<PAGE>
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended September 30, 2000
------------------
OR
[ ] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
---------- ----------
Commission File Number 1-15049
-------
FBR ASSET INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Virginia 54-1873198
(State or other Jurisdiction of (I.R.S. employer
Incorporation or Organization) identification no.)
Potomac Tower (703) 469-1000
1001 Nineteenth Street North (Registrant's telephone number
Arlington, Virginia 22209 including area code)
(Address of principal executive offices)
(zip code)
</TABLE>
N/A
(former name)
Indicate by checkmark 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 reports), and (ii) has been subject to such filing
requirements for the past 90 days:
Yes: X No
----- -----
As of November 10, 2000, the latest practicable date, there were 3,995,627
shares of FBR Asset Investment Corporation's common stock outstanding.
================================================================================
<PAGE>
FBR ASSET INVESTMENT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
---------
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements and Notes
Statements of Financial Condition as of September 30, 2000
(unaudited) and as of December 31, 1999............................... 1
Statements of Income for the Three and Nine Months Ended
September 30, 2000 and 1999 (unaudited)............................... 2
Statements of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 2000 (unaudited), and the Year
Ended December 31, 1999............................................... 4
Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (unaudited)............................... 5
Notes to Financial Statements........................................... 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 9
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk..... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 2. Changes in Securities and Use of Proceeds...................... 21
Item 3. Defaults Upon Senior Securities................................ 21
Item 4. Submission of Matters to Vote of Security Holders.............. 21
Item 5. Other Information.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
SIGNATURES................................................................ 22
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS AND NOTES
FBR Asset Investment Corporation
Statements of Financial Condition as of September 30, 2000 (unaudited) and
December 31, 1999 *
================================================================================
<TABLE>
<CAPTION>
As of September 30, 2000 As of December 31, 1999
------------------------- ------------------------
(unaudited)
ASSETS
<S> <C> <C>
Mortgage-backed securities, at fair value $158,218,701 $236,014,844
Cash and cash equivalents 4,864,317 13,417,467
Investments in equity securities, at fair value 42,598,892 49,647,865
Notes receivable 24,000,000 27,000,000
Dividends receivable 525,450 1,400,897
Prepaid expenses and other assets 180,560 253,516
Due from custodian -- 806,093
Interest receivable 1,263,426 1,639,778
------------ ------------
Total assets $231,651,346 $330,180,460
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Repurchase agreements $139,938,000 $221,714,000
Interest payable 1,475,541 487,222
Dividends payable 2,423,296 2,891,368
Management fees payable 290,128 237,167
Accounts payable and accrued expenses 168,166 129,677
Deferred revenue -- 178,305
------------ ------------
Total liabilities 144,295,131 225,637,739
------------ ------------
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 September 30,
2000, and December 31, 1999, respectively 104,158 104,158
Additional paid-in capital 194,097,193 194,097,193
Accumulated other comprehensive loss (1,390,268) (12,982,359)
Retained deficit (21,612,070) (15,463,462)
Treasury stock, at cost, 6,377,000 shares
and 4,609,491 shares as of September 30,
2000 and December 31, 1999, respectively (83,842,798) (61,212,809)
------------ ------------
Total shareholders' equity 87,356,215 104,542,721
------------ ------------
Total liabilities and shareholders' equity $231,651,346 $330,180,460
============ ============
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
1
<PAGE>
FBR Asset Investment Corporation
Statements of Income for the Three Months Ended September 30, 2000 and 1999
(unaudited)*
================================================================================
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
<S> <C> <C>
2000 1999
---------- ----------
(unaudited) (unaudited)
Income:
Interest $4,211,836 $2,909,012
Dividends 1,381,898 1,694,354
---------- ----------
Total income 5,593,734 4,603,366
Expenses:
Interest expense 2,820,747 1,539,401
Management fee expense 242,145 296,546
Professional fees & other expenses 191,542 248,844
Amortization of stock options issued to manager -- 113,687
---------- ----------
Total expenses 3,254,434 2,198,478
---------- ----------
Realized gain on sale of available-for-sale equity securities,
net 57,098 330,724
---------- ----------
Net income $2,396,398 $2,735,612
========== ==========
Basic and diluted earnings per share $0.58 $0.38
========== ==========
Weighted-average common and equivalent shares 4,157,662 7,111,727
========== ==========
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
2
<PAGE>
FBR Asset Investment Corporation
Statements of Income for the Nine Months Ended September 30, 2000 and 1999
(unaudited)*
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Income:
Interest $14,383,894 $10,654,590
Dividends 3,447,289 4,533,206
----------- -----------
Total income 17,831,183 15,187,796
Expenses:
Interest expense 8,628,191 4,921,530
Management fee expense 825,549 975,252
Professional fees & other expenses 455,953 758,227
Amortization of stock options issued to manager -- 341,060
----------- -----------
Total expenses 9,909,693 6,996,069
----------- -----------
Realized gain on sale of available-for-sale equity securities, net 636,305 1,074,077
Realized gain on sale of mortgage-backed securities, net 67,358 --
Recognized loss on available-for-sale equity securities (5,626,022) --
----------- -----------
Net income $ 2,999,131 $ 9,265,804
=========== ===========
Basic and diluted earnings per share $ 0.63 $ 1.19
=========== ===========
Weighted-average common and equivalent shares 4,731,163 7,773,157
=========== ===========
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
3
<PAGE>
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Nine Months Ended
September 30, 2000 (unaudited) and the Year Ended December 31, 1999
================================================================================
<TABLE>
<CAPTION>
Accumulated
Other
Additional Retained Comprehensive Comprehensive
Common Paid in Earnings Treasury Income Income
Stock Capital (Deficit) Stock (Loss) Total (Loss)
------- ------------ ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
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
------- ------------ ------------ ------------ ------------ ------------
Repurchase of common stock -- -- -- (22,629,989) -- (22,629,989)
Net Income -- -- 2,999,131 -- -- 2,999,131 $ 2,999,131
Other comprehensive income
Change in unrealized loss
on available-for-sale
securities -- -- -- -- 11,592,091 11,592,091 11,592,091
-----------
Comprehensive income -- -- -- -- -- -- $14,591.222
===========
Dividends -- -- (9,147,739) -- -- (9,147,739)
------- ------------ ------------ ------------ ------------ ------------
Balance, September 30, 2000 104,158 $194,097,193 $(21,612,070) $(83,842,798) $ (1,390,268) $ 87,356,215
======= ============ ============ ============ ============ ============
</TABLE>
================================================================================
* The accompanying notes are an integral part of these Statements.
4
<PAGE>
FBR Asset Investment Corporation
Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999
================================================================================
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,999,131 $ 9,265,804
Adjustments to reconcile net income to net cash provided
by operating activities
Realized and recognized losses (gains) on mortgage backed
and available for sale equity securities 4,922,359 (1,074,077)
Amortization 4,717 342,257
Premium amortization on mortgage-backed securities 206,897 552,258
Changes in operating assets and liabilities:
Due from custodian 806,093 --
Dividends receivable 875,447 64,658
Interest receivable 376,352 1,132,159
Prepaid expenses 72,956 (271,713)
Management fees payable 52,961 (1,145,174)
Accounts payable and accrued expenses 38,490 (25,257)
Interest payable 988,319 612,406
Due to custodian -- (2,041,230)
Due to broker -- 5,496,189
Deferred revenue (178,306) 115,772
------------- ------------
Net cash provided by operating activities 11,165,416 13,024,052
------------- ------------
Cash flows from investing activities:
Purchase of mortgage-backed securities (40,921,815) (9,888,384)
Investments in equity securities (1,801,410) (11,454,320)
Investments in notes receivable, net of repayments 3,000,000 (17,836,638)
Proceeds from sale of mortgage backed securities 101,529,084 --
Proceeds from sale of available-for-sale equity securities 14,931,133 9,110,897
Receipt of principal payments on mortgage-backed securities 17,566,242 23,533,286
------------- ------------
Net cash provided by (used in) investing activities 94,303,234 (6,535,159)
------------- ------------
Cash flows from financing activities:
Repurchase of common stock (22,629,989) (20,725,983)
Repayments of repurchase agreements, net (81,776,000) (14,474,000)
Dividends paid (9,615,811) (8,007,428)
------------- ------------
Net cash used in financing activities (114,021,800) (43,207,411)
------------- ------------
Net decrease in cash and cash equivalents (8,553,150) (36,718,518)
Cash and cash equivalents, beginning of the period 13,417,467 41,144,326
------------- ------------
Cash and cash equivalents, end of the period $ 4,864,317 $ 4,425,808
------------- ------------
Supplemental disclosure of non-cash investing activities:
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
5
<PAGE>
FBR ASSET INVESTMENT CORPORATION
Notes to Financial Statements (unaudited)
Note 1 Basis of Presentation
The financial statements of FBR Asset Investment Corp. ("FBR Asset" or the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q. Therefore, they do not include all information required by generally
accepted accounting principles for complete financial statements. The interim
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation of the results for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results for
the entire year. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1999 and included on Form 10-K filed by the Company with the
Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 Investments in Mortgage-Backed Securities
During the nine months ended September 30, 2000, FBR Asset received proceeds of
$101.5 million from the sale of mortgage-backed securities. The Company recorded
$1.4 million in realized losses related to these sales. Concurrent with these
sales, FBR Asset terminated a related hedge position and recorded a $1.5 million
gain.
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
September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Total Mortgage
September 30, 2000 Freddie Mac Fannie Mae Ginnie Mae Assets
------------------------------ ------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Mortgage-backed securities,
Available-for-sale, principal $88,959,760 $ 60,671,735 $10,251,180 $159,882,675
Unamortized premium (discount) 466,346 718,503 592,684 1,777,533
----------- ------------ ----------- ------------
Amortized cost 89,426,106 61,390,238 10,843,864 161,660,208
Gross unrealized gains __ 7,731 __ 7,731
Gross unrealized losses (1,998,022) (1,037,927) (413,289) (3,449,238)
----------- ------------ ----------- ------------
Estimated fair value $87,428,084 $ 60,360,042 $10,430,575 $158,218,701
=========== ============ =========== ============
<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
=========== ============ =========== ============
</TABLE>
6
<PAGE>
Note 3 Repurchase Agreements
At September 30, 2000, FBR Asset had $139.9 million outstanding under repurchase
agreements with a weighted average borrowing rate of 6.63% as of the end of the
period and a remaining weighted-average term to maturity of 15 days. At
September 30, 2000, mortgage-backed securities pledged against repurchase
agreements had an estimated fair value of $148.6 million. At September 30, 2000,
the repurchase agreements had remaining maturities of between 1 and 47 days.
As of 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 weighted-average remaining 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.
Note 4 Interest Rate Swaps
At September 30, 2000 and December 31, 1999, 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 $437,335 and $468,422 at September 30, 2000,
and December 31, 1999, respectively. FBR Asset accounts for this interest rate
swap as a hedge and accordingly, its value has not been recorded in the
financial statements.
Note 5 Notes Receivable
As of September 30, 2000 and December 31, 1999, FBR Asset held a $20 million
note from Prime Retail, Inc. and Prime Retail, L.P. (together, "Prime Retail"),
which bore interest at a rate of 15% per annum through its maturity date on June
30, 2000. The note matured June 30, 2000, but the maturity date was extended to
August 14, 2000, with an increased interest rate of 16% per annum for accrual
periods after June 30, 2000. The Prime Retail note went into default when it was
unpaid on August 14, 2000. Commencing August 15, 2000, the note began accruing
interest at a default rate initially set at 21% per annum, and increasing by
0.5% increments at the end of each subsequent 30-day period. FBR Assets' income
for the three and nine month periods ended September 30, 2000, as reflected in
the financial statements included herein, does not include interest at a rate
above 15% per annum or at the default rates on the Prime Retail note. All
interest accrued on the loan through October 31, 2000, has now been paid,
including interest accrued at the higher applicable interest rates described
above. The entire $20 million principal amount of the loan remains outstanding.
In addition, FBR Asset has incurred approximately $106,000 in expenses as a
result of Prime Retail's default under the note, which expenses are reimbursable
under the loan agreement and note, but which have not yet been reimbursed to FBR
Asset. The Prime Retail note is secured by 49.9% equity interests in four
subsidiaries of Prime Retail, L.P. and by a 100% equity interest in another
subsidiary of Prime Retail, L.P., each of which subsidiaries owns commercial
real estate subject to mortgage debt.
Note 6 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.
Note 7 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, for all periods presented.
7
<PAGE>
Note 8 Recent Accounting Pronouncements
In 1998, Statement of 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 9 Shareholders' Equity
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 $24.1 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 for a cost of $37.1 million or $13.57 average cost
per share. On March 16, 2000, the Board of Directors authorized the repurchase
of up to an additional 1,000,000 shares of FBR Asset's common stock. On
September 14, 2000, the Board of Directors authorized the repurchase of up to an
additional 400,000 shares of FBR Asset's common stock. Between January 1, 2000,
and September 30, 2000, FBR Asset repurchased 1,767,509 shares of its common
stock for a cost of $22.6 million or $12.80 average cost per share.
FBR Asset had outstanding, as of September 30, 2000 and December 31, 1999,
1,021,900 options to purchase common stock. These options have terms of eight to
ten years and have an exercise price of $20 per share.
Note 10 Equity Investments
At September 30, 2000, FBR Asset's equity investments had an aggregate cost
basis of $40.5 million, a fair value of $42.6 million, unrealized gains of $4.2
million and unrealized losses of $2.1 million.
As of December 31, 1999, FBR Asset's equity investments had an aggregate cost
basis of $57.5 million, fair value of $49.6 million and unrealized losses of
$7.9 million.
<TABLE>
<CAPTION>
Amount of Market Value at Market Value at
Equity Investments Investment(1) Sept. 30, 2000 December 31, 1999
------------------ ------------- --------------- -----------------
<S> <C> <C> <C>
Anthracite Capital, Inc. .......................... $10,084,268 $12,852,499 $10,084,268
Capital Automotive REIT............................ 23,925,850 22,296,495 21,841,402
Imperial Credit Commercial Mortgage Inv. Corp. .... -- -- 10,237,500
Prime Retail, Inc. ................................ -- -- 694,688
Prime Retail, Inc., pfd............................ 1,038,800 543,939 1,151,696
Resource Asset Investment Trust.................... 3,704,181 4,341,645 3,725,717
Encompass Services Corporation..................... 286,931 405,445 1,912,594
Atlas Pipeline Partners............................ 1,507,623 2,158,869 --
----------- ----------- -----------
Total........................................... $40,547,653 $42,598,892 $49,647,865
=========== =========== ===========
</TABLE>
(1) As of September 30, 2000.
Note 11 Subsequent Events
On November 1/st/ and 2/nd/, 2000, FBR Asset sold 1,581,846 shares of its
Anthracite Capital, Inc. common shares for an average price of $7.22 per share
or $11,420,546 resulting in an $1.3 million realized gain.
On November 3, 2000, William R. Swanson, President and Chief Operating Officer
of FBR Asset Investment Corporation, passed away. Eric F. Billings will
continue to serve as Chairman and Chief Executive Officer. Mr. Billings and the
board of directors have not made any determination at this time as to a likely
successor to Mr. Swanson or other management changes.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, including,
without limitation, statements containing the words "believes," "plans,"
"anticipates," "expects" and words of similar import. Such forward-looking
statements related to future events and the future financial performance of FBR
Asset, involve known and unknown risk, uncertainties and other factors which may
cause the actual results, or performance and achievements of FBR Asset to be
materially different from the results or achievements expressed or implied by
such forward-looking statements. FBR Asset is not obligated to update any such
factors or to reflect the impact of actual future events or developments on such
forward-looking statements.
Overview
FBR Asset targets investments in real estate assets and real estate-related
companies. FBR Asset has invested, and intends to continue investing in, whole-
pool mortgage-backed securities that are guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae, mortgage loans, mortgage-backed securities, real property, and
joint ventures formed to own real property. FBR Asset invests in some of these
assets indirectly through its investments in and loans made to REITs and other
companies.
As of September 30, 2000, FBR Asset had:
. mortgage-backed securities totaling $158.2 million, which were financed
with repurchase agreements totaling $139.9 million;
. investments in equity securities of 6 companies with an original total
cost basis of $40.5 million and a total market value of $42.6 million;
and
. loans to 2 companies totaling $24.0 million.
A summary of FBR Asset's current investments, cash and cash equivalents is set
forth at the end of this discussion.
Results of Operations
The following discussion sets forth the significant components of FBR Asset's
net income for the three-month periods ended September 30, 2000 and 1999.
Net Income
FBR Asset had net income for the three months ended September 30, 2000 of $2.4
million, or $0.58 per share, compared to net income of $2.7 million or $0.38 per
share for the corresponding period in 1999. The decrease in net income is
primarily attributable to a $0.3 million decrease in investment gains.
For the three months ended September 30, 2000, the weighted average annual yield
on FBR Asset's mortgage-backed securities was 7.04%. As of September 30, 2000,
FBR Asset had investments in 37 mortgage-backed securities. For the three months
ended September 30, 1999, the weighted average annual yield on FBR Asset's
mortgage-backed securities was 6.26%. As of September 30, 1999, FBR Asset had
investments in 33 mortgage-backed securities.
FBR Asset's interest income and dividend income increased to $5.6 million for
the three months ended September 30, 2000 from $4.6 million for the three months
ended September 30, 1999. This 21.7% increase is primarily attributable to FBR
Asset's increased investment in mortgage-backed securities in 2000, thereby
increasing the amount of interest income generated by the company's mortgage-
backed security portfolio.
For the three months ended September 30, 2000, the weighted average annual yield
on FBR Asset's equity securities and promissory notes was 14.23%, compared to
8.39% for the three months ended September 30, 1999, based on interest and
dividend income accrued on, and the weighted average carrying value of, equity
securities and promissory notes. The average annual yield on all investments
increased to 8.90% from 7.06%.The increase reflects the increased investment in
higher yielding promissory notes and higher yielding mortgage backed securities.
9
<PAGE>
FBR Asset incurred interest expense of $2.8 million for the three months ended
September 30, 2000. This represents 86.7% of the total expenses for the period.
FBR Asset incurred interest expense of $1.5 million for the three months ended
September 30,1999. This represents 70.0% of the total expenses for the period.
The $1.3 million increase in interest expense reflects the 48.4% increase in
weighted average borrowings under repurchase agreements to $163.2 million from
$110.0 million and a corresponding increase in the borrowing rate for the three
months ended September 30, 2000 compared to the three months ended September 30,
1999.
Management fees for the three months ended September 30, 2000, were $242,145
compared to $296,546 for the three months ended September 30, 1999. The decrease
is due to FBR Asset's increased investment in mortgage-backed securities in
2000, and a corresponding reduction in FBR Asset's other assets. The management
fee FBR Asset pays is lower for mortgage-backed securities.
Professional fees and other expenses consist primarily of legal and accounting
fees. Professional fees and other expenses were $191,542 for the three months
ended September 30, 2000, and $248,844 for the three months ended September 30,
1999. The decreased fees are attributable to the reduction of legal and audit
fees related to the recent registration statement of FBR Asset's stock.
The following discussion sets forth the significant components of FBR Asset's
net income for the nine-month periods ended Septembere 30, 2000 and 1999.
Net Income
FBR Asset had net income for the nine months ended September 30, 2000 of $3.0
million or $0.63 per share, compared to net income of $9.3 million or $1.19 per
share for the corresponding period in 1999. The decrease in net income is
primarily attributable to an impairment charge against income of $5.6 million,
most of which was recorded in the first quarter of 2000, to reflect the decline
in value of four of the company's available-for-sale equity investments.
For the nine months ended September 30, 2000, the weighted average annual yield
on FBR Asset's mortgage-backed securities was 6.65%. For the nine months ended
September 30, 1999, the weighted average annual yield on FBR Asset's mortgage-
backed securities was 6.25%.
FBR Asset's interest income and dividend income increased to $17.8 million for
the nine months ended September 30, 2000 from $15.2 million for the nine months
ended September 30, 1999. This 17.1% increase is primarily attributable to FBR
Asset's increased investment in mortgage-backed securities during 2000.
For the nine months ended September 30, 2000, the weighted average annual yield
on FBR Asset's equity securities and promissory notes was 13.19%, compared to
9.58% for the nine months ended September 30, 1999, based on interest and
dividend income accrued on, and the weighted average carrying value of, equity
securities and promissory notes. The average annual yield on all investments
increased to 8.25% from 7.39%.The increase reflects the increase in investment
of cash in higher yielding promissory notes and the increase in the number of
higher yielding mortgage backed securities.
FBR Asset incurred interest expense of $8.6 million for the nine months ended
September 30, 2000. This represents 87.1% of the total expenses for the period.
FBR Asset incurred interest expense of $4.9 million for the nine months ended
September 30,1999. This represents 70.3% of the total expenses for the year. The
$3.7 million increase reflects the 52.1% increase in weighted average borrowings
under repurchase agreements to $184.0 million from $121.0 million and a
corresponding increase in the borrowing rate for the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999.
Management fees for the nine months ended September 30, 2000, were $825,549
compared to $975,252 for the nine months ended September 30, 1999. The decrease
is due to FBR Asset's increased investment in mortgage-backed securities in
2000, and a corresponding reduction in FBR Asset's other assets. The management
fee FBR Asset pays is lower for mortgage-backed securities.
Professional fees and other expenses consist primarily of legal and accounting
fees. Professional fees and other expenses were $455,953 for the nine months
ended September 30, 2000, and $758,227 for the nine months ended September 30,
1999. The decreased fees are attributable to the reduction of legal and audit
fees related to the recent registration statement of FBR Asset's stock.
10
<PAGE>
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 three and nine months ended September 30, 2000 and 1999. Information is
based on daily average balances during the period.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ -----------
<S> <C> <C> <C>
Mortgage securities available for sale $3,208,446 $180,802,170 7.04%
Investment in equity securities and
promissory notes/(1)/ 2,320,665 64,686,711 14.23%
Cash and cash equivalents 64,623 3,993,878 6.42%
---------- ------------ -----
Total/(3)/ $5,593,734 $249,482,759 8.90%
========== ============ =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ -----------
<S> <C> <C> <C>
Mortgage securities available for sale $2,205,750 $139,793,527 6.26%
Investment in equity securities
and promissory notes/(2)/ 2,201,887 104,080,157 8.39%
Cash and cash equivalents 195,729 14,892,034 5.21%
---------- ------------ ----
Total/(3)/ $4,603,366 $258,765,718 7.06%
========== ============ ====
</TABLE>
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC, Prime Capital Funding I, LLC, and Prime
Retail, Inc. Such amounts are included as interest income in FBR Asset's
statements of income included in its financial statements.
(2) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC, Prime Retail, Inc., and Prime Group
Realty, L.P. Such amounts are included as interest income in FBR Asset's
statements of income included in its financial statements.
(3) FBR Asset accrues dividend income based on declared dividends for the
periods presented.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ -----------
<S> <C> <C> <C>
Mortgage securities available for sale $10,422,497 $208,911,319 6.65%
Investment in equity securities and
promissory notes/(1)/ 7,073,242 71,435,252 13.19%
Cash and cash equivalents 335,444 7,437,900 6.01%
----------- ------------ -----
Total/(3)/ $17,831,183 $287,784,471 8.25%
=========== ============ =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
--------------------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
----------------- ------------ -----------
<S> <C> <C> <C>
Mortgage securities available for sale $ 6,907,357 $147,662,937 6.25%
Investment in equity securities
and promissory notes/(2)/ 7,469,179 104,294,070 9.58%
Cash and cash equivalents 811,260 22,765,555 4.76%
----------- ------------ ----
Total/(3)/ $15,187,796 $274,722,562 7.39%
=========== ============ ====
</TABLE>
12
<PAGE>
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC, Prime Capital Funding I, LLC and Prime
Retail, Inc.. Such amounts are included as interest income in FBR Asset's
statements of income included in its financial statements.
(2) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC, Prime Retail, Inc., Prime Group Realty,
L.P., Kennedy Wilson Inc., and Brookdale Living Communities, Inc. Such
amounts are included as interest income in FBR Asset's statements of income
included in its financial statements.
(3) FBR Asset accrues dividend income based on declared dividends for the
periods presented.
Interest Expense
The following table sets forth information regarding the total amount of
interest expense from repurchase agreements, including the net amount payable
and receivable 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>
Three Months Ended
September 30, 2000 $2,791,533 $163,166,726/(1)/ 6.79%
Three Months Ended
September 30, 1999 $1,539,401 $110,020,022/(2)/ 5.55%
</TABLE>
<TABLE>
<CAPTION>
Weighted Weighted
Interest Average Average
Expense Balance Expense
---------- ----------------- ---------
<S> <C> <C> <C>
Nine Months Ended
September 30, 2000 $8,598,977 $184,022,040/(1)/ 6.22%
Nine Months Ended
September 30, 1999 $4,921,530 $120,984,601/(2)/ 5.44%
</TABLE>
(1) At September 30, 2000, FBR Asset had $139,938,000 outstanding under
repurchase agreements, with a weighted-average remaining maturity of
15 days.
(2) At September 30, 1999, FBR Asset had $114,076,000 outstanding under
repurchase agreements, with a weighted-average remaining maturity of
20 days.
Changes in Financial Condition
Mortgage-Backed Securities Available for Sale
FBR Asset invests in mortgage-backed securities that are agency pass-through
securities representing a 100% interest in the underlying conforming mortgage
loans. Conforming loans comply with the underwriting requirements for purchase
by Fannie Mae, Freddie Mac, and Ginnie Mae. These securities bear little risk of
credit loss due to defaults because they are guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac, among other assets.
FBR Asset held mortgage-backed securities of $158.2 million as of September 30,
2000. FBR Asset held mortgage-backed securities of $133.4 million on
September 30, 1999. At December 31, 1999, FBR Asset held mortgage-backed
securities equal to $236.0 million.
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 September 30, 2000, the amount of unamortized premium,
net of discounts recorded in FBR Asset's statement of financial condition was
$1.8 million. At December 31, 1999, the amount of unamortized discount, net of
premiums recorded in FBR Asset's statement of financial condition was $1,213.
13
<PAGE>
Given FBR Asset's current portfolio composition, if mortgage principal repayment
rates increase over the life of the mortgage-backed securities comprising the
current portfolio, all other factors being equal, FBR Asset's net interest
income would decrease during the life of the mortgage-backed securities, as FBR
Asset would be required to amortize its net premium balance into income over a
shorter time period. Similarly, if mortgage principal repayment rates decrease
over the life of the mortgage-backed securities, all other factors being equal,
FBR Asset's net interest income would increase during the life of the mortgage-
backed securities, as FBR Asset would be required to amortize its net premium
balance over a longer time period.
FBR Asset received mortgage principal payments equal to $17.6 million for the
nine months ended September 30, 2000. FBR Asset received mortgage principal
payments equal to $30.4 million for the year ended December 31, 1999.
At September 30, 2000, $2.1 million of net unrealized gains on equity securities
and $3.5 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, 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. See "Shareholders' Equity" elsewhere in
"Management's Discussion and Analysis" and Note 6 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 $139.9 million outstanding under repurchase agreements with
several financial institutions on September 30, 2000. FBR Asset had
$221.7 million outstanding under repurchase agreements on December 31, 1999.
At September 30, 2000, the ratio of the amounts due under repurchase agreement
to shareholder's equity was 1.60 to 1.
At September 30, 2000, the term to maturity of FBR Asset's borrowings had been
limited to 93 days with a weighted average remaining maturity of 15 days and a
weighted average cost of funds on outstanding borrowings of 6.63%.
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%.
Notes Receivable
On July 17, 2000, FBR Asset extended a $4 million loan to Prime Capital Funding
I, LLC ("Prime Capital") pursuant to a Sixty-Day Loan and Security Agreement.
The loan bore interest at a rate of 18% per annum and was secured by a pledge of
two mortgage notes owned by Prime Capital (the "Collateral Mortgage Notes") with
an aggregate principal balance of approximately $11.25 million, both of which
notes are secured by deeds of trust on the same three commercial real estate
properties. This loan to Prime Capital was due in full on September 17, 2000.
On September 29, 2000, Prime Capital conveyed the Collateral Mortgage Notes to
FBR Asset in exchange for FBR Asset's cancellation of Prime Capital's
indebtedness under the $4 million loan. In connection with this conveyance,
Prime Capital also agreed to repurchase the Collateral Mortgage Notes from FBR
Asset on December 26, 2000, for a cash repurchase price of $4,155,778 plus any
costs associated with the transaction. The conveyance and agreement to
repurchase were made pursuant to a Bond Market Association form of master
repurchase agreement, with an addendum specifying additional specific terms
applicable to the transaction.
In November, 1999, FBR Asset made a $20 million loan to Prime Retail, Inc. and
Prime Retail, L.P. (together, "Prime Retail") secured by equity interests in
limited partnerships and limited liability companies that own commercial real
estate. The loan's original maturity date, as previously extended, was June 30,
2000, and the loan bore interest at 15% per annum through that date. The
maturity date was extended to August 14, 2000, with an increased interest rate
of 16% per annum for accrual periods after June 30, 2000. The Prime Retail loan
went into default when it remained unpaid at the close of business on August 14,
2000. Commencing August 15, 2000, the note began accruing interest at a default
rate initially set at 21% per annum, and increasing by 0.5% increments at the
end of each subsequent 30-day period. FBR Asset's income for the three and nine
month periods ended September 30, 2000, as reflected in the financial
statements, included herein, does not include interest at a rate above 15% per
annum or at the default rates on the Prime Retail note. All interest accrued on
loan through the October 31, 2000, has now been paid, including interest accrued
at the higher applicable interest rates described above. The entire $20 million
principal amount of the loan remains outstanding. In addition, FBR Asset has
incurred approximately $106,000 in expenses as a result of Prime Retail's
default under the note, which expenses are reimbursable under the loan agreement
and note, but which have not yet been reimbursed to FBR Asset. The Prime Retail
loan is secured by 49.9% interests in four subsidiaries of Prime Retail, L.P.,
each of which subsidiaries owns commercial real estate subject to mortgage debt,
and by a 100% equity interest in another subsidiary of Prime Retail, L.P. (the
"Puerto Rico Subsidiary") which owns a retail factory outlet center located in
Puerto Rico that is unencumbered by mortgage debt. FBR Asset has not yet
foreclosed on any collateral securing the Prime Retail loan, and has
14
<PAGE>
been working with Prime Retail to try to arrange a repayment out of proceeds of
a proposed first mortgage loan which Prime Retail is trying to obtain against a
mortgage on the Puerto Rico property. There can be no assurances that any such
proposed mortgage loan will be made, as FBR Asset understands that Prime Retail
has not reached terms of any commitment from a lender. FBR Asset is evaluating
possible foreclosure action, and gave notice to Prime retail of its intent to
sell the equity interests in the Puerto Rico Subsidiary in August, 2000. FBR
Asset believes that the value of its collateral currently is adequate to cover
the entire amount of Prime Retail's debt to FBR Asset, but there can be no
assurance that the value of the collateral will not decrease or that FBR Asset
will be successful in selling the collateral in a foreclosure sale for an amount
equal to the amount of Prime Retail's debt, particularly if local real estate
market conditions in Puerto Rico change.
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 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 5.96% based upon the $50 million notional amount of the
swap.
Capital Resources and Liquidity
Liquidity is a measurement of FBR Asset's ability to meet potential cash
requirements including ongoing commitments to repay borrowings, fund
investments, loan acquisition and lending activities, and for other general
business purposes. The primary sources of funds for liquidity consist of
repurchase agreements and maturities, distributions or principal payments on
mortgage- backed and equity securities, and proceeds from sales of those
securities. To date, proceeds from the issuance of common stock and repurchase
agreements have provided FBR Asset with sufficient funding for its investment
needs. Potential future sources of liquidity for FBR Asset include existing cash
balances, borrowing capacity through margin accounts, and future issuances of
common, preferred stock or debt. FBR Asset believes that its existing cash
balances, borrowing capacity through margin accounts and borrowing capacity
under collateralized repurchase agreements will be sufficient to meet its
investment objectives and fund operating expenses for at least the next twelve
months. FBR Asset may, however, seek debt or equity financings, in public or
private transactions, to provide capital for corporate purposes and/or strategic
business opportunities. There can be no assurance that FBR Asset will be able to
generate sufficient funds from future operations, or raise sufficient debt or
equity on acceptable terms, to take advantage of investment opportunities that
become available. Should FBR Asset's needs ever exceed these sources of
liquidity, management believes FBR Asset's mortgage-backed and equity securities
could be sold, in most circumstances, to provide cash.
For the nine months ended September 30, 2000, FBR Asset's operating activities
resulted in net cash flows of $11.2 million. The primary source of operating
cash flow was interest on mortgage-backed securities, interest on notes
receivable and dividends from REIT investments. For the nine months ended
September 30, 1999, FBR Asset's operating activities provided net cash flows of
$13.0 million.
For the nine months ended September 30, 2000, FBR Asset's investing activities
resulted in net cash provided of $94.3 million compared to net cash used in
investing activities for the nine months ended September 30, 1999, of
$6.5 million. The increase is primarily attributable to proceeds from the
sale of mortgage-backed securities.
For the nine months ended September 30, 2000, net cash used in FBR Asset's
financing activities was $114.0 million compared to net cash used for the nine
months ended September 30, 1999, of $43.2 million. The increase in cash used in
financing activities is primarily attributable to the repayment of amounts due
under 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 available-for-sale securities 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.
15
<PAGE>
As of September 30, 2000, the value of the equity securities in FBR Asset's
portfolio had increased from the adjusted cost basis of $40.5 million to
$42.6 million. As of December 31, 1999, the value of the equity securities in
FBR Asset's portfolio had declined from the adjusted cost basis of $57.5 million
to $49.6 million. Increases and declines are generally recorded as accumulated
other comprehensive income in the statement of financial condition, except to
the extent they are deemed to be other than temporary.
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 market value. For the nine months ended September 30, 2000, FBR Asset
recorded a charge to reflect the decline in value of its investment in Prime
Retail, Inc.'s common and preferred stock, Encompass Service Corporation, and
Resource Asset Investment Trust of $5.6 million. For the year ended December 31,
1999, FBR Asset recorded a charge to reflect the decline in value of its
investment in Anthracite Capital, Inc. and Imperial Credit Commercial Mortgage
Investment Corporation of $10.9 million which FBR Asset determined was other
than temporary.
In September 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, the Board of Directors
authorized the repurchase of up to an additional 1,500,000 shares of FBR Asset's
common stock. On March 16, 2000, the Board of Directors authorized the
repurchase of up to an additional 1,000,000 shares of FBR Asset's common stock.
On September 14, 2000, the Board of Directors authorized the repurchase of up to
an additional 400,000 shares of FBR Asset's common stock. Between September 1998
and September 30, 2000, FBR Asset repurchased 6,377,000 shares of its common
stock for $83.8 million or $13.15 average cost per share.
16
<PAGE>
FBR ASSET INVESTMENT CORPORATION
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of September 30, 2000,
and December 31, 1999.
<TABLE>
<CAPTION>
As of September 30, 2000 As of December 31, 1999
------------------------------------- --------------------------------------
Amount Percentage Amount Percentage
Shares Percent of Market Increase of Market Increase
Owned Ownership/(3)/ Investment Value (Decrease) Investment Value (Decrease)
---------- ------------- ------------ ------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-Backed Securities N/A N/A $161,660,208 $158,218,701 (2.13)% $241,684,039 $236,014,844 (2.35)%
------------ ------------ ------------ ------------
Equity Investments/(1)(2)/
Anthracite Capital, Inc.
(AHR) 1,581,846 6.29% $ 10,084,268 $ 12,852,499 27.45% $ 10,084,268 $ 10,084,268 0.00%
Capital Automotive REIT
(CARS) 1,715,115 6.91% 23,925,850 22,296,495 (6.81)% 25,000,000 21,841,402 (12.63)%
Chastain Capital
Corporation (CHAS) 78,934 1.07% -- -- 0.00% -- -- 0.00%
Imperial Credit
Commercial Mortgage
Inv. Corp. (ICMI) -- -- -- -- 0.00% 10,413,000 10,237,500 (1.69)%
Prime Retail,
Inc. (PRT) -- -- -- -- 0.00% 1,201,317 694,688 (42.17)%
Prime Retail, Inc., pfd
(PRT pfd) 78,400 0.32% 1,038,800 543,939 (47.64)% 1,454,320 1,151,696 (20.81)%
Resource Asset
Investment Trust (RAS) 344,575 5.53% 3,704,181 4,341,645 17.21% 5,292,516 3,725,717 (29.60)%
Encompass Services
Corporation (ESR)/(4)/ 49,901 0.08% 286,931 405,445 41.30% 4,053,180 1,912,594 (52.81)%
Atlas Pipeline
Partners (APL) 124,700 3.97% 1,507,623 2,158,869 43.20% -- -- 0.00%
------------ ------------ ------ ------------ ------------
Total Equity
Investments $ 40,547,653 $ 42,598,892 5.06% $ 57,498,601 $ 49,647,865 (13.65)%
------------ ------------ ------ ------------ ------------ --------
Promissory Notes/(2)/
Prime Capital
Holding, LLC N/A N/A -- -- N/A $ 7,000,000 $ 7,000,000 N/A
Prime Capital
Funding I, LLC N/A N/A 4,000,000 4,000,000 N/A -- -- N/A
Prime Retail, L.P. N/A N/A 20,000,000 20,000,000 N/A 20,000,000 20,000,000 N/A
------------ ------------ ------------ ------------ --------
Total Promissory
Notes $ 24,000,000 $ 24,000,000 N/A $ 27,000,000 $ 27,000,000 N/A
------------ ------------ ------------ ------------
Cash and Cash Equivalents N/A N/A $ 4,864,317 $ 4,864,317 N/A $ 13,417,467 $ 13,417,467 N/A
------------ ------------ ------------ ------------
Total Investments & Cash
and Cash Equivalents $231,072,178 $229,681,910 (.60)% $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) As of June 30, 2000.
(4) Formerly Building One Services Corporation (BOSS)
17
<PAGE>
FBR ASSET INVESTMENT CORPORATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that can result from a change
in the prices of equity securities in the equity market, a change in the value
of financial instruments as a result of changes in interest rates, a change in
the volatility of interest rates or, a change in the credit rating of an issuer.
FBR Asset is exposed to the following market risks as a result of its
investments in mortgage-backed securities and equity investments. None of these
investments are held for trading purposes.
Interest Rate Risk
FBR Asset is subject to interest rate risk as a result of its investments in
mortgage-backed securities and its financing with repurchase agreements, all of
which are interest rate sensitive financial instruments. FBR Asset is exposed to
interest rate risk that fluctuates based on changes in the level or volatility
of interest rates and mortgage prepayments and in the shape and slope of the
yield curve. FBR Asset attempts to hedge a portion of its exposure to interest
rate risk primarily through the use of interest rate swaps.
FBR Asset's primary risk is related to changes in both short and long term
interest rates, which affect the company in several ways. As interest rates
increase, the market value of the mortgage-backed securities may be expected to
decline, prepayment rates may be expected to go down and durations may be
expected to extend. An increase in interest rates is beneficial to the market
value of FBR Asset's swap position as the cash flows from the floating rate
portion increase under this scenario. The reverse is true for mortgage-backed
securities and the swap if interest rates decline.
The fair value of interest rate swap agreements that qualify as hedges is not
recorded for accounting purposes. The differential between amounts paid and
received under the swap agreements is recorded as an adjustment to the interest
expense incurred under the repurchase agreements. In the event of early
termination of a swap agreement, a gain or loss is recorded and the company
receives or makes a payment based on the fair value of the swap agreement.
The table that follows shows the expected change in market value for FBR Asset's
current mortgage-backed securities and interest rate swaps under several
interest rate "shocks." Interest rates are defined by the U.S. Treasury yield
curve. The changes in rates are assumed to occur instantaneously. It is further
assumed that the changes in rates occur uniformly across the yield curve and
that the level of LIBOR changes by the same amount as the yield curve. Actual
changes in market conditions are likely to be different from these assumptions.
Changes in value are measured as percentage changes from their respective values
presented in the column labeled "Value at 9/30/00." 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.
18
<PAGE>
<TABLE>
<CAPTION>
Value at 9/30/00 Value at 9/30/00
with 100 basis with 100 basis
Value at point increase Percent point decrease Percent
9/30/00/(1)/ in interest rates Change in interest rates Change
----------------- ------------------- --------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Assets
Mortgage securities $158,218,701 $150,710,291 (4.75%) $161,804,068 2.27%
Other 73,432,645 73,432,645 73,432,645
------------ ------------ ------------
Total Assets $231,651,346 $224,142,936 (3.24%) $235,236,713 1.55%
============ ============ ============
Liabilities
Interest rate swap $ (437,335) $ (675,152)/(2)/ $ (203,394)/(2)/
Other 144,295,131 144,295,131 144,295,131
------------ ------------ ------------
Total Liabilities $143,857,796 $143,619,979 (0.17%) $144,091,737 0.16%
------------ ------------ ------------
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) $ (952,933) $ (8,223,526) (762.97%) 2,398,493 351.70%
Retained deficit (21,612,070) (21,612,070) (21,612,070)
Treasury stock $(83,842,798) $(83,842,798) (83,842,798)
------------ ------------ ------------
Total Shareholders' Equity $ 87,793,550/(2)/ $ 80,522,957 (8.28%) $ 91,144,976 3.82%
------------ ------------ ------------
Total Liabilities and
Shareholders' Equity $231,651,346 $224,142,936 (3.24%) $235,236,713 1.55%
============ ============ ============
</TABLE>
(1) Includes Accrued Interest.
(2) In accordance with GAAP, the fair value of interest rate swaps accounted
for as hedges is not recorded. Accordingly, the carrying value of the
interest rate swap in the company's financial statements is $0. See Note 4
to Notes to Financial Statements. The fair value of the interest rate
swap is based on quoted market prices as of September 30, 2000. As of
September 30, 2000, interest payments received under the swap agreement
were based on an interest rate of 6.67% 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 changes or the values of
corresponding equity indices change.
While it is impossible to exactly project what factors may affect the prices of
equity sectors and how much the affect 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 September 30, 2000.
19
<PAGE>
<TABLE>
<CAPTION>
Value at Value at
Sept. 30, 2000 with Sept. 30, 2000 with
Value at 10% increase Percent 10% decrease in Percent
Sept. 30, 2000 in price Change price Change
--------------- -------------------- -------- -------------------- --------
<S> <C> <C> <C> <C> <C>
Assets
Equity securities $ 42,598,892 $ 46,858,781 10.00% $ 38,339,003 -10.00%
Other 189,052,454 189,052,454 189,052,454
------------ ------------ ------------
Total Assets $231,651,346 $235,911,235 1.84% $227,391,457 -1.84%
Liabilities $144,295,131 $144,295,131 $144,295,131
Shareholders' Equity
Common stock $ 104,158 $ 104,158 $ 104,158
Paid-in-capital 194,097,193 194,097,193 194,097,193
Accumulated comprehensive
loss (1,390,268) 2,869,621 306.41% (5,650,157) -306.41%
Retained deficit (21,612,070) (21,612,070) (21,612,070)
Treasury stock (83,842,798) (83,842,798) (83,842,798)
------------ ------------ ------------
Total Shareholders' Equity $ 87,356,215 $ 91,616,104 4.88% $ 83,096,326 -4.88%
Total Liabilities and
Shareholders' Equity $231,651,346 $235,911,235 1.84% $227,391,457 -1.84%
============ ============ ============
Book value per share $ 21.63 $ 22.68 4.88% $ 20.57 -4.88%
============ ============ ============
</TABLE>
Except to the extent that FBR Asset sells its equity investments or a decrease
in market value is deemed to be other than temporary, an increase or decrease in
the market value of those assets will not directly affect FBR Asset's earnings,
however an increase or decrease in interest rates would affect the market value
of the assets owned by the companies in which FBR Asset invests. Consequently,
if those companies' earnings are affected by changes in the market value of
their assets, that could in turn impact their ability to pay dividends, which
could in turn affect FBR Asset's earnings. If FBR Asset had sold all of its
equity investments on September 30, 2000, the company would have realized a gain
of approximately $2.1 million which would have been included in earnings.
Developments Since September 30, 2000
On November 1/st/ and 2/nd/, 2000, FBR Asset sold 1,581,846 shares of its
Anthracite Capital, Inc. common shares for an average price of $7.22 per share
or $11,420,546 resulting in an $1.3 million realized gain.
On November 3, 2000, William R. Swanson, President and Chief Operating Officer
of FBR Asset Investment Corporation, passed away. Eric F. Billings will
continue to serve as Chairman and Chief Executive Officer. Mr. Billings and the
board of directors have not made any determination at this time as to a likely
successor to Mr. Swanson or other management changes.
20
<PAGE>
FBR ASSET INVESTMENT CORPORATION
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The registrant's stock became registered under the Securities and
Exchange Act of 1934 on September 27, 1999. The common stock is listed
on the American Stock Exchange and its symbol is "FB."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FBR ASSET INVESTMENT CORPORATION
(Registrant)
Date: November 14, 2000 By: /s/ Kurt R. Harrington
---------------------------------------------
Kurt R. Harrington
Chief Financial Officer and Treasurer (Principal
Financial and Accounting Officer)
22
