<PAGE>
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: JUNE 30, 2000
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 at August 11, 2000
Common Stock, $.01 par value 14,210,645
<PAGE>
Annaly Mortgage Management, Inc.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999 1
Statements of Operations (Unaudited) for the quarters and six months ended June 30, 2000
and 1999 2
Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 2000 3
Statements of Cash Flows (Unaudited) for the quarters and six months ended June 30, 2000
and 1999 4
Notes to Financial Statements (Unaudited) 5-9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-21
Item 3. Quantitative and Qualitative Disclosure about Market Risk 22-23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
</TABLE>
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
----------------------- ----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 121,512 $ 71,918
Mortgage-Backed Securities, at fair value 1,450,852,364 1,437,792,631
Receivable for Mortgage-Backed Securities sold 12,653,699 46,402,360
Accrued interest receivable 6,898,611 6,857,683
Other assets 247,150 197,896
----------------------- ----------------------
Total assets $1,470,773,336 $1,491,322,488
======================= ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $1,349,682,000 $1,338,295,750
Payable for Mortgage-Backed Securities purchased 38,154,012
Accrued interest payable 6,117,961 6,682,687
Dividends payable 4,262,402 4,753,461
Accounts payable 271,327 164,100
----------------------- ----------------------
Total liabilities 1,360,333,690 1,388,050,010
----------------------- ----------------------
Stockholders' Equity:
Common stock: par value $.01 per share; 100,000,000
Authorized, 14,208,007 and 13,581,316 shares issued
and outstanding, respectively 142,080 135,813
Additional paid-in capital 145,303,101 140,262,657
Accumulated other comprehensive loss (35,008,078) (37,568,510)
Retained earnings 2,543 442,518
----------------------- ----------------------
Total stockholders' equity 110,439,646 103,272,478
----------------------- ----------------------
Total liabilities and stockholders' equity $1,470,773,336 $1,491,322,488
======================= ======================
</TABLE>
See notes to financial statements
1
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the For the Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage-Backed Securities $25,732,165 $22,264,812 $50,347,932 $44,279,733
Other interest income 2,355 118 3,370 138
---------------- ----------------- ----------------- ------------------
Total interest income 25,734,520 22,264,930 50,351,302 44,279,871
INTEREST EXPENSE:
Repurchase agreements 21,453,016 16,865,824 40,745,970 34,016,865
---------------- ----------------- ----------------- ------------------
NET INTEREST INCOME 4,281,504 5,399,106 9,605,332 10,263,006
GAIN ON SALE OF MORTGAGE-BACKED
SECURITIES
64,774 25,853 171,627 90,413
GENERAL AND ADMINISTRATIVE
EXPENSES
507,322 561,010 1,089,641 1,171,014
---------------- ----------------- ----------------- ------------------
NET INCOME 3,838,956 4,863,949 8,687,318 9,182,405
---------------- ----------------- ----------------- ------------------
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on available-
for-sale securities (630,080) (13,419,555) 2,732,059 (12,933,640)
Less: reclassification adjustment
for net gains included in net income (64,774) (25,853) (171,627) (90,413)
---------------- ----------------- ----------------- ------------------
Other comprehensive gain (loss) (694,854) (13,445,408) 2,560,432 (13,024,053)
---------------- ----------------- ----------------- ------------------
COMPREHENSIVE INCOME $ 3,144,102 ($ 8,581,459) $11,247,750 ($ 3,841,648)
================ ================= ================= ==================
NET INCOME PER SHARE:
Basic $0.27 $0.38 $0.63 $0.72
================ ================= ================= ==================
Diluted $0.26 $0.37 $0.61 $0.71
================ ================= ================= ==================
AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 14,039,741 12,697,338 13,850,140 12,677,718
================ ================= ================= ==================
Diluted 14,631,940 13,110,275 14,152,881 12,957,718
================ ================= ================= ==================
</TABLE>
See notes to financial statements
2
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
Common Additional
Stock Paid-In Comprehensive Retained
Par Value Capital Income Earnings
----------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $135,813 $140,262,657 $442,518
Net Income $4,848,362 4,848,362
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 3,255,286
-------------------
Comprehensive income $8,103,648
===================
Exercise of stock options 346 138,150
Proceeds from direct purchase 2,838 2,313,779
Dividends declared for the quarter
ended March 31, 2000,
$0.35 per average share (4,864,891)
----------------- ------------------- ----------------
BALANCE, MARCH 31, 2000 $138,997 $142,714,586 $425,989
Net Income $3,838,956 3,838,956
Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment (694,854)
-------------------
Comprehensive income $3,144,102
===================
Exercise of stock options 10 8,115
Proceeds from direct purchase 3,073 2,580,400
Dividends declared for the quarter
ended June 30, 2000,
$0.30 per average share (4,262,402)
----------------- ------------------- ----------------
BALANCE, JUNE 30, 2000 $142,080 $145,303,101 $ 2,543
================= =================== ================
Disclosure of reclassification amount:
Unrealized holding gains arising
during the period $2,732,059
Less: reclassification adjustment for
gains included in net income (171,627)
-------------------
Net unrealized gains on securities $2,560,432
===================
<CAPTION>
Other
Comprehensive
Income Total
------------------- -------------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1999 ($37,568,510) $103,272,478
Net Income
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 3,255,286
Comprehensive income 8,103,648
Exercise of stock options 138,496
Proceeds from direct purchase 2,316,617
Dividends declared for the quarter
ended March 31, 2000,
$0.35 per average share (4,864,891)
------------------- -------------------
BALANCE, MARCH 31, 2000 ($34,313,224) $108,966,348
Net Income
Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment (694,854)
Comprehensive income 3,144,102
Exercise of stock options 8,125
Proceeds from direct purchase 2,583,473
Dividends declared for the quarter
ended June 30, 2000,
$0.30 per average share (4,262,402)
------------------- -------------------
BALANCE, JUNE 30, 2000 ($35,008,078) $110,439,646
=================== ===================
Disclosure of reclassification amount:
Unrealized holding gains arising
during the period
Less: reclassification adjustment for
gains included in net income
Net unrealized gains on securities
</TABLE>
See notes to financial statements
3
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter For the Quarter
Ended Ended For the Six For the Six
June 30, June 30, Months Ended Months Ended June
2000 1999 June 30, 2000 30, 1999
--------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,838,956 $4,863,949 $8,687,318 $9,182,405
Adjustments to reconcile net income to net cash
Provided by operating activities:
Amortization of mortgage premiums and
discounts, net 519,905 1,886,272 994,611 4,050,915
Gain on sale of mortgage-backed securities (64,774) (25,853) (171,627) (90,413)
Decrease (increase) in accrued interest (128,822) 16,798 (40,928) (620,322)
receivable
Increase in other assets (30,959) (171,534) (49,254) (190,951)
Increase (decrease) in accrued interest payable 678,168 (814,852) (564,726) 3,715,195
Increase (decrease) in accounts payable (568) 100,425 107,227 291,092
--------------- ----------------- ------------------ -------------------
Net cash provided by operating activities 4,811,906 5,855,205 8,962,621 16,337,921
--------------- ----------------- ------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (85,683,125) (101,582,524) (174,111,811) (356,751,056)
Proceeds from sale of Mortgage-Backed Securities 18,877,266 16,443,000 88,659,898 48,212,366
Principal payments of Mortgage-Backed
Securities 38,538,346 110,312,495 69,724,277 235,805,426
--------------- ----------------- ------------------ -------------------
Net cash provided (used) in investing
activities (28,267,513) 25,172,971 (15,727,636) (72,733,264)
--------------- ----------------- ------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 3,414,378,000 2,619,594,000 6,516,210,500 5,272,183,000
Principal payments on repurchase agreements 3,388,683,500) (2,646,710,000) (6,504,824,250) (5,207,953,000)
Proceeds from exercise of stock options 8,125 1,000 146,621 196,496
Proceeds from direct purchase 2,583,471 4,900,090
Dividends paid (4,864,891) (4,190,108) (9,618,352) (8,047,771)
--------------- ----------------- ------------------ -------------------
Net cash provided (used) by
financing activities 23,421,205 (31,305,108) 6,814,609 56,378,725
--------------- ----------------- ------------------ -------------------
Net increase (decrease) in cash and cash equivalents (34,402) (276,932) 49,594 (16,618)
Cash and cash equivalents, beginning of period 155,914 329,334 71,918 69,020
--------------- ----------------- ------------------ -------------------
Cash and cash equivalents, end of period $ 121,512 $ 52,402 $ 121,512 $ 52,402
=============== ================= ================== ===================
Supplemental disclosure of cash flow Information:
Interest paid $20,774,848 $17,680,676 $41,310,696 $30,241,491
=============== ================= ================== ===================
Noncash financing activities:
Net change in unrealized losses on available-for-
sale securities ($694,854) ($13,445,408) $2,560,432 ($13,024,053)
=============== ================= ================== ===================
Dividends declared, not yet paid $4,262,402 $4,444,142 $4,262,402 $4,444,142
=============== ================= ================== ===================
</TABLE>
See notes to financial statements
4
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 Mortgage-Backed Securities on February 18, 1997, upon
receipt of the net proceeds from the private placement of equity capital. An
initial public offering was completed on October 14, 1997.
A summary of the Company's significant accounting policies follows:
BASIS OF PRESENTATION - The accompanying unaudited financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. The interim
financial statements for the three and six month periods are unaudited; however,
in the opinion of the Company's management, all adjustments, consisting only of
normal recurring accruals, necessary for a fair statement of the results of
operations have been included. These unaudited financials statements should be
read in conjunction with the audited financial statements included in the
Company's Annual Report on form 10-K for the year ended December 31, 1999. The
nature of the Company's business is such that the results of any interim period
are not necessarily indicative of results for a full year.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand
and money market funds. The carrying amounts of cash equivalents approximate
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 six months ended June 30, 2000 and the year ended December 31, 1999.
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 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 June 30, 2000 and December 31, 1999, 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
June 30, 2000 and December 31, 1999, all of the Company's Mortgage-Backed
Securities have a "AAA" rating or an implied a "AAA" rating.
5
<PAGE>
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 June 30, 2000, which are carried at their
fair value:
<TABLE>
<CAPTION>
FEDERAL FEDERAL GOVERNMENT
HOME LOAN NATIONAL NATIONAL TOTAL
MORTGAGE MORTGAGE MORTGAGE MORTGAGE-BACKED
CORPORATION ASSOCIATION ASSOCIATION SECURITIES
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed $ 502,002,481 $ 870,659,962 $ 92,305,316 $ 1,464,967,759
Securities, gross
Unamortized discount (209,156) (1,177,013) -- (1,386,169)
Unamortized premium 8,423,271 12,194,445 1,661,136 22,278,852
-------------------------------------------------------------------------
Amortized cost 510,216,596 881,677,394 93,966,452 1,485,860,442
Gross unrealized gains 168,383 699,235 867,618
Gross unrealized losses (11,973,876) (20,725,170) (3,176,650) (35,875,696)
-------------------------------------------------------------------------
Estimated fair value $ 498,411,103 $ 861,651,459 $ 90,789,802 $ 1,450,852,364
=========================================================================
</TABLE>
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 1999, which are carried at
their fair value:
<TABLE>
<CAPTION>
FEDERAL FEDERAL GOVERNMENT
HOME LOAN NATIONAL NATIONAL TOTAL
MORTGAGE MORTGAGE MORTGAGE MORTGAGE-BACKED
CORPORATION ASSOCIATION ASSOCIATION SECURITIES
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed
Securities, gross $ 454,711,462 $ 900,782,563 $ 97,423,038 $ 1,452,917,063
Unamortized discount (171,241) (964,133) -- (1,135,374)
Unamortized premium 8,454,547 13,359,448 1,765,457 23,579,452
-------------------------------------------------------------------------
Amortized cost 462,994,768 913,177,878 99,188,495 1,475,361,141
Gross unrealized gains 359,888 1,171,250 1,531,138
Gross unrealized losses (12,091,145) (22,966,353) (4,042,150) (39,099,648)
-------------------------------------------------------------------------
Estimated fair value $ 451,263,511 $ 891,382,775 $ 95,146,345 $ 1,437,792,631
=========================================================================
</TABLE>
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 June 30, 2000, and December 31, 1999, the weighted
average lifetime cap was 10.4% and 10.6% respectively.
6
<PAGE>
During the six months ended June 30, 2000 and 1999, the Company's realized
$171,627 and $90,413 in gains from sales of Mortgage-Backed Securities,
respectively. During the year ended December 31, 1999, the Company realized
$563,259 in gains for sales of Mortgage-Backed Securities. There were no losses
on sales of Mortgage-Backed Securities for the six months ended June 30, 2000.
Losses totaled $108,477 for the year ended December 31, 1999.
3. REPURCHASE AGREEMENTS
As of June 30, 2000, the Company had outstanding $1,349,682,000 of
repurchase agreements with a weighted average borrowing rate of 6.30%. The
weighted average remaining maturity was 24 days and a weighted average original
term was 39 days. As of December 31, 1999, the Company had outstanding
$1,338,295,750 of repurchase agreements with a weighted average borrowing rate
of 5.26%. The weighted average remaining maturity was 20 days.
At June 30, 2000 and December 31, 1999, the repurchase agreements had the
following remaining maturities:
June 30, 2000 December 31, 1999
------------------------------------------
Within 30 days $ 907,214,000 $ 1,197,416,250
30 to 59 days 265,017,000 25,767,000
60 to 89 days 83,520,000 -
90 to 119 days 54,676,000 115,112,500
120 days or over 39,255,000 -
------------------------------------------
$ 1,349,682,000 $ 1,338,295,750
==========================================
4. COMMON STOCK
Options were exercised and the share purchase and dividend reinvestment
plan was in effect during the six month period ending June 30, 2000 increasing
the total number of shares outstanding to 14,208,007. The number of stock
options exercised was 35,624, with an aggregate purchase price of $146,621. The
number of shares issued in the direct purchase plan was 591,067 with an
aggregate purchase price of $4,900,090. During the year ended December 31, 1999,
57,204 options were exercised at an aggregate price of $233,276. Also, 875,688
shares were purchased in direct offering, total $8,170,602.
During the six months ending June 30, 2000, the Company declared dividends
to shareholders totaling $9,127,293 or $0.66 per weighted average share, of
which $4,262,402 was paid on July 27, 2000. During the Company's year ending
December 31, 1999, the Company declared dividends to shareholders totaling
$17,977,754, or $1.39 per weighted average share, of which $13,224,293 was paid
during the period and $4,753,461 was paid on January 27, 2000. For Federal
income tax purposes dividends paid for the year ended December 31, 1999 are
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.
7
<PAGE>
For the three months ended June 30, 2000 the reconciliation is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30, 2000
-----------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-----------------------------------------------------
<S> <C> <C> <C>
Net income $ 3,838,956
-------------
Basic EPS 3,838,956 14,039,741 $ 0.27
===========
Effect of dilutive securities:
Dilutive stock options - 592,199
-----------------------------------------------------
Diluted EPS $ 3,838,956 14,631,940 $ 0.26
=====================================================
</TABLE>
For the six months ended June 30, 2000 the reconciliation is as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 2000
-----------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-----------------------------------------------------
<S> <C> <C> <C>
Net income $ 8,687,318
-------------
Basic EPS 8,687,318 13,850,140 $ 0.63
===========
Effect of dilutive securities:
Dilutive stock options - 302,741
-----------------------------------------------------
Diluted EPS $ 8,687,318 14,152,881 $ 0.61
=====================================================
</TABLE>
Options to purchase 653,256 shares were outstanding during the quarter
ended June 30, 2000 and dilutive, as the exercise price (between $4.00 and
$8.63) was less than the average stock price for the three month period for the
Company of $8.69. Options to purchase 155,176 shares of stock were outstanding
during the period and are not considered dilutive. The exercise price (between
$8.94 and $11.25) was greater than the average stock price for the three month
period of $8.69.
Options to purchase 354,256 shares were outstanding during the six months
ended June 30, 2000 and dilutive, as the exercise price (between $4.00 and
$8.125) was less than the average stock price for the six month period for the
Company of $8.47. Options to purchase 454,176 shares of stock were outstanding
during the period and are not considered dilutive. The exercise price (between
$8.63 and $11.25) was greater than the average stock price for the three month
period of $8.47.
6. COMPREHENSIVE INCOME
The Company adopted FASB Statement no. 130, Reporting Comprehensive Income,
Statement no. 130 requires the reporting of comprehensive income in addition to
net income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income. The
Company at June 30, 2000 and December 31, 1999 held securities classified as
available-for-sale. At June 30, 2000 and December 31, 1999, the net unrealized
losses totaled $35,008,078 and $37,568,510, respectively.
8
<PAGE>
7. LEASE COMMITMENTS
The Corporation has non-cancelable lease for office space, which commenced
in April 1998 and expires in December 2007.
The Corporation's aggregate minimum lease payments are as follows:
2000 95,299
2001 97,868
2002 100,515
2003 110,261
2004 through 2007 472,145
----------
Total lease obligation $ 876,088
==========
8. RELATED PARTY TRANSACTIONS
Included in "Other Assets" on the Balance sheet is an investment in Annaly
International Money Management, Inc. On June 24, 1998, the Company acquired
99,960 nonvoting shares, at a cost of $49,980. The officers and directors of
Annaly International Money Management Inc. are also officers and directors of
the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a real estate investment trust that owns and manages a portfolio of
mortgage-backed securities. Our principal business objective is to generate net
income for distribution to our stockholders from the spread between the interest
income on our mortgage-backed securities and the costs of borrowing to finance
our acquisition of mortgage-backed securities.
We commenced operations on February 18, 1997 upon the consummation of a
private placement. We completed our initial public offering on October 14, 1997.
The 317-day period ended December 31, 1997 was a short operating period and not
a full twelve months
RESULTS OF OPERATIONS: FOR THE QUARTER ENDED JUNE 30, 2000 AND 1999
NET INCOME SUMMARY
For the quarter ended June 30, 2000, our GAAP net income was $3.8 million,
or $.27 basic earnings per average share, as compared to $4.9 million, or $.38
basic earnings per average share, for the quarter ended June 30, 1999. We
compute our GAAP net income per share by dividing net income by the weighted
average number of shares of outstanding common stock during the period, which
was 14,039,741 for the quarter ended June 30, 2000 and 12,697,338 for the
quarter ended June 30, 1999. Dividends per weighted average number of shares
outstanding for the quarter ended June 30, 2000 was $.30 per share, or $4.3
million in total. Dividends per weighted average number of shares outstanding
for the quarter ended March 31, 1999 was $.35 per share, or $4.4 million in
total. Our return on average equity was 14.00% for the quarter ended June 30,
2000 and 16.20% for the quarter ended June 30, 1999.
<TABLE>
<CAPTION>
NET INCOME SUMMARY
------------------
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income $25,734 $22,265 $50,351 $44,280
Interest Expense 21,453 16,866 40,746 34,017
-----------------------------------------------------------------
Net Interest Income 4,281 5,399 9,605 10,263
Gain on Sale of Mortgage-Backed Securities 65 26 172 90
General and Administrative Expenses 507 561 1,090 1,171
-----------------------------------------------------------------
Net Income $ 3,839 $4,864 $8,687 $9,182
=================================================================
Average Number of Basic Shares Outstanding 14,039,741 12,697,338 13,850,140 12,677,718
Average Number of Diluted Shares Outstanding 14,631,940 13,110,275 14,152,881 12,957,718
Basic Net Income Per Share $0.27 $0.38 $0.63 $0.72
Diluted Net Income Per Share $0.26 $0.37 $0.61 $0.71
Average Total Assets $1,457,152 $1,496,793 $1,456,436 $1,508,688
Average Equity $109,703 $120,104 $107,911 $123,112
Annualized Return on Average Assets 1.05% 1.30% 1.20% 1.22%
Annualized Return on Average Equity 14.00% 16.20% 16.10% 14.92%
</TABLE>
10
<PAGE>
TAXABLE INCOME AND GAAP INCOME
For the quarter ended June 30, 2000 and 1999, our income as calculated for
tax purposes (taxable income) differed from income as calculated according to
GAAP (GAAP income). Our taxable income for the quarter ended June 30, 2000 was
approximately $3.4 million, or $0.25 per share, as compared to taxable income of
$4.9 million, or $0.38 per share, for the quarter ended June 30, 1999. The
differences were in the calculations of premium and discount amortization, gains
on sale of mortgage-backed securities, and general and administrative expenses.
The distinction between taxable income and GAAP income is important to
our stockholders because dividends are declared on the basis of taxable income.
While we do not pay taxes so long as we satisfy the requirements for exemption
from taxation pursuant to the REIT provisions of the Internal Revenue Code, each
year we complete a corporate tax form on which taxable income is calculated as
if we were to be taxed. This taxable income level determines the amount of
dividends we can pay out over time. The table below presents the major
differences between our GAAP and taxable income for the quarters ended June 30,
2000 and March 31, 2000, the year ended December 31, 1999, and the four quarters
in 1999
<TABLE>
<CAPTION>
TAXABLE INCOME
--------------
Taxable General Taxable Taxable Gain
& Mortgage on Sale of
GAAP Net Administrative Amortization Securities Taxable Net
Income Differences Differences Differences Income
-------------- ---------------- ---------------- --------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended
June 30, 2000 $3,839 $1 ($323) ($69) $3,448
For the Quarter Ended
March 31, 2000 $4,848 $1 $16 ($25) $4,840
----------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1999 $18,139 $9 $814 ($525) $18,437
For the Quarter Ended
December 31, 1999 $4,444 $2 $21 ($288) $4,179
For the Quarter Ended
September 30, 1999 $4,513 $5 ($14) ($235) $4,269
For the Quarter Ended
June 30, 1999 $4,864 $2 $363 - $5,229
For the Quarter Ended
March 31, 1999 $4,318 - $444 ($2) $4,760
</TABLE>
INTEREST INCOME AND AVERAGE EARNING ASSET YIELD
We had average earning assets of $1.5 billion for the quarters ended June
30, 2000 and 1999. Our primary source of income for the quarters ended June 30,
2000 and 1999 was interest income. A portion of our income was generated by
gains on the sales of our mortgage-backed securities. Our interest income was
$25.7 million for the quarter ended June 30, 2000 and $22.3 million for the
quarter ended June 30, 1999. Our yield on average earning assets was 6.97% and
5.95% for the same respective periods. Our average earning asset balance
decreased by $20.5 million for the quarter ended June 30, 2000 as compared to
the quarter ended June 30, 1999. Interest income increased by $3.4 million for
the quarter ended June 30, 2000 over the quarter ended June 30, 1999, due to the
decline in the portfolio CPR and an increase in the coupons on adjustable rate
securities. The table below shows our average balance of cash equivalents and
mortgage-backed securities, the yields we earned on each type of earning assets,
our yield on average earning assets and our interest income for the quarters
ended June 30, 2000 and March 31, 2000, the year ended December 31, 1999, and
the four quarters in 1999.
11
<PAGE>
<TABLE>
<CAPTION>
AVERAGE EARNING ASSET YIELD
---------------------------
Yield on
Average Yield on Average 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> <C>
For the Quarter ended June 30, 2000 $243 $1,476,283 $1,476,526 3.29% 6.97% 6.97% $25,735
For the Quarter ended March 31, 2000 $226 $1,448,148 $1,448,374 1.79% 6.80% 6.80% $24,617
---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 $221 $1,461,033 $1,461,254 4.10% 6.15% 6.15% $89,812
For the Quarter Ended December 31, 1999 $2 $1,420,308 $1,420,310 4.05% 6.58% 6.58% $23,371
For the Quarter Ended September 30, 1999 $877 $1,416,525 $1,417,404 4.10% 6.26% 6.25% $22,161
For the Quarter Ended June 30, 1999 $2 $1,496,793 $1,496,795 4.30% 5.95% 5.95% $22,265
For the Quarter Ended March 31, 1999 $2 $1,502,627 $1,502,629 4.01% 5.87% 5.87% $22,015
</TABLE>
The constant prepayment rate (or CPR) on our mortgage-backed securities for
the quarter ended June 30, 2000 was 11% and for the quarter ended June 30, 1999
was 21%. CPR is an assumed rate of prepayment for our mortgage-backed
securities, expressed as an annual rate of prepayment relative to the
outstanding principal balance of our mortgage-backed securities. CPR does not
purport to be either a historical description of the prepayment experience of
our mortgage-backed securities or a prediction of the anticipated rate of
prepayment of our mortgage-backed securities.
Principal prepayments had a negative effect on our earning asset yield for
the quarters ended June 30, 2000 and 1999 because we adjust our rates of premium
amortization and discount accretion monthly based upon the effective yield
method, which takes into consideration changes in prepayment speeds.
INTEREST EXPENSE AND THE COST OF FUNDS
We anticipate that our largest expense will be the cost of borrowed funds.
We had average borrowed funds of $1.4 billion and total interest expense of
$21.5 million for the quarter ended June 30, 2000. We had average borrowed funds
of $1.4 billion and total interest expense of $16.9 million for the quarter
ended June 30, 1999. Our average cost of funds was 6.30% for the quarter ended
June 30, 2000 and 4.91% for the quarter ended June 30, 1999. The cost of funds
rate increased 1.39% for the quarter ended June 30, 2000 when compared to the
quarter ended June 30, 1999; consequently, interest expense increased by 27%.
With our current asset/liability management strategy, changes in our cost of
funds are expected to be closely correlated with changes in short-term LIBOR,
although we may choose to extend the maturity of our liabilities at any time.
Our average cost of funds was 0.16% below one-month LIBOR for the quarter ended
June 30, 2000 and 0.05% below average one-month LIBOR for the quarter ended June
30, 1999. We generally have structured our borrowings to adjust with one-month
LIBOR because we believe that one-month LIBOR may continue to be lower than
six-month LIBOR in the present interest rate environment. During the quarter
ended June 30, 2000, average one-month LIBOR, was 6.46%, which was 0.38% lower
than average six-month LIBOR, which was 6.84%. During the quarter ended June 30,
1999, average one-month LIBOR, was 4.96%, 0.23% lower than average six-month
LIBOR, which was 5.19%.
The table below shows our average borrowed funds and average cost of funds
as compared to average one-month and average six-month LIBOR for the quarters
ended June 30, 2000 and March 31, 2000, the year ended December 31, 1999 and the
four quarters in 1999.
12
<PAGE>
<TABLE>
<CAPTION>
AVERAGE COST OF FUNDS
---------------------
Average
One-Month Average Cost Average Cost
LIBOR of Funds of Funds
Relative to Relative to Relative to
Average Average Average Average Average Average Average
Borrowed Interest Cost of One-Month Six-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
June 30, 2000 $1,360,419 $21,453 6.30% 6.46% 6.84% (0.38%) (0.16%) (0.54%)
For the Quarter Ended
March 31, 2000 $1,329,900 $19,293 5.80% 5.92% 6.32% (0.40%) (0.12%) (0.52%)
----------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1999 $1,350,230 $69,846 5.17% 5.25% 5.53% (0.28%) (0.08%) (0.36%)
For the Quarter Ended
December 31, 1999 $1,324,326 $18,597 5.61% 5.78% 6.08% (0.30%) (0.17%) (0.47%)
For the Quarter Ended
September 30, 1999 $1,320,776 $17,232 5.22% 5.28% 5.80% (0.52%) (0.06%) (0.58%)
For the Quarter Ended
June 30, 1999 $1,374,154 $16,865 4.91% 4.96% 5.19% (0.23%) (0.05%) (0.28%)
For the Quarter Ended
March 31, 1999 $1,381,663 $17,151 4.97% 4.96% 5.05% (0.09%) 0.01% (0.08%)
</TABLE>
NET INTEREST RATE AGREEMENT EXPENSE
We have not entered into any interest rate agreements to date. As part of
our asset/liability management process, we may enter into interest rate
agreements such as interest rate caps, floors or swaps. These agreements would
be entered into with the intent to reduce interest rate or prepayment risk and
would be designed to provide us income and capital appreciation in the event of
certain changes in interest rates. However, even after entering into these
agreements, we would still be exposed to interest rate and prepayment risks. We
review the need for interest rate agreements on a regular basis consistent with
our capital investment policy.
NET INTEREST INCOME
Our net interest income, which equals interest income less interest
expense, totaled $4.3 million for the quarter ended June 30, 2000 and $5.4
million for the quarter ended June 30, 1999. Our net interest income decreased
because of the increase in asset yields of 1.02% was not as great as the
increase of 1.39% in funding cost. Our net interest spread, which equals the
yield on our average assets for the period less the average cost of funds for
the period, was .67% for the quarter ended June 30, 2000 as compared to 1.04%
for the quarter ended June 30, 1999. This 0.37% decrease in spread income is
reflected in the $1.1 million decline in net interest income. Net interest
margin, which equals net interest income divided by average total assets, was
1.16% on an annualized basis for the quarter ended June 30, 2000 and 1.44% for
the quarter ended June 30, 1999. The principal reason that net interest margin
exceeded net interest spread is that average interest earning assets exceeded
average interest bearing liabilities. A portion of our assets is funded with
equity rather than borrowings. We did not have any interest rate agreement
expenses to date.
The table below shows our 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
quarters ended June 30, 2000 and March 31, 2000, the year ended December 31,
1999, and the four quarters in 1999.
13
<PAGE>
<TABLE>
<CAPTION>
GAAP NET INTEREST INCOME
------------------------
(dollars in thousands)
Amortized
Cost of
Average Interest Yield on
Mortgage- Income on Average Average
Backed Mortgage- Average Total Interest Balance of Average Net
Securities Backed Cash Interest Earning Repurchase Interest Cost of Interest
Held Securities Equivalents Income Assets Agreements Expense Funds Income
---- ---------- ----------- ------ ------ ---------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter $1,476,283 $25,732 $243 $25,735 6.97% $1,360,419 $21,453 6.30% 4,282
Ended June 30, 2000
For the Quarter
Ended March 31, 2000 $1,448,148 $24,616 $226 $24,617 6.80% $1,329,900 $19,293 5.80% $4,848
---------------------------------------------------------------------------------------------------------------------------------
For the Year
Ended December 31, 1999 $1,461,033 $89,801 $221 $89,812 6.15% $1,350,230 $69,846 5.17% $ 19,966
For the Quarter
Ended December 31, 1999 $1,420,308 $23,372 $2 $23,372 6.58% $1,324,326 $18,597 5.61% $4,774
For the Quarter
Ended September 30, 1999 $1,416,525 $22,151 $877 $22,160 6.26% $1,320,776 $17,232 5.22% $4,929
For the Quarter
Ended June 30, 1999 $1,493,532 $22,265 $2 $22,265 5.95% $1,374,154 $16,865 4.91% $5,399
For the Quarter
Ended March 31, 1999 $1,502,629 $22,015 $2 $22,015 5.87% $1,381,663 $17,151 4.97% $4,864
</TABLE>
GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES
For the quarter ended June 30, 2000, we sold mortgage-backed securities
with an aggregate historical amortized cost of $18.8 million for an aggregate
gain of $64,774. For the quarter ended June 30, 1999, we sold mortgage-backed
securities with an aggregate historical amortized cost of $16.4 million for an
aggregate gain of $25,853. The difference between the sale price and the
historical amortized cost of our mortgage-backed securities is a realized gain
and increases income accordingly. We do not expect to sell assets on a frequent
basis, but may from time to time sell existing assets to move into new assets,
which our management believes might have higher risk-adjusted returns, or to
manage our balance sheet as part of our asset/liability management strategy.
CREDIT LOSSES
We have not experienced credit losses on our mortgage-backed securities to
date. We have limited our exposure to credit losses on our mortgage-backed
securities by purchasing only securities, issued or guaranteed by FNMA, FHLMC or
GNMA, which, although not rated, carry an implied "AAA" rating.
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expenses were $507,322 for the quarter ended June 30, 2000 and $561,010
for the quarter ended June 30, 1999. G&A expenses as a percentage of average
assets was 0.14% and 0.15% for the quarters ended June 30, 2000 and 1999,
respectively. The Company is internally managed and continues to be a low cost
provider. G&A expenses decreased by $53,688 for the quarter ended June 30, 2000,
when compared to the quarter ended June 30, 1999.
14
<PAGE>
<TABLE>
<CAPTION>
GAAP G&A EXPENSES AND OPERATING EXPENSE RATIOS
----------------------------------------------
Total G&A Total G&A
Expenses/Average Expenses/Average
Total G&A Expenses Assets (annualized) Equity (annualized)
------------------ ------------------- -------------------
<S> <C> <C> <C>
For the Quarter Ended June 30, 2000 $507 0.15% 1.39%
For the Quarter Ended March 31, 2000 $582 0.16% 2.19%
------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 $2,281 0.15% 1.94%
For the Quarter Ended December 31, 1999 $596 0.16% 2.21%
For the Quarter Ended September 30, 1999 $514 0.14% 1.81%
For the Quarter Ended June 30, 1999 $561 0.15% 1.44%
For the Quarter Ended March 31, 1999 $610 0.16% 1.93%
</TABLE>
NET INCOME AND RETURN ON AVERAGE EQUITY
Our net income was $3.8 million for the quarter ended June 30, 2000 and
$4.9 million for the quarter ended June 30, 1999. Our return on average equity
was 14.00% for the quarter ended June 30, 2000 and 16.20% for the quarter ended
June 30, 1999. The decrease in net income is a direct result of an decrease in
spread income. As previously mentioned, the substantial increases in funding
cost were only partially offset by an increase in the yield on assets. The table
below shows our net interest income, gain on sale of mortgage-backed securities
and G&A expenses each as a percentage of average equity, and the return on
average equity for the quarters ended June 30, 2000 and March 31, 2000, the year
ended December 31, 1999, and for the four quarters in 1999.
<TABLE>
<CAPTION>
COMPONENTS OF RETURN ON AVERAGE EQUITY
--------------------------------------
(Ratios for all Quarters are annualized)
Gain on Sale of
Net Interest Mortgage-Backed G&A Return on
Income/Average Securities/Average Expenses/Average Average
Equity Equity Equity Equity
------ ------ ------ ------
<S> <C> <C> <C> <C>
For the Quarter Ended June 30, 2000 15.61% 0.24% 1.85% 14.00%
For the Quarter Ended March 31, 2000 20.07% 0.40% 2.19% 18.28%
-------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 16.97% 0.38% 1.94% 15.41%
For the Quarter Ended December 31, 1999 17.65% 0.99% 2.21% 16.43%
For the Quarter Ended September 30, 1999 17.40% 0.34% 1.81% 15.93%
For the Quarter Ended June 30, 1999 17.99% 0.08% 1.87% 16.20%
For the Quarter Ended March 31, 1999 15.43% 0.20% 1.93% 13.70%
</TABLE>
DIVIDENDS AND TAXABLE INCOME
We have elected to be taxed as a REIT under the Internal Revenue Code.
Accordingly, we have distributed substantially all of our taxable income for
each year since inception to our stockholders, including income resulting from
gains on sales of our mortgage-backed securities. From inception through June
30, 2000, approximate taxable income exceeded dividend declarations by $859,000,
or $0.06 per share, based on the number of shares of common stock outstanding at
period end.
15
<PAGE>
<TABLE>
<CAPTION>
DIVIDEND SUMMARY
----------------
Weighted
Average
Taxable Common Taxable Net Dividends Dividend Cumulative
Net Shares Income Per Declared Total Pay-out Undistributed
Income Outstanding Share Per Share Dividends Ratio Taxable Income
------ ----------- ----- --------- --------- ----- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
June 30, 2000 $3,448 14,039,741 $0.25 $0.30 $4,262 123.6% $859
For the Quarter Ended
March 31, 2000 $4,840 13,660,539 $0.36 $0.35 $4,864 100.5% $1,673
--------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1999 $18,437 12,889,510 $1.43 $1.39 $17,978 97.5% $1,697
For the Quarter Ended
December 31, 1999 $4,179 13,383,426 $0.31 $0.35 $4,754 113.74% $1,697
For the Quarter Ended
September 30, 1999 $4,269 12,745,416 $0.34 $0.35 $4,588 91.1% $2,271
For the Quarter Ended
June 30, 1999 $5,229 12,697,338 $0.41 $0.35 $4,444 87.1% $2,589
For the Quarter Ended
March 31, 1999 $4,760 12,657,884 $0.37 $0.33 $4,190 94.9% $1,804
</TABLE>
FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
All of our mortgage-backed securities at June 30, 2000 were adjustable-rate
or fixed-rate mortgage-backed securities backed by single-family mortgage loans.
All of the mortgage assets underlying these mortgage-backed securities were
secured with a first lien position on the underlying single-family properties.
All our mortgage-backed securities were FHLMC, FNMA or GNMA mortgage
pass-through certificates or CMOs, which carry an implied "AAA" rating. We
mark-to-market all of our earning assets at liquidation value.
We accrete discount balances as an increase in interest income over the
life of discount mortgage-backed securities and we amortize premium balances as
a decrease in interest income over the life of premium mortgage-backed
securities. At June 30, 2000 and 1999, we had on our balance sheet a total of
$1.4 million and $1.0 million respectively, of unamortized discount (which is
the difference between the remaining principal value and current historical
amortized cost of our mortgage-backed securities acquired at a price below
principal value) and a total of $22.3 million and $26.0 million, respectively,
of unamortized premium (which is the difference between the remaining principal
value and the current historical amortized cost of our mortgage-backed
securities acquired at a price above principal value).
We received mortgage principal repayments of $38.5 million for the quarter
ended June 30, 2000 and $110.3 million for the quarter ended June 30, 1999.
Given our current portfolio composition, if mortgage principal prepayment rates
were to increase over the life of our mortgage-backed securities, all other
factors being equal, our net interest income would decrease during the life of
these mortgage-backed securities as we would be required to amortize our net
premium balance into income over a shorter time period. Similarly, if mortgage
principal prepayment rates were to decrease over the life of our mortgage-backed
securities, all other factors being equal, our net interest income would
increase during the life of these mortgage-backed securities, as we would
amortize our net premium balance over a longer time period.
The table below summarizes our mortgage-backed securities at June 30, 2000,
March 31, 2000, December 31, 1999, September 30, 1999, June 30, 1999, and March
31, 1999.
16
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE-BACKED SECURITIES
--------------------------
Estimated
Amortized Fair Weighted
Net Amortized Cost/Principal Estimated Value/Principal Average
Principal Value Premium Cost Value Fair Value Value Yield
--------------- ------- ---- ----- ---------- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
At June 30, 2000 $1,464,968 $20,893 $1,485,861 101.43% $1,450,853 99.04% 7.32%
At March 31, 2000 $1,448,875 $21,826 $1,470,701 101.51% $1,436,389 99.14% 7.02%
--------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 $1,452,917 $22,444 $1,475,361 101.54% $1,437,793 98.96% 6.77%
At September 30, 1999 $1,402,565 $22,981 $1,425,546 101.64% $1,401,770 99.94% 6.41%
At June 30, 1999 $1,468,547 $24,985 $1,493,532 101.70% $1,474,104 100.38% 6.21%
At March 31, 1999 $1,527,530 $26,071 $1,553,601 101.71% $1,547,618 101.32% 5.94%
</TABLE>
The tables below set forth certain characteristics of our mortgage-backed
securities. 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.
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
--------------------------------------------------------
Weighted Principal Value
Weighted Average Weighted at Period End
Average Weighted Weighted Term to Weighted Average as % of Total
Principal Coupon Average Average Net Next Average Asset Mortgage-Backed
Value Rate Index Level Margin Adjustment Lifetime Cap Yield Securities
----- ---- ----------- ------ ---------- ------------ ----- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At June 30, 2000 $986,046 7.53% 6.02% 1.51% 9 months 10.41% 7.46% 67.31%
At March 31, 2000 $957,419 7.18% 5.63% 1.55% 10 months 10.59% 7.006% 66.08%
---------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 $951,839 7.33% 5.84% 1.49% 11 months 10.30% 7.64% 65.51%
At September 30, 1999 $889,293 6.76% 5.13% 1.63% 9 months 10.82% 6.14% 63.40%
At June 30, 1999 $941,559 6.67% 4.96% 1.71% 11 months 11.00% 5.84% 64.12%
At March 31, 1999 $1,036,947 6.63% 4.97% 1.66% 11 months 11.01% 5.64% 67.88%
</TABLE>
<TABLE>
<CAPTION>
FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
---------------------------------------------------
Principal Value
Weighted Weighted as % of Total
Average Average Mortgage-Backed
Principal Value Coupon Rate Asset Yield Securities
--------------- ----------- ----------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
At June 30, 2000 $478,922 6.58% 7.05% 32.69%
------------------------------------------------------------------------------------------------
At March 31, 2000 $491,456 6.58% 7.04% 33.92%
At December 31, 1999 $501,078 6.58% 7.01% 34.49%
At September 30, 1999 $513,272 6.58% 6.91% 36.60%
At June 30, 1999 $526,988 6.58% 6.88% 35.88%
At March 31, 1999 $490,583 6.54% 6.37% 32.12%
</TABLE>
17
<PAGE>
At June 30, 2000 and December 31, 1999 we held mortgage-backed securities
with coupons linked to the one-year, three-year, and five-year Treasury indices,
one-month LIBOR and the six-month CD rate.
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
JUNE 30, 2000
-------------
3-Year
One-Month Six-Month 1-Year Treasury 5-Year
LIBOR CD Rate Treasury Index Index Treasury Index
----- ------- -------------- ----- --------------
<S> <C> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 2 mo. 25 mo. 17 mo. 32 mo.
Weighted Average Annual Period Cap None 1.00% 1.93% 2% 1.34%
Weighted Average Lifetime Cap at
June 30, 2000 9.15% 11.37% 12.16% 13.23% 11.71%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
June 30, 2000 40.32% 1.91% 19.83% 4.66% 0.59%
</TABLE>
<TABLE>
<CAPTION>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
DECEMBER 31, 1999
-----------------
1-Year 3-Year
One-Month Six-Month Treasury Treasury 5-Year
LIBOR CD Rate Index Index Treasury Index
----- ------- ----- ----- --------------
<S> <C> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 2 mo. 25 mo. 16 mo. 36 mo.
Weighted Average Annual Period Cap None 1.00% 1.93% 1.57% 1.35%
Weighted Average Lifetime Cap at
December 31, 1999 9.20% 11.36% 11.19% 13.23% 11.68%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
December 31, 1999 34.89% 2.12% 22.62% 5.22% 0.66%
</TABLE>
INTEREST RATE AGREEMENTS
Interest rate agreements are assets that are carried on a balance sheet at
estimated liquidation value. We have not entered into any interest rate
agreements since our inception.
BORROWINGS
To date, our debt has consisted entirely of borrowings collateralized by a
pledge of our mortgage-backed securities. These borrowings appear on our balance
sheet as repurchase agreements. At June 30, 2000, we had established uncommitted
borrowing facilities in this market with twenty lenders in amounts, which we
believe, are in excess of our needs. All of our mortgage-backed securities are
currently accepted as collateral for these borrowings. However, we limit our
borrowings, and thus our potential asset growth, in order to maintain unused
borrowing capacity and thus increase the liquidity and strength of our balance
sheet.
For the quarters ended June 30, 2000 and 1999, the term to maturity of our
borrowings ranged from one day to 3 months, with a weighted average original
term to maturity of 39 days at June 30, 2000. At June 30, 2000, the weighted
average cost of funds for all of our borrowings was 6.30% and the weighted
average term to next rate adjustment was 24 days. At June 30, 1999, the term to
maturity ranged from one day to one year, with a weighted average original term
of 72 days. The weighted average cost of funds for all of our borrowings was
4.87% and weighted average term to the next adjustment was 24 days.
18
<PAGE>
LIQUIDITY
Liquidity, which is our ability to turn non-cash assets into cash, allows
us to purchase additional mortgage-backed securities and to pledge additional
assets to secure existing borrowings should the value of our pledged assets
decline. Potential immediate sources of liquidity for us include cash balances
and unused borrowing capacity. Unused borrowing capacity will vary over time as
the market value of our mortgage-backed securities varies. Our balance sheet
also generates liquidity on an on-going basis through mortgage principal
repayments and net earnings held prior to payment as dividends. Should our needs
ever exceed these on-going sources of liquidity plus the immediate sources of
liquidity discussed above, we believe that our mortgage-backed securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is one
of the goals of our capital investment policy. Under this policy, we limit asset
growth in order to preserve unused borrowing capacity for liquidity management
purposes.
STOCKHOLDERS' EQUITY
We use "available-for-sale" treatment for our mortgage-backed securities;
we carry these assets on our balance sheet at estimated market value rather than
historical amortized cost. Based upon this "available-for-sale" treatment, our
equity base at June 30, 2000 was $110.4 million, or $7.77 per share. If we had
used historical amortized cost accounting, our equity base at June 30, 2000
would have been $145.4 million, or $10.24 per share. Our equity base at June 30,
1999 was $113.6 million, or $8.95 per share. If we had used historical amortized
cost accounting, our equity base at June 30, 1999 would have been $133.0
million, or $10.48 per share. During the quarter ended June 30, 2000, the
Company raised additional capital in the amount of $2.6 million through its
share purchase and dividend reinvestment plan.
With our "available-for-sale" accounting treatment, unrealized fluctuations
in market values of assets do not impact our GAAP or taxable income but rather
are reflected on our balance sheet by changing the carrying value of the asset
and stockholders' equity under "Accumulated Other Comprehensive Income (Loss)."
By accounting for our assets in this manner, we hope 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, our book value and
book value per share are likely to fluctuate far more than if we 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 not be
meaningful.
The table below shows unrealized gains and losses on the mortgage-backed
securities in our portfolio.
<TABLE>
<CAPTION>
UNREALIZED GAINS AND LOSSES
---------------------------
(dollars in thousands)
At At At At At At
June 30, March 31, December 31, September 30, June 30, March 31,
2000 2000 1999 1999 1999 1999
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unrealized Gain $ 864 $ 1,320 $ 1,531 $ 998 $ 1,744 $ 2,801
Unrealized Loss (35,872) (35,633) (39,100) (24,773) (21,172) (8,784)
---------------------------------------------------------------------------------------
Net Unrealized Loss ($35,008) ($34,313) ($37,569) ($23,775) ($19,428) ($5,983)
=======================================================================================
Net Unrealized Loss as % of Mortgage-
Backed Securities Principal Value (2.39%) (2.37%) (2.59%) (1.70%) (1.32%) (0.39%)
Net Unrealized Loss as % of Mortgage-
Backed Securities Amortized Cost (2.36%) (2.33%) (2.54%) (1.68%) (1.30%) (0.39%)
</TABLE>
Unrealized changes in the estimated net market value of mortgage-backed
securities have one direct effect on our potential earnings and dividends:
positive market-to-market changes increase our equity base and allow us to
increase our borrowing capacity while negative changes tend to limit borrowing
capacity under our capital investment policy. A very large negative change in
the net market value of our mortgage-backed securities might impair our
liquidity position, requiring us to sell assets with the likely result of
realized losses upon sale. "Unrealized Losses on Available for Sale Securities"
was $35.0 million, or 2.36% of the amortized cost of our mortgage-backed
securities at June 30, 2000. "Unrealized Losses on Available for Sale
Securities" was $19.4 million or 1.30% of the amortized cost of our
mortgage-backed securities at June 30, 1999.
19
<PAGE>
The table below shows our equity capital base as reported and on a
historical amortized cost basis at June 30, 2000, March 31, 2000, December
31,1999, September 30, 1999, June 30, 1999 and March 31,1999. Issuances of
common stock, the level of GAAP earnings as compared to dividends declared, and
other factors influence our historical cost equity capital base. The GAAP
reported equity capital base is influenced by these factors plus changes in the
"Net Unrealized Losses on Assets Available for Sale" account.
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------
Historical
Historical Net Unrealized GAAP Reported Amortized Cost GAAP Reported
Amortized Cost Gains on Assets Equity Base Equity Per Equity (Book
Equity Base Available for Sale (Book Value) Share Value) Per Share
----------- ------------------ ------------ ----- ----------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
At June 30, 2000 $145,448 (35,008) $110,440 $10.24 $7.77
--------------------------------------------------------------------------------------------------------------
At March 31, 2000 $143,279 ($34,313) $108,966 $10.31 $7.84
At December 31, 1999 $140,841 ($37,569) $103,272 $10.37 $7.60
At September 30, 1999 $136,850 ($23,776) $113,074 $10.44 $8.63
At June 30, 1999 $133,020 ($19,428) $113,592 $10.48 $8.95
At March 31, 1999 $132,599 ($5,983) $126,617 $10.44 $9.97
</TABLE>
LEVERAGE
Our debt-to-GAAP reported equity ratio at June 30, 2000 and, 1999 was 12:1
and 11.8:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management's
opinion of the level of risk of our assets and liabilities, our liquidity
position, our level of unused borrowing capacity and over-collateralization
levels required by lenders when we pledge assets to secure borrowings.
Our target debt-to-GAAP reported equity ratio is determined under our
capital investment policy. Should our actual debt-to-equity ratio increase above
the target level due to asset acquisition or market value fluctuations in
assets, we will cease to acquire new assets. Our management will, at that time,
present a plan to our Board of Directors to bring us back to our target
debt-to-equity ratio; in many circumstances, this would be accomplished in time
by the monthly reduction of the balance of our mortgage-backed securities
through principal repayments.
ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES
We continually review our asset/liability management strategy with respect
to interest rate risk, mortgage prepayment risk, credit risk and the related
issues of capital adequacy and liquidity. We seek attractive risk-adjusted
stockholder returns while maintaining a strong balance sheet.
We seek to manage the extent to which our net income changes as a function
of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although we have not done so to date, we
may seek to mitigate the potential impact on net income of periodic and lifetime
coupon adjustment restrictions in our 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. We will seek to mitigate the effect of changes in the mortgage
principal repayment rate by balancing assets we purchase at a premium with
assets we purchase at a discount. To date, the aggregate premium exceeds the
aggregate discount on our mortgage-backed securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce our net income
compared to what net income would be absent such prepayments.
INFLATION
Virtually all of our assets and liabilities are financial in nature. As a
result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or
20
<PAGE>
changes in inflation rates. Our financial statements are prepared in accordance
with GAAP and our dividends based upon our net income as calculated for tax
purposes; in each case, our activities and balance sheet are measured with
reference to historical cost or fair market value without considering inflation.
OTHER MATTERS
We calculate that our qualified REIT assets, as defined in the Internal
Revenue Code, are 99.5% of our total assets at June 30, 2000 and 1999, as
compared to the Internal Revenue Code requirement that at least 75% of our total
assets be qualified REIT assets. We also calculate that 99.7% and 99.9% of our
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 for the
quarters ended June 30, 2000 and 1999, respectively. We also met all REIT
requirements regarding the ownership of our common stock and the distribution of
our net income. Therefore, as of June 30, 2000 and 1999, we believe that we
qualified as a REIT under the Internal Revenue Code.
We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act. If we were
to become regulated as an investment company, then our 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 SEC, in order to
qualify for this exemption, we must maintain at least 55% of our assets directly
in qualifying interests. In addition, unless certain mortgage securitites
represent all the certificates issued with respect to an underlying pool of
mortgages, the mortgage-backed 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. We calculate that as of June 30,
2000 and 1999 we were in compliance with this requirement.
21
<PAGE>
ITEM. 2 QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond our control. Changes in the general level of interest rates
can affect our net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with our interest-bearing liabilities, by affecting the spread
between our interest-earning assets and interest-bearing liabilities. Changes in
the level of interest rates also can affect the value of our mortgage-backed
securities and our ability to realize gains from the sale of these assets. We
may utilize a variety of financial instruments, including interest rate swaps,
caps, floors and other interest rate exchange contracts, in order to limit the
effects of interest rates on our operations. If we use these types of
derivatives to hedge the risk of interest-earning assets or interest-bearing
liabilities, we may be subject to certain risks, including the risk that losses
on a hedge position will reduce the funds available for payments to holders of
securities and that the losses may exceed the amount we invested in the
instruments. To date, we have not purchased any hedging instruments.
Our profitability and the value of our portfolio may be adversely affected
during any period as a result of changing interest rates. The following table
quantifies the potential changes in net interest income and portfolio value
should interest rates go up or down 200 basis points, assuming the yield curves
of the rate shocks will be parallel to each other and the current yield curve.
All changes in income and value are measured as percentage changes from the
projected net interest income and portfolio value at the base interest rate
scenario. The base interest rate scenario assumes interest rates at June 30,
2000 and various estimates regarding prepayment and all activities are made at
each level of rate shock. Actual results could differ significantly from these
estimates.
<TABLE>
<CAPTION>
Projected Percentage Change in Projected Percentage Change in
Change in Interest Rate Net Interest Income Portfolio Value
------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
-200 Basis Points 72% 3%
-100 Basis Points 33% 2%
-50 Basis Points 17% 1%
Base Interest Rate
+50 Basis Points (24%) (1%)
+100 Basis Points (45%) (2%)
+200 Basis Points (87%) (5%)
</TABLE>
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. We attempt to control risks
associated with interest rate movements. Methods for evaluating interest rate
risk include an analysis of our interest rate sensitivity "gap", which is the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of our
interest-earning assets and interest-bearing liabilities at June 30, 2000. The
amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature. Mortgage-backed securities reflect estimated
prepayments that were estimated based on analyses of broker estimates, the
results of a
22
<PAGE>
prepayment model that we utilized and empirical data. Our management believes
that these assumptions approximate actual experience and considers them
reasonable; however, the interest rate sensitivity of our assets and liabilities
in the table could vary substantially if different assumptions were used or
actual experience differs from the historical experience on which the
assumptions are based.
<TABLE>
<CAPTION>
(IN THOUSANDS)
More than 1
Within 3 Year to 3 3 Years and
Months 4-12 Months Years Over Total
-------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Mortgage-Backed Securities $ 653,114 $ 101,655 $ 134,451 $ 575,719 $1,464,969
Rate Sensitive Liabilities:
Repurchase Agreements 1,349,682 $1,349,682
-------------------------------------------------------------------------------------
Interest rate sensitivity gap ($ 696,568) $ 101,655 $ 134,481 $ 575,719 $ 115,287
=====================================================================================
Cumulative rate sensitivity gap ($ 696,568) ($594,913) ($460,432) $ 115,287
=====================================================================================
Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets (48%) (41%) (31%) 8%
</TABLE>
Our analysis of risks is based on management's experience, estimates, models and
assumptions. These analyses rely on models, which utilize estimates of fair
value and interest rate sensitivity. Actual economic conditions or
implementation of investment decisions by our management may produce results
that differ significantly form the estimates and assumptions used in our models
and the projected results shown in the above tables and in this report. These
analyses contain certain forward-looking statements and are subject to the safe
harbor statement set forth under the heading, "Special Note Regarding
Forward-Looking Statements."
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 1 - Financial Data Schedule
(b) Reports
None
24
<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: August 11, 2000 By: /s/ Michael A.J. Farrell
-------------------------
Michael A.J. Farrell
Chairman of the Board and Chief
Executive Officer
(authorized officer of registrant)
Dated: August 11, 2000 By: /s/ Kathryn F. Fagan
---------------------
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal accounting officer)
25
