<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration File No.: 333-86401
The information contained in this prospectus supplement is not complete and may
be changed. A registration statement relating to these securities has been
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933. A final prospectus supplement and accompanying
prospectus will be delivered to purchasers of these securities. This prospectus
supplement and the accompanying prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted
PRELIMINARY PROSPECTUS SUPPLEMENT
(SUBJECT TO COMPLETION, DATED JANUARY [__], 2001)
(TO PROSPECTUS DATED SEPTEMBER 16, 1999)
5,000,000 SHARES
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON STOCK
We are offering 5,000,000 shares of our common stock, par value $0.01
per share at a price of $[___] per share. We will receive all of the net
proceeds from the sale of such common stock. Our common stock is listed on the
New York Stock Exchange under the symbol NLY. The last reported sale price of
our common stock on January 11, 2001 was $9.875 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS TO READ ABOUT THE RISKS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
Per Share Total
--------- -----
Public offering price................... $ $
Underwriting discounts.................. $ $
Proceeds, before expenses, to us........ $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
We have granted an option for an additional 750,000 shares of our
common stock at the public offering price, less the underwriting discounts to
the underwriters, solely to cover the over-allotments, if any.
We expect that the common stock will be ready for delivery on or about
January [__], 2001.
FRIEDMAN BILLINGS RAMSEY
TUCKER ANTHONY CAPITAL MARKETS
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JANUARY [__], 2001
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
---------------------
FORWARD-LOOKING STATEMENTS...................................................S-3
THE COMPANY..................................................................S-4
RECENT DEVELOPMENTS..........................................................S-4
THE OFFERING.................................................................S-5
USE OF PROCEEDS..............................................................S-5
CAPITALIZATION...............................................................S-6
FEDERAL INCOME TAX CONSIDERATIONS............................................S-6
UNDERWRITING.................................................................S-8
EXPERTS.....................................................................S-10
LEGAL MATTERS...............................................................S-10
PROSPECTUS
----------
ABOUT THIS PROSPECTUS..........................................................3
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995...............................3
ABOUT ANNALY MORTGAGE MANAGEMENT, INC..........................................3
RISK FACTORS...................................................................5
USE OF PROCEDS................................................................11
DESCRIPTION OF STOCK..........................................................12
FEDERAL INCOME TAX CONSIDERATIONS.............................................16
PLAN OF DISTRIBUTION..........................................................24
EXPERTS.......................................................................25
LEGAL MATTERS.................................................................25
WHERE YOU CAN FIND MORE INFORMATION...........................................25
INCORPORATION OF CERTAIN DOCUMENT BY REFERENCE................................26
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FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain or
incorporate by reference certain forward-looking statements. When used,
statements which are not historical in nature, including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend," and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties, including, among
other things:
o business conditions and the general economy, especially as they
affect interest rates,
o the federal, state, and local regulatory environment;
o an increase in the prepayment rate on the loans that back our
mortgage-backed securities;
o the inability to borrow at favorable rates; and
o the inability to maintain our REIT qualification.
Other risks, uncertainties, and factors that could cause actual results
to differ materially from those projected are detailed from time to time in
reports filed by us with the Securities and Exchange Commission, including Forms
10-Q and 10-K.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in or incorporated by reference into this
prospectus supplement and the accompanying prospectus might not occur.
You should rely only on the information contained in or incorporated by
reference into this prospectus supplement and the accompanying prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
prospectus supplement and the accompanying prospectus is current as of the date
such information is presented. Our business, financial condition, results of
operations and prospects may have changed since such dates.
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The following information is qualified by its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in, or incorporated by reference into, the accompanying prospectus. We
encourage you to read this prospectus supplement and the accompanying
prospectus, as well as the information which is incorporated by reference in the
prospectus and this prospectus supplement, in their entireties. You should
carefully consider the factors set forth under "Risk Factors" in the
accompanying prospectus before making an investment decision to purchase shares
of our common stock. All references to "we," "us" or the "Company" in this
prospectus supplement and the accompanying prospectus mean Annaly Mortgage
Management, Inc. Unless otherwise specified, the information in this prospectus
supplement assumes that the underwriters do not exercise the over-allotment
option described herein under "Underwriting."
THE COMPANY
We are a publicly traded company that owns and manages a portfolio of
mortgage-backed securities, including mortgage pass-through certificates,
collateralized mortgage obligations (or CMOs) and other securities representing
interests in or obligations backed by pools of mortgage loans. 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 have elected to be taxed as a real estate
investment trust (or REIT) under the Internal Revenue Code. Therefore,
substantially all of our assets consist of qualified REIT real estate assets (of
the type described in Section 856(c)(5)(B) of the Internal Revenue Code). We
commenced operations on February 18, 1997. We are self-advised and self-managed.
We have financed our purchases of mortgage-backed securities with the
net proceeds of equity offerings and borrowings under repurchase agreements
whose interest rates adjust based on changes in short-term market interest
rates. We plan to finance additional purchases of mortgage-backed securities
with the proceeds of this offering, future offerings and future borrowings.
We are a Maryland corporation. Our principal office is located at 12
East 41st Street, Suite 700, New York, New York 10017, and our telephone number
is 212-696-0100.
RECENT DEVELOPMENTS
We declared our fourth quarter 2000 common stock dividend of $0.25 per
share on December 20, 2000. This dividend is payable on January 30, 2001 to
stockholders of record on December 29, 2000.
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THE OFFERING
Common stock offered by us................. 5,000,000 shares
Common stock to be outstanding
after the offering......................... 19,522,509 shares(1)
Use of proceeds............................ We intend to use the net proceeds
of this offering to purchase
mortgage-backed securities. We
then intend to increase our
investment assets by borrowing
against these mortgage-backed
securities and using the proceeds
to acquire additional
mortgage-backed securities.
New York Stock Exchange symbol............. NLY
-----------------
(1) Based upon the number of shares outstanding as of January 11, 2001.
USE OF PROCEEDS
We intend to use the net proceeds of this offering to purchase
mortgage-backed securities. We then intend to increase our investment assets by
borrowing against these mortgage-backed securities and using the proceeds to
acquire additional mortgage-backed securities.
The net proceeds from the sale of the 5,000,000 shares of common stock
offered hereby will be approximately $[____], after deducting the underwriting
discount and the estimated expenses of the offering.
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CAPITALIZATION
The following table sets forth our actual capitalization at September
30, 2000 and as adjusted to give effect to the issuance of 5,000,000 shares of
our common stock offered hereby and the application of the estimated net
proceeds therefrom.
SEPTEMBER 30, 2000
Actual As Adjusted(1)(2)
------ -----------------
Common stock: par value $0.01 per share;
100,000,000 Authorized, 14,299,433 shares
issued and outstanding (as adjusted
19,299,433 shares) 142,994 192,994
Additional paid-in capital 146,069,666 192,332,166
Accumulated other comprehensive loss (27,739,094) (27,739,094)
Retained earnings 233,781 233,781
-----------
Total 118,707,347 165,019,847
=========== ===========
(1) After deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, and assuming no exercise of the
underwriters' over-allotment option to purchase up to an additional 750,000
shares of our common stock. Assumes a per share price of $9.875.
(2) Does not include 903,807 shares of common stock issuable upon the exercise
of options granted pursuant to our Long-Term Incentive Plan.
FEDERAL INCOME TAX CONSIDERATIONS
Based on various factual representations made by us regarding our
operations, in the opinion of Brown & Wood LLP, our counsel, commencing with our
taxable year ended December 31, 1997, we have been organized in conformity with
the requirements for qualification as a REIT under the Code, and our method of
operating has enabled us, and will enable us, to meet the requirements for
qualification and taxation as a REIT. Our qualification as a REIT depends upon
our ability to meet the various requirements imposed under the Code through
actual operations. Brown & Wood LLP will not review our operations, and no
assurance can be given that actual operations will meet these requirements. The
opinion of Brown & Wood LLP is not binding on the IRS or any court. The opinion
of Brown & Wood LLP is based upon existing law, IRS regulations and currently
published administrative positions of the IRS and judicial decisions, all of
which are subject to change either prospectively or retroactively.
The following discussion supplements the discussion set forth in the
prospectus and should be read in conjunction with the discussion in the
prospectus. The following discussion reflects material changes in federal tax
laws that have become effective since the date of the prospectus. The headings
used below correspond to those used in the prospectus and you should
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read the following material rather than the material that appears under the
identical headings in the prospectus.
ASSET TESTS
At the close of each quarter of our taxable year, we must satisfy the
following three tests relating to the nature of our assets:
(a) at least 75% of the value of our total assets must be represented
by "real estate assets," cash, cash items and government
securities;
(b) not more than 25% of our total assets may be represented by
securities other than those in the 75% asset class(e.g.,
government securities and mortgage-backed securities); and
(c) of the investments included in the 25% asset class, the value of
any one issuer's securities (other than an interest in a
partnership, shares of a "qualified REIT subsidiary" or another
REIT) owned by us may not exceed 5% of the value of our total
assets, and we may not own more than 10% of any one issuer's
outstanding voting securities (other than an interest in a
partnership, shares of a "qualified REIT subsidiary" or another
REIT).
For taxable years beginning after December 31, 2000, the
above-described asset tests will change in three ways. First, a REIT will be
allowed to hold up to 100% of the stock in a subsidiary that could earn income
that would not be qualifying income if earned directly by the parent REIT. Both
the subsidiary and the REIT must jointly elect to treat the subsidiary as a
"Taxable REIT Subsidiary" by jointly filing a Form 8875 with the IRS. A Taxable
REIT Subsidiary would pay tax at the regular corporate rates on any income that
it would earn. Moreover, the Code contains rules, including rules requiring the
imposition of taxes on a REIT at the rate of 100% on certain reallocated income
and expenses, to ensure that contractual arrangements between a Taxable REIT
Subsidiary and the parent REIT are at arm's-length.
Under the second change to the asset tests, we would be denied REIT
status if at the close of any calendar quarter we owned securities (other than
those in the 75% asset class) representing 10% of the value of any one issuer,
other than a partnership, a qualified REIT subsidiary, another REIT, a Taxable
REIT Subsidiary, or certain debt securities that qualify under a safe harbor set
out in the Code. Under a transition rule, however, this limitation will not
apply to securities held on July 12, 1999, provided the issuer of those
securities does not engage in a substantially new line of business or acquire
substantial new assets after that date.
Under the third change to the asset tests, we would be denied REIT
status if at the close of any calendar quarter we owned securities issued by one
or more taxable REIT subsidiaries if the aggregate value of those securities
exceeded 20% of the value of our total assets.
If we fail to meet any of the asset tests as of the close of a calendar
quarter due to the acquisition of securities or other assets, the Code allows us
a 30-day period following the close of the calendar quarter to come into
compliance with the asset tests. If we do cure a failure
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within the 30-day period, we will be treated as having satisfied the asset tests
at the close of the calendar quarter.
DISTRIBUTION REQUIREMENTS.
To qualify as a REIT, we are required to distribute dividends (other
than capital gain dividends) to our shareholders in an amount at least equal to
(1) the sum of (a) 95% of our REIT taxable income (computed without regard to
the dividends paid deduction and net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (2) the sum of certain
items of noncash income. In addition, if we were to recognize gain on
disposition of any assets acquired from a "C" corporation in a transaction in
which gain was not recognized, we would be required to distribute at least 95%
of the gain recognized net of the tax we would pay on such gain. For taxable
years beginning after December 31, 2000, the above-described 95% distribution
requirements will be lowered to 90%.
To the extent that we do not distribute all of our net capital gain or
distribute at least 95% (90% for years beginning after December 31, 2000), but
less than 100%, of our REIT taxable income, we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates. In addition, if we should
fail to distribute during each calendar year at least the sum of (1) 85% of our
REIT ordinary income for such year, (2) 95% of our REIT capital gain income for
such year, and (3) any undistributed taxable income from prior periods, we would
be subject to a 4% excise tax on the excess of such required distribution over
the sum of amounts we actually distributed during the calendar year and the
amount, if any, on which we paid income tax for such year.
We may elect to require the shareholders to include undistributed net
capital gains in their income by designating, in a written notice to
shareholders, those amounts as undistributed capital gains. If we make such an
election, the shareholders will (1) include in their income as capital gains
their proportionate share of such undistributed capital gains and (2) be deemed
to have paid their proportionate share of the tax we paid on such undistributed
capital gains and thereby receive a credit or refund for such amount. In
addition, a shareholder will increase the basis in their shares by the
difference between the amount of capital gain included in their income and the
amount of the tax that we are deemed to have paid on the shareholder's behalf.
Our earnings and profits will be adjusted appropriately.
Under certain circumstances, we may be able to rectify a failure to
meet the distribution requirement for a year by paying deficiency dividends to
shareholders in a later year, which may be included in our deduction for
dividends paid for the earlier year. Thus, we may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, we will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
UNDERWRITING
Friedman, Billings, Ramsey & Co., Inc. is acting as representative of
the underwriters. Subject to the terms and conditions contained in the
underwriting agreement, we have agreed to sell to each underwriter, and each
underwriter has agreed to purchase from us the number of shares set forth
opposite its name below. The underwriting agreement provides that the
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obligation of the underwriters to pay for and accept delivery of our common
stock is subject to approval of certain legal matters by counsel and to certain
other conditions. The underwriters are obligated to take and pay for all shares
of our common stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
Underwriter Number of Shares
----------- ----------------
Friedman, Billings, Ramsey & Co., Inc........
Tucker Anthony Incorporated..................
Total.................................
The following table shows the per share and total underwriting discount
we will pay to the underwriters. Such amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase 750,000
additional shares of our common stock.
No Exercise Full Exercise
----------- -------------
Per Share........................ $[_______] $[_______]
Total............................ $[_______] $[_______]
Each of our officers and directors has agreed with the representative,
for a period of 90 days after the date of this prospectus supplement, subject to
certain exceptions, not to sell any shares of common stock or any securities
convertible into or exchangeable for shares of common stock owned by the
holders, without the prior written consent of the representative. However, the
representative may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to these agreements.
The underwriters propose to offer our common stock directly to the
public at $[___] per share and to certain dealers at such price less a
concession not in excess of $[___] per share. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $[__] per share to
certain dealers.
We expect to incur expenses of approximately $100,000 in connection
with this offering.
We have granted the underwriters an option exercisable for 30 days
after the date of this prospectus supplement to purchase up to 750,000
additional shares of common stock to cover over-allotments, if any, at the
public offering price less the underwriting discounts set forth on the cover
page of this prospectus supplement. If the underwriters exercise this option,
the underwriters will have a firm commitment, subject to certain conditions, to
purchase all of such shares covered thereby.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the underwriters may be required to make in respect
thereof.
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In connection with the offering, the underwriters are permitted to
engage in certain transactions that stabilize the price of our common stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the our common stock.
If the underwriters create a short position in our common stock in
connection with the offering. i.e., if they sell more than 5,000,000 shares of
common stock, the underwriters may reduce that short position by purchasing our
common stock in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither we nor the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of our common stock. In addition, neither we nor the
underwriters make any representation that the underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
The representative or its affiliates have provided, and may in the
future provide us with investment banking, financial advisory, or commercial
banking services, for which they have received and may receive customary
compensation.
EXPERTS
Our financial statements and schedules included in our Annual Report
(Form 10-K) for the year ended December 31, 1999, have been audited by Deloitte
& Touche LLP, independent auditors, as set forth in their reports thereon
included therein and incorporated herein by reference. Such financial statements
and schedules are incorporated herein by reference in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered
hereby will be passed upon for us by Brown & Wood LLP. The opinion of counsel
described under the heading "Federal Income Tax Considerations" will be rendered
by Brown & Wood LLP, which will be subject to various assumptions and based on
current tax law. Certain legal matters relating to this offering will be passed
upon for the underwriters by Hunton & Williams.
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Prospectus
Annaly Mortgage Management, Inc.
12 East 41st Street, Suite 700
New York, New York 10017
(212-696-0100)
$200,000,000
Common Stock and Preferred Stock
By this prospectus, we may offer, from time to time, shares of our:
. common stock
. preferred stock
. any combination of the foregoing
We will provide specific terms of these securities in supplements to this
prospectus. You should read this prospectus and any supplement carefully before
you decide to invest.
This prospectus may not be used to consummate sales of these securities
unless it is accompanied by a prospectus supplement.
The New York Stock Exchange lists our common stock under the symbol "NLY".
To ensure we qualify as a real estate investment trust, no person may own
more than 9.8% of the outstanding shares of any class of our common stock or our
preferred stock, unless our Board of Directors waives this limitation.
Consider carefully the risk factors beginning on page 5 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is September 16, 1999
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TABLE OF CONTENTS
<TABLE>
<S> <C>
ABOUT THIS PROSPECTUS.............................................. 3
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995................... 3
ABOUT ANNALY MORTGAGE MANAGEMENT, INC.............................. 3
RISK FACTORS....................................................... 5
USE OF PROCEEDS.................................................... 11
DESCRIPTION OF STOCK............................................... 12
FEDERAL INCOME TAX CONSIDERATIONS.................................. 16
PLAN OF DISTRIBUTION............................................... 24
EXPERTS............................................................ 25
LEGAL MATTERS...................................................... 25
WHERE YOU CAN FIND MORE INFORMATION................................ 25
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................... 26
</TABLE>
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ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process. Under this process, we may offer and
sell any combination of preferred stock and common stock in one or more
offerings up to a total dollar amount of $200,000,000. This prospectus provides
you with a general description of the securities we may offer. Each time we
offer to sell securities, we will provide a supplement to this prospectus that
will contain specific information about the terms of that offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read both this prospectus and any prospectus
supplement together with the additional information you may need to make your
investment decision.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This prospectus and the documents incorporated by reference herein contain
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995, that are based on our current expectations, estimates and
projections. Statements that are not historical facts, including statements
about our beliefs and expectations, are forward-looking statements. These
statements are not guarantees of future performance, events or results and
involve potential risks and uncertainties. Accordingly, our actual results may
differ from our current expectations, estimates and projections. We undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Important factors that may impact our actual results include changes in
interest rates, changes in the yield curve, changes in prepayment rates, the
supply of mortgage-backed securities, our ability to obtain financing, the terms
of any financing and the other factors described in this prospectus under the
heading "Risk Factors."
ABOUT ANNALY MORTGAGE MANAGEMENT, INC.
General
We are a real estate investment trust (or REIT) organized under Maryland
law. We own, manage and finance a portfolio of mortgage-backed securities. We
seek to generate net income for our stockholders from the spread between the
interest income we earn on our portfolio of mortgage-backed securities and our
borrowing costs to finance our portfolio of mortgage-backed securities. We were
organized on November 25, 1996 and commenced operations on February 18, 1997. We
are self-advised and self-managed.
Assets
On June 30, 1999, all of the mortgage-backed securities we owned were
"agency certificates." Agency certificates are mortgage-backed securities where
a government agency or federally chartered corporation, such as FHLMC, FNMA or
GNMA, guarantees payments of principal or interest on the certificates. Although
not rated, these agency certificates carry an implied "AAA" rating.
. Freddie Mac is a common abbreviation that refers to the Federal Home
Loan Mortgage Corporation, a privately-owned government-sponsored
enterprise created pursuant to an act of Congress.
. Fannie Mae is a common abbreviation that refers to the Federal
National Mortgage Association, a privately-owned, federally-chartered
corporation organized under an act of Congress.
. Ginnie Mae is a common abbreviation that refers to the Government
National Mortgage Association, a wholly-owned instrumentality of the
United States within the Department of Housing and Urban Development.
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Even though we have only acquired AAA securities so far, under our capital
investment policy we have the ability to acquire securities of lower credit
quality. Under our policy:
. 75% of our investments must have a AA or higher rating by Standard &
Poor's Corporation (or S&P), or an equivalent rating by another nationally
recognized rating organization, or our management must determine that the
investments are of comparable credit quality to investments with these ratings;
. the remaining 25% of our investments must have a BBB or higher rating
by S&P, or an equivalent rating by another nationally recognized rating
organization, or our management must determine that the investments are of
comparable credit quality to investments with these ratings; securities with
ratings of BBB or higher are commonly referred to as "investment grade"
securities; and
. we seek to have a minimum weighted average rating for our portfolio of
at least A by S&P.
We acquire both adjustable-rate and fixed-rate mortgage-backed securities.
Adjustable-rate mortgage-backed securities have interest rates that adjust
periodically based upon changes in an objective index of short-term interest
rates, such as LIBOR or a Treasury index. On June 30, 1999, approximately 64%
of our mortgage-backed securities were adjustable-rate securities and
approximately 36% were fixed-rate securities.
Borrowings
We borrow money primarily through repurchase agreements using our mortgage-
backed securities as collateral. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 to 12:1, although the ratio may vary from time to
time depending upon market conditions and other factors our management deems
relevant. At June 30, 1999, our debt-to-equity ratio was 11.8:1.
We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. However, the interest rates on our
borrowings generally adjust more frequently than the interest rates on our
mortgage-backed securities. In addition, our fixed-rate mortgage-backed
securities do not provide for any periodic rate adjustments. Accordingly, we
could experience net losses or a decrease in net profits in a period of rising
interest rates.
Stock Listing
Our common stock is traded on the New York Stock Exchange under the symbol
"NLY."
Principal Executive Offices and Telephone Number
Our principal executive offices are located at 12 East 41st Street, Suite
700, New York, New York 10017. Our telephone number is (212) 696-0100.
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RISK FACTORS
An investment in our stock involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks described in
this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially adversely affected. If this were to occur, the trading price of our
common stock could decline significantly and you may lose all or part of your
investment.
If the interest payments on our borrowings increase relative to the interest we
earn on our mortgage-backed securities, it may adversely affect our
profitability
We earn money based upon the spread between the interest payments we earn
on our mortgage-backed security investments and the interest payments we must
make on our borrowings. If the interest payments on our borrowings increase
relative to the interest we earn on our mortgage-backed securities, our
profitability may be adversely affected.
The interest payments on our borrowings may increase relative to the
interest we earn on our adjustable-rate mortgage-backed securities for various
reasons discussed in this section.
. Differences in timing of interest rate adjustments on our mortgage-backed
securities and our borrowings may adversely affect our profitability
We rely primarily on short-term borrowings to acquire mortgage-backed
securities with long-term maturities. Accordingly, if short-term interest rates
increase, this may adversely affect our profitability.
Most of the mortgage-backed securities we acquire are adjustable-rate
securities. This means that their interest rates may vary over time based upon
changes in an objective index, such as:
. LIBOR or the London Interbank Offered Rate. The interest rate that
banks in London offer for deposits in London of U.S. dollars.
. Treasury Index. A monthly or weekly average yield of benchmark U.S.
Treasury securities, as published by the Federal Reserve Board.
. CD Rate. The weekly average of secondary market interest rates on six-
month negotiable certificates of deposit, as published by the Federal
Reserve Board.
These indices generally reflect short-term interest rates. On June 30,
1999, approximately 64% of our mortgage-backed securities were adjustable-rate
securities.
The interest rates on our borrowings similarly vary with changes in an
objective index. However, the interest rates on our borrowings generally adjust
more frequently than the interest rates on our adjustable-rate mortgage-backed
securities. For example, on June 30, 1999, our adjustable-rate mortgage-backed
securities had a weighted average term to next rate adjustment of 10 months,
while our borrowings had a weighted average term to next rate adjustment of 24
days. Accordingly, in a period of rising interest rates, we could experience a
decrease in net income or a net loss because the interest rates on our
borrowings adjust faster than the interest rates on our adjustable-rate
mortgage-backed securities.
. Interest rate caps on our mortgage-backed securities may adversely affect
our profitability
Our adjustable-rate mortgage-backed securities are typically subject to
periodic and lifetime interest rate caps. Periodic interest rate caps limit the
amount an interest rate can increase during any given period. Lifetime interest
rate caps limit the amount an interest rate can increase through maturity of a
mortgage-backed security. Our borrowings are not subject to similar
restrictions. Accordingly, in a period of rapidly increasing interest rates, we
could experience a decrease in net income or a net loss because the interest
rates on our borrowings could increase
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without limitation while the interest rates on our adjustable-rate mortgage-
backed securities would be limited by caps.
. Because we acquire fixed-rate securities, an increase in interest rates
may adversely affect our profitability
While the majority of our investments consist of adjustable-rate mortgage-
backed securities, we also invest in fixed-rate mortgage-backed securities. In
a period of rising interest rates, our interest payments could increase while
the interest we earn on our fixed-rate mortgage-backed securities would not
change. This would adversely affect our profitability. On June 30, 1999,
approximately 36% of our mortgage-backed securities were fixed-rate securities.
An increase in prepayment rates may adversely affect our profitability
The mortgage-backed securities we acquire are backed by pools of mortgage
loans. We receive payments, generally, from the payments that are made on these
underlying mortgage loans. When borrowers prepay their mortgage loans at rates
that are faster than expected, this results in prepayments that are faster than
expected on the mortgage-backed securities. These faster than expected
prepayments may adversely affect our profitability.
We often purchase mortgage-backed securities that have a higher interest
rate than the market interest rate at the time. In exchange for this higher
interest rate, we must pay a premium over the market value to acquire the
security. In accordance with accounting rules, we amortize this premium over the
term of the mortgage-backed security. If the mortgage-backed security is prepaid
in whole or in part prior to its maturity date, however, we must expense the
premium that was prepaid at the time of the prepayment. This adversely affects
our profitability. On June 30, 1999, approximately 87% of the mortgage-backed
securities we owned were acquired at a premium.
Prepayment rates generally increase when interest rates fall and decrease
when interest rates rise, but changes in prepayment rates are difficult to
predict. Prepayment rates also may be affected by conditions in the housing and
financial markets, general economic conditions and the relative interest rates
on fixed-rate and adjustable-rate mortgage loans.
We may seek to reduce prepayment risk by acquiring mortgage-backed
securities at a discount. If a discounted security is prepaid in whole or in
part prior to its maturity date, we will earn income equal to the amount of the
remaining discount. This will improve our profitability if the discounted
securities are prepaid faster than expected. On June 30, 1999, approximately 13%
of the mortgage-backed securities we owned were acquired at a discount.
While we seek to minimize prepayment risk to the extent practical, in
selecting investments we must balance prepayment risk against other risks and
the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.
An increase in interest rates may adversely affect our book value
Increases in interest rates may negatively affect the market value of our
mortgage-backed securities. Our fixed-rate securities, generally, are more
negatively affected by these increases. In accordance with accounting rules, we
reduce our book value by the amount of any decrease in the market value of our
mortgage-backed securities. During the second quarter of 1999, rising interest
rates contributed to a decline in our book value from $9.97 per share at the
beginning of the quarter to $8.95 per share at the end of the quarter.
Our strategy involves significant leverage
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1,
although our ratio may at times be above or below this amount. We incur this
leverage by borrowing against a substantial portion of the market value of our
mortgage-backed securities. By incurring this leverage, we can enhance our
returns. However, this leverage, which is fundamental to our investment
strategy, also creates significant risks.
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. Our leverage may cause substantial losses
Because of our significant leverage, we may incur substantial losses if our
borrowing costs increase. Our borrowing costs may increase for any of the
following reasons:
. short-term interest rates increase
. the market value of our mortgage-backed securities decreases
. interest rate volatility increases
. the availability of financing in the market decreases.
. Our leverage may cause margin calls and defaults and force us to
sell assets under adverse market conditions
Because of our leverage, a decline in the value of our mortgage-backed
securities may result in our lenders initiating margin calls. A margin call
means that the lender requires us to pledge additional collateral to re-
establish the ratio of the value of the collateral to the amount of the
borrowing. Our fixed-rate mortgage-backed securities generally are more
susceptible to margin calls as increases in interest rates tend to more
negatively affect the market value of fixed-rate securities.
If we are unable to satisfy margin calls, our lenders may foreclose on our
collateral. This could force us to sell our mortgage-backed securities under
adverse market conditions. Additionally, in the event of our bankruptcy, our
borrowings, which are generally made under repurchase agreements, may qualify
for special treatment under the Bankruptcy Code. This special treatment would
allow the lenders under these agreements to avoid the automatic stay provisions
of the Bankruptcy Code and to liquidate the collateral under these agreements
without delay.
. Liquidation of collateral may jeopardize our REIT status
To continue to qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to liquidate
our mortgage-backed securities, we may be unable to comply with these
requirements, ultimately jeopardizing our status as a REIT. For further
discussion of these asset and source of income requirements, and the
consequences of our failure to continue to qualify as a REIT, please see the
"Federal Income Tax Considerations" section of this prospectus.
. We may exceed our target leverage ratios
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1.
However, we are not required to stay within this leverage ratio. If we exceed
this ratio, the adverse impact on our financial condition and results of
operations from the types of risks described in this section would likely be
more severe.
. We may not be able to achieve our optimal leverage
We use leverage as a strategy to increase the return to our investors.
However, we may not be able to achieve our desired leverage for any of the
following reasons:
. we determine that the leverage would expose us to excessive risk
. our lenders do not make funding available to us at acceptable rates
. our lenders require that we provide additional collateral to cover our
borrowings.
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. We may incur increased borrowing costs which would adversely affect our
profitability
Currently, all of our borrowings are collateralized borrowings in the form
of repurchase agreements. If the interest rates on these repurchase agreements
increase, it would adversely affect our profitability.
Our borrowing costs under repurchase agreements generally correspond to
short-term interest rates such as LIBOR or a short-term Treasury index, plus or
minus a margin. The margins on these borrowings over or under short-term
interest rates may vary depending upon:
. the movement of interest rates
. the availability of financing in the market
. the value and liquidity of our mortgage-backed securities.
If we are unable to renew our borrowings at favorable rates, our profitability
may be adversely affected
Since we rely primarily on short-term borrowings, our ability to achieve
our investment objectives depends not only on our ability to borrow money in
sufficient amounts and on favorable terms, but also on our ability to renew or
replace on a continuous basis our maturing short-term borrowings. If we are not
able to renew or replace maturing borrowings, we would have to sell our assets
under possibly adverse market conditions.
We have not used derivatives to mitigate our interest rate and prepayment risks
Our policies permit us to enter into interest rate swaps, caps and floors
and other derivative transactions to help us mitigate our interest rate and
prepayment risks described above. However, we have determined in the past that
the cost of these transactions outweighs the benefits. In addition, we will not
enter into derivative transactions if we believe they will jeopardize our status
as a REIT. If we decide to enter into derivative transactions in the future,
these transactions may mitigate our interest rate and prepayment risks but
cannot insulate us from these risks.
Our investment strategy may involve credit risk
We may incur losses if there are payment defaults under our mortgage-backed
securities.
To date, all of our mortgage-backed securities have been agency
certificates which, although not rated, carry an implied "AAA" rating. Agency
certificates are mortgage-backed securities where Freddie Mac, Fannie Mae or
Ginnie Mae guarantees payments of principal or interest on the certificates.
Even though we have only acquired AAA securities so far, under our capital
investment policy we have the ability to acquire securities of lower credit
quality. Under our policy:
. 75% of our investments must have a AA or higher rating by Standard &
Poor's Corporation (or S&P), or an equivalent rating by a similar
nationally recognized rating organization, or our management must
determine that the investments are of comparable credit quality to
investments with these ratings;
. the remaining 25% of our investments must have a BBB or higher rating
by S&P, or an equivalent rating by a similar nationally recognized
rating organization, or our management must determine that the
investments are of comparable credit quality to investments with these
ratings; securities with ratings of BBB or higher are commonly
referred to as "investment grade" securities; and
. we seek to have a minimum weighted average rating for our portfolio of
at least A by S&P.
If we acquire mortgage-backed securities of lower credit quality, we may
incur losses if there are defaults under those mortgage-backed securities or if
the rating agencies downgrade the credit quality of those mortgage-backed
securities.
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Because of competition, we may not be able to acquire mortgage-backed securities
at favorable yields
Our net income depends, in large part, on our ability to acquire mortgage-
backed securities at favorable spreads over our borrowing costs. In acquiring
mortgage-backed securities, we compete with other REITs, investment banking
firms, savings and loan associations, banks, insurance companies, mutual funds,
other lenders and other entities that purchase mortgage-backed securities, many
of which have greater financial resources than us. As a result, in the future,
we may not be able to acquire sufficient mortgage-backed securities at favorable
spreads over our borrowing costs.
We are dependent on our key personnel
We are dependent on the efforts of our key officers and employees,
including Michael A. J. Farrell, Chairman of the Board and Chief Executive
Officer, Timothy J. Guba, President and Chief Operating Officer, Wellington J.
St. Claire, Vice Chairman and Portfolio Manager, and Kathryn F. Fagan, Chief
Financial Officer. The loss of any of their services could have an adverse
effect on our operations. Although we have employment agreements with each of
them, we cannot assure you they will remain employed with us.
Some of our officers and employees have potential conflicts of interest
Some of our officers and employees have potential conflicts of interest
with us. The material potential conflicts are as follows:
. Our officers and employees manage assets for other clients
Messrs. Farrell and Guba, Ms. St. Claire and other officers and employees
are actively involved in managing mortgage-backed securities and other fixed
income assets for institutional clients through Fixed Income Discount Advisory
Company. FIDAC is a registered investment adviser that on June 30, 1999 managed,
assisted in managing or supervised approximately $650 million in gross assets
for a wide array of clients. Of that amount, FIDAC managed approximately $450
million of those gross assets on a discretionary basis. The U.S. Dollar Floating
Rate Fund is a fund managed by FIDAC. Mr. Farrell is a Director of the Floating
Rate Fund. These officers will continue to perform services for FIDAC, the
institutional clients and the Floating Rate Fund. Mr. Farrell is also the sole
shareholder of FIDAC.
These responsibilities may create conflicts of interest for these officers
and employees if they are presented with corporate opportunities that may
benefit us and the institutional clients and the Floating Rate Fund. Our
officers allocate investments among Annaly, the institutional clients and the
Floating Rate Fund by determining the entity or account for which the investment
is most suitable. In making this determination, our officers consider the
investment strategy and guidelines of each entity or account with respect to
acquisition of assets, leverage, liquidity and other factors that our officers
determine appropriate.
. Some of our directors and officers have ownership interests in our
affiliates that create potential conflicts of interest
Mr. Farrell, our Chairman and Chief Executive Officer, and our other
directors and officers, have direct and indirect ownership interests in our
affiliates that create potential conflicts of interest.
During 1998, we made an initial investment of $49,980 in Annaly
International Mortgage Management, Inc. Annaly International explores business
opportunities overseas, including the origination of mortgages. Annaly
International has not commenced operations beyond this exploratory stage. We own
24.99% of the equity of Annaly International in the form of non-voting
securities. The remaining equity of Annaly International is owned by FIDAC,
Michael A.J. Farrell, Timothy J. Guba, our President and Chief Operating
Officer, Wellington J. St. Claire, our Vice Chairman and Portfolio Manager,
Kathryn F. Fagan, our Chief Financial Officer, John S. Grace, one of our
directors, and other persons. Mr. Farrell is the sole shareholder of FIDAC.
During 1998, Annaly International made an initial investment of $20,400 in
Annaly.com, Inc. Annaly.com explores opportunities to acquire or originate
mortgages in the United States. Annaly.com has established a Web
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site at http://www.annaly.com but has not commenced the acquisition or
origination of mortgages. Annaly International owns 51% of the equity of
Annaly.com. The remaining equity of Annaly.com is owned by FIDAC.
Our management allocates rent and other office expenses between our
affiliates and us. These allocations may create conflicts of interest. Our
management currently allocates rent and other expenses 90% to Annaly and 10% to
FIDAC. Our audit committee must approve any change in these allocation
percentages. In addition, we may enter into agreements, such as technology
sharing or research agreements, with our affiliates in the future. These
agreements would present potential conflicts of interest. Our management will
obtain prior approval of our audit committee prior to entering into any
agreements with our affiliates.
We and our shareholders are subject to certain tax risks
. Our failure to qualify as a REIT would have adverse tax consequences
We believe that since 1997 we have qualified for taxation as a REIT for
federal income tax purposes. We plan to continue to meet the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. The determination that we are a REIT requires an analysis of
various factual matters and circumstances that may not be totally within our
control. For example, to qualify as a REIT, as least 95% of our gross income
must come from certain sources that are itemized in the REIT tax laws. We are
also required to distribute to stockholders at least 95% of our REIT taxable
income (excluding capital gains). Even a technical or inadvertent mistake could
jeopardize our REIT status. Furthermore, Congress and the IRS might make changes
to the tax laws and regulations, and the courts might issue new rulings that
make it more difficult or impossible for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first fail to qualify. If we fail to qualify as a REIT, we
would have to pay significant income taxes and would therefore have less money
available for investments or for distributions to our stockholders. This would
likely have a significant adverse effect on the value of our securities. In
addition, we would no longer be required to make any distributions to our
stockholders.
. We have certain distribution requirements
As a REIT, we must distribute 95% of our annual taxable income. The
required distribution limits the amount we have available for other business
purposes, including amounts to fund our growth. Also, it is possible that
because of the differences between the time we actually receive revenue or pay
expenses and the period we report those items for distribution purposes, we may
have to borrow funds on a short-term basis to meet the 95% distribution
requirement.
. We are also subject to other tax liabilities
Even if we qualify as a REIT, we may be subject to certain federal, state
and local taxes on our income and property. Any of these taxes would reduce our
operating cash flow.
Loss of Investment Company Act exemption would adversely affect us
We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act. If we fail to qualify for
this exemption, our ability to use leverage would be substantially reduced and
we would be unable to conduct our business as described in this prospectus.
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. Under the current interpretation of the SEC staff,
in order to qualify for this exemption, we must maintain at least 55% of our
assets directly in these qualifying real estate interests. Mortgage-backed
securities that do not represent all the certificates issued with respect to an
underlying pool of mortgages may be treated as securities separate from the
underlying mortgage loans and, thus, may not qualify for purposes of the 55%
requirement. Therefore, our ownership of these mortgage-
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backed securities is limited by the provisions of the Investment Company Act. In
addition, in meeting the 55% requirement under the Investment Company Act, we
treat as qualifying interests mortgage-backed securities issued with respect to
an underlying pool as to which we hold all issued certificates. If the SEC or
its staff adopts a contrary interpretation, we could be required to sell a
substantial amount of our mortgage-backed securities, under potentially adverse
market conditions. Further, in order to insure that we at all times qualify for
the exemption from the Investment Company Act, we may be precluded from
acquiring mortgage-backed securities whose yield is somewhat higher than the
yield on mortgage-backed securities that could be purchased in a manner
consistent with the exemption. The net effect of these factors may be to lower
our net income.
Issuances of large amounts of our stock could cause our price to decline
As of August 26, 1999, 12,793,224 shares of our common stock were
outstanding. This prospectus may be used for the issuance of additional common
stock or shares of preferred stock that are convertible into common stock. If we
issue a significant number of shares of common stock or convertible preferred
stock in a short period of time, there could be a dilution of the existing
common stock and a decrease in the market price of the common stock.
We may change our policies without stockholder approval
Our Board of Directors and management determine all of our policies,
including our investment, financing and distribution policies. Although they
have no current plans to do so, they may amend or revise these policies at any
time without a vote of our stockholders. Policy changes could adversely affect
our financial condition, results of operations, the market price of our common
stock or our ability to pay dividends or distributions.
We are subject to the year 2000 risk
The year 2000 risk arises because certain computer programs have been
written using two digits rather than four to define the applicable years.
Consequently, date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations. Our accounting software
vendor has certified that the software package we use is year 2000 compliant.;
however, we have not independently determined that this package is year 2000
compliant and we cannot assure you it is free of year 2000 risk.
We rely on third-party suppliers for a number of key services. If supplier
operations are interrupted due to the year 2000 risk, that interruption could
affect our operations. Although some of our suppliers have assured us that they
are year 2000 compliant, we cannot assure you that our vendors are free of year
2000 risk.
USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, we
intend to use the net proceeds from any of the offered securities for the
purchase of mortgage-backed securities. We then intend to increase our
investment assets by borrowing against these mortgage-backed securities and
using the proceeds to acquire additional mortgage-backed securities.
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DESCRIPTION OF STOCK
General
Our authorized capital stock consists of 100 million shares of common
stock. Pursuant to our articles of incorporation, our Board has the right to
classify or reclassify any unissued shares of common stock into one or more
classes or series of common stock or preferred stock.
Common Stock
Voting
Each of our common stockholders is entitled to one vote for each share held
of record on each matter submitted to a vote of common stockholders.
Our bylaws provide that annual meetings of our stockholders will be held
each calendar year on the date determined by our President, and special meetings
may be called by a majority of our Board, our Chairman, a majority of our
independent directors, our President or generally by stockholders entitled to
cast at least 25% of the votes which all stockholders are entitled to cast at
the meeting. Our articles of incorporation may be amended in accordance with
Maryland law.
Dividends; Liquidation; Other Rights
Common stockholders are entitled to receive dividends when declared by our
Board of Directors out of legally available funds. The right of common
stockholders to receive dividends is subordinate to the rights of preferred
stockholders or other senior stockholders. If we have a liquidation,
dissolution or winding up, our common stockholders will share ratably in all of
our assets remaining after the payment of all of our liabilities and the payment
of all liquidation and other preference amounts to preferred stockholders and
other senior stockholders. Common stockholders have no preemptive or other
subscription rights, and there are no conversion rights, or redemption or
sinking fund provisions, relating to the shares of common stock.
Classification or Reclassification of Common Stock or Preferred Stock
Our articles of incorporation authorize our Board to reclassify any
unissued shares of common or preferred stock into other classes or series of
shares, to establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
class or series.
Issuance of Preferred Stock
The following description sets forth general terms and provisions of the
preferred stock to which any prospectus supplement may relate. The statements
below describing the preferred stock are in all respects subject to and
qualified in their entirety by reference to our articles of incorporation, by-
laws and any articles supplementary to our articles of incorporation designating
terms of a series of preferred stock. The preferred stock, when issued, will be
fully paid and non-assessable. Because our Board has the power to establish the
preferences, powers and rights of each series of preferred stock, our Board may
afford the holders of any series of preferred stock preferences, powers and
rights, voting or otherwise, senior to the rights of common stockholders.
The rights, preferences, privileges and restrictions of each series of
preferred stock will be fixed by the articles supplementary relating to the
series. A prospectus supplement, relating to each series, will specify the
terms of the preferred stock, as follows:
- the title and stated value of the preferred stock;
- the number of shares offered, the liquidation preference per share and
the offering price of the shares;
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- the dividend rate(s), period(s) and payment date(s) or method(s) of
calculation applicable to the preferred stock;
- the date from which dividends on the preferred stock will accumulate,
if applicable;
- the procedures for any auction and remarketing for the preferred
stock;
- the provision for a sinking fund, if any, for the preferred stock;
- the provision for redemption, if applicable, of the preferred stock;
- any listing of the preferred stock on any securities exchange;
- the terms, if any, upon which the preferred stock will be convertible
into common stock, including the conversion price (or manner of
calculation) and conversion period;
- any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock;
- a discussion of certain material federal income tax considerations
applicable to the preferred stock;
- the relative ranking and preferences of the preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs;
- any limitation on issuance of any series of preferred stock ranking
senior to or on a parity with the series of preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs; and
- any limitations on direct or beneficial ownership and restrictions on
transfer of the preferred stock, in each case as may be appropriate to
preserve our status as REIT.
Restrictions on Ownership and Transfer
To ensure that we meet the requirements for qualification as a REIT, our
articles of incorporation prohibit anyone from acquiring or holding, directly or
constructively, ownership of a number of shares of any class of our capital
stock in excess of 9.8% of the outstanding shares. For this purpose the term
"ownership" generally means either direct ownership or constructive ownership in
accordance with the constructive ownership provisions of section 544 of the
Internal Revenue Code.
The constructive ownership provisions of section 544 of the Internal
Revenue Code, generally attribute ownership of securities owned by a
corporation, partnership, estate or trust proportionately to its stockholders,
partners or beneficiaries; attribute ownership of securities owned by family
members to other members of the same family; and set forth rules as to when
securities constructively owned by a person are considered to be actually owned
for the application of such attribution provisions (i.e., "reattribution"). To
determine whether a person holds or would hold capital stock in excess of the
9.8% ownership limit, a person will be treated as owning not only shares of
capital stock actually owned, but also any shares of capital stock attributed to
that person under the attribution rules described above. Accordingly, a person
who individually owns less than 9.8% of the shares outstanding may nevertheless
be in violation of the 9.8% ownership limit.
Any transfer of shares of capital stock that would cause us to be
disqualified as a REIT or that would (a) create a direct or constructive
ownership of shares of capital stock in excess of the 9.8% ownership limit, or
(b) result in the shares of capital stock being beneficially owned (within the
meaning of section 856(a) of the Internal Revenue Code) by fewer than 100
persons (determined without reference to any rules of attribution), or (c)
result in us being "closely held" within the meaning of section 856(h) of the
Internal Revenue Code, will be null and void, and the intended transferee (the
"purported transferee") will acquire no rights to those shares. These
restrictions on transferability and ownership will not apply if our Board
determines that it is no longer in our best interests to continue to qualify as
a REIT.
Any purported transfer of shares of capital stock that would result in a
purported transferee owning (directly or constructively) shares of capital stock
in excess of the 9.8% ownership limit due to the unenforceability of the
transfer restrictions described above will constitute "excess securities."
Excess securities will be transferred by operation of law to a trust that we
will establish for the exclusive benefit of a charitable organization, until
such time as the trustee of the trust retransfers the excess securities. The
trustee will be a banking institution designated by us that is not affiliated
with the purported transferee or us. While the excess securities are held in
trust, the purported transferee will not be entitled to vote or to share in any
dividends or other distributions with respect to the securities. Subject to the
9.8% ownership limit, excess securities may be transferred by the trust to any
person (if such transfer would not result in excess securities) at a price not
to exceed the price paid by the purported transferee (or, if no
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consideration was paid by the purported transferee, the fair market value of the
excess securities on the date of the purported transfer), at which point the
excess securities will automatically cease to be excess securities.
Upon a purported transfer of excess securities, the purported transferee
shall cease to be entitled to distributions, voting rights and other benefits
with respect to the shares of capital stock except the right to payment of the
purchase price for the shares of capital stock on the retransfer of securities
as provided above. Any dividend or distribution paid to a purported transferee
on excess securities prior to our discovery that shares of capital stock have
been transferred in violation of our articles of incorporation shall be repaid
to us upon demand. If these transfer restrictions are determined to be void,
invalid or unenforceable by a court of competent jurisdiction, then the
purported transferee of any excess securities may be deemed, at our option, to
have acted as an agent on our behalf in acquiring the excess securities and to
hold the excess securities on our behalf.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Any person who acquires shares in violation of our articles of
incorporation, or any person who is a purported transferee such that excess
securities results, must immediately give written notice or, in the event of a
proposed or attempted transfer that would be void as set forth above, give at
least 15 days prior written notice to us of such event and shall provide us such
other information as we may request in order to determine the effect, if any, of
the transfer on our status as a REIT. In addition, every record owner of more
than 5.0% (during any period in which the number of record stockholders is 2,000
or more) or 1.0% (during any period in which the number of record stockholders
is greater than 200 but less than 2,000) or 1/2% (during any period in which the
number of record stockholders is 200 or less) of the number or value of our
outstanding shares must send us an annual written notice by January 31 stating
the name and address of the record owner and the number of shares held and
describing how the shares are held. Further, each stockholder is required to
disclose to us in writing information with respect to the direct and
constructive ownership of shares as the Board deems reasonably necessary to
comply with the REIT provisions of the Internal Revenue Code, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
Our Board may increase or decrease the 9.8% ownership limit. In addition,
to the extent consistent with the REIT provisions of the Internal Revenue Code,
our Board may, pursuant to our articles of incorporation, waive the 9.8%
ownership limit for a purchaser of our stock. In connection with any such
waiver, we may require that the stockholder requesting the waiver enter into an
agreement with us providing that we may repurchase shares from the stockholder
under certain circumstances to ensure compliance with the REIT provisions of the
Internal Revenue Code. The repurchase would be at fair market value as set forth
in the agreement between us and the stockholder. The consideration received by
the stockholder in the repurchase might be characterized as the receipt by the
stockholder of a dividend from us, and any stockholder entering into an
agreement with us should consult its tax advisor. At present, we do not intend
to waive the 9.8% ownership limit for any purchaser.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of our capital stock to receive a premium
for their shares that might otherwise exist in the absence of such provisions.
Such provisions also may make us an unsuitable investment vehicle for any person
seeking to obtain ownership of more than 9.8% of the outstanding shares of our
capital stock.
Classification of Board, Vacancies and Removal of Directors
Our by-laws provide for a staggered Board of Directors. Our by-laws provide
for nine directors divided into three classes, with terms of three years each.
The number of directors in each class and the expiration of each class term is
as follows:
<TABLE>
<S> <C> <C> <C>
Class 1 3 Directors Expires 2000
Class 2 3 Directors Expires 2001
Class 3 3 Directors Expires 2002
</TABLE>
At each annual meeting of our stockholders, successors of the class of
directors whose term expires at that meeting will be elected for a three-year
term and the directors in the other two classes will continue in office. A
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classified Board may delay, defer or prevent a change in control or other
transaction that might involve a premium over the then prevailing market price
for our common stock or other attributes that our stockholders may consider
desirable. In addition, a classified Board could prevent stockholders who do not
agree with the policies of our Board of Directors from replacing a majority of
the Board of Directors for two years, except in the event of removal for cause.
On August 30, 1999, John S. Grace, one of the Class 1 directors, resigned
from our Board, leaving one vacancy on our Board. Our by-laws provide that any
vacancy on our Board may be filled by a majority of the remaining directors. Any
individual so elected director will hold office for the unexplored term of the
director he or she is replacing. Our by-laws provide that a director may be
removed at any time only for cause upon the affirmative vote of at least two-
thirds of the votes entitled to be cast in the election of directors, but only
by a vote taken at a stockholder meeting. These provisions preclude stockholders
form removing incumbent directors, except for cause and upon a substantial
affirmative vote, and filling the vacancies created by such removal with their
own nominees.
Indemnification
Our articles of incorporation obligate us to indemnify our directors and
officers and to pay or reimburse expenses for them before the final disposition
of a proceeding to the maximum extent permitted by Maryland law. The
Corporations and Associations Article of the Annotated Code of Maryland (or the
Maryland General Corporation Law) permits a corporation to indemnify its present
and former directors and officers against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that (1) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (a) was committed in bad faith, or (b) was the result of active
and deliberate dishonesty, or (2) the director or officer actually received an
improper personal benefit in money, property or services, or (3) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful.
Limitation of Liability
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages, except to
the extent that (1) it is proved that the person actually received an improper
benefit or profit in money, property or services, or (2) a judgment or other
final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. Our articles of incorporation provide for elimination of the
liability of our directors and officers to us or our stockholders for money
damages to the maximum extent permitted by Maryland law from time to time.
Maryland Business Combination Statute
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is
any person who beneficially owns ten percent or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between us and an
interested stockholder unless the Board approved the transaction prior to the
party becoming an interested stockholder. The five-year period runs from the
most recent date on which the interested stockholder became an interested
stockholder. The law also requires a supermajority stockholder vote for such
transactions after the end of the five-year period. This means that the
transaction must be approved by at least:
. 80% of the votes entitled to be cast by holders of outstanding voting
shares; and
. 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested stockholder with whom
the business combination is to be effected.
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As permitted by the Maryland General Corporation Law, we have elected not
to be governed by the Maryland business combination statute. We made this
election by opting out of this statute in our articles of incorporation. If,
however, we amend our articles of incorporation to opt back in to the statute,
the business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating these offers, even
if our acquisition would be in our stockholders' best interests.
Maryland Control Share Acquisition Statute
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a stockholder vote. Two-thirds of the shares eligible to vote
must vote in favor of granting the "control shares" voting rights. "Control
shares" are shares of stock that, taken together with all other shares of stock
the acquiror previously acquired, would entitle the acquiror to exercise at
least 20% of the voting power in electing directors. Control shares do not
include shares of stock the acquiring person is entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may compel
the Board of Directors to call a special meeting of stockholders to be held
within 50 days to consider the voting rights of the shares. If such a person
makes no request for a meeting, we have the option to present the question at
any stockholders' meeting.
If voting rights are not approved at a meeting of stockholders then we may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value. We will determine the fair value
of the shares, without regard to voting rights, as of the date of either:
. the last control share acquisition; or
. any meeting where stockholders considered and did not approve voting
rights of the control shares.
If voting rights for control shares are approved at a stockholders' meeting
and the acquiror becomes entitled to vote a majority of the shares of stock
entitled to vote, all other stockholders may exercise appraisal rights. This
means that you would be able to redeem your stock back to us for fair value.
Under Maryland law, the fair value may not be less than the highest price per
share paid in the control share acquisition. Furthermore, certain limitations
otherwise applicable to the exercise of dissenters' rights would not apply in
the context of a control share acquisition.
The control share acquisition statute would not apply to shares acquired in
a merger, consolidation or share exchange if we were a party to the transaction.
The control share acquisition statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating any such
offers, even if our acquisition would be in our stockholders' best interests.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C., 450 West 33rd Street, 15th Floor,
New York, New York 10001, is the transfer agent and registrar for our stock. Its
telephone number is (800) 851-9677.
FEDERAL INCOME TAX CONSIDERATIONS
The following discusses the material United States federal income tax
considerations that relate to our treatment as a REIT and that apply to an
investment in our stock. No assurance can be given that the conclusions set out
below would be sustained by a court if challenged by the IRS. This summary deals
only with stock that you hold as a "capital asset", which generally means
property that is held for investment. It does not address tax considerations
applicable to you if you are a person subject to special tax rules, such as:
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. a dealer or trader in securities;
. a financial institution;
. an insurance company;
. a stockholder that holds our stock as a hedge, part of a straddle,
conversion transaction or other arrangement involving more than one
position;
. a stockholder whose functional currency is not the United States
dollar; or
. a tax-exempt or foreign taxpayer, except to the extent discussed
below.
The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986 and regulations, rulings and judicial decisions
interpreting the Internal Revenue Code as of the date of this prospectus; any of
these authorities may be repealed, revoked or modified, perhaps with retroactive
effect, so as to result in federal income tax consequences different from those
discussed below.
The discussion set out below is intended only as a summary of the material
United States federal income tax consequences of our treatment as a REIT and of
an investment in our stock. We urge you to consult your own tax advisor as to
the tax consequences of an investment in our stock, including the application to
your particular situation of the tax considerations discussed below, as well as
the application of state, local or foreign tax laws. The statements of United
States tax law set out below are based on the laws in force and their
interpretation as of the date of this prospectus, and are subject to any changes
occurring after that date.
General
We have elected to become subject to tax as a REIT for federal income tax
purposes effective for our taxable year ending December 31, 1997. In the opinion
of Morgan, Lewis & Bockius LLP, commencing with our taxable year ended December
31, 1997, we have been organized in conformity with the requirements for
qualification and taxation as a REIT under the Internal Revenue Code, and our
method of operation enables us to meet the requirements for qualification and
taxation as a REIT. This opinion is based on factual assumptions and
representations relating to our organization and operations and factual
assumptions and representations relating to our continued efforts to comply with
the various REIT tests. Qualification as a REIT depends upon our ability to meet
on a continuing basis, through actual operating results, the various
qualification tests imposed under the Internal Revenue Code, and Morgan, Lewis &
Bockius LLP has not reviewed in the past, and may not review in the future, our
compliance with these tests.
There can be no assurance, however, that we will qualify as a REIT in any
particular taxable year, given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations and the possibility of
future changes in our circumstances. If we were not to qualify as a REIT in any
particular year, we would be subject to federal income tax as a regular domestic
corporation, and you would be subject to tax in the same manner as a stockholder
of a regular domestic corporation. In this event, we could be subject to a
potentially substantial income tax liability in respect of each taxable year
that we fail to qualify as a REIT, and the amount of earnings and cash available
for distribution to you and other stockholders could be significantly reduced or
eliminated. See "Failure to qualify" below.
REIT Qualification Requirements
The following is a brief summary of the material technical requirements
that we must meet on an ongoing basis in order to qualify, and remain qualified,
as a REIT under the Internal Revenue Code.
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Stock Ownership Tests
We must meet the following stock ownership tests:
(1) our capital stock must be transferable;
(2) our capital stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months (or during a proportionate
part of a taxable year of less than 12 months); and
(2) no more than 50% of the value of our capital stock may be owned,
directly or indirectly, by five or fewer individuals at any time
during the last half of the taxable year. In applying this test, the
Internal Revenue Code treats some entities as individuals.
Tax-exempt entities, other than private foundations and certain
unemployment compensation trusts, are generally not treated as individuals for
these purposes. The requirements of items (2) and (3) above do not apply to the
first taxable year for which we made an election to be taxed as a REIT. However,
these stock ownership requirements must be satisfied in each subsequent taxable
year. Our articles of incorporation provide restrictions regarding the transfer
of our shares in order to aid us in meeting the stock ownership requirements. In
addition, we are required under Treasury Department regulations to demand annual
written statements from the record holders of designated percentages of our
capital stock disclosing actual and constructive stock ownership and to maintain
permanent records showing the information we have received as to the actual and
constructive stock ownership and a list of those persons failing or refusing to
comply with our demand.
Asset Tests
We generally must meet the following asset tests at the close of each
quarter of each taxable year:
(a) at least 75% of the value of our total assets must consist of
Qualified REIT Real Estate Assets, government securities, cash and
cash items; and
(b) the value of securities that we hold (other than government
securities) may not exceed 25% of the value of our total assets, and
in addition, we may not hold securities of any one issuer that
constitute either
(1) 5% or more of the value of our total assets or
(2) 10% of the outstanding voting securities of the issuer.
"Qualified REIT Real Estate Assets" means pass-through certificates,
mortgage loans and other assets of the type described in Section 856(c)(5)(B) of
the Internal Revenue Code.
We, along with one or more other entities, may form and capitalize one or
more taxable subsidiaries that will engage in hedging activities, the creation
of mortgage-backed securities through securitization or other activities. In
order to ensure that we would not violate the more than 10% single issuer voting
stock limitation, we would own only non-voting preferred and common stock, and
the other entities would own all of the voting common stock. The value of our
investment in any of these subsidiaries would also be limited to less than 5% of
the value of our total assets at the end of each calendar quarter so that we can
also comply with the 5% of value, single-issuer asset limitation. The taxable
subsidiary would not elect REIT status and would distribute only net after-tax
profits to its stockholders, including us. We will consult with our tax advisor
to determine whether our activities or the formation and contemplated method of
operation of a subsidiary corporation would cause us to fail to satisfy the REIT
requirements.
Gross Income Tests
We generally must meet the following gross income tests for each taxable
year:
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(a) at least 75% of our gross income must be derived from the real estate
sources specified in the Internal Revenue Code, including interest
income and gain from the disposition of Qualified REIT Real Estate
Assets or "qualified temporary investment income," which is income
derived from "new capital" within one year of its receipt; and
(b) at least 95% of our gross income for each taxable year must be derived
from sources of income qualifying for the 75% gross income test
described in (a), dividends, interest, and gains from the sale of
stock or other financial instruments (including interest rate swap and
cap agreements, options, futures contracts, forward rate agreements or
similar financial instruments entered into to hedge variable rate debt
incurred to acquire Qualified REIT Real Estate Assets) not held for
sale in the ordinary course of business.
Distribution Requirement
We generally must distribute to our stockholders at least 95% of our REIT
taxable income before deductions of dividends paid and excluding net capital
gain. However, we may elect to retain, rather than distribute, our net long-term
capital gains and pay the tax on these gains, while our stockholders include
their proportionate share of the undistributed long-term capital gains in income
and receive a credit for their share of the tax that we pay.
Failure to Qualify
If we fail to qualify for taxation as a REIT in any taxable year and relief
provisions do not apply, we will be subject to tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates.
Distributions to stockholders in any year in which we fail to qualify as a REIT
will not be deductible by us, nor will we be required to make distributions.
Unless entitled to relief under specific statutory provisions, we also will be
disqualified from taxation as a REIT for four taxable years following the year
during which qualification was lost. It is not possible to state whether in all
circumstances we would be entitled to such statutory relief.
Recent Developments
On August 4, 1999, Congress released the "Taxpayer Refund and Relief Act of
1999," a bill that is to be sent to the White House for President Clinton's
approval when Congress reconvenes in September. The bill would change the
restriction on the ability of the REIT to own securities of any issuer from the
current 10% of the voting securities of an issuer to 10% of the vote or value of
the securities of an issuer. President Clinton's proposed budget plan, released
earlier this year, included similar provisions. In addition, the bill would
allow REITs to own up to 100% of the stock of "taxable REIT subsidiaries."
Although a taxable REIT subsidiary would not be subject to the 10% vote or value
test, a taxable REIT subsidiary would otherwise be subject to the REIT asset
tests. If these provisions were to become law, we might have to change our
future or current ownership of subsidiaries in order to continue to qualify as a
REIT. Congress' Taxpayer Refund and Relief Act of 1999 does contain a transition
rule under which securities that a REIT has held on July 12, 1999 will not be
subject to this new limitation, assuming that the issuer of the securities does
not engage in a substantially new line of business or acquire a substantial
asset. This transition rule may exempt our ownership of 24.99% of the equity of
Annaly International from the bill's provisions if it were enacted as proposed.
The bill also contains a provision, among others, that would reduce a REIT's
annual distribution requirement from the current 95% of REIT taxable income to
90%.
Taxation of Annaly Mortgage Management
In any year in which we qualify as a REIT, we generally will not be subject
to federal income tax on that portion of our REIT taxable income or capital gain
that we distribute to our stockholders. We will, however, be subject to federal
income tax at normal corporate income tax rates upon any undistributed taxable
income or capital gain.
Notwithstanding our qualification as a REIT, we may also be subject to tax
in the following other circumstances:
. If we fail to satisfy either the 75% or the 95% gross income
test, but nonetheless maintain our qualification as a REIT
because we meet other requirements, we generally would be
subject to a
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100% tax on the greater of the amount by which we fail either
the 75% or the 95% gross income test multiplied by a fraction
intended to reflect our profitability.
. We will also be subject to a tax of 100% on net income derived
from any "prohibited transaction" which is, in general, a sale
or other disposition of property held primarily for sale to
customers in the ordinary course of business.
. If we have (1) net income from the sale or other disposition
of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (2) other non-
qualifying income from foreclosure property, it will be
subject to federal income tax at the highest corporate income
tax rate.
. If we fail to distribute during each calendar year at least
the sum of (1) 85% of our REIT ordinary income for such year,
(2) 95% of our REIT capital gain net income for such year and
(3) any undistributed amount of ordinary and capital gain net
income from the preceding taxable years, we would be subject
to a 4% federal excise tax on the excess of the required
distribution over the amounts actually distributed during the
taxable year.
. If we acquire any asset from a C corporation in a transaction
in which the basis of the asset is determined by reference to
the basis of the asset in the hands of a C corporation and we
recognize gain upon a disposition of such asset occurring
within 10 years of its acquisition, then we would be subject
to tax to the extent of any built-in gain at the highest
regular corporate rate.
. We also may be subject to the corporate alternative minimum
tax, as well as other taxes in situations not presently
contemplated.
If we fail to qualify as a REIT in any taxable year and the relief
provisions provided in the Internal Revenue Code do not apply, we would be
subject to federal income tax, including any applicable alternative minimum tax,
on our taxable income in that taxable year and all subsequent taxable years at
the regular corporate income tax rates. We would not be allowed to deduct
distributions to shareholders in these years, nor would we be required to make
them under the Internal Revenue Code. Further, unless entitled to the relief
provisions of the Internal Revenue Code, we also would be disqualified from re-
electing REIT status for the four taxable years following the year during which
we became disqualified.
We intend to monitor on an ongoing basis our compliance with the REIT
requirements described above. In order to maintain our REIT status, we will be
required to limit the types of assets that we might otherwise acquire, or hold
some assets at times when we might otherwise have determined that the sale or
other disposition of these assets would have been more prudent.
Taxation of Stockholders
Unless you are a tax-exempt entity, distributions that we make to you,
including constructive distributions, generally will be subject to tax as
ordinary income to the extent of our current and accumulated earnings and
profits as determined for federal income tax purposes. If the amount we
distribute to you exceeds your allocable share of current and accumulated
earnings and profits, the excess will be treated as a return of capital to the
extent of your adjusted basis in your stock, which will reduce your basis in
your stock but will not be subject to tax. If the amount we distribute to you
also exceeds your adjusted basis, this excess amount will be treated as a gain
from the sale or exchange of a capital asset. Distributions you receive, whether
characterized as ordinary income or as capital gain, are not eligible for the
corporate dividends received deduction.
Distributions that we designate as capital gain dividends generally will be
subject to tax as long-term capital gain to you, to the extent that the
distributions to you and the other shareholders do not exceed our actual net
capital gain for the taxable year. In the event that we realize a loss for the
taxable year, you will not be permitted to deduct any share of that loss.
Further, if we, or a portion of our assets, were to be treated as a taxable
mortgage pool, any "excess inclusion income" that is allocated to you could not
be offset by any net operating loss that you may have.
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Future Treasury Department regulations may require that you take into account,
for purposes of computing your individual alternative minimum tax liability,
some of our tax preference items.
Dividends that we declare during the last quarter of the calendar year and
actually pay to you during January of the following taxable year generally are
treated as if we had paid, and you had received, them on December 31 of the
calendar year and not on the date actually paid and received. In addition, we
may elect to treat other dividends distributed after the close of the taxable
year as having been paid during the taxable year, so long as they meet the
requirements described in the Internal Revenue Code, but you will be treated as
having received these dividends in the taxable year in which their distribution
is actually made.
If you sell or otherwise dispose of our stock, you will generally recognize
a capital gain or loss in an amount equal to the difference between the amount
realized and your adjusted basis in the stock, which gain or loss will be long-
term if you have held the stock for more than one year. Any loss that you
recognize on the sale or exchange of our stock that you have held for six months
or less generally will be treated as a long-term capital loss to the extent,
with respect to the stock, of (1) any long-term capital gain dividends that you
receive and (2) any long-term capital gain that we retain and the tax on which
you receive a credit.
If we do not qualify as a REIT in any year, distributions that we make to
you would be taxable in the same manner discussed above, except that:
. we would not be allowed to designate any distributions as capital gain
dividends;
. distributions would be eligible for the corporate dividends received
deduction;
. the excess inclusion income rules would not apply to you; and
. you would not receive any share of our tax preference items.
In this event, however, we could be subject to potentially substantial
federal income tax liability, and the amount of earnings and cash available for
distribution to you and other stockholders could be significantly reduced or
eliminated.
Information Reporting and Backup Withholding
We will report to our domestic stockholders and to the IRS the amount of
distributions that we pay, and the amount of tax that we withhold on these
distributions for each calendar year. Under the backup withholding rules, you
may be subject to backup withholding at a rate of 31% with respect to
distributions paid unless you:
. are a corporation or otherwise within an exempt category and
demonstrate this fact when required; or
. provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding and otherwise comply with applicable
requirements of the backup withholding rules.
If you do not provide us with your correct taxpayer identification number,
then you may also be subject to penalties imposed by the IRS.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against your United States
federal income tax liability, provided that you furnish the required information
to the IRS.
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Taxation of Tax-Exempt Entities
The discussion under this heading only applies to you if you are a tax-
exempt entity.
Subject to the discussion below regarding a "pension-held REIT,"
distributions received from us or gain realized on the sale of our stock will
not be taxable as unrelated business taxable income (UBTI), provided that:
. you have not incurred indebtedness to purchase or hold our stock;
. you do not otherwise use our shares in an unrelated trade or business;
and
. we, consistent with our present intent, do not hold a residual
interest in a REMIC that gives rise to "excess inclusion" income as
defined under section 860E of the Internal Revenue Code.
If we were to be treated as a "taxable mortgage pool," however, a
substantial portion of the dividends you receive may be subject to tax as UBTI.
In addition, a substantial portion of the dividends you receive may
constitute UBTI if we are treated as a "pension-held REIT" and you are a
"qualified pension trust" that holds more than 10% by value of our interests at
any time during a taxable year. For these purposes, a "qualified pension trust"
is any pension or other retirement trust that qualifies under section 401(a) of
the Internal Revenue Code. We would be treated as a "pension-held REIT" if (1)
we would not have qualified as a REIT but for the provisions of the Internal
Revenue Code which look through qualified pension trust stockholders to the
qualified pension trust's beneficiaries in determining stock ownership of a REIT
and (2) at least one qualified pension trust holds more than 25% of our stock by
value or one or more qualified pension trusts (each owning more than 10% of our
stock by value) hold in the aggregate more than 50% of our stock by value.
Assuming compliance with the ownership limit provisions set forth in our
articles of incorporation, it is unlikely that pension plans will accumulate
sufficient stock to cause us to be treated as a pension-held REIT.
If you are exempt from federal income taxation under sections 501(c)(7),
(c)(9), (c)(17), and (c)(20) of the Internal Revenue Code, then distributions
you receive may also constitute UBTI; we urge you to consult your tax advisor
concerning the applicable "set aside" and reserve requirements.
United States Federal Income Tax Considerations Applicable to Foreign Holders
The discussion under this heading applies to you only if you are not a U.S.
person. A U.S. person is a person who is:
. a citizen or resident of the United States;
. a corporation, partnership, or other entity created or organized in
the United States or under the laws of the United States or of any
political subdivision thereof;
. an estate whose income is includible in gross income for United States
Federal income tax purposes regardless of its source; or
. a trust, if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. persons have authority to control all substantial decisions
of the trust, or (2) the trust was in existence on August 26, 1996 and
has made an election to be treated as a U.S. person;
This discussion is only a brief summary of the United States federal tax
consequences that apply to you, which are highly complex, and does not consider
any specific facts or circumstances that may apply to you and your particular
situation. We urge you to consult your tax advisor regarding the United States
federal tax consequences of acquiring, holding and disposing of our stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.
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Distributions
Except for distributions attributable to gain from the dispositions of real
property interests or designated as capital gains dividends, distributions you
receive from us generally will be subject, to the extent of our earnings and
profits, to withholding of United States federal income tax at the rate of 30%,
unless reduced or eliminated by an applicable tax treaty or unless the
distributions are treated as effectively connected with a United States trade or
business. If you wish to claim the benefits of an applicable tax treaty, you
may need to satisfy certification and other requirements, some of which will
change on January 1, 2001.
Distributions you receive that are in excess of our earnings and profits
will be treated as a tax-free return of capital to the extent of your adjusted
basis in your stock. If the amount of the distribution also exceeds your
adjusted basis, this excess amount will be treated as gain from the sale or
exchange of our stock as described below. If we cannot determine at the time we
make a distribution whether the distribution will exceed our earnings and
profits, the distribution will be subject to withholding at the same rate as
dividends. These withheld amounts, however, will be refundable or creditable
against your United States federal tax liability if it is subsequently
determined that the distribution was, in fact, in excess of our earnings and
profits. If you receive a dividend that is treated as being effectively
connected with your conduct of a trade or business within the United States, the
dividend will be subject to the United States federal income tax on net income
that applies to United States persons generally and may be subject to the branch
profits tax if you are a corporation.
Distributions that we make to you and designate as capital gains dividends,
other than those attributable to the disposition of a United States real
property interest, generally will not be subject to United States federal income
taxation, unless:
. your investment in our stock is effectively connected with your
conduct of a trade or business within the United States; or
. you are a nonresident alien individual who is present in the United
States for 183 days or more in the taxable year and other requirements
are met.
Distributions that are attributable to your disposition of United States
real property interests are subject to income and withholding taxes pursuant to
the Foreign Investment in Real Property Act of 1980 (FIRPTA), and may also be
subject to branch profits tax if you are a corporation that is not entitled to
treaty relief or exemption. However, because we do not expect to hold assets
that would be treated as "United States real property interests" as defined by
FIRPTA, the FIRPTA provisions should not apply to your investment in our stock.
Gain on Disposition
You generally will not be subject to United States federal income tax on
gain recognized on a sale or other disposition of our stock unless:
. the gain is effectively connected with your conduct of a trade or
business within the United States;
. you are a nonresident alien individual who holds our stock as a
capital asset and is present in the United States for 183 or more days
in the taxable year and other requirements are met; or
. you are subject to tax under the FIRPTA rules discussed below.
Gain that is effectively connected with your conduct of a trade or business
within the United States will be subject to the United States federal income tax
on net income that applies to United States persons generally and may be subject
to the branch profits tax if you are a corporation. However, these effectively-
connected gains will not be subject to withholding. We urge you to consult
applicable treaties, which may provide for different rules.
Under FIRPTA, you may be subject to tax on gain recognized from your sale
or other disposition of our stock if we were to both (1) hold United States real
property interests and (2) fail to qualify as a "domestically-controlled
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REIT." A REIT qualifies as "domestically-controlled" as long as less than 50% in
value of its shares of beneficial interest are held by foreign persons at all
times during the shorter of (1) the previous five years and (2) the period in
which the REIT is in existence. As mentioned above, we do not expect to hold any
United States real property interests. Furthermore, we will likely qualify as a
"domestically-controlled REIT," although no assurances can be provided because
our shares are publicly-traded.
State and Local Taxes
We and our stockholders may be subject to state or local taxation in
various jurisdictions, including those in which we or they transact business or
reside. The state and local tax treatment that applies to us and our
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, we urge you to consult your own tax advisor regarding the
effect of state and local tax laws.
PLAN OF DISTRIBUTION
We may sell the securities offered pursuant to this prospectus and any
accompanying prospectus supplements to or through one or more underwriters or
dealers or we may sell the securities to investors directly or through agents.
Any underwriter or agent involved in the offer and sale of the securities will
be named in the applicable prospectus supplement. We may sell securities
directly to investors on our own behalf in those jurisdictions where we are
authorized to do so.
Underwriters may offer and sell the securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or at negotiated prices. We also may,
from time to time, authorize dealers or agents to offer and sell these
securities upon such terms and conditions as may be set forth in the applicable
prospectus supplement. In connection with the sale of any of these securities,
underwriters may receive compensation from us in the form of underwriting
discounts or commissions and may also receive commissions from purchasers of the
securities for whom they may act as agent. Underwriters may sell the securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for which they may act as agents.
Shares may also be sold in one or more of the following transactions: (a)
block transactions (which may involve crosses) in which a broker-dealer may sell
all or a portion of the shares as agent but may position and resell all or a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker-dealer as principal and resale by the broker-dealer for its own
account pursuant to a prospectus supplement; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable New York
Stock Exchange or other stock exchange rules; (d) ordinary brokerage
transactions and transactions in which a broker-dealer solicits purchasers; (e)
sales "at the market" to or through a market maker or into an existing trading
market, on an exchange or otherwise, for shares; and (f) sales in other ways not
involving market makers or established trading markets, including direct sales
to purchasers. Broker-dealers may also receive compensation from purchasers of
the shares which is not expected to exceed that customary in the types of
transactions involved.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of these securities, and any discounts or
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered
into with us, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act. Unless otherwise
set forth in the accompanying prospectus supplement, the obligations of any
underwriters to purchase any of these securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all of
the series of securities, if any are purchased.
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Underwriters, dealers and agents may engage in transactions with, or
perform services for, us and our affiliates in the ordinary course of business.
In connection with the offering of the securities hereby, certain
underwriters, and selling group members and their respective affiliates may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the applicable securities. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the Securities and Exchange Commission pursuant to which these persons may bid
for or purchase securities for the purpose of stabilizing their market price.
The underwriters in an offering of securities may also create a "short
position" for their account by selling more securities in connection with the
offering than they are committed to purchase from us. In that case, the
underwriters could cover all or a portion of the short position by either
purchasing securities in the open market following completion of the offering of
these securities or by exercising any over-allotment option granted to them by
us. In addition, the managing underwriter may impose "penalty bids" under
contractual arrangements with other underwriters, which means that they can
reclaim from an underwriter (or any selling group member participating in the
offering) for the account of the other underwriters, the selling concession for
the securities that are distributed in the offering but subsequently purchased
for the account of the underwriters in the open market. Any of the transactions
described in this paragraph or comparable transactions that are described in any
accompanying prospectus supplement may result in the maintenance of the price of
the securities at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph or in an
accompanying prospectus supplement are required to be taken by any underwriters
and, if they are undertaken, may be discontinued at any time.
The common stock is listed on the New York Stock Exchange under the symbol
"NLY." The preferred stock will be new issues of securities with no established
trading market and may or may not be listed on a national securities exchange.
Any underwriters or agents to or through which securities are sold by us may
make a market in the securities, but these underwriters or agents will not be
obligated to do so and any of them may discontinue any market making at any time
without notice. No assurance can be given as to the liquidity of or trading
market for any shares of preferred stock.
EXPERTS
Deloitte & Touche LLP, independent auditors, have audited our financial
statements as of December 31, 1998 and 1997 and for the year ended December 31,
1998 and the period ended December 31, 1997, as set forth in their reports which
are incorporated in this prospectus by reference. Our financial statements are
incorporated by reference in reliance on Deloitte & Touche LLP's reports, given
on their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for us
by Morgan, Lewis & Bockius LLP. The opinion of counsel described under the
heading "Federal Income Tax Considerations" is being rendered by Morgan, Lewis &
Bockius LLP. This opinion is subject to various assumptions and is based on
current tax law.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Commission. You may inspect and copy such reports, proxy
statements and other information at the public reference facilities maintained
by the Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W,
Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
further information. This material can also be obtained from the Commission's
worldwide web site at http://www.sec.gov. Our outstanding common stock is
listed on the NYSE under the symbol "NLY," and all such reports, proxy
statements and other information filed by us with the NYSE may be inspected at
the NYSE's offices at 20 Broad Street, New York, New York 10005.
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We have filed a registration statement, of which this prospectus is a part,
covering the securities offered hereby. As allowed by Commission rules, this
prospectus does not contain all the information set forth in the registration
statement and the exhibits, financial statements and schedules thereto. We refer
you to the registration statement, the exhibits, financial statements and
schedules thereto for further information. This prospectus is qualified in its
entirety by such other information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" information into
this prospectus, which means that we can disclose important information to you
by referring you to another document filed separately with the Commission. The
information incorporated by reference is deemed to be part of this prospectus,
except for any information superseded by information in this prospectus. We have
filed the documents listed below with the Commission (File No. 1-13447) under
the Securities Exchange Act of 1934 (the "Exchange Act"), and these documents
are incorporated herein by reference:
. Our Annual Report on Form 10-K for the year ended December 31, 1998.
. Our Quarterly Reports on Form 10-Q for the quarters ended March 31,
1999 and June 30, 1999.
. Our Proxy Statement dated March 25, 1999.
. The description of our common stock included in our registration
statement on Form 8-A, as amended.
Any documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus and prior to the termination of
the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference in this prospectus and
to be part hereof from the date of filing those documents. Any documents we file
pursuant to these sections of the Exchange Act after the date of the initial
registration statement that contains this prospectus and prior to the
effectiveness of the registration statement will automatically be deemed to be
incorporated by reference in this prospectus and to be part hereof from the date
of filing those documents.
Any statement contained in this prospectus or in a document incorporated by
reference shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained in this prospectus or in any other document
which is also incorporated by reference modifies or supersedes that statement.
You may obtain copies of all documents which are incorporated in this
prospectus by reference (other than the exhibits to such documents which are not
specifically incorporated by reference herein) without charge upon written or
oral request to Investor Relations, at Annaly Mortgage Management, Inc., 12 East
41st Street, Suite 700, New York, New York, 10017, telephone number (212) 696-
0100.
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