-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TU63kyprmDAGYpCt62q1Aw1iTk4DPlK85+f+bp9+9XGjSipqs8jTsrid9YwFW/VQ cv4F2XxmNET/ImcOaYW1kQ== 0000950136-01-501250.txt : 20010828 0000950136-01-501250.hdr.sgml : 20010828 ACCESSION NUMBER: 0000950136-01-501250 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010827 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNALY MORTGAGE MANAGEMENT INC CENTRAL INDEX KEY: 0001043219 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 223479661 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13447 FILM NUMBER: 1723391 BUSINESS ADDRESS: STREET 1: 1500 HARBOR ST CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2012231900 MAIL ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 10-Q/A 1 file001.txt AMENDED QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _________________ COMMISSION FILE NUMBER: 1-13447 ANNALY MORTGAGE MANAGEMENT, INC. (Exact name of Registrant as specified in its Charter) MARYLAND 22-3479661 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12 EAST 41ST STREET, SUITE 700 NEW YORK, NEW YORK (Address of principal executive offices) 10017 (Zip Code) (212) 696-0100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the last practicable date: Class Outstanding at August 22, 2001 Common Stock, $.01 par value 44,685,134 1 ANNALY MORTGAGE MANAGEMENT, INC. FORM 10-Q INDEX
Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Statements of Financial Condition- June 30, 2001 (Unaudited) and December 31, 2000 1 Statements of Operations (Unaudited) for the quarters and six months ended June 30, 2001 and 2000 2 Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 2001 3 Statements of Cash Flows (Unaudited) for the quarters and six months ended June 30, 2001 and 2000 4 Notes to Financial Statements (Unaudited) 5-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-23 Item 3. Quantitative and Qualitative Disclosure about Market Risk 24-25 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 25 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES
2 ANNALY MORTGAGE MANAGEMENT, INC STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2001 DECEMBER 31, (UNAUDITED) 2000 ----------------------- ------------------------ ASSETS Cash and cash equivalents $ 115,251 $113,061 Mortgage-Backed Securities, at fair value 5,572,287,848 1,978,219,376 Receivable for Mortgage-Backed Securities sold 5,508,019 44,933,631 Accrued interest receivable 32,189,910 11,502,482 Other assets 217,391 260,238 ----------------------- ------------------------ Total assets $5,610,318,419 $2,035,028,788 ======================= ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements $4,481,816,000 $1,628,359,000 Payable for Mortgage-Backed Securities purchased 641,648,805 258,798,138 Accrued interest payable 18,226,032 8,314,414 Dividends payable 17,870,698 3,630,745 Accounts payable 806,324 284,105 ----------------------- ------------------------ Total liabilities 5,160,367,859 1,899,386,402 ----------------------- ------------------------ Stockholders' Equity: Common stock: par value $.01 per share; 100,000,000 Authorized, 44,676,744 and 14,522,978 shares issued and outstanding, respectively 446,767 145,230 Additional paid-in capital 442,603,203 147,844,861 Accumulated other comprehensive gain (loss) 4,860,055 (13,044,259) Retained earnings 2,040,535 696,554 ----------------------- ------------------------= Total stockholders' equity 449,950,560 135,642,386 ----------------------- ------------------------ Total liabilities and stockholders' equity $5,610,318,419 $2,035,028,788 ======================= ========================
See notes to financial statements 1 ANNALY MORTGAGE MANAGEMENT, INC STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE FOR THE SIX FOR THE SIX QUARTER ENDED QUARTER ENDED MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 ---------------- ------------------ ----------------- ------------------ INTEREST INCOME: Mortgage-Backed Securities and cash equivalents $64,789,651 $25,734,520 $107,224,072 $50,351,302 INTEREST EXPENSE: Repurchase agreements 45,283,966 21,453,016 78,737,043 40,745,970 ---------------- ----------------- ----------------- ------------------ NET INTEREST INCOME 19,505,685 4,281,504 28,487,029 9,605,332 GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 481,936 64,774 751,414 171,627 GENERAL AND ADMINISTRATIVE EXPENSES 1,392,778 507,322 2,313,327 1,089,641 ---------------- ----------------- ----------------- ------------------ NET INCOME 18,594,843 3,838,956 26,925,116 8,687,318 ---------------- ----------------- ----------------- ------------------ OTHER COMPREHENSIVE INCOME Unrealized gain (loss) on available- for-sale securities 2,191,109 (630,080) 18,655,728 2,732,059 Less: reclassification adjustment for net gains included in net income (481,936) (64,774) (751,414) (171,627) ---------------- ----------------- ----------------- ------------------ Other comprehensive gain (loss) 1,709,173 (694,854) 17,904,314 2,560,432 ---------------- ----------------- ----------------- ------------------ COMPREHENSIVE INCOME $20,304,016 $ 3,144,102 $44,829,430 $11,247,750 ================ ================= ================= ================== NET INCOME PER SHARE: Basic $0.48 $0.27 $0.89 $0.63 ================ ================= ================= ================== Diluted $0.48 $0.26 $0.88 $0.61 ================ ================= ================= ================== AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 38,473,928 14,039,741 30,138,057 13,850,140 ================ ================= ================= ================== Diluted 39,054,488 14,631,940 30,758,235 14,152,881 ================ ================= ================= ==================
See notes to financial statements 2 ANNALY MORTGAGE MANAGEMENT, INC STATEMENT OF STOCKHOLDER'S EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED)
COMMON ADDITIONAL OTHER STOCK PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE PAR VALUE CAPITAL INCOME EARNINGS INCOME TOTAL ----------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $145,230 $147,844,861 $696,554 ($13,044,259) $135,642,386 Net Income $8,330,273 8,330,273 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 16,195,141 16,195,141 --------------- Comprehensive income $24,525,414 24,525,414 =============== Exercise of stock options 259 113,973 114,232 Proceeds from direct purchase 26 27,601 27,627 Proceeds from offerings 111,500 99,172,361 99,283,861 Dividends declared for the quarter ended March 31, 2001, $0.35 per average share (7,710,438) (7,710,438) ----------------------------- ------------------------------------------ BALANCE, MARCH 31, 2001 $257,015 $247,158,796 $1,316,389 $3,150,882 $251,883,082 Net Income $18,594,843 18,594,843 Other comprehensive income: Unrealized net gains on securities, net of reclassification adjustment 1,709,173 1,709,173 -------------- Comprehensive income $20,304,016 20,304,016 ============== Exercise of stock options 549 306,532 307,081 Proceeds from direct purchase 18 24,285 24,303 Proceeds from offering 189,185 195,113,590 195,302,775 Dividends declared for the quarter ended June 30, 2001, $0.40 per average share (17,870,697) (17,870,697) ============================= =========================================== BALANCE, JUNE 30, 2001 $446,767 $442,603,203 $2,040,535 $4,860,055 $449,950,560 ============================= ===========================================
See notes to financial statements 3 ANNALY MORTGAGE MANAGEMENT, INC STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE FOR THE QUARTER ENDED QUARTER ENDED FOR THE SIX FOR THE SIX JUNE 30, JUNE 30, MONTHS ENDED MONTHS ENDED 2001 2000 JUNE 30, 2001 JUNE 30, 2000 ------------------ ----------------- ------------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $18,594,843 $3,838,956 $26,925,116 $8,687,318 Adjustments to reconcile net income to net cash provided by operating activities: amortization of mortgage premiums and discounts, net 6,724,306 519,905 8,937,789 994,611 Gain on sale of Mortgage-Backed Securities (481,936) (64,774) (751,414) (171,627) Increase in accrued interest receivable (10,084,919) (128,822) (20,687,428) (40,928) (Decrease) increase in other assets 105,788 (30,959) 42,847 (49,254) Increase (decrease) in accrued interest Payable 3,531,348 678,168 9,911,618 (564,726) Increase (decrease) in accounts payable 226,559 (568) 522,219 107,227 ------------------ ----------------- ------------------ ---------------- Net cash provided by operating activities 18,615,989 4,811,906 24,900,747 8,962,621 ------------------ ----------------- ------------------ ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Mortgage-Backed Securities (2,148,120,233) (85,683,125) (3,986,508,656) (174,111,811) Proceeds from sale of Mortgage-Backed Securities 196,795,004 18,877,266 348,683,093 88,659,898 Principal payments of Mortgage-Backed Securities 381,341,586 38,538,346 475,751,309 69,724,277 ---------------- ------------------ ----------------- ------------------ Net cash used in investing activities (1,569,983,643) (28,267,513) (3,162,074,254) (15,727,636) ------------------ ----------------- ------------------ ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from repurchase agreements 11,649,453,000 3,414,378,000 18,675,926,527 6,516,210,500 Principal payments on repurchase agreements (10,285,937,000) (3,388,683,500) (15,822,469,527) (6,504,824,250) Proceeds from exercise of stock options 307,081 8,125 421,313 146,621 Proceeds from direct purchase 24,303 2,583,471 51,930 4,900,090 Proceeds from offerings 195,302,775 - 294,586,636 - Dividends paid (7,710,437) (4,864,891) (11,341,182) (9,618,352) ------------------ ----------------- ------------------ ---------------- Net cash provided by financing Activities 1,551,439,722 23,421,205 3,137,175,697 6,814,609 ------------------ ----------------- ------------------ ---------------- Net increase (decrease) in cash and cash Equivalents 72,068 (34,402) 2,190 49,594 Cash and cash equivalents, beginning of period 43,183 155,914 113,061 71,918 ------------------ ----------------- ------------------ ---------------- Cash and cash equivalents, end of period $ 115,251 $ 121,512 $ 115,251 $ 121,512 ================== ================= ================== ================ Supplemental disclosure of cash flow Information: Interest paid $41,752,619 $20,774,848 $68,825,425 $41,310,696 ================== ================= ================== ================ Noncash financing activities: Net change in unrealized losses on available-for-sale securities $1,709,173 ($694,854) $17,904,314 $2,560,432 ================== ================= ================== ================ Dividends declared, not yet paid $17,870,698 $4,262,402 $17,870,698 $4,262,402 ================== ================= ================== ================
See notes to financial statements 4 ANNALY MORTGAGE MANAGEMENT, INC NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001 (UNAUDITED) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland on November 25, 1996. The Company commenced its operations of purchasing and managing an investment portfolio of Mortgage-Backed Securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital. An initial public offering was completed on October 14, 1997. A summary of the Company's significant accounting policies follows: BASIS OF PRESENTATION - The accompanying unaudited financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. The interim financial statements for the three and six month periods are unaudited; however, in the opinion of the Company's management, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results of operations have been included. These unaudited financials statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on form 10-K for the year ended December 31, 2000. The nature of the Company's business is such that the results of any interim period are not necessarily indicative of results for a full year. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash on hand and money market funds. The carrying amounts of cash equivalents approximates their value. MORTGAGE-BACKED SECURITIES - The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed Securities"). Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its investments as either trading investments, available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most of its Mortgage-Backed Securities until maturity, it may, from time to time, sell any of its Mortgage-Backed Securities as part of its overall management of its balance sheet. Accordingly, this flexibility requires the Company to classify all of its Mortgage-Backed Securities as available-for-sale. All assets classified as available-for-sale are reported at fair value, based on market prices provided by certain dealers who make markets in these financial instruments, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. Unrealized losses on Mortgage-Backed Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognized in income and the cost basis of the Mortgage-Backed Securities is adjusted. There were no such adjustments for the six months ended June 30, 2001 and the year ended December 31, 2000. Interest income is accrued based on the outstanding principal amount of the Mortgage-Backed Securities and their contractual terms. Premiums and discounts associated with the purchase of the Mortgage-Backed Securities are amortized into interest income over the lives of the securities using the interest method. Mortgage-Backed Securities transactions are recorded on the trade date. Purchases of newly issued securities are recorded when all significant uncertainties regarding the characteristics of the securities are removed, generally shortly before settlement date. Realized gains and losses on Mortgage-Backed Securities transactions are determined on the specific identification basis. 5 CREDIT RISK - At June 30, 2001 and December 31, 2000, the Company has limited its exposure to credit losses on its portfolio of Mortgage-Backed Securities by only purchasing securities issued by Federal Home Loan Mortgage Corporation "FHLMC"), Federal National Mortgage Association ("FNMA"), or Government National Mortgage Association ("GNMA"). The payment of principal and interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by those respective agencies and the payment of principal and interest on the GNMA Mortgage-Backed Securities are backed by the full-faith-and-credit of the U.S. government. At June 30, 2001 and December 31, 2000 all of the Company's Mortgage-Backed Securities have an implied "AAA" rating. INCOME TAXES - The Company has elected to be taxed as a Real Estate Investment Trust ("REIT") and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") with respect thereto. Accordingly, the Company will not be subjected to Federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS - The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as mended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date for FASB Statement No. 133, and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and as interpreted by the FASB and the Derivatives Implementation Group through Statement No. 133, Implementation Issues, as of January 1, 2000. The Company has no derivative instruments or any embedded derivative instruments that require bifurcation. Management has determined that the adoption of SFAS No. 133 has no material effect on the Company's financial statements. 2. MORTGAGE-BACKED SECURITIES The following table pertains to the Company's Mortgage-Backed Securities classified as available-for-sale as of June 30, 2001, which are carried at their fair value:
FEDERAL HOME FEDERAL NATIONAL GOVERNMENT LOAN MORTGAGE MORTGAGE NATIONAL MORTGAGE TOTAL MORTGAGE- CORPORATION ASSOCIATION ASSOCIATION BACKED SECURITIES ---------------------------------------------------------------------------------------------- Mortgage-Backed Securities, gross $2,821,258,185 $2,541,669,494 $135,307,356 $5,498,235,035 Unamortized discount (1,787,737) (1,093,772) - (2,881,509) Unamortized premium 31,730,127 38,026,329 2,317,811 72,074,267 ---------------------------------------------------------------------------------------------- Amortized cost 2,851,200,575 2,578,602,051 137,625,167 5,567,427,793 Gross unrealized gains 12,410,587 6,834,892 76,675 19,322,154 Gross unrealized losses (7,162,492) (6,976,234) (323,373) (14,462,099) ---------------------------------------------------------------------------------------------- Estimated fair value $2,856,448,670 $2,578,460,709 $137,378,469 $5,572,287,848 ===============================================================================================
6
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR VALUE AMORTIZED COST GAIN LOSS ---------------------------------------------------------------------------------------------- Adjustable rate $4,058,819,502 $18,239,018 ($6,918,191) $4,070,140,329 Fixed rate 1,508,608,291 1,083,136 (7,543,908) 1,502,147,519 ---------------------------------------------------------------------------------------------- Total $5,567,427,793 $19,322,154 ($14,462,099) $5,572,287,848 ==============================================================================================
The following table pertains to the Company's Mortgage-Backed Securities classified as available-for-sale as of December 31, 2000, which are carried at their fair value:
FEDERAL HOME FEDERAL NATIONAL GOVERNMENT LOAN MORTGAGE MORTGAGE NATIONAL MORTGAGE TOTAL MORTGAGE- CORPORATION ASSOCIATION ASSOCIATION BACKED SECURITIES ---------------------- ------------------------ ----------------------- ---------------------- Mortgage-Backed Securities, gross $1,029,045,622 $853,777,836 $85,143,889 $1,967,967,347 Unamortized discount (221,944) (767,116) - (989,060) Unamortized premium 11,203,043 11,569,619 1,512,687 24,285,349 ---------------------- ------------------------ ----------------------- ---------------------- Amortized cost 1,040,026,721 864,580,339 86,656,576 1,991,263,636 Gross unrealized gains 2,220,525 798,984 - 3,019,509 Gross unrealized losses (5,426,076) (9,503,333) (1,134,360) (16,063,769) ---------------------- ------------------------ ----------------------- ---------------------- Estimated fair value $1,036,821,170 $855,875,990 $85,522,216 $1,978,219,376 ====================== ======================== ======================= ======================
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR AMORTIZED COST GAIN LOSS VALUE ---------------------- ------------------------ ----------------------- ---------------------- Adjustable rate $1,475,409,337 $ 12,565 ($7,819,597) $1,467,602,305 Fixed rate 515,854,299 3,006,944 (8,244,172) 510,617,071 ---------------------- ------------------------ ----------------------- ---------------------- Total $1,991,263,636 $3,019,509 ($16,063,769) $1,978,219,376 ====================== ======================== ======================= ======================
The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate adjustments are limited to no more than 1% every six months) and lifetime caps. The weighted average lifetime cap was 11.4% at June 30, 2001 and 11.5% at December 31, 2000. During the six months ended June 30, 2001, the Company realized $751,414 in gains from sales of Mortgage-Backed Securities. During the six months ended June 30, 2000, the Company realized $171,627 in gains from sales of Mortgage-Backed Securities. 3. REPURCHASE AGREEMENTS The Company had outstanding $4,481,816,000 and $1,682,359,000 of repurchase agreements with a weighted average borrowing rate of 4.06% and 6.55% and a weighted average remaining maturity of 87 days and 29 days as of June 30, 2001 and December 31, 2000, respectively. 7 At June 30, 2001 and December 31, 2000, the repurchase agreements had the following remaining maturities: JUNE 30, 2001 DECEMBER 31, 2000 --------------------------- --------------------------- Within 30 days $2,475,769,000 $1,135,886,000 30 to 59 days 1,310,660,000 363,810,000 60 to 89 days 95,287,000 48,845,000 90 to 119 days - - Over 120 days 600,100,000 79,818,000 --------------------------- --------------------------- Total $4,481,816,000 $1,628,359,000 =========================== =========================== 4. COMMON STOCK During the six months ended June 30, 2001, 80,828 options were exercised or shares granted under the long-term compensation plan at $421,313. Also, 4,438 shares were purchased in the dividend reinvestment and direct purchase program at $51,931. The Company completed an offering of common stock during the second quarter of 2001 issuing 18,918,500 shares, with aggregate net proceeds of $195.3 million. Offerings for 11,150,000 shares were completed during the first quarter for aggregate net proceeds or $99.3 million. During the year ended December 31, 2000, the number of stock options exercised was 47,499, with an aggregate purchase price of $198,762. The number of shares issued in the dividend reinvestment and direct purchase plan was 894,163 with an aggregate purchase price of $7,392,859. During the Company's quarter ending June 30, 2001, the Company declared dividends to shareholders totaling $17,870,698 or $0.40 per share, which was paid on July 27, 2001. During the year ended December 31, 2000, the Company declared dividends to shareholders totaling $16,333,252, or $1.15 per share, of which $12,702,507 was paid during the year and $3,630,745 was paid on January 30,2001. 5. EARNINGS PER SHARE (EPS) In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No. 128), which requires dual presentation of basic EPS and diluted EPS on the face of the income statement for all entities with complex capital structures. SFAS No. 128 also requires a reconciliation of the numerator and denominator of basic EPS and diluted EPS computation. For the quarter ended June 30, 2001, the reconciliation is as follows:
For the Quarter Ended June 30, 2001 ------------------------------------------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount Net income $18,594,843 ----------------------- Basic earnings per share 18,594,843 38,473,928 $0.48 ======================== Effect of dilutive securities: Dilutive stock options 580,560 ----------------------------------------------- Diluted earnings per share $18,594,843 39,054,488 $0.48 =========================================================================
8 For the six months ended June 30, 2001, the reconciliation is as follows:
For the Six Months Ended June 30, 2001 ------------------------------------------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount Net income $26,925,116 ----------------------- Basic earnings per share 26,925,116 30,138,057 $0.89 ======================== Effect of dilutive securities: Dilutive stock options 620,178 ----------------------------------------------- Diluted earnings per share $26,925,116 30,758,235 $0.88 ========================================================================
Options to purchase 822,394 shares were outstanding during the quarter ended June 30, 2001 and were dilutive as the exercise price of between $4.00 and $11.25 was less than the average stock price for the quarter of $12.21. Options to purchase 6,250 shares of stock were outstanding and not considered dilutive. The exercise price of $13.69 was greater than the average stock price for the quarter of $12.21. Options to purchase 822,394 shares were outstanding during the six months ended June 30, 2001 and were dilutive as the exercise price of between $4.00 and $11.25 was less than the average stock price for the six months of $11.43. Options to purchase 6,250 shares of stock were outstanding and not considered dilutive. The exercise price of $13.69 was greater than the average stock price for the six months of $12.21. For the quarter ended June 30, 2000, the reconciliation is as follows:
For the Quarter Ended June 30, 2000 ------------------------------------------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount Net income $3,838,956 ----------------------- Basic earnings per share 3,838,956 14,039,741 $0.27 ======================== Effect of dilutive securities: Dilutive stock options 592,199 ----------------------------------------------- Diluted earnings per share $3,838,956 14,631,940 $0.26 ========================================================================
For the six months ended June 30, 2000, the reconciliation is as follows:
For the Six Months Ended June 30, 2000 ------------------------------------------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount Net income $8,687,318 ----------------------- Basic earnings per share 8,687,318 13,850,140 $0.63 ======================== Effect of dilutive securities: Dilutive stock options 302,741 ---------------------------------------------- Diluted earnings per share $8,687,318 14,152,881 $0.61 ========================================================================
9 Options to purchase 653,256 shares were outstanding during the quarter ended June 30, 2000 and were dilutive as the exercise price (between $4.00 and $8.63) was less than the average stock price for the quarter for the Company of $8.69. Options to purchase 155,176 shares of stock were outstanding and not considered dilutive. The exercise price (between $8.94 and $11.25) was greater than the average stock price for the quarter of $8.69. Options to purchase 354,256 shares were outstanding during the six months ended June 30, 2000 and were dilutive as the exercise price (between $4.00 and $8.13) was less than the average stock price for the six months for the Company of $8.47. Options to purchase 454,176 shares of stock were outstanding and not considered dilutive. The exercise price (between $8.63 and $11.25) was greater than the average stock price for the six months of $8.47 6. COMPREHENSIVE INCOME The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Statement No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company at June 30, 2001 and December 31, 2000 held securities classified as available-for-sale. At June 30, 2001, the net unrealized gain totaled $4,860,055. and at December 31, 2000, the net unrealized loss totaled $13,044,259. 7. LEASE COMMITMENTS The Corporation has a noncancelable lease for office space, which commenced in April 1998 and expires in December 2007. The Corporation's aggregate future minimum lease payments are as follows: 2001 $97,868 2002 100,515 2003 110,261 2004 113,279 2005 116,388 2006 119,590 2007 122,888 ------------------ Total remaining lease payments $780,789 ================== 8. RELATED PARTY TRANSACTION Included in "Other Assets" on the Balance sheet is an investment in Annaly International Money Management, Inc. On June 24, 1998, the Company acquired 99,960 nonvoting shares, at a cost of $49,980. The officers and directors of Annaly International Money Management Inc. are also officers and directors of the Company. 9. INTEREST RATE RISK The primary market risk to the Company is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company's control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with the interest-bearing liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of the mortgage-backed securities and the Company's ability to realize gains from the sale of these assets. 10 The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, although the Company has not done so to date, the Company may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of mortgage-backed securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on mortgage-backed securities. The Company will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets purchased at a premium with assets purchased at a discount. To date, the aggregate premium exceeds the aggregate discount on the mortgage-backed securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce net income compared to what net income would be absent such prepayments. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We are a real estate investment trust that owns and manages a portfolio of mortgage-backed securities. Our principal business objective is to generate net income for distribution to our stockholders from the spread between the interest income on our mortgage-backed securities and the costs of borrowing to finance our acquisition of mortgage-backed securities. RESULTS OF OPERATIONS: FOR THE QUARTER ENDED JUNE 30, 2001 AND 2000 NET INCOME SUMMARY For the quarter ended June 30, 2001, our GAAP net income was $18.6 million, or $0.48 basic earnings per average share, as compared to $3.8 million, or $0.27 basic earnings per average share, for the quarter ended June 30, 2000. We compute our GAAP net income per share by dividing net income by the weighted average number of shares of outstanding common stock during the period, which was 38,473,928 for the quarter ended June 30, 2001 and 14,039,741 for the quarter ended June 30, 2000. Dividends per shares outstanding for the quarter ended June 30, 2001 was $.40 per share, or $17.9 million in total. Dividends per shares outstanding for the quarter ended June 30, 2000 was $.30 per share, or $4.3 million in total. Our annualized return on average equity was 19.42% for the quarter ended June 30, 2001 and 14.00% for the quarter ended June 30, 2000. For the six months ended June 30, 2001, our GAAP net income was $26.9 million, or $0.89 basic earnings per average share, as compared to $8.7 million, or $0.63 basic earnings per average share, for the six months ended June 30, 2000. We compute our GAAP net income per share by dividing net income by the weighted average number of shares of outstanding common stock during the period, which was 30,138,057 for the six months ended June 30, 2001 and 13,850,140 for the six months ended June 30, 2000. Dividends per actual shares outstanding for the six months ended June 30, 2001 was $.70 per share, or $25.6 million in total. Our annualized return on average equity was 16.77% for the six months ended June 30, 2001 and 16.10% for the six months ended June 30, 2000. NET INCOME SUMMARY (dollars in the thousands, except for per share data) -----------------------------------------------------
QUARTER QUARTER SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 ---------------------------------------------------------------- Interest Income $64,790 $25,734 $107,224 $50,351 Interest Expense 45,284 21,453 78,737 40,746 ---------------------------------------------------------------- Net Interest Income 19,506 4,281 28,487 9,605 Gain on Sale of Mortgage-Backed Securities 482 65 751 172 General and Administrative Expenses 1,393 507 2,313 1,090 ---------------------------------------------------------------- Net Income $18,595 $ 3,839 $26,925 $8,687 ================================================================ Average Number of Basic Shares Outstanding 38,473,928 14,039,741 30,138,057 13,850,140 Average Number of Diluted Shares Outstanding 39,054,488 14,631,940 30,758,235 14,152,881 Basic Net Income Per Share $0.48 $0.27 $0.89 $0.63 Diluted Net Income Per Share $0.48 $0.26 $0.88 $0.61 Average Total Assets $4,566,700 $1,457,152 $3,722,809 $1,456,436 Average Equity $449,951 $109,703 $321,196 $107,911 Annualized Return on Average Assets 1.63% 1.05% 1.45% 1.20% Annualized Return on Average Equity 19.42% 14.00% 16.77% 16.10%
12 Interest Income and Average Earning Asset Yield We had average earning assets of $4.3 billion and $1.5 billion for the quarters ended June 30, 2001 and 2000, respectively. Our primary source of income for the quarters ended June 30, 2001 and 2000 was interest income. A portion of our income was generated by gains on the sales of our mortgage-backed securities. Our interest income was $64.8 million for the quarter ended June 30, 2001 and $25.7 million for the quarter ended June 30, 2000. Our yield on average earning assets was 6.09% and 6.97% for the same respective periods. Our average earning asset balance increased by $2.7 billion and interest income increased by $39.1 million for the quarter ended June 30, 2001 as compared to the quarter ended June 30, 2000, due to the substantial increase in the asset base resulting from the inflow of capital during the quarter. We had average earning assets of $3.4 billion and $1.5 billion for the six months ended June 30, 2001 and 2000, respectively. Our interest income was $107.2 million for the six months ended June 30, 2001 and $50.4 million for the six months ended June 30, 2000. Our yield on average earning assets was 6.35% and 6.89% for the same respective periods. Our average earning asset balance increased by $1.9 billion and interest income increased by $56.8 million for the six months ended June 30, 2001 as compared to the six months ended June 30, 2000, due to equity offerings in the first and second quarters. The table below shows our average balance of cash equivalents and mortgage-backed securities, the yields we earned on each type of earning asset, our yield on average earning assets and our interest income for the quarters ended June 30, 2001, March 31, 2001, the year ended December 31, 2000 and the four quarters in 2000. AVERAGE EARNING ASSET YIELD ---------------------------
Yield on Average Yield on Average Yield on Average Mortgage- Average Average Mortgage- Average Cash Backed Earning Cash Backed Earning Interest Equivalents Securities Assets Equivalents Securities Assets Income ----------- ---------- ------ ----------- ---------- ------ ------ (dollars in thousands) For the Quarter Ended June 30, 2001 $2 $4,256,864 $4,256,866 3.72% 6.09% 6.09% $64,790 For the Quarter Ended March 31, 2001 $2 $2,502,088 $2,502,090 4.93% 6.78% 6.78% $42,434 - ------------------------------------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 2000 $263 $1,564,228 $1,564,491 4.1.8% 7.02% 7.02% $109,750 For the Quarter Ended December 31, 2000 $394 $1,741,985 $1,742,379 5.08% 7.16% 7.15% $31,160 For the Quarter Ended September 30, 2000 $188 $1,590,497 $1,590,685 5.43% 7.10% 7.10% $28,239 For the Quarter Ended June 30, 2000 $243 $1,476,283 $1,476,526 3.29% 6.97% 6.97% $25,734 For the Quarter Ended March 31, 2000 $226 $1,448,148 $1,448,374 1.79% 6.80% 6.80% $24,617
The constant prepayment rate (or CPR) on our mortgage-backed securities for the quarter ended June 30, 2001 was 25% and for the quarter ended June 30, 2000 was 11%. CPR is an assumed rate of prepayment for our mortgage-backed securities, expressed as an annual rate of prepayment relative to the outstanding principal balance of our mortgage-backed securities. CPR does not purport to be either a historical description of the prepayment experience of our mortgage-backed securities or a prediction of the anticipated rate of prepayment of our mortgage-backed securities. Principal prepayments had a negative effect on our earning asset yield for the quarters and six months ended June 30, 2001 and 2000 because we adjust our rates of premium amortization and discount accretion monthly based upon the effective yield method, which takes into consideration changes in prepayment speeds. INTEREST EXPENSE AND THE COST OF FUNDS We anticipate that our largest expense will be the cost of borrowed funds. We had average borrowed funds of $4.0 billion and total interest expense of $45.3 million for the quarter ended June 30, 2001. We had average 13 borrowed funds of $1.4 billion and total interest expense of $21.5 million for the quarter ended June 30, 2000. Our average cost of funds was 4.49% for the quarter ended June 30, 2001 and 6.30% for the quarter ended June 30, 2000. The cost of funds rate decreased 181 basis points and the average borrowed funds increased by $2.6 billion for the quarter ended June 30, 2001 when compared to the quarter ended June 30, 2000. Due to the increase of $2.6 billion in the average repurchase balance, interest expense increased by 111%. We had average borrowed funds of $3.2 billion and total interest expense of $78.7 million for the six months ended June 30, 2001. We had average borrowed funds of $1.3 billion and total interest expense of $40.7 million for the six months ended June 30, 2000. Our average cost of funds was 4.93% for the six months ended June 30, 2001 and 6.05% for the six months ended June 30, 2000. The cost of funds rate decreased 112 basis points and the average borrowed funds increased by $1.9 billion for the six months ended June 30, 2001 when compared to the six months ended June 30, 2000. With our current asset/liability management strategy, changes in our cost of funds are expected to be closely correlated with changes in short-term LIBOR, although we may choose to extend the maturity of our liabilities at any time. Our average cost of funds was 0.22% above average one-month LIBOR for the quarter ended June 30, 2001 and 0.16% below average one-month LIBOR for the quarter ended June 30, 2000. We generally have structured our borrowings to adjust with one-month LIBOR because we believe that one-month LIBOR may continue to be lower than six-month LIBOR in the present interest rate environment. During the quarter ended June 30, 2001, average one-month LIBOR, was 4.27%, which was 0.15 higher than average six-month LIBOR, which was 4.12%. During the quarter ended June 30, 2000, average one-month LIBOR, was 6.46%, 0.40% lower than average six-month LIBOR, which was 6.84%. The table below shows our average borrowed funds and average cost of funds as compared to average one-month and average six-month LIBOR for the quarters ended June 30, 2001, March 31, 2001, the year ended December 31, 2000 and the four quarters in 2000. AVERAGE COST OF FUNDS ---------------------
Average One-Month Average Cost Average Cost LIBOR of Funds of Funds Relative to Relative to Relative to Average Average Average Average Average Average Average Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR - ---------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) For the Quarter Ended June 30, 2001 $4,035,022 $45,284 4.49% 4.27% 4.12% 0.15% 0.22% 0.37% For the Quarter Ended March 31, 2001 $2,355,658 $33,453 5.68% 5.51% 5.18% 0.33% 0.17% 0.50% - ----------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 $1,449,999 $92,902 6.41% 6.41% 6.66% (0.25%) - (0.25%) For the Quarter Ended December 31, 2000 $1,632,564 $27,377 6.71% 6.65% 6.62% 0.03% 0.06% 0.09% For the Quarter Ended September 30, 2000 $1,477,112 $24,779 6.71% 6.62% 6.84% (0.22%) 0.09% (0.13%) For the Quarter Ended June 30, 2000 $1,360,419 $21,453 6.30% 6.46% 6.84% (0.38%) (0.16%) (0.54%) For the Quarter Ended March 31, 2000 $1,329,900 $19,293 5.80% 5.92% 6.32% (0.40%) (0.12%) (0.52%)
NET INTEREST RATE AGREEMENT EXPENSE We have not entered into any interest rate agreements to date. As part of our asset/liability management process, we may enter into interest rate agreements such as interest rate caps, floors or swaps. These agreements would be entered into with the intent to reduce interest rate or prepayment risk and would be designed to provide us income and capital appreciation in the event of certain changes in interest rates. However, even after entering into these agreements, we would still be exposed to interest rate and prepayment risks. We review the need for interest 14 rate agreements on a regular basis consistent with our capital investment policy. NET INTEREST INCOME Our net interest income, which equals interest income less interest expense, totaled $19.5 million for the quarter ended June 30, 2001 and $4.3 million for the quarter ended June 30, 2000. Our net interest income increased because of the increased asset size of the company. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.60% for the quarter ended June 30, 2001 as compared to 0.67% for the quarter ended June 30, 2000. This 0.93% increase in spread income is reflected in the increase in net interest income. Net interest margin, which equals net interest income divided by average total assets, was 1.71% on an annualized basis for the quarter ended June 30, 2001 and 1.16% for the quarter ended June 30, 2000. The principal reason that net interest margin exceeded net interest spread is that average interest earning assets exceeded average interest bearing liabilities. A portion of our assets is funded with equity rather than borrowings. We did not have any interest rate agreement expenses to date. Our net interest income, which equals interest income less interest expense, totaled $28.5 million for the six months ended June 30, 2001 and $9.6 million for the six months ended June 30, 2000. Our net interest income increased as a direct result of the equity offerings during the six month ended June 30, 2001 Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.42% for the six months ended June 30, 2001 as compared to 0.84% for the six months ended June 30, 2000. This 0.58% increase in spread income is reflected in the increase in net interest income. The table below shows our interest income by earning asset type, average earning assets by type, total interest income, interest expense, average repurchase agreements, average cost of funds, and net interest income for the quarters ended June 30, 2001, March 31, 2001, the year ended December 31, 2000, and the four quarters in 2000. GAAP NET INTEREST INCOME
Average Interest Yield on Mortgage- Income on Average Average Backed Mortgage- Average Total Interest Balance of Average Net Securities Backed Cash Interest Earning Repurchase Interest Cost of Interest Held Securities Equivalents Income Assets Agreements Expense Funds Income ---------- ---------- ----------- -------- -------- ---------- -------- -------- -------- (dollars in the thousands) For the Quarter Ended June 30, 2001 $4,256,864 $64,790 $2 $64,790 6.09% $4,035,022 $45,284 4.49% $19,506 For the Quarter Ended March 31, 2001 $2,502,088 $42,434 $2 6.78% $2,355,658 $33,453 5.68% $8,981 - ------------------------------------------------------------------------------------------------------------------------------ For the Year Ended December 31, 2000 $1,564,228 $109,739 $263 $109,750 7.02% $1,449,999 $92,902 6.41% $16,848 For the Quarter Ended December 31, 2000 $1,741,985 $31,154 $394 $31,160 7.16% $1,632,564 $27,377 6.71% $3,783 For the Quarter Ended September 30, 2000 $1,590,497 $28,237 $188 $28,239 7.10% $1,447,112 $24,779 6.71% $3,460 For the Quarter Ended June 30, 2000 $1,476,283 $25,732 $243 $25,734 6.97% $1,360,419 $21,453 6.30% $4,282 For the Quarter Ended March 31, 2000 $1,448,148 $24,616 $226 $24,617 6.80% $1,329,900 $19,293 5.80% $5,323
15 GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES For the quarter ended June 30, 2001, we sold mortgage-backed securities with an aggregate historical amortized cost of $196.3 million for an aggregate gain of $481,936. For the quarter ended June 30, 2000, we sold mortgage-backed securities with an aggregate historical amortized cost of $18.8 million for an aggregate gain of $64,774. For the six months ended June 30, 2001, we sold mortgage-backed securities with an aggregate historical amortized cost of $347.9 million for an aggregate gain of $751,414. For the six months ended June 30, 2000, we sold mortgage-backed securities with an aggregate historical amortized cost of $88.4 million for an aggregate gain of $171,627. The difference between the sale price and the historical amortized cost of our mortgage-backed securities is a realized gain and increases income accordingly. We do not expect to sell assets on a frequent basis, but may from time to time sell existing assets to move into new assets, which our management believes might have higher risk-adjusted returns, or to manage our balance sheet as part of our asset/liability management strategy. CREDIT LOSSES We have not experienced credit losses on our mortgage-backed securities to date. We have limited our exposure to credit losses on our mortgage-backed securities by purchasing only securities, issued or guaranteed by FNMA, FHLMC or GNMA, which, although not rated, carry an implied "AAA" rating. GENERAL AND ADMINISTRATIVE EXPENSES G&A expenses were $1,392,778 for the quarter ended June 30, 2001 and $507,322 for the quarter ended June 30, 2000. G&A expenses as a percentage of average assets was 0.12% and 0.15% on an annualized basis for the quarters ended June 30, 2001 and 2000, respectively. The Company is internally managed and continues to be a low cost provider. G&A expenses were $2,313,327 for the six months ended June 30, 2001 and $1,089,641 for the six months ended June 30, 2000. Due to the increase in average assets, Annaly is able to take advantage of economies of scale. Even though G&A expenses increased for the quarter and the six months ended June 30, 2001, when compared to the quarter and six months ended June 30, 2000, G&A as a percentage of average assets declined. GAAP G&A EXPENSES AND OPERATING EXPENSE RATIOS ---------------------------------------------- Total G&A Total G&A Expenses/Average Expenses/Average Total G&A Assets Equity Expenses (annualized) (annualized) ---------- ---------------- ---------------- (dollars in the thousands) For the Quarter Ended June 30, 2001 $1,393 0.12% 1.44% For the Quarter Ended March 31, 2001 $921 0.13% 1.90% - -------------------------------------------------------------------------------- For the Year Ended December 31, 2000 $2,286 0.14% 1.94% For the Quarter Ended December 31, 2000 $670 0.14% 2.11% For the Quarter Ended September 30, 2000 $527 0.13% 1.84% For the Quarter Ended June 30, 2000 $507 0.15% 1.85% For the Quarter Ended March 31, 2000 $582 0.16% 2.19% NET INCOME AND RETURN ON AVERAGE EQUITY Our net income was $18.6 million for the quarter ended June 30, 2001 and $3.8 million for the quarter ended June 30, 2000. Our return on average equity was 19.4% for the quarter ended June 30, 2001 and 14.0% for 16 the quarter ended June 30, 2000. Our net income was $26.9 million for the six months ended June 30, 2001 and $8.7 million for the six months ended June 30, 2000. Our return on average equity was 16.8% for the six months ended June 30, 2001 and 16.1% for the six months ended June 30, 2000. The increase in net income is a direct result of the increase in capital from the offerings completed in the first and second quarters of 2001. As previously mentioned, the new capital allowed us to grow the balance sheet and ultimately grow earnings. The table below shows our net interest income, gain on sale of mortgage-backed securities and G&A expenses each as a percentage of average equity, and the return on average equity for the quarters ended June 30, 2001, March 31, 2001, the year ended December 31, 2000, and for the four quarters in 2000. COMPONENTS OF RETURN ON AVERAGE EQUITY -------------------------------------- (Ratios for all Quarters are annualized)
Gain on Sale of Net Interest Mortgage-Backed G&A Return on Income/Average Securities/Average Expenses/Average Average Equity Equity Equity Equity -------------- ------------------ ---------------- ----------- For the Quarter Ended June 30, 2001 20.37% 0.50% 1.45% 19.42% For the Quarter Ended March 31, 2001 18.54% 0.56% 1.90% 17.20% - ------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 2000 14.31% 1.72% 1.94% 14.09% For the Quarter Ended December 30, 2000 11.90% 3.09% 2.11% 12.88% For the Quarter Ended September 30, 2000 12.08% 3.05% 1.84% 13.29% For the Quarter Ended June 30, 2000 15.61% 0.24% 1.85% 14.00% For the Quarter Ended March 31, 2000 20.07% 0.40% 2.19% 18.28%
FINANCIAL CONDITION MORTGAGE-BACKED SECURITIES All of our mortgage-backed securities at June 30, 2001 were adjustable-rate or fixed-rate mortgage-backed securities backed by single-family mortgage loans. All of the mortgage assets underlying these mortgage-backed securities were secured with a first lien position on the underlying single-family properties. All our mortgage-backed securities were FHLMC, FNMA or GNMA mortgage pass-through certificates or CMOs, which carry an implied "AAA" rating. We mark-to-market all of our earning assets at liquidation value. We accrete discount balances as an increase in interest income over the life of discount mortgage-backed securities and we amortize premium balances as a decrease in interest income over the life of premium mortgage-backed securities. At June 30, 2001 and December 31, 2000, we had on our balance sheet a total of $2.9 million and $1.0 million respectively, of unamortized discount (which is the difference between the remaining principal value and current historical amortized cost of our mortgage-backed securities acquired at a price below principal value) and a total of $72.1 million and $24.3 million, respectively, of unamortized premium (which is the difference between the remaining principal value and the current historical amortized cost of our mortgage-backed securities acquired at a price above principal value). We received mortgage principal repayments of $381.3 million for the quarter ended June 30, 2001 and $38.5 million for the quarter ended June 30, 2000. Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities, as we would amortize our net premium balance over a longer time period. The table below summarizes our mortgage-backed securities at June 30, 2001, March 31, 2001, December 31, 2000, September 30, 2000, June 30, 2000, and March 31, 2000. 17 MORTGAGE-BACKED SECURITIES --------------------------
Amortized Estimated Fair Weighted Net Amortized Cost/Principal Estimated Value/Principal Average Principal Value Premium Cost Value Fair Value Value l Yield ----------------- --------- ----------- ---------------- ------------ ---------------- ---------- (dollars in thousands) At June 30, 2001 $5,498,235 $69,193 $5,567,428 101.26% $5,572,288 101.34% 5.75% At March 31, 2001 $3,455,436 $42,023 $3,497,459 101.22% $3,500,610 101.31% 6.43% - -------------------------------------------------------------------------------------------------------------------------------- At December 31, 2000 $1,967,967 $23,296 $1,991,263 101.18% $1,978,219 100.52% 7.09% At September 30, 2000 $1,669,997 $21,878 $1,691,875 101.31% $1,664,136 99.65% 7.23% At June 30, 2000 $1,464,968 $20,893 $1,485,861 101.43% $1,450,853 99.04% 7.32% At March 31, 2000 $1,448,875 $21,826 $1,470,701 101.51% $1,436,389 99.14% 7.02%
The tables below set forth certain characteristics of our mortgage-backed securities. The index level for adjustable-rate mortgage-backed securities is the weighted average rate of the various short-term interest rate indices, which determine the coupon rate. ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS --------------------------------------------------------
Weighted Principal Value Weighted Average Weighted at Period End Average Weighted Weighted Term to Weighted Average as % of Total Principal Coupon Average Average Net Next Average Asset Mortgage-Backed Value Rate Index Level Margin Adjustment Lifetime Cap Yield Securities --------- -------- ----------- ----------- ---------- ------------ -------- --------------- (dollars in thousands) At June 30, 2001 $3,997,580 6.47% 4.60% 1.87% 26 months 11.37% 5.38% 72.71% At March 31, 2001 $2,495,296 7.01% 5.14% 1.87% 26 months 11.57% 6.35% 72.21% - ------------------------------------------------------------------------------------------------------------------------------ At December 31, 2000 $1,454,356 7.61% 5.76% 1.85% 15 months 11.47% 7.24% 73.90% At September 30, 2000 $1,203,268 7.64% 5.93% 1.71% 13 months 11.01% 7.36% 72.05% At June 30, 2000 $986,046 7.53% 6.02% 1.51% 9 months 10.41% 7.46% 67.31% At March 31, 2000 $957,419 7.18% 5.63% 1.55% 10 months 10.59% 7.06% 66.08%
FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS ---------------------------------------------------
Principal Value Weighted Weighted as % of Total Average Coupon Average Mortgage-Backed Principal Value Rate Asset Yield Securities --------------- -------------- ----------- ---------------- (dollars in thousands) At June 30, 2001 $1,500,655 6.83% 6.71% 27.29% At March 31, 2001 $960,140 6.79% 6.69% 27.79% - ------------------------- ---------------- ---------------- -------------- ------------------ At December 31, 2000 $513,611 6.62% 6.68% 26.10% At September 30, 2000 $466,729 6.58% 6.92% 27.95% At June 30, 2000 $478,922 6.58% 7.05% 32.69% At March 31, 2000 $491,456 6.58% 7.04% 33.92%
18 At June 30, 2001 and December 31, 2000 we held mortgage-backed securities with coupons linked to the one-year, three-year, and five-year Treasury indices, one-month LIBOR, 12 month cumulative average one-year treasury, and the six-month CD rate. ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX --------------------------------------------------- JUNE 30, 2001 -------------
12 Month Cumulative 3-Year 5-Year One-Month Six-Month Ave. 1-Year 1-Year Treasury Treasury LIBOR CD Rate Treasury Treasury Index Index Index --------- --------- ----------- -------------- -------- -------- Weighted Average Adjustment Frequency 1 mo. 6 mo. 1 mo. 12 mo. 36 mo. 60 mo. Weighted Average Term to Next Adjustment 1 mo. 1 mo. 1 mo. 36 mo. 16 mo. 36 mo. Weighted Average Annual Period Cap None 1.00% None 1.94% 2.00% 1.79% Weighted Average Lifetime Cap at June 30, 2001 9.09% 11.36% 10.60% 12.11% 12.91% 12.46% Mortgage Principal Value as Percentage of Mortgage-Backed Securities at June 30, 2001 18.06% 0.36% 0.63% 51.22% 2.09% 0.35%
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX --------------------------------------------------- DECEMBER 31, 2000 -----------------
3-Year One-Month Six-Month 1-Year Treasury 5-Year LIBOR CD Rate Treasury Index Index Treasury Index ----------- ----------- ---------------- ---------- ---------------- Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo. Weighted Average Term to Next Adjustment 1 mo. 2 mo. 23 mo. 20 mo. 40 mo. Weighted Average Annual Period Cap None 1.00% 1.98% 2.00% 1.76% Weighted Average Lifetime Cap at December 31, 2000 9.11% 11.37% 12.61% 13.24% 12.42% Mortgage Principal Value as Percentage of Mortgage-Backed Securities at December 31, 2000 24.08% 1.21%% 44.52% 2.97% 1.12%
INTEREST RATE AGREEMENTS Interest rate agreements are assets that are carried on a balance sheet at estimated liquidation value. We have not entered into any interest rate agreements since our inception. BORROWINGS To date, our debt has consisted entirely of borrowings collateralized by a pledge of our mortgage-backed securities. These borrowings appear on our balance sheet as repurchase agreements. At June 30, 2001, we had established uncommitted borrowing facilities in this market with twenty lenders in amounts, which we believe, are in excess of our needs. All of our mortgage-backed securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and thus increase the liquidity and strength of our balance sheet. 19 For the quarter ended June 30, 2001 the term to maturity of our borrowings ranged from one day to three years, with a weighted average original term to maturity of 121 days. At June 30, 2001, the weighted average cost of funds for all of our borrowings was 4.06% and the weighted average term to next rate adjustment was 87 days. At June 30, 2000, the term to maturity ranged from one day to 3 months, with a weighted average original term of 39 days. The weighted average cost of funds for all of our borrowings 6.30% and weighted average term to the next adjustment was 39 days. LIQUIDITY Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional mortgage-backed securities and to pledge additional assets to secure existing borrowings should the value of our pledged assets decline. Potential immediate sources of liquidity for us include cash balances and unused borrowing capacity. Unused borrowing capacity will vary over time as the market value of our mortgage-backed securities varies. Our balance sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior to payment as dividends. Should our needs ever exceed these on-going sources of liquidity plus the immediate sources of liquidity discussed above, we believe that our mortgage-backed securities could in most circumstances be sold to raise cash. The maintenance of liquidity is one of the goals of our capital investment policy. Under this policy, we limit asset growth in order to preserve unused borrowing capacity for liquidity management purposes. STOCKHOLDERS' EQUITY We use "available-for-sale" treatment for our mortgage-backed securities; we carry these assets on our balance sheet at estimated market value rather than historical amortized cost. Based upon this "available-for-sale" treatment, our equity base at June 30, 2001 was $450.0 million, or $10.07 per share. If we had used historical amortized cost accounting, our equity base at June 30, 2001 would have been $445.1 million, or $9.96 per share. Our equity base at June 30, 2000 was $110.4 million, or $7.77 per share. If we had used historical amortized cost accounting, our equity base at June 30, 2000 would have been $145.4 million, or $10.24 per share. During the quarter ended June 30, 2001, the Company raised $195.3 in a secondary offering. During the quarter ended March 31, 2001, the Company completed offerings totalling $99.3 million. With our "available-for-sale" accounting treatment, unrealized fluctuations in market values of assets do not impact our GAAP or taxable income but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders' equity under "Accumulated Other Comprehensive Income (Loss)." By accounting for our assets in this manner, we hope to provide useful information to stockholders and creditors and to preserve flexibility to sell assets in the future without having to change accounting methods. As a result of this mark-to-market accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may not be meaningful. The table below shows unrealized gains and losses on the mortgage-backed securities in our portfolio. UNREALIZED GAINS AND LOSSES --------------------------- (Dollars in thousands)
At June 30, At March 31, At December 31, 2001 2001 2000 ---------------------------------------------------------------- Unrealized Gain $19,322 $12,606 $ 3,020 Unrealized Loss (14,462) (9,455) (16,064) ---------------------------------------------------------------- Net Unrealized Gain (Loss) $4,860 $3,151 ($13,044) ================================================================ Net Unrealized Gain (Loss) as % of Mortgage- 0.08% 0.09% (0.66%) Backed Securities Principal Value
20
Net Unrealized Gain (Loss) as % of Mortgage- 0.08% 0.09% (0.66%) Backed Securities Amortized Cost
Unrealized changes in the estimated net market value of mortgage-backed securities have one direct effect on our potential earnings and dividends: positive market-to-market changes increase our equity base and allow us to increase our borrowing capacity while negative changes tend to limit borrowing capacity under our capital investment policy. A very large negative change in the net market value of our mortgage-backed securities might impair our liquidity position, requiring us to sell assets with the likely result of realized losses upon sale. "Unrealized Gains on Available for Sale Securities" was $4.9 million, or 0.08% of the amortized cost of our mortgage-backed securities at June 30, 2001. "Unrealized Losses on Available for Sale Securities" was $13.0 million or 0.66% of the amortized cost of our mortgage-backed securities at December 31, 2000. The table below shows our equity capital base as reported and on a historical amortized cost basis at June 30, 2001, March 31, 2001, December 31, 2000, September 30, 2000, June 30, 2000 and March 31,2000. Issuances of common stock, the level of GAAP earnings as compared to dividends declared, and other factors influence our historical cost equity capital base. The GAAP reported equity capital base is influenced by these factors plus changes in the "Net Unrealized Losses on Assets Available for Sale" account. STOCKHOLDERS' EQUITY --------------------
Net Unrealized Historical Historical Gains (Losses) on GAAP Reported Amortized Cost GAAP Reported Amortized Cost Assets Available Equity Base Equity Per Equity (Book Equity Base for Sale (Book Value) Share Value) Per Share -------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) At June 30, 2001 $445,091 $4,860 $449,951 $9.96 $10.07 At March 31, 2001 $248,732 $3,151 $251,883 $9.67 $9.80 - -------------------------------------------------------------------------------------------------------------------- At December 31, 2000 $148,686 ($13,044) $135,642 $10.24 $9.34 At September 30, 2000 $146,446 ($27,739) $118,707 $10.24 $8.30 At June 30, 2000 $145,448 ($35,008) $110,440 $10.24 $7.77 At March 31, 2000 $143,279 ($34,313) $108,966 $10.31 $7.84
LEVERAGE Our debt-to-GAAP reported equity ratio at June 30, 2001 and, 2000 was 10:1 and 12:1, respectively. We generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this range from time to time based upon various factors, including our management's opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity and over-collateralization levels required by lenders when we pledge assets to secure borrowings. Our target debt-to-GAAP reported equity ratio is determined under our capital investment policy. Should our actual debt-to-equity ratio increase above the target level due to asset acquisition or market value fluctuations in assets, we will cease to acquire new assets. Our management will, at that time, present a plan to our Board of Directors to bring us back to our target debt-to-equity ratio; in many circumstances, this would be accomplished in time by the monthly reduction of the balance of our mortgage-backed securities through principal repayments. ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES We continually review our asset/liability management strategy with respect to interest rate risk, mortgage prepayment risk, credit risk and the related issues of capital adequacy and liquidity. We seek attractive risk-adjusted stockholder returns while maintaining a strong balance sheet. 21 We seek to manage the extent to which our net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, although we have not done so to date, we may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in our portfolio of mortgage-backed securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on mortgage-backed securities. We will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets we purchase at a premium with assets we purchase at a discount. To date, the aggregate premium exceeds the aggregate discount on our mortgage-backed securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce our net income compared to what net income would be absent such prepayments. INFLATION Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors drive our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our dividends based upon our net income as calculated for tax purposes; in each case, our activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation. OTHER MATTERS We calculate that our qualified REIT assets, as defined in the Internal Revenue Code, are 99.4% and 99.5% of our total assets at June 30, 2001 and 2000, as compared to the Internal Revenue Code requirement that at least 75% of our total assets be qualified REIT assets. We also calculate that 100% of our revenue qualifies for the 75% source of income test and for the 95% source of income test, under the REIT rules for the years ended June 30, 2001 and 2000. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, as of June 30, 2001 and 2000, we believe that we qualified as a REIT under the Internal Revenue Code. We at all times intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If we were to become regulated as an investment company, then our use of leverage would be substantially reduced. The Investment Company Act exempts entities that are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (qualifying interests). Under current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain at least 55% of our assets directly in qualifying interests. In addition, unless certain mortgage securitites represent all the certificates issued with respect to an underlying pool of mortgages, the mortgage-backed securities may be treated as securities separate from the underlying mortgage loans and, thus, may not be considered qualifying interests for purposes of the 55% requirement. We calculate that as of June 30, 2001 and 2000 we were in compliance with this requirement. 22 ITEM. 2 QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of our mortgage-backed securities and our ability to realize gains from the sale of these assets. We may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts, in order to limit the effects of interest rates on our operations. If we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and that the losses may exceed the amount we invested in the instruments. To date, we have not purchased any hedging instruments. Our profitability and the value of our portfolio may be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net interest income and portfolio value should interest rates go up or down 200 basis points, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve. All changes in income and value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at June 30, 2001 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates. Projected Percentage Projected Percentage Change in Change in Change in Interest Rate Net Interest Income Portfolio Value - -------------------------------------------------------------------------------- - -200 Basis Points 21% 2% - -100 Basis Points 9% 1% - -50 Basis Points 4% 1% Base Interest Rate +50 Basis Points (7%) (1%) +100 Basis Points (14%) (2%) +200 Basis Points (30%) (6%) ASSET AND LIABILITY MANAGEMENT Asset and liability management is concerned with the timing and magnitude of the repricing of assets and liabilities. We attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk include an analysis of our interest rate sensitivity "gap", which is the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest 23 income positively or negatively even if an institution were perfectly matched in each maturity category. The following table sets forth the estimated maturity or repricing of our interest-earning assets and interest-bearing liabilities at June 30, 2001. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, except adjustable-rate loans, and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature. Mortgage-backed securities reflect estimated prepayments that were estimated based on analyses of broker estimates, the results of a prepayment model that we utilized and empirical data. Our management believes that these assumptions approximate actual experience and considers them reasonable; however, the interest rate sensitivity of our assets and liabilities in the table could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. (IN THOUSANDS)
More than Within 1 Year to 3 Years and 3 Months 4-12 Months 3 Years Over Total ----------------------------------------------------------------------------------- (in thousands) Rate Sensitive Assets: Mortgage-Backed Securities 1,208,282 374,540 513,443 3,401,970 5,498,235 Rate Sensitive Liabilities: Repurchase Agreements 2,475,769 1,405,947 600,100 4,481,816 ----------------------------------------------------------------------------------- Interest rate sensitivity gap (1,267,487) (1,031,407) (86,657) 3,401,970 1,016,419 =================================================================================== Cumulative rate sensitivity gap (1,267,487) (2,298,894) (2,385,551) 1,016,419 =================================================================================== Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets (23%) (42%) (45%) 18%
Our analysis of risks is based on management's experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly form the estimates and assumptions used in our models and the projected results shown in the above tables and in this report. These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the heading, "Special Note Regarding Forward-Looking Statements." 24 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of stockholders of Annaly Mortgage Management, Inc. was held on May 17, 2001. (b) All Class II director nominees were elected. (c) Certain matters voted upon at the meeting and the votes cast with the respect to such matters are as follows: Proposals and Vote Tabulations Election of Directors Broker Director Votes Received Votes Withheld Non-votes -------- -------------- -------------- --------- Kevin P. Brady 22,951,477 219,085 0 Timothy J. Guba 21,689,120 1,481,442 0 Donnell Segalas 22,954,857 215,705 0 The continuing directors of the Company are Spencer I. Browne, Michael A. J. Farrell, Jonathan D. Green, John A. Lambiase, and Wellington J. St. Claire. Management Proposals
Votes Cast ------------------------ Broker For Against Abstain Non-votes ---------- ------- ------- --------- Approval of the appointment of independent auditors 23,080,812 60,684 29,066 0 for 2001
25 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Exhibit -------- ------- 10.1 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Michael A.J. Farrell. 10.2 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Wellington J. St. Claire. 10.3 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Kathryn F. Fagan. 10.4 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Jennifer A. Stephens. (b) Reports on Form 8-K The Company filed a Form 8-K on April 9, 2001, with respect to the Company's ratio of earnings to fixed charges. The Company filed a Form 8-K on April 16, 2001, with respect to a press release reporting earnings for the quarter ended March 31, 2001. The Company filed a Form 8-K on May 1, 2001, with respect to the Company's entering into of an underwriting agreement with UBS Warburg LLC. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ANNALY MORTGAGE MANAGEMENT, INC. Dated: August 23, 2001 By: /s/ Michael A.J. Farrell -------------------------------------- Michael A.J. Farrell Chairman of the Board and Chief Executive Officer (authorized officer of registrant) Dated: August 23, 2001 By: /s/ Kathryn F. Fagan -------------------------------------- Kathryn F. Fagan Chief Financial Officer and Treasurer (principal accounting officer) 27 Exhibit Index Exhibit Number Exhibit -------- ------- 10.1 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Michael A.J. Farrell. 10.2 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Wellington J. St. Claire. 10.3 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Kathryn F. Fagan. 10.4 Employment Agreement, dated August 23, 2001, effective as of May 1, 2001, between the Company and Jennifer A. Stephens. 28 EX-10.1 3 file002.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement"), dated August 23, 2001, and effective the May 1, 2001, is entered into by and between Michael A.J. Farrell (the "Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"). WHEREAS, the Company and the Executive entered into an employment agreement, effective as of January 27,1997 (the "Employment Agreement"); WHEREAS, the Company offered shares of Common Stock as set forth in an offering memorandum dated January 27, 1997 (the "Offering"); and WHEREAS, the Company desires to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions. NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties agree to amend and restate the Employment Agreement in its entirety to read as follows: In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows: 1. Employment as Chairman of the Board and Chief Executive Officer of the Company. The Company does hereby employ, engage and hire the Executive as Chairman of the Board and Chief Executive Officer of the Company, and the Executive does hereby accept and agree to such hiring, engagement, and employment. The Executive's duties as Chairman of the Board and Chief Executive Officer shall be such executive and managerial duties as the Board of Directors of the Company shall from time to time prescribe and as provided in the Bylaws of the Company. The Executive shall devote such time, energy and skill to the performance of his duties for the Company and for the benefit of the Company as may be necessary or required for the effective conduct and operation of the Company's business. Furthermore, the Executive shall exercise due diligence and care in the performance of his duties to the Company under this Agreement. 2. Term of Agreement. The term ("Term") of this Agreement shall commence as of the date of the closing under the Offering (the "Effective Date") and shall continue through December 31, 1999. From and after December 31, 1999, and each anniversary thereafter, the Term of the Agreement shall automatically be extended for additional successive one-year periods unless, not later than three months prior to December 31, 1999 or any such anniversary, as applicable, either party shall have given written notice to the other that it does not wish to extend the Term of the Agreement. 3. Compensation. (a) Base Salary. The Company shall pay the Executive, and the Executive agrees to accept from the Company, in payment for his services to the Company a base salary at the rate determined below ("Base Salary"), payable in equal biweekly installments or at such other time or times as the Executive and Company shall agree. Base Salary shall (i) equal a per annum amount of 0.25% times the book value (as defined below) of the Company, (ii) be reviewed quarterly and upon the raising of additional equity through the placement of securities, and (iii) be subject to a maximum per annum amount of $1,000,000 ("Salary Cap"). The Salary Cap can be raised at any time by the Board of Directors of the Company in its sole discretion. In determining the Base Salary, the "book value" of the Company shall be the aggregate amounts reported on the Company's balance sheet prepared in accordance with generally accepted accounting principles as Stockholders' Equity but excluding any adjustments for valuation reserves (i.e., changes in the value of the Company's portfolio of investments as a result of mark-to-market valuation changes), all determined as of the close of business on the Effective Date and thereafter on the closing date of any placements of securities resulting in additional equity and on the last day of each fiscal quarter. In consideration of the cash flow needs of the Company, the Base Salary can be lowered at management's discretion. (b) Performance Bonus - Board of Directors Discretion. The Executive shall be eligible to receive an incentive performance bonus based upon a percentage of his Base Salary. Except as provided in Section 7, any such bonus awarded to the Executive shall be payable in the amount, in the manner, and at the time determined by the Company's Board of Directors in its sole and absolute discretion. (c) Annual Review. The Board of Directors of the Company shall, at least annually, review the Executive's entire compensation package to determine whether it continues to meet the Company's compensation objectives. Such annual review will include a determination of (i) whether to increase the Salary Cap in accordance with Section 3(a) and (ii) the incentive performance bonus to be awarded in accordance with Section 3(b). 4. Fringe Benefits. The Executive shall be entitled to participate in any benefit programs adopted from time to time by the Company for the benefit of its executive employees, and the Executive shall be entitled to receive such other fringe benefits as may be granted to him from time to time by the Company's Board of Directors. (a) Benefit Plans. The Executive shall be entitled to participate in any benefit plans relating to stock options, stock purchases, awards, pension, thrift, profit sharing, life insurance, medical coverage, education, or other retirement or employee benefits available to other executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to 2 obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees. (b) Vacation. The Executive shall be entitled to (i) four (4) weeks of paid vacation per calendar year for the first two years of service to the Company, and (ii) five (5) weeks of paid vacation per calendar year for the next two years of service to the Company, with such vacation to be scheduled and taken in accordance with the Company's standard vacation policies. After four years of service to the Company, the Executive shall be entitled to such number of weeks of paid vacation per calendar year as determined by the Board of Directors of the Company after review of industry standards, but shall in no event be entitled to fewer than five weeks of paid vacation per calendar year. 5. Business Expenses. The Company shall reimburse the Executive for any and all necessary, customary and usual expenses, properly receipted in accordance with Company policies, incurred by Executive on behalf of the Company. 6. Termination of Employment. (a) Death. If the Executive dies while employed by the Company, his employment shall immediately terminate. The Company's obligation to pay the Executive's Base Salary shall cease as of the date of Executive's death. Thereafter, Executive's beneficiaries or his estate shall receive benefits in accordance with the Company's retirement, insurance and other applicable programs and plans then in effect. (b) Disability. (i) If, as a result of the Executive's incapacity due to physical or mental illness ("Disability"), Executive shall have been absent from the full-time performance of his duties with the Company for six (6) consecutive months, and, within thirty (30) days after written notice is provided to him by the Company, he shall not have returned to the full-time performance of his duties, the Executive's employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which the Executive is absent from the full-time performance of his duties with the Company due to Disability, the Company shall continue to pay the Executive his Base Salary at the rate in effect at the commencement of such period of Disability. Subsequent to such termination, the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (ii) If, however, as a result of the Executive's partial incapacity due to physical or mental illness in which Executive shall not have been absent from his duties for six consecutive months and shall have returned to work on a full-time basis but is not able to perform at the same level as when hired and/or is not able to perform the same functions originally hired for 3 ("Partial Disability"), the Company shall make reasonable efforts to accommodate the Executive's Partial Disability by modifying his job description appropriately, together with a commensurate adjustment in compensation; provided, however, the Company shall be required to so continue the employment of the Executive in the event of a Partial Disability of the Executive only if the Company determines, in its sole discretion, that it can create a position for which the Executive would be suited and that would be economically advantageous to the Company. (c) Termination by the Company for Cause. The Company may terminate the Executive's employment under this Agreement for "Cause," at any time prior to expiration of the Term of the Agreement, only in the event of (i) the Executive's material breach of this Agreement, including without limitation the failure to substantially perform the reasonable and lawful duties of his position for the Company, which breach shall continue for 60 days after notice thereof by the Company to the Executive, which notice shall specify in detail the Executive's breach, (ii) acts or omissions constituting recklessness or willful misconduct on the part of the Executive in respect of his fiduciary obligations or otherwise relating to the business of the Company, or (iii) the Executive's conviction for fraud, misappropriation or embezzlement. In the case of clauses (ii) and (iii), the Executive's employment under this Agreement may be terminated immediately without any advance written notice, and the Company's obligation to pay the Executive's Base Salary, any bonus and benefits shall cease as of the termination date. (d) Termination by the Executive for Good Reason. The Executive shall have the right to terminate this Agreement for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without the Executive's express written consent, of any one or more of the following events: (i) A reduction in title and/or compensation of the Executive by the Board of Directors or the assignment of duties to the Executive not consistent with those of a senior executive of the Company, except in connection with the Company's termination of the Executive's employment for Cause pursuant to Section 6(c) or as otherwise expressly contemplated herein; (ii) The Company's material breach of any of the provisions of this Agreement, including, but not limited to, a reduction by the Company in the Executive's Base Salary in effect as of the Effective Date, or as the same may be increased as provided herein; or a change in the conditions of the Executive's employment (e.g., including, without limitation, a failure by the Company to provide the Executive with incentive compensation and benefits plans that provide benefits and the opportunity to obtain incentive compensation, in each case comparable to those available under benefits programs in effect as of the Effective Date, etc.); 4 (iii) The relocation of the Company's principal executive offices to a location more than 50 miles from its location as of Effective Date or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to the extent necessary to meet the standard set forth in the last two sentences of Section 1; or (iv) A Change in Control as defined in Section 8 below. The Executive agrees to provide the Company with thirty (30) days' prior written notice of any termination for Good Reason. (e) Termination by the Executive without Good Reason. The Executive may at any time during the Term of this Agreement terminate his employment hereunder for any reason or no reason by giving the Company notice in writing not less than one hundred twenty (120) days in advance of such termination. The Executive shall have no further obligations to the Company after the effective date of termination, as set forth in the notice. Notwithstanding the foregoing, in the event any "person" (as defined in Section 8 below) begins a tender or exchange offer, circulates a proxy to shareholders or takes other steps to effect a Change of Control, the Executive agrees that he will not voluntarily leave the employ of the Company, and will render services to the Company commensurate with his position, until such "person" has abandoned or terminated efforts to effect a Change of Control or until a Change of Control has occurred. In the event of a termination by the Executive under this paragraph, the Company will pay only the portion of Base Salary or previously awarded Bonus unpaid as of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect according to their terms, but no additional accrual or vesting will take place. 7. Compensation upon Termination by the Company other than for Cause, or by the Executive for Good Reason. If the Executive's employment shall be terminated (i) by the Company other than for Cause, or (ii) by the Executive for Good Reason, the Executive shall be entitled to the following benefits: (a) Payment of Unpaid Base Salary. The Company shall immediately pay the Executive any portion of the Executive's Base Salary or previously awarded bonus not paid prior to the termination date. (b) Severance Payment. The Company shall pay the Executive an amount (the "Severance Amount") equal to three times the higher of (i) the Executive's combined Salary Cap and actual bonus compensation for the preceding fiscal year or (ii) the average for the three preceding years of the Executive's combined actual Base Salary and bonus compensation; provided, however, that the Severance Amount shall not be less than $250,000, nor more than 1.0% of book value (as defined in Section 3(a)) to the extent the Severance amount is greater than $250,000. The Severance Amount shall be payable 50% within five (5) days after the termination date and the remaining 50% shall be payable in twelve (12) equal consecutive monthly installments beginning on the first day of the month following the termination date. 5 (c) Immediate Vesting of Stock Options. The Company shall take all propriate action to ensure that all stock options on the Company's stock owned by the Executive as of the Effective Date and which have not been exercised prior to the termination date become immediately exercisable by the Executive, whether or not the right to exercise such stock options would otherwise then be vested in the Executive, provided, however, an option that is an incentive stock option (within the meaning of Code Section 422(b)) shall not be exercisable for the first time in a calendar year to the extent that the aggregate fair market value of stock (as determined under Code Section 422(b)(3)) with respect to which ISO's are exercisable by the Executive during such calendar year exceeds $100,000. The provisions of this Section 7(c) shall constitute an amendment to any existing stock option agreements (including award certificates) of the Company as of the Effective Date. All other stock options owned by the Executive as of the termination date shall be exercisable in accordance with the Company's stock option plan and the applicable stock option agreements. (d) Continuation of Fringe Benefits. From and after termination of the Executive's employment, the Company shall continue to provide the Executive with all life insurance and medical coverage Fringe Benefits set forth in Section 4 as if the Executive's employment under the Agreement had not been terminated until the earlier to occur of (i) such time as the Executive finds full-time employment or (ii) this Agreement terminates. Notwithstanding the immediately preceding sentence, if, as the result of the termination of the Executive's employment, the Executive and/or his otherwise eligible dependents or beneficiaries shall become ineligible for benefits under any one or more of the Company's benefit plans or the cost of providing such benefits exceeds 200% of the cost of providing such benefits to other members of senior management, the Company, at the Company's option, shall (i) continue to provide the Executive and his eligible dependents or beneficiaries with benefits at a level at least equivalent to the level of benefits for which the Executive and his dependents and beneficiaries were eligible under such plans immediately prior to the termination date or (ii) for any Fringe Benefit not so provided, the Company shall pay the Executive 200% of the cost of providing such Fringe Benefit to other members of senior management. (e) Excise Tax Gross-Up. In the event that (i) the Executive becomes entitled to the benefit payments provided under subparagraphs (a)-(d) of this Section 7 ("Benefit Payments"), and (ii) any of the Benefit Payments will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended from time to time ("Code"), or successor sections thereto ("Excise Tax"), the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Benefit Payments and any federal, state and local income tax and Excise Tax upon the payments provided for under this Section 7, shall be equal to the amount of the Benefit Payments. For purposes of determining whether any of the Benefit Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by the Executive in connection with a Change in Control (defined below) or the termination of Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of section 280G(b)(2) 6 of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax advisors selected by the Company and reasonably acceptable to the Executive such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Benefit Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(1) of the Code (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the termination date of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes based on the marginal rate referenced above. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the termination date, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess but only to the extent that such interest, penalties or additions would not have been reduced by prompt payment by the Executive to the appropriate tax authority of the Gross-Up Payments previously received) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Benefit Payments. (f) No Mitigation Required; No Other Entitlement to Benefits Under Agreement. The Executive shall not be required in any way to mitigate the amount of any payment provided for in this Section 7, including, but not limited to, by seeking other employment, nor shall the amount of any payment provided for in this Section 7 be reduced by any compensation earned by the Executive as the result of employment with another employer after the termination date of employment, or otherwise. Except as set forth in this Section 7, following a termination governed by this Section 7, the Executive shall not be entitled to any 7 other compensation or benefits set forth in this Agreement, except as may be separately negotiated by the parties and approved by the Board of Directors of the Company in writing in conjunction with the termination of Executive's employment under this Section 7. 8. Change in Control. A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) Any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company any trustee or other fiduciary holding securities under an Executive benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or from a transferor in a transaction expressly approved or consented to by the Board of Directors) representing more than 9.8% of the combined voting power of the Company's then outstanding securities; or (b) During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this section), (i) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or (ii) whose election is to replace a person who ceases to be a director due to death, disability or age, cease for any reason to constitute a majority thereof; or (c) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an Executive benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) The shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 9. Dispute Relating to Executive's Termination of Employment for Good Reason. If the Executive resigns his employment with the Company alleging in good faith as the basis for 8 such resignation any of the "Good Reasons" specified in Section 6(d), and if the Company then disputes the Executive's right to the payment of benefits under Section 7, the Company shall continue to pay the Executive the full compensation (including, but not limited to, his Base Salary) in effect at the date the Executive provided notice of such resignation, and the Company shall continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was then a participant, until the earlier of (i) the expiration of the Term of the Agreement or (ii) the date the dispute is finally resolved, either by mutual written agreement of the parties or by arbitration in accordance with Section 22. For the purposes of this Section, the Company shall bear the burden of proving that the grounds for the Executive's resignation do not fall within the scope of Section 6(d), and there shall be a rebuttable presumption that the Executive alleged such grounds in good faith. 10. Noncompetition Provisions. (a) Noncompetition. The Executive agrees that during the Term of this Agreement prior to any termination of his employment hereunder and for a period of one year following the occurrence of any event entitling the Executive to Benefit Payments, provided the Company makes all such payments when due according to the provisions of Section 7, he will not, directly or indirectly, without the prior written consent of the Company, manage, operate, join, control, participate in, or be connected as a stockholder (other than as a holder of shares publicly traded on a stock exchange or the NASDAQ National Market System), partner, or other equity holder with, or as an officer, director or employee of, any real estate investment trust whose business strategy is competitive with that of the Company, as determined by a majority of the Company's Independent Directors ("Competing REIT"). It is further expressly agreed that the Company will would suffer irreparable injury of the Company in violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Executive from competing with the Company or any subsidiary or affiliate of the Company, in the areas of business set forth above, in violation of this Agreement. It is further expressly agreed that the Executive's interest in and employment by Fixed Income Discount Advisory Company or eNTR shall not be deemed to violate any provisions of this Section, regardless of the scope of the Executive's activities with such firm; provided, however, that the Executive shall not in such capacity provide services to any Competing REIT. (b) Right to Company Materials. The Executive agrees that all styles, designs, lists, materials, books, files, reports, correspondence, records, and other documents ("Company Materials") used, prepared, or made available to the Executive in connection with his employment by the Company shall be and shall remain the property of the Company. Upon the termination of employment or the expiration of this Agreement, all Company Materials shall be returned immediately to the Company, and the Executive shall not make or retain any copies thereof. (c) Soliciting Executives. The Executive promises and agrees that he will not directly or indirectly solicit any of the Company Executives to work for any Competing REIT. 9 (d) Maryland Law. The Executive agrees, in accordance with Maryland law, to first offer to the Company corporate opportunities learned of solely as a result of his service as an officer and director of the Company. 11. Notices. All notices and other communications under this Agreement shall be in writing and shall be given by fax or first class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective persons named below: If to the Company: Timothy J. Guba President Annaly Mortgage Management, Inc. 1500 Harbor Blvd. Weehawken, NJ 07087 Phone: (201) 223-1900 Fax: (201) 223-1230 If to the Executive: Michael A. J. Farrell Chief Executive Officer Annaly Mortgage Management, Inc. 1500 Harbor Blvd. Weehawken, NJ 07087 Phone: (201) 223-1900 Fax: (201) 223-1230 A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson. Either party may change such party's address for notices by notice duly given pursuant hereto. 12. Attorneys' Fees. In the event judicial determination is necessary of any dispute arising as to the parties' rights and obligations hereunder, each party shall have the right, in addition to any other relief granted by the court, to attorneys' fees based on a determination by the court of the extent to which each party has prevailed as to the material issues raised in determination of the dispute. 13. Termination of Prior Agreements. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to employment or with respect to the compensation of the Executive by the Company. 14. Assignment; Successors. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the Company with or to any other individual or entity, this Agreement shall, subject to the provisions hereof, be binding 10 upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of the Company hereunder. 15. Governing Law. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of New Jersey. 16. Entire Agreement; Headings. This Agreement embodies the entire agreement of the parties respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 17. Waiver; Modification. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto. 18. Severability. In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement. 19. Indemnification. The Company shall indemnify and hold Executive harmless to the maximum extent permitted by Section 2-418 of the Maryland General Corporations Law or its successor statute. 20. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. Successor Sections. References herein to sections or rules of the Code or Exchange Act shall be deemed to include any successor sections or rules. 22. Arbitration. Any dispute, claim or controversy arising out of or in relation to this Agreement, which the Executive and the Company are unable to resolve shall be determined by the decision of a board of arbitration consisting of three (3) members (the "Board of Arbitration") selected by the American Arbitration Association upon application made to it for such purpose by either the Company or the Executive. The arbitration proceedings shall take place in New York, New York or such other place as shall be agreed to by the parties. The Board of Arbitration shall reach and render a decision in writing. In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures as a majority 11 of the members of the Board of Arbitration deems necessary or appropriate. Any award shall be rendered on the basis of the substantive law governing this Agreement and shall be concurred in by a majority of the arbitrators. To the extent practical, decisions of the arbitrators shall be rendered no more than thirty (30) calendar days following commencement of the arbitration proceedings with respect thereto. Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the Executive and the Company and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. Each party to the arbitration shall bear its own expense in relation thereto, including but not limited to such party's attorneys' fees, if any, and the expenses and fees of the member of the Board of Arbitration appointed by such party; provided, however, that the expenses and fees of the third member of the Board of Arbitration and any other expenses of the Board of Arbitration not capable of being attributed to any one member shall be borne in equal parts by Executive and the Company. 12 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written. ANNALY MORTGAGE MANAGEMENT, INC. By: /s/ Wellington St. Claire ------------------------------ Name: Wellington St. Claire Title: Vice Chairman and Chief Investment Officer /s/ Michael A. J. Farrell ------------------------------ Michael A. J. Farrell 13 EX-10.2 4 file003.txt AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement"), dated August 23, 2001, and effective the May 1, 2001, is entered into by and between Wellington St. Claire (the "Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"). WHEREAS, the Company and the Executive entered into an employment agreement, effective as of January 27, 1997 (the "Employment Agreement"); WHEREAS, the Company offered shares of Common Stock as set forth in an offering memorandum dated January 27, 1997 (the "Offering"); and WHEREAS, the Company desires to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions. NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties agree to amend and restate the Employment Agreement in its entirety to read as follows: In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows: 1. Employment as Vice Chairman of the Board. The Company does hereby employ, engage and hire the Executive as Vice Chairman of the Board of the Company, and the Executive does hereby accept and agree to such hiring, engagement, and employment. The Executive's duties as Vice Chairman of the Board shall be such executive and managerial duties as the Board of Directors of the Company shall from time to time prescribe and as provided in the Bylaws of the Company. The Executive shall devote such time, energy and skill to the performance of her duties for the Company and for the benefit of the Company as may be necessary or required for the effective conduct and operation of the Company's business. Furthermore, the Executive shall exercise due diligence and care in the performance of her duties to the Company under this Agreement. 2. Term of Agreement. The term ("Term") of this Agreement shall commence as of the date of the closing under the Offering (the "Effective Date") and shall continue through December 31, 1999. From and after December 31, 1999, and each anniversary thereafter, the Term of the Agreement shall automatically be extended for additional successive one-year periods unless, not later than three months prior to December 31, 1999 or any such anniversary, as applicable, either party shall have given written notice to the other that it does not wish to extend the Term of the Agreement. 3. Compensation. (a) Base Salary. The Company shall pay the Executive, and the Executive agrees to accept from the Company, in payment for her services to the Company a base salary at the rate determined below ("Base Salary"), payable in equal biweekly installments or at such other time or times as the Executive and Company shall agree. Base Salary shall (i) equal a per annum amount of 0.20% times the book value (as defined below) of the Company, (ii) be reviewed quarterly and upon the raising of additional equity through the placement of securities, and (iii) be subject to a maximum per annum amount of $765,000 ("Salary Cap"). The Salary Cap can be raised at any time by the Board of Directors of the Company in its sole discretion. In determining the Base Salary, the "book value" of the Company shall be the aggregate amounts reported on the Company's balance sheet prepared in accordance with generally accepted accounting principles as Stockholders' Equity but excluding any adjustments for valuation reserves (i.e., changes in the value of the Company's portfolio of investments as a result of mark-to-market valuation changes), all determined as of the close of business on the Effective Date and thereafter on the closing date of any placements of securities resulting in additional equity and on the last day of each fiscal quarter. In consideration of the cash flow needs of the Company, the Base Salary can be lowered at management's discretion. (b) Performance Bonus - Board of Directors Discretion. The Executive shall be eligible to receive an incentive performance bonus based upon a percentage of her Base Salary. Except as provided in Section 7, any such bonus awarded to the Executive shall be payable in the amount, in the manner, and at the time determined by the Company's Board of Directors in its sole and absolute discretion. (c) Annual Review. The Board of Directors of the Company shall, at least annually, review the Executive's entire compensation package to determine whether it continues to meet the Company's compensation objectives. Such annual review will include a determination of (i) whether to increase the Salary Cap in accordance with Section 3(a) and (ii) the incentive performance bonus to be awarded in accordance with Section 3(b). 4. Fringe Benefits. The Executive shall be entitled to participate in any benefit programs adopted from time to time by the Company for the benefit of its executive employees, and the Executive shall be entitled to receive such other fringe benefits as may be granted to her from time to time by the Company's Board of Directors. (a) Benefit Plans. The Executive shall be entitled to participate in any benefit plans relating to stock options, stock purchases, awards, pension, thrift, profit sharing, life insurance, medical coverage, education, or other retirement or employee benefits available to other executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees. 2 (b) Vacation. The Executive shall be entitled to (i) four (4) weeks of paid vacation per calendar year for the first two years of service to the Company, and (ii) five (5) weeks of paid vacation per calendar year for the next two years of service to the Company, with such vacation to be scheduled and taken in accordance with the Company's standard vacation policies. After four years of service to the Company, the Executive shall be entitled to such number of weeks of paid vacation per calendar year as determined by the Board of Directors of the Company after review of industry standards, but shall in no event be entitled to fewer than five weeks of paid vacation per calendar year. 5. Business Expenses. The Company shall reimburse the Executive for any and all necessary, customary and usual expenses, properly receipted in accordance with Company policies, incurred by Executive on behalf of the Company. 6. Termination of Executive's Employment. (a) Death. If the Executive dies while employed by the Company, her employment shall immediately terminate. The Company's obligation to pay the Executive's Base Salary shall cease as of the date of Executive's death. Thereafter, Executive's beneficiaries or his estate shall receive benefits in accordance with the Company's retirement, insurance and other applicable programs and plans then in effect. (b) Disability. (i) If, as a result of the Executive's incapacity due to physical or mental illness ("Disability"), Executive shall have been absent from the full-time performance of her duties with the Company for six (6) consecutive months, and, within thirty (30) days after written notice is provided to her by the Company, she shall not have returned to the full-time performance of her duties, the Executive's employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which the Executive is absent from the full-time performance of her duties with the Company due to Disability, the Company shall continue to pay the Executive her Base Salary at the rate in effect at the commencement of such period of Disability. Subsequent to such termination, the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (ii) If, however, as a result of the Executive's partial incapacity due to physical or mental illness in which Executive shall not have been absent from her duties for six consecutive months and shall have returned to work on a full-time basis but is not able to perform at the same level as when hired and/or is not able to perform the same functions originally hired for ("Partial Disability"), the Company shall make reasonable efforts to accommodate the Executive's 3 Partial Disability by modifying her job description appropriately, together with a commensurate adjustment in compensation; provided, however, the Company shall be required to so continue the employment of the Executive in the event of a Partial Disability of the Executive only if the Company determines, in its sole discretion, that it can create a position for which the Executive would be suited and that would be economically advantageous to the Company. (c) Termination by the Company for Cause. The Company may terminate the Executive's employment under this Agreement for "Cause," at any time prior to expiration of the Term of the Agreement, only in the event of (i) the Executive's material breach of this Agreement, including without limitation the failure to substantially perform the reasonable and lawful duties of her position for the Company, which breach shall continue for 60 days after notice thereof by the Company to the Executive, which notice shall specify in detail the Executive's breach, (ii) acts or omissions constituting recklessness or willful misconduct on the part of the Executive in respect of his fiduciary obligations or otherwise relating to the business of the Company, or (iii) the Executive's conviction for fraud, misappropriation or embezzlement. In the case of clauses (ii) and (iii), the Executive's employment under this Agreement may be terminated immediately without any advance written notice, and the Company's obligation to pay the Executive's Base Salary, any bonus and benefits shall cease as of the termination date. (d) Termination by the Executive for Good Reason. The Executive shall have the right to terminate this Agreement for Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without the Executive's express written consent, of any one or more of the following events: (i) A reduction in title and/or compensation of the Executive by the Board of Directors or the assignment of duties to the Executive not consistent with those of a senior executive of the Company, except in connection with the Company's termination of the Executive's employment for Cause pursuant to Section 6(c) or as otherwise expressly contemplated herein; (ii) The Company's material breach of any of the provisions of this Agreement, including, but not limited to, a reduction by the Company in the Executive's Base Salary in effect as of the Effective Date, or as the same may be increased as provided herein; or a change in the conditions of the Executive's employment (e.g., including, without limitation, a failure by the Company to provide the Executive with incentive compensation and benefits plans that provide benefits and the opportunity to obtain incentive compensation, in each case comparable to those available under benefits programs in effect as of the Effective Date, etc.); 4 (iii) The relocation of the Company's principal executive offices to a location more than 50 miles from its location as of Effective Date or the Company's requiring the Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to the extent necessary to meet the standard set forth in the last two sentences of Section 1; or (iv) A Change in Control as defined in Section 8 below. The Executive agrees to provide the Company with thirty (30) days' prior written notice of any termination for Good Reason. (e) Termination by the Executive Without Good Reason. The Executive may at any time during the Term of this Agreement terminate her employment hereunder for any reason or no reason by giving the Company notice in writing not less than one hundred twenty (120) days in advance of such termination. The Executive shall have no further obligations to the Company after the effective date of termination, as set forth in the notice. Notwithstanding the foregoing, in the event any "person" (as defined in Section below) begins a tender or exchange offer, circulates a proxy to shareholders or takes other steps to effect a Change of Control, the Executive agrees that she will not voluntarily leave the employ of the Company, and will render services to the Company commensurate with his position, until such "person" has abandoned or terminated efforts to effect a Change of Control or until a Change of Control has occurred. In the event of a termination by the Executive under this paragraph, the Company will pay only the portion of Base Salary or previously awarded Bonus unpaid as of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect according to their terms, but no additional accrual or vesting will take place. 7. Compensation Upon Termination by the Company Other Than for Cause, or by the Executive for Good Reason. If the Executive's employment shall be terminated (i) by the Company other than for Cause, or (ii) by the Executive for Good Reason, the Executive shall be entitled to the following benefits: (a) Payment of Unpaid Base Salary. The Company shall immediately pay the Executive any portion of the Executive's Base Salary or previously awarded bonus not paid prior to the termination date. (b) Severance Payment. The Company shall pay the Executive an amount (the "Severance Amount") equal to three times the higher of (i) the Executive's combined Salary Cap and actual bonus compensation for the preceding fiscal year or (ii) the average for the three preceding years of the Executive's combined actual Base Salary and bonus compensation; provided, however, that the Severance Amount shall not be less than $250,000, nor more than 1.0% of book value (as defined in Section 3(a)) to the extent the Severance Amount is greater than $250,000. The Severance Amount shall be payable 50% within five (5) days after the termination date and the remaining 50% shall be payable in twelve (12) equal consecutive monthly installments beginning on the first day of the month following the termination date. 5 (c) Immediate Vesting of Stock Options. The Company shall take all appropriate action to ensure that all stock options on the Company's stock owned by the Executive as of the Effective Date and which have not been exercised prior to the termination date become immediately exercisable by the Executive, whether or not the right to exercise such stock options would otherwise then be vested in the Executive, provided, however, an option that is an incentive stock option (within the meaning of Code Section 422(b)) shall not be exercisable for the first time in a calendar year to the extent that the aggregate fair market value of stock (as determined under Code Section 422(b)(3)) with respect to which ISO's are exercisable by the Executive during such calendar year exceeds $100,000. The provisions of this Section 7(c) shall constitute an amendment to any existing stock option agreements (including award certificates) of the Company as of the Effective Date. All other stock options owned by the Executive as of the termination date shall be exercisable in accordance with the Company's stock option plan and the applicable stock option agreements. (d) Continuation of Fringe Benefits. From and after termination of the Executive's employment, the Company shall continue to provide the Executive with all life insurance and medical coverage Fringe Benefits set forth in Section 4 as if the Executive's employment under the Agreement had not been terminated until the earlier to occur of (i) such time as the Executive finds full-time employment or (ii) this Agreement terminates. Notwithstanding the immediately preceding sentence, if, as the result of the termination of the Executive's employment, the Executive and/or his otherwise eligible dependents or beneficiaries shall become ineligible for benefits under any one or more of the Company's benefit plans or the cost of providing such benefits exceeds 200% of the cost of providing such benefits to other members of senior management, the Company, at the Company's option, shall (i) continue to provide the Executive and his eligible dependents or beneficiaries with benefits at a level at least equivalent to the level of benefits for which the Executive and her dependents and beneficiaries were eligible under such plans immediately prior to the termination date or (ii) for any Fringe Benefit not so provided, the Company shall pay the Executive 200% of the cost of providing such Fringe Benefit to other members of senior management. (e) Excise Tax Gross-Up. In the event that (i) the Executive becomes entitled to the benefit payments provided under subparagraphs (a)-(d) of this Section 7 ("Benefit Payments"), and (ii) any of the Benefit Payments will be subject to any excise tax imposed under Section 4999 of the Internal Revenue Code of 1986, as amended from time to time ("Code"), or successor sections thereto ("Excise Tax"), the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Benefit Payments and any federal, state and local income tax and Excise Tax upon the payments provided for under this Section 7, shall be equal to the amount of the Benefit Payments. For purposes of determining whether any of the Benefit Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by the Executive in connection with a Change in Control (defined below) or the termination of Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any person affiliated with the Company or such person) shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess 6 parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax advisors selected by the Company and reasonably acceptable to the Executive such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount (as defined in section 280G(b)(3) of the Code) allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, (ii) the amount of the Benefit Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Benefit Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(1) of the Code (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the termination date of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes based on the marginal rate referenced above. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the termination date, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess but only to the extent that such interest, penalties or additions would not have been reduced by prompt payment by the Executive to the appropriate tax authority of the Gross-Up Payments previously received) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Benefit Payments. (f) No Mitigation Required; no Other Entitlement to Benefits Under Agreement. The Executive shall not be required in any way to mitigate the amount of any payment provided for in this Section 7, including, but not limited to, by seeking other employment, nor shall the amount of any payment provided for in this Section 7 be reduced by any compensation earned by the Executive as the result of employment with another employer after the termination date of employment, or otherwise. Except as set forth in this Section 7, following a termination governed by this Section 7, the Executive shall not be entitled to any other compensation or benefits set forth in this Agreement, except as may be separately 7 negotiated by the parties and approved by the Board of Directors of the Company in writing in conjunction with the termination of Executive's employment under this Section 7. 8. Change in Control. A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) Any "Person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company any trustee or other fiduciary holding securities under an Executive benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or from a transferor in a transaction expressly approved or consented to by the Board of Directors) representing more than 9.8% of the combined voting power of the Company's then outstanding securities; or (b) During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board of Directors and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this section), (i) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at lest two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved or (ii) whose election is to replace a person who ceases to be a director due to death, disability or age, cease for any reason to constitute a majority thereof; or (c) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an Executive benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (d) The shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 9. Dispute Relating to Executive's Termination Of Employment for Good Reason. If the Executive resigns her employment with the Company alleging in good faith as the basis for such resignation any of the "Good Reasons" specified in Section 6(d), and if the Company then disputes the Executive's right to the payment of benefits under Section 7, the Company shall 8 continue to pay the Executive the full compensation (including, but not limited to, his Base Salary) in effect at the date the Executive provided notice of such resignation, and the Company shall continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was then a participant, until the earlier of (i) the expiration of the Term of the Agreement or (ii) the date the dispute is finally resolved, either by mutual written agreement of the parties or by arbitration in accordance with Section 22. For the purposes of this Section, the Company shall bear the burden of proving that the grounds for the Executive's resignation do not fall within the scope of Section 6(d), and there shall be a rebuttable presumption that the Executive alleged such grounds in good faith. 10. Noncompetition Provisions. (a) Noncompetition. The Executive agrees that during the Term of this Agreement prior to any termination of his employment hereunder and for a period of one year following the occurrence of any event entitling the Executive to Benefit Payments, provided the Company makes all such payments when due according to the provisions of Section 7, she will not, directly or indirectly, without the prior written consent of the Company, manage, operate, join, control, participate in, or be connected as a stockholder (other than as a holder of shares publicly traded on a stock exchange or the NASDAQ National Market System), partner, or other equity holder with, or as an officer, director or employee of, any real estate investment trust whose business strategy is competitive with that of the Company, as determined by a majority of the Company's Independent Directors ("Competing REIT"). It is further expressly agreed that the Company will or would suffer irreparable injury of the Company in violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Executive from competing with the Company or any subsidiary or affiliate of the Company, in the areas of business set forth above, in violation of this Agreement. It is further expressly agreed that the Executive's interest in and employment by Fixed Income Discount Advisory Company shall not be deemed to violate any provisions of this Section, regardless of the scope of the Executive's activities with such firm; provided, however, that the Executive shall not in such capacity provide services to any Competing REIT. (b) Right to Company Materials. The Executive agrees that all styles, designs, lists, materials, books, files, reports, correspondence, records, and other documents ("Company Materials") used, prepared, or made available to the Executive in connection with her employment by the Company shall be and shall remain the property of the Company. Upon the termination of employment or the expiration of this Agreement, all Company Materials shall be returned immediately to the Company, and the Executive shall not make or retain any copies thereof. (c) Soliciting Executives. The Executive promises and agrees that she will not directly or indirectly solicit any of the Company Executives to work for any Competing REIT. 9 (d) Maryland Law. The Executive agrees, in accordance with Maryland law, to first offer to the Company corporate opportunities learned of solely as a result of her service as an officer and director of the Company. 11. Notices. All notices and other communications under this Agreement shall be in writing and shall be given by fax or first class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective persons named below: If to the Company: Michael A. J. Farrell Chairman and Chief Executive Officer Annaly Mortgage Management, Inc. 1500 Harbor Blvd. Weehawken, NJ 07087 Phone: (201) 223-1900 Fax: (201) 223-1230 If to the Executive: Wellington J. St. Claire Vice Chairman of the Board Annaly Mortgage Management, Inc. 1500 Harbor Blvd. Weehawken, NJ 07087 Phone: (201) 223-1900 Fax: (201) 223-1230 A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 10178, Attn: Robert C. Mendelson. Either party may change such party's address for notices by notice duly given pursuant hereto. 12. Attorneys' Fees. In the event judicial determination is necessary of any dispute arising as to the parties' rights and obligations hereunder, each party shall have the right, in addition to any other relief granted by the court, to attorneys' fees based on a determination by the court of the extent to which each party has prevailed as to the material issues raised in determination of the dispute. 13. Termination of Prior Agreements. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to employment or with respect to the compensation of the Executive by the Company. 14. Assignment; Successors. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the Company with or to any other individual or entity, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of the Company hereunder. 10 15. Governing Law. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of New Jersey. 16. Entire Agreement; Headings. This Agreement embodies the entire agreement of the parties respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 17. Waiver; Modification. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto. 18. Severability. In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement. 19. Indemnification. The Company shall indemnify and hold Executive harmless to the maximum extent permitted by Section 2-418 of the Maryland General Corporations Law or its successor statute. 20. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 21. Successor Sections. References herein to sections or rules of the Code or Exchange Act shall be deemed to include any successor sections or rules. 22. Arbitration. Any dispute, claim or controversy arising out of or in relation to this Agreement, which the Executive and the Company are unable to resolve shall be determined by the decision of a board of arbitration consisting of three (3) members (the "Board of Arbitration") selected by the American Arbitration Association upon application made to it for such purpose by either the Company or the Executive. The arbitration proceedings shall take place in New York, New York or such other place as shall be agreed to by the parties. The Board of Arbitration shall reach and render a decision in writing. In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures as a majority of the members of the Board of Arbitration deems necessary or appropriate. Any award shall be rendered on the basis of the substantive law governing this Agreement and shall be concurred in by a majority of the arbitrators. To the extent practical, decisions of the arbitrators shall be rendered no more than thirty (30) calendar days following commencement of the arbitration 11 proceedings with respect thereto. Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the Executive and the Company and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. Each party to the arbitration shall bear its own expense in relation thereto, including but not limited to such party's attorneys' fees, if any, and the expenses and fees of the member of the Board of Arbitration appointed by such party; provided, however, that the expenses and fees of the third member of the Board of Arbitration and any other expenses of the Board of Arbitration not capable of being attributed to any one member shall be borne in equal parts by Executive and the Company. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written. ANNALY MORTGAGE MANAGEMENT, INC. By: /s/ Michael A.J. Farrell ------------------------------------ Michael A.J. Farrell By: /s/ Wellington J. St. Claire ------------------------------------ Wellington J. St. Claire 12 EX-10.3 5 file004.txt AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement"), dated August 23, 2001, and effective the May 1, 2001, is entered into by and between Kathryn F. Fagan (the "Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"). WHEREAS, the Company and the Executive entered into an employment agreement, effective as of November 1, 1997 (the "Employment Agreement"); and WHEREAS, the Company desires to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions and subject to the rights of termination hereinafter set forth, and the Executive is willing to accept such employment on such terms and conditions. NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties agree to amend and restate the Employment Agreement in its entirety to read as follows: In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows: 1. Employment as Treasurer and Chief Financial Officer of the Company. The Company does hereby employ, engage and hire the Executive as Treasurer and Chief Financial Officer of the Company, and the Executive does hereby accept and agree to such hiring, engagement, and employment. The Executive's duties as Treasurer and Chief Financial Officer shall be such executive and managerial duties as the Board of Directors of the Company shall from time to time prescribe and as provided in the Bylaws of the Company. The Executive shall devote such time, energy and skill to the performance of her duties for the Company and for the benefit of the Company as may be necessary or required for the effective conduct and operation of the Company's business. Furthermore, the Executive shall exercise due diligence and care in the performance of her duties to the Company under this Agreement. 2. Term of Agreement. The term ("Term") of this Agreement shall commence as of the date of the closing under the Offering (the "Effective Date") and shall continue through December 31, 1999. From and after December 31, 1999, and each anniversary thereafter, the Term of the Agreement shall automatically be extended for successive one-year periods unless, not later than three months prior to December 31, 1999 or any such anniversary, as applicable, either party shall have given written notice to the other that it does not wish to extend the Term of the Agreement. 3. Compensation. (a) Base Salary. The Company shall pay the Executive, and the Executive agrees to accept from the Company, in payment for her services to the Company a base salary at the rate determined below ("Base Salary"), payable in equal biweekly installments or at such other time or times as the Executive and Company shall agree. Base Salary shall (i) equal a per annum amount of 0.10% times the book value (as defined below) of the Company, (ii) be reviewed quarterly and upon the raising of additional equity through the placement of securities, and (iii) be subject to a maximum per annum amount of $350,000 ("Salary Cap"). The Salary Cap can be raised at any time by the Board of Directors of the Company in its sole discretion. In determining the Base Salary, the "book value" of the Company shall be the aggregate amounts reported on the Company's balance sheet prepared in accordance with generally accepted accounting principles as Stockholders' Equity but excluding any adjustments for valuation reserves (i.e., changes in the value of the Company's portfolio of investments as a result of mark-to-market valuation changes), all determined as of the close of business on the Effective Date and thereafter on the closing date of any placements of securities resulting in additional equity and on the last day of each fiscal quarter. In consideration of the cash flow needs of the Company, the Base Salary can be lowered at management's discretion. (b) Performance Bonus - Board of Directors Discretion. The Executive shall be eligible to receive an incentive performance bonus based upon a percentage of her Base Salary. Except as provided in Section 7, any such bonus awarded to the Executive shall be payable in the amount, in the manner, and at the time determined by the Company's Board of Directors in its sole and absolute discretion. (c) Annual Review. The Board of Directors of the Company shall, at least annually, review the Executive's entire compensation package to determine whether it continues to meet the Company's compensation objectives. Such annual review will include a determination of (i) whether to increase the Salary Cap in accordance with Section 3(a) and (ii) the incentive performance bonus to be awarded in accordance with Section 3(b). 2 4. Fringe Benefits. The Executive shall be entitled to participate in any benefit programs adopted from time to time by the Company for the benefit of its executive employees, and the Executive shall be entitled to receive such other fringe benefits as may be granted to her from time to time by the Company's Board of Directors. (a) Benefit Plans. The Executive shall be entitled to participate in any benefit plans relating to stock options, stock purchases, awards, pension, thrift, profit sharing, life insurance, medical coverage, education, or other retirement or employee benefits available to other executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees. (b) Vacation. The Executive shall be entitled to (i) four (4) weeks of paid vacation per calendar year for the first two years of service to the Company, and (ii) five (5) weeks of paid vacation per calendar year for the next two years of service to the Company, with such vacation to be scheduled and taken in accordance with the Company's standard vacation policies. After four years of service to the Company, the Executive shall be entitled to such number of weeks of paid vacation per calendar year as determined by the Board of Directors of the Company after review of industry standards, but shall in no event be entitled to fewer than five weeks of paid vacation per calendar year. 5. Business Expenses. The Company shall reimburse the Executive for any and all necessary, customary and usual expenses, properly receipted in accordance with Company policies, incurred by Executive on behalf of the Company. 6. Termination of Executive's Employment. (a) Death. If the Executive dies while employed by the Company, her employment shall immediately terminate. The Company's obligation to pay the Executive's Base Salary shall cease as of the date of Executive's death. Thereafter, Executive's beneficiaries or her estate shall receive benefits in accordance with the Company's retirement, insurance and other applicable programs and plans then in effect. (b) Disability. If, as a result of the Executive's incapacity due to physical or mental illness ("Disability"), Executive shall have been absent from the full-time performance of her duties with the Company for six (6) consecutive months, and, within thirty (30) days after written notice is provided to her by the Company, she shall not have returned to the full-time performance of her duties, the Executive's employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which the Executive is absent from the full-time performance of her duties with the Company due to Disability, the Company shall continue to pay the Executive her Base Salary at the rate in effect at the commencement of such period of Disability. Subsequent to such termination, the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. 3 (c) Termination by the Company for Cause. The Company may terminate the Executive's employment under this Agreement for "Cause," at any time prior to expiration of the Term of the Agreement, only in the event of (i) the Executive's material breach of this Agreement, including without limitation the failure to substantially perform the reasonable and lawful duties of her position for the Company, which breach shall continue for 60 days after notice thereof by the Company to the Executive, which notice shall specify in detail the Executive's breach, (ii) acts or omissions constituting recklessness or willful misconduct on the part of the Executive in respect of her fiduciary obligations or otherwise relating to the business of the Company, or (iii) the Executive's conviction for fraud, misappropriation or embezzlement. In the case of clauses (ii) and (iii), the Executive's employment under this Agreement may be terminated immediately without any advance written notice, and the Company's obligation to pay the Executive's Base Salary, any bonus and benefits shall cease as of the termination date. (d) Termination by the Executive. The Executive may at any time during the Term of this Agreement terminate her employment hereunder for any reason or no reason by giving the Company notice in writing not less than one hundred twenty (120) days in advance of such termination. The Executive shall have no further obligations to the Company after the effective date of termination, as set forth in the notice. In the event of a termination by the Executive under this paragraph, the Company will pay only the portion of Base Salary or previously awarded Bonus unpaid as of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect according to their terms, but no additional accrual or vesting will take place. 7. Compensation Upon Termination by the Company Other Than for Cause. If the Executive's employment shall be terminated by the Company other than for Cause, the Executive shall be entitled to the following benefits: (a) Payment of Unpaid Base Salary. The Company shall immediately pay the Executive any portion of the Executive's Base Salary or previously awarded bonus not paid prior to the termination date. (b) Severance Payment. The Company shall pay the Executive an amount (the "Severance Amount") equal to three times the higher of (i) the Executive's combined Salary Cap and actual bonus compensation for the preceding fiscal year or (ii) the average for the three preceding years of the Executive's combined actual Base Salary and bonus compensation; provided, however, that the Severance Amount shall not be less than $250,000, nor more than 1.0% of book value (as defined in Section 3(a)) to the extent the Severance Amount is greater than $250,000. The Severance Amount shall be payable 50% within five (5) days after the termination date and the remaining 50% shall be payable in twelve (12) equal consecutive monthly installments beginning on the first day of the month following the termination date. (c) Immediate Vesting of Stock Options. The Company shall take all appropriate action to ensure that all stock options on the Company's stock owned by the Executive as of the Effective Date and which have not been exercised prior to the termination date become immediately exercisable by the Executive, whether or not the right to exercise such stock options would otherwise then be vested in the Executive, provided, however, an option that is an incentive stock option (within the meaning of Code Section 422(b)) shall not be exercisable 4 for the first time in a calendar year to the extent that the aggregate fair market value of stock (as deter mined under Code Section 422(b)(3)) with respect to which ISO's are exercisable by the Executive during such calendar year exceeds $100,000. The provisions of this Section 7(c) shall constitute an amendment to any existing stock option agreements (including award certificates) of the Company as of the Effective Date. All other stock options owned by the Executive as of the termination date shall be exercisable in accordance with the Company's stock option plan and the applicable stock option agreements. 8. Noncompetition Provisions. (a) Noncompetition. The Executive agrees that during the Term of this Agreement prior to any termination of her employment hereunder and, in the event of termination of the Executive's employment by the Company for Cause or voluntary termination of employment by the Executive, for a period of one year following such termination, she will not, directly or indirectly, without the prior written consent of the Company, manage, operate, join, control, participate in, or be connected as a stockholder (other than as a holder of shares publicly traded on a stock exchange or the NASDAQ National Market System), partner, or other equity holder with, or as an officer, director or employee of, any real estate investment trust whose business strategy is competitive with that of the Company, as determined by a majority of the Company's Independent Directors ("Competing REIT"). It is further expressly agreed that the Company will or would suffer irreparable injury of the Company in violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Executive from competing with the Company or any subsidiary or affiliate of the Company, in the areas of business set forth above, in violation of this Agreement. (b) Right to Company Materials. The Executive agrees that all styles, designs, lists, materials, books, files, reports, correspondence, records, and other documents ("Company Materials") used, prepared, or made available to the Executive in connection with her employment by the Company shall be and shall remain the property of the Company. Upon the termination of employment or the expiration of this Agreement, all Company Materials shall be returned immediately to the Company, and the Executive shall not make or retain any copies thereof. (c) Soliciting Executives. The Executive promises and agrees that she will not directly or indirectly solicit any of the Company Executives to work for any Competing REIT. (d) Maryland Law. The Executive agrees, in accordance with Maryland law, to first offer to the Company corporate opportunities learned of solely as a result of her service as an officer and director of the Company. 5 9. Notices. All notices and other communications under this Agreement shall be in writing and shall be given by fax or first class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective persons named below: If to the Company: Michael A. J. Farrell Chairman and Chief Executive Officer Annaly Mortgage Management, Inc. 1500 Harbor Blvd. Weehawken, NJ 07087 Phone: (201) 223-1900 Fax: (201) 223-1230 If to the Executive: Kathryn F. Fagan Treasurer and Chief Financial Officer Annaly Mortgage Management, Inc. 1500 Harbor Blvd. Weehawken, NJ 07087 Phone: (201) 223-1900 Fax: (201) 223-1230 A copy of any notice pursuant to this Agreement shall be sent to Morgan, Lewis & Bockius, 101 Park Avenue, New York, New York 10178, Attention: Robert C. Mendelson. Either party may change such party's address for notices by notice duly given pursuant hereto. 10. Attorneys' Fees. In the event judicial determination is necessary of any dispute arising as to the parties' rights and obligations hereunder, each party shall have the right, in addition to any other relief granted by the court, to attorneys' fees based on a determination by the court of the extent to which each party has prevailed as to the material issues raised in determination of the dispute. 11. Termination of Prior Agreements. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to employment or with respect to the compensation of the Executive by the Company. 12. Assignment; Successors. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the Company with or to any other individual or entity, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of the Company hereunder. 13. Governing Law. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with the laws of the State of New Jersey. 6 14. Entire Agreement; Headings. This Agreement embodies the entire agreement of the parties respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 15. Waiver; Modification. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto. 16. Severability. In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violate such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement. 17. Indemnification. The Company shall indemnify and hold Executive harm less to the maximum extent permitted by Section 2-418 of the Maryland General Corporations Law or its successor statute. 18. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 19. Successor Sections. References herein to sections or rules of the Code or Exchange Act shall be deemed to include any successor sections or rules. 20. Arbitration. Any dispute, claim or controversy arising out of or in relation to this Agreement, which the Executive and the Company are unable to resolve shall be determined by the decision of a board of arbitration consisting of three (3) members (the "Board of Arbitration") selected by the American Arbitration Association upon application made to it for such purpose by either the Company or the Executive. The arbitration proceedings shall take place in New York, New York or such other place as shall be agreed to by the parties. The Board of Arbitration shall reach and render a decision in writing. In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures as a majority of the members of the Board of Arbitration deems necessary or appropriate. Any award shall be rendered on the basis of the substantive law governing this Agreement and shall be concurred in by a majority of the arbitrators. To the extent practical, decisions of the arbitrators shall be rendered no more than thirty (30) calendar days following commencement of the arbitration proceedings with respect thereto. Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the Executive and 7 the Company and entitled to be enforced to the fullest extent permitted by law and entered in any court of competent jurisdiction. Each party to the arbitration shall bear its own expense in relation thereto, including but not limited to such party's attorneys' fees, if any, and the expenses and fees of the member of the Board of Arbitration appointed by such party; provided, however, that the expenses and fees of the third member of the Board of Arbitration and any other expenses of the Board of Arbitration not capable of being attributed to any one member shall be borne in equal parts by Executive and the Company. 8 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has hereunto signed this Agreement, as of the date first above written. ANNALY MORTGAGE MANAGEMENT, INC. By: /s/ Wellington St. Claire ------------------------------------ Wellington St. Claire By: /s/ Kathryn F. Fagan ------------------------------------ Kathryn F. Fagan 9 EX-10.4 6 file005.txt AMENDED & RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.4 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement"), dated August 23, 2001, and effective the May 1, 2001, is entered into by and between Jennifer A. Stephens (the "Executive") and Annaly Mortgage Management, Inc., a Maryland corporation (the "Company"). WHEREAS, the Company and the Executive entered into an employment agreement, effective as of January 3, 2001 (the "Employment Agreement"); and WHEREAS, the Company desires to establish its right to the continued services of the Executive, in the capacity described below, on the terms and conditions subject to the rights of termination hereinafter set for the, and the Executive is willing to accept such employment on such terms and conditions. NOW, THEREFORE, in consideration of the mutual promises and agreements herein made and intending to be legally bound hereby, the parties agree to amend and restate the Employment Agreement in its entirety to read as follows: In consideration of the mutual agreements hereinafter set forth, the Executive and the Company have agreed and do hereby agree as follows: 1. Employment as Corporate Secretary and Senior Vice President of the Company. The Company does hereby employ, engage and hire the Executive as Corporate Secretary and Senior Vice President of the Company, and the Executive does hereby accept and agree to such hiring, engagement and employment. The Executive's duties as Corporate Secretary and Senior Vice President shall be such executive and managerial duties as the Board of Directors of the Company shall from time to time prescribe and as provided in the Bylaws of the Company. The Executive shall devote such time, energy and skill to the performance of her duties for the Company and for the benefit of the Company as may be necessary or required for the effective conduct and operation of the Company's business. Furthermore, the Executive shall exercise due diligence and care in the performance of her duties. 2. Term of Agreement. The term ("Term") of this Agreement shall commence as of January 3, 2001 and shall continue through December 31, 2001. From and after December 31, 2001, and each anniversary thereafter, the Term of the Agreement shall be automatically extended for successive one-year period unless, not later than three months prior to December 31, 2001 or any such anniversary, as applicable, either party shall have given written notice to the other that it does not wish to extend the Term of the Agreement. 3. Compensation. (a) Base Salary. The Company shall pay the Executive, and the Executive agrees to accept from the Company, in payment for her services to the Company a base salary at the rate determined below ("Base Salary"), payable in equal biweekly installments or at such time or times as the Executive and Company shall agree. Base Salary shall (I) equal a per annum amount of 0.10% times the book value (as defined below) of the Company, (ii) be reviewed quarterly and upon the raising of additional equity through the placement of securities, and (iii) be subject to a maximum per annum amount of $300,000. The Salary Cap can be raised at any time by the Board of Directors of the Company in its sole discretion. In determining the Base Salary, the "book value" of the Company shall be the aggregate amounts reported on the Company's balance sheet prepared in accordance with generally accepted accounting principles as Stockholder's Equity but excluding and adjustments for valuation reserves (i.e., changes in the value of the Company's portfolio of investments as a result of mark-to-market valuation changes), all determined as of the close of business on the Effective Date and thereafter on the closing date of any placements of securities resulting in additional equity and on the last day of each fiscal quarter. In consideration of the cash flow needs of the Company, the Base Salary can be lowered at management's discretion. (b) Performance Bonus - Board of Directors Discretion. The Executive shall be eligible to receive an incentive performance bonus based on a percentage of her Base Salary. Except as provided in Section 7, any such bonus awarded to the Executive shall be payable in the amount, in the manner, and at the time determined by the Company's Board of Directors in its sole and absolute discretion. (c) Annual Review. The Board of Directors of the Company shall, at least annually, review the Executives entire compensation package to determine whether it continues to meet the Company's compensation objectives. Such annual review will include a determination of (i) whether to increase the Salary Cap in accordance with section 3(a) and (ii) the incentive performance bonus to be awarded in accordance with Section 3(b). 4. Fringe Benefits. The Executive shall be entitled to participate in any benefit programs adopted from time to time by the Company for the benefit of its executive employees, and the Executive shall be entitled to receive other fringe benefits as may be granted to her from time to time be the Company's Board of Directors. (a) Benefit Plans. The Executive shall be entitled to participate in any benefit plans relating to stock options, stock purchases, awards, pension, thrift, profit sharing, life insurance, medical coverage, education, or other retirement or employee benefits available to other executive employees of the Company, subject to any restrictions (including waiting periods) specified in such plans. The Company shall make commercially reasonable efforts to obtain medical and disability insurance, and such other forms of insurance as the Board of Directors shall from time to time determine, for its employees. (b) Vacation. The Executive shall be entitled to (i) four (4) weeks of paid vacation per calendar year for the first two years of service to the Company and (ii) five (5) weeks of paid vacation per calendar year for the next two years of service to the Company, with such vacation to be scheduled and taken in accordance with the Company's standard vacation policies. After four years of service to the Company, the executive shall be entitled to such 2 number of weeks of paid vacation per calendar year as determine by the Board of Directors of the Company after review of industry standards, but shall in no event be entitled to fewer than five weeks of paid vacation per calendar year. 5. Business Expenses. The Company shall reimburse the Executive for any and all necessary, customary and usual expenses, properly receipted in accordance with Company policies incurred by Executive on behalf of the Company. 6. Termination of Executive's employment. (a) Death. If the Executive dies while employed by the Company, her employment shall immediately terminate. The Company's obligation to pay the Executives Base Salary shall cease as of the date of the Executive's death. Thereafter, Executive's beneficiaries or her estate shall receive in accordance with the Company's retirement, insurance and other applicable programs and plans then in effect. (b) Disability. If, as a result of the Executive's incapacity due to physical or mental illness ("Disability"), Executive shall have been absent from the full-time performance of her duties with the Company for six (6) consecutive months, and within thirty (30) days after written notice is provided to her by the Company, she shall not have returned to the full-time performance of her duties, the Executives employment under this Agreement may be terminated by the Company for Disability. During any period prior to such termination during which the Executive is absent from the fill-time performance of her duties with the Company due to Disability, the Company shall continue to pay the Executive her Base Salary at the rate in effect at the commencement of such period of Disability. Subsequent to such termination, the Executive's benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs. (c) Termination by the Company for Cause. The Company may terminate the Executives employment under this Agreement for "Cause" at any time prior to expiration of the Term of the Agreement, only in the event of (i) the Executive's material breach of this Agreement, including without limitation the failure to substantially perform the reasonable and lawful duties of her position for the Company, which breach shall continue for 60 days after notice thereof by the Company to the Executive, which notice shall specify in detail the Executive's breach, (ii) acts or omissions constituting recklessness or willful misconduct on the part of the Executive in respect of her fiduciary obligations or otherwise relating to the business of the Company, or (iii) the Executive's conviction for fraud, misappropriation or embezzlement. In the case of clauses (ii) and (iii), the Executives employment under this Agreement may be terminated immediately without any advance written notice, and the Company's obligation to pay the Executive's Base Salary, any bonus and benefits shall cease as of the termination date. (d) Termination by the Executive. The Executive may at any time during the Term of this Agreement terminate her employment hereunder for any reason or no reason by giving the Company notice in writing not less than one hundred twenty (120) days in advance of such termination. The Executive shall have no further obligations to the Company after the effective date of termination, as set forth in the notice. In the event of termination by the Executive under this paragraph, the Company will pay only the portion of Base Salary or 3 previously awarded Bonus unpaid as of the termination date. Benefits which have accrued and/or vested on the termination date will continue in effect according to their terms, but no additional accrual or vesting will take place. 7. Compensation Upon Termination by the Company Other Than for Cause. If the Executive's employment shall be terminated by the Company other than for Cause, the Executive shall be entitles to the following benefits: (a) Payment of Unpaid Base Salary. The Company shall immediately pay the Executive any portion of the Executives Base Salary or previous bonus not paid prior to the termination date. (b) Severance Payment. The Company shall pay the Executive an amount (the "Severance Amount") equal to three times the higher of (i) the Executives combined Salary Cap and actual bonus compensation for the preceding fiscal year or (ii) the average for three preceding years of the Executive's combined actual Base Salary and bonus compensation; provided however, that the Severance Amount shall not be less than $250,000, nor more than 1% of book value (as defined in section 3(a)) to the extent of the Severance Amount is greater than $250,000. The Severance Amount shall be payable 50% within five (5) days after the termination date and the remaining 50% shall be payable in twelve (12) consecutive monthly installments beginning on the first day of the month following the termination date. (c) Immediate Vesting of Stock Options. The Company shall take all appropriate action to ensure that all stock options on the Company's stock owned by the Executive as of the Effective Date and which have not been exercised prior to the termination date become immediately exercisable by the Executive, whether or not the right to exercise such stock options would otherwise be vested in the Executive provided, however, an option that is incentive stock option (within the meaning of Code Section 422(b)) shall not be exercisable for the first time in a calendar year to the extent that the aggregate fair market value of stock (as determined under Code Section 422(b)(3)) with respect to ISO's are exercisable by the Executive during such calendar year exceeds $100,000. The provisions of this Section 7(c) shall constitute and amendment to any existing stock option agreements (including award certificates) of the Company as of the Effective Date. All other stock options owned by the Executive as of the termination date shall be exercisable in accordance with the Company's stock option plan and the applicable stock option agreements. 8. Noncompetition Provisions. (a) Noncompetition. The Executive agrees that during the Term of this Agreement prior to any termination of her employment hereunder and, in the event of termination of the Executive's employment by the Company for Cause or voluntary termination of employment by the Executive, for a period of one year following such termination, she will not, directly or indirectly, without prior written consent of the Company, manage, operate, join, control, participate in, or be connected as a stockholder (other than as a holder of shares publicly traded on a stock exchange or the NASDAQ National Market System), partner, or other equity holder with, or as an officer, director or employee of any real estate investment trust whose business strategy is competitive with that of the Company, as determined be a majority of the Company's Independent Directors ("Competing REIT"). It is further expressly agreed that the Company will or would suffer irreparable injury of the Company in 4 violation of the preceding sentence of this Agreement and that the Company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Executive further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Executive form competing with the Company or any subsidiary or affiliate of the Company, in the areas of business set forth above in violation of this Agreement. 9. Notices. All notices and other communications under this Agreement shall be in writing and shall be given by fax or first class mail, certified or registered return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective persons named below: If to the Company: Michael A. J. Farrell Chairman and Chief Executive Officer Annaly Mortgage Management, Inc. 12 East 41st Street 7th Floor New York, New York 10017 If to the Executive: Jennifer Stephens Senior Vice President and Secretary Annaly Mortgage Management, Inc. 12 East 41st Street 7th Floor New York, New York 10017 10. Attorney's Fees. In the event judicial determination is necessary of any dispute arising as to the parties' rights and obligations hereunder, each party shall have the right, in addition to any other relief granted by the court, to attorney's fees based on a determination by the court of the extent to which each party has prevailed as to the material issues raised in determination of the dispute. 11. Termination of Prior Agreements. This Agreement terminates and supersedes any and all prior agreements and understandings between the parties with respect to employment or with respect to the compensation of the Executive by the Company. 12. Assignment: Successors. This Agreement is personal in its nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder; provided that, in the event of the merger, consolidation, transfer, or sale of all or substantially all of the assets of the Company with or to any other individual entity, this Agreement shall, subject to the provisions hereof, be binding upon and inure to the benefit of such successor and such successor shall discharge and perform all the promises, covenants, duties, and obligations of the Company hereunder. 13. Governing Law. This Agreement and the legal relations thus created between the parties hereto shall be governed by and construed under and in accordance with laws of the State of New York. 5 14. Entire Agreement: Headings. This Agreement embodies the entire agreement of the parties respecting the matters within its scope and may be modified only in writing. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement. 15. Waiver: Modification. Failure to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such term, covenant, or condition, nor shall any waiver or relinquishment of, or failure to insist upon strict compliance with, any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other times. This Agreement shall not be modified in any respect except by a writing executed by each party hereto. 16. Severability. In the event that a court of competent jurisdiction determines that any portion of this Agreement is in violation of any statute or public policy, only the portions of this Agreement that violates such statute or public policy shall be stricken. All portions of this Agreement that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any portion of this Agreement shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of the parties under this Agreement. 17. Indemnification. The Company shall indemnify and hold Executive harmless to the maximum extent permitted by Section 2-418 of the Maryland General Corporations Law or its successor statute. 18. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 19. Successor Sections. References herein to sections or rules of the Code or Exchange Act shall be deemed to include any successor sections or rules. 20. Arbitration. Any dispute, claim or controversy arising out of or in relation to this Agreement, which the Executive and the Company are unable to resolve shall be determined by the decision of a board of arbitration consisting of three (3) members (the "Board of Arbitration") selected by the American Arbitration Association upon application made to it for such purpose by other the Company or the Executive. The arbitration proceedings shall take place in New York, New York or such other place as shall be agreed to by the parties. The Board of Arbitration shall reach and render a decision in writing. In connection with rendering its decision, the Board of Arbitration shall adopt and follow such rules and procedures as a majority of the members of the Board of Arbitration deems necessary or appropriate. Any award shall be rendered on the basis of substantive law governing this Agreement and shall be concurred in by a majority of the arbitrators. To the extent practical, decisions of the arbitrators shall be rendered no more than thirty (30) calendar days following commencement of the arbitration proceedings with respect thereto. Any decision made by the Board of Arbitration (either prior to or after the expiration of such thirty (30) calendar day period) shall be final, binding and conclusive on the Executive and the Company and entitled to be enforced to the fullest extent permitted by the law and entered in relation thereto, including but not limited to such party's attorneys' fees, if any, 6 and the expenses and fees of the member of the Board of Arbitration appointed by such party; provided, however, that the expenses and the fees of the third member of the Board of Arbitration and any other expenses of the Board of Arbitration not capable of being attributed to any one member shall be borne in equal parts by the Executive and the Company. 7 IN WITNESS WHEREOF, the Company has caused this Agreement to be exercised by its duly authorized officer, and the Executive has hereto signed the Agreement as of the date first above written. ANNALY MORTGAGE MANAGEMENT, INC. By: /s/ Wellington St. Claire ------------------------------------ Wellington St. Claire By: /s/ Jennifer Stephens ------------------------------------- Jennifer Stephens 8 -----END PRIVACY-ENHANCED MESSAGE-----