-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G+7Tu89bT+KjlB/il0/sTLb+x7zot2soBV4/Y5nMPoYid6mmS538T26nWrwRHRSR CHc09DOOg1oSKj/bKnFwEg== 0000944209-99-000774.txt : 19990517 0000944209-99-000774.hdr.sgml : 19990517 ACCESSION NUMBER: 0000944209-99-000774 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANWORTH MORTGAGE ASSET CORP CENTRAL INDEX KEY: 0001047884 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 522059785 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13709 FILM NUMBER: 99621078 BUSINESS ADDRESS: STREET 1: 1299 OCEAN AVENUE STREET 2: SUITE 210 CITY: SANTA MONICA STATE: CA ZIP: 90401 BUSINESS PHONE: 3103931428 MAIL ADDRESS: STREET 1: 1299 OCEAN AVENUE STREET 2: SUITE 210 CITY: SANTA MONICA STATE: CA ZIP: 90401 10-Q 1 FORM 10-Q ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ______________________ (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ______________ Commission File No. 001-13709 ______________________ ANWORTH MORTGAGE ASSET CORPORATION (Exact name of Registrant as specified in its charter) MARYLAND 52-2059785 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1299 Ocean Avenue, #200 Santa Monica, CA 90401 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 394-0115 ______________________ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of March 31, 1999, 2,291,300 shares of Common Stock, $0.01 par value per share were issued and outstanding. ______________________ ================================================================================ INDEX -----
Part I. Financial Information Page - ------ --------------------- ---- Item 1. Financial Statements Balance Sheets at March 31, 1999 and March 31, 1998................................. 3 Statements of Operations for the three months ended March 31, 1999 and for the period March 17, 1998 (Commencement of Operations) to March 31, 1998................ 4 Statement of Stockholders' Equity for the three months March 31, 1999............... 5 Statements of Cash Flows for the three months ended March 31, 1999 and for the period March 17, 1998 (Commencement of Operations) to March 31, 1998................ 6 Notes to the Financial Statements................................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................. 11 Part II. Other Information - ------- ----------------- Item 1. Legal Proceedings ....................................................................... 24 Item 2. Changes in Securities.................................................................... 24 Item 3. Defaults upon Senior Securities.......................................................... 24 Item 4. Submission of Matters to a Vote of Security Holders...................................... 24 Item 5. Other Information........................................................................ 24 Item 6. Exhibits and Reports on Form 8-K......................................................... 24 Signatures.......................................................................................... 25
Page 2 Part I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ANWORTH MORTGAGE ASSET CORPORATION Balance Sheets
March 31, 1999 December 31, 1998 -------------- ----------------- (unaudited) Assets Mortgage backed securities $166,679,000 $184,245,000 Other marketable securities 490,000 488,000 Cash and cash equivalents 2,888,000 13,299,000 Accrued interest receivable 1,210,000 1,411,000 Prepaid expenses and other - 15,000 ------------ ------------ $171,267,000 $199,458,000 ============ ============ Liabilities and Stockholders Equity Liabilities Reverse repurchase agreements $141,320,000 $170,033,000 Payable for purchase of mortgage-backed 10,001,000 10,047,000 securities Accrued interest payable 1,569,000 1,799,000 Dividends payable 275,000 279,000 Accrued expenses and other 90,000 58,000 ------------ ------------ 153,255,000 182,216,000 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share; authorized 20,000,000 shares; no shares issued and outstanding - - Common stock; par value $.01 per share; authorized 100,000,000 shares; 2,328,000 and 2,291,300 issued and outstanding respectively 23,000 23,000 Additional paid in capital, net 18,971,000 18,971,000 Other comprehensive income, unrealized gain (loss) on available for sale securities (839,000) (1,775,000) Retained earnings 27,000 23,000 Treasury stock at cost (36,700 shares) (170,000) - ------------ ------------ 18,012,000 17,242,000 ------------ ------------ $171,267,000 $199,458,000 ============ ============
See notes to financial statements. Page 3 ANWORTH MORTGAGE ASSET CORPORATION Statements of Operations (unaudited)
Period from March 17, 1998 Three months (Commencement ended of Operations) to March 31, 1999 March 31, 1998 Interest and dividend income net of amortization of premium $2,404,000 $ 73,000 Interest expense 2,036,000 42,000 ---------- ---------- Net interest income $ 368,000 $ 31,000 Expenses: Management fee 44,000 7,000 Incentive fee - - Other expense 46,000 8,000 ---------- ---------- Net Income $ 278,000 $ 16,000 ========== ========== Basic and diluted earnings per share $ 0.12 $ 0.01 ========== ========== Dividends declared per share $ 0.12 $ 0.00 ========== ========== Average number of shares outstanding 2,320,172 2,200,100 ========== ==========
See notes to financial statements. Page 4 ANWORTH MORTGAGE ASSET CORPORATION Statement of Stockholders' Equity Three Months Ended March 31, 1999
Accum. Other Other Common Common Additional Compre- Treasury Compre- Stock Stock Paid-in hensive Retained Stock hensive Shares Par Value Capital Income Earnings at Cost Income Total ------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 2,328,000 $23,000 $18,971,000 $(1,775,000) $ 23,000 $ - $17,242,000 Issuance of common stock - - - Available-for-sale securities, Fair value adjustment 936,500 936,500 936,500 Net income 278,500 278,500 278,500 ---------- $1,215,000 ========== Repurchase of (36,700) (170,000) (170,000) common stock Dividends declared- $0.12 per share (275,000) (275,000) -------------------------------------------------------------------------------- ----------- Balance, March 31, 1999 2,291,300 $23,000 $18,971,000 $ (838,500) $ 26,500 $(170,000) $18,012,000 ================================================================================ ===========
See notes to financial statements. Page 5 ANWORTH MORTGAGE ASSET CORPORATION Statements of Cash Flows
For the three months ended March 31, 1999 1998 ------------ ------------ Operating Activities: Net income $ 278,000 $ 16,000 Adjustments to reconcile net income to net cash provided by operating activites: Amortization 518,000 5,000 Decrease (increase) in accrued interest receivable 194,000 (696,000) Decrease (increase) in deferred organization expense - (12,000) Increase (decrease) in accrued interest payable (229,000) 42,000 Increase (decrease) in accrued expenses and other 51,000 27,000 ------------ ------------ Net cash provided by operating activities 812,000 (618,000) Investing Activities: Available-for-sale securities: Purchases (46,000) (88,680,000) Principal payments 17,981,000 - ------------ ------------ Net cash (used in) investing activities 17,935,000 (88,680,000) Financing Activities: Net borrowings from reverse repurchase agreements (28,713,000) 83,507,000 Proceeds from common stock issued, net - 18,381,000 Repurchase of common stock (170,000) Dividends paid (275,000) - ------------ ------------ Net cash provided by financing activities (29,158,000) 101,888,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents (10,411,000) 12,590,000 Cash and cash equivalents at beginning of period 13,299,000 1,000 ------------ ------------ Cash and cash equivalents at end of period $ 2,888,000 $ 12,591,000 ============ ============
See notes to financial statements. Page 6 ANWORTH MORTGAGE ASSET CORPORATION NOTES TO FINANCIAL STATEMENTS March 31, 1999 NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Anworth Mortgage Asset Corporation (the "Company") was incorporated in Maryland on October 20, 1997. The Company commenced its operations of purchasing and managing an investment portfolio of primarily adjustable-rate mortgage-backed securities on March 17, 1998, upon completion of its initial public offering of the Company's common stock. A summary of the company's significant accounting policies follows: BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The operating results for the quarter ended March 31, 1999 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1999. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of twelve months or less. The carrying amount of cash equivalents approximates their fair market value. MORTGAGE BACKED SECURITIES The Company invests primarily in adjustable-rate mortgage pass-through certificates and hybrid adjustable-rate mortgage-backed securities ("ARM" securities). Hybrid ARM securities have an initial interest rate that is fixed for a certain period, usually three to five years, and then adjusts annually for the remainder of the term of the loan. Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"), requires the Company to classify its investments as either trading investments, available-for-sale investments or held-to-maturity investments. It is the Company's policy to classify each of its ARM securities as available-for-sale and then to monitor the security's performance over time before making a final determination as to the Page 7 permanent classification. At this time all of the Company's ARM securities are classified as available-for-sale. All assets that are classified as available- for-sale are carried at fair market value. Interest income is accrued based on the outstanding principal amount of the ARM securities and their contractual terms. Premiums associated with the purchase of ARM securities are amortized into interest income over the estimated lives of the asset using the effective yield method. ARM securities are recorded on the date the securities are purchased or sold. CREDIT RISK At March 31, 1999 the Company has limited its exposure to credit losses on its portfolio of ARM securities by purchasing primarily securities from Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA"). The payment of principal and interest on the FHLMC and FNMA ARM securities are guaranteed by those respective agencies. At March 31, 1999, all of the Company's ARM securities have an implied "AAA" rating. INCOME TAXES The Company intends to elect to be taxed as a Real Estate Investment Trust and to comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, the Company will not be subject to Federal income tax to the extent that its distributions to stockholders satisfy the REIT requirements. EARNINGS PER SHARE Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. Stock options that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. MORTGAGE BACKED SECURITIES Page 8 The following table pertains to the Company's ARM securities classified as available-for-sale as of March 31, 1999, which are carried at their fair value:
Federal Federal Home Loan National Other Total Mortgage Mortgage ARM ARM Corporation Association Assets Assets - ----------------------------------------------------------------------------------------------------- Amortized Cost ($000's) $38,326 $117,992 $0 $156,318 Unrealized gains (losses) (228) (468) 0 (696) --------------------------------------------------------------- Estimated fair value $38,098 $117,524 $0 $155,622 ---------------------------------------------------------------
In addition, at March 31, 1999 the Company held a position in a preferred stock issued by Thornburg Mortgage Asset Corporation and a position in a fixed-rate mortgage backed security, which had fair values of $490,000 and $9,952,000 respectively. The remaining portion of the mortgage backed securities consisted of a principal payments receivable of $1,107,000. The following table summarizes the Company's securities as of March 31, 1999 at their fair value:
Fixed REIT Rate Preferred ARMS MBS Stock Total - ------------------------------------------------------------------------------------------------------- Amortized Cost ($000's) $156,318 $10,120 $464 $166,902 Unrealized gains 26 26 Unrealized losses (696) (170) (866) ------------------------------------------------------------------- Estimated fair value $155,622 $ 9,950 $490 $166,062 -------------------------------------------------------------------
NOTE 3. REVERSE REPURCHASE AGREEMENTS The Company has entered into reverse repurchase agreements to finance most of its ARM securities. The reverse repurchase agreements are short-term borrowings that are secured by the market value of the Company's ARM securities and bear interest rates that have historically moved in close relationship to LIBOR. At March 31, 1999, the repurchase agreements had the following remaining maturities: - ------------------------------------------------------------ Within 59 days $ 61,280,571 60 to 89 days 13,570,364 90 to 119 days 26,268,309 Over 120 days 40,201,000 ------------ $141,320,244 ------------
NOTE 4. INITIAL PUBLIC OFFERING Page 9 On March 12, 1998 the Company completed its initial public offering of common stock, $0.01 par value. The Company issued 2,200,000 shares of common stock at a price of $9 per share and received net proceeds of $18,414,000, net of underwriting discount of $0.63 per share. Offering costs in connection with the public offering, including the underwriting discount and other expenses, which total $491,182, have been charged against the proceeds of the offering. Prior to March 17, 1998, the Company had no operations other than activities relating to its organization, registration under the Securities Act of 1933 and the issuance of 100 shares of its common stock to its initial shareholder. The Company granted the underwriters of the initial public offering of the Company's common stock a 30-day option to purchase additional shares of common stock solely to cover over-allotments, if any, at the public offering price of $9 per share. On April 14, 1998, the underwriters purchased an additional 127,900 shares under the terms of this option. As a result, the Company received additional net proceeds of $1,070,523, net of the underwriting discount of $0.63 per share, on April 14, 1998, which is reflected in the accompanying financial statements. NOTE 5. TRANSACTIONS WITH AFFILIATES The Company entered into a Management Agreement (the "Agreement") with Anworth Mortgage Advisory Corporation (the "Manager"), effective March 12, 1998. Under the terms of the Agreement, the Manager, subject to the supervision of the Company's Board of Directors, is responsible for the management of the day-to- day operations of the Company and provides all personnel and office space. The Company pays the Manager an annual base management fee equal to 1% of the first $300 million of Average Net Invested Assets (as defined in the Agreement), plus 0.8% of the portion above $300 million (the "Base Management Compensation"). In addition to the Base Management Compensation, the Manager shall receive as incentive compensation for each fiscal quarter an amount equal to 20% of the Net Income of the Company, before incentive compensation, for such fiscal quarter in excess of the amount that would produce an annualized Return on Equity (calculated by multiplying the Return on Equity for such fiscal quarter by four) equal to the Ten-Year U.S. Treasury Rate for such fiscal quarter plus 1% (the "Incentive Management Compensation"). For the quarter ended March 31, 1999 and for the period from March 17, 1998 (commencement of operations) to March 31, 1998, the Company paid the Manager $44,000 and $7,000, respectively, in base management fee. The Company has adopted the Anworth Mortgage Asset Corporation 1997 Stock Option and Awards Plan (the "Stock Option Plan") which authorizes the grant of options to purchase an aggregate of up to 300,000 of the outstanding shares of the company's Common Stock. The plan authorizes the Board of Directors, or a committee of the Board of Directors, to grant incentive stock options ("ISOs") as defined under section 422 of the Internal Revenue Code of 1986, as Page 10 amended, options not so qualified ("NQSOs"), dividend equivalent rights ("DERs") and stock appreciation rights ("SARs"). The exercise price for any option granted under the Stock Option Plan may not be less than 100% of the fair market value of the shares of Common Stock at the time the option is granted. As of March 31, 1999, the Company had granted 148,000 options at an exercise price of $9 per share and 136,000 DERs. Options granted to officers become exercisable at a rate of 33.3% each year following their date of grant. Options granted to directors become exercisable six months after their date of grant. These options will expire on March 11, 2008. The DER's are payable only when their associated stock options are exercised, thereby reducing the effective strike price of such options. The Company will recognize compensation expense at the time the average market price of the stock exceeds the effective strike price. The Company has not yet recognized any compensation expense related to the DER's because the current market price of the common stock is substantially less than the effective strike price. In April 1999, the Company granted an additional 50,000 options and an additional 12,500 DER's. These options will vest three years from the date of grant and will expire on April 17, 2009. For the quarter ended March 31, 1999, the Company recorded no operating expense associated with this plan. NOTE 6. SHARE REPURCHASE In December of 1998, the Board of Directors authorized the repurchase of 50,000 shares of the Company's common stock. As of March 31, 1999, 36,700 shares had been repurchased at an average cost of $4.63 per share. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information contained in this Quarterly Report on Form 10-Q constitutes "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," or "continue" or the negatives thereof or other variations thereon or comparable terminology. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, but not limited to, risks related to the future level and relationship of various interest rates, prepayment rates and the timing of new programs. The statements in the "Risk Factors" of the Company's Prospectus dated March 12, 1998 constitute cautionary statements identifying important factors, including certain risks and uncertainties, with respect to such forward-looking statements that could cause the actual results, performance or achievements of the Company to differ materially from those reflected in such forward-looking statements. GENERAL Page 11 Anworth Mortgage Asset Corporation (the "Company") was formed in October 1997 to invest in mortgage assets, including mortgage pass-through certificates, collateralized mortgage obligations, mortgage loans and other securities representing interests in, or obligations backed by, pools of mortgage loans which can be readily financed and short-term investments (collectively, Mortgage-Backed Securities). The Company's principal business objective is to generate net income for distribution to stockholders from the spread between the interest income on its Mortgage-Backed Securities and the costs of borrowing to finance its acquisition of Mortgage-Backed Securities. The Company commenced operations on March 17, 1998 upon the closing of its initial public offering. Since that date the Company has been in the process of deploying its capital and building its balance sheet through the acquisition of mortgage assets and the financing of those assets in the credit markets. The Company seeks to generate income through its use of leverage and active management of the asset/liability yield spread. The financial statements included in this quarterly report on Form 10-Q should be interpreted in light of this growth process and are not necessarily representative of what they may be in the future. The Company will seek to generate growth in earnings and dividends per share in a variety of ways, including through (i) issuing new Common Stock and increasing the size of the balance sheet when opportunities in the market for Mortgage- Backed Securities are likely to allow growth in earnings per share, (ii) seeking to improve productivity by increasing the size of the balance sheet at a rate faster than the rate of increase in operating expenses, (iii) continually reviewing the mix of Mortgage-Backed Security types on the balance sheet in an effort to improve risk-adjusted returns, and (iv) attempting to improve the efficiency of the Company's balance sheet structure through the issuance of uncollateralized subordinated debt, preferred stock and other forms of capital, to the extent management deems such issuances appropriate. The Company is organized for tax purposes as a real estate investment trust ("REIT") and therefore generally passes through substantially all of its earnings to stockholders without paying federal or state income tax at the corporate level. The Company's investment policy is to invest at least 70% of total assets in "Primary" adjustable-rate Mortgage Securities and Short-Term Investments (investments with an average life of one year or less). "Primary" as used herein Page 12 means either (i) securities that are rated within one of the two highest rating categories by at least one of either Standard & Poor's or Moody's, or (ii) securities that are unrated but are either obligations of the United States or obligations guaranteed by the United States government or an agency or instrumentality of the United States government. The remainder of the Company's investment portfolio, comprising not more than 30% of its total assets, may consist of mortgage assets which are unrated, or, if rated, are less than Primary, including (i) mortgage loans secured by first liens on single-family (one-to-four units) residential properties, (ii) mortgage securities backed by loans on single-family, multi-family, commercial or other real estate-related properties which are rated at least Investment Grade (rated at least "BBB" or "Baa" by Standard & Poor's or Moody's, respectively) or (as to single-family and multi-family Mortgage Securities) the equivalent, if not rated, (iii) fixed-rate mortgage assets, including the acquisition of such assets for the purpose of being combined with hedging instruments to obtain investment characteristics similar to adjustable-rate mortgage assets, and (iv) other mortgage securities representing interests in, or secured by mortgages on, real property. The Company may also generate qualified REIT income through investment in other REITs. The Company will generally not acquire inverse floaters, Remic residuals or first loss subordinated bonds. The Company may acquire mortgage derivative securities, including, but not limited to, interest only, principal only or other mortgage securities that receive a disproportionate share of interest income or principal, either as an independent stand-alone investment opportunity or to assist in the management of prepayment and other risks, but only on a limited basis due to the greater risk of loss associated with mortgage derivative securities. FINANCIAL CONDITION At March 31, 1999, the Company held total assets of $171 million, consisting primarily of $156 million of ARM securities, $10 million of fixed-rate mortgage- backed securities and $.5 million of REIT preferred stock. At March 31, 1999, 94% of the qualified real estate assets held by the Company were Primary assets. Of the ARM securities owned by the Company, 82% were adjustable-rate pass- through certificates which reset at least once a year. The remaining 18% were 3/1 and 5/1 hybrid ARMS with an average reset of 3.8 years. Hybrid ARM securities have an initial interest rate that is fixed for a certain period, usually three to five years, and then adjust annually for the remainder of the term of the loan. Page 13 The following table presents a schedule of ARM securities owned at March 31, 1999 classified by type of issuer. ARM SECURITIES BY ISSUER (Dollar amounts in thousands)
- ----------------------------------------------------------------- Agency Carrying Portfolio Value Percentage - ----------------------------------------------------------------- FNMA $117,524 76 - ----------------------------------------------------------------- FHLMC 38,098 24 - ----------------------------------------------------------------- Total Portfolio $155,622 100 =================================================================
The following table classifies the Company's portfolio of ARM securities by type of interest rate index. ARM ASSETS BY INDEX (Dollar amounts in thousands)
- -------------------------------------------------------------- Index Carrying Portfolio Value Percentage - -------------------------------------------------------------- Six-month LIBOR $ 12,541 8.1% - -------------------------------------------------------------- Six-month Certificate of Deposit 7,202 4.6% - -------------------------------------------------------------- One-year Constant Maturity Treasury 129,518 83.2% - -------------------------------------------------------------- Cost of Funds Index 6,361 4.1% - -------------------------------------------------------------- 155,622 100.0% ==============================================================
The ARM portfolio had a weighted average coupon of 7.08% at March 31, 1999. The weighted average one-month constant prepayment rates ("CPR") of the Company's MBS portfolio were 34%, 33% and 28%, respectively, for the months of January, February and March, 1999. At March 31, 1999 the unamortized net premium paid for the mortgage-backed securities was $4,071,000. Page 14 The Company analyzes its mortgage-backed securities and the extent to which prepayments impact the yield of the securities. When actual prepayments exceed expectations, the Company amortizes the premiums paid on mortgage assets over a shorter time period, resulting in a reduced yield to maturity on the Company's mortgage assets. Conversely, if actual prepayments are less than the assumed constant prepayment rate, the premium would be amortized over a longer time period, resulting in a higher yield to maturity. The Company monitors its yield expectations versus its actual prepayment experience on a monthly basis in order to adjust the amortization of the net premium. The fair value of the Company's portfolio of mortgage-backed securities classified as available-for-sale was $.87 million less than the amortized cost of the securities, resulting in a negative adjustment of .52% of the amortized cost of the portfolio as of March 31, 1999, a significant improvement over the $1.8 million negative adjustment at December 31, 1998. This price improvement reflects the possibility of slower future prepayments which would have the effect of extending the average life of the Company's ARM securities and increasing their yield and market value. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 For the quarter ended March 31, 1999, the Company's net income was $278,000, or $0.12 per share (basic and diluted EPS), based on an average of 2,320,172 average shares outstanding. Net interest income for the quarter totaled $368,000. Net interest income is comprised of the interest income earned on mortgage investments less interest expense from borrowings. During the first quarter of 1999, the Company incurred operating expenses of $90,000, consisting of a base management fee of $44,000 and other operating expenses of $46,000. The Company commenced operations on March 17, 1998, therefore comparing results of operations to the period ended March 31, 1998 is not meaningful because the 1998 period was comprised of only 15 days. The Company's return on average equity was 1.46% or, on an annualized basis, 5.97%, for the quarter ended March 31, 1999. The table below shows the components of return on average equity. Page 15 COMPONENTS OF RETURN ON AVERAGE EQUITY/(1)/
- --------------------------------------------------------------------------------------------------- For the Quarter Ended Net Interest Income/ G&A Expense/(2)// Net Income/ Equity Equity Equity - --------------------------------------------------------------------------------------------------- Jun 30, 1998 2.52% 0.65% 1.87% - --------------------------------------------------------------------------------------------------- Sep 30, 1998 1.92% 0.64% 1.28% - --------------------------------------------------------------------------------------------------- Dec 31, 1998 1.62% 0.23% 1.40% - --------------------------------------------------------------------------------------------------- Mar 31, 1999 1.94% 0.47% 1.46% - ---------------------------------------------------------------------------------------------------
(1) Average equity excludes unrealized gain (loss) on available-for-sale ARM securities. (2) Excludes performance fees. The following table shows the Company's average daily balances of cash equivalents and mortgage assets, the yields earned on each type of earning assets, the yield on average daily earning assets and interest income.
- ------------------------------------------------------------------------------------------------------------------- Average Yield on Daily Yield on Average Yield on Average Amortized Average Average Daily Average Dividend Daily Cost of Daily Daily Amortized Daily and Cash Mortgage Earning Cash Cost of Earning Interest in thousands Equivalents Assets Assets Equivalents Mortgage Assets Income Assets - ------------------------------------------------------------------------------------------------------------------- For the quarter ended June 30, 1998 $6,878 $175,340 $182,218 5.59 6.17 6.14 $2,799 - ------------------------------------------------------------------------------------------------------------------- For the quarter ended September 30, 1998 $5,476 $196,014 $201,490 5.56 5.92 5.91 $2,978 - ------------------------------------------------------------------------------------------------------------------- For the quarter ended December 31, 1998 $6,736 $187,444 $194,181 5.00 5.62 5.60 $2,717 - ------------------------------------------------------------------------------------------------------------------- For the quarter ended March 31, 1999 $8,384 $170,633 $179,017 4.87 5.40 5.37 $2,404 - -------------------------------------------------------------------------------------------------------------------
The table below shows the Company's average daily borrowed funds and average daily cost of funds as compared to average one- and average three-month LIBOR.
- --------------------------------------------------------------------------------------------------------------------------- Average Average Average One-month Cost of Cost of LIBOR Funds Funds Average Average Average Average Relative Relative Relative Daily Daily One- Three- to Average to Average to Average Borrowed Interest Cost of Month Month Three-month One-month Three-month in thousands Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR - --------------------------------------------------------------------------------------------------------------------------- For the quarter ended June 30, 1998 $162,829 $2,318 5.70% 5.66% 5.69% (0.03)% 0.04% 0.01% - --------------------------------------------------------------------------------------------------------------------------- For the quarter ended Sept 30, 1998 182,954 2,611 5.71% 5.62% 5.62% 0.00% 0.09% 0.09% - --------------------------------------------------------------------------------------------------------------------------- For the quarter ended Dec 31, 1998 174,611 2,407 5.51% 5.36% 5.27% 0.09% 0.15% 0.24% - --------------------------------------------------------------------------------------------------------------------------- For the quarter ended Mar 31, 1999 157,555 2,036 5.24% 4.95% 5.00% (0.05)% 0.29% 0.24% - ---------------------------------------------------------------------------------------------------------------------------
Page 16 For the quarter ended March 31, 1999, the yield on the Company's total assets, including the impact of the amortized of premiums and discounts, was 5.37%. The Company's weighted average cost of funds at March 31, 1999, was 5.24%. The Company pays the Manager an annual base management fee, generally based on average net invested assets, as defined in the Management Agreement, payable monthly in arrears as follows: 1.0% of the first $300 million of Average Net Invested Assets, plus 0.8% of the portion above $300 million. In order for the Manager to earn a performance fee, the rate of return on the stockholders' investment, as defined in the Management Agreement, must exceed the average ten-year U.S. Treasury rate during the quarter plus 1%. During the first quarter of 1999, the Manager earned no performance fee. During the first quarter of 1999, the Company's return on common equity was 1.46% or, on an annualized basis, 5.97%. The ten-year U.S. Treasury rate for the corresponding period was 4.96%. The following table shows operating expenses as a percent of total assets: ANNUALIZED OPERATING EXPENSE RATIOS
- ------------------------------------------------------------------------------------------------------ Management Fee & Other For The Expenses/ Performance Fee/ Total G&A Expenses/ Quarter Ended Total Assets Total Assets Total Assets - ------------------------------------------------------------------------------------------------------ Jun 30, 1998 0.23% 0.00% 0.23% - ------------------------------------------------------------------------------------------------------ Sep 30,1998 0.24% 0.00% 0.24% - ------------------------------------------------------------------------------------------------------ Dec 31,1998 0.09% 0.00% 0.09% - ------------------------------------------------------------------------------------------------------ Mar 31, 1999 0.21% 0.00% 0.21% - ------------------------------------------------------------------------------------------------------
Page 17 The Company did not enter into any interest rate agreements to date. As part of its asset/liability management process, the Company may enter into interest rate agreements such as interest rate caps, floors and swaps. These agreements would be entered into to reduce interest rate risk and would be designed to provide income and capital appreciation to the Company in the event of certain changes in interest rates. The Company reviews the need for interest rate agreements on a regular basis consistent with its Capital Investment Policy. The Company has not experienced credit losses on its portfolio of ARM securities to date, but losses may be experienced in the future. At March 31, 1999, the Company had limited its exposure to credit losses on its portfolio of ARM securities by purchasing only Agency Certificates, which, although not rated, carry an implied "AAA" rating. COMMON DIVIDEND As a REIT, the Company is required to declare dividends amounting to 85% of each year's taxable income by the end of each calendar year and to have declared dividends amounting to 95% of its taxable income for each year by the time it files its applicable tax return and, therefore, generally passes through substantially all of its earnings to shareholders without paying federal income tax at the corporate level. Since the Company, as a REIT, pays its dividends based on taxable earnings, the dividends may at times be more or less than reported earnings. On March 17, 1999 the Company declared a dividend of $0.12 per share payable on April 12, 1999 to holders of record as of April 1, 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds for the quarter ended March 31, 1999 consisted of reverse repurchase agreements, which totaled $141 million at March 31, 1999. The Company's other significant source of funds for the quarter ended March 31, 1999 consisted of payments of principal and interest from its ARM securities portfolio in the amount of $18.0 million. In the future, the Company expects its primary sources of funds will consist of borrowed funds under reverse repurchase agreement transactions with one- to twelve-month maturities and of Page 18 monthly payments of principal and interest on its ARM securities portfolio. The Company's liquid assets generally consist of unpledged ARM assets, cash and cash equivalents. The borrowings incurred during the quarter ended March 31, 1999 had a weighted average interest cost during the quarter of 5.24%. As of March 31, 1999, all of the Company's reverse repurchase agreements were fixed-rate term reverse repurchase agreements with original maturities that range from three months to one year. The Company has borrowing arrangements with ten different financial institutions and on March 31, 1999, had borrowed funds under reverse repurchase agreements with eight of these firms. Because the Company borrows money based on the fair value of its ARM securities and because increases in short-term interest rates can negatively impact the valuation of ARM securities, the Company's borrowing ability could be limited and lenders may initiate margin calls in the event short-term interest rates increase or the value of the Company's ARM securities declines for other reasons. During the quarter ended March 31, 1999, the Company had adequate cash flow, liquid assets and unpledged collateral with which to meet its margin requirements during the period. Further, the Company believes it will continue to have sufficient liquidity to meet its future cash requirements from its primary sources of funds for the foreseeable future without needing to sell assets. STOCKHOLDERS' EQUITY The Company uses "available-for-sale" treatment for its Mortgage-Backed Securities; these assets are carried on the balance sheet at estimated market value rather than historical amortized cost. Based upon such "available-for- sale" treatment, the Company's equity base at March 31, 1999 was $18.0 million, or $7.86 per share. If the Company had used historical amortized cost accounting, the Company's equity base at March 31, 1999 would have been $18.9 million, or $8.23 per share. With the Company's "available-for-sale" accounting treatment, unrealized fluctuations in fair values of assets do not impact GAAP or taxable income but rather are reflected on the balance sheet by changing the carrying value of the asset and reflecting the change in stockholders' equity under "Other comprehensive income, unrealized gain (loss) on available for sale securities." By accounting for its assets in this manner, the Company hopes to provide useful information to stockholders and creditors and to preserve flexibility to sell assets in the future without having to change accounting methods. Page 19 As a result of this mark-to-market accounting treatment, the book value and book value per share of the Company are likely to fluctuate far more than if the Company used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may be misleading. Unrealized changes in the estimated fair value of Mortgage-Backed Securities have one direct effect on the Company's potential earnings and dividends: positive mark-to-market changes will increase the Company's equity base and allow the Company to increase its borrowing capacity while negative changes will tend to limit borrowing capacity under the Company's Capital Investment Policy. A very large negative change in the net market value of the Company's Mortgage- Backed Securities might impair the Company's liquidity position, requiring the Company to sell assets with the likely result of realized losses upon sale. "Other comprehensive income, unrealized gain (loss) on available for sale securities" was $.84 million, or 0.50% of the amortized cost of mortgage backed securities at March 31, 1999. EFFECTS OF INTEREST RATE CHANGES The Company has invested in adjustable-rate mortgage securities. Adjustable- rate mortgage assets are typically subject to periodic and lifetime interest rate caps that limit the amount an adjustable-rate mortgage securities' interest rate can change during any given period. Adjustable-rate mortgage securities are also typically subject to a minimum interest rate payable. The Company borrowings will not be subject to similar restrictions. Hence, in a period of increasing interest rates, interest rates on its borrowings could increase without limitation by caps, while the interest rates on its mortgage assets could be so limited. This problem would be magnified to the extent the Company acquires mortgage assets that are not fully indexed. Further, some adjustable- rate mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in receipt by the Company of less cash income on its adjustable-rate mortgage assets than is required to pay interest on the related borrowings. These factors could lower the Company's net interest income or cause a net loss during periods of rising interest rates, which would negatively impact the Company's liquidity and its ability to make distributions to stockholders. Page 20 The Company intends to fund the purchase of a substantial portion of its adjustable-rate mortgage securities with borrowings that may have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of the mortgage assets. Thus, the Company anticipates that in most cases the interest rate indices and repricing terms of its mortgage assets and its funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. During periods of changing interest rates, such interest rate mismatches could negatively impact the Company's net income, dividend yield and the market price of the Common Stock. Prepayments are the full or partial repayment of principal prior to the original term to maturity of a mortgage loan and typically occur due to refinancing of mortgage loans. Prepayment rates on mortgage securities vary from time to time and may cause changes in the amount of the Company's net interest income. Prepayments of adjustable-rate mortgage loans usually can be expected to increase when mortgage interest rates fall below the then-current interest rates on such loans and decrease when mortgage interest rates exceed the then-current interest rate on such loans, although such effects are not predictable. Prepayment experience also may be affected by the conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans underlying mortgage securities. The purchase prices of mortgage securities are generally based upon assumptions regarding the expected amounts and rates of prepayments. Where slow prepayment assumptions are made, the Company may pay a premium for mortgage securities. To the extent such assumptions materially and adversely differ from the actual amounts of prepayments, the Company would experience losses. The total prepayment of any mortgage asset that had been purchased at a premium by the Company would result in the immediate write-off of any remaining capitalized premium amount and consequent reduction of the Company's net interest income by such amount. Finally in the event that the Company is unable to acquire new mortgage assets to replace the prepaid mortgage assets, its financial condition, cash flows and results of operations could be materially adversely affected. OTHER MATTERS As of March 31, 1999, the Company calculates its Qualified REIT Assets, as defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be greater than 90.0% of its total assets, as compared to the Code requirement that at Page 21 least 75% of its total assets must be Qualified REIT Assets. The Company also calculates that greater than 98% of its 1999 revenue for the quarter ended March 31, 1999 qualifies for both the 75% source of income test and the 95% source of income test under the REIT rules. The Company also met all REIT requirements regarding the ownership of its common stock and the distributions of its net income. Therefore, as of March 31, 1999, the Company believes that it will continue to qualify as a REIT under the provisions of the Code. The Company at all times intends to conduct its business so as not to become regulated as an investment company under the Investment Company Act of 1940, as amended (the "Investment Company Act). If the Company were to become regulated as an investment company, then the Company's use of leverage would be substantially reduced. The Investment Company Act exempts entities that are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" ("Qualifying Interests"). Under current interpretation of the staff of the SEC, in order to qualify for this exemption, the Company must maintain at least 55% of its assets directly in Qualifying Interests. In addition, unless certain mortgage securities represent all of the certificates issued with respect to an underlying pool of mortgages, such mortgage securities may be treated as securities separate from the underlying mortgage loans and, thus, may not be considered Qualifying Interests for purposes of the 55% requirement. The Company calculates that it is in compliance with this requirement. YEAR 2000 The Company is subject to risks associated with the "Year 2000" problem, a term which refers to uncertainties about the ability of various data processing hardware and software to interpret dates correctly as we approach the Year 2000. To address these risks the Company has implemented a plan whereby it will evaluate its internal systems and, to a much larger extent, evaluate the readiness of the systems used by the Company's External Counterparties. The Company will develop contingency plans for implementation in the event of failure of any systems on which its business relies. Internal Systems - Currently, the Company uses a general ledger software application to prepare its books and records, as well as spreadsheet software to construct subsidiary ledgers. Throughout the fourth quarter of 1998 and into the Page 22 first and second quarters of 1999 the Company intends to create parallel files within these applications to test these packages' ability to interpret the year 2000 in various data fields on which calculations are made. In the event that either application is found not to be Year 2000 compliant, the Company will obtain replacement software from the suppliers. To date, the Company has not incurred any additional expense in connection with the evaluation of internal systems. Since the Company is externally managed, the testing and potential software replacement referred to above should not result in additional cost to the Company. External Counterparties - The Company has implemented a plan of communicating with its External Counterparties regarding the state of readiness of their Year 2000 plans. During the fourth quarter of 1998, the Company compiled a list of these counterparties and solicited information from each one regarding their Year 2000 plans. Many of these counterparties are prominent broker-dealers and investment banks or government mortgage agencies who are known by the Company to be involved in Year 2000 review processes currently being performed by securities industry regulators (such as the New York Stock Exchange or the Securities and Exchange Commission) and self-regulatory organizations. The Company intends to monitor the progress of each of these counterparties over the course of the next three quarters and report to shareholders regarding progress made by these counterparties. Contingency Plans - During the second and third quarters of 1999, after gathering data through the processes described above, the Company will develop plans to address any potential failure in internal or external systems. In its normal course of business the Company relies heavily on the accurate functioning of many computer applications. The Company's ability to perform its normal business functions depends heavily on the Company's ability to perform mathematical calculations quickly and accurately and its ability to send and receive funds quickly and accurately. While the Company believes that completion of its Year 2000 Plan will reduce some of the uncertainty that currently surrounds the Year 2000 problem, the Company acknowledges that Year 2000-related breakdowns in either the internal or external systems on which the Company depends could cause significant disruptions in the Company's operations. Page 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings At March 31, 1999, there were no pending legal proceedings to which the Company was a party or of which any of its property was subject. Item 2. Changes in Securities Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None Page 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, ANWORTH MORTGAGE ASSET CORPORATION Dated: May 13, 1999 By: /s/ Lloyd McAdams _________________________ Lloyd McAdams President (authorized officer of registrant) Dated: May 13, 1999 By: /s/ Pamela J. Watson _________________________ Pamela J. Watson, Chief Financial Officer and Treasurer (principal accounting officer) FINANCIAL DATA SCHEDULE This schedule contains summary financial information extracted from the March 31, 1999 Form 10-Q and is qualified in its entirety by reference to such financial statements. Page 25 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31, 1999 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,889 167,169 1,213 0 0 4,099 0 0 171,268 153,225 0 0 0 18,824 (813) 171,268 0 2,404 0 0 90 0 2,036 278 0 278 0 0 0 278 .12 .12
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