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 June 30, 2001
-------------
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
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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 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 August 10, 2001, the latest practicable date, there were 7,972,527 shares
of FBR Asset Investment Corporation's common stock outstanding.
FBR ASSET INVESTMENT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
INDEX
PART I. FINANCIAL INFORMATION Page
----
ITEM 1 - Financial Statements and Notes
Statements of Financial Condition as of June 30, 2001
(unaudited) and as of December 31, 2000..................................................................... 1
Statements of Income for the Three and Six Months Ended
June 30, 2001 and 2000 (unaudited).......................................................................... 2
Statements of Changes in Shareholders' Equity for the Six Months Ended June
30, 2001 (unaudited), and the Year
Ended December 31, 2000 .................................................................................... 4
Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000 (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................................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 20
Item 2. Changes in Securities and Use of Proceeds.............................................................. 20
Item 3. Defaults Upon Senior Securities........................................................................ 20
Item 4. Submission of Matters to Vote of Security Holders...................................................... 20
Item 5. Other Information...................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K....................................................................... 20
SIGNATURES......................................................................................................... 21
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS AND NOTES
FBR Asset Investment Corporation
Statements of Financial Condition as of June 30, 2001 (unaudited) and
December 31, 2000
===================================================================================================================================
As of June 30, 2001 As of December 31, 2000
------------------- -----------------------
(unaudited)
ASSETS
Mortgage-backed securities, pledged as collateral, at fair value $232,366,661 $144,867,416
Mortgage-backed securities, at fair value 14,135,877 9,980,789
Cash and cash equivalents 3,502,554 36,810,566
Investments in equity securities, at fair value 51,932,056 28,110,190
Notes receivable 12,000,000 4,000,000
Dividends, interest and fees receivable 3,564,075 1,813,478
Prepaid expenses and other assets 112,569 221,628
------------- ------------
Total assets $317,613,792 $225,804,067
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Repurchase agreements $214,024,000 $133,896,000
Interest payable 174,351 844,841
Dividends payable 2,257,143 3,731,911
Management fees payable 346,922 78,727
Accounts payable and accrued expenses 148,469 237,218
Due to clearing broker 9,341,705 --
Other -- 174,786
----------- -----------
Total liabilities 226,292,590 138,963,483
----------- -----------
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, 3,472,527
and 3,884,427 shares issued and outstanding as of
June 30, 2001, and December 31, 2000, respectively 34,725 38,844
Additional paid-in capital 99,341,547 107,529,063
Accumulated other comprehensive income (loss) 12,158,728 (748,691)
Retained deficit (20,213,798) (19,978,632)
------------- ------------
Total shareholders' equity 91,321,202 86,840,584
---------- ----------
Total liabilities and shareholders' equity $317,613,792 $225,804,067
============= ============
================================================================================================================================
The accompanying notes are an integral part of these statements.
1
FBR Asset Investment Corporation
Statements of Income for the Three Months Ended June 30, 2001 and 2000
(unaudited)
===================================================================================================================================
Three Months Ended June 30,
2001 2000
----- ----
(unaudited) (unaudited)
Income:
Interest $ 3,361,619 $ 4,558,480
Dividends 1,063,843 1,355,641
Fee Income 1,701,828 --
--------- -----------
Total income 6,127,290 5,914,121
Expenses:
Interest expense 1,769,644 2,834,635
Management fee expense 485,916 226,174
Professional fees & other expenses 195,868 4,034
-------- -----
Total expenses 2,451,428 3,064,843
--------- ---------
Realized gain (loss) on sale of available-for-sale equity securities 523,364 (36,678)
Realized loss on sale of mortgage-backed securities, net (25,321)
(175,084)
Recognized loss on available-for-sale equity securities -- (56,354)
---------- --------
Net income $4,024,142 $ 2,730,925
============ ===========
Basic earnings per share $ 1.16 $ 0.59
========= ========
Diluted earnings per share $ 1.11 $ 0.59
========= ========
Basic weighted-average common and equivalent shares 3,472,527 4,643,526
========= =========
Diluted weighted-average common and equivalent shares 3,617,400 4,643,526
========= =========
===================================================================================================================================
The accompanying notes are an integral part of these statements.
2
FBR Asset Investment Corporation
Statements of Income for the Six Months Ended June 30, 2001 and 2000
(unaudited)
===================================================================================================================================
Six Months Ended June 30,
2001 2000
----- ----
(unaudited) (unaudited)
Income:
Interest $ 6,341,072 $ 10,172,058
Dividends 1,263,910 2,065,391
Fee Income 1,701,828 --
--------- ------------
Total income 9,306,810 12,237,449
Expenses:
Interest expense 3,673,588 5,807,444
Management fee expense 818,891 583,404
Professional fees & other expenses 445,809 264,411
-------- --------
Total expenses 4,938,288 6,655,259
--------- ---------
Realized gain on sale of available-for-sale equity securities 503,389 579,207
Realized (loss) gain on sale of mortgage-backed securities, net (175,084) 67,358
Recognized loss on available-for-sale equity securities (544,880) (5,626,022)
------------ ----------
Net income $4,151,947 $ 602,733
============ =========
Basic earnings per share $ 1.17 $ 0.12
========= ========
Diluted earnings per share $ 1.14 $ 0.12
========= ========
Basic weighted-average common and equivalent shares 3,543,369 5,021,065
========= =========
Diluted weighted-average common and equivalent shares 3,642,150 5,021,065
========= =========
===================================================================================================================================
The accompanying notes are an integral part of these statements.
3
FBR Asset Investment Corporation
Statements of Changes in Shareholders' Equity for the Six Months Ended June 30,
2001 (unaudited), and the Year Ended December 31, 2000
===================================================================================================================================
Additional Retained
Common Paid in Earnings Treasury
Stock Capital (Deficit) Stock
----- ------- --------- -----
Balance, December 31, 1999 104,158 194,097,193 (15,463,462) (61,212,809)
------------- ------------ ------------ ------------
Repurchase of common stock -- -- -- (25,420,635)
Net income -- -- 8,364,480 --
Other comprehensive income
Change in unrealized loss on
available-for-sale securities -- -- -- --
Dividends -- -- (12,879,650) --
------------- ------------ ------------ ------------
Balance, December 31, 2000 104,158 194,097,193 (19,978,632) (86,633,444)
------------- ------------ ----------- ------------
Stock option grants -- 142,500 -- --
Repurchase of common stock -- -- -- (8,334,135)
Net Income -- -- 4,151,947 --
Change in unrealized loss on
available-for-sale securities -- -- -- --
Dividends
-- -- (4,387,113) --
------------- ------------ ------------ ------------
Balance, June 30, 2001 $104,158 $194,239,693 $(20,213,798) $(94,967,579)
============= ============ ============ ============
Accumulated
Other
Comprehensive
Income Comprehensive
(Loss) Total Income
------ ----- ------
Balance, December 31, 1999 (12,982,359) 104,542,721
------------- -----------
Repurchase of common stock -- (25,420,635)
Net income -- 8,364,480 $ 8,364,480
Other comprehensive income
Change in unrealized loss on
available-for-sale securities 12,233,668 12,233,668 12,233,668
Dividends -- (12,879,650) --
------------ ------------ -----------
Balance, December 31, 2000 (748,691) 86,840,584 20,598,148
------------ ------------ -----------
Stock option grants -- 142,500
Repurchase of common stock -- (8,334,135)
Net Income -- 4,151,947 $ 4,151,947
Change in unrealized loss on
available-for-sale securities 12,907,419 12,907,419 12,907,419
-----------
Dividends -- (4,387,113)
------------ ------------
Balance, June 30, 2001 $12,158,728 $ 91,321,202 $17,059,366
============ ============ ===========
===================================================================================================================================
The accompanying notes are an integral part of these Statements.
4
FBR Asset Investment Corporation
Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000
(unaudited)
===================================================================================================================================
For the Six Months Ended June 30,
2001 2000
---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net income $ 4,151,947 $602,733
Adjustments to reconcile net income to net cash provided by operating
activities
Realized and recognized losses on mortgage-backed and
equity securities 216,575 4,979,457
Compensation expense related to stock option grants 142,500 --
Amortization -- 4,717
Premium amortization on mortgage-backed securities 523,322 140,290
Changes in operating assets and liabilities:
Due from custodian -- 806,093
Dividends, interest and fees receivable (1,750,596) 1,317,804
Prepaid expenses 109,059 (49,956)
Management fees payable 268,195 60,113
Accounts payable and accrued expenses (88,749) (23,499)
Interest payable (670,490) (301,670)
Other
(174,786) (178,306)
---------------- -----------------
Net cash provided by operating activities 2,726,977 7,357,776
---------------- -----------------
Cash flows from investing activities:
Purchase of mortgage-backed securities (120,134,678) (40,921,815)
Investments in equity securities (7,144,000) (1,801,410)
Investments in notes receivable (12,000,000) --
Repayment of notes receivable 4,000,000 7,000,000
Proceeds from sale of mortgage backed securities 8,304,470 69,687,543
Proceeds from sale of available-for-sale equity securities 4,362,364 12,348,207
Receipt of principal payments on mortgage-backed securities 20,603,167 11,686,705
---------------- -----------------
Net cash (used in) provided by investing activities (102,008,677) 57,999,230
---------------- -----------------
Cash flows from financing activities:
Repurchase of common stock (8,334,135) (19,379,057)
Borrowings / (Repayments) of repurchase agreements 80,128,000 (45,839,000)
Dividends paid (5,820,177) (7,062,375)
---------------- -----------------
Net cash used in financing activities 65,973,688 (72,280,432)
---------------- -----------------
Net decrease in cash and cash equivalents (33,308,012) (6,923,426)
Cash and cash equivalents, beginning of the period 36,810,566 13,417,467
---------------- -----------------
Cash and cash equivalents, end of the period $3,502,554 $6,494,041
---------------- -----------------
Supplemental disclosure:
Cash payments for interest $ 4,344,078 $ 6,109,114
===================================================================================================================================
The accompanying notes are an integral part of these statements.
5
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, 2000 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
For the three and six months ended June 30, 2001, the weighted average coupon
rate on the mortgage-backed securities was 5.80% and 6.06%, respectively.
The following table summarizes the Company's mortgage-backed securities as of
June 30, 2001, and December 31, 2000:
Total Mortgage
June 30, 2001 Freddie Mac Fannie Mae Ginnie Mae Assets
- -------------- ----------- ----------- ----------- ------
Mortgage-backed securities,
Available-for-sale, face $124,639,602 $ 118,503,898 __ $243,143,500
Unamortized net premium 1,082,112 1,667,302 __ 2,749,414
------------- --------------- ------- --------------
Amortized cost 125,721,714 120,171,200 __ 245,892,914
Gross unrealized gains 494,046 649,243 __ 1,143,289
Gross unrealized losses (230,196) (303,469) __ (533,665)
------------- --------------- ------- --------------
Estimated fair value $125,985,564 $ 120,516,974 __ $246,502,538
============= =============== ======= ==============
Total Mortgage
December 31, 2000 Freddie Mac Fannie Mae Ginnie Mae Assets
- ----------------- ----------- ----------- ----------- ------
Mortgage-backed securities,
available-for-sale, face $85,927,247 $ 58,134,867 $ 9,660,054 $153,722,168
Unamortized net premium 413,946 669,906 573,054 1,656,906
------------- --------------- ------- --------------
Amortized cost 86,341,193 58,804,773 10,233,108 155,379,074
Gross unrealized gains 138,622 424,165 __ 562,787
Gross unrealized losses (380,578) (411,713) (301,365) (1,093,656)
------------- --------------- ------- --------------
Estimated fair value $86,099,237 $58,817,225 $9,931,743 $154,848,205
============= =============== ======= ==============
6
Note 3 Repurchase Agreements
At June 30, 2001, the Company had $214.0 million outstanding under repurchase
agreements with a weighted average borrowing rate of 3.87% as of the end of the
period and a remaining weighted-average term to maturity of 17 days. At June 30,
2001, mortgage-backed securities pledged against repurchase agreements had an
estimated fair value of $232.4 million. At June 30, 2001, the repurchase
agreements had remaining maturities of between 6 and 27 days. For the three
months ended June 30, 2001, the weighted average borrowing rate was 4.57% and
the weighted average repurchase agreement balance was $155.4 million. For the
six months ended June 30, 2001, the weighted average borrowing rate was 5.17%
and the weighted average repurchase agreement balance was $143.2 million.
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
generally have maturities of 30 to 90 days and 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. At June 30, 2001, the Company was not a party to any interest
rate swaps.
On July 27, 2001 the Company entered into an interest rate swap agreement that
matures on July 27, 2004, and has a notional amount of $50 million. Under this
agreement the Company will pay a fixed interest rate of 4.97% on the notional
amount and receive a variable rate calculated based on the three-month LIBOR.
The Company adopted FAS 133 on January 1, 2001. Under FAS 133, changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, depending on the type of hedge transaction.
For fair value hedge transactions, changes in the fair value of the derivative
instrument and changes in the fair value of the hedged item due to the risk
being hedged are recorded through the income statement. For cash-flow hedge
transactions, effective changes in the fair value of the derivative instrument
are reported in other comprehensive income while ineffective changes are
recorded through the income statement. The gains and losses on cash flow hedge
transactions that are reported in other comprehensive income are reclassified to
earnings in the periods in which earnings are effected by the hedged cash flows.
If a cash flow hedging relationship is terminated the related gain or loss in
other comprehensive income is amortized over the remaining life of the prior
hedging relationship.
Note 5 Notes Receivable
On March 30, 2001, the Company loaned $12 million to Prime Aurora, L.L.C.
("Prime Aurora"), a wholly-owned subsidiary of Prime Group Realty, L.P.
("PGRLP"). The loan bears interest at 16% per annum. The Company was paid a
commitment fee of $120,000 at closing. The loan matured on June 29, 2001, and
was extended through September 30, 2001, upon payment of an extension fee of
$120,000. Prime Aurora granted to the Company a first lien mortgage on
approximately 97 acres of unimproved land owned by Prime Aurora and located in
Aurora, Illinois. No assurances can be provided that the value of the property
encumbered by this mortgage will be sufficient to secure the loan. PGRLP has
unconditionally guaranteed all obligations of Prime Aurora in connection with
the loan.
Note 6 Comprehensive Income
Comprehensive income includes net income as currently reported by the Company on
the statement of income adjusted for other comprehensive income. Other
comprehensive income for the Company is changes in unrealized gains and losses
related to the Company's mortgage-backed securities ("MBS") and equity
securities accounted for as available for sale with changes in fair value
recorded through shareholders equity and changes in unrealized gains and losses
related to the Company's use of cash flow hedges.
Note 7 Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code.
To qualify for tax treatment as a REIT, the Company must meet certain income and
asset tests and distribution requirements. The Company generally will not be
subject to federal income tax at the corporate level to the extent that it
distributes at least 90 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 the Company's results or financial
condition. Furthermore, because the Company's investments include stock in other
7
REITs, failure of those REITs to maintain their REIT status could jeopardize the
Company's qualification as a REIT. No provision has been made for income taxes
in the accompanying financial statements, as the Company believes it has met the
requirements, for all periods presented. See discussion below in Note 10 related
to the acquisition of a broker dealer and creation of a taxable REIT subsidiary
("TRS").
Note 8 Shareholders' Equity
From January 1, 2001 to June 30, 2001, the Company repurchased 411,900 shares of
it's common stock at an average price of $20.23 per share. On March 16, 2001,
the Company declared a dividend of $0.60 per share payable April 16, 2001, to
shareholders of record as of March 30, 2001. On June 14, 2001, the Company
declared a dividend of $0.65 per share payable July 16, 2001, to shareholders of
record as of June 29, 2001. Treasury stock, at cost, has been deducted from
common stock and additional paid-in capital for presentation purposes.
As of June 30, 2001 and December 31, 2000, 1,011,900 and 996,900, respectively,
options to purchase common stock were outstanding. These options have terms of
eight to ten years. 996,900 of these options have an exercise price of $20 per
share while the remaining 15,000 options have an exercise price of $15 per
share. As a result, 145,047 and 98,781 shares, respectively, were included to
calculate diluted earnings per share for the three and six-month periods
presented.
Note 9 Equity Investments
At June 30, 2001, FBR Asset's equity investments had an aggregate cost basis of
$40.4 million, a fair value of $51.9 million and unrealized gains of $11.5
million.
Amount of Carrying Value at Carrying Value at
Equity Investments Investment(1) June 30, 2001 December 31, 2000
-------------- ------------- -----------------
Capital Automotive REIT...................................... $19,740,855 $25,472,070 $23,068,463
Annaly Mortgage Management, Inc.............................. 7,144,000 10,968,000 ---
Prime Retail, Inc., pfd...................................... 493,920 540,960 543,939
Saxon Capital Acquisition Corporation (2).................... 9,300,000 9,300,000 ---
Resource Asset Investment Trust.............................. 3,704,181 5,651,030 4,245,164
Encompass Services Corporation............................... 252,624
------------ ----------- -----------
Total................................................. $40,382,956 $51,932,060 $28,110,190
============ =========== ===========
(1) As of June 30, 2001.
(2) On June 29, 2001, the Company purchased 1,000,000 shares of the common
stock of Saxon Capital Acquisition Corp. at a price of $9.30 per share
in a private placement.
The Company received $1.7 million of income related to a fee sharing agreement
with FBR during the second quarter of 2001, when it participated in the private
placement of the common stock of Saxon Capital Acquisition Corp. ("Saxon
Capital"), where FBR acted as the placement agent. The $1.7 million fee is not
qualifying income for purposes of the REIT gross income tests.
Note 10 Subsequent Events
On July 9, 2001, the Company and its taxable broker-dealer subsidiary completed
an agreement with Friedman Billings Ramsey & Co., Inc. ("FBR") pursuant to which
we will be entitled to receive 10% of the net cash fees earned by FBR as a
result of investment banking engagements of FBR by entities in which the Company
commits to make an equity investment or a loan. The Company's right to be paid
10% of the net cash fees earned by FBR will be conditioned on, among other
factors, whether our commitment to invest in or lend to the entity that engages
FBR is a contributing factor in the entity's decision to engage FBR, facilitates
the provision of investment banking services to the entity by FBR, or assists in
facilitating the completion of a transaction.
On July 9, 2001, the Company acquired a registered broker-dealer from an
affiliate of FBR Group. This broker-dealer subsidiary will participate with us
in the fee-sharing arrangement described above. The payments the subsidiary
receives from FBR will generally be taxed at normal corporate rates and will
generally not be distributed to the Company's shareholders.
On August 2, 2001, the Company completed a secondary offering of 4,500,000
shares of common stock. The price per share to the public was $23. The lead
underwriter for the offering was Friedman, Billings, Ramsey & Co., Inc. and the
co-manager was Stifel, Nicolaus & Company. The net proceeds to the Company,
before deducting expenses, were $98,325,000. The Company has granted the
underwriters an option, exercisable for 30 days, to purchase up to 675,000
additional shares of common stock to cover over-allotments, if any.
8
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 meaning. Such forward-looking
statements related to future events and the future financial performance of the
Company, involve known and unknown risk, uncertainties and other factors which
may cause the actual results, or performance and achievements of the Company to
be materially different from the results or achievements expressed or implied by
such forward-looking statements. The Company 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
The Company targets investments in real estate assets and real estate-related
companies. The Company has invested, and intends to continue investing in,
mezzanine loans, 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. The
Company invests in some of these assets indirectly through its investments in
and loans made to REITs and other companies.
The Company intends to expand its mezzanine loan program substantially in the
future.
In addition, subject to maintaining its REIT qualification, the Company invests
from time to time in non-real estate related assets, including but not limited
to purchasing equity securities of and making mezzanine and other loans to
companies that are not involved primarily in the real estate business or in a
real estate-related business.
Results of Operations
The following discussion sets forth the significant components of FBR Asset's
net income for the three-month periods ended June 30, 2001 and 2000.
Net Income
The Company had net income for the three months ended June 30, 2001, of $4.0
million or $1.16 per basic share, compared to net income of $2.7 million or
$0.59 per basic share for the corresponding period in 2000. Fully diluted net
income per share for the second quarter of 2001 was $1.11 per share; compared to
$0.59 per share for the second quarter of 2000. The increase is primarily due to
gains on the sale of available-for-sale equity securities and fee income.
The Company's interest income and dividend income decreased to $4.4 million for
the three months ended June 30, 2001, from $5.9 million for the three months
ended June 30, 2000.
For the three months ended June 30, 2001, the weighted average annual yield on
the Company's mortgage-backed securities was 5.80%. As of June 30, 2001, the
Company had investments in 22 mortgage-backed securities. For the three months
ended June 30, 2000, the weighted average annual yield on the Company's
mortgage-backed securities was 6.43%. As of June 30, 2000, the Company had
investments in 38 mortgage-backed securities.
For the three months ended June 30, 2001, the weighted average annual yield on
FBR Asset's equity securities and promissory notes was 14.73%, compared to
14.77% for the three months ended June 30, 2000, based on interest and dividend
income accrued on, and the weighted average cost basis of, equity securities and
promissory notes. The average annual yield on all investments decreased to 7.42%
from 8.29%. The decrease is primarily related to a reduction in interest income
received from the Company's notes receivable due to repayments and a reduction
of investment in mortgage-backed securities from their levels in 2000. However,
the Company substantially increased its mortgage-backed security portfolio
during May and June 2001.
9
The Company received $1.7 million of income related to a fee sharing agreement
with FBR during the second quarter of 2001, when it participated in the private
placement of the common stock of Saxon Capital Acquisition Corp. ("Saxon
Capital"), where FBR acted as the placement agent.
The Company incurred interest expense of $1.8 million for the three months ended
June 30, 2001. This represents 72.2% of the total expenses for the period. The
Company incurred interest expense of $2.8 million for the three months ended
June 30, 2000. This represented 92.5% of the total expenses for that period. The
$1.0 million decrease in interest expense reflects the 14.2% decrease in
weighted average borrowings under repurchase agreements to $155.4 million from
$181.1 million, in addition to a lower weighted average borrowing cost of 4.57%
compared to 6.28%.
Management fees for the three months ended June 30, 2001, were $485,916 compared
to $226,174 for the three months ended June 30, 2000. The Company recorded
$267,076 in incentive compensation for the three months ended June 30, 2001,
earned by its portfolio manager based on the performance of the Company over the
preceding 12-month period.
Professional fees and other expenses consist primarily of legal and accounting
fees. Professional fees and other expenses were $195,868 for the three months
ended June 30, 2001, and $4,034 for the three months ended June 30, 2000. The
increased fees are attributable to legal, audit, tax and other fees.
The following discussion sets forth the significant components of FBR Asset's
net income for the six-month periods ended June 30, 2001 and 2000.
Net Income
The Company had net income for the six months ended June 30, 2001, of $4.2
million or $1.17 per basic share, compared to net income of $.6 million or $0.12
per basic share for the corresponding period in 2000. Fully diluted net income
per share for the six months ended June 30, 2001 was $1.14 per share; compared
to $0.12 per share for the first six months of 2000. The increase is primarily
due to gains on the sale of available-for-sale equity securities and fee income.
The Company's interest income and dividend income decreased to $7.6 million for
the six months ended June 30, 2001, from $12.2 million for the six months ended
June 30, 2000. The decrease is primarily related to a reduction in interest
income received from the Company's notes receivable due to repayments and a
reduction in the Company's investment in mortgage-backed securities during most
of the first half of 2001 from their levels in 2000. However, the Company
substantially increased it's mortgage-backed security portfolio during May and
June 2001.
For the six months ended June 30, 2001, the weighted average annual yield on the
Company's mortgage-backed securities was 6.06%. For the six months ended June
30, 2000, the weighted average annual yield on the Company's mortgage-backed
securities was 6.48%.
For the six months ended June 30, 2001, the weighted average annual yield on FBR
Asset's equity securities and promissory notes was 10.18%, compared to 12.80%
for the six months ended June 30, 2000, based on interest and dividend income
accrued on, and the weighted average cost basis of, equity securities and
promissory notes. The average annual yield on all investments decreased to 6.74%
from 8.00%. The decrease reflects the decreased investment in mortgage-backed
securities and promissory notes during the first four months of 2001.
The Company incurred interest expense of $3.7 million for the six months ended
June 30, 2001. This represents 74.4% of the total expenses for the period. The
Company incurred interest expense of $5.8 million for the six months ended June
30, 2000. This represents 87.3% of the total expenses for that period. The $2.1
million decrease in interest expense reflects the 26.4% decrease in weighted
average borrowings under repurchase agreements to $143.2 million from $194.6
million, in addition to a lower weighted average borrowing cost of 5.17%
compared to 5.99%.
Management fees for the six months ended June 30, 2001, were $818,891 compared
to $583,404 for the six months ended June 30, 2000. The Company recorded
$395,153 in incentive compensation during the six months ended June 30, 2001,
earned by it's portfolio manager based on the performance of the Company over
the preceding 12-month period.
Professional fees and other expenses consist primarily of legal and accounting
fees. Professional fees and other expenses were $445,809 for the six months
ended June 30, 2001, and $264,411 for the six months ended June 30, 2000. The
increased fees are attributable to legal, audit, tax and other fees.
10
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 six months ended June 30, 2001 and 2000. Information is based on
daily average balances during the period.
Three Months Ended June 30, 2001
--------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
------ ------- -----
Mortgage securities available for sale $2,633,777 $182,289,194 5.80%
Investment in equity securities and
Promissory notes/(1)/ /(3)/ 1,669,192 45,451,028 14.73%
Cash and cash equivalents 122,493 11,435,780 4.30%
---------- ------------ ----
Total $4,425,462 $239,176,002 7.42%
========== ============ ====
Three Months Ended June 30, 2000
--------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
------ ------- -----
Mortgage securities available for sale $3,386,363 $211,154,403 6.43%
Investment in equity securities
And promissory notes/(2)/ /(3)/ 2,391,581 64,945,093 14.77%
Cash and cash equivalents 136,177 10,086,300 5.42%
----------- ----------- ----
Total $5,914,121 $286,185,796 8.29%
=========== ============ ====
(1) Includes accrued interest and amortized commitment fees on convertible loan
to Prime Group Realty. Such amounts are included as interest income in the
Company'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 and Prime Retail, Inc. Such amounts are
included as interest income in the Company's statements of income included
in its financial statements.
(3) The Company accrues dividend income based on the ex-dividend date.
Six Months Ended June 30, 2001
------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
------ ------- -----
Mortgage securities available for sale $5,022,870 $167,154,840 6.06%
Investment in equity securities and
Promissory notes/(1)/(3)/ 2,082,163 41,256,102 10.18%
Cash and cash equivalents 499,949 19,194,447 5.25%
-------- ------------ ----
Total $7,604,982 $227,605,389 6.74%
========== ============ ====
11
Six Months Ended June 30, 2000
------------------------------
Weighted
Weighted Average
Interest/Dividend Average Annualized
Income Balance Yield
------ ------- -----
Mortgage securities available for sale $7,214,051 $223,120,340 6.48%
Investment in equity securities
And promissory notes/(2)/(3)/ 4,752,578 74,502,397 12.80%
Cash and cash equivalents 270,820 9,178,834 5.92%
------------ ------------ ----
Total $12,237,449 $306,801,571 8.00%
============ ============ ====
(1) Includes accrued interest and amortized commitment fees on convertible
loans to Prime Group Realty, L.P. and Prime Capital Funding I, LLC. Such
amounts are included as interest income in the Company'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 and Prime Retail, Inc. Such amounts are
included as interest income in the Company's statements of income included
in its financial statements.
(3) The Company accrues dividend income based on the ex-dividend date.
Changes in Financial Condition
Mortgage-Backed Securities Available for Sale
The Company 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.
The Company held mortgage-backed securities of $246.5 million as of June 30,
2001. The Company held mortgage-backed securities of $154.8 million on December
31, 2000.
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 June 30, 2001, the amount of unamortized premium, net
of discounts recorded in the Company's statement of financial condition was $2.7
million. At December 31, 2000, the amount of unamortized premium, net of
discounts recorded in the Company's statement of financial condition was $1.7
million.
The Company received mortgage principal payments equal to $20.6 million for the
six months ended June 30, 2001. The Company received mortgage principal payments
equal to $23.7 million for the year ended December 31, 2000.
At June 30, 2001, $11.5 million of net unrealized gains on equity securities and
$0.6 million of net unrealized gains on mortgage-backed securities were included
in the Company's statement of financial condition as accumulated other
comprehensive income. At December 31, 2000, $0.2 million of net unrealized
losses on equity securities and $0.5 million of net unrealized losses on
mortgage-backed securities were included in the Company's statement of financial
condition as accumulated other comprehensive loss.
Repurchase Agreements
To date, the Company's debt has consisted mainly of borrowings collateralized by
a pledge of most of the Company's mortgage-backed securities. The Company has
obtained, and believes it will be able to continue to obtain, short-term
financing in amounts and at interest rates consistent with the Company's
financing objectives.
The Company had $214.0 million outstanding under repurchase agreements with
several financial institutions on June 30, 2001. The Company had $133.9 million
outstanding under repurchase agreements on December 31, 2000. At June 30, 2001,
the ratio of the amounts due under repurchase agreement to shareholder's equity
was 2.34 to 1.
At June 30, 2001, the term to maturity of the Company's borrowings had been
limited to 27 days with a weighted average remaining maturity of 17 days and a
weighted average cost of funds on outstanding borrowings of 3.87%.
12
Notes Receivable
On March 30, 2001, the Company loaned $12 million to Prime Aurora, L.L.C.
("Prime Aurora"), a wholly-owned subsidiary of Prime Group Realty, L.P.
("PGRLP"). The loan bears interest at 16% per annum. The Company was paid a
commitment fee of $120,000 at closing. The loan matured on June 29, 2001, and
was extended through September 30, 2001, upon payment of an extension fee of
$120,000. Prime Aurora granted to the Company a first lien mortgage on
approximately 97 acres of unimproved land owned by Prime Aurora and located in
Aurora, Illinois. No assurances can be provided that the value of the property
encumbered by this mortgage will be sufficient to secure the loan. PGRLP has
unconditionally guaranteed all obligations of Prime Aurora in connection with
the loan.
Capital Resources and Liquidity
Liquidity is a measurement of the Company'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 the Company with sufficient funding for its investment
needs. Potential future sources of liquidity for the Company include existing
cash balances, borrowing capacity through margin accounts, and future issuances
of common, preferred stock or debt. The Company 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. The Company may, however, seek debt or equity financings, in public or
private transactions, to provide capital for corporate purposes and/or strategic
business opportunities (see "Developments Since June 30, 2001"). There can be no
assurance that the Company 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 the
Company's needs ever exceed these sources of liquidity, management believes the
Company's mortgage-backed and equity securities could be sold, in most
circumstances, to provide cash.
For the six months ended June 30, 2001, the Company's operating activities
resulted in net cash flows of $2.7 million. The primary source of operating cash
flow was interest on mortgage-backed securities, interest on notes receivable,
dividends, and fee income from investments. For the six months ended June 30,
2000, the Company's operating activities provided net cash flows of $7.4
million.
For the six months ended June 30, 2001, the Company's investing activities
resulted in net cash used of $102.0 million compared to net cash provided by
investing activities for the six months ended June 30, 2000, of $58.0 million.
The change is primarily attributable to increased purchases of mortgage-backed
and available-for-sale equity securities during the six months ended June 30,
2001 compared to the six months ended June 30, 2000.
For the six months ended June 30, 2001, net cash used in the Company's financing
activities was $66.0 million compared to net cash used for the six months ended
June 31, 2000, of $72.3 million. The decrease in cash used in financing
activities is primarily attributable to a decrease in stock repurchases and an
increase in borrowings under repurchase agreements during the first half of
2001.
Shareholders' Equity
As of June 30, 2001, the value of the equity securities in the Company's
portfolio had increased from the adjusted cost basis of $40.4 million to $51.9
million. As of December 31, 2000, the value of the equity securities in the
Company's portfolio had declined from the adjusted cost basis of $28.3 million
to $28.1 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 the Company 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 six months ended June 30, 2001, the Company recorded a
charge to reflect the decline in value of its investment in Prime Retail, Inc.'s
preferred stock of $0.5 million. For the six months ended June 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.
13
FBR ASSET INVESTMENT CORPORATION
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of June 30, 2001, and
December 31, 2000.
As of June 30, 2001
-------------------
Amount Percentage
Shares Percent Of Carrying Increase
Owned Ownership/(3) Investment Value (Decrease)
----- ------------ ---------- ----- ----------
Mortgage-Backed Securities N/A N/A $245,892,914 $246,502,538 0.25%
------------ ------------ -----
Equity Investments/(1)(2)/
Capital Automotive REIT
(CARS) 1,415,115 6.54% 19,740,855 25,472,070 29.03%
Annaly Mortgage Management, Inc.
(NLY) 800,000 3.11% 7,144,000 10,968,000 53.53%
Prime Retail, Inc., pfd
(PRT pfd) 78,400 3.41% 493,920 540,960 9.52%
Resource Asset Investment
Trust (RAS) 344,575 3.78% 3,704,181 5,651,030 52.56%
Saxon Capital Acquisition
Corporation 1,000,000 3.57% 9,300,000 9,300,000 0.00%
Encompass Services
Corporation (ESR)/(4)/ 49,900 0.08%
---------- ---------- -----
Total Equity Investments $40,382,956 $ 51,932,060 28.60%
----------- ------------ ----------
Promissory Notes/(2)/
Prime Capital Funding I, LLC N/A N/A -- -- N/A
Prime Group Realty, L.P. N/A N/A 12,000,000 12,000,000 N/A
------------ -------------
Total Promissory Notes $12,000,000 $12,000,000 N/A
------------ -----------
Cash and Cash Equivalents N/A N/A $ 3,502,554 $ 3,502,554 N/A
------------ -----------
Total Investments & Cash
And Cash Equivalents $301,778,424 $313,937,152 4.03%
============= =============
As of December 31, 2000
-----------------------
Amount Percentage
of Carrying Increase
Investment Value (Decrease)
---------- ----- ----------
Mortgage-Backed Securities $155,379,074 $154,848,205 (0.34%)
------------ ------------
Equity Investments/(1)(2)/
Capital Automotive REIT
(CARS) 23,298,100 23,068,463 (0.99%)
Annaly Mortgage Management, Inc.
(NLY) -- -- --
Prime Retail, Inc., pfd
(PRT pfd) 1,038,800 543,939 (47.64%)
Resource Asset Investment
Trust (RAS) 3,704,181 4,245,164 14.60%
Saxon Capital Acquisition
Corporation -- -- --
Encompass Services
Corporation (ESR)/(4)/ 286,931 252,624 (11.96%)
----------- ----------- --------
Total Equity Investments $ 28,328,012 $ 28,110,190 (0.77%)
------------ ------------ --------
Promissory Notes/(2)/
Prime Capital Funding I, LLC 4,000,000 4,000,000 N/A
Prime Group Realty, L.P. N/A
----------- ---------- ---
Total Promissory Notes $ 4,000,000 $ 4,000,000 N/A
----------- -----------
Cash and Cash Equivalents $36,810,566 $ 36,810,566 N/A
----------- ------------
Total Investments & Cash
And Cash Equivalents $224,517,652 $223,768,961 (0.33%)
============ ============ -------
(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 March 31, 2001. For Prime Retail, Inc., represents the percentage
ownership of 10.5% Series A Cumulative Preferred Stock
(4) Formerly Building One Services Corporation (BOSS)
14
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.
The Company is exposed to the following market risks as a result of its
investments in mortgage-backed securities and equity investments. None of these
investments is held for trading purposes.
Interest Rate Risk
The Company 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. The Company 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. The Company attempts to hedge a portion of its exposure to
interest rate risk primarily through the use of interest rate swaps.
The Company'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 the Company'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 Company records it's interest rate swap agreements at fair value (See Note 4
of "Notes to Financial Statements-Interest Rate Swaps"). 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 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 the
Company's current mortgage-backed securities 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 6/30/01." 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.
15
Value at
6/30/01
with 100
Value at 6/30/01 basis point
with 100 basis decrease in
Value at point increase Percent interest Percent
6/30/01/(1)/ in interest rates Change rates Change
------------ ----------------- ------ ----- ------
Assets
Mortgage securities $246,502,538 $236,249,780 (4.16%) $246,863,375 0.15%
Other 71,111,254 71,111,254 71,111,254
-------------- ------------- -------------
Total Assets $317,613,792 $ 307,361,034 (3.23%) $317,974,629 0.11%
============ ============= =============
Liabilities 226,292,590 226,292,590 226,292,590
-------------- ------------- -------------
Shareholders' Equity
Common stock $ 34,725 $ 34,725 $ 34,725
Paid-in-capital 99,341,547 99,341,547 99,341,547
Accumulated other
Comprehensive income $ 12,158,728 $ 1,905,970 (84.32%) 12,519,565 2.97%
Retained deficit $(20,213,798) $ (20,213,798) (20,213,798)
-------------- -------------- -------------
Total Shareholders' Equity $91,321,202 $81,068,444 (11.23%) $91,682,039 0.40%
----------- -------------- ------------
Total Liabilities and
Shareholders' Equity $317,613,792 $307,361,034 (3.23%) $317,974,629 0.11%
============ ============= =============
(1) Includes Accrued Interest.
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 the Company'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
the Company's direct investments. Second, the REITs in which the Company 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 the Company 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 the Company has
invested.
Equity Price Risk
The Company 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 the Company as of June 30, 2001.
16
Value at
June 30, 2001 Value at
with June 30, 2001 with
Value at 10% increase Percent 10% decrease in Percent
June 30, 2001 in price Change price Change
-------------- -------- ------ ----- ------
Assets
Equity securities $51,932,056 $57,125,262 10.00% $46,738,850 -10.00%
Other 265,681,736 265,681,736 265,681,736
------------ ------------ -----------
Total Assets $317,613,792 $322,806,998 1.64% $312,420,586 -1.64%
Liabilities $226,292,590 $226,292,590 $226,292,590
Shareholders' Equity
Common stock $ 34,725 $ 34,725 $ 34,725
Paid-in-capital 99,341,547 99,341,547 99,341,547
Accumulated comprehensive
Income 12,158,728 17,351,934 42.71 6,965,522 -42.71
Retained deficit (20,213,798) (20,213,798) (20,213,798)
------------ ------------ ------------
Total
Shareholders' Equity $91,321,202 $ 96,514,408 5.69% $86,127,996 -5.69%
Total Liabilities and Shareholders'
Equity $317,613,792 $322,806,998 1.64% $312,420,586 -1.64%
============ ============= ============
Book value per share $ 26.30 $ 27.79 5.69% $ 24.80 -5.69%
========= ========== =========
Except to the extent that the Company 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 the Company's
earnings, however an increase or decrease in interest rates would affect the
market value of the assets owned by the companies in which the Company 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 the Company's earnings. If the Company had sold all
of its equity investments on June 30, 2001, the company would have realized a
gain of approximately $11.5 million which would have been included in earnings.
Developments Since June 30, 2001
On July 9, 2001, the Company and its taxable broker-dealer subsidiary completed
an agreement with Friedman Billings Ramsey & Co. ("FBR") pursuant to which we
will be entitled to receive 10% of the net cash fees earned by FBR as a result
of investment banking engagements of FBR by entities in which the Company
commits to make an equity investment or a loan. The Company's right to be paid
10% of the net cash fees earned by FBR will be conditioned on, among other
factors, whether our commitment to invest in or lend to the entity that engages
FBR is a contributing factor in the entity's decision to engage FBR, facilitates
the provision of investment banking services to the entity by FBR, or assists in
facilitating the completion of a transaction.
On July 9, 2001, the Company acquired a registered broker-dealer from an
affiliate of FBR Group. This broker-dealer subsidiary will participate with us
in the fee-sharing arrangement described above. The payments the subsidiary
receives from FBR will generally be taxed at normal corporate rates and will
generally not be distributed to the Company's shareholders.
On July 27, 2001, the Company entered into an interest rate swap agreement that
matures on July 27, 2004, and has a notional amount of $50 million. Under this
agreement the Company will pay a fixed interest rate of 4.97% on the notional
amount and receive a variable rate calculated based on the three-month LIBOR on
the notional amount.
On August 2, 2001 the Company completed a secondary offering of 4,500,000 shares
of common stock. The price per share to the public was $23. The lead underwriter
for the offering was Friedman, Billings, Ramsey & Co., Inc. and the co-manager
was Stifel, Nicolaus & Company. The net proceeds to the Company, before
deducting expenses, were approximately $98,325,000 million. The Company has
granted the underwriters an option, exercisable for 30 days, to purchase up to
675,000 additional shares of common stock to cover over-allotments, if any.
17
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
The Company held its Annual meeting of Shareholders on May 24,
2001, at which shareholders took the following actions:
1. The election of five directors nominated to serve until the next
Annual Meeting
2. The ratification of the appointment of Arthur Andersen LLP as the
Company's independent auditors for 2001
The results of the voting in connection with the preceding items
were as follows:
1. Election of Directors: A total of 2,883,208 votes were received for
this item
For Against Abstain
--- ------- -------
Emanuel J. Friedman 2,881,708 1,500 ---
Eric F. Billings 2,881,708 1,500 ---
Peter A. Gallagher 2,881,708 1,500 ---
Stephen D. Harlan 2,881,708 1,500 ---
Russell C. Lindner 2,881,708 1,500 ---
2. Ratification of the Appointment of Arthur Andersen LLP: A total of
2,883,208 votes were received for this item.
For Against Abstain
--- ------- -------
2,882,208 --- 1,000
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
None
(b) Reports on Form 8-K
Current report on Form 8-K filed May 4, 2001.
18
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: August 14, 2001 By: /s/ Kurt R. Harrington
----------------------
Kurt R. Harrington
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)