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UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
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FOR THE QUARTER ENDED MARCH 31, 2002
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(Dollars in thousands, except per share amounts)
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Historical Pro Forma
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FBR FB Adjustments Consolidated
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Revenues:
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Investment banking:
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Underwriting (Note 1a) $ 12,310 $ - $ (4,016) $ 8,294
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Corporate finance (Note 1b) 11,474 - 288 11,762
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Investment gains 191 - - 191
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Institutional brokerage:
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Principal transactions (Note 1c) 7,058 - 171 7,229
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Agency commissions 8,745 - - 8,745
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Asset management:
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Base management fees (Note 1d) 5,996 - (1,149) 4,847
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Incentive allocations and fees (Note 1d) 1,783 - (1,698) 85
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Net investment income (loss) (Note 1e) 6,022 7,215 (4,456) 8,781
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Technology sector net investment and incentive loss (1,099) - - (1,099)
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Dividends and other (Note 1f) 641 826 (658) 809
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Interest (Note 1g) 1,249 19,583 (5,794) 15,038
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Total revenues 54,370 27,624 (17,312) 64,682
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Interest expense (Note 1h) 370 6,635 (6,539) 466
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Net revenues 54,000 20,989 (10,773) 64,216
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Expenses:
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Compensation and benefits (Note 1i) 31,319 - (1,187) 30,132
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Business development and professional services (Note 1i) 6,412 183 (391) 6,204
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Clearing and brokerage fees 626 - - 626
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Occupancy and equipment 2,209 - - 2,209
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Communications 2,079 - - 2,079
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Other operating expenses (Note 1j) 2,466 2,847 (2,847) 2,466
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Total expenses 45,111 3,030 (4,425) 43,716
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Net income (loss) before taxes and extraordinary gain 8,889 17,959 (6,348) 20,500
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Income tax provision (Note 1k) - 55 (55) -
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Net income (loss) before extraordinary gain $ 8,889 $ 17,904 $ (6,293) $ 20,500
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Basic earnings per share before extraordinary gain $ 0.19 $ 1.46 $ 0.25
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Diluted earnings per share before extraordinary gain $ 0.19 $ 1.46 $ 0.25
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Weighted average shares outstanding:
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Basic (Note 1l) 45,663 12,268 37,321 82,984
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Diluted (Note 1l) 46,171 12,289 37,397 83,568
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Notes to Unaudited Condensed Pro Forma
Consolidated Financial Statements For the Quarter Ended
March 31, 2002
(Dollars in thousands)
(1) A summary of the unaudited condensed pro forma consolidated statements of
operations adjustments to effect the merger, prepared in accordance with
SEC Regulation S-X-Article 11, is as follows:
(a) Underwriting -- These balances in the unaudited condensed pro forma
consolidated statements of operations reflect adjustments to eliminate FBR
Group's revenue generated from FBR Asset's secondary offerings of $4,016 for
the three months ended March 31, 2002.
(b) Corporate finance -- These balances in the unaudited condensed pro
forma consolidated statements of operations reflect adjustments to
reclassify to corporate finance revenue amounts paid by FBR Group to FBR
Asset in connection with investment banking transactions pursuant to a fee
sharing agreement between the companies of $288 for the three months ended
March 31, 2002.
(c) Principal transactions -- These balances in the unaudited condensed
pro forma consolidated statements of operations reflect adjustments to
eliminate FBR Group's broker-dealer trading losses generated from
transactions involving FBR Asset common stock of $171 for the three months
ended March 31, 2002.
(d) Base management fees and incentive allocations and fees -- These
balances in the unaudited condensed pro forma consolidated statements of
operations reflect adjustments to eliminate FBR Group's base management and
incentive fees earned pursuant to its management agreement with FBR Asset of
$1,149 and $1,698, respectively for the three months ended March 31, 2002.
(e) Net investment income -- These balances in the unaudited condensed
pro forma consolidated statements of operations reflect adjustments to
eliminate FBR Group's income derived from its equity investment in FBR Asset
of $4,456 for the three months ended March 31, 2002.
(f) Dividends and other -- These balances in the unaudited condensed pro
forma consolidated statements of operations reflect adjustments to (1)
eliminate FBR Group's dividend income earned from its broker-dealer trading
inventory holdings of FBR Asset of $370 for the three months ended March 31,
2002, and (2) reclassify to corporate finance revenue amounts paid by FBR
Group to FBR Asset in connection with investment banking transactions
pursuant to a fee sharing agreement between the companies of $288 for the
three months ended March 31, 2002.
(g) Interest -- These balances in the unaudited condensed pro forma
consolidated statements of operations reflect adjustments to record
amortization of premiums created in purchase accounting due to the new cost
basis of FBR Asset's mortgage-backed securities at the time of the merger of
$5,794 for the three months ended March 31, 2002.
The adjustments discussed above to record amortization of premiums
established on FBR Asset's mortgage-backed securities have been prepared in
accordance with SEC Regulation S-X -- Article 11. These adjustments,
however, do not correspond to the mortgage-backed securities balances during
the historical periods but are reflective of amortization that would be
recorded in the future considering the March 31, 2003 value of FBR Asset's
mortgage-backed securities portfolio. In purchase accounting, the March 31,
2003 unrealized gain on these FBR Asset securities contained in other
comprehensive income was eliminated and a new cost basis established. In
this case, the unrealized gain creates a premium that will be amortized over
the remaining lives of the applicable March 31, 2003 mortgage-backed
securities. The adjustments in the pro forma financial statements reflect
the amortization of this premium created in purchase accounting calculated
based on the application of the effective interest method for recognizing
interest income and includes management's assumptions with respect to
prepayment speeds as of March 31, 2003 as required by SFAS No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." The total additional
premium established based on the March 31, 2003 balance sheet is $46,850 and
based upon prepayment speeds as of March 31, 2003 substantially all would be
amortized over approximately three and a half years.
(h) Interest expense -- These balances in the unaudited condensed pro
forma consolidated statements of operations reflect interest adjustments
created in purchase accounting related to FBR Asset's interest rate swaps as
of March 31, 2003 of $6,539 for the three months ended March 31, 2002.
These interest rate swaps are cash flow xxxxxx of the debt recorded on the
balance sheet used to finance the mortgage-backed securities and convert a
portion of the variable interest rate borrowings to a fixed interest rate. In
purchase accounting, the March 31, 2003 unrealized loss on these FBR Asset
derivatives of approximately $10,480 contained in other comprehensive income was
eliminated. In this case, the unrealized loss created a credit balance (i.e., a
day-one value of the derivatives) which is recorded as a liability on the
balance sheet. The day-one value of the interest rate swaps recorded as a
liability reestablishes the market rate of interest on the derivatives and
reduces the fixed rate of interest expense over the remaining lives of the
derivatives, which range from four months to sixteen months. These adjustments
are based upon the fair value of the instruments and market rates as of March
31, 2003 using the effective interest method.
(i) Compensation and benefits and business development and professional
services -- These balances in the unaudited condensed pro forma consolidated
statements of operations reflect adjustments to eliminate FBR Group's
expenses incurred as a result of FBR Asset's secondary equity offerings.
(j) Other operating expenses -- These balances in the unaudited
condensed pro forma consolidated statements of operations reflect
adjustments to eliminate base management and incentive fees payable by FBR
Asset to FBR Group.
(k) Income tax provision (benefit) -- These balances in the unaudited
condensed pro forma consolidated statements of operations reflect
adjustments to present the tax provision of the combined entity's taxable
REIT subsidiaries based on the effective tax rate of these subsidiaries
during the period.
(l) Basic and diluted weighted average shares outstanding -- These
balances in the unaudited condensed pro forma consolidated statements of
operations reflect the conversion of historical FBR Asset shares not owned
by FBR Group based on the 3.65 exchange ratio.
