More annual reports from Annaly Capital Management:
2023 ReportPeers and competitors of Annaly Capital Management:
Irongate Group.
‘-
., .: .,
-,
L E T T E R
T O S H A R E H O L D E RS
TO our fe//ow Shareholders: I’m pleased to have this opportunity to review Annaly Mortgage Management, Inc.’s remarkable first year as a
public company and to thank the management, directors, staff and shareholders who helped to make 1997 such a successful year for us.
The challenges during 1997 were many, but Annaly succeeded in recognizing exceptional growth and strong results in a period when
investment climates changed dramatically from our initial capitalization through the end of the year
When we began operations in February 1997 with the completion of a successful offering raising $36 million in a private placement,
interest rates were universally recognized to be rising, and investment margins were viewed as relatively weak. By the time of our October
1997 initial public offering of 8.946 million shares, including the underwriter’s overallotment, which raised approximately an additional $14.2
million, the interest rate environment was shifting, Interest rates at year end 1997 were at their lowest level in two years and concerns about
global deflationary events found their way in the domestic markets. Despite these uncertain market conditions, we were gratified that the pri-
vate placement and the initial public offering combined created a $132 million capital base.
Acting on the changes taking place over the course of 1997, we incorporated our observations about overseas markets and general
credit spreads into our investment decisions and realized positive results. In the fourth quarter of 1997, the net interest margin on an
annualized basis increased to 1.220/. from 1.16% in the third quarter while our focused asset management kept the constant prepayment rate
(CPR) for the fourth quarter at a relatively low 180/.. This represented a very slight increase from the previous quarter amid an environment
of falling yields and increased homeowner refinancing. Earnings for the shortened year period from February 18, 1997 to December 31, 1997
were $4,9 million, or $0.83 per average share outstanding, on interest income of $24.7 million. We accomplished all of this in a year that saw
us grow from a relatively small, privately held company to a New York Stock Exchange-listed company with $1.2 billion in gross assets at
December 31, 1997.
From its inception, Annaly has viewed our primary mission as identifying the prospects for investing in high credit quality, mortgage
backed securities and implementing the most prudent cost controls and investment parameters to produce exceptional income returns relative
to the current investment alternatives. To the credit,of our asset management strategy, investors who participated in our initial private place-
ment earned an 180/0 total rate of return through the December 31, 1997 end of this shortened operating year, including $0.73 in dividends per
average share generated in a year when the Company was rarely at its optimal level of investment leverage. Investors who participated in the
initial public offering in October earned $0.22 in dividends as we began to deploy the capital late in the year.
We hold paramount the liquidity of the assets in Annaly’s portfolio, and the portfolio at year end consisted of 100% Federal National
Mortgage Association (FNMA), Government National Mortgage Association (GNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
securities, backed by either the full faith and credit or implied credit of the United States Government. We evaluate assets daily—continually
reviewing Annaly’s asseUliability strategy vis-a-vis the market’s fluctuating risk factors—implementing hedging efforts where appropriate and
adjusting the asset mix according to our interpretation of market conditions. The challenges we have anticipated in the market since the
beginning of 1997 have ultimately evidenced themselves, and we believe that the earnings Annaly has achieved and the liquidity the portfolio
has maintained are a clear reflection of the strength of our capital policy.
Our emphasis has been, and will remain, on long term earnings growth and stability. We believe that current market dynamics will
continue beyond the short term. In implementing our core investment strategies, we feel justified in our outlook for our earnings potential in
1998. Our early track record, in managing Annaly and its predecessor funds adeptly though the most dramatic of interest rate swings, bears
this out, We have faith in our capital investment policy, and we are grateful for our shareholder’s faith in it as well.
Our faith is well placed. I feel personally fortunate to have the opportunity to work with an exceptional team of professionals who
are 100% dedicated to the best interests of the shareholders. Their efforts, sacrifices and long hours are the unpaid dividends that reside
within our Company. I am thankful too for the opportunity to work with our Board of Directors, whose expertise, guidance and deep wealth
of personal experiences have been an invaluable resource to the firm.
Finally, our whole team of employees, officers and directors of Annaly are sincerely grateful to our shareholders, who took the
time to hear our plan and have demonstrated their belief in our abilities. It is our goal to be the top-performing company in our business
without sacrificing or compromising any of the principles which are embedded in our culture, We look forward to continuing the pursuit
of this vision in 1998.
Michael A.J. Farrell
Chairman and Chief Executive Officer
March 17th, 1998
C O M PA N Y P R O F I LE
A N N A L Y M O R T G A G E M A N A G E M E N T ,
l NC
Annaly Mortgage Management, Inc., a Maryland corporation owns and manages a portfolio of 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 has elected to be taxed as a Real Estate Investment Trust,
(“”RElT”), under the Internal Revenue Code of 1986.
F I N A N C I AL
H I G H L I G H TS
Period from February 78, 1997 to December31, 1997
(do//ars in ffrousands, except for per share dafa)
Statement of Operations Data:
Days in period
Interest income
Interest expense
Net interest income
Gain on sale of mortgage-backed securities
General and administrative expenses (G&A expense)
Net income
Basic net income per average share
Diluted net income per average share
Dividends declared per average share
Balance Sheet Data at December 31, 1997:
Mortgage-Backed Securities, net
Total assets
Repurchase agreements
Total liabilities
Stockholders’ equity
Number of common shares outstanding
Other Data:
Average total assets
Average borrowings
Average equity
Yield on interest earning assets for the period ended December 31, 1997
Cost of funds on interest bearing liabilities for the period ended December 31, 1997
Annualized Financial Ratios (l):
Net interest margin (net interest income/average total assets)
G&A expense as a percentage of average assets
G&A expense as a percentage of average equity
Return on average assets
Return on average equity
(11 Each ratio has been computed by annualizing the resu/fs for the 3 i 7-day period ended December 31, 1997.
1
$
317
24,713
19,677
5,036
735
852
$
4.919
$0.83
$0.78
$0.79
$ 1,161,779
1,167,740
918,869
1,032,654
135,086
12,713,900
$ 476,855
404,140
61,096
6.34°k
5.61°10
1 .220/0
0.21%
1.610/0
1.19~o
9.27~o
. .
.
.
.
..-
. . . . . . . . . . . . ----- .
M A N A G E M E NT ’ S
D I S C U S S I O N
A N D A N A L Y S I S
OF
F I N A N C I A L C O N D I T I O N
A ND
R E S UI
- TS
O F O P E R A T I O NS
A N N A L Y M O R T G A Q E M A N A G E M E N T , I NC .
Overview
The Company is a real estate investment trust (“REIT”) which acquires and manages Mortgage-Backed Securities which
can be readily financed. The Company commenced operations on February 18, 1997 upon the closing of a private place-
ment which resulted in proceeds to the Company of approximately $33 million. The Company received additional pro-
ceeds of $878,000 upon the closing of an offering to certain officers and directors of the Company on July 31, 1997. The
Company’s initial public offering was completed on October 14, 1997 raising approximate net proceeds of $99.0 million.
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. Since the commencement of operations on February 18, 1997, the Company has been in
the process of building its balance sheet by acquiring Mortgage-Backed Securities. Therefore, the operating results of
the Company reflected in the financial statements included in this annual report 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) continu-
ally 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.
Results Of Operations: February 18, 1997 to December 31, 1997
The Company’s 1997 fiscal year commenced with the start of operations on February 18, 1997 and concluded on
December 31, 1997. The 317-day period from February 18, 1997 to December 31, 1997 is referred to herein as “the
period ended December 31, 1997.”
Net Income Summary
For the period ended December 31, 1997, net income, as calculated according to Generally Accepted Accounting
Principles (L’GAAP), was $4,919,494, or $0.83 per share. Taxable income was $4,884,308, or $0.82 per share. Net
income per share is computed by dividing net income by the weighted average number of shares of outstanding
Common Stock during the period, which was 5,952,123. Dividends per weighted average number of shares outstanding
was $0.79 per share, $4,689,662 in total. Return on average equity was 9.270/. on an annualized basis.
Management’s policy is to focus on income and expense measures as a percentage of equity rather than as a percent-
age of assets. Therefore, improvements in asset-based measures such as net interest margin or operating expenses as
a percentage of assets do not necessarily translate into improved stockholder returns. Improvements in net interest
income or operating expenses as a percentage of equity, however, indicate that the Company is effectively utilizing its
equity capital base. The Company seeks to increase net income as a percentage of equity consistent with its Capital
Investment Policy.
2
. .
., . ..- . .. ,. - . ..__ . ------ . — . —.———. . .— —. ,—.
Net Income Summary
(dollars In thousands, except per share amounts)
Interest Income
Interest Expense
Net Interest Income
Gain on Sale of Mortgage-Backed Securities
General and Administrative Expenses
Net Income
Average Number of Outstanding Shares
Basic Net Income Per Share
Average Total Assets
Average Equity
Annualized Return on Average Assets
Annualized Return on Average Equity
Taxable Income and GAAP Income
Period Ended
December 31, 1997
$ 2 4 , 7 13
19,677
5,036
735
852
4.919
$
5,952,123
0,83
476,855
61,096
1.19%
9.27%
For the period ended December 31, 1997, income as calculated for tax purposes (taxable income) differed from taxable
income as calculated according to generally accepted accounting principles (GAAP income). The differences were in
the calculation of premium amortization, gain on sale of securities, and general and administrative expenses.
The distinction between taxable income and GAAP income is important to the Company’s stockholders because divi-
dends are declared on the basis of taxable income. While the Company does not pay taxes so long as it satisfies the
requirements for exemption from taxation pursuant to the REIT Provisions of the Internal Revenue Code, each year the
Company completes a corporate tax form wherein taxable income is calculated as if the Company were to be taxed.
This taxable income level determines the amount of dividends the Company can pay out over time. The table below
presents the major differences between GAAP and taxable income for the Company
Taxable Income
(dollars /n thousands)
For the Period Ended
December 31, 1997
GAAP Net
Income
Taxable General &
Administrative
Differences
Taxable Moflgage
Amortization
Differences
Taxable Gain on
Sale of Securities
Differences
Taxable Net
Income
$4,919
$3
($92)
$54
$4,884
Interest Income and Average Earning Asset Yiald
The Company had average earning assets of $448.3 million for the period ended December 31, 1997. The
Company’s primary source of income for the period ended December 31, 1997 was interest income. A portion of
income was generated by gains on sales of Mortgage-Backed Securities. Interest income was $24.7 million for the
period ended December 31, 1997. The yield on average earning assets was 6.340/. for the same period. The table
below shows the Company’s average balance of cash equivalents and Mortgage-Backed Securities, the yields
earned on each type of earning assets, the yield on average earning assets and interest income.
Average Earning Asset Yield
(dollars In thousands)
For the Period Ended
December 31, 1997
Average
Cash
Equivalents
Average
Amoriized
Cost of Mortgage-
Backed Securities
Average
Earning
Assets
Yield on
Average
Cash
Equivalents
Yield on
Average
Amortized
Cost of Morfgage-
Backed Securities
Yield on
Average Earning
Assets
Interest
Income
$30
$448,276
$448,306
4.20%
6.3470
6.34%
$24,713
The Constant Prepayment Rate (or “CPR”) on the Company’s portfolio of Mortgage-Backed Securities for the period
ended December 31, 1997 was 170/.. “CPR” means an assumed rate of prepayment for the Company’s Mortgage-
Backed Securities, expressed as an annual rate of prepayment relative to the outstanding principal balance of the
Company’s Moflgage-Backed Securities. This CPR does not purpoti to be either a historical description of the prepay-
ment experience of the Company’s Mortgage-Backed Securities or a prediction of the anticipated rate of prepayment
of the Company’s Mortgage-Backed Securities. Since a large portion of the Company’s assets was purchased at a pre-
mium to par value and only a small portion of the Company’s assets was purchased at a discount to par value, the
premium balance in the Company’s portfolio is substantially higher than the discount balance. Principal prepayments
had a negative effect on the Company’s earning asset yield for the period ended December 31, 1997 because the
Company adjusts its rates of premium amortization and discount accretion monthly based on actual payments received.
3
.
.
. . — -
..-. . .
. . . ,-.
Interest Expense and the Cost of Funds
The Company anticipates that its largest expense will usually be the cost of borrowed funds. The Company had aver-
age borrowed funds of $404.1 million and total interest expense of $19.7 million for the period ended December 31,
1997. The average cost of funds was 5.61 O/. for the same period. Interest expense is calculated in the same manner for
GAAP and tax purposes.
With the Company’s current asset/liability management strategy, changes in the Company’s cost of funds are expected
to be closely correlated with changes in short-term LIBOR, although the Company may choose to extend the maturity
of its liabilities at any time. The Company’s average cost of funds was 0.06% below one-month LIBOR for the period
ended December 31, 1997. The Company generally has structured its borrowings to adjust with one-month LIBOR
because the Company believes that one-month LIBOR may continue to be lower than six-month LIBOR in the present
interest rate environment, During the period ended December 31, 1997, average one-month LIBOR, which was 5.670/~,
was 0.200/0 lower than average six-month LIBOR, which was 5.877..
The table below shows the Company’s average borrowed funds and average cost of funds as compared to average
one- and average six-month LIBOR.
Averaqe Cost of Funds
(do//ars in thousands)
For the Period
Ended
December 31, 1997
Average
Borrowed
Funds
Interest
Expense
Average
cost of
Funds
Average
One-
Month
LIBOR
Average
Six-
Month
LIBOR
Average
One-Month
LIBOR
Relative
to Average
Six-Month
LIBOR
Average
cost of
Funds
Relative
to Average
One-Month
LIBOR
Average
cost of
Funds
Relative
to Average
Six-Month
LIBOR
$404,140
$19,677
5.61?6
5.677.
5.87%
(0.20%)
(0,06°~0)
(0.26?6)
Net Interest Rate Agreement Expense
For the period ended December 31, 1997, the Company did not enter into any interest rate agreements. 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.
Net Interest Income
Net interest income, which equals interest income less interest expense, totaled $5.0 million for the period ended
December 31, 1997. Net interest spread, which equals the yield on the Company’s average assets for the period less the
average cost of funds for the period, was r).i’3°/0 for the period ended December 31, 1997. Net interest margin, which
equals net interest income divided by average total assets, was 1.227. on an annualized basis. Taxable net interest
income was $92,406 less than GAAP net interest income because of differing premium amortization. The principal reason
that annualized net interest margin exceeded net interest spread is that average assets exceeded average liabilities. A
podion of the Company’s assets are funded with equity rather than borrowings. The Company did not have any interest
rate agreement expenses for the period ended December 31, 1997.
The table below shows interest income by earning asset type, average earning assets by type, total interest income,
interest expense, average repurchase agreements, average cost of funds, and net interest income for the period ended
December 31, 1997.
GAAP Net Interest Income
Average
Amortized
cost of
Mortgage-
Backed
Securities
Held
Interest
Income on
Mongage-
Backed
Securities
(dol/ars in thousands)
For the Period
Interest
Income on
Cash
Average
Cash
Total
Interest
Equivalents Equivalents Income
Yield on
Average
Interest
Earning
Assets
Average
Balance of
Repurchase
Interest
Agreements Expense
Average
cost of
Funds
Net
Interest
Income
Ended
December 31, 1997 $448,276 $24,682
$30
$31
$24,713 6.34?L
$404,140 $19,677 5.61°~0 $5,036
4
. .
. . .
. . . .
- -- . . . . . .-.— “--
-.
. .
Gains and Leases on Sales of Mortgage-Backed Securities
For the period ended December 31, 1997, the Company sold Mortgage-Backed Securities with an aggregate historical
amortized cost of $173.9 million for an aggregate gain of $735,303. The difference between the sale price and the his-
torical amortized cost of the Moflgage-Backed Securities is a realized gain and increased income accordingly. Taxable
gain on sale of Mortgage-Backed Securities was $54,502 greater than GAAP gain on sale of Mortgage-Backed
Securities. The Company does not expect to sell assets on a frequent basis, but may from time to time sell existing
assets to move into new assets which management believes might have higher risk-adjusted returns or to manage its
balance sheet as part of management’s asset/liability management strategy.
Credit Expenses
The Company has not experienced credit losses on its portfolio of Mortgage-Backed Securities to date, but losses
may be experienced in the future. At December 31, 1997, the Company had limited its exposure to credit losses on its
potiolio of Mortgage-Backed Securities by purchasing only Agency Certificates which, although not rated, carry an
implied “AAA rating,
General and Administrative Expensea
General and administrative expenses (“operating expense” or “G&A expense”) was $851,990 for the period ended
December 31, 1997. Taxable G&A expenses were $2,718 less than for GAAP purposes.
GAAP G&A Expense and Operating Expense Ratios
(dollars In thousands)
Cash Comp
and Benefits
Expense
Other G&A
Expense
Total G&A
Expense
Total G&A
Expense/Average
Assets
(annualized)
Total G&A
Expense/Average
Equity
(annualized)
For the Period Ended December 31, 1997
$492
$360
$852
0,21%
1.61?0
The Company’s G&A expense increased as a result of the consummation of the Company’s initial public offering. In addi-
tion, certain compensation expenses will increase commensurate with growth in the Company’s equity base. Despite
these increases in operating expenses, management believes that the Company’s operating expenses over time are
likely to grow at a slower rate than its asset or equity base and thus management believes that the Company’s operating
expense ratios are likely to continue to improve over time.
Net Income and Return on Average Equity
Net income was $4.9 million in the period ended December 31, 1997. Return on average equity was 9.270/. on an annual-
ized basis. The table below shows, on an annualized basis, the Company’s net interest income, gain on sale of Mortgage-
Backed Securities and G&A expense each as a percentage of average equity, and the return on average equity.
Components of Return on Average Equity
For the Period Ended December 31, 1997 (on an annualized basis)
9.49:L
1 .39?/0
1.61%
Dividends and Taxable income
Net Interest
Income/Average
Equity
Gain on Sale of
Morlgage-Backed
Securities/
Average
Equity
G&A
Expense/Average
Equity
Return on
Average
Equity
9.270/.
The Company will elect to be taxed as a REIT under the Internal Revenue Code. Accordingly, the Company intends to distrib-
ute substantially all of its taxable income for each year to stockholders, including income resulting from gains on sales of
Modgage-Backed Securities. On a cumulative basis through December 31, 1997, earned taxable income exceeded dividend
declarations by $194,646, or $0.015 per share, based on the number of shares of Common Stock outstanding at period end.
Dividend Summary
(dollars in thousands, except per share data)
For the Period Ended
December 31, 1997
Taxable
Net
Income
Weighted
Average
Common Shares
Outstanding
Taxable Net
Income
Per Share
Dividends
Declared
Per Share
Total
Dividends
Dividend
Pay-out
Ratio
Cumulative
Undistributed
Taxable
Income
$4,884
5,952,123
$0.82
$0.79
$4,690
96.0%
$194
5
. .
.,. . . . . . .
.-
. . . .
-. . . . .
Financial Condition
Mortgage-Backed Securities
All of the Company’s Mortgage-Backed Securities at December 31, 1997 were adjustable-rate or fixed-rate Mortgage-
Backed Securities backed by Single-Family Motigage Loans. All of the mortgage assets underlying such Mortgage-Backed
Securities were secured with a first lien position with respect to the underlying single-family properties. At December 31,
1997, all the Company’s Mortgage-Backed Securities were Agency Certificates which carry an implied “AAA” rating. All of
the Company’s earning assets are marked-to-market at liquidation value.
Discount balances are accreted as an increase in interest income over the life of discount Mortgage-Backed Securities
and premium balances are amortized as a decrease in interest income over the life of premium Mortgage-Backed
Securities. At December 31, 1997, the Company had on its balance sheet a total of $114,186 of unamortized discount
(which is the difference between the remaining principal value and current historical amortized cost of Mortgage-Backed
Securities acquired at a price below principal value) and a total of $21.5 million of unamortized premium (which is the
difference between the remaining principal value and the current historical amortized cost of Mortgage-Backed Securities
acquired at a price above principal value).
Mortgage principal repayments received were $79.8 million for the period ended December 31, 1997. Given the Company’s
current portfolio composition, if mortgage principal prepayment rates increase over the life of the Mortgage-Backed Securities
comprising the current portfolio, all other factors being equal, the Company’s net interest income should decrease during the
life of such Mortgage-Backed Securities as the Company will be required to amortize its net premium balance into income
over a shorter time period. Similarly, if mortgage principal prepayment rates decrease over the life of such Mortgage-Backed
Securities, all other factors being equal, the Company’s net interest income should increase during the life of such Mortgage-
Backed Securities as the Company will amortize its net premium balance over a longer time period.
The table below summarizes the Company’s Mortgage-Backed Securities at December 31, 1997.
Mortgage-Backed Securities
(dollars in thousands)
At December 31, 1997
Principal
Value
Net
Premium
Amortized
cost
Amortized
Costi
Principal
Value
Estimated
Fair
Value
Estimated
Fair Value/
Principal
Value
Weighted
Average
Yield
$1,138,365
$21,390
$1,159,755
101.88% $1,161,779
102,06%
6.5770
During the period ended December 31, 1997, the Company’s Motigage-Backed Securities consisted solely of Agency
Certificates. However, the Company may purchase other types of Mortgage-Backed Securities in the future.
The tables below set forth certain characteristics of the Company’s Mortgage-Backed Securities at December 31, 1997.
The index level for adjustable-rate Mortgage-Backed Securities is the weighted average rate of the various short-term
interest rate indices which determine the coupon rate.
Adjustable-Rate Mortgage-Backed Security Characteristics
(dollars in thousands)
At December 31, 1997
Principal
Value
$994,653
Weighted Weighted
Average
Average
Index
Coupon
Level
Rate
Weighted
Average
Net
Margin
Weighted
Average
Term to
Next
Adjustment
Weighted Weighted
Average
Average
Lifetime
Asset
Yield
Cap
Ptincipal Value
at Period
End as 7. of
Moflgage-
Backed
Securities
7.13%
5.52~o
1.61%
22 months
10.78%
6.500/0
87.3870
Fixed-Rate Mortgage-Backed Security Characteristics
/do//are in thousands)
At December 31, 1997
Weighted
Average
Coupon Rate
Weighted
Average
Asset ‘field
Principal Value
as:& of
Morigage-Backed
Securities
7.50?&
7.08%
12,620/.
Ptincipal
Value
$143,712
At December 31, 1997, the Company held Moflgage-Backed Securities with coupons linked to the one- and three-year Treasury
Indices, one-month LIBOR and the six-month CD rate. The table below segments the Company’s adjustable-rate Mortgage-
Backed Securities by type of adjustment index, coupon adjustment frequency and annual and lifetime cap adjustment.
——. - . . . . . . . . . ..—. —.-. — .—. -—
—.
6
Adjustable-Rate Mortgage-Backed Securities by Index
Weighted Average Adjustment Frequency
Weighted Average Term to Next Adjustment
Weighted Average Annual Period Cap
Weighted Average Lifetime Cap
Mortgage Principal Value as Percentage of Mortgage-Backed Securities
One-Month
LIBOR
Six-Month
CD Rate
1 mo.
1 mo.
none
9.21%
30,940/0
6 mo.
4 mo,
2.00%
1 0.88%
7.81 O/.
1-Year
Treasury
Index
50 mo.
46 mo.
1.780/.
11 .77?/0
48.45%
Index
3-Year
Treasury
36 mo.
12 mo.
2.0070
14.1 6%
. 18%
The table below shows unrealized gains and losses on the Mortgage-Backed Securities in the Company’s pohfolio.
Unrealized Gains and Losses
(do//ars in thousands)
Unrealized Gain
Unrealized Loss
Net Unrealized Gain
Net Unrealized Gain as % of Mortgage-Backed Securities Principal Value
Net Unrealized Gain as ?4 of Mortgage-Backed Securities Amortized Cost
Interest Rate Agreements
At December 31, 1997
$3,253
(1 ,229)
2,024
0,18%
0.17%
Interest rate agreements are assets that are carried on a balance sheet at estimated liquidation value. At December 31, 1997,
there were no interest rate agreements on the Company’s balance sheet.
Borrowings
To date, the Company’s debt has consisted entirely of borrowings collateralized by a pledge of the Company’s Mortgage-
Backed Securities. These borrowings appear on the balance sheet as repurchase agreements. At December 31, 1997,
the Company had established uncommitted borrowing facilities in this market with nineteen lenders in amounts which the
Company believes are in excess of its needs. All of the Company’s Mortgage-Backed Securities are currently accepted
as collateral for such borrowings. The Company, however, limits its borrowings, and thus its potential asset growth, in
order to maintain unused borrowing capacity and thus increase the liquidity and strength of its balance sheet.
For the period ended December 31, 1997, the term to maturity of the Company’s borrowings has ranged from one day to
six months, with a weighted average original term to maturity of 50 days and a weighted average remaining maturity of
16 days at December 31, 1997. Many of the Company’s borrowings have a cost of funds which adjust monthly based on
a fixed spread over or under one-month LIBOR or based on the daily Fed Funds rate. As a result, the average term to
the next rate adjustment for the Company’s borrowings is typically shorter than the term to maturity for the Company’s
Mortgage-Backed Securities. At December 31, 1997, the weighted average cost of funds for all of the Company’s bor-
rowings was 6.1 6~0 and the weighted average term to next rate adjustment was 16 days.
Liquidity
Liquidity, which is the Company’s ability to turn non-cash assets into cash, allows the Company to purchase additional
Mortgage-Backed Securities and to pledge additional assets to secure existing borrowings should the value of pledged
assets decline. Potential immediate sources of liquidity for the Company include cash balances and unused borrowing
capacity, Unused borrowing capacity will vary over time as the market value of the Company’s Mortgage-Backed
Securities varies. The Company’s balance sheet also generates liquidity on an on-going basis through mortgage principal
repayments and net earnings held prior to payment as dividends. Should the Company’s needs ever exceed these on-
going sources of liquidity plus the immediate sources of liquidity discussed above, management believes that the
Company’s Mortgage-Backed Securities could in most circumstances be sold to raise cash. The maintenance of liquidity is
one of the goals of the Company’s Capital Investment Policy. Under this policy, asset growth is limited in order to presewe
unused borrowing capacity for liquidity management purposes.
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 December 31, 1997 was $135.1 million, or $10.62 per share. If the Company
had used historical amortized cost accounting, the Company’s equity base at December 31, 1997 would have been
$133.1 million, or $10.47 per share.
.
.
~.-— . . . . . . . . . . . . . . . .4, .
With the Company’s “available-for-sale” accounting treatment, unrealized fluctuations in market 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 “Net Unrealized Gain on Assets Available-for-Sale.” 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.
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 net market value of Motigage-Backed Securities have one direct effect on the
Company’s potential earnings and dividends: positive market-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. “Net Unrealized Gain on Assets Available-for-Sale” was $2.0 million, or 0,020/0
of the amortized cost of Mortgage-Backed Securities at December 31, 1997.
The table below shows the Company’s equity capital base as reported and on a historical amortized cost basis at
December 31, 1997, The historical cost equity capital base is influenced by issuances of Common Stock, the level of
GAAP earnings as compared to dividends declared, and other factors. The GAAP reported equity capital base is influ-
enced by these factors plus changes in the “Net Unrealized Gain on Assets Available-for-Sale” account.
Stockholders’ Equity
(do//ars in thousands, except per share dafa)
Historical
Amortized Cost
Equity Base
Net Unrealized
Gain on Assets
Available-for-Sale
GAAP Reported
Equity Base
(Book Value)
Histoflcal
Amoflized Cost
Equity Per Share
GAAP Reporfed
Equity (Book Value:)
Per Share
At December 31, 1997
$133,063
$2,024
$135,087
$10.47
$10.62
Leverage
The Company’s debt-to-GAAP reported equity ratio at December 31, 1997 was 7:1. The Company generally expects to
maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from time to time based upon
various factors, including management’s opinion of the level of risk of its assets and liabilities, the Company’s liquidity
position, the level of unused borrowing capacity and over-collateralization levels required by lenders when the
Company pledges assets to secure borrowings.
The target debt-to-GAAP reporled equity ratio is determined under the Company’s Capital Investment Policy. Should the
actual debt-to-equity ratio of the Company increase above the target level due to asset acquisition andlor market value fluc-
tuations in assets, management will cease to acquire new assets. Management will, at such time, present a plan to its
Board of Directors to bring the Company back to its target debt-to-equity ratio; in many circumstances, this would be accom-
plished in time by the monthly reduction of the balance of Mortgage-Backed Securities through principal repayments.
Asset/Liability Management and Effect of Changes in Interest Rates
Management continually reviews
mortgage prepayment risk, credit risk and the related issues of capital adequacy and liquidity. The Company seeks
attractive risk-adjusted stockholder returns while maintaining a strong balance sheet.
the Company’s asset/liability management strategy with respect
to
interest rate r i s k,
The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by
matching adjustable-rate assets with variable-rate borrowings. In addition, although it has not done so to date, the
Company may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions
in its portfolio of Mortgage-Backed Securities by entering into interest rate agreements such as interest rate caps and
interest rate swaps. While the Company has determined, based upon the current interest rate environment and other
relevant factors, that it would not be economically advantageous, at present, for the Company to enter into interest rate
agreements, the Company may enter into such agreements in the future.
8
.
.
.
.
.
.
.
.-
.
-
---
.—-—.. ~.—~ —
.
.
.
.
.
.
.
.
.
,,-—
Inflation
Other Matters
Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, pre-
payments on Mortgage-Backed Securities. The Company will seek to mitigate the effect of changes in the mortgage
principal repayment rate from an economic point of view by balancing assets purchased at a premium with assets pur-
chased at a discount. To date, the aggregate premium exceeds the aggregate discount on Mortgage-Backed Securities
in the Company’s portfolio. As a result, prepayments, which result in the expensing of unamoflized premium, will reduce
the Company’s net income compared to what net income would be absent such prepayments.
Virtually all of the Company’s assets and liabilities are financial in nature. As a result, interest rates and other factors
drive the Company’s performance far more than does inflation. Changes in interest rates do not necessarily correlate
with inflation rates or changes in inflation rates, The Company’s financial statements are prepared in accordance with
GAAP and the Company’s dividends are determined by the Company’s net income as calculated for tax purposes; in
each case, the Company’s activities and balance sheet are measured with reference to historical cost or fair market
value without considering inflation.
The Company calculated its qualified REIT assets, as defined in the Internal Revenue Code, to be 99.50/. of is total assets,
as compared to the Code requirement that at least 750/. of its total assets must be qualified REIT assets. The Company
also calculates that 97. 10/. of its revenue qualifies for the 75% source of income test and 10O”A of its revenue qualifies for
the 95?6 source of income test under the REIT rules. Furthermore, the Company’s revenues during the year ended
December 31, 1997 subject to the 307. income limitation under the REIT rules amount to 2.90/. of total revenue, The
Company also met all REIT requirements regarding the ownership of its Common Stock and the distributions of its net
income. Therefore, as of December 31, 1997, the Company believes that it qualified 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. 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 exemp-
tion, the Company must maintain at least 55~o of its assets directly in Qualifying Interests, In addition, unless certain
mortgage securities represent all 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. As of December 31, 1997, the Company calculates that it is in
compliance with
this
requirement.
Safe Harbor Statement
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: Statements in this discussion
regarding Annaly Mortgage Management, Inc. (the “Company”) and its business which are not historical facts are
“forward-looking statements” that involve risks and uncertainties. For a discussion of such risks and uncertainties,
which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors”
in the Company’s Form 10-K.
9
.
.*
. . - - - - - .
. . _
, _ _
. . , _ _ k .
B A L A N C E S H E
ET
AN NALY MO RTBA13E MANAGEMENT, INC.
December 31. 1997
Assets
Cash and cash equivalents
Mortgage-Backed Securities—At fair value, net of unamortized premiumtdiscount
Accrued interest receivable
Other assets
Tots/ assets
Liabilities and Stockholders’ Equity
Liabilities:
Repurchase agreements
Payable for Mortgage-Backed Securities purchased
Accrued interest payable
Dividends payable
Accounts payable
Total liabilities
Stockholders’ Equity:
Common stock par value $.01 per share; 100,000,000 authorized, 12,713,900
shares issued and outstanding
Additional paid-in capital
Net unrealized gains on Mortgage-Backed Securities
Retained earnings
Total stockholders’ equity
Total Liabilities and Stockholders’ Equity
See notes fo financial statements.
S T A T E M E NT
O F O P E R A T I O NS
For the period February 18, 1997 (commencement of operations) through December 31, 1997
Interest Income:
Mortgage-Based Securities
Money market account
Total interest income
Interest Expense:
Repurchase agreements
Net interest income
Gain on sa/e of Mortgage-Backed Securities
General and administrative expenses
Net income
Net income per share:
Basic
Dilutive
Average number of shares outstanding
See notes to financial stafemenfs.
$
511,172
1,161,779,192
5,338,861
111,257
$1,167,740,482
$ 918,869,000
105,793,723
4,992,447
2,797,058
201,976
1,032,654,204
127,139
132,705,765
2,023,751
229,623
135,086,278
$1,167,740,482
$24,682,353
30,782
24,713,135
19,676,954
5,036,181
735,303
851,990
$4,919,494
$0.83
$0.78
5,952,123
10
. .
.
. . — - . . .
. . - . . ’ .-
. . — . — . . — . — — . — -
. — - . . — .-. .=
S T A T E M E N T OF
S Tn
C K H0
~D E R 5 t
E Q U I TY
AN NALY MO RTGAQE MANAGEMENT, INE.
For the period February 18, 1997 (commencement of operations) through December 31, 1997
Balance February 18, 1997
Issuance of common stock
Available-for-sale securities—
Fair value adjustment
Net income
Dividends declared—
$0.79 per average share
Common
Stock
Par Value
Additional
Paid-in
Capital
Net
Unrealized
Gain
Retained
Earnings
Total
$
800 $
11,200 $
126,339
132,694,565
–$
—
( 2 0 9 ) $
—
11,791
132,820,904
—
—
—
— 2,023,751
—
—
—
4,919,494
2,023,751
4,919,494
—
—
(4,689,662)
(4,689,662)
Balance, December 31, 1997
$127,139 $132,705,765 $2,023,751 $ 229,623 $135,086,278
See notes to financia/ statements
S T A T E M E N T
O F C A
SH
F L O WS
For the period February 18, 1997 (commencement of operations) through December31, 1997
Cash flows form operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net
Gain on sale of Mortgage~Backed Securities
Increase in accrued interest receivable
Increase in other assets
Increase in accrued interest payable
Increase in accounts payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of Mortgage-Backed Securities
Proceeds from sale of Mortgage-Backed Securities
Principal payments on Mortgage-Backed Securities
Net cash used in investing activities
Cash flows form financing activities:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
Net proceeds from private placement equity offering
Net proceeds from direct offering
Net proceeds from public offering
Dividends paid
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Interest paid
Noncash financing activities:
Net unrealized gains on available-for-sale securities
Dividends declared, not yet paid
See nofes to financia/ statements.
11
$
4,919,494
2,620,729
(735,303)
(5,338,861)
(111 ,257)
4,992,447
201,976
6,549,225
(1,310,362,097)
174,682,533
79,832,420
(1,055,847,144)
3,498,546,390
(2,579,677,390)
32,979,904
878,000
98,962,999
(1 ,892,604)
1,049,797,299
499,380
11,792
511,172
$
$
$
14,684,507
2,023.751
2,797,058
. . . . . . . . . . . . . . . . . . .. ——-.— .-.
.-
N O T E S
TO
F I N A N C I A L S T A T E M E N TS
AN NALY MORTGAGE MANAGEMENT, INC.
For the period February 18, 1997 (commencement of operations) through December 31, 1997
1 Organization and Significant Accounting Policies
Annaly Mortgage Management, Inc. (the “Company”) was incorporated in Maryland on November 25, 1996. The
Company commenced its operations of purchasing and managing an investment portfolio of primarily adjustable-rate
Mortgage-Backed Securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity
capital. On July 31, 1997, the Company received additional proceeds from a direct offering to officers and directors. An
initial public offering was completed on October 14, 1997 (see Note 5). .
A summary of the Company’s significant accounting policies follows:
cash and Cash Equivalents—Cash and cash equivalents includes cash on hand and money market funds. The carrying
amounts of cash equivalents approximates their value.
Mortgage-Backed Securities—The Company invests primarily in mortgage pass-through certificates, collateralized
mortgage obligations and other motigage-backed securities representing interests in or obligations backed by pools of
mortgage loans (collectively, “Mortgage-Backed Securities”).
Statement of Financial Accounting Standards No. 115, Accounting for Ceflain Investments in Debt and Equity Securities
(“SFAS 11 5“), requires the Company to classify its investments as either trading investments, available-for-sale invest-
ments or held-to-maturity investments. Although the Company generally intends to hold most of its Mortgage-Backed
Securities until maturity, it may, from time to time, sell any of its Mortgage-Backed Securities as part of its overall man-
agement of its balance sheet. Accordingly, this flexibility requires the Company to classify all of its Mortgage-Backed
Securities as available-for-sale. All assets classified as available-for-sale are repofled at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of stockholders’ equity.
Unrealized losses on Mortgage-Backed Securities that are considered other than temporary, as measured by the amount
of decline in fair value attributable to factors other than temporary, are recognized in income and the cost basis of the
Mortgage-Backed Securities is adjusted. There were no such adjustments for the period ending December 31, 1997.
Interest income is accrued based on the outstanding principal amount of the Mortgage-Backed Securities and their con-
tractual terms. Premiums and discounts associated with the purchase of the Mortgage-Backed Securities are amortized
into interest income over the lives of the securities using the effective yield method.
Mortgage-Backed Securities transactions are recorded on the date the securities are purchased or sold. Purchases of
newly issued securities are recorded when all significant uncertainties regarding the characteristics of the securities are
removed, generally shortly before settlement date. Realized gains and losses on Mortgage-Backed Securities transac-
tions are determined on the specific identification basis.
Credit Risk—At December 31, 1997, the Company has limited is exposure to credit losses on its portfolio of Mortgage-
Backed Securities by only purchasing securities from Federal Home Loan Motigage Corporation (“FHLMC”), Federal
National Mortgage Association (“FNMA), or Government National Mortgage Association (’ (GNMA). The payment of
principal and interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by those respective
agencies and the payment of principal and interest on the GNMA Mortgage-Backed Securities are backed by the full-
faith-and-credit of the U.S. government. At December 31, 1997, all of the Company’s Mortgage-Backed Securities
have an implied “AAA rating.
Income Taxes—The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) and intends to com-
ply with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) with respect thereto.
Accordingly, the Company will not be subjected to Federal income tax to the extent of its distributions to shareholders
and as long as certain asset, income and stock ownership tests are met.
Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
12
.-
. . . . . . . . . . . . . . . — . . . - . — - - - - - - - - - - - - - — — . — , . . — . . — — . . . . - - - -
-., ..—
2 Mortgage-Backed Securities
The following table pertains to the Company’s Mortgage-Backed Securities classified as available-for-sale as of
December 31, 1997, which are carried at their fair value:
Mortgage-Backed Securities, gross
Unamortized discount
Unamortized premium
Amortized cost
Gross unrealized gains
Gross unrealized losses
Estimated fair value
Federal
Home Loan
Mortgage
Corporation
Federal
National
Mortgage
Association
Government
National
Mortgage
Association
Total
Mortgage
Assets
$273,119,008
(3,619)
2,848,376
$691,081,916
(110,567)
14,532,363
S174,164,513
—
4,123,451
$1,138,365,437
(114,186)
21,504,190
275,963,765
376,485
(115,190)
705,503,712
1,948,068
(802,801)
178,287,964
928,453
(311 ,264)
1,159,755,441
3,253,006
(1 ,229,255)
$276,225,060
$706,648,979
$178,905,153
$1,161,779,192
FASB Statement No. 107, Disclosures About Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale,
The fair values of the Company’s Mortgage-Backed Securities are based on market prices provided by certain dealers
who make markets in these financial instruments. The fair values reported reflect estimates and may not necessarily be
indicative of the amounts the Company could realize in a current market exchange. Cash and cash equivalents, interest
receivable, repurchase agreements and other liabilities are reflected in the financial statements at their amortized cost,
which approximates their fair value because of the short-term nature of these instruments.
The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate adjustments are limited to
no more than 10/. every six months) and lifetime caps. At December 31, 1997, the weighted average lifetime cap was 10.8°/0.
During the period ended December 31, 1997, the Company realized $735,303 in gains from sales of Mortgage-Backed
Securities. There were no losses on sales of Mortgage-Backed Securities during the period.
3 Repurchase Agreements
The Company has entered into repurchase agreements to finance most of its Mortgage-Backed Securities. The repur-
chase agreements are secured by the market value of the Company’s Mortgage-Backed Securities and bear interest
rates that have historically moved in close relationship to LIBOR.
As of December 31, 1997, the Company had outstanding $918,869,000 of repurchase agreements with a weighted
average borrowing rate of 6.16°/!0 and a weighted average remaining maturity of 16 days. At December 31, 1997,
Mortgage-Backed Securities actually pledged had an estimated
fair value of $936,859,658.
At December 31, 1997, the repurchase agreements had the following remaining maturities:
Within 30 days
30 to 59 days
60 tO 89 days
90 to 119 days
Over 120 days
4 Common Stock
$590,960,000
51,776,000
.
103,391,000
172,742,000
$916,669,000
During the period the Company completed a private placement of equity capital. The Company received net proceeds
of $32,979,905 from an issuance of 3,600,000 shares of common stock. The Company received additional proceeds of
$878,000 from an issuance of 87,800 shares of common stock upon the closing of a direct offering to certain directors,
officers, and employees of the Company on July 31, 1997. The Company issued 9,006,100 shares of common stock on
October 14, 1997 during an initial public offering. Approximate net proceeds received in the offering were $98,962,999.
During the Company’s period ending December 31, 1997, the Company declared dividends to shareholders totaling
$4,689,662, or $.79 per weighted average share, of which $1,892,604 was paid during the period and $2,797,058 was
paid on Januaty 20, 1998. For Federal income tax purposes dividends paid for the period is ordinary income to the
Company stockholders.
13
. .
4
.
.
.
.
.
.
.
.
.
.—-. ——
----- —— —.———
-..
- —
--
-—
5 Earnings per Share (EPS)
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting No. 128,
Earnings Per Share (SFAS No. 128), which requires dual presentation of Basic EPS and Diluted EPS on the face of the
income statement for all entities with complex capital structures. SFAS No. 128 also requires a reconciliation of the
numerator and denominator of Basic EPS and Diluted EPS computation. The reconciliation is as follows:
Net income
Basic EPS
Effect of dilutive securities:
Dilutive stock options
Diluted EPS
For the Period Ended December 31, 1997
Income (Numerator)
Shares (Denominator)
Per-Share Amount
$4,919,494
4,919,494
—
$4,919,494
5,952,123
S0.83
348,500
6,300,623
$0.78
Options to purchase 348,500 shares were outstanding during the period (Note 7) and were dilutive as the exercise
price (between $4.00 and $10.00) was less than the average stock price for the period for the Company (between
$11.00 and $12.00).
6 Long Term Stock Incentive Plan
The Company has adopted a Long Term Stock Incentive Plan for executive officers, key employees and nonemployee
directors (the “Incentive Plan”). The Incentive Plan authorizes the Compensation Committee of the Board of Directors to
grant awards, including incentive stock options as defined under section 422 of the Code (“ISOS”) and options not so
qualified (“NQSOS”). The Incentive Plan authorizes the granting of options or other awards for an aggregate of the greater
of 500,000 shares or 50/. of the outstanding shares of the Company’s common stock.
The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation.” Accordingly, no compensation cost for the Incentive Plan has been deter-
mined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123. For the
Company’s pro forma net earnings, the compensation cost will be amortized over the four-year vesting period of the
options. The Company’s net earnings per share would have been reduced to the pro forma amounts indicated below:
Net earnings—as reported
Net earnings—pro forma
Earnings per share—as reported
Earnings per share—pro forma
For the Period Ending
June 30, 1997 December 31, IW7
$1,340,059
1,249,778
0.36
0.34
$
$
$4,919,494
4,738,932
0,83
0.80
$
$
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in the period ended December 31, 1997: dividend yield of
10YO; expected volatility of 250/.; risk-free interest rate of 6.077.; and expected lives of four years.
Information regarding options is as follows:
Granted (31 1,000 ISOS, 37,500 NQSOS)
Exercised
Expired
Outstanding, end of period
Weighted average fair value of options granted during the period (per share)
The following table summarizes information about stock options outstanding:
Shares
Weighted Average Exercise Price
348,500
—
—
348,500
$
2.07
$6,42
—
—
$6.42
Options Outstanding
Range of
Exercise Prices
OptIons
Outstanding
Weighted Average Remaining Weighted Average
Contractual Life (Yrs.)
Exercise Price
:
4.00
10.00
208,250
140,250
$4.00—$10.00
348,500
4.0
3.8
3.9
$ 4 . 00
10.00
$ 6 . 42
. .
.-
. . - . . e . . . . . . . . - . — - — - _ . — . . — . — . . . . . , . . . — _ . _ __
14
The vesting periods for the options are as follows: 7,500 options vested as of June 26, 1997. The remainder of the
options will vest in four equal annual installments beginning in 1998 and ending in 2001.
7 Lease Commitments
The Corporation has a noncancellable lease for office space, which commences in April 1998 and expires in
December 2007.
The Corporation’s aggregate future minimum lease payments are as follows:
1998
1999
2000
2001
2002
2003 and thereafter
$ 67,787
92,804
95,299
97,868
100,515
582,406
$1,036,679
8 Summarized Quarterly Results (Unaudited)
The following is a presentation of the quarterly results of operations.
Interest income from Moflgage-Backed
Securities and cash
Interest expense on repurchase agreements
Net interest income
Gain on sale of Mortgage-Backed Securities
General and administrative expenses
Net income
Net income per share:
Basic
Dilutive
Period Ended
March 31,1997
June 30, 1997
Quarters Endina.
September 30, 1997
December 31, 1997
$1,060,692
713,120
$5,448,215
4,435,697
$6,123,457
5,126,089
347,572
—
64,047
1,012,518
229,865
185,849
997,368
429,400
227,245
$12,080,771
9,402,048
2,678,723
76,038
374,849
$ 283,525
$1,056,534
$1,199,523
$2,379,912
$
$
0,08
0,07
$
$
0.28
0.26
$
$
0,32
0,29
$
$
0.21
0.20
Average number of shares outstanding
3,680,000
3,680,000
3,739,170
11,449,777
15
. .
.– .
..- - - . . . ..— .. —---- —. ----
.-
I N D E P E N D E N T A U D I T O RS
*
R E P O RT
To the Stockholders of
Annaly Mortgage Management, Inc.
We have audited the accompanying balance sheet of Annaly Mortgage Management, Inc. (the “Company”) as of
December 31, 1997, and the related statements of operations, stockholders’ equity and cash flows for the period
February 18, 1997 (commencement of operations) through December 31, 1997. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence suppotiing the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation, We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 1997 and the results of its operations and its cash flows for the period February 18, 1997 (commence-
ment of operations) through December 31, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche
New York, New York
February 6, 1998
C O M M ON
S T n c K A ND
M A R K ET
D A TA
The Company’s Common Stock began trading October 8, 1997 on the New York Stock Exchange under the trading
symbol N LY.
The following tables set forth, for the periods indicated, the high, low and closing sales prices per share of Common
Stock as reported on the New York Stock Exchange and the cash dividends declared per share of Common Stock
Stock Prices
For the Quarter ended December 31, 1997
Cash Dividends Declared Per Share
For the Quarter ended March 31, 1997
For the Quarter ended June 30, 1997
For the Quarter ended September 30, 1997
For the Quafler ended December 31, 1997
Hiah
.
12’%6
Low
Close
10
11
$0.075
$0.255
$0.18
$0.22
The Company intends to pay quarterly dividends and to make such distributions to its shareholders in amounts such that all
or substantially all of its taxable income in each year (subject to certain adjustments) is distributed so as to qualify for the tax
benefits accorded to a REIT under the Internal Revenue Code. All distributions will be made by the Company at the discre-
tion of the Board of Directors and will depend on the earnings of the Company, financial condition of the Company, mainte-
nance of REIT status and such other factors as the Board of Directors may deem relevant from time to time.
16
. .
. . . . . .._ e . . . ..-. .—- ,.. __.. —..— —.. . .—..— . . . _—
C O R P O R A TE
l N
F O R M A TI ON
Corporate Officers
Board of Directors
Corporate Headquarters
Michael A. J. Farrell
Cha~rman of f,be Board 8
Ch/ef E,~5cut/\~e Oti/cer
Wellington J, St. Claire
nice Cha~r??rso,? &
Ch/ef Asset Manager
Timothy J, Guba
Pres)dect &
Michael A. J. Farrell
Chairman of the Board &
Ch,ef E. Continue reading text version or see original annual report in PDF
format above