0000950136-01-501415.txt : 20011009
0000950136-01-501415.hdr.sgml : 20011009
ACCESSION NUMBER: 0000950136-01-501415
CONFORMED SUBMISSION TYPE: 424B5
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20010924
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: 424B5
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-58054
FILM NUMBER: 1743380
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
424B5
1
file001.txt
DEFINITIVE MATERIALS
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 33-58054
PROSPECTUS SUPPLEMENT September 20, 2001
(To Prospectus Dated April 24, 2001)
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14,000,000 SHARES
[ANNALY LOGO OMITTED]
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON STOCK
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We are offering 14,000,000 shares of our common stock, par value $0.01 per
share. We will receive all of the net proceeds from the sale of such common
stock.
Our common stock is listed on the New York Stock Exchange under the symbol
"NLY." The last reported sale price of our common stock on September 20, 2001
was $12.73 per share.
BEFORE BUYING ANY OF THESE SHARES OF OUR COMMON STOCK, YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 4 OF
THE ACCOMPANYING PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PER SHARE TOTAL
-------------------------------------- ----------- --------------
Public offering price $12.73 $178,220,000
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Underwriting discounts and commissions $ 0.73 $ 10,220,000
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Proceeds, before expenses, to us $12.00 $168,000,000
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We have granted the underwriters a 30-day option to purchase up to an
additional 2,100,000 shares of our common stock to cover over-allotments at
the public offering price per share, less the underwriting discounts and
commissions.
The underwriters are offering the shares of our common stock as described in
"Underwriting." Delivery of the shares will be made on or about September 26,
2001.
UBS WARBURG
ABN AMRO Rothschild LLC
Friedman Billings Ramsey
TUCKER ANTHONY SUTRO
CAPITAL MARKETS
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S-2
You should rely only on the information contained in or incorporated by
reference into this prospectus supplement and the accompanying prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
prospectus supplement and the accompanying prospectus is accurate only as of the
date such information is presented. Our business, financial condition, results
of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT
Forward-looking information...................... S-2
The Company...................................... S-3
The offering..................................... S-8
Use of proceeds.................................. S-8
Recent developments.............................. S-8
Capitalization................................... S-9
Selected financial data.......................... S-10
Underwriting..................................... S-11
Legal matters.................................... S-13
Experts.......................................... S-13
PROSPECTUS
About this prospectus.............................. 1
Forward-looking information ....................... 1
About Annaly Mortgage Management, Inc.............. 1
Risk factors....................................... 4
Use of proceeds.................................... 11
Ratio of earnings to fixed charges................. 11
Description of stock............................... 12
Federal income tax considerations.................. 17
Plan of distribution............................... 26
Experts............................................ 27
Legal matters...................................... 27
Where you can find more information................ 27
Incorporation of certain documents by reference.... 28
FORWARD-LOOKING INFORMATION
This prospectus supplement and the accompanying prospectus contain or
incorporate by reference certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond our control) may be identified by
reference to a future period or periods or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "anticipate,"
"continue," or similar terms or variations on those terms or the negative of
those terms. Actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to, changes in interest rates, changes in yield curve, changes in
prepayment rates, the availability of mortgage-backed securities for purchase,
the availability of financing and, if available, the terms of any financing. For
a discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, see "Risk
factors" in the accompanying prospectus. We do not undertake, and specifically
disclaim any obligation, to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
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S-2
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The following information may not contain all of the information that is
important to you. We encourage you to read this prospectus supplement and the
accompanying prospectus, as well as the information which is incorporated by
reference in the accompanying prospectus, in their entireties. You should
carefully consider the factors set forth under "Risk factors" on page 4 in the
accompanying prospectus before making an investment decision to purchase shares
of our common stock. All references to "we," "us" or the "Company" in this
prospectus supplement and the accompanying prospectus mean Annaly Mortgage
Management, Inc. Unless otherwise indicated, the information in this prospectus
supplement assumes that the underwriters do not exercise the over-allotment
option described in "Underwriting."
THE COMPANY
BACKGROUND
We own and manage a portfolio of mortgage-backed securities, including mortgage
pass-through certificates, collateralized mortgage obligations (or CMOs) and
other securities representing interests in or obligations backed by pools of
mortgage loans. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our mortgage-backed securities and the cost of borrowings to finance our
acquisition of mortgage-backed securities. We have elected and believe that we
are organized and have operated in a manner that enables us to be taxed as a
real estate investment trust (or REIT) under the Internal Revenue Code of 1986
(or Code). If we qualify for taxation as a REIT, we generally will not be
subject to federal income tax on our taxable income that is distributed to our
stockholders. Therefore, substantially all of our assets consist of qualified
REIT real estate assets (of the type described in Section 856(c)(6)(B) of the
Code). We are a Maryland corporation that commenced operations on February 18,
1997. We are self-advised and self-managed.
We have financed our purchases of mortgage-backed securities with the net
proceeds of equity offerings and borrowings under repurchase agreements whose
interest rates adjust based on changes in short-term market interest rates.
BUSINESS STRATEGY
Our principal business objective is to generate income for distribution to our
stockholders, primarily from the net cash flows on our mortgage-backed
securities. Our net cash flows result primarily from the difference between the
interest income on our mortgage-backed securities and our borrowing costs under
repurchase agreements. To achieve our business objective, our strategy is:
> to purchase mortgage-backed securities, the majority of which we expect to
have interest rates that adjust based on changes in short-term market
interest rates;
> to acquire mortgage-backed securities that we believe:
- we have the necessary expertise to evaluate and manage;
- we can readily finance;
- are consistent with our balance sheet guidelines and risk management
objectives; and
- provide attractive investment returns in a range of scenarios;
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S-3
THE COMPANY
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> to finance the purchase of mortgage-backed securities with the proceeds of
equity offerings and, to the extent permitted by our capital investment
policy, to utilize leverage to increase potential returns to stockholders
through borrowings (primarily under repurchase agreements);
> to attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
generally correspond to the interest rate adjustment indices and interest
rate adjustment periods of our adjustable-rate mortgage-backed securities;
> to seek to minimize prepayment risk by structuring a diversified portfolio
with a variety of prepayment characteristics and through other means; and
> to issue new equity or debt and increase the size of our balance sheet when
opportunities in the market for mortgage-backed securities are likely to
allow growth in earnings per share.
We believe we are able to obtain cost efficiencies through our
facilities-sharing arrangement with Fixed Income Discount Advisory Company (or
FIDAC) and by virtue of our management's experience in managing portfolios of
mortgage-backed securities and arranging collateralized borrowings. We will
strive to become even more cost-efficient over time by:
> seeking to raise additional capital from time to time in order to increase
our ability to invest in mortgage-backed securities;
> striving to lower our effective borrowing costs over time by seeking direct
funding with collateralized lenders, rather than using financial
intermediaries, and investigating the possibility of using commercial paper
and medium term note programs;
> improving the efficiency of our balance sheet structure by investigating
the possibility of using uncollateralized subordinated debt, preferred
stock and other forms of capital; and
> utilizing information technology to the fullest extent possible in our
business, including to improve our ability to monitor the performance of
our mortgage-backed securities and to lower our operating costs.
ASSETS
Under our capital investment policy, at least 75% of our total assets must be
comprised of high-quality mortgage-backed securities and short-term investments.
High quality mortgage-backed securities mean securities that (i) are rated
within one of the two highest rating categories by at least one of the
nationally recognized rating agencies, (ii) are unrated but are guaranteed by
the United States government or an agency of the United States government or
(iii) are unrated but we determine them to be of comparable credit quality to
rated high quality mortgage-backed securities.
The remainder of our assets, comprising not more than 25% of our total assets,
may consist of other qualified REIT real estate assets which are unrated or
rated below high quality securities but which are at least "investment grade"
(rated "BBB" or better by Standard & Poor's Corporation (or S&P) or the
equivalent by another nationally recognized rating agency) or, if not rated, we
determine them to be of comparable credit quality to an investment which is
rated "BBB" or better.
We may acquire mortgage-backed securities backed by single-family residential
mortgage loans as well as securities backed by loans on multi-family, commercial
or other real estate-related properties. To date, all of the mortgage-backed
securities that we have acquired have been backed by single-family residential
mortgage loans.
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S-4
THE COMPANY
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Our allocation of investments among the permitted investment types may vary from
time-to-time based on the evaluation by our Board of Directors of economic and
market trends and our perception of the relative values available from these
types of investments, except that in no event will our investments that are not
high quality securities exceed 25% of our total assets.
We acquire only those mortgage-backed securities that we believe we have the
necessary expertise to evaluate and manage, that are consistent with our balance
sheet guidelines and risk management objectives and that we believe we can
readily finance. Since we generally hold the mortgage-backed securities we
acquire until maturity, we generally do not seek to acquire assets whose
investment returns are attractive in only a limited range of interest rate
scenarios. We believe that future interest rates and mortgage prepayment rates
are very difficult to predict. Therefore, we seek to acquire mortgage-backed
securities which we believe will provide acceptable returns over a broad range
of interest rate and prepayment scenarios.
To date, all of the securities that we have acquired have been agency
mortgage-backed securities which, although not rated, carry an implied "AAA"
rating. Agency mortgage-backed securities are mortgage-backed securities for
which a government agency or federally chartered corporation, such as the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association or the Government National Mortgage Association, guarantees payments
of principal or interest on the securities. Agency mortgage-backed securities
consist of agency pass-through certificates and CMOs issued or guaranteed by an
agency. Pass-through certificates provide for a pass-through of the monthly
interest and principal payments made by the borrowers on the underlying mortgage
loans. CMOs divide a pool of mortgage loans into multiple tranches with
different principal and interest payment characteristics.
At June 30, 2001, approximately 55% of our mortgage-backed securities were
adjustable-rate pass-through certificates, approximately 27% of our
mortgage-backed securities were fixed-rate pass-through certificates or CMOs and
approximately 18% of our mortgage-backed securities were CMO floaters. Our
adjustable-rate pass-through certificates are backed by adjustable-rate mortgage
loans and have coupon rates which adjust over time, subject to interest rate
caps and lag periods, in conjunction with changes in short-term interest rates.
CMO floaters are tranches of mortgage-backed securities where the interest rate
adjusts in conjunction with changes in short-term interest rates. CMO floaters
may be backed by fixed-rate mortgage loans or, less often, by adjustable-rate
mortgage loans. In this prospectus supplement, except where the context
indicates otherwise, we use the term "adjustable-rate securities" or
"adjustable-rate mortgage-backed securities" to refer to adjustable-rate
pass-through certificates and CMO floaters. At June 30, 2001, the weighted
average yield on our portfolio of earning assets was 5.75%, and the weighted
average term to next rate adjustment on adjustable-rate securities was 26
months.
We intend to continue to invest in adjustable-rate pass-through certificates,
fixed-rate mortgage-backed securities and CMO floaters. Although we have not
done so to date, we may also invest on a limited basis in mortgage derivative
securities representing the right to receive interest only or a
disproportionately large amount of interest. We have not and will not invest in
real estate mortgage investment conduit residuals, other CMO residuals or any
mortgage-backed securities, such as inverse floaters, which have imbedded
leverage as part of their structural characteristics.
BORROWINGS
We attempt to structure our borrowings to have interest rate adjustment indices
and interest rate adjustment periods that, on an aggregate basis, correspond
generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. However, periodic rate adjustments
on our borrowings are generally more frequent than rate adjustments on our
mortgage-backed securities. At June 30, 2001, the weighted average cost of funds
for all of our borrowings was 4.06%, the weighted average original term to
maturity was 121 days and the weighted average term to next rate adjustment of
these borrowings was 87 days.
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S-5
THE COMPANY
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We generally expect to maintain a ratio of debt-to-equity of between 8:1 and
12:1, although the ratio may vary from time to time depending upon market
conditions and other factors that our management deems relevant. For purposes of
calculating this ratio, our equity is equal to the value of our investment
portfolio on a mark-to-market basis, less the book value of our obligations
under repurchase agreements and other collateralized borrowings. At June 30,
2001, our ratio of debt-to-equity was 9.96:1.
HEDGING
To the extent consistent with our election to qualify as a REIT, we may enter
into hedging transactions, including interest rate swaps, to attempt to protect
our mortgage-backed securities and related borrowings against the effects of
major interest rate changes. This hedging would be used to mitigate declines in
the market value of our mortgage-backed securities during periods of increasing
or decreasing interest rates and to limit or cap the rates on our borrowings.
These transactions would be entered into solely for the purpose of hedging
interest rate or prepayment risk and not for speculative purposes. To date, we
have not entered into any hedging transactions.
COMPLIANCE WITH REIT REQUIREMENTS AND INVESTMENT COMPANY ACT OF 1940
We constantly monitor our mortgage-backed securities and the income from these
securities and, to the extent we enter into hedging transactions in the future,
will monitor income from our hedging transactions as well, so as to ensure at
all times that we maintain our qualification as a REIT and our exempt status
under the Investment Company Act of 1940.
MANAGEMENT Our executive officers are:
> Michael A.J. Farrell, Chairman of the Board and Chief Executive Officer;
> Timothy J. Guba, President and Chief Operating Officer;
> Wellington J. St. Claire, Vice Chairman of the Board and Chief Investment
Officer;
> Kathryn F. Fagan, Chief Financial Officer and Treasurer; and
> Jennifer A. Stephens, Secretary and Investment Officer.
Messrs. Farrell and Guba and Ms. St. Claire have an average of 18 years
experience in the investment banking and investment management industries where,
in various capacities, they have each managed portfolios of mortgage-backed
securities, arranged collateralized borrowings and utilized hedging techniques
to mitigate interest rate and other risk within fixed-income portfolios. Ms.
Fagan is a certified public accountant and, prior to becoming our Chief
Financial Officer and Treasurer, served as Chief Financial Officer and
Controller of a publicly owned savings and loan association. Ms. Stephens has
worked for us since December 1996. It is currently anticipated that Mr. Guba
will step down as our President and Chief Operating Officer effective on
December 31, 2001 and that Mr. Farrell will assume these positions within the
Company. Since 1994, Messrs. Farrell and Guba and Ms. St. Claire have managed
FIDAC, a registered investment advisor which, at June 30, 2001, managed,
assisted in managing or supervised approximately $1.8 billion in gross assets
for a wide array of clients, of which, at that date, approximately $1.2 billion
was managed on a discretionary basis. Mr. Farrell is the sole stockholder of
FIDAC.
Management's duties on behalf of FIDAC's clients may create conflicts of
interest if members of management are presented with corporate opportunities
that may benefit both the Company and clients for which FIDAC acts as investment
advisor. In the event that an investment opportunity arises, the investment will
be allocated
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THE COMPANY
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to another entity or us by determining the entity or account for which the
investment is most suitable. In making this determination, our management will
consider the investment strategy and guidelines of each entity or account with
respect to acquisition of assets, leverage, liquidity and other factors which
management determines appropriate.
DISTRIBUTIONS
To maintain our qualification as a REIT, we must distribute all or substantially
all of our taxable income to our stockholders for each year (subject to certain
adjustments). We have done this in the past and intend to continue to do so in
the future. This will enable us to qualify for the tax benefits accorded to a
REIT under the Code.
The following table sets forth the cash distributions declared per share for our
two most recent fiscal quarters and our last two fiscal years.
CASH DISTRIBUTIONS
DECLARED PER SHARE
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2001
First Quarter ended March 31, 2001........................ $0.30
Second Quarter ended June 30, 2001........................ 0.40
2000
First Quarter ended March 31, 2000........................ $0.35
Second Quarter ended June 30, 2000........................ 0.30
Third Quarter ended September 30, 2000.................... 0.25
Fourth Quarter ended December 31, 2000.................... 0.25
1999
First Quarter ended March 31, 1999........................ $0.33
Second Quarter ended June 30, 1999........................ 0.35
Third Quarter ended September 30, 1999.................... 0.35
Fourth Quarter ended December 31, 1999.................... 0.35
We have not established a minimum distribution payment level and our ability to
pay distributions may be adversely affected for the reasons described under the
caption "Risk factors" in the accompanying prospectus. All distributions will be
made at the discretion of our Board of Directors and will depend on our
earnings, our financial condition, maintenance of our REIT status and such other
factors as our Board of Directors may deem relevant from time to time.
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S-7
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THE OFFERING
Common stock offered by us.......................... 14,000,000 shares
Common stock to be outstanding
after this offering................................. 58,685,134 shares(1)
New York Stock Exchange symbol...................... NLY
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(1) Based upon the number of shares outstanding as of September 20, 2001 and
does not include 813,154 shares of common stock issuable upon the
exercise of options granted pursuant to our long-term incentive plan.
USE OF PROCEEDS
We expect to receive approximately $167.7 million in net proceeds from the sale
of the shares of our common stock in this offering, or approximately $192.9
million if the underwriters' over-allotment option is exercised in full, after
payment of our expenses related to this offering and underwriting discounts and
commissions.
We intend to use the net proceeds of this offering to purchase mortgage-backed
securities. We then intend to increase our investment assets by borrowing
against these mortgage-backed securities and using the proceeds of such
borrowings to acquire additional mortgage-backed securities.
RECENT DEVELOPMENTS
On January 29, 2001, we issued 9,800,000 shares of our common stock in two
public offerings. We also issued an additional 1,350,000 shares of our common
stock pursuant to the underwriters' over-allotment option which was exercised on
February 22, 2001. We raised aggregate net proceeds of approximately $99,300,000
in these offerings. Pursuant to our stated investment policy, we applied the net
proceeds from the January 2001 offerings towards the purchase of additional
mortgage-backed securities.
On April 30, 2001, we issued 17,000,000 shares of our common stock in a public
offering. We also issued an additional 1,918,500 shares of our common stock
pursuant to the underwriters' over-allotment option which was exercised on May
1, 2001. We raised aggregate net proceeds of approximately $195,300,000 in this
offering. Pursuant to our stated investment policy, we applied the net proceeds
from the April 2001 offering towards the purchase of additional mortgage-backed
securities.
On June 20, 2001, we declared our second quarter 2001 common stock dividend of
$0.40 per share for distribution to stockholders of record on July 5, 2001. This
dividend was paid on July 27, 2001.
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S-8
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2001:
> on a historical basis; and
> as adjusted for the sale of 14,000,000 shares of our common stock at the
price set forth on the cover page of this prospectus supplement and the
application of the net proceeds of this offering as described in "Use of
proceeds."
The information set forth in the following table should be read in conjunction
with, and is qualified in its entirety by, the financial statements and the
notes thereto included in our Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2000, our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 and our Quarterly Report on Form 10-Q/A for the quarter ended
June 30, 2001, which are incorporated by reference into the accompanying
prospectus.
AS OF JUNE 30, 2001
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AS ADJUSTED FOR
HISTORICAL THIS OFFERING(1)
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(dollars in thousands)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share,
100,000,000 authorized, 44,676,744 shares
issued and outstanding on a historical
basis and 58,676,744 shares issued and
outstanding on an as adjusted basis
following this offering(2)................... $ 447 $ 587
Additional paid-in capital....................... 442,603 610,163
Accumulated other comprehensive loss............. 4,860 4,860
Retained earnings............................. 2,041 2,041
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Total stockholders' equity................... 449,951 617,651
---------- ----------
Total capitalization................... $ 449,951 $ 617,651
========= =========
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(1) After deducting underwriting discounts and commissions and estimated
offering expenses payable by us in this offering. Assumes (i) no exercise
of the underwriters' over-allotment option to purchase up to an
additional 2,100,000 shares of our common stock, (ii) net proceeds per
share of $12.00 with respect to the shares offered in this offering and
(iii) approximate aggregate expenses of $300,000.
(2) Excludes (i) 8,390 shares of common stock issued after June 30, 2001 upon
the exercise of options granted pursuant to our long-term incentive plan
and (ii) 813,514 shares of common stock with a weighted average exercise
price of $8.66 per share that are issuable upon the exercise of options
granted pursuant to our long-term incentive plan.
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S-9
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SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from our audited
financial statements for the period ended December 31, 1997 and the fiscal years
ended December 31, 1998, 1999 and 2000 and from our unaudited financial
statements for the six months ended June 30, 2000 and 2001. Our unaudited
interim results, in the opinion of management, reflect all adjustments
(consisting solely of normal recurring adjustments), which are necessary to
present fairly the results for the unaudited interim periods. Our unaudited
interim results for the six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2001. The following selected financial data should be read in
conjunction with the more detailed information contained in the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in our Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2000 and our Quarterly Report
on Form 10-Q/A for the quarter ended June 30, 2001, which are incorporated by
reference into the accompanying prospectus.
FOR THE PERIOD
FROM FEBRUARY 18, FOR THE YEARS FOR THE SIX MONTHS
1997 TO DECEMBER ENDED DECEMBER 31, ENDED JUNE 30,
31, --------------------------------------------------------------------
1997(1) 1998 1999 2000 2000(1) 2001(1)
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STATEMENT OF OPERATIONS DATA: (dollars in thousands, except for per share data)
Days in period........................... 317 365 365 366 182 181
Interest income.......................... $24,713 $89,986 $89,812 $109,750 $50,351 $107,224
Interest expense......................... 19,677 75,735 69,846 92,902 40,746 78,737
Net interest income...................... 5,036 14,251 19,966 16,848 9,605 28,487
Gain on sale of mortgage-backed
securities............................. 735 3,344 454 2,025 172 751
General and administrative expenses...... 852 2,106 2,281 2,286 1,090 2,313
-- --- ---- ----- ---- ----- ---- ----- ------- ---------
Net income............................... $4,919 $15,489 $18,139 $16,587 $8,687 $26,925
====== ======= ======= ======= ====== =======
Basic net income per average share....... $0.83 $1.22 $1.41 $1.18 $0.63 $0.89
Diluted net income per average share..... $0.80 $1.19 $1.35 $1.15 $0.61 $0.88
Dividends declared per average share..... $0.79 $1.21 $1.38 $1.15 $0.65 $0.70
BALANCE SHEET DATA:
Mortgage-backed securities, at fair
value.................................. $1,161,779 $1,520,289 $1,437,793 $1,978,219 $1,450,852 $5,572,288
Total assets............................. 1,167,740 1,527,352 1,491,322 2,035,029 1,470,773 5,610,318
Repurchase agreements.................... 918,869 1,280,510 1,338,296 1,628,359 1,349,682 4,481,816
Total liabilities........................ 1,032,654 1,401,481 1,388,050 1,899,386 1,360,334 5,160,368
Stockholders' equity..................... 135,086 125,871 103,272 135,642 110,440 449,951
Number of shares of common stock
outstanding............................ 12,713,900 12,648,424 13,581,316 14,522,978 14,208,007 44,676,744
OTHER DATA:
Average total assets..................... $476,855 $1,499,875 $1,473,765 $1,652,459 $1,456,436 $3,722,809
Average earning assets................... 448,306 1,461,791 1,461,254 1,564,491 1,462,216 3,379,476
Average borrowings....................... 404,140 1,360,040 1,350,230 1,449,999 1,345,160 3,195,340
Average equity........................... 61,096 131,265 117,685 117,727 107,911 321,196
Yield on interest earning assets......... 6.34% 6.16% 6.15% 7.02% 6.89% 6.35
Cost of funds on interest bearing 5.61% 5.57% 5.17% 6.41% 6.05% 4.93
liabilities............................
Interest rate spread..................... 0.73% 0.59% 0.98% 0.61% 0.84% 1.42
ANNUALIZED FINANCIAL RATIOS:
Net interest margin (net interest
income/average total assets)....... 1.22% 0.95% 1.35% 1.02% 1.32% 1.53
General and administrative expenses as a
percentage of average assets....... 0.21% 0.14% 0.15% 0.14% 0.15% 0.12
General and administrative expenses as a
percentage of average equity....... 1.61% 1.60% 1.94% 1.94% 2.02% 1.44
Return on average assets................. 1.19% 1.03% 1.23% 1.00% 1.20% 1.45
Return on average equity................. 9.27% 11.80% 15.41% 14.09% 16.10% 16.77
------------------------
(1) Ratios for the 317-day period ended December 31, 1997 and the six months
ended June 30, 2000 and 2001 have been annualized.
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S-10
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UNDERWRITING
We and the underwriters for this offering named below have entered into an
underwriting agreement concerning the shares of our common stock being offered.
The underwriters' obligations are several and not joint, which means that each
underwriter is required to purchase a specified number of shares, but is not
responsible for the commitment of any other underwriter to purchase shares.
Subject to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of shares of common
stock set forth opposite its name below.
UNDERWRITERS NUMBER OF SHARES
---------------------------------------------------------------------------
UBS Warburg LLC ............................................. 6,370,000
ABN AMRO Rothschild LLC ..................................... 2,210,000
Friedman, Billings, Ramsey & Co., Inc. ...................... 2,210,000
Tucker Anthony Incorporated ................................. 2,210,000
A.G. Edwards & Sons, Inc. ................................... 200,000
First Union Securities, Inc. ................................ 200,000
Legg Mason Wood Walker, Incorporated ........................ 200,000
Flagstone Securities, LLC ................................... 100,000
Jolson Merchant Partners .................................... 100,000
Stifel, Nicolaus & Company, Incorporated .................... 100,000
Wedbush Morgan Securities Inc. .............................. 100,000
--------
Total............................................... 14,000,000
==========
The underwriting agreement provides that the obligations of the underwriters are
conditional and may be terminated at their discretion based on their assessment
of the state of the financial markets. The obligations of the underwriters may
also be terminated upon the occurrence of the events specified in the
underwriting agreement. The underwriters are severally committed to purchase all
of the common stock being offered if any shares are purchased, other than those
covered by the over-allotment option described below.
We have granted the underwriters an option to purchase up to 2,100,000
additional shares of our common stock at the public offering price, less the
underwriting discounts and commissions, set forth on the cover page of this
prospectus supplement, to cover over-allotments, if any. This option is
exercisable for a period of 30 days. If the underwriters exercise their
over-allotment option, the underwriters have severally agreed, subject to
conditions, to purchase shares in approximately the same proportion as set forth
in the table above.
The following table provides information regarding the per share and total
underwriting discounts and commissions that we will pay to the underwriters.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase up to an additional 2,100,000 shares of our
common stock.
NO EXERCISE FULL EXERCISE
------------------------------------------------------------------------------
Per share........................... $ 0.73 $ 0.73
Total.......................... $10,220,000 $11,753,000
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $300,000.
The underwriters propose to offer the common stock directly to the public
initially at the offering price set forth on the cover page of this prospectus
supplement. The underwriters may offer the common stock to securities dealers at
that price less a concession not in excess of $0.44 per share. Securities
dealers may
--------------------------------------------------------------------------------
S-11
UNDERWRITING
--------------------------------------------------------------------------------
reallow a concession not in excess of $0.10 per share on sales to certain other
brokers or dealers. The underwriters reserve the right to reject any order for
the purchase of shares. If all of the shares are not sold at the public offering
price, the underwriters may change the offering price and other selling terms.
We have agreed in the underwriting agreement to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 and to contribute to payments that the underwriters may
be required to make in respect thereof.
We, and each of our directors and executive officers, have agreed with the
underwriters that for a period of 90 days following the date of this prospectus
supplement that, without the prior written consent of UBS Warburg LLC, neither
we nor our directors and executive officers will offer, sell, contract to sell,
hedge or otherwise dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exchangeable for shares of our
common stock.
The underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934. Over-allotment
transactions involve syndicate sales in excess of the offering size, which
create a syndicate short position. Stabilizing transactions permit bids to
purchase the common stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the underwriters
to reclaim a selling concession from a syndicate member when the common stock
originally sold by such syndicate member is purchased in a stabilizing
transaction or syndicate covering transaction to cover syndicate short
positions. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. Neither we nor the
underwriters make any representation or prediction as to the effect that the
transactions described above may have on the price of our common stock. These
transactions may be effected on the New York Stock Exchange or otherwise and, if
commenced, may be discontinued at any time.
In the ordinary course of their business, the underwriters and/or their
affiliates have in the past performed, and may continue to perform, investment
banking, broker dealer, lending, financial advisory or other services for us for
which they have received, or may receive, customary compensation. In addition,
we have secured repurchase credit facilities with UBS Warburg LLC and ABN AMRO
Bank N.V., an affiliate of ABN AMRO Rothschild LLC, and one of our affiliates
manages, in part, the portfolio of FBR Asset Investment Corporation, an
affiliate of Friedman, Billings, Ramsey & Co., Inc.
--------------------------------------------------------------------------------
S-12
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LEGAL MATTERS
In addition to the legal opinions referred to under "Legal Matters" in the
accompanying prospectus, the legality of the shares of our common stock will be
passed upon for us by McKee Nelson LLP, Washington, D.C. Certain legal matters
relating to this offering will be passed upon for the underwriters by Clifford
Chance Rogers & Wells LLP, New York, New York.
EXPERTS
The financial statements incorporated by reference in the accompanying
prospectus from our Annual Report on Form 10-K/A for the year ended December 31,
2000 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated therein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
--------------------------------------------------------------------------------
S-13
PROSPECTUS
$420,000,000
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON STOCK AND PREFERRED STOCK
By this prospectus, we may offer, from time to time, shares of our:
o common stock;
o preferred stock; or
o any combination of the foregoing.
We will provide specific terms of each issuance of these securities in
supplements to this prospectus. You should read this prospectus and any
supplement carefully before you decide to invest.
This prospectus may not be used to consummate sales of these securities
unless it is accompanied by a prospectus supplement.
The New York Stock Exchange lists our common stock under the symbol "NLY."
To ensure we qualify as a real estate investment trust, no person may own
more than 9.8% of the outstanding shares of any class of our common stock or our
preferred stock, unless our Board of Directors waives this limitation.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
We may sell these securities to or through underwriters, dealers or agents,
or we may sell the securities directly to investors on our own behalf.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is April 24, 2001
[THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
PAGE
----
ABOUT THIS PROSPECTUS........................................................1
FORWARD-LOOKING INFORMATION..................................................1
ABOUT ANNALY MORTGAGE MANAGEMENT, INC........................................1
RISK FACTORS.................................................................4
USE OF PROCEEDS.............................................................11
RATIO OF EARNINGS TO FIXED CHARGES..........................................11
DESCRIPTION OF STOCK........................................................12
FEDERAL INCOME TAX CONSIDERATIONS...........................................17
PLAN OF DISTRIBUTION........................................................26
EXPERTS.....................................................................27
LEGAL MATTERS...............................................................27
WHERE YOU CAN FIND MORE INFORMATION.........................................27
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................28
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (or SEC) using a "shelf" registration
process. Under this process, we may offer and sell any combination of common
stock and preferred stock in one or more offerings for total proceeds of up to
$420,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we offer to sell securities, we will provide
a supplement to this prospectus that will contain specific information about the
terms of that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. It is important for you to consider
the information contained in this prospectus and any prospectus supplement
together with additional information described under the heading "Where You Can
Find More Information."
FORWARD-LOOKING INFORMATION
This prospectus contains or incorporates by reference certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements which are based on various assumptions (some of which
are beyond our control) may be identified by reference to a future period or
periods or by the use of forward-looking terminology, such as "may," "will,"
"believe," "expect," "anticipate," "continue," or similar terms or variations on
those terms or the negative of those terms. Actual results could differ
materially from those set forth in forward-looking statements due to a variety
of factors, including, but not limited to, changes in interest rates, changes in
yield curve, changes in prepayment rates, the availability of mortgage-backed
securities for purchase, the availability of financing and, if available, the
terms of any financing. For a discussion of the risks and uncertainties which
could cause actual results to differ from those contained in the forward-looking
statements, see "Risk Factors" in this prospectus. We do not undertake, and
specifically disclaim any obligation, to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
ABOUT ANNALY MORTGAGE MANAGEMENT, INC.
GENERAL
We own, manage and finance a portfolio of mortgage-backed securities,
including mortgage pass-through certificates, collateralized mortgage
obligations (or CMOs) and other securities representing interests in or
obligations backed by pools of mortgage loans. Our principal business objective
is to generate net income for distribution to our stockholders from the spread
between the interest income on our mortgage-backed securities and the cost of
borrowings to finance our acquisition of mortgage-backed securities. We have
elected and believe that we are organized and have operated in a manner that
enables us to be taxed as a real estate investment trust (or REIT) under the
Internal Revenue Code of 1986, as amended (or the Code). If we qualify for
taxation as a REIT, we generally will not be subject to federal income tax on
our taxable income that is distributed to our stockholders. Therefore,
substantially all of our assets consist of qualified REIT real estate assets (of
the type described in Section 856(c)(6)(B) of the Code). We are a Maryland
corporation that commenced operations on February 18, 1997. We are self-advised
and self-managed.
We have financed our purchases of mortgage-backed securities with the net
proceeds of equity offerings and borrowings under repurchase agreements whose
interest rates adjust based on changes in short-term market interest rates.
ASSETS
On December 31, 2000, all of the mortgage-backed securities we owned were
"agency certificates." Agency certificates are mortgage-backed securities where
a government agency or federally chartered
1
corporation, such as FHLMC, FNMA or GNMA, guarantees payments of principal or
interest on the certificates. Although not rated, these agency certificates
carry an implied "AAA" rating.
o Freddie Mac is a common abbreviation that refers to the Federal Home
Loan Mortgage Corporation, a privately-owned, government-sponsored
enterprise created pursuant to an act of Congress.
o Fannie Mae is a common abbreviation that refers to the Federal National
Mortgage Association, a privately-owned, federally-chartered
corporation organized under an act of Congress.
o Ginnie Mae is a common abbreviation that refers to the Government
National Mortgage Association, a wholly-owned instrumentality of the
United States within the Department of Housing and Urban Development.
Even though we have only acquired "AAA" securities so far, pursuant to our
capital investment policy, we have the ability to acquire securities of lower
credit quality. Under our policy:
o 75% of our investments must have a "AA" or higher rating by Standard &
Poor's Corporation (or S&P), an equivalent rating by another nationally
recognized rating organization or our management must determine that
the investments are of comparable credit quality to investments with
these ratings.
o the remaining 25% of our investments must have a "BBB" or higher rating
by S&P, or an equivalent rating by another nationally recognized rating
organization, or our management must determine that the investments are
of comparable credit quality to investments with these ratings.
Securities with ratings of "BBB" or higher are commonly referred to as
"investment grade" securities.
o we seek to have a minimum weighted average rating for our portfolio of
at least "A" by S&P.
We acquire both adjustable-rate and fixed-rate mortgage-backed securities.
Adjustable-rate mortgage-backed securities have interest rates that adjust
periodically based upon changes in an objective index of short-term interest
rates, such as London Interbank Offered Rate (or LIBOR) or a Treasury index. On
December 31, 2000, approximately 74% of our mortgage-backed securities were
adjustable-rate securities and approximately 26% were fixed-rate securities.
BORROWINGS
We borrow money primarily through repurchase agreements using our
mortgage-backed securities as collateral. We generally expect to maintain a
ratio of debt-to-equity of between 8:1 to 12:1, although the ratio may vary from
time to time depending upon market conditions and other factors our management
deems relevant. At December 31, 2000, our debt-to-equity ratio was 12:1.
We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. However, the interest rates on our
borrowings generally adjust more frequently than the interest rates on our
mortgage-backed securities. In addition, our fixed-rate mortgage-backed
securities do not provide for any periodic rate adjustments. Accordingly, we
could experience net losses or a decrease in net profits in a period of rising
interest rates.
STOCK LISTING
Our common stock is traded on the New York Stock Exchange under the symbol
"NLY."
2
PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER
Our principal executive offices are located at 12 East 41st Street, Suite
700, New York, New York 10017. Our telephone number is (212) 696-0100.
3
RISK FACTORS
An investment in our stock involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks described in
this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition and results of operations could be
materially adversely affected. If this were to occur, the trading price of our
common stock could decline significantly and you may lose all or part of your
investment.
IF THE INTEREST PAYMENTS ON OUR BORROWINGS INCREASE RELATIVE TO THE INTEREST WE
EARN ON OUR MORTGAGE-BACKED SECURITIES, IT MAY ADVERSELY AFFECT OUR
PROFITABILITY
We earn money based upon the spread between the interest payments we earn
on our mortgage-backed securities and the interest payments we must make on our
borrowings. If the interest payments on our borrowings increase relative to the
interest we earn on our mortgage-backed securities, our profitability may be
adversely affected.
The interest payments on our borrowings may increase relative to the
interest we earn on our adjustable-rate mortgage-backed securities for various
reasons discussed in this section.
o DIFFERENCES IN TIMING OF INTEREST RATE ADJUSTMENTS ON OUR MORTGAGE-BACKED
SECURITIES AND OUR BORROWINGS MAY ADVERSELY AFFECT OUR PROFITABILITY
We rely primarily on short-term borrowings to acquire mortgage-backed
securities with long-term maturities. Accordingly, if short-term interest rates
increase, this may adversely affect our profitability.
Most of the mortgage-backed securities we acquire are adjustable-rate
securities. This means that their interest rates may vary over time based upon
changes in an objective index, such as:
o LIBOR. The interest rate that banks in London offer for deposits in
London of U.S. dollars.
o Treasury Index. A monthly or weekly average yield of benchmark U.S.
Treasury securities, as published by the Federal Reserve Board.
o CD Rate. The weekly average of secondary market interest rates on
six-month negotiable certificates of deposit, as published by the
Federal Reserve Board.
These indices generally reflect short-term interest rates. On December 31,
2000, approximately 74% of our mortgage-backed securities were adjustable-rate
securities.
The interest rates on our borrowings similarly vary with changes in an
objective index. However, the interest rates on our borrowings generally adjust
more frequently than the interest rates on our adjustable-rate mortgage-backed
securities. For example, on December 31, 2000, our adjustable-rate
mortgage-backed securities had a weighted average term to next rate adjustment
of 15 months, while our borrowings had a weighted average term to next rate
adjustment of 29 days. Accordingly, in a period of rising interest rates, we
could experience a decrease in net income or a net loss because the interest
rates on our borrowings adjust faster than the interest rates on our
adjustable-rate mortgage-backed securities.
o INTEREST RATE CAPS ON OUR MORTGAGE-BACKED SECURITIES MAY ADVERSELY AFFECT
OUR PROFITABILITY
Our adjustable-rate mortgage-backed securities are typically subject to
periodic and lifetime interest rate caps. Periodic interest rate caps limit the
amount an interest rate can increase during any given period. Lifetime interest
rate caps limit the amount an interest rate can increase through maturity of a
mortgage-backed security. Our borrowings are not subject to similar
restrictions. Accordingly, in a period of rapidly increasing
4
interest rates, we could experience a decrease in net income or a net loss
because the interest rates on our borrowings could increase without limitation
while the interest rates on our adjustable-rate mortgage-backed securities would
be limited by caps.
o BECAUSE WE ACQUIRE FIXED-RATE SECURITIES, AN INCREASE IN INTEREST RATES MAY
ADVERSELY AFFECT OUR PROFITABILITY
While the majority of our investments consist of adjustable-rate
mortgage-backed securities, we also invest in fixed-rate mortgage-backed
securities. In a period of rising interest rates, our interest payments could
increase while the interest we earn on our fixed-rate mortgage-backed securities
would not change. This would adversely affect our profitability. On December 31,
2000, approximately 26% of our mortgage-backed securities were fixed-rate
securities.
AN INCREASE IN PREPAYMENT RATES MAY ADVERSELY AFFECT OUR PROFITABILITY
The mortgage-backed securities we acquire are backed by pools of mortgage
loans. We receive payments, generally, from the payments that are made on these
underlying mortgage loans. When borrowers prepay their mortgage loans at rates
that are faster than expected, this results in prepayments that are faster than
expected on the mortgage-backed securities. These faster than expected
prepayments may adversely affect our profitability.
We often purchase mortgage-backed securities that have a higher interest
rate than the market interest rate at the time. In exchange for this higher
interest rate, we must pay a premium over the market value to acquire the
security. In accordance with accounting rules, we amortize this premium over the
term of the mortgage-backed security. If the mortgage-backed security is prepaid
in whole or in part prior to its maturity date, however, we must expense the
premium that was prepaid at the time of the prepayment. This adversely affects
our profitability. On December 31, 2000, approximately 87% of the
mortgage-backed securities we owned were acquired at a premium.
Prepayment rates generally increase when interest rates fall and decrease
when interest rates rise, but changes in prepayment rates are difficult to
predict. Prepayment rates also may be affected by conditions in the housing and
financial markets, general economic conditions and the relative interest rates
on fixed-rate and adjustable-rate mortgage loans.
We may seek to reduce prepayment risk by acquiring mortgage-backed
securities at a discount. If a discounted security is prepaid in whole or in
part prior to its maturity date, we will earn income equal to the amount of the
remaining discount. This will improve our profitability if the discounted
securities are prepaid faster than expected. On December 31, 2000, approximately
13% of the mortgage-backed securities we owned were acquired at a discount.
We can also acquire mortgage-backed securities that are less affected by
prepayments. For example, we can acquire CMOs, a type of mortgage-backed
security. CMOs divide a pool of mortgage loans into multiple tranches that allow
for shifting of prepayment risks from slower-paying tranches to faster-paying
tranches. This is in contrast to pass-through or pay-through mortgage-backed
securities, where all investors share equally in all payments, including all
prepayments. As discussed below, the Investment Company Act of 1940 (or the
Investment Company Act) imposes restrictions on our purchase of CMOs. On
December 31, 2000, approximately 24% of our mortgage-backed securities were CMOs
and approximately 76% of our mortgage-backed securities were pass-through or
pay-through securities.
While we seek to minimize prepayment risk to the extent practical, in
selecting investments we must balance prepayment risk against other risks and
the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.
5
AN INCREASE IN INTEREST RATES MAY ADVERSELY AFFECT OUR BOOK VALUE
Increases in interest rates may negatively affect the market value of our
mortgage-backed securities. Our fixed-rate securities, generally, are more
negatively affected by these increases. In accordance with accounting rules, we
reduce our book value by the amount of any decrease in the market value of our
mortgage-backed securities.
OUR STRATEGY INVOLVES SIGNIFICANT LEVERAGE
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1,
although our ratio may at times be above or below this amount. We incur this
leverage by borrowing against a substantial portion of the market value of our
mortgage-backed securities. By incurring this leverage, we can enhance our
returns. However, this leverage, which is fundamental to our investment
strategy, also creates significant risks.
o OUR LEVERAGE MAY CAUSE SUBSTANTIAL LOSSES
Because of our significant leverage, we may incur substantial losses if our
borrowing costs increase. Our borrowing costs may increase for any of the
following reasons:
o short-term interest rates increase;
o the market value of our mortgage-backed securities decreases;
o interest rate volatility increases; or
o the availability of financing in the market decreases.
o OUR LEVERAGE MAY CAUSE MARGIN CALLS AND DEFAULTS AND FORCE US TO SELL
ASSETS UNDER ADVERSE MARKET CONDITIONS
Because of our leverage, a decline in the value of our mortgage-backed
securities may result in our lenders initiating margin calls. A margin call
means that the lender requires us to pledge additional collateral to
re-establish the ratio of the value of the collateral to the amount of the
borrowing. Our fixed-rate mortgage-backed securities generally are more
susceptible to margin calls as increases in interest rates tend to more
negatively affect the market value of fixed-rate securities.
If we are unable to satisfy margin calls, our lenders may foreclose on our
collateral. This could force us to sell our mortgage-backed securities under
adverse market conditions. Additionally, in the event of our bankruptcy, our
borrowings, which are generally made under repurchase agreements, may qualify
for special treatment under the Bankruptcy Code. This special treatment would
allow the lenders under these agreements to avoid the automatic stay provisions
of the Bankruptcy Code and to liquidate the collateral under these agreements
without delay.
o LIQUIDATION OF COLLATERAL MAY JEOPARDIZE OUR REIT STATUS
To continue to qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to liquidate
our mortgage-backed securities, we may be unable to comply with these
requirements, ultimately jeopardizing our status as a REIT. For further
discussion of these asset and source of income requirements and the consequences
of our failure to continue to qualify as a REIT, please see the "Federal Income
Tax Considerations" section of this prospectus.
6
o WE MAY EXCEED OUR TARGET LEVERAGE RATIOS
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1.
However, we are not required to stay within this leverage ratio. If we exceed
this ratio, the adverse impact on our financial condition and results of
operations from the types of risks described in this section would likely be
more severe.
o WE MAY NOT BE ABLE TO ACHIEVE OUR OPTIMAL LEVERAGE
We use leverage as a strategy to increase the return to our investors.
However, we may not be able to achieve our desired leverage for any of the
following reasons:
o we determine that the leverage would expose us to excessive risk;
o our lenders do not make funding available to us at acceptable rates; or
o our lenders require that we provide additional collateral to cover our
borrowings.
o WE MAY INCUR INCREASED BORROWING COSTS WHICH WOULD ADVERSELY AFFECT OUR
PROFITABILITY
Currently, all of our borrowings are collateralized borrowings in the form
of repurchase agreements. If the interest rates on these repurchase agreements
increase, it would adversely affect our profitability.
Our borrowing costs under repurchase agreements generally correspond to
short-term interest rates such as LIBOR or a short-term Treasury index, plus or
minus a margin. The margins on these borrowings over or under short-term
interest rates may vary depending upon:
o the movement of interest rates;
o the availability of financing in the market; or
o the value and liquidity of our mortgage-backed securities.
IF WE ARE UNABLE TO RENEW OUR BORROWINGS AT FAVORABLE RATES, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED
Since we rely primarily on short-term borrowings, our ability to achieve
our investment objectives depends not only on our ability to borrow money in
sufficient amounts and on favorable terms, but also on our ability to renew or
replace on a continuous basis our maturing short-term borrowings. If we are not
able to renew or replace maturing borrowings, we would have to sell our assets
under possibly adverse market conditions.
WE HAVE NOT USED DERIVATIVES TO MITIGATE OUR INTEREST RATE AND PREPAYMENT RISKS
Our policies permit us to enter into interest rate swaps, caps and floors
and other derivative transactions to help us mitigate our interest rate and
prepayment risks described above. However, we have determined in the past that
the cost of these transactions outweighs the benefits. In addition, we will not
enter into derivative transactions if we believe they will jeopardize our status
as a REIT. If we decide to enter into derivative transactions in the future,
these transactions may mitigate our interest rate and prepayment risks but
cannot insulate us from these risks.
OUR INVESTMENT STRATEGY MAY INVOLVE CREDIT RISK
We may incur losses if there are payment defaults under our mortgage-backed
securities.
7
To date, all of our mortgage-backed securities have been agency
certificates which, although not rated, carry an implied "AAA" rating. Agency
certificates are mortgage-backed securities where Freddie Mac, Fannie Mae or
Ginnie Mae guarantees payments of principal or interest on the certificates.
Even though we have only acquired "AAA" securities so far, pursuant to our
capital investment policy, we have the ability to acquire securities of lower
credit quality. Under our policy:
o 75% of our investments must have a "AA" or higher rating by S&P, an
equivalent rating by a similar nationally recognized rating
organization or our management must determine that the investments are
of comparable credit quality to investments with these ratings.
o the remaining 25% of our investments must have a "BBB" or higher rating
by S&P, or an equivalent rating by a similar nationally recognized
rating organization, or our management must determine that the
investments are of comparable credit quality to investments with these
ratings. Securities with ratings of "BBB" or higher are commonly
referred to as "investment grade" securities.
o we seek to have a minimum weighted average rating for our portfolio of
at least "A" by S&P.
If we acquire mortgage-backed securities of lower credit quality, we may
incur losses if there are defaults under those mortgage-backed securities or if
the rating agencies downgrade the credit quality of those mortgage-backed
securities.
WE HAVE NOT ESTABLISHED A MINIMUM DIVIDEND PAYMENT LEVEL
We intend to pay quarterly dividends and to make distributions to our
stockholders in amounts such that all or substantially all of our taxable income
in each year (subject to certain adjustments) is distributed. This will enable
us to qualify for the tax benefits accorded to a REIT under the Code. We have
not established a minimum dividend payment level and our ability to pay
dividends may be adversely affected for the reasons described in this section.
All distributions will be made at the discretion of our Board of Directors and
will depend on our earnings, our financial condition, maintenance of our REIT
status and such other factors as our Board of Directors may deem relevant from
time to time.
BECAUSE OF COMPETITION, WE MAY NOT BE ABLE TO ACQUIRE MORTGAGE-BACKED SECURITIES
AT FAVORABLE YIELDS
Our net income depends, in large part, on our ability to acquire
mortgage-backed securities at favorable spreads over our borrowing costs. In
acquiring mortgage-backed securities, we compete with other REITs, investment
banking firms, savings and loan associations, banks, insurance companies, mutual
funds, other lenders and other entities that purchase mortgage-backed
securities, many of which have greater financial resources than us. As a result,
in the future, we may not be able to acquire sufficient mortgage-backed
securities at favorable spreads over our borrowing costs.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We are dependent on the efforts of our key officers and employees,
including Michael A. J. Farrell, Chairman of the Board of Directors and Chief
Executive Officer, Timothy J. Guba, President and Chief Operating Officer,
Wellington J. St. Claire, Vice Chairman and Chief Investment Officer, Kathryn F.
Fagan, Chief Financial Officer and Treasurer, and Jennifer A. Stephens,
Secretary and Investment Officer. The loss of any of their services could have
an adverse effect on our operations. Although we have employment agreements with
each of them, we cannot assure you they will remain employed with us.
8
SOME OF OUR OFFICERS AND EMPLOYEES HAVE POTENTIAL CONFLICTS OF INTEREST
Some of our officers and employees have potential conflicts of interest
with us. The material potential conflicts are as follows:
o OUR OFFICERS AND EMPLOYEES MANAGE ASSETS FOR OTHER CLIENTS
Messrs. Farrell and Guba, Ms. St. Claire and other officers and employees
are actively involved in managing mortgage-backed securities and other fixed
income assets for institutional clients through Fixed Income Discount Advisory
Company (or FIDAC). FIDAC is a registered investment adviser that on December
31, 2000 managed, assisted in managing or supervised approximately $1.2 billion
in gross assets for a wide array of clients. Of that amount, FIDAC managed
approximately $850 million of those gross assets on a discretionary basis. The
U.S. Dollar Floating Rate Fund is a fund managed by FIDAC. Mr. Farrell is a
Director of the Floating Rate Fund. These officers will continue to perform
services for FIDAC, the institutional clients and the Floating Rate Fund. Mr.
Farrell is also the sole shareholder of FIDAC.
These responsibilities may create conflicts of interest for these officers
and employees if they are presented with corporate opportunities that may
benefit us and the institutional clients and the Floating Rate Fund. Our
officers allocate investments among Annaly Mortgage Management, Inc. (or
Annaly), the institutional clients and the Floating Rate Fund by determining the
entity or account for which the investment is most suitable. In making this
determination, our officers consider the investment strategy and guidelines of
each entity or account with respect to acquisition of assets, leverage,
liquidity and other factors that our officers determine appropriate.
o SOME OF OUR DIRECTORS AND OFFICERS HAVE OWNERSHIP INTERESTS IN OUR
AFFILIATES THAT CREATE POTENTIAL CONFLICTS OF INTEREST
Mr. Farrell, our Chairman and Chief Executive Officer, and our other
directors and officers, have direct and indirect ownership interests in our
affiliates that create potential conflicts of interest.
During 1998, we made an initial investment of $49,980 in Annaly
International Mortgage Management, Inc. (or Annaly International). Annaly
International explores business opportunities overseas, including the
origination of mortgages. Annaly International has not commenced operations
beyond this exploratory stage. We own 33% of the equity of Annaly International
in the form of non-voting securities. The remaining equity of Annaly
International is owned by FIDAC, Michael A.J. Farrell, Timothy J. Guba, our
President and Chief Operating Officer, Wellington J. St. Claire, our Vice
Chairman and Chief Investment Officer, Kathryn F. Fagan, our Chief Financial
Officer and Treasurer, and other persons.
During 1998, Annaly International made an initial investment of $20,400 in
Annaly.com, Inc. (or Annaly.com). Annaly.com explores opportunities to acquire
or originate mortgages in the United States. Annaly.com has established a Web
site at http://www.annaly.com but has not commenced the acquisition or
origination of mortgages. Annaly International owns 51% of the equity of
Annaly.com. The remaining equity of Annaly.com is owned by FIDAC.
Our management allocates rent and other office expenses between our
affiliates and us. These allocations may create conflicts of interest. Our
management currently allocates rent and other expenses 90% to Annaly and 10% to
FIDAC. Our audit committee must approve any change in these allocation
percentages. In addition, we may enter into agreements, such as technology
sharing or research agreements, with our affiliates in the future. These
agreements would present potential conflicts of interest. Our management will
obtain prior approval of our audit committee prior to entering into any
agreements with our affiliates.
9
WE AND OUR SHAREHOLDERS ARE SUBJECT TO CERTAIN TAX RISKS
o OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES
We believe that since 1997 we have qualified for taxation as a REIT for
federal income tax purposes. We plan to continue to meet the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. The determination that we are a REIT requires an analysis of
various factual matters and circumstances that may not be totally within our
control. For example, to qualify as a REIT, at least 75% of our gross income
must come from real estate sources and 95% of our gross income must come from
real estate sources and certain other sources that are itemized in the REIT tax
laws. We are also required to distribute to stockholders at least 90% (95% with
respect to taxable years beginning before January 1, 2001) of our REIT taxable
income (excluding capital gains). Even a technical or inadvertent mistake could
jeopardize our REIT status. Furthermore, Congress and the IRS might make changes
to the tax laws and regulations, and the courts might issue new rulings that
make it more difficult or impossible for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless the IRS granted us relief under certain
statutory provisions, we would remain disqualified as a REIT for four years
following the year we first fail to qualify. If we fail to qualify as a REIT, we
would have to pay significant income taxes and would therefore have less money
available for investments or for distributions to our stockholders. This would
likely have a significant adverse effect on the value of our securities. In
addition, the tax law would no longer require us to make distributions to our
stockholders.
o WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS
As a REIT, we must distribute 90% (95% with respect to taxable years
beginning before January 1, 2001) of our annual taxable income. The required
distribution limits the amount we have available for other business purposes,
including amounts to fund our growth. Also, it is possible that because of the
differences between the time we actually receive revenue or pay expenses and the
period we report those items for distribution purposes, we may have to borrow
funds on a short-term basis to meet the 90% distribution requirement.
o WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES
Even if we qualify as a REIT, we may be subject to certain federal, state
and local taxes on our income and property. Any of these taxes would reduce our
operating cash flow.
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT US
We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act. If we fail to qualify for
this exemption, our ability to use leverage would be substantially reduced and
we would be unable to conduct our business as described in this prospectus.
The Investment Company Act exempts entities that are primarily engaged in
the business of purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate. Under the current interpretation of the SEC staff,
in order to qualify for this exemption, we must maintain at least 55% of our
assets directly in these qualifying real estate interests. Mortgage-backed
securities that do not represent all of the certificates issued with respect to
an underlying pool of mortgages may be treated as securities separate from the
underlying mortgage loans and, thus, may not qualify for purposes of the 55%
requirement. Therefore, our ownership of these mortgage-backed securities is
limited by the provisions of the Investment Company Act. In addition, in meeting
the 55% requirement under the Investment Company Act, we treat as qualifying
interests mortgage-backed securities issued with respect to an underlying pool
as to which we hold all issued certificates. If the SEC or its staff adopts a
contrary interpretation, we could be required to sell a
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substantial amount of our mortgage-backed securities, under potentially adverse
market conditions. Further, in order to insure that we at all times qualify for
the exemption from the Investment Company Act, we may be precluded from
acquiring mortgage-backed securities whose yield is somewhat higher than the
yield on mortgage-backed securities that could be purchased in a manner
consistent with the exemption. The net effect of these factors may be to lower
our net income.
ISSUANCES OF LARGE AMOUNTS OF OUR STOCK COULD CAUSE OUR PRICE TO DECLINE
As of March 15, 2001, 25,696,459 shares of our common stock were
outstanding. This prospectus may be used for the issuance of additional shares
of common stock or shares of preferred stock that are convertible into common
stock. If we issue a significant number of shares of common stock or convertible
preferred stock in a short period of time, there could be a dilution of the
existing common stock and a decrease in the market price of the common stock.
WE MAY CHANGE OUR POLICIES WITHOUT STOCKHOLDER APPROVAL
Our Board of Directors and management determine all of our policies,
including our investment, financing and distribution policies. Although they
have no current plans to do so, they may amend or revise these policies at any
time without a vote of our stockholders. Policy changes could adversely affect
our financial condition, results of operations, the market price of our common
stock or our ability to pay dividends or distributions.
USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, we
intend to use the net proceeds from the sale of the securities offered by this
prospectus and the related accompanying prospectus supplement for the purchase
of mortgage-backed securities. We then intend to increase our investment assets
by borrowing against these mortgage-backed securities and using the proceeds to
acquire additional mortgage-backed securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratios of earnings to fixed charges for
the periods shown:
ANNALY MORTGAGE MANAGEMENT, INC.
RATIO OF EARNINGS TO FIXED CHARGES
February 18,
1997
(commencement of
For the Year For the Year For the Year operations)
Ended December Ended December Ended December through December
31, 2000 31, 1999 31, 1998 31, 1997
-----------------------------------------------------------------------
Ratio of earnings to fixed charges 1.18x 1.26x 1.20x 1.25x
The ratios of earnings to fixed charges were computed by dividing earnings
as adjusted by fixed charges. For this purpose, earnings consist of net income
from continuing operations and fixed charges. Fixed charges consist of interest
expense. To date, we have not issued any preferred stock.
11
DESCRIPTION OF STOCK
GENERAL
Our authorized capital stock consists of 100 million shares of common
stock, par value $.01 per share. Pursuant to our articles of incorporation, our
Board of Directors has the right to classify or reclassify any unissued shares
of common stock into one or more classes or series of common stock or preferred
stock. As of March 15, 2001, we had 25,696,459 shares of common stock
outstanding, not including 883,380 shares of common stock issuable upon the
exercise of options granted pursuant to our Long-Term Incentive Plan.
COMMON STOCK
All shares of common stock offered hereby will be duly authorized, fully
paid and nonassessable. The statements below describing the common stock are in
all respects subject to and qualified in their entirety by reference to our
articles of incorporation, by-laws and any articles supplementary to our
articles of incorporation.
VOTING
Each of our common stockholders is entitled to one vote for each share held
of record on each matter submitted to a vote of common stockholders.
Our by-laws provide that annual meetings of our stockholders will be held
each calendar year on the date determined by our President, and special meetings
may be called by a majority of our Board of Directors, our Chairman, a majority
of our independent directors, our President or generally by stockholders
entitled to cast at least 25% of the votes which all stockholders are entitled
to cast at the meeting. Our articles of incorporation may be amended in
accordance with Maryland law.
DIVIDENDS; LIQUIDATION; OTHER RIGHTS
Common stockholders are entitled to receive dividends when declared by our
Board of Directors out of legally available funds. The right of common
stockholders to receive dividends is subordinate to the rights of preferred
stockholders or other senior stockholders. If we have a liquidation, dissolution
or winding up, our common stockholders will share ratably in all of our assets
remaining after the payment of all of our liabilities and the payment of all
liquidation and other preference amounts to preferred stockholders and other
senior stockholders. Common stockholders have no preemptive or other
subscription rights, and there are no conversion rights, or redemption or
sinking fund provisions, relating to the shares of common stock.
CLASSIFICATION OR RECLASSIFICATION OF COMMON STOCK OR PREFERRED STOCK
Our articles of incorporation authorize our Board of Directors to
reclassify any unissued shares of common or preferred stock into other classes
or series of shares, to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations and restrictions on ownership, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each class or series.
PREFERRED STOCK
The following description sets forth general terms and provisions of the
preferred stock to which any prospectus supplement may relate. The statements
below describing the preferred stock are in all respects subject to and
qualified in their entirety by reference to our articles of incorporation,
by-laws and any articles supplementary to our articles of incorporation
designating terms of a series of preferred stock. The preferred stock, when
issued, will be fully paid and non-assessable. Because our Board of Directors
has the power to
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establish the preferences, powers and rights of each series of preferred stock,
our Board of Directors may afford the holders of any series of preferred stock
preferences, powers and rights, voting or otherwise, senior to the rights of
common stockholders.
The rights, preferences, privileges and restrictions of each series of
preferred stock will be fixed by the articles supplementary relating to the
series. A prospectus supplement, relating to each series, will specify the terms
of the preferred stock, as follows:
- the title and stated value of the preferred stock;
- the number of shares offered, the liquidation preference per share and
the offering price of the shares;
- the dividend rate(s), period(s) and payment date(s) or method(s) of
calculation applicable to the preferred stock;
- the date from which dividends on the preferred stock will accumulate,
if applicable;
- the procedures for any auction and remarketing for the preferred stock;
- the provision for a sinking fund, if any, for the preferred stock;
- the provision for redemption, if applicable, of the preferred stock;
- any listing of the preferred stock on any securities exchange;
- the terms and provisions, if any, upon which the preferred stock will
be convertible into common stock, including the conversion price (or
manner of calculation) and conversion period;
- any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock;
- a discussion of certain material federal income tax considerations
applicable to the preferred stock;
- the relative ranking and preferences of the preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs;
- any limitation on issuance of any series of preferred stock ranking
senior to or on a parity with the series of preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs; and
- any limitations on direct or beneficial ownership and restrictions on
transfer of the preferred stock, in each case as may be appropriate to
preserve our status as REIT.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
To ensure that we meet the requirements for qualification as a REIT, our
articles of incorporation prohibit anyone from acquiring or holding, directly or
constructively, ownership of a number of shares of any class of our capital
stock in excess of 9.8% of the outstanding shares. For this purpose the term
"ownership" generally means either direct ownership or constructive ownership in
accordance with the constructive ownership provisions of Section 544 of the
Code, as modified in Section 856(h) of the Code.
13
The constructive ownership provisions of Section 544 of the Code, generally
attribute ownership of securities owned by a corporation, partnership, estate or
trust proportionately to its stockholders, partners or beneficiaries; attribute
ownership of securities owned by family members to other members of the same
family; and set forth rules for attributing securities constructively owned by
one person to another person (i.e., "reattribution"). To determine whether a
person holds or would hold capital stock in excess of the 9.8% ownership limit,
a person will be treated as owning not only shares of capital stock actually
owned, but also any shares of capital stock attributed to that person under the
attribution rules described above. Accordingly, a person who individually owns
less than 9.8% of the shares outstanding may nevertheless be in violation of the
9.8% ownership limit.
Any transfer of shares of capital stock that would cause us to be
disqualified as a REIT or that would (a) create a direct or constructive
ownership of shares of capital stock in excess of the 9.8% ownership limit, or
(b) result in the shares of capital stock being beneficially owned (within the
meaning of Section 856(a) of the Code) by fewer than 100 persons (determined
without reference to any rules of attribution), or (c) result in us being
"closely held" within the meaning of Section 856(h) of the Code, will be null
and void, and the intended transferee (the "purported transferee") will acquire
no rights to those shares. These restrictions on transferability and ownership
will not apply if our Board of Directors determines that it is no longer in our
best interests to continue to qualify as a REIT.
Any purported transfer of shares of capital stock that would result in a
purported transferee owning (directly or constructively) shares of capital stock
in excess of the 9.8% ownership limit due to the unenforceability of the
transfer restrictions described above will constitute "excess securities."
Excess securities will be transferred by operation of law to a trust that we
will establish for the exclusive benefit of a charitable organization, until
such time as the trustee of the trust retransfers the excess securities. The
trustee will be a banking institution designated by us that is not affiliated
with the purported transferee or us. While the excess securities are held in
trust, the purported transferee will not be entitled to vote or to share in any
dividends or other distributions with respect to the securities. Subject to the
9.8% ownership limit, excess securities may be transferred by the trust to any
person (if such transfer would not result in excess securities) at a price not
to exceed the price paid by the purported transferee (or, if no consideration
was paid by the purported transferee, the fair market value of the excess
securities on the date of the purported transfer), at which point the excess
securities will automatically cease to be excess securities.
Upon a purported transfer of excess securities, the purported transferee
shall cease to be entitled to distributions, voting rights and other benefits
with respect to the shares of capital stock except the right to payment of the
purchase price for the shares of capital stock on the retransfer of securities
as provided above. Any dividend or distribution paid to a purported transferee
on excess securities prior to our discovery that shares of capital stock have
been transferred in violation of our articles of incorporation shall be repaid
to us upon demand. If these transfer restrictions are determined to be void,
invalid or unenforceable by a court of competent jurisdiction, then the
purported transferee of any excess securities may be deemed, at our option, to
have acted as an agent on our behalf in acquiring the excess securities and to
hold the excess securities on our behalf.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Any person who acquires shares in violation of our articles of
incorporation, or any person who is a purported transferee such that excess
securities results, must immediately give written notice or, in the event of a
proposed or attempted transfer that would be void as set forth above, give at
least 15 days prior written notice to us of such event and shall provide us such
other information as we may request in order to determine the effect, if any, of
the transfer on our status as a REIT. In addition, every record owner of more
than 5.0% (during any period in which the number of record stockholders is 2,000
or more) or 1.0% (during any period in which the number of record stockholders
is greater than 200 but less than 2,000) or 1/2% (during any period in which the
number of record stockholders is 200 or less) of the number or value of our
outstanding shares
14
must send us an annual written notice by January 31 stating the name and address
of the record owner and the number of shares held and describing how the shares
are held. Further, each stockholder is required to disclose to us in writing
information with respect to the direct and constructive ownership of shares as
the Board of Directors deems reasonably necessary to comply with the REIT
provisions of the Code, to comply with the requirements of any taxing authority
or governmental agency or to determine any such compliance.
Our Board of Directors may increase or decrease the 9.8% ownership limit.
In addition, to the extent consistent with the REIT provisions of the Code, our
Board of Directors may, pursuant to our articles of incorporation, waive the
9.8% ownership limit for a purchaser of our stock. In connection with any such
waiver, we may require that the stockholder requesting the waiver enter into an
agreement with us providing that we may repurchase shares from the stockholder
under certain circumstances to ensure compliance with the REIT provisions of the
Code. The repurchase would be at fair market value as set forth in the agreement
between us and the stockholder. The consideration received by the stockholder in
the repurchase might be characterized as the receipt by the stockholder of a
dividend from us, and any stockholder entering into an agreement with us should
consult its tax advisor. At present, we do not intend to waive the 9.8%
ownership limit for any purchaser.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of our capital stock to receive a premium
for their shares that might otherwise exist in the absence of such provisions.
Such provisions also may make us an unsuitable investment vehicle for any person
seeking to obtain ownership of more than 9.8% of the outstanding shares of our
capital stock.
CLASSIFICATION OF BOARD OF DIRECTORS, VACANCIES AND REMOVAL OF DIRECTORS
Our by-laws provide for a staggered Board of Directors. Our by-laws provide
for between three and fifteen directors divided into three classes, with terms
of three years each. The number of directors in each class and the expiration of
each class term is as follows:
Class 1 2 Directors Expires 2003
Class 2 3 Directors Expires 2001
Class 3 3 Directors Expires 2002
At each annual meeting of our stockholders, successors of the class of
directors whose term expires at that meeting will be elected for a three-year
term and the directors in the other two classes will continue in office. A
classified Board of Directors may delay, defer or prevent a change in control or
other transaction that might involve a premium over the then prevailing market
price for our common stock or other attributes that our stockholders may
consider desirable. In addition, a classified Board of Directors could prevent
stockholders who do not agree with the policies of our Board of Directors from
replacing a majority of the Board of Directors for two years, except in the
event of removal for cause.
Our by-laws provide that any vacancy on our Board of Directors may be
filled by a majority of the remaining directors. Any individual so elected
director will hold office for the unexplored term of the director he or she is
replacing. Our by-laws provide that a director may be removed at any time only
for cause upon the affirmative vote of at least two-thirds of the votes entitled
to be cast in the election of directors, but only by a vote taken at a
stockholder meeting. These provisions preclude stockholders from removing
incumbent directors, except for cause and upon a substantial affirmative vote,
and filling the vacancies created by such removal with their own nominees.
INDEMNIFICATION
Our articles of incorporation obligate us to indemnify our directors and
officers and to pay or reimburse expenses for them before the final disposition
of a proceeding to the maximum extent permitted by Maryland law. The
Corporations and Associations Article of the Annotated Code of Maryland (or the
15
Maryland General Corporation Law) permits a corporation to indemnify its present
and former directors and officers against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that (1) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (a) was committed in bad faith, or (b) was the result of active
and deliberate dishonesty, or (2) the director or officer actually received an
improper personal benefit in money, property or services, or (3) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful.
LIMITATION OF LIABILITY
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages, except to
the extent that (1) it is proved that the person actually received an improper
benefit or profit in money, property or services, or (2) a judgment or other
final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. Our articles of incorporation provide for elimination of the
liability of our directors and officers to us or our stockholders for money
damages to the maximum extent permitted by Maryland law from time to time.
MARYLAND BUSINESS COMBINATION STATUTE
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is any
person who beneficially owns ten percent or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between us and an
interested stockholder unless the Board of Directors approved the transaction
prior to the party becoming an interested stockholder. The five-year period runs
from the most recent date on which the interested stockholder became an
interested stockholder. The law also requires a supermajority stockholder vote
for such transactions after the end of the five-year period. This means that the
transaction must be approved by at least:
o 80% of the votes entitled to be cast by holders of outstanding voting
shares; and
o 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested stockholder with whom
the business combination is to be effected.
As permitted by the Maryland General Corporation Law, we have elected not
to be governed by the Maryland business combination statute. We made this
election by opting out of this statute in our articles of incorporation. If,
however, we amend our articles of incorporation to opt back in to the statute,
the business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating these offers, even
if our acquisition would be in our stockholders' best interests.
MARYLAND CONTROL SHARE ACQUISITION STATUTE
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a stockholder vote. Two-thirds of the shares eligible to vote
must vote in favor of granting the "control shares" voting rights. "Control
shares" are shares of stock that, taken together with all other shares of stock
the acquiror previously acquired, would entitle the acquiror to exercise at
least 10% of the voting power in electing directors. Control shares do not
include shares of stock the acquiring person is entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
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If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may compel
the Board of Directors to call a special meeting of stockholders to be held
within 50 days to consider the voting rights of the shares. If such a person
makes no request for a meeting, we have the option to present the question at
any stockholders' meeting.
If voting rights are not approved at a meeting of stockholders then we may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value. We will determine the fair value
of the shares, without regard to voting rights, as of the date of either:
o the last control share acquisition; or
o any meeting where stockholders considered and did not approve voting
rights of the control shares.
If voting rights for control shares are approved at a stockholders' meeting
and the acquiror becomes entitled to vote a majority of the shares of stock
entitled to vote, all other stockholders may exercise appraisal rights. This
means that you would be able to redeem your stock back to us for fair value.
Under Maryland law, the fair value may not be less than the highest price per
share paid in the control share acquisition. Furthermore, certain limitations
otherwise applicable to the exercise of dissenters' rights would not apply in
the context of a control share acquisition.
The control share acquisition statute would not apply to shares acquired in
a merger, consolidation or share exchange if we were a party to the transaction.
The control share acquisition statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating any such
offers, even if our acquisition would be in our stockholders' best interests.
TRANSFER AGENT AND REGISTRAR
Mellon Investor Services LLC, 44 Wall Street, 16th Floor, New York, New
York 10005, is the transfer agent and registrar for our stock. Its telephone
number is (800) 777-3694.
FEDERAL INCOME TAX CONSIDERATIONS
Based on various assumptions and factual representations made by us
regarding our operations, in the opinion of Brown & Wood LLP, our counsel,
commencing with our taxable year ended December 31, 1997, we have been organized
in conformity with the requirements for qualification as a REIT under the Code,
and our method of operating has enabled, and will enable us to meet the
requirements for qualification and taxation as a REIT. Our qualification as a
REIT depends upon our ability to meet the various requirements imposed under the
Code through actual operations. Brown & Wood LLP will not review our operations,
and no assurance can be given that actual operations will meet these
requirements. The opinion of Brown & Wood LLP is not binding on the Internal
Revenue Service (or IRS) or any court. The opinion of Brown & Wood LLP is based
upon existing law, Treasury regulations and currently published administrative
positions of the IRS and judicial decisions, all of which are subject to change
either prospectively or retroactively.
The following discusses the material United States federal income tax
("federal income tax") considerations that relate to our treatment as a REIT and
that apply to an investment in our stock. No assurance can be given that the
conclusions set out below would be sustained by a court if challenged by the
IRS. Except for the discussion under the caption "Federal Income Tax
Considerations Applicable to Foreign Stockholders," this summary only applies to
"U.S. Stockholders" as defined below. Also, this summary deals only with stock
that is held as a capital asset, which generally means property that is held for
investment. In
17
addition, except to the extent discussed below, this summary does not address
tax considerations applicable to you if you are subject to special tax rules,
such as:
o a dealer or trader in securities;
o a financial institution;
o an insurance company;
o a stockholder that holds our stock as a hedge, part of a straddle,
conversion transaction or other arrangement involving more than one
position;
o a stockholder whose functional currency is not the United States
dollar; or
o a tax-exempt organization or foreign taxpayer.
The discussion below is based upon the Code and regulations, rulings and
judicial decisions interpreting the Code as of the date of this prospectus. Any
of these authorities may be repealed, revoked or modified, perhaps with
retroactive effect, so as to result in federal income tax consequences different
from those discussed below.
THE DISCUSSION SET OUT BELOW IS INTENDED ONLY AS A SUMMARY OF THE MATERIAL
FEDERAL INCOME TAX CONSEQUENCES OF OUR TREATMENT AS A REIT AND OF AN INVESTMENT
IN OUR STOCK. TAXPAYERS AND PREPARERS OF TAX RETURNS (INCLUDING RETURNS FILED BY
ANY PARTNERSHIP OR OTHER ARRANGEMENT) SHOULD BE AWARE THAT UNDER TREASURY
REGULATIONS A PROVIDER OF ADVICE ON SPECIFIC ISSUES OF LAW IS NOT CONSIDERED AN
INCOME TAX RETURN PREPARER UNLESS THE ADVICE IS (I) GIVEN WITH RESPECT TO EVENTS
THAT HAVE OCCURRED AT THE TIME THE ADVICE IS RENDERED AND IS NOT GIVEN WITH
RESPECT TO THE CONSEQUENCES OF CONTEMPLATED ACTIONS, AND (II) IS DIRECTLY
RELEVANT TO THE DETERMINATION OF AN ENTRY ON A TAX RETURN. ACCORDINGLY, WE URGE
YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE FEDERAL TAX CONSEQUENCES OF
AN INVESTMENT IN OUR STOCK, INCLUDING THE APPLICATION TO YOUR PARTICULAR
SITUATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW, AS WELL AS THE APPLICATION
OF STATE, LOCAL OR FOREIGN TAX LAWS. THE STATEMENTS OF UNITED STATES TAX LAW SET
OUT BELOW ARE BASED ON THE LAWS IN FORCE AND THEIR INTERPRETATION AS OF THE DATE
OF THIS PROSPECTUS, AND ARE SUBJECT TO CHANGES OCCURRING AFTER THAT DATE.
GENERAL
We elected to become subject to tax as a REIT for federal income tax
purposes effective for our taxable year ending on December 31, 1997, and we plan
to continue to meet the requirements for taxation as a REIT. There can be no
assurance, however, that we will qualify as a REIT in any particular taxable
year given the highly complex nature of the rules governing REITs, the ongoing
importance of factual determinations, and the possibility of future changes in
our circumstances. If we fail to qualify as a REIT in any particular taxable
year, we will be subject to federal income tax as a regular domestic
corporation, and you will be subject to tax in the same manner as a stockholder
of a regular domestic corporation. In that event, we may be subject to a
substantial income tax liability in respect of each taxable year that we fail to
qualify as a REIT, and the amount of earnings and cash available for
distribution to you and other stockholders could be significantly reduced or
eliminated. See "Failure to Qualify" below.
REIT QUALIFICATION REQUIREMENTS
The following is a brief summary of the material technical requirements
imposed by the Code that we must satisfy on an ongoing basis to qualify, and
remain qualified, as a REIT.
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STOCK OWNERSHIP REQUIREMENTS
We must meet the following stock ownership requirements:
(1) our capital stock must be transferable;
(2) our capital stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months (or during a proportionate part
of a taxable year of less than 12 months); and
(3) no more than 50% of the value of our capital stock may be owned,
directly or indirectly, by five or fewer individuals at any time during
the last half of the taxable year. In applying this test, the Code
treats some entities as individuals.
Tax-exempt entities, other than private foundations and certain
unemployment compensation trusts, are generally not treated as individuals for
these purposes. The requirements of items (2) and (3) above did not apply to the
first taxable year for which we made an election to be taxed as a REIT. However,
these stock ownership requirements must be satisfied in each subsequent taxable
year. Our articles of incorporation impose restrictions on the transfer of our
shares to help us meet the stock ownership requirements. In addition, Treasury
regulations require us to demand from the record holders of designated
percentages of our capital stock, annual written statements disclosing actual
and constructive ownership of our stock. The same regulations require us to
maintain permanent records showing the information we have received regarding
actual and constructive stock ownership and a list of those persons failing or
refusing to comply with our demand.
ASSET REQUIREMENTS
We generally must meet the following asset requirements at the close of
each quarter of each taxable year:
(1) at least 75% of the value of our total assets must be "qualified REIT
real estate assets" (described below), government securities, cash and
cash items;
(2) no more than 25% of the value of our total assets may be securities
other than securities in the 75% asset class (for example, government
securities);
(3) no more than 20 % of the value of our total assets may be securities of
one or more Taxable REIT subsidiaries (described below); and
(4) except for securities in the 75% asset class, securities in a Taxable
REIT subsidiary or "qualified REIT subsidiary," and certain partnership
interests and debt obligations:
(A) no more than 5% of the value of our total assets may be securities
of any one issuer,
(B) we may not hold securities that possess more than 10% percent of
the total voting power of the outstanding securities of any one
issuer, and
(C) we may not hold securities that have a value of more than 10
percent of the total value of the outstanding securities of any one
issuer. (Under a special transition provision, this restriction
does not apply to securities held on July 12, 1999, provided the
issuer of those securities does not engage in a substantially new
line of business or acquire substantial new assets after that date,
and provided we do not acquire additional securities in such
issuer. We believe this special transition provision
19
exempts our ownership of 33% of the equity of Annaly International
Mortgage Management, Inc., as operated on July 12, 1999).
"Qualified REIT real estate assets" means assets of the type described in
section 856(c)(5)(B) of the Code, and generally include (among other assets)
interests in mortgages on real property, and shares in other REITs. A "Taxable
REIT subsidiary" is a corporation that may earn income that would not be
qualifying income if earned directly by the REIT. A REIT may hold up to 100% of
the stock in a Taxable REIT subsidiary. To treat a subsidiary as a Taxable REIT
subsidiary, both the subsidiary and the REIT must file a joint election with the
IRS on IRS Form 8875. A Taxable REIT subsidiary will pay tax at the corporate
rates on any income it earns. Moreover, the Code contains rules to ensure
contractual arrangements between a Taxable REIT subsidiary and the parent REIT
are at arm's length.
If we fail to meet any of the asset tests as of the close of a calendar
quarter due to the acquisition of securities or other assets, the Code allows us
a 30-day period following the close of the calendar quarter to come into
compliance with the asset tests. If we do cure a failure within the 30-day
period, we will be treated as having satisfied the asset tests at the close of
the calendar quarter.
GROSS INCOME REQUIREMENTS
We generally must meet the following gross income requirements for each
taxable year:
(1) at least 75% of our gross income must be derived from the real estate
sources specified in section 856(c)(3) of the Code, including interest
income and gain from the disposition of qualified REIT real estate
assets, and "qualified temporary investment income" (generally, income
we earn from investing new capital, provided we received that income
within one year of acquiring such new capital); and
(2) at least 95% of our gross income for each taxable year must be derived
from sources of income specified in section 856(c)(2) of the Code,
which includes the types of gross income described just above, as well
as dividends, interest, and gains from the sale of stock or other
financial instruments (including interest rate swap and cap agreements,
options, futures contracts, forward rate agreements or similar
financial instruments entered into to hedge variable rate debt incurred
to acquire qualified REIT real estate assets) not held for sale in the
ordinary course of business.
DISTRIBUTION REQUIREMENTS
We generally must distribute dividends (other than capital gain dividends)
to our stockholders in an amount at least equal to (1) the sum of (a) 90% of our
REIT taxable income (computed without regard to the dividends paid deduction and
net capital gains) and (b) 90% of the net income (after tax, if any) from
foreclosure property, minus (2) the sum of certain items of non-cash income. In
addition, if we were to recognize "Built in Gain" on disposition of any assets
acquired from a "C" corporation in a transaction in which Built in Gain was not
recognized (as discussed below), we would be required to distribute at least 90%
of the Built in Gain recognized net of the tax we would pay on such gain. Built
in Gain is the excess of (a) the fair market value of an asset (measured at the
time of acquisition) over (b) the basis of the asset (measured at the time of
acquisition). As to our net capital gains, rather than distribute them, we may
elect to retain and pay the federal income tax on them, in which case our
stockholders will (1) include their proportionate share of the undistributed net
capital gains in income, (2) receive a credit for their share of the federal
income tax we pay and (3) increase the bases in their stock by the difference
between their share of the capital gain and their share of the credit.
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FAILURE TO QUALIFY
If we fail to qualify as a REIT in any taxable year and the relief
provisions provided in the Code do not apply, we will be subject to federal
income tax, including any applicable alternative minimum tax, on our taxable
income in that taxable year and all subsequent taxable years at the regular
corporate income tax rates. We will not be allowed to deduct distributions to
shareholders in these years, nor will the Code require us to make distributions.
Further, unless entitled to the relief provisions of the Code, we also will be
barred from re-electing REIT status for the four taxable years following the
year in which we fail to qualify. It is not possible to state in what
circumstances we would be entitled to any statutory relief.
We intend to monitor on an ongoing basis our compliance with the REIT
requirements described above. To maintain our REIT status, we will be required
to limit the types of assets that we might otherwise acquire, or hold some
assets at times when we might otherwise have determined that the sale or other
disposition of these assets would have been more prudent.
TAXATION OF ANNALY MORTGAGE MANAGEMENT
In any year in which we do qualify as a REIT, we generally will not be
subject to federal income tax on that portion of our REIT taxable income or
capital gain that we distribute to our stockholders. We will, however, be
subject to federal income tax at regular corporate income tax rates on any
undistributed taxable income or capital gain.
Notwithstanding our qualification as a REIT, we may also be subject to
federal income tax in the following other circumstances:
o If we fail to satisfy either the 75% or the 95% gross income test, but
nonetheless maintain our qualification as a REIT because we meet other
requirements, we generally will be subject to a 100% tax on the greater
of the amount by which we fail either the 75% or the 95% gross income
test multiplied by a fraction intended to reflect our profitability.
o We will be subject to a tax of 100% on net income derived from any
"prohibited transaction" which is, in general, a sale or other
disposition of property held primarily for sale to customers in the
ordinary course of business.
o If we have (1) net income from the sale or other disposition of
foreclosure property that is held primarily for sale to customers in
the ordinary course of business or (2) other non-qualifying income from
foreclosure property, it will be subject to federal income tax at the
highest corporate income tax rate.
o If we fail to distribute during each calendar year at least the sum of
(1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year and (3) any amount of
undistributed ordinary income and capital gain net income from
preceding taxable years, we will be subject to a 4% federal tax on the
excess of the required distribution over the amounts actually
distributed during the taxable year.
o If we acquire a Built in Gain asset from a C corporation in a
transaction in which the basis of the asset is determined by reference
to the basis of the asset in the hands of the C corporation and we
recognize Built in Gain upon a disposition of such asset occurring
within 10 years of its acquisition, then we will be subject to federal
tax to the extent of any Built in Gain at the highest corporate income
tax rate.
o We may also be subject to the corporate alternative minimum tax, as
well as other taxes in situations not presently contemplated.
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TAXATION OF STOCKHOLDERS
Unless you are a tax-exempt entity, distributions that we make to you,
including constructive distributions, generally will be subject to tax as
ordinary income to the extent of our current and accumulated earnings and
profits as determined for federal income tax purposes. If the amount we
distribute to you exceeds your allocable share of current and accumulated
earnings and profits, the excess will be treated as a return of capital to the
extent of your adjusted basis in your stock, which will reduce your basis in
your stock but will not be subject to tax. To the extent the amount we
distribute to you exceeds both your allocable share of current and accumulated
earnings and profits and your adjusted basis, this excess amount will be treated
as a gain from the sale or exchange of a capital asset. Distributions to our
corporate stockholders, whether characterized as ordinary income or as capital
gain, are not eligible for the corporate dividends received deduction.
Distributions that we designate as capital gain dividends generally will be
taxable in your hands as long-term capital gains, to the extent such
distributions do not exceed our actual net capital gain for the taxable year. In
the event that we realize a loss for the taxable year, you will not be permitted
to deduct any share of that loss. Further, if we, or a portion of our assets,
were to be treated as a taxable mortgage pool, any excess inclusion income that
is allocated to you could not be offset by any losses or other deductions you
may have. Future Treasury regulations may require you to take into account, for
purposes of computing your individual alternative minimum tax liability, some of
our tax preference items.
Dividends that we declare during the last quarter of a calendar year and
actually pay to you during January of the following taxable year, generally are
treated as if we had paid, and you had received them on December 31 of the
calendar year and not on the date actually paid. In addition, we may elect to
treat other dividends distributed after the close of the taxable year as having
been paid during the taxable year, so long as they meet the requirements
described in the Code, but you will be treated as having received these
dividends in the taxable year in which the distribution is actually made.
If you sell or otherwise dispose of our stock, you will generally recognize
a capital gain or loss in an amount equal to the difference between the amount
realized and your adjusted basis in the stock, which gain or loss will be
long-term if the stock is held for more than one year. Any loss recognized on
the sale or exchange of stock held for six months or less generally will be
treated as a long-term capital loss to the extent of (1) any long-term capital
gain dividends you receive with respect to the stock and (2) your proportionate
share of any long-term capital gains that we retain (see the discussion under
the caption Distribution Requirements).
If we fail to qualify as a REIT in any year, distributions we make to you
will be taxable in the same manner discussed above, except that:
o we will not be allowed to designate any distributions as capital gain
dividends;
o distributions (to the extent they are made out of our current and
accumulated earnings and profits) will be eligible for the corporate
dividends received deduction;
o the excess inclusion income rules will not apply to the stockholders;
and
o you will not receive any share of our tax preference items.
In this event, however, we could be subject to substantial federal income
tax liability as a C corporation, and the amount of earnings and cash available
for distribution to you and other stockholders could be significantly reduced or
eliminated.
22
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year, we will report to our U.S. stockholders and to the
IRS the amount of distributions that we pay, and the amount of tax (if any) that
we withhold on these distributions. Under the backup withholding rules, you may
be subject to backup withholding tax at a rate of 31% with respect to
distributions paid unless you:
o are a corporation or come within another exempt category and
demonstrate this fact when required; or
o provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding tax and otherwise comply with the
applicable requirements of the backup withholding tax rules.
A U.S. stockholder may satisfy this requirement by providing us an
appropriately prepared Form W-9. If you do not provide us with your correct
taxpayer identification number, then you may also be subject to penalties
imposed by the IRS.
Backup withholding tax is not an additional tax. Any amounts withheld under
the backup withholding tax rules will be refunded or credited against your
federal income tax liability, provided you furnish the required information to
the IRS.
TAXATION OF TAX-EXEMPT ENTITIES
The discussion under this heading only applies to you if you are a
tax-exempt entity.
Subject to the discussion below regarding a pension-held REIT,
distributions received from us or gain realized on the sale of our stock will
not be taxable as unrelated business taxable income (or UBTI), provided that:
o you have not incurred indebtedness to purchase or hold our stock;
o you do not otherwise use our stock in a trade or business unrelated to
your exempt purpose; and
o we, consistent with our present intent, do not hold a residual interest
in a REMIC that gives rise to excess inclusion income as defined under
section 860E of the Code.
If we were to be treated as a taxable mortgage pool, however, a substantial
portion of the dividends you receive may be subject to tax as UBTI.
In addition, a substantial portion of the dividends you receive may
constitute UBTI if we are treated as a "pension-held REIT" and you are a
"qualified pension trust" that holds more than 10% by value of our interests at
any time during a taxable year. For these purposes, a "qualified pension trust"
is any pension or other retirement trust that satisfies the requirements imposed
under section 401(a) of the Code. We will be treated as a "pension-held REIT" if
(1) we would not be a REIT if we had to treat stock held in a qualified pension
trust as owned by the trust (instead of as owned by the trust's multiple
beneficiaries) and (2) (a) at least one qualified pension trust holds more than
25% of our stock by value, or (b) one or more qualified pension trusts (each
owning more than 10% of our stock by value) hold in the aggregate more than 50%
of our stock by value. Assuming compliance with the ownership limit provisions
set forth in our articles of incorporation, it is unlikely that pension plans
will accumulate sufficient stock to cause us to be treated as a pension-held
REIT.
23
If you qualify for exemption under sections 501(c)(7), (c)(9), (c)(17), and
(c)(20) of the Code, then distributions received by you may also constitute
UBTI. We urge you to consult your tax advisors concerning the applicable set
aside and reserve requirements.
FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN STOCKHOLDERS
The discussion under this heading only applies to you if you are not a U.S.
stockholder (hereafter, a "foreign stockholder"). A U.S. stockholder is a
stockholder who is:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any
political subdivision thereof;
o an estate whose income is includible in gross income for United States
(as defined in the Code and attending regulations) Federal income tax
purposes regardless of its source; or
o a trust, if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. persons have authority to control all substantial decisions
of the trust, or (2) the trust was in existence on August 20, 1996, was
treated as a domestic trust prior to such date, and has made an
election to continue to be treated as a domestic trust.
This discussion is only a brief summary of the United States federal tax
consequences that apply to you, which are highly complex, and does not consider
any specific facts or circumstances that may apply to you and your particular
situation. We urge you to consult your tax advisors regarding the United States
federal tax consequences of acquiring, holding and disposing of our stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.
DISTRIBUTIONS
Except for distributions attributable to gain from the disposition of real
property interests or distributions designated as capital gains dividends,
distributions you receive from us generally will be subject, to the extent of
our earnings and profits, to federal withholding tax at the rate of 30%, unless
reduced or eliminated by an applicable tax treaty or unless the distributions
are treated as effectively connected with your United States trade or business.
If you wish to claim the benefits of an applicable tax treaty, you may need to
satisfy certification and other requirements, such as providing IRS Form W-8BEN.
If you wish to claim distributions are effectively connected with your United
States trade or business, you may need to satisfy certification and other
requirements such as providing IRS Form W-8ECI.
Distributions you receive that are in excess of our earnings and profits
will be treated as a tax-free return of capital to the extent of your adjusted
basis in your stock. If the amount of the distribution also exceeds your
adjusted basis, this excess amount will be treated as gain from the sale or
exchange of your stock as described below. If we cannot determine at the time we
make a distribution whether the distribution will exceed our earnings and
profits, the distribution will be subject to withholding at the same rate as
dividends. These withheld amounts, however, will be refundable or creditable
against your United States federal tax liability if it is subsequently
determined that the distribution was, in fact, in excess of our earnings and
profits. If you receive a dividend that is treated as being effectively
connected with your conduct of a trade or business within the United States, the
dividend will be subject to the United States federal income tax on net income
that applies to United States persons generally, and may be subject to the
branch profits tax if you are a corporation.
24
Distributions that we make to you and designate as capital gains dividends,
other than those attributable to the disposition of a United States real
property interest, generally will not be subject to United States federal income
taxation, unless:
o your investment in our stock is effectively connected with your conduct
of a trade or business within the United States; or
o you are a nonresident alien individual who is present in the United
States for 183 days or more in the taxable year, and other requirements
are met.
Distributions that are attributable to a disposition of United States real
property interests are subject to income and withholding taxes pursuant to the
Foreign Investment in Real Property Act of 1980 (FIRPTA), and may also be
subject to branch profits tax if you are a corporation that is not entitled to
treaty relief or exemption. However, because we do not expect to hold assets
that would be treated as United States real property interests as defined by
FIRPTA, the FIRPTA provisions should not apply to investment in our stock.
GAIN ON DISPOSITION
You generally will not be subject to United States federal income tax on
gain recognized on a sale or other disposition of our stock unless:
o the gain is effectively connected with your conduct of a trade or
business within the United States;
o you are a nonresident alien individual who holds our stock as a capital
asset and are present in the United States for 183 or more days in the
taxable year and other requirements are met; or
o you are subject to tax under the FIRPTA rules discussed below.
Gain that is effectively connected with your conduct of a trade or business
within the United States will be subject to the United States federal income tax
on net income that applies to United States persons generally and may be subject
to the branch profits tax if you are a corporation. However, these effectively-
connected gains will generally not be subject to withholding. We urge you to
consult applicable treaties, which may provide for different rules.
Under FIRPTA, you may be subject to tax on gain recognized from a sale or
other disposition of your stock if we were to both (1) hold United States real
property interests and (2) fail to qualify as a domestically-controlled REIT. A
REIT qualifies as a domestically-controlled REIT as long as less than 50% in
value of its shares of beneficial interest are held by foreign persons at all
times during the shorter of (1) the previous five years and (2) the period in
which the REIT is in existence. As mentioned above, we do not expect to hold any
United States real property interests. Furthermore, we will likely qualify as a
domestically-controlled REIT, although no assurances can be provided because our
shares are publicly-traded.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The information reporting and backup withholding tax requirements
(discussed above) will generally not apply to foreign holders in the case of
distributions treated as (1) dividends subject to the 30% (or lower treaty rate)
withholding tax (discussed above), or (2) capital gain dividends. Also, as a
general matter, backup withholding and information reporting will not apply to
the payment of proceeds from shares sold by or through a foreign office of a
foreign broker. However, in some cases (for example, a sale of shares through
the foreign office of a U.S. broker), information reporting is required unless
the foreign holder certifies under penalty of perjury that it is a foreign
holder, or otherwise establishes an exemption. A foreign stockholder may satisfy
this requirement by using an appropriately prepared IRS Form W-8 BEN.
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FEDERAL ESTATE TAXES
In general, if an individual who is not a citizen or resident (as defined
in the Code) of the United States owns (or is treated as owning) our stock at
the date of death, such stock will be included in the individual's estate for
United States Federal estate tax purposes, unless an applicable treaty provides
otherwise.
STATE AND LOCAL TAXES
We and our stockholders may be subject to state or local taxation in
various jurisdictions, including those in which we or they transact business or
reside. The state and local tax treatment that applies to us and our
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, we urge you to consult your own tax advisors regarding the
effect of state and local tax laws.
PLAN OF DISTRIBUTION
We may sell the securities offered pursuant to this prospectus and any
accompanying prospectus supplements to or through one or more underwriters or
dealers or we may sell the securities to investors directly or through agents.
Any underwriter or agent involved in the offer and sale of the securities will
be named in the applicable prospectus supplement. We may sell securities
directly to investors on our own behalf in those jurisdictions where we are
authorized to do so.
Underwriters may offer and sell the securities at a fixed price or prices,
which may be changed, at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or at negotiated prices. We also may,
from time to time, authorize dealers or agents to offer and sell these
securities upon such terms and conditions as may be set forth in the applicable
prospectus supplement. In connection with the sale of any of these securities,
underwriters may receive compensation from us in the form of underwriting
discounts or commissions and may also receive commissions from purchasers of the
securities for whom they may act as agent. Underwriters may sell the securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for which they may act as agents.
Shares may also be sold in one or more of the following transactions: (a)
block transactions (which may involve crosses) in which a broker-dealer may sell
all or a portion of the shares as agent but may position and resell all or a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker-dealer as principal and resale by the broker-dealer for its own
account pursuant to a prospectus supplement; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable New York
Stock Exchange or other stock exchange rules; (d) ordinary brokerage
transactions and transactions in which a broker-dealer solicits purchasers; (e)
sales "at the market" to or through a market maker or into an existing trading
market, on an exchange or otherwise, for shares; and (f) sales in other ways not
involving market makers or established trading markets, including direct sales
to purchasers. Broker-dealers may also receive compensation from purchasers of
the shares which is not expected to exceed that customary in the types of
transactions involved.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of these securities, and any discounts or
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements entered
into with us, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act. Unless otherwise
set forth in the accompanying prospectus supplement, the obligations of any
26
underwriters to purchase any of these securities will be subject to certain
conditions precedent, and the underwriters will be obligated to purchase all of
the series of securities, if any are purchased.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us and our affiliates in the ordinary course of business.
In connection with the offering of the securities hereby, certain
underwriters, and selling group members and their respective affiliates, may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the applicable securities. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the SEC pursuant to which these persons may bid for or purchase securities for
the purpose of stabilizing their market price.
The underwriters in an offering of securities may also create a "short
position" for their account by selling more securities in connection with the
offering than they are committed to purchase from us. In that case, the
underwriters could cover all or a portion of the short position by either
purchasing securities in the open market following completion of the offering of
these securities or by exercising any over-allotment option granted to them by
us. In addition, the managing underwriter may impose "penalty bids" under
contractual arrangements with other underwriters, which means that they can
reclaim from an underwriter (or any selling group member participating in the
offering) for the account of the other underwriters, the selling concession for
the securities that are distributed in the offering but subsequently purchased
for the account of the underwriters in the open market. Any of the transactions
described in this paragraph or comparable transactions that are described in any
accompanying prospectus supplement may result in the maintenance of the price of
the securities at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph or in an
accompanying prospectus supplement are required to be taken by any underwriters
and, if they are undertaken, may be discontinued at any time.
The common stock is listed on the New York Stock Exchange under the symbol
"NLY." The preferred stock will be new issues of securities with no established
trading market and may or may not be listed on a national securities exchange.
Any underwriters or agents to or through which securities are sold by us may
make a market in the securities, but these underwriters or agents will not be
obligated to do so and any of them may discontinue any market making at any time
without notice. No assurance can be given as to the liquidity of or trading
market for any securities sold by us.
EXPERTS
Deloitte & Touche LLP, independent auditors, have audited our financial
statements as of December 31, 2000, 1999 and for each of the three years in the
period ended December 31, 2000, as set forth in their report which is
incorporated in this prospectus by reference. Our financial statements are
incorporated by reference in reliance on Deloitte & Touche LLP's reports, given
on their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for us
by Brown & Wood LLP. The opinion of counsel described under the heading "Federal
Income Tax Considerations" is being rendered by Brown & Wood LLP. This opinion
is subject to various assumptions and is based on current tax law.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may inspect and copy such reports, proxy
statements and other information at the public reference facilities maintained
by the SEC at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W, Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information. This
material can also be obtained
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from the SEC's worldwide web site at http://www.sec.gov. Our outstanding common
stock is listed on the NYSE under the symbol "NLY," and all such reports, proxy
statements and other information filed by us with the NYSE may be inspected at
the NYSE's offices at 20 Broad Street, New York, New York 10005.
We have filed a registration statement, of which this prospectus is a part,
covering the securities offered hereby. As allowed by SEC rules, this prospectus
does not contain all the information set forth in the registration statement and
the exhibits, financial statements and schedules thereto. We refer you to the
registration statement, the exhibits, financial statements and schedules thereto
for further information. This prospectus is qualified in its entirety by such
other information.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information in this prospectus. We have filed the
documents listed below with the SEC (File No. 1-13447) under the Securities
Exchange Act of 1934 (the "Exchange Act"), and these documents are incorporated
herein by reference:
o Our Annual Report on Form 10-K/A for the year ended December 31, 2000;
o Our Definitive Proxy Statement filed March 27, 2001;
o Our Current Report on Form 8-K filed January 31, 2001;
o Our Current Report on Form 8-K filed April 9, 2001;
o Our Current Report on Form 8-K filed April 16, 2001; and
o The description of our common stock included in our registration
statement on Form 8-A, as amended.
Any documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus and prior to the termination of
the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference in this prospectus and
to be part hereof from the date of filing those documents. Any documents we file
pursuant to these sections of the Exchange Act after the date of the initial
registration statement that contains this prospectus and prior to the
effectiveness of the registration statement will automatically be deemed to be
incorporated by reference in this prospectus and to be part hereof from the date
of filing those documents.
Any statement contained in this prospectus or in a document incorporated by
reference shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained in this prospectus or in any other document
which is also incorporated by reference modifies or supersedes that statement.
You may obtain copies of all documents which are incorporated in this
prospectus by reference (other than the exhibits to such documents which are not
specifically incorporated by reference herein) without charge upon written or
oral request to Investor Relations, at Annaly Mortgage Management, Inc., 12 East
41st Street, Suite 700, New York, New York, 10017, telephone number (212)
696-0100.
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ANNALY MORTGAGE MANAGEMENT, INC.
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