<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number ____________
FBR ASSET INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 54-1873198
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
Potomac Tower (901) 580-6000
1001 Nineteenth Street North (Registrant's telephone number
Arlington, Virginia 22209 including area code)
(Address of principal executive offices)
(zip code)
N/A
(former name)
Indicate by check mark whether the Registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the Registrant was
required to file such report), and (ii) has been subject to such filing
requirements for the past 90 days:
Yes: X No _____ (The Registrant has not been subject to such filing
-----
requirements for the past 90 days)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant: $38,009,851 as of March 24, 2000.
As of March 24, 2000, the latest practicable date, there were 5,097,227 shares
of the Registrant's common stock outstanding.
Portions of the Registrant's Registration Statement on Form S-11, as amended,
Registration No. 333-67343, are incorporated by reference in Part IV, Item 14.
Portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission no later than 120 days after the Registrant's
fiscal year ended December 31, 1999, and to be delivered to stockholders in
connection with the 2000 Annual Meeting of Stockholders, are incorporated by
reference in Part III, Items 10 (as related to Directors), 11, 12 and 13.
<PAGE>
FBR ASSET INVESTMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
REPORT: FORM 10-K Page
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<S> <C>
PART I...................................................................................... 1
Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 16
Item 3. Legal Proceedings............................................................... 16
Item 4. Submission Of Matters To Vote Of Security Holders............................... 17
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters........... 17
Item 6. Selected Financial Data......................................................... 19
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations Overview.................................................. 19
Item 8. Financial Statements And Supplementary Data..................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................ 30
PART III.................................................................................... 31
Item 10. Directors And Executive Officers Of The Registrant............................ 31
Item 11. Executive Compensation........................................................ 31
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 31
Item 13. Certain Relationships and Related Transactions................................ 31
PART IV..................................................................................... 32
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 32
</TABLE>
SIGNATURES
(i)
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PART I.
Certain statements set forth in FBR Asset Investment Corporation's Annual Report
on Form 10-K for the year ended December 31, 1999, constitute forward looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and are subject to the safe harbor created by such section. Certain
factors that could cause results to differ materially from those described in
the forward looking statements are enumerated in Item 1. "Business--Factors
Affecting FBR Asset's Business, Operating Results and Financial Condition" and
elsewhere as appropriate. This Annual Report on Form 10-K (including those
items incorporated by reference), including the Consolidated Financial
Statements and the notes thereto, should be read in its entirety for a complete
understanding.
Item 1. Business
FBR Asset's Business
Operating Policies & Strategies
FBR Asset relies upon the professionals employed by Friedman, Billings, Ramsey
Group Inc. ("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
1999, 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 and continuing 1999 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:
. the amount and nature of anticipated cash flows from the asset;
. the risks of investing in the asset;
. FBR Asset's ability to pledge the asset to secure collateralized
borrowings;
. the capital requirements for purchasing and financing the asset;
. the potential for appreciation and depreciation of the asset's value; and
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. 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. FBR Asset
has taken or may take the following actions without the consent of its
stockholders:
. borrowed money;
. made loans to other companies;
. invested in securities of other issuers;
. sold existing investments and made additional investments;
. repurchased or otherwise reacquired FBR Asset's shares; and
. FBR Asset also may issue preferred stock that has liquidation and dividend
preferences over the outstanding common stock or offer securities in
exchange for property, although to date FBR Asset has chosen not to take
those actions
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 equity securities owned by FBR Asset. 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 September
30, 1999, by the companies in which FBR Asset held equity securities on that
date, FBR Asset believes that at September 30, 1999, approximately 57% of FBR
Asset's assets were invested in residential mortgage-backed
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securities, approximately 10% were invested in commercial real estate,
approximately 22% were invested in commercial mortgage loans, approximately 3%
were invested in commercial mortgage-backed securities, and approximately 8% did
not fit into the identified categories.
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 5% were invested in
commercial mortgage loans, approximately 2% were invested in commercial
mortgage-backed securities, approximately 8% were loans made to other companies,
and approximately 8% 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 December 31, 1999, FBR Asset owned mortgage-backed securities guaranteed by
Freddie Mac, Fannie Mae, or Ginnie Mae that had a market value of $236.0
million, and had borrowed $221.7 million to finance its investment in those
securities. As of December 31, 1999, FBR Asset had established an $88 million
face amount short position in 7.00% Ginnie Mae agency mortgage-backed
securities. The short position was established to offset the potential
adverse effects of market price fluctuations in certain mortgage-backed
securities The position is structured and accounted for as a hedge
transaction such that any gains or losses are recognized upon
termination of the position. The fair value of this short position at
December 31, 1999, was $182,188. Anthracite Capital, Inc., one of
the companies in which FBR Asset has invested, also owned similar securities at
December 31, 1998, and December 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
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prepayments may occur at higher or lower interest rates than the original
investment, thus affecting the yield on FBR Asset's investments.
At December 31, 1999, FBR Asset owned 39 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 repurchase agreements, an interest rate swap and a short position. The
mortgage-backed securities, the short position, the swap, and the repurchase
agreements are summarized on the following table.
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<TABLE>
<CAPTION>
Effective Effective
Original Market Nominal Weighted Duration Relevant
Issue Date Face Principal Value at Yield Average Life at Prepayment
Descriptive of Amount Amount 12/31/99 at at 12/31/99 12/31/99 Assumption
Title/(1)/ Securities (thousands) (thousands) (thousands) 12/31/99/(5)/ (years) (years) (% PAM)/(2)/
---------- ---------- ----------- ----------- ----------- ----------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Freddie Mac
FGOLD 15-yr. 04/01/97 $ 64,257 $ 79,334 $ 62,470 7.23% 5.20 3.63 150
Fannie Mae
FNMA 15-yr. 05/01/98 $ 18,924 $ 23,381 $ 18,373 7.20% 5.30 3.69 148
Freddie Mac
FGOLD 30-yr. 05/01/98 $ 2,959 $ 11,850 $ 2,973 7.74% 2.40 1.96 251
Freddie Mac
FGOLD 15-yr. 09/01/95 $ 3,080 $ 7,496 $ 3,055 7.26% 4.10 2.89 174
Fannie Mae
30-yr. 11/01/98 $ 9,412 $ 16,291 $ 9,337 7.71% 3.80 2.92 212
Fannie Mae
30-yr. 05/01/98 $ 9,153 $ 16,868 $ 9,528 7.26% 3.00 2.27 268
Ginnie Mae
30-yr. 05/01/98 $ 12,142 $ 45,874 $ 12,313 7.70% 6.70 3.68 152
Freddie Mac
FGOLD 15-yr. 04/01/97 $ 9,194 $ 10,083 $ 8,554 7.14% 5.70 4.34 123
Fannie Mae
FNMA 30-yr. 09/01/99 $ 44,962 $ 45,094 $ 42,597 7.50% 9.20 5.38 141
Ginnie Mae
30-yr. 09/01/99 $ 32,314 $ 32,720 $ 32,003 7.73% 9.40 4.56 146
Ginnie Mae
30-yr. 11/01/99 $ 10,062 $ 10,068 $ 10,174 7.85% 8.00 3.94 225
Fannie Mae
FNMA 15-yr. 10/01/99 $ 11,249 $ 11,442 $ 11,130 7.24% 5.80 3.68 161
Fannie Mae
FNMA 15-yr. 03/01/98 $ 10,959 $ 15,380 $ 10,420 7.22% 5.70 3.83 132
Fannie Mae
FNMA 15-yr. 10/01/99 $ 3,200 $ 3,269 $ 3,088 7.16% 3.50 2.83 176
----------- ----------- ----------- ---- ---- ---- ---
Mortgage
Portfolio
Total $ 241,867 $ 329,150 $ 236,015 7.32% 5.00 3.54 176
=========== =========== =========== ==== ==== ==== ===
Repurchase
Agreement Liability 12/16/99 - - $ 221,714 5.83% - - -
Interest Rate Swap
Agreement 6/1/98 - $ 50,000/(3)/ (4) - -
</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 then levels 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. Actual prepayments may be
materially different from the prepayment rates assumed in the PAM.
(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 5.96% based in each case on
the $50 million notional amount.
(5) The nominal yield is the internal rate of return of the security based
on the given market price. It is the single discount rate that equates
a security price (inclusive of accrued interest) with its projected
cash flows. For a mortgage product, it represents the yield for a
given yield curve environment based on prepayments for that
environment.
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As the table above shows, the average nominal yield (as defined in footnote
5 above) on FBR Asset's mortgage-backed securities at December 31, 1999,
was approximately 7.32%. 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 preceding table 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
October 1999 to January 1999 to
Face Amount December 1999 December 1999
Mortgage-Backed Securities (in thousands) (% PAM) (% PAM)
---------------------------- -------------- --------------- ---------------
<S> <C> <C> <C>
Freddie Mac FGOLD 15-yr. 6.5% $ 64,257 188 311
Fannie Mae 15-yr. 6.5% 18,924 166 276
Freddie Mac FGOLD 15-yr. 7.0% 3,080 183 310
Freddie Mac FGOLD 30-yr. 8.0% 2,959 188 226
Fannie Mae 30-yr. 7.5% 9,412 261 366
Fannie Mae 30-yr. 9.0% 9,153 351 390
Ginnie Mae 30-yr. 7.95% 12,142 215 268
Freddie Mac FGOLD 15-yr. 5.5% 9,194 131 172
Fannie Mae 30-yr. 6.5% 44,962 185 245
Ginnie Mae 30-yr. 7.5% 32,314 263 740
Ginnie Mae 30-yr. 8.0% 10,062 263 740
Fannie Mae 15-yr. 7.0% 11,249 335 226
Fannie Mae 15-yr. 6.0% 10,959 107 167
Fannie Mae 15-yr. 6.0% 3,200 128 185
--------------
Total $ 241,867
==============
</TABLE>
Freddie Mac Certificates
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 principle 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.
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Fannie Mae Certificates
Federal National Mortgage Association, better known as "Fannie Mae," is a
privately owned, federally chartered corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae provides
funds to the mortgage market primarily by purchasing home mortgage loans from
local lenders, thereby replenishing their funds for additional lending. Fannie
Mae guarantees to registered holders of Fannie Mae certificates, such as FBR
Asset, that it will distribute amounts representing scheduled principal and
interest (at the rate provided by the Fannie Mae certificate) on the mortgage
loans in the pool underlying the Fannie Mae certificate, whether or not
received, and the full principal amount of any mortgage loan foreclosed or
otherwise finally liquidated, whether or not the principal amount is actually
received. The obligations of Fannie Mae under its guarantees are solely those
of Fannie Mae and are not backed by the full faith and credit of the United
States. If Fannie Mae were unable to satisfy its obligations, distributions to
FBR Asset would consist solely of payments and other recoveries on the
underlying mortgage loans, and accordingly, monthly distributions to FBR Asset
would be adversely affected by delinquent payments and defaults on the mortgage
loans.
Ginnie Mae Certificates
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
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mortgaged properties in amounts that exceed the equity holder's equity interest
in the property and result in realized losses. Forms of credit enhancements
include, but are not limited to, limited issuer guarantees, reserve funds,
private mortgage guaranty pool insurance, over-collateralization, and
subordination.
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 and had not invested in the mortgage-backed
securities. 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 December 31, 1999, on FBR Asset's mortgage-backed securities
portfolio was 16 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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<TABLE>
<CAPTION>
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Example 1 Example 2
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<S> <C> <C>
1. Amount invested in mortgage-backed
security.......................................... $10,000,000 $10,000,000
2. Annual interest rate on mortgage-backed
security.......................................... 7.25% 7.25%
3. Income from mortgage-backed security
(1 x 2)*.......................................... $ 725,000 $ 725,000
4. Amount borrowed to finance investment in
mortgage-backed security.......................... $ 8,000,000 $ 5,000,000
5. Interest rate on amount borrowed.................. 5.50% 5.50%
6. Interest expense (4 x 5)*......................... $ 440,000 $ 275,000
7. Equity capital invested (1 - 4)*.................. $ 2,000,000 $ 5,000,000
8. Management fee (0.25% x $10,000,000).............. $ 25,000 $ 25,000
9. Hedging expense (4 x 1%)*......................... $ 80,000 $ 50,000
10. Total expenses (6 + 8 + 9)*....................... $ 545,000 $ 350,000
11. Net income on mortgage-backed security
(3-10)*........................................... $ 180,000 $ 375,000
12. Return on equity capital invested
(11 + 7)*......................................... 9.00% 7.50%
-------------------------------------------------------------------------------------------------------
</TABLE>
* 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 invested 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
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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.
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:
. puts and calls on securities or indices of securities;
. Eurodollar futures contracts and options on such contracts;
. interest rate swaps, which are the exchange of fixed-rate payments for
floating-rate payments; or
. other similar transactions.
FBR Asset may also use these techniques to attempt to protect itself against
declines in the market value of its assets that result from general trends in
debt markets. The inability to match closely the maturities and interest rates,
or the inability to protect adequately against declines in the market values,
could result in losses with respect to FBR Asset's mortgage assets.
At December 31, 1999, FBR Asset was indebted for $221.7 million under
short-term repurchase agreements. These agreements expire and are renewed on
a regular basis. As of December 31, 1999, all of the repurchase agreements,
except one, held by FBR Asset had a stated maturity date of February 14, 2000.
The remaining repurchase agreement had a stated maturity date of February 7,
2000. 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 7.32%, which is the average
nominal yield (as defined in footnote 5 on page 5) of FBR Asset's mortgage
portfolio as of December 31, 1999, the interest owed on the borrowings would
exceed the interest income payable to FBR Asset on its mortgage-backed
securities.
To offset the potential adverse effects of market price fluctuations in certain
mortgage-backed securities, FBR Asset established an $88 million face amount
short position in 7.00% Fannie Mae 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 and repaid
the related repurchase agreement. The remaining $50,000,000 agreement matures
on June 1, 2001.
10
<PAGE>
Interest rate management techniques do not eliminate risk. For example, if both
long-term and short-term interest rates were to increase significantly, it could
be expected that:
. the weighted average life of the mortgage-backed securities would be
extended because prepayments of the underlying mortgage loans would
decrease; and
. 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 FBR
Asset 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 ("Capital Automotive"), and to a lesser extent
through its equity investments in Prime Retail, Inc. ("Prime Retail"), Resource
Asset Investment Trust ("Resource"), and Imperial Credit Commercial Mortgage
Investment Corp. ("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
also loaned Prime Retail $40 million, $20 million of which was repaid in
September 1999.
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:
. 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.
. 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.
. 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.
. Upon expiration or termination of the lease, the lease generally provides
that additions, repairs, renovations and improvements become the property
of Capital Automotive.
. 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.
11
<PAGE>
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.
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 December 31, 1999, FBR Asset owned
interests in commercial loans and CMBS indirectly through its investments in
Anthracite Capital, Inc.("Anthracite"), Imperial Credit Commercial Mortgage
Investment Corporation, Prime Capital and Resource Asset Investment Trust.
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 before or while the company offered its stock to the public.
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. Prime Capital originates
first and mezzanine commercial loans.
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 owns 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 to provide interim financing before a property is
sold or the loan refinanced, and loans made to facilitate construction of new
commercial properties.
12
<PAGE>
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 December 31, 1999, FBR Asset owned
interests in CMBS through its equity ownership of Anthracite and Imperial
Credit. 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.
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.
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 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 makes and invests in real estate-based loans. In 1998, FBR
Asset made a loan of $11.5 million to Prime Capital Holding, LLC and Prime
Capital Funding, Inc. (together, "Prime Capital"), which was repaid in full by
November 1999. FBR Asset subsequently loaned Prime Capital an
13
<PAGE>
additional $7 million, which is currently outstanding. The note accrues interest
at an annualized rate of 17% and is due on March 31, 2000. Prime Capital has
requested an extension. The note is secured by 100% equity interests in
subsidiaries of Prime Capital which own commercial mortgage loans subject to
"warehouse" indebtedness. Since December 31, 1998, FBR Asset invested $5.0
million in loans to Brookdale Living Communities and $7.0 million in loans to
Prime Group Realty Trust, both of which have been repaid. As of December 31,
1999, FBR Asset held a $20 million note of Prime Retail, L.P. ("Prime Retail")
with an interest rate of 15% per annum and matures on June 30, 2000, subject to
automatic extension to December 31, 2000, in the absence of a default. The loan
is secured by equity interest in five subsidiaries of Prime Retail, L.P., which
subsidiaries own commercial real estate subject to mortgage debt. Each of these
loans provides debt financing for capital needs not covered by traditional
secured and senior loans and available equity. FBR Asset seeks to receive
origination fees and to charge interest rates that are appropriate for this type
of lending under prevailing market conditions. 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.
14
<PAGE>
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of December 31,
1998, and December 31, 1999.
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------
Amount Percentage
Shares Percent of Market Increase
Owned Ownership/(6)/ Investment Value (Decrease)
---------- -------------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-Backed Securities N/A N/A $160,705,240 $161,418,739 0.44%
------------ ------------
Equity Investments/(1)(2)/
Anthracite Capital, Inc.
(AHR) 1,581,846 7.53% $ 18,334,496 $ 12,358,170 (32.60%)
Capital Automotive REIT
(CARS) 1,792,115 7.23% 25,000,000 26,657,711 6.63%
Chastain Capital Corporation
(CHAS) 700,000 9.53% 9,765,000 3,150,000 (67.74%)
Imperial Credit Commercial
Mortgage Inv. Corp.
(ICMI) 900,000 3.16% 13,050,230 8,437,500 (35.35%)
Prime Retail, Inc. (PRT) 123,500 0.29% 1,201,317 1,211,844 0.88%
Prime Retail, Inc., pfd
(PRT pfd) 78,400 1.00% - - -
Resource Asset Investment
Trust (RAS) 344,575 5.59% 5,292,516 3,790,325 (28.38%)
Building One Services
Corporation (BOSS) 202,659 0.75% 10,000,000 10,437,500 4.38%
East-West Bancorp, Inc.
(EWBC) 520,000 1.31% 5,200,000 4,940,000 (5.00%)
------------ ------------ ------
Total Equity Investments $ 87,843,559 $ 70,983,050 (19.20%)
------------ ------------ ------
Promissory Notes/(2)/
Prime Capital Holding,
LLC/(3)/ N/A N/A $ 12,504,334 $ 12,504,334 N/A
Prime Retail, Inc. N/A N/A - - N/A
Kennedy-Wilson, Inc./(4)/ N/A N/A 7,525,479 7,525,479 N/A
------------ ------------
Total Promissory Notes $ 20,029,813 $ 20,029,813 N/A
------------ ------------
Cash and Cash Equivalents N/A N/A $ 41,144,326 $ 41,144,326 N/A
------------ ------------
Total Investments & Cash
and Cash Equivalents $309,722,938 $293,575,928 (5.21%)
============ ============ ======
<CAPTION>
As of December 31, 1999
-------------------------------------------
Amount Percentage
of Market Increase
Investment Value (Decrease)/(5)/
---------- ----- ---------------
<S> <C> <C> <C>
Mortgage-Backed Securities $241,684,039 $236,014,844 (2.35%)
------------ ------------
Equity Investments/(1)(2)/
Anthracite Capital, Inc.
(AHR) 10,084,268 $ 10,084,268 0.00%
Capital Automotive REIT
(CARS) 25,000,000 21,841,402 (12.63%)
Chastain Capital Corporation
(CHAS) - - -
Imperial Credit Commercial
Mortgage Inv. Corp.
(ICMI) 10,413,000 10,237,500 (1.69%)
Prime Retail, Inc. (PRT) 1,201,317 694,688 (42.17%)
Prime Retail, Inc., pfd
(PRT pfd) 1,454,320 1,151,696 (20.81%)
Resource Asset Investment
Trust (RAS) 5,292,516 3,725,717 (29.60%)
Building One Services
Corporation (BOSS) 4,053,180 1,912,594 (52.81%)
East-West Bancorp, Inc.
(EWBC) - - -
------------ ------------ ------
Total Equity Investments $ 57,498,601 $ 49,647,865 (13.65%)
Promissory Notes/(2)/
Prime Capital Holding,
LLC/(3 $ 7,000,000 $ 7,000,000 N/A
Prime Retail, Inc. 20,000,000 20,000,000 N/A
Kennedy-Wilson, Inc./(4)/ - - N/A
------------ ------------
Total Promissory Notes $ 27,000,000 $ 27,000,000 N/A
------------ ------------
Cash and Cash Equivalents $ 13,417,467 $ 13,417,467 N/A
------------ ------------
Total Investments & Cash
and Cash Equivalents $339,600,107 $326,080,176 (3.98%)
============ ============ ======
</TABLE>
________________
(1) The symbols in parentheses next to the company names are the symbols of
those companies on Nasdaq or a national securities exchange. Each of these
companies is a reporting company under the Securities Exchange Act of 1934.
Information is available about these companies on the SEC's website,
www.sec.gov.
(2) FBR has underwritten or privately placed the securities of these companies
or their affiliates.
(3) Includes principal of $11,557,442 as of December 31, 1998, and $7,000,000
as of December 31, 1999, and accrued interest receivable of $946,892 as of
December 31, 1998.
(4) Includes principal of $7,500,000 and accrued interest receivable of $25,479
as of December 31, 1998.
(5) The amount by which the market value at December 31, 1999, differs from the
amount of FBR Asset's original investment.
(6) As of September 30, 1999.
The following table shows, for the calendar years 1998 and 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 December 31, 1999, on which FBR Asset held each investment,
and the gross income from each investment for the years ended December 31,
1998 and 1999.
15
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1998 December 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 $164,970,427 $10,744,041
------------ - --------- ------------ -----------
Equity Investments
Anthracite Capital, Inc. $ 10,356,129 $ 739,613 $ 18,334,496 $ 2,293,677
Capital Automotive REIT 21,986,301 1,569,893 25,000,000 2,473,119
Chastain Capital Corporation 6,581,342 287,000 3,150,000 -
Imperial Credit Commercial
Mortgage Inv. Corp. 13,050,230 1,062,000 12,616,713 1,035,000
Imperial Credit Industries, Inc. - - 3,576,712 798,326
Prime Retail, Inc. 374,166 36,433 1,201,317 145,730
Prime Retail, Inc., preferred - - 1,016,032 154,350
Resource Asset Investment Trust 4,329,152 576,466 5,292,516 702,933
Building One Services Corporation 10,000,000 - 6,187,518 -
East-West Bancorp, Inc. 2,621,370 - 4,102,329 46,800
------------ ----------- ------------ -----------
Total Equity Investments &
Dividends $ 69,298,690 $ 4,271,405 $ 80,477,633 $ 7,649,935
------------ ----------- ------------ -----------
Promissory Notes
Prime Capital Holding, LLC $ 7,947,365 $ 1,248,707 $ 11,272,154 $ 1,808,451
Prime Group Realty, Inc. - - 3,049,315 494,742
Prime Retail, Inc. - - 5,095,890 1,055,555
Kennedy-Wilson Inc. 5,506,849 749,264 3,510,608 511,411
Brookdale Living Communities - - 1,493,151 224,727
------------ ----------- ------------ -----------
Total Promissory Notes $ 13,454,214 $ 1,997,971 $ 24,421,118 $ 4,094,886
------------ ----------- ------------ -----------
Cash & Cash Equivalents $ 84,496,947 $ 4,556,800 $ 20,576,171 $ 984,987
------------ ----------- ------------ -----------
Total Investments and
Cash & Cash Equivalents $336,814,783 $17,927,502 $290,445,349 $23,473,849
============ =========== ============ ===========
</TABLE>
Item 2. Properties
FBR Asset occupies a portion of the office space in the headquarters building of
Friedman, Billings, Ramsey Group, Inc. in Arlington, Virginia. FBR Asset
believes that its present facilities are adequate for its current and presently
projected needs.
Item 3. Legal Proceedings
FBR Asset is not currently a defendant or plaintiff in any material lawsuits or
arbitrations.
If plaintiffs in any future suits against FBR Asset were to prosecute their
claims successfully, or if FBR Asset were to settle such suits by making
significant payments to the plaintiffs, FBR Asset's operating results and
financial condition could be materially and adversely affected. FBR Asset
carries very limited insurance that may cover only a portion of any such
payments.
In addition to these financial costs and risks, the defense of litigation or
arbitration may divert the efforts and attention of FBR Asset's management and
staff, and FBR Asset may incur significant legal expenses in defending such
litigation or arbitration. This may be the case even with respect to claims and
litigation that management believes to be frivolous, and FBR Asset intends to
defend vigorously any
16
<PAGE>
frivolous claims against it. The amount of time that management and other
employees may be required to devote in connection with the defense of litigation
could be substantial and might materially divert their attention from other
responsibilities within FBR Asset.
In addition, FBR Asset's charter documents allow indemnification of FBR Asset's
officers, directors and agents to the maximum extent permitted under Virginia
law. FBR Asset has been and in the future may be the subject of indemnification
assertions under these charter documents by officers, directors or agents of FBR
Asset who are or may become defendants in litigation.
Item 4. Submission Of Matters To Vote Of Security Holders
None.
Item 5. Market For Registrant's Common Equity And Related Stockholder Matters
The principal market for trading FBR Asset's common stock is the American Stock
Exchange. The effective date of FBR Asset's initial public offering was
September 27, 1999. The high sale price of FBR Asset's common stock for the
year ended December 31, 1999, was $15.00, and the low sale price of FBR Asset's
common stock for the year ended December 31, 1999, was $10.75.
According to the records of FBR Asset's transfer agent, FBR Asset had
approximately 5.8 million shares outstanding as of December 31, 1999.
Because many shares are held by brokers and other institutions on behalf of
shareholders, FBR Asset is unable to estimate the total number of beneficial
shareholders represented by these record holders.
FBR Asset repurchased 2,737,191 shares of its common stock in 1999 at an average
price of $13.57 per share and has repurchased an additional 709,109 shares of
its common stock from January 1, 2000 through March 24, 2000, at an average
price of $12.10 per share.
Dividends & Distribution Policy
To maintain its status as a REIT for federal income tax purposes, FBR Asset is
required to distribute substantially all of 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:
. the taxable income of FBR Asset;
. the financial condition of FBR Asset;
. the distributions required to maintain REIT status and to avoid corporate
income tax and the 4% excise tax; and
. other factors that the Board of Directors considers relevant.
To date, FBR Asset has declared the following dividends:
17
<PAGE>
<TABLE>
<CAPTION>
For the Period Total Per Share
- -------------------------- -------------------- ---------------
<S> <C>
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
04/01/99 - 06/30/99 2,702,498 0.380
07/01/99 - 09/30/99 2,844,734 0.400
10/01/99 - 12/31/99/(4)/ 2,891,368 0.500
01/01/99 - 12/31/99/(5)/ 1,355,182 0.250
-------------------- ---------------
$24,196,389 $3.0650
==================== ===============
</TABLE>
__________________
(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.
(4) Dividend declared December 15, 1999, and paid on January 15, 2000, to
shareholders of record as of December 31, 1999.
(5) Includes special dividend declared January 31, 2000, and payable February
25, 2000, to holders of record as of February 11, 2000.
Through December 31, 1999, FBR Asset had paid substantially all of its dividends
to date out of current or accumulated earnings and profits; only 10% of those
dividends were 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.
18
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
December 15, 1997
(Inception) through For the Year Ended
December 31, December 31,
----------------------------
1997 1998 1999
------------------- ----------- -----------
<S> <C> <C> <C>
Statement of Operations Data:
Interest income....................................... $ 18,040 $13,656,097 $15,823,914
Dividend income....................................... 434,717 4,271,405 7,649,935
Other income.......................................... 268,520 - -
Interest expense...................................... - 5,359,633 7,920,648
Management Fee expense................................ 58,623 1,520,725 1,329,063
Other expense......................................... 15,733 1,089,102 1,432,589
Net realized losses................................... - (8,369,807) (7,648,960)
Net income............................................ 646,921 1,588,235 5,142,589
Basic and diluted income per share.................... $ 0.06 $ 0.16 $ 0.68
Dividends declared per share/(1)/..................... $ 0.05 $ 1.16 $ 1.61
Weighted average basic and diluted shares............. 10,218,999 10,044,483 7,523,715
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Selected Balance Sheet Data:
Mortgage-backed securities, at fair value............... $ - $161,418,739 $236,014,844
Cash and cash equivalents............................... 163,223,199 41,144,326 13,417,467
Investments in equity securities, at fair value......... 23,318,750 70,983,050 49,647,865
Notes receivable........................................ - 19,082,921 27,000,000
Total assets............................................ 190,538,402 295,930,620 330,180,460
Repurchase agreements................................... - 128,550,000 221,714,000
Total liabilities....................................... 771,573 145,026,041 225,637,739
Accumulated other comprehensive loss/(2)/............... - (9,800,530) (12,982,359)
Shareholders' equity.................................... 189,766,829 150,904,579 104,542,721
Book value per share.................................... $18.57 $17.66 $18.00
Common shares issued and outstanding/(3)/............... 10,218,999 8,543,527 5,806,336
</TABLE>
<TABLE>
<CAPTION>
December 15, 1997
(Inception) through For the Year Ended
December 31, December 31,
------------------------------
1997 1998 1999
------------------- ------------- -------------
<S> <C> <C> <C>
Other Selected Data
Weighted average daily borrowings....................... $ - $ 144,793,891 $ 143,231,112
Average equity.......................................... 189,766,829 182,750,145 130,269,059
</TABLE>
___________________
(1) Dividends are calculated and declared based on estimates of FBR Asset's
taxable income.
(2) Accumulated other comprehensive loss includes unrealized net gain on
mortgage-backed securities of $713,499 as of December 31, 1998, unrealized
net loss on mortgage-backed securities of $4,863,103 as of December 31,
1999, and unrealized net loss on investments in equity securities of
$10,514,029 as of December 31, 1998, and $8,119,256 as of December 31,
1999.
(3) Reflects 1,872,300 and 4,609,491 shares of treasury stock repurchased as of
December 31, 1998, and December 31, 1999, respectively.
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations Overview
FBR Asset targets investments in real estate assets and real estate-related
companies. FBR Asset has invested, and intends to continue investing in, whole-
pool mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae, mortgage loans, mortgage-backed securities, real property, and
joint ventures formed to own real property. FBR Asset invests in some of these
assets indirectly through its investments in and loans made to REITs and other
companies.
As of December 31, 1999, FBR Asset had:
. mortgage-backed securities totaling $236.0 million, which were financed
with repurchase agreements totaling $221.7 million;
19
<PAGE>
. investments in equity and debt securities of 7 companies with an original
total cost basis of $57.5 million and a total market value of $49.6
million; and
. loans to 2 companies totaling $27 million.
A summary of FBR Asset's current investments, cash and cash equivalents is set
forth at the end of this discussion.
Results of Operations
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 years
ended December 31, 1998 and 1999.
Net Income
Year Ended December 31, 1999 and Year Ended December 31, 1998
FBR Asset's sources of income since inception have been (i) quarterly dividend
earnings on its REIT holdings, (ii) interest earnings on its mortgage-backed
securities, notes receivable, and cash and cash equivalents and (iii) gains on
the sale of mortgage-backed securities and equity investments. FBR Asset's
primary sources of interest income to date have been its investments in fixed-
rate mortgage-backed securities and outstanding loans. Interest income is
recorded based on contractual rates of interest and amortization of any premium
or discount associated with the original purchase. The amount of future
contractual interest income received may be adversely affected in the event of
prepayments or defaults on notes payable on mortgage loans underlying the
mortgage-backed securities. Generally, 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 year ended December 31, 1999, was $5.1 million, or $0.68 per
share. This is an increase of 219% over net income of $1.6 million for the year
ended December 31, 1998, which was $0.16 per share. 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 year ended December 31,
1999, was $15.8 million compared to $13.7 million for the year ended December
31, 1998. This represents an increase of 15.3%. FBR Asset did not begin
investing in mortgage-backed securities until the second quarter of 1998.
For the year ended December 31, 1999, the weighted average annual yield on FBR
Asset's mortgage-backed securities was 6.51%. As of December 31, 1999, FBR
Asset had investments in 39 mortgage-backed securities.
For the year ended December 31, 1998, the weighted average annual yield on FBR
Asset's mortgage-backed securities was 6.19%. As of December 31, 1998, FBR
Asset had investments in 33 mortgage-backed securities.
For the year ended December 31, 1999, based on interest and dividend income
accrued on, and the weighted average carrying value of, equity securities and
promissory notes, the weighted average annual yield on FBR Asset's equity
securities and promissory notes was 11.20%, compared to 7.90% for the
20
<PAGE>
year ended December 31, 1998. The increase reflects the increase in investment
of cash in higher yielding promissory notes and the increase in the number of
dividend-paying equity securities.
Dividend income for the year ended December 31, 1999, was $7.6 million, compared
to $4.3 million for the year ended December 31, 1998. The increase is due to
increased investments by FBR Asset in REIT securities that pay dividends.
FBR Asset did not begin to leverage its mortgage portfolio until May 1998. FBR
Asset anticipates that its cost of borrowed funds will continue to comprise the
largest portion of its total expenses in future periods.
FBR Asset incurred interest expense of $7.9 million for the year ended December
31, 1999. This represents 74.1% of the total expenses for the period. FBR
Asset incurred interest expense of $5.4 million for the year ended December
31,1998. This represents 67.3% of the total expenses for the year.
Management fees for the year ended December 31, 1999, were $1.3 million compared
to $1.5 million for the year ended December 31, 1998. The decrease is due to an
increase in FBR Asset's investment in mortgage-backed securities in 1999, and a
corresponding reduction in FBR Asset's cash account. The management fee FBR
Asset pays is greater for cash than for mortgage-backed securities.
Professional fees consist primarily of legal and accounting fees. Professional
fees were $755,561 for the year ended December 31, 1999, and $436,885 for the
year ended December 31, 1998. The increased fees are attributable to legal and
audit fees related to the recent registration statement of FBR Asset's stock and
to costs associated with the acquisition of assets.
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 years ended December 31, 1998 and 1999. Information is based on daily
average balances during the period.
<TABLE>
<CAPTION>
Year Ended December 31, 1999
Weighted
Weighted Average
Interest/Dividend Average Annual
Income Balance Yield
----------------- ------------ --------
<S> <C> <C> <C>
Mortgage securities available for sale $ 10,744,041 $164,970,427 6.51%
Investment in equity securities and
promissory notes/(1)(2) 11,744,821 104,898,751 11.20%
Cash and cash equivalents 984,987 20,576,171 4.79%
----------------- ------------ --------
Total $ 23,473,849 $290,445,349 8.08%
================= ============ ========
</TABLE>
21
<PAGE>
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ ----------
<S> <C> <C> <C>
Mortgage securities available for sale $ 7,101,326 $169,564,932 6.19%
Investment in equity securities and
promissory notes/(1)(2) 6,269,376 82,752,904 7.90%
Cash and cash equivalents 4,556,800 84,496,947 5.39%
----------------- ------------ ----------
Total $ 17,927,502 $336,814,783 6.41%
================= ============ ==========
</TABLE>
____________________
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital, Prime Retail, Kennedy-Wilson and Brookdale. 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.
Interest Expense
The following table sets forth information regarding the total amount of
interest expense from repurchase agreements, including the net amount payable
under the interest rate swap agreement and the resultant average yields.
Information is based on daily average balances during the reported periods.
<TABLE>
<CAPTION>
Weighted Weighted
Interest Average Average
Expense Balance Expense
---------- ----------------- --------
<S> <C> <C> <C>
Year Ended
December 31, 1999 $7,920,648 $143,231,112/(1)/ 5.53%
Year Ended
December 31, 1998 $5,359,633 $144,793,891/(2)/ 5.82%
</TABLE>
________________
(1) At December 31, 1999, FBR Asset had $221,714,000 outstanding under
repurchase agreements, with a weighted-average remaining maturity of 45
days.
(2) At December 31, 1998, FBR Asset had $128,550,000 outstanding under
repurchase agreements, with a weighted-average remaining maturity of 73
days. FBR Asset began its repurchase agreement program on May 13, 1998.
Changes in Financial Condition
Mortgage-Backed Securities Available-for-Sale
FBR Asset invests in mortgage-backed securities that are agency pass-through
securities representing a 100% interest in the underlying conforming mortgage
loans. Conforming loans comply with the underwriting requirements for purchase
by Fannie Mae, Freddie Mac, and Ginnie Mae. These securities bear little risk
of credit loss due to defaults because they are guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac.
FBR Asset held mortgage-backed securities of $236.0 million as of December 31,
1999. FBR Asset held mortgage-backed securities of $161.4 million on December
31, 1998. As of December 31, 1999, FBR Asset had established an $88 million
face amount short position in 7.00% Fannie Mae mortgage-backed securities.
Premium and discount balances associated with the purchase of mortgage-backed
securities are amortized as a decrease or increase in interest income over the
life of the security. At December 31, 1999, the amount of unamortized discount,
net of premiums, recorded in FBR Asset's statement of
22
<PAGE>
financial condition was $1,213. At December 31, 1998, the amount of unamortized
premiums, 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 increase, as FBR Asset would be required to amortize its net
discount 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
decrease, as FBR Asset would be required to amortize its net discount balance
over a longer time period.
FBR Asset received mortgage principal repayments equal to $30.4 million for the
year ended December 31, 1999. FBR Asset received mortgage principal repayments
equal to $21.2 million for the year ended December 31, 1998.
At December 31, 1999, $8.1 million of net unrealized losses on equity securities
and $4.9 million of net unrealized losses on mortgage-backed securities were
included in FBR Asset's statement of financial condition as accumulated other
comprehensive loss. At December 31, 1998, $10.5 million of net unrealized
losses on equity securities and $0.7 million of net unrealized gains on
mortgage-backed securities were included in FBR Asset's statement of financial
condition as accumulated other comprehensive loss. See "Stockholders' Equity"
elsewhere in "Management's Discussion and Analysis" and Note 3 of Notes to
Financial Statements for further discussion.
Repurchase Agreements
To date, FBR Asset's debt has consisted mainly of borrowings collateralized by a
pledge of most of FBR Asset's mortgage-backed securities. FBR Asset has
obtained, and believes it will be able to continue to obtain, short-term
financing in amounts and at interest rates consistent with FBR Asset's financing
objectives.
FBR Asset had $221.7 million outstanding under repurchase agreements with
several financial institutions on December 31, 1999. FBR Asset had $128.6
million outstanding under repurchase agreements on December 31, 1998. At
December 31, 1999, the ratio of FBR Asset's repurchase agreement to
shareholder's equity was 2 to 1.
At December 31, 1999, the term to maturity of FBR Asset's borrowings had been
limited to 60 days with a weighted average remaining maturity of 45 days and a
weighted average cost of funds on outstanding borrowings of 5.83%.
At December 31, 1998, the term to maturity of FBR Asset's borrowings had been
limited to 92 days with a weighted average remaining maturity of 73 days and a
weighted average cost of funds on outstanding borrowings of 5.08%.
Short Sales
FBR Asset has established a short position to offset the potential adverse
effects of market price fluctuations in certain of its mortgage-backed
securities. The positions are structured and accounted for
23
<PAGE>
as hedge transactions such that any gains or losses will be recognized upon
termination of the position. FBR Asset's unrealized gains or losses on its
position are recorded as an asset or liability with a corresponding increase or
decrease included in comprehensive income. At December 31, 1999, FBR Asset had
established an $88 million face amount short position in 7.00% Fannie Mae
mortgage-backed securities. The fair value of this short position at
December 31, 1999, was $182,188.
Contractual Commitments
FBR Asset is a party to an interest rate swap agreement to offset the potential
adverse effects of rising interest rates under some of its short-term repurchase
agreements. That agreement is with Salomon Brothers Holding Company Inc.
("Salomon"). Salomon Smith Barney Holdings, Inc., the parent company of Salomon
Brothers Holding Company 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
December 31, 1999, the interest rate payable to FBR Asset by Salomon was 6.12%.
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 December 31, 1999, and December 31, 1998, $500,000 million
of collateral was required under the interest rate swap agreement.
Capital Resources and Liquidity
Liquidity is a measurement of FBR Asset's ability to meet potential cash
requirements including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities, and for other general
business purposes. The primary sources of funds for liquidity consist of
repurchase agreements and maturities, distributions or principal payments on
mortgage-backed and equity securities, and proceeds from sales of those
securities. To date, proceeds from the issuance of common stock and repurchase
agreements have provided FBR Asset with sufficient funding for its investment
needs. Potential future sources of liquidity for FBR Asset include existing
cash balances, borrowing capacity through margin accounts, and future issuances
of common, preferred stock or debt. FBR Asset believes that its existing cash
balances, borrowing capacity through margin accounts and borrowing capacity
under collateralized repurchase agreements will be sufficient to meet its
investment objectives, fund operating expenses for at least the next twelve
months and repurchase shares of FBR Asset common stock. FBR Asset may, however,
seek debt or equity financings, in public or private transactions, to provide
capital for corporate purposes and/or strategic business opportunities. There
can be no assurance that FBR Asset will be able to generate sufficient funds
from future operations, or raise sufficient debt or equity on acceptable terms,
to take advantage of investment opportunities that become available. Should FBR
Asset's needs ever exceed these sources of liquidity, management believes FBR
Asset's mortgage-backed securities could be sold, in most circumstances, to
provide cash.
For the year ended December 31, 1999, FBR Asset's operating activities resulted
in net cash flows of $9.7 million. The primary source of operating cash flow
was interest on mortgage-backed securities,
24
<PAGE>
interest on notes receivable and dividends from REIT investments. For the year
ended December 31, 1998, FBR Asset's operating activities provided net cash
flows of $11.2 million.
For the year ended December 31, 1999, FBR Asset's investing activities resulted
in net cash used of $82.6 million compared to net cash used for the year ended
December 31, 1998 of $232.3 million. The decrease is primarily attributable to
the decrease in purchases of equity and mortgage-backed securities.
For the year ended December 31 1999, net cash provided by FBR Asset's financing
activities was $45.2 million compared to net cash provided by financing
activities for the year ended December 31, 1998, of $99.0 million. The decrease
in cash provided from financing activities is primarily attributable to the
decrease in net proceeds from repurchase agreements.
Shareholders' Equity
FBR Asset accounts for its investments in mortgage-backed securities and other
equity instruments in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS 115, FBR Asset has classified these investments
as "available-for-sale." Securities classified as available for sale are
reported at fair value, with temporary unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity as
accumulated other comprehensive income.
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. As of December 31, 1999, the value of the equity
securities in FBR Asset's portfolio had declined from $57.5 million as of the
date the investments were made to $49.6 million. Declines have been recorded as
accumulated other comprehensive income in the statement of financial condition,
except that for the year ended December 31, 1998, FBR Asset recognized and
charged to income a loss of $6.6 million on its investment in Chastain Capital
Corporation. In 1999, FBR Asset realized and charged to income losses of $10.9
million on its investments in Imperial Credit Commercial Mortgage Investment
Corp. and Anthracite Capital Corp. See Note 6 of "Notes to Financial
Statements--Equity Investments"
For the year ended December 31, 1998, FBR Asset recorded a charge to reflect the
decline in value of its investment in Chastain Capital Corporation, which FBR
Asset determined was other than temporary. That determination resulted, in
substantial part, from Chastain Capital Corporation's announcement that it was
suspending its dividend for the fourth quarter of 1998. As of December 31,
1998, the value of the equity securities in FBR Asset's portfolio had declined
from $87.8 million from the date the investments were made to $71.0 million.
With respect to each of FBR Asset's other equity investments, management
believes that, as of December 31, 1999, their decline in fair value was
temporary. That belief is based on several facts, including the following:
25
<PAGE>
. None of the REITs, except for Chastain Capital Corporation and Prime
Retail, Inc., has suspended its dividends.
. Almost all of the equity securities have increased in fair value since
the worst of the liquidity crisis in September 1998.
. Each of the REIT securities owned has experienced pricing movements
similar to the Morgan Stanley REIT Index for the past year. This
similar movement suggests that the entire industry has declined and
not just one specific company.
. The sharpest movements within the REIT sector track similar declines
and subsequent increases in the Dow Jones Index (serving as a leading
indicator by several weeks) and the Russell 2000 Index.
Based on these factors, FBR Asset believes that the declines are not persistent
declines in market value, but rather reflect general market and REIT sector
pricing movements, and are therefore temporary changes. Further, FBR Asset has
the intent and ability to hold each of its investments to allow for the
anticipated recovery in stock prices. There can be no assurance, however, that
other charges will not be required in future periods.
As a result of "mark-to-market" accounting treatment, the book value and book
value per share of FBR Asset are likely to fluctuate far more than those of
companies who do not make investments in marketable and non-marketable debt and
equity securities. As a result, comparisons with these companies may not be
meaningful.
In June 1998, FBR Asset's Board of Directors authorized a program to repurchase
up to 2,000,000 shares of FBR Asset's common stock. On March 30, 1999, FBR
Asset's Board authorized the repurchase of up to 2,000,000 additional shares of
FBR Asset's common stock. On December 16, 1999, FBR Asset's Board authorized
the purchase of up to 1,500,000 additional shares of FBR Asset's common stock.
Between June 1998 and December 1999, FBR Asset repurchased 4,609,491 shares of
its common stock at an average price of $13.28 per share. Between December 31,
1999, and March 24, 2000, FBR Asset repurchased an additional 709,109 shares of
its common stock at an average price of $12.10 per share. On March 16, 2000,
FBR Asset's Board authorized the purchase of up to 1,000,000 additional shares
of FBR Asset's common stock.
Year 2000 Compliance
FBR Asset has dedicated resources over the past several years to address the
potential hardware, software, and other computer and technology issues and
related concerns associated with the transition to the Year 2000 and to confirm
that our service providers, BlackRock Financial Management, Inc. and Fixed
Income Discount Advisory Company, Inc. in particular, took similar measures. As
a result of those efforts, we have not experienced any material disruptions in
our operations in connection with, or following, the transition to the Year
2000. FBR Management and FBR have represented to FBR Asset that the total cost
to complete the Year 2000 compliance efforts is estimated to have been less then
$350,000.
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
26
<PAGE>
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 FBR Asset 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. FBR Asset finances its investment in mortgage-backed
securities through repurchase agreements. If short-term interest rates
increase, FBR Asset's profit margin in mortgage-backed securities will decrease.
Also, FBR Asset's ability to sell mortgage-backed securities to retire
repurchase agreement indebtedness may be restricted by its need to comply with
certain tax provisions applicable to REITs.
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 FBR Asset
receives or makes a payment based on the fair value of the swap agreement.
The table that follows shows the expected change in market value for FBR Asset's
current mortgage-backed securities and interest rate swaps under several
interest rate "shocks." Interest rates are defined by the U.S. Treasury yield
curve. The changes in rates are assumed to occur instantaneously. It is
further assumed that the changes in rates occur uniformly across the yield curve
and that the level of LIBOR changes by the same amount as the yield curve.
Actual changes in market conditions are likely to be different from these
assumptions.
Changes in value are measured as percentage changes form their respective values
presented in the column labeled "Value at 12/31/99." 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.
27
<PAGE>
<TABLE>
<CAPTION>
Value at
12/31/99
with 100
Value at 12/31/99 basis point
with 100 basis decrease in
Value at point increase in Percent interest Percent
12/31/99/(1)/ interest rates Change rates Change
---------------- -------------------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C>
Assets
Mortgage securities $236,014,844 $ 226,201,537 (4.16%) $244,594,982 3.64%
Other 94,165,616 94,165,616 94,165,616
--------------- ---------------- -------------
Total Assets $330,180,460 $ 320,367,153 (2.97%) $338,760,598 2.60%
=============== ================ =============
Liabilities
Interest rate swap $ (468,422) $ (1,179,422)/(2)/ $ 257,422/(2)/
Other 225,637,739 225,637,739 225,637,739
--------------- ---------------- -------------
Total Liabilities $225,169,317 $ 224,458,317 (0.32%) $225,895,161 .32%
--------------- ---------------- -------------
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) $(12,513,937) $ (21,616,244) (72.74%) (4,659,693) 62.76%
Retained earnings
(deficit) (15,463,462) (15,463,462) (15,463,462)
Treasury stock $(61,212,809) $ (61,212,809) (61,212,809)
--------------- ---------------- -------------
Total Shareholders'
Equity $105,011,143/(2)/ $ 95,908,836 (8.67%) $112,865,437 7.48%
--------------- ---------------- -------------
Total Liabilities and
Shareholders' Equity $330,180,460 $ 320,367,153 (2.97%) $338,760,598 2.60%
============== ================= =============
</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 FBR Asset'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 December 31, 1999. As of December
31, 1999, interest payments received under the swap agreement were based on
an interest rate of 6.12% while interest payments made were based on an
interest rate of 5.96%.
As shown above, the portfolio generally will benefit more 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 change or the values of
corresponding equity indices change.
28
<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 December 31, 1999.
<TABLE>
<CAPTION>
Value at
December 31, 1999 Value at
with December 31, 1999
Value at 10% increase Percent with 10% decrease Percent
December 31, 1999 in price Change in price Change
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Equity securities $ 49,647,865 $ 54,612,651 10.00% $ 44,683,078 -10.00%
Other 280,532,595 280,532,595 280,532,595
------------ ------------ ------------
Total Assets $330,180,460 $335,145,246 1.50% $325,215,673 -1.50%
Liabilities $225,637,739 $225,637,739 $225,637,739
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,097,193 194,097,193 194,097,193
Accumulated comprehensive
income (loss) (12,982,359) (8,017,573) 38.24% (17,947,146) -38.24%
Retained earnings
(deficit) (15,463,462) (15,463,462) (15,463,462)
Treasury stock (61,212,809) (61,212,809) (61,212,809)
------------ ------------ ------------
Total Shareholders' Equity $104,542,721 $109,507,507 4.75% $ 99,577,934 -4.75%
Total Liabilities and
Shareholders' Equity $330,180,460 $335,145,246 1.50% $325,215,673 -1.50%
------------ ------------ ------------
Book value per share $ 18.00 $ 18.86 4.75% $ 17.15 -4.75%
============ ============ ============
</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 December 31, 1999, FBR Asset would have
incurred a loss of approximately $8.1 million which would have been charged to
earnings.
Events Since December 31, 1999
On January 31, 2000, FBR Asset announced that its Board of Directors had
approved a special cash dividend of $.25 per share. The dividend was paid on
February 25, 2000, to shareholders of record at February 11, 2000.
On February 14, 2000, FBR Management terminated its management agreement with
BlackRock Financial Management, Inc., and engaged Fixed Income Discount Advisory
Company, Inc. ("FIDAC") to manage FBR Asset's mortgage asset investment program
as a sub-advisor. As compensation for rendering services, FIDAC will be
entitled to share the management fees of FBR Management, calculated based on the
average gross asset value managed by FIDAC, with a minimum annual fee of
$100,000 payable quarterly. The agreement may be terminated by either party
with thirty (30) days' advance notice.
29
<PAGE>
On March 16, 2000, FBR Asset declared a dividend of $0.55 per share, payable on
April 14, 2000, to shareholders of record as of March 31, 2000. Also, on March
16, 2000, FBR Asset's Board of Directors authorized the repurchase of up to an
additional 1,000,000 shares of FBR Asset's common stock.
Between December 31, 1999, and March 24, 2000, FBR Asset repurchased an
additional 709,109 shares of its common stock at an average price of$12.10 per
share. On March 16, 2000, FBR Asset's Board of Directors authorized the
repurchase of up to 1,000,000 additional shares of FBR Asset's common stock.
On January 18, 2000, Prime Retail, Inc., a REIT in which FBR Asset has invested
approximately $2.6 million in preferred and common stock, announced that, in
view of current liquidity requirements and its revised earnings estimates, its
board of directors had voted to suspend its regular quarterly dividend on its
common stock and on the common units of limited partnership interests in Prime
Retail, L.P. Prime Retail, Inc. also announced that its board of directors had
determined at that time not to declare the regular quarterly dividend on the
company's 10.5% Series A Senior Cumulative Convertible Preferred Stock and its
8.5% Series B Cumulative Participating Convertible Preferred STock scheduled to
be paid on February 15, 2000.
Item 8. Financial Statements And Supplementary Data
The information required by Item 8 is set forth in Item 14 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
30
<PAGE>
PART III
Item 10. Directors And Executive Officers Of The Registrant
The information regarding directors required by this Item 10 is incorporated by
reference to FBR Asset's definitive Proxy Statement for its annual meeting of
shareholders to be held on June 15, 2000, under the headings "Proposal No. 1--
Election of Directors" and "Section 16 (a) Beneficial Ownership Reporting
Compliance." Information regarding executive officers found under the Heading
"Executive Officers of the Registrant" in Part I hereof is also incorporated by
reference into this Item 10.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to FBR
Asset's definitive Proxy Statement for its annual meeting of shareholders to be
held on June 15, 2000, under the heading "Executive Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is incorporated by reference to FBR
Asset's definitive Proxy Statement for its annual meeting of shareholders to be
held on June 15, 2000, under the heading "Security Ownership of Certain
Beneficial Owners and Management."
Item 13. Certain Relationships and Related Transactions
The information required by this Item 13 is incorporated by reference to FBR
Asset's definitive Proxy Statement for its annual meeting of shareholders to be
held on June 15, 2000, under the heading "Certain Relationships and Related
Transactions."
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. Financial Statements. The following consolidated financial statements
of FBR Asset included in FBR Asset's Annual Report to Shareholders for
the year ended December 31, 1998, filed as Exhibit 13.01 to this Form
10-K, are incorporated by reference into this Item 14:
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Public Accountants F-2
Statements of Financial Condition as of December 31, 1999 F-3
and 1998
Statements of Income for the Years ended December 31, 1999 F-4
and 1998 and the Period From December 15, 1997 (Inception)
to December 31, 1997
Statements of Changes in Shareholders' Equity for the Years ended F-5
December 31, 1999 and 1998 and for the Period from December 15, 1999
(Inception) to December 31, 1997
Statements of Cash Flows for the Years ended December 31, 1999 and F-6
1998 and for the Period from December 15, 1997 (Inception)
to December 31, 1997
Notes to Financial Statements F-7
</TABLE>
2. All schedules are omitted because they are not required or
because the information is shown in the financial statements or notes
thereto.
3. Following is a list of exhibits to this Form 10-K, which are
incorporated by reference into this Item 14.
<TABLE>
<CAPTION>
Exhibit Number Exhibit Title
------------- -------------
<S> <C>
3.01 Registrant's Articles of Incorporation. *
3.02 Registrant's bylaws. *
4.01 Form of Specimen Certificate for Registrant's Common Stock. *
10.01 Management Agreement, dated December 17, 1997, by and between FBR Asset
Investment Corporation and Friedman, Billings, Ramsey Investment Management, Inc. *
10.02 Agreement to Extend and Amend Management Agreement, dated December 17, 1999, by
and between FBR Asset Investment Corporation and Friedman, Billings, Ramsey
Investment Management, Inc.
10.03 License Agreement, dated December 17, 1997, by and between FBR Asset Investment
Corporation and Friedman, Billings, Ramsey Group, Inc. *
10.04 Stock Option Agreement, dated December 17, 1997, by and between FBR Asset
Investment Corporation and Friedman, Billings, Ramsey Investment Management,
Inc. *
10.05 Sub-Management Agreement, dated February 14, 2000, by and between Friedman,
Billings, Ramsey Investment Management, Inc. and Fixed Income Discount Advisory
Company, Inc.
10.06 Stock Incentive Plan. *
10.07 Assignment Agreement, dated as of December 17, 1998, by and between Friedman,
Billings, Ramsey Investment Management, Inc., and BlackRock Financial
Management, Inc. *
13.01 Annual Report to Shareholders for the Year ended December 31, 1999.
21.01 List of Subsidiaries of the Registrant.
27.01 Financial Data Schedule.
</TABLE>
* Filed with the SEC as part of FBR Asset's Registration Statement on Form S-11,
as amended, Registration No. 333-67343.
32
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Index to Financial Statements
Page
----
<S> <C>
Report of Independent Public Accountants................................ F-2
Statements of Financial Condition
as of December 31, 1999, and
December 31, 1998..................................................... F-3
Statements of Income for the Years
Ended December 31, 1999 and 1998,
and the period from December 15, 1997
(Inception), through December 31, 1997................................ F-4
Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1999 and
1998, and the period from December 15, 1997
(Inception), through December 31, 1997................................ F-5
Statements of Cash Flows for
the Years Ended December 31, 1999 and
1998, and the period from December 15, 1997
(Inception), through December 31, 1997 and............................ F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To the Shareholders of FBR Asset Investment Corporation:
We have audited the accompanying statements of financial condition of FBR Asset
Investment Corporation (the "Company") as of December 31, 1999 and 1998, and the
related statements of income, changes in shareholders' equity and cash flows for
the years ended December 31, 1999 and 1998, and the period from December 15,
1997 (inception) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FBR Asset Investment
Corporation as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999 and 1998, and the
period from December 15, 1997 (inception), through December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Anderson LLP
Vienna, Virginia
January 31, 2000
F-2
<PAGE>
FBR Asset Investment Corporation
Statements of Financial Condition as of December 31, 1999 and 1998*
<TABLE>
<CAPTION>
===================================================================================================================
As of December 31, 1999 As of December 31, 1998
----------------------- -----------------------
<S> <C> <C>
Assets
Mortgage-backed securities, at fair value $236,014,844 $161,418,739
Investments in equity securities, at
fair value 49,647,865 70,983,050
Cash and cash equivalents 13,417,467 41,144,326
Due from custodian 806,093 -
Notes receivable 27,000,000 19,082,921
Dividends receivable 1,400,897 870,477
Prepaid expenses and other assets 253,516 461,059
Interest receivable 1,639,778 1,970,048
-------------- --------------
Total assets $330,180,460 $295,930,620
============== ==============
Liabilities and Shareholders' Equity
Liabilities:
Repurchase agreements $221,714,000 $128,550,000
Interest payable 487,222 310,096
Dividends payable 2,891,368 2,563,058
Management fees payable 237,167 1,275,514
Accounts payable and accrued expenses 129,677 224,933
Due to custodian - 11,929,614
Deferred revenue 178,305 172,826
-------------- --------------
Total liabilities 225,637,739 145,026,041
============== ==============
Shareholders' equity:
Preferred stock, par value $.01 per share,
50,000,000 shares authorized - -
Common stock, par value $.01 per share,
200,000,000 shares authorized, 10,415,827 shares
issued as of December 31, 1999 and 1998,
respectively 104,158 104,158
Additional paid-in capital 194,097,193 194,097,193
Accumulated other comprehensive loss (12,982,359) (9,800,530)
Retained (deficit) (15,463,462) (9,425,579)
Treasury stock, at cost, 4,609,491 shares and
1,872,300 shares as of December 31, 1999 and 1998,
respectively (61,212,809) (24,070,663)
-------------- --------------
Total shareholders' equity 104,542,721 150,904,579
-------------- --------------
Total liabilities and shareholders' equity $330,180,460 $295,930,620
============== ==============
===================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-3
<PAGE>
FBR Asset Investment Corporation
Statements of Income for the Years ended December 31, 1999 and 1998, and the
Period from December 15, 1997 (Inception) through December 31, 1997*
<TABLE>
<CAPTION>
===========================================================================================================================
December 15, 1997
(Inception) through
Year Ended December 31, December 31,
------------------------------ -------------------
1999 1998 1997
-------------- ----------- -------------------
<S> <C> <C> <C>
Income:
Interest $ 15,823,914 $13,656,097 $ 18,040
Dividends 7,649,935 4,271,405 434,717
Other income - - 268,520
-------------- ------------ -------------------
Total Income 23,473,849 17,927,502 721,277
-------------- ------------ -------------------
Expenses:
Interest expense 7,920,648 5,359,633 -
Management fee expense 1,329,063 1,520,725 58,623
Professional fees 755,561 436,885 12,000
Insurance 41,325 52,769 -
Amortization of stock options issued to manager 454,746 454,746 -
Other 180,907 144,702 3,733
-------------- ------------ -------------------
Total expenses 10,682,300 7,969,460 74,356
-------------- ------------ ------------------
Realized gain (loss) on sale of mortgage-backed securities (358,692) 176,048 -
Realized gain on sale of equity investments 3,597,190 - -
Recognized loss on available-for-sale equity securities (10,887,458) (6,615,000) -
Realized loss on interest rate hedge - (1,930,855) -
-------------- ------------ ------------------
Net income $ 5,142,589 $ 1,588,235 $ 646,921
============== ============ ==================
Basic and diluted earnings per share $ 0.68 $ 0.16 $ 0.06
============== ============ ==================
Weighted-average common and equivalent shares 7,523,715 10,044,483 10,218,999
============== ============ ==================
===========================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-4
<PAGE>
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Years Ended December 31,
1999 and 1998, and the Period from December 15, 1997 (Inception) through
December 31, 1997.*
<TABLE>
<CAPTION>
===================================================================================================================================
Accumulated
Other
Additional Retained Comprehensive
Common Paid in Earnings Treasury Income Comprehensive
Stock Capital (Deficit) Stock (Loss) Total Income (Loss)
----------- ----------- ------------- ------------ ------------- ------------ -------------
Balance, December 15, 1997 $ - $ - $ - $ - $ - $ -
---------- ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Repurchase of common stock - - - (24,070,663) - (24,070,663)
Options issued to manager - 909,492 - - - 909,492
Net income (Loss) - - 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 income (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 - - - (37,142,146) - (37,142,146)
Net Income - - 5,142,589 - - 5,142,589 $ 5,142,589
Other comprehensive income (loss) -
Change in unrealized loss on
available-for-sale securities - - - - (3,181,829) (3,181,829) (3,181,829)
------------
Comprehensive income - - - - - - $ 1,960,760
============
Dividends - - (11,180,472) - - (11,180,472)
-------- ------------ ------------ ------------ ------------- ------------
Balance, December 31, 1999 $104,158 $194,097,193 $(15,463,462) $(61,212,809) $ (12,982,359) $104,542,721
======== ============ ============ ============ ============= ============
===================================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-5
<PAGE>
FBR Asset Investment Corporation
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998, and the
Period from December 15, 1997 (Inception), through December 31, 1997*
<TABLE>
<CAPTION>
====================================================================================================================================
December 15, 1997
(Inception) through
For the Year Ended December 31, December 31,
------------------------------- -------------------
1999 1998 1997
------------------------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,142,589 $ 1,588,235 $ 646,921
Adjustments to reconcile net income to net cash
(used in) provided by operating activities--
Realized loss on available-for-sale equity securities 10,887,458 6,615,000 -
Realized gain on sale of mortgage-backed and equity securities (3,238,498) (176,048) -
Unrealized gain on equity investments - - (268,520)
Amortization 456,342 456,342 3,733
Premium amortization on mortgage-backed securities 682,695 777,179 -
Changes in operating assets and liabilities:
Due from custodian (806,093) - -
Due from affiliate - 545,827 (545,827)
Dividends receivable (530,420) (435,760) (434,717)
Interest receivable 330,270 (1,962,048) (8,000)
Prepaid expenses (248,799) - (11,642)
Management fees payable (1,038,347) 1,216,891 58,623
Accounts payable and accrued expenses (95,256) 212,933 12,000
Interest payable 177,126 310,096 -
Due to custodian (2,041,230) 2,041,230 -
Deferred revenue 5,479 (17,174) 190,000
------------- ------------- ------------
Net cash (used in) provided by operating activities 9,683,316 11,172,703 (357,429)
============= ============= ============
Cash flows from investing activities:
Purchase of mortgage-backed securities (282,288,201) (221,156,241) -
Investments in equity securities (11,454,320) (64,876,250) (23,050,230)
Investments in notes receivable, net of repayments (7,917,079) (16,000,000) (3,000,000)
Proceeds from sale of mortgage-backed securities 160,809,435 48,533,267 -
Proceeds from sale of equity securities 27,894,010 - -
Receipt of principal payments on mortgage-backed securities 30,376,288 21,204,987 -
------------- ------------- ------------
Net cash used in investing activities (82,579,867) (232,294,237) (26,050,230)
------------- ------------- ------------
Cash flows from financing activities:
Repurchase of common stock (37,142,146) (24,070,663) -
Proceeds from issuance of common stock - 3,661,001 189,630,858
Proceeds from (repayments of) repurchase agreements, net 93,164,000 128,550,000 -
Dividends paid (10,852,162) (9,097,677) -
------------- ------------- ------------
Net cash provided by financing activities 45,169,692 99,042,661 189,630,858
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (27,726,859) (122,078,873) 163,223,199
Cash and cash equivalents, beginning of the period 41,144,326 163,223,199 -
------------- ------------- ------------
Cash and cash equivalents, end of the period 13,417,467 41,144,326 163,223,199
------------- ------------- ------------
Supplemental disclosure of non-cash investing activities:
Securities purchased but not settled $ - $ 9,888,384 $ -
====================================================================================================================================
</TABLE>
*The accompanying notes are an integral part of these statements.
F-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 are generally temporarily invested in readily marketable,
interest-bearing securities. To seek yields commensurate with its investment
objectives, FBR Asset leverages its assets and mortgage loan portfolio primarily
with collateralized borrowings. FBR Asset uses derivative financial instruments
to hedge a portion of the interest rate risk associated with its borrowings.
Note 2 Summary of Significant Accounting Policies
Investments in Mortgage-Backed Securities
FBR Asset invests primarily in mortgage pass-through certificates that represent
a 100 percent interest in the underlying conforming mortgage loans and are
guaranteed by the Government National Mortgage Association ("Ginnie Mae"), the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), and the Federal National
Mortgage Association ("Fannie Mae").
Mortgage-backed security transactions are recorded on the date the securities
are purchased or sold. Any amounts payable for unsettled trades are recorded as
"due to custodian" in FBR Asset's Statement of Financial Condition.
FBR Asset accounts for its investments in mortgage-backed securities as
available-for-sale securities. FBR Asset does not hold its mortgage-backed
securities for trading purposes, but may not hold such investments to maturity,
and has classified these investments as available-for-sale. Securities
classified as available-for-sale are reported at fair value, with temporary
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Realized gains and losses on mortgage-backed
securities transactions are determined on the specific identification basis.
Unrealized losses on mortgage-backed securities that are determined to be other
than temporary are recognized in income. Management regularly reviews its
investment portfolio for other than temporary market value decline. There were
no such adjustments for mortgage-backed investments during the periods
presented.
The fair value of FBR Asset's mortgage-backed securities are based on market
prices provided by certain dealers who make markets in these financial
instruments. The fair values reported reflect estimates and may not necessarily
be indicative of the amounts FBR Asset could realize in a current market
transaction.
F-7
<PAGE>
Income from investments in mortgage-backed securities is recognized using the
effective interest method, using the expected yield over the life of the
investment. Income includes contractual interest accrued and the amortization
or accretion of any premium or discount recorded upon purchase. Changes in
anticipated yields result primarily from 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 $176,044 in realized gains
related to this sale.
During 1999, FBR Asset received proceeds of $160.8 million from the sale of
mortgage-backed securities. The Company recorded $851,464 in realized gains
related to this sale. Concurrent with this sale, FBR Asset terminated a related
hedge position and recorded a $1.2 million loss.
The following table summarizes FBR Asset's mortgage-backed securities as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Total Mortgage
December 31, 1999 Freddie Mac Fannie Mae Ginnie Mae Assets
- ----------------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Mortgage-backed securities,
available-for-sale, principal $79,490,738 $107,859,276 $54,517,427 $241,867,441
Unamortized premium (discount) 359,594 (1,190,013) 829,206 (1,213)
----------- ------------ ----------- ------------
Amortized cost 79,850,332 106,669,263 55,346,633 241,866,228
Gross unrealized losses (2,797,261) (2,196,860) (857,263) (5,851,384)
----------- ------------ ----------- ------------
Estimated fair value $77,053,071 $104,472,403 $54,489,370 $236,014,844
=========== ============ =========== ============
December 31, 1998
- -----------------
Mortgage-backed securities,
available-for-sale, principal $93,278,879 $ 48,386,872 $16,294,168 $157,959,919
Unamortized premium 529,783 1,427,632 787,906 2,745,321
----------- ------------ ----------- ------------
Amortized cost 93,808,662 49,814,504 17,082,074 160,705,240
Gross unrealized gains 665,251 191,021 123,260 979,532
Gross unrealized losses (89,517) (162,997) (13,519) (266,033)
----------- ------------ ----------- ------------
Estimated fair value $94,384,396 $ 49,842,528 $17,191,815 $161,418,739
=========== ============ =========== ============
</TABLE>
Short Sales
FBR Asset has established a short position to offset the potential adverse
effects of market price fluctuations in certain of its mortgage-backed
securities. The positions are structured and accounted for
F-8
<PAGE>
as hedge transactions such that any gains or losses will be recognized upon
termination of the position. FBR Asset's unrealized gains or losses on its
position are recorded as an asset or liability with a corresponding increase or
decrease included in comprehensive income. At December 31, 1999, FBR Asset had
established an $88 million face amount short position in 7.00% Fannie Mae agency
mortgage-backed securities. The fair value of the short position at December 31,
1999, was $182,188.
Repurchase Agreements
FBR Asset has entered into short-term repurchase agreements to finance a
significant portion of its mortgage-backed investments. The repurchase
agreements are secured by FBR Asset's mortgage-backed securities and bear
interest at rates that have historically related closely to LIBOR for a
corresponding period.
At December 31, 1999, FBR Asset had $221.7 million outstanding under repurchase
agreements with a weighted average borrowing rate of 5.83% as of the end of the
period and a remaining weighted-average term to maturity of 45 days. At
December 31, 1999, mortgage-backed securities pledged had an estimated fair
value of $228.9 million. At December 31, 1999, the repurchase agreements had
remaining maturities of between 38 and 45 days.
As of December 31, 1998, FBR Asset had $128.6 million outstanding under
repurchase agreements with a weighted-average borrowing rate of 5.08% as of the
end of the period and a weighted-average remaining maturity of 73 days. At
December 31, 1998, mortgage-backed securities pledged had an estimated fair
value of $136.2 million. At December 31, 1998, the repurchase agreements had
remaining maturities of between 69 and 74 days.
Interest Rate Swaps
FBR Asset enters into interest rate swap agreements to offset the potential
adverse effects of rising interest rates under certain short-term repurchase
agreements. The interest rate swap agreements are structured such that FBR
Asset receives payments based on a variable interest rate and makes payments
based on a fixed interest rate. The variable interest rate on which payments
are received is calculated based on the three-month LIBOR. FBR Asset's
repurchase agreements, which generally have maturities of 30 to 90 days, carry
interest rates that correspond to LIBOR rates for those same periods. The swap
agreements effectively fix FBR Asset's borrowing cost and are not held for
speculative or trading purposes. As a result of these factors, FBR Asset has
accounted for these agreements as hedges.
The fair value of interest rate agreements that qualify as hedges are not
recorded. The differential between amounts paid and received under the interest
rate swap agreements is recorded as an adjustment to the interest expense
incurred under the repurchase agreements. In the event of early termination of
an interest rate agreement and repayment of the underlying debt, a gain or loss
is recorded and FBR Asset receives or makes a payment based on the fair value of
the interest rate agreement on the date of termination.
At December 31, 1999 and 1998, FBR Asset was party to an interest rate swap
agreement that matures on June 1, 2001, and has a notional amount of $50
million, and a fair value of $468,422 and $(910,535) at December 31, 1999, and
December 31, 1998, respectively.
F-9
<PAGE>
Investments in Equity Securities
Investments in securities that are listed on a national securities exchange (or
reported on the Nasdaq National Market) are stated at the last reported sale
price on the day of valuation. Listed securities for which no sale was reported
are stated at the mean between the closing "bid" and "asked" price on the day of
valuation. Other securities for which quotations are not readily available are
valued at fair value as determined by FBR Asset's investment adviser, Friedman,
Billings, Ramsey Investment Management, Inc. ("FBR Management"). FBR Management
may use methods of valuing securities other than those described above if it
believes the alternative method is preferable in determining the fair value of
such securities.
Consistent with the intention to have FBR Asset operate as a REIT, management
concluded that its investments in equity securities are being held for long-term
yield, capital appreciation, and cash flow. Accordingly, management has
classified such investments as available-for-sale.
Realized gains and losses are recorded on the date of the transaction using the
specific identification method. The difference between the purchase price and
market price (or fair value) of investments in securities is reported as an
unrealized gain or loss and a component of comprehensive income.
Management regularly reviews any declines in the market value of its equity
investments for declines that are other than temporary. Such declines are
recorded in operations as a "recognized loss on available-for-sale securities."
Notes Receivable
As of December 31, 1999, FBR Asset held a $20 million note of Prime Retail Inc.
and Prime Retail, L.P., ("Prime Retail") with an interest rate of 15% per annum,
and matures on June 30, 2000, subject to automatic extension to December 31,
2000, in the absence of a default. The loan is secured by equity interest in
five subsidiaries of Prime, L.P., which subsidiaries own commercial real estate
subject to mortgage debt. As of December 31, 1999, FBR Asset also held a Short-
Term Loan and Security Agreement with Prime Capital Holding, LLC and Prime
Capital Funding, Inc. together, ("Prime Capital"), which had a $7 million
outstanding balance at December 31, 1999. The note accrues interest at an
annualized rate of 17% and is due on March 31, 2000. The note is secured by 100%
equity interests in subsidiaries of Prime Capital which own commercial mortgage
loans subject to "warehouse" indebtedness. Prime Capital is an affiliate of
Prime Retail, L.P.
Credit Risk
FBR Asset is exposed to the risk of credit losses on its portfolio of mortgage-
backed securities and notes receivable, such as the notes from Prime Retail and
Prime Capital referred to above. In addition, many of FBR Asset's investments
in equity securities are in companies that are also exposed to the risk of
credit losses in their businesses.
FBR Asset seeks to limit its exposure to credit losses on its portfolio of
mortgage-backed securities by purchasing securities issued and guaranteed by
Freddie Mac, Fannie Mae, or Ginnie Mae. The payment of principal and interest on
the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by
those respective agencies and the payment of principal and interest on the
Ginnie Mae mortgage-backed securities is backed by the full-faith-and-credit of
the U.S. Government. At December 31, 1999 and 1998, all of FBR Asset's mortgage-
backed securities have an implied "AAA" rating. FBR Asset's notes receivable and
certain mortgage-backed securities and other loans of companies in which
we invest are not issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae.
Concentration Risk
Equity and debt investments, such as the Prime Capital and Prime Retail
notes referred to above, may also involve substantial amounts relative to FBR
Asset's total net assets and create exposure to issuers that are generally
concentrated in the REIT industry. These investments may include non-investment
grade and securities of privately held issuers with no ready markets. The
concentration and illiquidity of these investments expose FBR Asset to a
significantly higher degree of risk than is associated with more diversified
investment grade or readily marketable securities.
F-10
<PAGE>
Cash and Cash Equivalents
All investments with original maturities of less than three months are cash
equivalents. As of December 31, 1999, cash and cash equivalents consisted of
$3.8 million of cash deposited in two commercial banks and $9.6 million in two
separate domestic money market funds. As of December 31, 1998, cash and cash
equivalents consisted of $14.4 million of cash deposited in two commercial banks
and $26.7 million in two separate domestic money market funds. The money market
funds invest primarily in obligations of the U.S. Government. The carrying
amount of cash equivalents approximates their fair value.
Comprehensive Income
Comprehensive income is a financial reporting methodology that includes certain
financial information that historically has not been recognized in the
calculation of net income. FBR Asset's only component of other comprehensive
income is the net unrealized loss on investments classified as available for
sale.
Net Income Per Share
FBR Asset presents basic and diluted earnings per share. Basic earnings per
share excludes potential dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that would share in earnings. The potentially dilutive securities did not
impact the computation of earnings per share for any period presented.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Income Taxes
FBR Asset has elected to be taxed as a REIT under the Internal Revenue Code. To
qualify for tax treatment as a REIT, FBR Asset must meet certain income and
asset tests and distribution requirements. FBR Asset generally will not be
subject to federal income tax at the corporate level to the extent that it
distributes at least 95 percent of its taxable income to its shareholders and
complies with certain other requirements. Failure to meet these requirements
could have a material adverse impact on FBR Asset's results or financial
condition. Furthermore, because FBR Asset's investments include stock in other
REITs, failure of those REITs to maintain their REIT status could jeopardize FBR
Asset's qualification as a REIT. No provision has been made for income taxes in
the accompanying financial statements, as FBR Asset believes it has met the
requirements.
Reclassifications
Certain amounts in the financial statements as of December 31, 1998, have been
reclassified to confirm with 1999 presentation.
Recent Accounting Pronouncements
F-11
<PAGE>
In 1998, Statement on Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities", was issued. This
statement is effective for all fiscal years beginning after June 15, 2000, and
generally requires that an entity recognize derivative financial instruments as
assets or liabilities and measure them at fair value. FBR Asset is currently
evaluating the impact of SFAS No. 133, but does not expect that the adoption
will have a material impact on its financial condition or future results of
operations based on its current hedging strategies.
Note 3 Shareholders' Equity
On December 15, 1997, FBR Asset completed a private placement of equity capital.
FBR Asset received net proceeds of $189.7 million from the issuance of
10,218,999 shares of common stock.
On January 15, 1998, Friedman, Billings, Ramsey & Co., Inc. purchased 196,828
shares of FBR Asset for $3.7 million pursuant to a stock option issued in
connection with the private placement offering.
FBR Asset declared and recorded dividends of $.05, $1.16 and $1.605 in 1997,
1998 and 1999, respectively.
In September 1998, the Board of Directors authorized the repurchase of up to
2,000,000 shares of FBR Asset's common stock. Through December 31, 1998, FBR
Asset had repurchased 1,872,300 shares for a cost of $24 million, or $12.86
average cost per share. On March 30, 1999, the Board of Directors authorized the
repurchase of up to an additional 2,000,000 shares of FBR Asset's common stock.
On December 16, 1999, the Board of Directors authorized the repurchase of up to
an additional 1,500,000 shares of FBR Asset's common stock. Between December 31,
1998, and December 31, 1999, FBR Asset repurchased an additional 2,737,191
shares of its common stock at an average price of $13.57 per share.
FBR Asset had outstanding, as of December 31, 1999, and December 31, 1998,
1,021,900 options to purchase common stock. These options have terms of eight to
ten years and have an exercise price of $20 per share.
Under FBR Asset's stock option plan, FBR Asset may grant, in the aggregate, up
to 155,000 tax qualified incentive stock options and non-qualified stock options
to its employees, directors or service providers. Options granted are generally
exercisable immediately and have a term of seven to ten years. As of December
31, 1999, FBR Asset had granted 155,000 options under its stock option plan.
FBR Asset accounts for its stock-based compensation in accordance with SFAS No.
123, "Accounting For Stock Based Compensation." Pursuant to SFAS No. 123, FBR
Asset applies the provisions of Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued to Employees" (APB No. 25), for stock options
issued to employees. Under APB No. 25, compensation expense is recorded to the
extent the fair market value of FBR Asset's stock exceeds the strike price of
the option on the date of grant. In addition and in accordance with the
disclosure requirements of SFAS No. 123, FBR Asset does provide pro forma net
income disclosures for options granted to employees as if the fair value method,
as defined in SFAS No. 123, had been applied for the purpose of computing
compensation expense. The impact of the issued and outstanding employee options
under the fair value method was not material to
F-12
<PAGE>
FBR Asset's net income or basic and diluted net income per share as reported in
the statement of income for the year ended December 31, 1999. No employee
options had been issued as of December 31, 1998.
The fair value of the option grant in 1999 was estimated on the grant date using
the following assumptions: average dividend yield of 8 percent; expected
volatility of 25 percent; risk free interest rate of 6.1 percent; and expected
lives of 8.5 years. All options issued in 1999 are fully vested, have an
exercise price of $20 and a remaining contractual life of approximately 8 years.
Note 4 Management and Performance Fees
FBR Asset has a management agreement with Friedman, Billings, Ramsey
Investment Management, Inc. ("FBR Management"), for an initial term expiring on
December 17, 1999 and a renewal expiring on December 17, 2000. FBR Management
performs portfolio management services on behalf of FBR Asset. Such services
include, but are not limited to, consulting with FBR Asset on purchase and sale
opportunities, collection of information and submission of reports pertaining to
FBR Asset's assets, interest rates, and general economic conditions, and
periodic review and evaluation of the performance of FBR Asset's portfolio of
assets.
FBR Management is entitled to a quarterly "base" management fee equal to the sum
of (1) 0.25 percent per annum (adjusted to reflect a quarterly period) of the
average invested mortgage assets of FBR Asset during each calendar quarter and,
(2) 0.75 percent per annum (adjusted to reflect a quarterly period) of the
remainder of the average invested assets of FBR Asset during each calendar
quarter. FBR Management also received options to purchase 1,021,900 shares of
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 was amortized
over the initial term of the Management Agreement. FBR Management assigned
options to acquire 51,045 shares to BlackRock Financial Management, Inc.
("BlackRock") (see below) in connection with the execution of the sub-management
agreement discussed below. The value of these options has been fully amortized
in the accompanying statements of income. In addition, FBR Management agreed to
the rescission of options to purchase 155,000 common shares in connection with
the establishment of FBR Asset's stock incentive plan.
FBR Management is also entitled to receive incentive compensation based on the
performance of FBR Asset. On December 31, 1998, and each calendar quarter
thereafter FBR Management is entitled to an incentive fee calculated by
reference to the preceeding 12 month period, FBR Management is entitled to an
incentive fee calculated as: funds from operations (as defined), plus net
realized gains or losses from asset sales, less the threshold amount (all
computed on a weighted average share outstanding basis), multiplied by 25
percent. The threshold amount is calculated as the weighted average per share
price of all equity offerings of FBR Asset, multiplied by a rate equal to the
ten-year U.S. Treasury rate plus five percent per annum. No incentive
compensation was earned during the periods presented.
FBR Management previously engaged BlackRock to manage FBR Asset's mortgage asset
investment program (the "Mortgage Portfolio") as a sub-adviser. BlackRock is a
majority owned subsidiary of PNC Bank Corporation who is a 4.9 percent owner of
FBR Management's parent company. As compensation for rendering services,
BlackRock was entitled to share the management fees of FBR Management,
calculated based on the average gross asset value managed by BlackRock, with a
minimum annual fee of $100,000, payable quarterly. The agreement was terminated
by FBR Management on February 14, 2000,
F-13
<PAGE>
and FBR Management entered into a new agreement with Fixed Income Discount
Advisory Company, Inc. ("FIDAC") on February 14, 2000, to assume management of
FBR Asset's Mortgage Portfolio as sub-advisor. See Note 7 Subsequent Events.
Note 5 Related Parties
As of December 31, 1999, a wholly-owned subsidiary of Friedman, Billings,
Ramsey Group, Inc. ("FBR Group") owned 1,344,086 shares or 23.15% of the
outstanding common stock of FBR Asset. As of December 31, 1998, that same
subsidiary owned 1,344,086 or 15.73% of the outstanding common stock of FBR
Asset. FBR Group is the parent company of FBR Management and FBR & Co.
Note 6 Equity Investments
At December 31, 1999, FBR Asset's equity investments had an aggregate cost basis
of $57.5 million, a fair value of $49.6 million and unrealized losses of $7.9
million.
As of December 31, 1998, FBR Asset's equity investments had an aggregate cost
basis of $81.2 million, fair value of $71.0 million, unrealized losses of $12.3
million, recognized losses of $6.6 million, and unrealized gains of $2.1
million.
<TABLE>
<CAPTION>
Amount of Market Value at Market Value at
Equity Investments Investment/(1)/ December 31, 1999 December 31, 1998
- ------------------ ----------------- -------------------- -----------------
<S> <C> <C> <C>
Anthracite Capital, Inc. $10,084,268 $10,084,268 $12,358,170
Capital Automotive REIT 25,000,000 21,841,402 26,657,711
Chastain Capital Corporation - - 3,150,000/(2)/
Imperial Credit Commercial Mortgage
Inv. Corp. 10,413,000 10,237,500 8,437,500
Prime Retail, Inc. 1,201,317 694,688 1,211,844
Prime Retail, Inc., pfd 1,454,320 1,151,696 -
Resource Asset Investment Trust 5,292,516 3,725,717 3,790,325
Building One Services Corporation/(3)/ 4,053,180 1,912,594 10,437,500
East-West Bank/(4)/ - - 4,940,000
----------------- -------------------- -----------------
Total $57,498,601 $49,647,865 $70,983,050
================= ==================== =================
</TABLE>
_______________
(1) As of December 31, 1999.
(2) Reflects recognized loss of $6.6 million recorded in 1998 for other than
temporary decline in the value of Chastain Capital Corporation. In
November 1999, FBR Asset received a liquidating dividend of $7.45 per share
on 700,000 shares of Chastain and recognized a gain of $2,065,000.
(3) In April 1999, FBR Asset sold 297,341 shares of Building One Services
Corporation and realized a gain of $743,353.
(4) In September and October 1999, FBR Asset sold 520,000 shares of East-West
Bank and realized a gain of $788,838.
Anthracite Capital, Inc. ("AHR")
On March 27, 1998, FBR Asset purchased 716, 846 shares of common stock in AHR,
for $13.95 per share. AHR was organized in November 1997 to invest in a
diversified portfolio of multifamily, commercial and residential mortgage loans,
mortgage-backed securities, and other real estate-related assets in the United
States and non-U.S. markets. AHR seeks to achieve strong investment returns by
maximizing the spread of investment income earned on its real estate assets over
the cost of financing and hedging these assets and/or liabilities. AHR's common
stock is publicly traded.
During September and October 1998, FBR Asset purchased an additional 865,000
shares of AHR for an average cost of $9.64 per share. In December 1999, FBR
Asset recorded a charge to operations in the amount of $8,250,228 to reflect
management's determination that the decline in the market value of the stock was
other than temporary.
F-14
<PAGE>
Capital Automotive REIT ("CARS")
On February 13, 1998, FBR Asset acquired 1,792,115 shares of common stock in
CARS for a price of $13.95 per share. CARS is a self-administered and self-
managed REIT formed to invest in the real property and improvements used by
operators of multi-site, multi-franchised motor vehicle dealerships and motor
vehicle-related businesses located in major metropolitan areas throughout the
United States. CARS primarily acquires real property and simultaneously leases
back this property for use by dealers. CARS' common stock is publicly traded.
Chastain Capital Corporation ("CHAS")
On April 29, 1998, FBR Asset purchased 700,000 shares of common stock in CHAS,
for $13.95 per share. CHAS was organized in December 1997 to invest in
commercial and multifamily mortgage and real estate related assets located in
major metropolitan markets throughout the United States.
In 1998, FBR Asset recorded a charge to operations in the amount of $6,615,000
to reflect management's determination that the decline in the market value of
the stock was other than temporary. On May 14, 1999, CHAS announced that its
Board of Directors had voted to sell all of CHAS' assets, either through a plan
of liquidation or through a sale of the company. On November 8, 1999, Chastain
Capital Corp. announced that its Board had declared an initial $7.45 per share
distribution to stockholders under a plan to liquidate itself. On November 29,
1999, FBR Asset received a liquidating dividend of $5.2 million or $7.45 per
share from Chastain and recognized a gain of $2,065,000. Chastain still has one
real estate asset remaining, a retail property Chastain plans to sell.
Imperial Credit Commercial Corporation ("ICMI")
In December 1997, FBR Asset purchased 900,000 shares of ICMI common stock for a
price of $14.50 per share. ICMI invests primarily in performing multifamily and
commercial term loans and interests in commercial and residential mortgage-
backed securities. ICMI also invests in various classes of non-investment grade
mortgage-backed securities. ICMI's common stock is publicly traded.
On July 22, 1999 Imperial Credit Commercial Mortgage and Imperial Credit
Industries announced a merger agreement under which Imperial Credit Industries
would acquire all of the outstanding shares of Imperial Credit Mortgage for a
cash purchase price of $11.50 per share, subject to increase under certain
circumstances. Completion of the merger is conditioned on, among other things,
approval by the shareholders of Imperial Credit Mortgage. On October 25, 1999,
after expiration of the tender offer period on October 22, 1999, during which
Imperial Credit Mortgage explored alternative transactions more favorable to its
shareholders, Imperial Credit Industries reported that the merger consideration
had been increased from $11.50 per share to approximately $11.57 per share. The
merger is expected to close on March 27, 2000. In the absence of other offers at
more favorable prices, management recorded a $2.6 million charge to earnings for
the transaction in the fourth quarter of 1999 representing the difference
between Imperial Credit Industries' most recent tender offer and FBR Asset's
cost basis.
Prime Retail, Inc. ("PRT")
In September 1998, FBR Asset purchased an aggregate of 122,300 shares of PRT,
for an average price of $9.74 per share. On October 18, 1998, FBR Asset
purchased an additional 1,200 shares of PRT's common stock for $7.90
per share. PRT is a REIT engaged primarily in the ownership,
F-15
<PAGE>
development, construction, acquisition, leasing, marketing and management of
factory outlet centers. PRT's common stock is publicly traded.
On April 22, 1999, FBR Asset purchased 78,400 shares of PRT's preferred stock
for a cost of $1,454,320 or $18.55 average cost per share. PRT's preferred
stock is publicly traded.
Resource Asset Investment Trust ("RAS")
On February 19, 1998, FBR Asset acquired 300,000 shares of common stock in RAS
for $15.33 per share. RAS's principal business activity is the acquisition
and/or financing of loans secured by mortgages on real property (or interests in
such loans) in situations that, generally, do not conform to the underwriting
standards of institution lenders or sources that provide financing through
securitization.
On June 24/th/ and 25/th/, 1998, FBR Asset acquired an additional 44,575 shares
of RAS for an average price of $15.55 per share.
Building One Services Corporation ("BOSS")
In December 1997, FBR Asset purchased 500,000 shares of BOSS (formerly
Consolidated Capital Corporation) common stock for $20.00 per share. BOSS was
founded in February 1997 to build consolidated enterprises through the
acquisition and integration of multiple businesses in one or more fragmented
industries. BOSS has undertaken to consolidate facilities management companies
and may select companies in this or related industries in which to make future
investments. BOSS's common stock is publicly traded. Pursuant to BOSS's tender
offer, which expired in April 1999, FBR Asset sold 297,341 of its BOSS common
shares for a price of $22.50 per share, or $6.7 million in April 1999.
East-West Bancorp ("EWB")
On June 30, 1998, FBR Asset purchased 520,000 shares of EWB for $10.00 per
share. EWB's strategy is to become the premier commercial bank in California
serving the unique personal and business banking needs of customers engaged in
business and having family ties with or origins from the Asia Pacific region,
with experienced personnel having the language capability and cultural
sensitivity appropriate for the region. Beginning September 30 through October
25, 1999, FBR Asset sold its 520,000 shares of common stock in East West Bancorp
for $5,988,838 or $11.52 average per share.
Kennedy-Wilson, Inc. ("KWIC")
FBR Asset owns warrants to acquire 131,096 shares of Kennedy-Wilson common stock
at a price of $7.5526 per share. The warrants expire in June 2003. As of
December 31, 1999, the market price of Kennedy-Wilson common stock was $8.00 per
share.
Imperial Credit Industries, Inc. ("ICII")
On June 30, 1999, FBR Asset purchased 400,000 shares of ICII's preferred stock
for $25.00 per share. ICII is a commercial and consumer finance holding
company specializing in non-conforming residential mortgage banking, business
and consumer lending and commercial leasing.
F-16
<PAGE>
On November 5/th/ and 10/th/, Imperial Credit Industries redeemed the 400,000
shares of Series B 14.5% cumulative preferred held by FBR Asset for $26.25 per
share or $10.5 million.
Note 7 Subsequent Events
On January 31, 2000, FBR Asset announced that its Board of Directors had
approved a special cash dividend of $.25 per share. The dividend was paid on
February 25, 2000, to shareholders of record at February 11, 2000.
On February 14, 2000, FBR Management terminated its management agreement with
BlackRock Financial Management, Inc., and engaged Fixed Income Discount Advisory
Company, Inc. ("FIDAC") to manage FBR Asset's mortgage asset investment program
as a sub-advisor. As compensation for rendering services, FIDAC will be
entitled to share the management fees of FBR Management, calculated based on the
average gross asset value managed by FIDAC, with a minimum annual fee of
$100,000 payable quarterly. The agreement may be terminated by either party
with thirty (30) days' advance notice.
F-17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FBR ASSET INVESTMENT CORPORATION
(Registrant)
Date: March 30, 2000 By: /s/ William R. Swanson
------------------------------
William R. Swanson
Executive Vice President
By: /s/ Kurt R. Harrington
------------------------------
Kurt R. Harrington
Chief Financial Officer, Treasurer and
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature Title
---- --------- -----
March 30, 2000 /s/ Emanuel J. Friedman Chairman of the
----------------------------- Board of Directors
March 30, 2000 /s/ Eric F. Billings Vice Chairman, Chief
----------------------------- Executive Officer,
President and Director
(Principal Executive
Officer)
March 30, 2000 /s/ William K. Swanson Executive Vice President,
----------------------------- Chief Operating Officer
and Director
March 30, 2000 /s/ Stephen D. Harlan Director
-----------------------------
March 30, 2000 /s/ Russell C. Lindner Director
-----------------------------
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Title
-------------- -------------
3.01 Registrant's Articles of Incorporation. *
3.02 Registrant's bylaws. *
4.01 Form of Specimen Certificate for Registrant's
Common Stock. *
10.01 Management Agreement, dated December 17, 1997, by
and between FBR Asset Investment Corporation and
Friedman, Billings, Ramsey Investment Management,
Inc. *
10.02 Agreement to Extend and Amend Management
Agreement, dated December 17, 1999, by and
between FBR Asset Investment Corporation and
Friedman, Billings, Ramsey Investment Management,
Inc.
10.03 License Agreement, dated December 17, 1997, by
and between FBR Asset Investment Corporation and
Friedman, Billings, Ramsey Group, Inc. *
10.04 Stock Option Agreement, dated December 17, 1997,
by and between FBR Asset Investment Corporation
and Friedman, Billings, Ramsey Investment
Management, Inc. *
10.05 Sub-Management Agreement, dated February 14,
2000, by and between Friedman, Billings, Ramsey
Investment Management, Inc. and Fixed Income
Discount Advisory Company, Inc.
10.06 Stock Incentive Plan. *
10.07 Assignment Agreement, dated as of December 17,
1998, by and between Friedman, Billings, Ramsey
Investment Management, Inc., and BlackRock
Financial Management, Inc. *
13.01 Annual Report to Shareholders for the Year ended
December 31, 1999.
21.01 List of Subsidiaries of the Registrant
27.01 Financial Data Schedule.
________________
* Filed with the SEC as part of FBR Asset's registration statement on Form
S-11, as amended, Registration No. 333- 67543.
F-19
<PAGE>
EXHIBIT 10.02
AGREEMENT TO EXTEND AND AMEND MANAGEMENT AGREEMENT
This Agreement to Extend and Amend Management Agreement (this
"Extension and Amendment Agreement") is made as of December 17, 1999, by and
between FBR Asset Investment Corporation (the "Company") and Friedman, Billings
Ramsey Investment Management, Inc. (the "Manager").
WHEREAS, the Company and the Manager are parties to that certain
Management Agreement, dated as of December 17, 1997 (the "Management
Agreement"); and
WHEREAS, the Management Agreement provides in Section 12 thereof that
the parties may extend the term of the Management Agreement for up to 12 months
by executing a written extension; and
WHEREAS, the parties have determined to extend the term of the
Management Agreement by 12 months in accordance with Section 12 of the
Management Agreement; and
WHEREAS, the parties desire to amend the third paragraph of Section 12
of the Management Agreement;
NOW, THEREFORE, in consideration of the mutual agreements set forth
herein, the parties agree as follows:
SECTION 1. Definitions. Capitalized terms used herein but not
-----------
otherwise defined shall have the meanings assigned to them in the Management
Agreement.
SECTION 2. Extension. The parties hereby agree to extend the term of
---------
the Management Agreement by 12 months commencing on the date hereof.
SECTION 3. Amendment. The parties hereby agree that the third paragraph
---------
of Section 12 of the Management Agreement is amended as follows, with double
underlined text indicating added language and struck-through text indicating
deleted language:
"Notwithstanding any other provision to the contrary, this Agreement,
or any extension hereof, may be terminated by the Company without
cause, upon 60 days written notice, by a majority vote of the
Independent Directors or by a vote of the holders of a majority of the
outstanding Common Shares; provided that, in the event of such a
termination without cause, (a) the base management fee and incentive
management fee earned during the twelve months preceding such
termination will be due and (b) Manager shall be paid a termination fee
equal to the base management fee and incentive management fee earned
during the twelve months ending on the final day of the calendar
quarter last ending prior to the date of termination. No termination
fee shall be due in the
<PAGE>
event the initial term, or any extension thereof, expires and is not
renewed or extended."
SECTION 4. Other terms. Other than as expressly amended hereby, all
-----------
other terms, conditions and provisions of the Management Agreement shall remain
in effect during the 12 month extension provided for hereby, unless the
Management Agreement is amended in writing by the parties or is sooner
terminated in accordance with the provisions thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Extension
Agreement as of the date first written above.
FBR ASSET INVESTMENT FRIEDMAN, BILLINGS RAMSEY
CORPORATION INVESTMENT MANAGEMENT, INC.
By: /s/ Kurt Harrington By: /s/ Kurt Harrington
------------------------ -----------------------
Name: Kurt Harrington Name: Kurt Harrington
Title: Chief Financial Officer Title: Treasurer
<PAGE>
EXHIBIT 10.04
MORTGAGE INVESTMENTS
SUB-MANAGEMENT AGREEMENT
THIS AGREEMENT is made and entered into as of February 14, 2000, by and
between FIXED INCOME DISCOUNT ADVISORY COMPANY, INC. (the "Sub-Manager") and
FRIEDMAN, BILLINGS, RAMSEY INVESTMENT MANAGEMENT, INC. (the "Manager").
RECITALS
WHEREAS, FBR Asset Investment Corporation (the "Company") has retained
the Manager to manage its business and affairs including the investment of
assets of the Company; and
WHEREAS, the Sub-Manager has expertise in managing a portfolio of
mortgage loans and mortgage securities ("mortgage investments"); and
WHEREAS, the Company conducts its business and intends to continue to
conduct its business in a manner that will permit it to qualify for the tax
benefits accorded by Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"); and
WHEREAS, the Manager with the consent of the Company desires to retain
the Sub-Manager to manage a portfolio of mortgage investments for the account of
the Company in such amounts from time to time as may be determined by the
Manager in consultation with the Sub-Manager; and
WHEREAS, the Sub-Manager is willing to provide such services on the
terms and conditions set forth below;
NOW THEREFORE, in consideration of the mutual agreements herein set
forth, the parties hereto agree as follows:
SECTION 1. Appointment and Acceptance.
--------------------------
The Manager hereby appoints the Sub-Manager as an "Investment Manager."
The Manager represents and warrants that (a) it has all requisite authority to
appoint the Sub-Manager hereunder, (b) the terms of the Agreement do not
conflict with any obligations by which the Manager or the Company is bound,
whether arising by contract, operation of law or otherwise and (c) this
Agreement has been duly authorized by appropriate corporate action. The
Sub-Manager does hereby accept said appointment and by its execution of this
Agreement the Sub-Manager represents and warrants that it is registered as an
investment adviser under the Investment Advisers Act of 1940.
<PAGE>
SECTION 2. Duties of the Sub-Manager.
-------------------------
(a) The Sub-Manager at all times will be subject to the supervision of
the Manager and will have only such functions and authority as the Manager may
delegate to it. The Sub-Manager will be responsible for the day-to-day
operations of the Company with respect to its mortgage investments. The
Sub-Manager will be responsible for the investment and reinvestment of those
assets designated by the Manager as subject to the Sub-Manager's management
(which assets, together with all additions, substitutions, and alterations
thereto are hereinafter called the "Portfolio"). The Portfolio may include
investments and instruments described in the guidelines for mortgage investments
for the account of the Company. Until modified by the Manager, these guidelines
shall be those set forth in Appendices A and A-1. The Company and the Manager
hereby delegate to the Sub-Manager all of its powers, duties and
responsibilities with regard to such investment and reinvestment and hereby
appoints the Sub-Manager as its agent in fact with full authority to buy, sell
or otherwise effect investment transactions involving investments in its name
for the Portfolio. Said powers, duties and responsibilities shall be exercised
by the Sub-Manager pursuant to and in accordance with this Agreement.
Sub-Manager's authority to buy, sell or otherwise effect investment transactions
involving investments in its name for the Portfolio shall be evidenced by a
Trading Authorization in the form attached hereto as Appendix C, which
Sub-Manager may show to third parties and on which third parties may rely,
provided that in no event shall the actions of Sub-Manager made pursuant to such
Trading Authorization modify, amend, diminish or otherwise alter the respective
rights, duties and obligations of the Company, Sub-Manager and Manager
hereunder. Notwithstanding the foregoing, the Manager shall have full authority
to direct the Sub-Manager with respect to the investments in the Portfolio.
(b) The Sub-Manager will perform (or cause to be performed) such
services and activities relating to mortgage investments of the Company as may
be appropriate, including:
(i) serving as the Company's consultant with respect to
formulation of mortgage investment criteria and preparation of mortgage
investment policy guidelines;
(ii) furnishing reports to the Manager regarding the Company's
mortgage investments and the services performed for the account of the
Company by the Sub-Manager;
(iii) monitoring and providing to the Manager on an ongoing basis
price information and other data, obtained from certain nationally
recognized dealers that maintain markets in mortgage investments from
time to time, and providing data and advice to the Manager in
connection with the identification of such dealers;
(iv) performing and supervising the performance of such
administrative functions necessary in the management of the Company's
mortgage investments as may be agreed upon by the Sub-Manager and the
Manager, including the maintenance of appropriate computer services to
perform such administrative functions;
-2-
<PAGE>
(v) to the extent not otherwise subject to an agreement
executed by the Manager or the Company, designating a servicer for
mortgage loans sold to the Company by originators and arranging for the
monitoring and supervision of such servicers;
(vi) counseling the Manager in connection with policy decisions
relating to mortgage investments to be made by the Company;
(vii) consulting with the Manager regarding the maintenance of
the Company's status as a REIT and assisting the Manager in monitoring
compliance with the various REIT qualification tests and other rules
set out in the Code and regulations thereunder;
(viii) engaging in hedging activities relating to the Company's
mortgage investments and consulting with the Manager to assure that
such activities are consistent with maintaining the Company's status as
a REIT;
(ix) upon request by and in accordance with the mortgage
investment policy guidelines or with the direction of the Manager,
investing or reinvesting any money of the Company; and
(x) consulting with the Manager regarding the maintenance of
the Company's exemption from the Investment Company Act and assisting
the Manager in monitoring compliance with the various requirements for
such exemption.
(c) Portfolio Management. The Sub-Manager will perform portfolio
management services on behalf of the Manager with respect to the Company's
mortgage investments. Such services will include, but not be limited to,
consulting with the Manager on purchase and sale policies, collection of
information and submission of reports pertaining to the Company's mortgage
investments, periodic review and evaluation of the performance of the Company's
portfolio of mortgage investments, acting as liaison between the Company and
banking, mortgage banking, investment banking and other parties with respect to
the purchase, financing and disposition of mortgage investments, and other
customary functions related to mortgage investment portfolio management.
(d) Reasonable Best Efforts. The Manager agrees to use its reasonable
best efforts at all times in performing services for the Manager and the Company
hereunder.
SECTION 3. Additional Activities of Sub-Manager. Nothing herein shall
------------------------------------
prevent the Sub-Manager or any of its Affiliates from engaging in other
businesses or from rendering services of any kind to any other person or entity,
including investment in, or advisory service to others investing in, any type of
mortgage investment, including investments that meet the principal investment
objectives of the Company. It is specifically understood and agreed that the
Sub-Manager may directly or indirectly supply services of any nature, including
investment advice and portfolio administration, to other companies seeking to
qualify as a REIT, including companies sponsored or organized by it, that may be
in direct or indirect competition with the Company. The Sub-Manager will not be
required to resolve any conflicts of interest that may arise in connection with
such competing services in favor of the Company, although employees
-3-
<PAGE>
performing services for multiple accounts will seek to allocate investment and
disposition opportunities available to and appropriate for the accounts in a
manner that is reasonably fair over time to each such account. The Manager
agrees that the Sub-Manager may refrain from rendering any advice or services
concerning securities of companies of which any of the Sub-Manager's, or
affiliates of the Sub-Manager's officers, directors, or employees are directors
or officers, or companies for which the Sub-Manager or any of the Manager's
affiliates or the officers, directors and employees of any of them has any
substantial economic interest, unless the Sub-Manager either determines in good
faith that it may appropriately do so without disclosing such conflict to the
Manager or discloses such conflict to the Manager prior to rendering such advice
or services with respect to the Company's mortgage investments. From time to
time, when determined by the Sub-Manager in its capacity of a fiduciary to be in
the best interest of the Company, the Sub-Manager may on behalf of the Company
purchase securities from or sell securities to an account managed by the Sub-
Manager at prevailing market levels in accordance with the procedure under
section 17(a)(7) of the Investment Company Act of 1940.
SECTION 4. Commitments. In order to meet the investment requirements of
-----------
the Company, as determined by the Manager from time to time, the Sub-Manager
agrees, at the direction of the Manager, to issue on behalf of the Company
commitments for the purchase of mortgage investments.
SECTION 5. Bank Accounts. At the direction of the Manager, the
-------------
Sub-Manager may establish and maintain one or more bank accounts in the name of
the Company, and may collect and deposit into any such account or accounts, and
disburse funds from any such account or accounts, under such terms and
conditions as the Manager may approve; and the Sub-Manager shall from time to
time render appropriate accountings of such collections and payments to the
Manager, the Company and, upon request, to the auditors of the Manager and the
Company.
SECTION 6. Records; Confidentiality. The Sub-Manager shall maintain
------------------------
appropriate books of accounts and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Manager and the Company at any time during
normal business hours. The Sub-Manager shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated third parties except
with the prior written consent of the Manager.
SECTION 7. Obligations of Sub-Manager.
--------------------------
(a) At the sole cost and expense of the Company, the Sub-Manager shall
require each seller or transferor of mortgage investments to the Company to make
such representations and warranties regarding such investments as may, in the
judgment of the Sub-Manager, be necessary and appropriate. In addition, the
Sub-Manager shall take such other action as it deems necessary or appropriate
with regard to the protection of the Company's mortgage investments.
(b) The Sub-Manager shall refrain from any action that would adversely
affect the status of the Company as a REIT or that, to the best of its
knowledge, would violate any law, rule or regulation of any governmental body or
agency having jurisdiction over the Company or the
-4-
<PAGE>
Manager or that would otherwise not be permitted by the Company's charter or by-
laws. If the Sub-Manager is ordered to take any such action by the Manager, the
Sub-Manager shall promptly notify the Manager of the Sub-Manager's judgment that
such action would adversely affect such status or violate any such law, rule or
regulation, or the Company's charter or by-laws and shall not be required to
take such action. Notwithstanding the foregoing, the Sub-Manager, its directors,
officers, stockholders and employees shall not be liable to the Manager, the
Company, or the Company's stockholders for any act or omission by the Sub-
Manager, its directors, officers, stockholders or employees except as provided
in Section 10 of this Agreement.
SECTION 8. Compensation. For services hereunder, the Manager shall be
------------
compensated in accordance with Exhibit B, attached hereto. If this agreement
terminates at any time other than the end of a calendar quarter, the last
quarterly fee shall be prorated based on the portion of such calendar quarter
during which this Agreement was in force.
SECTION 9. Custodian. Securities representing Company mortgage
---------
investments shall be held by a custodian duly appointed by the Company, and the
Sub-Manager is authorized to give instructions to the custodian with respect to
all investment decisions regarding such mortgage investments. Except as provided
in Paragraph 2 above, nothing contained herein shall be deemed to authorize the
Sub-Manager to take or receive physical possession of any of the mortgage
investments for the account of the Company, it being intended that sole
responsibility for safekeeping thereof (in such investments as the Sub-Manager
may direct) and the consummation of all purchases, sales, deliveries and
investments made pursuant to the Sub-Manager's direction shall rest upon the
custodian.
The Sub-Manager is authorized to enter into Tri-Party Repurchase
Agreements and sign the standard PSA tri-party agreement (the "Tri-Party
Agreement") on behalf of the Company and the subcustodian thereunder is
authorized to act as a subcustodian for the Company mortgage investments
involved in any tri-party repurchase agreement pursuant to such Tri-Party
agreement.
SECTION 10. Limits of Sub-Manager Responsibility. The Sub-Manager
------------------------------------
assumes no responsibility under this Agreement other than to render the services
called for hereunder in good faith and shall not be responsible for any action
of the Manager or the Company in following or declining to follow any advice or
recommendations of the Sub-Manager, including as set forth in Section 7 of this
Agreement. The Sub-Manager, its directors, officers, stockholders and employees
will not be liable to the Manager, the Company, or the Company's or any
subsidiary's shareholders for any acts or omissions by the Sub-Manager, its
directors, officers, stockholders or employees under or in connection with this
Agreement, except by reason of acts constituting bad faith, willful misconduct,
negligence or reckless disregard of their duties. The Manager shall reimburse,
indemnify and hold harmless the Sub-Manager, its stockholders, directors,
officers and employees of and from any and all expenses, losses, damages,
liabilities, demands, charges and claims of any nature whatsoever, (including
attorneys' fees) in respect of or arising from any acts or omissions of the
Sub-Manager, its stockholders, directors, officers and employees made
-5-
<PAGE>
in good faith in the performance of the Sub-Manager's duties under this
Agreement and not constituting bad faith, willful misconduct, negligence or
reckless disregard of its duties.
SECTION 11. No Joint Venture. The Manager and the Sub-Manager are not
----------------
partners or joint venturers with each other and nothing herein shall be
construed to make them such partners or joint venturers or impose any liability
as such on either of them.
SECTION 12. Resignation or Removal of the Sub-Manager. The Sub-Manager
-----------------------------------------
may be removed by the Manager or may resign upon 30 days' notice in writing. On
the effective date of the removal or resignation of the Sub-Manager or as close
to such date as is reasonably possible, the Sub-Manager shall provide the
Manager with a final report containing such information concerning the Company's
mortgage investments as the Manager may reasonably request.
SECTION 13. Assignment, Changes in Organization of Sub-Manager. Unless
--------------------------------------------------
the Manager expressly consents thereto in writing, any assignment (as defined in
the Investment Advisers Act of 1940) by the Sub-Manager of this Agreement shall
automatically terminate this Agreement. If the Sub-Manager hereunder is
converted into, merges or consolidates with or sells or transfers substantially
all of its assets or business to another entity, the resulting entity or the
entity to which such sale or transfer has been made shall notify the Manager of
such sale or transfer and shall become the Sub-Manager hereunder only if the
Manager specifically so consents in writing.
SECTION 14. Release of Money or Other Property Upon Written Request.
-------------------------------------------------------
The Sub-Manager agrees that any money or other property of the Company held by
the Sub-Manager under this Agreement shall be held by the Sub-Manager as
custodian for the Company, and the Sub-Manager's records shall be appropriately
marked clearly to reflect the ownership of such money or other property by the
Company. Upon the receipt by the Sub-Manager of a written request signed by a
duly authorized officer of the Company or the Manager requesting the Sub-Manager
to release to the Company any money or other property then held by the
Sub-Manager for the account of the Company under this Agreement, the Sub-Manager
shall release such money or other property to the Company within a reasonable
period of time, but in no event later than 30 days following such request. The
Sub-Manager shall not be liable to the Manager, Company, or the Company's or a
subsidiary's stockholders for any acts performed or omissions to act by the
Company or the Manager in connection with the money or other property released
to the Company in accordance with this Section. The Company shall indemnify the
Sub-Manager, its directors, officers, stockholders and employees against any and
all expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever, which arise in connection with the Sub-Manager's release of
such money or other property to the Company in accordance with the terms of this
Section 14. Indemnification pursuant to this provision shall be in addition to
any right of the Sub-Manager to indemnification under Section 10 of this
Agreement.
SECTION 15. Notices. Unless expressly provided otherwise herein, all
-------
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against
-6-
<PAGE>
receipt or upon actual receipt of registered or certified mail, postage prepaid,
return receipt requested, addressed as set forth below:
(a) If to the Manager or the Company:
Friedman, Billings, Ramsey Investment Management, Inc.
1001 Nineteenth Street, North
Arlington, Virginia 22209
Attention: Robert S. Smith, Esq.
or by facsimile to (703) 312-9756
(b) If to the Sub-Manager:
Fixed Income Discount Advisory Company, Inc.
12 East 41st Street
New York, NY 10017
Attention: Michael A.J. Farrell, Chairman and CEO
or by facsimile to (212) __________
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section 19 for the giving of notice.
SECTION 16. Binding Nature of Agreement; Successors and Assigns. This
---------------------------------------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
SECTION 17. Entire Agreement. This Agreement contains the entire
----------------
agreement and understanding among the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements,
understandings, inducements and conditions, express or implied, oral or written,
of any nature whatsoever with respect to the subject matter hereof. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.
SECTION 18. Controlling Law. This Agreement and all questions relating
---------------
to its validity, interpretation, performance and enforcement shall be governed
by and construed, interpreted and enforced in accordance with the laws of the
Commonwealth of Virginia, notwithstanding any Virginia or other conflict-of-law
provisions to the contrary.
SECTION 19. Indulgences, Not Waivers. Neither the failure nor any delay
------------------------
on the part of a party to exercise any right, remedy, power or privilege under
this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, remedy, power or privilege
-7-
<PAGE>
preclude any other or further exercise of the same or of any other right,
remedy, power or privilege, nor shall any waiver of any right, remedy, power or
privilege with respect to any occurrence be construed as a waiver of such right,
remedy, power or privilege with respect to any other occurrence. No waiver shall
be effective unless it is in writing and is signed by the party asserted to have
granted such waiver.
SECTION 20. Costs and Expenses. Each party hereto shall bear its own
------------------
costs and expenses incurred in connection with the negotiations and preparation
of and the closing under this Agreement, and all matters incident thereto.
SECTION 21. Titles Not to Affect Interpretation. The titles of
-----------------------------------
paragraphs and subparagraphs contained in this Agreement are for convenience
only, and they neither form a part o f this Agreement nor are they to be used in
the construction or interpretation hereof.
SECTION 22. Execution in Counterparts. This Agreement may be executed
-------------------------
in any number of counterparts, each of which shall be deemed to be an original
as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
SECTION 23. Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
SECTION 24. Investment Manager Brochure. The Manager hereby
---------------------------
acknowledges that it has received from the Sub-Manager a copy of the ADV Form,
Part II, as currently filed, at least forty-eight hours prior to entering into
this Agreement.
SIGNATURE PAGE FOLLOWS
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement as of the date first written above.
FIXED INCOME DISCOUNT
ADVISORY COMPANY, INC.
By:________________________________
Name:______________________________
Title:_____________________________
FRIEDMAN, BILLINGS, RAMSEY
INVESTMENT MANAGEMENT, INC.
By:________________________________
Name:______________________________
Title:_____________________________
Agreed to:
FBR ASSET INVESTMENT CORPORATION
By:________________________________
Name:______________________________
Title:_____________________________
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<PAGE>
Appendix A
MORTGAGE LOAN PORTFOLIO
Proposed Investment Guidelines
The Portfolio.................................. The Mortgage Loan Portfolio
(the Portfolio) is a separate
account managed by Fixed
Income Discount Advisory
Company, Inc. (FIDAC) for the
benefit of the FBR Asset
Investment Corporation (the
Corporation).
Investment Objective........................... The Portfolio will consist of
qualifying REIT mortgage
assets that will earn both a
positive spread to their
funding costs and an
attractive return on capital.
Approximately 4-15% of the
Corporation's total equity
will be allocated to the
Portfolio. This equity will be
levered in order to meet the
55% qualifying "Non-RIC" asset
requirement.
Duration Guidelines............................ The Portfolio will be managed
with a very low duration
target.
Asset Guidelines............................... Following are eligible
investments:
Loans secured by residential
properties and agency and non-
agency mortgage-backed
securities backed by loans
secured by residential and
multifamily properties
including, but not limited to
1) pass-throughs, 2) project
loans, and 3) adjustable rate
mortgages (further details
follow in Appendix A1);
The Portfolio may only invest
in U.S. dollar denominated
securities.
The Portfolio may use interest
swaps and/or exchange traded
options for purposes of yield
curve management and
maintaining a target duration.
The Portfolio may purchase
private placement or Rule 144A
securities.
Credit Criteria............................... Securities must be rated
investment grade or
A-1
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<PAGE>
better by a national recognized
credit rating agency at the time
of purchase.
In the event that a Portfolio
investment is downgraded below
these credit quality guidelines,
the Investment Manager shall
notify the Corporation and provide
an evaluation and a recommended
course of action.
Leverage.................................... The Portfolio may enter into
reverse repurchase agreements.
Other financing strategies will be
used from time to time with the
prior approval of the Company.
Reinvestment of Income...................... All investment income of the
Portfolio and capital gains, if
any, will be added to the assets
of the Portfolio.
Custodian................................... As selected by the Corporation.
A-2
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<PAGE>
Appendix A1
DESCRIPTION OF MORTGAGE LOAN PORTFOLIO
Overview
- --------
Fixed Income Discount Advisory Company, Inc. (FIDAC) will be the sub-advisor on
the Mortgage Portfolio. The investment objective of the Mortgage Portfolio is to
manage a portfolio of qualifying REIT mortgage assets that will earn both a
positive spread to their funding costs and an attractive return on capital.
FIDAC intends to invest primarily in the following three sectors of the mortgage
market:
1. Whole-pool agency pass-through securities
2. Non-conforming residential mortgage loans
3. Project loans.
These sectors are described below.
Agency Pass-Through Securities
- ------------------------------
FIDAC will buy agency pass-through securities that represent 100% interest in
the underlying conforming mortgage loans ("whole pools"). Most of the loans will
fully amortize over the terms of their mortgages, but some may require a
"balloon" payment upon maturity. Conforming loans comply with the underwriting
requirements for purchase by one of the following agencies: Federal Home Loan
Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), and
Government National Mortgage Association (GNMA). Under current requirements,
conforming loans must be secured by first liens on single-family residential
properties that comply with requirements governing original outstanding
principal balances, loan-to-value ratios, and various other underwriting
criteria.
These securities do not bear the risk of credit loss due to defaults as they are
guaranteed by the agencies. GNMA is a wholly owned corporate instrumentality of
the U.S. Government within the U.S. Department of Housing and Urban Development
(HUD) and, therefore, its guarantee is backed by the full faith and credit of
the U.S. Government. FNMA and FHLMC are government-sponsored agencies that are
not backed by the full faith and credit of the U.S. Government, although they
have implicit government guarantees.
Agency securities may be collateralized by either fixed or adjustable coupons.
Fixed-rate mortgage loans have a constant coupon over the life of the loan,
generally 15 or 30 years. FIDAC will generally buy seasoned, short
weighted-average maturity ("WAM"), fixed-rate securities. FIDAC will also invest
in securities backed by adjustable-rate mortgage ("ARM") loans, which provide
for the periodic adjustment of the coupon. The coupon is set as the sum of a
fixed margin and an index, subject to certain periodic and life-time
interest-rate caps. The most
A1-1
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<PAGE>
common reference indices for ARMs are the Constant-Maturity Treasury Indices
(CMT), LIBOR, and the CD rate. Agency securities may also include hybrid ARMs,
which are securities that have an adjustable coupon for an initial period and
thereafter a fixed coupon.
Mortgage loans are subject to prepayment risk. The rate at which prepayments
occur on mortgage loans will be affected by a variety of factors, including
current interest rates and economic, demographic, tax, social, legal, and other
factors. Generally, prepayments increase when interest rates fall and decrease
when interest rates rise. To the extent that actual prepayment rates are
different than originally anticipated, the yield on and duration of investments
in mortgage loans may be adversely affected. This may adversely affect the
expected rate of return on the investments. FIDAC will seek to manage this risk
through constant monitoring of the portfolio and an active funding and hedging
program.
The markets for all of these assets are very liquid and FIDAC intends to
purchase them from various Wall Street broker/dealers.
Non-Conforming or "Whole-Loan" Mortgages
- ----------------------------------------
FIDAC will also buy non-conforming adjustable-rate and hybrid mortgage loans and
securities collateralized by such loans. Non-conforming mortgage loans are loans
secured by first liens on single-family residential properties that do not
qualify for purchase by FHLMC, FNMA, or GNMA. Non-conforming loans generally
have outstanding principal balances in excess of agency-program guidelines or
are issued based upon different underwriting criteria than those required by the
agencies.
Pass-through securities collateralized by non-conforming loans (private
pass-through securities) are issued by originators of and investors in mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks, and special-purpose subsidiaries of those instruments.
Although these securities are generally structured similarly to the GNMA, FNMA,
and FHLMC securities, they typically are not guaranteed by an entity having the
credit status of one of the agencies and, therefore, generally offer higher
yield than their agency counterparts. Although some credit risk does exist for
both whole loans and whole loan-backed securities, historical losses from
well-underwritten loan packages are extremely small.
While less liquid, there are active markets for both whole loans and securities
collateralized by these loans. FIDAC intends to purchase these assets from
various Wall Street dealers and mortgage originators. As an example, FIDAC has
identified for purchase loans originated by Merrill Lynch as an attractive
source of product. These loans are uncapped adjustable-rate mortgage loans that
Merrill Lynch offers to its brokerage clients ("Prime First" Program).
Putable and Non-Putable FHA/GNMA Project Loans
- ----------------------------------------------
Project loans are government-insured (via FHA insurance or GNMA guarantee)
two-part
A1-2
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<PAGE>
financing vehicles that (i) finance the construction or rehabilitation of
multifamily residential housing and healthcare facilities and (ii) provide
permanent financing for the project once construction is completed. The loans
can have final maturities as long as forty years and, unlike single-family
mortgage loans, often contain explicit call protection in the form of prepayment
lock-outs or prepayment penalties that can last up to ten years. Project loans
are sold as either single-loan participation or multiple-loan pools. Many
project loans issued prior to 1984 contain a put-option provision which permits
the loans to be assigned to HUD after twenty years .
Project loans are administratively complex, demanding significant knowledge of
the project loans and the mortgage market in general. As a result of their
complexity and various operational concerns, the market for these loans is less
liquid than traditional mortgage loans.
Default risk is largely mitigated with project loans, since the FHA and GNMA
insures the loans against default. FHA-insured project loans are effectively 99%
insured, while GNMA-backed project loans are 100% insured.
One major advantage of these securities, relative to residential loans and
securities, is that their cash flows are generally more stable. Non-putable
project loans exhibit very stable cash flows over the first ten years of their
term, owing to the explicit call protection of the loans. At the end of the
call-protection period, the loans are fully prepayable. However, the greater
costs associated with refinancing multifamily housing are a disincentive, even
for loans at above market rates. The long maturity of the loans poses extension
risk in the event of a significant rise in rates.
Putable project loans do not possess significant extension risk due to the
ability to assign the loans to HUD. However, the loans generally do not possess
significant call protection, because most of the loans are seasoned and,
therefore, well into their lock-out period. Most putable project loans are
lower-coupon issues, providing little incentive for the mortgagor to refinance
based on changes in interest rates.
Project loans offer a significantly higher yield than single-family mortgage
loans and, as mentioned above, these loans offer more stable cash flows than
single-family mortgage loans due to their explicit prepayment protection, making
them a unique asset class in the mortgage market.
The value of the call-protection feature has increased as the single-family
market has become more efficient in exercising imbedded refinancing options. On
an option-adjusted-spread (OAS) basis, project loans are estimated to be at
least thirty basis points cheaper than single-family mortgage loans.
FIDAC intends to purchase these assets from various Wall Street broker/dealers
and mortgage originators.
A1-3
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<PAGE>
Sample Portfolio of December 31, 1999
- -------------------------------------
================================================================================
ALLOCATION YIELD DURATION
ASSET CLASS RANGE RANGE RANGE
- --------------------------------------------------------------------------------
Short-WAM Pools 8-12% 6.25-6.75% 2.00-2.50
- --------------------------------------------------------------------------------
Agency ARMs 15-25% 6.00-6.50% 0.50-1.00
- --------------------------------------------------------------------------------
Hybrid ARMs 8-12% 6.75-7.25% 1.75-2.25
- --------------------------------------------------------------------------------
Whole-Loan ARMs (ML Prime First) 8-12% 6.75-7.25% 0.25-0.75
- --------------------------------------------------------------------------------
Whole-Loan ARMs 15-25% 6.25-6.75% 0.50-1.00
- --------------------------------------------------------------------------------
Putable Project Loans 8-12% 6.25-6.75% 2.50-3.50
- --------------------------------------------------------------------------------
Non-Putable Project Loans 15-25% 6.50-7.50% 4.50-5.50
================================================================================
Total Portfolio 100% 6.25-7.00% 1.50-2.50
================================================================================
Timing of Investments
- ---------------------
It is anticipated that once the Company is fully invested in equity REIT
securities, approximately 15% of the Company's total equity capital will be
allocated to the Mortgage Loan Portfolio. This equity will be levered in order
to meet the 55% qualifying "Non-RIC" asset requirement. Assuming total equity
capital of $300 million, approximately $45 million will be allocated to the
Mortgage Loan portfolio. Once fully invested, the portfolio will typically have
leverage in the range of 6:1 to 9:1 (debt to equity), implying a total Mortgage
Loan Portfolio of $300 million to $450 million.
In order to build a portfolio of this size, FIDAC will begin to invest in these
securities as soon as possible after the closing date. While all of the sectors
discussed above have fairly liquid markets, FIDAC would begin by investing in
the most liquid sectors (agency securities), and slowly building toward our
target allocations over a six-to-nine month time frame. The timing of
investments and the amount of leverage in the portfolio will ultimately be a
function of not only the availability of appropriate product, but also the
timing and leverage of the non-Mortgage Loan Portfolio.
Funding/Hedging Strategy
- ------------------------
The portfolio will be funded with equity, as well as with LIBOR-based
collateralized borrowings. Derivatives may be used to effectively lock in
longer-term funding costs to better match the maturities of the liabilities with
the maturities of the assets. FIDAC will seek to manage the interest-rate risk
of the portfolio's mark-to-market and net interest margin through the use of
derivatives, as well as the asset-liability structure of the portfolio. One such
measure of this risk is "duration," which measures the portfolio's sensitivity
to changes in interest rates. The duration target of the portfolio's net assets
(total assets less liabilities) will generally be set
A1-4
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<PAGE>
at very low levels.
Some of the derivatives used to manage interest-rate risk will include
interest-rate swaps and caps. Interest-rate swaps are arrangements whereby
parties "swap" interest payments. The most common type of swap is one in which
the two parties exchange fixed- for floating-rate payments. For example, if the
rate to swap 5-year fixed for 3-month LIBOR is ten percent, the fixed payer will
make fixed payments equal to ten percent per annum and receive 3-month LIBOR.
Swaps will be used for asset-liability management in that they will allow
investors to swap floating-rate liabilities into a fixed rate.
Interest-rate caps, also referred to as interest-rate ceilings, allow the
purchaser to "cap" the contractual rate associated with a floating-rate
liability. The seller of the cap pays the purchaser any amount above the
periodic capped rate on the settlement date. As mentioned above, the coupons of
adjustable-rate mortgages are usually subject to certain periodic and life-time
interest-rate caps. Purchasing caps allows the investor to effectively uncap the
portfolio's ARM positions or, alternatively, to cap the portfolio's liability
costs.
Sample Asset-Liability Position as of December 31, 1999
- -------------------------------------------------------
Leverage Ratio: [7:1] (debt to equity)
-------------------------------------------------------------------------
AMOUNT NET YIELD DURATION
-------------------------------------------------------------------------
Assets $360,000 6.40% 2.00
Liabilities $[315,000 6.00% 0.25
including hedge 6.25% 2.00
-------------------------------------------------------------------------
Net Assets $45,000 7.45% 0.00
-------------------------------------------------------------------------
A1-5
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<PAGE>
Appendix B
COMPENSATION OF SUB-MANAGER
As compensation for rendering services under the Mortgage Investment
Sub-Management Agreement, the Sub-Manager shall be paid a quarterly management
fee in arrears at the annual rate of 0.20% based on the average gross asset
value of each calendar quarter (calculated as the average of the beginning and
ending gross asset value of the calendar quarter) with a minimum annual fee of
$100,000. The Sub-Manager will be reimbursed for reasonable out-of-pocket
expenses incurred in connection with managing the Mortgage Assets, including
travel, meals, hotels, and other miscellaneous expenses. The Sub-Manager agrees
that the aggregate amount of such expenses shall not exceed $15,000 annually,
without the prior approval of the Manager.
B-1
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<PAGE>
Appendix C
FORM OF TRADING AUTHORIZATION
To: Fixed Income Discount Advisory Company, Inc. (FIDAC)
Ladies and Gentlemen:
Pursuant to that certain Mortgage Investments Sub-Management Agreement
(the "Sub-Management Agreement") by and between Friedman, Billings, Ramsey
Investment Management, Inc. (the "Undersigned") and Fixed Income Discount
Advisory Company, Inc. ("Authorized Agent"), the Undersigned hereby authorizes
Authorized Agent to act as its agent and attorney to buy, sell and trade in
bonds and other securities for the Undersigned's account(s) and risk and in the
Undersigned's name or number on your books.
You may follow the express instructions of the Undersigned in every
respect concerning the Undersigned's account(s) with you, and make deliveries of
securities and/or payment of moneys to the Undersigned or otherwise as the
Undersigned may order and direct. In all matters and things aforementioned, as
well as in all other things necessary or incidental to the furtherance or
conduct of the account of the Undersigned permitted under the Sub-Management
Agreement, the Authorized Agent is authorized to act for the Undersigned and on
the Undersigned's behalf in the same manner and with the same force and effect
as the Undersigned might or could do. Third parties are permitted to rely on
this authorization as evidence of your authority to act as the Undersigned's
agent, but no such reliance by a third party shall have any affect on the rights
and obligation of you or the Undersigned under the Sub-Management Agreement.
The Undersigned hereby ratifies and confirms any and all transactions
heretofore made by the Authorized Agent for the Undersigned's account which have
been disclosed to the Undersigned.
This authorization is made pursuant to the Sub-Management Agreement and
does not modify, amend, restrict or limit any rights or obligations you or the
Undersigned may have under the Sub-Management Agreement or any other agreement
between you and the Undersigned.
This authorization shall continue and remain in full force and effect
until revoked by the Undersigned by a written notice addressed to you and
delivered to your principal office (via mail or facsimile), but such revocation
shall not affect any liability either you or the Undersigned may have resulting
from transactions initiated prior to such revocation.
This authorization and its enforcement shall be governed by the laws of
the State of New York. This authorization may not be assigned by you to any
successor firm or firms without the express prior written consent of the
Undersigned, which may given or withheld in the sole and absolute discretion of
the Undersigned. The provisions hereof shall inure to the benefit of you or, to
C-1
-18-
<PAGE>
the extent consented to in writing by the Undersigned, any assignee,
irrespective of any change or changes at any time in the personnel thereof for
any cause whatsoever, and shall be binding upon the Undersigned, and/or the
estate executors, administrators and assigns of the Undersigned.
If any provision of this authorization shall be rendered invalid for
any reason, the provisions of this agreement so affected shall be deemed
modified or superseded, as the case may be, and all other provisions, and the
provisions so modified or superseded shall in all respects continue and be in
full force and effect.
INITIAL APPROPRIATE LINES IF AUTHORITY IS BEING GRANTED TO EFFECT MARGIN
TRANSACTIONS OR WITHDRAW MONEY AND/OR SECURITIES.
Agent shall be authorized to purchase on margin: _____ _____ __________
Yes No Initials
Agent shall be authorized to wire money and/or securities to the designated
accounts only:
_____ _____ __________
Yes No Initials
Very truly yours,
FRIEDMAN, BILLINGS, RAMSEY
INVESTMENT MANAGEMENT, INC.
By:___________________________
William R. Swanson, Chief
Operating Officer
Dated:________________________
C-2
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<PAGE>
Annual Report to Shareholders for the Year
Ended December 31, 1999
This Annual Report on Form 10-K, without exhibits, will be delivered to the
Registrant's shareholders before or simultaneously with delivery of the
Registrant's annual proxy statement.
<PAGE>
EXHIBIT 21.01
List of Subsidiaries of the Registrant
The registrant has no subsidiaries.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 41,144,326 13,417,467
<SECURITIES> 232,401,789 285,662,709
<RECEIVABLES> 19,082,921 27,000,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 295,930,620 330,180,460
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 295,930,620 330,180,460
<CURRENT-LIABILITIES> 145,026,041 225,637,739
<BONDS> 0 0
0 0
0 0
<COMMON> 104,158 104,158
<OTHER-SE> 150,800,421 104,438,563
<TOTAL-LIABILITY-AND-EQUITY> 295,930,620 330,180,460
<SALES> 0 0
<TOTAL-REVENUES> 17,927,502 23,473,849
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,609,827 2,761,652
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,359,633 7,920,648
<INCOME-PRETAX> 1,588,235 5,142,589
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,588,235 5,142,589
<EPS-BASIC> 0.16 0.68
<EPS-DILUTED> 0.16 0.68
</TABLE>
