<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-13447
ANNALY MORTGAGE MANAGEMENT, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 22-3479661
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12 EAST 41ST STREET, SUITE 700
NEW YORK, NEW YORK
(Address of principal executive offices)
10017
(Zip Code)
(212) 696-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No____
------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the last practicable date:
Class Outstanding May 11, 1998
Common Stock, $.01 par value 12,757,674
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
<TABLE>
<CAPTION>
<S> <C>
Balance Sheet - December 31, 1997 and March 31, 1998 1
Statement of Operations for the period ended March 31, 1997 and the quarter ended March 31, 1998 2
Statement of Stockholders' Equity the quarter March 31, 1998 3
Statement of Cash Flows for the period ended March 31, 1997 and the quarter ended March 31, 1998 4
Notes to Financial Statements 5-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND MARCH 31, 1998
- -------------------------------------------------------------------------------
DECEMBER 31, MARCH 31,
1997 1998
-------------------------------------
ASSETS
CASH AND CASH EQUIVALENTS $ 511,172 $ 10,325
MORTGAGE-BACKED SECURITIES,
At fair value, net of
unamortized premium/discount 1,161,779,192 1,518,846,811
ACCRUED INTEREST RECEIVABLE 5,338,861 7,517,446
OTHER ASSETS 111,257 173,404
-------------- --------------
TOTAL ASSETS $1,167,740,482 $1,526,547,986
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements $ 918,869,000 $1,361,070,000
Payable for Mortgage-Backed Securities
purchased 105,793,723 19,529,331
Accrued interest payable 4,992,447 10,057,672
Dividends payable 2,797,058 4,082,456
Accounts payable 201,976 145,411
-------------- --------------
Total liabilities 1,032,654,204 1,394,884,870
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock: par value $.01 per share;
100,000,000 authorized;12,713,900 and
12,757,674 shares issued and
outstanding, respectively 127,139 127,577
Additional paid-in capital 132,705,765 132,768,779
Net unrealized gains (losses) on
Mortgage-Backed Securities 2,023,751 (2,088,557)
Retained earnings 229,623 855,317
-------------- --------------
Total stockholders' equity 135,086,278 131,663,116
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,167,740,482 $1,526,547,986
============== ==============
See notes to financial statements.
1
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEBRUARY 18, FOR THE
1997 THROUGH QUARTER ENDED
MARCH 31, 1997 MARCH 31, 1998
-------------------------------
<S> <C> <C>
INTEREST INCOME:
Mortgage-Backed Securities $1,031,038 $20,078,691
Money market account 29,654 30
---------- -----------
Total interest income 1,060,692 20,078,721
INTEREST EXPENSE:
Repurchase agreements 713,120 16,313,474
---------- -----------
NET INTEREST INCOME 347,572 3,765,247
GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 0 1,427,084
GENERAL AND ADMINISTRATIVE EXPENSES 64,047 484,181
---------- -----------
NET INCOME $ 283,525 $ 4,708,150
========== ===========
NET INCOME PER SHARE:
Basic $0.08 $0.37
===== =====
Dilutive $0.07 $0.36
===== =====
AVERAGE NUMBER OF SHARES OUTSTANDING 3,680,000 12,727,405
========== ===========
</TABLE>
See notes to financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 31, 1998
- -------------------------------------------------------------------------------------------------------------
COMMON ADDITIONAL NET
STOCK PAID-IN UNREALIZED RETAINED
PAR VALUE CAPITAL GAIN EARNINGS TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1997 $ 127,139 $132,705,765 $ 2,023,751 $ 229,623 $135,086,278
Exercise of stock options 438 193,262 - - 193,700
Additional cost of Initial Public
Offering (130,248) (130,248)
Available for sale securities -
Fair value adjustment - - (4,112,308) - (4,112,308)
Net income - - - 4,708,150 4,708,150
Dividends declared -
$0.32 per average share - - - (4,082,456) (4,082,456)
--------- ------------ ----------- ----------- ------------
BALANCE, MARCH 31, 1998 $ 127,577 $132,768,779 $(2,088,557) $ 855,317 $131,663,116
========= ============ =========== =========== ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------
FEBRUARY 18,1997 FOR THE QUARTER
THROUGH ENDED MARCH 31,
MARCH 31,1997 1998
-----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 283,525 $ 4,708,150
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net 85,436 1,622,343
Gain on sale of Mortgage-Backed Securities (1,427,084)
Increase in accrued interest receivable (1,521,374) (2,178,585)
Increase in other assets (8,040) (62,147)
Increase in accrued interest payable 644,634 5,065,225
Increase (Decrease) in accounts payable 164,292 (56,565)
------------- ---------------
Net cash provided by operating activities (351,527) 7,671,337
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (248,747,733) (685,643,269)
Proceeds from sale of Mortgage-Backed Securities 143,782,573
Principal payments on Mortgage-Backed Securities 483,312 94,221,118
------------- ---------------
Net cash used in investing activities (248,264,420) (447,639,578)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 241,601,000 2,632,120,000
Principal payments on repurchase agreements (25,955,000) (2,189,919,000)
Proceeds from exercise of stock options 193,700
Proceeds from private placement of equity capital 33,025,173
Additional cost of initial public offering (130,248)
Dividends paid (2,797,058)
------------- ---------------
Net cash provided by financing activities 248,671,173 439,467,394
------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 55,226 (500,847)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 12,011 511,172
------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 67,237 $ 10,325
============= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 68,487 $ 11,248,249
============= ===============
NONCASH FINANCING ACTIVITIES:
Net unrealized losses on available-for-sale securities $ (720,303) $ (2,088,557)
============= ===============
Dividends declared, not yet paid $ 4,082,456
===============
</TABLE>
See notes to financial statements.
4
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTER ENDED MARCH 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland
on November 25, 1996. The Company commenced its operations of purchasing and
managing an investment portfolio of primarily adjustable-rate Mortgage-Backed
Securities on February 18, 1997, upon receipt of the net proceeds from the
private placement of equity capital. On July 31, 1997, the Company received
additional proceeds from a direct offering to officers and directors. An
initial public offering was completed on October 14, 1997.
A summary of the Company's significant accounting policies follows:
CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand
and money market funds. The carrying amounts of cash equivalents
approximates their value.
MORTGAGE-BACKED SECURITIES - The Company invests primarily in mortgage pass-
through certificates, collateralized mortgage obligations and other mortgage-
backed securities representing interests in or obligations backed by pools of
mortgage loans (collectively, "Mortgage-Backed Securities").
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), requires the Company
to classify its investments as either trading investments, available-for-sale
investments or held-to-maturity investments. Although the Company generally
intends to hold most of its Mortgage-Backed Securities until maturity, it
may, from time to time, sell any of its Mortgage-Backed Securities as part of
its overall management of its balance sheet. Accordingly, this flexibility
requires the Company to classify all of its Mortgage-Backed Securities as
available-for-sale. All assets classified as available-for-sale are reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity.
Unrealized losses on Mortgage-Backed Securities that are considered other
than temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and
the cost basis of the Mortgage-Backed Securities is adjusted. There were no
such adjustments for the period ended December 31, 1997 and the quarter ended
March 31, 1998.
Interest income is accrued based on the outstanding principal amount of the
Mortgage-Backed Securities and their contractual terms. Premiums and
discounts associated with the purchase of the Mortgage-Backed Securities are
amortized into interest income over the lives of the securities using the
effective yield method.
Mortgage-Backed Securities transactions are recorded on the date the
securities are purchased or sold. Purchases of newly issued securities are
recorded when all significant uncertainties regarding
5
<PAGE>
the characteristics of the securities are removed, generally shortly before
settlement date. Realized gains and losses on Mortgage-Backed Securities
transactions are determined on the specific identification basis.
CREDIT RISK - At March 31, 1998, the Company has limited exposure to credit
losses on its portfolio of Mortgage-Backed Securities by only purchasing
securities from Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA"), or Government National Mortgage
Association ("GNMA"). The payment of principal and interest on the FHLMC and
FNMA Mortgage-Backed Securities are guaranteed by those respective agencies
and the payment of principal and interest on the GNMA Mortgage-Backed
Securities are backed by the full-faith-and-credit of the U.S. government.
At December 31, 1997 and March 31, 1998, all of the Company's Mortgage-Backed
Securities have an implied "AAA" rating.
INCOME TAXES - The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect thereto.
Accordingly, the Company will not be subjected to Federal income tax to the
extent of its distributions to shareholders and as long as certain asset,
income and stock ownership tests are met.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 1997, which are carried
at their fair value:
<TABLE>
<CAPTION>
FEDERAL FEDERAL GOVERNMENT
HOME LOAN NATIONAL NATIONAL TOTAL
MORTGAGE MORTGAGE MORTGAGE MORTGAGE
CORPORATION ASSOCIATION ASSOCIATION ASSETS
<S> <C> <C> <C> <C>
Mortgage-Backed
Securities, gross $273,119,008 $691,081,916 $174,164,513 $1,138,365,437
Unamortized discount (3,619) (110,567) - (114,186)
Unamortized premium 2,848,376 14,532,363 4,123,451 21,504,190
------------ ------------ ------------ --------------
Amortized cost 275,963,765 705,503,712 178,287,964 1,159,755,441
Gross unrealized gains 376,485 1,948,068 928,453 3,253,006
Gross unrealized losses (115,190) (802,801) (311,264) (1,229,255)
------------ ------------ ------------ --------------
Estimated fair value $276,225,060 $706,648,979 $178,905,153 $I,161,779,192
============ ============ ============ ==============
</TABLE>
6
<PAGE>
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of March 31, 1998, which are carried at
their fair value:
<TABLE>
<CAPTION>
FEDERAL FEDERAL GOVERNMENT
HOME LOAN NATIONAL NATIONAL TOTAL
MORTGAGE MORTGAGE MORTGAGE MORTGAGE
CORPORATION ASSOCIATION ASSOCIATION ASSETS
<S> <C> <C> <C> <C>
Mortgage-Backed
Securities, gross $409,333,869 $917,302,552 $169,034,486 $1,495,670,907
Unamortized discount (164,020) (810,586) - (974,606)
Unamortized premium 7,166,509 15,205,704 3,866,853 26,239,066
------------ ------------ ------------ --------------
Amortized cost 416,336,358 931,697,670 172,901,339 1,520,935,367
Gross unrealized gains 590,111 1,966,279 3,819 2,560,209
Gross unrealized losses (685,986) (3,007,915) (954,864) (4,648,765)
------------ ------------ ------------ --------------
Estimated fair value $416,240,483 $930,656,034 $171,950,294 $1,518,846,811
============ ============ ============ ==============
</TABLE>
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale.
The fair values of the Company's Mortgage-Backed Securities are based on market
prices provided by certain dealers who make markets in these financial
instruments. The fair values reported reflect estimates and may not necessarily
be indicative of the amounts the Company could realize in a current market
exchange. Cash and cash equivalents, interest receivable, repurchase agreements
and other liabilities are reflected in the financial statements at their
amortized cost, which approximates their fair value because of the short-term
nature of these instruments.
The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every six
months) and lifetime caps. At December 31, 1997, the weighted average lifetime
cap was 10.8%. At March 31, 1998, the weighted average lifetime cap was 10.0%.
During the period ended December 31, 1997, the company realized $735,303 in
gains from sales of Mortgage-Backed Securities. During the quarter ended March
31, 1998, the Company realized $1,427.084 in gains from sales of Mortgage-
Backed Securities. There were no losses on sales of Mortgage-Backed Securities
during the period ended December 31, 1997 or the quarter ended March 31, 1998.
3. REPURCHASE AGREEMENTS
The Company has entered into repurchase agreements to finance most of its
Mortgage-Backed Securities. The repurchase agreements are secured by the market
value of the Company's Mortgage-Backed Securities and bear interest rates that
have historically moved in close relationship to LIBOR.
As of December 31, 1997, the Company had outstanding $918,869,000 of repurchase
agreements with a weighted average borrowing rate of 6.16% and a weighted
average remaining maturity of 16
7
<PAGE>
days. At December 31, 1997, Mortgage-Backed Securities actually pledged had
an estimated fair value of $936,859,658. As of March 31, 1998, the Company
had outstanding $1,361,070,000 of repurchase agreements with a weighted
average borrowing rate of 5.58% and a weighted average remaining maturity of
20 days. At March 31, 1998, Mortgage-Backed Securities actually pledged had
an estimated fair value of $1,427,920,334.
At December 31, 1997 and March 31, 1998, the repurchase agreements had the
following remaining maturities:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
<S> <C> <C>
Within 30 days $590,960,000 $1,031,027,000
30 to 59 days 51,776,000 322,064,000
60 to 89 days - -
90 to 119 days 103,391,000 7,979,000
Over 120 days 172,742,000 -
------------ --------------
$9l8,869,000 $1,361,070,000
============ ==============
</TABLE>
4. COMMON STOCK
Options were exercised during the quarter increasing the total number of
shares outstanding to 12,757,674. The number of stock options exercised was
43,774, with a total amount paid of $193,700.
During the Company's quarter ending March 31, 1998, the Company declared
dividends to shareholders totaling $4,082,456, or $.32 per weighted average
share which was paid on April 20, 1998. For Federal income tax purposes
dividends paid for the quarter is ordinary income to the Company
stockholders.
5. EARNINGS PER SHARE (EPS)
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No. 128),
which requires dual presentation of Basic EPS and Diluted EPS on the face of
the income statement for all entities with complex capital structures. SFAS
No. 128 also requires a reconciliation of the numerator and denominator of
Basic EPS and Diluted EPS computation. The reconciliation is as follows:
8
<PAGE>
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income $4,708,150
----------
Basic EPS 4,708,150 12,727,405 $0.37
-----
Effect of dilutive securities:
Dilutive stock options - 195,790
---------- ----------
Diluted EPS $4,708,150 12,923,195 $0.36
========== ========== =====
</TABLE>
Options to purchase 312,226 shares were outstanding during the period and were
dilutive, as the exercise price (between $4.00 and $10.00) was less than the
average stock price for the quarter of $10.83. Options to purchase 2,426 shares
of stock were granted during the quarter and are not considered dilutive. The
exercise price of $11.25 was greater than the average stock price for the
quarter of $10.83
6. LEASE COMMITMENTS
The Corporation's aggregate future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998 $ 67,787
l999 92,804
2000 95,299
2001 97,868
2002 100,515
2003 and thereafter 582,406
----------
$1,036,679
==========
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Statements in this discussion regarding the Company and its business
which are not historical facts are "forward-looking statements" that involve
risks and uncertainties. For a discussion of such risks and uncertainties,
which could cause actual results to differ from those contained in the forward-
looking statements, see "Risk Factors" in the Company's Form 10-K for the year
ended December 31, 1997.
OVERVIEW
The Company is a real estate investment trust ("REIT") which acquires and
manages Mortgage-Backed Securities which can be readily financed. The Company
commenced operations on February 18, 1997 upon the closing of the Private
Placement, which resulted in proceeds to the Company of $33 million. The
Company received additional proceeds of $878,000 upon the closing of the Direct
Offering on July 31, 1997. The Company's initial public offering was completed
on October 14, 1997 raising net proceeds of $99.0 million.
The Company's principal business objective is to generate net income for
distribution to stockholders from the spread between the interest income on its
Mortgage-Backed Securities and the costs of borrowing to finance its acquisition
of Mortgage-Backed Securities. Since the commencement of operations on February
18, 1997, the Company has been in the process of building its balance sheet by
acquiring Mortgage-Backed Securities. Therefore, the operating results of the
Company reflected in the financial statements included in this Form 10-Q should
be interpreted in light of this growth process and are not necessarily
representative of what they may be in the future.
The Company will seek to generate growth in earnings and dividends per
share in a variety of ways, including through (i) issuing new Common Stock and
increasing the size of the balance sheet when opportunities in the market for
Mortgage-Backed Securities are likely to allow growth in earnings per share,
(ii) seeking to improve productivity by increasing the size of the balance sheet
at a rate faster than the rate of increase in operating expenses, (iii)
continually reviewing the mix of Mortgage-Backed Security types on the balance
sheet in an effort to improve risk-adjusted returns, and (iv) attempting to
improve the efficiency of the Company's balance sheet structure through the
issuance of uncollateralized subordinated debt, preferred stock and other forms
of capital, to the extent management deems such issuances appropriate.
RESULTS OF OPERATIONS: FOR THE QUARTER ENDED MARCH 31, 1998
The Company's 1997 fiscal year commenced with the start of operations on
February 18, 1997 and concluded on December 31, 1997. The 317-day period from
February 18, 1997 to December 31, 1997 is referred to herein as "the period
ended December 31, 1997." The quarter ended March 31, 1998 is its calendar
equivalent.
NET INCOME SUMMARY
For the quarter ended March 31, 1998, net income, as calculated according
to Generally Accepted Accounting Principles ("GAAP"), was $4,708,150, or $0.37
per average share, as compared to the period ended March 31, 1997 of $283,525,
or $0.08 per average share. Taxable income for the quarter ended March 31, 1998
was $4,635,445, or $0.36 per share. Net income per share is computed by dividing
net income by the weighted average number of shares of outstanding Common Stock
during the period, which was 12,727,405. Dividends per weighted average number
of shares outstanding was $0.32 per share, $4,082,456 in total. Return on
average equity was 13.97% on an annualized basis.
Comparing net income for the period February 18, 1997 through March 31,
1997 to the quarter ended March 31, 1998 may be deceptive. The 42-day period
ended March 31, 1997 is a shortened operating period and not a full quarter.
Secondly, during the period ended March 31, 1997 the Company's asset base was
substantially
10
<PAGE>
lower than at March 31, 1998. The reason for the asset size difference is
twofold. First, the Company was in an asset acquisition period. Additionally,
the Company's capital base was only $32 million, as compared to $133 million at
March 31, 1998.
Management's policy is to focus on income and expense measures as a
percentage of equity rather than as a percentage of assets. Therefore,
improvements in asset-based measures such as net interest margin or operating
expenses as a percentage of assets do not necessarily translate into improved
stockholder returns. Improvements in net interest income or operating expenses
as a percentage of equity, however, indicate that the Company is effectively
utilizing its equity capital base. The Company seeks to increase net income as
a percentage of equity consistent with its Capital Investment Policy.
NET INCOME SUMMARY
------------------
<TABLE>
<CAPTION>
Period Ended
March 31, 1998
(dollars in
thousands, except
per share amounts)
------------------
<S> <C>
$ 20,078
Interest Income
Interest Expense 16,313
-----------
Net Interest Income 3,765
Gain on Sale of Mortgage-Backed Securities 1,427
General and Administrative Expenses 484
-----------
Net Income 4,708
===========
Average Number of Outstanding Shares 12,727,405
Basic Net Income Per Share $ 0.37
Diluted Net Income Per Share $ 0.36
Average Total Assets $ 1,316,110
Average Equity $ 134,827
Annualized Return on Average Assets 1.43%
Annualized Return on Average Equity 13.97%
</TABLE>
TAXABLE INCOME AND GAAP INCOME
For the quarter ended March 31, 1998, income as calculated for tax purposes
(taxable income) differed from income as calculated according to generally
accepted accounting principles (GAAP income). The differences were in the
calculations of premium amortization and general and administrative expenses.
For the period February 18, 1997 through March 31, 1997 there were no
differences between GAAP and taxable income.
The distinction between taxable income and GAAP income is important to the
Company's stockholders because dividends are declared on the basis of taxable
income. While the Company does not pay taxes so long as it satisfies the
requirements for exemption from taxation pursuant to the REIT Provisions of the
Code, each year the Company completes a corporate tax form wherein taxable
income is calculated as if the Company were to be taxed. This taxable income
level determines the amount of dividends the Company can pay out over time.
The table below presents the major differences between GAAP and taxable income
for the Company.
TAXABLE INCOME
--------------
<TABLE>
<CAPTION>
Taxable General Taxable Mortgage Taxable Gain on
GAAP Net & Administrative Amortization Sale of Securities Taxable Net
Income Differences Differences Differences Income
<S> <C> <C> <C> <C> <C>
For the Quarter Ended
March 31, 1998 $4,708 $1 ($74) $4,635
For the Period Ended
December 31, 1997 $4,919 $3 ($92) $54 $4,884
</TABLE>
11
<PAGE>
INTEREST INCOME AND AVERAGE EARNING ASSET YIELD
The Company had average earning assets of $1,307.1 million for the quarter
ended March 31, 1998. The Company's primary source of income for the period
ended March 31, 1998 was interest income. A portion of income was generated by
gains on sales of Mortgage-Backed Securities. Interest income was $20.1 million
for the period ended March 31, 1998. The yield on average earning assets was
6.15% for the same period. The table below shows the Company's average balance
of cash equivalents and Mortgage-Backed Securities, the yields earned on each
type of earning assets, the yield on average earning assets and interest income.
AVERAGE EARNING ASSET YIELD
---------------------------
<TABLE>
<CAPTION>
Yield on
Average Average
Amortized Amortized
Cost of Yield on Cost of Yield on
Average Mortgage- Average Average Mortgage- Average
Cash Backed Earning Cash Backed Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
----------- ---------- ---------- ----------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
For the Quarter Ended March 31, 1998 $ 2 $1.307.088 $1,307,090 4.45% 6.15% 6.15% $20,079
For the Period Ended December 31, 1997 $30 $ 448,276 $ 448,306 4.20% 6.34% 6.34% $24,713
</TABLE>
The Constant Prepayment Rate (or "CPR") on the Company's portfolio of
Mortgage-Backed Securities for the quarter ended March 31, 1998 was 21%. "CPR"
means an assumed rate of prepayment for the Company's Mortgage-Backed
Securities, expressed as an annual rate of prepayment relative to the
outstanding principal balance of the Company's Mortgage-Backed Securities. This
CPR does not purport to be either a historical description of the prepayment
experience of the Company's Mortgage-Backed Securities or a prediction of the
anticipated rate of prepayment of the Company's Mortgage-Backed Securities.
Since a large portion of the Company's assets was purchased at a premium to par
value and only a small portion of the Company's assets was purchased at a
discount to par value, the premium balance in the Company's portfolio is
substantially higher than the discount balance. Principal prepayments had a
negative effect on the Company's earning asset yield for the quarter ended March
31, 1998 because the Company adjusts its rates of premium amortization and
discount accretion monthly based on actual payments received.
INTEREST EXPENSE AND THE COST OF FUNDS
The Company anticipates that its largest expense will usually be the cost
of borrowed funds. The Company had average borrowed funds of $1,167.5 million
and total interest expense of $16.3 million for the quarter ended March 31,
1998. Interest expense for the period February 18, 1997 through March 31, 1997
was $713,120. The average cost of funds was 5.59% for the quarter ended March
31, 1998. Interest expense is calculated in the same manner for GAAP and tax
purposes.
With the Company's current asset/liability management strategy, changes in
the Company's cost of funds are expected to be closely correlated with changes
in short-term LIBOR, although the Company may choose to extend the maturity of
its liabilities at any time. The Company's average cost of funds was 0.05% below
one-month LIBOR for the quarter ended March 31, 1998. The Company generally has
structured its borrowings to adjust with one-month LIBOR because the Company
believes that one-month LIBOR may continue to be lower than six-month LIBOR in
the present interest rate environment. During the quarter ended March 31, 1998,
average one-month LIBOR, which was 5.64%, was 0.04% lower than average six-month
LIBOR, which was 5.68%.
12
<PAGE>
The table below shows the Company's average borrowed funds and average cost
of funds as compared to average one- and average six-month LIBOR.
AVERAGE COST OF FUNDS
---------------------
<TABLE>
<CAPTION>
Average Average Cost Average Cost
One-Month of Funds of Funds
Average Average LIBOR Relative Relative to Relative
Average Average One- Six- to Average Average to Average
Borrowed Interest Cost of Month Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
---------- -------- ------- ------- ------- -------------- ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
March 31, 1998 $1,167,483 $16,313 5.59% 5.64% 5.68% (0.04%) (0.05%) (0.09%)
For the Period Ended $ 404,140 $19,677 5.61% 5.67% 5.87% (0.20%) (0.06%) (0.26%)
December 31, 1997
</TABLE>
NET INTEREST RATE AGREEMENT EXPENSE
The Company did not enter into any interest rate agreements to date. As
part of its asset/liability management process, the Company may enter into
interest rate agreements such as interest rate caps, floors and swaps. These
agreements would be entered into to reduce interest rate risk and would be
designed to provide income and capital appreciation to the Company in the event
of certain changes in interest rates. The Company reviews the need for interest
rate agreements on a regular basis consistent with its Capital Investment
Policy.
NET INTEREST INCOME
Net interest income, which equals interest income less interest expense,
totaled $3.8 million for the quarter ended March 31, 1998 and $347,572 for the
period February 18, 1997 through March 31, 1997. Net interest spread, which
equals the yield on the Company's average assets for the period less the average
cost of funds for the period, was 0.56% for the quarter ended March 31, 1998.
Net interest margin, which equals net interest income divided by average total
assets, was 1.14% on an annualized basis. Taxable net interest income was
$74,132 less than GAAP net interest income because of differing premium
amortization. The principal reason that annualized net interest margin exceeded
net interest spread is that average assets exceeded average liabilities. A
portion of the Company's assets are funded with equity rather than borrowings.
The Company did not have any interest rate agreement expenses for the quarter
ended March 31, 1998
The table below shows interest income by earning asset type, average
earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
quarter ended March 31, 1998 and the period ended December 31, 1997.
GAAP NET INTEREST INCOME
------------------------
<TABLE>
<CAPTION>
Average
Amortized
Cost of Interest Yield on
Mortgage- Income on Interest Average Average
Backed Mortgage- Average Income Total Interest Balance of Average Net
Securities Backed Cash on Cash Interest Earning Repurchase Interest Cost of Interest
Held Securities Equivalents Equivalents Income Assets Agreements Expense Funds Income
---------- ---------- ----------- ----------- -------- -------- ---------- -------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
March 31, 1998 $1,307,088 $20,079 $ 2 $30 $20,079 6.15% $1,167,483 $16,313 5.59% $3,765
For the Period Ended
December 31, 1997 $ 448,276 $24,682 $30 $31 $24,713 6.34% $ 404,140 $19,677 5.61% $5,036
</TABLE>
13
<PAGE>
GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES
For the quarter ended March 31, 1998, the Company sold Mortgage-Backed
Securities with an aggregate historical amortized cost of $142.4 million for an
aggregate gain of $1.4 million. During the period February 18, 1997 through
March 31, 1997 Mortgage-Backed Securities were not sold. The difference between
the sale price and the historical amortized cost of the Mortgage-Backed
Securities is a realized gain and increased income accordingly. The Company
does not expect to sell assets on a frequent basis, but may from time to time
sell existing assets to move into new assets which management believes might
have higher risk-adjusted returns or to manage its balance sheet as part of
management's asset/liability management strategy.
CREDIT EXPENSES
The Company has not experienced credit losses on its portfolio of Mortgage-
Backed Securities to date, but losses may be experienced in the future. At
March 31, 1998, the Company had limited its exposure to credit losses on its
portfolio of Mortgage-Backed Securities by purchasing only Agency Certificates,
which, although not rated, carry an implied "AAA" rating.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses ("operating expense" or "G&A expense")
were $484,181 for the quarter ended March 31, 1998. For the period February 18,
1997 through March 31, 1997, G&A expenses were $64,047. Taxable G&A expenses
were $1,427 less than for GAAP purposes for the quarter ended March 31, 1998.
GAAP G&A EXPENSE AND OPERATING EXPENSE RATIOS
---------------------------------------------
<TABLE>
<CAPTION>
Total G&A Total G&A
Cash Comp Expense/Average Expense/Average
and Benefits Other G&A Total G&A Assets Equity
Expense Expense Expense (annualized) (annualized)
------------ --------- --------- ---------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended
March 31, 1998 $259 $225 $484 0.15% 1.44%
For the Period Ended
December 31, 1997 $492 $360 $852 0.21% 1.61%
</TABLE>
Certain compensation expenses will increase commensurate with growth in the
Company's equity base. Despite these increases in operating expenses, management
believes that the Company's operating expenses over time are likely to grow at a
slower rate than its asset or equity base and thus management believes that the
Company's operating expense ratios are likely to continue to improve over time.
NET INCOME AND RETURN ON AVERAGE EQUITY
Net income was $4.7 million in the quarter ended March 31, 1998. Return on
average equity was 13.97% on an annualized basis. The table below shows, on an
annualized basis, the Company's net interest income, gain on sale of Mortgage-
Backed Securities and G&A expense each as a percentage of average equity, and
the return on average equity.
COMPONENTS OF RETURN ON AVERAGE EQUITY
--------------------------------------
<TABLE>
<CAPTION>
Gain on Sale of
Net Interest Mortgage-Backed G&A Expense/ Return on
Income/Average Securities/ Average Average
Equity Average Equity Equity Equity
-------------- --------------- ------------ ---------
<S> <C> <C> <C> <C>
For the Period Ended March 31, 1998 11.18% 4.23% 1.44% 13.97%
(on an annualized basis)
For the Period Ended December 31, 1997 9.49% 1.39% 1.61% 9.27%
(on an annualized basis)
</TABLE>
14
<PAGE>
DIVIDENDS AND TAXABLE INCOME
The Company elected to be taxed as a REIT under the Code. Accordingly, the
Company intends to distribute substantially all of its taxable income for each
year to stockholders, including income resulting from gains on sales of
Mortgage-Backed Securities. Through March 31, 1998, earned taxable income
exceeded dividend declarations by $742,769, or $0.06 per share, based on the
number of shares of Common Stock outstanding at period end.
DIVIDEND SUMMARY
----------------
<TABLE>
<CAPTION>
Weighted
Average Cumulative
Taxable Common Taxable Net Dividends Dividend Undistributed
Net Shares Income Declared Total Pay-out Taxable
Income Outstanding Per Share Per Share Dividends Ratio Income
------- ----------- ----------- --------- --------- -------- -------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
March 31, 1998 $4,635 12,727,405 $0.36 $0.32 $4,082 88.07% $742
For the Period Ended
December 31, 1997 $4,884 5,952,123 $0.82 $0.79 $4,690 96.0% $194
</TABLE>
FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
All of the Company's Mortgage-Backed Securities at March 31, 1998 were
adjustable-rate or fixed-rate Mortgage-Backed Securities backed by Single-Family
Mortgage Loans. All of the mortgage assets underlying such Mortgage-Backed
Securities were secured with a first lien position with respect to the
underlying single-family properties. At March 31, 1998, all the Company's
Mortgage-Backed Securities were Agency Certificates, which carry an implied
"AAA" rating. All of the Company's earning assets are marked-to-market at
liquidation value.
Discount balances are accreted as an increase in interest income over the
life of discount Mortgage-Backed Securities and premium balances are amortized
as a decrease in interest income over the life of premium Mortgage-Backed
Securities. At March 31, 1998, the Company had on its balance sheet a total of
$974,606 of unamortized discount (which is the difference between the remaining
principal value and current historical amortized cost of Mortgage-Backed
Securities acquired at a price below principal value) and a total of $26.2
million of unamortized premium (which is the difference between the remaining
principal value and the current historical amortized cost of Mortgage-Backed
Securities acquired at a price above principal value).
Mortgage principal repayments received were $94.2 million for the quarter
ended March 31, 1998. Given the Company's current portfolio composition, if
mortgage principal prepayment rates increase over the life of the Mortgage-
Backed Securities comprising the current portfolio, all other factors being
equal, the Company's net interest income should decrease during the life of such
Mortgage-Backed Securities as the Company will be required to amortize its net
premium balance into income over a shorter time period. Similarly, if mortgage
principal prepayment rates decrease over the life of such Mortgage-Backed
Securities, all other factors being equal, the Company's net interest income
should increase during the life of such Mortgage-Backed Securities as the
Company will amortize its net premium balance over a longer time period.
15
<PAGE>
The table below summarizes the Company's Mortgage-Backed Securities at
March 31, 1998 and December 31, 1997.
MORTGAGE-BACKED SECURITIES
--------------------------
<TABLE>
<CAPTION>
Estimated
Amortized Estimated Fair Value/ Weighted
Principal Net Amortized Cost/Principal Fair Principal Average
Value Premium Cost Value Value Value Yield
---------- ------- ---------- -------------- ---------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
At March 31, 1998 $1,495,670 $25,265 $1,520,935 101.70% $1,518,847 101.55% 6.51%
At December 31, 1997 $1,138,365 $21,390 $1,159,755 101.88% $1,161,779 102.06% 6.57%
</TABLE>
At March 31, 1998, the Company's Mortgage-Backed Securities consisted
solely of Agency Certificates. However, the Company may purchase other types of
Mortgage-Backed Securities in the future.
The tables below set forth certain characteristics of the Company's
Mortgage-Backed Securities at March 31, 1998 and December 31, 1997. The index
level for adjustable-rate Mortgage-Backed Securities is the weighted average
rate of the various short-term interest rate indices which determine the coupon
rate.
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
--------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Principal Value
Weighted Weighted Average Weighted Weighted at Period
Average Average Weighted Term to Average Average End as % of
Principal Coupon Index Average Net Next Lifetime Asset Mortgage-Backed
Value Rate Level Margin Adjustment Cap Yield Securities
---------- -------- -------- ----------- ---------- -------- -------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At March 31, 1998 $1,176,716 6.89% 5.45% 1.61% 12 months 10.00% 6.46% 78.68%
At December 31, 1997 $ 994,653 7.13% 5.52% 1.61% 22 months 10.78% 6.50% 87.38%
</TABLE>
FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
---------------------------------------------------
<TABLE>
<CAPTION>
Weighted Weighted Principal Value
Principal Average Average as % of Mortgage-
Value Coupon Rate Asset Yield Backed Securities
--------- ----------- ----------- -----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
At March 31, 1998 $318,954 6.85% 6.70% 21.32%
At December 31, 1997 $143,712 7.50% 7.08% 12.62%
</TABLE>
At March 31, 1998 and December 31, 1997, the Company held Mortgage-Backed
Securities with coupons linked to the one- and three-year Treasury Indices, one-
month LIBOR and the six-month CD rate. The table below segments the Company's
adjustable-rate Mortgage-Backed Securities by type of adjustment index, coupon
adjustment frequency and annual and lifetime cap adjustment.
16
<PAGE>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
MARCH 31, 1998
--------------
<TABLE>
<CAPTION>
1-Year 3-Year
One-Month Six-Month Treasury Treasury
LIBOR CD Rate Index Index
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 45 mo. 36 mo.
Weighted Average Term to Next Adjustment 1 mo. 3 mo. 31 mo. 12 mo.
Weighted Average Annual Period Cap none 2.00% 1.97% 2.00%
Weighted Average Lifetime Cap at
March 31, 1998 9.15% 10.88% 10.69% 14.16%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
March 31, 1998 36.29% 5.51% 36.75 .13%
</TABLE>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
DECEMBER 31, 1997
-----------------
<TABLE>
<CAPTION>
1-Year 3-Year
One-Month Six-Month Treasury Treasury
LIBOR CD Rate Index Index
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo.
Weighted Average Term to Next Adjustment 1 mo. 3 mo. 6 mo. 12 mo.
Weighted Average Annual Period Cap none 2.00% 1.78% 2.00%
Weighted Average Lifetime Cap
at December 31, 1997 9.21% 10.88% 11.77% 14.16%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
December 31, 1997 30.94% 7.81% 48.45% .18%
</TABLE>
The table below shows unrealized gains and losses on the Mortgage-Backed
Securities in the Company's portfolio.
UNREALIZED GAINS AND LOSSES
---------------------------
<TABLE>
<CAPTION>
At March 31, At December 31,
1998 1997
(dollars in (dollars
thousands) in thousands)
------------ ---------------
<S> <C> <C>
Unrealized Gain $ 2,622 $ 3,253
Unrealized Loss (4,710) (1,229)
Net Unrealized Gain (Loss) (2,088) 2,024
Net Unrealized Gain as % of Mortgage-Backed Securities Principal Value 0.14% 0.20%
Net Unrealized Gain as % of Mortgage-Backed Securities Amortized Cost 0.14% 0.20%
</TABLE>
INTEREST RATE AGREEMENTS
Interest rate agreements are assets that are carried on a balance sheet at
estimated liquidation value. At March 31, 1998, there were no interest rate
agreements on the Company's balance sheet.
BORROWINGS
To date, the Company's debt has consisted entirely of borrowings
collateralized by a pledge of the Company's Mortgage-Backed Securities. These
borrowings appear on the balance sheet as repurchase agreements. At March 31,
1998, the Company had established uncommitted borrowing facilities in this
market with twenty-four lenders in amounts which the Company believes are in
excess of its needs. All of the Company's Mortgage-Backed Securities are
currently accepted as collateral for such borrowings. The Company, however,
limits its borrowings, and thus its potential asset growth, in order to maintain
unused borrowing capacity and thus increase the liquidity and strength of its
balance sheet.
17
<PAGE>
For the quarter ended March 31, 1998, the term to maturity of the Company's
borrowings has ranged from one day to six months, with a weighted average
original term to maturity of 66 days and a weighted average remaining maturity
of 20 days at March 31, 1998. Many of the Company's borrowings have a cost of
funds which adjust monthly based on a fixed spread over or under one-month LIBOR
or based on the daily Fed Funds rate. As a result, the average term to the next
rate adjustment for the Company's borrowings is typically shorter than the term
to maturity for the Company's Mortgage-Backed Securities. At March 31, 1998,
the weighted average cost of funds for all of the Company's borrowings was 5.58%
and the weighted average term to next rate adjustment was 20 days.
LIQUIDITY
Liquidity, which is the Company's ability to turn non-cash assets into
cash, allows the Company to purchase additional Mortgage-Backed Securities and
to pledge additional assets to secure existing borrowings should the value of
pledged assets decline. Potential immediate sources of liquidity for the
Company include cash balances and unused borrowing capacity. Unused borrowing
capacity will vary over time as the market value of the Company's Mortgage-
Backed Securities varies. The Company's balance sheet also generates liquidity
on an on-going basis through mortgage principal repayments and net earnings held
prior to payment as dividends. Should the Company's needs ever exceed these on-
going sources of liquidity plus the immediate sources of liquidity discussed
above, management believes that the Company's Mortgage-Backed Securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is
one of the goals of the Company's Capital Investment Policy. Under this policy,
asset growth is limited in order to preserve unused borrowing capacity for
liquidity management purposes.
STOCKHOLDERS' EQUITY
The Company uses "available-for-sale" treatment for its Mortgage-Backed
Securities; these assets are carried on the balance sheet at estimated market
value rather than historical amortized cost. Based upon such "available-for-
sale" treatment, the Company's equity base at March 31, 1998 was $131.7 million,
or $10.32 per share. If the Company had used historical amortized cost
accounting, the Company's equity base at March 31, 1998 would have been $133.8
million, or $10.48 per share.
With the Company's "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact GAAP or taxable income but
rather are reflected on the balance sheet by changing the carrying value of the
asset and reflecting the change in stockholders' equity under "Net Unrealized
Losses on Assets Available for Sale." By accounting for its assets in this
manner, the Company hopes to provide useful information to stockholders and
creditors and to preserve flexibility to sell assets in the future without
having to change accounting methods.
As a result of this mark-to-market accounting treatment, the book value and
book value per share of the Company are likely to fluctuate far more than if the
Company used historical amortized cost accounting. As a result, comparisons
with companies that use historical cost accounting for some or all of their
balance sheet may be misleading.
Unrealized changes in the estimated net market value of Mortgage-Backed
Securities have one direct effect on the Company's potential earnings and
dividends: positive market-to-market changes will increase the Company's equity
base and allow the Company to increase its borrowing capacity while negative
changes will tend to limit borrowing capacity under the Company's Capital
Investment Policy. A very large negative change in the net market value of the
Company's Mortgage-Backed Securities might impair the Company's liquidity
position, requiring the Company to sell assets with the likely result of
realized losses upon sale. "Net Unrealized Losses on Assets Available for Sale"
was $2.1 million, or 0.14% of the amortized cost of Mortgage-Backed Securities
at March 31, 1998.
The table below shows the Company's equity capital base as reported and on
a historical amortized cost basis at March 31, 1998 and December 31, 1997.
Issuances of Common Stock, the level of GAAP earnings as compared to dividends
declared, and other factors influence the historical cost equity capital base.
The GAAP
18
<PAGE>
reported equity capital base is influenced by these factors plus changes in the
"Net Unrealized Losses on Assets Available for Sale" account.
STOCKHOLDERS' EQUITY
--------------------
<TABLE>
<CAPTION> GAAP
Historical Net Unrealized Reported Historical GAAP Reported
Amortized Cost Losses on Assets Equity Base Amortized Cost Equity (Book Value)
Equity Base Available for Sale (Book Value) Equity Per Share Per Share
------------------ ------------------ ------------ ---------------- -------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
At March 31, 1998 $133,751 ($2,088) $131,663 $10.48 $10.32
At December 31, 1997 $133,063 $2,024 $135,087 $10.47 $10.62
</TABLE>
LEVERAGE
The Company's debt-to-GAAP reported equity ratio at March 31, 1998 was
10:1. The Company generally expects to maintain a ratio of debt-to-equity of
between 8:1 and 12:1, although the ratio may vary from time to time based upon
various factors, including management's opinion of the level of risk of its
assets and liabilities, the Company's liquidity position, the level of unused
borrowing capacity and over-collateralization levels required by lenders when
the Company pledges assets to secure borrowings.
The target debt-to-GAAP reported equity ratio is determined under the
Company's Capital Investment Policy. Should the actual debt-to-equity ratio of
the Company increase above the target level due to asset acquisition and/or
market value fluctuations in assets, management will cease to acquire new
assets. Management will, at such time, present a plan to its Board of Directors
to bring the Company back to its target debt-to-equity ratio; in many
circumstances, this would be accomplished in time by the monthly reduction of
the balance of Mortgage-Backed Securities through principal repayments.
ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES
Management continually reviews the Company's asset/liability management
strategy with respect to interest rate risk, mortgage prepayment risk, credit
risk and the related issues of capital adequacy and liquidity. The Company
seeks attractive risk-adjusted stockholder returns while maintaining a strong
balance sheet.
The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although it has not done so to date, the
Company may seek to mitigate the potential impact on net income of periodic and
lifetime coupon adjustment restrictions in its portfolio of Mortgage-Backed
Securities by entering into interest rate agreements such as interest rate caps
and interest rate swaps.
Changes in interest rates may also have an effect on the rate of mortgage
principal prepayments and, as a result, prepayments on Mortgage-Backed
Securities. The Company will seek to mitigate the effect of changes in the
mortgage principal repayment rate from an economic point of view by balancing
assets purchased at a premium with assets purchased at a discount. To date, the
aggregate premium exceeds the aggregate discount on Mortgage-Backed Securities
in the Company's portfolio. As a result, prepayments, which result in the
expensing of unamortized premium, will reduce the Company's net income compared
to what net income would be absent such prepayments.
INFLATION
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates and other factors drive the Company's
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates. The
Company's financial statements are prepared in accordance with GAAP and the
Company's dividends are determined by the Company's net income as
19
<PAGE>
calculated for tax purposes; in each case, the Company's activities and balance
sheet are measured with reference to historical cost or fair market value
without considering inflation.
OTHER MATTERS
The Company calculated its qualified REIT Assets, as defined in the
Internal Revenue Code of 1986, as amended (the "Code"), to be 99.5% of is total
assets, as compared to the Code requirement that at least 75% of its total
assets must be qualified REIT Assets. The Company also calculates that 93.4%
of its revenue qualifies for the 75% source of income test and 100% of its
revenue qualifies for the 95% source of income test under the REIT rules. The
Company also met all REIT requirements regarding the ownership of its common
stock and the distributions of its net income. Therefore, as of March 31, 1998,
the Company believes that it qualified as a REIT under the provisions of the
Code.
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act of
1940. If the Company were to become regulated as an investment company, then
the Company's use of leverage would be substantially reduced. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" ("Qualifying Interests"). Under current interpretation of the
staff of the Commission, in order to qualify for this exemption, the Company
must maintain at least 55% of its assets directly in Qualifying Interests. In
addition, unless certain mortgage securitites represent all the certificates
issued with respect to an underlying pool of mortgages, such mortgage securities
may be treated as securities separate from the underlying mortgage loans and,
thus, may not be considered Qualifying Interests for purposes of the 55%
requirement. As of March 31, 1998, the Company calculates that it is in
compliance with this requirement.
20
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 1 - Financial Data Schedule
(b) Reports
None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANNALY MORTGAGE MANAGEMENT, INC.
Dated: May 11, 1998 By: /s/ Michael A.J. Farrell
-----------------------------------------
Michael A.J. Farrell
Chairman of the Board and Chief Executive
Officer
(authorized officer of registrant)
Dated: May 11, 1998 By: /s/ Kathryn F. Fagan
-----------------------------------------
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal accounting officer)
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1998 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-30-1998
<CASH> 11
<SECURITIES> 1,518,847
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,526,496
<PP&E> 51
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,526,548
<CURRENT-LIABILITIES> 1,394,885
<BONDS> 0
0
0
<COMMON> 132,896
<OTHER-SE> (1,233)
<TOTAL-LIABILITY-AND-EQUITY> 1,526,548
<SALES> 0
<TOTAL-REVENUES> 20,079
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 484
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,313
<INCOME-PRETAX> 4,708
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,708
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,708
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
