<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended March 31, 2000
---------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 1-15049
---------
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 (703) 469-1000
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 reports), and (ii) has been subject to such
filing requirements for the past 90 days:
Yes: X No
----- -------
As of May 11, 2000, the latest practicable date, there were 4,752,027 shares of
FBR Asset Investment Corporation's common stock outstanding.
<PAGE>
FBR ASSET INVESTMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
REPORT: FORM 10-Q Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements and Notes
Statements of Financial Condition as of March 31, 2000
(unaudited) and as of December 31, 1999............................. 1
Statements of Income for the Three Months Ended
March 31, 2000 and 1999 (unaudited)................................. 2
Statements of Changes in Shareholders' Equity for the
Three Months Ended March 31, 2000, and the Years
Ended December 31, 1999 and 1998 ................................... 3
Statements of Cash Flows for the Three Months Ended
March 31, 2000 and 1999 (unaudited)................................. 4
Notes to Financial Statements......................................... 5
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 11
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 March 31, 2000 (unaudited), and December
31, 1999 *
================================================================================
<TABLE>
<CAPTION>
As of March 31, 2000 As of December 31, 1999
---------------------- -------------------------
(unaudited)
<S> <C> <C>
Assets
Mortgage-backed securities, at fair value $211,980,452 $236,014,844
Cash and cash equivalents 10,074,856 13,417,467
Investments in equity securities, at
fair value 40,296,735 49,647,865
Notes receivable 24,543,070 27,000,000
Dividends receivable 709,750 1,400,897
Prepaid expenses and other assets 226,135 253,516
Due from custodian - 806,093
Interest receivable 1,235,616 1,639,778
----------------- -----------------
Total assets $289,066,614 $330,180,460
================= =================
Liabilities and Shareholders' Equity
Liabilities:
Repurchase agreements $166,071,000 $221,714,000
Interest payable 975,181 487,222
Dividends payable 2,803,475 2,891,368
Management fees payable 594,396 237,167
Accounts payable and accrued expenses 132,441 129,677
Due to custodian 27,391,493 -
Deferred revenue 10,758 178,305
----------------- -----------------
Total liabilities 197,978,744 225,637,739
----------------- -----------------
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 March
31, 2000, and December 31, 1999,
respectively 104,158 104,158
Additional paid-in capital 194,097,193 194,097,193
Accumulated other comprehensive loss (8,188,693) (12,982,359)
Retained deficit (21,762,661) (15,463,462)
Treasury stock, at cost, 5,623,800 shares
and 4,609,491 shares as of March 31,
2000 and December 31, 1999, respectively (73,162,127) (61,212,809)
----------------- -----------------
Total shareholders' equity 91,087,870 104,542,721
----------------- -----------------
Total liabilities and shareholders'
equity $289,066,614 $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 March 31, 2000 and 1999
(unaudited)*
================================================================================
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
2000 1999
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Income:
Interest $ 5,613,578 $ 3,925,664
Dividends 709,750 1,239,503
------------- -------------
Total income 6,323,328 5,165,167
------------- -------------
Expenses:
Interest expense 2,972,809 1,724,475
Management fee expense 357,230 350,281
Professional fees 200,790 249,763
Insurance 22,664 10,381
Amortization of stock options issued to manager - 113,687
Other 36,923 8,136
------------- -------------
Total expenses 3,590,416 2,456,723
------------- -------------
Realized gain on sale of available-for-sale equity securities 615,885 -
Realized gain on sale of mortgage-backed securities 92,679 -
Recognized loss on available-for-sale equity securities (5,569,668) -
------------- -------------
Net income (loss) $ (2,128,192) $ 2,708,444
============= =============
Basic and diluted (loss) earnings per share $ (0.39) $ 0.32
============= =============
Weighted-average common and equivalent shares 5,398,604 8,451,983
============= =============
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
2
<PAGE>
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Three Months Ended March
31, 2000 (unaudited), and the Years Ended December 31, 1999 and 1998
==============================================================================
<TABLE>
<CAPTION>
Additional Retained
Common Paid in Earnings Treasury
Stock Capital (Deficit) Stock
------------ ------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $102,190 $189,528,668 $ 135,971 -
------------ ------------ ------------ --------------
Issuance of common stock 1,968 3,659,033 - -
Repurchase of common stock - - - (24,070,663)
Options issued to manager - 909,492 - -
Net income (Loss) - - 1,588,235 -
Other comprehensive loss
Change in unrealized gain on
available-for-sale securities - - - -
Comprehensive income (loss)
Dividends - - (11,149,785) -
------------ ------------ ------------ ------------
Balance, December 31, 1998 104,158 194,097,193 (9,425,579) (24,070,663)
------------ ------------ ------------ ------------
Repurchase of common stock - - - (37,142,146)
Net income - - 5,142,589 -
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities - - - -
Comprehensive loss
Dividends - - (11,180,472) -
------------ ------------ ------------ ------------
Balance, December 31, 1999 104,158 194,097,193 (15,463,462) (61,212,809)
------------ ------------ ------------ ------------
Repurchase of common stock - - - (11,949,318)
Net Loss - - (2,128,192) -
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities - - - -
Comprehensive income - - - -
Dividends - - (4,171,007) -
------------ ------------ ------------ ------------
Balance, March 31, 2000 $104,158 $194,097,193 $(21,762,661) $(73,162,127)
============ ============ ============ ============
<CAPTION>
Accumulated
Other
Comprehensive
Income Comprehensive
(Loss) Total Income (Loss)
-------------- ------------ ---------------
<S> <C> <C> <C>
Balance, December 31, 1997 $ - $189,766,829
-------------- ------------
Issuance of common stock - 3,661,001
Repurchase of common stock - (24,070,663)
Options issued to manager - 909,492
Net income (Loss) - 1,588,235 $ 1,588,235
Other comprehensive loss
Change in unrealized gain on
available-for-sale securities (9,800,530) (9,800,530) (9,800,530)
-----------
Comprehensive income (loss) $(8,212,295)
===========
Dividends - (11,149,785)
------------ ------------
Balance, December 31, 1998 (9,800,530) 150,904,579
------------ ------------
Repurchase of common stock - (37,142,146)
Net income - 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 loss $ 1,960,760
===========
Dividends - (11,180,472)
------------ ------------
Balance, December 31, 1999 (12,982,359) 104,542,721
------------ ------------
Repurchase of common stock - (11,949,318)
Net Loss - (2,128,192) $(2,128,192)
Other comprehensive income (loss)
Change in unrealized loss on
available-for-sale securities 4,793,666 4,793,666 4,793,666
Comprehensive income - - $ 2,665.474
===========
Dividends - (4,171,007)
------------ ------------
Balance, March 31, 2000 $ (8,188,693) $ 91,087,870
============ ============
</TABLE>
==============================================================================
* The accompanying notes are an integral part of these Statements.
3
<PAGE>
FBR Asset Investment Corporation
Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999
(unaudited)*
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------
2000 1999
----------------- ---------------
(unaudited) (unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income $(2,128,192) $ 2,708,444
Adjustments to reconcile net income to net cash provided by operating
activities--
Realized loss on mortgage backed and available-for-sale equity securities 6,996,363 -
Realized gain on sale of mortgage backed and available for sale equity securities (2,135,259) -
Amortization 4,717 114,086
Premium amortization on mortgage-backed securities 94,977 194,382
Changes in operating assets and liabilities:
Due from custodian 806,093 -
Dividends receivable 691,147 141,741
Interest receivable 404,162 (11,434)
Prepaid expenses 27,381 (7,035)
Management fees payable 357,229 (1,014,122)
Accounts payable and accrued expenses 2,764 (79,034)
Interest payable 487,959 749,546
Due to custodian - (2,041,230)
Deferred revenue (167,547) (57,000)
------------ ------------
Net cash provided by operating activities 5,441,794 698,344
Cash flows from investing activities:
Purchase of mortgage-backed securities (15,903,118) (9,888,384)
Investments in equity securities (1,801,410) -
Investments in notes receivable, net of repayments 2,456,930 (12,074,468)
Proceeds from sale of mortgage backed securities 59,546,303 -
Proceeds from sale of available-for-sale equity securities 12,384,885 -
Receipt of principal payments on mortgage-backed securities 6,383,223 8,882,579
------------ ------------
Net cash provided by (used in) investing activities 63,066,813 (13,080,273)
------------ ------------
Cash flows from financing activities:
Repurchase of common stock (11,949,318) (1,465,900)
(Repayments of) Proceeds from repurchase agreements, net (55,643,000) 3,069,000
Dividends paid (4,258,900) (2,563,058)
------------ ------------
Net cash used in financing activities (71,851,218) (959,958)
------------ ------------
Net decrease in cash and cash equivalents (3,342,611) (13,341,887)
Cash and cash equivalents, beginning of the period 13,417,467 41,144,326
------------ ------------
Cash and cash equivalents, end of the period 10,074,856 27,802,439
------------ ------------
Supplemental disclosure of non-cash investing activities:
Securities purchased but not settled $27,391,493 $ -
</TABLE>
================================================================================
*The accompanying notes are an integral part of these statements.
4
<PAGE>
Notes to Financial Statements
Note 1 Basis of Presentation
The financial statements of FBR Asset Investment Corp. (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Therefore, they do
not include all information required by generally accepted accounting principles
for complete financial statements. The interim financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the results for the
periods presented. The results of operations for interim periods are not
necessarily indicative of the results for the entire year. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 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
5
<PAGE>
During the three months ended March 31, 2000, FBR Asset received proceeds of
$59.5 million from the sale of mortgage-backed securities. The Company recorded
$1.4 million in realized losses related to this sale. Concurrent with this sale,
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
March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Total Mortgage
March 31, 2000 Freddie Mac Fannie Mae Ginnie Mae Assets
- -------------- ------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C>
Mortgage-backed securities,
available-for-sale, principal $97,023,396 $ 64,917,491 $53,539,271 $215,480,158
Unamortized premium (discount) 486,119 799,643 777,491 2,063,253
----------- ------------ ----------- ------------
Amortized cost 97,509,515 65,717,134 54,316,762 217,543,411
Gross unrealized losses (3,179,140) (1,632,412) (751,407) (5,562,959)
----------- ------------ ----------- ------------
Estimated fair value $94,330,375 $ 64,084,722 $53,565,355 $211,980,452
=========== ============ =========== ============
December 31, 1999
- -----------------
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
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 March 31, 2000, FBR Asset had $166.1 million outstanding under repurchase
agreements with a weighted average borrowing rate of 6.12% as of the end of the
period and a remaining weighted-average term to maturity of 10 days. At March
31, 2000, mortgage-backed securities pledged had an estimated fair value of
$171.3 million. At March 31, 2000, the repurchase agreements had remaining
maturities of between 3 and 24 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, 1998, the repurchase agreements had
remaining maturities of between 38 and 45 days.
Note 4 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.
7
<PAGE>
At March 31, 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 $165,960 and $468,422 at March 31, 2000, and
December 31, 1999, respectively.
Note 5 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 equity securities other than those described above if
it believes the alternative method is preferable in determining the fair value
of such securities. FBR Asset accounts for its investments in equity securities
as available-for-sale. Realized gains and losses from the sale of equity
investments 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 equity securities."
Note 6 Notes Receivable
As of March 31, 2000 and December 31, 1999, FBR Asset held a $20 million note
from Prime Retail Inc. and Prime Retail, L.P., ("Prime Retail") with an
interest rate of 15% per annum. The note matures on June 30, 2000, and is
subject to automatic extension to December 31, 2000, in the absence of events of
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 March 31, 2000, FBR Asset had also separately loaned Prime Capital Holding,
LLC and Prime Capital Funding, Inc. (together, "Prime Capital"), $4.5 million
under a different borrowing agreement. Amounts outstanding accrue interest at an
annualized rate of 17%. Amounts under this borrowing agreement were originally
due on March 31, 2000. On March 31, 2000, FBR Asset and Prime Capital signed an
agreement to extend the maturity date to April 30, 2000. On April 30, 2000, FBR
Asset and Prime Capital signed an agreement to extend the maturity date to May
22, 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.
Note 7 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.
8
<PAGE>
Note 8 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.
Note 9 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.
Note 10 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 11 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 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. 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. Between January 1, 2000, and March
31, 2000, FBR Asset repurchased 1,014,309 shares of its common stock at an
average price of $11.78 per share.
FBR Asset had outstanding, as of March 31, 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 12 Equity Investments
At March 31, 2000, FBR Asset's equity investments had an aggregate cost basis of
$42.9 million, a fair value of $40.3 million, unrealized gains of $1.2 million
and unrealized losses of $3.8 million.
9
<PAGE>
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) March 31, 2000 December 31, 1999
------------------ ------------ -------------- -----------------
<S> <C> <C> <C>
Anthracite Capital, Inc..................................... $10,084,268 $11,270,653 $10,084,268
Capital Automotive REIT..................................... 25,000,000 21,505,380 21,841,402
Chastain Capital Corporation................................ -- -- --
Imperial Credit Commercial Mortgage Inv. Corp............... -- -- 10,237,500
Prime Retail, Inc........................................... 270,156 270,156 694,688
Prime Retail, Inc., pfd..................................... 1,038,800 1,038,800 1,151,696
Resource Asset Investment Trust............................. 3,704,181 3,704,181 3,725,717
Encompass Services Corporation.............................. 1,023,654 775,440 1,912,594
Atlas Pipeline Partners..................................... 1,801,410 1,732,125 --
----------- ----------- -----------
Total................................................. $42,922,469 $40,296,735 $49,647,865
=========== =========== ===========
</TABLE>
(1) As of March 31, 2000.
Note 13 Subsequent Events
On May 22, 2000, FBR Asset, Prime Capital Holding, LLC and Prime Capital
Funding, Inc. signed and agreement to extend the maturity date on the $4.5
million outstanding under the Short-Term Loan and Security Agreement to May 15,
2000.
10
<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, and involve known and unknown risk, uncertainties and other factors which
may cause the actual results, performance of 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 March 31, 2000, FBR Asset had:
. mortgage-backed securities totaling $212.0 million, which were financed
with repurchase agreements totaling $166.1 million;
. investments in equity and debt securities of 6 companies with an
original total cost basis of $42.9 million and a total market value of
$40.3 million; and
. loans to 2 companies totaling $24.5 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 March 31, 2000 and 1999.
Net Income
FBR Asset had a net loss for the three months ended March 31, 2000 of $2.1
million, or $0.39 per share, compared to net income of $2.7 million or $0.32 per
share for the corresponding period in 1999. The decrease in net income is
primarily attributable to a charge against income of $5.6 million to reflect the
decline in value of four of the company's available-for-sale equity investments.
For the three months ended March 31, 2000, the weighted average annual yield on
FBR Asset's mortgage-backed securities was 6.52%. As of March 31, 2000, FBR
Asset had investments in 40 mortgage-backed securities.
11
<PAGE>
For the three months ended March 31, 1999, the weighted average annual yield on
FBR Asset's mortgage-backed securities was 6.30%. As of March 31, 1999, FBR
Asset had investments in 33 mortgage-backed securities.
FBR Asset's interest income and dividend income increased to $6.3 million for
the three months ended March 31, 2000 from $5.2 million for the three months
ended March 31, 1999. This 21.1% increase is primarily attributable to an
increase in FBR Asset's investment in mortgage-backed securities during the
fourth quarter of 1999, thereby increasing the amount of interest income
generated by the company's mortgage-backed security portfolio.
For the three months ended March 31, 2000, 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 11.27%, compared to 8.98% for the three
months ended March 31, 1999. The average annual yield on all investments
increased to 7.75% from 7.14%.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 $3.0 million for the three months ended
March 31, 2000. This represents 82.8% of the total expenses for the period. FBR
Asset incurred interest expense of $1.7 million for the three months ended March
31,1999. This represents 70.2% of the total expenses for the year. This 76.5%
increase reflects the 61.2% increase in weighted average borrowings under
repurchase agreements to $208.0 million from $129.0 million.
Management fees for the three months ended March 31, 2000, were $357,230
compared to $350,281 for the three months ended March 31, 1999.
Professional fees consist primarily of legal and accounting fees. Professional
fees were $200,790 for the three months ended March 31, 2000, and $249,763 for
the three months ended March 31, 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.
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 months ended March 31, 2000 and 1999. Information is based on daily
average balances during the period.
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
Weighted
Weighted Average
Interest/Dividend Average Annual
Income Balance Yield
----------------------- -------------- ----------
<S> <C> <C> <C>
Mortgage securities available for sale $3,827,688 $235,086,277 6.52%
Investment in equity securities and
promissory notes/(1)(2)/ 2,360,996 84,055,855 11.27%
Cash and cash equivalents 134,644 8,271,368 6.53%
---------- ------------ -----
Total/(2)/ $6,323,328 $327,413,500 7.75%
========== ============ =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
Interest/Dividend Average Annualized
Income Balance Yield
----------------------- ------------------- -----------------
<S> <C> <C> <C>
Mortgage securities available for sale $2,423,063 $156,067,632 6.30%
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C>
Investment in equity securities
and promissory notes/(1)(2)/ 2,413,460 109,007,029 8.98%
Cash and cash equivalents 328,644 28,129,410 4.74%
---------- ------------ ----
Total/(2)/ $5,165,167 $293,204,071 7.14%
========== ============ ====
</TABLE>
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Capital Holding LLC, Prime Retail, Inc., 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.
(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
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
March 31, 2000 $2,972,809 $208,026,725/(1)/ 5.73%
Three Months Ended
March 31, 1999 $1,724,475 $129,045,267/(2)/ 5.42%
</TABLE>
(1) At March 31, 2000, FBR Asset had $166,071,000 outstanding under repurchase
agreements, with a weighted-average remaining maturity of 10 days.
(2) At March 31, 1999, FBR Asset had $131,619,000 outstanding under repurchase
agreements, with a weighted-average remaining maturity of 47 days.
Changes in Financial Condition
Mortgage-Backed Securities Available for Sale
FBR Asset invests in mortgage-backed securities that are agency pass-through
securities representing a 100% interest in the underlying conforming mortgage
loans. Conforming loans comply with the underwriting requirements for purchase
by Fannie Mae, Freddie Mac, and Ginnie Mae. These securities bear little risk of
credit loss due to defaults because they are guaranteed by Ginnie Mae, Fannie
Mae or Freddie Mac, among other assets.
FBR Asset held mortgage-backed securities of $212.0 million as of March 31,
2000. FBR Asset held mortgage-backed securities of $151.7 million on March 31,
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 March 31, 2000, the amount of unamortized premium, net
of discounts recorded in FBR Asset's statement of financial condition was $2.1
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.
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
13
<PAGE>
FBR Asset would be required to amortize its net premium balance into income over
a shorter time period. Similarly, if mortgage principal repayment rates decrease
over the life of the mortgage-backed securities, all other factors being equal,
FBR Asset's net interest income would increase during the life of the mortgage-
backed securities, as FBR Asset would be required to amortize its net premium
balance over a longer time period.
FBR Asset received mortgage principal repayments equal to $6.4 million for the
three months ended March 31, 2000. FBR Asset received mortgage principal
repayments equal to $30.4 million for the year ended December 31, 1999.
At March 31, 2000, $2.6 million of net unrealized losses on equity securities
and $5.6 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 11 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 $166.1 million outstanding under repurchase agreements with
several financial institutions on March 31, 2000. FBR Asset had $221.7 million
outstanding under repurchase agreements on December 31, 1999. At March 31,
2000, the ratio of the amounts due under repurchase agreement to shareholder's
equity was 1.82 to 1.
At March 31, 2000, the term to maturity of FBR Asset's borrowings had been
limited to 30 days with a weighted average remaining maturity of 10 days and a
weighted average cost of funds on outstanding borrowings of 6.12%.
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%.
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
14
<PAGE>
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 three months ended March 31, 2000, FBR Asset's operating activities
resulted in net cash flows of $5.4 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 three months ended March 31, 1999,
FBR Asset's operating activities provided net cash flows of $698,344.
For the three months ended March 31, 2000, FBR Asset's investing activities
resulted in net cash provided of $63.1 million compared to net cash used for the
three months ended March 31, 1999, of $13.1 million. The increase is primarily
attributable to proceeds from the sale of mortgage-backed securities.
For the three months ended March 31, 2000, net cash used in FBR Asset's
financing activities was $71.9 million compared to net cash used in financing
activities for the three months ended March 31, 1999, of $959,958. 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.
As of March 31, 2000, the value of the equity securities in FBR Asset's
portfolio had declined from $42.9 million as of the date the investments were
made to $40.3 million. As of December 31, 1999, the value of the equity
securities in FBR Asset's portfolio had declined from $57.5 million from the
date the investments were made to $49.6 million. Declines are generally recorded
as accumulated other
15
<PAGE>
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 three months ended March 31, 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. ("Anthracite") and Imperial Credit Commercial Mortgage
Investment Corporation ("Imperial Credit") of $10.9 million which FBR Asset
determined was other than temporary.
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, 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.
Between September 1998 and March 31, 2000, FBR Asset repurchased 5,623,800
shares of its common stock at an average price of $13.01 per share.
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 Friedman, Billings, Ramsey Group, Inc. have represented
to FBR Asset that the total cost to complete the Year 2000 compliance efforts is
estimated to have been less than $350,000.
16
<PAGE>
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of March 31, 2000, and
December 31, 1999.
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------------------
Amount Percentage
Shares Percent of Market Increase
Owned/(3)/ Ownership/(3)/ Investment Value (Decrease)
---------- -------------- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
Mortgage-Backed Securities N/A N/A $217,543,411 $211,980,452 (2.56%)
------------ ------------
Equity Investments/(1)(2)/
Anthracite Capital, Inc.
(AHR) 1,581,846 7.55% $ 10,084,268 $ 11,270,653 11.76%
Capital Automotive REIT
(CARS) 1,792,115 7.23% 25,000,000 21,505,380 (13.98%)
Chastain Capital
Corporation (CHAS) 700,000 9.23% -- -- 0.00%
Imperial Credit Commercial
Mortgage Inv. Corp.
(ICMI) 900,000 3.16% -- -- 0.00%
Prime Retail, Inc. (PRT) 123,500 0.28% 270,156 270,156 (0.00%)
Prime Retail, Inc., pfd
(PRT pfd) 78,400 0.18% 1,038,800 1,038,800 (0.00%)
Resource Asset Investment
Trust (RAS) 344,575 5.56% 3,704,181 3,704,181 (0.00%)
Encompass Services
Corporation (ESR)/(4)/ 168,574 0.27% 1,023,654 775,440 (24.25%)
Atlas Pipeline Partners
(APL) 149,000 1.31% 1,801,410 1,732,125 (3.85%)
------------ ------------ ------
Total Equity Investments $ 42,922,469 $ 40,296,735 (6.12%)
------------ ------------ ------
Promissory Notes/(2)/
Prime Capital Holding,
LLC N/A N/A $ 4,543,070 $ 4,543,070 N/A
Prime Retail, L.P. N/A N/A 20,000,000 20,000,000 N/A
------------ ------------
Total Promissory Notes $ 24,543,070 $ 24,543,070 N/A
------------ ------------
Cash and Cash Equivalents N/A N/A $ 10,074,856 $ 10,074,856 N/A
------------ ------------
Total Investments & Cash
and Cash Equivalents $295,083,806 $286,895,113 (2.78%)
============ ============
<CAPTION>
As of December 31, 1999
-------------------------------------------------
Amount Percentage
of Market Increase
Investment Value (Decrease)
---------- ----- --------
<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) -- -- 0.00%
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%)
Encompass Services
Corporation (ESR)/(4)/ 4,053,180 1,912,594 (52.81%)
Atlas Pipeline Partners
(APL) -- -- 0.00%
------------ ------------
Total Equity Investments $ 57,498,601 $ 49,647,865 (13.65%)
------------ ------------ --------
Promissory Notes/(2)/
Prime Capital Holding, LLC $ 7,000,000 $ 7,000,000 N/A
Prime Retail, L.P. 20,000,000 20,000,000 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) As of December 31, 1999.
(4) Formerly Building One Services Corporation (BOSS)
<PAGE>
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 3/31/00." 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
3/31/00
with 100
Value at 3/31/00 basis point
with 100 basis decrease in
Value at point increase Percent interest Percent
3/31/00/(1)/ in interest rates Change rates Change
------------ ----------------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Mortgage securities $211,980,452 $ 203,820,870 (3.85%) $219,249,717 3.43%
Other 77,086,162 77,086,162 77,086,162
------------ ------------ ------------
Total Assets $289,066,614 $ 280,907,032 (2.82%) $296,335,879 2.51%
============ ============= ============
Liabilities
Interest rate swap $ (165,960) $ (283,797)/(2)/ $ 625,922/(2)/
Other 197,978,744 197,978,744 197,978,744
------------ ------------- ------------
Total Liabilities $197,812,784 $ 197,694,947 (0.06%) $198,604,666 0.40%
------------ ------------- ------------
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) $ (8,022,733) $ (16,064,478) (100.24%) (1,545,350) 80.74%
Retained earnings
(deficit) (21,762,661) (21,762,661) (21,762,661)
Treasury stock $(73,162,127) $ (73,162,127) (73,162,127)
------------ ------------- ------------
Total Shareholders'
Equity $ 91,253,830/(2)/ $ 83,212,085 (8.81%) $ 97,731,213 7.10%
------------ ------------- ------------
Total Liabilities and
Shareholders' Equity $289,066,614 $ 280,907,032 (2.82%) $296,335,879 2.51%
============ ============= ============
</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 March 31, 2000. As of March 31,
2000, interest payments received under the swap agreement were based on an
interest rate of 6.11% while interest payments made were based on an
interest rate of 5.96%.
As shown above, the portfolio generally will benefit less from a decline in
interest rates than it will be adversely affected by a similar-scale increase.
This effectively may limit investors' upside potential in a market rally.
The value of FBR Asset's investments in other companies is also likely to be
affected by significant changes in interest rates. First, many of the companies
are exposed to risks similar to those identified above as being applicable to
FBR Asset's direct investments. Second, the REITs in which FBR Asset has
invested tend to trade on a yield basis. As interest rates increase, the yield
required by investors in REITs, thrifts and other financial institutions
increases with the result that market values decline. Finally, changes in
interest rates often affect market prices of equity securities generally.
Because each of the companies in which FBR Asset invests has its own interest
rate risk management process, it is not feasible for us to quantify the
potential impact that interest rate changes would have on the stock price or the
future dividend payments by any of the companies in which FBR Asset has
invested.
Equity Price Risk
FBR Asset is exposed to equity price risk as a result of its investments in
equity securities of REITs and other real estate related companies. Equity
price risk changes as the volatility of equity prices changes or the values of
corresponding equity indices change.
While it is impossible to 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
<PAGE>
decrease in the price of the equities held by FBR Asset would have on the value
of the total assets and the book value of FBR Asset as of March 31, 1999.
<TABLE>
<CAPTION>
Value at
March 31, 2000 Value at
with March 31, 2000 with
Value at 10% increase Percent 10% decrease in Percent
March 31, 2000 in price Change price Change
------------------ ------------------- ----------- ------------------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Equity securities $ 40,296,735 $ 44,326,409 10.00% $ 36,267,062 -10.00%
Other 248,769,879 248,769,879 248,769,879
------------ ------------ ------------
Total Assets $289,066,614 $293,096,288 1.39% $285,036,941 -1.39%
Liabilities $197,978,744 $197,978,744 $197,978,744
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) (8,188,693) (4,159,019) 49.21% (12,218,366) -49.21%
Retained earnings
(deficit) (21,762,661) (21,762,661) (21,762,661)
Treasury stock (73,162,127) (73,162,127) (73,162,127)
------------ ----------- -----------
Total
Shareholders'
Equity $ 91,087,870 $ 95,117,544 4.42% $ 87,058,197 -4.42%
Total Liabilities and
Shareholders'
Equity $289,066,614 $293,096,288 1.39% $285,036,941 -1.39%
============ ============ ============
Book value per share $ 19.01 $ 19.85 4.42% $ 18.17 -4.42%
============ ============ ============
</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 March 31, 2000, the company would have incurred a loss of
approximately $2.6 million which would have been charged to earnings.
Developments Since March 31, 2000
On May 22, 2000 FBR Asset, Prime Capital Holding, LLC and Prime Capital
Funding, Inc. signed and agreement to extend the maturity date on the $4.5
million outstanding under the Short-Term Loan and Security Agreement to May 15,
2000.
20
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The registrant's stock became registered under the Securities and
Exchange Act of 1934 on September 27, 1999. The common stock is listed on the
American Stock Exchange and its symbol is "FB."
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: May 15, 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 (Principal Financial and Accounting
Officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1999 MAR-31-2000
<CASH> 13,417,467 10,074,856
<SECURITIES> 236,014,844 211,980,452
<RECEIVABLES> 27,000,000 24,543,070
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 330,180,460 289,066,614
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 330,180,460 289,066,614
<CURRENT-LIABILITIES> 225,637,739 197,978,744
<BONDS> 0 0
0 0
0 0
<COMMON> 104,158 104,158
<OTHER-SE> 104,438,563 90,983,712
<TOTAL-LIABILITY-AND-EQUITY> 330,180,460 289,066,614
<SALES> 0 0
<TOTAL-REVENUES> 23,473,849 6,323,328
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,761,652 617,607
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 7,920,648 2,972,809
<INCOME-PRETAX> 5,142,589 (2,128,192)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,142,589 (2,128,192)
<EPS-BASIC> 0.68 (0.39)
<EPS-DILUTED> 0.68 (0.39)
</TABLE>
