Annaly Corporate Profile
To Our Fellow Shareholders:
Every morning as I walk to the office I pass the steps leading up to the New York Public Library. Flanking the north
and south of the steps are two magnificent statues of lions. They are a constant source of inspiration. I’d like to share
some of that with you today. As I write this letter I reflect on the incredibly momentous times we live in and the third
anniversary of our company. 1999 has been recorded as the worst year for high quality bonds in the past century. It
was preceded by 1998, which was the worst year for the credit markets in the century. 1997, the year we went public,
was no picnic either, with the Chairman of the Federal Reserve calling the equity markets "irrationally exuberant".
The Dow Jones Industrial Average was at about 6500 when he made this statement.
Through all of this Annaly has persevered and prospered from an earnings perspective. 1999 will record that Annaly’s
earnings were 17% higher than 1998’s. This performance occurred despite the "worst bond market of the century". We
watched with amazement while Companies with no earnings soared in market valuation while our positive earnings
surprises gained little or no immediate recognition for NLY’s shares. As a result of its continuing strong earnings
performance however, on a year over year basis, NLY outperformed the Standard and Poor’s Index in 1999. In the
time of "dot.com" mania, I think it is fair to characterize the year as success, with a view that as a company that pays
out at least 95% of its earnings, Annaly has created solid returns for its shareholders since its inception in 1997.
During my career I have watched the cycles between the growth and earnings sectors grow longer and longer in their
duration. Bear markets in either the debt or equity markets are not straight lines as demonstrated in the vivid contrasts
of 1999. Throughout it all we have maintained our disciplined approach of keeping to high grade, liquid United States
Government or Agency securities. These securities always perform best in volatile times. As tempting as it may be
now from a yield perspective, we do not feel that it is still the time to go out and stretch for returns by straying from
this discipline. There will be time enough for that when the business cycle turns.
In January of this year, the economy passed its 107th month of expansion. This is the longest period of good times in
our nation’s history. The result of this growth is now being reflected in the US Treasury’s debt management. We enjoy
the luxury, as a nation, of reducing our debt for the first time in generations. Given the high quality rating of our
assets, this is a very positive development for Annaly. Our assets should perform very well in this environment, even
at lower levels of economic growth, should the expansion slow.
In closing, I thought I would share with you one reminder of the timeless qualities that keep us focused on doing the
right things for Annaly’s shareholders. It’s the two lions that guard the entrance to the library mentioned above that I
walk past each day; I learned their names this year. Patience and Fortitude.
Michael A.J. Farrell
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Annaly Corporate Profile
Chairman of the Board
Chief Executive Officer
March 17th, 2000
Return on Average Equity and Dividend Yield ($ in millions)
Annaly's Management Team
Back Row Left to Right: Timothy J. Guba, Michael A. J. Farrell Bottom Row Left to Right: Kristopher R. Konrad,
Rose Marie Miller, Wellington J. St. Claire, Jennifer A. Stephens, Kathryn F. Fagan, James P. Fortescue (not pictured)
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Annaly Corporate Profile
Net Income ($ in millions)
Net Interest Income ($ in millions)
Interest Rate Spread
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Annaly Corporate Profile
"Net income increased by 17% for the year ended December 31, 1999 over the previous year. Income for the year
ended December 31, 1999 reflects an improvement in net interest income and less dependence on gains on disposition
of assets, when compared to the year ended December 31, 1998. This is the result of improved net interest spread. Our
net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the
period, was 0.98% for 1999 as compared to 0.59% for 1998."
Annaly Corporate Profile
Annaly Mortgage Management, Inc owns and manages a portfolio of mortgage-backed securities. Our principal
business objective is to generate net income for distribution to our stockholders from the spread between the interest
income on our mortgage-backed securities and costs of borrowing to finance our acquisition of mortgage-backed
securities. We have elected to be taxed as a real estate investment trust (or REIT) under the Internal Revenue Code.
We commenced operations on February 18, 1997. We are self-advised and self-managed.
Financial Highlights
(dollars in thousands, except for
per share data)
Statement of Operations Date
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:
Mortgage-Backed Securities, net
Total assets
Repurchase agreements
Total liabilities
Stockholders’ equity
Number of common shares
outstanding
For the
Year Ended
December 31, 1999
For the
Year
Ended
December 31, 1998
February 18, 1997
(commencemnt of
operations) through
December 31, 1997 (1)
365
$89,812
69,846
$19,966
454
2,281
$18,139
$1.41
$1.35
$1.38
365
$89,986
75,735
$14,251
3,344
2,106
$15,489
$1.22
$1.19
$1.21
317
$24,713
19,677
$5,036
735
852
$4,919
$0.83
$0.80
$0.79
December 31, 1999 December 31, 1998
December 31, 1997
$1,437,793
1,491,322
1,338,296
1,388,050
103,272
13,581,316
$1,520,289
1,527,352
1,280,510
1,401,481
125,871
12,648,424
$1,161,779
1,167,740
918,869
1,032,654
135,086
12,713,900
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Annaly Corporate Profile
$1,473,765
1,350,230
117,685
6.15%
5.17%
$1,499,875
1,360,040
131,265
6.16%
5.57%
Other Data:
Average total assets
Average borrowings
Average equity
Yield on interest earning assets
Cost of funds on interest bearing
liabilities
Interest rate spread
Financial Ratios:
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
(1) Ratios for the 317-day period ended December 31, 1997 have been annualized.
1.03%
11.80%
1.23%
15.41%
0.95%
0.59%
1.60%
1.94%
0.14%
0.15%
1.35%
0.98%
$476,855
404,140
61,096
6.34%
5.61%
0.73%
1.22%
0.21%
1.61%
1.19%
9.27%
Management’s Discussion and Analysis of Financial Condition and Result of Operation
Safe Harbor Statement
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this discussion
regarding 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" Form 10-K for the year ended December 31,
1999.
Overview
We are a real estate investment trust that owns and manages a portfolio of mortgage-backed securities. Our principal
business objective is to generate net income for distribution to our stockholders from the spread between the interest
income on our mortgage-backed securities and the costs of borrowing to finance our acquisition of mortgage-backed
securities.
We commenced operations on February 18, 1997 upon the consummation of a private placement. We completed our
initial public offering on October 14, 1997.
The 317-day period ended December 31, 1997 was a short operating period and not a full twelve months. Also,
average assets for the period ended December 31, 1997 totaled $476.9 million, whereas average assets for the year
ended December 31, 1998 totaled $1.5 billion. As a result, the comparison of net income for the period ended
February 18, 1997 and the year ended December 31, 1998 may show changes that may not be indicative of future
periods.
Results of Operations Net Income Summary
For the year ended December 31, 1999, our GAAP net income was $18.1 million, or $1.41 basic earnings per average
share, as compared to $15.5 million, or $1.22 basic earnings per average share, for the year ended December 31, 1998.
We compute our GAAP net income per share by dividing net income by the weighted average number of shares of
outstanding common stock during the period, which was 12,889,510 for the year ended December 31, 1999 and
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Annaly Corporate Profile
12,709,116 for the year ended December 31, 1998. Dividends per weighted average number of shares outstanding for
the year ended December 31, 1999 was $1.38 per share, or $18.0 million in total. Dividends per weighted average
number of shares outstanding for the year ended December 31, 1998 was $1.22 per share, or $15.4 million in total.
Our return on average equity was 15.41% for the year ended December 31, 1999 and 11.80% for the year ended
December 31, 1998.
Net Income Summary
Interest Income
Interest Expense
Net Interest Income
Gain on Sale of Mortgage-Backed Securities
General and Administrative Expenses
Net Income
Average Number of Basic Shares Outstanding
Average Number of Diluted Shares Outstanding
Basic Net Income Per Share
Diluted Net Income Per Share
Average Total Assets
Average Equity
Annualized Return on Average Assets
Annualized Return on Average Equity
Taxable Income and GAAP Income
Year Ended December
31, 1998
$89,812
69,846
19,966
454
2,281
$18,139
12,889,510
13,454,007
$1.41
$1.35
$1,473,765
$117,685
1.23%
15.41%
Year Ended December
31, 1999
$89,986
75,735
14,251
3,344
2,106
$15,489
12,709,116
13,020,648
$1.22
$1.19
$1,499,875
$131,265
1.03%
11.80%
For the years ended December 31, 1999 and 1998, our income as calculated for tax purposes (taxable income) differed
from income as calculated according to GAAP (GAAP income). Our taxable income for the year ended December 31,
1999 was approximately $18.4 million, or $1.43 per share, as compared to taxable income of $16.5 million, or $1.30
per share, for the year ended December 31, 1998. The differences were in the calculations of premium and discount
amortization, gains on sale of mortgage-backed securities, and general and administrative expenses.
The distinction between taxable income and GAAP income is important to our stockholders because dividends are
declared on the basis of taxable income. While we do not pay taxes so long as we satisfy the requirements for
exemption from taxation pursuant to the REIT provisions of the Internal Revenue Code, each year we complete a
corporate tax form on which taxable income is calculated as if we were to be taxed. This taxable income level
determines the amount of dividends we can pay out over time. The table below presents the major differences between
our GAAP and taxable income for the years ended December 31, 1999, 1998, and 1997, and the four quarters in 1999.
Taxable Income
(dollars in thousands)
For the Year Ended
December 31, 1999
For the Year Ended
December 31, 1998
For the Period Ended
December 31, 1997
GAAP
Net
Income
$18,139
$15,489
$4,919
Taxable
General &
Administrative
Differences
$9
Taxable
Mortgage
Amortization
Differences
$814
Taxable
Gain on Sale
of Securities
Differences
$(525)
$6
$3
$959
$(92)
$23
$54
Taxable
Net
Income
$18,437
$16,477
$4,884
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Annaly Corporate Profile
For the Quarter Ended
December 31, 1999
For the Quarter Ended
September 30, 1999
For the Quarter Ended June
30, 1999
For the Quarter Ended
March 31, 1999
$4,444
$4,513
$4,864
$4,318
$2
$5
$2
—
$21
$(288)
$4,179
$(14)
$(235)
$4,269
$363
$444
—
$5,229
$(2)
$4,760
Interest Income and Average Earning Asset Yield
We had average earning assets of $1.5 billion for the year ended December 31, 1999 and 1998. Our primary source of
income for the years ended December 31, 1999 and 1998 was interest income. A portion of our income was generated
by gains on the sales of our mortgage-backed securities. Our interest income was $89.8 million for the year ended
December 31, 1999 and $90.0 million for the year ended December 31, 1998. Our yield on average earning assets was
6.15% and 6.16% for the same respective periods. Our average earning asset balance decreased by $756,000 for the
year ended December 31, 1999 as compared to the year ended December 31, 1998. Interest income decreased by
$174,000 for the year ended December 31, 1999 over prior year, due to the slight decline in the average earning asset
balance and yield. The table below shows our average balance of cash equivalents and mortgage-backed securities, the
yields we earned on each type of earning assets, our yield on average earning assets and our interest income for the
years ended December 31, 1999 and 1998, and the period ended December 31, 1997, and the four quarters in 1999.
Average Earning Asset Yield
Average
Cash
Equivalents
Average
Mortgage
Backed
Securities
Average
Earning
Assets
$221 $1,461,033 $1,461,254
Yield on
Average
Cash
Equivalents
4.10%
Yield on
Average
Mortgage-Backed
Securities
Yield on
Average
Interest
Earning
Income
Assets
6.15% 6.15% $89,812
$2 $1,461,789 $1,461,791
4.32%
6.16% 6.16% $89,986
$30
$448,276 $0,448,306
4.20%
6.34% 6.34% $24,713
$2 $1,420,308 $1,420,310
4.05%
6.58% 6.58% $23,371
For the Year
Ended
December
31, 1999
For the Year
Ended
December
31, 1998
For the
Period
Ended
December
31, 1997
For the
Quarter
Ended
December
31, 1999
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Annaly Corporate Profile
For the
Quarter
Ended
September
30, 1999
For the
Quarter
Ended June
30, 1999
For the
Quarter
Ended
March 31,
1999
$877 $1,416,525 $1,417,404
4.10%
6.26% 6.25% $22,161
$2 $1,504,669 $1,504,671
4.30%
5.92% 5.92% $22,265
$2 $1,502,627 $1,502,629
4.01%
5.87% 5.87% $22,015
The constant prepayment rate (or CPR) on our mortgage-backed securities for the year ended December 31, 1999 was
18% and for the year ended December 31, 1998 was 23%. CPR is an assumed rate of prepayment for our
mortgage-backed securities, expressed as an annual rate of prepayment relative to the outstanding principal balance of
our mortgage-backed securities. CPR does not purport to be either a historical description of the prepayment
experience of our mortgage-backed securities or a prediction of the anticipated rate of prepayment of our
mortgage-backed securities.
Principal prepayments had a negative effect on our earning asset yield for the years ended December 31, 1999 and
1998 because we adjust our rates of premium amortization and discount accretion monthly based upon the effective
yield method, which takes into consideration changes in prepayment speeds.
Interest Expense and the Cost of Funds
We anticipate that our largest expense will be the cost of borrowed funds. We had average borrowed funds of $1.4
billion and total interest expense of $69.8 million for the year ended December 31, 1999. We had average borrowed
funds of $1.4 billion and total interest expense of $75.7 million for the year ended December 31, 1998. Our average
cost of funds was 5.17% for the year ended December 31, 1999 and 5.57% for the year ended December 31, 1998. The
cost of funds rate declined 0.40% and the average borrowed funds declined by $9.8 million for the year ended
December 31, 1999 when compared to the year ended December 31, 1998; consequently, interest expense decreased
by 8%.
With our current asset/liability management strategy, changes in our cost of funds are expected to be closely correlated
with changes in short-term LIBOR, although we may choose to extend the maturity of our liabilities at any time. Our
average cost of funds was 0.08% below one-month LIBOR for the year ended December 31, 1999 and equal to
average one-month LIBOR for the year ended December 31, 1998. We generally have structured our borrowings to
adjust with one-month LIBOR because we believe that one-month LIBOR may continue to be lower than six-month
LIBOR in the present interest rate environment. During the year ended December 31, 1999, average one-month
LIBOR, which was 5.25%, was 0.28% lower than average six-month LIBOR, which was 5.53%. During the year
ended December 31, 1998, average one-month LIBOR, which was 5.57%, was 0.03% higher than average six-month
LIBOR, which was 5.54%.
The table below shows our average borrowed funds and average cost of funds as compared to average one-month and
average six-month LIBOR for the years ended December 31, 1999 and 1998, the period ended December 31, 1997 and
the four quarters in 1999.
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Annaly Corporate Profile
Average
Borrowed
Funds
$1,350,230
Interest
Expense
$69,846
Average
Average
One-
Cost of
Month
Funds
LIBOR
5.17% 5.25%
Average
Six-Month
LIBOR
5.53%
Average
One-Month
LIBOR
Relative
toAverage
Six- Month
LIBOR
(0.28%)
Average
Cost of
Funds
Relative to
Average
One-
Month
LIBOR
(0.08%)
Average
Cost of
Funds
Relative to
Average
Six-Month
LIBOR
(0.36%)
$1,360,040
$75,735
5.57% 5.57%
5.54%
0.03%
–
0.03%
$404,140
$19,677
5.61% 5.67%
5.87%
(0.20%)
(0.06%)
(0.26%)
$1,324,326
$18,597
5.61% 5.78%
6.08%
(0.30%)
(0.17%)
(0.47%)
$1,320,776
$17,232
5.22% 5.28%
5.80%
(0.52%)
(0.06%)
(0.58%)
$1,374,154
$16,865
4.91% 4.96%
5.19%
(0.23%)
(0.05%)
(0.28%)
$1,381,663
$17,151
4.97% 4.96%
5.05%
(0.09%)
0.01%
(0.08%)
(dollars in
thousands)
For the Year
Ended
December
31, 1999
For the Year
Ended
December
31, 1998
For the
Period
Ended
December
31, 1997
For the
Quarter
Ended
December
31, 1999
For the
Quarter
Ended
September
30, 1999
For the
Quarter
Ended June
30, 1999
For the
Quarter
Ended March
31, 1999
Net Interest Rate Agreement Expense
We have not entered into any interest rate agreements to date. As part of our asset/liability management process, we
may enter into interest rate agreements such as interest rate caps, floors or swaps. These agreements would be entered
into with the intent to reduce interest rate or prepayment risk and would be designed to provide us income and capital
appreciation in the event of certain changes in interest rates. However, even after entering into these agreements, we
would still be exposed to interest rate and prepayment risks. We review the need for interest rate agreements on a
regular basis consistent with our capital investment policy.
Net Interest Income
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Annaly Corporate Profile
Our net interest income, which equals interest income less interest expense, totaled $20.0 million for the year ended
December 31, 1999 and $14.3 million for the year ended December 31, 1998. Our net interest income increased
because of lower funding costs for the year. Our net interest spread, which equals the yield on our average assets for
the period less the average cost of funds for the period, was 0.98% for the year ended December 31, 1999 as compared
to 0.59% for the year ended December 31, 1998. This 0.39% increase in spread income is reflected in the $6.7 million
increase in net interest income. Net interest margin, which equals net interest income divided by average interest
earning assets, was 1.35% for the year ended December 31, 1999 and 0.95% for the year ended December 31, 1998.
The principal reason that net interest margin exceeded net interest spread is that average interest earning assets
exceeded average interest bearing liabilities. A portion of our assets is funded with equity rather than borrowings. We
did not have any interest rate agreement expenses to date.
The table below shows our interest income by earning asset type, average earning assets by type, total interest income,
interest expense, average repurchase agreements, average cost of funds, and net interest income for the years ended
December 31, 1999 and 1998, the period ended December 31, 1997, and the four quarters in 1999.
GAAP Net Interest Income
Average
Mortgage-
Backed
Securities
Held
$1,461,033
Interest
Income
on
Mortgage-
Backed
Securities
$89,801
Average
Cash
Equivalents
Total
Interest
Income
Cash $89,812
Yield on
Average
Interest
Interest
Earning
Expense
Assets
6.15% $1,350,230 $69,846
Average
Balance of
Repurchase
Agreements
Average
Net
Cost of
Interest
Income
Funds
5.17% $19,966
$1,461,789
$89,986
$2 $89,986
6.16% $1,360,040 $75,735
5.57% $14,251
$448,276
$24,682
$31 $24,713
6.34% $404,140 $19,677
5.61% $5,036
$1,420,308
$23,372
$2 $23,372
6.58% $1,324,326 $18,597
5.61% $4,774
$1,416,525
$22,151
$877 $22,160
6.26% $1,320,776 $17,232
5.22% $4,929
(dollars in
thousands)
For the
Year
Ended
December
31, 1999
For the
Year
Ended
December
31, 1998
For the
Period
Ended
December
31, 1997
For the
Quarter
Ended
December
31, 1999
For the
Quarter
Ended
September
30, 1999
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Annaly Corporate Profile
$1,504,669
$22,265
$2 $22,265
5.92% $1,374,154 $16,865
4.91% $5,399
$1,502,629
$22,015
$2 $22,015
5.87% $1,381,663 $17,151
4.97% $4,864
For the
Quarter
Ended
June 30,
1999
For the
Quarter
Ended
March 31,
1999
Gains and Losses on Sales of Mortgage-Backed Securities
For the year ended December 31, 1999, we sold mortgage-backed securities with an aggregate historical amortized
cost of $167.3 million for an aggregate gain of $455,000. For the year ended December 31, 1998, we sold
mortgage-backed securities with an aggregate historical amortized cost of $565.2 million for an aggregate gain of $3.3
million. As stated above, our gain on the sale of assets declined substantially. For the year ended December 31, 1999,
there was a greater emphasis on spread income and not gains. The difference between the sale price and the historical
amortized cost of our mortgage-backed securities is a realized gain and increases income accordingly. We do not
expect to sell assets on a frequent basis, but may from time to time sell existing assets to move into new assets, which
our management believes might have higher risk-adjusted returns, or to manage our balance sheet as part of our
asset/liability management strategy.
Credit Losses
We have not experienced credit losses on our mortgage-backed securities to date. We have limited our exposure to
credit losses on our mortgage-backed securities by purchasing only securities, issued or guaranteed by FNMA,
FHLMC or GNMA, which, although not rated, carry an implied "AAA" rating.
General and Administrative Expenses
G&A expenses were $2.3 million for the year ended December 31, 1999 and $2.1 million for the year ended
December 31, 1998. G&A expenses as a percentage of average assets was 0.15% and 0.14% for the years ended
December 31, 1999 and 1998, respectively. G&A expenses increased by $175,000 for 1999, when compared to 1998.
Salaries and benefits increased by $102,000, with the addition of one employee and higher benefits cost. Also,
accounting, legal, and printing cost increased for the year as a direct result of secondary offering cost.GAAP G&A
Expenses and Operating Expense Ratios
Cash
Expense
Compensation
and Benefits
$1,312
Other G&A
Expenses
$969
Total
G&A
Expenses
$2,281
Total
G&A Expenses/
Average Assets
(annualized)
0.15%
Total
G&A Expenses/
Average
Equity
(annualized)
1.94%
$1,210
$896
$2,106
0.14%
1.60%
(dollars in
thousands)
For the Year
Ended
December 31,
1999
For the Year
Ended
December 31,
1998
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Annaly Corporate Profile
For the Period
Ended
December 31,
1997
For the Quarter
Ended
December 31,
1999
For the Quarter
Ended
September 30,
1999
For the Quarter
Ended June 30,
1999
For the Quarter
Ended March
31, 1999
$492
$360
$852
0.21%
1.61%
$304
$292
$596
0.16%
2.21%
$337
$177
$514
0.14%
1.81%
$338
$223
$561
0.15%
1.44%
$333
$277
$610
0.16%
1.93%
Net Income and Return on Average Equity
Our net income was $18.1 million for the year ended December 31, 1999 and $15.5 million for the year ended
December 31, 1998. Our return on average equity was 15.4% for the year ended December 31, 1999 and 11.8% for the
year ended December 31, 1998. The increase in net income is a direct result of an increase in spread income.
As previously mentioned, the substantial decline in interest expense was the primary reason that our earnings
increased. The table below shows our net interest income, gain on sale of mortgage-backed securities and G&A
expenses each as a percentage of average equity, and the return on average equity for the years ended December 31,
1999, 1998, and the period ended December 31, 1997, and for the four quarters in 1999.
Components of Return on Average Equity
(Ratios for the Quarters Ended
December 31, 1999, September
30, 1999, June 30, 1999, March
31, 1999 and the Period ended
December 31, 1997 are
annualized)
For the Year Ended December
31, 1999
For the Year Ended December
31, 1998
For the Period Ended December
31, 1997
For the Quarter Ended December
30, 1999
For the Quarter Ended
September 30, 1999
Net
Interest
Income/Average
Equity
16.97%
Gain on
Sale of
Mortgage-
Backed
Securities/Average
Equity
0.38%
10.85%
9.49%
17.65%
17.40%
2.55%
1.39%
0.99%
0.34%
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G&A
Expenses/
Average
Equity
1.94%
Return on
Average
Equity
15.41%
1.60%
11.80%
1.61%
9.27%
2.21%
16.43%
1.81%
15.93%
Annaly Corporate Profile
For the Quarter Ended June 30,
1999
For the Quarter Ended March 31,
1999
Dividends and Taxable Income
17.99%
15.43%
0.08%
0.20%
1.87%
16.20%
1.93%
13.70%
We have elected to be taxed as a REIT under the Internal Revenue Code. Accordingly, we have distributed
substantially all of our taxable income for each year since inception to our stockholders, including income resulting
from gains on sales of our mortgage-backed securities. From inception through December 31, 1999, approximate
taxable income exceeded dividend declarations by $1.7 million, or $0.12 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 Year
Ended
December 31,
1999
For the Year
Ended
December 31,
1998
For the Period
Ended
December 31,
1997
For the
Quarter
Ended
December 31,
1999
For the
Quarter
Ended
September
30, 1999
For the
Quarter
Ended June
30, 1999
For the
Quarter
Ended March
31, 1999
Weighted
Average
Taxable
Common
Net
Shares
Income
Outstanding
$18,437 12,889,510
Taxable
Net
Income
Per Share
$1.43
Dividends
Declared
Per Share
$1.39
Total
Dividends
$17,978
Dividend
Payout
Ratio
97.5%
Cumulative
Undistributed
Taxable
Income
$1,697
$16,477 12,709,116
$1.30
$1.21
$15,437
93.7%
$1,234
$4,884
5,952,123
$0.82
$0.79
$4,690
96.0%
$194
$4,179 13,383,426
$0.31
$0.35
$4,754
113.74%
$1,697
$4,269 12,745,416
$0.34
$0.35
$4,588
91.1%
$2,271
$5,229 12,697,338
$0.41
$0.35
$4,444
87.1%
$2,589
$4,760 12,657,884
$0.37
$0.33
$4,190
94.9%
$1,804
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Annaly Corporate Profile
Financial Condition
Mortgage-Backed Securities
All of our mortgage-backed securities at December 31, 1999 were adjustable-rate or fixed-rate mortgage-backed
securities backed by single-family mortgage loans. All of the mortgage assets underlying these mortgage-backed
securities were secured with a first lien position on the underlying single-family properties. All our mortgage-backed
securities were FHLMC, FNMA or GNMA mortgage pass-through certificates or CMOs, which carry an implied
"AAA" rating. We mark-to-market all of our earning assets at liquidation value.
We accrete discount balances as an increase in interest income over the life of discount mortgage-backed securities
and we amortize premium balances as a decrease in interest income over the life of premium mortgage-backed
securities. At December 31, 1999 and 1998, we had on our balance sheet a total of $1.1 million and $609,000
respectively, of unamortized discount (which is the difference between the remaining principal value and current
historical amortized cost of our mortgage-backed securities acquired at a price below principal value) and a total of
$23.6 million and $24.9 million, respectively, of unamortized premium (which is the difference between the remaining
principal value and the current historical amortized cost of our mortgage-backed securities acquired at a price above
principal value).
We received mortgage principal repayments of $362.7 million for the year ended December 31, 1999 and $486.3
million for the year ended December 31, 1998. Given our current portfolio composition, if mortgage principal
prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net
interest income would decrease during the life of these mortgage-backed securities as we would be required to
amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment
rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest
income would increase during the life of these mortgage-backed securities as we would amortize our net premium
balance over a longer time period.
The table below summarizes our mortgage-backed securities at December 31, 1999, 1998 and 1997, September 30,
1999, June 30, 1999, and March 31, 1999.
Mortgage-Backed Securities
Principal
Value
$1,452,917
Amortized
Net
Premium
Cost
$22,444 $1,475,361
Amortized
Cost/
Principal
Value
101.54%
Estimated
Fair
Value
$1,437,793
Estimated Fair
Value/
Principal Value
98.96%
Weighted
Yield
Average
6.77%
$1,502,414
$24,278 $1,526,692
101.62%
$1,520,289
101.19%
6.43%
$1,138,365
$21,390 $1,159,755
101.88%
$1,161,779
102.06%
6.57%
$1,402,565
$22,981 $1,425,546
101.64%
$1,401,770
99.94%
6.41%
$1,468,547
$24,985 $1,493,532
101.70%
$1,474,104
100.38%
6.21%
(dollars in
thousands)
At
December
31, 1999
At
December
31, 1998
At
December
31, 1997
At
September
30, 1999
At June
30, 1999
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Annaly Corporate Profile
At March
31, 1999
$1,527,530
$26,071 $1,553,601
101.71%
$1,547,618
101.32%
5.94%
The tables below set forth certain characteristics of our mortgage-backed securities. The index level for adjustable-rate
mortgage-backed securities is the weighted average rate of the various short-term interest rate indices, which
determine the coupon rate.
Adjustable-Rate Mortgage-Backed Security Characteristics
Weighted
Average
Coupon
Rate
Weighted
Average
Index
Level
7.33% 5.84%
Principal
Value
$951,839
Weighted
Weighted
Average
Average
Term to
Net
Next
Margin
Adjustment
1.49% 11 months
Weighted
Average
Lifetime
Cap
10.30%
Weighted
Average
Asset
Yield
7.64%
Principal
Value at
Period End
as % of
Total
Mortgage-
Backed
Securities
65.51%
$1,030,654
6.84% 5.18%
1.66% 12 months
10.63%
6.42%
68.60%
$994,653
7.13% 5.52%
1.61% 22 months
10.78%
6.50%
87.38%
$889,293
6.76% 5.13%
1.63% 9 months
10.82%
6.14%
63.40%
$941,559
6.67% 4.96%
1.71% 11 months
11.00%
5.84%
64.12%
$1,036,947
6.63% 4.97%
1.66% 11 months
11.01%
5.64%
67.88%
(dollars in
thousands)
At December
31, 1999
At December
31, 1998
At December
31, 1997
At
September
30, 1999
At June 30,
1999
At March 31,
1999
Fixed-Rate Mortgage-Backed Security Characteristics
(dollars in thousands)
At December 31, 1999
At December 31, 1998
At December 31, 1997
At December 31, 1999
At September 30, 1999
At June 30, 1999
At March 31, 1999
Principal
Value
$501,078
$471,760
$143,712
$513,272
$526,988
$401,002
Weighted
Average
Coupon Rate
6.58%
6.55%
7.50%
Weighted
Average
Asset Yield
7.01%
6.47%
7.08%
Principal Value as %
of Total Mortgage-
Backed Securities
34.49%
31.40%
12.62%
6.58%
6.58%
6.82%
6.91%
6.88%
6.65%
36.60%
35.88%
26.02%
At December 31, 1999 and 1998 we held mortgage-backed securities with coupons linked to the one-year, three-year,
and five-year Treasury indices, one-month LIBOR and the six-month CD rate.
Adjustable-Rate Mortgage-Backed Securities by Index
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Annaly Corporate Profile
December 31, 1999
Weighted Average Adjustment
Frequency
Weighted Average Term to Next
Adjustment
Weighted Average Annual Period
Cap
Weighted Average Lifetime Cap at
December 31, 1999
Mortgage Principal Value as
Percentage of Mortgage-Backed
Securities at December 31, 1999
One-Month
LIBOR
1 mo.
Six-Month
CD Rate
6 mo.
1-Year
Treasury
Index
12 mo.
3-Year
Treasury
Index
36 mo.
5-Year
Treasury
Index
60 mo.
1 mo.
2 mo.
25 mo.
16 mo.
36 mo.
None
1.00%
1.93%
1.57%
1.35%
9.20%
11.36%
11.19%
13.23%
11.68%
34.89%
2.12%
22.62%
5.22%
0.66%
Adjustable-Rate Mortgage-Backed Securities by Index
One-Month
LIBOR
1 mo.
Six-Month
CD Rate
6 mo.
1-Year
Treasury
Index
12 mo.
3-Year
Treasury
Index
36 mo.
5-Year
Treasury
Index
60 mo.
1 mo.
3 mo.
23 mo.
9 mo.
2 mo.
None
1.00%
1.83%
2.00%
2.00%
9.16%
11.04%
11.76%
13.07%
11.57%
29.60%
3.73%
33.33%
1.62%
0.32%
December 31, 1998
Weighted Average Adjustment
Frequency
Weighted Average Term to Next
Adjustment
Weighted Average Annual Period
Cap
Weighted Average Lifetime Cap at
December 31, 1998
Mortgage Principal Value as
Percentage of Mortgage-Backed
Securities at December 31, 1998
Interest Rate Agreements
Interest rate agreements are assets that are carried on a balance sheet at estimated liquidation value. We have not
entered into any interest rate agreements since our inception.
Borrowings
To date, our debt has consisted entirely of borrowings collateralized by a pledge of our mortgage-backed securities.
These borrowings appear on our balance sheet as repurchase agreements. At December 31, 1999, we had established
uncommitted borrowing facilities in this market with twenty-three lenders in amounts, which we believe, are in excess
of our needs. All of our mortgage-backed securities are currently accepted as collateral for these borrowings. However,
we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and thus
increase the liquidity and strength of our balance sheet.
For the years ended December 31, 1999 and 1998, the term to maturity of our borrowings ranged from one day to one
year, with a weighted average original term to maturity of 50 days at December 31, 1999 and 49 days at December 31,
1998. At December 31, 1999, the weighted average cost of funds for all of our borrowings was 5.26% and the
weighted average term to next rate adjustment was 20 days. At December 31, 1998, the weighted average cost of funds
for all of our borrowings was 5.21% and the weighted average term to next rate adjustment was 29 days.
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Annaly Corporate Profile
Liquidity
Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional mortgage-backed
securities and to pledge additional assets to secure existing borrowings should the value of our pledged assets decline.
Potential immediate sources of liquidity for us include cash balances and unused borrowing capacity. Unused
borrowing capacity will vary over time as the market value of our mortgage-backed securities varies. Our balance
sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior
to payment as dividends. Should our needs ever exceed these on-going sources of liquidity plus the immediate sources
of liquidity discussed above, we believe that our mortgage-backed securities could in most circumstances be sold to
raise cash. The maintenance of liquidity is one of the goals of our capital investment policy. Under this policy, we
limit asset growth in order to preserve unused borrowing capacity for liquidity management purposes.
Stockholders’ Equity
We use "available-for-sale" treatment for our mortgage-backed securities; we carry these assets on our balance sheet at
estimated market value rather than historical amortized cost. Based upon this "available-for-sale" treatment, our equity
base at December 31, 1999 was $103.3 million, or $7.60 per share. If we had used historical amortized cost
accounting, our equity base at December 31, 1999 would have been $140.8 million, or $10.37 per share. Our equity
base at December 31, 1998 was $125.9 million, or $9.95 per share. If we had used historical amortized cost
accounting, our equity base at December 31, 1998 would have been $132.3 million, or $10.46 per share. During the
year ended December 31, 1999, the Company raised additional capital in the amount of $8.2 million through its direct
purchase program.
With our "available-for-sale" accounting treatment, unrealized fluctuations in market values of assets do not impact
our GAAP or taxable income but rather are reflected on our balance sheet by changing the carrying value of the asset
and stockholders’ equity under "Accumulated Other Comprehensive Income (Loss)." By accounting for our assets in
this manner, we hope to provide useful information to stockholders and creditors and to preserve flexibility to sell
assets in the future without having to change accounting methods.
As a result of this mark-to-market accounting treatment, our book value and book value per share are likely to
fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that
use historical cost accounting for some or all of their balance sheet may not be meaningful.
The table below shows unrealized gains and losses on the mortgage-backed securities in our portfolio.
Unrealized Gains and Losses
(dollars in thousands)
Unrealized Gain
Unrealized Loss
Net Unrealized Gain (Loss)
Net Unrealized Gain (Loss) as
% of Mortgage-Backed
Securities Principal Value
Net Unrealized Gain (Loss) as
% of Mortgage-Backed
Securities Amortized Cost
At December 31, 1999
$1,531
(39,100)
$(37,569)
(2.59%)
At Decmber 31, 1998
$3,302
(9,706)
$(6,404)
(0.43%)
At Decmber 31, 1997
$3,253
(1,229)
$(2,024
0.18%
(2.54%)
(0.42%)
0.17%
Unrealized changes in the estimated net market value of mortgage-backed securities have one direct effect on our
potential earnings and dividends: positive market-to-market changes increase our equity base and allow us to increase
our borrowing capacity while negative changes tend to limit borrowing capacity under our capital investment policy.
A very large negative change in the net market value of our mortgage-backed securities might impair our liquidity
position, requiring us to sell assets with the likely result of realized losses upon sale. "Unrealized Losses on Available
for Sale Securities" was $37.6 million, or 2.54% of the amortized cost of our mortgage-backed securities at December
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Annaly Corporate Profile
31, 1999. "Unrealized Losses on Available for Sale Securities" was $6.4 million or 0.43% of the amortized cost of our
mortgage-backed securities at December 31, 1998.
The table below shows our equity capital base as reported and on a historical amortized cost basis at December 31,
1999, 1998, and 1997, and September 30, 1999, June 30, 1999 and March 31,1999. Issuances of common stock, the
level of GAAP earnings as compared to dividends declared, and other factors influence our historical cost equity
capital base. The GAAP reported equity capital base is influenced by these factors plus changes in the "Net Unrealized
Losses on Assets Available for Sale" account.
Stockholders’ Equity
(dollars in
thousands, except
per share data)
At December 31,
1999
At December 31,
1998
At December 31,
1997
At September 30,
1999
At June 30, 1999
At March 31, 1999
Leverage
Historical
Amortized
Cost
Equity Base
$140,841
Net Unrealized
Gains on
Assets
Available
for Sale
$(37,569)
GAAP
Reported
Equity Base
(Book Value)
$103,272
Historical
Amortized
Cost Equity
Per Share
$10.37
GAAP
Reported
Equity (Book
Value)
Per Share
$7.60
$132,275
$(6,404)
$125,871
$10.46
$133,062
$2,024
$135,086
$10.47
$136,850
$(23,776)
$113,074
$10.44
$133,020
$133,055
$(19,428)
$(1,910)
$113,592
$131,145
$10.48
$10.43
$9.95
$10.62
$8.63
$8.95
$10.28
Our debt-to-GAAP reported equity ratio at December 31, 1999 and, 1998 was 12.9:1 and 10.1:1, respectively. We
generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management’s opinion of the level of risk of our
assets and liabilities, our liquidity position, our level of unused borrowing capacity and over-collateralization levels
required by lenders when we pledge assets to secure borrowings.
Our target debt-to-GAAP reported equity ratio is determined under our capital investment policy. Should our actual
debt-to-equity ratio increase above the target level due to asset acquisition or market value fluctuations in assets, we
will cease to acquire new assets. Our management will, at that time, present a plan to our Board of Directors to bring
us back to our target debt-to-equity ratio; in many circumstances, this would be accomplished in time by the monthly
reduction of the balance of our mortgage-backed securities through principal repayments.
Asset/Liability Management and Effect of Changes in Interest Rates
We continually review our asset/liability management strategy with respect to interest rate risk, mortgage prepayment
risk, credit risk and the related issues of capital adequacy and liquidity. We seek attractive risk-adjusted stockholder
returns while maintaining a strong balance sheet.
We seek to manage the extent to which our net income changes as a function of changes in interest rates by matching
adjustable-rate assets with variable-rate borrowings. In addition, although we have not done so to date, we may seek to
mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in our portfolio of
mortgage-backed securities by entering into interest rate agreements such as interest rate caps and interest rate swaps.
Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result,
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Annaly Corporate Profile
prepayments on mortgage-backed securities. We will seek to mitigate the effect of changes in the mortgage principal
repayment rate by balancing assets we purchase at a premium with assets we purchase at a discount. To date, the
aggregate premium exceeds the aggregate discount on our mortgage-backed securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce our net income compared to what net income
would be absent such prepayments.
Inflation
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors drive our
performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or
changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our dividends based
upon our net income as calculated for tax purposes; in each case, our activities and balance sheet are measured with
reference to historical cost or fair market value without considering inflation.
Other Matters
We calculate that our qualified REIT assets, as defined in the Internal Revenue Code, are 99.5% of our total assets at
December 31, 1999 and 1998, as compared to the Internal Revenue Code requirement that at least 75% of our total
assets be qualified REIT assets. We also calculate that 99.5% and 96.4% of our revenue qualifies for the 75% source
of income test, and 100% of its revenue qualifies for the 95% source of income test, under the REIT rules for the years
ended December 31, 1999 and 1998, respectively. We also met all REIT requirements regarding the ownership of our
common stock and the distribution of our net income. Therefore, as of December 31, 1999 and 1998, we believe that
we qualified as a REIT under the Internal Revenue Code.
We at all times intend to conduct our business so as not to become regulated as an investment company under the
Investment Company Act. If we were to become regulated as an investment company, then our use of leverage would
be substantially reduced. The Investment Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (qualifying interests).
Under current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain at least
55% of our assets directly in qualifying interests. In addition, unless certain mortgage securities represent all the
certificates issued with respect to an underlying pool of mortgages, the mortgage-backed securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be considered qualifying interests for
purposes of the 55% requirement. We calculate that as of December 31, 1999 and 1998 we were in compliance with
this requirement.
Balance Sheets
December 31, 1999 and 1998
Assets
Cash and Cash Equivalents
Mortgage-Backed Securities—At fair value
Receivable for Mortgage-Backed Securities sold
Accrued interest receivable
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Repurchase agreements
Payable for Mortgage-Backed Securities purchased
Accrued interest payable
1999
1998
71,918
1,437,792,631
46,402,360
6,857,683
197,896
1,491,322,488
69,020
1,520,288,762
—
6,782,043
212,214
1,527,352,039
1,338,295,750
38,154,012
6,682,687
1,280,510,000
111,921,205
5,052,626
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Annaly Corporate Profile
Dividends payable
Accounts payable
Total liabilities
Stockholders’ Equity:
Common stock: par value $.01 per share;100,000,000
authorized, 13,581,316 and 12,648,424 shares issued and
outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
4,753,461
164,100
1,388,050,010
3,857,663
139,236
1,401,480,730
135,813
126,484
140,262,657
(37,568,510)
442,518
103,272,478
131,868,108
(6,404,275)
280,992
125,871,309
Total Liabilities and Stockholders’ Equity
1,491,322,488
1,527,352,039
See notes to financial statements.
Statements of Operations
Years Ended December 31, 1999 and 1998
Interest Income:
Mortgage-Backed Securities
Other interest income
Total interest income
Interest Expense:
Repurchase agreements
Net Interest Income
Gain on sale of Mortgage-Backed Securities
General and administrative expenses
Net Income
Other Comprehensive Loss:
Unrealized loss on available-for-sale securities
Less reclassification adjustment for gains included in net
income
Other comprehensive gain (loss)
Comprehensive Income
Net Income Per Share:
Basic
Diluted
Average Number of Shares Outstanding:
Basic
Diluted
See notes to financial statements.
Statement of Stockholders Equity
1999
1998
$89,801,353
10,641
89,811,994
69,846,206
19,965,788
454,782
2,281,290
18,139,280
(30,709,453)
(454,782)
(31,164,235)
$(13,024,955)
$1.41
$1.35
$89,985,526
105
89,985,631
75,735,280
14,250,351
3,344,106
2,105,534
15,488,923
(5,083,920)
(3,344,106)
(8,428,026)
$7,060,897
$1.22
$1.19
12,889,510
13,454,007
12,709,116
13,020,648
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Annaly Corporate Profile
Years Ended
December 31,
1999 and 1998
Balance, December
31, 1997
Net income
Other
comprehensive
income:Unrealized
net losses on
securities, net of
reclassification
adjustment
Comprehensive
income
Exercise of stock
options
Additional cost of
initial public offering
Stock buyback
Dividends declared
for the year ended
December 31,
1998, $1.22 per
average share
Balance, December
31, 1998
Net income
Other
comprehensive
income:Unrealized
net losses on
securities, net of
reclassification
adjustment
Comprehensive
income
Exercise of stock
options
Proceeds from
direct purchase
Dividends declared
for the year ended
December 31,
1999, $1.39 per
average share
Common
Stock
Par
Value
Additional
Paid-in
Capital
$127,139 $132,705,765
Comprehensive
Income
Retained
Earnings
$— $229,623
Other
Comprehensive
Income
Total
$2,023,751 $135,086,278
—
—
—
—
15,488,923 15,488,923
—
(8,428,026)
—
(8,428,026)
—
—
—
—
$7,060,897
441
194,658
—
(130,248)
(1,096)
(902,067)
—
—
—
—
—
—
—
—
7,060,897
195,099
(130,248)
(903,163)
—
—
(15,437,554)
— (15,437,554)
126,484 131,868,108
280,992
(6,404,275) 125,871,309
—
—
— $18,139,280 18,139,280
— (31,164,235)
—
— (31,164,235)
—
—
—
— $(13,024,955)
572
232,704
—
8,757
8,161,845
—
—
—
— (13,024,955)
233,276
—
8,170,602
—
—
(17,977,754)
— (17,977,754)
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Annaly Corporate Profile
Balance, December
31, 1999
Disclosure of
reclassification
amounts:Unrealized
holding losses
arising during
period
Less
reclassification
adjustment of gains
included in net
income
Net unrealized
losses on securities
$135,813 $140,262,657
$442,518
$(37,568,510) $103,272,478
—
— $(30,709,453)
—
—
—
—
—
—
(454,782)
— $(31,164,235)
—
—
—
—
—
—
See notes to financial statements.
Statement of Cash Flows
Years Ended December 31, 1999 and 1998
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities: Amortization of mortgage premiums and
discounts, net
Depreciation of fixed assets
Gain on sale of Mortgage-Backed Securities
Increase in accrued interest receivable
Decrease (increase) in other assets
Increase in accrued interest payable
Increase (decrease) 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 From Financing Activities:
Proceeds from repurchase agreements
Principal payments on repurchase agreements
Proceeds from exercise of stock options
Proceeds from direct equity offering
Additional cost of initial public offering
Purchase of Treasury Stock
1999
1998
$18,139,280
6,103,239
$15,488,923
8,235,371
22,670
(454,782)
(98,310)
14,318
1,630,061
24,864
14,154
(3,344,106)
(1,443,182)
(115,112)
60,179
(62,740)
25,381,340
18,833,487
(559,695,956)
122,552,293
362,657,549
(1,420,592,798)
568,553,814
486,337,605
(74,486,114)
(365,701,379)
11,202,660,000
11,506,566,000
(11,144,874,250) (11,144,925,000)
195,100
—
(130,248)
(903,163)
233,276
8,170,602
—
—
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Dividends paid
Net cash provided by financing activities
Net Increase (decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning Of Year
Cash and Cash Equivalents, End Of Year
Supplemental Disclosure Of Cash Flow Information:
Interest paid
(17,081,956)
(14,376,949)
49,107,672
2,898
69,020
$71,918
346,425,740
(442,152)
511,172
$69,020
$68,216,145
$75,675,101
Noncash Financing Activities:
Net change in unrealized loss on available-for-sale securities
Dividends declared, not yet paid
$(31,164,235)
$4,753,461
$(8,428,026)
$3,857,663
See notes to financial statements.
Notes to Financial Statements
Years Ended December 31, 1999 and 1998
1. Organization and Significant Accounting Policies
Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland on November 25, 1996. The
Company commenced its operations of purchasing and managing an investment portfolio of Mortgage-Backed
Securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital. An
initial public offering was completed on October 14, 1997.
A summary of the Company’s significant accounting policies follows:
Cash and Cash Equivalents–Cash and cash equivalents includes cash on hand and money market funds. The carrying
amounts of cash equivalents approximates their value.
Mortgage-Backed Securities–The Company invests primarily in mortgage pass-through certificates, collateralized
mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of
mortgage loans (collectively, "Mortgage-Backed Securities").
Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"), requires the Company to classify its investments as either trading investments,
available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most
of its Mortgage-Backed Securities until maturity, it may, from time to time, sell any of its Mortgage-Backed Securities
as part of its overall management of its balance sheet. Accordingly, this flexibility requires the Company to classify all
of its Mortgage-Backed Securities as available-for-sale. All assets classified as available-for-sale are reported at fair
value, 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 years ended December 31,
1999 and 1998.
Interest income is accrued based on the outstanding principal amount of the Mortgage-Backed Securities and their
contractual terms. Premiums and discounts associated with the purchase of the Mortgage-Backed Securities are
amortized into interest income over the lives of the securities using the effective yield method.
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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
transactions are determined on the specific identification basis.
Credit Risk–At December 31, 1999 and 1998, the Company has limited its exposure to credit losses on its portfolio of
Mortgage-Backed Securities by only purchasing securities from Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), or Government National Mortgage Association
("GNMA"). The payment of principal and interest on the FHLMC and FNMA Mortgage-Backed Securities are
guaranteed by those respective agencies and the payment of principal and interest on the GNMA Mortgage-Backed
Securities are backed by the full-faith-and-credit of the U.S. government. At December 31, 1999 and 1998, all of the
Company’s Mortgage-Backed Securities have an implied "AAA" rating.
Income Taxes–The Company has elected to be taxed as a Real Estate Investment Trust ("REIT") and intends to
comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code") with respect thereto.
Accordingly, the Company will not be subjected to Federal income tax to the extent of its distributions to shareholders
and as long as certain asset, income and stock ownership tests are met.
Use of Estimates–The preparation of financial statements in conformity with generally accepted accounting principles
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.
Reclassifications–Certain prior year amounts have been reclassified to conform to the current year presentation.
2. Mortgage-Backed Securities
The following table pertains to the Company’s Mortgage-Backed Securities classified as available-for-sale as of
December 31, 1999, which are carried at their fair value:
Mortgage-Backed
Securities, gross
Unamortized discount
Unamortized premium
Federal Home
Loan Mortgage
Corporation
$454,711,462
Federal National
Mortgage
Association
$900,782,563
Government
National Mortgage
Association
$97,423,038
Total Mortgage
Assets
$1,452,917,063
(171,241)
8,454,547
(964,133)
13,359,448
–
1,765,457
(1,135,374)
23,579,452
Amortized cost
462,994,768
913,177,878
99,188,495
1,475,361,141
Gross unrealized
gains
Gross unrealized
losses
359,888
1,171,250
–
1,531,138
(12,091,145)
(22,966,353)
(4,042,150)
(39,099,648)
Estimated fair value
$451,263,511
$891,382,775
$95,146,345
$1,437,792,631
The following table pertains to the Company’s Mortgage-Backed Securities classified as available-for-sale as of
December 31, 1998, which are carried at their fair value:
Federal Home Loan
Mortgage
Corporation
Federal National
Mortgage
Association
Government
National Mortgage
Association
Total Mortgage
Assets
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Mortgage-Backed
Securities, gross
Unamortized
discount
Unamortized
premium
$449,433,408
$955,650,670
$97,330,495
$1,502,414,573
(184,996)
(423,583)
–
(608,579)
8,852,370
14,264,277
1,770,397
24,887,044
Amortized cost
458,100,782
969,491,364
99,100,892
1,526,693,038
Gross unrealized
gains
Gross unrealized
losses
659,557
2,092,119
549,900
3,301,576
(3,487,784)
(5,692,759)
(525,309)
(9,705,852)
Estimated fair value
$455,272,555
$965,890,724
$99,125,483
$1,520,288,762
The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate adjustments are
limited to no more than 1% every six months) and lifetime caps. The weighted average lifetime cap was 10.6% at
December 31, 1999 and 1998.
During the year ended December 31, 1999, the Company realized $563,259 in gains from sales of Mortgage-Backed
Securities. Losses totaled $108,477 for the year ended December 31, 1999. During the year ended December 31, 1998,
the Company realized $3,344,070 in gains from sales of Mortgage-Backed Securities. Losses totaled $9,964 for the
year ended December 31, 1998.
3. Repurchase Agreements
The Company had outstanding $1,338,295,750 and $1,280,510,000 of repurchase agreements with a weighted average
borrowing rate of 5.26% and 5.21% and a weighted average remaining maturity of 20 days and 29 days as of
December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, Mortgage-Backed Securities actually
pledged had an estimated fair value of $1,376,684,559 and $1,458,669,078, respectively.
At December 31, 1999 and 1998, the repurchase agreements had the following remaining maturities:
Within 30 days
30 to 59 days
60 to 89 days
90 to 119 days
4. Common Stock
1999
$1,197,416,250
25,767,000
–
115,112,500
$1,338,295,750
1998
$1,222,542,000
31,346,000
26,622,000
–
$1,280,510,000
During the year ended December 31, 1999, 57,204 options were exercised at $233,276. Also, 875,688 shares were
purchased in direct offerings, totaling $8,170,602. During the year ended December 31, 1998, 44,124 options were
exercised at $195,099. Stock buybacks during the year ended December 31, 1998 totaled 109,600 shares at a cost of
$903,163.
During the Company’s year ending December 31, 1999, the Company declared dividends to shareholders totaling
$17,977,754, or $1.39 per weighted average share, of which $13,224,293 was paid during the year and $4,753,461 was
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Annaly Corporate Profile
paid on January 27, 2000. During the Company’s year ending December 31, 1998, the Company declared dividends to
shareholders totaling $15,437,554, or $1.22 per weighted average share, of which $11,579,891 was paid during the
year and $3,857,663 was paid on January 25, 1999.
5. Earnings Per Share (EPS)
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting No.
128, Earnings Per Share (SFAS No. 128), which requires dual presentation of Basic EPS and Diluted EPS on the face
of the income statement for all entities with complex capital structures. SFAS No. 128 also requires a reconciliation of
the numerator and denominator of Basic EPS and Diluted EPS computation. For the year ended December 31, 1999,
the reconciliation is as follows:
Years Ended December
31, 1999
Net income
Basic EPS
Effect of dilutive
securities:
Dilutive stock options
Diluted EPS
Income (Numerator)
Shares (Denominator)
Per-Share Amount
$18,139,280
18,139,280
12,889,510
$1.41
–
$18,139,280
564,497
13,454,007
$1.35
Options to purchase 708,380 shares were outstanding during the year (Note 6) and were dilutive as the exercise price
(between $4.00 and $8.94) was less than the average stock price for the year for the Company of $9.58. Options to
purchase 135,676 shares of stock were outstanding and not considered dilutive. The exercise price (between $10.00
and $11.25) was greater than the average stock price for the year of $9.58.
For the year ended December 31, 1998, the reconciliation is as follows:
Year Ending December
31, 1998
Net income
Basic EPS
Effect of dilutive
securities:
Dilutive stock options
Diluted EPS
Income (Numerator)
$15,488,923
15,488,923
Shares (Denominator)
Per-Share Amount
12,709,116
$1.22
–
$15,488,923
311,532
13,020,648
$1.19
Options to purchase 446,084 shares were outstanding during the year (Note 6) and were dilutive as the exercise price
(between $4.00 and $8.13) was less than the average stock price for the year for the Company of $9.36. Options to
purchase 147,676 shares of stock were outstanding and not considered dilutive. The exercise price (between $10.00
and $11.28) was greater than the average stock price for the year of $9.36.
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 9.95% 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
determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123. For
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the Company’s pro forma net earnings, the compensation cost will be amortized over the vesting period of the options.
The Company’s net earnings per share would have been reduced to the pro forma amounts indicated below:
Year Ending December 31,
Net earnings–as reported
Net earnings–pro forma
Earnings per share–as reported
Earnings per share–pro forma
1999
$18,139,280
18,010,908
$1.41
$1.40
1998
$15,488,925
15,280,631
$1.22
$1.20
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 year ended December 31, 1999: dividend yield of
15%; expected volatility of 32%; risk-free interest rate of 5.61%; and the weighted average expected lives of seven
years. For the year ended December 31, 1998, dividend yield of 10%; expected volatility of 33%; risk-free interest rate
of 5.56%; and the weighted average expected lives of six years.
Information regarding options at December 31, 1999 is as follows:
Outstanding, January 1, 1999
Granted (298,068 ISOs, 545,988
NQSOs)
Exercised
Expired
Outstanding, December 31, 1999
Weighted average fair value of
options granted during the year
(per share)
Options Outstanding Weighted Average Exercise Price
$7.42
8.63
593,760
307,500
(57,204)
–
844,056
$0.63
4.08
–
$8.03
Information regarding options at December 31, 1998, is as follows:
Outstanding, January 1, 1998
Granted (282,272 ISOs, 311,488
NQSOs)
Exercised
Expired
Outstanding, December 31, 1998
Weighted average fair value of
options granted during the year
(per share)
Options Outstanding Weighted Average Exercise Price
$6.42
8.17
348,500
289,384
(44,124)
–
593,760
$1.99
4.34
–
$7.42
The following table summarizes information about stock options outstanding at December 31, 1999:
Range of Exercise Prices
$4.00
8.13
8.63
8.94
10.00
Options Outstanding
122,502
278,378
300,000 /FONT>
7,500
125,750
Weighted Average Remaining
Contractual Life (Yrs.)
2
9
10
3
2
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Annaly Corporate Profile
10.75
11.25
7,500
2,426
844,056
3
3
7.2
At December 31, 1999 and 1998, 162,389 and 56,241 options were vested and not exercised, respectively.
7. Comprehensive Income
The Company adopted FASB Statement No. 130, Reporting Comprehensive Income. Statement No. 130 requires the
reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain financial information that historically has
not been recognized in the calculation of net income. The Company at December 31, 1999 and 1998 held securities
classified as available-for-sale. At December 31, 1999, the net unrealized losses totaled $37,568,510 and at December
31, 1998, the net unrealized losses totaled $6,404,275.
8. Lease Commitments
The Corporation has a noncancelable lease for office space, which commenced in April 1998 and expires in December
2007.
The Corporation’s aggregate future minimum lease payments are as follows:
2000
2001
2002
2003
2004
2005
2006
2007
Total remaining lease payments
9. Related Party Transaction
$95,299
97,868
100,515
110,261
113,279
116,388
119,590
122,888
$876,088
Included in "Other Assets" on the Balance sheet is an investment in Annaly International Money Management, Inc. On
June 24, 1998, the Company acquired 99,960 nonvoting shares, at a cost of $49,980. The officers and directors of
Annaly International Money Management Inc. are also officers and directors of the Company.
10.Summarized Quarterly Results (Unaudited)
The following is a presentation of the quarterly results of operations for the year ended December 31, 1999.
Quarters Ending
Interest income from
Mortgage-Backed
Securities and cash
Interest expense on
repurchase
agreements
Net interest income
Gain on sale of
Mortgage-Backed
Securities
March 31, 1999
$22,014,941
June 30, 1999 September 30, 1999 December 31, 1999
$23,370,851
$22,161,272
$22,264,930
17,151,041
16,865,824
17,232,086
18,597,255
4,863,900
64,560
5,399,106
25,853
4,929,186
97,656
4,773,596
266,713
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Annaly Corporate Profile
General and
administrative
expenses
Net income
Net income per
share:
Basic
Dilutive
Average number of
shares outstanding:
Basic
Dilutive
610,004
561,010
513,60
596,676
$4,318,456
$4,863,949
$4,513,242
$4,443,633
$0.34
$0.33
$0.38
$0.37
$0.35
$0.35
$0.33
$0.32
12,657,884
12,952,822
12,697,338
13,110,275
12,745,416
13,025,096
13,383,426
13,992,414
The following is a presentation of the quarterly results of operations for the year ended December 31, 1998.
Quarters Ending
Interest income from
Mortgage-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
Average number of
shares outstanding:
Basic
Dilutive
Independent Auditors Report
March 31, 1998
$20,078,721
June 30, 1998 September 30, 1998 December 31, 1999
$22,136,390
$24,008,567
$23,761,953
16,313,474
20,177,580
20,765,301
18,478,925
3,765,247
1,427,084
3,584,373
295,875
3,243,266
993,630
3,657,465
627,517
484,181
493,718
528,240
599,185
$4,708,150
$3,386,530
$3,708,656
$3,685,797
$0.37
$0.36
$0.27
$0.26
$0.29
$0.29
$0.29
$0.29
12,727,405
12,923,195
12,757,674
12,959,771
12,704,194
12,785,765
12,648,116
12,731,192
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Independent Auditors Report
To the Stockholders of
Annaly Mortgage Management, Inc.
We have audited the accompanying balance sheets of Annaly Mortgage Management, Inc. (the "Company") as of
December 31, 1999 and 1998, and the related statements of operations, stockholders’ equity and cash flows for the
years ended December 31, 1999 and 1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting 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 audits provide 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, 1999 and 1998 and the results of its operations and its cash flows for the year ended December 31,
1999 and 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche, L.L.P.
New York, New York
February 11, 2000
Common Stock and Market Data
The Company’s Common Stock began trading October 8, 1997 on the New York Stock Exchange under the trading
symbol NLY.
The following tables set forth, for the quarters indicated, the high, low, and closing sales price per share of common
Stock as reported on the New York Stock Exchange and the cash dividends declared per share of Common Stock.
First Quarter ended
March 31, 1999
Second Quarter ended
June 30, 1999
Third Quarter ended
September 30, 1999
Fourth Quarter ended
December 31, 1999
First Quarter ended
March 31, 1998
Second Quarter ended
June 30, 1998
Third Quarter ended
September 30, 1998
High
$10.25
$11.38
$11.50
$9.44
$11.75
$11.31
$9.00
Stock Prices Low
$7.94
$9.31
$9.19
$8.06
$10.00
$8.69
$6.75
Close
$10.25
$11.25
$9.31
$8.75
$11.81
$9.06
$8.13
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Fourth Quarter ended
December 31, 1998
$9.00
$6.13
$8.25
First Quarter ended March 31, 1999
Second Quarter ended June 30, 1999
Third Quarter ended September 30, 1999
Fourth Quarter ended December 31, 1999
First Quarter ended March 31, 1998
Second Quarter ended June 30, 1998
Third Quarter ended September 30, 1998
Fourth Quarter ended December 31, 1998
Fourth Quarter ended December 31, 1997
Cash Dividends
Declared Per Share
$0.33
$0.35
$0.35
$0.35
$0.32
$0.32
$0.27
$0.305
$0.22
We intend to pay quarterly dividends and to make distributions to our stockholders in amounts that all or substantially
all of our taxable income in each year (subject to certain adjustments) is distributed. This will enable us to qualify for
the tax benefits accorded to a REIT under the Code. All distributions will be made at the discretion of our Board and
will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our
Board of Directors may deem relevant from time to time.
Corporate Officers
Michael A.J. Farrell
Chairman of the Board &
Chief Executive Officer
Wellington J. St. Claire
Vice Chairman &
Chief Investment Officer
Timothy J. Guba
President & Chief Operating Officer
Kathryn F. Fagan
Chief Financial Officer & Treasurer
Jennifer A. Stephens
Senior Vice President &
Corporate Secretary
James P. Fortescue
Vice President
Kristopher R. Konrad
Assistant Vice President
Rose-Marie Miller
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Annaly Corporate Profile
Assistant Vice President
Board of Directors
Michael A.J. Farrell
Chairman of the Board &
Chief Executive Officer
Wellington J. St. Claire
Vice Chairman &
Chief Investment Officer
Timothy J. Guba
President & Chief Operating Officer
Kevin P. Brady
Founder & Principal
KPB Associates
Spencer I. Browne
Former President & Chief Executive Officer Asset Investors Corporation
Jonathan D. Green
President & Chief Executive Officer
Rockefeller Group Development Corporation
John A. Lambiase
Former Managing Director
Salomon Brothers, Inc.
Donnell A. Segalas
Principal Maplewood Partners
Corporate Headquarters
Annaly Mortgage Management, Inc.
12 East 41st Street, Suite 700
New York, New York 10017
(888) 8ANNALY
Legal Counsel
Morgan, Lewis & Bockius L.L.P.
101 Park Avenue
New York, New York 10178-0060
Auditors
Deloitte & Touche L.L.P.
Two World Financial Center
New York, New York 10281-1434
Stock Transfer Agent
Shareholder inquiries concerning dividend
payments, lost certificates, change of address:
ChaseMellon Shareholder Services, L.L.C
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Annaly Corporate Profile
PO Box 3315
South Hackensack, New Jersey
07606-1915
(800) 851-9677
www.chasemellon.com
Stock Exchange Listing
The common stock is listed on the New York Stock Exchange (symbol: NLY)
Annual Meeting
The Annual Meeting of Stockholders will be held Monday, May 15, 2000 at 9 a.m. at 101 Park Avenue, New York,
New York 39th Floor
Shareholder Communications
Copies of the Companys Annual Report and Financials may be obtained by writing the Corporate Secretary, by calling
the investor relations hot line at 888-8ANNALY, or by visiting our website at www.annaly.com
About the cover:
Annaly Mortgage Management invests in mortgage-backed securities. To date, all of the mortgage assets underlying
these mortgage-backed securities were secured with a first lien on the underlying single-family properties. Therefore,
we hosted a contest for elementary school students to draw a picture of their house. We would like to thank all
participants for the excellent drawings.
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