FBR & Co.

In January 2017, the FASB issued ASU 2017-04, “Intangibles — Goodwill and Other (Topic 350) — Simplifying the Test for Goodwill Impairment (Topic 805)”. The standard simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. Instead, a goodwill impairment charge will be measured at the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of the reporting unit.  This guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The standard must be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company is currently in the process of evaluating the impact of the adoption of this ASU on its consolidated financial statements.

During the three months ended March 31, 2017, the Company recorded a tax provision of $52 which results in a 3.9% effective tax rate.  During the three months ended March 31, 2017, the Company’s effective tax rate differed from statutory tax rate as a result of recording a full valuation allowance against its net deferred tax assets.  Prior to recording a full valuation allowance against its net deferred tax assets in the third quarter of 2016, the Company’s first quarter 2016 tax provision was determined pursuant to ASC 740, “Income Taxes” (“ASC 740”), using an estimated annual effective rate based on forecasted taxable income for the full year.  During the three months ended March 31, 2016, the Company recorded a tax benefit of $6,631 and its effective tax rate was 54.9%.  For the three months ended March 31, 2016, the effective tax rate differed from statutory tax rates primarily due to the effects of adopting the guidance in ASU 2016-09 which requires the tax effects of share based awards to be treated as discrete items in the interim period in which the windfalls or shortfalls occur.  During the first quarter of 2016, windfalls of $970 were included in the Company’s income tax benefit.

On April 12, 2017, another purported shareholder of the Company filed a second putative class action against the same defendants that also challenges the disclosures made in connection with the Merger, styled Woo J. Kim v. FBR & Co., et al., Case No. 1:17-cv-004440LMB-IDD.  The Kim complaint asserts substantially the same claims as the Rubin complaint, and those claims are based on substantially the same categories of alleged omissions.  The plaintiff in the Kim action seeks to enjoin the consummation of the Merger or, in the alternative, for rescission of the merger or rescissory damages.  The plaintiff in the Kim action also seeks damages and certain costs and fees, including attorneys’ and experts’ fees.  

In the first quarter of 2017, we recognized a tax provision of $0.1 million which results in a 3.9% effective tax rate.  Our effective tax rate in the first quarter of 2017 differed from statutory tax rates as a result of recording a full valuation allowance against our net deferred tax assets.  Prior to recognizing a full valuation allowance against our net deferred tax assets in the third quarter of 2016, our first quarter of 2016 tax provision was determined pursuant to ASC 740, “Income Taxes” (“ASC 740”), using an estimated annual effective rate based on forecasted taxable income for the full year, During the first quarter of 2016, we recognized a tax benefit of $6.6 million and our effective tax rate was 54.9%. Our first quarter 2016 effective tax rate differed from statutory tax rates primarily due to the effects of adopting the guidance in ASU 2016-09 which requires the tax effects of share based awards to be treated as discrete items in the interim period in which the tax windfalls or shortfalls occur.  During the first quarter of 2016, windfalls of $1.0 million were included in our income tax benefit.

We entered into an amended and restated plan of merger, dated as of March 15, 2017, and effective as of February 17, 2017, with B. Riley Financial, Inc. and BRC Merger Sub, LLC (“Merger Sub”), pursuant to which we will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger.  Following the announcement of the Merger, two actions were filed in the United States District Court for the Eastern District of Virginia.

On April 4, 2017, a purported shareholder of our Company filed a putative class action against the Company and the members of our board of directors that challenges the disclosures made in connection with the Merger, styled Michael Rubin v. FBR & Co., et al., Case No. 1:17-cv-00410-LMB-MSN.  The Rubin complaint alleges that the registration statement filed in connection with the Merger fails to disclose certain allegedly material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule 14a-9 promulgated thereunder.  The alleged omissions generally relate to (i) certain financial projections; (ii) alleged conflicts of interest faced by our executive officers and our financial advisor, (iii) the process prior to the Merger; and (iv) certain valuation analyses performed by our financial advisor.  Based on these allegations, the plaintiff in the Rubin action seeks to enjoin the forth coming shareholder vote on the Merger and the consummation of the Merger or, in the alternative, for rescission of the Merger or rescissory damages.  The plaintiff in the Rubin action also seeks certain costs and fees, including attorneys’ and experts’ fees.