20
Section 1. General Provisions......................................................................... 20
Section 2. Subordinate Officers, Committees and Agents................................................ 21
Section 3. Removal and Resignation.................................................................... 21
Section 4. Vacancies.................................................................................. 22
Section 5. General Powers............................................................................. 22
Section 6. Duties of the President.................................................................... 22
Section 7. Duties of the vice-presidents.............................................................. 23
Section 8. Duties of the Treasurer.................................................................... 23
Section 9. Duties of the Secretary.................................................................... 23
Section 10. Other Duties of Officers.................................................................. 24
Section 11. Salaries.................................................................................. 24
ARTICLE VII..................................................................................................... 24
Section 1. Contracts.................................................................................. 24
Section 2. Checks and Drafts.......................................................................... 25
Section 3. Deposits................................................................................... 25
ARTICLE VIII.................................................................................................... 25
Section 1. Certificates of Stock...................................................................... 25
Section 2. Lost Certificate........................................................................... 26
Section 3. Transfer Agents and Registrars............................................................. 26
Section 4. Transfer of Stock.......................................................................... 26
Section 5. Stock Ledger............................................................................... 27
ARTICLE IX...................................................................................................... 28
Section 1. Declaration................................................................................ 28
Section 2. Contingencies.............................................................................. 28
ARTICLE X....................................................................................................... 28
Section 1. Seal....................................................................................... 28
Section 2. Affixing Seal.............................................................................. 28
ARTICLE XI...................................................................................................... 29
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Waiver of Notice....................................................................................... 29
ARTICLE XII..................................................................................................... 29
Section 1. By Directors............................................................................... 29
Section 2. By Shareholders............................................................................ 30
</TABLE>
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<PAGE>
BYLAWS
OF
FBR ASSET INVESTMENT CORPORATION
The Board of Directors of FBR Asset Investment Corporation (the
"Corporation") hereby sets out the Bylaws of the Corporation in their entirety,
as follows:
ARTICLE I
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 II
Definitions
For purposes of these Bylaws, the following words shall have the
meanings set forth below:
(a) "Manager" means the Person responsible for directing
day-to-day business affairs of the Corporation, including any Person to which
the Manager subcontracts substantially all such functions.
(b) "Affiliate" of a Person shall mean (i) any Person directly
or indirectly owning, controlling, or holding, with power to vote ten (10)
percent or more of the outstanding voting securities of such other Person, (ii)
any Person ten (10) percent or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held, with power to vote, by such
other Person, (iii) any Person directly or indirectly controlling, controlled
by, or under common control with such other Person, (iv) any executive officer,
director, trustee or general partner of such other Person, and (v) any legal
entity for which such Person acts as an executive officer, director, trustee or
general partner.
(c) An "indirect relationship" shall include circumstances in
which a person'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.
(d) "Person" means and includes any natural person,
corporation, partnership, association, trust, limited liability company, or any
other legal entity.
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<PAGE>
(e) "Independent Director" shall mean any director who within
the last two years has not directly or indirectly (i) owned an interest in the
Manager or any of its Affiliates, (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 services for the Manager or any of its Affiliates.
Any person having a discretionary brokerage account with any Affiliates of the
Manager shall not be disqualified from being an Independent Director solely for
that reason.
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
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<PAGE>
holders of shares entitled to cast not less than ten percent (10%) 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.
Section 4. Notice. Not less than ten (10) nor more than sixty (60) 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.
Notice of a meeting of shareholders to act on (i) an amendment of the
Articles of Incorporation of the Corporation (the "Articles of Incorporation"),
(ii) a plan of merger or share exchange, (iii) the sale, lease, exchange or
other disposition of all, or substantially all, the property of the Corporation
otherwise than in the usual and regular course of its
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<PAGE>
business, or (iv) the dissolution of the Corporation, shall be given in the
manner provided above, to each shareholder, whether or not entitled to vote, not
less than twenty-five (25) nor more than sixty (60) days before the date of the
meeting. Any such notice shall state that one of the purposes of the meeting is
to consider the particular extraordinary corporate act and, when applicable,
shall be accompanied by a copy of the (i) proposed amendment, (ii) plan of
merger or share exchange, or (iii) agreement pursuant to which the disposition
of all or substantially all of the Corporation's property will be effected.
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,
the Managing Directors in their order of rank and seniority, or a Chairman
chosen by the shareholders entitled to cast a majority of the votes that all
shareholders present in person or by proxy are entitled to cast. The Secretary,
or, in his absence, an assistant secretary, or in the absence of both the
Secretary and assistant secretaries, a person appointed by the Chairman shall
act as Secretary.
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<PAGE>
Section 7. Quorum. At any meeting of shareholders, the presence in
person or by proxy of shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this Section
7 shall not affect any requirement under any statute, the Articles of
Incorporation 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 other matter which may properly come before the
meeting, unless more than a majority of the votes cast is required by statute,
by the Articles of Incorporation or by these Bylaws. Each shareholder of record
shall have the right, at every meeting of shareholders, to one vote for each
share held.
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<PAGE>
Section 9. Proxies. A shareholder may vote the shares of stock owned of
record by him, either in person or by proxy executed in writing by the
shareholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
Section 10. Voting of Shares by Certain Holders. Shares registered in
the name of another corporation, if entitled to be voted, may be voted by the
president, a vice president or a proxy appointed by the president or a vice
president of such other corporation, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the board
of directors of such other corporation presents a certified copy of such bylaw
or resolution, in which case such person may vote such shares. Any fiduciary may
vote shares registered in his name as such fiduciary, either in person or by
proxy.
Shares of its own stock indirectly owned by this Corporation shall not
be voted at any meeting and shall not be counted in determining the total number
of outstanding shares entitled to be voted at any given time, unless they are
held by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
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
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<PAGE>
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure that the
Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the shareholder of record of
the specified stock in place of the shareholder who makes the certification.
Section 11. Inspectors. At any meeting of shareholders, the Chairman of
the meeting may, or upon the request of any shareholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or
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<PAGE>
inspectors on the number of shares represented at the meeting and the results of
the voting shall be prima facie evidence thereof.
Section 12. Fixing Record Date. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of the shareholders
or any adjournment thereof, or entitled to receive payment for any dividend, or
in order to make a determination of shareholders for any other proper purpose,
the Board of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than seventy
days prior to the date on which the particular action, requiring such
determination of shareholders, is to be taken. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a meeting
of shareholders, or shareholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this section such determination shall
apply to any adjournment thereof.
Section 13. Action Without a Meeting. Any action required or permitted
to be taken at a meeting of shareholders may be taken without a meeting if a
consent in writing, setting forth such action, is signed by each shareholder
entitled to vote on the matter and any other shareholder entitled to notice of a
meeting of shareholders (but not to vote thereat) has waived in writing any
right to dissent from such action, and such consent and waiver are filed with
the minutes of proceedings of the shareholders.
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<PAGE>
Section 14. Voting by Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
Section 15. Voting List. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make, at least ten (10)
days before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. Such list, for a period of ten (10) days
prior to such meeting, shall be kept on file at the registered office of the
Corporation or at its principal place of business or at the office of its
transfer agent or registrar and shall be subject to inspection by any
shareholder at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any shareholder during the whole time of the meeting. The
original stock transfer books shall be prima facie evidence as to who are the
shareholders entitled to examine such list or transfer books or to vote at any
meeting of shareholders. If the requirements of this section have not been
substantially complied with, the meeting shall, on the demand of any shareholder
in person or by proxy, be adjourned until the requirements are complied with.
Section 16. Shareholder Proposals. To be properly brought before an
annual meeting of shareholders, business must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (iii) otherwise properly brought before
the meeting by a shareholder. In addition to any other applicable requirements,
for business to be properly brought before an annual meeting by a shareholder,
the shareholder
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<PAGE>
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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<PAGE>
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 or by the Articles of Incorporation or 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. Number, Tenure and Qualifications. The number of Directors
of the Corporation shall be not less than one (1) nor more than nine (9). The
initial Board of Directors shall consist of five (5) persons. The initial term
of the Directors shall expire at the first annual meeting of shareholders.
Directors need not be shareholders in the Corporation.
At all times beginning (90) calendar days following the sale of the
Corporation's common stock to a shareholder other than FBR Group, Inc., and its
Affiliates (except during a period not to exceed 60 days following the death,
resignation, incapacity or removal from office of a Director prior to the
expiration of the Director's term of office), at least 30% of the members of the
Board of Directors shall be Independent Directors.
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<PAGE>
Section 3. Changes in Number; Vacancies.
Any vacancy occurring on the Board of Directors may, subject to the
provisions of Section 5 of this Article IV, 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 Articles of Incorporation or
these Bylaws.
Section 4. 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 5. Removal of Directors. The shareholders may, at any time,
remove any Director, with or without cause, by the affirmative vote of the
holders of not less than two-
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<PAGE>
thirds of all the shares entitled to vote on the election of Directors and may
elect a successor to fill any resulting vacancy for the balance of the term of
the removed Director.
Section 6. 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 Commonwealth of Virginia, for the holding of regular meetings of
the Board of Directors without other notice than such resolution.
Section 7. 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 Commonwealth of Virginia, as the place
for holding any special meeting of the Board of Directors called by them.
Section 8. 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
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<PAGE>
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 9. Quorum. Subject to the provisions of Section 10 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 10. 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
Articles of Incorporation, these Bylaws, or applicable statute.
(b) Notwithstanding anything in these Bylaws to the contrary,
a majority of the Independent Directors or the holders of a majority of the
outstanding common stock of the Corporation must approve (i) any transaction
pursuant to which the Company would invest in any securities that are being
underwritten or placed by the Manager or any Affiliate of the Manager and (ii)
any transaction involving the Corporation in which the Manager or an Affiliate
of the Manager has a material financial interest.
Section 11. 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
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<PAGE>
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 12. 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 13. 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 14. Policies and Resolutions. It shall be the duty of the Board
of Directors to insure that the purchase, sale, retention and disposal of the
Corporation's assets, the investment policies and the borrowing policies of the
Corporation and the limitations thereon or amendment thereof are at all times:
(a) consistent with such policies, limitations and
restrictions as are contained in these Bylaws, or in the Corporation's Articles
of Incorporation, 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.
- 16 -
<PAGE>
Section 15. Nominations. Subject to the rights of holders of any class
or series of stock having a preference over the common stock as to dividends or
upon liquidation, nominations for the election of Directors shall be made by the
Corporation's notice of the meeting of shareholders for such election, the Board
of Directors, or by any shareholder entitled to vote in the election of
Directors generally. However, any shareholder entitled to vote in the election
of Directors generally may nominate one or more persons for election as
Directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the Corporation
not later than (i) with respect to an election to be held at an annual meeting
of shareholders, ninety (90) days in advance of such meeting, and (ii) with
respect to an election to be held at a special meeting of shareholders for the
election of Directors, the close of business on the seventh (7th) day following
the date on which notice of such meeting is first given to shareholders. Each
notice shall set forth: (a) the name and address of the shareholder who intends
to make the nomination and of the person or persons to be nominated; (b) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
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
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<PAGE>
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.
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
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<PAGE>
business at such meeting, and the act of a majority present shall be the act of
such committee. The Board of Directors may designate a chairman of any
committee, and such chairman or any two members of any committee may fix the
time and place of its meetings unless the Board shall otherwise provide. In the
absence or disqualification of any member of any such committee, the members
thereof present at any meeting and not disqualified from voting, whether or not
they constitute a quorum, may unanimously appoint another Director to act at the
meeting in the place of such absent or disqualified members; provided, however,
that in the event of the absence or disqualification of an Independent Director,
such appointee shall be an Independent Director.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Directors at the meeting next succeeding, and any
action by the committees shall be subject to revision and alteration by the
Board of Directors, provided that no rights of third persons shall be affected
by any such revision or alteration.
Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all
vacancies, to designate alternative members to replace any absent or
disqualified member, or to dissolve any such committee.
Section 2. Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
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
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<PAGE>
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 and Secretary.
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, including one or more assistant secretaries,
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<PAGE>
and one or more assistant treasurers, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws, or as the Board of Directors may from time to time determine. The
Directors may delegate to any officer or committee the power to elect
subordinate officers and to retain or appoint employees or other agents.
Section 3. Removal and Resignation. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the Chairman of the Board, the
President or the Secretary. Any resignation shall take effect at the time
specified therein or, if the time when it shall become effective is not
specified therein, immediately upon its receipt. The acceptance of a resignation
shall not be necessary to make it effective unless otherwise stated in the
resignation.
Section 4. Vacancies. A vacancy in any office may be filled by the
Board of Directors for the balance of the term.
Section 5. General Powers. All officers of the Corporation as between
themselves and the Corporation shall, respectively, have such authority and
perform such duties in the management of the property and affairs of the
Corporation as may be determined by resolution of the Board of Directors, or in
the absence of controlling provisions in a resolution of the Board of Directors,
as may be provided in these Bylaws.
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
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<PAGE>
management and direction of the business and operations of the Corporation and
its divisions, if any, subject only to the ultimate authority of the Board of
Directors. In the absence of the Chairman of the Board, or if there are no such
officers, the President shall preside at all corporate meetings. He may sign and
execute in the name of the Corporation share certificates, deeds, mortgages,
bonds, contracts or other instruments except in cases where the signing and the
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the Corporation or shall be
required by law otherwise to be signed or executed. In addition, he shall
perform all duties incident to the office of the President and such other duties
as from time to time may be assigned to him by the Board of Directors.
Section 7. Duties of the Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer, and Managing Directors ("Managing Officers").
Each Managing Officer, if any, shall have such powers and duties as may from
time to time be assigned to him by the President or the Board of Directors. Any
Managing Officer may sign and execute in the name of the Corporation deeds,
mortgages, bonds, contracts or other instruments authorized by the Board of
Directors, except where the signing and execution of such documents shall be
expressly delegated by the Board of Directors or the President to some other
officer or agent of the Corporation or shall be required by law or otherwise to
be signed or executed.
Section 8. Duties of the Treasurer. The Treasurer shall have such
powers and duties as may be assigned to him by the President of the Board of
Directors. The Treasurer may sign and execute in the name of the Corporation
share certificates, deeds, mortgages, bonds, contracts or other instruments,
except in cases where the signing and the execution thereof shall be expressly
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<PAGE>
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.
Section 11. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a Director of the
Corporation.
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<PAGE>
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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<PAGE>
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.
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
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<PAGE>
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 Articles of Incorporation or (ii) the Board of Directors, pursuant
to any provision of the Corporation's Articles of Incorporation, 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 Articles of Incorporation
or by action of the Board of Directors thereunder, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
Section 5. Stock Ledger. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate stock ledger
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<PAGE>
containing the name and address of each shareholder and the number of shares of
stock of each class held by such shareholder.
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 Articles of Incorporation. Dividends may be paid in
cash, property or shares of the Corporation, subject to applicable provisions of
law and the Articles of Incorporation.
Section 2. Contingencies. Before payment of any dividends, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the Board of Directors may from time to time, in its absolute
discretion, think proper as a reserve fund for contingencies, for equalizing
dividends, for repairing or maintaining the property of the Corporation, its
subsidiaries or any partnership for which it serves as general partner, or for
such other purpose as the Board of Directors shall determine to be in the best
interests of the Corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
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<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 Articles of
Incorporation or these Bylaws of the Corporation or pursuant to applicable law,
a waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
at nor the purpose of any meeting need be set forth in the waiver of notice,
unless specifically required by statute. The attendance of any person at any
meeting shall constitute a waiver of notice of such meeting, except where such
person attends a meeting for the express purpose of objecting to the transaction
of any business on the ground that the meeting is not lawfully called or
convened.
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<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 3, Section 5, Section 9, or Section 10(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 3, Section 5, Section 9, or
Section 10(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 separately as a class.
Dated: December 23, 1997
-29-
Exhibit 4
Incorporated Under the Laws of the State of Virginia
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
Virginia corporation, fully-paid and nonassessable and 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
hereunder affixed this________________day of __________________A.D. _____
_____________________ _______________________
President Secretary
SHARES $.01 EACH
<PAGE>
SEE ATTACHED LEGEND
-------------------
Certificate
FOR
SHARES
of the
Capital Stock
ISSUED TO
DATE
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_____________________________________________________________________
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>
THE SHARES OF COMMON 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"), AND FOR CERTAIN OTHER PURPOSES UNDER THE CODE AND
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"). 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 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 PREFERRED STOCK IN EXCESS OF 15% OF THE NUMBER OF
OUTSTANDING SHARES OF ANY 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 CORPORATION BEING "CLOSELY HELD" UNDER SECTION 856(H) OF THE
CODE, (V) 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, (VI) BENEFICIALLY OWN SHARES OF EQUITY STOCK THAT
WOULD RESULT IN THE SHARES OF EQUITY STOCK BEING BENEFICIALLY OWNED BY A
DISQUALIFIED ORGANIZATION, OR (VII) BENEFICIALLY OWN SHARES OF EQUITY STOCK THAT
WOULD RESULT IN 25% OR MORE OF ANY CLASS OF THE EQUITY STOCK BEING BENEFICIALLY
OWNED BY ONE OR MORE ERISA INVESTORS. ANY PERSON WHO ATTEMPTS TO BENEFICIALLY
OWN OR CONSTRUCTIVELY OWN SHARES OF EQUITY STOCK IN EXCESS OF THE ABOVE
LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION IN WRITING. IF THE
RESTRICTIONS ABOVE ARE VIOLATED, THE SHARES OF COMMON 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 ARTICLES OF INCORPORATION, 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 SHAREHOLDER WHO SO
REQUESTS.
Exhibit 5
[COMPANY LETTERHEAD]
May 28, 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
Virginia 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 6,517,150 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.
In giving this opinion, we have examined the Charter and Bylaws of the
Company as in effect on the date hereof, the proceedings of the Board of
Directors of the Company or a committee thereof relating to the issuance of the
Secondary 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
the Secondary Shares have been duly and validly authorized and are validly
issued, fully paid, and non-assessable.
<PAGE>
[COMPANY LETTERHEAD]
FBR Asset Investment Corporation
May 28, 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,
/s/ Hunton & Williams
Exhibit 8
[COMPANY LETTERHEAD]
May 28, 1999
FBR Asset Investment Corporation
1001 Nineteenth Street North
Arlington, VA 22209
FBR Asset Investment Corporation
--------------------------------
Qualification as Real Estate Investment Trust
---------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to FBR Asset Investment Corporation,
a Virginia 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 May 28, 1999 (No. 333-67343), as
amended through the date hereof, with respect to the offer and sale from time to
time in public or private transactions of up to 6,470,950 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 the Company, as duly
filed with the State Corporation Commission of the State of Virginia on December
16, 1997;
2. the Bylaws of the Company;
3. the Registration Statement, including the prospectus contained as part
thereof (the "Prospectus"); and
<PAGE>
FBR Asset Investment Corporation
May 28, 1999
Page 2
4. 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 factual representations
contained in a certificate, dated May 27, 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 factual representations contained in the
Officer's Certificate. Where such factual representations involve terms defined
in the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations thereunder (the "Regulations"), published rulings of the Internal
Revenue Service (the "Service"), or other relevant authority, we have explained
such terms to the Company's representatives and are satisfied that the Company's
representatives understand such terms and are capable of making such factual
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
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FBR Asset Investment Corporation
May 28, 1999
Page 3
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 Registration Statement 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 factual
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 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.
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 "Other Matters--Legal" 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 the purchasers of Secondary Shares pursuant to the Prospectus, and
it may not be distributed, relied upon for any purpose by any other person,
quoted in whole or in part or otherwise
<PAGE>
FBR Asset Investment Corporation
May 28, 1999
Page 4
reproduced in any document, or filed with any governmental agency without our
express written consent.
Very truly yours,
/s/ Hunton & Williams
-----------------------------------
Exhibit 10.6
FBR ASSET INVESTMENT CORPORATION
STOCK INCENTIVE PLAN
SECTION 1. Purpose; Definitions
The purpose of the Plan is to give the Company a competitive advantage
in attracting, retaining and motivating officers, employees, non-employee
directors and other service providers and to provide the Company and its
Subsidiaries and Affiliated Companies with an incentive compensation plan
providing incentives directly linked to the profitability of the Company's
businesses and/or increases in shareholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Affiliated Company" means any corporation (or partnership, joint
venture, or other enterprise), of which the Company owns or controls, directly
or indirectly, 10% or more, but less than 50% of the outstanding shares of stock
normally entitled to vote for the election of directors (or comparable equity
participation and voting power).
b. "Award" means a Stock Appreciation Right, Stock Option, Restricted
Stock, unrestricted share of Common Stock, dividend equivalent, interest
equivalent, Performance Unit or other award granted under this Plan.
c. "Board" means the Board of Directors of the Company.
d. [Intentionally left blank]
e. "Cause" means (except as otherwise provided by the Committee in the
agreement relating to any Award) (1) conviction of a participant for committing
a felony under federal law or the law of the state in which such action
occurred, (2) dishonesty in the course of fulfilling a participant's employment
duties or (3) willful and deliberate failure on the part of a participant to
perform his employment duties in any material respect. Notwithstanding the
foregoing, if a participant is a party to an employment agreement with the
Corporation or any Subsidiary or Affiliated Company that contains a definition
of "Cause," such definition shall apply to such participant for purposes of the
Plan except to the extent otherwise provided by the Committee in the agreement
relating to any Award.
f. "Change in Control" and "Change in Control Price" have the meanings
set forth in Sections 10(b) and (c), respectively.
g. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
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h. "Committee" means the Board or, if the Board appoints it, a
committee of two or more non-employee directors selected by the Board.
i. "Common Stock" means the common stock, par value $0.01 per share, of
the Company.
j. "Company" means FBR Asset Investment Corporation, a Virginia
corporation.
k. "Disability" means permanent and total disability as determined by
the Committee for purposes of the Plan.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
m. "Fair Market Value" means, as of any given date, the closing price
of the Common Stock reported in the Wall Street Journal for the day prior to
such date, or if the Common Stock was not traded on either the American Stock
Exchange or the New York Stock Exchange on such day, then for the last preceding
day on which the Common Stock was traded. If there is no regular public trading
market for the Common Stock, Fair Market Value shall be determined by such other
source as the Committee may select.
n. "Incentive Stock Option" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422 of
the Code.
o. "NonQualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
p. "Performance Goals" means the performance goals established by the
Committee in connection with the grant of Restricted Stock or Performance Units.
Performance Goals may be established based on any of the following areas of
performance of the Company, or any Affiliated Company: asset growth; combined
net worth; debt to equity ratio; earnings per share; revenues; operating income;
operating cash flow; net income, before or after taxes; return on total capital,
equity, revenue or assets; total shareholder return; or changes in the market
price of the Common Stock.
q. "Performance Units" means an Award granted under Section 8.
r. "Plan" means the FBR Asset Investment Corporation Stock Incentive
Plan, as set forth herein and as hereinafter amended from time to time.
s. "Restricted Stock" means an Award granted under Section 7.
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<PAGE>
t. "Retirement" means retirement from employment with the Company, a
Subsidiary or an Affiliated Company as determined by the Committee for purposes
of an Award under the Plan.
u. "Stock Appreciation Right" means an Award granted under Section 6.
v. "Stock Option" means an Award granted under Section 5.
w. "Subsidiary" means: (i) for the purpose of an Incentive Stock
Option, any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company if, at the time of the granting of the
Incentive Stock Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain; and (ii) for the purposes of any other Award, any corporation (or
partnership, joint venture, or other enterprise) of which the Company owns or
controls, directly or indirectly, 50% or more of the outstanding shares of stock
normally entitled to vote for the election of directors (or comparable equity
participation and voting power).
x. "Termination of Employment" means the termination of the
participant's employment with, or service as an officer, non-employee director
or other service provider of, the Company and any Subsidiary or Affiliated
Company notwithstanding that service as a non-employee director or other service
provider may not constitute "employment" for other purposes. A participant
employed by or serving as a non-employee director or other service provider of a
Subsidiary or an Affiliated Company shall also be deemed to incur a Termination
of Employment if the Subsidiary or Affiliated Company ceases to be such a
Subsidiary or Affiliated Company, as the case may be, and the participant does
not immediately thereafter become an employee, director or service provider of
the Company or another Subsidiary or Affiliated Company. Temporary absences from
employment or other service because of illness, vacation or leave of absence and
transfers among the Company and its Subsidiaries, or, if the Committee so
determines, among the group consisting of the Company, its Subsidiaries and
Affiliated Companies, shall not be considered Terminations of Employment.
In addition, certain other terms used in the Plan have definitions
provided to them in the first place in which they are used herein.
SECTION 2. Administration
The Plan shall be administered by the Committee; provided, that any
authority granted to the Committee under the Plan may also be exercised by the
full Board; and provided, further, that the full Board shall have the sole
authority to grant Awards to non-employee directors, and any reference to the
Committee shall be a reference to the Board with respect to all such Awards.
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<PAGE>
The Committee shall have plenary authority to grant Awards pursuant to
the terms of the Plan or, in the Committee's discretion, in connection with
awards under other bonus plans or programs of the Company, to officers,
employees, non-employee directors or other service providers of the Company and
its Subsidiaries and Affiliated Companies.
Among other things, the Committee shall have the authority, subject to
the terms of the Plan:
(a) To select the officers, employees, non-employee directors and
service providers to whom Awards may from time to time be granted;
(b) To determine whether and to what extent Awards are to be granted
hereunder;
(c) To determine the number of shares of Common Stock to be covered by
each Stock Option granted hereunder;
(d) To determine the terms and conditions of any Award granted
hereunder (including, but not limited to, the option price (subject to Section
5(a)), any vesting condition, restriction or limitation (which may be related to
the performance of the participant, the Company or any Subsidiary or Affiliated
Company) and any vesting acceleration or forfeiture or waiver regarding any
Award and the shares of Common Stock relating thereto, based on such factors as
the Committee shall determine; and
(e) To determine under what circumstances an Award may be settled in
cash or Common Stock under Section 5(g) or Section 6(d)(ii).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any award certificate relating
thereto) and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the members thereof may delegate all or a portion of the
administration of the Plan to one or more senior managers of the Company.
Any determination made by the Committee or pursuant to delegated
authority pursuant to the provisions of the Plan with respect to any Award shall
be made in the sole discretion of the Committee or such delegate at the time of
the grant of the Award or, unless in contravention of any express term of the
Plan, at any time thereafter. All decisions made by the Committee or any
appropriate delegate pursuant to the provisions of the Plan shall be final and
binding on all persons, including the Company and Plan participants.
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<PAGE>
SECTION 3. Common Stock Subject to Plan
Subject to adjustment as described below, the total number of shares of
Common Stock reserved and available for grant pursuant to Awards under the Plan
shall not exceed 155,000 shares. Shares subject to Awards under the Plan may be
authorized and unissued shares or may be treasury shares, or both.
If any shares of Restricted Stock are forfeited, or if any Stock Option
or Stock Appreciation Right terminates without being exercised, or if any Stock
Appreciation Right (whether granted alone or in conjunction with a Stock Option)
is exercised for cash, shares subject to such Awards shall again be available
for distribution in connection with Awards under the Plan.
In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, such as any merger, consolidation, separation,
including a spin-off, or other distribution of stock or property (without regard
to the payment of any cash dividends by the Company in the ordinary course) of
the Company, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Company, the Committee or Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Plan, in the number, kind and option price, as
applicable, of shares subject to outstanding Stock Options, and in the number
and kind of shares subject to other outstanding Awards granted under the Plan,
and/or such other equitable substitution or adjustments as it may determine to
be appropriate in its sole discretion; provided, however, that the number of
shares subject to any Award shall always be a whole number. Such adjusted option
price shall also be used to determine the amount payable by the Company upon the
exercise of any Stock Appreciation Right associated with any Stock Option.
SECTION 4. Eligibility
Officers, employees, and non-employee directors of, and other persons
who provide services to, the Company, a Subsidiary or an Affiliated Company who
are responsible for or contribute to the growth and profitability of the
business of the Company, a Subsidiary or an Affiliated Company are eligible to
be granted Awards under the Plan. No more than one million (1,000,000) shares of
Common Stock may be allocated to the Awards, including the maximum amounts
payable under or with respect to any Stock Option, Stock Appreciation Right,
unrestricted Common Stock, Restricted Stock, or Performance Unit, that are
granted to any participant during any single taxable year of the Company.
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<PAGE>
SECTION 5. Stock Options
Stock Options may be granted alone or in addition to other Awards
granted under the Plan and may be of two types: Incentive Stock Options and
NonQualified Stock Options. Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, NonQualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights). Incentive Stock Options
may be granted only to employees of the Company and its Subsidiaries. To the
extent that any Stock Option is not designated as an Incentive Stock Option or,
even if so designated, does not qualify as an Incentive Stock Option, it shall
constitute a NonQualified Stock Option.
Stock Options shall be evidenced by option award certificates, the
terms and provisions of which may differ. An option award certificate shall
indicate on its face whether it is intended to be an award certificate for an
Incentive Stock Option or a NonQualified Stock Option. The grant of a Stock
Option shall occur on the date the Committee by resolution selects an individual
to be a participant in any grant of a Stock Option, determines the number of
shares of Common Stock to be subject to such Stock Option to be granted to such
individual and specifies the terms and provisions of the Stock Option, or on
such later date as is specified by the Committee.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee and,
unless otherwise determined by the Committee, shall not be less than the Fair
Market Value of the Common Stock subject to the Stock Option on the date of
grant. The option price per share shall not be decreased thereafter except
pursuant to Section 3 of this Plan.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee. Unless otherwise determined by the Committee, the term of each Stock
Option shall be 10 years. No Stock Option shall be exercisable more than 10
years after the date the Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. Unless otherwise determined
by the Committee, Stock Options shall become exercisable ratably on each of the
first five anniversaries of the date of grant. In addition, the Committee may at
any time accelerate the exercisability of any Stock Option.
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<PAGE>
(d) Method of Exercise. Subject to the provisions of this Section 5,
Stock Options may be exercised, in whole or in part, at any time during the
option term by giving written notice of exercise, or notice in accordance with
such other procedures as may be established from time to time, to the Company or
its designated agent specifying the number of shares of Common Stock subject to
the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase
price in cash or by certified or cashier's check or such other instrument as the
Company may accept. If approved by the Committee, payment, in full or in part,
may also be made in the form of unrestricted Common Stock already owned by the
optionee of the same class as the Common Stock subject to the Stock Option
(based on the Fair Market Value of the Common Stock on the date the Stock Option
is exercised); provided, however, that such already owned shares have been held
by the optionee for at least six months at the time of exercise unless otherwise
determined by the Committee; provided, further, that, in the case of an
Incentive Stock Option, the right to make a payment in the form of already owned
shares of Common Stock of the same class as the Common Stock subject to the
Stock Option may be authorized only at the time the Stock Option is granted.
In the discretion of the Committee, payment for any shares subject to a
Stock Option may also be made by delivering a properly executed exercise notice
to the Company, together with a copy of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds necessary to
pay the purchase price, and, if requested, by the amount of any federal, state,
local or foreign withholding taxes. To facilitate the foregoing, the Company may
enter into agreements for coordinated procedures with one or more brokerage
firms.
In addition, in the discretion of the Committee, payment for any shares
subject to a Stock Option may also be made by instructing the Company or its
designated agent to withhold a number of such shares having a Fair Market Value
on the date of exercise equal to the aggregate exercise price of such Stock
Option.
No shares of Common Stock shall be issued until full payment therefor
has been made. An optionee shall have all of the rights of a shareholder of the
Company holding the class or series of Common Stock that is subject to such
Stock Option (including, if applicable, the right to vote the shares and the
right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 3(a).
(e) Transferability of Stock Options. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution, or, in the Committee's discretion, pursuant to a written
beneficiary designation, (ii) pursuant to a qualified domestic relations order,
as defined in the Code or (iii) in the Committee's discretion, pursuant to a
gift to such optionee's "immediate family" members directly, or indirectly or by
means of a trust, partnership or limited liability company. All Stock Options
shall be exercisable, subject to the
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<PAGE>
terms of this Plan, only by the optionee, guardian, legal representative or
beneficiary of the optionee or permitted transferee, it being understood that
the terms "holder" and "optionee" include any such guardian, legal
representative or beneficiary or transferee. For purposes of this Section 5(e),
"immediate family" shall mean, except as otherwise defined by the Committee, the
optionee's spouse, children, siblings, stepchildren, grandchildren, parents,
stepparents, grandparents, in-laws and persons related by legal adoption. Such
transferees may transfer a Stock Option only by will or by the laws of descent
and distribution.
(f) Termination by Death or Disability. Unless otherwise determined by
the Committee, if an optionee's Termination of Employment is by reason of death
or Disability, any Stock Option held by such optionee may thereafter be
exercised, to the extent exercisable at the time of such termination, for a
period of twelve (12) months (or such other period as the Committee may specify
in the option agreement) from the date of such termination or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(g) Termination by Reason of Retirement. Unless otherwise determined by
the Committee, if an optionee's Termination of Employment is by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such
Retirement, or on such accelerated basis as the Committee may determine, for a
period of five (5) years (or such other period as the Committee may specify in
the option agreement) from the date of such Termination of Employment or until
the expiration of the stated term of such Stock Option, whichever period is the
shorter; provided, however, that if the optionee dies within such period any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of twelve (12) months from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(h) Other Termination. Unless otherwise determined by the Committee, if
an optionee's Termination of Employment is for any reason other than death,
Disability or Retirement, any Stock Option held by such optionee, to the extent
then exercisable, or on such accelerated basis as the Committee may determine,
may be exercised for the lesser of three (3) months from the date of such
Termination of Employment or the balance of such Stock Option's term; provided,
however, that if the optionee dies within such three (3) month period, any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such three (3) month period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of twelve
(12) months from the date of such death or until the expiration of the stated
term of such Stock Option, whichever period is the shorter.
(i) Cashing Out of Stock Option. On receipt of written notice of
exercise, the Committee may elect to cash out all or part of the portion of the
shares of Common Stock for which a Stock Option is being exercised by paying the
optionee an amount, in cash or Common Stock, equal to the excess of the Fair
Market Value of the Common Stock over the option price
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<PAGE>
times the number of shares of Common Stock for which the Option is being
exercised on the effective date of such cash-out.
(j) Change in Control Cash-out. Notwithstanding any other provision of
the Plan, during the 60-day period from and after a Change in Control (the
"Exercise Period"), unless the Committee shall determine otherwise at the time
of grant, an optionee shall have the right, whether or not the Stock Option is
fully exercisable and in lieu of the payment of the exercise price for the
shares of Common Stock being purchased under the Stock Option and by giving
notice to the Company, to elect (within the Exercise Period) to surrender all or
part of the Stock Option to the Company and to receive cash, within 30 days of
such notice, in an amount equal to the amount by which the Change in Control
Price per share of Common Stock on the date of such election shall exceed the
exercise price per share of Common Stock under the Stock Option (the "Spread")
multiplied by the number of shares of Common Stock granted under the Stock
Option as to which the right granted under this Section 5(j) shall have been
exercised. Notwithstanding the foregoing, if any right granted pursuant to this
Section 5(j) would make a Change in Control transaction ineligible for
pooling-of-interests accounting under APB No. 16 that but for the nature of such
grant would otherwise be eligible for such accounting treatment, the Committee
shall have the ability to substitute for the cash payable pursuant to such right
Common Stock with a Fair Market Value equal to the cash that would otherwise be
payable hereunder.
(k) Deferral of Option Shares. The Committee may from time to time
establish procedures pursuant to which an optionee may elect to defer, until a
time or times later than the exercise of an Option, receipt of all or a portion
of the shares subject to such Option and/or to receive cash at such later time
or times in lieu of such deferred shares, all on such terms and conditions as
the Committee shall determine. If any such deferrals are permitted, then
notwithstanding Section 5(d) above, an optionee who elects such deferral shall
not have any rights as a stockholder with respect to such deferred shares unless
and until certificates representing such shares are actually delivered to the
optionee with respect thereto, except to the extent otherwise determined by the
Committee.
SECTION 6. Stock Appreciation Rights
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a NonQualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. In addition, Stock Appreciation Rights may be granted without
relationship to a Stock Option to employees residing in foreign jurisdictions,
where the grant of a Stock Option is impossible or impracticable because of
securities or tax laws or other governmental regulations.
(b) Freestanding Stock Appreciation Rights. A Stock Appreciation Right
granted without relationship to a Stock Option, pursuant to Section 6(a), shall
be exercisable as
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<PAGE>
determined by the Committee, but in no event after ten years from the date of
grant. The base price of a Stock Appreciation Right granted without relationship
to a Stock Option shall be the Fair Market Value of a share of Common Stock on
the date of grant. A Stock Appreciation Right granted without relationship to a
Stock Option shall entitle the holder, upon receipt of such right, to a cash
payment determined by multiplying (i) the difference between the base price of
the Stock Appreciation Right and the Fair Market Value of a share of Common
Stock on the date of exercise of the Stock Appreciation Right, by (ii) the
number of shares of Common Stock as to which such Stock Appreciation Right shall
have been exercised. A freestanding Stock Appreciation Right may be exercised by
giving written notice of exercise to the Company or its designated agent
specifying the number of shares of Common Stock as to which such Stock
Appreciation Right is being exercised.
(c) Tandem Stock Appreciation Rights. A Stock Appreciation Right
granted in conjunction with a Stock Option may be exercised by an optionee in
accordance with Section 6(d) by surrendering the applicable portion of the
related Stock Option in accordance with procedures established by the Committee.
Upon such exercise and surrender, the optionee shall be entitled to receive an
amount determined in the manner prescribed in Section 6(d). Stock Options which
have been so surrendered shall no longer be exercisable to the extent the
related Stock Appreciation Rights have been exercised. A Stock Appreciation
Right shall terminate and no longer be exercisable upon the termination or
exercise of the related Stock Option.
(d) Tandem Stock Appreciation Right Terms and Conditions. Stock
Appreciation Rights granted in conjunction with a Stock Option shall be subject
to such terms and conditions as shall be determined by the Committee, including
the following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this
Section 6.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive an amount in cash, equal to the excess of the
Fair Market Value of one share of Common Stock over the option price
per share specified in the related Stock Option multiplied by the
number of shares in respect of which the Stock Appreciation Right shall
have been exercised.
(iii) Stock Appreciation Rights shall be transferable only to permitted
transferees of the underlying Stock Option in accordance with Section
5(e).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall
be deemed to have been exercised for the purpose of the limitation set
forth in Section 3 on the number of shares of Common Stock to be issued
under the Plan, but only to the extent of the number of shares
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<PAGE>
covered by the Stock Appreciation Right at the time of exercise based
on the value of the Stock Appreciation Right at such time.
SECTION 7. Bonus Shares and Restricted Stock
(a) Administration. Awards of shares of Common Stock or Restricted
Stock may be made either alone or in addition to other Awards granted under the
Plan. In addition, a participant may receive unrestricted shares of Common Stock
or Restricted Stock in lieu of certain cash payments awarded under other plans
or programs of the Company. The Committee shall determine the officers,
employees, non-employee directors and other service providers to whom and the
time or times at which grants of unrestricted shares of Common Stock and
Restricted Stock will be awarded, the number of shares to be awarded to any
participant, the conditions for vesting, the time or times within which such
Awards may be subject to forfeiture and any other terms and conditions of the
Awards, in addition to those contained in Section 7(c).
(b) Awards and Certificates. Awards of unrestricted shares of Common
Stock and Restricted Stock shall be evidenced in such manner as the Committee
may deem appropriate, including book-entry registration or delivery of one or
more stock certificates to the participant, or, in the case of Restricted Stock,
a custodian or escrow agent. Any stock certificate issued in respect of
unrestricted shares or shares of Restricted Stock shall be registered in the
name of such participant. The Committee may require that the stock certificates
evidencing shares of Restricted Stock be held in custody or escrow by the
Company or its designated agent until the restrictions thereon shall have lapsed
and that, as a condition of any Award of Restricted Stock, the participant shall
have delivered a stock power, endorsed in blank, relating to the Common Stock
covered by such Award.
(c) Terms and Conditions. Shares of Restricted Stock shall be subject
to the following terms and conditions:
(i) The Committee may, prior to or at the time of grant, condition the
grant or vesting, as applicable, of an award of Restricted Stock upon
the attainment of Performance Goals. The Committee may also condition
the grant or vesting of Restricted Stock upon the continued service of
the participant. The conditions for grant or vesting and the other
provisions of Restricted Stock Awards (including without limitation any
applicable Performance Goals) need not be the same with respect to each
recipient. The Committee may at any time, in its sole discretion,
accelerate or waive, in whole or in part, any of the foregoing
restrictions.
(ii) Subject to the provisions of the Plan and the terms of the
Restricted Stock Award, during the period, if any, set by the
Committee, commencing with the date of such Award for which such
participant's continued service is required (the "Restriction Period"),
and until the later of (A) the expiration of the Restriction Period and
(B) the date the applicable Performance Goals (if any) are satisfied,
the participant shall not be permitted
-11-
<PAGE>
to sell, assign, transfer, pledge or otherwise encumber shares of
Restricted Stock; provided that the foregoing shall not prevent a
participant from pledging Restricted Stock as security for a loan, the
sole purpose of which is to provide funds to pay the option price for
Stock Options.
(iii) Except as provided in this paragraph (iii) and Sections 7(c)(i)
and 7(c)(ii) or the terms of the Restricted Stock Award, the
participant shall have, with respect to the shares of Restricted Stock,
all of the rights of a shareholder of the Company holding the class or
series of Common Stock that is the subject of the Restricted Stock,
including, if applicable, the right to vote the shares and the right to
receive any cash dividends. If so determined by the Committee under the
applicable terms of the Restricted Stock Award and subject to Section
15(e) of the Plan, (A) cash dividends on the class or series of Common
Stock that is the subject of the Restricted Stock Award shall be
automatically deferred and reinvested in additional Restricted Stock,
held subject to the vesting of the underlying Restricted Stock, or held
subject to meeting Performance Goals applicable only to dividends, (B)
dividends payable in Common Stock shall be paid in the form of
Restricted Stock of the same class as the Common Stock with which such
dividend was paid, held subject to the vesting of the underlying
Restricted Stock, or held subject to meeting Performance Goals
applicable only to dividends and (C) dividends paid in other property
shall be held subject to the vesting of the underlying Restricted
Stock.
(iv) Except to the extent otherwise provided under the applicable terms
of the Restricted Stock Award and Sections 7(c)(i), 7(c)(ii), 7(c)(v)
and 11(a)(ii), upon a participant's Termination of Employment for any
reason during the Restriction Period or before the applicable
Performance Goals are satisfied, all shares still subject to
restriction shall be forfeited by the participant.
(v) Except to the extent otherwise provided in Section 11(a)(ii), in
the event of a participant's Termination of Employment by reason of
Retirement, the Committee shall have the discretion to waive, in whole
or in part, any or all remaining restrictions (other than, in the case
of Restricted Stock with respect to which a participant is a Covered
Employee, satisfaction of the applicable Performance Goals unless the
participant's employment is terminated by reason of death or
Disability) with respect to any or all of such participant's shares of
Restricted Stock.
(vi) If and when any applicable Performance Goals are satisfied and the
Restriction Period expires without a prior forfeiture of the Restricted
Stock, unlegended certificates for such shares shall be delivered to
the participant upon surrender of the legended certificates, or the
restrictions on such shares shall be removed from the book-entry
registration.
-12-
<PAGE>
SECTION 8. Performance Units
(a) Administration. Performance Units may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the officers, employees, non-employee directors and other service providers to
whom, and the time or times at which, Performance Units shall be awarded, the
number of Performance Units to be awarded to any participant, the duration of
the Award cycle and any other terms and conditions of the Award, in addition to
those contained in Section 8(b).
(b) Terms and Conditions. Performance Units Awards shall be subject to
the following terms and conditions.
(i) The Committee may, prior to or at the time of the grant, designate
Performance Units, in which event it shall condition the settlement
thereof upon the attainment of Performance Goals. The Committee may
also condition the settlement thereof upon the continued service of the
participant. The provisions of such Awards (including without
limitation any applicable Performance Goals) need not be the same with
respect to each recipient. Subject to the provisions of the Plan and
the Performance Units Agreement referred to in Section 8(b)(vi),
Performance Units may not be sold, assigned, transferred, pledged or
otherwise encumbered during the Award cycle.
(ii) Except to the extent otherwise provided in the applicable
Performance Unit Agreement and Sections 8(b)(ii) and 11(a)(iii), upon a
participant's Termination of Employment for any reason during the Award
cycle or before any applicable Performance Goals are satisfied, all
rights to receive cash or stock in settlement of the Performance Units
shall be forfeited by the participant.
(iii) Except to the extent otherwise provided in Section 11(a)(iii), in
the event that a participant's employment is terminated (other than for
Cause), or in the event of a participant's Retirement, the Committee
shall have the discretion to waive, in whole or in part, any or all
remaining payment limitations with respect to any or all of such
participant's Performance Units.
(iv) A participant may elect to further defer receipt of cash or shares
in settlement of Performance Units for a specified period or until a
specified event, subject in each case to the Committee's approval and
to such terms as are determined by the Committee (the "Elective
Deferral Period"). Subject to any exceptions adopted by the Committee,
such election must generally be made prior to commencement of the Award
cycle for the Performance Units in question.
(v) At the expiration of the Award cycle, the Committee shall evaluate
the Company's performance in light of any Performance Goals for such
Award, and shall determine the number of Performance Units granted to
the participant which have been
-13-
<PAGE>
earned, and the Committee shall then cause to be delivered (A) a number
of shares of Common Stock equal to the number of Performance Units
determined by the Committee to have been earned, or (B) cash equal to
the Fair Market Value of such number of shares of Common Stock to the
participant as determined by the Committee in its discretion (subject
to any deferral pursuant to Section 8(b)(iv)).
(vi) Each Award shall be confirmed by, and be subject to, the terms of
a Performance Unit Agreement.
SECTION 9. Dividend Equivalents and Interest Equivalents
(a) The Committee may provide that a participant to whom a Stock Option
has been awarded, which is exercisable in whole or in part at a future time for
shares of Common Stock (such shares, the "Option Shares") shall be entitled to
receive an amount per Option Share, equal in value to the cash dividends, if
any, paid per share of Common Stock on issued and outstanding shares, as of the
dividend record dates occurring during the period between the date of the Award
and the time each such Option Share is delivered pursuant to the exercise of
such Stock Option. Such amounts (herein called "dividend equivalents") may, in
the discretion of the Committee, be:
(i) paid in cash or shares of Common Stock from time to time prior to
or at the time of the delivery of such shares of Common Stock or upon
expiration of the Stock Option if it shall not have been fully
exercised (except that payment of the dividend equivalents on an
Incentive Stock Option may not be made prior to exercise); or
(ii) converted into contingently credited shares of Common Stock (with
respect to which dividend equivalents shall accrue) in such manner, at
such value, and deliverable at such time or times, as may be determined
by the Committee.
Such shares of Common Stock (whether delivered or contingently credited) shall
be charged against the limitations set forth in Section 3.
(b) The Committee, in its discretion, may authorize payment of interest
equivalents on any portion of any Award payable at a future time in cash, and
interest equivalents on dividend equivalents which are payable in cash at a
future time.
SECTION 10. Change in Control Provisions
(a) Impact of Event. Notwithstanding any other provision of the Plan to
the contrary, in the event of a Change in Control:
(i) Any Stock Options outstanding as of the date such Change in Control
is determined to have occurred, and which are not then exercisable and
vested, shall become fully exercisable and vested to the full extent of
the original grant.
-14-
<PAGE>
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall become
free of all restrictions and become fully vested and transferable to
the full extent of the original grant.
(iii) All Performance Units shall be considered to be earned and
payable in full, and any other deferred or other restrictions shall
lapse and such Performance Units shall be settled in cash or Common
Stock (as determined by the Committee) as promptly as is practicable.
(b) For purposes of the Plan, a "Change in Control" shall mean the
happening of any of the following events:
(i) acquisition by any individual, entity or group (with the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 50% or more of either (A) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (B)
the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors
(the "Outstanding Company Voting Securities"); provided, however, that,
for purposes of this subsection (i), the following acquisitions shall
not constitute a Change of Control: (1) any acquisition directly from
the Company, (2) any acquisition by the Company, (3) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company, (4) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii) of this Section 11(b)
or (5) any acquisition of beneficial ownership by Emanual Friedman,
Eric Billings, W. Russell Ramsey, or William Swanson (the "FBR
Parties"), or any entity that is controlled by one or more of the FBR
Parties (the "FBR Affiliates"); or
(ii) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease to constitute at least a majority of the
Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(iii) Approval by the shareholders of the Company of a reorganization,
merger or consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the acquisition of
assets or stock of another corporation (a "Business
-15-
<PAGE>
Combination"), in each case, unless, following such Business
Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 60% of, respectively, the then
outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (B) no Person (excluding any
corporation resulting from such Business Combination or any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination or the FBR Parties or FBR
Affiliates) beneficially owns, directly or indirectly, 50% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination and (C) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
(c) Change in Control Price. For purposes of the Plan, "Change in
Control Price" means the higher of (i) the highest reported sales price, regular
way, of a share of Common Stock in any transaction reported on the New York
Stock Exchange Composite Tape or other national exchange on which such shares
are listed or on NASDAQ during the 60-day period prior to and including the date
of a Change in Control or (ii) if the Change in Control is the result of a
tender or exchange offer or a Corporate Transaction, the highest price per share
of Common Stock paid in such tender or exchange offer or Corporate Transaction;
provided, however, that in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, the Change in Control
Price shall be in all cases the Fair Market Value of the Common Stock on the
date such right under Section 5(j) is exercised. To the extent that the
consideration paid in any such transaction described above consists all or in
part of securities or other non-cash consideration, the value of such securities
or other non-cash consideration shall be determined in the sole discretion of
the Board.
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<PAGE>
SECTION 11. Tax Offset Bonuses
At the time an Award is made hereunder or at any time thereafter, the
Committee may grant to the participant receiving such Award the right to receive
a cash payment in an amount specified by the Committee, to be paid at such time
or times (if ever) as the Award results in compensation income to the
participant, for the purpose of assisting the participant to pay the resulting
taxes, all as determined by the Committee and on such other terms and conditions
as the Committee shall determine.
SECTION 12. Amendment and Termination
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of
participants under any Award theretofore granted without the participants'
consent. In addition, no such amendment shall be made without the approval of
the Company's shareholders to the extent such approval is required by law or
agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent.
Subject to the above provisions, the Board shall have authority to
amend the Plan to take into account changes in law and tax and accounting rules
as well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.
SECTION 13. Unfunded Status of Plan
It is presently intended that the Plan constitute an "unfunded" plan
for incentive and deferred compensation. The Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Stock or make payments; provided, however, that
unless the Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
No Award may be granted under this plan after November 12, 2008. Awards
granted before that date shall remain valid in accordance with their terms.
SECTION 14. General Provisions
(a) The Committee may require each person purchasing or receiving
shares pursuant to an Award to represent to and agree with the Company in
writing that such person is acquiring the shares without a view to the
distribution thereof. The certificates for such shares may include
-17-
<PAGE>
any legend, or, in the case of book-entry registration any notation,
which the Committee deems appropriate to reflect any restrictions on
transfer.
Notwithstanding any other provision of the Plan or certificates made
pursuant thereto, the Company shall not be required to issue or deliver any
stock certificate or certificates for shares of Common Stock, or account for
such shares by book-entry registration, under the Plan prior to fulfillment of
all of the following conditions:
(1) Listing or approval for listing upon notice of issuance,
of such shares on the American Stock Exchange or the New York Stock
Exchange, or such other securities exchange as may at the time be the
principal market for the Common Stock;
(2) Any registration or other qualification of such shares of
the Company under any state, federal or foreign law or regulation, or
the maintaining in effect of any such registration or other
qualification which the Committee shall, in its absolute discretion
upon the advice of counsel, deem necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any
state or federal governmental agency or foreign governmental body which
the Committee shall, in its absolute discretion after receiving the
advice of counsel, determine to be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Company or any
Subsidiary or Affiliated Company from adopting other or additional compensation
arrangements for its employees.
(c) Adoption of the Plan shall not confer upon any employee any right
to continued employment, nor shall it interfere in any way with the right of the
Company or a Subsidiary or an Affiliated Company to terminate the employment of
any employee at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for federal income tax
purposes with respect to any Award under the Plan, the participant shall pay to
the Company, or make arrangements satisfactory to the Company regarding the
payment of, any federal, state, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. Unless otherwise determined by
the Company, withholding obligations may be settled with Common Stock, including
Common Stock that is part of the Award that gives rise to the withholding
requirement. The obligations of the Company under the Plan shall be conditional
on such payment or arrangements, and the Company and its Subsidiaries or
Affiliated Companies shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment otherwise due to the participant. The
Committee may establish such procedures as it deems appropriate, including
making irrevocable elections, for the settlement of withholding obligations with
Common Stock.
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<PAGE>
(e) Reinvestment of dividends in additional Restricted Stock at the
time of any dividend payment shall only be permissible if sufficient shares of
Common Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Awards).
(f) The Committee, in its sole discretion, may establish such
procedures as it deems appropriate for a participant to designate a beneficiary
to whom any amounts payable in the event of the participant's death are to be
paid or by whom any rights of the participant, after the participant's death,
may be exercised.
(g) In the case of a grant of an Award to any employee of a Subsidiary
or Affiliated Company, the Company may, if the Committee so directs, issue or
transfer the shares of Common Stock, if any, covered by the Award to the
Subsidiary or Affiliated Company, for such lawful consideration as the Committee
may specify, upon the condition or understanding that the Subsidiary or
Affiliated Company will transfer the shares of Common Stock to the employee in
accordance with the terms of the Award specified by the Committee pursuant to
the provisions of the Plan.
(h) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Virginia,
without reference to principles of conflict of laws.
SECTION 15. Effective Date of Plan
The Plan shall be effective November 13, 1998.
-19-
Exhibit 10.7
(Multicurrency--Cross Border)
ISDA(R)
International Swap Dealers Association, Inc.
MASTER AGREEMENT
dated as of ..............................
................................................ and ..........................
have entered and/or anticipate entering into one or more transactions (each a
"Transaction") that are or will be governed by this Master Agreement, which
includes the schedule (the "Schedule"), and the documents and other confirming
evidence (each a "Confirmation") exchanged between the parties confirming those
Transactions.
Accordingly, the parties agree as follows:--
1. Interpretation
(a) Definitions. The terms defined in Section 14 and in the Schedule will have
the meanings therein specified for the purpose of this Master Agreement.
(b) Inconsistency. In the event of any inconsistency between the provisions of
the Schedule and the other provisions of this Master Agreement, the Schedule
will prevail. In the event of any inconsistency between the provisions of any
Confirmation and this Master Agreement (including the Schedule), such
Confirmation will prevail for the purpose of the relevant Transaction.
(c) Single Agreement. All Transactions are entered into in reliance on the fact
that this Master Agreement and all Confirmations form a single agreement between
the parties (collectively referred to as this "Agreement"), and the parties
would not otherwise enter into any Transactions.
2. Obligations
(a) General Conditions.
(i) Each party will make each payment or delivery specified in each
Confirmation to be made by it, subject to the other provisions of this
Agreement.
(ii) Payments under this Agreement will be made on the due date for value on
that date in the place of the account specified in the relevant Confirmation
or otherwise pursuant to this Agreement, in freely transferable funds and in
the manner customary for payments in the required currency. Where settlement
is by delivery (that is, other than by payment), such delivery will be made
for receipt on the due date in the manner customary for the relevant
obligation unless otherwise specified in the relevant Confirmation or
elsewhere in this Agreement.
(iii) Each obligation of each party under Section 2(a)(i) is subject to (1)
the condition precedent that no Event of Default or Potential Event of
Default with respect to the other party has occurred and is continuing, (2)
the condition precedent that no Early Termination Date in respect of the
relevant Transaction has occurred or been effectively designated and (3)
each other applicable condition precedent specified in this Agreement.
Copyright (C) 1992 by International Swap Dealers Association, Inc.
<PAGE>
(b) Change of Account. Either party may change its account for receiving a
payment or delivery by giving notice to the other party at least five Local
Business Days prior to the scheduled date for the payment or delivery to which
such change applies unless such other party gives timely notice of a reasonable
objection to such change.
(c) Netting. If on any date amounts would otherwise be payable:--
(i) in the same currency; and
(ii) in respect of the same Transaction,
by each party to the other, then, on such date, each party's obligation to make
payment of any such amount will be automatically satisfied and discharged and,
if the aggregate amount that would otherwise have been payable by one party
exceeds the aggregate amount that would otherwise have been payable by the other
party, replaced by an obligation upon the party by whom the larger aggregate
amount would have been payable to pay to the other party the excess of the
larger aggregate amount over the smaller aggregate amount.
The parties may elect in respect of two or more Transactions that a net amount
will be determined in respect of all amounts payable on the same date in the
same currency in respect of such Transactions, regardless of whether such
amounts are payable in respect of the same Transaction. The election may be made
in the Schedule or a Confirmation by specifying that subparagraph (ii) above
will not apply to the Transactions identified as being subject to the election,
together with the starting date (in which case subparagraph (ii) above will not,
or will cease to, apply to such Transactions from such date). This election may
be made separately for different groups of Transactions and will apply
separately to each pairing of Offices through which the parties make and receive
payments or deliveries.
(d) Deduction or Withholding for Tax.
(i) Gross-Up. All payments under this Agreement will be made without any
deduction or withholding for or on account of any Tax unless such deduction
or withholding is required by any applicable law, as modified by the
practice of any relevant governmental revenue authority, then in effect. If
a party is so required to deduct or withhold, then that party ("X") will:--
(1) promptly notify the other party ("Y") of such requirement;
(2) pay to the relevant authorities the full amount required to be
deducted or withheld (including the full amount required to be deducted
or withheld from any additional amount paid by X to Y under this Section
2(d)) promptly upon the earlier of determining that such deduction or
withholding is required or receiving notice that such amount has been
assessed against Y;
(3) promptly forward to Y an official receipt (or a certified copy), or
other documentation reasonably acceptable to Y, evidencing such payment
to such authorities; and
(4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to the
payment to which Y is otherwise entitled under this Agreement, such
additional amount as is necessary to ensure that the net amount actually
received by Y (free and clear of Indemnifiable Taxes, whether assessed
against X or Y) will equal the full amount Y would have received had no
such deduction or withholding been required. However, X will not be
required to pay any additional amount to Y to the extent that it would
not be required to be paid but for:--
(A) the failure by Y to comply with or perform any agreement
contained in Section 4(a)(i), 4(a)(iii) or 4(d); or
(B) the failure of a representation made by Y pursuant to Section
3(f) to be accurate and true unless such failure would not have
occurred but for (I) any action taken by a taxing authority, or
brought in a court of competent jurisdiction, on or after the date
on
2 ISDA(R)1992
<PAGE>
which a Transaction is entered into (regardless of whether such
action is taken or brought with respect to a party to this
Agreement) or (II) a Change in Tax Law.
(ii) Liability. If:--
(1) X is required by any applicable law, as modified by the practice of
any relevant governmental revenue authority, to make any deduction or
withholding in respect of which X would not be required to pay an
additional amount to Y under Section 2(d)(i)(4);
(2) X does not so deduct or withhold; and
(3) a liability resulting from such Tax is assessed directly against X,
then, except to the extent Y has satisfied or then satisfies the liability
resulting from such Tax, Y will promptly pay to X the amount of such
liability (including any related liability for interest, but including any
related liability for penalties only if Y has failed to comply with or
perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d)).
(e) Default Interest; Other Amounts. Prior to the occurrence or effective
designation of an Early Termination Date in respect of the relevant Transaction,
a party that defaults in the performance of any payment obligation will, to the
extent permitted by law and subject to Section 6(c), be required to pay interest
(before as well as after judgment) on the overdue amount to the other party on
demand in the same currency as such overdue amount, for the period from (and
including) the original due date for payment to (but excluding) the date of
actual payment, at the Default Rate. Such interest will be calculated on the
basis of daily compounding and the actual number of days elapsed. If, prior to
the occurrence or effective designation of an Early Termination Date in respect
of the relevant Transaction, a party defaults in the performance of any
obligation required to be settled by delivery, it will compensate the other
party on demand if and to the extent provided for in the relevant Confirmation
or elsewhere in this Agreement.
3. Representations
Each party represents to the other party (which representations will be deemed
to be repeated by each party on each date on which a Transaction is entered into
and, in the case of the representations in Section 3(f), at all times until the
termination of this Agreement) that:--
(a) Basic Representations.
(i) Status. It is duly organised and validly existing under the laws of the
jurisdiction of its organisation or incorporation and, if relevant under
such laws, in good standing;
(ii) Powers. It has the power to execute this Agreement and any other
documentation relating to this Agreement to which it is a party, to deliver
this Agreement and any other documentation relating to this Agreement that
it is required by this Agreement to deliver and to perform its obligations
under this Agreement and any obligations it has under any Credit Support
Document to which it is a party and has taken all necessary action to
authorise such execution, delivery and performance;
(iii) No Violation or Conflict. Such execution, delivery and performance do
not violate or conflict with any law applicable to it, any provision of its
constitutional documents, any order or judgment of any court or other agency
of government applicable to it or any of its assets or any contractual
restriction binding on or affecting it or any of its assets;
(iv) Consents. All governmental and other consents that are required to have
been obtained by it with respect to this Agreement or any Credit Support
Document to which it is a party have been obtained and are in full force and
effect and all conditions of any such consents have been complied with; and
3 ISDA(R)1992
<PAGE>
(v) Obligations Binding. Its obligations under this Agreement and any Credit
Support Document to which it is a party constitute its legal, valid and
binding obligations, enforceable in accordance with their respective terms
(subject to applicable bankruptcy, reorganisation, insolvency, moratorium or
similar laws affecting creditors' rights generally and subject, as to
enforceability, to equitable principles of general application (regardless
of whether enforcement is sought in a proceeding in equity or at law)).
(b) Absence of Certain Events. No Event of Default or Potential Event of Default
or, to its knowledge, Termination Event with respect to it has occurred and is
continuing and no such event or circumstance would occur as a result of its
entering into or performing its obligations under this Agreement or any Credit
Support Document to which it is a party.
(c) Absence of Litigation. There is not pending or, to its knowledge, threatened
against it or any of its Affiliates any action, suit or proceeding at law or in
equity or before any court, tribunal, governmental body, agency or official or
any arbitrator that is likely to affect the legality, validity or enforceability
against it of this Agreement or any Credit Support Document to which it is a
party or its ability to perform its obligations under this Agreement or such
Credit Support Document.
(d) Accuracy of Specified Information. All applicable information that is
furnished in writing by or on behalf of it to the other party and is identified
for the purpose of this Section 3(d) in the Schedule is, as of the date of the
information, true, accurate and complete in every material respect.
(e) Payer Tax Representation. Each representation specified in the Schedule as
being made by it for the purpose of this Section 3(e) is accurate and true.
(f) Payee Tax Representations. Each representation specified in the Schedule as
being made by it for the purpose of this Section 3(f) is accurate and true.
4. Agreements
Each party agrees with the other that, so long as either party has or may have
any obligation under this Agreement or under any Credit Support Document to
which it is a party:--
(a) Furnish Specified Information. It will deliver to the other party or, in
certain cases under subparagraph (iii) below, to such government or taxing
authority as the other party reasonably directs:--
(i) any forms, documents or certificates relating to taxation specified in
the Schedule or any Confirmation;
(ii) any other documents specified in the Schedule or any Confirmation; and
(iii) upon reasonable demand by such other party, any form or document that
may be required or reasonably requested in writing in order to allow such
other party or its Credit Support Provider to make a payment under this
Agreement or any applicable Credit Support Document without any deduction or
withholding for or on account of any Tax or with such deduction or
withholding at a reduced rate (so long as the completion, execution or
submission of such form or document would not materially prejudice the legal
or commercial position of the party in receipt of such demand), with any
such form or document to be accurate and completed in a manner reasonably
satisfactory to such other party and to be executed and to be delivered with
any reasonably required certification,
in each case by the date specified in the Schedule or such Confirmation or, if
none is specified, as soon as reasonably practicable.
(b) Maintain Authorisations. It will use all reasonable efforts to maintain in
full force and effect all consents of any governmental or other authority that
are required to be obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party and will use all reasonable efforts to
obtain any that may become necessary in the future.
4 ISDA(R)1992
<PAGE>
(c) Comply with Laws. It will comply in all material respects with all
applicable laws and orders to which it may be subject if failure so to comply
would materially impair its ability to perform its obligations under this
Agreement or any Credit Support Document to which it is a party.
(d) Tax Agreement. It will give notice of any failure of a representation made
by it under Section 3(f) to be accurate and true promptly upon learning of such
failure.
(e) Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax
levied or imposed upon it or in respect of its execution or performance of this
Agreement by a jurisdiction in which it is incorporated, organised, managed and
controlled, or considered to have its seat, or in which a branch or office
through which it is acting for the purpose of this Agreement is located ("Stamp
Tax Jurisdiction") and will indemnify the other party against any Stamp Tax
levied or imposed upon the other party or in respect of the other party's
execution or performance of this Agreement by any such Stamp Tax Jurisdiction
which is not also a Stamp Tax Jurisdiction with respect to the other party.
5. Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party or, if
applicable, any Credit Support Provider of such party or any Specified Entity of
such party of any of the following events constitutes an event of default (an
"Event of Default") with respect to such party:--
(i) Failure to Pay or Deliver. Failure by the party to make, when due, any
payment under this Agreement or delivery under Section 2(a)(i) or 2(e)
required to be made by it if such failure is not remedied on or before the
third Local Business Day after notice of such failure is given to the party;
(ii) Breach of Agreement. Failure by the party to comply with or perform any
agreement or obligation (other than an obligation to make any payment under
this Agreement or delivery under Section 2(a)(i) or 2(e) or to give notice
of a Termination Event or any agreement or obligation under Section 4(a)(i),
4(a)(iii) or 4(d)) to be complied with or performed by the party in
accordance with this Agreement if such failure is not remedied on or before
the thirtieth day after notice of such failure is given to the party;
(iii) Credit Support Default.
(1) Failure by the party or any Credit Support Provider of such
party to comply with or perform any agreement or obligation to be
complied with or performed by it in accordance with any Credit
Support Document if such failure is continuing after any
applicable grace period has elapsed;
(2) the expiration or termination of such Credit Support Document
or the failing or ceasing of such Credit Support Document to be in
full force and effect for the purpose of this Agreement (in either
case other than in accordance with its terms) prior to the
satisfaction of all obligations of such party under each
Transaction to which such Credit Support Document relates without
the written consent of the other party; or
(3) the party or such Credit Support Provider disaffirms,
disclaims, repudiates or rejects, in whole or in part, or
challenges the validity of such Credit Support Document;
(iv) Misrepresentation. A representation (other than a representation under
Section 3(e) or (f)) made or repeated or deemed to have been made or
repeated by the party or any Credit Support Provider of such party in this
Agreement or any Credit Support Document proves to have been incorrect or
misleading in any material respect when made or repeated or deemed to have
been made or repeated;
(v) Default under Specified Transaction. The party, any Credit Support
Provider of such party or any applicable Specified Entity of such party (1)
defaults under a Specified Transaction and, after giving effect to any
applicable notice requirement or grace period, there occurs a liquidation
of, an acceleration of obligations under, or an early termination of, that
Specified Transaction, (2) defaults, after giving effect to
5 ISDA(R)1992
<PAGE>
any applicable notice requirement or grace period, in making any payment or
delivery due on the last payment, delivery or exchange date of, or any
payment on early termination of, a Specified Transaction (or such default
continues for at least three Local Business Days if there is no applicable
notice requirement or grace period) or (3) disaffirms, disclaims, repudiates
or rejects, in whole or in part, a Specified Transaction (or such action is
taken by any person or entity appointed or empowered to operate it or act on
its behalf);
(vi) Cross Default. If "Cross Default" is specified in the Schedule as
applying to the party, the occurrence or existence of (1) a default, event
of default or other similar condition or event (however described) in
respect of such party, any Credit Support Provider of such party or any
applicable Specified Entity of such party under one or more agreements or
instruments relating to Specified Indebtedness of any of them (individually
or collectively) in an aggregate amount of not less than the applicable
Threshold Amount (as specified in the Schedule) which has resulted in such
Specified Indebtedness becoming, or becoming capable at such time of being
declared, due and payable under such agreements or instruments, before it
would otherwise have been due and payable or (2) a default by such party,
such Credit Support Provider or such Specified Entity (individually or
collectively) in making one or more payments on the due date thereof in an
aggregate amount of not less than the applicable Threshold Amount under such
agreements or instruments (after giving effect to any applicable notice
requirement or grace period);
(vii) Bankruptcy. The party, any Credit Support Provider of such party or
any applicable Specified Entity of such party:--
(1) is dissolved (other than pursuant to a consolidation, amalgamation
or merger); (2) becomes insolvent or is unable to pay its debts or
fails or admits in writing its inability generally to pay its debts as
they become due; (3) makes a general assignment, arrangement or
composition with or for the benefit of its creditors; (4) institutes
or has instituted against it a proceeding seeking a judgment of
insolvency or bankruptcy or any other relief under any bankruptcy or
insolvency law or other similar law affecting creditors' rights, or a
petition is presented for its winding-up or liquidation, and, in the
case of any such proceeding or petition instituted or presented
against it, such proceeding or petition (A) results in a judgment of
insolvency or bankruptcy or the entry of an order for relief or the
making of an order for its winding-up or liquidation or (B) is not
dismissed, discharged, stayed or restrained in each case within 30
days of the institution or presentation thereof; (5) has a resolution
passed for its winding-up, official management or liquidation (other
than pursuant to a consolidation, amalgamation or merger); (6) seeks
or becomes subject to the appointment of an administrator, provisional
liquidator, conservator, receiver, trustee, custodian or other similar
official for it or for all or substantially all its assets; (7) has a
secured party take possession of all or substantially all its assets
or has a distress, execution, attachment, sequestration or other legal
process levied, enforced or sued on or against all or substantially
all its assets and such secured party maintains possession, or any
such process is not dismissed, discharged, stayed or restrained, in
each case within 30 days thereafter; (8) causes or is subject to any
event with respect to it which, under the applicable laws of any
jurisdiction, has an analogous effect to any of the events specified
in clauses (1) to (7) (inclusive); or (9) takes any action in
furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the foregoing acts; or
(viii) Merger Without Assumption. The party or any Credit Support Provider
of such party consolidates or amalgamates with, or merges with or into, or
transfers all or substantially all its assets to, another entity and, at the
time of such consolidation, amalgamation, merger or transfer:--
(1) the resulting, surviving or transferee entity fails to assume all
the obligations of such party or such Credit Support Provider under
this Agreement or any Credit Support Document to which it or its
predecessor was a party by operation of law or pursuant to an
agreement reasonably satisfactory to the other party to this
Agreement; or
6 ISDA(R)1992
<PAGE>
(2) the benefits of any Credit Support Document fail to extend
(without the consent of the other party) to the performance by such
resulting, surviving or transferee entity of its obligations under
this Agreement.
(b) Termination Events. The occurrence at any time with respect to a party or,
if applicable, any Credit Support Provider of such party or any Specified Entity
of such party of any event specified below constitutes an illegality if the
event is specified in (i) below, a Tax Event if the event is specified in (ii)
below or a Tax Event Upon Merger if the event is specified in (iii) below, and,
if specified to be applicable, a Credit Event Upon Merger if the event is
specified pursuant to (iv) below or an Additional Termination Event if the event
is specified pursuant to (v) below:--
(i) Illegality. Due to the adoption of, or any change in, any applicable law
after the date on which a Transaction is entered into, or due to the
promulgation of, or any change in, the interpretation by any court, tribunal
or regulatory authority with competent jurisdiction of any applicable law
after such date, it becomes unlawful (other than as a result of a breach by
the party of Section 4(b)) for such party (which will be the Affected
Party):--
(1) to perform any absolute or contingent obligation to make a payment
or delivery or to receive a payment or delivery in respect of such
Transaction or to comply with any other material provision of this
Agreement relating to such Transaction; or
(2) to perform, or for any Credit Support Provider of such party to
perform, any contingent or other obligation which the party (or such
Credit Support Provider) has under any Credit Support Document relating
to such Transaction;
(ii) Tax Event. Due to (x) any action taken by a taxing authority, or
brought in a court of competent jurisdiction, on or after the date on which
a Transaction is entered into (regardless of whether such action is taken or
brought with respect to a party to this Agreement) or (y) a Change in Tax
Law, the party (which will be the Affected Party) will, or there is a
substantial likelihood that it will, on the next succeeding Scheduled
Payment Date (1) be required to pay to the other party an additional amount
in respect of an Indemnifiable Tax under Section 2(d)(i)(4) (except in
respect of interest under Section 2(e), 6(d)(ii) or 6(e)) or (2) receive a
payment from which an amount is required to be deducted or withheld for or
on account of a Tax (except in respect of interest under Section 2(e),
6(d)(ii) or 6(e)) and no additional amount is required to be paid in respect
of such Tax under Section 2(d)(i)(4) (other than by reason of Section
2(d)(i)(4)(A) or (B));
(iii) Tax Event Upon Merger. The party (the "Burdened Party") on the next
succeeding Scheduled Payment Date will either (I) be required to pay an
additional amount in respect of an Indemnifiable Tax under Section
2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or
6(e)) or (2) receive a payment from which an amount has been deducted or
withheld for or on account of any Indemnifiable Tax in respect of which the
other party is not required to pay an additional amount (other than by
reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of a
party consolidating or amalgamating with, or merging with or into, or
transferring all or substantially all its assets to, another entity (which
will be the Affected Party) where such action does not constitute an event
described in Section 5(a)(viii);
(iv) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified in
the Schedule as applying to the party, such party ("X"), any Credit Support
Provider of X or any applicable Specified Entity of X consolidates or
amalgamates with, or merges with or into, or transfers all or substantially
all its assets to, another entity and such action does not constitute an
event described in Section 5(a)(viii) but the creditworthiness of the
resulting, surviving or transferee entity is materially weaker than that of
X, such Credit Support Provider or such Specified Entity, as the case may
be, immediately prior to such action (and, in such event, X or its successor
or transferee, as appropriate, will be the Affected Party); or
(v) Additional Termination Event. If any "Additional Termination Event" is
specified in the Schedule or any Confirmation as applying, the occurrence of
such event (and, in such event, the Affected
7 ISDA(R)1992
<PAGE>
Party or Affected Parties shall be as specified for such Additional
Termination Event in the Schedule or such Confirmation).
(c) Event of Default and Illegality. If an event or circumstance which would
otherwise constitute or give rise to an Event of Default also constitutes an
Illegality, it will be treated as an Illegality and will not constitute an Event
of Default.
6. Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event of
Default with respect to a party (the "Defaulting Party") has occurred and is
then continuing, the other party (the "Non-defaulting Party") may, by not more
than 20 days notice to the Defaulting Party specifying the relevant Event of
Default, designate a day not earlier than the day such notice is effective as an
Early Termination Date in respect of all outstanding Transactions. If, however,
"Automatic Early Termination" is specified in the Schedule as applying to a
party, then an Early Termination Date in respect of all outstanding Transactions
will occur immediately upon the occurrence with respect to such party of an
Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the
extent analogous thereto, (8), and as of the time immediately preceding the
institution of the relevant proceeding or the presentation of the relevant
petition upon the occurrence with respect to such party of an Event of Default
specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
(b) Right to Terminate Following Termination Event.
(i) Notice. If a Termination Event occurs, an Affected Party will, promptly
upon becoming aware of it, notify the other party, specifying the nature of
that Termination Event and each Affected Transaction and will also give such
other information about that Termination Event as the other party may
reasonably require.
(ii) Transfer to Avoid Termination Event. If either an Illegality under
Section 5(b)(i)(1) or a Tax Event occurs and there is only one Affected
Party, or if a Tax Event Upon Merger occurs and the Burdened Party is the
Affected Party, the Affected Party will, as a condition to its right to
designate an Early Termination Date under Section 6(b)(iv), use all
reasonable efforts (which will not require such party to incur a loss,
excluding immaterial, incidental expenses) to transfer within 20 days after
it gives notice under Section 6(b)(i) all its rights and obligations under
this Agreement in respect of the Affected Transactions to another of its
Offices or Affiliates so that such Termination Event ceases to exist.
If the Affected Party is not able to make such a transfer it will give
notice to the other party to that effect within such 20 day period,
whereupon the other party may effect such a transfer within 30 days after
the notice is given under Section 6(b)(i).
Any such transfer by a party under this Section 6(b)(ii) will be subject to
and conditional upon the prior written consent of the other party, which
consent will not be withheld if such other party's policies in effect at
such time would permit it to enter into transactions with the transferee on
the terms proposed.
(iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(l) or a
Tax Event occurs and there are two Affected Parties, each party will use all
reasonable efforts to reach agreement within 30 days after notice thereof is
given under Section 6(b)(i) on action to avoid that Termination Event.
(iv) Right to Terminate. If:--
(1) a transfer under Section 6(b)(ii) or an agreement under Section
6(b)(iii), as the case may be, has not been effected with respect to
all Affected Transactions within 30 days after an Affected Party gives
notice under Section 6(b)(i); or
(2) an Illegality under Section 5(b)(i)(2), a Credit Event Upon Merger
or an Additional Termination Event occurs, or a Tax Event Upon Merger
occurs and the Burdened Party is not the Affected Party,
8 ISDA(R)1992
<PAGE>
either party in the case of an Illegality, the Burdened Party in the
case of a Tax Event Upon Merger, any Affected Party in the case of a
Tax Event or an Additional Termination Event if there is more than one
Affected Party, or the party which is not the Affected Party in the
case of a Credit Event Upon Merger or an Additional Termination Event
if there is only one Affected Party may, by not more than 20 days
notice to the other party and provided that the relevant Termination
Event is then continuing, designate a day not earlier than the day such
notice is effective as an Early Termination Date in respect of all
Affected Transactions.
(c) Effect of Designation.
(i) If notice designating an Early Termination Date is given under Section
6(a) or (b), the Early Termination Date will occur on the date so
designated, whether or not the relevant Event of Default or Termination
Event is then continuing.
(ii) Upon the occurrence or effective designation of an Early Termination
Date, no further payments or deliveries under Section 2(a)(i) or 2(e) in
respect of the Terminated Transactions will be required to be made, but
without prejudice to the other provisions of this Agreement. The amount, if
any, payable in respect of an Early Termination Date shall be determined
pursuant to Section 6(e).
(d) Calculations.
(i) Statement. On or as soon as reasonably practicable following the
occurrence of an Early Termination Date, each party will make the
calculations on its part, if any, contemplated by Section 6(e) and will
provide to the other party a statement (1) showing, in reasonable detail,
such calculations (including all relevant quotations and specifying any
amount payable under Section 6(e)) and (2) giving details of the relevant
account to which any amount payable to it is to be paid. In the absence of
written confirmation from the source of a quotation obtained in determining
a Market Quotation, the records of the party obtaining such quotation will
be conclusive evidence of the existence and accuracy of such quotation.
(ii) Payment Date. An amount calculated as being due in respect of any Early
Termination Date under Section 6(e) will be payable on the day that notice
of the amount payable is effective (in the case of an Early Termination Date
which is designated or occurs as a result of an Event of Default) and on the
day which is two Local Business Days after the day on which notice of the
amount payable is effective (in the case of an Early Termination Date which
is designated as a result of a Termination Event). Such amount will be paid
together with (to the extent permitted under applicable law) interest
thereon (before as well as after judgment) in the Termination Currency, from
(and including) the relevant Early Termination Date to (but excluding) the
date such amount is paid, at the Applicable Rate. Such interest will be
calculated on the basis of daily compounding and the actual number of days
elapsed.
(e) Payments on Early Termination. If an Early Termination Date occurs, the
following provisions shall apply based on the parties' election in the Schedule
of a payment measure, either "Market Quotation" or "Loss", and a payment method,
either the "First Method" or the "Second Method". If the parties fail to
designate a payment measure or payment method in the Schedule, it will be deemed
that "Market Quotation" or the "Second Method", as the case may be, shall apply.
The amount, if any, payable in respect of an Early Termination Date and
determined pursuant to this Section will be subject to any Set-off.
(i) Events of Default. If the Early Termination Date results from an Event
of Default:--
(1) First Method and Market Quotation. If the First Method and Market
Quotation apply, the Defaulting Party will pay to the Non-defaulting
Party the excess, if a positive number, of (A) the sum of the Settlement
Amount (determined by the Non-defaulting Party) in respect of the
Terminated Transactions and the Termination Currency Equivalent of the
Unpaid Amounts owing to the Non-defaulting Party over (B) the
Termination Currency Equivalent of the Unpaid Amounts owing to the
Defaulting Party.
9 ISDA(R)1992
<PAGE>
(2) First Method and Loss. If the First Method and Loss apply, the
Defaulting Party will pay to the Non-defaulting Party, if a positive
number, the Non-defaulting Party's Loss in respect of this Agreement.
(3) Second Method and Market Quotation. If the Second Method and Market
Quotation apply, an amount will be payable equal to (A) the sum of the
Settlement Amount (determined by the Non-defaulting Party) in respect of
the Terminated Transactions and the Termination Currency Equivalent of
the Unpaid Amounts owing to the Non-defaulting Party less (B) the
Termination Currency Equivalent of the Unpaid Amounts owing to the
Defaulting Party. If that amount is a positive number, the Defaulting
Party will pay it to the Non-defaulting Party; if it is a negative
number, the Non-defaulting Party will pay the absolute value of that
amount to the Defaulting Party.
(4) Second Method and Loss. If the Second Method and Loss apply, an
amount will be payable equal to the Non-defaulting Party's Loss in
respect of this Agreement. If that amount is a positive number, the
Defaulting Party will pay it to the Non-defaulting Party; if it is a
negative number, the Non-defaulting Party will pay the absolute value of
that amount to the Defaulting Party.
(ii) Termination Events. If the Early Termination Date results from a
Termination Event:--
(1) One Affected Party. If there is one Affected Party, the amount
payable will be determined in accordance with Section 6(e)(i)(3), if
Market Quotation applies, or Section 6(e)(i)(4), if Loss applies, except
that, in either case, references to the Defaulting Party and to the
Non-defaulting Party will be deemed to be references to the Affected
Party and the party which is not the Affected Party, respectively, and,
if Loss applies and fewer than all the Transactions are being
terminated, Loss shall be calculated in respect of all Terminated
Transactions.
(2) Two Affected Parties. If there are two Affected Parties:--
(A) if Market Quotation applies, each party will determine a
Settlement Amount in respect of the Terminated Transactions, and an
amount will be payable equal to (I) the sum of (a) one-half of the
difference between the Settlement Amount of the party with the
higher Settlement Amount ("X") and the Settlement Amount of the
party with the lower Settlement Amount ("Y") and (b) the Termination
Currency Equivalent of the Unpaid Amounts owing to X less (II) the
Termination Currency Equivalent of the Unpaid Amounts owing to Y;
and
(B) if Loss applies, each party will determine its Loss in respect
of this Agreement (or, if fewer than all the Transactions are being
terminated, in respect of all Terminated Transactions) and an amount
will be payable equal to one-half of the difference between the Loss
of the party with the higher Loss ("X") and the Loss of the party
with the lower Loss ("Y").
If the amount payable is a positive number, Y will pay it to X; if it is
a negative number, X will pay the absolute value of that amount to Y.
(iii) Adjustment for Bankruptcy. In circumstances where an Early Termination
Date occurs because "Automatic Early Termination" applies in respect of a
party, the amount determined under this Section 6(e) will be subject to such
adjustments as are appropriate and permitted by law to reflect any payments
or deliveries made by one party to the other under this Agreement (and
retained by such other party) during the period from the relevant Early
Termination Date to the date for payment determined under Section 6(d)(ii).
10 ISDA(R)1992
<PAGE>
(iv) Pre-Estimate. The parties agree that if Market Quotation applies an
amount recoverable under this Section 6(e) is a reasonable pre-estimate of
loss and not a penalty. Such amount is payable for the loss of bargain and
the loss of protection against future risks and except as otherwise provided
in this Agreement neither party will be entitled to recover any additional
damages as a consequence of such losses.
7. Transfer
Subject to Section 6(b)(ii), neither this Agreement nor any interest or
obligation in or under this Agreement may be transferred (whether by way of
security or otherwise) by either party without the prior written consent of the
other party, except that:--
(a) a party may make such a transfer of this Agreement pursuant to a
consolidation or amalgamation with, or merger with or into, or transfer of all
or substantially all its assets to, another entity (but without prejudice to any
other right or remedy under this Agreement); and
(b) a party may make such a transfer of all or any part of its interest in any
amount payable to it from a Defaulting Party under Section 6(e).
Any purported transfer that is not in compliance with this Section will be void.
8. Contractual Currency
(a) Payment in the Contractual Currency. Each payment under this Agreement will
be made in the relevant currency specified in this Agreement for that payment
(the "Contractual Currency"). To the extent permitted by applicable law, any
obligation to make payments under this Agreement in the Contractual Currency
will not be discharged or satisfied by any tender in any currency other than the
Contractual Currency, except to the extent such tender results in the actual
receipt by the party to which payment is owed, acting in a reasonable manner and
in good faith in converting the currency so tendered into the Contractual
Currency, of the full amount in the Contractual Currency of all amounts payable
in respect of this Agreement. If for any reason the amount in the Contractual
Currency so received falls short of the amount in the Contractual Currency
payable in respect of this Agreement, the party required to make the payment
will, to the extent permitted by applicable law, immediately pay such additional
amount in the Contractual Currency as may be necessary to compensate for the
shortfall. If for any reason the amount in the Contractual Currency so received
exceeds the amount in the Contractual Currency payable in respect of this
Agreement, the party receiving the payment will refund promptly the amount of
such excess.
(b) Judgments. To the extent permitted by applicable law, if any judgment or
order expressed in a currency other than the Contractual Currency is rendered
(i) for the payment of any amount owing in respect of this Agreement, (ii) for
the payment of any amount relating to any early termination in respect of this
Agreement or (iii) in respect of a judgment or order of another court for the
payment of any amount described in (i) or (ii) above, the party seeking
recovery, after recovery in full of the aggregate amount to which such party is
entitled pursuant, to the judgment or order, will be entitled to receive
immediately from the other party the amount of any shortfall of the Contractual
Currency received by such party as a consequence of sums paid in such other
currency and will refund promptly to the other party any excess of the
Contractual Currency received by such party as a consequence of sums paid in
such other currency if such shortfall or such excess arises or results from any
variation between the rate of exchange at which the Contractual Currency is
converted into the currency of the judgment or order for the purposes of such
judgment or order and the rate of exchange at which such party is able, acting
in a reasonable manner and in good faith in converting the currency received
into the Contractual Currency, to purchase the Contractual Currency with the
amount of the currency of the judgment or order actually received by such party.
The term "rate of exchange" includes, without limitation, any premiums and costs
of exchange payable in connection with the purchase of or conversion into the
Contractual Currency.
(c) Separate Indemnities. To the extent permitted by applicable law, these
indemnities constitute separate and independent obligations from the other
obligations in this Agreement, will be enforceable as separate and independent
causes of action, will apply notwithstanding any indulgence granted by the party
to which any payment
11 ISDA(R)1992
<PAGE>
is owed and will not be affected by judgment being obtained or claim or proof
being made for any other sums payable in respect of this Agreement.
(d) Evidence of Loss. For the purpose of this Section 8, it will be sufficient
for a party to demonstrate that it would have suffered a loss had an actual
exchange or purchase been made.
9. Miscellaneous
(a) Entire Agreement. This Agreement constitutes the entire agreement and
understanding of the parties with respect to its subject matter and supersedes
all oral communication and prior writings with respect thereto.
(b) Amendments. No amendment, modification or waiver in respect of this
Agreement will be effective unless in writing (including a writing evidenced by
a facsimile transmission) and executed by each of the parties or confirmed by an
exchange of telexes or electronic messages on an electronic messaging system.
(c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and
6(c)(ii), the obligations of the parties under this Agreement will survive the
termination of any Transaction.
(d) Remedies Cumulative. Except as provided in this Agreement, the rights,
powers, remedies and privileges provided in this Agreement are cumulative and
not exclusive of any rights, powers, remedies and privileges provided by law.
(e) Counterparts and Confirmations.
(i) This Agreement (and each amendment, modification and waiver in respect
of it) may be executed and delivered in counterparts (including by facsimile
transmission), each of which will be deemed an original.
(ii) The parties intend that they are legally bound by the terms of each
Transaction from the moment they agree to those terms (whether orally or
otherwise). A Confirmation shall be entered into as soon as practicable and
may be executed and delivered in counterparts (including by facsimile
transmission) or be created by an exchange of telexes or by an exchange of
electronic messages on an electronic messaging system, which in each case
will be sufficient for all purposes to evidence a binding supplement to this
Agreement. The parties will specify therein or through another effective
means that any such counterpart, telex or electronic message constitutes a
Confirmation.
(f) No Waiver of Rights. A failure or delay in exercising any right, power or
privilege in respect of this Agreement will not be presumed to operate as a
waiver, and a single or partial exercise of any right, power or privilege will
not be presumed to preclude any subsequent or further exercise, of that right,
power or privilege or the exercise of any other right, power or privilege.
(g) Headings. The headings used in this Agreement are for convenience of
reference only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
10. Offices; Multibranch Parties
(a) If Section 10(a) is specified in the Schedule as applying, each party that
enters into a Transaction through an Office other than its head or home office
represents to the other party that, notwithstanding the place of booking office
or jurisdiction of incorporation or organisation of such party, the obligations
of such party are the same as if it had entered into the Transaction through its
head or home office. This representation will be deemed to be repeated by such
party on each date on which a Transaction is entered into.
(b) Neither party may change the Office through which it makes and receives
payments or deliveries for the purpose of a Transaction without the prior
written consent of the other party.
12 ISDA(R)1992
<PAGE>
(c) If a party is specified as a Multibranch Party in the Schedule, such
Multibranch Party may make and receive payments or deliveries under any
Transaction through any Office listed in the Schedule, and the Office through
which it makes and receives payments or deliveries with respect to a Transaction
will be specified in the relevant Confirmation.
11. Expenses
A Defaulting Party will, on demand, indemnify and hold harmless the other party
for and against all reasonable out-of-pocket expenses, including legal fees and
Stamp Tax, incurred by such other party by reason of the enforcement and
protection of its rights under this Agreement or any Credit Support Document to
which the Defaulting Party is a party or by reason of the early termination of
any Transaction, including, but not limited to, costs of collection.
12. Notices
(a) Effectiveness. Any notice or other communication in respect of this
Agreement may be given in any manner set forth below (except that a notice or
other communication under Section 5 or 6 may not be given by facsimile
transmission or electronic messaging system) to the address or number or in
accordance with the electronic messaging system details provided (see the
Schedule) and will be deemed effective as indicated:--
(i) if in writing and delivered in person or by courier, on the date it is
delivered;
(ii) if sent by telex, on the date the recipient's answerback is received;
(iii) if sent by facsimile transmission, on the date that transmission is
received by a responsible employee of the recipient in legible form (it
being agreed that the burden of proving receipt will be on the sender and
will not be met by a transmission report generated by the sender's facsimile
machine);
(iv) if sent by certified or registered mail (airmail, if overseas) or the
equivalent (return receipt requested), on the date that mail is delivered or
its delivery is attempted; or
(v) if sent by electronic messaging system, on the date that electronic
message is received,
unless the date of that delivery (or attempted delivery) or that receipt, as
applicable, is not a Local Business Day or that communication is delivered (or
attempted) or received, as applicable, after the close of business on a Local
Business Day, in which case that communication shall be deemed given and
effective on the first following day that is a Local Business Day.
(b) Change of Addresses. Either party may by notice to the other change the
address, telex or facsimile number or electronic messaging system details at
which notices or other communications are to be given to it.
13. Governing Law and Jurisdiction
(a) Governing Law. This Agreement will be governed by and construed in
accordance with the law specified in the Schedule.
(b) Jurisdiction. With respect to any suit, action or proceedings relating to
this Agreement ("Proceedings"), each party irrevocably:--
(i) submits to the jurisdiction of the English courts, if this Agreement is
expressed to be governed by English law, or to the non-exclusive
jurisdiction of the courts of the State of New York and the United States
District Court located in the Borough of Manhattan in New York City, if this
Agreement is expressed to be governed by the laws of the State of New York;
and
(ii) waives any objection which it may have at any time to the laying of
venue of any Proceedings brought in any such court, waives any claim that
such Proceedings have been brought in an inconvenient
13 ISDA(R)1992
<PAGE>
forum and further waives the right to object, with respect to such
Proceedings, that such court does not have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in
any other jurisdiction (outside, if this Agreement is expressed to be governed
by English law, the Contracting States, as defined in Section 1(3) of the Civil
Jurisdiction and Judgments Act 1982 or any modification, extension or
re-enactment thereof for the time being in force) nor will the bringing of
Proceedings in any one or more jurisdictions preclude the bringing of
Proceedings in any other jurisdiction.
(c) Service of Process. Each party irrevocably appoints the Process Agent (if
any) specified opposite its name in the Schedule to receive, for it and on its
behalf, service of process in any Proceedings. If for any reason any party's
Process Agent is unable to act as such, such party will promptly notify the
other party and within 30 days appoint a substitute process agent acceptable to
the other party. The parties irrevocably consent to service of process given in
the manner provided for notices in Section 12. Nothing in this Agreement will
affect the right of either party to serve process in any other manner permitted
by law.
(d) Waiver of Immunities. Each party irrevocably waives, to the fullest extent
permitted by applicable law, with respect to itself and its revenues and assets
(irrespective of their use or intended use), all immunity on the grounds of
sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any
court, (iii) relief by way of injunction, order for specific performance or for
recovery of property, (iv) attachment of its assets (whether before or after
judgment) and (v) execution or enforcement of any judgment to which it or its
revenues or assets might otherwise be entitled in any Proceedings in the courts
of any jurisdiction and irrevocably agrees, to the extent permitted by
applicable law, that it will not claim any such immunity in any Proceedings.
14. Definitions
As used in this Agreement:--
"Additional Termination Event" has the meaning specified in Section 5(b).
"Affected Party" has the meaning specified in Section 5(b).
"Affected Transactions" means (a) with respect to any Termination Event
consisting of an Illegality, Tax Event or Tax Event Upon Merger, all
Transactions affected by the occurrence of such Termination Event and (b) with
respect to any other Termination Event, all Transactions.
"Affiliate" means, subject to the Schedule, in relation to any person, any
entity controlled, directly or indirectly, by the person, any entity that
controls, directly or indirectly, the person or any entity directly or
indirectly under common control with the person. For this purpose, "control" of
any entity or person means ownership of a majority of the voting power of the
entity or person.
"Applicable Rate" means:--
(a) in respect of obligations payable or deliverable (or which would have been
but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(b) in respect of an obligation to pay an amount under Section 6(e) of either
party from and after the date {determined in accordance with Section 6(d)(ii))
on which that amount is payable, the Default Rate;
(c) in respect of all other obligations payable or deliverable (or which would
have been but for Section 2(a)(iii)) by a Non-defaulting Party, the Non-default
Rate; and
(d) in all other cases, the Termination Rate.
"Burdened Party" has the meaning specified in Section 5(b).
14 ISDA(R)1992
<PAGE>
"Change in Tax Law" means the enactment, promulgation, execution or ratification
of, or any change in or amendment to, any law (or in the application or official
interpretation of any law) that occurs on or after the date on which the
relevant Transaction is entered into.
"consent" includes a consent, approval, action, authorisation, exemption,
notice, filing, registration or exchange control consent.
"Credit Event Upon Merger" has the meaning specified in Section 5(b).
"Credit Support Document" means any agreement or instrument that is specified as
such in this Agreement.
"Credit Support Provider" has the meaning specified in the Schedule.
"Default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the relevant payee (as certified by it) if it
were to fund or of funding the relevant amount plus 1% per annum.
"Defaulting Party" has the meaning specified in Section 6(a).
"Early Termination Date" means the date determined in accordance with Section
6(a) or 6(b)(iv).
"Event of Default" has the meaning specified in Section 5(a) and, if applicable,
in the Schedule.
"Illegality" has the meaning specified in Section 5(b).
"Indemnifiable Tax" means any Tax other than a Tax that would not be imposed in
respect of a payment under this Agreement but for a present or former connection
between the jurisdiction of the government or taxation authority imposing such
Tax and the recipient of such payment or a person related to such recipient
(including, without limitation, a connection arising from such recipient or
related person being or having been a citizen or resident of such jurisdiction,
or being or having been organised, present or engaged in a trade or business in
such jurisdiction, or having or having had a permanent establishment or fixed
place of business in such jurisdiction, but excluding a connection arising
solely from such recipient or related person having executed, delivered,
performed its obligations or received a payment under, or enforced, this
Agreement or a Credit Support Document).
"law" includes any treaty, law, rule or regulation (as modified, in the case of
tax matters, by the practice of any relevant governmental revenue authority) and
"lawful" and "unlawful" will be construed accordingly.
"Local Business Day" means, subject to the Schedule, a day on which commercial
banks are open for business (including dealings in foreign exchange and foreign
currency deposits) (a) in relation to any obligation under Section 2(a)(i), in
the place(s) specified in the relevant Confirmation or, if not so specified, as
otherwise agreed by the parties in writing or determined pursuant to provisions
contained, or incorporated by reference, in this Agreement, (b) in relation to
any other payment, in the place where the relevant account is located and, if
different, in the principal financial centre, if any, of the currency of such
payment, (c) in relation to any notice or other communication, including notice
contemplated under Section 5(a)(i), in the city specified in the address for
notice provided by the recipient and, in the case of a notice contemplated by
Section 2(b), in the place where the relevant new account is to be located and
(d) in relation to Section 5(a)(v)(2), in the relevant locations for performance
with respect to such Specified Transaction.
"Loss" means, with respect to this Agreement or one or more Terminated
Transactions, as the case may be, and a party, the Termination Currency
Equivalent of an amount that party reasonably determines in good faith to be its
total losses and costs (or gain, in which case expressed as a negative number)
in connection with this Agreement or that Terminated Transaction or group of
Terminated Transactions, as the case may be, including any loss of bargain, cost
of funding or, at the election of such party but without duplication, loss or
cost incurred as a result of its terminating, liquidating, obtaining or
reestablishing any hedge or related trading position (or any gain resulting from
any of them). Loss includes losses and costs (or gains) in respect of any
payment or delivery required to have been made (assuming satisfaction of each
applicable condition precedent) on or before the relevant Early Termination Date
and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3)
or 6(e)(ii)(2)(A) applies. Loss
15 ISDA(R)1992
<PAGE>
does not include a party's legal fees and out-of-pocket expenses referred to
under Section 11. A party will determine its Loss as of the relevant Early
Termination Date, or, if that is not reasonably practicable, as of the earliest
date thereafter as is reasonably practicable. A party may (but need not)
determine its Loss by reference to quotations of relevant rates or prices from
one or more leading dealers in the relevant markets.
"Market Quotation" means, with respect to one or more Terminated Transactions
and a party making the determination, an amount determined on the basis of
quotations from Reference Market-makers. Each quotation will be for an amount,
if any, that would be paid to such party (expressed as a negative number) or by
such party (expressed as a positive number) in consideration of an agreement
between such party (taking into account any existing Credit Support Document
with respect to the obligations of such party) and the quoting Reference
Market-maker to enter into a transaction (the "Replacement Transaction") that
would have the effect of preserving for such party the economic equivalent of
any payment or delivery (whether the underlying obligation was absolute or
contingent and assuming the satisfaction of each applicable condition precedent)
by the parties under Section 2(a)(i) in respect of such Terminated Transaction
or group of Terminated Transactions that would, but for the occurrence of the
relevant Early Termination Date, have been required after that date. For this
purpose, Unpaid Amounts in respect of the Terminated Transaction or group of
Terminated Transactions are to be excluded but, without limitation, any payment
or delivery that would, but for the relevant Early Termination Date, have been
required (assuming satisfaction of each applicable condition precedent) after
that Early Termination Date is to be included. The Replacement Transaction would
be subject to such documentation as such party and the Reference Market-maker
may, in good faith, agree. The party making the determination (or its agent)
will request each Reference Market-maker to provide its quotation to the extent
reasonably practicable as of the same day and time (without regard to different
time zones) on or as soon as reasonably practicable after the relevant Early
Termination Date. The day and time as of which those quotations are to be
obtained will be selected in good faith by the party obliged to make a
determination under Section 6(e), and, if each party is so obliged, after
consultation with the other. If more than three quotations are provided, the
Market Quotation will be the arithmetic mean of the quotations, without regard
to the quotations having the highest and lowest values. If exactly three such
quotations are provided, the Market Quotation will be the quotation remaining
after disregarding the highest and lowest quotations. For this purpose, if more
than one quotation has the same highest value or lowest value, then one of such
quotations shall be disregarded. If fewer than three quotations are provided, it
will be deemed that the Market Quotation in respect of such Terminated
Transaction or group of Terminated Transactions cannot be determined.
"Non-default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the Non-defaulting Party (as certified by it) if
it were to fund the relevant amount.
"Non-defaulting Party" has the meaning specified in Section 6(a).
"Office" means a branch or office of a party, which may be such party's head or
home office.
"Potential Event of Default" means any event which, with the giving of notice or
the lapse of time or both, would constitute an Event of Default.
"Reference Market-makers" means four leading dealers in the relevant market
selected by the party determining a Market Quotation in good faith (a) from
among dealers of the highest credit standing which satisfy all the criteria that
such party applies generally at the time in deciding whether to offer or to make
an extension of credit and (b) to the extent practicable, from among such
dealers having an office in the same city.
"Relevant Jurisdiction" means, with respect to a party, the jurisdictions (a) in
which the party is incorporated, organised, managed and controlled or considered
to have its seat, (b) where an Office through which the party is acting for
purposes of this Agreement is located, (c) in which the party executes this
Agreement and (d) in relation to any payment, from or through which such payment
is made.
"Scheduled Payment Date" means a date on which a payment or delivery is to be
made under Section 2(a)(i) with respect to a Transaction.
16 ISDA(R)1992
<PAGE>
"Set-off" means set-off, offset, combination of accounts, right of retention or
withholding or similar right or requirement to which the payer of an amount
under Section 6 is entitled or subject (whether arising under this Agreement,
another contract, applicable law or otherwise) that is exercised by, or imposed
on, such payer.
"Settlement Amount" means, with respect to a party and any Early Termination
Date, the sum of:--
(a) the Termination Currency Equivalent of the Market Quotations (whether
positive or negative) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation is determined; and
(b) such party's Loss (whether positive or negative and without reference to any
Unpaid Amounts) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation cannot be determined or would not (in
the reasonable belief of the party making the determination) produce a
commercially reasonable result.
"Specified Entity" has the meaning specified in the Schedule.
"Specified Indebtedness" means, subject to the Schedule, any obligation (whether
present or future, contingent or otherwise, as principal or surety or otherwise)
in respect of borrowed money.
"Specified Transaction" means, subject to the Schedule, (a) any transaction
(including an agreement with respect thereto) now existing or hereafter entered
into between one party to this Agreement (or any Credit Support Provider of such
party or any applicable Specified Entity of such party) and the other party to
this Agreement (or any Credit Support Provider of such other party or any
applicable Specified Entity of such other party) which is a rate swap
transaction, basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, foreign exchange transaction, cap transaction, floor
transaction, collar transaction, currency swap transaction, cross-currency rate
swap transaction, currency option or any other similar transaction (including
any option with respect to any of these transactions), (b) any combination of
these transactions and (c) any other transaction identified as a Specified
Transaction in this Agreement or the relevant confirmation.
"Stamp Tax" means any stamp, registration, documentation or similar tax.
"Tax" means any present or future tax, levy, impost, duty, charge, assessment or
fee of any nature (including interest, penalties and additions thereto) that is
imposed by any government or other taxing authority in respect of any payment
under this Agreement other than a stamp, registration, documentation or similar
tax.
"Tax Event" has the meaning specified in Section 5(b).
"Tax Event Upon Merger" has the meaning specified in Section 5(b).
"Terminated Transactions" means with respect to any Early Termination Date (a)
if resulting from a Termination Event, all Affected Transactions and (b) if
resulting from an Event of Default, all Transactions (in either case) in effect
immediately before the effectiveness of the notice designating that Early
Termination Date (or, if "Automatic Early Termination" applies, immediately
before that Early Termination Date).
"Termination Currency" has the meaning specified in the Schedule.
"Termination Currency Equivalent" means, in respect of any amount denominated in
the Termination Currency, such Termination Currency amount and, in respect of
any amount denominated in a currency other than the Termination Currency (the
"Other Currency"), the amount in the Termination Currency determined by the
party making the relevant determination as being required to purchase such
amount of such Other Currency as at the relevant Early Termination Date, or, if
the relevant Market Quotation or Loss (as the case may be), is determined as of
a later date, that later date, with the Termination Currency at the rate equal
to the spot exchange rate of the foreign exchange agent (selected as provided
below) for the purchase of such Other Currency with the Termination Currency at
or about 11:00 a.m. (in the city in which such foreign exchange agent is
located) on such date as would be customary for the determination of such a rate
for the purchase of such Other Currency for value on the relevant
17 ISDA(R)1992
<PAGE>
Early Termination Date or that later date. The foreign exchange agent will, if
only one party is obliged to make a determination under Section 6(e), be
selected in good faith by that party and otherwise will be agreed by the
parties.
"Termination Event" means an Illegality, a Tax Event or a Tax Event Upon Merger
or, if specified to be applicable, a Credit Event Upon Merger or an Additional
Termination Event.
"Termination Rate" means a rate per annum equal to the arithmetic mean of the
cost (without proof or evidence of any actual cost) to each party (as certified
by such party) if it were to fund or of funding such amounts.
"Unpaid Amounts" owing to any party means, with respect to an Early Termination
Date, the aggregate of (a) in respect of all Terminated Transactions, the
amounts that became payable (or that would have become payable but for Section
2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early
Termination Date and which remain unpaid as at such Early Termination Date and
(b) in respect of each Terminated Transaction, for each obligation under Section
2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be
settled by delivery to such party on or prior to such Early Termination Date and
which has not been so settled as at such Early Termination Date, an amount equal
to the fair market value of that which was (or would have been) required to be
delivered as of the originally scheduled date for delivery, in each case
together with (to the extent permitted under applicable law) interest, in the
currency of such amounts, from (and including) the date such amounts or
obligations were or would have been required to have been paid or performed to
(but excluding) such Early Termination Date, at the Applicable Rate. Such
amounts of interest will be calculated on the basis of daily compounding and the
actual number of days elapsed. The fair market value of any obligation referred
to in clause (b) above shall be reasonably determined by the party obliged to
make the determination under Section 6(e) or, if each party is so obliged, it
shall be the average of the Termination Currency Equivalents of the fair market
values reasonably determined by both parties.
IN WITNESS WHEREOF the parties have executed this document on the respective
dates specified below with effect from the date specified 6n the first page of
this document.
<TABLE>
<S> <C>
............................................................. .............................................................
(Name of Party) (Name of Party)
By: ...................................................... By: ......................................................
Name: Name:
Title: Title:
Date: Date:
</TABLE>
18 ISDA(R)1992
<PAGE>
(Multicurrency--Cross Border)
ISDA(R)
International Swap Dealers Association, Inc.
SCHEDULE
to the
Master Agreement
dated as of ..................................
<TABLE>
<S> <C>
between ................................................ and .................................................
("Party A") ("Party B")
Part 1. Termination Provisions.
(a) "Specified Entity" means in relation to Party A for the purpose of:--
Section 5(a)(v) .....................................................................................
Section 5(a)(vi) ....................................................................................
Section 5(a)(vii) ...................................................................................
Section 5(b)(iv) ....................................................................................
and in relation to Party B for the purpose of:--
Section 5(a)(v) .....................................................................................
Section 5(a)(vi) ....................................................................................
Section 5(a)(vii) ...................................................................................
Section 5(b)(iv) ....................................................................................
(b) "Specified Transaction" will have the meaning specified in Section 14 of this Agreement unless another
meaning is specified here............................................................................
.....................................................................................................
.....................................................................................................
(c) The "Cross Default" provisions of Section 5(a)(vi) will/will not * apply to Party A
will/will not * apply to Party B
</TABLE>
If such provisions apply:--
- ----------
* Delete as applicable.
19 ISDA(R)1992
<PAGE>
<TABLE>
<S> <C>
"Specified Indebtedness" will have the meaning specified in Section 14 of this Agreement unless
another meaning is specified here ...................................................................
.....................................................................................................
"Threshold Amount" means ............................................................................
.....................................................................................................
(d) The "Credit Event Upon Merger" provisions of Section 5(b)(iv) will/will not * apply to Party A
will/will not * apply to Party B
(e) The "Automatic Early Termination" provision of Section 6(a) will/will not * apply to Party A
will/will not * apply to Party B
(f) Payments on Early Termination. For the purpose of Section 6(e) of this Agreement:--
(i) Market Quotation/Loss * will apply.
(ii) The First Method/The Second Method * will apply.
(g) "Termination Currency" means ..............................., if such currency is specified and freely
available, and otherwise United States Dollars.
(h) Additional Termination Event will/will not apply*. The following shall constitute an Additional
Termination Event:-- ................................................................................
.....................................................................................................
.....................................................................................................
.....................................................................................................
.....................................................................................................
.....................................................................................................
For the purpose of the foregoing Termination Event, the Affected Party or Affected Parties shall
be:--................................................................................................
</TABLE>
Part 2. Tax Representations.
(a) Payer Representations. For the purpose of Section 3(e) of this
Agreement, Party A will/will not* make the following representation and
Party B will/will not* make the following representation:--
It is not required by any applicable law, as modified by the practice
of any relevant governmental revenue authority, of any Relevant
Jurisdiction to make any deduction or withholding for or on account of
any Tax from any payment (other than interest under Section 2{e),
6(d)(ii) or 6(e) of this Agreement) to be made by it to the other party
under this Agreement. In making this representation, it may rely on (i)
the accuracy of any representations made by the other party pursuant to
Section 3(f) of this Agreement, (ii) the satisfaction
- ----------
* Delete as applicable.
20 ISDA(R)1992
<PAGE>
of the agreement contained in Section 4(a)(i) or 4(a)(iii) of this
Agreement and the accuracy and effectiveness of any document provided
by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of this
Agreement and (iii) the satisfaction of the agreement of the other
party contained in Section 4(d) of this Agreement, provided that it
shall not be a breach of this representation where reliance is placed
on clause (ii) and the other party does not deliver a form or document
under Section 4(a)(iii) by reason of material prejudice to its legal or
commercial position.
(b) Payee Representations. For the purpose of Section 3(f) of this
Agreement, Party A and Party B make the representations specified
below, if any:
(i) The following representation will/will not* apply to Party A and
will/will not* apply to Party B:--
It is fully eligible for the benefits of the "Business Profits" or
"Industrial and Commercial Profits" provision, as the case may be, the
"Interest" provision or the "Other Income" provision (if any) of the
Specified Treaty with respect to any payment described in such
provisions and received or to be received by it in connection with this
Agreement and no such payment is attributable to a trade or business
carried on by it through a permanent establishment in the Specified
Jurisdiction.
If such representation applies, then:--
"Specified Treaty" means with respect to Party A................................
"Specified Jurisdiction" means with respect to Party A..........................
"Specified Treaty" means with respect to Party B................................
"Specified Jurisdiction" means with respect to Party B..........................
(ii) The following representation will/will not* apply to Party A and
will/will not* apply to Party B:--
Each payment received or to be received by it in connection with this
Agreement will be effectively connected with its conduct of a trade or
business in the Specified Jurisdiction.
If such representation applies, then:--
"Specified Jurisdiction" means with respect to Party A..........................
"Specified Jurisdiction" means with respect to Party B..........................
(iii) The following representation will/will not* apply to Party A and
will/will not* apply to Party B:--
(A) It is entering into each Transaction in the ordinary course of its
trade as, and is, either (1) a recognised U.K. bank or (2) a recognised
U.K. swaps dealer (in either case (1) or (2), for purposes of the
United Kingdom Inland Revenue extra statutory concession C17 on
interest and currency swaps dated March 14, 1989), and (B) it will
bring into account payments made and received in respect of each
Transaction in computing its income for United Kingdom tax purposes.
(iv) Other Payee Representations:--....................................
..................................................................
..................................................................
..................................................................
- ----------
* Delete as applicable.
21 ISDA(R)1992
<PAGE>
N.B. The above representations may need modification if either party is
a Multibranch Party.
Part 3. Agreement to Deliver Documents.
For the purpose of Sections 4(a)(i) and (ii) of this Agreement, each party
agrees to deliver the following documents, as applicable:--
(a) Tax forms, documents or certificates to be delivered are:--
<TABLE>
<CAPTION>
Party required to Form/Document/ Date by which
deliver document Certificate to be delivered
<S> <C> <C> <C>
.................... ................. .......................
.................... ................. .......................
.................... ................. .......................
.................... ................. .......................
.................... ................. .......................
</TABLE>
(b) Other documents to be delivered are:--
<TABLE>
<CAPTION>
Covered
Party required to Form/Document/ Date by which Section 3(d)
deliver document Certificate to be delivered Representation
<S> <C> <C> <C> <C>
.................... ................. ................... Yes/No*
.................... ................. ................... Yes/No*
.................... ................. ................... Yes/No*
.................... ................. ................... Yes/No*
.................... ................. ................... Yes/No*
Part 4. Miscellaneous.
(a) Addresses for Notices. For the purpose of Section 12(a) of this Agreement:--
Address for notices or communications to Party A:--
Address: ...................................................................................
Attention: .................................................................................
Telex No.: ......................................... Answerback: ...........................
Facsimile No.: ..................................... Telephone No.: ........................
Electronic Messaging System Details: .......................................................
</TABLE>
- ----------
* Delete as applicable.
22 ISDA(R)1992
<PAGE>
<TABLE>
<S> <C>
Address for notices or communications to Party B:--
Address: ...................................................................................
Attention: .................................................................................
Telex No.: ......................................... Answerback: ...........................
Facsimile No.: ..................................... Telephone No.: ........................
Electronic Messaging System Details: .......................................................
(b) Process Agent. For the purpose of Section 13(c) of this Agreement:--
Party A appoints as its Process Agent ......................................................
Party B appoints as its Process Agent ......................................................
(c) Offices. The provisions of Section 10(a) will/will not* apply to this Agreement.
(d) Multibranch Party. For the purpose of Section 10(c) of this Agreement:--
Party A is/is not* a Multibranch Party and, if so, may act through the following Offices:--
<S> <C> <C> <C>
....................... ....................... .......................
....................... ....................... .......................
Party B is/is not* a Multibranch Party and, if so, may act through the following Offices:--
....................... ....................... .......................
....................... ....................... .......................
(e) Calculation Agent. The Calculation Agent is ..................................., unless
otherwise specified in a Confirmation in relation to the relevant Transaction.
(f) Credit Support Document. Details of any Credit Support Document:--
............................................................................................
............................................................................................
............................................................................................
</TABLE>
- ----------
* Delete as applicable.
23 ISDA(R)1992
<PAGE>
<TABLE>
<S> <C>
(g) Credit Support Provider. Credit Support Provider means in relation to Party A, .............
............................................................................................
............................................................................................
Credit Support Provider means in relation to Party B, ......................................
............................................................................................
............................................................................................
(h) Governing Law. This Agreement will be governed by and construed in accordance with English
law/the laws of the State of New York (without reference to choice of law doctrine)*.
(i) Netting of Payments. Subparagraph (ii) of Section 2(c) of this Agreement will not apply to
the following Transactions or groups of Transactions (in each case starting from the date of
this Agreement/in each case starting from ...........................*).....................
............................................................................................
............................................................................................
(j) "Affiliate" will have the meaning specified in Section 14 of this Agreement unless another
meaning is specified here ..................................................................
............................................................................................
</TABLE>
Part 5. Other Provisions.
- ----------
* Delete as applicable.
24 ISDA(R)1992
<PAGE>
(Bilateral Form) (ISDA Agreements Subject to New York Law Only)
ISDA(R)
International Swaps and Derivatives Association, Inc.
CREDIT SUPPORT ANNEX
to the Schedule to the
..............................................
dated as of .............
between
..................................... and .....................................
("Party A") ("Party B")
This Annex supplements, forms part of, and is subject to, the above-referenced
Agreement, is part of its Schedule and is a Credit Support Document under this
Agreement with respect to each party.
Accordingly, the parties agree as follows:--
Paragraph 1. Interpretation
(a) Definitions and Inconsistency. Capitalized terms not otherwise defined
herein or elsewhere in this Agreement have the meanings specified pursuant to
Paragraph 12, and all references in this Annex to Paragraphs are to Paragraphs
of this Annex. In the event of any inconsistency between this Annex and the
other provisions of this Schedule, this Annex will prevail, and in the event of
any inconsistency between Paragraph 13 and the other provisions of this Annex,
Paragraph 13 will prevail.
(b) Secured Party and Pledgor. All references in this Annex to the "Secured
Party" will be to either party when acting in that capacity and all
corresponding references to the "Pledgor" will be to the other party when acting
in that capacity; provided, however, that if Other Posted Support is held by a
party to this Annex, all references herein to that party as the Secured Party
with respect to that Other Posted Support will be to that party as the
beneficiary thereof and will not subject that support or that party as the
beneficiary thereof to provisions of law generally relating to security
interests and secured parties.
Paragraph 2. Security Interest
Each party, as the Pledgor, hereby pledges to the other party, as the Secured
Party, as security for its Obligations, and grants to the Secured Party a first
priority continuing security interest in, lien on and right of Set-off against
all Posted Collateral Transferred to or received by the Secured Party hereunder.
Upon the Transfer by the Secured Party to the Pledgor of Posted Collateral, the
security interest and lien granted hereunder on that Posted Collateral will be
released immediately and, to the extent possible, without any further action by
either party.
Paragraph 3. Credit Support Obligations
(a) Delivery Amount. Subject to Paragraphs 4 and 5, upon a demand made by the
Secured Party on or promptly following a Valuation Date, if the Delivery Amount
for that Valuation Date equals or exceeds the Pledgor's Minimum Transfer Amount,
then the Pledgor will Transfer to the Secured Party Eligible Credit Support
having a Value as of the date of Transfer at least equal to the applicable
Delivery Amount (rounded pursuant to
Copyright (C) 1994 by International Swap Dealers Association, Inc.
<PAGE>
Paragraph 13). Unless otherwise specified in Paragraph 13, the "Delivery Amount"
applicable to the Pledgor for any Valuation Date will equal the amount by which:
(i) the Credit Support Amount
exceeds
(ii) the Value as of that Valuation Date of all Posted Credit Support held
by the Secured Party.
(b) Return Amount. Subject to Paragraphs 4 and 5, upon a demand made by the
Pledgor on or promptly following a Valuation Date, if the Return Amount for that
Valuation Date equals or exceeds the Secured Party's Minimum Transfer Amount,
then the Secured Party will Transfer to the Pledgor Posted Credit Support
specified by the Pledgor in that demand having a Value as of the date of
Transfer as close as practicable to the applicable Return Amount (rounded
pursuant to Paragraph 13). Unless otherwise specified in Paragraph 13, the
"Return Amount" applicable to the Secured Party for any Valuation Date will
equal the amount by which:
(i) the Value as of that Valuation Date of all Posted Credit Support held
by the Secured Party
exceeds
(ii) the Credit Support Amount.
"Credit Support Amount" means, unless otherwise specified in Paragraph 13, for
any Valuation Date (i) the Secured Party's Exposure for that Valuation Date plus
(ii) the aggregate of all Independent Amounts applicable to the Pledgor, if any,
minus (iii) all Independent Amounts applicable to the Secured Party, if any,
minus (iv) the Pledgor's Threshold; provided, however, that the Credit Support
Amount will be deemed to be zero whenever the calculation of Credit Support
Amount yields a number less than zero.
Paragraph 4. Conditions Precedent, Transfer Timing, Calculations and
Substitutions
(a) Conditions Precedent. Each Transfer obligation of the Pledgor under
Paragraphs 3 and 5 and of the Secured Party under Paragraphs 3, 4(d)(ii), 5 and
6(d) is subject to the conditions precedent that:
(i) no Event of Default, Potential Event of Default or Specified Condition
has occurred and is continuing with respect to the other party; and
(ii) no Early Termination Date for which any unsatisfied payment
obligations exist has occurred or been designated as the result of an Event
of Default or Specified Condition with respect to the other party.
(b) Transfer Timing. Subject to Paragraphs 4(a) and 5 and unless otherwise
specified, if a demand for the Transfer of Eligible Credit Support or Posted
Credit Support is made by the Notification Time, then the relevant Transfer will
be made not later than the close of business on the next Local Business Day; if
a demand is made after the Notification Time, then the relevant Transfer will be
made not later than the close of business on the second Local Business Day
thereafter.
(c) Calculations. All calculations of Value and Exposure for purposes of
Paragraphs 3 and 6(d) will be made by the Valuation Agent as of the Valuation
Time. The Valuation Agent will notify each party (or the other party, if the
Valuation Agent is a party) of its calculations not later than the Notification
Time on the Local Business Day following the applicable Valuation Date (or in
the case of Paragraph 6(d), following the date of calculation).
(d) Substitutions.
(i) Unless otherwise specified in Paragraph 13, upon notice to the Secured
Party specifying the items of Posted Credit Support to be exchanged, the
Pledgor may, on any Local Business Day, Transfer to the Secured Party
substitute Eligible Credit Support (the "Substitute Credit Support"); and
2 ISDA (R) 1994
<PAGE>
(ii) subject to Paragraph 4(a), the Secured Party will Transfer to the
Pledgor the items of Posted Credit Support specified by the Pledgor in its
notice not later than the Local Business Day following the date on which
the Secured Party receives the Substitute Credit Support, unless otherwise
specified in Paragraph 13 (the "Substitution Date"); provided that the
Secured Party will only be obligated to Transfer Posted Credit Support with
a Value as of the date of Transfer of that Posted Credit Support equal to
the Value as of that date of the Substitute Credit Support.
Paragraph 5. Dispute Resolution
If a party (a "Disputing Party") disputes (I) the Valuation Agent's calculation
of a Delivery Amount or a Return Amount or (II) the Value of any Transfer of
Eligible Credit Support or Posted Credit Support, then (1) the Disputing Party
will notify the other party and the Valuation Agent (if the Valuation Agent is
not the other party) not later than the close of business on the Local Business
Day following (X) the date that the demand is made under Paragraph 3 in the case
of (I) above or (Y) the date of Transfer in the case of (II) above, (2) subject
to Paragraph 4(a), the appropriate party will Transfer the undisputed amount to
the other party not later than the close of business on the Local Business Day
following (X) the date that the demand is made under Paragraph 3 in the case of
(I) above or (Y) the date of Transfer in the case of (II) above, (3) the parties
will consult with each other in an attempt to resolve the dispute and (4) if
they fail to resolve the dispute by the Resolution Time, then:
(i) In the case of a dispute involving a Delivery Amount or Return Amount,
unless otherwise specified in Paragraph 13, the Valuation Agent will
recalculate the Exposure and the Value as of the Recalculation Date by:
(A) utilizing any calculations of Exposure for the Transactions (or
Swap Transactions) that the parties have agreed are not in dispute;
(B) calculating the Exposure for the Transactions (or Swap
Transactions) in dispute by seeking four actual quotations at
mid-market from Reference Market-makers for purposes of calculating
Market Quotation, and taking the arithmetic average of those obtained;
provided that if four quotations are not available for a particular
Transaction (or Swap Transaction), then fewer than four quotations may
be used for that Transaction (or Swap Transaction); and if no
quotations are available for a particular Transaction (or Swap
Transaction), then the Valuation Agent's original calculations will be
used for that Transaction (or Swap Transaction); and
(C) utilizing the procedures specified in Paragraph 13 for calculating
the Value, if disputed, of Posted Credit Support.
(ii) In the case of a dispute involving the Value of any Transfer of
Eligible Credit Support or Posted Credit Support, the Valuation Agent will
recalculate the Value as of the date of Transfer pursuant to Paragraph 13.
Following a recalculation pursuant to this Paragraph, the Valuation Agent will
notify each party (or the other party, if the Valuation Agent is a party) not
later than the Notification Time on the Local Business Day following the
Resolution Time. The appropriate party will, upon demand following that notice
by the Valuation Agent or a resolution pursuant to (3) above and subject to
Paragraphs 4(a) and 4(b), make the appropriate Transfer.
Paragraph 6. Holding and Using Posted Collateral
(a) Care of Posted Collateral. Without limiting the Secured Party's rights under
Paragraph 6(c), the Secured Party will exercise reasonable care to assure the
safe custody of all Posted Collateral to the extent required by applicable law,
and in any event the Secured Party will be deemed to have exercised reasonable
care if it exercises at least the same degree of care as it would exercise with
respect to its own property. Except as specified in the preceding sentence, the
Secured Party will have no duty with respect to Posted Collateral, including,
without limitation, any duty to collect any Distributions, or enforce or
preserve any rights pertaining thereto.
3 ISDA (R) 1994
<PAGE>
(b) Eligibility to Hold Posted Collateral; Custodians.
(i) General. Subject to the satisfaction of any conditions specified in
Paragraph 13 for holding Posted Collateral, the Secured Party will be
entitled to hold Posted Collateral or to appoint an agent (a "Custodian")
to hold Posted Collateral for the Secured Party. Upon notice by the Secured
Party to the Pledgor of the appointment of a Custodian, the Pledgor's
obligations to make any Transfer will be discharged by making the Transfer
to that Custodian. The holding of Posted Collateral by a Custodian will be
deemed to be the holding of that Posted Collateral by the Secured Party for
which the Custodian is acting.
(ii) Failure to Satisfy Conditions. If the Secured Party or its Custodian
fails to satisfy any conditions for holding Posted Collateral, then upon a
demand made by the Pledgor, the Secured Party will, not later than five
Local Business Days after the demand, Transfer or cause its Custodian to
Transfer all Posted Collateral held by it to a Custodian that satisfies
those conditions or to the Secured Party if it satisfies those conditions.
(iii) Liability. The Secured Party will be liable for the acts or omissions
of its Custodian to the same extent that the Secured Party would be liable
hereunder for its own acts or omissions.
(c) Use of Posted Collateral. Unless otherwise specified in Paragraph 13 and
without limiting the rights and obligations of the parties under Paragraphs 3,
4(d)(ii), 5, 6(d) and 8, if the Secured Party is not a Defaulting Party or an
Affected Party with respect to a Specified Condition and no Early Termination
Date has occurred or been designated as the result of an Event of Default or
Specified Condition with respect to the Secured Party, then the Secured Party
will, notwithstanding Section 9-207 of the New York Uniform Commercial Code,
have the right to:
(i) sell, pledge, rehypothecate, assign, invest, use, commingle or
otherwise dispose of, or otherwise use in its business any Posted
Collateral it holds, free from any claim or right of any nature whatsoever
of the Pledgor, including any equity or right of redemption by the Pledgor;
and
(ii) register any Posted Collateral in the name of the Secured Party, its
Custodian or a nominee for either.
For purposes of the obligation to Transfer Eligible Credit Support or Posted
Credit Support pursuant to Paragraphs 3 and 5 and any rights or remedies
authorized under this Agreement, the Secured Party will be deemed to continue to
hold all Posted Collateral and to receive Distributions made thereon, regardless
of whether the Secured Party has exercised any rights with respect to any Posted
Collateral pursuant to (i) or (ii) above.
(d) Distributions and Interest Amount.
(i) Distributions. Subject to Paragraph 4(a), if the Secured Party receives
or is deemed to receive Distributions on a Local Business Day, it will
Transfer to the Pledgor not later than the following Local Business Day any
Distributions it receives or is deemed to receive to the extent that a
Delivery Amount would not be created or increased by that Transfer, as
calculated by the Valuation Agent (and the date of calculation will be
deemed to be a Valuation Date for this purpose).
(ii) Interest Amount. Unless otherwise specified in Paragraph 13 and
subject to Paragraph 4(a), in lieu of any interest, dividends or other
amounts paid or deemed to have been paid with respect to Posted Collateral
in the form of Cash (all of which may be retained by the Secured Party),
the Secured Party will Transfer to the Pledgor at the times specified in
Paragraph 13 the Interest Amount to the extent that a Delivery Amount would
not be created or increased by that Transfer, as calculated by the
Valuation Agent (and the date of calculation will be deemed to be a
Valuation Date for this purpose). The Interest Amount or portion thereof
not Transferred pursuant to this Paragraph will constitute Posted
Collateral in the form of Cash and will be subject to the security interest
granted under Paragraph 2.
4 ISDA (R) 1994
<PAGE>
Paragraph 7. Events of Default
For purposes of Section 5(a)(iii)(1) of this Agreement, an Event of Default will
exist with respect to a party if:
(i) that party fails (or fails to cause its Custodian) to make, when due,
any Transfer of Eligible Collateral, Posted Collateral or the Interest
Amount, as applicable, required to be made by it and that failure continues
for two Local Business Days after notice of that failure is given to that
party;
(ii) that party fails to comply with any restriction or prohibition
specified in this Annex with respect to any of the rights specified in
Paragraph 6(c) and that failure continues for five Local Business Days
after notice of that failure is given to that party; or
(iii) that party fails to comply with or perform any agreement or
obligation other than those specified in Paragraphs 7(i) and 7(ii) and that
failure continues for 30 days after notice of that failure is given to that
party.
Paragraph 8. Certain Rights and Remedies
(a) Secured Party's Rights and Remedies. If at any time (1) an Event of Default
or Specified Condition with respect to the Pledgor has occurred and is
continuing or (2) an Early Termination Date has occurred or been designated as
the result of an Event of Default or Specified Condition with respect to the
Pledgor, then, unless the Pledgor has paid in full all of its Obligations that
are then due, the Secured Party may exercise one or more of the following rights
and remedies:
(i) all rights and remedies available to a secured party under applicable
law with respect to Posted Collateral held by the Secured Party;
(ii) any other rights and remedies available to the Secured Party under the
terms of Other Posted Support, if any;
(iii) the right to Set-off any amounts payable by the Pledgor with respect
to any Obligations against any Posted Collateral or the Cash equivalent of
any Posted Collateral held by the Secured Party (or any obligation of the
Secured Party to Transfer that Posted Collateral); and
(iv) the right to liquidate any Posted Collateral held by the Secured Party
through one or more public or private sales or other dispositions with such
notice, if any, as may be required under applicable law, free from any
claim or right of any nature whatsoever of the Pledgor, including any
equity or right of redemption by the Pledgor (with the Secured Party having
the right to purchase any or all of the Posted Collateral to be sold) and
to apply the proceeds (or the Cash equivalent thereof) from the liquidation
of the Posted Collateral to any amounts payable by the Pledgor with respect
to any Obligations in that order as the Secured Party may elect.
Each party acknowledges and agrees that Posted Collateral in the form of
securities may decline speedily in value and is of a type customarily sold on a
recognized market, and, accordingly, the Pledgor is not entitled to prior notice
of any sale of that Posted Collateral by the Secured Party, except any notice
that is required under applicable law and cannot be waived.
(b) Pledgor's Rights and Remedies. If at any time an Early Termination Date has
occurred or been designated as the result of an Event of Default or Specified
Condition with respect to the Secured Party, then (except in the case of an
Early Termination Date relating to less than all Transactions (or Swap
Transactions) where the Secured Party has paid in full all of its obligations
that are then due under Section 6(e) of this Agreement):
(i) the Pledgor may exercise all rights and remedies available to a pledgor
under applicable law with respect to Posted Collateral held by the Secured
Party;
(ii) the Pledgor may exercise any other rights and remedies available to
the Pledgor under the terms of Other Posted Support, if any;
5 ISDA (R) 1994
<PAGE>
(iii) the Secured Party will be obligated immediately to Transfer all
Posted Collateral and the Interest Amount to the Pledgor; and
(iv) to the extent that Posted Collateral or the Interest Amount is not so
Transferred pursuant to (iii) above, the Pledgor may:
(A) Set-off any amounts payable by the Pledgor with respect to any
Obligations against any Posted Collateral or the Cash equivalent of
any Posted Collateral held by the Secured Party (or any obligation of
the Secured Party to Transfer that Posted Collateral); and
(B) to the extent that the Pledgor does not Set-off under (iv)(A)
above, withhold payment of any remaining amounts payable by the
Pledgor with respect to any Obligations, up to the Value of any
remaining Posted Collateral held by the Secured Party, until that
Posted Collateral is Transferred to the Pledgor.
(c) Deficiencies and Excess Proceeds. The Secured Party will Transfer to the
Pledgor any proceeds and Posted Credit Support remaining after liquidation,
Set-off and/or application under Paragraphs 8(a) and 8(b) after satisfaction in
full of all amounts payable by the Pledgor with respect to any Obligations; the
Pledgor in all events will remain liable for any amounts remaining unpaid after
any liquidation, Set-off and/or application under Paragraphs 8(a) and 8(b).
(d) Final Returns. When no amounts are or thereafter may become payable by the
Pledgor with respect to any Obligations (except for any potential liability
under Section 2(d) of this Agreement), the Secured Party will Transfer to the
Pledgor all Posted Credit Support and the Interest Amount, if any.
Paragraph 9. Representations
Each party represents to the other party (which representations will be deemed
to be repeated as of each date on which it, as the Pledgor, Transfers Eligible
Collateral) that:
(i) it has the power to grant a security interest in and lien on any
Eligible Collateral it Transfers as the Pledgor and has taken all necessary
actions to authorize the granting of that security interest and lien;
(ii) it is the sole owner of or otherwise has the right to Transfer all
Eligible Collateral it Transfers to the Secured Party hereunder, free and
clear of any security interest, lien, encumbrance or other restrictions
other than the security interest and lien granted under Paragraph 2;
(iii) upon the Transfer of any Eligible Collateral to the Secured Party
under the terms of this Annex, the Secured Party will have a valid and
perfected first priority security interest therein (assuming that any
central clearing corporation or any third-party financial intermediary or
other entity not within the control of the Pledgor involved in the Transfer
of that Eligible Collateral gives the notices and takes the action required
of it under applicable law for perfection of that interest); and
(iv) the performance by it of its obligations under this Annex will not
result in the creation of any security interest, lien or other encumbrance
on any Posted Collateral other than the security interest and lien granted
under Paragraph 2.
Paragraph 10. Expenses
(a) General. Except as otherwise provided in Paragraphs 10(b) and 10(c), each
party will pay its own costs and expenses in connection with performing its
obligations under this Annex and neither party will be liable for any costs and
expenses incurred by the other party in connection herewith.
(b) Posted Credit Support. The Pledgor will promptly pay when due all taxes,
assessments or charges of any nature that are imposed with respect to Posted
Credit Support held by the Secured Party upon becoming aware of the same,
regardless of whether any portion of that Posted Credit Support is subsequently
disposed of under Paragraph
6 ISDA (R) 1994
<PAGE>
6(c), except for those taxes, assessments and charges that result from the
exercise of the Secured Party's rights under Paragraph 6(c).
(c) Liquidation/Application of Posted Credit Support. All reasonable costs and
expenses incurred by or on behalf of the Secured Party or the Pledgor in
connection with the liquidation and/or application of any Posted Credit Support
under Paragraph 8 will be payable, on demand and pursuant to the Expenses
Section of this Agreement, by the Defaulting Party or, if there is no Defaulting
Party, equally by the parties.
Paragraph 11. Miscellaneous
(a) Default Interest. A Secured Party that fails to make, when due, any Transfer
of Posted Collateral or the Interest Amount will be obligated to pay the Pledgor
(to the extent permitted under applicable law) an amount equal to interest at
the Default Rate multiplied by the Value of the items of property that were
required to be Transferred, from (and including) the date that Posted Collateral
or Interest Amount was required to be Transferred to (but excluding) the date of
Transfer of that Posted Collateral or Interest Amount. This interest will be
calculated on the basis of daily compounding and the actual number of days
elapsed.
(b) Further Assurances. Promptly following a demand made by a party, the other
party will execute, deliver, file and record any financing statement, specific
assignment or other document and take any other action that may be necessary or
desirable and reasonably requested by that party to create, preserve, perfect or
validate any security interest or lien granted under Paragraph 2, to enable that
party to exercise or enforce its rights under this Annex with respect to Posted
Credit Support or an Interest Amount or to effect or document a release of a
security interest on Posted Collateral or an Interest Amount.
(c) Further Protection. The Pledgor will promptly give notice to the Secured
Party of, and defend against, any suit, action, proceeding or lien that involves
Posted Credit Support Transferred by the Pledgor or that could adversely affect
the security interest and lien granted by it under Paragraph 2, unless that
suit, action, proceeding or lien results from the exercise of the Secured
Party's rights under Paragraph 6(c).
(d) Good Faith and Commercially Reasonable Manner. Performance of all
obligations under this Annex, including, but not limited to, all calculations,
valuations and determinations made by either party, will be made in good faith
and in a commercially reasonable manner.
(e) Demands and Notices. All demands and notices made by a party under this
Annex will be made as specified in the Notices Section of this Agreement, except
as otherwise provided in Paragraph 13.
(f) Specifications of Certain Matters. Anything referred to in this Annex as
being specified in Paragraph 13 also may be specified in one or more
Confirmations or other documents and this Annex will be construed accordingly.
Paragraph 12. Definitions
As used in this Annex:--
"Cash" means the lawful currency of the United States of America.
"Credit Support Amount" has the meaning specified in Paragraph 3.
"Custodian" has the meaning specified in Paragraphs 6(b)(i) and 13.
"Delivery Amount" has the meaning specified in Paragraph 3(a).
"Disputing Party" has the meaning specified in Paragraph 5.
"Distributions" means with respect to Posted Collateral other than Cash, all
principal, interest and other payments and distributions of cash or other
property with respect thereto, regardless of whether the Secured Party has
disposed of that Posted Collateral under Paragraph 6(c). Distributions will not
include any item of property acquired by the
7 ISDA (R) 1994
<PAGE>
Secured Party upon any disposition or liquidation of Posted Collateral or, with
respect to any Posted Collateral in the form of Cash, any distributions on that
collateral, unless otherwise specified herein.
"Eligible Collateral" means, with respect to a party, the items, if any,
specified as such for that party in Paragraph 13.
"Eligible Credit Support" means Eligible Collateral and Other Eligible Support.
"Exposure" means for any Valuation Date or other date for which Exposure is
calculated and subject to Paragraph 5 in the case of a dispute, the amount, if
any, that would be payable to a party that is the Secured Party by the other
party (expressed as a positive number) or by a party that is the Secured Party
to the other party (expressed as a negative number) pursuant to Section
6(e)(ii)(2)(A) of this Agreement as if all Transactions (or Swap Transactions)
were being terminated as of the relevant Valuation Time; provided that Market
Quotation will be determined by the Valuation Agent using its estimates at
mid-market of the amounts that would be paid for Replacement Transactions (as
that term is defined in the definition of "Market Quotation").
"Independent Amount" means, with respect to a party, the amount specified as
such for that party in Paragraph 13; if no amount is specified, zero.
"Interest Amount" means, with respect to an Interest Period, the aggregate sum
of the amounts of interest calculated for each day in that Interest Period on
the principal amount of Posted Collateral in the form of Cash held by the
Secured Party on that day, determined by the Secured Party for each such day as
follows:
(x) the amount of that Cash on that day; multiplied by
(y) the Interest Rate in effect for that day; divided by
(z) 360.
"Interest Period" means the period from (and including) the last Local Business
Day on which an Interest Amount was Transferred (or, if no Interest Amount has
yet been Transferred, the Local Business Day on which Posted Collateral in the
form of Cash was Transferred to or received by the Secured Party) to (but
excluding) the Local Business Day on which the current Interest Amount is to be
Transferred.
"Interest Rate" means the rate specified in Paragraph 13.
"Local Business Day", unless otherwise specified in Paragraph 13, has the
meaning specified in the Definitions Section of this Agreement, except that
references to a payment in clause (b) thereof will be deemed to include a
Transfer under this Annex.
"Minimum Transfer Amount" means, with respect to a party, the amount specified
as such for that party in Paragraph 13; if no amount is specified, zero.
"Notification Time" has the meaning specified in Paragraph 13.
"Obligations" means, with respect to a party, all present and future obligations
of that party under this Agreement and any additional obligations specified for
that party in Paragraph 13.
"Other Eligible Support" means, with respect to a party, the items, if any,
specified as such for that party in Paragraph 13.
"Other Posted Support" means all Other Eligible Support Transferred to the
Secured Party that remains in effect for the benefit of that Secured Party.
"Pledgor" means either party, when that party (i) receives a demand for or is
required to Transfer Eligible Credit Support under Paragraph 3(a) or (ii) has
Transferred Eligible Credit Support under Paragraph 3(a).
8 ISDA (R) 1994
<PAGE>
"Posted Collateral" means all Eligible Collateral, other property,
Distributions, and all proceeds thereof that have been Transferred to or
received by the Secured Party under this Annex and not Transferred to the
Pledgor pursuant to Paragraph 3(b), 4(d)(ii) or 6(d)(i) or released by the
Secured Party under Paragraph 8. Any Interest Amount or portion thereof not
Transferred pursuant to Paragraph 6(d)(ii) will constitute Posted Collateral in
the form of Cash.
"Posted Credit Support" means Posted Collateral and Other Posted Support.
"Recalculation Date" means the Valuation Date that gives rise to the dispute
under Paragraph 5; provided, however, that if a subsequent Valuation Date occurs
under Paragraph 3 prior to the resolution of the dispute, then the
"Recalculation Date" means the most recent Valuation Date under Paragraph 3.
"Resolution Time" has the meaning specified in Paragraph 13.
"Return Amount" has the meaning specified in Paragraph 3(b).
"Secured Party" means either party, when that party (i) makes a demand for or is
entitled to receive Eligible Credit Support under Paragraph 3(a) or (ii) holds
or is deemed to hold Posted Credit Support.
"Specified Condition" means, with respect to a party, any event specified as
such for that party in Paragraph 13.
"Substitute Credit Support" has the meaning specified in Paragraph 4(d)(i).
"Substitution Date" has the meaning specified in Paragraph 4(d)(ii).
"Threshold" means, with respect to a party, the amount specified as such for
that party in Paragraph 13; if no amount is specified, zero.
"Transfer" means, with respect to any Eligible Credit Support, Posted Credit
Support or Interest Amount, and in accordance with the instructions of the
Secured Party, Pledgor or Custodian, as applicable:
(i) in the case of Cash, payment or delivery by wire transfer into one or
more bank accounts specified by the recipient;
(ii) in the case of certificated securities that cannot be paid or
delivered by book-entry, payment or delivery in appropriate physical form
to the recipient or its account accompanied by any duly executed
instruments of transfer, assignments in blank, transfer tax stamps and any
other documents necessary to constitute a legally valid transfer to the
recipient;
(iii) in the case of securities that can be paid or delivered by
book-entry, the giving of written instructions to the relevant depository
institution or other entity specified by the recipient, together with a
written copy thereof to the recipient, sufficient if complied with to
result in a legally effective transfer of the relevant interest to the
recipient; and
(iv) in the case of Other Eligible Support or Other Posted Support, as
specified in Paragraph 13.
"Valuation Agent" has the meaning specified in Paragraph 13.
"Valuation Date" means each date specified in or otherwise determined pursuant
to Paragraph 13.
"Valuation Percentage" means, for any item of Eligible Collateral, the
percentage specified in Paragraph 13.
"Valuation Time" has the meaning specified in Paragraph 13.
"Value" means for any Valuation Date or other date for which Value is calculated
and subject to Paragraph 5 in the case of a dispute, with respect to:
(i) Eligible Collateral or Posted Collateral that is:
9 ISDA (R) 1994
<PAGE>
(A) Cash, the amount thereof; and
(B) a security, the bid price obtained by the Valuation Agent
multiplied by the applicable Valuation Percentage, if any;
(ii) Posted Collateral that consists of items that are not specified as
Eligible Collateral, zero; and
(iii) Other Eligible Support and Other Posted Support, as specified in
Paragraph 13.
Paragraph 13. Elections and Variables
(a) Security Interest for "Obligations". The term "Obligations" as used in this
Annex includes the following additional obligations:
With respect to Party A: ..................................................
With respect to Party B: ..................................................
(b) Credit Support Obligations.
(i) Delivery Amount, Return Amount and Credit Support Amount.
(A) "Delivery Amount" has the meaning specified in Paragraph 3(a),
unless otherwise specified here: .....................................
(B) "Return Amount" has the meaning specified in Paragraph 3(b),
unless otherwise specified here: .....................................
(C) "Credit Support Amount" has the meaning specified in Paragraph 3,
unless otherwise specified here: .....................................
(ii) Eligible Collateral. The following items will qualify as "Eligible
Collateral" for the party specified:
<TABLE>
<CAPTION>
Party A Party B Valuation
Percentage
<S> <C> <C> <C>
(A) Cash [ ] [ ] [ ]%
(B) negotiable debt obligations issued by the U.S. Treasury [ ] [ ] [ ]%
Department having an original maturity at issuance of
not more than one year ("Treasury Bills")
(C) negotiable debt obligations issued by the U.S. Treasury [ ] [ ] [ ]%
Department having an original maturity at issuance of
more than one year but not more than 10 years
("Treasury Notes")
(D) negotiable debt obligations issued by the U.S. Treasury [ ] [ ] [ ]%
Department having an original maturity at issuance of
more than 10 years ("Treasury Bonds")
(E) other: ................................................ [ ] [ ] [ ]%
</TABLE>
(iii) Other Eligible Support. The following items will qualify as "Other
Eligible Support" for the party specified:
10 ISDA (R) 1994
<PAGE>
Party A Party B
(A) .......................................... [ ] [ ]
(B) .......................................... [ ] [ ]
(iv) Thresholds.
(A) "Independent Amount" means with respect to Party A: $.............
"Independent Amount" means with respect to Party B: $.............
(B) "Threshold" means with respect to Party A: $......................
"Threshold" means with respect to Party B: $......................
(C) "Minimum Transfer Amount" means with respect to Party A: $........
"Minimum Transfer Amount" means with respect to Party B: $........
(D) Rounding. The Delivery Amount and the Return Amount will be
rounded [down to the nearest integral multiple of $....... /up and
down to the nearest integral multiple of $.............,
respectively*].
(c) Valuation and Timing.
(i) "Valuation Agent" means, for purposes of Paragraphs 3 and 5, the party
making the demand under Paragraph 3, and, for purposes of Paragraph 6(d),
the Secured Party receiving or deemed to receive the Distributions or the
Interest Amount, as applicable, unless otherwise specified here:...........
(ii) "Valuation Date" means: ..............................................
(iii) "Valuation Time" means:
[ ] the close of business in the city of the Valuation Agent
on the Valuation Date or date of calculation, as applicable;
[ ] the close of business on the Local Business Day before the
Valuation Date or date of calculation, as applicable;
provided that the calculations of Value and Exposure will be made as of
approximately the same time on the same date.
(iv) "Notification Time" means 1:00 p.m., New York time, on a Local
Business Day, unless otherwise specified here:
(d) Conditions Precedent and Secured Party's Rights and Remedies. The following
Termination Event(s) will be a "Specified Condition" for the party specified
(that party being the Affected Party if the Termination Event occurs with
respect to that party):
_________________________________
* Delete as applicable.
11 ISDA (R) 1994
<PAGE>
Party A Party B
Illegality [ ] [ ]
Tax Event [ ] [ ]
Tax Event Upon Merger [ ] [ ]
Credit Event Upon Merger [ ] [ ]
Additional Termination Event(s):1/ [ ] [ ]
....................................... [ ] [ ]
....................................... [ ] [ ]
(e) Substitution.
(i) "Substitution Date" has the meaning specified in Paragraph 4(d)(ii),
unless otherwise specified here: ..........................................
(ii) Consent. If specified here as applicable, then the Pledgor must obtain
the Secured Party's consent for any substitution pursuant to Paragraph
4(d): [applicable/inapplicable*]2/
(f) Dispute Resolution.
(i) "Resolution Time" means 1:00 p.m., New York time, on the Local Business
Day following the date on which the notice is given that gives rise to a
dispute under Paragraph 5, unless otherwise specified here: ...............
(ii) Value. For the purpose of Paragraphs 5(i)(C) and 5(ii), the Value of
Posted Credit Support will be calculated as follows: ......................
(iii) Alternative. The provisions of Paragraph 5 will apply, unless an
alternative dispute resolution procedure is specified here: ...............
(g) Holding and Using Posted Collateral.
(i) Eligibility to Hold Posted Collateral; Custodians. Party A and its
Custodian will be entitled to hold Posted Collateral pursuant to Paragraph
6(b); provided that the following conditions applicable to it are
satisfied:
(1) Party A is not a Defaulting Party.
(2) Posted Collateral may be held only in the following
jurisdictions: ...................................................
(3) ..................................................................
Initially, the Custodian for Party A is ..............................
_________________________________
1/ If the parties elect to designate an Additional Termination Event as a
"Specified Condition", then they should only designate one or more Additional
Termination Events that are designated as such in their Schedule.
* Delete as applicable.
2/ Parties should consider selecting "applicable" where substitution
without consent could give rise to a registration requirement to perfect
properly the security interest in Posted Collateral (e.g., where a party to the
Annex is the New York branch of an English bank).
12 ISDA (R) 1994
<PAGE>
Party B and its Custodian will be entitled to hold Posted Collateral
pursuant to Paragraph 6(b); provided that the following conditions
applicable to it are satisfied:
(1) Party B is not a Defaulting Party.
(2) Posted Collateral may be held only in the following
jurisdictions: ...................................................
(3) ..................................................................
Initially, the Custodian for Party B is ..............................
(ii) Use of Posted Collateral. The provisions of Paragraph 6(c) will not
apply to the [party/parties*] specified here:
[ ] Party A
[ ] Party B
and [that party/those parties*] will not be permitted to: .................
(h) Distributions and Interest Amount.
(i) Interest Rate. The "Interest Rate" will be: ...........................
(ii) Transfer of Interest Amount. The Transfer of the Interest Amount will
be made on the last Local Business Day of each calendar month and on any
Local Business Day that Posted Collateral in the form of Cash is
Transferred to the Pledgor pursuant to Paragraph 3(b), unless otherwise
specified here: ...........................................................
(iii) Alternative to Interest Amount. The provisions of Paragraph 6(d)(ii)
will apply, unless otherwise specified here: ..............................
(i) Additional Representation(s).
[Party A/Party B*] represents to the other party (which representation(s) will
be deemed to be repeated as of each date on which it, as the Pledgor, Transfers
Eligible Collateral) that:
(i) ......................................................................
(ii) ......................................................................
(j) Other Eligible Support and Other Posted Support.
(i) "Value" with respect to Other Eligible Support and Other Posted Support
means: ....................................................................
(ii) "Transfer" with respect to Other Eligible Support and Other Posted
Support means: ............................................................
(k) Demands and Notices.
All demands, specifications and notices under this Annex will be made pursuant
to the Notices Section of this Agreement, unless otherwise specified here:
_________________________________
* Delete as applicable.
13 ISDA (R) 1994
<PAGE>
Party A: ..................................................................
...........................................................................
Party B: ..................................................................
...........................................................................
(l) Addresses for Transfers.
Party A: ..................................................................
...........................................................................
Party B: ..................................................................
...........................................................................
(m) Other Provisions.
14 ISDA (R) 1994
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) included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Washington, D.C.
May 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0001073208
<NAME> x#erem7a
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 41,144,326 27,802,439
<SECURITIES> 232,401,789 216,681,308
<RECEIVABLES> 19,082,921 31,157,389
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 295,930,620 278,705,361
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 295,930,620 278,705,361
<CURRENT-LIABILITIES> 145,026,041 135,943,630
<BONDS> 0 0
0 0
0 0
<COMMON> 104,158 104,158
<OTHER-SE> 150,800,421 142,657,573
<TOTAL-LIABILITY-AND-EQUITY> 295,930,620 278,705,361
<SALES> 0 0
<TOTAL-REVENUES> 17,927,502 5,165,167
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,609,827 732,248
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,359,633 1,724,475
<INCOME-PRETAX> 1,588,235 2,708,444
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,588,235 2,708,444
<EPS-BASIC> 0.16 0.32
<EPS-DILUTED> 0.16 0.32
</TABLE>
