As filed with the Securities and Exchange Commission on January 15, 2003
Registration Statement No. 333-101703


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Amendment No. 1 to

Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


Forest Merger Corporation

(Exact name of registrant as specified in its charter)


         
Virginia   6798   32-0045263
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
classification code number)
  (I.R.S. Employer
Identification No.)

1001 Nineteenth Street North

Arlington, VA 22209
(703) 312-9500
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)


William J. Ginivan, Esq.

Chief Legal Officer
Friedman, Billings, Ramsey Group, Inc.
1001 Nineteenth Street North
Arlington, VA 22209
(703) 312-9500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)


Copies to:

         
Trevor S. Norwitz, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
(212) 403-1000
  Daniel M. LeBey, Esq.
Hunton & Williams
951 East Byrd Street
Richmond, VA 23219
(804) 788-8200
  J. Warren Gorrell, Jr., Esq.
David W. Bonser, Esq.
Hogan & Hartson L.L.P.
555 13th Street, NW
Washington, DC 20004
(202) 637-5600


     Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement is declared effective and all conditions to the proposed transaction have been satisfied or waived.

     If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box:     o

     If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:     o

     If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:     o


CALCULATION OF REGISTRATION FEE

                 


Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Unit Offering Price Fee(5)

Class A Common Stock, par value $0.01 per share
  121,861,584(1)   N/A   $1,095,573,067(3)   $100,793(6)

Class B Common Stock, par value $0.01 per share
   26,319,599(2)   N/A   $133,177,171(4)   $12,252


(1)  The maximum number of shares of Class A common stock of Forest Merger Corporation, a Virginia corporation, which will be renamed “Friedman, Billings, Ramsey Group, Inc.” upon the completion of the merger described below and which we refer to as “New FBR Group,” to be issued in the merger of FBR Asset Investment Corporation, a Virginia corporation, with and into New FBR Group, and the merger of Friedman, Billings, Ramsey Group, Inc., a Virginia corporation, with and into New FBR Group, based on the exchange ratios of one share of FBR Asset common stock, par value $0.01 per share, to be exchanged for 3.65 shares of New FBR Group Class A common stock, par value $0.01 per share, and one share of FBR Group Class A common stock, par value $0.01 per share, to be exchanged for one share of New FBR Group Class A common stock. Includes the maximum number of shares of New FBR Group Class A common stock that may be issued upon conversion of outstanding options to acquire shares of FBR Asset common stock and FBR Group Class A common stock.
 
(2)  The maximum number of shares of Class B common stock of New FBR Group to be issued in the merger of FBR Group with and into New FBR Group, based on the exchange ratio of one share of FBR Group Class B common stock, par value $0.01 per share, to be exchanged for one share of New FBR Group Class B common stock, par value $0.01 per share.
 
(3)  Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and calculated pursuant to Rule 457(f) under the Securities Act. Pursuant to Rule 457(f)(1) under the Securities Act, the proposed maximum aggregate offering price of New FBR Group Class A common stock was calculated in accordance with Rule 457(c) under the Securities Act as the sum of (a)(i) $32.80, the average of the high and low prices per share of FBR Asset common stock as reported on the New York Stock Exchange on November 29, 2002, multiplied by (ii) 22,520,427, the aggregate number of shares of FBR Asset common stock to be converted into New FBR Group Class A common stock in the merger or issuable pursuant to outstanding options or other equity-based awards prior to the date the merger is expected to be completed and (b)(i) $9.00, the average of the high and low prices per share of FBR Group Class A common stock as reported on the New York Stock Exchange on November 29, 2002, multiplied by (ii) 35,647,025, the aggregate number of shares of FBR Group common stock to be exchanged for New FBR Group Class A common stock in the merger or issuable pursuant to outstanding options or other equity-based awards prior to the date the merger is expected to be completed.
 
(4)  Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and calculated pursuant to Rule 457(f) under the Securities Act. Pursuant to Rule 457(f)(2) under the Securities Act, the proposed maximum aggregate offering price of New FBR Group Class B common stock was calculated as the book value of FBR Group Class B common stock on December 5, 2002.
 
(5)  Determined in accordance with Section 6(b) of the Securities Act of 1933 at a rate equal to $92.00 per $1,000,000 of the proposed maximum aggregate offering price.
 
(6)  The total registration fee due in connection with this filing is $100,793. On December 6, 2002, a filing fee of $97,473 was paid in connection with the filing of the preliminary registration materials with the Commission. Accordingly, the fee payable upon filing of this registration statement is $3,320.


    The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




 

Preliminary Draft Dated January 15, 2003, Subject to Completion
 
[FBR GROUP LOGO] [FBR ASSET LOGO]

To the shareholders of Friedman, Billings, Ramsey Group, Inc. and FBR Asset Investment Corporation:

PROPOSED MERGER OF FBR GROUP AND FBR ASSET

     The boards of directors of Friedman, Billings, Ramsey Group, Inc. and FBR Asset Investment Corporation, upon the recommendation of their respective special committees, consisting entirely of independent, non-management directors, have unanimously approved a combination of FBR Group and FBR Asset. The new company that will result from this merger, Forest Merger Corporation, which we refer to in this joint proxy statement/ prospectus as “New FBR,” will assume the name of “Friedman, Billings, Ramsey Group, Inc.” We are proposing the transaction because we believe the combination of FBR Group and FBR Asset will, among other things, present significant new growth opportunities and business flexibility, and simplify our corporate structure. In addition, the status of New FBR as a real estate investment trust, or “REIT,” will permit the distribution of dividends in a tax-efficient manner. Following completion of the merger, New FBR will operate as a self-managed REIT.

     When the transaction is completed, FBR Group shareholders will receive one share of New FBR Class A common stock in exchange for each share of FBR Group Class A common stock they own, and one share of New FBR Class B common stock in exchange for each share of FBR Group Class B common stock they own. FBR Asset shareholders will receive 3.65 shares of New FBR Class A common stock for each share of FBR Asset common stock they own. In the aggregate, approximately 122,000,000 shares of Class A common stock and 26,320,000 shares of Class B common stock of New FBR will be issued in connection with the transaction. Following completion of the transaction, shares of New FBR Class A common stock will be entitled to one vote per share and shares of New FBR Class B common stock will be entitled to three votes per share. After giving effect to the merger, former FBR Group Class A shareholders will hold approximately [18]% of the economic interest and [13]% of the total voting power of New FBR, while former FBR Group Class B shareholders will hold approximately [19]% of the economic interest and [42]% of the total voting power of New FBR. Former FBR Asset shareholders will hold approximately [63]% of the economic interest and [45]% of the total voting power of New FBR. We expect that New FBR Class A common stock will be listed on the New York Stock Exchange under the symbol “FBR.”

     Before we can complete the transaction, holders of a majority of the voting power of outstanding FBR Group shares and holders of more than two-thirds of the outstanding FBR Asset shares must vote in favor of the merger agreement and the transactions contemplated by the merger agreement. Please note that, together, the two undersigned individuals beneficially own approximately 1,250,000 shares of Class A common stock and 17,636,240 shares of Class B common stock of FBR Group, representing approximately [53]% of the total voting power of FBR Group. We have agreed to vote our FBR Group shares in favor of the approval of the merger agreement as long as the merger agreement is in effect, which is sufficient to ensure approval of the merger agreement and the transactions contemplated by the merger agreement by FBR Group shareholders. In addition, FBR Group, which beneficially owns 2,600,000 shares of FBR Asset common stock, representing approximately [10]% of the total voting power of FBR Asset, has agreed to vote its FBR Asset shares in favor of the approval of the merger agreement as long as the merger agreement is in effect.

     We enthusiastically support this combination of our companies and join with the rest of the members of the boards of directors of FBR Group and FBR Asset in recommending that you vote FOR approval of the merger agreement and the transactions contemplated by the merger agreement.

     Information about all the proposals is contained in this joint proxy statement/ prospectus, which we urge you to read in full. Among the most significant risk factors FBR Group and FBR Asset shareholders should consider before voting are:

•  Changes in interest rates and fluctuation in the stock market could have an adverse effect on New FBR’s operating results and ability to pay expected dividends and may cause declines in the market value of New FBR’s mortgage-backed securities
 
 
•  Use of leverage could adversely affect the operations of New FBR, particularly with respect to its mortgage-backed securities business, which could in turn adversely affect its operating results and ability to pay expected dividends
 
 
•  If New FBR does not achieve the projected benefits of the merger, the market price of New FBR’s common stock could decline
 
•  Failure to qualify as a REIT would subject New FBR to U.S. federal income tax, which would materially reduce New FBR’s earnings
 
•  Risks inherent in the investment banking business, such as the risk of loss resulting from the ownership or underwriting of securities, the risks of trading securities, the risk of loss from lending activities, and the risks of reduced demand for financial advisory and underwriting services, could all have an adverse effect on New FBR’s operating results and ability to pay expected dividends

See “Risk Factors Relating to the Merger and New FBR” beginning on page [ l ].
     
EMANUEL J. FRIEDMAN
  ERIC F. BILLINGS
Chairman and Co-Chief Executive Officer
Friedman, Billings, Ramsey Group, Inc.
  Chairman and Chief Executive Officer
  FBR Asset Investment Corporation
Vice Chairman and Co-Chief Executive Officer
  Friedman, Billings, Ramsey Group, Inc.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the merger or determined if this joint proxy statement/ prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

This joint proxy statement/ prospectus is dated [ l ] [ l ], 2003

and is first being mailed to shareholders on or about [ l ] [ l ], 2003.


 

REFERENCES TO ADDITIONAL INFORMATION

      This joint proxy statement/prospectus incorporates important business and financial information about FBR Group and FBR Asset from other documents that are not included in or delivered with this joint proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in this joint proxy statement/prospectus by requesting them in writing or by telephone or over the Internet from the appropriate company at the following addresses:

     
Friedman, Billings, Ramsey Group, Inc.
1001 Nineteenth Street North
Arlington, VA 22209
(703)312-9500
Attention: Investor Relations
  FBR Asset Investment Corporation
1001 Nineteenth Street North
Arlington, VA 22209
(703)469-1000
Attention: Investor Relations
or
  or
[ l ]
  [ l ]

      If you would like to request documents, please do so by [ l ] [ l ], 2003, in order to receive them before your special meeting.

      See “Where You Can Find More Information” on page [ l ].


 

[FBR GROUP LOGO]

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To be Held [ l ] [ l ], 2003

To the Shareholders of Friedman, Billings, Ramsey Group, Inc.:

      We will hold a special meeting of the shareholders of Friedman, Billings, Ramsey Group, Inc. on [ l ] [ l ], 2003, at [ l ] a.m., local time, at [ l ], to consider and vote on the following proposals:

  •  to approve the Agreement and Plan of Merger, dated as of November 14, 2002, by and among Friedman, Billings, Ramsey Group, Inc., FBR Asset Investment Corporation, a Virginia corporation, and Forest Merger Corporation, a Virginia corporation and wholly owned subsidiary of FBR Asset (“New FBR”), and the transactions contemplated thereby; and
 
  •  to act upon such other matters as may properly come before the FBR Group special meeting or any adjournment or postponement thereof.

      Pursuant to the merger agreement, FBR Asset will merge with and into New FBR, and, immediately following that merger, FBR Group will merge with and into New FBR, with New FBR continuing as the surviving company to each merger. At the time of the merger, each outstanding share of FBR Group Class A common stock will be converted into the right to receive one share of New FBR Class A common stock, each outstanding share of FBR Group Class B common stock will be converted into the right to receive one share of New FBR Class B common stock, and each outstanding share of FBR Asset common stock will be converted into the right to receive 3.65 shares of New FBR Class A common stock.

      We will transact no other business at the special meeting, except for business properly brought before the special meeting or any adjournment or postponement of it by the FBR Group board of directors.

      Only FBR Group shareholders of record at the close of business on [ l ] [ l ], 2003, the record date for the special meeting, may vote at the special meeting and any adjournments or postponements of it. A complete list of FBR Group shareholders of record entitled to vote at the special meeting will be available for the 10 days before the special meeting at our executive offices for inspection by FBR Group shareholders during ordinary business hours for proper purposes.

      Your vote is very important. Please sign, date and return the enclosed proxy card as soon as possible to make sure that your shares are represented at the special meeting. To do so, you may complete and return the enclosed proxy card. If you are a shareholder of record of FBR Group common stock, you also may cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct it on how to vote your shares. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting against the merger.

      For more information about the merger described above and the other transactions contemplated by the merger agreement, please review the accompanying joint proxy statement/prospectus and the merger agreement attached to it as Annex A.

      Based upon the unanimous recommendation of the special committee of the FBR Group board of directors, the FBR Group board of directors unanimously recommends that you vote FOR approval of the merger agreement.

  By Order of the FBR Group Board of Directors,
 
  CATHY SIGALAS
  Corporate Secretary

[ l ] [ l ], 2003

Arlington, Virginia


 

(This page intentionally left blank)

 


 

[FBR ASSET LOGO]

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To be Held [ l ] [ l ], 2003

To the Shareholders of FBR Asset Investment Corporation:

      We will hold a special meeting of the shareholders of FBR Asset Investment Corporation on [ l ] [ l ], 2003, at [ l ] p.m., local time, at the [ l ] to consider and vote on the following proposals:

  •  to approve the Agreement and Plan of Merger, dated as of November 14, 2002, by and among FBR Asset Investment Corporation, Friedman, Billings, Ramsey Group, Inc., a Virginia corporation, and Forest Merger Corporation, a Virginia corporation and wholly owned subsidiary of FBR Asset (“New FBR”), and the transactions contemplated thereby; and
 
  •  to act upon such other matters as may properly come before the FBR Asset special meeting or any adjournment or postponement thereof.

      Pursuant to the merger agreement, FBR Asset will merge with and into New FBR, and, immediately following that merger, FBR Group will merge with and into New FBR, with New FBR continuing as the surviving company to each merger. At the time of the merger, each outstanding share of FBR Asset common stock will be converted into the right to receive 3.65 shares of New FBR Class A common stock, each outstanding share of FBR Group Class A common stock will be converted into the right to receive one share of New FBR Class A common stock, and each outstanding share of FBR Group Class B common stock will be converted into the right to receive one share of New FBR Class B common stock.

      We will transact no other business at the special meeting, except for business properly brought before the special meeting or any adjournment or postponement of it by the FBR Asset board of directors.

      Only FBR Asset shareholders of record at the close of business on [ l ] [ l ], 2003, the record date for the special meeting, may vote at the special meeting and any adjournments or postponements of it. A complete list of FBR Asset shareholders of record entitled to vote at the special meeting will be available for the 10 days before the special meeting at our executive offices for inspection by FBR Asset shareholders during ordinary business hours for proper purposes.

      Your vote is very important. The approval of holders of more than two-thirds of the outstanding shares of FBR Asset common stock as of the record date is required to approve the merger. Please submit your proxy as soon as possible to make sure that your shares are represented at the special meeting. To do so, you may complete and return the enclosed proxy card. If you are a shareholder of record of FBR Asset common stock, you also may cast your vote in person at the special meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct them on how to vote your shares. If you do not vote or do not instruct your broker or bank how to vote, it will have the same effect as voting against the merger.

      For more information about the merger described above and the other transactions contemplated by the merger agreement, please review the accompanying joint proxy statement/prospectus and the merger agreement attached to it as Annex A.

      Based upon the unamimous recommendation of the special committee of the FBR Asset board of directors, the FBR Asset board of directors recommends that you vote FOR approval of the merger agreement.

  By Order of the FBR Asset Board of Directors,
 
  CATHY SIGALAS
  Corporate Secretary

[ l ] [ l ], 2003

Arlington, Virginia


 

TABLE OF CONTENTS

           
Page

Questions and Answers About the Merger
    iii  
Summary
    1  
 
Selected Historical Financial Data
    10  
 
Selected Unaudited Pro Forma Consolidated Financial Data and Comparative Per Share Data
    14  
Risk Factors Related to the Merger and New FBR
    16  
 
Risks Related to the Merger
    16  
 
Risks Related to New FBR
    21  
Cautionary Statement Regarding Forward-Looking Statements
    42  
Recent Developments
    42  
The FBR Group Special Meeting
    43  
 
Date, Time and Place
    43  
 
Purpose of the FBR Group Special Meeting
    43  
 
FBR Group Record Date; Shares Entitled to Vote; Quorum
    43  
 
Vote Required
    44  
 
Voting by FBR Group Directors and Executive Officers
    44  
 
Voting of Proxies
    44  
 
Revocability of Proxies
    45  
 
Solicitation of Proxies
    45  
The FBR Asset Special Meeting
    46  
 
Date, Time and Place
    46  
 
Purpose of the FBR Asset Special Meeting
    46  
 
FBR Asset Record Date; Shares Entitled to Vote; Quorum
    46  
 
Vote Required
    46  
 
Voting by FBR Asset Directors and Executive Officers
    47  
 
Voting by FBR Group
    47  
 
Voting of Proxies
    47  
 
Revocability of Proxies
    47  
 
Solicitation of Proxies
    48  
The Merger
    49  
 
General Description of the Merger
    49  
 
Background to the Merger
    49  
 
FBR Group Reasons for the Merger
    54  
 
Recommendation of the FBR Group Special Committee and the FBR Group Board of Directors
    57  
 
FBR Asset Reasons for the Merger
    58  
 
Recommendation of the FBR Asset Special Committee and the FBR Asset Board of Directors
    60  
 
Certain Financial Projections
    61  
 
Opinion of Goldman Sachs
    62  
 
Opinion of Lehman Brothers
    71  
 
Interests of Certain Persons in the Merger
    77  
 
Listing of New FBR Capital Stock
    78  
 
Transfer Agent and Registrar
    78  
 
Investment and Operational Policies of New FBR
    78  
 
Dividends
    84  
 
Material U.S. Federal Income Tax Consequences of the Merger
    84  
 
Accounting Treatment
    86  
 
Regulatory Matters
    86  
 
Appraisal Rights
    87  
 
Resale of New FBR Common Stock
    87  
Description of the Transaction Agreements
    88  
 
The Merger Agreement
    88  
 
The Voting Agreements
    101  
 
The Shareholder Agreements
    102  
 
The Extension of the Management Agreement
    103  
 
Description of Governance Arrangements Following the Transaction
    103  
Comparative Per Share Market Price and Dividend Information
    104  
Unaudited Pro Forma Consolidated Financial Information
    105  
 
How We Prepared the Unaudited Condensed Pro Forma Consolidated Financial Statements
    105  
 
Transaction-Related Expenses
    106  
Unaudited Condensed Pro Forma Consolidated Balance Sheets
    107  
Unaudited Condensed Pro Forma Consolidated Statements of Operations for the Nine Months Ended September 30, 2002
    108  
Unaudited Condensed Pro Forma Consolidated Statements of Operations for the Year Ended December 31, 2001
    109  


 

           
Page

Notes to Unaudited Condensed Pro Forma Consolidated Financial Statements
    110  
Report of Independent Accountants
    115  
Forest Merger Corporation Balance Sheet
    116  
Note to Forest Merger Corporation Balance Sheet
    117  
Real Estate Investment Trust Status of New FBR
    118  
 
Taxation as a REIT
    118  
 
Requirements for Qualification as a REIT
    120  
 
Failure to Qualify
    128  
 
Taxation of Taxable U.S. Shareholders
    129  
 
Taxation of U.S. Shareholders on the Disposition of Common Stock
    130  
 
Capital Gains and Losses
    130  
 
Information Reporting Requirements and Backup Withholding
    130  
 
Taxation of Tax-Exempt Shareholders
    131  
 
Taxation of Non-U.S. Shareholders
    131  
 
State and Local Taxes
    133  
 
Recent Developments
    133  
Description of New FBR Capital Stock
    134  
 
Authorized Capital Stock
    134  
 
New FBR Common Stock
    134  
 
Preferred Stock
    134  
 
Dividend Rights
    134  
 
Rights upon Liquidation
    135  
 
Restrictions on Ownership and Transfer
    135  
 
Certain Provisions Affecting Change in Control
    137  
Comparison of Shareholder Rights
    138  
 
Comparison of Certain Articles of Incorporation and Bylaw Provisions
    138  
Legal Matters
    167  
Experts
    167  
Independent Accountants
    167  
Shareholder Proposals
    168  
 
FBR Group
    168  
 
FBR Asset
    168  
Other Matters
    168  
Where You Can Find More Information
    168  

ANNEXES

     
Annex A
  Agreement and Plan of Merger
Annex B
  Voting Agreement, Emanuel J. Friedman
Annex C
  Voting Agreement, Eric F. Billings
Annex D
  Shareholder Agreement, Emanuel J. Friedman
Annex E
  Shareholder Agreement, Eric F. Billings
Annex F
  Agreement to Extend Management Agreement
Annex G
  Form of Amended and Restated Articles of Incorporation of New FBR
Annex H
  Form of Bylaws of New FBR
Annex I
  Opinion of Goldman, Sachs & Co.
Annex J
  Opinion of Lehman Brothers

ii


 

QUESTIONS AND ANSWERS ABOUT THE MERGER

Q:  When and where are the special meetings of shareholders?
 
A:  The special meeting of FBR Group shareholders will take place on [ l ] [ l ], 2003, at [ l ]. The special meeting of FBR Asset shareholders will take place on [ l ] [ l ], 2003, at [ l ].
 
Q:  What shareholder approvals are required to approve the merger?
 
A:  For FBR Group, the approval of the holders of a majority of the voting power of the outstanding FBR Group shares entitled to vote as of the record date is required to approve the merger agreement.
 
    For FBR Asset, the approval of the holders of more than two-thirds of the outstanding FBR Asset shares entitled to vote as of the record date is required to approve the merger agreement.
 
    As of the FBR Group record date, FBR Group directors and officers held and were entitled to vote shares of FBR Group Class A common stock and FBR Group Class B common stock representing approximately [ l ]% of the outstanding voting power of FBR Group. Each of Emanuel J. Friedman, the Chairman and Co-Chief Executive Officer of FBR Group, and Eric F. Billings, the Vice Chairman and Co-Chief Executive Officer of FBR Group, who, together, beneficially own approximately [53]% of the total voting power of the company, has agreed to vote his FBR Group shares in favor of the approval of the merger agreement as long as the merger agreement is in effect, which is sufficient to ensure approval of the merger agreement and the transactions contemplated by the merger agreement by FBR Group shareholders.
 
    As of the FBR Asset record date, FBR Asset directors and officers held and were entitled to vote [ l ]% of FBR Asset common stock outstanding. In addition, FBR Group, which, as of the FBR Asset record date, beneficially owned shares of FBR Asset common stock representing approximately [10]% of FBR Asset common stock outstanding, has agreed to vote its shares of FBR Asset common stock in favor of the approval of the merger agreement as long as the merger agreement is in effect.
 
Q:  Do the boards of directors recommend approval of the merger?
 
A:  Yes. The boards of directors of both FBR Group and FBR Asset, each on the recommendation of the special committee of independent directors that each company formed to evaluate the advisability and fairness of the merger to shareholders, unanimously approved and adopted the merger agreement and the transactions contemplated by the merger agreement and recommend that you vote “FOR” their approval.
 
Q:  Why were special committees formed?
 
A.  The boards of directors of each of FBR Group and FBR Asset formed a special committee to protect the interests of shareholders of each company in the evaluation and negotiation of the merger agreement and the transactions contemplated by the merger agreement from potential conflicts of interest resulting from FBR Group’s and its management’s representation on FBR Asset’s board of directors, and the representation of the controlling FBR Group shareholders on FBR Group’s board of directors.
 
Q:  Why are FBR Group and FBR Asset going to merge?
 
A:  We believe that the merger will provide important strategic and financial benefits to FBR Group and FBR Asset and their respective shareholders.
 
    From FBR Group’s point of view, these benefits include:

    •  increased capital base,
 
    •  new business flexibility and earnings stability, and
 
    •  ability to pay significant cash dividends to shareholders in a tax-efficient manner as a result of New FBR’s anticipated REIT status.

    From FBR Asset’s point of view, these benefits include:

    •  premium to the market value of shares of FBR Asset common stock,
 
    •  internal management,
 
    •  increased unleveraged capital base,

iii


 

    •  greater protection for dividends and earnings through diversification, and
 
    •  improved prospects for growth.

    To review the reasons for the merger in greater detail, see pages [ l ] through [ l ].
 
Q:  What are the principal risks relating to the merger?
 
A:  There are a number of risks relating to the merger, including the following:

    •  Changes in interest rates and fluctuations in the stock market could have an adverse effect on New FBR’s operating results and ability to pay expected dividends and may cause declines in the market value of New FBR’s mortgage-backed securities;
 
    •  Use of leverage could adversely affect the operations of New FBR, particularly with respect to its mortgage-backed securities business, which could in turn adversely affect its operating results and ability to pay expected dividends;
 
    •  If New FBR does not achieve the projected benefits of the merger, the market price of New FBR’s common stock could decline;
 
    •  Failure to qualify as a REIT would subject New FBR to U.S. federal income tax, which would materially reduce New FBR’s earnings; and
 
    •  Risks inherent in the investment banking business, such as the risk of loss resulting from the ownership or underwriting of securities, the risks of trading securities, the risk of loss from lending activities, and the risks of reduced demand for financial advisory and underwriting services could all have an adverse effect on New FBR’s operating results and ability to pay expected dividends.

    See “Risk Factors Related to the Merger and New FBR — Risks Related to the Merger” on page [ l ].
 
Q:  What will happen in the transaction?
 
A:  In the transaction, FBR Asset will merge with and into New FBR and, immediately following that merger, FBR Group will merge with and into New FBR. As a result of the merger:

    •  FBR Group and FBR Asset will cease to exist, and
 
    •  New FBR will survive the merger and own and operate the businesses of FBR Group and FBR Asset.

Q:  What economic interests in and voting power of New FBR will the FBR Group shareholders and FBR Asset shareholders hold after the merger?
 
A:  The former FBR Group Class A shareholders will hold approximately [18]% of the economic interest and [13]% of the total voting power of New FBR, former FBR Group Class B shareholders will hold approximately [19]% of the economic interest and [42]% of the total voting power of New FBR, and former FBR Asset shareholders will hold approximately [63]% of the economic interest and [45]% of the total voting power of New FBR.
 
Q:  What will be the name of the combined company after the merger?
 
A:  The new public company will assume the name of “Friedman, Billings, Ramsey Group, Inc.”
 
Q:  What will I receive for my shares?
 
A:  Each FBR Group shareholder will receive one share of a corresponding class of New FBR common stock for each share of FBR Group Class A or FBR Group Class B common stock that the shareholder owns.
 
    Each FBR Asset shareholder will receive 3.65 shares of New FBR Class A common stock for each share of FBR Asset common stock that the shareholder owns.
 
    Following completion of the transaction, shares of New FBR Class A common stock will be entitled to one vote per share and shares of New FBR Class B common stock will be entitled to three votes per share.
 
    Example: If an FBR Group shareholder currently owns 100 shares of FBR Group Class A common stock and 10 shares of FBR Group Class B common stock, as a result of the merger the shareholder will be entitled to receive 100 shares of New FBR Class A common stock and 10 shares of New FBR Class B common stock.
 
    Example: If an FBR Asset shareholder currently owns 100 shares of FBR Asset common stock, as a result of the merger the shareholder will be entitled to receive 365 shares of New FBR Class A common stock.
 
Q:  Will I continue to receive dividends on my shares?
 
A:  Under the merger agreement, FBR Asset is permitted to pay distributions to shareholders

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equal to the greater of (1) regular quarterly dividends of $1.25 per share of FBR Asset common stock or (2) distributions as may be required to cause FBR Asset to have distributed 100% of its taxable income for the taxable year ended December 31, 2002, as may be necessary to maintain FBR Asset’s status as a REIT and to prevent FBR Asset from incurring certain U.S. federal income tax liabilities. On December 10, 2002, FBR Asset declared a quarterly dividend of $1.25 per share of FBR Asset common stock payable on February 3, 2003 to FBR Asset shareholders of record as of December 27, 2002. In addition, on December 10, 2002, FBR Asset declared a special dividend of $0.30 per share payable on January 31, 2003 to FBR Asset shareholders of record as of December 27, 2002. FBR Asset does not plan to declare and pay any further regular quarterly dividends if the merger is completed before [ l ] [ l ], [ l ]. If the merger is completed after [ l ] [ l ], [ l ], FBR Asset currently intends to continue to pay regular quarterly dividends for any additional quarterly periods ending before the completion of the merger.

    Under the merger agreement, FBR Group is prohibited from declaring or paying any dividends or distributions prior to the completion of the merger without the prior consent of FBR Asset.
 
Q:  Will I receive dividends on my New FBR shares?
 
A:  Yes. In order to qualify as a real estate investment trust, or “REIT,” for U.S. federal income tax purposes, New FBR must distribute to its shareholders annually at least 90% of its taxable income, excluding the retained earnings of its taxable REIT subsidiaries. It is anticipated that, after the completion of the merger, New FBR will maintain the dividend policy of FBR Asset. The payment of dividends by New FBR, however, will be subject to approval and declaration by the New FBR board of directors, and will depend on a variety of factors, including business, financial and regulatory considerations.
 
Q:  What are the U.S. federal income tax consequences of the merger?
 
A:  We have structured the transaction so that it is anticipated that the merger of FBR Asset with and into New FBR, and the merger of FBR Group with and into New FBR, each will be a reorganization for U.S. federal income tax purposes. FBR Group and FBR Asset will not be obligated to complete the merger unless they receive legal opinions to the effect that the merger qualifies as a reorganization for U.S. federal income tax purposes. In addition, in connection with the filing of the registration statement, Wachtell, Lipton, Rosen & Katz and Hogan & Hartson L.L.P. have delivered to FBR Group and FBR Asset, respectively, their opinions, dated the date of this joint proxy statement/prospectus, that (1) the merger of FBR Asset with and into New FBR and the merger of FBR Group with and into New FBR will each qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and (2) the merger of FBR Group with and into New FBR will not be treated as a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code. Accordingly, FBR Group shareholders and FBR Asset shareholders will not recognize gain or loss for U.S. federal income tax purposes in the transaction (except with respect to any cash received by FBR Asset shareholders instead of fractional shares of New FBR common stock). You are strongly urged to consult with your tax advisor to determine the particular U.S. federal, state, local and foreign income or other tax consequences of the merger to you. See “The Merger — Material U.S. Federal Income Tax Consequences of the Merger” on page [ l ].
 
Q:  How will the New FBR shares differ from the shares I own now?
 
A:  Like FBR Group, but unlike FBR Asset, New FBR will have two classes of common stock, Class A common stock, which will have one vote per share, and Class B common stock, which will have three votes per share. Ownership of FBR Group Class B common stock is currently restricted to certain people associated with the founding of FBR Group; Messrs. Friedman and Billings currently own [36]% and [31]%, respectively, of the shares of FBR Group Class B common stock outstanding. Like FBR Asset, but unlike FBR Group, New FBR is expected to qualify as a REIT for U.S. federal income tax purposes and its amended and restated articles of incorporation will include a provision preventing any shareholder from owning more than 9.9% of the value

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of New FBR’s common stock without a waiver from New FBR’s board of directors or shareholders. So long as it qualifies for taxation as a REIT, New FBR generally will not be subject to U.S. federal income tax on the income that it distributes currently to shareholders. The existing subsidiaries of FBR Group and some of the existing subsidiaries of FBR Asset will become taxable REIT subsidiaries of New FBR, and their activities will continue to be fully subject to U.S. federal income tax.
 
Q:  If I would like to vote on the approval of the merger agreement, what do I need to do now?
 
A:  After carefully reading and considering the information contained in this joint proxy statement/ prospectus, please complete and sign your proxy card and return it in the enclosed postage-paid envelope as soon as possible so that your shares may be represented at your special meeting.
 
    If you sign, date and send your proxy and do not indicate how you want to vote, your proxy will be voted for the approval of the merger agreement.
 
Q:  What do I do if I want to change my vote?
 
A:  Send a later-dated, signed proxy card to your company’s Corporate Secretary prior to the date of your special meeting or attend your company’s special meeting in person and vote. You also may revoke your proxy by sending a notice of revocation to your company’s Corporate Secretary at the address indicated under “Summary — The Companies” on page [ l ].
 
Q:  If my broker holds my shares in “street name,” will my broker vote my shares?
 
A:  If you do not provide your broker with instructions on how to vote your street name shares, your broker will not be permitted to vote them on the proposals. You should, therefore, be sure to provide your broker with instructions on how to vote your shares. Shareholders should check the voting form provided by their brokers to see if they offer telephone or Internet voting.
 
    If you do not give voting instructions to your broker, your votes will not be counted as voting for the merger unless you appear and vote in person at your special meeting. If your broker holds your shares and you attend the special meeting, please bring a letter from your broker identifying you as the beneficial owner of the shares and acknowledging that you will vote your shares.
 
Q:  What will happen if I abstain from voting or fail to vote?
 
A:  An abstention or failure to vote will have the same effect as a vote against the merger.
 
Q:  Who else must approve the merger?
 
A:  Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, FBR Group and FBR Asset may not complete the merger until they have furnished certain information and materials to the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission and the applicable waiting period has expired or been terminated. On January 6, 2003, FBR Group and FBR Asset were granted early termination of the applicable waiting period.
 
    Completion of the merger is also subject to approval of other regulatory authorities, including the Federal Reserve Board, where the failure to obtain those approvals would have a material adverse effect on New FBR after completion of the merger.
 
    We have made the relevant filings or intend to make them as soon as practicable. See “The Merger — Regulatory Matters” on page [ l ].
 
Q:  When do you expect to complete the merger?
 
A:  We expect to complete the merger in the first quarter of 2003.
 
Q:  What if FBR Group’s average closing stock price for 10 trading days prior to the special meetings is less than $8.75 per share or more than $10.55 per share?
 
A:  If FBR Group’s average closing stock price during that period is less than $8.75 per share, then FBR Asset may elect to exercise or waive its right under the merger agreement to terminate the merger agreement and cause the merger not to not take place. If you are an FBR Asset shareholder, by voting for approval of the merger agreement, you will be delegating to FBR Asset the authority to waive that termination right and permit the merger to take place even if FBR Group’s average closing stock price during that period is less than $8.75 per share.

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    Similarly, if FBR Group’s average closing stock price during that period is greater than $10.55 per share, then FBR Group may elect to exercise or waive its right under the merger agreement to terminate the merger agreement and cause the merger not to not take place. If you are an FBR Group shareholder, by voting for approval of the merger agreement, you will be delegating to FBR Group the authority to waive that termination right and permit the merger to take place even if FBR Group’s average closing stock price during that period is greater than $10.55 per share.
 
    If either party waives its right to terminate the merger agreement even though the market price of FBR Group’s Class A common stock has risen above, or fallen below, as the case may be, the collar set forth in the merger agreement, then the shareholders of one of the parties could receive less value in the merger than the parties anticipated and the shareholders of the other party could receive more value in the merger than the parties anticipated.
 
Q:  What will determine whether the walk-away rights are exercised or waived?
 
A:  In the event either FBR Group or FBR Asset is entitled to terminate the merger agreement under the walk-away provisions, the special committee of the applicable party’s board of directors will make a determination as to whether it is in the best interests of that party’s shareholders to proceed with or terminate the transaction. In making this determination, the special committee of the applicable party will consider a variety of factors, including:

  •  The historical performance and future prospects of each of the companies’ businesses;
 
  •  Market conditions affecting both companies;
 
  •  The value of each company’s common stock and its value over the short-term and long-term;
 
  •  Alternatives to the merger available to each of the companies; and
 
  •  The possibility of amending the merger agreement to obtain more favorable terms.

  The special committees may, if they consider it appropriate, request a new fairness opinion or reaffirmation of the existing fairness opinion from their respective financial advisors in connection with a decision to exercise or waive walk-away rights, but they are not obligated to do so.

Q:  Should I send in my share certificates now?
 
A:  No. Shortly after the merger is completed, we will send you written instructions for exchanging your share certificates.
 
Q:  Do I have appraisal rights?
 
A:  No. Neither FBR Group shareholders nor FBR Asset shareholders will have appraisal rights under Virginia law as a result of the merger.
 
Q:  Who can help answer my questions?
 
A:  If you have any questions about the merger or if you need additional copies of this joint proxy statement/ prospectus or the enclosed proxy card, you should contact:

FBR Group shareholders:

Friedman, Billings, Ramsey Group, Inc.

1001 Nineteenth Street North
Arlington, VA 22209
(703) 312-9500
Attention: Investor Relations

Or

[ l ]

FBR Asset shareholders:

FBR Asset Investment Corporation

1001 Nineteenth Street North
Arlington, VA 22209
(703) 469-1000
Attention: Investor Relations

Or

[ l ]

Q:  Where can I find more information about the companies?
 
A:  You can find more information about FBR Group and FBR Asset from various sources described under “Where You Can Find More Information” on page [ l ].

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SUMMARY

      This summary highlights selected information from this joint proxy statement/prospectus and may not contain all the information that is important to you. To understand the merger fully and for a more complete description of the legal terms of the merger, you should read carefully this entire document, including the annexes, and the other documents to which we have referred you. For information on how to obtain the documents that we have filed with the Securities and Exchange Commission, see “References to Additional Information” on the inside front cover of this joint proxy statement/prospectus and “Where You Can Find More Information” on page [ l ] . For a discussion of the risk factors that you should consider in evaluating the merger, see “Risk Factors Related to the Merger and New FBR” beginning on page [ l ].

      Throughout this joint proxy statement/prospectus when we use the term “New FBR,” we are referring to Forest Merger Corporation, a newly formed company that is currently a wholly owned subsidiary of FBR Asset, and which, upon completion of the merger, will be the surviving company of the merger described below. Unless the context requires otherwise, when we use the term “merger,” we are referring to first (1) the merger of FBR Asset with and into New FBR, with New FBR being the surviving corporation, followed by (2) the merger of FBR Group with and into New FBR, with New FBR being the surviving corporation.

The Companies

Friedman, Billings, Ramsey Group, Inc.

1001 Nineteenth Street North
Arlington, VA 22209
(703) 312-9500

      FBR Group is a financial holding company for businesses that provide investment banking, institutional brokerage, specialized asset management, and private client services. FBR Group focuses capital and financial expertise primarily in six industry sectors: financial services, real estate, technology, energy, healthcare and diversified industries. For additional information about FBR Group and its business, see “Where You Can Find More Information” on page [ l ].

FBR Asset Investment Corporation

1001 Nineteenth Street North
Arlington, VA 22209
(703) 469-1000

      FBR Asset was formed in December 1997. FBR Asset invests in investment grade residential mortgage-backed securities and makes opportunistic investments in debt and equity securities of companies engaged in real estate-related and other businesses. FBR Asset is externally managed by Friedman, Billings, Ramsey Investment Management, Inc., or “FBRIM,” a subsidiary of FBR Group. FBR Asset is structured to qualify as a real estate investment trust, or “REIT,” for U.S. federal income tax purposes. For additional information about FBR Asset and its business, see “Where You Can Find More Information” on page [ l ].

New FBR

1001 Nineteenth Street North
Arlington, VA 22209
( l ) [ l ]-[ l ]

      FBR Asset formed New FBR solely for the purpose of effecting the merger. To date, New FBR has not conducted any activities other than those incident to its formation, the execution of the merger agreement and the preparation of this joint proxy statement/prospectus. New FBR is a wholly owned subsidiary of FBR Asset. Upon completion of the merger, FBR Group and FBR Asset each will be merged with and into New FBR, the business of New FBR will be the businesses currently conducted by FBR Group and FBR Asset, and New FBR will change its name to “Friedman, Billings, Ramsey Group, Inc.” FBR Group and FBR Asset

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anticipate that, following completion of the merger, New FBR will qualify as a REIT for tax purposes. It will conduct substantially all operating businesses, including substantially all of those currently conducted by FBR Group and its subsidiaries, through taxable REIT subsidiaries. New FBR will be a self-managed REIT, as compared to FBR Asset, which is externally managed by a subsidiary of FBR Group pursuant to a management agreement. Upon completion of the merger, the management agreement between FBR Asset and the FBR Group subsidiary will be terminated, and the FBR Group personnel who currently manage FBR Asset’s business under the management agreement will become employees of New FBR and will continue to perform the services they currently perform relating to FBR Asset’s business.

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The Merger

      The merger agreement is attached as Annex A to this joint proxy statement/prospectus. We encourage you to read the merger agreement carefully and in its entirety. It is the principal document governing the merger.

What You Will Receive in the Merger

      FBR Group Shareholders (page [ l ]). In the merger, each share of FBR Group Class A common stock will be converted into the right to receive one share of New FBR Class A common stock and each share of FBR Group Class B common stock will be converted into the right to receive one share of New FBR Class B common stock.

      FBR Asset Shareholders (page [ l ]). In the merger, each share of FBR Asset common stock will be converted into the right to receive 3.65 shares of New FBR Class A common stock.

      Following completion of the transaction, shares of New FBR Class A common stock will be entitled to one vote per share and shares of New FBR Class B common stock will be entitled to three votes per share.

      See “Risk Factors Related to the Merger and New FBR — Risks Related to the Merger — The value of the shares of New FBR common stock that you receive upon the completion of the merger may be less than the value of your shares of FBR Group common stock or FBR Asset common stock as of the date of the merger agreement or on the date of the special meetings” on page [ l ].

Organizational Chart of FBR Asset and FBR Group Before and After the Merger

Before:

(ORGANIZATIONAL CHART)

After:

(ORGANIZATIONAL CHART)

3


 

Recommendations of the Boards of Directors

      FBR Group (page [ l ]). At its meeting on November 14, 2002, the FBR Group board of directors, upon the unanimous recommendation of a special committee, consisting entirely of independent directors, after due consideration, unanimously:

  •  determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and fair to and in the best interests of FBR Group and its shareholders,
 
  •  approved the merger and approved and adopted the merger agreement and the transactions contemplated by the merger agreement,
 
  •  directed that the merger agreement and the transactions contemplated by the merger agreement be submitted to a vote at a meeting of FBR Group shareholders, and
 
  •  recommended that FBR Group shareholders approve the merger agreement and the transactions contemplated by the merger agreement.

      In reaching their conclusions, the FBR Group special committee and FBR Group board of directors considered a number of positive and negative factors, including the following, no one of which was determinative:

           Positive Factors:

  •  the expectation that the transaction would add approximately $700 million of new capital to FBR Group, which is expected to help create new business flexibility and earnings stability,
 
  •  the expectation that the merger would be accretive to FBR Group earnings and book value,
 
  •  the expectation that the greater diversity of business as a result of the transaction would help stabilize FBR Group’s revenue stream, and
 
  •  the ability to distribute dividends to FBR Group shareholders in a tax-efficient manner as permitted by the REIT rules.

           Negative Factors:

  •  uncertainty regarding how the transaction would affect trading in FBR Group common stock both before the completion of the merger, as a result of arbitrage activity, and how New FBR common stock would trade after the completion of the transaction,
 
  •  the risk that, under the terms and conditions of the merger agreement, FBR Asset can terminate the merger agreement if the average closing stock price of FBR Group Class A common stock for the 10 trading days prior to the shareholders meeting is less than $8.75 per share, and
 
  •  the termination fee and expenses of up to $11.3 million payable by FBR Group to FBR Asset under certain circumstances.

      See “The Merger — FBR Group Reasons for the Merger” on page [ l ].

      FBR Asset (page [ l ]). At its meeting on November 14, 2002, the FBR Asset board of directors, upon the unanimous recommendation of a special committee, consisting entirely of independent directors unaffiliated with FBR Group, after due consideration:

  •  determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and fair to and in the best interests of FBR Asset and FBR Asset shareholders unaffiliated with FBR Group,
 
  •  approved the merger and approved and adopted the merger agreement and the transactions contemplated by the merger agreement,

4


 

  •  directed that the merger agreement and the transactions contemplated by the merger agreement be submitted to a vote at a meeting of FBR Asset shareholders, and
 
  •  recommended that FBR Asset shareholders approve the merger agreement.

      In reaching their conclusions, the FBR Asset special committee and FBR Asset board of directors considered a number of positive and negative factors, including the following, no one of which was determinative:

 
Positive Factors:

  •  that the exchange ratio represented a premium of 22.2% over the closing price of a share of FBR Asset common stock on November 14, 2002 (the last business day before the proposed transaction was announced publicly),
 
  •  that holders of FBR Asset common stock currently receive a dividend of $1.25 per share per quarter and that, as adjusted to reflect the 3.65 shares of New FBR Class A common stock to be received in the merger for each share of the FBR Asset common stock, the holders initially are expected to receive the same distribution per quarter for each share following completion of the merger,
 
  •  that a combined FBR Asset and FBR Group could have more potential to grow revenue and income, without additional outside sources of financing, than FBR Asset on a stand-alone basis, and
 
  •  that by merging with FBR Group, FBR Asset would become internally managed, thereby eliminating any conflicts of interest with FBR Group.

 
  Negative Factors:

  •  the fact that because the exchange ratio is fixed, a decrease in the trading price per share of FBR Group Class A common stock before the completion of the merger will reduce the value of the per share and aggregate consideration that will be received by the FBR Asset shareholders,
 
  •  the fact that shares of New FBR Class B common stock will be entitled to three votes per share,
 
  •  the right under the merger agreement of FBR Group to terminate the merger agreement if FBR Group’s average closing stock price for the 10 trading days prior to the special meeting is greater than $10.55 per share, thereby potentially limiting the potential premium to be received by the FBR Asset shareholders in the merger, and
 
  •  the termination fee and expenses of up to $16.7 million payable by FBR Asset to FBR Group under certain circumstances, which may discourage some proposals to acquire FBR Asset by a third party because of the increased price that the acquiror would have to pay.

      See “The Merger — FBR Asset Reasons for the Merger” on page [ l ].

To review the background of and reasons for the merger in greater detail, see pages [ l ] through [ l ].

Fairness Opinions of Financial Advisors

      FBR Group (page [ l ]). Goldman, Sachs & Co. delivered its opinion to the special committee of the FBR Group board of directors and the FBR Group board of directors that, as of November 14, 2002, and based upon and subject to the factors and assumptions set forth therein, the exchange ratio of one share of New FBR Class A common stock to be received for each share of FBR Group Class A common stock pursuant to the merger agreement is fair from a financial point of view to the holders of FBR Group Class A common stock.

      The full text of the written opinion of Goldman Sachs, dated November 14, 2002, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex I. FBR Group’s Class A shareholders should read the opinion in its entirety. Goldman Sachs provided its opinion for the information and assistance of the special

5


 

committee of the FBR Group board of directors and the FBR Group board of directors in connection with their consideration of the transactions contemplated by the merger agreement. The Goldman Sachs opinion is not a recommendation as to how any holder of FBR Group Class A common stock or FBR Group Class B common stock should vote with respect to the transactions. In addition, the Goldman Sachs opinion does not express any opinion as to the prices at which shares of New FBR Class A common stock may trade if and when they are issued.

      FBR Asset (page [ l ]). In deciding to approve the merger, the FBR Asset board of directors and the special committee of FBR Asset’s board of directors formed to review the transaction considered the opinion of Lehman Brothers Inc., delivered to the FBR Asset special committee on November 14, 2002, and subsequently confirmed in writing, that, as of the date of the opinion and based upon and subject to the factors and assumptions set forth therein, the exchange ratio to be offered in the merger is fair from a financial point of view to the holders of FBR Asset common stock (other than FBR Group and its affiliates).

      The full text of the written opinion of Lehman Brothers, dated November 14, 2002, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex J to this joint proxy statement/ prospectus. We encourage FBR Asset shareholders to read the opinion carefully and in its entirety. Lehman Brothers provided its opinion for the information and assistance of FBR Asset’s special committee of the board of directors and FBR Asset’s board of directors in connection with their consideration of the transactions contemplated by the merger agreement. The Lehman Brothers opinion is not a recommendation as to how any holder of FBR Asset common stock should vote with respect to the transactions. In addition, the Lehman Brothers opinion does not express any opinion as to the prices at which shares of New FBR Class A common stock may trade if and when they are issued.

Interests of Directors and Management in the Merger (page [ l ])

      FBR Group shareholders and FBR Asset shareholders should note that some directors and officers of FBR Group and FBR Asset have interests in the merger that are different in certain respects from the interests of other FBR Group shareholders and FBR Asset shareholders, respectively. As provided in the merger agreement, upon the completion of the merger, all of the current members of the FBR Group board of directors and the FBR Asset board of directors will become members of the New FBR board of directors. As of [ l ][ l ], 2003, directors and officers of FBR Group beneficially owned in the aggregate [ l ] shares of FBR Group Class A common stock and [ l ] shares of FBR Group Class B common stock, representing [ l ]% of the economic interest and [ l ]% of the total voting power of FBR Group. As of [ l ][ l ], 2003, directors and officers of FBR Asset beneficially owned in the aggregate [ l ] shares of FBR Asset Class A common stock, representing [ l ]% of the economic interest and voting power of FBR Asset. Upon completion of the merger, directors and officers of New FBR will beneficially own in the aggregate approximately [ l ] shares of New FBR Class A common stock and [ l ] shares of New FBR Class B common stock, representing [ l ]% of the economic interest and [ l ]% of the total voting power of New FBR. In addition, Messrs. Friedman and Billings, through their ownership of shares of FBR Group Class A common stock and FBR Group Class B common stock, currently control approximately [53%] of the outstanding voting power of FBR Group common stock, and, upon completion of the transaction, will control approximately [29]% of the outstanding voting power of New FBR common stock.

      Approval of the merger by FBR Group shareholders and FBR Asset shareholders will constitute a “change in control” under the stock-based compensation plans of FBR Group and FBR Asset, respectively. Under both FBR Group’s and FBR Asset’s stock-based plans, unvested stock options held by employees and directors become fully vested and exercisable, and all restrictions on restricted stock awards lapse, upon a change in control of FBR Group or FBR Asset, respectively. As of [ l ][ l ], [ l ], Robert B. Smith, Richard J. Hendrix, Kurt Harrington and William J. Ginivan held unvested options to purchase [ l ], [ l ], [ l ] and [ l ] shares of FBR Group Class A common stock, respectively, all of which will vest upon approval of the merger agreement by FBR Group shareholders. As of [ l ][ l ], [ l ], Messrs. Hendrix, Harrington and Ginivan held [ l ], [ l ] and [ l ] shares of restricted FBR Asset Class A common stock, respectively. No non-employee directors of FBR Group or FBR Asset currently hold unvested stock options or restricted stock.

6


 

      Messrs. Smith and Ginivan have purchased 150,000 and 50,000 shares of FBR Group Class A common stock under the FBR Stock Purchase and Loan Plan, respectively. Under this plan, certain key FBR Group employees were loaned funds in 2001 by FBR Group in order to facilitate the purchase of shares of FBR Group Class A common stock. The shares of FBR Group Class A common stock are held by FBR Group as collateral for the loans, and employees are generally not permitted to sell any of the shares until the second anniversary of purchase. Upon a “change in control” of FBR Group, employees may immediately sell shares, although they must then either immediately repay the underlying loan or provide alternative collateral acceptable to FBR Group. Approval of the merger by the FBR Group shareholders will constitute a change in control for purposes of the plan.

      See “The Merger — Interests of Certain Persons in the Merger” on page [ l ].

Conditions to the Completion of the Merger (page [ l ])

      Each of FBR Group’s and FBR Asset’s obligation to complete the merger is subject to the satisfaction or waiver of a number of conditions, including the following:

  •  the merger agreement is approved by the required vote of FBR Group shareholders and FBR Asset shareholders,
 
  •  no legal prohibition on completion of the merger is in effect,
 
  •  the applicable waiting period under U.S. antitrust laws expires or is terminated,
 
  •  the shares of New FBR common stock are approved for listing on the New York Stock Exchange,
 
  •  the parties’ respective representations and warranties in the merger agreement are true and correct, to the extent set forth in the merger agreement,
 
  •  the parties comply with their respective covenants and agreements in the merger agreement, to the extent set forth in the merger agreement,
 
  •  each of FBR Group and FBR Asset receives an opinion of its respective tax counsel to the effect that the merger of FBR Asset with and into New FBR and the merger of FBR Group with and into New FBR will each qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, and that the merger of FBR Group into New FBR will not be treated as a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code,
 
  •  each of FBR Group and New FBR receives an opinion of tax counsel to the effect that, commencing with its taxable year commencing on the day before the closing date for the initial private placement of its shares of common stock and ended December 31, 1997, FBR Asset was organized and has operated in conformity with the requirements for qualification as a REIT under Sections 856 through 860 of the Internal Revenue Code, and
 
  •  each of FBR Group, FBR Asset and New FBR receives an opinion of tax counsel to the effect that, commencing with the taxable year ending on December 31 of the calendar year in which the effective time of the merger takes place, New FBR’s organization and intended method of operation will enable it to meet the requirements for qualification and taxation as a REIT under Sections 856 through 860 of the Internal Revenue Code.

Termination of the Merger Agreement (page [ l ])

      FBR Group and FBR Asset can jointly agree to terminate the merger agreement at any time. Either FBR Group or FBR Asset may also terminate the merger agreement if:

  •  the merger is not completed on or before July 31, 2003 (as long as the failure to complete the merger before that date is not the result of the failure by the terminating company to fulfill any of its obligations under the merger agreement),

7


 

  •  government actions do not permit the completion of the merger, so long as the terminating company has used its commercially reasonable efforts to obtain all necessary governmental approvals and lift any injunctions,
 
  •  either FBR Group shareholders or FBR Asset shareholders fail to approve the merger agreement at a duly held special meeting of those shareholders,
 
  •  the other company’s board of directors fails to recommend that its shareholders approve the merger agreement, changes its recommendation, or fails to hold its special meeting of shareholders,
 
  •  the other company breaches or fails to perform any of its representations, warranties, covenants or other agreements contained in the merger agreement and the breach or failure has not been waived by the non- breaching party or is not cured prior to the earlier of 30 business days after giving written notice of the breach or July 31, 2003, or
 
  •  prior to the receipt of the approval of its shareholders, it terminates the merger agreement in connection with a superior proposal as provided in the merger agreement.

      In addition, FBR Asset may terminate the merger agreement if FBR Group’s average closing stock price for the 10 trading days prior to the special meetings is less than $8.75 per share, and FBR Group may terminate the merger agreement if FBR Group’s average closing stock price for the 10 trading days prior to the special meetings is greater than $10.55 per share. However, even if these termination rights arise, they may be waived by FBR Asset or FBR Group, as applicable. In approving the proposed merger, you will be delegating to FBR Asset or FBR Group, as the case may be, the authority to waive the termination rights described in this paragraph and permit the merger to be completed in the event such termination rights arise.

Termination Fees (page [ l ])

      FBR Group will pay a termination fee in the amount of $8.8 million plus actual expenses up to $2.5 million in cash to the extent set forth in the merger agreement if the merger agreement is terminated because FBR Group fails to recommend that its shareholders approve the merger agreement, changes its recommendation, fails to hold its special meeting of shareholders or terminates the merger agreement in connection with a superior proposal.

      FBR Asset will pay a termination fee in the amount of $14.2 million plus actual expenses up to $2.5 million in cash to the extent set forth in the merger agreement if the merger agreement is terminated because FBR Asset fails to recommend that its shareholders approve the merger agreement, changes its recommendation, fails to hold its special meeting of shareholders or terminates the merger agreement in connection with a superior proposal.

      In the event that the merger agreement is terminated for any other reason, no termination fees will be payable. See “Description of the Transaction Agreements — The Merger Agreement — Expenses; Termination Fees” on page [ l ].

No Solicitation Covenant (page [ l ])

      The merger agreement contains provisions prohibiting FBR Group and FBR Asset from actively seeking an alternative transaction. The no solicitation covenant generally prohibits FBR Group and FBR Asset, as well as their officers, directors, subsidiaries, employees, agents and representatives, from taking any action to solicit an acquisition proposal as described on page [ l ]. The merger agreement does not, however, prohibit either FBR Group or FBR Asset or its respective board of directors from considering, and potentially recommending, an unsolicited written superior proposal from a third party in the circumstances described under “Description of the Transaction Agreements — The Merger Agreement — No Solicitation by FBR Group or FBR Asset” on page [ l ].

8


 

The Voting Agreements (page [ l ])

      Emanuel J. Friedman, the Chairman and Co-Chief Executive Officer of FBR Group, and Eric F. Billings, the Vice Chairman and Co-Chief Executive Officer of FBR Group, beneficially own, in the aggregate, approximately [1,250,000] shares of FBR Group Class A common stock and [17,636,240] shares of FBR Group Class B common stock, representing approximately [53]% of the total voting power of FBR Group. Messrs. Friedman and Billings each have agreed to vote their FBR Group shares in favor of the proposal as long as the merger agreement remains in effect. Their vote is sufficient to ensure approval of the merger agreement and the transactions contemplated by the merger agreement by FBR Group shareholders.

The Shareholder Agreements (page [ l ])

      Following the merger, Messrs. Friedman and Billings will beneficially own, in the aggregate, approximately [1,250,000] shares of New FBR Class A common stock and [17,636,240] shares of New FBR Class B common stock, representing approximately [29]% of the total voting power of New FBR. Messrs. Friedman and Billings have entered into shareholder agreements pursuant to which they have agreed to vote their shares of New FBR Class A and New FBR Class B common stock in favor of the election of Peter A. Gallagher, Stephen D. Harlan and Russell C. Lindner to the New FBR board of directors at the 2003 annual meeting of New FBR shareholders. The shareholder agreements also contain provisions regarding the sale or transfer of Messrs. Friedman’s and Billings’s New FBR common stock for a period of one year from the effective time of the merger.

The Extension of the Management Agreement (page [ l ])

      In connection with the execution of the merger agreement, FBR Asset and FBRIM, a wholly owned subsidiary of FBR Group, entered into an agreement, dated as of November 14, 2002, to extend the management agreement under which FBRIM manages FBR Asset. The management agreement has been extended on its current terms for an additional one-year term beginning on December 17, 2002. The extension agreement provides that, in the event that the merger agreement is terminated for any reason by any party, FBR Asset will have the right to terminate the management agreement without penalty upon 60 days prior written notice. Upon completion of the merger, the management agreement will terminate automatically.

Comparative Market Price Information (page [ l ])

      Shares of FBR Group Class A common stock are listed on the New York Stock Exchange under the symbol “FBR,” and shares of FBR Asset common stock are listed on the New York Stock Exchange under the symbol “FB.” The following table presents the last reported sale price per share of FBR Group Class A common stock and FBR Asset common stock, as reported on the New York Stock Exchange Composite Transaction reporting system on November 14, 2002, the last full trading day prior to the public announcement of the merger, and on January [ l ], 2003, the last trading day for which this information could be obtained prior to the date of this joint proxy statement/ prospectus. The following table also presents the FBR Asset common stock equivalent based on the value of FBR Group Class A common stock on November 14, 2002, the last full trading day prior to the public announcement of the merger, and on January [ l ], 2003, the last full trading day for which this information could be obtained prior to the date of this joint proxy statement/ prospectus multiplied by the 3.65 exchange ratio.

                         
FBR Group FBR Asset
Class A FBR Asset Common
Common Common Stock
Date Stock Stock Equivalent




November 14, 2002
  $ 9.50     $ 28.37     $ 34.68  
January [ l ], 2003
    [ l ]       [ l ]       [ l ]  

9


 

SELECTED HISTORICAL FINANCIAL DATA

Selected Historical Financial Data of FBR Group

      The following selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 2001 are derived from the consolidated financial statements of FBR Group, which have been audited by Arthur Andersen LLP, FBR Group’s independent auditors during this period. The selected financial data as of and for the nine months ended September 30, 2002 and 2001 are derived from interim financial statements that are not audited, but, in the opinion of management, they include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of FBR Group’s financial position and results of operations as of the dates and for the periods indicated. Results of operations for the periods indicated below are not necessarily indicative of future results. The selected information set forth below should be read in conjunction with FBR Group’s consolidated financial statements and related footnotes, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for the year ended December 31, 2001, incorporated by reference in this joint proxy statement/prospectus from FBR Group’s Annual Report on Form 10-K for the year ended December 31, 2001. See “Where You Can Find More Information” on page [ l ].

Friedman, Billings, Ramsey Group, Inc.

(dollars in thousands, except per share amounts)
                                                             
Nine Months Ended
September 30, Year Ended December 31,


2002 2001 2001 2000 1999 1998 1997







Consolidated Statement of Operations Data
                                                       
Revenues
                                                       
 
Investment banking
                                                       
   
Underwriting
  $ 67,666     $ 26,925     $ 47,853     $ 21,086     $ 22,642     $ 70,791     $ 142,506  
   
Corporate finance
    47,476       21,454       28,534       31,404       22,541       41,356       60,649  
   
Investment gains
    4,413       5,414       6,762       1,453       3,853              
     
     
     
     
     
     
     
 
      119,555       53,793       83,149       53,943       49,036       112,147       203,155  
     
     
     
     
     
     
     
 
 
Institutional brokerage
                                                       
   
Principal transactions
    21,173       15,513       26,330       32,319       22,058       (28,192 )     16,646  
   
Agency commissions
    27,328       18,461       27,084       21,084       14,988       15,308       12,395  
     
     
     
     
     
     
     
 
      48,501       33,974       53,414       53,403       37,046       (12,884 )     29,041  
     
     
     
     
     
     
     
 
 
Asset management
                                                       
   
Base management fees
    20,837       13,934       19,744       9,719       9,409       7,556       3,156  
   
Incentive allocations and fees
    8,967       1,817       3,628       1,673       1,577       3,841       12,610  
   
Net investment income (loss)
    11,802       3,834       9,532       10,843       (5,268 )     (3,972 )     3,228  
     
     
     
     
     
     
     
 
      41,606       19,585       32,904       22,235       5,718       7,425       18,994  
     
     
     
     
     
     
     
 
   
Technology sector net investment and incentive income (loss)
    (5,733 )     (15,378 )     (18,100 )     41,614       36,398       29        
 
Interest, dividends and other
    5,407       7,414       9,422       9,695       10,768       16,151       4,945  
     
     
     
     
     
     
     
 
   
Total revenues
    209,336       99,388       160,789       180,890       138,966       122,868       256,135  
     
     
     
     
     
     
     
 
Expenses
                                                       
 
Compensation and benefits
    115,455       73,283       108,112       109,768       98,424       82,599       156,957  
 
Business development and professional services
    23,044       21,170       28,879       19,229       23,582       29,314       22,406  
 
Clearing and brokerage fees
    3,886       5,106       7,087       6,207       4,693       5,078       4,961  
 
Occupancy and equipment
    6,564       11,125       10,852       9,544       6,674       4,225       2,638  
 
Communications
    6,275       4,220       5,832       5,085       4,323       3,592       2,325  
 
Interest expense
    1,408       737       1,083       1,665       1,323       4,927       3,770  
 
Other operating expenses
    8,044       7,166       9,415       7,147       6,918       9,342       5,941  
 
Restructuring and software impairment charges
                5,151                          
     
     
     
     
     
     
     
 
   
Total expenses
    164,676       122,807       176,411       158,645       145,937       139,077       198,998  
     
     
     
     
     
     
     
 
 
Net income (loss) before taxes and extraordinary gain
    44,660       (23,419 )     (15,622 )     22,245       (6,971 )     (16,209 )     57,137  
 
Income tax provision (benefit)
    2,343             (1,760 )     4,163                   22,855  
     
     
     
     
     
     
     
 
 
Net income (loss) before extraordinary gain
  $ 42,317     $ (23,419 )   $ (13,862 )   $ 18,082     $ (6,971 )   $ (16,209 )   $ 34,282  
     
     
     
     
     
     
     
 

10


 

                                                             
September 30, December 31,


2002 2001 2001 2000 1999 1998 1997







Consolidated Balance Sheet Data
                                                       
Assets
                                                       
 
Cash and cash equivalents
  $ 92,068     $ 32,892     $ 46,246     $ 52,337     $ 43,743     $ 46,827     $ 207,691  
 
Marketable trading securities
    5,188       13,599       15,706       18,447       6,137       13,150       78,784  
 
Long-term investments
    145,312       110,462       119,982       142,950       135,723       97,157       36,351  
 
Other
    256,546       73,935       110,024       38,485       40,753       47,982       36,501  
     
     
     
     
     
     
     
 
   
Total assets
  $ 499,114     $ 230,888     $ 291,958     $ 252,219     $ 226,356     $ 205,116     $ 359,327  
     
     
     
     
     
     
     
 
Liabilities
                                                       
 
Accounts payable and other liabilities
  $ 118,062     $ 56,129     $ 73,075     $ 36,733     $ 34,358     $ 15,322     $ 52,008  
 
Short-term debt
    70,051             20,195                         40,000  
 
Accrued dividends
                                        24,000  
 
Trading account securities sold short
    76,377       1,092       13,377       930       3,029       2,892       16,673  
     
     
     
     
     
     
     
 
   
Total liabilities
    264,490       57,221       106,647       37,663       37,387       18,214       132,681  
Shareholders’ equity
    234,624       173,667       185,311       214,556       188,969       186,902       226,646  
     
     
     
     
     
     
     
 
   
Total liabilities and shareholders’ equity
  $ 499,114     $ 230,888     $ 291,958     $ 252,219     $ 226,356     $ 205,116     $ 359,327  
     
     
     
     
     
     
     
 
                                                         
Nine Months Ended
September 30, Year Ended December 31,


2002 2001 2001 2000 1999 1998 1997







Statistical Data (Unaudited)
                                                       
Basic earnings (loss) per share before extraordinary gain
  $ 0.92     $ (0.49 )   $ (0.29 )   $ 0.37     $ (0.14 )   $ (0.33 )   $ 1.48  
Diluted earnings (loss) per share before extraordinary gain
  $ 0.88     $ (0.49 )   $ (0.29 )   $ 0.36     $ (0.14 )   $ (0.33 )   $ 1.48  
Pro forma basic and diluted earnings per share(1)
    N/A       N/A       N/A       N/A       N/A       N/A     $ 0.85  
Book value per share
  $ 5.06     $ 3.82     $ 4.06     $ 4.34     $ 3.86     $ 3.81     $ 4.53  
Total employees
    464       502       433       386       390       358       265  
Revenue per employee
  $ 467     $ 224     $ 393     $ 466     $ 372     $ 394     $ 1,162  
Pre-tax return on average equity
    21 %     -12 %     -8 %     11 %     -4 %     -8 %     41 %
Compensation and benefits expense as a percentage of revenues
    55 %     74 %     67 %     61 %     71 %     67 %     61 %
Basic weighted average shares outstanding (in thousands)
    45,995       48,122       47,466       49,162       48,872       49,724       40,276  
Diluted weighted average shares outstanding (in thousands)
    48,218       48,122       47,466       50,683       48,872       49,724       40,276  
Ending shares outstanding (in thousands)
    46,396       45,514       45,605       49,380       48,961       49,119       50,029  


(1)  Reflects pro forma U.S. federal and state income taxes based on estimated applicable tax rates as if we had not elected subchapter S corporation status prior to December 21, 1997. Historical, as reported, income tax benefit for 1997 was $59,539.

11


 

Selected Historical Financial Data of FBR Asset

      The following selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 2001 are derived from the consolidated financial statements of FBR Asset, which as of and for each of the three years in the period ended December 31, 2001 have been audited by KPMG LLP, FBR Asset’s independent auditors. The consolidated financial statements of FBR Asset as of December 31, 1999, 1998 and 1997, along with the 1998 and 1997 consolidated statements of income, have been audited by Arthur Andersen LLP. The selected financial data as of and for the nine months ended September 30, 2002 and 2001 are derived from interim financial statements that are not audited, but, in the opinion of management, they include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of FBR Asset’s financial position and results of operations as of the dates and for the periods indicated. Results of operations for the periods indicated below are not necessarily indicative of future results. The selected information set forth below should be read in conjunction with FBR Asset’s consolidated financial statements and related footnotes, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for the year ended December 31, 2001, incorporated by reference in this joint proxy statement/prospectus from FBR Asset’s Annual Report on Form 10-K/ A, as amended, for the year ended December 31, 2001. See “Where You Can Find More Information” on page [ l ].

FBR Asset Investment Corporation

(dollars in thousands, except per share amounts)
                                                         
December 15,
1997
Nine Months Ended (Inception)
September 30, Year Ended December 31, Through


December 31,
2002 2001 2001 2000 1999 1998 1997







Statement of Operations Data
                                                       
Interest income
  $ 119,167     $ 14,877     $ 32,391     $ 18,759     $ 15,824     $ 13,656     $ 18  
Dividend income
    1,964       2,311       3,821       5,082       7,650       4,271       435  
Fee income
    5,858       1,702       2,876                          
Interest expense
    44,070       7,794       14,613       10,935       7,921       5,360        
Management and incentive fee expense
    14,450       1,774       3,494       1,079       1,329       1,521       59  
Other expense
    1,679       591       772       596       1,433       1,089       16  
Net realized and recognized gains (losses)
    19,646       1,065       3,330       (2,866 )     (7,649 )     (8,370 )      
Net income
    84,156       9,796       23,065       8,364       5,143       1,588       647  
Basic income per share
  $ 4.48     $ 2.17     $ 4.27     $ 1.84     $ 0.68     $ 0.16     $ 0.06  
Weighted average basic shares
    18,785       4,507       5,402       4,544       7,524       10,044       10,219  
Diluted income per share
  $ 4.47     $ 2.12     $ 4.17     $ 1.84     $ 0.68     $ 0.16     $ 0.06  
Weighted average diluted shares
    18,808       4,619       5,525       4,544       7,524       10,044       10,219  
Dividends declared per share
  $ 3.75     $ 2.05     $ 3.30     $ 2.95     $ 1.61     $ 1.16     $ 0.05  

12


 

                                                         
September 30, December 31,


2002 2001 2001 2000 1999 1998 1997







Selected Balance Sheet Data                                                
Mortgage-backed securities, at fair value
  $ 5,822,505     $ 1,187,819     $ 1,238,366     $ 154,848     $ 236,015     $ 161,419     $  
Cash and cash equivalents
    12,670       1,771       6,630       36,811       13,417       41,144       163,223  
Investments in equity securities, at fair value
    99,307       51,769       61,693       28,110       49,648       70,983       23,319  
Notes receivable
          12,000       8,000       4,000       27,000       19,083        
Total Assets
    5,983,578       1,262,348       1,325,125       225,804       330,180       295,931       190,538  
Repurchase agreements
    5,151,039       983,614       1,105,145       133,896       221,714       128,550        
Total liabilities
    5,255,552       1,071,032       1,121,260       138,963       225,638       145,026       772  
Accumulated other comprehensive income (loss)
    70,315       15,469       15,154       (749 )     (12,982 )     (9,801 )      
Shareholders’ equity
    728,026       191,317       203,866       86,841       104,543       150,905       189,767  
Book value per share
  $ 29.06     $ 23.97     $ 23.98     $ 22.36     $ 18.00     $ 17.66     $ 18.57  
Common shares issued and outstanding
    25,054       7,983       8,503       3,884       5,806       8,544       10,219  
                                                         
December 15,
1997
Nine Months Ended (Inception)
September 30, Year Ended December 31, Through


December 31,
2002 2001 2001 2000 1999 1998 1997







Other Selected Data (Unaudited)
                                                       
Weighted average daily borrowings
  $ 2,933,000     $ 243,868     $ 462,952     $ 172,287     $ 143,231     $ 144,794     $  
Average equity
    541,293       110,677       133,849       90,393       130,269       182,750       189,767  

13


 

SELECTED UNAUDITED PRO FORMA CONSOLIDATED

FINANCIAL DATA AND COMPARATIVE PER SHARE DATA

      We have included the following selected unaudited pro forma consolidated financial data only for the purposes of illustration. The unaudited pro forma statement of operations data assumes that the merger was completed on January 1, 2001 and the unaudited pro forma consolidated balance sheet data assumes that the merger was completed on September 30, 2002. The pro forma financial data does not necessarily indicate what the operating results or financial position would have been if the merger had been completed at the dates indicated. For example, the pro forma adjustments include reductions to revenues to reflect amortization of premiums established due to the new cost basis of FBR Asset’s mortgage backed securities at the time of the merger (based for these purposes on the fair value of FBR Asset’s mortgage backed securities as of September 30, 2002; the actual amount of premium amortization will depend upon the fair value of FBR Asset’s mortgage backed securities at the date of consummation of the merger), of $20,201 and $26,935, respectively, for the nine months ended September 30, 2002 and year ended December 31, 2001. In addition the pro forma adjustments include reductions to interest expense to reflect interest adjustments related to FBR Asset’s interest rate swaps and Eurodollar futures contracts of $1,834 and $14,987, respectively for the nine months ended September 30, 2002 and year ended December 31, 2001. The net effect of these adjustments are $18,367 and $11,948 reductions to pro forma combined net income during the respective periods. Furthermore, this data does not necessarily indicate what the future operating results or financial position of New FBR will be. The unaudited pro forma consolidated statement of operations data does not include adjustments to reflect any costs savings or other operational efficiencies that may be realized as a result of the merger of FBR Group and FBR Asset or any future merger-related restructuring or integration expenses.

      Also set forth below are earnings, cash dividends and book value per common share amounts for FBR Group and FBR Asset on a historical basis.

      You should read this selected unaudited pro forma consolidated financial data in conjunction with the “Unaudited Condensed Pro Forma Consolidated Financial Information” and the related notes beginning on page [ l ].

                   
Nine Months
Year Ended Ended
December 31, September 30,
2001 2002


(dollars in thousands, except
per share amounts)
Statement of Pro Forma Consolidated Operations Data:
               
Operating revenue
  $ 161,928     $ 292,285  
Net income (loss) before extraordinary gain
  $ (12,561 )   $ 86,774  
Earnings (loss) per share before extraordinary gain:
               
 
Basic
  $ (0.19 )   $ 0.76  
 
Diluted
  $ (0.19 )   $ 0.74  
                 
September 30,
2002

Pro Forma Consolidated Balance Sheet Data:
               
Total assets
  $ 6,474,592          
Total liabilities
  $ 5,514,719          
Stockholders’ equity
  $ 959,873          

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Nine Months
Year Ended Ended
December 31, September 30,
2001 2002


Comparative Per Share Data:
               
FBR Group — Historical:
               
 
Historical per common share:
               
   
Earnings (loss) per basic share before extraordinary gain
  $ (0.29 )   $ 0.92  
   
Earnings (loss) per diluted share before extraordinary gain
    (0.29 )     0.88  
   
Cash dividends per share
           
   
Book value per share
    4.06       5.06  
FBR Asset — Historical:
               
 
Historical per common share:
               
   
Earnings per basic share
  $ 4.27     $ 4.48  
   
Earnings per diluted share
    4.17       4.47  
   
Cash dividends per share
    3.30       3.75  
   
Book value per share
    23.98       29.06  
                 
Nine Months
Year Ended Ended
December 31, September 30,
2001 2002


Pro Forma Combined Equivalent per share of FBR Group common stock:
               
Earnings (loss) per basic share
  $ (0.19 )   $ 0.76  
Earnings (loss) per diluted share
  $ (0.19 )   $ 0.74  
Cash dividends per share
    *       *  
Book value per share
  $ 5.76     $ 7.48  
                 
Nine Months
Year Ended Ended
December 31, September 30,
2001 2003


Pro Forma Combined Equivalent per share of FBR Asset common stock:
               
Earnings (loss) per basic share
  $ (0.69 )   $ 2.77  
Earnings (loss) per diluted share
  $ (0.69 )   $ 2.70  
Cash dividends per share
    *       *  
Book value per share
  $ 21.02     $ 27.30  

(*)  In order to qualify as a REIT for U.S. federal income tax purposes, New FBR must distribute to its shareholders annually at least 90% of its taxable income, excluding the retained earnings of its taxable REIT subsidiaries. It is anticipated that, after completion of the merger, New FBR will maintain the dividend policy of FBR Asset. The payment of dividends by New FBR, however, will be subject to approval and declaration by the New FBR board of directors and will depend on a variety of factors, including business, financial and regulatory concerns.

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RISK FACTORS RELATED TO THE MERGER AND NEW FBR

      The following material risk factors, including the material risks associated with the merger and related transactions, should be considered by holders of FBR Asset common stock and by holders of FBR Group common stock in evaluating whether to approve the merger. These factors should be considered in conjunction with the other information included elsewhere in this joint proxy statement/ prospectus and the risk factors relating to an investment in FBR Group’s common stock and FBR Asset’s common stock that can be found in the annual reports of the two companies on Form 10-K and Form 10K/A for the year ended December 31, 2001, which are incorporated in this joint proxy statement/ prospectus by reference.

Risks Related to the Merger

      The value of the shares of New FBR common stock that you receive upon the completion of the merger may be less than the value of your shares of FBR Group common stock or FBR Asset common stock as of the date of the merger agreement or on the date of the special meetings.

      Upon completion of the merger, all shares of FBR Group common stock and FBR Asset common stock will be converted into the right to receive shares of New FBR common stock. The ratios at which the shares will be converted are fixed, and there will be no adjustment for changes in the market price of either FBR Group common stock or FBR Asset common stock.

      It is the parties’ intention to complete the merger immediately following the special meetings of the FBR Group shareholders and FBR Asset shareholders to vote on the merger, assuming the merger is approved at these meetings; however, if other conditions to close the merger are not satisfied or duly waived at that time, there may be a significant amount of time between the date of the two special meetings and the date when the merger is completed. Although the merger agreement provides that either FBR Group or FBR Asset may terminate the merger agreement in the event the average market price of FBR Group Class A common stock during the 10 trading days prior to the shareholder meetings is higher or lower than the range described under “— the Merger Agreement — Special Termination Right,” neither FBR Group nor FBR Asset will have the right to terminate the merger agreement based on fluctuations in the market price of either FBR Group Class A common stock or FBR Asset common stock during the period following the shareholder meetings. As a result, the relative or absolute prices of shares of FBR Group common stock and FBR Asset common stock may vary significantly between the dates of the merger agreement, this joint proxy statement/ prospectus, the special meetings and the completion of the merger. These variations may be caused by, among other factors, changes in the businesses, operations, results and prospects of New FBR’s companies, market expectations of the likelihood that the merger will be completed and the timing of its completion, the prospects for our post-merger operations, the effect of any conditions or restrictions imposed on or proposed with respect to New FBR by regulators, and general market and economic conditions.

      In addition, it is impossible to predict accurately the market price of New FBR common stock to be received by FBR Group shareholders and FBR Asset shareholders after the completion of the merger. Accordingly, the prices of FBR Group common stock and FBR Asset common stock on the date of the special meetings may not be indicative of their prices immediately prior to the completion of the merger or the price of New FBR common stock after the merger is completed.

      The merger is subject to the receipt of consents and approvals from government entities that could delay completion of the merger or impose conditions that could have a material adverse effect on New FBR, FBR Group or FBR Asset or cause abandonment of the merger, which may adversely affect the value of the shares of FBR Group or FBR Asset common stock.

      Completion of the merger is conditioned upon:

  •  the approval of the Board of Governors of the Federal System of an application by New FBR and its taxable REIT subsidiaries under Section 3(a)(1) of the Bank Holding Company Act to become bank holding companies and elect to be treated as financial holding companies or the non-objection of the Office of the Comptroller of the Currency under the Change of Bank Control Act for New FBR and its

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  taxable REIT subsidiaries to control FBR National Bank & Trust (the “Bank”) if the Bank restructures its operations prior to the merger, and
 
  •  other regulatory approvals where the failure to obtain those approvals would have a material adverse effect on New FBR after completion of the merger.

      A substantial delay in obtaining satisfactory approvals or the imposition of unfavorable terms or conditions in the approvals could have an adverse effect on the business, financial condition or results of operations of FBR Group or FBR Asset, or may cause the abandonment of the merger.

      FBR Group and FBR Asset have the right to terminate the merger agreement based on the average closing stock price of FBR Group common stock for the 10 trading days prior to the shareholders meetings, and may waive these termination rights, which could result in the merger being consummated and your receiving shares of New FBR common stock that have less value than the value of your FBR Group common stock or FBR Asset common stock.

      The merger agreement provides that if the average closing stock price of FBR Group Class A common stock for the 10 trading days prior to the shareholders meetings is greater than $10.55 per share, FBR Group will have the right to terminate the merger agreement, and that if the average closing stock price of FBR Group Class A common stock for the 10 trading days prior to the shareholders meetings is less than $8.75 per share, FBR Asset will have the right to terminate the merger agreement. Even if these termination rights arise, they may be waived by FBR Asset or FBR Group, as applicable. In approving the proposed merger, you will be delegating to FBR Asset or FBR Group, as the case may be, the authority to waive the termination rights described in this paragraph and permit the merger to be completed in the event these termination rights arise. In the case of FBR Asset, the special committee of its board would exercise this authority. Because FBR Asset and FBR Group may elect to exercise or waive these termination rights without seeking further shareholder approval, there can be no assurance that the per share value of each share of New FBR Class A common stock will be either higher than $8.75 or lower than $10.55.

      If a party to the merger agreement exercises its right to terminate the merger agreement because the market price of FBR Group Class A common stock has risen above, or fallen below, the collar set forth in the merger agreement, then the market price of the common stock of FBR Asset could fall or the market price of FBR Group Class A common stock could increase to reflect the loss of the premium that the 3.65 exchange ratio in the merger represents for the FBR Asset shareholders. It is also possible that in the event the merger agreement is terminated, the market prices of both companies’ common stock could fall to reflect the loss of the anticipated synergies and benefits to both companies from the merger. Alternatively, if a party waives its right to terminate the merger agreement even though the market price of FBR Group’s Class A common stock has risen above, or fallen below, as the case may be, the collar set forth in the merger agreement, then the shareholders of one of the parties could receive less value in the merger than the parties anticipated and the shareholders of the other party could receive more value in the merger than the parties anticipated.

      New FBR may fail to realize the anticipated benefits of the merger, which could have an adverse effect on its earnings and in turn negatively affect the value of its common stock and its ability to distribute dividends.

      The merger will combine two companies that have previously operated as independent companies, although FBR Group has managed FBR Asset pursuant to a management agreement. FBR Group and FBR Asset expect to realize cost savings and other financial and operating benefits as a result of the merger. However, FBR Group and FBR Asset cannot predict with certainty when these cost savings and benefits will occur, or the extent to which they actually will be achieved. The integration of FBR Group and FBR Asset will also require substantial attention from management. The diversion of management attention and any difficulties associated with integrating FBR Group and FBR Asset could have a material adverse effect on New FBR’s operating results and on the value of New FBR’s common stock.

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      The voting power of New FBR’s principal shareholders and other officers, directors and nominees may discourage third party acquisitions of New FBR and prevent shareholders of New FBR from receiving any premium above market price for their shares.

      After completion of the merger, Emanuel J. Friedman and Eric F. Billings will have significant influence over the operations of New FBR through their ownership of New FBR common stock, which together, as a result of their ownership of outstanding shares of New FBR Class A and Class B common stock, will represent approximately [29]% of the total voting power of New FBR common stock. In addition, upon completion of the merger, Mr. Friedman will be Chairman and Co-Chief Executive Officer and Mr. Billings will be the Vice Chairman and Co-Chief Executive Officer of New FBR. Messrs. Friedman and Billings and all of the other officers, directors and nominees of New FBR will, as a group, control approximately [ l ]% of the total voting power of New FBR. The extent of the influence that Messrs. Friedman and Billings and the other officers, directors and nominees of New FBR will have over New FBR may have the effect of discouraging offers to acquire control of New FBR and may preclude holders of New FBR common stock from receiving any premium above market price for their shares that may be offered in connection with any attempt to acquire control of New FBR without the approval of Messrs. Friedman and Billings.

      The ownership limitation applicable to New FBR’s common stock related to its REIT status may discourage third parties from attempting to acquire New FBR and prevent shareholders of New FBR from receiving any premium above market price for their shares.

      We anticipate that New FBR will qualify as a REIT upon completion of the merger, and New FBR’s amended and restated articles of incorporation will include a provision preventing any shareholder from owning more than 9.9% of New FBR’s outstanding common stock without approval by New FBR’s board. This ownership limitation provision in New FBR’s amended and restated articles of incorporation may have the effect of discouraging offers to acquire control of New FBR and may preclude holders of New FBR common stock from receiving any premium above market price for their shares that might otherwise be offered in connection with any attempt to acquire control of New FBR.

      The requirement that New FBR distribute at least 90% of its taxable income to its shareholders each year will result in FBR Group shareholders receiving periodic taxable distributions.

      In order to qualify as a REIT, New FBR must distribute to its shareholders, each calendar year, at least 90% of its taxable income. As a result, after the merger, shareholders of FBR Group who did not receive distributions of this magnitude from FBR Group will begin receiving periodic taxable distributions from New FBR. Such distributions generally will be taxable as ordinary income to the extent that they are made out of New FBR’s current or accumulated earnings and profits. See “Real Estate Investment Trust Status of New FBR — Taxation of Taxable U.S. Shareholders.”

      Absence of a historical trading market for New FBR’s common stock and the historical volatility of the market prices of FBR Group’s and FBR Asset’s common stock create uncertainty about future trading prices of New FBR’s Class A common stock, which may result in the value of the shares of New FBR common stock being less than the value immediately after the merger.

      After FBR Group and FBR Asset complete the merger, shares of New FBR Class A common stock will begin trading publicly for the first time and there may be significant fluctuations in the market price of New FBR’s Class A common stock, both initially before an orderly trading market develops and after that time as well. Historically, the market prices of FBR Group’s Class A common stock and of FBR Asset’s common stock have been highly volatile. These fluctuations often have been unrelated or disproportionate to the operating performance of the two companies. The price of FBR Group’s Class A common stock has generally traded below FBR Group’s initial public offering price of $20.00 per share in December 1997 and has ranged from $3 5/8 per share to $21 3/4 per share since that time through September 30, 2002. The price of FBR Asset’s common stock has ranged from $9.75 per share to $36.95 per share since FBR Asset’s initial public offering in 1999 through September 30, 2002. Any negative changes in the public’s perception of the prospects for companies in the REIT, the mortgage-backed securities, the principal equity investing or the mezzanine or

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senior secured lending industries, or in the investment banking, securities brokerage, asset management or financial services industries could depress New FBR’s stock price regardless of its results.

      The following factors could contribute to the volatility of the price of New FBR’s Class A common stock:

  •  actual or anticipated variations in New FBR’s quarterly results;
 
  •  changes in New FBR’s level of dividend payments;
 
  •  new products or services offered by New FBR and its competitors;
 
  •  changes in New FBR’s financial estimates by securities analysts;
 
  •  conditions or trends in the investment or financial services industries in general;
 
  •  changes in interest rate environments and the mortgage market that cause New FBR’s borrowing costs to increase, New FBR’s reported yields on its mortgage-backed securities to decrease or that cause the value of New FBR’s mortgage-backed securities to decrease;
 
  •  announcements by New FBR of significant acquisitions, strategic partnerships, investments or joint ventures;
 
  •  changes in the market valuations of the companies in which New FBR makes principal investments;
 
  •  negative changes in the public’s perception of the prospects of investment or financial services companies;
 
  •  general economic conditions such as a recession, or interest rate or currency rate fluctuations;
 
  •  any obstacles in continuing to qualify as a REIT, including due to changes in law applicable to REITs;
 
  •  additions or departures of New FBR’s key personnel; and
 
  •  additional sales of New FBR’s securities.

      Many of these factors are beyond New FBR’s control.

      Failure to complete the merger may require, under specified circumstances, payment of termination fees and may result in a decrease in the market price of each party’s common stock.

      The merger is subject to shareholder approval of both FBR Asset and FBR Group and other customary conditions. Each of FBR Asset and FBR Group might not be able to satisfy its obligations under the merger agreement and complete the merger. Failure by either party to complete the merger, under specified circumstances, may require a party to pay a termination fee and the other party’s expenses in connection with the merger. These payments could amount to as much as $16.7 million from FBR Asset, or $11.3 million, in the case of FBR Group. In addition, failure to complete the merger could result in a decline in the market price of FBR Asset and/or FBR Group common stock to the extent current market prices reflect a market assumption that the merger will be completed. See “Description of the Transaction Agreements — The Merger Agreement — Expenses; Termination Fees.”

      The directors and executive officers of FBR Asset and FBR Group have interests in the completion of the merger that may conflict with the interests of the shareholders of their respective companies.

      FBR Group shareholders and FBR Asset shareholders should note that some directors and officers of FBR Group and FBR Asset have interests in the merger that are different in certain respects from the interests of other FBR Group shareholders and FBR Asset shareholders. As provided in the merger agreement, upon the completion of the merger, all of the current members of the FBR Group board of directors and the FBR Asset board of directors will become members of the New FBR board of directors and will receive customary cash and stock-based compensation in accordance with FBR Group’s current policies. In addition, Messrs. Friedman and Billings, through their ownership of shares of FBR Group Class A common stock and FBR Group Class B common stock, currently control approximately [53]% of the outstanding voting power of

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FBR Group common stock, and, upon completion of the transaction, will control approximately [29]% of the outstanding voting power of New FBR common stock.

      As of [ l ][ l ], 2003, directors and officers of FBR Group beneficially owned in the aggregate [ l ] shares of FBR Group Class A common stock and [ l ] shares of FBR Group Class B common stock, representing [ l ]% of the economic interest and [ l ]% of the total voting power of FBR Group. As of [ l ][ l ], 2003, directors and officers of FBR Asset beneficially owned in the aggregate [ l ] shares of FBR Asset Class A common stock, representing [ l ]% of the economic interest and voting power of FBR Asset. Upon completion of the merger, directors and officers of New FBR will beneficially own in the aggregate approximately [ l ] shares of New FBR Class A common stock and [ l ] shares of New FBR Class B common stock, representing [ l ]% of the economic interest and [ l ]% of the total voting power of New FBR.

      Approval of the merger by FBR Group shareholders and FBR Asset shareholders will constitute a “change in control” under the stock-based compensation plans of FBR Group and FBR Asset, respectively. Under both FBR Group’s and FBR Asset’s stock-based plans, unvested stock options held by employees and directors become fully vested and exercisable, and all restrictions on restricted stock awards lapse, upon a change in control of FBR Group or FBR Asset, respectively. As of [ l ][ l ], [ l ], Robert B. Smith, Richard J. Hendrix, Kurt Harrington and William J. Ginivan held unvested options to purchase [ l ], [ l ], [ l ] and [ l ] shares of FBR Group Class A common stock, respectively, all of which will vest upon approval of the merger agreement by FBR Group shareholders. As of [ l ][ l ], [ l ], Messrs. Hendrix, Harrington and Ginivan held [ l ], [ l ] and [ l ] shares of restricted FBR Asset Class A common stock, respectively. No non-employee directors of FBR Group or FBR Asset currently hold unvested stock options or restricted stock.

      Messrs. Smith and Ginivan have purchased 150,000 and 50,000 shares of FBR Group Class A common stock under the FBR Stock Purchase and Loan Plan, respectively. Under this plan, certain key FBR Group employees were loaned funds in 2001 by FBR Group in order to facilitate the purchase of shares of FBR Group Class A common stock. The shares of FBR Group Class A common stock are held by FBR Group as collateral for the loans, and employees are generally not permitted to sell any of the shares until the second anniversary of purchase. Upon a “change in control” of FBR Group, employees may immediately sell shares, although they must then either immediately repay the underlying loan or provide alternative collateral acceptable to FBR Group. Approval of the merger by the FBR Group shareholders will constitute a change in control for purposes of the plan. See “The Merger — Interests of Certain Persons in the Merger.”

      Financial forecasts and projections prepared by management, considered by the parties or included in this document may not be realized, which may adversely affect the market price of FBR Group, FBR Asset or New FBR common stock.

      Neither FBR Asset nor FBR Group makes, as a matter of course, public forecasts or projections as to future revenues, earnings or other financial statement data, and none of the projections relating to future financial results of FBR Group or FBR Asset prepared by management, considered by the parties to the transaction or included or incorporated by reference in this document were prepared with a view to public disclosure or compliance with the published guidelines of the SEC or the American Institute of Certified Public Accountants regarding projections and forecasts. These projections are inherently based on various estimates and assumptions that are subject to the judgment of those preparing them. These projections are also subject to significant economic, competitive, industry and other uncertainties and contingencies, all of which are difficult or impossible to predict and many of which are beyond the control of FBR Asset or FBR Group. Accordingly, there can be no assurance that FBR Asset’s or FBR Group’s financial results will not be significantly higher or lower than those set forth in such projections. Significantly lower financial results could have a material adverse effect on the market price of FBR Group, FBR Asset or New FBR common stock.

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      In performing their financial analyses and rendering their fairness opinions, the respective financial advisers to the FBR Group special committee and the FBR Asset special committee reviewed and relied on, among other things, the financial forecasts and the costs savings and operational synergies projected by FBR Group management in its capacity as management of both FBR Group and FBR Asset, and a failure of New FBR to achieve these results could have a material adverse effect on the market price of New FBR’s common stock.

      In performing their financial analyses and rendering their opinions regarding the fairness from a financial point of view of the merger consideration to be received by the shareholders of FBR Group and FBR Asset in the merger, the respective financial advisors to the FBR Group special committee and the FBR Asset special committee reviewed and relied on, among other things, internal financial analyses and forecasts for FBR Group and FBR Asset prepared by FBR Group management, in its capacity as management of both FBR Group and FBR Asset, including certain pro forma financial analyses and forecasts for New FBR following completion of the merger prepared by FBR Group management and cost savings and operating synergies projected by FBR Group management to result from the merger. The respective financial advisors to the FBR Group special committee and the FBR Asset special committee also assumed that the pro forma financial analyses and forecasts for New FBR and the cost savings and operational synergies projected by FBR Group management as a result of the merger will be achieved within the time frames estimated by FBR Group management. These pro forma financial analyses and forecasts and projected cost savings and operational synergies may not be achieved in full, at all, or within the projected time frames, and a failure of New FBR to realize these pro forma financial analyses and forecasts and projected cost savings and operational synergies could have a material adverse effect on the earnings per share of the combined company, which could in turn have an adverse effect on the market price of New FBR’s common stock.

      FBR Group has been unable to obtain the consent of Arthur Andersen LLP and shareholders may be unable to recover against Arthur Andersen LLP for any untrue statements of material fact contained in its financial statements audited by Arthur Andersen LLP.

      Arthur Andersen LLP audited the consolidated financial statements of FBR Group for each of the three years in the period ended December 31, 2001. FBR Group elected in March 2002 not to renew Arthur Andersen’s engagement as FBR Group’s independent auditor, and instead engaged PricewaterhouseCoopers LLP as FBR Group’s independent auditor for the 2002 fiscal year. PricewaterhouseCoopers LLP did not re-audit any of FBR Group’s historical consolidated financial statements. As permitted by Rule 437a of the Securities Act of 1933, New FBR has not filed the written consent of Arthur Andersen LLP regarding FBR Group’s audited financial statements that are incorporated by reference in the registration statement, of which this joint proxy statement/ prospectus is a part, as required by Section 7 of the Securities Act. New FBR has made reasonable efforts to obtain a written consent from Arthur Andersen LLP in connection with the registration statement, of which this joint proxy statement/ prospectus forms a part, but these efforts have been unsuccessful. As a result, investors may be unable to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933, as amended, for any untrue statements of material fact contained in the financial statements audited by Arthur Andersen LLP for the three fiscal years ended December 31, 2001 or any omissions to state a material fact required to be stated therein, which financial statements are incorporated in the registration statement.

Risks Related to New FBR

      The risks that apply to New FBR that will result from the merger of FBR Group and FBR Asset fall into the following four categories:

  •  General risks related to New FBR;
 
  •  Risks related to New FBR’s investment banking, asset management, trading, brokerage and other fee-based investment and financial services businesses that will be operated through new FBR’s taxable REIT subsidiaries;

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  •  Risks related to New FBR’s principal investing activities, including its investments in mortgage-backed securities and mortgage loans, equity securities of other companies and senior secured and mezzanine loans to other companies; and
 
  •  Tax risks related to New FBR’s REIT status.

 
General Risks Related to New FBR

      New FBR may experience significant fluctuations in its quarterly operating results due to the volatile nature of the investment banking business and the sensitivity of its principal investing business to changes in interest rates and fluctuations in the stock market and it may therefore fail to meet profitability and/or dividend expectations, which may, in turn, affect the market price of its common stock and its ability to distribute dividends.

      New FBR’s revenues and operating results may fluctuate from quarter to quarter and from year to year due to a combination of factors, including:

  •  the number of underwriting and merger and acquisition transactions completed by New FBR’s investment banking group, and the level and timing of fees New FBR receives from those transactions;
 
  •  changes in the earnings from New FBR’s mortgage-backed securities and other principal investments resulting from market volatility and changes in interest rates;
 
  •  changes in the market valuations of the investments of the funds New FBR manages and of the companies in which it makes principal investments;
 
  •  access to public markets or other exit strategies for companies in which New FBR has invested as a principal;
 
  •  the realization of profits or losses on principal investments or warrants New FBR holds;
 
  •  the level of institutional and retail brokerage transactions and the level of commissions New FBR receives from those transactions;
 
  •  the timing of recording of asset management fees and special allocations of income, if any; and
 
  •  variations in expenditures for personnel, consulting and legal expenses, and expenses of establishing new business units, including marketing and technology expenses.

      Any one of these factors could adversely affect the market price of New FBR’s common stock and its ability to distribute dividends.

      The amount of New FBR’s dividends will depend upon New FBR’s operating results.

      New FBR expects that it will qualify as a REIT after the merger and that it will distribute at least 90% of its REIT taxable income to its shareholders, excluding the retained earnings of its taxable REIT subsidiaries. New FBR currently anticipates that its taxable REIT subsidiaries will retain most or all of their earnings and profits, which would make these earnings and profits unavailable for distribution to New FBR’s shareholders. As a result, New FBR may need to generate sufficient taxable income outside of its taxable REIT subsidiaries to maintain the current dividend rate that FBR Asset pays to its common shareholders, as adjusted for the exchange ratio in the merger. There can be no assurance that New FBR will be able to generate sufficient taxable income to maintain this dividend rate or maintain a tax status as a REIT. If New FBR does not qualify as a REIT, it will not be required to make any distributions to shareholders.

      New FBR is subject to extensive government regulation which could adversely affect its results, which may, in turn, affect the market price of the shares of its common stock and its ability to distribute dividends.

      The securities business is subject to extensive regulation under federal and state laws in the United States, and also is subject to regulation in the foreign countries in which New FBR will conduct its investment banking and securities brokerage and asset management activities. Compliance with these laws can be expensive, and any failure to comply could have a material adverse effect on its operating results.

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      Compliance with many of the regulations applicable to New FBR involves a number of risks, particularly in areas where applicable regulations may be subject to interpretation. In the event of non-compliance with an applicable regulation, governmental regulators and self-regulatory organizations such as the National Association of Securities Dealers may institute administrative or judicial proceedings that may result in:

  •  censure, fines or civil penalties (including treble damages in the case of insider trading violations);
 
  •  issuance of cease-and-desist orders;
 
  •  deregistration or suspension of the non-compliant broker-dealer or investment adviser;
 
  •  suspension or disqualification of the broker-dealer’s officers or employees; or
 
  •  other adverse consequences.

      The imposition of any penalties or orders on New FBR could have a material adverse effect on its operating results and financial condition. The investment banking and brokerage businesses have recently come under intense scrutiny at both the state and federal level and the cost of compliance and the potential liability for non-compliance has increased as a result.

      As a result of FBR Group’s acquisition of Rushmore Trust and Savings, FSB and its conversion into a national bank known as FBR National Bank & Trust (the “Bank”), in 2001, FBR Group became a bank holding company regulated under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a bank holding company, FBR Group is subject to extensive supervision, regulation and examination by banking regulatory agencies. As a result of the merger, unless prior to the merger the Bank is able to convert to a limited purpose bank that engages solely in trust or fiduciary activities, New FBR and the taxable REIT subsidiary will each become bank holding companies and will become subject to the same requirements. In general, the BHC Act prohibits or restricts a bank holding company’s engagement in a wide variety of businesses, some of which are businesses in which FBR Group currently engages and in which New FBR and the taxable REIT subsidiary will engage following completion of the merger, including venture capital, merchant banking and investment banking.

      The Gramm-Leach-Bliley Act, or GLB Act, which became law in November 1999, significantly changed the regulatory structure and oversight of the financial services industry. The GLB Act permits a qualifying bank holding company that elects to be treated as a financial holding company (an “FHC”) to engage in a full range of financial activities, including banking, insurance, and securities activities, as well as merchant banking and additional activities that are “financial in nature” or “incidental” to such financial activities. In order for a bank holding company to qualify as an FHC, its subsidiary depository institutions must be “well-capitalized” and “well-managed” and have at least a “satisfactory” Community Reinvestment Act rating. The Bank currently meets these criteria, and New FBR and the taxable REIT subsidiary will each be making an election to be treated as a financial holding company. The Federal Reserve Board has previously approved FBR Group’s election to become an FHC.

      FBR Group and FBR Asset currently engage in a wide variety of businesses, including venture capital, merchant banking and investment banking, that existing law would prohibit FBR Group and FBR Asset from engaging in as a bank holding company in the manner in which they currently engage, but which the GLB Act permits an FHC to engage in a similar fashion as FBR Group does today. Although New FBR believes that it will be able to maintain FBR Group’s qualification as an FHC under the GLB Act and continue to engage in the businesses in which FBR Group currently engages, there can be no assurance that New FBR will be able to do so or that it will not be required to incur substantial costs to maintain compliance with the GLB Act. In addition, even if New FBR is successful in maintaining FHC status, the GLB Act is a very recently enacted law and there is a great deal of uncertainty surrounding its scope and interpretation. There can be no assurance that these regulations and subsequent interpretations will not prevent New FBR from engaging in one or more lines of businesses in which FBR Group currently engages or will not impose restrictions that could limit the profitability of these businesses or otherwise restrict New FBR’s flexibility in engaging in them.

      New FBR anticipates that the Bank will ultimately convert to an entity that engages solely in trust or fiduciary operations, a status that would terminate the status of New FBR and the taxable REIT subsidiary as

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financial holding companies. Although the Bank has commenced steps to cause such conversion by engaging in discussions to sell or otherwise dispose of the Bank’s non-trust deposit liabilities and assets, no assurances can be given that the conversion will occur prior to the merger. If the conversion does not occur prior to the merger, approval of the merger by the Federal Reserve Board will be required and could be subject to conditions requiring that the conversion (or other disposition of the Bank) to be consummated promptly after the merger. Conversion to a limited purpose entity would be subject to the non-objection of the Office of the Comptroller of the Currency with respect to a change of control notice to be filed by New FBR and its taxable REIT subsidiary that will control the Bank, as well as pursuant to a condition of approval in the Bank’s conversion to a national bank.

      In addition, as a bank holding company (separate from its status as an FHC), FBR Group is, and New FBR will be, subject to a wide variety of restrictions, liabilities and other requirements applicable to bank holding companies, including required capital levels, restrictions on transactions with the Bank, restrictions on payment or receipt of dividends and community reinvestment requirements. Federal banking regulators possess broad powers to take supervisory action, including the imposition of potentially large fines, against New FBR as they deem appropriate if New FBR violates any of these requirements or engages in unsafe or unsound practices. These types of supervisory actions could result in higher capital requirements and limitations on both our banking and non-banking activities, any and all of which could have a material adverse effect on its businesses and profitability. Conversion of the Bank to a limited purpose entity will eliminate most of these requirements upon New FBR and the taxable REIT subsidiary. Finally, the GLB Act imposes customer privacy requirements on any company engaged in financial activities such as those engaged in by New FBR. Any failure to comply with such privacy requirements could result in significant penalties or fines.

      The regulatory environment in which New FBR operates is also subject to change. New FBR’s business may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, the Internal Revenue Service, other United States or foreign governmental regulatory authorities or the NASD. New FBR also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and the NASD.

      Additional regulation, changes in existing laws and rules, or changes in interpretations or enforcement of existing laws and rules often directly affect the method of operation and profitability of securities firms such as Friedman, Billings, Ramsey & Co., Inc. (“FBR & Co.”) and REITs such as New FBR. New FBR cannot predict what effect these types of changes might have. Its businesses may be materially affected not only by regulations applicable to it as a financial market intermediary or a REIT, but also by regulations of general application. For example, the volume of its venture capital, underwriting, merger and acquisition, asset management and principal investment businesses in a given time period could be affected by, among other things, existing and proposed tax legislation, antitrust policy and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board) and changes in interpretation or enforcement of existing laws and rules that affect the business and financial communities. The level of business and financing activity in each of the industries on which it focuses can be affected not only by such legislation or regulations of general applicability, but also by industry-specific legislation or regulations.

      Loss of Investment Company Act exemption would adversely affect New FBR and negatively affect the market price of shares of its common stock and its ability to distribute dividends.

      FBR Asset believes that it currently is not, and the parties intend to continue operating New FBR so as not to become, regulated as an investment company under the Investment Company Act of 1940 because FBR Asset is, and New FBR will be, “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Specifically, FBR Asset has invested, and the parties intend that New FBR will continue investing, at least 55% of its assets in mortgage loans or mortgage-backed securities that represent the entire ownership in a pool of mortgage loans and at least an additional 25% of its assets in mortgages, mortgage-backed securities, securities of REITs, and other real estate-related assets.

      If New FBR fails to qualify for that exemption, it could be required to restructure its activities. For example, if the market value of New FBR’s investments in equity securities were to increase by an amount that resulted in less than 55% of New FBR’s assets being invested in mortgage loans or mortgage-backed

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securities that represent the entire ownership in a pool of mortgage loans, it might have to sell equity securities in order to qualify for exemption under the Investment Company Act. The sale could occur under adverse market conditions.

      Failure to procure adequate capital and funding would adversely affect New FBR’s results and may, in turn, negatively affect the market price of shares of its common stock and its ability to distribute dividends.

      New FBR will depend upon the availability of adequate funding and capital for its operations. For example, New FBR will continue FBR Asset’s strategy of investing in mortgage-backed securities funded by short-term borrowings. In addition, New FBR’s broker-dealer, banking and other financial services subsidiaries are dependent on the availability of adequate capital to satisfy applicable regulatory capital requirements. As a REIT, like FBR Asset, New FBR will be required to distribute substantially all of its taxable income, excluding taxable REIT subsidiary retained earnings, to its shareholders and will therefore not be able to retain its earnings for new investments. However, New FBR’s taxable REIT subsidiaries will be able to retain (and likely will retain) earnings for investment in new capital subject to the various REIT requirements. Historically, FBR Asset has been able to satisfy its capital requirements by raising new equity capital in the private and public capital markets and through short-term borrowing arrangements. FBR Group has historically satisfied its capital needs from equity contributions, internally generated funds and loans from third parties. New FBR cannot assure you that any, or sufficient, funding or capital will continue to be available to it in the future on terms that are acceptable to it. In the event that New FBR cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of its common stock and its ability to distribute dividends.

      New FBR may not be able to manage its growth efficiently, which may adversely affect New FBR’s results and may, in turn, negatively affect the market price of New FBR common stock and its ability to distribute dividends.

      Over the last several years, FBR Asset and FBR Group have experienced significant growth in their business activities and, in the case of FBR Group, in the number of its employees. New FBR’s growth has required and will continue to require increased investment in management and professionals, personnel, financial and management systems and controls and facilities, which could cause New FBR’s operating margins to decline from historical levels, especially in the absence of revenue growth. In addition, as is common in the securities industry, New FBR’s broker-dealer subsidiaries will continue to be highly dependent on the effective and reliable operation of its communications and information systems and business continuity plans. New FBR believes that its current and anticipated future growth will require implementation of new and enhanced communications and information systems and training of its personnel to operate such systems. In addition, the scope of procedures for assuring compliance with applicable laws and regulations and NASD rules has changed as the size and complexity of New FBR’s business has changed. As New FBR has grown and continues to grow, New FBR has implemented and continues to implement additional formal compliance procedures to reflect such growth. Any difficulty or significant delay in the implementation or operation of existing or new systems, compliance procedures or the training of personnel could adversely affect New FBR’s ability to manage growth.

      New FBR may not be able to enter into repurchase agreements with other institutions, which may adversely affect its results and may, in turn, negatively affect the market price of its common stock and its ability to distribute dividends.

      Historically, FBR Asset’s short-term borrowings have been funded through repurchase agreements which have not been pursuant to committed credit facilities and New FBR anticipates continuing that practice. However, there can be no assurance that access to this source of borrowing will continue. In the event that New FBR’s access to short-term borrowings becomes limited or unavailable, there could be an adverse effect on New FBR’s results that may, in turn, negatively affect the market price of its common stock and its ability to distribute dividends.

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      New FBR’s corporate governance will be significantly influenced by insiders, which may result in corporate action with which you do not agree.

      As of September 30, 2002, FBR Group’s officers and directors directly controlled approximately [ l ]% of the voting power of FBR Group’s outstanding common stock. Upon completion of the merger, the officers, directors and nominees of New FBR will beneficially own approximately [ l ]% of the economic interest and [ l ]% of the total voting power of New FBR. Therefore, they will be able to exert significant influence over the outcome of all corporate actions requiring approval of New FBR’s shareholders (other than actions requiring a vote of holders of New FBR’s Class A common stock voting as a separate class), which may result in corporate action with which you do not agree.

      The super voting rights of the holders of New FBR’s Class B common stock will give a small group of insiders who will hold shares of New FBR’s Class B common stock significant voting power with respect to matters requiring shareholder approval and the former FBR Group shareholders, as a group, will hold a disproportionately large percentage of the voting power of New FBR relative to their overall economic ownership interest in New FBR.

      FBR Asset has only one class of common stock. Holders of FBR Asset common stock are entitled to one vote per share. Accordingly, each FBR Asset shareholder has voting power that is directly proportional to that shareholder’s economic ownership interest in FBR Asset. FBR Group, on the other hand, has two classes of common stock: Class A common stock, which carries one vote per share, and Class B common stock, which carries three votes per share. Two individuals, Emanuel Friedman, Chairman and Co-Chief Executive Officer of FBR Group, and Eric Billings, Vice Chairman and Co-Chief Executive Officer of FBR Group, who are the founders of FBR Group, collectively own shares of FBR Group Class B common stock that represent [53]% of the voting power of FBR Group, and only [37]% of the economic ownership interest in FBR Group. New FBR’s capital structure will include the same two classes of common stock, with the same voting rights, as are included in FBR Group’s capital structure. In the merger, holders of outstanding FBR Group Class B common stock will receive one share of New FBR Class B common stock for each share of FBR Group Class B common stock they hold. The FBR Asset shareholders will receive one share of New FBR Class A common stock for each share of FBR Asset common stock they hold. As a result, former holders of FBR Asset common stock will hold in the aggregate a [63]% economic interest in New FBR, while holding only [45]% of the voting power in New FBR, while the former holders of FBR Group Class A and Class B common stock will hold in the aggregate a [37]% economic ownership interest in New FBR, while holding [55]% of the voting power in New FBR. Former holders of FBR Group Class B common stock will hold in the aggregate a [19]% economic ownership interest in New FBR, while holding [42]% of the voting power in New FBR. Messrs. Friedman and Billings, as holders of shares of New FBR Class A common stock and New FBR Class B common stock, will hold in the aggregate a [14]% economic ownership interest in New FBR, while holding [29]% of the voting power in New FBR. The disproportionately large voting power that the former FBR Group shareholders will have, relative to their overall economic ownership interest in New FBR, will enable the former FBR Group shareholders to control the outcome of shareholder votes on important matters that require shareholder approval, even though they will own less than a majority of the economic ownership interest in New FBR. In particular, Messrs. Friedman and Billings and other holders of New FBR Class B common stock will have significant influence over matters requiring approval by New FBR shareholders.

      New FBR faces intense competition for personnel which could adversely affect its business and in turn negatively affect the market price of its common stock and its ability to distribute dividends.

      New FBR’s business is dependent on the highly skilled, and often highly specialized, individuals it will employ. Retention of specialists to manage its mortgage-backed securities portfolio, research analysts, investment banking personnel, private equity specialists, sales and trading personnel, asset management personnel, and technology, lending, management and administrative professionals are particularly important to New FBR’s prospects. New FBR’s failure to recruit and retain qualified employees could materially and adversely affect New FBR’s future operating results and may, in turn, negatively affect the market price of its common stock and its ability to pay dividends.

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      New FBR will be dependent on a small number of key senior professionals and loss of the professionals could adversely affect its results and may, in turn, negatively affect the market price of its common stock and its ability to pay dividends.

      The parties do not anticipate that New FBR will enter into employment agreements with its senior officers and other key professionals. The loss of professionals, particularly a senior professional with a broad range of contacts in an industry, could materially and adversely affect our operating results. Among the key professionals on whom New FBR will depend, and whose loss could have a material adverse effect on New FBR’s business, are Emanuel J. Friedman and Eric F. Billings. New FBR’s investment banking strategy is to establish relationships with prospective corporate clients in advance of any transaction, and to maintain these relationships by providing advisory services to corporate clients in equity, debt and merger and acquisition transactions. These relationships depend in part upon the individual employees who represent New FBR in its dealings with its clients. From time to time, other companies in the investment industry have experienced losses of professionals in all areas of the investment business. The level of competition for key personnel includes competition from non-brokerage U.S. and foreign financial services companies, commercial banks, other investment banks and venture capital firms, all of which may target or increase their efforts in some of the same industries that New FBR serves. In particular, New FBR faces competition for experienced investment bankers, research analysts and venture capital managers of the type on which New FBR’s business is highly dependent. New FBR cannot assure you that losses of key personnel due to competition or otherwise will not occur.

      Competition may result in increased compensation costs, which could adversely affect New FBR’s results and may, in turn, negatively affect the market price of its common stock and its ability to pay dividends.

      Competition for the recruiting and retention of employees may increase elements of New FBR’s compensation costs. New FBR cannot assure you that, in order to support its growth plans, it will be able to recruit and hire a sufficient number of new employees with the desired qualifications in a timely manner. New FBR regularly reviews its compensation policies, including stock incentives. Nonetheless, New FBR’s incentives may be insufficient in light of competition for experienced professionals in the investment industry, particularly if the value of its stock declines or fails to appreciate sufficiently to be a competitive source of a portion of professional compensation. Increased compensation costs could adversely affect the amount of cash available for distribution to shareholders.

      Litigation and potential securities laws liabilities may adversely affect New FBR’s business and may, in turn, negatively affect the market price of its common stock and its ability to pay dividends.

      Many aspects of New FBR’s business involve substantial risks of liability, litigation and arbitration, which could adversely affect it. As an underwriter, a broker-dealer and an investment adviser, FBR & Co. and other FBR Group subsidiaries are exposed to substantial liability under federal and state securities laws, other federal and state laws and court decisions, including decisions with respect to underwriters’ liability and limitations on the ability of issuers to indemnify underwriters, as well as with respect to the handling of customer accounts. For example, underwriters may be held liable for material misstatements or omissions of fact in a prospectus used in connection with the securities being offered and broker-dealers may be held liable for statements made by their securities analysts or other personnel. Broker-dealers and asset managers may also be held liable by customers and clients for losses sustained on investments if it is found that they caused such losses. In recent years, there has been an increasing incidence of litigation involving the securities industry, including class actions that seek substantial damages and frequently name as defendants underwriters of a public offering and investment banks that provide advisory services in merger and acquisition transactions. In addition, because New FBR will continue FBR Asset’s principal equity investing and senior secured and mezzanine lending strategies, New FBR may be exposed to litigation alleging control person or lender liability. New FBR is also subject to the risk of other litigation, including litigation that may be without merit. As New FBR intends actively to defend any such litigation, it could incur significant legal expenses. New FBR carries limited insurance that may cover only a portion of any such expenses. In addition, increasing costs of insurance for our investment banking business may further limit the coverage to which it has access. An adverse resolution of any future lawsuits against it could materially adversely affect its operating results

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and financial condition and may, in turn, negatively affect the market price of its common stock and its ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or arbitration may materially divert the efforts and attention of its management and staff from their other responsibilities.

      New FBR’s charter documents also will allow indemnification of its officers, directors and agents to the maximum extent permitted by Virginia law. New FBR will likely have entered into indemnification agreements with these persons. FBR Group has been, and in the future New FBR may be, the subject of indemnification assertions under these charter documents or agreements by its officers, directors or agents who are or may become defendants in litigation. Amounts paid pursuant to their indemnification agreements could adversely affect the financial results of New FBR and the amount of cash available for distribution to shareholders.

      New FBR will be highly dependent on systems and third parties, so systems failures could significantly disrupt its business, which may, in turn, negatively affect the market price of its common stock and its ability to pay dividends.

      New FBR’s business is highly dependent on communications and information systems, including systems provided by its clearing brokers and other third parties. Any failure or interruption of its systems, the systems of its clearing broker or third-party trading systems could cause delays or other problems in its securities trading activities, which could have a material adverse effect on its operating results and negatively affect the market price of its common stock and its ability to pay dividends.

      In addition, New FBR’s clearing brokers provide elements of its principal disaster recovery system. New FBR cannot assure you that it or its clearing brokers will not suffer any systems failure or interruption, including one caused by an earthquake, fire, other natural disaster, power or telecommunications failure, act of God, act of war or otherwise, or that it or its clearing brokers’ back-up procedures and capabilities in the event of any such failure or interruption will be adequate.

 
      Risks Related to New FBR’s Investment Banking, Asset Management, Trading, Brokerage and Other Fee-Based Financial Services Businesses Operated Through Its Taxable REIT Subsidiaries

      New FBR may be adversely affected by the general risks of the investment banking business.

      Through taxable REIT subsidiaries, including FBR & Co., New FBR will operate investment banking, asset management, trading, brokerage and other fee-based financial services businesses. The financial and investment business is, by its nature, subject to numerous and substantial risks, particularly in volatile or illiquid markets and in markets influenced by sustained periods of low or negative economic growth. As a financial and investment firm, New FBR’s operating results are adversely affected by a number of factors, which include:

  •  the risk of losses resulting from the ownership or underwriting of securities;
 
  •  the risks of trading securities for itself (i.e., principal activities) and for its customers;
 
  •  reduced cash inflows from investors into its asset management businesses;
 
  •  the risk of losses from lending, including to small, privately-owned companies;
 
  •  counterparty failure to meet commitments;
 
  •  customer default and fraud;
 
  •  customer complaints;
 
  •  employee errors, misconduct and fraud (including unauthorized transactions by traders);
 
  •  failures in connection with the processing of securities transactions;
 
  •  litigation and arbitration;

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  •  the risks of reduced revenues in periods of reduced demand for public offerings or reduced activity in the secondary markets; and
 
  •  the risk of reduced fees it receives for selling securities on behalf of its customers (i.e., underwriting spreads).

      Any one of these factors could adversely affect the market price of New FBR’s common stock and its ability to pay dividends.

      New FBR may experience significant losses if the value of its trading and investment activities deteriorates, which could negatively affect the market price of its common stock and its ability to pay dividends.

      From time to time in connection with underwriting, asset management and other activities, FBR Group owns, and after completion of the merger New FBR will own, large amounts, or have commitments to purchase large amounts, of the securities of companies. This ownership subjects New FBR to significant risks.

      FBR Group conducts its securities trading, market-making and investment activities primarily for its own account, which subjects its capital to significant risks. Upon completion of the merger, New FBR will be exposed to these risks, which include market, credit, leverage, real estate, counterparty and liquidity risks, which could result in losses. These activities often involve the purchase, sale or short sale of securities as principal in markets that may be characterized as relatively illiquid or that may be particularly susceptible to rapid fluctuations in liquidity and price. These losses could negatively affect the market price of New FBR’s common stock and its ability to distribute dividends.

      New FBR may experience reduced revenues during periods of declining prices or reduced demand for public offerings and merger and acquisition transactions or reduced activity in the secondary markets in sectors on which FBR Group has historically focused, which could negatively affect the market price of New FBR’s common stock and its ability to pay dividends.

      New FBR’s revenues are likely to be lower during periods of declining prices or inactivity in the markets for securities of companies in the sectors in which FBR Group has historically focused. These markets have historically experienced significant volatility not only in the number and size of equity offerings and merger and acquisition transactions, but also in the aftermarket trading volume and prices of securities.

      In particular, information technology and biotechnology company stocks, which are an area of focus in FBR Group’s investment banking and brokerage activities, are extremely volatile.

      A significant amount of FBR Group’s revenues historically resulted from underwritten transactions by companies in its targeted industries, from aftermarket trading for such companies, and from proprietary investments and fees and incentive income received from assets under management. Underwriting activities in those targeted industries can decline for a number of reasons including increased competition for underwriting business or periods of market uncertainty caused by concerns over inflation, rising interest rates or related issues. For example, during the second half of 1998, the market for equity offerings deteriorated and the market prices of many of the securities which FBR Group had underwritten and made a market in, and securities in which FBR Group and its asset management vehicles were invested in, were subject to considerable volatility and declines in price. These factors led to a significant reduction in underwriting revenues, to significant market making losses for FBR Group, and to a significant reduction in the stream of fees received from FBR Group’s asset management vehicles. Underwriting and brokerage fees can also be materially adversely affected if a company or industry segment associated with these activities disappoints in quarterly performance relative to analysts’ expectations or by changes in long-term prospects. These losses in revenue could negatively affect the market price of New FBR’s common stock and its ability to distribute dividends.

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      New FBR may experience reduced investment banking revenues due to economic, political and market conditions, which could negatively affect the market price of its common stock and its ability to pay dividends.

      Reductions in public offering, merger and acquisition, portfolio company valuation and securities trading activities, due to any one or more changes in economic, political or market conditions could cause New FBR’s revenues from investment banking, trading, lending, sales and asset management activities to decline materially. Many national and international factors affect the amount and profitability of these activities, including:

  •  economic, political and market conditions;
 
  •  level and volatility of interest rates and the impact on prepayment speeds of mortgage-backed securities;
 
  •  legislative and regulatory changes;
 
  •  currency values;
 
  •  inflation;
 
  •  flows of funds into and out of mutual funds, pension funds and venture capital funds; and
 
  •  availability of short-term and long-term funding and capital.

      For example, in 2000, concerns about earnings of companies in the technology sector of the United States economy led to increased volatility and a decline in the Nasdaq that continued through much of 2001. This decline adversely affected underwriting and securities trading activity in the technology sector in the United States. Furthermore, after the terrorist attacks of September 11, 2001, the broad equity markets in the United State were disrupted and market conditions for equity transactions were adversely affected. Losses resulting from reduced investment banking activities could negatively affect New FBR’s financial performance, the market price of New FBR’s common stock and its ability to distribute dividends.

      New FBR may experience reduced revenues due to declining market volume, price and liquidity, which can also cause counterparties to fail to perform and may negatively affect the market price of its common stock and its ability to distribute dividends.

      New FBR’s revenues may decrease in the event of a decline in the market volume of securities transactions, prices or liquidity. Declines in the volume of securities transactions and in market liquidity generally result in lower revenues from trading activities and commissions. Lower price levels of securities may also result in a reduced volume of underwriting transactions, and could cause a reduction in New FBR’s revenues from corporate finance fees, as well as losses from declines in the market value of securities held by New FBR in trading and other investment, lending and underwriting positions, reduced asset management fees and incentive income and withdrawals of funds under management. Sudden sharp declines in market values of securities can result in illiquid markets and the failure of issuers and counterparties to perform their obligations, as well as increases in claims and litigation, including arbitration claims from customers. In such markets, FBR Group has incurred, and New FBR may incur in the future, reduced revenues or losses in its principal trading, market-making, investment banking, lending and asset management activities. Such losses could negatively affect the market price of its common stock and its ability to distribute dividends.

      New FBR may incur losses associated with its underwriting activities, which could adversely affect New FBR’s results and may negatively affect the market price of its common stock and its ability to distribute dividends.

      Participation in underwritings involves both economic and regulatory risks. As an underwriter, FBR & Co. may incur losses if it is unable to resell the securities it is committed to purchase or if it is forced to liquidate its commitment at less than the agreed purchase price. In addition, the trend, for competitive and other reasons, toward larger commitments on the part of lead underwriters means that, from time to time, an underwriter may retain significant ownership of individual securities. Finally, it has been FBR Group’s anecdotal experience that increased competition has eroded and is expected to continue to erode underwriting

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spreads. These factors, along with New FBR’s concentration in a limited number of industry sectors, may negatively affect New FBR’s financial results, the market price of its common stock and its ability to distribute dividends.

      New FBR’s focus on relatively few industries may limit its revenues, which may adversely affect its operating results and negatively impact the market price of its common stock and its ability to distribute dividends.

      New FBR’s investment banking business will be dependent on revenues related to securities issued by companies in specific industry sectors. The financial services, real estate, technology, energy, healthcare and diversified industries sectors account for the majority of New FBR’s investment banking, asset management and research activities. For example, in the first three quarters of 2002, approximately [80]% of FBR Group’s investment banking revenue was derived from the real estate and financial services sectors. Therefore, any downturn in the market for the securities of companies in these industries, or factors affecting such companies, would adversely affect New FBR’s operating results and financial condition. In 1998 and 1999, the specialty finance companies, equity REITs and mortgage REITs on which FBR & Co. focused experienced a significant downturn which, in turn, adversely affected FBR Group. The frequency and size of securities offerings can vary significantly from industry to industry due to economic, legislative, regulatory and political factors. Underwriting activities in a particular industry can decline for a number of reasons.

      New FBR also will derive a significant portion of its revenues from institutional brokerage transactions related to the securities of companies in these sectors. Its revenues from such institutional brokerage transactions may decline when underwriting activities in these industry sectors decline, the volume of trading on The Nasdaq Stock Market or the New York Stock Exchange declines, or when industry sectors or individual companies report results below investors’ expectations.

      The timing of New FBR’s recognition of investment banking revenue from a significant transaction can materially affect its quarterly operating results, which may adversely affect its operating results and negatively affect the market price of its common stock and its ability to distribute dividends.

      New FBR records its revenues from an underwriting transaction only when the underwriting is completed. New FBR records revenues from merger and acquisition transactions only when it has rendered the services and the client is contractually obligated to pay; generally, most of the fee is earned only after the transaction closes. Accordingly, the timing of New FBR’s recognition of revenue from a significant transaction can materially affect its quarterly operating results. New FBR has structured its investment banking operations based on expectations of a high level of demand for underwriting and corporate finance transactions. As a result, it has fixed costs associated with those businesses. Accordingly, those businesses could experience losses if demand for these transactions is lower than expected.

      New FBR has potential conflicts of interest with its officers and employees.

      From time to time, New FBR’s officers and employees invest in private or public companies in which it, or one of its affiliates, is or could potentially be an investor or for which it carries out investment banking assignments, publishes research or acts as a market maker. In addition, it has in the past organized and will likely in the future organize businesses, such as its private investment vehicles and venture capital funds, in which its employees may acquire minority interests or profit interests. There are risks that, as a result of such investment or profit interest, an officer or employee may have incentives to take actions that would conflict with New FBR’s best interests. New FBR believes it has in place compliance procedures and practices designed to monitor the activities of its officers and employees in this regard, but it cannot guarantee that these procedures and practices will be effective.

      New FBR’s access to confidential information through its broker-dealer subsidiary and investment management business may restrict New FBR’s ability to take action with respect to some of its investments, which, in turn, may negatively affect the potential return to shareholders.

      New FBR may obtain confidential information about the companies in which it has invested or may invest. If New FBR does possess confidential information about other companies, it may be restricted in its

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ability to dispose of, increase the amount of, or otherwise take action with respect to its investment in those companies. New FBR’s management of investment funds could create a conflict of interest to the extent the fund managers are aware of inside information concerning potential investment targets or to the extent the fund managers wish to invest in companies for which FBR & Co. is underwriting securities. New FBR believes it has in place compliance procedures and practices designed to ensure that inside information is not used for making investment decisions on behalf of the funds and to monitor funds invested in its investment banking clients. New FBR cannot assure you, however, that these procedures and practices will be effective. In addition, this conflict and these procedures and practices may limit the freedom of these officials to make potentially profitable investments on behalf of those funds, which could have an adverse effect on its operations. These limitations imposed by New FBR’s access to confidential information could therefore negatively affect the potential market price of its common stock and its ability to distribute dividends.

      New FBR’s business is dependent on cash inflows to mutual funds and other pooled investment vehicles, which could result in New FBR experiencing operating losses if cash flows slow, and negatively impact cash available for distribution to its shareholders.

      A slowdown or reversal of cash inflows to mutual funds and other pooled investment vehicles could lead to lower underwriting and brokerage revenues for New FBR since mutual funds and other pooled investment vehicles purchase a significant portion of the securities offered in public offerings and traded in the secondary markets. Demand for new equity offerings has been driven in part by institutional investors, particularly large mutual funds, seeking to invest cash received from the public. New FBR’s brokerage business is particularly dependent on the institutional market. The public may sell mutual funds as a result of a decline in the market generally or as a result of a decline in mutual fund net asset values. To the extent that a decline in cash inflows into mutual funds reduces demand by fund managers for initial public or secondary offerings, New FBR’s business and results of operations could be materially adversely affected. Moreover, a slowdown in investment activity by mutual funds may have an adverse effect on the securities markets generally. Such environments may adversely affect the market price of New FBR common stock and its ability to distribute dividends.

      New FBR’s investment banking and other financial services businesses face significant competition from larger financial services firms with greater resources which could reduce its market share and harm its financial performance which may, in turn, adversely affect the market price of its common stock and ability to distribute dividends.

      New FBR will, through its broker-dealer subsidiaries and other taxable REIT subsidiaries, be engaged in the highly competitive financial services, underwriting, securities brokerage, principal investing, asset management and banking businesses. It competes directly with large Wall Street securities firms, established venture capital funds, securities subsidiaries of major commercial bank holding companies, major regional firms, smaller “niche” players and those offering competitive services via the Internet. To an increasing degree, New FBR also competes for various segments of the financial services business with other institutions, such as commercial banks, savings institutions, mutual fund companies, life insurance companies and financial planning firms. New FBR’s industry focus also subjects it to direct competition from a number of specialty securities firms, smaller investment banking boutiques and venture capital funds that specialize in providing services to those industry sectors. If New FBR is not able to compete successfully in this environment, its business, operating results and financial condition will be adversely affected, which may adversely affect the cash available for distribution to shareholders.

      Competition from commercial banks has increased because of acquisitions of securities firms by commercial banks, as well as internal expansion by commercial banks into the securities business. This competition could adversely affect New FBR’s operating results.

      New FBR also faces intense competition in its asset management business from a variety of sources, including venture capital funds, private equity funds, mutual funds, hedge funds and other asset managers. New FBR competes for investor funds as well as for the opportunity to participate in transactions.

      Many of New FBR’s competitors have greater personnel and financial resources than it does. Larger competitors are able to advertise their products and services on a national or regional basis and may have a

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greater number and variety of distribution outlets for their products, including retail distribution. Discount brokerage firms and others operating on-line market their services through aggressive pricing and promotional efforts. In addition, some competitors have a much longer history of investment activities than New FBR does and, therefore, may possess a relative advantage with regard to access to business and capital.

      New FBR may not be able to keep up with rapid technological change, which may adversely affect the market price of its common stock and its ability to distribute dividends.

      There are significant technical and financial risks in the development of new services and products or enhanced versions of existing services and products. New FBR cannot assure you that it will be able to:

  •  develop or obtain the necessary technologies;
 
  •  effectively use new technologies;
 
  •  adapt its services and products to evolving industry standards; or
 
  •  develop, introduce and market in a profitable manner service and product enhancements or new services and products.

      If it is unable to develop and introduce enhanced or new services or products quickly enough to respond to market or customer requirements, or if it or its services and products do not achieve market acceptance, New FBR’s business, financial condition and operating results will be materially adversely affected and its cash available for distribution to shareholders may be negatively impacted.

     Risks Related to New FBR’s Principal Investing Activities

      Declines in the market values of New FBR’s mortgage-backed securities and other investments may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to its shareholders.

      A substantial portion of New FBR’s assets will be investments in mortgage-backed securities and other investment securities. Most of those assets are classified for accounting purposes as “available-for-sale.” Changes in the market values of those assets will be directly charged or credited to New FBR’s shareholders’ equity. As a result, a decline in values may reduce the book value of New FBR’s assets. Moreover, if the decline in value of an available-for-sale security is other than temporary, such decline will reduce earnings, as will a decline in the value of securities not classified as available-for-sale for accounting purposes.

      A decline in the market value of New FBR’s assets may adversely affect New FBR in instances where New FBR has borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require New FBR to post additional collateral to support the loan. If New FBR were unable to post the additional collateral, it would have to sell the assets at a time when it might not otherwise choose to do so. A reduction in credit available may reduce New FBR’s earnings and, in turn, cash available for distribution to shareholders.

      Use of leverage could adversely affect the operations of New FBR, particularly with respect to New FBR’s mortgage-backed securities portfolio and negatively affect cash available for distribution to its shareholders.

      Using debt to finance the purchase of mortgage-backed securities and other investment securities will expose New FBR to the risk that margin calls will be made and that it will not be able to meet those margin calls. To meet margin calls, New FBR may sell mortgage-backed securities and those sales of mortgage-backed securities could result in realized losses, and negatively affect cash available for distribution to its shareholders.

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      While it will not be the policy of New FBR to leverage its equity securities or loan investments, if New FBR were to leverage these investments, this leverage could expose it to the risk that margin calls will be made and that it will not be able to meet them. A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

      New FBR will enter into repurchase agreements to finance mortgage related investments, which can amplify the effect of a decline in value resulting from an interest rate increase. For example, assume that New FBR finances $90 million through repurchase agreements to acquire $100 million of 8% mortgage-backed securities. If prevailing interest rates increase from 8% to 9%, the value of the mortgage-backed securities may decline to a level below the amount required to be maintained under the terms of the repurchase agreements. If the mortgage-backed securities were then sold, New FBR would have to transfer additional assets to secure the borrowings.

      Changes in interest rates could negatively affect the value of New FBR’s mortgage-backed securities, which could result in reduced earnings or losses and negatively affect the cash available for distribution to its shareholders.

      FBR Asset has invested indirectly in mortgage loans by purchasing mortgage-backed securities and New FBR will assume ownership of these assets and continue this investment strategy. Under a normal yield curve, an investment in mortgage-backed securities will decline in value if long-term interest rates increase. Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of the mortgage-backed securities New FBR owns, those guarantees do not protect it from declines in market value caused by changes in interest rates. Declines in market value may ultimately reduce earnings or result in losses to New FBR, which may negatively affect cash available for distribution to its shareholders.

      A significant risk associated with FBR Asset’s current portfolio of mortgage-backed securities is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates were to increase significantly, the market value of these mortgage-backed securities would decline and the weighted average life of the investments would increase. FBR Asset and, after completion of the merger, New FBR could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the repurchase agreements FBR Asset and New FBR enter into in order to finance the purchase of mortgage-backed securities.

      Market values of mortgage-backed securities may decline without any general increase in interest rates for any number of reasons, such as increases in defaults, increases in voluntary prepayments and widening of credit spreads.

      An increase in New FBR’s borrowing costs relative to the interest it receives on its mortgage-backed securities may adversely affect its profitability, which may negatively affect cash available for distribution to its shareholders.

      As New FBR’s repurchase agreements and other short-term borrowing instruments mature, New FBR will be required either to enter into new repurchase agreements or to sell a portion of its mortgage-backed securities or other investment securities. An increase in short-term interest rates at the time that New FBR seeks to enter into new repurchase agreements would reduce the spread between New FBR’s returns on its mortgage-backed securities and the cost of its borrowings. An increase in long-term interest rates at a time when New FBR is seeking to sell a portion of its fixed rate mortgage-backed securities would reduce the value of the securities. Either or both of these changes in interest rates would adversely affect New FBR’s returns on its mortgage-backed securities portfolio, which might reduce earnings and, in turn, cash available for distribution to its shareholders.

      Prepayment rates could negatively affect the value of New FBR’s mortgage-backed securities, which could result in losses or reduced earnings or losses and negatively affect the cash available for distribution to its shareholders.

      In the case of residential mortgage loans, there are seldom any restrictions on borrowers’ abilities to prepay their loans. Homeowners tend to prepay mortgage loans faster when interest rates decline. Conse-

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quently, owners of the loans have to reinvest the money received from the prepayments at the lower prevailing interest rates. Conversely, homeowners tend not to prepay mortgage loans when interest rates increase. Consequently, owners of the loans are unable to reinvest money that would have otherwise been received from prepayments at the higher prevailing interest rates. These tendencies concerning prepayment rates may result in losses or reduced earnings or losses for New FBR and negatively affect the cash available for distribution to its shareholders.

      Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of the mortgage-backed securities New FBR owns, those guarantees do not protect investors against prepayment risks.

      Rapid changes in the values of our mortgage-backed securities and other real estate assets may make it more difficult for New FBR to maintain its REIT status or exemption from the Investment Company Act.

      If the market value or income potential of New FBR’s mortgage-backed securities and mezzanine loans decline as a result of increased interest rates, prepayment rates or other factors, it may need to increase its real estate investments and income and/or liquidate its non-qualifying assets in order to maintain its REIT status or exemption from the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of many of its non-real estate assets. New FBR may have to make investment decisions that it otherwise would not want to make absent the REIT and Investment Company Act considerations.

      Hedging against interest rate exposure may adversely affect New FBR’s earnings, which could adversely affect cash available for distribution to its shareholders.

      As of September 30, 2002, FBR Asset had entered into a total of $3.1 billion notional amount interest rate swap agreements to limit, or “hedge,” the adverse effects of rising interest rates on its short-term repurchase agreements. In the future, New FBR may enter into other interest rate swap agreements or pursue other hedging strategies. New FBR’s hedging activity varies in scope based on the level and volatility of interest rates and principal prepayments, the type of mortgage-backed securities held, and other changing market conditions.

      Interest rate hedging may fail to protect or could adversely affect New FBR because, among other things:

  •  interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
 
  •  available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
 
  •  the duration of the hedge may not match the duration of the related liability;
 
  •  the amount of income that a REIT may earn from hedging transactions to offset interest rate losses is limited by federal tax provisions governing REITs;
 
  •  the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs New FBR’s ability to sell or assign its side of the hedging transaction; and
 
  •  the party owing money in the hedging transaction may default on its obligation to pay.

      New FBR’s hedging activity may adversely affect its earnings, which could adversely affect cash available for distribution to its shareholders.

      New FBR’s assets are likely to include mezzanine or senior loans that may have greater risks of loss than secured senior loans and if those losses are realized, it could adversely affect its earnings, which could adversely affect its cash available for distribution to its shareholders.

      New FBR will continue FBR Asset’s mezzanine and senior loan program, and New FBR expects its assets to include a significant amount of loans that involve a higher degree of risk than long-term senior secured loans. First, the loans may not be secured by mortgages or liens on assets. Even if secured, these loans may have higher loan-to-value ratios than a senior secured loan. Furthermore, New FBR’s right to payment and the security interest may be subordinated to the payment rights and security interests of the senior lender.

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Therefore, New FBR may be limited in its ability to enforce its rights to collect these loans and to recover any of the loan balance through a foreclosure of collateral.

      New FBR’s loans may have an interest only payment schedule, with the principal amount remaining outstanding and at risk until the maturity of the loan. In this case, a borrower’s ability to repay its loan may be dependent upon a liquidity event that will enable the repayment of the loan.

      In addition to the above, numerous other factors may affect a company’s ability to repay its loan, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. A deterioration in a company’s financial condition and prospects may be accompanied by deterioration in the collateral for the loan. Losses in New FBR’s loans could adversely affect its earnings, which could adversely affect cash available for distribution to its shareholders.

      Loans that New FBR makes to highly leveraged companies may have a greater risk of loss which, in turn, could adversely affect cash available for distribution to its shareholders.

      Leverage may have material adverse consequences to the companies to which New FBR makes loans and to New FBR as an investor in these companies. These companies may be subject to restrictive financial and operating covenants. The leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. As a result, leveraged companies have a greater risk of loss. Losses on New FBR loans could adversely affect its earnings, which could adversely affect cash available for distribution to its shareholders.

      New FBR’s due diligence may not reveal all of a portfolio company’s liabilities and may not reveal other weaknesses in a portfolio company’s business.

      Before making an investment in another business entity, New FBR will assess the strength and skills of the entity’s management and other factors that it believes will determine the success of the investment. In making the assessment and otherwise conducting customary due diligence, New FBR will rely on the resources available to it and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly-organized entities because there may be little or no information publicly available about the companies. Against this background, there can be no assurance that New FBR’s due diligence processes will uncover all relevant facts or that any investment will be successful.

      New FBR depends on management and has limited ability to influence management of portfolio companies.

      New FBR will not control the management, investment decisions or operations of the enterprises in which it invests. Management of those enterprises may decide to change the nature of their assets, or management may otherwise change in a manner that is not satisfactory to New FBR. New FBR will typically have no ability to affect these management decisions, and as noted below, may have only limited ability to dispose of these investments.

      New FBR may make investments that have limited liquidity, which may reduce the return on those investments to shareholders.

      The equity securities of a new entity in which New FBR invests are likely to be restricted as to resale and may otherwise be highly illiquid. New FBR expects that there will be restrictions on its ability to resell the securities of any private or newly-public company that it acquires for a period of at least one year after it acquires those securities. In addition, applicable REIT tax provisions may cause sales of certain assets to be disadvantageous. Thereafter, a public market sale may be subject to volume limitations or dependent upon securing a registration statement for a secondary offering of the securities.

      The securities of newly-public entities may trade less frequently and in smaller volume than securities of companies that are more widely held and have more established trading patterns. Thus, sales of these securities may cause their values to fluctuate more sharply. Furthermore, because New FBR will be the

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corporate parent of FBR & Co., New FBR’s ability to invest in companies may be constrained by applicable securities laws and the rules of the National Association of Securities Dealers, Inc. This is because FBR & Co. is a registered broker-dealer and its investment and trading activities are regulated by the SEC and NASD. For example, the NASD’s rules may limit New FBR’s ability to invest in the securities of companies whose securities are underwritten by FBR & Co.

      The short- and medium-term loans New FBR will make will be based, in part, upon New FBR’s knowledge of the borrower and its industry. In addition, New FBR does not yet nor may it ever have a significant enough portfolio of loans to easily sell them to a third party. As a result, these loans are and may continue to be highly illiquid.

      Prices of the equity securities of new entities in which New FBR invests may be volatile.

      Prices of the equity securities of new entities in which New FBR invests may be volatile. It may make investments that are significant relative to the portfolio company’s overall capitalization, and resales of significant amounts of these securities might adversely affect the market and the sales price for the securities.

      Disposition value of investments is dependent upon general and specific market conditions which could result in a decline of the value of the investments.

      Even if New FBR makes an appropriate investment decision based on the intrinsic value of an enterprise, there is no assurance that the trading market value of the investment will not decline, perhaps materially, as a result of general market conditions. For example, an increase in interest rates, a general decline in the stock markets, or other market conditions adverse to companies of the type in which New FBR invests could result in a decline in the value of its investments.

      The market for investment opportunities is competitive, which could make it difficult for New FBR to purchase or originate investments at attractive yields, which could have an adverse effect on cash available for distribution to its shareholders.

      New FBR will gain access to good investment opportunities only to the extent that they become known to it. Gaining access to good investment opportunities is a highly competitive business. New FBR will compete with other companies that have greater capital, more long-standing relationships, broader product offerings and other advantages. Competitors include, but are not limited to, business development companies, small business investment companies, commercial lenders and mezzanine funds and other broker-dealers. Increased competition would make it more difficult for New FBR to purchase or originate investments at attractive yields, which could have an adverse effect on cash available for distribution to its shareholders.

      New FBR may incur losses as a result of our technology sector investment activities, which could negatively affect the market price of its common stock and its ability to distribute dividends.

      FBR Group’s technology sector investments are made through funds which FBR Group manages and funds which a third party acts as a manager. These funds may invest in technology companies in the early stages of their development. New FBR’s business and prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in early stages of development, particularly companies in new and rapidly evolving markets. Moreover, these funds may invest in privately held companies as to which little public information is available. Accordingly, New FBR depends on these fund managers to obtain adequate information to evaluate the potential returns from investing in these companies. Fund managers may or may not be successful in this task. Also, these companies frequently have less diverse product lines and smaller market presence than large competitors. They are thus generally more vulnerable to economic downturns and may experience substantial variations in operating results.

      Moreover, many of these technology sector portfolio companies will require additional equity funding to satisfy their continuing working capital requirements. Because of the circumstances of those companies or market conditions, it is possible that one or more of these portfolio companies will not be able to raise additional financing or may be able to do so only at a price or on terms that are unfavorable to them. Adverse returns with respect to these technology sector investment activities could adversely affect New FBR’s operating results, which could negatively affect the market price of its common stock and its ability to distribute dividends.

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     Tax Risks Related to New FBR

      Ownership limitation may restrict change of control or business combination opportunities in which shareholders of New FBR might receive a premium for their shares.

      In order for New FBR to qualify as a REIT, no more than 50% in value of its outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. In order to preserve New FBR’s REIT status, its amended and restated articles of incorporation generally prohibits any shareholder from directly or indirectly owning more than 9.9% of any class or series of New FBR’s outstanding common stock or preferred stock.

      The ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of New FBR’s common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests. See “Description of New FBR Capital Stock” and “Real Estate Investment Trust Status of New FBR — Requirements for Qualification as a REIT.”

      U.S. federal income tax requirements may restrict New FBR’s operations, which could restrict New FBR’s ability to take advantage of attractive investment opportunities, which could negatively affect the cash available for distribution to its shareholders.

      FBR Asset believes it has operated and, following the merger, New FBR intends to continue to operate in a manner that is intended to cause it to qualify as a REIT for U.S. federal income tax purposes. However, the U.S. federal income tax laws governing REITs are extremely complex, and interpretations of the U.S. federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT will require New FBR to meet various tests regarding the nature of its assets and its income, the ownership of its outstanding stock, and the amount of its distributions on an ongoing basis. In some instances, compliance with these tests may not be completely within the control of New FBR. For example, some of New FBR’s investments will be in equity securities of other REITs, which generally are qualifying assets and produce qualifying income for purposes of the REIT qualification tests. The failure of the REITs in which New FBR invests to maintain their REIT status, however, could jeopardize New FBR’s REIT status. Accordingly, New FBR cannot be certain that it will be successful in operating so as to qualify as a REIT.

      At any time, new laws, interpretations, or court decisions may change the federal tax laws regarding, or the U.S. federal income tax consequences of, qualification as a REIT. In addition, compliance with the REIT qualification tests could restrict New FBR’s ability to take advantage of attractive investment opportunities in non-qualifying assets, which would negatively affect the cash available for distribution to its shareholders. For example, New FBR may be required to limit further its investment in non-REIT equity securities and mezzanine loans to the extent that such loans are not secured by real property.

      New FBR’s ownership of and relationship with its taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize New FBR’s REIT status and may result in the application of a 100% excise tax.

      A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A taxable REIT subsidiary will pay income tax at regular corporate rates on any income that it earns. In addition, the taxable REIT subsidiary rules limit the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis.

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      New FBR will inherit ownership of the taxable REIT subsidiaries of FBR Asset in the merger. In addition, each subsidiary of FBR Group in existence immediately prior to the effective time of the merger will become a taxable REIT subsidiary of New FBR as of the closing date of the merger. As a result, all of New FBR’s operating businesses, including those currently operated by FBR Group, will be conducted after the merger through taxable REIT subsidiaries. New FBR’s taxable REIT subsidiaries will pay corporate income tax on their taxable income, and their after-tax net income will be available for distribution to New FBR but is not required to be distributed to New FBR.

      FBR Group and FBR Asset believe that, as of the closing date of the merger, the aggregate value of the taxable REIT subsidiary stock and securities owned by New FBR will be significantly less than 20% of the value of New FBR’s total assets (including the taxable REIT subsidiary stock and securities). Furthermore, New FBR will monitor at all times the value of its investments in its taxable REIT subsidiaries for the purpose of ensuring compliance with the rule that no more than 20% of the value of its assets may consist of taxable REIT subsidiary stock and securities (which is applied at the end of each calendar quarter). In addition, New FBR will scrutinize all of its transactions with its taxable REIT subsidiaries for the purpose of ensuring that they are entered into on arm’s-length terms in order to avoid incurring the 100% excise tax described above. There can be no complete assurance, however, that New FBR will be able to comply with the 20% limitation on ownership of taxable REIT subsidiary stock and securities on an ongoing basis so as to maintain REIT status or to avoid application of the 100% excise tax imposed on certain non-arm’s-length transactions.

      Failure to make required distributions would subject New FBR to tax, which would reduce the cash available for distribution to its shareholders.

      In order to qualify as a REIT, an entity must distribute to its shareholders, each calendar year, at least 90% of its taxable income, other than any net capital gain and excluding any retained earnings of taxable REIT subsidiaries. To the extent that a REIT satisfies the 90% distribution requirement, but distributes less than 100% of its taxable income, it will be subject to federal corporate income tax on its undistributed income. In addition, the REIT will incur a 4% nondeductible excise tax on the amount, if any, by which its distributions in any calendar year are less than the sum of:

  •  85% of its ordinary income for that year,
 
  •  95% of its capital gain net income for that year, and
 
  •  100% of its undistributed taxable income from prior years.

      FBR Asset has paid out, and New FBR intends to continue to pay out, its REIT taxable income to its shareholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% excise tax. See “Real Estate Investment Trust Status of New FBR — Requirements for Qualification as a REIT — Distribution Requirements.” There, however, is no requirement that taxable REIT subsidiaries distribute their after-tax net income to their parent REIT or its shareholders and New FBR’s taxable REIT subsidiaries may elect not to make any distributions to New FBR.

      New FBR’s taxable income may substantially exceed its net income as determined based on generally accepted accounting principles because, for example, capital losses will be deducted in determining its GAAP income, but may not be deductible in computing its taxable income. In addition, New FBR may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets, referred to as phantom income. Although some types of phantom income are excluded in determining the 90% distribution requirement, New FBR will incur corporate income tax and the 4% excise tax with respect to any phantom income items if it does not distribute those items on an annual basis. See “Real Estate Investment Trust Status of New FBR — Requirements for Qualification as a REIT — Distribution Requirements.” As a result of the foregoing, New FBR may generate less cashflow than taxable income in a particular year. In that event, New FBR may be required to use cash reserves, incur debt, or liquidate non-cash assets at rates or times that it regards as unfavorable in order to satisfy the distribution requirement and to avoid corporate income tax and the 4% excise tax in that year.

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      Failure to qualify as a REIT would subject New FBR to U.S. federal income tax, which would reduce the cash available for distribution to its shareholders.

      If New FBR fails to qualify as a REIT in any calendar year, it would be required to pay U.S. federal income tax on its taxable income. New FBR might need to borrow money or sell assets in order to pay that tax. Its payment of income tax would decrease the amount of its income available for distribution to its shareholders. Furthermore, if New FBR ceases to be a REIT, it no longer would be required to distribute substantially all of its taxable income to its shareholders. Unless its failure to qualify as a REIT were excused under federal tax laws, New FBR could not re-elect REIT status until the fifth calendar year following the year in which it failed to qualify. In addition, FBR Asset’s failure to qualify as a REIT in any taxable year prior to or ending on completion of the merger could jeopardize New FBR’s REIT status after the merger and/or cause it to be subject to U.S. federal income tax.

      Failure of New FBR to distribute the earnings and profits of FBR Group would cause New FBR to fail to qualify as a REIT.

      At the end of any taxable year, a REIT may not have any accumulated earnings and profits, described generally for U.S. federal income tax purposes as cumulative undistributed net income, attributable to an ordinary non-REIT corporation. In connection with the merger, New FBR will succeed to the accumulated earnings and profits of FBR Group, which is an ordinary non-REIT corporation. PricewaterhouseCoopers LLP is preparing, and will provide prior to the date of the mergers, a computation of FBR Group’s accumulated earnings and profits as of December 31, 2002, and a projection, based on certain assumptions, of FBR Group’s earnings and profits for the period from January 1, 2003 through the date of the merger. Based on this report, New FBR will make a corresponding special one-time cash distribution to its shareholders on or before December 31, 2003, in an amount that is intended to equal or exceed the accumulated earnings and profits that it will inherit from FBR Group. However, the determination of accumulated earnings and profits for U.S. federal income tax purposes is extremely complex and the computations of PricewaterhouseCoopers are not binding on the Internal Revenue Service. If the Internal Revenue Service were successfully to assert that FBR Group’s accumulated earnings and profits were greater than New FBR’s special distribution, New FBR possibly could fail to qualify as a REIT. Alternatively, New FBR could avoid losing its REIT status by paying a deficiency dividend to eliminate any remaining accumulated earnings and profits of FBR Group. There can be no complete assurance, however, that the Internal Revenue Service would not assert loss of REIT status as the penalty for failing to distribute the accumulated earnings and profits of FBR Group by the end of 2003.

      A sale of assets acquired from FBR Group within ten years after the merger would result in corporate income tax, which would reduce the cash available for distribution to its shareholders.

      If New FBR sells stock or securities of a taxable REIT subsidiary or any other asset that it acquires from FBR Group within ten years after the merger and recognizes a taxable gain on the sale, New FBR will be taxed at the highest corporate rate on an amount equal to the lesser of:

  •  the amount of gain that New FBR recognizes at the time of the sale; or
 
  •  the amount of gain that New FBR would have recognized if it had sold the asset at the time of the merger for its then fair market value.

      This rule potentially could inhibit New FBR from selling taxable REIT subsidiary stock or securities or other assets acquired from FBR Group within ten years after the merger.

      Adverse legislative or regulatory tax changes may affect the tax treatment of New FBR or its shareholders.

      At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations thereof may take effect retroactively and could adversely affect New FBR or you, as a shareholder. On January 7, 2003, the Bush Administration released a proposal that would exclude corporate dividends from an individual’s taxable income, to the extent that corporate income tax has been paid on the earnings from which the dividends are paid. REIT dividends

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would not be exempt from income tax in the hands of an individual shareholder because REITs’ income generally is not subject to corporate-level tax. This proposal could cause stock in non-REIT corporations to be a more attractive investment to individual investors than stock in REITs. There can be no assurance regarding the form in which this proposal ultimately will be enacted or whether it will in fact be enacted.

      In addition to the other information included or incorporated by reference in this joint proxy statement/prospectus (including the matters addressed in “Cautionary Statement Regarding Forward-Looking Statements”), FBR Group shareholders and FBR Asset shareholders should consider carefully the matters described below in determining whether to vote in favor of the approval of the merger agreement.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

      This joint proxy statement/prospectus contains “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be made directly in this joint proxy statement/prospectus by reference to other documents filed with the SEC by FBR Group, FBR Asset and New FBR, and they also may be made a part of this joint proxy statement/prospectus by reference to other documents filed with the SEC by FBR Group and FBR Asset, which is known as “incorporation by reference.” These statements may include statements regarding the period following the completion of the merger and the transactions contemplated by the merger agreement.

      Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of those words or other comparable terminology. Statements concerning projections, future performance, developments, events, market forecasts, revenues, expenses, earnings, run rates and any other guidance on present or future periods constitute forward-looking statements. These forward-looking statements are subject to a number of factors, risks, and uncertainties that might cause actual results to differ materially from stated expectations or current circumstances. These factors include, but are not limited to, the overall environment for interest rates, repayment speeds within the mortgage-backed securities market, risk associated with equity investments, the demand for public offerings, activity in the secondary securities market, the high degree of risk associated with technology and other venture capital investments, competition for business and personnel, and general economic, political, and market conditions. In addition to the risks related to the businesses of FBR Group and FBR Asset, the factors related to the merger and New FBR discussed under “Risk Factors Related to the Merger and New FBR,” among others, could cause actual results to differ materially from those described in the forward-looking statements. Shareholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this joint proxy statement/prospectus or as of the date of any document incorporated by reference in this joint proxy statement/prospectus, as applicable. None of FBR Group, FBR Asset or New FBR is under any obligation, and each expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

      For additional information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please see the annual reports on Form 10-K and the quarterly reports on Form 10-Q that FBR Group and FBR Asset have filed with the SEC.

      All forward-looking statements in this joint proxy statement/ prospectus attributable to FBR Group, FBR Asset and New FBR or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

      New FBR acknowledges that the safe harbor provisions of the Private Securities Litigation Reform Act do not apply to it in connection with its initial public offering of New FBR common stock.

RECENT DEVELOPMENTS

      After the close of the market on December 6, 2002, FBR Asset sold an aggregate of 1,100,000 newly issued shares of FBR Asset common stock directly to Legg Mason Opportunity Trust and Legg Mason Capital Management, as advisor to and on behalf of its clients, from FBR Asset’s shelf registration statement at a price of $33.65 per share. In the transaction, Legg Mason Opportunity Trust purchased 1,000,000 shares of FBR Asset common stock and Legg Mason Capital Management purchased 100,000 shares of FBR Asset common stock. After deducting estimated offering expenses, the net proceeds from the transaction to FBR Asset were approximately $37 million.

      On December 10, 2002, FBR Asset declared a quarterly dividend of $1.25 per share of FBR Asset common stock payable on February 3, 2003 to FBR Asset shareholders of record as of December 27, 2002. In addition, on December 10, 2002, FBR Asset declared a special dividend of $0.30 per share payable on January 31, 2003 to FBR Asset shareholders of record as of December 27, 2002.

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THE FBR GROUP SPECIAL MEETING

      We are furnishing this joint proxy statement/prospectus to FBR Group shareholders as part of the solicitation of proxies by the FBR Group board of directors for use at the FBR Group special meeting.

Date, Time and Place

      FBR Group will hold the FBR Group special meeting on [ l ],[ l ] [ l ], 2003, at [ l ] a.m., local time, at [ l ].

Purpose of the FBR Group Special Meeting

      At the FBR Group special meeting, we are asking holders of record of FBR Group common stock to consider and vote on a proposal to approve the merger agreement by and among FBR Group, FBR Asset and Forest Merger Corporation, which we refer to as New FBR, and the transactions contemplated by the merger agreement, and to act upon such other matters as may properly come before the FBR Group special meeting or any adjournment or postponement thereof. See “The Merger” and “Description of the Transaction Agreements — The Merger Agreement.”

      The FBR Group board of directors, upon the unanimous recommendation of a special committee consisting entirely of independent directors formed to consider the transaction, after due consideration, unanimously:

  •  determined that the merger and the other transactions contemplated by the merger agreement are advisable and fair to and in the best interests of FBR Group and its shareholders,
 
  •  approved the merger and approved and adopted the merger agreement and the transactions contemplated by the merger agreement,
 
  •  directed that the merger agreement and the transactions contemplated by the merger agreement be submitted to a vote at a meeting of FBR Group shareholders, and
 
  •  recommended that the FBR Group shareholders approve the merger agreement and the transactions contemplated by the merger agreement.

      The FBR Group board of directors unanimously recommends that FBR Group shareholders vote FOR approval of the merger agreement.

      Certain directors and officers of FBR Group will receive financial and other benefits in connection with the merger. For a discussion of the interests of certain persons in the merger, see “The Merger — Interests of Certain Persons in the Merger.”

FBR Group Record Date; Shares Entitled to Vote; Quorum

      Only holders of record of FBR Group common stock at the close of business on [ l ] [ l ], 2003, the FBR Group record date, are entitled to notice of and to vote at the FBR Group special meeting. On the FBR Group record date, approximately [ l ] shares of FBR Group Class A common stock were issued and outstanding and held by approximately [ l ] holders of record, and [ l ] shares of FBR Group Class B common stock were issued and outstanding and held by [ l ] holders of record. A quorum will be present at the FBR Group special meeting if a majority of the votes entitled to be cast are present, in person or by proxy. If a quorum is not present at the FBR Group special meeting, we expect that the FBR Group special meeting will be adjourned to solicit additional proxies. Holders of record of FBR Group Class A common stock on the FBR Group record date are entitled to one vote per share and holders of record of FBR Group Class B common stock on the FBR Group record date are entitled to three votes per share at the FBR Group special meeting on the proposal to approve the merger agreement.

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Vote Required

      The approval of the merger agreement by FBR Group shareholders requires the affirmative vote of the holders of a majority of the voting power of the outstanding shares entitled to vote at the FBR Group special meeting as of the FBR Group record date, either in person or by proxy, voting as a single class.

Voting by FBR Group Directors and Executive Officers

      At the close of business on the FBR Group record date, FBR Group directors and executive officers, including Messrs. Friedman and Billings, owned and were entitled to vote [ l ] shares of FBR Group Class A common stock and [ l ] shares of FBR Group Class B common stock, representing, in the aggregate, [ l ]% of the outstanding voting power of FBR Group common stock on that date. Each FBR Group director and executive officer has indicated his or her present intention to vote, or cause to be voted, the FBR Group common stock owned by him or her for the approval of the merger agreement.

      Emanuel J. Friedman, the Chairman and Co-Chief Executive Officer of FBR Group, and Eric F. Billings, the Vice Chairman and Co-Chief Executive Officer of FBR Group, together, beneficially own [1,250,000] shares of FBR Group Class A common stock and [17,636,240] shares of FBR Group Class B common stock, representing approximately [53]% of the total voting power of the company. Each of Messrs. Friedman and Billings has agreed to vote his shares of FBR Group common stock in favor of the approval of the merger agreement as long as the merger agreement is in effect, which is sufficient to ensure approval of the merger agreement and the transactions contemplated by the merger agreement by FBR Group shareholders.

Voting of Proxies

      All shares represented by properly executed proxies received in time for the FBR Group special meeting will be voted at the FBR Group special meeting in the manner specified by the shareholders giving those proxies. Properly executed proxies that do not contain voting instructions will be voted for the approval of the merger agreement.

      FBR Group common stock represented at the FBR Group special meeting but not voting, including FBR Group common stock for which proxies have been received but for which holders of shares have abstained, will be treated as present at the FBR Group special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business.

      Only shares affirmatively voted for the approval of the merger agreement, including properly executed proxies that do not contain voting instructions, will be counted as favorable votes for the approval of the merger agreement. An abstention or failure to vote will have the same effect as a vote against the approval of the merger agreement. Also, under New York Stock Exchange rules, brokers that hold shares of FBR Group common stock in street name for customers that are the beneficial owners of those shares may not give a proxy to vote those shares without specific instructions from those customers. If an FBR Group shareholder owns shares through a broker and attends the FBR Group special meeting, the shareholder should bring a letter from that shareholder’s broker identifying that shareholder as the beneficial owner of the shares and acknowledging that you will vote your shares.

      The individuals named as proxies by an FBR Group shareholder may vote for one or more adjournments of the FBR Group special meeting, including adjournments to permit further solicitations of proxies. No proxy voted against the proposal to approve the merger agreement will be voted in favor of any adjournment.

      FBR Group does not expect that any matter other than the proposal to approve the merger agreement will be brought before the FBR Group special meeting. If, however, other matters are properly presented at the FBR Group special meeting, the individuals named as proxies will vote in accordance with the recommendation of the FBR Group board of directors.

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Revocability of Proxies

      Submitting a proxy on the enclosed form does not preclude an FBR Group shareholder from voting in person at the FBR Group special meeting. An FBR Group shareholder may revoke a proxy at any time before it is voted by filing with FBR Group a duly executed revocation of proxy, by submitting a duly executed proxy to FBR Group with a later date or by appearing at the FBR Group special meeting and voting in person. FBR Group shareholders may revoke a proxy by any of these methods, regardless of the method used to deliver a shareholder’s previous proxy. Attendance at the FBR Group special meeting without voting will not itself revoke a proxy.

Solicitation of Proxies

      FBR Group and FBR Asset will share equally the expenses incurred in connection with the printing and mailing of this joint proxy statement/prospectus. In addition to solicitation by mail, the directors, officers and employees of FBR Group and its subsidiaries, who will not be specially compensated, may solicit proxies from FBR Group shareholders by telephone, facsimile, telegram or other electronic means or in person. Arrangements also will be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of shares held of record by these persons, and FBR Group will reimburse them for their reasonable out-of-pocket expenses.

      FBR Group will mail a copy of this joint proxy statement/ prospectus to each holder of record of FBR Group common stock on the FBR Group record date.

      You should not send in any FBR Group share certificates with your proxy card. A letter of transmittal with instructions for the surrender of your FBR Group share certificates will be mailed to you as soon as practicable after completion of the merger.

      FBR Group has retained [ l ] to assist in the solicitation of proxies from banks, brokerage firms, nominees, institutional holders and individual investors for a fee of $[ l ] plus reimbursement for expenses.

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THE FBR ASSET SPECIAL MEETING

      We are furnishing this joint proxy statement/prospectus to FBR Asset shareholders as part of the solicitation of proxies by the FBR Asset board of directors for use at the FBR Asset special meeting.

Date, Time and Place

      FBR Asset will hold its special meeting on [ l ],[ l ] [ l ], 2003, at [ l ] p.m., local time, at [ l ].

Purpose of the FBR Asset Special Meeting

      At the FBR Asset special meeting, we are asking holders of record of FBR Asset common stock to consider and vote on a proposal to approve the merger agreement by and among FBR Asset, FBR Group and Forest Merger Corporation, which we refer to as New FBR, and the transactions contemplated by the merger agreement, and to act upon such other matters as may properly come before the FBR Asset special meeting or any adjournment or postponement thereof. See “The Merger” and “Description of the Transaction Agreements — The Merger Agreement.”

      The FBR Asset board of directors, upon the unanimous recommendation of a special committee consisting entirely of independent directors unaffiliated with FBR Group formed to consider the transaction, after due consideration:

  •  determined that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable and fair to and in the best interests of FBR Asset and FBR Asset shareholders unaffiliated with FBR Group,
 
  •  approved the merger and approved and adopted the merger agreement and the transactions contemplated by the merger agreement,
 
  •  directed that the merger agreement and the transactions contemplated by the merger agreement be submitted to a vote at a meeting of FBR Asset shareholders, and
 
  •  recommended that FBR Asset shareholders approve the merger agreement.

      Based on the unanimous recommendation of the special committee, the FBR Asset board of directors recommends that FBR Asset shareholders vote FOR the approval of the merger agreement.

      Certain directors and officers of FBR Asset will receive financial and other benefits in connection with the merger. For a discussion of the interests of certain persons in the merger, see “The Merger — Interests of Certain Persons in the Merger.”

FBR Asset Record Date; Shares Entitled to Vote; Quorum

      Only holders of record of FBR Asset common stock at the close of business on [ l ] [ l ], 2003, the FBR Asset record date, are entitled to notice of and to vote at the FBR Asset special meeting. On the FBR Asset record date, approximately [ l ] shares of FBR Asset common stock were issued and outstanding and held by approximately [ l ] holders of record. A quorum will be present at the FBR Asset special meeting if shareholders entitled to cast a majority of the votes entitled to be cast at the meeting are present, in person or by proxy. If a quorum is not present at the FBR Asset special meeting, we expect that the FBR Asset special meeting will be adjourned to solicit additional proxies. Holders of record of FBR Asset common stock on the FBR Asset record date are entitled to one vote per share at the FBR Asset special meeting on the proposal to approve the merger agreement.

Vote Required

      The approval of the merger agreement by FBR Asset shareholders requires the affirmative vote of the holders of more than two-thirds of the shares outstanding and entitled to vote at the FBR Asset special meeting as of the FBR Asset record date, either in person or by proxy.

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Voting by FBR Asset Directors and Executive Officers

      At the close of business on the FBR Asset record date, FBR Asset directors and executive officers owned and were entitled to vote [ l ]% of the FBR Asset common stock outstanding on that date. Each FBR Asset director and executive officer has indicated his or her present intention to vote, or cause to be voted, the FBR Asset common stock owned by him or her for the approval of the merger agreement.

Voting by FBR Group

      At the close of business on the FBR Asset record date, FBR Group beneficially owned and was entitled to vote approximately [10]% of the FBR Asset common stock outstanding on that date. In the merger agreement, FBR Group has agreed to vote the FBR Asset common stock beneficially owned by it for the approval of the merger agreement, unless the merger agreement is terminated prior to the FBR Asset special meeting.

Voting of Proxies

      All shares represented by properly executed proxies received in time for the FBR Asset special meeting will be voted at the FBR Asset special meeting in the manner specified by the shareholders giving those proxies. Properly executed proxies that do not contain voting instructions will be voted for the approval of the merger agreement.

      FBR Asset common stock represented at the FBR Asset special meeting but not voting, including FBR Asset common stock for which proxies have been received but for which holders of shares have abstained, will be treated as present at the FBR Asset special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business.

      Only shares affirmatively voted for the approval of the merger agreement, including properly executed proxies that do not contain voting instructions, will be counted as favorable votes for the approval of the merger agreement. An abstention or failure to vote will have the same effect as a vote against the approval of the merger agreement. Also, under New York Stock Exchange rules, brokers that hold FBR Asset common stock in street name for customers that are the beneficial owners of those shares may not give a proxy to vote those shares without specific instructions from those customers. If an FBR Asset shareholder owns shares through a broker and attends the FBR Asset special meeting, the shareholder should bring a letter from that shareholder’s broker identifying that shareholder as the beneficial owner of the shares and acknowledging that you will vote your shares.

      The individuals named as proxies by an FBR Asset shareholder may vote for one or more adjournments of the FBR Asset special meeting, including adjournments to permit further solicitations of proxies. No proxy voted against the proposal to approve the merger agreement will be voted in favor of any adjournment.

      FBR Asset does not expect that any matter other than the proposal to approve the merger agreement will be brought before the FBR Asset special meeting. If, however, other matters are properly presented at the FBR Asset special meeting, the individuals named as proxies will vote in accordance with the recommendation of the FBR Asset board of directors.

Revocability of Proxies

      Submitting a proxy on the enclosed form does not preclude an FBR Asset shareholder from voting in person at the FBR Asset special meeting. An FBR Asset shareholder may revoke a proxy at any time before it is voted by filing with FBR Asset a duly executed revocation of proxy, by submitting a duly executed proxy to FBR Asset with a later date or by appearing at the FBR Asset special meeting and voting in person. FBR Asset shareholders may revoke a proxy by any of these methods, regardless of the method used to deliver a shareholder’s previous proxy. Attendance at the FBR Asset special meeting without voting will not itself revoke a proxy.

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Solicitation of Proxies

      FBR Group and FBR Asset will share equally the expenses incurred in connection with the printing and mailing of this joint proxy statement/prospectus. In addition to solicitation by mail, the directors, officers and employees of FBR Asset and its subsidiaries, who will not be specially compensated, may solicit proxies from FBR Asset shareholders by telephone, facsimile, telegram or other electronic means or in person. Arrangements will also be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of shares held of record by these persons, and FBR Asset will reimburse them for their reasonable out-of-pocket expenses.

      FBR Asset will mail a copy of this joint proxy statement/ prospectus to each holder of record of FBR Asset common stock on the FBR Asset record date.

      You should not send in any FBR Asset share certificates with your proxy card. A letter of transmittal with instructions for the surrender of your FBR Asset share certificates will be mailed to you as soon as practicable after completion of the merger.

      FBR Asset has retained [ l ] to assist in the solicitation of proxies from banks, brokerage firms, nominees, institutional holders and individual investors for a fee of $[ l ] plus reimbursement for expenses.

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THE MERGER

      The discussion in this joint proxy statement/ prospectus of the merger and the principal terms of the merger agreement is subject to, and is qualified in its entirety by reference to, the merger agreement, a copy of which is attached as Annex A to this joint proxy statement/ prospectus and is incorporated by reference in this joint proxy statement/ prospectus.

General Description of the Merger

      Pursuant to the merger agreement, FBR Asset will merge with and into New FBR and, immediately following that merger, FBR Group will merge with and into New FBR, with New FBR continuing as the surviving corporation to both mergers. In the merger, each outstanding share of FBR Group Class A common stock will be converted into the right to receive one share of New FBR Class A common stock, each outstanding share of FBR Group Class B common stock will be converted into the right to receive one share of New FBR Class B common stock, and each outstanding share of FBR Asset common stock will be converted into the right to receive 3.65 shares of New FBR Class A common stock.

      As a result of the merger, FBR Group and FBR Asset will cease to exist, and New FBR will survive the merger and own and operate the businesses currently owned and operated by FBR Group and FBR Asset. Former FBR Group shareholders will hold approximately [37]% of the economic interest and [55]% of the total voting power of New FBR, and former FBR Asset shareholders will hold approximately [63]% of the economic interest and [45]% of the total voting power of New FBR.

Background to the Merger

      FBR Group, through a wholly-owned subsidiary, has managed FBR Asset pursuant to a management agreement since FBR Asset’s formation in November 1997. Since that time, FBR Group has maintained a significant equity interest in FBR Asset, which represented approximately [10%] of FBR Asset’s outstanding stock as of [[ l ] [ l ], 2003]. In addition, Eric F. Billings, the Co-Chief Executive Officer and Vice Chairman of FBR Group, serves as the Chairman and Chief Executive Officer of FBR Asset, Emanuel J. Friedman, the Co-Chief Executive Officer and Chairman of FBR Group, serves as a director of FBR Asset, and the other executive officers of FBR Asset are either officers of or otherwise employed by FBR Group. The three remaining directors of FBR Asset, Peter A. Gallagher, Stephen D. Harlan and Russell C. Lindner, are independent directors of FBR Asset with no affiliation with FBR Group.

      In the course of their regular strategic planning, members of FBR Group management have periodically reviewed and considered FBR Group’s relationship with FBR Asset, and in early September 2002 they began to consider whether a combination of FBR Group and FBR Asset might be beneficial to both companies. At that time, members of FBR Group senior management informed Messrs. Gallagher, Harlan and Lindner that they were interested in exploring the possibility of such a transaction. The independent FBR Asset directors indicated that a mutually beneficial transaction might be possible and said that they would be willing, in their capacity as independent directors of FBR Asset, to consider a proposal if FBR Group decided to make one. In light of the significant equity interest of Messrs. Friedman and Billings in FBR Group, their being directors of both FBR Group and FBR Asset and the relationship between the companies, FBR Group and FBR Asset management considered that it would be prudent and appropriate for the boards of directors of both companies to form special committees excluding Messrs. Friedman and Billings to consider any proposal or transaction that might develop.

      On September 10, 2002, at a special meeting of the FBR Group board, FBR management advised the board that it was considering the possibility of such a transaction. The FBR Group board resolved to form a special committee of directors, consisting of Daniel J. Altobello and Wallace L. Timmeny, neither of whom is an officer of FBR Group, and delegated to that committee the authority to consider, evaluate and approve or reject any such proposal or transaction on behalf of FBR Group. The FBR Group special committee was formed to ensure that the exploration of a transaction would take into account the best interests of FBR Group and its shareholders, including the disinterested public shareholders of FBR Group, and that any transaction not in the best interests of the disinterested public shareholders of FBR Group would be rejected.

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      At a regularly scheduled meeting on September 12, 2002, the FBR Asset board met and discussed with members of FBR Group and FBR Asset management the possibility of a combination with FBR Group. At the September 12th meeting, representatives from FBR Asset’s regular outside legal counsel, Hunton & Williams, made a presentation to the board about the fiduciary duties of directors of a Virginia corporation in general and in the context of a possible business combination transaction. Upon the advice of such outside counsel, the FBR Asset board formed a special committee of directors, consisting of Messrs. Gallagher, Harlan and Lindner, none of whom is an affiliate of FBR Group, to consider and negotiate the terms of such a transaction and evaluate the fairness of such a transaction to the holders of FBR Asset common stock other than FBR Group if FBR Group were to present a proposal.

      After the September 12, 2002 meeting of the FBR Asset board, the FBR Asset special committee met several times to discuss the hiring of legal and financial advisors in connection with its evaluation of a possible transaction. At a meeting of the FBR special committee held on September 13, 2002, the FBR Asset special committee elected Mr. Harlan to act as its chairman and engaged Hogan & Hartson L.L.P. as its legal advisor. Shortly thereafter, after interviewing several potential financial advisors, the FBR Asset special committee engaged Lehman Brothers Inc. as its financial advisor in connection with the possible transaction.

      At a meeting of the FBR Asset board held on September 23, 2002, the members of the FBR Asset special committee requested that the FBR Asset board consider, and the FBR Asset board adopted unanimously, resolutions proposed by the FBR Asset special committee to expand the authority of the FBR Asset special committee to specifically include, among other things, the ability to consider potential strategic alternatives to a possible transaction with FBR Group in the event that FBR Group were to make a proposal for a possible transaction.

      Management of FBR Group continued to contemplate the possibility of a transaction, and the board and special committee of FBR Group met separately and discussed the hiring of legal and financial advisors in connection with their evaluation of a possible transaction. The FBR Group board engaged Wachtell, Lipton, Rosen & Katz as FBR Group’s legal advisor and the FBR Group special committee, after considering several potential legal advisors, engaged Baker Botts L.L.P. as legal advisor to the special committee. The FBR Group special committee also engaged Goldman, Sachs & Co. (who had been working with FBR Group) as financial advisor to the FBR Group special committee in connection with the possible transaction, after considering the need for and interviewing an alternative financial advisory firm.

      Effective as of October 1, 2002, John T. Wall was elected to the FBR Group board to fill a pre-existing vacancy. Mr. Wall was also appointed to the FBR Group special committee.

      On October 7, 2002, following discussions in which FBR Group expressed its concerns about the risk to both companies of premature disclosure and its willingness to continue explorations on a confidential basis only, FBR Asset and FBR Group entered into a confidentiality agreement. In the succeeding weeks, the parties and their advisors conducted due diligence investigations, which included the exchange of documents as well as discussions with members of management. FBR Group’s and the FBR Asset special committee’s legal advisors also had general discussions as to how a transaction might be structured, taking into account tax considerations in particular.

      On October 21, 2002, the FBR Group special committee met to discuss the status of negotiations relating to a potential combination of FBR Group and FBR Asset. Goldman Sachs prepared and delivered a report to the members of the FBR Group special committee summarizing the potential transaction and the status of the parties’ due diligence reviews.

      On October 23 and October 29, 2002, members of FBR Group and FBR Asset management, including Messrs. Friedman and Billings and Richard J. Hendrix, the President and Chief Operating Officer of FBR Asset and Senior Managing Director of the FBR Group subsidiary that manages FBR Asset, had discussions with the FBR Asset special committee about the potential strategic and other benefits of a combination of FBR Group and FBR Asset. During these discussions, FBR Group management indicated that the potential transaction they were exploring was a stock-for-stock merger at roughly a market-price based exchange ratio but which would seek to preserve the fundamental investment characteristics of the FBR Asset stock

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including in terms of dividends, book value and earnings per share. It was noted that the then-current ratio of the trading prices of shares of FBR Asset common stock and FBR Group Class A common stock was approximately 3.1 shares of FBR Group Class A common stock to one share of FBR Asset common stock. In the course of these discussions, FBR Group management explained that all discussions were subject to the willingness of the FBR Group special committee to proceed, and noted that the founders and controlling shareholders of FBR Group, Messrs. Friedman and Billings, would only be willing to proceed if a transaction could be structured that retained the voting rights of their shares of FBR Group Class B common stock.

      On October 30, 2002, the FBR Asset special committee met to review the status of the discussions with FBR Group. As part of this review, the FBR Asset special committee also discussed with its advisors certain strategic alternatives available to FBR Asset in lieu of a possible transaction with FBR Group, including a strategic transaction with another mortgage REIT, liquidation, or maintaining its current structure as a stand alone, externally managed company. The FBR Asset special committee, after discussions with its financial advisors, formed the belief that the transaction with FBR Group would maximize shareholder value more than another strategic transaction. Lehman Brothers noted that in liquidation, after taking into account the expenses to be incurred and the likely market discount on the liquidation of its assets, FBR Asset shareholders would likely receive less than FBR Asset’s current book value. Maintaining FBR Asset’s current structure was, however, a viable and attractive alternative. Therefore, it was the view of the FBR Asset special committee, after receiving the advice of its financial and legal advisors, that a market exchange ratio would not be in the best interests of the FBR Asset shareholders not affiliated with FBR Group, and that any potential transaction with FBR Group would have to include a significant premium for FBR Asset shareholders in order to merit further exploration. On October 31, 2002, Mr. Harlan spoke with Messrs. Friedman and Billings and relayed to them the FBR Asset special committee’s view. During a discussion on the same day with the FBR Asset special committee, Mr. Friedman asked whether, assuming approval by the FBR Group special committee, the FBR Asset special committee would consider an exchange ratio in the range of 3.25 shares of FBR Group common stock for each share of FBR Asset common stock. Mr. Harlan, on behalf of the FBR Asset special committee, informed Mr. Friedman that the FBR Asset special committee would review such exchange ratio with its advisors.

      On November 1, 2002, the FBR Asset special committee met telephonically, together with their financial and legal advisors, to discuss the positive and negative factors of a 3.25 exchange ratio. The FBR Asset special committee met telephonically again on November 2, 2002 and unanimously agreed that a possible transaction with FBR Group at a 3.25 exchange ratio would not be in the best interests of the FBR Asset shareholders not affiliated with FBR Group. Mr. Harlan communicated this position to Messrs. Friedman and Billings on November 2, 2002 and informed them that the FBR Asset special committee believed that it was only worth continuing to explore a possible transaction if FBR Group would be able to offer an exchange ratio substantially higher than the range previously discussed. Mr. Harlan further stated that, in light of the parties’ different views as to the appropriate nature of the possible transaction, the FBR Asset special committee had instructed its advisors not to review the draft merger agreement delivered by FBR Group’s legal advisors on November 1, 2002 or to engage in any discussions or negotiations concerning a potential transaction.

      On November 4, 2002, Mr. Billings met with Mr. Harlan and discussed FBR Group’s views as to the value of each of FBR Group and FBR Asset and how an appropriate exchange ratio might be determined. Mr. Harlan advised Mr. Billings that he thought it might be useful for he and Mr. Friedman to present their analysis directly to the full FBR Asset special committee.

      On November 5, 2002, Messrs. Friedman and Billings, as well as other senior officers of FBR Group, met with the FBR Asset special committee and its legal and financial advisors. FBR Group’s legal advisors and Goldman Sachs were also present at the meeting in person or by telephone. At the meeting, Messrs. Friedman and Billings presented an analysis of the historical and projected earnings of each of FBR Group and FBR Asset, and the portions of a combined company’s pro forma earnings that each company would be likely to contribute. On the basis of this analysis, Messrs. Friedman and Billings concluded that in their view, an exchange ratio of 3.5 would be fair to both companies, reiterating that neither FBR Group’s board nor the FBR Group special committee had considered or approved a formal proposal at an exchange ratio of 3.5.

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      After caucusing separately with its financial and legal advisors, the FBR Asset special committee informed Messrs. Friedman and Billings that they would not be able to recommend a transaction at that exchange ratio and that they believed the exchange ratio would have to be significantly higher, in part to reflect what was, in the opinion of the FBR Asset special committee, an acquisition by FBR Group’s controlling shareholders of significant voting power with respect to FBR Asset’s business. Mr. Harlan also indicated that, in addition to the exchange ratio, certain other key governance and management issues, particularly concerning board composition of the combined company and executive compensation, would have to be resolved before the FBR Asset special committee could recommend any potential transaction. Messrs. Friedman and Billings responded that they believed an exchange ratio above 3.5 would not be acceptable to the FBR Group board or the FBR Group special committee.

      On November 6, 2002, Messrs. Friedman and Billings requested that the FBR Asset special committee meet with them for a further discussion of the parties’ views of a potential transaction. Messrs. Harlan and Lindner met with Messrs. Friedman and Billings. Mr. Gallagher was unable to attend. Messrs. Friedman and Billings reiterated that they did not believe that an exchange ratio above 3.5 would be acceptable to the FBR Group board or the FBR Group special committee. Messrs. Harlan and Lindner expressed the FBR Asset special committee’s concerns about a potential transaction at a 3.5 exchange ratio. The parties believed that they could have a fundamental disagreement about the relative values of the two companies and agreed to have Goldman Sachs and Lehman Brothers continue to talk about issues surrounding their valuation perspectives and a potential transaction.

      On November 8, 2002, the FBR Asset special committee met with its financial and legal advisors and discussed valuation metrics, as well as a number of other possible terms of the transaction. The members of the FBR Asset special committee agreed that they would reiterate to FBR Group that a 3.5 exchange ratio was unacceptable and would outline other potential deal terms, including the right to terminate any possible merger agreement if the price of a share of FBR Group Class A common stock dropped below an agreed-upon price.

      On November 9, 2002, Mr. Harlan called Messrs. Friedman and Billings and said that the FBR Asset special committee would be prepared to consider an exchange ratio of 3.7, but only together with a number of other terms of the transaction, including among others, mechanisms to protect the value to be received by shareholders, primarily through a walk-away right, the dividend policy of the combined company, key management issues such as executive compensation, employment agreements for Messrs. Friedman and Billings and key man life insurance for Messrs. Friedman and Billings, and issues relating to the terms of an extension of the existing management contract, which was set to expire in December 2002. Goldman Sachs and Lehman Brothers continued to discuss valuation metrics.

      On the morning of November 11, 2002, the FBR Group board met, together with FBR Group’s legal advisors and Goldman Sachs. It was the consensus of the FBR Group board at the November 11th meeting that an exchange ratio of 3.7 would be unacceptable. Following the board meeting, the FBR Group special committee met, together with its financial advisor. Goldman Sachs reviewed the financial terms of the proposed transaction with the members of the FBR Group special committee. The FBR Group special committee resolved that FBR Group management should formally offer to the FBR Asset special committee a merger at an exchange ratio of 3.5. The FBR Group special committee further resolved that FBR Group management be authorized to negotiate an exchange rate as high as 3.6. After the FBR Group board and FBR Group special committee meetings, Messrs. Friedman and Billings, other senior officers of FBR Group and FBR Group’s legal advisors met with the FBR Asset special committee and its legal and financial advisors. The FBR Asset special committee outlined its views of the potential positive and negative factors associated with a potential transaction with FBR Group and reiterated its position that the exchange ratio should be 3.7 and that the special committee was not prepared to propose a lower number. Messrs. Friedman and Billings replied that FBR Group was not prepared to propose an exchange ratio higher than 3.5. After further discussions regarding other terms of the transaction important to the FBR Asset special committee, including the possible ability to maintain FBR Asset’s current dividend policy, possible pricing control mechanisms such as a floating exchange ratio, pricing collar or walk-away rights, possible employment contracts and key man life insurance for Messrs. Friedman and Billings, the maintenance of Messrs. Friedman’s and Billings’s

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ownership interest in the combined company and issues relating to the extension of the existing management contract pending the consummation of a potential transaction, the FBR Asset special committee consulted with its legal and financial advisors and FBR Group management consulted with its legal advisors and Goldman Sachs and the parties concluded the meeting without agreement and determined to cease their discussions regarding a possible transaction. A representative of FBR Group management called members of the FBR Group special committee to inform them that the FBR Asset special committee was not willing to accept an exchange ratio below 3.7.

      In the late afternoon of November 11, 2002, Mr. Friedman called Mr. Harlan and indicated that the FBR Group special committee had authorized FBR Group management to propose an exchange ratio of 3.6, subject to the resolution of other terms of the transaction.

      After consulting telephonically with the other members of the FBR Asset special committee and the special committee’s financial and legal advisors, the FBR Asset special committee unanimously agreed, and Mr. Harlan informed Mr. Friedman, that, subject to satisfactory resolution of other terms, the FBR Asset special committee was prepared to consider an exchange ratio of 3.65. Mr Friedman responded that 3.65 was not acceptable to FBR Group. Following these discussions, the FBR Group board met and discussed these developments.

      On the morning of November 12, 2002, Mr. Hendrix contacted Mr. Harlan and asked whether the FBR Asset special committee would be prepared to work to reach a definitive agreement promptly if the FBR Group special committee were to accept an exchange ratio of 3.65. Mr. Hendrix also reviewed with Mr. Harlan the positions of the FBR Group board and the FBR Group special committee on the other transaction issues that had been raised by the FBR Asset special committee. Mr. Hendrix informed Mr. Harlan that FBR Group already had key man insurance on each of Messrs. Friedman and Billings and that FBR Group’s policy was not to enter into employment agreements. Mr. Hendrix noted, however, that if an agreement with respect to the exchange ratio could be reached, Messrs. Friedman and Billings would each be willing to agree to certain volume limitations on any potential sale of shares of the combined company by them, FBR Group would agree to customary fiduciary exceptions from any no solicitation covenant, subject to a customary termination fee, FBR Group would agree that Messrs. Harlan, Gallagher and Lindner would be members of the board of directors of the combined company, and FBR Group would agree to extend the current management contract until the earlier of the consummation of any potential transaction or 60 days after the termination of the merger agreement. Mr. Hendrix further indicated that management intended, if possible, to maintain FBR Asset’s current dividend policy in 2003. The FBR Asset special committee then met telephonically with its financial and legal advisors to discuss further a possible transaction at an exchange ratio of 3.65 together with other transaction terms, including the walk-away right. The FBR Asset special committee unanimously agreed, and Mr. Harlan informed Mr. Hendrix, that the FBR Asset special committee and its advisors were prepared to move quickly to negotiate and finalize an agreement if FBR Group was prepared to do so as well.

      In the afternoon of November 12th, the FBR Group board and the FBR Group special committee met telephonically and consulted with their legal advisors and Goldman Sachs. It was the view of the FBR Group board and the FBR Group special committee that management and its advisors should work to negotiate and finalize drafts of definitive agreements for the board and special committee to consider on the basis of a 3.65 exchange ratio.

      On November 13 and 14, 2002, FBR Group’s legal advisors and the FBR Asset special committee’s legal advisors negotiated the scope of each company’s representations, warranties and operational covenants, the walk-away right, board composition, no solicitation covenants, termination fees and other terms of the merger agreement, the voting agreements, the shareholder agreements and the extension of the management agreement. During the course of these negotiations, the legal advisors consulted with FBR Group management and the FBR Asset special committee.

      On the evening of November 14, 2002, each of the FBR Group special committee and the FBR Group board met and reviewed the terms of the merger agreement with FBR Group management, the legal advisors to the FBR Group board and the FBR Group special committee and Goldman Sachs. At the meetings,

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Goldman Sachs delivered its opinion, dated as of November 14, 2002, to the FBR Group board and the FBR Group special committee that, based upon and subject to the factors and assumptions set forth in such opinion, the exchange ratio of one share of New FBR Class A common stock to be received for each share of FBR Group Class A common stock pursuant to the merger agreement is fair from a financial point of view to the holders of FBR Group Class A common stock. The FBR Group special committee then convened separately and unanimously found that the merger agreement and the transactions contemplated thereby were fair to and in the best interests of the holders of FBR Group Class A common stock, and, on the unanimous recommendation of the FBR Group special committee, the FBR Group board unanimously approved the merger agreement and the transactions contemplated thereby.

      On the same evening, the FBR Asset special committee met and reviewed the terms of the merger agreement with its legal and financial advisors. At the meeting, Hogan & Hartson L.L.P. reiterated its previous advice regarding the fiduciary obligations of the FBR Asset special committee and reviewed with the FBR Asset special committee a summary of its due diligence review of FBR Group and the terms of the merger agreement and related documents. Lehman Brothers then reviewed with the FBR Asset special committee the strategic alternatives available to FBR Asset other than the proposed transaction. The FBR Asset special committee again determined that there was likely no third party that could or would be willing to pay greater than the 3.65x exchange ratio currently offered by FBR Group or to otherwise match the terms of the proposed transaction, including the walk-away right. In addition, Lehman Brothers indicated that its liquidation analysis resulted in an implied valuation range for a share of FBR Asset common stock of $28.08 to $28.99, while the 3.65 exchange ratio offered by FBR Group, based upon the closing price of a share of FBR Group Class A common stock of $9.19 on November 13, 2002, implied a price per FBR Asset common share of $33.54. See “— Opinion of Lehman Brothers.” The FBR Asset special committee again considered maintaining FBR Asset’s current structure. After discussion and advice from its financial and legal advisors, the FBR Asset special committee determined that, because of the many positive factors relating to the proposed transaction with FBR Group, including the 22.2% premium to market price as of November 14, 2002 to be received by FBR Asset shareholders and the removal of potential conflicts of interest by becoming internally managed by FBR Group while still expecting to be able to maintain FBR Asset’s current level of dividends, entering into the proposed transaction was the best alternative available to FBR Asset and the holders of FBR Asset common stock other than FBR Group. See “— FBR Asset Reasons for the Merger.” Lehman Brothers then delivered its oral opinion to the FBR Asset special committee that, based on and subject to the various assumptions and qualifications set forth in such opinion, as of November 14, 2002, the exchange ratio in the transaction was fair to the holders of FBR Asset common stock (other than FBR Group and its affiliates), from a financial point of view. The FBR Asset special committee unanimously found that the merger agreement and the transactions contemplated thereby were fair to and in the best interests of the holders of FBR Asset common stock other than FBR Group and its affiliates. Messrs. Friedman and Billings then joined the members of the FBR Asset special committee, constituting the full board of FBR Asset and, on the unanimous recommendation of the FBR Asset special committee, the FBR Asset board approved the merger agreement and the transactions contemplated thereby by a vote of 3-0, with Messrs. Friedman and Billings recusing themselves from the vote.

      Following approval by each of the parties’ special committees and boards, on the evening of November 14th, the parties executed the merger agreement, the voting agreements, the shareholder agreements and the extension of the management agreement.

FBR Group Reasons for the Merger

      The following discussion of the information and factors considered by the FBR Group special committee and the FBR Group board of directors is not intended to be exhaustive, but includes all material factors considered by the FBR Group special committee and the FBR Group board of directors.

     FBR Group Special Committee

      In reaching its decision to approve the terms of the merger agreement and the transactions contemplated by the merger agreement and to recommend that the FBR Group board of directors approve the merger

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agreement and the transactions contemplated by the merger agreement and declare the advisability of the same, the FBR Group special committee consulted with FBR Group management as well as its legal counsel and financial advisor and carefully considered the following material factors:

  •  the expectation that the transaction would add approximately $700 million of new capital to FBR Group, which is expected to help create new business flexibility and earnings stability;
 
  •  the potential for the transaction to broaden FBR Group’s investor base;
 
  •  the ability to distribute dividends to FBR Group shareholders in a tax-efficient manner as permitted by the REIT tax rules;
 
  •  the expectation that the resulting book equity would improve FBR Group’s visibility and market presence, enhancing overall growth opportunities;
 
  •  the expectation that the merger would be accretive to FBR Group earnings and book value;
 
  •  the expectation that the transaction would allow for more efficient internal access to capital, increasing investment banking growth;
 
  •  the tax benefits and synergies to be created by combining certain of FBR Group’s anticipated real estate investment-related activities with those of FBR Asset in a REIT format, which FBR Group management expected to be approximately $25.1 million in 2003;
 
  •  other possible cost synergies to be created by merging with FBR Asset, including eliminating fees currently paid between FBR Group and FBR Asset;
 
  •  a combined FBR Asset and FBR Group would have an expected equity market capitalization of over $1.2 billion, which could generate greater research coverage and institutional investment as well as potentially increase the trading volume of shares of FBR Group common stock;
 
  •  the expectation that the greater diversity of business as a result of the transaction would help stabilize FBR Group’s revenue stream;
 
  •  the expectation that the merger would be a tax-free transaction for U.S. federal income tax purposes;
 
  •  the terms and conditions of the merger agreement, including the right of FBR Group to terminate the merger agreement if FBR Group’s average closing stock price for the 10 trading days prior to the special meeting is greater than $10.55 per share, and the right to terminate the merger agreement prior to its approval by FBR Group shareholders in the exercise of its fiduciary duty in connection with a superior proposal, subject to a termination fee;
 
  •  the proposed composition of the board of directors and executive officers of New FBR, which would facilitate the integration and assist the continuation of the best practices of FBR Group and FBR Asset following the completion of the merger by providing New FBR with board-level expertise of FBR Group and FBR Asset;
 
  •  the analysis and presentation of Goldman Sachs and the opinion of Goldman Sachs that, as of November 14, 2002, and based upon and subject to the factors and assumptions set forth in the opinion, the exchange ratio of one share of New FBR Class A common stock to be received for each share of FBR Group Class A common stock is fair from a financial point of view to the holders of FBR Group Class A common stock (the written opinion of Goldman Sachs is attached as Annex I to this joint proxy statement/prospectus);
 
  •  the fact that pursuing the merger would preclude possible adverse consequences, including the loss of the management fee revenue to FBR Group that would result if the merger was not consummated and FBR Asset elected not to renew the management agreement between the companies;
 
  •  the expectation that unification of the businesses of FBR Group and FBR Asset would remove some of the confusion in the marketplace resulting from two separate public companies having similar management;

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  •  the likelihood that the transactions contemplated by the merger agreement would be successfully completed;

      The FBR Group special committee considered the following negative factors relating to the merger:

  •  uncertainty regarding how the transaction would affect the trading in FBR Group common stock both before the completion of the merger, as a result of arbitrage activity, and, after the completion of the transaction, as a result of the structure of New FBR;
 
  •  the risk that, under the terms and conditions of the merger agreement, FBR Asset can terminate the merger agreement if the average closing stock price of FBR Group Class A common stock for the 10 trading days prior to the shareholders meetings is less than $8.75 per share;
 
  •  the risk of a third party offering FBR Asset a superior proposal which, if accepted by FBR Asset, would result in the termination of the management agreement between FBR Asset and FBRIM upon 60 days’ prior written notice;
 
  •  the termination fee and expenses of up to $11.3 million payable by FBR Group to FBR Asset under certain circumstances, which may discourage some proposals to acquire FBR Group by a third party because of the increased price that the acquiror would have to pay;
 
  •  the fact that certain benefits would vest as a result of a change in control as a result of the merger;
 
  •  the risk that certain FBR Group shareholders might view the combined company as a different and less desireable investment vehicle for their capital and that sales of shares by such shareholders could temporarily depress the share price of FBR Group common stock; and
 
  •  the timing of receipt and the terms of approvals from appropriate government entities, including the possibility of delay in obtaining satisfactory approvals or the imposition of unfavorable terms or conditions in the approvals.

      The FBR Group special committee also considered the following factors relating to the merger:

  •  the review and analysis of each of FBR Group’s and FBR Asset’s business, financial condition, earnings, risks and prospects;
 
  •  the historical market prices and trading information with respect to the shares of FBR Group common stock and FBR Asset common stock;
 
  •  the comparisons of historical financial measures for FBR Group and FBR Asset, including earnings, return on capital and cash flow, and comparisons of historical operational measures for FBR Group and FBR Asset;
 
  •  the current industry, economic and market conditions; and
 
  •  the interests that certain FBR Group executive officers and directors may have with respect to the merger in addition to their interests as FBR Group shareholders. See “— Interests of FBR Group Directors and Management in the Merger.”

      This discussion of the information and factors that the FBR Group special committee considered in making its decision is not intended to be exhaustive but includes all material factors considered by the FBR Group special committee. In view of the wide variety of factors considered in connection with its evaluation of the transaction and the complexity of those matters, the FBR Group special committee did not find it useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to these factors. In addition, the individual members of the FBR Group special committee may have given different weight to different factors.

      The FBR Group special committee believed that, overall, the positive factors of the transaction to FBR Group and its shareholders substantially outweighed the risks related to the merger, and, therefore, unanimously recommended to the FBR Group board of directors that the merger agreement and the transactions contemplated by the merger agreement be adopted and approved.

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      FBR Group Board of Directors

      In reaching its decision to adopt and approve the merger agreement and the transactions contemplated by the merger agreement, and recommend that FBR Group shareholders approve the merger agreement, the FBR Group board of directors consulted with FBR Group’s management, as well as with its legal counsel and with Goldman Sachs, financial advisor to the FBR Group special committee, and carefully considered the following material factors:

  •  the conclusions and recommendation of the FBR Group special committee;
 
  •  the factors referred to above as having been taken into account by the FBR Group special committee; and
 
  •  FBR Group’s board of directors having received the opinion of Goldman Sachs that, as of November 14, 2002, and based upon and subject to the factors and assumptions set forth in the opinion, the exchange ratio of one share of New FBR Class A common stock to be received for each share of FBR Group Class A common stock is fair from a financial point of view to the holders of FBR Group Class A common stock (the written opinion of Goldman Sachs is attached as Annex I to this joint proxy statement/prospectus).

      This discussion of the information and factors that the FBR Group board of directors considered in making its decision is not intended to be exhaustive but includes all material factors considered by the FBR Group board of directors. In view of the wide variety of factors considered in connection with its evaluation of the transaction and the complexity of those matters, the FBR Group board of directors did not find it useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to these factors. In addition, the individual members of the FBR Group board of directors may have given different weight to different factors.

      The FBR Group board of directors believed that, overall, the potential benefits of the transaction to FBR Group and its shareholders outweighed the risks.

      The FBR Group board of directors, including members of the FBR Group special committee, do not believe that the merger agreement and the transactions contemplated by the merger agreement give rise to any conflict of interest between the holders of FBR Group Class A common stock and FBR Group Class B common stock. Nevertheless, the following procedures were followed in order to ensure that the merger is procedurally fair to the Class A shareholders of FBR Group:

  •  the FBR Group special committee consisted of independent directors appointed to represent the interests of holders of FBR Group common stock;
 
  •  the FBR Group special committee, at the expense of FBR Group, retained and was advised by Baker & Botts L.L.P., its own independent legal counsel, and was assisted by Goldman Sachs, as its financial advisor, in connection with its evaluation of a potential transaction with FBR Asset;
 
  •  the merger consideration and other terms of the merger were the result of extensive negotiations between the management of FBR Group, in consultation with the FBR Group special committee, on the one hand, and the FBR Asset special committee, on the other hand.

Recommendation of the FBR Group Special Committee and the FBR Group Board of Directors

      FBR Group Special Committee

      On November 14, 2002, the FBR Group special committee:

  •  determined that the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of the FBR Group shareholders; and
 
  •  recommended that the FBR Group board of directors approve the merger agreement and the transactions contemplated by the merger agreement, and that the FBR Group board of directors declare the advisability of the same.

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      FBR Group Board of Directors

      On November 14, 2002, the FBR Group board of directors:

  •  determined that the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of FBR Group and its shareholders;
 
  •  approved the merger and approved and adopted the merger agreement and the transactions contemplated by the merger agreement;
 
  •  directed that the merger agreement and the transactions contemplated by the merger agreement be submitted to a vote at a meeting of the FBR Group shareholders; and
 
  •  recommended that the FBR Group shareholders approve the merger agreement and the transactions contemplated by the merger agreement.

      THE FBR GROUP BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF FBR GROUP COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER AGREEMENT.

      Certain directors of FBR Group will receive financial and other benefits in connection with the merger. For a discussion of the interests of certain persons in the merger, see “— Interests of Certain Persons in the Merger.”

FBR Asset Reasons for the Merger

      The following discussion of the information and factors considered by the FBR Asset special committee is not intended to be exhaustive, but includes all material factors considered by the FBR Asset special committee and the FBR Asset board of directors.

      In reaching its conclusions, the FBR Asset special committee consulted with its independent financial and legal advisors, and considered the short- and long-term interests of FBR Asset and its shareholders not affiliated with FBR Group. Set forth below is a discussion of the material positive and negative factors considered by the FBR Asset special committee in making its determination to recommend the merger agreement and the transactions contemplated by the merger agreement to the FBR Asset board of directors.

      The FBR Asset special committee considered the following positive factors:

  •  each share of FBR Asset common stock will be converted into 3.65 shares of New FBR Class A common stock, which, based on the closing price of a share of FBR Group Class A common stock on November 14, 2002, represented a premium of 22.2% over the closing price of shares of FBR Asset common stock on November 14, 2002 (the last business day before the proposed transaction was announced publicly);
 
  •  holders of FBR Asset common stock currently receive a dividend of $1.25 per share per quarter and that, as adjusted to reflect the 3.65 shares of New FBR Class A common stock to be received in the merger for each share of FBR Asset common stock, the holders initially are expected to receive the same distribution per quarter for each share following the completion of the merger;
 
  •  by effectively merging with FBR Group, FBR Asset would become internally managed, thereby eliminating any potential conflicts of interest between FBR Asset and its external manager;
 
  •  the terms and conditions of the merger agreement, including the right of FBR Asset to terminate the merger agreement if FBR Group’s average closing stock price for the 10 trading days prior to the special meeting is less than $8.75 per share, (representing an implied 12.6% premium over the closing price per share of shares of FBR Asset common stock on November 14, 2002), thereby helping to protect the FBR Asset shareholders from a potential decrease in the price of FBR Group Class A common stock;

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  •  the tax benefits and synergies to be created by conducting certain of FBR Group’s traditional real estate investment-related activities in a REIT structure, which would eliminate most of the U.S. federal and state income taxes payable on the income from those activities so long as it is distributed to New FBR shareholders;
 
  •  other possible cost synergies to be created by merging with FBR Group, including eliminating the approximately $32.5 million in fees payable annually to FBR Group under the management agreement;
 
  •  a combined FBR Asset and FBR Group could have more potential to grow revenue and income, without additional outside sources of financing, than FBR Asset on a stand-alone basis because the income generated by the broker-dealer activities of FBR Group will not be required to be distributed to shareholders;
 
  •  FBR Group’s relatively low amount of debt, which is expected to reduce the net debt to book value of FBR Asset from approximately 7:1 to approximately 5:1 on a pro forma combined basis;
 
  •  a combined FBR Asset and FBR Group could be less subject to the risk of reduced earnings in an environment of rising interest rates than FBR Asset on a stand-alone basis due to the revenues generated by FBR Group’s broker-dealer activities;
 
  •  a combined FBR Asset and FBR Group would have an expected equity market capitalization of over $1.2 billion, which could generate greater research coverage and institutional investing, as well as increased trading volume compared to the current market for shares of FBR Asset common stock;
 
  •  the expected accretion to FBR Asset’s earnings per share as a result of the transaction;
 
  •  the expected accretion to FBR Asset’s book value per share as a result of the transaction;
 
  •  the analysis and financial presentation of Lehman Brothers on November 14, 2002 and the opinion of Lehman Brothers rendered to the FBR Asset special committee on November 14, 2002 that, as of November 14, 2002, and based upon and subject to the factors and assumptions set forth in the Lehman Brothers written opinion, the exchange ratio of 3.65 shares of New FBR Class A common stock to be offered for each share of FBR Asset common stock pursuant to the merger agreement and the merger was fair, from a financial point of view, to FBR Asset shareholders other than FBR Group and its affiliates;
 
  •  the fact that the receipt of consideration by FBR Asset shareholders in the merger, except for any cash in lieu of fractional shares, generally will be a tax-free transaction to FBR Asset shareholders; and
 
  •  the likelihood that the transactions contemplated by the merger agreement would be successfully completed.

      The FBR Asset special committee also considered the following negative factors:

  •  the fact that the consideration to be received by holders of shares of FBR Asset common stock consists of shares of New FBR common stock, the exact number of which is based on a fixed exchange ratio of 3.65 shares of New FBR Class A common stock (each share expected to have the same value as a share of FBR Group Class A common stock) for each share of FBR Asset common stock. As a result, a decrease in the trading price per share of FBR Group Class A common stock before the completion of the merger will reduce the value of the per share and aggregate consideration that will be received by the FBR Asset shareholders;
 
  •  the risks associated with receiving the equivalent of shares of FBR Group Class A common stock as consideration in the merger, including the historical volatility of and underperformance in comparison to its peer groups of the market price per share of FBR Group Class A common stock;

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  •  the fact that each share of New FBR Class B common stock will be entitled to three votes per share, resulting in:

    •  former holders of FBR Group Class B common stock controlling approximately [42]% of the voting power of New FBR while holding only approximately [19]% of the economic ownership of New FBR, and
 
    •  FBR Asset shareholders controlling only approximately [45]% voting power of New FBR despite holding approximately [63]% of the economic ownership of New FBR;

  •  the level of FBR Group general and administrative expenses as a percentage of FBR Group revenue;
 
  •  the historical and potential future volatility of FBR Group’s investment banking and other revenues, which tend to vary much more from quarter to quarter than the revenues of FBR Asset;
 
  •  the risk that the market may not understand or approve of the combination of a mortgage REIT and a broker-dealer;
 
  •  the risk that the merger would not be favored by FBR Asset’s shareholders because shareholders in mortgage REITs generally are income-oriented investors, while shareholders of broker-dealers generally are growth-oriented investors;
 
  •  the terms and conditions of the merger agreement, including the right of FBR Group to terminate the merger agreement if FBR Group’s average closing stock price for the 10 trading days prior to the special meeting is greater than $10.55 per share, thereby potentially limiting the potential premium to be received by FBR Asset shareholders in the merger; and
 
  •  the termination fee and expenses of up to $16.7 million payable by FBR Asset to FBR Group under certain circumstances, which may discourage some proposals to acquire FBR Asset by a third party because of the increased price that the acquiror would have to pay.

      The above discussion is not intended to be exhaustive of all factors considered by the FBR Asset special committee, but does set forth all material positive and negative factors considered by the FBR Asset special committee. The members of the FBR Asset special committee unanimously determined the merger to be fair and in the best interests of the FBR Asset shareholders other than FBR Group and its affiliates, and unanimously determined to recommend that the FBR Asset board of directors adopt, approve and declare advisable the merger agreement and the transactions contemplated by the merger agreement in light of the various factors described above and other factors that each member of the FBR Asset special committee felt were appropriate. In addition, the FBR Asset special committee held extensive discussions with its financial and legal advisors with respect to the quantitative and qualitative analysis of the terms of the transaction and the factors described above. In view of the wide variety of factors considered by the FBR Asset special committee in connection with its evaluation of the merger and the complexity of these matters, the FBR Asset special committee did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision. Rather, the FBR Asset special committee made its recommendation based on the totality of the information presented to and the investigation conducted by it. In considering the factors discussed above, individual members of the FBR Asset special committee may have given different weights to different factors.

Recommendation of the FBR Asset Special Committee and the FBR Asset Board of Directors

      The FBR Asset special committee unanimously determined that the merger agreement and the transactions contemplated by the merger agreement are fair to and in the best interests of FBR Asset and FBR Asset shareholders other than FBR Group and its affiliates. The FBR Asset special committee unanimously recommended to the FBR Asset board of directors that the FBR Asset board of directors adopt, approve and declare advisable the merger agreement and the transactions contemplated by the merger agreement.

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      The members of the FBR Asset board of directors unaffiliated with FBR Group, consisting of all of the members of the FBR Asset special committee, unanimously adopted the merger agreement and approved the transactions contemplated by the merger agreement based on their belief that the merger agreement and the transactions contemplated by the merger agreement are advisable, fair and in the best interests of FBR Asset’s shareholders not affiliated with FBR Group, and unanimously recommend approval of the merger agreement and the transactions contemplated by the merger agreement to FBR Asset’s shareholders at the FBR Asset special meeting. In reaching its decision, the FBR Asset board of directors considered the following factors:

  •  the recommendation, conclusion and analyses of the FBR Asset special committee, which the FBR Asset board of directors expressly adopted;
 
  •  the positive and negative factors referred to above that the FBR Asset special committee took into account in its determination; and
 
  •  the fact that the consideration to be paid to FBR Asset shareholders and the other terms of the merger were the result of extensive negotiations between the FBR Asset special committee and representatives of FBR Group.

      The FBR Asset board of directors believes that the merger and the transactions contemplated by the merger agreement and the manner in which they were negotiated and agreed to are procedurally fair to FBR Asset shareholders, including the FBR Asset shareholders unaffiliated with FBR Group, based upon the following factors:

  •  the FBR Asset special committee consisted entirely of non-management, independent directors with no affiliation with FBR Group, whose objective was to represent the interests of FBR Asset shareholders other than with FBR Group and its affiliates;
 
  •  the FBR Asset special committee, at the expense of FBR Asset, retained its own financial advisor, Lehman Brothers, and its own legal advisor, Hogan & Hartson L.L.P., each of which the FBR Asset special committee determined to be independent of FBR Group, to, among other things, negotiate the terms of the merger agreement and the transactions contemplated by the merger agreement and, in the case of Lehman Brothers, render a fairness opinion relating to the fairness, from a financial point of view, of the exchange ratio to be offered in the merger to the holders of FBR Asset common stock (other than FBR Group and its affiliates), on behalf of the FBR Asset shareholders other than FBR Group and its affiliates;
 
  •  the FBR Asset special committee, with the assistance of its advisors, undertook an extensive evaluation of FBR Asset and FBR Group, met 20 times between the time of its formation and the execution of the merger agreement and engaged in extensive meetings and negotiations with FBR Group and its representatives; and
 
  •  the consideration to be paid to FBR Asset shareholders and the other terms of the merger were the result of extensive negotiations between the FBR Asset special committee and representatives of FBR Group.

      In view of the wide variety of factors considered by the FBR Asset board of directors in connection with its evaluation of the merger, the FBR Asset board of directors did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision. In considering the factors discussed above, individual members of the FBR Asset board of directors may have given different weights to different factors.

Certain Financial Projections

      Neither FBR Group nor FBR Asset makes, as a matter of course, public forecasts or projections as to future revenues, earnings, or other financial statement data. However, in connection with the discussions concerning the proposed transaction, members of FBR Group management, in their capacity as management of both FBR Group and FBR Asset, furnished to the boards of directors and the special committees of FBR Group and FBR Asset, as well as to Goldman Sachs and Lehman Brothers, certain projected financial data for

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the 2003 fiscal year. These projections included, among other things, the following forecasts relating to FBR Group, FBR Asset and New FBR:
                                   
Merger New FBR
FBR Group FBR Asset Adjustments Group




(US $ in millions)
Revenues
    331.5       246.5       (69.8 )     508.2  
Expenses
    230.4       121.5       (46.0 )     305.9  
     
     
     
     
 
Pre-Tax Income
    101.1       125.0       (23.8 )     202.3  
 
Tax
    40.4       0.0       (25.1 )     15.3  
     
     
     
     
 
GAAP Net Income
  $ 60.7     $ 125.0     $ 1.3     $ 187.0  
     
     
     
     
 
 
Dividends Paid
                            181.4  
 
Important Information about the Projections

      The projections referred to above were not prepared with a view to public disclosure and are included in this document only because such projections were made available to the boards of directors and special committees of FBR Group and FBR Asset, and to Goldman Sachs and Lehman Brothers. These projections were not prepared with a view to compliance with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants regarding projections or forecasts, or generally accepted accounting principles. Neither the independent accountants of FBR Group or FBR Asset, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the projections and they do not express any opinion or any form of assurance with respect thereto. The projections were not prepared with the approval of either the FBR Group board of directors or special committee or the FBR Asset board of directors or special committee.

      The projections are forward-looking statements that are subject to certain risks and uncertainties and should be read with caution. See “Risk Factors Related to the Merger and New FBR” and “Cautionary Statement Regarding Forward-Looking Statements.” The projections are subjective in many respects and thus susceptible to interpretation and periodic revision based on actual experience and recent developments. While presented with numeric specificity, the projections reflect numerous assumptions made by FBR Group management with respect to industry performance, general business, economic, market and financial conditions and other matters, including assumed interest rates and effective tax rates consistent with historical levels, all of which are difficult to predict and many of which are beyond FBR Group’s, FBR Asset’s and New FBR’s control. Accordingly, there can be no assurance that the assumptions made in preparing the projections will prove accurate, and actual results may be materially greater or less than those contained in the projections. Except to the extent required under the federal securities laws, none of FBR Group, FBR Asset or New FBR intends to make publicly available any update or other revisions to the projections to reflect circumstances existing after the date of the preparation of the projections or the occurrence of future events even in the event that any or all of the assumptions are shown to be in error.

Opinion of Goldman Sachs

      Goldman Sachs rendered its opinion to FBR Group’s special committee of the board of directors and to FBR Group’s board of directors that, as of November 14, 2002, and based upon and subject to the factors and assumptions set forth therein, the exchange ratio of one share of New FBR Class A common stock to be received for each share of FBR Group Class A common stock pursuant to the merger agreement is fair from a financial point of view to the holders of FBR Group Class A common stock.

      The full text of the written opinion of Goldman Sachs, dated November 14, 2002, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex I. FBR Group’s Class A stockholders should read the opinion in its entirety. Goldman Sachs provided its opinion for the information and assistance of FBR Group’s special committee of the board of directors and FBR Group’s board of directors in connection with

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their consideration of the transactions contemplated by the merger agreement. The Goldman Sachs opinion is not a recommendation as to how any holder of FBR Group Class A common stock or FBR Group Class B common stock should vote with respect to the transactions.

      In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

  •  the merger agreement;
 
  •  annual reports to stockholders and annual reports on Form 10-K of FBR Group for the five years ended December 31, 2001 and for FBR Asset for the two years ended December 31, 2001;
 
  •  interim reports to stockholders and Quarterly Reports on Form 10-Q of FBR Group and FBR Asset;
 
  •  other communications from FBR Group and FBR Asset to their respective stockholders;
 
  •  internal financial analyses and forecasts for FBR Group and FBR Asset prepared by their respective managements, including certain pro forma financial analyses and forecasts for New FBR following the completion of the transactions contemplated by the merger agreement prepared by the management of FBR Group; and
 
  •  cost savings and operating synergies projected by the managements of FBR Group and FBR Asset to result from the transactions contemplated by the merger agreement.

      Goldman Sachs also held discussions with members of the senior management of FBR Group and FBR Asset regarding their assessment of the strategic rationale for, and the potential benefits of, the transactions contemplated by the merger agreement and the past and current business operations, financial condition and future prospects of their respective companies, including discussions regarding the extreme sensitivity of the net income and shareholders’ equity of Mortgage REIT companies to changes in interest rates. In addition, Goldman Sachs reviewed the reported price and trading activity for the FBR Group Class A common stock and the FBR Asset common stock, compared certain financial and stock market information for FBR Group and FBR Asset with similar information for certain other companies, the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations in the broker-dealer and mortgage REIT industry specifically and in other industries generally and performed such other studies and analyses as it considered appropriate.

      Goldman Sachs relied upon the accuracy and completeness of all of the financial, accounting, tax and other information discussed with or reviewed by it and assumed such accuracy and completeness for purposes of rendering the opinion described above. Goldman Sachs also assumed, with the consent of FBR Group, that pro forma financial analyses and forecasts for New FBR following completion of the transactions contemplated by the merger agreement prepared by the management of FBR Group were reasonably prepared on a basis reflecting the best currently available estimates and judgments of FBR Group, that cost savings and operating synergies projected by the managements of FBR Group and FBR Asset to result from the transactions contemplated by the merger agreement were reasonably prepared on a basis reflecting the best currently available estimates and judgments of FBR Group and FBR Asset, and that such pro forma financial analyses and forecasts and cost savings and operational synergies will be realized in the amounts and time periods contemplated by the managements of FBR Group and FBR Asset. In addition, Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any derivative or off-balance-sheet assets and liabilities) of FBR Group or FBR Asset or any of their respective subsidiaries. No evaluation or appraisal of the assets or liabilities of FBR Group or FBR Asset or any of their respective subsidiaries was furnished to Goldman Sachs. Goldman Sachs assumed for purposes of rendering the opinion described above that New FBR will be qualified and taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. In addition, the Goldman Sachs opinion does not express any opinion as to the prices at which New FBR Class A common stock may trade if and when they are issued.

      The following is a summary of the material financial analyses used by Goldman Sachs in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs. The order of analyses described does not

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represent relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and alone are not a complete description of Goldman Sachs’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before November 13, 2002 and is not necessarily indicative of current market conditions.

      Discounted Cash Flow Analysis. Goldman Sachs performed a discounted cash flow analysis for FBR Asset pursuant to which indicative ranges of aggregate equity values, equity values per share and premia/discounts to market price were calculated using discount rates ranging from 8.0% to 11.0% and interest rate spreads (the difference between the return on FBR Asset’s portfolio of mortgage backed securities, or MBS portfolio, and the cost of FBR Asset’s funds) ranging from 1.2% to 1.5%. The market price used by Goldman Sachs for purposes of this analysis was the FBR Asset closing price of $28.00 on November 13, 2002.

      The discounted cash flow analysis was based on earnings and dividends estimates for FBR Asset provided by FBR Asset’s management for 2003 and on the following assumptions discussed with FBR Asset’s management for 2004 and each year thereafter: an MBS portfolio of $5.45 billion levered at 9 to 1 debt to equity, interest expense of 2.5%, other pre-tax income of $6.25 million, operating expenses (including base management fee) of $13.04 million, an annual incentive management fee range of $4.11 million to $8.19 million and a 100% dividend payout ratio.

      This analysis indicated an indicative range of aggregate equity values for FBR Asset from $700.1 million to $1,085.2 million, an indicative range of equity values per share of FBR Asset from $27.94 to $43.31 and an indicative range of premia/ discounts to the FBR Asset market price of $28.00 from (0.2)% to 54.7%.

      Selected Companies Analysis in Mortgage REIT Industry and Pro Forma Comparison. Goldman Sachs reviewed and compared certain financial information for FBR Asset and for New FBR on a pro forma basis to corresponding financial information, ratios and public market multiples for the following publicly traded corporations in the (1) Self-Managed Non-Traditional Mortgage REITs, (2) Self-Managed Traditional Mortgage REITs and (3) Externally-Managed Traditional Mortgage REITs segments of the Mortgage REIT industry:

      Non-Traditional Mortgage REITs — Self-Managed

  •  iStar Financial Inc.
 
  •  IMPAC Mortgage Holdings, Inc.
 
  •  Novastar Financial Inc.

      Traditional Mortgage REITs — Self-Managed

  •  Annaly Mortgage Management, Inc.
 
  •  Redwood Trust, Inc.
 
  •  Rait Investment Trust
 
  •  MFA Mortgage Investments, Inc.
 
  •  Anworth Mortgage Asset Corporation
 
  •  Capstead Mortgage Corporation

      Traditional Mortgage REITs — Externally-Managed

  •  Thornburg Mortgage, Inc.
 
  •  Anthracite Capital, Inc.
 
  •  Apex Mortgage Capital, Inc.

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      Although none of the selected companies is directly comparable to FBR Asset, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of FBR Asset.

      Goldman Sachs calculated and compared various financial multiples and ratios based on the following:

  •  historical financial data for the selected mortgage REITs, FBR Asset and FBR Group at or for the twelve months ended June 30, 2002;
 
  •  median IBES earnings estimates for the selected mortgage REITs and FBR Asset;
 
  •  estimates prepared by FBR Asset’s management for FBR Asset;
 
  •  estimates prepared by FBR Asset’s and FBR Group’s managements for New FBR; and
 
  •  per share closing prices for the selected mortgage REITs, FBR Asset and FBR Group on November 13, 2002.

      Goldman Sachs calculated the selected companies’ estimated calendar years 2002 and 2003 price to earnings ratios, price to tangible book value ratios and indicated dividend yields and compared the results to the corresponding results for FBR Asset and for New FBR on a pro forma basis. The pro forma comparison assumed a share price of New FBR equal to the share price of FBR Group at an exchange ratio of 3.65 New FBR shares for each FBR Asset share (while noting that the actual share price of New FBR may be different) and excluded the amortization of the market-to-market adjustment related to the MBS premium (“MBS Premium Amortization”).

      The following table presents the results of this analysis:

                                 
Price/Earnings

Price/Tangible Indicated
2002E 2003E Book Value Dividend Yield




FBR Asset (Assuming IBES Earnings Estimates)
    4.8x       5.6x       1.05x       17.9 %
FBR Asset (Assuming Management Earnings Estimates)
    4.6x       5.6x       1.05x       20.7 %
New FBR (Assuming Constant FBR Group Share Price and Management Earnings Estimates)
    7.2x       6.0x       1.38x       11.3 %
Median — Non-Traditional Mortgage REITs — Self-Managed (Assuming IBES Earnings Estimates)
    5.9x       5.8x       1.62x       16.0 %
Median — Traditional Mortgage REITs — Self- Managed (Assuming IBES Earnings Estimates)
    6.1x       6.2x       1.35x       15.4 %
Median — Traditional Mortgage REITs — Externally-Managed (Assuming IBES Earnings Estimates)
    6.3x       6.0x       0.96x       13.7 %
Median — All (Assuming IBES Earnings Estimates)
    6.1x       6.1x       1.35x       15.4 %

      Selected Companies Analysis in Broker/Dealer Industry and Pro Forma Comparison. Goldman Sachs reviewed and compared certain financial information for FBR Group and for New FBR on a pro forma basis to corresponding financial information, ratios and public market multiples for the following publicly traded corporations in the Large Cap and Mid and Small Cap segments of the Broker/ Dealer industry:

      Large Cap

  •  Morgan Stanley
 
  •  Goldman, Sachs & Co.

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  •  Merrill Lynch & Co., Inc.
 
  •  Lehman Brothers Inc.

      Mid and Small Cap

  •  Bear, Stearns Co. Inc.
 
  •  Legg Mason, Inc.
 
  •  A.G. Edwards & Sons, Inc.
 
  •  Raymond James Financial, Inc.
 
  •  Jefferies Group, Inc.
 
  •  Knight Trading Group, Inc.
 
  •  Fahnestock Viner Holdings, Inc.
 
  •  SWS Group, Inc.
 
  •  SoundView Technology Group, Inc.

      Although none of the selected companies is directly comparable to FBR Group, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of FBR Group.

      Goldman Sachs calculated and compared various financial multiples and ratios based on the following:

  •  historical financial data at or for the twelve months ended June 2002 for Merrill Lynch & Co., Inc., Legg Mason, Inc., Raymond James Financial, Inc., Friedman, Billings, Ramsey Group, Inc., FBR Asset Investment Corporation, Fahnestock Viner Holdings, Inc., SoundView Technology Group, Inc., Knight Trading Group, Inc., SWS Group, Inc. and Jefferies Group, Inc. and historical financial data at or for the twelve months ended May 2002 for Goldman, Sachs & Co., Morgan Stanley, Lehman Brothers Inc., Bear, Stearns Co. Inc. and A.G. Edwards & Sons, Inc.;
 
  •  median IBES earnings estimates for the selected companies;
 
  •  estimates prepared by FBR Group’s management for FBR Group;
 
  •  estimates prepared by FBR Asset’s and FBR Group’s managements for New FBR; and
 
  •  per share closing prices for the selected companies and FBR Group on November 13, 2002.

      Goldman Sachs calculated the selected companies’ calendar years 2002 and 2003 price to earnings ratios, price to book ratios (excluding accumulated other comprehensive income, or AOCI) and indicated dividend yields and compared the results to the corresponding results for FBR Group, FBR Group excluding the FBR Asset-related businesses and New FBR on a pro forma basis. The pro forma comparison assumed a share price of New FBR equal to the share price of FBR Group at an exchange ratio of 3.65 New FBR shares for each FBR Asset share (while noting that the actual share price of New FBR may be different) and excluded the MBS Premium Amortization.

      Estimates for FBR Group excluding FBR Asset-related businesses were based on FBR Group management estimates, assuming (1) $160 million in estimated market capitalization for the FBR Asset-related businesses (based on $28.5 million of estimated after-tax income related to FBR Asset-related businesses for 2003 and the FBR Asset price to 2003 estimated earnings multiple of 5.6x), (2) earnings related to FBR Asset in 2002 of $27.1 million, and (3) earnings related to FBR Asset in 2003 of $28.5 million.

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      The following table presents the results of this analysis:

                                 
Price/Earnings

Price/Book Indicated
Selected Companies 2002E 2003E (Excl. AOCI) Dividend Yield





FBR Group (Assuming Management Earnings Estimates)
    7.8x       7.3x       2.05 x     0.0 %
FBR Group, excluding FBR Asset-Related Businesses (Assuming Management Earnings Estimates)
    9.6x       8.7x              
New FBR (Assuming Constant FBR Group Share Price and Management Earnings Estimates)
    7.2x       6.0x       1.21 x     11.3 %
Large Cap — Median (Assuming IBES Estimates)
    14.4x       12.4x       1.91 x     1.2 %
Mid and Small Cap — Median (Assuming IBES Estimates)
    17.8x       15.5x       1.15 x     0.9 %

      Analysis of Pro Forma Financial Data. Goldman Sachs analyzed the merger based on estimates for FBR Group and FBR Asset, on a stand-alone basis, prepared by their respective managements and on estimates for New FBR prepared by FBR Asset’s and FBR Group’s managements, including estimates of the tax synergies and the MBS Premium Amortization expense resulting from the merger provided by FBR Group’s management.

      Goldman Sachs’ analyses indicated that, based on the closing price of FBR Asset on November 13, 2002, the exchange ratio of 3.65 New FBR shares for each FBR Asset share represented an implied premium to market of 19.8% for the FBR Asset stockholders, or a total premium of $124.5 million. For the ten trading days ending November 13, 2002, the exchange ratio of 3.65 New FBR shares for each FBR Asset share represented an implied premium to the average closing price for FBR Asset common stock during that period of 17.4%, or a total premium of $114.8 million. In addition, based on the closing price of FBR as of November 13, 2002, an exchange ratio of 3.65 New FBR shares for each FBR Asset share represented an implied 1.30x price to December 31, 2002 estimated book value (excluding AOCI) multiple and an implied 6.7x price to estimated 2003 earnings multiple for FBR Asset.

      Goldman Sachs also compared the following:

  •  estimated tangible book value per share (excluding AOCI) as of December 31, 2002 and estimated book value per share (excluding AOCI) as of December 31, 2002 of FBR Group and FBR Asset, on a stand-alone basis, to the corresponding estimated pro forma results per share of New FBR;
 
  •  estimated 2003 net income per share of FBR Group and FBR Asset, on a stand-alone basis, to the pro forma corresponding estimated 2003 net income per share (excluding the MBS Premium Amortization) of New FBR;
 
  •  estimated 2003 net income per share of FBR Group and FBR Asset, on a stand-alone basis, to the pro forma corresponding estimated 2003 net income per share (including the MBS Premium Amortization) of New FBR; and
 
  •  estimated 2003 dividend of FBR Group and FBR Asset, on a stand-alone basis, to the corresponding estimated pro forma dividend for New FBR, assuming no earnings distribution from the taxable REIT subsidiaries to the REIT in 2003.

      Goldman Sachs performed these analyses based on the closing prices of FBR Group and FBR Asset on November 13, 2002. These analyses indicated that the proposed transaction would be accretive to FBR Group’s stockholders and FBR Asset’s stockholders on a per share basis for each of the metrics described above, with the exception of the pro forma dilution to FBR Asset’s stockholders of (1) the estimated tangible book value per share (excluding AOCI) as of December 31, 2002 and (2) the estimated dividend per share for 2003, assuming no earnings distribution from the taxable REIT subsidiaries to the REIT in 2003. Assuming a distribution to the REIT of approximately 27% of the estimated 2003 earnings of the taxable

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REIT subsidiaries, the analysis indicated there would be no dilution to the FBR Asset stockholders on an estimated dividend per share basis for 2003.

      Goldman Sachs also analyzed New FBR’s hypothetical pro forma value. Assuming a hypothetical pro forma value of New FBR based on (1) the average 2003 earnings multiple of FBR Group and FBR Asset (6.2x price to 2003 estimated earnings), (2) the 2003 earnings estimate (excluding the MBS Premium Amortization) for New FBR based on FBR Group’s and FBR Asset’s managements estimates, (3) an exchange ratio of 3.65 New FBR shares for each FBR Asset share, and (4) the share prices for FBR Group and FBR Asset on November 13, 2002, the merger is accretive to value for both FBR Group’s stockholders and FBR Asset’s stockholders. This analysis also indicated that for FBR Group stockholders to break-even on an implied share value basis, New FBR would have to trade at least at a multiple of 6.0x price to estimated 2003 earnings and for FBR Asset stockholders to break-even on an implied share value basis, New FBR would have to trade at least at a multiple of 5.0x price to estimated 2003 earnings.

      In addition, Goldman Sachs’ analysis indicated that assuming a hypothetical pro forma value of New FBR based on (1) the average tangible book value multiple of FBR Group and FBR Asset (1.32x price to estimated December 31, 2002 tangible book value (excluding AOCI)), (2) the estimated December 31, 2002 tangible book value of New FBR based on FBR Group’s and FBR Asset’s managements estimates, (3) an exchange ratio of 3.65 New FBR shares for each FBR Asset share, and (4) the share prices for FBR Group and FBR Asset on November 13, 2002, the merger is dilutive to value for FBR Group stockholders and accretive to value for FBR Asset stockholders. This analysis also indicated that, for FBR Group’s stockholders to break-even on an implied share value basis, New FBR would have to trade at least at a multiple of 1.38x price to an estimated December 31, 2002 tangible book value (excluding AOCI) and, for FBR Asset stockholders to break-even on an implied share value basis, New FBR would have to trade at least at a multiple of 1.15x price to an estimated tangible December 31, 2002 book value (excluding AOCI) multiple.

      Pro Forma Regression Analysis. In order to analyze the market valuations for Mortgage REITs, Goldman Sachs examined the correlation between price to book value and return on average common equity. As Mortgage REITs generally pay out most of their earnings in dividends and Mortgage REIT investors seem to value Mortgage REITS in part based on dividend yields, a higher return on equity should generally lead to a higher price to book value multiple.

      Goldman Sachs performed an exponential regression analysis of the correlation between (1) the ratio of price (based on November 13, 2002 market prices) to June 30, 2002 book values (excluding AOCI) and (2) estimated return on average common equity, or ROACE, based on 2003 IBES estimates, including the following companies: Annaly Mortgage Management, Inc., Anthracite Capital, Inc., Anworth Mortgage Asset Corporation, Apex Mortgage Capital, Novastar Financial, Inc., IMPAC Mortgage Holdings, Inc., iStar Financial Inc., MFA Mortgage Investments, Inc., Redwood Trust, Inc., and Thornburg Mortgage, Inc. This regression analysis produced an R-squared value of 41.4%.

      This analysis indicated that Self-Managed Traditional Mortgage REITs, such as Annaly Mortgage Management, Inc., Anworth Mortgage Asset Corporation, MFA Mortgage Investments, Inc. and Redwood Trust, Inc., trade at price to book value multiples approximately equal to or higher than implied by the regression analysis and that Externally-Managed Traditional Mortgage REITS, such as FBR Asset, Anthracite Capital, Inc., Apex Mortgage Capital, Inc., and Thornburg Mortgage, Inc., trade at price to book value multiples approximately equal to or lower than implied by the regression analysis.

      The regression analysis implied a price to book value multiple of 1.12x for FBR Asset on a standalone basis, versus the actual multiple as of November 13, 2002 of 1.05x. The discount of the actual multiple relative to the implied multiple is consistent with the observation, indicated above, that Externally-Managed Traditional Mortgage REITs traded at price to book value multiples approximately equal to or lower than implied by the regression analysis. For New FBR, the regression analysis implied a price to book multiple of 1.17x. Given that New FBR will be a Self-Managed Mortgage REIT, a price to book value multiple in excess of 1.17x would be consistent with the observation, indicated above, that Self-Managed Mortgage REITs traded at price to book value multiples approximately equal to or higher than implied by the regression analysis.

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      Historical Exchange Ratio Analysis. Goldman Sachs computed the historical exchange ratios of FBR Asset and FBR Group stock prices for various periods and dates during the period from January 1, 2000 to November 13, 2002. The following table presents the results of this analysis:

Historical Exchange Ratio Analysis

     
Historical Period Exchange Ratio


January 1, 2000 to November 13, 2002
  3.07x
November 14, 2001 to November 13, 2002
  3.70x
October 31, 2002 to November 13, 2002
  3.11x
On November 13, 2002
  3.05x

      Dividend Yield Analysis. Goldman Sachs analyzed the indicated 2002 annual dividend yields and the 2003 estimated dividend yields for FBR Asset and New FBR based on a share price of New FBR equal to the share price of FBR Group. Goldman Sachs then compared these dividend yields to the dividend yields of the following selected companies from the Self-Managed Non-Traditional Mortgage REITs, Self-Managed Traditional Mortgage REITs and Externally-Managed Traditional Mortgage REITs segments of the Mortgage REIT industry.

      Non-Traditional Mortgage REITs — Self-Managed

  •  iStar Financial Inc.
 
  •  IMPAC Mortgage Holdings, Inc.
 
  •  Novastar Financial Inc.

      Traditional Mortgage REITs — Self-Managed

  •  Annaly Mortgage Management, Inc.
 
  •  Redwood Trust, Inc.
 
  •  Rait Investment Trust
 
  •  MFA Mortgage Investments, Inc.
 
  •  Anworth Mortgage Asset Corporation
 
  •  Capstead Mortgage Corporation

      Traditional Mortgage REITs — Externally-Managed

  •  Thornburg Mortgage, Inc.
 
  •  Anthracite Capital, Inc.
 
  •  Apex Mortgage Capital, Inc.

      Goldman Sachs calculated (1) the indicated 2002 annual dividends of the selected companies and FBR Asset based on the latest quarterly dividend and (2) the 2003 estimated dividends based on the 2003 IBES earnings estimates and estimated dividend payout ratios based on 2002 IBES earnings estimates and indicated 2002 annual dividends calculated as described above (except for FBR Asset and Anworth which assumed a 100% dividend payout ratio). For FBR Asset, Goldman Sachs also calculated the indicated 2002 annual dividend and the estimated 2003 dividend based on FBR Asset’s management’s estimates. For New FBR, Goldman Sachs calculated the indicated 2002 annual dividend and the estimated 2003 dividend based on FBR Asset’s and FBR Group’s managements estimates, assuming no earnings distribution from the taxable REIT subsidiaries to the REIT in 2003.

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      The results of this analysis are summarized in the following chart.

                                   
Indicated 2002 Annual 2003E


Dividend Dividend Dividend Dividend
Per Share Yield Per Share Yield




FBR Asset
                               
 
IBES Estimates
  $ 5.00       17.9 %   $ 4.98       17.8 %
 
Management Estimates
  $ 5.80       20.7 %   $ 4.99       17.8 %
 
Pro Forma (Constant FBR Group Share Price)
  $ 3.80       11.3 %   $ 4.82       14.4 %
Non-Traditional Mortgage REITs — Self-Managed Median (IBES Estimates)
  $ 2.52       16.0 %   $ 2.72       16.2 %
Traditional Mortgage REITs — Self-Managed Median (IBES Estimates)
  $ 2.46       15.4 %   $ 2.56       13.3 %
Traditional Mortgage REITs — Externally-Managed Median (IBES Estimates)
  $ 2.00       13.7 %   $ 1.54       14.4 %
Median — All (IBES Estimates)
  $ 2.36       15.4 %   $ 2.19       14.4 %

      The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to New FBR, FBR Group or FBR Asset or the contemplated transaction.

      Goldman Sachs prepared these analyses solely for purposes of Goldman Sachs’ providing its opinion to the special committee of FBR Group’s board of directors and to FBR Group’s board of directors as to the fairness from a financial point of view of the transaction. These analyses do not purport to be appraisals or necessarily to reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of New FBR, FBR Group, FBR Asset, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

      As described above, Goldman Sachs’ opinion was one of many factors taken into consideration by the special committee of the FBR Group board of directors and the FBR Group board of directors in making their respective determinations to approve the merger agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of Goldman Sachs attached as Annex I.

      Goldman Sachs, as part of its investment banking business, is continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities and private placements as well as for estate, corporate and other purposes. Goldman Sachs is familiar with FBR Group having acted as its financial advisor from time to time, including having acted as financial advisor to the special committee of the FBR Group board of directors in connection with, and having participated in certain of the negotiations leading to, the merger agreement. Goldman Sachs also may provide investment banking services to New FBR and its affiliates in the future. The FBR Group special committee of the board of directors selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the contemplated transactions.

      Goldman Sachs provides a full range of financial, advisory and securities services and, in the course of its normal trading activities, may from time to time effect transactions and hold positions in the debt or equity

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securities, including derivative securities, of FBR Group, FBR Asset or New FBR for its own account and for the accounts of customers.

      Pursuant to a letter agreement dated November 11, 2002, FBR Group’s special committee of the board of directors engaged Goldman Sachs to act as its financial advisor in connection with the contemplated transactions. Pursuant to the terms of this engagement letter, FBR Group has agreed to pay Goldman Sachs a transaction fee of $3 million, which is payable upon completion of the transaction. In addition, FBR Group has agreed to reimburse Goldman Sachs for its reasonable expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.

Opinion of Lehman Brothers

      In September 2002, the FBR Asset special committee engaged Lehman Brothers to act as its financial advisor with respect to evaluating strategic alternatives available to FBR Asset, including a possible transaction with FBR Group. On November 14, 2002, Lehman Brothers rendered its oral opinion (subsequently confirmed in writing) to the FBR Asset special committee that, as of such date, and, based upon and subject to certain matters stated in its written opinion, from a financial point of view the exchange ratio of 3.65 shares of New FBR Class A common stock for each share of FBR Asset common stock to be offered to the holders of FBR Asset common stock in the merger was fair to the holders of FBR Asset common stock other than FBR Group and its affiliates.

      The full text of Lehman Brothers’ written opinion, dated November 14, 2002, is attached as Annex J to this Joint Proxy Statement-Prospectus. Shareholders may read such opinion for a discussion of the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Lehman Brothers in rendering its opinion. The following is a summary of the Lehman Brothers opinion and the methodology that Lehman Brothers used to render its fairness opinion.

      Lehman Brothers’ advisory services and opinion were provided for the information and assistance of the FBR Asset special committee in connection with its consideration of the merger. Lehman Brothers’ opinion is not intended to be and does not constitute a recommendation to any holder of FBR Asset common stock as to how such holder should vote on the approval of the merger. Lehman Brothers was not requested to opine as to, and Lehman Brothers’ opinion does not address, the FBR Asset special committee’s underlying business decision to proceed with or effect the merger.

      In arriving at its opinion, Lehman Brothers reviewed and analyzed:

        1.     the merger agreement and the specific terms of the transactions contemplated by the merger agreement, including the governance of New FBR following the merger;
 
        2.     publicly available information concerning FBR Asset and FBR Group that Lehman Brothers believed to be relevant to its analysis, including FBR Asset’s and FBR Group’s Annual Reports on Forms 10-K for the fiscal year ended December 31, 2001, Quarterly Reports on Forms 10-Q for the quarters ended March 31, and June 30, 2002, and earnings releases for the quarter ended September 30, 2002;
 
        3.     financial and operating information with respect to the business, operations and prospects of FBR Asset furnished to Lehman Brothers by FBR Asset, including financial projections of FBR Asset prepared by management of FBR Asset;
 
        4.     financial and operating information with respect to the business, operations and prospects of FBR Group furnished to Lehman Brothers by FBR Group, including financial projections of FBR Group prepared by management of FBR Group;
 
        5.     a trading history of FBR Asset common stock from September 29, 1999 (the date of the initial public offering of the FBR Asset common stock) to November 13, 2002 and a comparison of that trading history with those of other companies that Lehman Brothers deemed relevant (the “peer group”);

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        6.     a trading history of FBR Group Class A common stock from December 27, 1997 (the date of the initial public offering of FBR Group Class A common stock) to November 13, 2002, and a comparison of that trading history with those of other companies that Lehman Brothers deemed relevant;
 
        7.     a comparison of the historical financial results and present financial condition of FBR Asset with those of other companies that Lehman Brothers deemed relevant;
 
        8.     a comparison of the historical financial results and present financial condition of FBR Group with those of other companies that Lehman Brothers deemed relevant;
 
        9.     the potential pro forma effect of the merger on the future financial performance of a combined FBR Asset and FBR Group, including the cost savings and tax benefits that the managements of FBR Asset and FBR Group expect to result from a combination of the businesses of FBR Asset and FBR Group;
 
        10.     publicly available reports prepared by independent research analysts regarding the future financial performance of FBR Asset;
 
        11.     the amount of cash dividends that managements of FBR Asset and FBR Group expect New FBR to pay following the completion of the merger; and
 
        12.     a comparison of the financial terms of the merger with the financial terms of certain other transactions that Lehman Brothers deemed relevant.

      In addition, Lehman Brothers had discussions with the managements of FBR Asset and FBR Group concerning their respective businesses, operations, assets, financial conditions and prospects and undertook such other studies, analyses and investigations as Lehman Brothers deemed appropriate.

      In arriving at its opinion, Lehman Brothers assumed and relied upon the accuracy and completeness of the financial and other information used by Lehman Brothers without assuming any responsibility for independent verification of such information. Lehman Brothers further relied upon the assurances of the managements of FBR Asset and FBR Group that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the projections for FBR Asset, upon advice of FBR Asset, Lehman Brothers assumed that such projections have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of FBR Asset as to the future performance of FBR Asset. With respect to the projections for FBR Group, upon advice of FBR Group, Lehman Brothers assumed that such projections have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of FBR Group as to the future performance of FBR Group, and, following discussions with management of FBR Group, Lehman Brothers further assumed that FBR Group would perform substantially in accordance with such projections. With respect to the cost savings and tax benefits that the managements of FBR Asset and FBR Group expect to result from a combination of the businesses of FBR Asset and FBR Group, upon advice of FBR Asset and FBR Group, Lehman Brothers has assumed that such cost savings and tax benefits will be realized substantially in accordance with such estimates. In arriving at its opinion, Lehman Brothers did not make or obtain any evaluations or appraisals of the assets or liabilities of FBR Asset or FBR Group. Upon advice of FBR Asset and FBR Group, Lehman Brothers assumed that (1) New FBR’s organization and intended method of operation will enable it to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code, (2) the merger of FBR Asset with and into New FBR will qualify as a reorganization under Section 368(a) of the Internal Revenue Code, and, therefore, as a tax-free transaction to the shareholders of FBR Asset, (3) the merger of FBR Group with and into New FBR will qualify as a reorganization under Section 368(a)(1)(A) of the Internal Revenue Code, and therefore as a tax-free transaction to the shareholders of FBR Group and (4) the merger agreement will constitute a plan of reorganization under Sections 354 and 361 of the Internal Revenue Code.

      In addition, Lehman Brothers expressed no opinion as to (1) the prices at which FBR Asset common stock or FBR Group Class A common stock will trade at any time following the announcement of the merger, (2) the prices at which New FBR Class A common stock will trade following the completion of the merger or

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(3) the impact that a change in interest rates would have on the market price of the FBR Asset common stock in the absence of the proposed merger in comparison to the impact that such a change has on the market prices of the shares of common stock of the companies included in the peer group. In addition, Lehman Brothers’ opinion should not be viewed as providing any assurance that (1) the market value of shares of New FBR Class A common stock to be held by the shareholders of FBR Asset after the completion of the merger will be in excess of the market value of shares of FBR Asset common stock owned by such shareholders at any time prior to the announcement or the completion of the merger or (2) the amount of cash dividends that the shareholders of FBR Asset will receive following the completion of the merger will equal or exceed the amount of cash dividends that the shareholders of FBR Asset would have received if the proposed merger was not completed.

      Lehman Brothers’ opinion was necessarily based upon market, economic and other conditions as they existed on, and could be evaluated as of, the date of such opinion.

      No limitations were imposed by the FBR Asset special committee on the scope of Lehman Brothers’ investigation or the procedures to be followed by Lehman Brothers in rendering its opinion, except that the FBR Asset special committee did not authorize Lehman Brothers to solicit, and Lehman Brothers did not solicit, any indications of interest from any third party with respect to the purchase of all or a part of the business of FBR Asset. In connection with rendering its opinion, Lehman Brothers performed certain financial, comparative and other analyses as described below. In arriving at its opinion, Lehman Brothers did not ascribe a specific range of value to FBR Asset or FBR Group, but rather made its determination as to the fairness, from a financial point of view, to holders of FBR Asset common stock (other than FBR Group and its affiliates) of the exchange ratio to be offered in merger on the basis of financial and comparative analyses. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial and comparative analysis and the application of those methods to the particular circumstances, and therefore, an opinion is not readily susceptible to summary description. Furthermore, in arriving at its opinion, Lehman Brothers did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Lehman Brothers believes that its analyses must be considered as a whole and that considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Lehman Brothers made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of FBR Asset and FBR Group. None of FBR Asset, FBR Group, Lehman Brothers or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses were not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold.

      The following is a summary of the material financial analyses used by Lehman Brothers in connection with providing its opinion to the FBR Asset special committee. Certain of the summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Lehman Brothers, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Accordingly, the analyses listed in the tables and described below must be considered as a whole. Considering any portion of such analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Lehman Brothers’ opinion.

 
      Stock Trading History

      Lehman Brothers considered historical data with regard to the trading price of FBR Asset common stock for the period from September 29, 1999 (the date of the initial public offering of the FBR Asset common

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stock) to November 13, 2002 and the relative stock price performances during this same period of FBR Asset and a mortgage REIT peer group, the peer group, consisting of:

  •  Annaly Mortgage Management, Inc.
 
  •  Apex Mortgage Capital, Inc.
 
  •  Capstead Mortgage Corp.
 
  •  Impac Mortgage Holdings, Inc.
 
  •  NovaStar Financial, Inc.
 
  •  Redwood Trust, Inc.
 
  •  Thornburg Mortgage Inc.

      During the period from November 13, 2001 to November 13, 2002, the closing price per of FBR Asset common stock ranged from $22.15 to $36.95 per share.

      Lehman Brothers also considered historical data with regard to the trading price of FBR Group Class A common stock for the period from December 27, 1997 (the date of the initial public offering of FBR Group Class A common stock) to November 13, 2002, and the relative stock price performances during this same period of FBR Group, a large capitalization group of broker-dealers consisting of Bear, Stearns & Co. Inc., Goldman Sachs Group, Inc. and Lehman Brothers Holdings Inc. (the “large cap peer group”) and a small capitalization group of broker-dealers consisting of A.G. Edwards, Inc., Jefferies Group, Inc., Legg Mason, Inc., Raymond James Financial, Inc., SWS Group, Inc. and Stifel Financial Corp. (the “small cap peer group”). During the period from November 13, 2001 to November 13, 2002 the closing price per share of FBR Group Class A common stock ranged from $4.50 to $12.88.

 
      Historical Exchange Ratio Analysis

      Lehman Brothers also compared the historical per share prices of FBR Asset and FBR Group common stock during different periods since September 29, 1999 (the date of the initial public offering of FBR Asset common stock) to November 14, 2002 in order to determine the implied average exchange ratio that existed for those periods. The following table indicates the average exchange ratio of FBR Group Class A common stock for FBR Asset common stock for the periods indicated:

         
Implied Average
Exchange Ratio(1)

At November 13, 2002
    3.05x  
10-day period
    3.11x  
20-day period
    3.04x  
30-day period
    3.08x  
60-day period
    3.17x  
6 Month
    3.15x  
Year-to-date
    3.40x  
One-year period
    3.53x  
Three-year period
    2.82x  
Period Since FBR Asset Initial Public Offering
    2.79x  

(1)  Represents average closing price of a share of FBR Asset common stock for the indicated period divided by the average closing price of a share of FBR Group Class A common stock for the same period.

      Lehman Brothers noted that the 3.65x exchange ratio is above the implied average exchange ratios presented above.

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      Comparable Company Analysis

      In order to assess how the public market values shares of similar publicly traded companies, Lehman Brothers reviewed and compared specific financial and operating data relating to FBR Asset with the companies comprising the peer group. Using publicly available information, Lehman Brothers calculated and analyzed each company’s current stock price to its historical and projected earnings per share (commonly referred to as a price earnings ratio, or “P/E”) and each company’s dividend yield, and the ratio of stock price to the value of the company’s common equity. The following table indicates the median values for the peer group and the implied price per share of FBR Asset common stock that result from multiplying the relevant FBR Asset data by the peer group median values.

                                 
Price to 2003
Last Quarter 2003 Estimated
Annualized Estimated Earnings Per Price/
Dividend Yield Dividend Yield Share Common Equity




Peer Group Median
    16.3 %     16.1 %(1)     6.2 x(2)     1.14 x
FBR Asset Data
  $ 5.00 (3)   $ 5.00 (4)   $ 5.00 (4)   $ 29.06 (5)
Implied Valuation
  $ 30.49     $ 30.67     $ 30.50     $ 33.42  


(1)  Peer group’s 2003 estimated dividend yields assume a payout of 100% of taxable income in 2003 and are based upon projected data from I/B/E/S International, Inc.
 
(2)  Peer group’s multiple of stock price to 2003 projected earnings per share are based upon data from IBES.
 
(3)  Actual last quarter dividend of $1.25 per share of FBR Asset common stock annualized.
 
(4)  Based on management projections for 2003 cash earnings per share of $5.00 and assumes 100% dividend payout.
 
(5)  Book value per share as of 9/30/02.

      Using the peer group median multiples, Lehman Brothers noted that the implied equity values per share of FBR Asset common stock ranged from $30.49 to $33.42. Lehman Brothers noted that the implied price per share of $33.54 offered in the merger based upon the 3.65 exchange ratio and the closing price per share of a FBR Group Class A common stock of $9.19 on November 13, 2002 was above the relative implied equity values of the peer group.

      However, because of the inherent differences between the mortgage portfolio, business, operations and prospects of FBR Asset and the mortgage portfolio, business, operations and prospects of the companies included in the peer group, Lehman Brothers believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the comparable company analysis and, accordingly, also made qualitative judgments concerning differences between the financial and operating characteristics and prospects of FBR Asset and the companies included in the peer group that would affect the public trading values of each.

 
      Liquidation/Net Asset Value Analysis

      Lehman Brothers performed a liquidation analysis of FBR Asset by subtracting FBR Asset’s liabilities and certain costs related to a hypothetical liquidation of FBR Asset from the estimated market value of FBR Asset’s mortgage-backed securities, equity securities and certain other assets. Lehman Brothers’ liquidation analysis was based on information and valuations supplied by FBR Asset’s management. FBR Asset management provided Lehman Brothers with FBR Asset’s balance sheet as of September 30, 2002, which reported book value (including Accumulated Other Comprehensive Income) of $728 million, or $29.03 per share. In performing its liquidation analysis, Lehman Brothers assumed that, based on the current market environment, FBR Asset would have to sell its portfolios of mortgage-backed securities, equity securities and certain other assets at a discount and that FBR Asset would incur transaction costs in connection with the liquidation of the portfolios. Lehman Brothers discussed these adjustments with the management of FBR Asset and management agreed with the reasonableness of the use of such adjustments for the purpose of this analysis. Applying discounts to the publicly traded equity portfolio ranging from 0% to 20% and 0% to 30% to the private equity investments as well as liquidation costs ranging from $1.0 million to $1.5 million resulted in

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an implied valuation range for a share of FBR Asset common stock of $28.08 to $28.99 per share. Lehman Brothers noted that the implied price per share of FBR Asset common stock of $33.54 offered in the merger based upon the 3.65 exchange ratio and the closing price per share of FBR Group Class A common stock of $9.19 on November 13, 2002, was above the implied valuation range of the liquidation analysis.
 
      Pro Forma Analysis

      Lehman Brothers analyzed the pro forma effect of the merger on the 2003 estimated earnings per share, the book value per share, the tangible book value per share, the return on assets for the quarter ended September 30, 2002 on an annualized basis, or “LQA,” and the LQA return on equity of FBR Asset. For the purposes of this analysis, Lehman Brothers assumed (1) a book value of $718.0 million for FBR Asset and $256.4 million for FBR Group, (2) return on assets and return on equity LQA based on the quarter ended September 30, 2002, (3) a transaction structure with 100% stock consideration in New FBR stock, (4) financial forecasts for each company from managements of FBR Asset and FBR Group, (5) cost savings and synergies from the transaction determined by the managements of FBR Asset and FBR Group, and (6) the payment of an FBR Asset common stock share equivalent of a 2003 dividend of $5.00 per share. Lehman Brothers estimated that, based on the assumptions described above, the pro forma impact of the transaction on the earnings per share, book value per share, LQA return on assets and LQA return on equity of FBR Asset would be 3.4%, 7.3%, 40.2% and 3.9% accretive assuming a December 31, 2002 closing date of the merger, and 6.6% dilutive to tangible book value per share. The financial forecasts that underlie this analysis are subject to substantial uncertainty and, therefore, actual results may be substantially different.

      Lehman Brothers is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with merger and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. The FBR Asset special committee selected Lehman Brothers because of its expertise, reputation and familiarity with the mortgage REIT and broker-dealer industries generally and because of its independence from both FBR Asset and FBR Group.

      As compensation for its services in connection with the merger, FBR Asset to date has paid to Lehman Brothers fees in the amount of $1.25 million. In addition to such amounts, if the mergers are consummated, FBR Asset has agreed to pay Lehman Brothers a fee equal to 0.30% of the FBR Asset Market Value. For the purpose of calculating such fee, “FBR Asset Market Value” equals the product of (x) the average of the closing prices of a share of FBR Asset common stock on the last five trading days prior to the consummation of the mergers and (y) the sum of (i) the number of outstanding shares of FBR Asset common stock on the date immediately preceding the consummation of the mergers (the “Calculation Date”) and (ii) the number of shares of FBR Asset common stock that would be outstanding on the Calculation Date if all convertible securities, options, stock appreciation rights, warrants or similar rights were vested and exercised on the Calculation Date. In addition, FBR Asset has agreed to reimburse Lehman Brothers for reasonable out-of-pocket expenses incurred in connection with the mergers and to indemnify Lehman Brothers for certain liabilities that may arise out of its engagement by the FBR Asset Special Committee and the rendering of its opinion. In the past, Lehman Brothers entered into two interest rate swap agreements and a master repurchase agreement with FBR Asset related to mortgage-backed securities held by FBR Asset. Lehman Brothers did not receive any compensation from FBR Asset in connection with the swap agreements. Rather, any revenue earned or losses incurred by Lehman Brothers as a result of entering into such agreements is determined by prevailing market conditions over the term of such agreements and subsequent movement in interest rates. FBR Asset has paid Lehman Brothers approximately $[ l ] under the master repurchase agreement. In the ordinary course of its business, Lehman Brothers may actively trade in the debt or equity securities of FBR Asset and FBR Group for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.

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Interests of Certain Persons in the Merger

      Some members of FBR Group’s and FBR Asset’s management, and the members of the FBR Group and FBR Asset boards of directors, have interests in the merger that are different from or in addition to the interests they share with you as FBR Group or FBR Asset shareholders. The FBR Group and FBR Asset boards of directors were aware of these different interests and considered them, among other matters, in approving the merger agreement and the merger. In addition, Messrs. Friedman and Billings, through their ownership of shares of FBR Group Class A common stock and FBR Group Class B common stock, currently control approximately [53]% of the outstanding voting power of FBR Group common stock, and, upon completion of the transaction, will control approximately [29]% of the outstanding voting power of New FBR common stock.

 
      New FBR Directors

      As provided in the merger agreement, upon the completion of the merger, all of the current members of the FBR Group board of directors and the FBR Asset board of directors will become members of the New FBR board of directors. As of [ l ] [ l ], 2003, directors and officers of FBR Group beneficially owned in the aggregate [ l ] shares of FBR Group Class A common stock and [ l ] shares of FBR Group Class B common stock, representing [ l ]% of the economic interest and [ l ]% of the total voting power of FBR Group. As of [ l ] [ l ], 2003, directors and officers of FBR Asset beneficially owned in the aggregate [ l ] shares of FBR Asset Class A common stock, representing [ l ]% of the economic interest and [ l ]% of the total voting power of FBR Asset. Upon completion of the merger, directors and officers of New FBR will beneficially own in the aggregate approximately [ l ] shares of New FBR Class A common stock and [ l ] shares of New FBR Class B common stock, representing [ l ]% of the economic interest and [ l ]% of the total voting power of New FBR.

 
      Equity Compensation Plans

      The merger agreement provides that, upon the completion of the merger, each outstanding and unexercised stock option to purchase shares of FBR Group Class A common stock granted under FBR Group stock-based plans, as well as each outstanding and unexercised stock option to purchase shares of FBR Asset common stock granted under FBR Asset stock-based plans, will be converted into an option to acquire New FBR Class A common stock. Appropriate adjustments will be made to the exercise price of, and number of shares subject to, each stock option, in accordance with the exchange ratios. Following completion of the merger, New FBR plans to continue granting equity-based awards, such as stock options and restricted stock, pursuant to the FBR Stock and Annual Incentive Plan and the FBR Asset Investment Corporation Stock Incentive Plan, with appropriate adjustments made to the aggregate grant limits under those plans in accordance with the exchange ratios.

      Approval of the merger by FBR Group shareholders and FBR Asset shareholders will constitute a “change in control” under the stock-based compensation plans of FBR Group and FBR Asset, respectively. Under both FBR Group’s and FBR Asset’s stock-based plans, unvested stock options held by employees and directors become fully vested and exercisable, and all restrictions on restricted stock awards lapse, upon a change in control of FBR Group or FBR Asset, respectively. Although the stock option plan of FBR Group permits each employee holder of a stock option, at any point during the 60-day period beginning on the date of a change in control, to “cash-out” the stock option and receive an amount per share equal to the excess of (1) the highest reported sales price per share reported on the New York Stock Exchange during the 60-day period culminating on the date of shareholder approval over (2) the exercise price of the stock option, all executive officers of FBR Group and FBR Asset have waived this cash-out right. As of [ l ] [ l ], [ l ], Robert B. Smith, Richard J. Hendrix, Kurt Harrington and William J. Ginivan held unvested options to purchase [ l ], [ l ], [ l ] and [ l ] shares of FBR Group Class A common stock, respectively, all of which will vest upon approval of the merger agreement by FBR Group shareholders. As of [ l ] [ l ], [ l ], Messrs. Hendrix, Harrington and Ginivan held [ l ], [ l ] and [ l ] shares of restricted FBR Asset Class A common stock, respectively. No non-employee directors of FBR Group or FBR Asset currently hold unvested stock options or restricted stock.

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      FBR Group Stock Purchase and Loan Plan

      Messrs. Smith and Ginivan have purchased 150,000 and 50,000 shares of FBR Group Class A common stock under the FBR Stock Purchase and Loan Plan, respectively. Under this plan, certain key FBR Group employees were loaned funds in 2001 by FBR Group in order to facilitate the purchase of shares of FBR Group Class A common stock. The shares of FBR Group Class A common stock are held by FBR Group as collateral for the loans, and employees are generally not permitted to sell any of the shares until the second anniversary of purchase. Upon a “change in control” of FBR Group, employees may immediately sell shares, although they must then either immediately repay the underlying loan or provide alternative collateral acceptable to FBR Group. Approval of the merger by the FBR Group shareholders will constitute a change in control for purposes of the plan.

Listing of New FBR Capital Stock

      It is a condition to the completion of the merger that New FBR Class A common stock issuable to FBR Group shareholders and FBR Asset shareholders pursuant to the merger agreement and the shares of New FBR Class A common stock issuable upon conversion of New FBR Class B common stock to be issued in the merger be approved for listing on the New York Stock Exchange.

Transfer Agent and Registrar

      The American Stock Transfer & Trust Company is the transfer agent and registrar for FBR Group common stock and FBR Asset common stock as of the date of this joint proxy statement/ prospectus. The American Stock Transfer & Trust Company is expected to be the transfer agent and registrar for New FBR common stock.

Investment and Operational Policies of New FBR

      New FBR will be an opportunistic investor and will not have specific guidelines or policies dictating specific investment or operating restrictions. New FBR may take the following actions without the consent of New FBR shareholders:

  •  borrow money;
 
  •  make loans to other companies;
 
  •  invest in securities of other issuers for the purpose of exercising control;
 
  •  sell existing investments and make additional investments;
 
  •  underwrite securities of other issuers; and
 
  •  repurchase or otherwise reacquire our shares.

      New FBR also may issue preferred stock that has liquidation and dividend preferences over the outstanding common stock or offer securities in exchange for property. New FBR plans to distribute an annual report, including New FBR’s audited financial statements, to shareholders as required under the securities laws.

 
      Investment Policies and Asset Allocation of New FBR

      New FBR’s goal, subject to maintaining REIT qualification, will be to make investments that it believes will generate the highest risk adjusted returns on capital invested or that hold strategic value to New FBR. To determine which assets are likely to meet these criteria, New FBR will employ an investment policy for allocation of its assets which considers:

  •  the amount and nature of anticipated cash flows from the asset;
 
  •  the risks of investing in the asset;

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  •  our ability to pledge the asset to secure collateralized borrowings;
 
  •  the capital requirements for purchasing and financing the asset;
 
  •  the potential for appreciation and depreciation of the asset’s value;
 
  •  the cost of financing, hedging and managing the asset; and
 
  •  the strategic value of the asset to New FBR.

      With regard to specific investments, New FBR may invest directly or indirectly in any type of loan, equity security, financial asset, real estate or mortgage-backed security, subject to the policy that it maintains its qualification as a REIT and exemption from registration as an investment company. New FBR will seek what it considers to be attractive opportunities to invest on a privately-negotiated basis as well as in the public markets. For example, New FBR believes there will be opportunities to co-invest with other REIT and non-REIT investors seeking to complete planned acquisitions, to provide mezzanine loans, and to provide private equity financing. In addition, New FBR will continue the operation of FBR Group’s capital markets and asset management businesses. The capital markets business will include an institutional investment banking and securities broker-dealer, and an online broker-dealer and securities distributor. The asset management business will be engaged in investment management and advisory services to hedge funds, private equity venture capital funds, managed accounts and mutual funds. The asset management business may also hold investments, as principal, in several of the funds that it manages and other investments acquired in connection with its business.

      Currently, New FBR intends to allocate approximately 60% of its equity capital to mortgage-backed securities. However, the amount of equity capital allocated to any investment category will vary depending on management’s determination of the best allocation of equity capital based on current investment opportunities available to New FBR, the current market environment and management’s view of future economic and market conditions. New FBR expects that investment opportunities will change from time to time. New FBR’s investment policies will be subject to change without shareholder approval. New FBR will be able to change the allocation of its assets without restriction, subject only to the policy that it maintains qualification as a REIT and exemption from registration as an investment company.

 
      Mezzanine and Senior Loan Program

      New FBR will provide mezzanine and senior loans to companies in need of short-term to medium-term financing commitments. New FBR’s investment and lending strategy will be to focus on companies that may have a higher risk credit profile and yield higher returns than the typical senior loan made by a commercial bank or other traditional lending institution. New FBR’s loans:

  •  may or may not be secured;
 
  •  may or may not be subordinated;
 
  •  have a variety of repayment structures and sources; and
 
  •  typically compensate for the higher risk profile of our borrowers through higher interest rates rather than equity features.

      New FBR will review various criteria when determining whether to provide a mezzanine loan to a potential borrower, including but not limited to:

  •  the borrower’s projected cash flows over the course of the loan and the likelihood of achieving those projections;
 
  •  the borrower’s ability to service and repay the loan based on the historical results of the borrower;
 
  •  the overall financial leverage of the borrower;
 
  •  the tangible assets of the borrower;

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  •  the liquidation value of the assets collateralizing the loan;
 
  •  alternative sources for repayment of the loan, including the potential for the borrower to undergo a liquidity event that will enable the repayment of the loan;
 
  •  the characteristics of the industry in which the borrower conducts its business;
 
  •  competition faced by the borrower for the sale of its goods or services;
 
  •  the degree to which the borrower’s results are tied to overall economic activity; and
 
  •  the quality, experience and reputation of the borrower’s management team.

      The above criteria and other criteria that New FBR will consider when evaluating a mezzanine or senior financing opportunity provide a general guide for lending and investment decisions, although not all criteria are considered equally in the determination of whether or not to make a loan.

      Through its mezzanine and senior loan program, New FBR plans to invest in companies in the real estate sector as well as in other sectors such as energy, financial services, consumer products and industrial manufacturing, and others that meet the above criteria.

 
      Equity Investments

      In evaluating equity investments, New FBR will follow a value-oriented investment approach. New FBR will focus particularly on the anticipated future cash flows to be generated by the underlying business, discounted by an appropriate rate to reflect both the risk of achieving those cash flows and the alternative uses for the capital to be invested. Other important considerations include:

  •  strength of management;
 
  •  liquidity of the investment;
 
  •  underlying value of the assets owned by the issuer; and
 
  •  prices of similar or comparable securities.

      Real Estate. New FBR will initially own indirect interests in real property through its equity investment in American Financial Realty Trust. As an equity holder, New FBR’s return on investment will not be directly linked to returns on any company’s assets, but will depend upon the authorization and payment of dividends and changes in the price of the equity securities it owns. In the future, New FBR may invest in other companies that own real property.

      New FBR will not initially own any direct interest in real estate. However, New FBR will not be restricted from purchasing real property directly or through joint ventures with affiliated or non-affiliated third parties that purchase real property, and may seek in the future to invest in real property to generate income and to provide itself with the potential for capital appreciation in the value of property owned.

      Real Estate-Related Businesses. The tax rules for qualification as a REIT will limit New FBR’s ability to expand its investments beyond its core direct and indirect investments in mortgage loans, mortgage-backed securities and real estate. Subject to those limits, however, New FBR will invest from time to time in businesses that provide services to real estate owners and operators. In many cases, these investments may provide higher returns than mortgage and real estate assets. For example, New FBR will initially hold an investment in Saxon Capital, Incorporated. Saxon Capital originates, purchases and securitizes mainly non-conforming first residential loans issued to borrowers with higher risk credit profiles. Saxon Capital also buys residential loans from banks, thrifts, credit unions and mortgage brokers, while its subsidiaries write subprime mortgages and handle loan servicing. Although Saxon Capital engages in business nationwide, almost a quarter of its loans are secured by property in California. Accordingly, New FBR may invest in real estate-related businesses in the future.

      Other Non-Real Estate Related Investments. Subject to maintaining qualification as a REIT, New FBR may invest from time to time in assets that are not related to the real estate business including those related to

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New FBR’s operation of FBR Group’s capital markets and asset management businesses. In this respect, New FBR will initially hold investments in MCG Capital Corporation, AmeriCredit Corporation, Franklin Bank Corporation and Oxford Finance Corporation.

      MCG Capital Corporation is a closed-end investment company that lends money to and invests in small and midsized firms with annual sales of less than $100 million. Its portfolio includes concerns such as community newspapers, magazine publishers, broadcast television stations, ISPs, competitive local exchange carriers (CLECs), wireless service providers and electronic security firms. As a business development company, MCG Capital is required to invest at least 70% of its assets in private or thinly traded U.S. public companies.

      AmeriCredit makes loans through franchised and independent car dealers to consumers buying late-model and new automobiles. Loans made through franchised dealers make up more than 95% of AmeriCredit’s loan portfolio. AmeriCredit focuses its business on consumers who have credit limitations or past credit trouble. It securitizes most of its loans, retaining the servicing and reinvesting the proceeds in new loans.

      Franklin Bank Corp. is a Texas-based savings and loan holding company, whose wholly owned subsidiary, Franklin Bank, S.S.B., is a Texas state savings bank that provides mortgage, commercial and retail banking products and services.

      Oxford Finance Corp is a specialty financial services company providing exclusively equipment loans to the life sciences industry.

      In addition to its direct investments, New FBR, through its subsidiaries, also plans to invest in marketable securities, bank investment securities, bank loans, investment partnerships and private debt. New FBR intends to seek investments in non-real estate related businesses when presented with the opportunity, subject to maintaining its REIT qualification.

 
      Mortgage Securities

      New FBR will invest directly in fixed- and adjustable-rate residential mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. New FBR will manage its residential mortgage-backed portfolio to provide a high risk-adjusted return on capital. New FBR typically invests in adjustable-rate mortgage-backed securities to reduce the overall interest rate sensitivity of the portfolio. New FBR will finance its investments in mortgage-backed securities primarily by entering into repurchase agreements to enhance the overall return on capital invested in this portfolio.

      Whole-Pool Mortgage-Backed Securities. New FBR will invest at least 55% of its assets in whole-pool mortgage-backed securities. Those securities represent the entire ownership interest in pools of mortgage loans made by lenders such as savings and loan institutions, mortgage bankers, and commercial banks. Various government, government-related and private organizations assemble the pools of loans for sale to investors such as New FBR.

      Mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Instead, mortgage-backed securities provide for a monthly payment that consists of both interest and principal. In effect, these payments are a “pass-through” of the monthly interest and principal payments made by borrowers on their mortgage loans, net of any fees paid to the issuer or guarantor of the securities.

      The investment characteristics of pass-through mortgage-backed securities differ from those of traditional fixed-income securities. The major differences include the payment of interest and principal on the mortgage-backed securities, as described above, and the possibility that principal may be prepaid on the mortgage-backed securities at any time due to prepayments on the underlying mortgage loans. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed-income securities.

      Mortgage prepayments are affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. Generally

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prepayments on pass-through mortgage-backed securities increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on New FBR’s investments.

      Initially, New FBR’s portfolio of residential mortgage-backed securities will consist almost entirely of adjustable rate, residential mortgage-backed securities. The residential mortgage-backed securities New FBR will own initially will be guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae.

      Federal Home Loan Mortgage Corporation, better known as “Freddie Mac,” is a privately owned government-sponsored enterprise created pursuant to Title III of the Emergency Home Finance Act of 1970. Freddie Mac’s principal activities currently consist of the purchase of mortgage loans or participation interests in mortgage loans and the resale of the loans and participations in the form of guaranteed mortgage-backed securities. Freddie Mac guarantees to holders of Freddie Mac certificates, such as New FBR, the timely payment of interest at the applicable pass-through rate and ultimate collection of all principal on the holder’s pro rata share of the unpaid principal balance of the underlying mortgage loans, but does not guarantee the timely payment of scheduled principal on the underlying mortgage loans. The obligations of Freddie Mac under its guarantees are solely those of Freddie Mac and are not backed by the full faith and credit of the United States. If Freddie Mac were unable to satisfy its obligations, the distributions made to New FBR would consist solely of payments and other recoveries on the underlying mortgage loans, and accordingly, monthly distributions to New FBR would be adversely affected by delinquent payments and defaults on those mortgage loans.

      Federal National Mortgage Association, better known as “Fannie Mae,” is a privately owned, federally chartered corporation organized and existing under the Federal National Mortgage Association Charter Act. Fannie Mae provides funds to the mortgage market primarily by purchasing home mortgage loans from local lenders, thereby replenishing their funds for additional lending. Fannie Mae guarantees to registered holders of Fannie Mae certificates, such as New FBR, that it will distribute amounts representing scheduled principal and interest (at the rate provided by the Fannie Mae certificate) on the mortgage loans in the pool underlying the Fannie Mae certificate, whether or not received, and the full principal amount of any mortgage loan foreclosed or otherwise finally liquidated, whether or not the principal amount is actually received. The obligations of Fannie Mae under its guarantees are solely those of Fannie Mae and are not backed by the full faith and credit of the United States. If Fannie Mae were unable to satisfy its obligations, the distributions made to New FBR would consist solely of payments and other recoveries on the underlying mortgage loans, and accordingly, monthly distributions to New FBR would be adversely affected by delinquent payments and defaults on the mortgage loans.

      Government National Mortgage Association, better known as “Ginnie Mae,” is a wholly owned corporate instrumentality of the United States within the Department of Housing and Urban Development. Title III of the National Housing Act of 1934 authorizes Ginnie Mae to guarantee the timely payment of principal and interest on certificates that represent an interest in a pool of mortgages insured by the Federal Housing Administration under the Housing Act or partially guaranteed by the Veteran’s Administration under the Servicemen’s Readjustment Act of 1944 and other loans eligible for inclusion in mortgage pools underlying Ginnie Mae certificates. Section 306(g) of the Housing Act provides that “the full faith and credit of the United States is pledged to the payment of all amounts that may be required to be paid under any guaranty under this subsection.” An opinion, dated December 12, 1969, of an Assistant Attorney General of the United States provides that guarantees under section 306(g) of Ginnie Mae certificates of the type that New FBR may purchase are authorized to be made by Ginnie Mae and “would constitute general obligations of the United States backed by its full faith and credit.”

      Although New FBR will not own directly single-family or multifamily privately-issued certificates, some of the companies in which New FBR will be invested may own these certificates. New FBR may in the future invest in other companies that invest in these assets or may invest in them directly.

      Single-family and multifamily privately-issued certificates are pass-through certificates that are not issued or guaranteed by one of the agencies described above and that are backed by a pool of single-family or multifamily mortgage loans. Single-family and multifamily privately-issued certificates are issued by origina-

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tors of, investors in, and other owners of mortgage loans, including savings and loan associations, savings banks, commercial banks, mortgage banks, investment banks and special purpose “conduit” subsidiaries of those institutions.

      While agency certificates are backed by the express obligation or guarantee of one of the agencies, as described above, single-family and multifamily privately-issued certificates are generally covered by one or more forms of private credit enhancements. Those credit enhancements provide an extra layer of loss coverage in the event that losses are incurred upon foreclosure sales or other liquidations of underlying mortgaged properties in amounts that exceed the equity holder’s equity interest in the property and result in realized losses. Forms of credit enhancements include, but are not limited to, limited issuer guarantees, reserve funds, private mortgage guaranty pool insurance, over-collateralization, and subordination.

      Commercial Mortgage Loans & CMBS. New FBR may invest from time to time in commercial mortgage loans and commercial mortgage-backed securities, commonly known as “CMBS.”

      New FBR may invest from time to time indirectly in commercial loans and CMBS through an investment in other companies that originate or acquire commercial mortgage loans or CMBS. In addition, New FBR may purchase commercial mortgage loans and CMBS directly.

      Commercial mortgage loans are loans secured by senior or subordinate liens on commercial or multifamily real estate. The characteristics of the commercial mortgage loans held by companies in which New FBR will be invested vary widely. Some of those companies’ commercial mortgage loan holdings are performing loans that can be securitized. However, some of the companies in which New FBR may invest in may own commercial mortgage loans that are not intended to be securitized.

      New FBR may invest directly, or the companies in which New FBR invests may invest, in commercial mortgage loans with borrowers who are delinquent in payments on the loans. A lender can purchase this kind of loan at a price less than the amount owed on the loan, which enables the lender to work out a forbearance plan or other restructuring. If an agreement cannot be made, the lender ultimately may foreclose on the loan, acquiring ownership of the commercial property.

      In addition to investing in commercial mortgage loans, some of the companies in which New FBR will be invested own CMBS. CMBS typically are divided into two or more classes, sometimes called “tranches.” Generally the most senior class or classes would be rated investment grade, which increases the marketability of the class. The junior, or subordinated, classes typically would include a non-investment grade rated class and an unrated, higher-yielding credit support class. The market for non-investment grade CMBS is limited, and holders of CMBS have incurred, and might in the future incur, significant losses if required to sell them as a result of margin calls or otherwise.

      To the extent that New FBR will hold interests in commercial mortgage loans and CMBS through its investments in other companies, New FBR must rely on the management of those other companies to make decisions with respect to the commercial mortgage loans and CMBS. In general, New FBR will have no ability to control those decisions. Moreover, the management of those other companies are not required to inform New FBR of their decisions, although to the extent the companies are reporting companies under the Exchange Act, they must file reports of material events with the SEC.

 
      New FBR’s Conflict of Interest and Corporate Opportunism Policies

      New FBR will have a Code of Business Conduct and Ethics, containing policies on conflicts of interest and corporate opportunities. This Code will prohibit conflict of interest transactions as a matter of New FBR policy, except under guidelines approved by the board of directors. Specifically, the Code will provide that a conflict of interest occurs when:

  •  New FBR transacts business or contracts with one of its non-subsidiary affiliates or with clients or proposed clients of its affiliates;

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  •  An employee, officer or director, or a member of his or her family, receives improper personal benefits as a result of his or her position at New FBR; or
 
  •  New FBR makes loans to, or guarantees of obligations of, directors, officers, employees and their family members.

      The Code also prohibits employees, officers and directors from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the board of directors. No employee, officer or director may use corporate property, information or position for improper personal gain, and no employee may compete with New FBR directly or indirectly. Under the Code, New FBR employees, officers and directors owe a duty to New FBR to advance its legitimate interests when the opportunity to do so arises.

      Any waiver of the Code for executive officers or directors may be made only by the board of directors or a board of directors committee and will be promptly disclosed to shareholders as required by law or stock exchange regulation.

Dividends

      The most recent quarterly dividend declared by FBR Asset was $1.25 per share of FBR Asset common stock payable on February 3, 2003 to FBR Asset shareholders of record as of December 27, 2002. In addition, on December 10, 2002, FBR Asset declared a special dividend of $0.30 per share payable on January 31, 2003 to FBR Asset shareholders of record as of December 27, 2002. FBR Asset’s current dividend is $5.00 per share of FBR Asset common stock on an annual basis. FBR Group historically has not declared any dividends on FBR Group common stock.

      In order to qualify as a REIT for U.S. federal income tax purposes, New FBR must distribute to its shareholders annually at least 90% of its taxable income, excluding the retained earnings of its taxable REIT subsidiaries. It is anticipated that, after the completion of the merger, New FBR will maintain the dividend policy of FBR Asset. The payment of dividends by New FBR, however, will be subject to approval and declaration by the New FBR board of directors, and will depend on a variety of factors, including business, financial and regulatory considerations.

Material U.S. Federal Income Tax Consequences of the Merger

      The following general discussion summarizes the anticipated material U.S. federal income tax consequences of the merger to holders of shares of FBR Group Class A common stock and holders of shares of FBR Asset common stock that exchange their shares for shares of New FBR Class A common stock in the merger and holders of shares of FBR Group Class B common stock that exchange their shares for shares of New FBR Class B common stock in the merger. This discussion addresses only those FBR Group shareholders and FBR Asset shareholders that hold their shares as a capital asset, and does not address all the U.S. federal income tax consequences that may be relevant to particular FBR Group shareholders and FBR Asset shareholders in light of their individual circumstances or to FBR Group shareholders and FBR Asset shareholders that are subject to special rules, such as:

  •  financial institutions;
 
  •  mutual funds;
 
  •  tax-exempt organizations;
 
  •  insurance companies;
 
  •  dealers in securities or foreign currencies;
 
  •  traders in securities that elect to apply a mark-to-market method of accounting;
 
  •  foreign holders;

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  •  persons that hold their shares as a hedge against currency risk or as part of a straddle, constructive sale or conversion transaction; or
 
  •  holders that acquired their shares upon the exercise of stock options or otherwise as compensation.

      The following discussion is not binding on the Internal Revenue Service. It is based upon the Internal Revenue Code, laws, regulations, rulings and decisions in effect as of the date of this joint proxy statement/prospectus, all of which are subject to change, possibly with retroactive effect. Tax consequences under state, local and foreign laws, and U.S. federal laws other than U.S. federal income tax laws, are not addressed.

      Holders of FBR Group and FBR Asset common stock are strongly urged to consult their tax advisors as to the specific tax consequences to them of the merger, including the applicability and effect of U.S. federal, state and local and foreign income and other tax laws in their particular circumstances.

      The parties have structured the merger so that it is anticipated that the merger will be a reorganization for U.S. federal income tax purposes. It is a condition to the completion of the merger that FBR Group receive an opinion from Wachtell, Lipton, Rosen & Katz, and FBR Asset receive an opinion of Hogan & Hartson L.L.P., in each case dated the closing date of the merger, to the effect that (1) the merger of FBR Asset with and into New FBR and the merger of FBR Group with and into New FBR will each qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and (2) the merger of FBR Group with and into New FBR will not be treated as a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code. The opinions will be based on customary assumptions and customary representations made by, among others, FBR Group, FBR Asset and New FBR. An opinion of counsel represents counsel’s best legal judgment and is not binding on the Internal Revenue Service or any court. No ruling has been, or will be, sought from the Internal Revenue Service as to the U.S. federal income tax consequences of the merger.

      In addition, in connection with the filing of the registration statement, Wachtell, Lipton, Rosen & Katz and Hogan & Hartson L.L.P. have delivered to FBR Group and FBR Asset, respectively, their opinions, dated the date of this joint proxy statement/prospectus, that (1) the merger of FBR Asset with and into New FBR and the merger of FBR Group with and into New FBR will each qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and (2) the merger of FBR Group with and into New FBR will not be treated as a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code. Accordingly, holders of shares of FBR Group Class A common stock and holders of FBR Asset common stock that exchange their shares for shares of New FBR Class A common stock in the merger and holders of shares of FBR Group Class B common stock that exchange their shares for shares of New FBR Class B common stock in the merger will not recognize gain or loss for U.S. federal income tax purposes (except with respect to any cash received by holders of shares of FBR Asset common stock instead of a fractional share of New FBR common stock). Each holder’s aggregate tax basis in New FBR common stock received in the merger will be the same as that holder’s aggregate tax basis in FBR Group or FBR Asset common stock surrendered in the merger in exchange therefor, decreased, in the case of a holder of FBR Asset common stock by the amount of any tax basis allocable to any fractional share interest for which cash is received. The holding period of the New FBR common stock received in the merger by a holder of FBR Group or FBR Asset common stock will include the holding period of FBR Group or FBR Asset common stock that the holder surrendered in the merger in exchange therefor.

      A holder of FBR Asset common stock that receives cash in lieu of a fractional share of New FBR common stock will recognize gain or loss equal to the difference between the amount of cash received and that holder’s tax basis in New FBR common stock that is allocable to the fractional share of New FBR common stock. That gain or loss generally will constitute capital gain or loss. In the case of an individual shareholder, any capital gain generally will be long-term capital gain, subject to tax at a maximum rate of 20%, if the individual has held his or her FBR Asset common stock for more than one year on the closing date of the merger. The deductibility of capital losses is subject to limitations for both individuals and corporations.

      Payments to holders of FBR Asset common stock in connection with the merger may be subject to “backup withholding” at a rate of 30%, unless a holder (1) provides a correct taxpayer identification number (which, for an individual shareholder, is the shareholder’s social security number) and any other required

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information to the exchange agent, or (2) is a corporation or comes within certain exempt categories and, when required, demonstrates that fact and otherwise complies with applicable requirements of the backup withholding rules. An FBR Asset shareholder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding does not constitute an additional tax and will be creditable against the shareholder’s U.S. federal income tax liability.

Accounting Treatment

      The merger will be accounted for as a purchase of FBR Asset by FBR Group using the purchase method of accounting. The purchase price based on the price per share of FBR Group common stock two days before and after November 15, 2002 will be allocated to FBR Asset’s identifiable assets and liabilities based on their estimated fair market values at the date of the completion of the merger, and any excess of the purchase price over those fair market values will be accounted for as goodwill. The results of final valuations of intangible and other assets and the finalization of any potential plans of restructuring have not yet been completed. We may revise the allocation of the purchase price when additional information becomes available.

Regulatory Matters

      Certain regulatory requirements imposed by U.S. and foreign regulatory authorities must be complied with before the merger is completed. FBR Group and FBR Asset are not aware of any material governmental consents or approvals that are required prior to the completion of the merger other than those described below. We have agreed that, if any additional governmental consents and approvals are required, we each shall use our commercially reasonable efforts to obtain these consents and approvals.

      Under the HSR Act and the rules promulgated under it by the U.S. Federal Trade Commission, which we refer to as the FTC, the merger cannot be completed until notifications have been given and certain information has been furnished to the FTC and the Antitrust Division of the U.S. Department of Justice, which we refer to as the Antitrust Division, and the specified waiting periods have expired or been terminated. FBR Group and FBR Asset filed notification and report forms under the HSR Act with the FTC and the Antitrust Division on December 17 and December 20, 2002, respectively. On January 6, 2003, the FTC granted FBR Group and FBR Asset early termination of the waiting period applicable to the merger.

      In addition, completion of the merger is conditioned upon the approval of the Board of Governors of the Federal System of an application by New FBR and its taxable REIT subsidiaries under Section 3(a)(1) of the Bank Holding Company Act to become bank holding companies and elect to be treated as financial holding companies or the non-objection of the Office of the Comptroller of the Currency under the Change of Bank Control Act for New FBR and its taxable REIT subsidiaries to control FBR National Bank & Trust (the “Bank”) if the Bank restructures its operations prior to the merger.

      The merger is also subject to the approval of or notice to certain state and foreign regulatory and self-regulating authorities, including the National Association of Securities Dealers, Inc. and the United Kingdom Securities and Futures Authority. FBR Group and FBR Asset conduct operations in a number of jurisdictions where other regulatory filings or approvals may be required or advisable in connection with the completion of the merger. Under the merger agreement, we are required to obtain these approvals prior to completing the merger, unless the failure to obtain the approvals would not have a material adverse effect on New FBR after completion of the merger. FBR Group and FBR Asset are currently reviewing whether filings or approvals may be required or advisable in those jurisdictions that may be material to FBR Group and FBR Asset and have made or will make regulatory filings in those jurisdictions.

      It is possible that any of the regulatory authorities with which filings are made may seek regulatory concessions as conditions for granting approval of the merger. Under the merger agreement, each of FBR Group and FBR Asset has agreed to use its commercially reasonable efforts to complete the merger, including to gain clearance from antitrust and competition authorities and to obtain other required approvals. However, neither FBR Group nor FBR Asset nor any of their respective subsidiaries is required to hold separate or divest any of their businesses or assets, or to take, or to agree to take, any action or agree to any limitation that

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could reasonably be expected to have a material adverse effect on their respective companies after giving effect to the merger or to impair substantially the benefits that FBR Group and FBR Asset expected to realize from the merger at the time they entered into the merger agreement. Also, with the exception of FBR Group’s interest in FBR National Bank & Trust, neither FBR Group nor FBR Asset is required to agree to any divestiture, to hold separate any business or to take any other action that is not conditional on the completion of the merger.

      Prior to completing the merger, FBR Group and FBR Asset are required to obtain antitrust approvals of any other regulatory authorities if the failure to obtain antitrust approvals of those regulatory authorities would have a material adverse effect on their respective companies after the completion of the merger.

      Although we do not expect regulatory authorities to raise any significant objections in connection with their review of the merger, we cannot assure you that we will obtain all required regulatory approvals or that these regulatory approvals will not contain terms, conditions or restrictions that would be detrimental to New FBR after the completion of the merger.

Appraisal Rights

      Under the Virginia Stock Corporation Act, neither FBR Group shareholders nor FBR Asset shareholders will have any appraisal rights as a result of the merger.

Resale of New FBR Common Stock

      New FBR common stock issued in the merger will not be subject to any restrictions on transfer arising under the Securities Act, except for shares of New FBR common stock issued to any FBR Group shareholder or FBR Asset shareholder that is, or is expected to be, an “affiliate” of FBR Group or FBR Asset, as applicable, for purposes of Rule 145 under the Securities Act. Persons that may be deemed to be affiliates of FBR Group or FBR Asset for those purposes generally include individuals or entities that control, are controlled by, or are under common control with, FBR Group or FBR Asset, respectively, and include the directors of FBR Group and FBR Asset, respectively.

      This joint proxy statement/ prospectus does not cover resales of New FBR common stock received by any person upon completion of the merger, and no person is authorized to make any use of this joint proxy statement/ prospectus in connection with any resale.

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DESCRIPTION OF THE TRANSACTION AGREEMENTS

      The following summaries of the transaction agreements are qualified by reference to the complete text of the agreements, which are attached as Annexes A through F to this joint proxy statement/ prospectus and are incorporated by reference in this joint proxy statement/ prospectus.

The Merger Agreement

 
Structure of the Merger

      To accomplish the combination of the businesses of FBR Group and FBR Asset, FBR Asset has formed a new subsidiary, Forest Merger Corporation (which we refer to as “New FBR”). Subject to the terms and conditions of the merger agreement, FBR Asset will be merged with and into New FBR, with New FBR as the surviving corporation and, immediately following the completion of that merger, FBR Group will be merged with and into New FBR, with New FBR as the surviving corporation. We refer to the FBR Group merger and the FBR Asset merger collectively as the “merger” in this joint proxy statement/ prospectus.

      Upon completion of the merger, the name of the surviving corporation will be changed to “Friedman, Billings, Ramsey Group, Inc.”

 
Closing; Completion of the Merger

      The completion of the merger will occur no later than the second business day after the satisfaction or waiver of the conditions set forth in the merger agreement or at another date or time as may be agreed to in writing by FBR Group and FBR Asset. If the merger agreement is approved at the special meetings, FBR Group and FBR Asset currently expect to complete the merger as soon as practicable following receipt of each of the shareholder approvals.

      Upon completion of the merger, the articles of incorporation of New FBR will be amended and restated. Forms of the amended and restated articles of incorporation and the bylaws of New FBR are attached to this joint proxy statement/ prospectus as Annexes G and H, respectively.

 
Merger Consideration

      When the merger is completed,

  •  holders of shares of FBR Asset common stock will receive, for each share of FBR Asset common stock issued and outstanding immediately before completion of the merger (other than any shares held directly (and not through subsidiaries) by FBR Group or FBR Asset at the time of completion of the merger), 3.65 shares of New FBR Class A common stock and cash in lieu of fractional shares;
 
  •  holders of shares of FBR Group Class A common stock will receive, for each share of FBR Group Class A common stock issued and outstanding immediately before completion of the merger (other than any shares held directly (and not through subsidiaries) by FBR Group or FBR Asset at the time of completion of the merger), one share of New FBR Class A common stock; and
 
  •  holders of shares of FBR Group Class B common stock will receive, for each share of FBR Group Class B common stock issued and outstanding immediately before completion of the merger (other than any shares held directly (and not through subsidiaries) by FBR Group or FBR Asset at the time of completion of the merger), one share of New FBR Class B common stock.

      Following completion of the transaction, shares of New FBR Class A common stock will be entitled to one vote per share and shares of New FBR Class B common stock will be entitled to three votes per share.

      Holders of shares of FBR Asset common stock will not receive certificates representing fractional shares of New FBR Class A common stock. Instead, each holder of shares of FBR Asset common stock otherwise entitled to a fractional share interest in New FBR will be paid an amount in cash equal to the holder’s proportionate interest in the proceeds from the sale or sales in the open market by the exchange agent, on behalf of all those holders, of the aggregate fractional shares of New FBR Class A common stock.

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      Upon completion of the merger, the outstanding shares of FBR Asset common stock, FBR Group Class A common stock and FBR Group Class B common stock will evidence only the right to receive the merger consideration, and those shares will be cancelled and will cease to exist.

 
Exchange of Stock Certificates for New FBR Stock Certificates

      New FBR has appointed American Stock Transfer & Trust Company to act as exchange agent for the purpose of paying the merger consideration in the merger. New FBR will make available to the exchange agent, upon or before the completion of the merger, shares of New FBR Class A common stock and New FBR Class B common stock for that purpose.

      As soon as practicable after the completion of the merger, the exchange agent will mail to each holder of record of outstanding FBR Asset common stock, FBR Group Class A common stock or FBR Group Class B common stock a letter of notification describing (1) the merger consideration to be issued to the holder and (2) the procedures for surrendering stock certificates in exchange for new certificates representing New FBR Class A common stock or New FBR Class B common stock, as applicable.

 
Treatment of FBR Group and FBR Asset Stock Options

      Upon completion of the merger, each outstanding and unexercised option to purchase FBR Asset common stock will be automatically converted into an option to purchase New FBR Class A common stock. The substituted New FBR stock option will permit its holder to purchase a number of shares of New FBR Class A common stock equal to the number of shares of FBR Asset common stock that could have been purchased under the corresponding FBR Asset stock option multiplied by 3.65 (rounded to the nearest whole share). The exercise price per share of New FBR Class A common stock of the substituted option will be equal to the per-share option exercise price specified in the FBR Asset stock option divided by 3.65 (rounded down to the nearest whole cent).

      Upon completion of the merger, each outstanding and unexercised option to purchase FBR Group Class A common stock will be automatically converted into an option to purchase a number of shares of New FBR Class A common stock equal to the number of shares of FBR Group Class A common stock subject to the option at an exercise price per share equal to the per-share option exercise price specified in the FBR Group stock option before the conversion.

 
Board of Directors and Officers of New FBR

      The directors of New FBR immediately following completion of the merger will consist of the current members of FBR Group and FBR Asset boards of directors: Daniel J. Altobello, Eric F. Billings, Emanuel J. Friedman, Peter A. Gallagher, Stephen D. Harlan, Russell C. Lindner, W. Russell Ramsey, Wallace L. Timmeny and John T. Wall. Each of these individuals will hold office until the earlier of the director’s resignation or removal or until a successor is duly elected and qualified, as the case may be. The officers of FBR Group immediately prior to the completion of the merger will be the initial officers of New FBR following completion of the merger, each to hold office until the earlier of the officer’s resignation or removal or until a successor is duly elected and qualified, as the case may be.

      Unless prohibited by the requirements of applicable law or the standards of any applicable domestic or foreign industry self-regulatory organization, New FBR will include Messrs. Gallagher, Harlan and Lindner in the management slate of nominees for election at the next annual or special meeting, each to fill a directorship position for a term ending at the subsequent annual meeting of shareholders of New FBR. In addition, each of Messrs. Friedman and Billings have entered into a shareholder agreement and agreed, among other things, to vote, or cause to be voted, all New FBR Class A common stock and New FBR Class B common stock beneficially owned by him in favor of the election of each of Messrs. Gallagher, Harlan and Lindner to the New FBR board of directors at the 2003 annual meeting of the shareholders of New FBR. Other terms of the shareholder agreements are described under “— The Shareholder Agreements.”

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REIT Qualification

      FBR Asset will:

  •  not elect to treat New FBR as a taxable REIT subsidiary; and
 
  •  maintain ownership of 100% of New FBR common stock and any other equity securities of New FBR at all times prior to the completion of the merger.

      New FBR will:

  •  succeed to FBR Asset’s REIT election and file its U.S. federal income tax return as a REIT for the taxable year ending on December 31st of the calendar year in which the closing date of the merger falls;
 
  •  timely make, and cause each first-tier subsidiary of FBR Group in existence immediately prior to the completion of the merger to join in timely making, a joint election under Section 856(l)(1) of the Internal Revenue Code on Form 8875 (or a successor form) to treat each first-tier subsidiary of FBR Group in existence immediately prior to the completion of the merger as a taxable REIT subsidiary effective as of the completion of the merger; and
 
  •  not make a deemed sale election under Treasury Regulation Section 1.337(d)-7T(c) with respect to the assets of FBR Group.

 
Representations and Warranties of FBR Group and FBR Asset

      The merger agreement contains customary representations and warranties by each of FBR Group and FBR Asset relating to, among other things:

  •  due organization and good standing;
 
  •  authorization to enter into the merger agreement and required shareholder approvals to complete the merger;
 
  •  enforceability of the merger agreement;
 
  •  compliance with SEC reporting requirements;
 
  •  required governmental and third-party consents;
 
  •  no breach of organizational documents or material agreements as a result of the merger agreement or the completion of the merger;
 
  •  receipt of opinion of financial advisor;
 
  •  payment of fees of brokers, finders and investment bankers;
 
  •  accuracy of information contained in the documents to be filed with the SEC or any other regulatory authority;
 
  •  capital structure;
 
  •  absence of defaults under certain contracts;
 
  •  exemption from anti-takeover statutes;
 
  •  tax matters (including qualification as a REIT for FBR Asset);
 
  •  permits and licenses;
 
  •  compliance with laws;
 
  •  no changes since January 1, 2002 that would have a material adverse effect;
 
  •  no material legal proceedings;

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  •  no material undisclosed liabilities;
 
  •  no dissenters’ rights; and
 
  •  intellectual property.

      The merger agreement also contains additional customary representations and warranties made by FBR Group relating to, among other things:

  •  ownership of FBR Asset capital stock;
 
  •  compliance with reporting requirements of regulatory entities;
 
  •  disclosure of related party transactions;
 
  •  compliance with Section 15(f) of the Investment Company Act;
 
  •  ownership of banking organizations;
 
  •  maintenance of key-man life insurance;
 
  •  employee matters, including appropriate funding of employee benefit plans and compliance with applicable regulations;
 
  •  derivative instruments; and
 
  •  investment advisory activities.

      The merger agreement also contains additional customary representations and warranties made by FBR Asset relating to, among other things:

  •  inapplicability of the Investment Company Act;
 
  •  New FBR capital stock and actions taken by New FBR; and
 
  •  absence of employee compensation and benefit plans.

      Conduct of Business of FBR Group and FBR Asset Pending the Merger

      Under the merger agreement, each of FBR Group and FBR Asset has agreed that, during the period before the completion of the merger, except as expressly contemplated by the merger agreement, it will, and will cause its subsidiaries to:

  •  conduct its operations only in the ordinary course of business consistent with past practice;
 
  •  seek to preserve intact its current business organizations;
 
  •  seek to keep available the service of its current officers; and
 
  •  seek to preserve its relationship with customers, suppliers and others having business dealings with it, in each case as determined in good faith by the FBR Group board of directors or the FBR Asset board of directors, as the case may be.

      In addition, pending the merger, each of FBR Group and FBR Asset has agreed that, without the other party’s written consent or except as otherwise expressly contemplated by the merger agreement, it will not, and will cause its subsidiaries not to, among other things:

  •  amend its organizational documents;
 
  •  authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities or equity equivalents (including any stock options or stock appreciation rights);
 
  •  classify or reclassify any unissued shares of stock;

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  •  declare, set aside or pay any dividend or make any other distribution, or redeem or otherwise acquire any securities or any securities of any of its subsidiaries, except that FBR Asset may make distributions equal to the greater of (1) FBR Asset’s regular quarterly dividends of $1.25 per share of FBR Asset common stock or (2) such distributions as may be required to cause FBR Asset to have distributed 100% of its taxable income for the taxable year ended December 31, 2002 as may be necessary to maintain FBR Asset’s status as a REIT and to prevent FBR Asset from incurring any liability for taxes with respect to undistributed income for the taxable year under Section 857(b) and Section 4981 of the Internal Revenue Code;
 
  •  change any of the accounting principles or practices used by it and maintain its books and records other than in accordance with GAAP consistently applied, except as required as a result of a change in law or in GAAP;
 
  •  take any action, or omit to take any action, which action or omission could reasonably be expected to terminate or jeopardize FBR Asset’s continuing status as a REIT or New FBR’s ability to qualify as a REIT following completion of the merger or would subject FBR Asset or New FBR to any U.S. federal income or excise tax;
 
  •  enter into any agreement with an affiliate on terms less favorable to it than the terms that would be obtained in an agreement with a third party on an arm’s-length basis;
 
  •  materially increase any compensation or enter into or materially amend any employment, severance or other arrangement with any of its officers, directors or employees earning more than $250,000 per annum , other than as required by law or any contract or existing plan or in connection with new hires; or
 
  •  adopt any new employee benefit plan or materially amend any existing plans or rights, other than as required by law.

     Additional Covenants Pending Completion of the Merger

      Each of FBR Group, FBR Asset and New FBR, if applicable, has agreed that it will, among other things:

  •  use commercially reasonable efforts to cause the completion of the merger to occur as soon as practicable after the shareholder votes with respect to the merger;
 
  •  take all necessary actions in case at any time after the completion of the merger any further action is necessary to carry out the purposes of the merger agreement;
 
  •  use commercially reasonable efforts to obtain consents, approvals or waivers of all third parties and regulatory authority necessary, proper or advisable for the completion of the transactions contemplated by the merger agreement;
 
  •  consult with each other with respect to the obtaining of all permits, consents, approvals and authorizations of all regulatory authority and other third parties necessary or advisable to consummate the transactions contemplated by the merger agreement and apprising the other party of the status of matters relating to the completion of the transactions contemplated by the merger agreement;
 
  •  consult with each other and give each other reasonable advance notice before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by the merger agreement;
 
  •  cooperate in the prompt preparation and the filing with the SEC of the registration statement on Form S-4 of which this joint proxy statement/prospectus forms a part;
 
  •  take all actions necessary in accordance with applicable law and its articles of incorporation and bylaws to convene a meeting of its shareholders as promptly as practicable to consider and vote upon the transactions contemplated by the merger agreement;

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  •  take all actions necessary to ensure that upon completion of the merger the New FBR board of directors will consist of the current members of the FBR Group and FBR Asset boards of directors; and
 
  •  promptly advise the other party upon learning of any change or event having or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on it or that it believes would, or would be reasonably expected to, cause or constitute a material breach of any of its representations, warranties or covenants contained in the merger agreement that would reasonably be expected to result in a failure of certain conditions set forth in the merger agreement to be satisfied.

      FBR Group has agreed further that it will, among other things:

  •  include in this joint proxy statement/prospectus the recommendation of the FBR Group board of directors and its special committee that FBR Group shareholders approve the merger agreement and the transactions contemplated by the merger agreement;
 
  •  cast or cause to be cast all votes attributable to shares of FBR Asset common stock owned of record by FBR Group or any of its subsidiaries, at any annual or special meeting of FBR Asset shareholders or in connection with any written consent or other vote of the FBR Group shareholders, (1) in favor of approval of the merger agreement and the transactions contemplated by the merger agreement and (2) against approval or adoption of any action or agreement (other than the merger agreement or the transactions contemplated by the merger agreement) made or taken in opposition to or in competition with the merger;
 
  •  deliver to FBR Asset and New FBR a study of a nationally recognized independent accounting firm mutually acceptable to FBR Asset and FBR Group, dated as of the closing date of the merger, stating the estimated amount of current and accumulated earnings and profits (as determined for U.S. federal income tax purposes) that FBR Group will have as of the completion of the merger and that, with respect to New FBR immediately following the completion of the merger, will be treated as “earnings and profits accumulated in any non-REIT year” within the meaning of Section 857(a)(2)(B) of the Internal Revenue Code; and
 
  •  manage FBR Asset, during the period from the date of the merger agreement until the completion of the merger, pursuant to the terms of the management agreement, as amended by the agreement to extend the management agreement, in a manner consistent with past practices.

      FBR Asset has agreed further that it will, among other things:

  •  include in this joint proxy statement/prospectus the recommendation of the FBR Asset board of directors and of its special committee that FBR Asset shareholders approve the merger agreement and the transactions contemplated by the merger agreement;
 
  •  use its commercially reasonable efforts to cause New FBR to take all actions necessary and appropriate to complete the merger, including, causing shares of New FBR Class A common stock to be issued in the merger and shares of New FBR Class A common stock issuable upon conversion of New FBR Class B common stock to be issued in the merger to be approved for listing on the New York Stock Exchange; and
 
  •  cause New FBR not to incur any obligations or conduct any business except as necessary and appropriate to effect the completion of the merger in accordance with the merger agreement.

      New FBR has further agreed that it will, among other things:

  •  on or before December 31st of the calendar year in which the completion of the merger falls, pay a cash dividend to its shareholders in an amount sufficient so that New FBR meets the requirements of Section 857(a)(2)(B) of the Internal Revenue Code in the taxable year in which the closing date of the merger falls;

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  •  take all actions necessary and appropriate to complete the merger, including, causing shares of New FBR Class A common stock to be issued in the merger and shares of New FBR Class A common stock issuable upon conversion of shares of New FBR Class B common stock to be issued in the merger to be approved for listing on the New York Stock Exchange; and
 
  •  not incur any obligations or conduct any business except as necessary and appropriate to effect the completion of the merger in accordance with the merger agreement.

     Pre-Merger Dividends

      Under the merger agreement, FBR Asset is permitted to pay distributions equal to the greater of (1) regular quarterly dividends of $1.25 per share of FBR Asset common stock or (2) distributions as may be required to cause FBR Asset to have distributed 100% of its taxable income for the taxable year ended December 31, 2002 as may be necessary to maintain FBR Asset’s status as a REIT and to prevent FBR Asset from incurring any liability for taxes with respect to undistributed income for the taxable year under Section 857(b) and Section 4981 of the Internal Revenue Code. On December 10, 2002, FBR Asset declared a quarterly dividend of $1.25 per share of FBR Asset common stock payable on February 3, 2003 to FBR Asset shareholders of record as of December 27, 2002. In addition, on December 10, 2002, FBR Asset declared a special dividend of $0.30 per share payable on January 31, 2003 to FBR Asset shareholders of record as of December 27, 2002. FBR Asset does not plan to declare and pay any further regular quarterly dividends if the merger is completed before [ l ] [ l ], [ l ]. If the merger is completed after [ l ] [ l ], [ l ], FBR Asset currently intends to continue to pay regular quarterly dividends for any additional quarterly periods ending before the completion of the merger.

      Under the merger agreement, FBR Group is prohibited from making any dividends or distributions prior to completion of the merger.

     Conditions to the Merger

 
Conditions to Each Party’s Obligations to Effect the Merger

      The obligations of FBR Group and FBR Asset to complete the merger are subject to the satisfaction or, where permissible, waiver of the following conditions:

  •  approval of the merger agreement by FBR Group shareholders and FBR Asset shareholders;
 
  •  each of FBR Group and FBR Asset will have received an opinion from Wachtell, Lipton, Rosen & Katz and Hogan & Hartson L.L.P., respectively, dated the closing date of the merger, relating to the U.S. federal income tax treatment of the merger;
 
  •  the registration statement on Form S-4 of which this joint proxy statement/prospectus forms a part will have become effective and will not be the subject of any stop order or proceedings by the SEC seeking a stop order;
 
  •  the New York Stock Exchange will have approved for listing the shares of New FBR Class A common stock to be issued in the merger and reserved for issuance upon conversion of shares of New FBR Class B common stock to be issued in the merger, subject to official notice of issuance;
 
  •  each of FBR Group, FBR Asset and New FBR will have received an opinion from Hunton & Williams, dated as of the closing date of the merger, relating to the REIT status of New FBR for the taxable year in which the merger occurs;
 
  •  except as would not reasonably be expected to have an FBR Group material adverse effect or an FBR Asset material adverse effect, as described below, all approvals, consents and authorizations of, filings and registrations with, and applications and notifications to all third parties and regulatory authorities required for the completion of the merger will have been obtained or made and will be in full force and effect and all waiting periods required by applicable law will have expired; and

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  •  no statute, rule, regulation, executive order, decree, ruling or injunction will have been enacted, entered, promulgated or enforced by any regulatory authorities that has the effect of making the completion of the merger illegal or prevents or prohibits completion of the merger.

      As used in the merger agreement, “material adverse effect,” when used in reference to FBR Group or FBR Asset, means any change or effect that, individually or in the aggregate, is or would reasonably be expected to be materially adverse to (1) the business, results of operations or financial condition of FBR Group or FBR Asset, as applicable, and its subsidiaries, taken as a whole, other than any change or effect arising out of a decline or deterioration in the economy in general or the industry in which FBR Group or FBR Asset, as applicable, and its subsidiaries operate, or (2) the ability of FBR Group or FBR Asset, as applicable, to consummate the transactions contemplated by the merger agreement without material delay.

      Conditions to the Obligations of FBR Group to Effect the Merger

      The obligations of FBR Group to complete the merger are subject to the satisfaction or, where permissible, waiver of the following conditions:

  •  material accuracy of the representations and warranties of FBR Asset contained in the merger agreement, except that any failure of a representation and warranty of FBR Asset to be accurate of which FBR Group had knowledge as of the date of the merger agreement will not be deemed a breach of such representation and warranty;
 
  •  performance by FBR Asset in all material respects of its obligations under the merger agreement;
 
  •  receipt by FBR Asset of a certificate of a senior officer of FBR Group certifying to each of the foregoing; and
 
  •  receipt by New FBR and FBR Group of an opinion from Hunton & Williams, dated the closing date of the merger, relating to the REIT status of FBR Asset.

     Conditions to the Obligations of FBR Asset to Effect the Merger

      The obligations of FBR Asset to complete the merger are subject to the satisfaction or, where permissible, waiver of the following conditions:

  •  material accuracy of the representations and warranties of FBR Group contained in the merger agreement;
 
  •  performance by FBR Group in all material respects of its obligations under the merger agreement; and
 
  •  receipt by FBR Asset of a certificate of a senior officer of FBR Group certifying to each of the foregoing.

     No Solicitation by FBR Group or FBR Asset

      Each of FBR Group and FBR Asset has agreed that, except as described below, it will not, and will use its commercially reasonable efforts to cause its officers, directors, employees, affiliates, agents and representatives not to, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information or offer access to its properties, books or records to, any person or group (other than to the other party or any designees of the other party) concerning any “competing transaction.”

      For purposes of the merger agreement, a competing transaction means any of the following (other than the transactions contemplated by the merger agreement) with respect to FBR Group or FBR Asset, as applicable, or any of its material subsidiaries:

  •  any tender offer or exchange offer, or any other proposal for the acquisition of a substantial equity interest, or of a substantial portion of the applicable company’s assets; or
 
  •  any merger, consolidation or other business combination or similar transaction.

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      However, each of FBR Group or FBR Asset may furnish information and access to a third party, in each case only in response to an unsolicited written proposal that constitutes, or that its board of directors or its special committee, after consultation with its financial advisors, determines is reasonably likely to lead to, a superior proposal. Before providing any such information or access to a third party, FBR Group or FBR Asset, as applicable, must first enter into a confidentiality agreement with the third party on terms no less favorable to it than the terms of the confidentiality agreement, dated October 7, 2002, between FBR Group and FBR Asset. FBR Group or FBR Asset, as applicable, may then participate in discussions and negotiate with the person or group making the proposal. FBR Group or FBR Asset, as applicable, must provide a copy of the written superior proposal (which will identify the third party making the proposal), and any amendments to the proposal to the other party, within one business day after receiving the written proposal and must keep the other party promptly advised of material developments.

      For purposes of the merger agreement, a “superior proposal” means, with respect to FBR Group or FBR Asset, any bona fide proposal relating to a competing transaction that is on terms which its board of directors or its special committee determines, in its good faith judgment, after consulting with an independent financial advisor of nationally recognized reputation, and taking into account, among other things, all legal, financial, regulatory and other aspects of the proposal and the third party making the proposal, (1) to be more favorable to its shareholders than the merger and (2) is reasonably capable of being consummated.

      In addition, the merger agreement does not prevent FBR Group or FBR Asset, or its board of directors or its special committee, from:

  •  taking, and disclosing to its shareholders, a position complying with Rule 14e-2(a) or Rule 14d-9 promulgated under the Exchange Act with respect to a competing transaction; or
 
  •  making any disclosure to its shareholders, if, in the good faith judgment of its board of directors or its special committee, after receiving advice of outside legal counsel, failure to make such disclosure would be reasonably likely to constitute a breach of its fiduciary duties to the corporation or its shareholders under applicable law (including a duty of candor) or otherwise be a violation of any applicable law.

      Except as described below, neither the board of directors of FBR Group or FBR Asset, as applicable, nor any of its committees may:

  •  withdraw or modify its recommendation that its shareholders approve the merger agreement, or
 
  •  approve or recommend, or authorize or cause FBR Group or FBR Asset, as applicable, to enter into any agreement or letter of intent with respect to, any competing transaction (other than a confidentiality agreement on the terms described above).

      Nevertheless, prior to the special meeting of the applicable company’s shareholders to approve the merger, the special committees or board of directors of FBR Group or FBR Asset, as applicable, after consultation with its outside legal counsel and independent financial advisor, may withdraw or modify its recommendation that its shareholders approve the merger agreement and may authorize and cause FBR Group or FBR Asset, as applicable, to enter into an agreement with respect to, or approve or recommend, a superior proposal.

      However, prior to or concurrently with the execution of any agreement relating to a superior proposal, FBR Group or FBR Asset, as applicable, must terminate the merger agreement under the terms of the merger agreement and pay, or cause to be paid, to the other party the termination fee discussed under “— Expenses; Termination Fees.”

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Termination of the Merger Agreement
 
Right to Terminate

      The merger agreement may be terminated at any time before completion of the merger, whether before or after approval of the merger agreement and the merger by the FBR Group shareholders or the FBR Asset shareholders, as follows:

  •  by mutual written consent of FBR Group, FBR Asset and New FBR;
 
  •  by either FBR Group or FBR Asset if:

  •  any regulatory authority issues an order, decree, ruling or takes any other action permanently restraining, enjoining or otherwise prohibiting the merger, and the order, decree ruling or other action becomes final and nonappealable, except that a party may not terminate the merger agreement pursuant to this provision if that party has failed to fulfill its obligations to use commercially reasonable efforts to take all actions and to do all things reasonably necessary, proper or advisable under applicable laws and regulations to complete the merger agreement;
 
  •  the merger is not completed prior to July 31, 2003, except that neither FBR Group nor FBR Asset may terminate the merger agreement if its breach is the reason that the merger has not been completed; or
 
  •  the required approval of the merger agreement by FBR Asset shareholders or FBR Group shareholders is not obtained at the applicable special meeting.

  •  by FBR Group:

  •  if, prior to the completion of the merger, the FBR Asset board of directors or its special committee (1) has withdrawn or modified in any manner adverse to FBR Group its approval or recommendation of the merger agreement, (2) has approved or recommended another offer or an agreement to effect a proposal made by a third party (other than an affiliate of FBR Group) to effect a competing transaction, (3) has resolved to effect any of the foregoing or (4) for any reason fails to hold the FBR Asset special meeting by July 20, 2003;
 
  •  if, prior to the completion of the merger, the FBR Group board of directors or its special committee approves or recommends another offer or an agreement to effect a superior proposal made by a third party and FBR Group has paid to FBR Asset the termination fee discussed under “— Expenses; Termination Fees — FBR Group Termination Fee;” or
 
  •  upon a violation or breach by FBR Asset of any agreement, covenant, representation or warranty so that the conditions to the completion of the merger would be incapable of being satisfied and such violation or breach has not been waived by FBR Group nor cured by FBR Asset prior to the earlier of (1) 30 business days after the giving of written notice to FBR Asset of the breach and (2) July 31, 2003.

  •  by FBR Asset:

  •  if, prior to the completion of the merger, the FBR Group board of directors or its special committee (1) has withdrawn or modified in any manner adverse to FBR Asset its approval or recommendation of the merger agreement, (2) has approved or recommended another offer or an agreement to effect a proposal made by a third party (other than an affiliate of FBR Asset) to effect a competing transaction, (3) has resolved to effect any of the foregoing or (4) for any reason fails to hold the FBR Group special meeting by July 20, 2003;
 
  •  if, prior to the completion of the merger, the FBR Asset board of directors or its special committee approves or recommends another offer or an agreement to effect a superior proposal made by a third party and FBR Asset has paid to FBR Group the termination fee discussed under “— Expenses; Termination Fees — FBR Asset Termination Fee;” or

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  •  upon a violation or breach by FBR Group of any agreement, covenant, representation or warranty contained in the merger agreement so that the conditions to the completion of the merger would be incapable of being satisfied, and such violation or breach has not been waived by FBR Asset nor cured by FBR Group prior to the earlier of (1) 30 business days after the giving of written notice to FBR Group of the breach and (2) July 31, 2003.

     Special Termination Right

      In addition, the merger agreement provides that, if the average closing stock price of FBR Group Class A common stock for the 10 trading days prior to the shareholders meetings is greater than $10.55 per share, FBR Group will have the right to terminate the merger agreement, and that, if the average closing stock price of FBR Group Class A common stock for the 10 trading days prior to the shareholders meetings is less than $8.75 per share, FBR Asset will have the right to terminate the merger agreement. Even if these termination rights arise, they may be waived by FBR Asset or FBR Group, as applicable. In approving the proposed merger, you will be delegating to FBR Asset or FBR Group, as the case may be, the authority to waive the termination rights described in this paragraph and permit the merger to be completed in the event these termination rights arise.

      In the event either FBR Group or FBR Asset is entitled to terminate the merger agreement under these provisions, the special committee of the applicable party’s board of directors will make a determination as to whether it is in the best interests of that party’s shareholders to proceed with or terminate the transaction. In making this determination, the special committee of the applicable party’s board of directors will consider a variety of factors, including:

  •  The historical performance and future prospects of each of the companies’ businesses;
 
  •  Market conditions affecting both companies;
 
  •  The value of each company’s common stock and its value over the short term and long term;
 
  •  Alternatives to the merger available to each of the companies; and
 
  •  The possibility of amending the merger agreement to obtain more favorable terms.

      At this time, neither the FBR Asset special committee nor the FBR Group special committee anticipates that it would seek a new fairness opinion or a reaffirmation of the existing fairness opinion from its financial advisor in connection with a decision to exercise or waive the termination rights described above. However, in the event such a termination right arises for either of the parties, either special committee may elect to request such a fairness opinion from its financial advisor.

      Because the parties expect that all conditions to the merger other than shareholder approval are likely to be satisfied prior to the special meetings, the parties anticipate that in the event either party is entitled to terminate the agreement pursuant to the provisions described above, such party would decide whether to exercise or waive that termination right as soon as possible following the special meetings, or, if later, as soon as possible following the satisfaction of all of the other conditions to closing contained in the merger agreement.

     Effect of Termination

      Except for provisions in the merger agreement regarding payment of fees and expenses, the effect of termination and specified miscellaneous provisions, if the merger agreement is terminated as described above, the merger agreement will become void and have no effect. In addition, if the merger agreement is so terminated, there will be no liability on the part of FBR Group, FBR Asset, New FBR or their affiliates, directors, officers or shareholders, except that a party will not be relieved from liability for any willful breach of the merger agreement.

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     Expenses; Termination Fees

      Except as described below, each party to the merger agreement will bear its own fees and expenses in connection with the transactions contemplated by the