The information contained in this prospectus supplement and accompanying
prospectus is not complete and may be changed. A registration statement relating
to these securities has been declared effective by the Securities and Exchange
Commission. This prospectus supplement and accompanying prospectus are not an
offer to sell these securities, and we are not soliciting offers to buy these
securities, in any jurisdication where the offer or sale is not permitted.
--------------------------------------------------------------------------------
PRELIMINARY PROSPECTUS SUPPLEMENT SUBJECT TO COMPLETION MARCH 27, 2003
(TO PROSPECTUS DATED JUNE 18, 2002)
--------------------------------------------------------------------------------
6,000,000 SHARES
[ANNALY LOGO]
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON STOCK
--------------------------------------------------------------------------------
We are offering 6,000,000 shares of our common stock, par value $0.01 per share.
We will receive all of the net proceeds from the sale of such common stock.
Our common stock is listed on the New York Stock Exchange under the symbol
"NLY." The last reported sale price of our common stock on March 26, 2003 was
$18.49 per share.
BEFORE BUYING ANY OF THESE SHARES OF OUR COMMON STOCK, YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 4 OF THE
ACCOMPANYING PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PER SHARE TOTAL
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Public offering price $ $
-----------------------------------------------------------------------------
Underwriting discounts and commissions $ $
-----------------------------------------------------------------------------
Proceeds, before expenses, to us $ $
-----------------------------------------------------------------------------
We have granted the underwriters a 30-day option to purchase up to an additional
900,000 shares of our common stock to cover over-allotments at the public
offering price per share, less the underwriting discounts and commissions.
The underwriters are offering the shares of our common stock as described in
"Underwriting." Delivery of the shares will be made on or about , 2003.
UBS WARBURG
MERRILL LYNCH & CO.
U.S. BANCORP PIPER JAFFRAY
--------------------------------------------------------------------------------
You should rely only on the information contained in or incorporated by
reference into this prospectus supplement and the accompanying prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
prospectus supplement and the accompanying prospectus is accurate only as of the
date such information is presented. Our business, financial condition, results
of operations and prospects may have changed since such dates.
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT PROSPECTUS
Forward-looking information.....S-2 About this prospectus.................. 1
The Company.....................S-3 Private Securities Litigation Reform
The offering....................S-8 Act of 1995 safe harbor cautionary
Use of proceeds.................S-8 statement ........................... 1
Recent developments.............S-8 About Annaly Mortgage Management, Inc.. 1
Capitalization..................S-9 Risk factors........................... 4
Selected financial data........S-10 Use of proceeds........................ 13
Underwriting...................S-11 Ratio of earnings to fixed charges..... 13
Legal matters..................S-13 Description of stock................... 13
Experts........................S-13 Federal income tax considerations...... 21
Plan of distribution................... 31
Experts................................ 33
Legal matters.......................... 33
Where you can find more information.... 33
Incorporation of certain documents by
reference............................ 34
FORWARD-LOOKING INFORMATION
This prospectus supplement and the accompanying prospectus contain or
incorporate by reference certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond our control) may be identified by
reference to a future period or periods or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "anticipate,"
"continue," or similar terms or variations on those terms or the negative of
those terms. Actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to, changes in interest rates, changes in yield curve, changes in
prepayment rates, the availability of mortgage-backed securities for purchase,
the availability of financing and, if available, the terms of any financing. For
a discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, see "Risk
factors" in the accompanying prospectus. We do not undertake, and specifically
disclaim any obligation, to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
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S-2
--------------------------------------------------------------------------------
The following information may not contain all of the information that is
important to you. We encourage you to read this prospectus supplement and the
accompanying prospectus, as well as the information which is incorporated by
reference in the accompanying prospectus, in their entireties. You should
carefully consider the factors set forth under "Risk factors" on page 4 in the
accompanying prospectus before making an investment decision to purchase shares
of our common stock. All references to "we," "us" or the "Company" in this
prospectus supplement and the accompanying prospectus mean Annaly Mortgage
Management, Inc. Unless otherwise indicated, the information in this prospectus
supplement assumes that the underwriters do not exercise the over-allotment
option described in "Underwriting."
THE COMPANY
BACKGROUND
We own and manage a portfolio of mortgage-backed securities, including mortgage
pass-through certificates, collateralized mortgage obligations (or CMOs) and
other securities representing interests in or obligations backed by pools of
mortgage loans. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our mortgage-backed securities and the cost of borrowings to finance our
acquisition of mortgage-backed securities. We have elected and believe that we
are organized and have operated in a manner that enables us to be taxed as a
real estate investment trust (or REIT) under the Internal Revenue Code of 1986,
as amended (or the Code). If we qualify for taxation as a REIT, we generally
will not be subject to federal income tax on our taxable income that is
distributed to our stockholders. Therefore, substantially all of our assets
consist of qualified REIT real estate assets (of the type described in Section
856(c)(5)(B) of the Code). We are a Maryland corporation that commenced
operations on February 18, 1997. We are self-advised and self-managed.
We have financed our purchases of mortgage-backed securities with the net
proceeds of equity offerings and borrowings under repurchase agreements whose
interest rates adjust based on changes in short-term market interest rates.
BUSINESS STRATEGY
Our principal business objective is to generate income for distribution to our
stockholders, primarily from the net cash flows on our mortgage-backed
securities. Our net cash flows result primarily from the difference between the
interest income on our mortgage-backed securities and our borrowing costs under
repurchase agreements. To achieve our business objective, our strategy is:
o to purchase mortgage-backed securities, the majority of which we expect to
have interest rates that adjust based on changes in short-term market
interest rates;
o to acquire mortgage-backed securities that we believe:
o we have the necessary expertise to evaluate and manage;
o we can readily finance;
o are consistent with our balance sheet guidelines and risk management
objectives; and
o provide attractive investment returns in a range of scenarios;
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S-3
THE COMPANY
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o to finance the purchase of mortgage-backed securities with the proceeds of
equity offerings and, to the extent permitted by our capital investment
policy, to utilize leverage to increase potential returns to stockholders
through borrowings (primarily under repurchase agreements);
o to attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
generally correspond to the interest rate adjustment indices and interest
rate adjustment periods of our adjustable-rate mortgage-backed securities;
o to seek to minimize prepayment risk by structuring a diversified portfolio
with a variety of prepayment characteristics and through other means; and
o to issue new equity or debt and increase the size of our balance sheet when
opportunities in the market for mortgage-backed securities are likely to
allow growth in earnings per share.
We believe we are able to obtain cost efficiencies through our
facilities-sharing arrangement with Fixed Income Discount Advisory Company (or
FIDAC) and by virtue of our management's experience in managing portfolios of
mortgage-backed securities and arranging collateralized borrowings. We will
strive to become even more cost-efficient over time by:
o seeking to raise additional capital from time to time in order to increase
our ability to invest in mortgage-backed securities;
o striving to lower our effective borrowing costs over time by seeking direct
funding with collateralized lenders, rather than using financial
intermediaries, and investigating the possibility of using commercial paper
and medium term note programs;
o improving the efficiency of our balance sheet structure by investigating
the possibility of using uncollateralized subordinated debt, preferred
stock and other forms of capital; and
o utilizing information technology to the fullest extent possible in our
business, including to improve our ability to monitor the performance of
our mortgage-backed securities and to lower our operating costs.
ASSETS
Under our capital investment policy, at least 75% of our total assets must be
comprised of high quality mortgage-backed securities and short-term investments.
High quality mortgage-backed securities mean securities that (i) are rated
within one of the two highest rating categories by at least one of the
nationally recognized rating agencies, (ii) are unrated but are guaranteed by
the United States government or an agency of the United States government or
(iii) are unrated but we determine them to be of comparable credit quality to
rated high quality mortgage-backed securities.
The remainder of our assets, comprising not more than 25% of our total assets,
may consist of other qualified REIT real estate assets which are unrated or
rated below high quality securities but which are at least "investment grade"
(rated "BBB" or better by Standard & Poor's Corporation (or S&P) or the
equivalent by another nationally recognized rating agency) or, if not rated, we
determine them to be of comparable credit quality to an investment which is
rated "BBB" or better.
We may acquire mortgage-backed securities backed by single-family residential
mortgage loans as well as securities backed by loans on multi-family, commercial
or other real estate-related properties. To date, all of the mortgage-backed
securities that we have acquired have been backed by single-family residential
mortgage loans.
-------------------------------------------------------------------------------
S-4
THE COMPANY
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Our allocation of investments among the permitted investment types may vary from
time-to-time based on the evaluation by our Board of Directors of economic and
market trends and our perception of the relative values available from these
types of investments, except that in no event will our investments that are not
high quality securities exceed 25% of our total assets.
We acquire only those mortgage-backed securities that we believe we have the
necessary expertise to evaluate and manage, that are consistent with our balance
sheet guidelines and risk management objectives and that we believe we can
readily finance. Since we generally hold the mortgage-backed securities we
acquire until maturity, we generally do not seek to acquire assets whose
investment returns are attractive in only a limited range of interest rate
scenarios. We believe that future interest rates and mortgage prepayment rates
are very difficult to predict. Therefore, we seek to acquire mortgage-backed
securities which we believe will provide acceptable returns over a broad range
of interest rate and prepayment scenarios.
To date, all of the securities that we have acquired have been agency
mortgage-backed securities which, although not rated, carry an implied "AAA"
rating. Agency mortgage-backed securities are mortgage-backed securities for
which a government agency or federally chartered corporation, such as the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association or the Government National Mortgage Association, guarantees payments
of principal or interest on the securities. Agency mortgage-backed securities
consist of agency pass-through certificates and CMOs issued or guaranteed by an
agency. Pass-through certificates provide for a pass-through of the monthly
interest and principal payments made by the borrowers on the underlying mortgage
loans. CMOs divide a pool of mortgage loans into multiple tranches with
different principal and interest payment characteristics.
At December 31, 2002, approximately 30% of our mortgage-backed securities were
adjustable-rate pass-through certificates, approximately 37% of our
mortgage-backed securities were fixed-rate pass-through certificates or CMOs and
approximately 33% of our mortgage-backed securities were CMO floaters. Our
adjustable-rate pass-through certificates are backed by adjustable-rate mortgage
loans and have coupon rates which adjust over time, subject to interest rate
caps and lag periods, in conjunction with changes in short-term interest rates.
CMO floaters are tranches of mortgage-backed securities where the interest rate
adjusts in conjunction with changes in short-term interest rates. CMO floaters
may be backed by fixed-rate mortgage loans or, less often, by adjustable-rate
mortgage loans. In this prospectus supplement, except where the context
indicates otherwise, we use the term "adjustable-rate securities" or
"adjustable-rate mortgage-backed securities" to refer to adjustable-rate
pass-through certificates and CMO floaters. At December 31, 2002, the weighted
average yield on our portfolio of mortgage-backed securities was 3.25%, and the
weighted average term to next rate adjustment on adjustable-rate securities was
11 months.
We intend to continue to invest in adjustable-rate pass-through certificates,
fixed-rate mortgage-backed securities and CMO floaters. Although we have not
done so to date, we may also invest on a limited basis in mortgage derivative
securities representing the right to receive interest only or a
disproportionately large amount of interest. We have not and will not invest in
real estate mortgage investment conduit residuals, other CMO residuals or any
mortgage-backed securities, such as inverse floaters, which have imbedded
leverage as part of their structural characteristics.
BORROWINGS
We attempt to structure our borrowings to have interest rate adjustment indices
and interest rate adjustment periods that, on an aggregate basis, correspond
generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. However, periodic rate adjustments
on our borrowings are generally more frequent than rate adjustments on our
mortgage-backed securities. At December 31, 2002, the weighted average cost of
funds for all of our borrowings was 1.72%, the weighted average original term to
maturity was 166 days and the weighted average term to next rate adjustment of
these borrowings was 124 days.
-------------------------------------------------------------------------------
S-5
THE COMPANY
--------------------------------------------------------------------------------
We generally expect to maintain a ratio of debt-to-equity of between 8:1 and
12:1, although the ratio may vary from time to time depending upon market
conditions and other factors that our management deems relevant. For purposes of
calculating this ratio, our equity is equal to the value of our investment
portfolio on a mark-to-market basis, less the book value of our obligations
under repurchase agreements and other collateralized borrowings. At December 31,
2002, our ratio of debt-to-equity was 9.4:1.
HEDGING
To the extent consistent with our election to qualify as a REIT, we may enter
into hedging transactions, including interest rate swaps, to attempt to protect
our mortgage-backed securities and related borrowings against the effects of
major interest rate changes. This hedging would be used to mitigate declines in
the market value of our mortgage-backed securities during periods of increasing
or decreasing interest rates and to limit or cap the rates on our borrowings.
These transactions would be entered into solely for the purpose of hedging
interest rate or prepayment risk and not for speculative purposes. To date, we
have not entered into any hedging transactions.
COMPLIANCE WITH REIT REQUIREMENTS AND INVESTMENT COMPANY ACT OF 1940
We constantly monitor our mortgage-backed securities and the income from these
securities and, to the extent we enter into hedging transactions in the future,
will monitor income from our hedging transactions as well, so as to ensure at
all times that we maintain our qualification as a REIT and our exempt status
under the Investment Company Act of 1940.
MANAGEMENT
Our executive officers are:
o Michael A.J. Farrell, Chairman of the Board, Chief Executive Officer and
President;
o Wellington J. Denahan, Vice Chairman of the Board and Chief Investment
Officer;
o Kathryn F. Fagan, Chief Financial Officer and Treasurer;
o Jennifer A. Stephens, Secretary and Investment Officer; and
o James P. Fortescue, Senior Vice President and Repurchase Agreement Manager.
Mr. Farrell and Ms. Denahan have an average of 22 years experience in the
investment banking and investment management industries where, in various
capacities, they have each managed portfolios of mortgage-backed securities,
arranged collateralized borrowings and utilized hedging techniques to mitigate
interest rate and other risk within fixed-income portfolios. Ms. Fagan is a
certified public accountant and, prior to becoming our Chief Financial Officer
and Treasurer, served as Chief Financial Officer and Controller of a publicly
owned savings and loan association. Ms. Stephens and Mr. Fortescue have worked
for us since December 1996. Since 1994, Mr. Farrell and Ms. Denahan have managed
FIDAC, a registered investment advisor which, at December 31, 2002, managed,
assisted in managing or supervised approximately $8 billion in gross assets for
a wide array of clients on a discretionary basis.
Management's duties on behalf of FIDAC's clients may create conflicts of
interest if members of management are presented with corporate opportunities
that may benefit both the Company and clients for which FIDAC acts as investment
advisor. In the event that an investment opportunity arises, the investment will
be allocated to another entity or us by determining the entity or account for
which the investment is most suitable. In making this determination, our
management will consider the investment strategy and guidelines of each entity
-------------------------------------------------------------------------------
S-6
THE COMPANY
--------------------------------------------------------------------------------
or account with respect to acquisition of assets, leverage, liquidity and other
factors which management determines appropriate.
We have been approached by Mr. Farrell, our Chairman of the Board, Chief
Executive Officer and President, and the sole stockholder of FIDAC, about the
possibility of us acquiring FIDAC. Our board of directors has formed a special
committee of independent directors to consider this matter and the special
committee has retained independent counsel to assist it. We have not decided
whether we will pursue this opportunity and either party may at any time
determine not to proceed with this proposed acquisition. If our board of
directors, based upon the recommendation of the special committee and with Mr.
Farrell abstaining, determines that we should acquire FIDAC, we expect that such
proposed acquisition will be submitted to a vote of our stockholders.
DISTRIBUTIONS
To maintain our qualification as a REIT, we must distribute all or substantially
all of our taxable income to our stockholders for each year (subject to certain
adjustments). We have done this in the past and intend to continue to do so in
the future. This will enable us to qualify for the tax benefits accorded to a
REIT under the Code.
The following table sets forth the cash distributions declared per share during
our current fiscal quarter and for our last three fiscal years.
CASH DISTRIBUTIONS
DECLARED PER SHARE
--------------------------------------------------------------------------------
2003
First Quarter............................... $0.60
2002
First Quarter............................... $0.63
Second Quarter.............................. 0.68
Third Quarter............................... 0.68
Fourth Quarter.............................. 0.68
2001
First Quarter............................... $0.30
Second Quarter.............................. 0.40
Third Quarter............................... 0.45
Fourth Quarter.............................. 0.60
2000
First Quarter............................... $0.35
Second Quarter.............................. 0.30
Third Quarter............................... 0.25
Fourth Quarter.............................. 0.25
We have not established a minimum distribution payment level and our ability to
pay distributions may be adversely affected for the reasons described under the
caption "Risk factors" in the accompanying prospectus. All distributions will be
made at the discretion of our Board of Directors and will depend on our
earnings, our financial condition, maintenance of our REIT status and such other
factors as our Board of Directors may deem relevant from time to time.
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S-7
--------------------------------------------------------------------------------
THE OFFERING
Common stock offered by us.......................... 6,000,000 shares
Common stock to be outstanding
after this offering................................. 90,646,859 shares(1)
New York Stock Exchange symbol...................... NLY
---------------------
(1) Based upon the number of shares outstanding as of March 25, 2003 and does
not include 487,959 shares of our common stock issuable upon the exercise
of outstanding options granted pursuant to our long-term incentive plan.
USE OF PROCEEDS
We expect to receive approximately $105.1 million in net proceeds from the sale
of the shares of our common stock in this offering, or approximately $120.9
million if the underwriters' over-allotment option is exercised in full, after
payment of our expenses related to this offering and underwriting discounts and
commissions.
We intend to use the net proceeds of this offering to purchase mortgage-backed
securities. We then intend to increase our investment assets by borrowing
against these mortgage-backed securities and using the proceeds of such
borrowings to acquire additional mortgage-backed securities.
RECENT DEVELOPMENTS
On March 20, 2003, we declared our first quarter 2003 common stock dividend of
$0.60 per share for distribution to stockholders of record on March 31, 2003.
This dividend will be paid on April 30, 2003.
-------------------------------------------------------------------------------
S-8
--------------------------------------------------------------------------------
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2002:
o on a historical basis; and
o as adjusted for the sale of 6,000,000 shares of our common stock at the
price set forth on the cover page of this prospectus supplement and the
application of the net proceeds of this offering as described in "Use of
proceeds."
The information set forth in the following table should be read in conjunction
with, and is qualified in its entirety by, the financial statements and the
notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, which is incorporated by reference into the
accompanying prospectus.
AS OF DECEMBER 31, 2002
--------------------------------
AS ADJUSTED FOR
HISTORICAL THIS OFFERING(1)
--------------------------------------------------------------------------------
(dollars in thousands)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.01 per share,
500,000,000 authorized, 84,569,206 shares
issued and outstanding on a historical
basis and 90,569,206 shares issued and
outstanding on an as adjusted basis
following this offering(2)................. $ 846 $ 906
Additional paid-in capital..................... 1,003,200 1,108,233
Accumulated other comprehensive gain........... 75,511 75,511
Retained earnings.............................. 509 509
----------- ----------
Total stockholders' equity................. 1,080,066 1,185,159
---------- ----------
Total capitalization................. $ 1,080,066 $1,185,159
=========== ==========
--------------------
(1) After deducting underwriting discounts and commissions and estimated
offering expenses payable by us in this offering. Assumes (i) no exercise
of the underwriters' over-allotment option to purchase up to an
additional 900,000 shares of our common stock, (ii) net proceeds per
share of $17.57 with respect to the shares offered in this offering after
deducting underwriting discounts and commissions and (iii) approximate
aggregate expenses of $300,000.
(2) Excludes (i) 24,747 shares of our common stock issued after December 31,
2002 upon the exercise of options granted pursuant to our long-term
incentive plan and 52,906 shares of our common stock issued after
December 31, 2002 through our dividend reinvestment and direct purchase
plan and (ii) 487,959 shares of our common stock with a weighted average
exercise price of $8.60 per share that are issuable upon the exercise of
outstanding options granted pursuant to our long-term incentive plan.
-------------------------------------------------------------------------------
S-9
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SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from our audited
financial statements for the fiscal years ended December 31, 1998, 1999, 2000,
2001, and 2002. The following selected financial data should be read in
conjunction with the more detailed information contained in the financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, which is incorporated by
reference into the accompanying prospectus.
FOR THE YEARS
ENDED DECEMBER 31,
1998 1999 2000 2001 2002
--------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for per share data)
STATEMENT OF OPERATIONS DATA:
Interest income........................ $89,986 $89,812 $109,750 $263,058 404,165
Interest expense....................... 75,735 69,846 92,902 168,055 191,758
Net interest income.................... 14,251 19,966 16,848 95,003 212,407
Gain on sale of mortgage-backed
securities........................... 3,344 454 2,025 4,586 21,063
General and administrative expenses.... 2,106 2,281 2,286 7,311 13,963
------- ------- ------- ------- --------
Net income............................. $15,489 $18,139 $16,587 $92,278 $219,507
======= ======= ======= ======= ========
Basic net income per average share..... $1.22 $1.41 $1.18 $2.23 $2.68
Diluted net income per average share... $1.19 $1.35 $1.15 $2.21 $2.67
Dividends declared per share........... $1.21 $1.38 $1.15 $1.75 $2.67
BALANCE SHEET DATA:
Mortgage-backed securities, at fair
value................................ $1,520,289 $1,437,793 $1,978,219 $7,575,379 $11,551,857
Total assets........................... 1,527,352 1,491,322 2,035,029 7,717,314 11,659,084
Repurchase agreements.................. 1,280,510 1,338,296 1,628,359 6,367,710 10,163,174
Total liabilities...................... 1,401,481 1,388,050 1,899,386 7,049,957 10,579,018
Stockholders' equity................... 125,871 103,272 135,642 667,357 1,080,066
Number of shares of common stock
outstanding.......................... 12,648,424 13,581,316 14,522,978 59,826,975 84,569,206
Weighted average number of shares...... 12,709,116 12,889,510 14,089,436 41,439,631 82,044,141
OTHER DATA:
Average total assets................... $1,499,875 $1,473,765 $1,652,459 $5,082,852 $10,486,423
Average earning assets................. 1,461,791 1,461,254 1,564,491 4,682,780 9,575,365
Average borrowings..................... 1,360,040 1,350,230 1,449,999 4,388,900 9,128,933
Average equity......................... 131,265 117,685 117,727 437,376 978,107
Yield on interest earning assets....... 6.16% 6.15% 7.02% 5.62% 4.22%
Cost of funds on interest bearing
liabilities.......................... 5.57% 5.17% 6.41% 3.83% 2.10%
Interest rate spread................... 0.59% 0.98% 0.61% 1.79% 2.12%
FINANCIAL RATIOS:
Net interest margin (net interest
income/average total assets)......... 0.95% 1.35% 1.02% 1.87% 2.03%
General and administrative expenses as a
percentage of average assets......... 0.14% 0.15% 0.14% 0.14% 0.13%
General and administrative expenses as a
percentage of average equity......... 1.60% 1.94% 1.94% 1.67% 1.43%
Return on average assets............... 1.03% 1.23% 1.00% 1.82% 2.09%
Return on average equity............... 11.80% 15.41% 14.09% 21.10% 22.44%
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S-10
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UNDERWRITING
We and the underwriters for this offering named below have entered into an
underwriting agreement concerning the shares of our common stock being offered.
The underwriters' obligations are several and not joint, which means that each
underwriter is required to purchase a specified number of shares, but is not
responsible for the commitment of any other underwriter to purchase shares.
Subject to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of shares of common
stock set forth opposite its name below.
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------------------
UBS Warburg LLC .........................................
Merrill Lynch, Pierce,
Fenner & Smith Incorporated ....................
U.S. Bancorp Piper Jaffray Inc...........................
Total...........................................
============
The underwriting agreement provides that the obligations of the underwriters are
conditional and may be terminated at their discretion based on their assessment
of the state of the financial markets. The obligations of the underwriters may
also be terminated upon the occurrence of the events specified in the
underwriting agreement. The underwriters are severally committed to purchase all
of the common stock being offered if any shares are purchased, other than those
covered by the over-allotment option described below.
We have granted the underwriters an option to purchase up to 900,000 additional
shares of our common stock at the public offering price, less the underwriting
discounts and commissions, set forth on the cover page of this prospectus
supplement, to cover over-allotments, if any. This option is exercisable for a
period of 30 days from the date of this prospectus supplement. If the
underwriters exercise their over-allotment option, the underwriters have
severally agreed, subject to certain conditions, to purchase shares in
approximately the same proportion as set forth in the table above.
The following table provides information regarding the per share and total
underwriting discounts and commissions that we will pay to the underwriters in
connection with this offering. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase up to an additional
900,000 shares of our common stock.
NO EXERCISE FULL EXERCISE
-------------------------------------------------------------------------------
Per share............................. $ $
Total............................ $ $
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately $300,000.
The underwriters propose to offer the common stock directly to the public
initially at the offering price set forth on the cover page of this prospectus
supplement. The underwriters may offer the common stock to securities dealers at
that price less a concession not in excess of $ per share. Securities dealers
may reallow a concession not in excess of $ per share on sales to certain other
brokers or dealers. The underwriters reserve the right to reject any order for
the purchase of shares. If all of the shares are not sold at the public offering
price, the underwriters may change the offering price and other selling terms.
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S-11
UNDERWRITING
--------------------------------------------------------------------------------
We have agreed in the underwriting agreement to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 and to contribute to payments that the underwriters may
be required to make in respect thereof.
We, and each of our directors and executive officers, have agreed with the
underwriters that for a period of 90 days following the date of this prospectus
supplement that, without the prior written consent of UBS Warburg LLC, neither
we nor our directors and executive officers will offer, sell, contract to sell,
hedge or otherwise dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exchangeable for shares of our
common stock, except issuances pursuant to the exercise of stock options
outstanding on the date of this prospectus supplement, issuances pursuant to our
dividend reinvestment and direct purchase plan and grants of stock options and
other awards pursuant to our long-term incentive plan.
The underwriters may engage in over-allotment transactions, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934. Over-allotment
transactions involve syndicate sales in excess of the offering size, which
create a syndicate short position. Stabilizing transactions permit bids to
purchase the common stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the underwriters
to reclaim a selling concession from a syndicate member when the common stock
originally sold by such syndicate member is purchased in a stabilizing
transaction or syndicate covering transaction to cover syndicate short
positions. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. Neither we nor the
underwriters make any representation or prediction as to the effect that the
transactions described above may have on the price of our common stock. These
transactions may be effected on the New York Stock Exchange or otherwise and, if
commenced, may be discontinued at any time.
In the ordinary course of their business, the underwriters and/or their
affiliates have in the past performed, and may continue to perform, investment
banking, broker dealer, lending, financial advisory or other services for us for
which they have received, or may receive, customary compensation. We have
entered into a Sales Agency Agreement, dated July 8, 2002, with UBS Warburg LLC
pursuant to which we may sell shares of our common stock in "at-the-market"
offerings in accordance with the terms thereof. We also have secured repurchase
credit facilities with UBS Warburg LLC and Merrill Lynch Government Securities
Incorporated, an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
--------------------------------------------------------------------------------
S-12
UNDERWRITING
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LEGAL MATTERS
In addition to the legal opinions referred to under "Legal Matters" in the
accompanying prospectus, the legality of the shares of our common stock will be
passed upon for us by McKee Nelson LLP, Washington, D.C. Certain legal matters
relating to this offering will be passed upon for the underwriters by Clifford
Chance US LLP, New York, New York.
EXPERTS
The financial statements incorporated in the accompanying prospectus by
reference from our Annual Report on Form 10-K for the year ended December 31,
2002 have been audited by Deloitte & Touche LLP, independent auditors, as stated
in their report, which is incorporated therein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
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S-13
PROSPECTUS
$162,000,000
ANNALY MORTGAGE MANAGEMENT, INC.
COMMON STOCK AND PREFERRED STOCK
By this prospectus, we may offer, from time to time, shares of our:
o common stock;
o preferred stock; or
o any combination of the foregoing.
We will provide specific terms of each issuance of these securities in
supplements to this prospectus. You should read this prospectus and any
supplement carefully before you decide to invest.
This prospectus may not be used to consummate sales of these securities
unless it is accompanied by a prospectus supplement.
The New York Stock Exchange lists our common stock under the symbol
"NLY."
To ensure we qualify as a real estate investment trust, no person may
own more than 9.8% of the outstanding shares of any class of our common stock or
our preferred stock, unless our Board of Directors waives this limitation.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS
PROSPECTUS.
We may sell these securities to or through underwriters, dealers or
agents, or we may sell the securities directly to investors on our own behalf.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is June 18, 2002
TABLE OF CONTENTS
PAGE
----
ABOUT THIS PROSPECTUS......................................................................1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT..........1
ABOUT ANNALY MORTGAGE MANAGEMENT, INC......................................................1
RISK FACTORS...............................................................................4
USE OF PROCEEDS...........................................................................13
RATIO OF EARNINGS TO FIXED CHARGES........................................................13
DESCRIPTION OF STOCK......................................................................13
FEDERAL INCOME TAX CONSIDERATIONS.........................................................21
PLAN OF DISTRIBUTION......................................................................31
EXPERTS...................................................................................33
LEGAL MATTERS.............................................................................33
WHERE YOU CAN FIND MORE INFORMATION.......................................................33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...........................................34
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission (or SEC) using a "shelf" registration
process. Under this process, we may offer and sell any combination of common
stock and preferred stock in one or more offerings for total proceeds of up to
$162,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we offer to sell securities, we will provide
a supplement to this prospectus that will contain specific information about the
terms of that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. It is important for you to consider
the information contained in this prospectus and any prospectus supplement
together with additional information described under the heading "Where You Can
Find More Information."
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
This prospectus and the documents incorporated by reference herein
contain "forward-looking" statements, as defined in the Private Securities
Litigation Reform Act of 1995, that are based on our current expectations,
estimates and projections. Statements that are not historical facts, including
statements about our beliefs and expectations, are forward-looking statements.
These statements are not guarantees of future performance, events or results and
involve potential risks and uncertainties. Accordingly, our actual results may
differ from our current expectations, estimates and projections. We undertake no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events, or otherwise.
Important factors that may impact our actual results include changes in
interest rates, changes in the yield curve, changes in prepayment rates, the
supply of mortgage-backed securities, our ability to obtain financing, the terms
of any financing and the other factors described in this prospectus under the
heading "Risk Factors."
ABOUT ANNALY MORTGAGE MANAGEMENT, INC.
GENERAL
We own, manage, and finance a portfolio of mortgage-backed securities,
including mortgage pass-through certificates, collateralized mortgage
obligations (or CMOs), and other securities representing interests in or
obligations backed by pools of mortgage loans. Our principal business objective
is to generate net income for distribution to our stockholders from the spread
between the interest income on our mortgage-backed securities and the cost of
borrowings to finance our acquisition of mortgage-backed securities. We have
elected and believe that we are organized and have operated in a manner that
enables us to be taxed as a real estate investment trust (or REIT) under the
Internal Revenue Code of 1986, as amended (or the Code). If we qualify for
taxation as a REIT, we generally will not be subject to federal income tax on
our taxable income that is distributed to our stockholders. Therefore,
substantially all of our assets consist of qualified REIT real estate assets (of
the type described in Section
1
856(c)(5)(B) of the Code). We are a Maryland corporation that commenced
operations on February 18, 1997. We are self-advised and self-managed.
We have financed our purchases of mortgage-backed securities with the
net proceeds of equity offerings and borrowings under repurchase agreements
whose interest rates adjust based on changes in short-term market interest
rates.
ASSETS
On March 31, 2002, all of the mortgage-backed securities we owned were
"agency certificates." Agency certificates are mortgage-backed securities where
a government agency or federally chartered corporation, such as Federal Home
Loan Mortgage Corporation (or FHLMC), Federal National Mortgage Association (or
FNMA), or Government National Mortgage Association (or GNMA), guarantees
payments of principal or interest on the certificates. Although not rated, these
agency certificates carry an implied "AAA" rating.
- Freddie Mac is a common abbreviation that refers to the FHLMC, a
privately-owned, government-sponsored enterprise created pursuant
to an act of Congress.
- Fannie Mae is a common abbreviation that refers to the FNMA, a
privately-owned, federally-chartered corporation organized under an
act of Congress.
- Ginnie Mae is a common abbreviation that refers to the GNMA, a
wholly-owned instrumentality of the United States within the
Department of Housing and Urban Development.
Even though we have only acquired "AAA" securities so far, pursuant to
our capital investment policy, we have the ability to acquire securities of
lower credit quality. Under our policy:
- 75% of our investments must have a "AA" or higher rating by
Standard & Poor's Corporation (or S&P), an equivalent rating by
another nationally recognized rating organization or our management
must determine that the investments are of comparable credit
quality to investments with these ratings;
- the remaining 25% of our investments must have a "BBB" or higher
rating by S&P, or an equivalent rating by another nationally
recognized rating organization, or our management must determine
that the investments are of comparable credit quality to
investments with these ratings. Securities with ratings of "BBB" or
higher are commonly referred to as "investment grade" securities;
and
- we seek to have a minimum weighted average rating for our portfolio
of at least "A" by S&P.
We acquire both adjustable-rate and fixed-rate mortgage-backed
securities. Adjustable-rate mortgage-backed securities have interest rates that
adjust periodically based upon changes in an objective index of short-term
interest rates, such as London Interbank Offered Rate (or LIBOR) or a U.S.
Treasury index. On March 31, 2002, approximately 73% of our mortgage-
2
backed securities were adjustable-rate securities and approximately 27% were
fixed-rate securities.
BORROWINGS
We borrow money primarily through repurchase agreements using our
mortgage-backed securities as collateral. We generally expect to maintain a
ratio of debt-to-equity of between 8:1 to 12:1, although the ratio may vary from
time to time depending upon market conditions and other factors our management
deems relevant. At March 31, 2002, our debt-to-equity ratio was 8.3:1.
We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. Nevertheless, the interest rates on
our borrowings generally adjust more frequently than the interest rates on our
mortgage-backed securities. In addition, our fixed-rate mortgage-backed
securities do not provide for any periodic rate adjustments. Accordingly, we
could experience net losses or a decrease in net profits in a period of rising
interest rates.
STOCK LISTING
Our common stock is traded on the New York Stock Exchange under the
symbol "NLY."
PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE NUMBER
Our principal executive offices, as of June 24, 2002, will be located
at 1211 Avenue of the Americas, Suite 2902, New York, New York 10036. Our
telephone number is (212) 696-0100.
3
RISK FACTORS
An investment in our stock involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks described in
this prospectus. If any of the risks discussed in this prospectus actually
occur, our business, financial condition, and results of operations could be
materially adversely affected. If this were to occur, the trading price of our
common stock could decline significantly and you may lose all or part of your
investment.
AN INCREASE IN THE INTEREST PAYMENTS ON OUR BORROWINGS RELATIVE TO THE INTEREST
WE EARN ON OUR MORTGAGE-BACKED SECURITIES MAY ADVERSELY AFFECT OUR PROFITABILITY
We earn money based upon the spread between the interest payments we
earn on our mortgage-backed securities and the interest payments we must make on
our borrowings. If the interest payments on our borrowings increase relative to
the interest we earn on our mortgage-backed securities, our profitability may be
adversely affected.
The interest payments on our borrowings may increase relative to the
interest we earn on our adjustable-rate mortgage-backed securities for various
reasons discussed in this section.
o DIFFERENCES IN TIMING OF INTEREST RATE ADJUSTMENTS ON OUR MORTGAGE-BACKED
SECURITIES AND OUR BORROWINGS MAY ADVERSELY AFFECT OUR PROFITABILITY
We rely primarily on short-term borrowings to acquire mortgage-backed
securities with long-term maturities. Accordingly, if short-term interest rates
increase, this may adversely affect our profitability.
Most of the mortgage-backed securities we acquire are adjustable-rate
securities. This means that their interest rates may vary over time based upon
changes in an objective index, such as:
- LIBOR. The interest rate that banks in London offer for deposits in
London of U.S. dollars.
- Treasury Index. A monthly or weekly average yield of benchmark U.S.
Treasury securities, as published by the Federal Reserve Board.
- CD Rate. The weekly average of secondary market interest rates on
six-month negotiable certificates of deposit, as published by the
Federal Reserve Board.
These indices generally reflect short-term interest rates. On March 31,
2002, approximately 73% of our mortgage-backed securities were adjustable-rate
securities.
The interest rates on our borrowings similarly vary with changes in an
objective index. Nevertheless, the interest rates on our borrowings generally
adjust more frequently than the interest rates on our adjustable-rate
mortgage-backed securities. For example, on March 31, 2002, our adjustable-rate
mortgage-backed securities had a weighted average term to next rate adjustment
of 16 months, while our borrowings had a weighted average term to next rate
adjustment of 150 days. Accordingly, in a period of rising interest rates, we
could experience a
4
decrease in net income or a net loss because the interest rates on our
borrowings adjust faster than the interest rates on our adjustable-rate
mortgage-backed securities.
o INTEREST RATE CAPS ON OUR MORTGAGE-BACKED SECURITIES MAY ADVERSELY AFFECT
OUR PROFITABILITY
Our adjustable-rate mortgage-backed securities are typically subject to
periodic and lifetime interest rate caps. Periodic interest rate caps limit the
amount an interest rate can increase during any given period. Lifetime interest
rate caps limit the amount an interest rate can increase through maturity of a
mortgage-backed security. Our borrowings are not subject to similar
restrictions. Accordingly, in a period of rapidly increasing interest rates, we
could experience a decrease in net income or a net loss because the interest
rates on our borrowings could increase without limitation while the interest
rates on our adjustable-rate mortgage-backed securities would be limited by
caps.
o BECAUSE WE ACQUIRE FIXED-RATE SECURITIES, AN INCREASE IN INTEREST RATES MAY
ADVERSELY AFFECT OUR PROFITABILITY
While the majority of our investments consist of adjustable-rate
mortgage-backed securities, we also invest in fixed-rate mortgage-backed
securities. In a period of rising interest rates, our interest payments could
increase while the interest we earn on our fixed-rate mortgage-backed securities
would not change. This would adversely affect our profitability. On March 31,
2002, approximately 27% of our mortgage-backed securities were fixed-rate
securities.
AN INCREASE IN PREPAYMENT RATES MAY ADVERSELY AFFECT OUR PROFITABILITY
The mortgage-backed securities we acquire are backed by pools of
mortgage loans. We receive payments, generally, from the payments that are made
on these underlying mortgage loans. When borrowers prepay their mortgage loans
at rates that are faster than expected, this results in prepayments that are
faster than expected on the mortgage-backed securities. These faster than
expected prepayments may adversely affect our profitability.
We often purchase mortgage-backed securities that have a higher
interest rate than the market interest rate at the time. In exchange for this
higher interest rate, we must pay a premium over the market value to acquire the
security. In accordance with accounting rules, we amortize this premium over the
term of the mortgage-backed security. If the mortgage-backed security is prepaid
in whole or in part prior to its maturity date, however, we must expense the
premium that was prepaid at the time of the prepayment. This adversely affects
our profitability. On March 31, 2002, approximately 94% of the mortgage-backed
securities we owned were acquired at a premium.
Prepayment rates generally increase when interest rates fall and
decrease when interest rates rise, but changes in prepayment rates are difficult
to predict. Prepayment rates also may be affected by conditions in the housing
and financial markets, general economic conditions and the relative interest
rates on fixed-rate and adjustable-rate mortgage loans.
We may seek to reduce prepayment risk by acquiring mortgage-backed
securities at a discount. If a discounted security is prepaid in whole or in
part prior to its maturity date, we will earn income equal to the amount of the
remaining discount. This will improve our profitability if
5
the discounted securities are prepaid faster than expected. On March 31, 2002,
approximately 6% of the mortgage-backed securities we owned were acquired at a
discount.
We can also acquire mortgage-backed securities that are less affected
by prepayments. For example, we can acquire CMOs, a type of mortgage-backed
security. CMOs divide a pool of mortgage loans into multiple tranches that allow
for shifting of prepayment risks from slower-paying tranches to faster-paying
tranches. This is in contrast to pass-through or pay-through mortgage-backed
securities, where all investors share equally in all payments, including all
prepayments. As discussed below, the Investment Company Act of 1940 (or the
Investment Company Act) imposes restrictions on our purchase of CMOs. On March
31, 2002, approximately 33% of our mortgage-backed securities were CMOs and
approximately 67% of our mortgage-backed securities were pass-through or
pay-through securities.
While we seek to minimize prepayment risk to the extent practical, in
selecting investments we must balance prepayment risk against other risks and
the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.
AN INCREASE IN INTEREST RATES MAY ADVERSELY AFFECT OUR BOOK VALUE
Increases in interest rates may negatively affect the market value of
our mortgage-backed securities. Our fixed-rate securities, generally, are more
negatively affected by these increases. In accordance with accounting rules, we
reduce our book value by the amount of any decrease in the market value of our
mortgage-backed securities.
OUR STRATEGY INVOLVES SIGNIFICANT LEVERAGE
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1,
although our ratio may at times be above or below this amount. We incur this
leverage by borrowing against a substantial portion of the market value of our
mortgage-backed securities. By incurring this leverage, we can enhance our
returns. Nevertheless, this leverage, which is fundamental to our investment
strategy, also creates significant risks.
o OUR LEVERAGE MAY CAUSE SUBSTANTIAL LOSSES
Because of our significant leverage, we may incur substantial losses if
our borrowing costs increase. Our borrowing costs may increase for any of the
following reasons:
- short-term interest rates increase;
- the market value of our mortgage-backed securities decreases;
- interest rate volatility increases; or
- the availability of financing in the market decreases.
6
o OUR LEVERAGE MAY CAUSE MARGIN CALLS AND DEFAULTS AND FORCE US TO SELL ASSETS
UNDER ADVERSE MARKET CONDITIONS
Because of our leverage, a decline in the value of our mortgage-backed
securities may result in our lenders initiating margin calls. A margin call
means that the lender requires us to pledge additional collateral to
re-establish the ratio of the value of the collateral to the amount of the
borrowing. Our fixed-rate mortgage-backed securities generally are more
susceptible to margin calls as increases in interest rates tend to more
negatively affect the market value of fixed-rate securities.
If we are unable to satisfy margin calls, our lenders may foreclose on
our collateral. This could force us to sell our mortgage-backed securities under
adverse market conditions. Additionally, in the event of our bankruptcy, our
borrowings, which are generally made under repurchase agreements, may qualify
for special treatment under the Bankruptcy Code. This special treatment would
allow the lenders under these agreements to avoid the automatic stay provisions
of the Bankruptcy Code and to liquidate the collateral under these agreements
without delay.
o LIQUIDATION OF COLLATERAL MAY JEOPARDIZE OUR REIT STATUS
To continue to qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to liquidate
our mortgage-backed securities, we may be unable to comply with these
requirements, ultimately jeopardizing our status as a REIT. For further
discussion of these asset and source of income requirements and the consequences
of our failure to continue to qualify as a REIT, please see the "Federal Income
Tax Considerations" section of this prospectus.
o WE MAY EXCEED OUR TARGET LEVERAGE RATIOS
We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1.
However, we are not required to stay within this leverage ratio. If we exceed
this ratio, the adverse impact on our financial condition and results of
operations from the types of risks described in this section would likely be
more severe.
o WE MAY NOT BE ABLE TO ACHIEVE OUR OPTIMAL LEVERAGE
We use leverage as a strategy to increase the return to our investors.
However, we may not be able to achieve our desired leverage for any of the
following reasons:
- we determine that the leverage would expose us to excessive risk;
- our lenders do not make funding available to us at acceptable
rates; or
- our lenders require that we provide additional collateral to cover
our borrowings.
7
o WE MAY INCUR INCREASED BORROWING COSTS WHICH WOULD ADVERSELY AFFECT OUR
PROFITABILITY
Currently, all of our borrowings are collateralized borrowings in the
form of repurchase agreements. If the interest rates on these repurchase
agreements increase, it would adversely affect our profitability.
Our borrowing costs under repurchase agreements generally correspond to
short-term interest rates such as LIBOR or a short-term Treasury index, plus or
minus a margin. The margins on these borrowings over or under short-term
interest rates may vary depending upon:
- the movement of interest rates;
- the availability of financing in the market; or
- the value and liquidity of our mortgage-backed securities.
IF WE ARE UNABLE TO RENEW OUR BORROWINGS AT FAVORABLE RATES, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED
Since we rely primarily on short-term borrowings, our ability to
achieve our investment objectives depends not only on our ability to borrow
money in sufficient amounts and on favorable terms, but also on our ability to
renew or replace on a continuous basis our maturing short-term borrowings. If we
are not able to renew or replace maturing borrowings, we would have to sell our
assets under possibly adverse market conditions.
WE HAVE NOT USED DERIVATIVES TO MITIGATE OUR INTEREST RATE AND PREPAYMENT RISKS
Our policies permit us to enter into interest rate swaps, caps and
floors and other derivative transactions to help us mitigate our interest rate
and prepayment risks described above. However, we have determined in the past
that the cost of these transactions outweighs the benefits. In addition, we will
not enter into derivative transactions if we believe they will jeopardize our
status as a REIT. If we decide to enter into derivative transactions in the
future, these transactions may mitigate our interest rate and prepayment risks
but cannot insulate us from these risks.
OUR INVESTMENT STRATEGY MAY INVOLVE CREDIT RISK
We may incur losses if there are payment defaults under our
mortgage-backed securities.
To date, all of our mortgage-backed securities have been agency
certificates which, although not rated, carry an implied "AAA" rating. Agency
certificates are mortgage-backed securities where Freddie Mac, Fannie Mae or
Ginnie Mae guarantees payments of principal or interest on the certificates.
Even though we have only acquired "AAA" securities so far, pursuant to
our capital investment policy, we have the ability to acquire securities of
lower credit quality. Under our policy:
8
- 75% of our investments must have a "AA" or higher rating by S&P, an
equivalent rating by a similar nationally recognized rating
organization or our management must determine that the investments
are of comparable credit quality to investments with these ratings;
- the remaining 25% of our investments must have a "BBB" or higher
rating by S&P, or an equivalent rating by a similar nationally
recognized rating organization, or our management must determine
that the investments are of comparable credit quality to
investments with these ratings. Securities with ratings of "BBB" or
higher are commonly referred to as "investment grade" securities;
and
- we seek to have a minimum weighted average rating for our portfolio
of at least "A" by S&P.
If we acquire mortgage-backed securities of lower credit quality, we
may incur losses if there are defaults under those mortgage-backed securities or
if the rating agencies downgrade the credit quality of those mortgage-backed
securities.
WE HAVE NOT ESTABLISHED A MINIMUM DIVIDEND PAYMENT LEVEL
We intend to pay quarterly dividends and to make distributions to our
stockholders in amounts such that all or substantially all of our taxable income
in each year (subject to certain adjustments) is distributed. This will enable
us to qualify for the tax benefits accorded to a REIT under the Code. We have
not established a minimum dividend payment level and our ability to pay
dividends may be adversely affected for the reasons described in this section.
All distributions will be made at the discretion of our Board of Directors and
will depend on our earnings, our financial condition, maintenance of our REIT
status and such other factors as our Board of Directors may deem relevant from
time to time.
BECAUSE OF COMPETITION, WE MAY NOT BE ABLE TO ACQUIRE MORTGAGE-BACKED SECURITIES
AT FAVORABLE YIELDS
Our net income depends, in large part, on our ability to acquire
mortgage-backed securities at favorable spreads over our borrowing costs. In
acquiring mortgage-backed securities, we compete with other REITs, investment
banking firms, savings and loan associations, banks, insurance companies, mutual
funds, other lenders and other entities that purchase mortgage-backed
securities, many of which have greater financial resources than us. As a result,
in the future, we may not be able to acquire sufficient mortgage-backed
securities at favorable spreads over our borrowing costs.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We are dependent on the efforts of our key officers and employees,
including Michael A. J. Farrell, Chairman of the Board of Directors, Chief
Executive Officer, and President, Wellington J. Denahan, Vice Chairman and Chief
Investment Officer, Kathryn F. Fagan, Chief Financial Officer and Treasurer, and
Jennifer A. Stephens, Secretary and Investment Officer. The loss of any of their
services could have an adverse effect on our operations. Although we
9
have employment agreements with each of them, we cannot assure you they will
remain employed with us.
SOME OF OUR OFFICERS AND EMPLOYEES HAVE POTENTIAL CONFLICTS OF INTEREST
Some of our officers and employees have potential conflicts of interest
with us. The material potential conflicts are as follows:
o OUR OFFICERS AND EMPLOYEES MANAGE ASSETS FOR OTHER CLIENTS
Mr. Farrell, Ms. Denahan and other officers and employees are actively
involved in managing mortgage-backed securities and other fixed income assets
for institutional clients through Fixed Income Discount Advisory Company (or
FIDAC). FIDAC is a registered investment adviser that on March 31, 2002 managed,
assisted in managing or supervised approximately $4.6 billion in gross assets on
a discretionary basis for a wide array of clients. The U.S. Dollar Floating Rate
Fund (or Floating Rate Fund) is a fund managed by FIDAC. Mr. Farrell is a
Director of the Floating Rate Fund. These officers will continue to perform
services for FIDAC, the institutional clients and the Floating Rate Fund. Mr.
Farrell is also the sole shareholder of FIDAC.
These responsibilities may create conflicts of interest for these
officers and employees if they are presented with corporate opportunities that
may benefit us and the institutional clients and the Floating Rate Fund. Our
officers allocate investments among us, the institutional clients, and the
Floating Rate Fund by determining the entity or account for which the investment
is most suitable. In making this determination, our officers consider the
investment strategy and guidelines of each entity or account with respect to
acquisition of assets, leverage, liquidity, and other factors that our officers
determine appropriate.
o SOME OF OUR DIRECTORS AND OFFICERS HAVE OWNERSHIP INTERESTS IN OUR
AFFILIATES THAT CREATE POTENTIAL CONFLICTS OF INTEREST
Mr. Farrell, our Chairman of the Board of Directors, Chief Executive
Officer, and President, and our other directors and officers, have direct and
indirect ownership interests in our affiliates that create potential conflicts
of interest.
During 1998, we made an initial investment of $49,980 in Annaly
International Mortgage Management, Inc. (or Annaly International). Annaly
International explores business opportunities overseas, including the
origination of mortgages. Annaly International has not commenced operations
beyond this exploratory stage. We own 33% of the equity of Annaly International
in the form of non-voting securities. The remaining equity of Annaly
International is owned by FIDAC, Michael A.J. Farrell, Wellington J. Denahan,
our Vice Chairman and Chief Investment Officer, Kathryn F. Fagan, our Chief
Financial Officer and Treasurer, and other persons.
During 1998, Annaly International made an initial investment of $20,400
in Annaly.com, Inc. (or Annaly.com). Annaly.com explores opportunities to
acquire or originate mortgages in the United States. Annaly.com has established
a Web site at http://www.annaly.com but has not
10
commenced the acquisition or origination of mortgages. Annaly International owns
51% of the equity of Annaly.com. The remaining equity of Annaly.com is owned by
FIDAC.
Our management allocates rent and other office expenses between our
affiliates and us. These allocations may create conflicts of interest. Our
management currently allocates rent and other expenses 90% to us and 10% to
FIDAC. Our audit committee must approve any change in these allocation
percentages. In addition, we may enter into agreements, such as technology
sharing or research agreements, with our affiliates in the future. These
agreements would present potential conflicts of interest. Our management will
obtain prior approval of our audit committee prior to entering into any
agreements with our affiliates.
WE AND OUR SHAREHOLDERS ARE SUBJECT TO CERTAIN TAX RISKS
o OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES
We believe that since 1997 we have qualified for taxation as a REIT for
federal income tax purposes. We plan to continue to meet the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. The determination that we are a REIT requires an analysis of
various factual matters and circumstances that may not be totally within our
control. For example, to qualify as a REIT, at least 75% of our gross income
must come from real estate sources and 95% of our gross income must come from
real estate sources and certain other sources that are itemized in the REIT tax
laws. We are also required to distribute to stockholders at least 90% of our
REIT taxable income (excluding capital gains). Even a technical or inadvertent
mistake could jeopardize our REIT status. Furthermore, Congress and the Internal
Revenue Service (or IRS) might make changes to the tax laws and regulations, and
the courts might issue new rulings that make it more difficult or impossible for
us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income
tax at regular corporate rates. Also, unless the IRS granted us relief under
certain statutory provisions, we would remain disqualified as a REIT for four
years following the year we first fail to qualify. If we fail to qualify as a
REIT, we would have to pay significant income taxes and would therefore have
less money available for investments or for distributions to our stockholders.
This would likely have a significant adverse effect on the value of our
securities. In addition, the tax law would no longer require us to make
distributions to our stockholders.
o WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS
As a REIT, we must distribute 90% of our annual taxable income. The
required distribution limits the amount we have available for other business
purposes, including amounts to fund our growth. Also, it is possible that
because of the differences between the time we actually receive revenue or pay
expenses and the period we report those items for distribution purposes, we may
have to borrow funds on a short-term basis to meet the 90% distribution
requirement.
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o WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES
Even if we qualify as a REIT, we may be subject to certain federal,
state and local taxes on our income and property. Any of these taxes would
reduce our operating cash flow.
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD ADVERSELY AFFECT US
We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act. If we fail to qualify for
this exemption, our ability to use leverage would be substantially reduced, and
we would be unable to conduct our business as described in this prospectus.
The Investment Company Act exempts entities that are primarily engaged
in the business of purchasing or otherwise acquiring mortgages and other liens
on and interests in real estate. Under the current interpretation of the SEC
staff, in order to qualify for this exemption, we must maintain at least 55% of
our assets directly in these qualifying real estate interests. Mortgage-backed
securities that do not represent all of the certificates issued with respect to
an underlying pool of mortgages may be treated as securities separate from the
underlying mortgage loans and, thus, may not qualify for purposes of the 55%
requirement. Our ownership of these mortgage-backed securities, therefore, is
limited by the provisions of the Investment Company Act. In addition, in meeting
the 55% requirement under the Investment Company Act, we treat as qualifying
interests mortgage-backed securities issued with respect to an underlying pool
as to which we hold all issued certificates. If the SEC or its staff adopts a
contrary interpretation, we could be required to sell a substantial amount of
our mortgage-backed securities, under potentially adverse market conditions.
Further, in order to insure that we at all times qualify for the exemption from
the Investment Company Act, we may be precluded from acquiring mortgage-backed
securities whose yield is somewhat higher than the yield on mortgage-backed
securities that could be purchased in a manner consistent with the exemption.
The net effect of these factors may be to lower our net income.
ISSUANCES OF LARGE AMOUNTS OF OUR STOCK COULD CAUSE OUR PRICE TO DECLINE
As of June 10, 2002, 82,923,895 shares of our common stock were
outstanding. This prospectus may be used for the issuance of additional shares
of common stock or shares of preferred stock that are convertible into common
stock. If we issue a significant number of shares of common stock or convertible
preferred stock in a short period of time, there could be a dilution of the
existing common stock and a decrease in the market price of the common stock.
WE MAY CHANGE OUR POLICIES WITHOUT STOCKHOLDER APPROVAL
Our Board of Directors and management determine all of our policies,
including our investment, financing and distribution policies. Although they
have no current plans to do so, they may amend or revise these policies at any
time without a vote of our stockholders. Policy changes could adversely affect
our financial condition, results of operations, the market price of our common
stock or our ability to pay dividends or distributions.
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USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, we
intend to use the net proceeds from the sale of the securities offered by this
prospectus and the related accompanying prospectus supplement for the purchase
of mortgage-backed securities. We then intend to increase our investment assets
by borrowing against these mortgage-backed securities and using the proceeds to
acquire additional mortgage-backed securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratios of earnings to fixed charges
for the periods shown:
ANNALY MORTGAGE MANAGEMENT INC.
RATIO OF EARNINGS TO FIXED CHARGES
February 18, 1997
For the For the For the For the For the (commencement of
Quarter Ended Year Ended Year Ended Year Ended Year Ended operations) through
March 31, December 31, December 31, December 31, December 31, December 31,
2002 2001 2000 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
Ratio of earnings 2.33X 1.55X 1.18X 1.26X 1.20X 1.25X
to fixed charges
The ratios of earnings to fixed charges were computed by dividing
earnings as adjusted by fixed charges. For this purpose, earnings consist of net
income from continuing operations and fixed charges. Fixed charges consist of
interest expense. To date, we have not issued any preferred stock.
DESCRIPTION OF STOCK
GENERAL
Our authorized capital stock consists of 500 million shares of common
stock, par value $.01 per share. Pursuant to our articles of incorporation, as
amended, our Board of Directors has the right to classify or reclassify any
unissued shares of common stock into one or more classes or series of common
stock or preferred stock. As of June 10, 2002, we had 82,923,895 shares of
common stock outstanding, not including 599,102 shares of common stock issuable
upon the exercise of options granted pursuant to our Long-Term Incentive Plan.
COMMON STOCK
All shares of common stock offered hereby will be duly authorized,
fully paid and nonassessable. The statements below describing the common stock
are in all respects subject to and qualified in their entirety by reference to
our articles of incorporation, as amended, by-laws,
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as amended and restated, and any articles supplementary to our articles of
incorporation, as amended.
o VOTING
Each of our common stockholders is entitled to one vote for each share
held of record on each matter submitted to a vote of common stockholders.
Our by-laws, as amended and restated, provide that annual meetings of
our stockholders will be held each calendar year on the date determined by our
President, and special meetings may be called by a majority of our Board of
Directors, our Chairman, a majority of our independent directors, our President
or generally by stockholders entitled to cast at least 25% of the votes which
all stockholders are entitled to cast at the meeting. Our articles of
incorporation, as amended, may be amended in accordance with Maryland law.
o DIVIDENDS; LIQUIDATION; OTHER RIGHTS
Common stockholders are entitled to receive dividends when declared by
our Board of Directors out of legally available funds. The right of common
stockholders to receive dividends is subordinate to the rights of preferred
stockholders or other senior stockholders. If we have a liquidation, dissolution
or winding up, our common stockholders will share ratably in all of our assets
remaining after the payment of all of our liabilities and the payment of all
liquidation and other preference amounts to preferred stockholders and other
senior stockholders. Common stockholders have no preemptive or other
subscription rights, and there are no conversion rights, or redemption or
sinking fund provisions, relating to the shares of common stock.
o CLASSIFICATION OR RECLASSIFICATION OF COMMON STOCK OR PREFERRED STOCK
Our articles of incorporation, as amended, authorize our Board of
Directors to reclassify any unissued shares of common or preferred stock into
other classes or series of shares, to establish the number of shares in each
class or series and to set the preferences, conversion and other rights, voting
powers, restrictions, limitations, and restrictions on ownership, limitations as
to dividends or other distributions, qualifications, and terms or conditions of
redemption for each class or series.
PREFERRED STOCK
The following description sets forth general terms and provisions of
the preferred stock to which any prospectus supplement may relate. The
statements below describing the preferred stock are in all respects subject to
and qualified in their entirety by reference to our articles of incorporation,
as amended, by-laws, as amended and restated, and any articles supplementary to
our articles of incorporation, as amended, designating terms of a series of
preferred stock. The preferred stock, when issued, will be validly issued, fully
paid, and non-assessable. Because our Board of Directors has the power to
establish the preferences, powers and rights of each series of preferred stock,
our Board of Directors may afford the holders of any series of preferred stock
preferences, powers and rights, voting or otherwise, senior to the rights of
common stockholders.
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The rights, preferences, privileges and restrictions of each series of
preferred stock will be fixed by the articles supplementary relating to the
series. A prospectus supplement, relating to each series, will specify the terms
of the preferred stock, as follows:
- the title and stated value of the preferred stock;
- the voting rights of the preferred stock, if applicable;
- the preemptive rights of the preferred stock, if applicable;
- the restrictions on alienability of the preferred stock, if
applicable;
- the number of shares offered, the liquidation preference per share
and the offering price of the shares;
- liability to further calls or assessment of the preferred stock, if
applicable;
- the dividend rate(s), period(s) and payment date(s) or method(s) of
calculation applicable to the preferred stock;
- the date from which dividends on the preferred stock will
accumulate, if applicable;
- the procedures for any auction and remarketing for the preferred
stock;
- the provision for a sinking fund, if any, for the preferred stock;
- the provision for and any restriction on redemption, if applicable,
of the preferred stock;
- the provision for and any restriction on repurchase, if applicable,
of the preferred stock;
- any listing of the preferred stock on any securities exchange;
- the terms and provisions, if any, upon which the preferred stock
will be convertible into common stock, including the conversion
price (or manner of calculation) and conversion period;
- the terms under which the rights of the preferred stock may be
modified, if applicable;
- any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock;
- a discussion of certain material federal income tax considerations
applicable to the preferred stock;
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- the relative ranking and preferences of the preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs;
- any limitation on issuance of any series of preferred stock ranking
senior to or on a parity with the series of preferred stock as to
dividend rights and rights upon the liquidation, dissolution or
winding-up of our affairs; and
- any limitations on direct or beneficial ownership and restrictions
on transfer of the preferred stock, in each case as may be
appropriate to preserve our status as REIT.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
To ensure that we meet the requirements for qualification as a REIT,
our articles of incorporation, as amended, prohibit anyone from acquiring or
holding, directly or constructively, ownership of a number of shares of any
class of our capital stock in excess of 9.8% of the outstanding shares. For this
purpose the term "ownership" generally means either direct ownership or
constructive ownership in accordance with the constructive ownership provisions
of Section 544 of the Code, as modified in Section 856(h) of the Code.
The constructive ownership provisions of Section 544 of the Code,
generally attribute ownership of securities owned by a corporation, partnership,
estate or trust proportionately to its stockholders, partners or beneficiaries;
attribute ownership of securities owned by family members to other members of
the same family; and set forth rules for attributing securities constructively
owned by one person to another person (i.e., "reattribution"). To determine
whether a person holds or would hold capital stock in excess of the 9.8%
ownership limit, a person will be treated as owning not only shares of capital
stock actually owned, but also any shares of capital stock attributed to that
person under the attribution rules described above. Accordingly, a person who
individually owns less than 9.8% of the shares outstanding may nevertheless be
in violation of the 9.8% ownership limit.
Any transfer of shares of capital stock that would cause us to be
disqualified as a REIT or that would (a) create a direct or constructive
ownership of shares of capital stock in excess of the 9.8% ownership limit, or
(b) result in the shares of capital stock being beneficially owned (within the
meaning of Section 856(a) of the Code) by fewer than 100 persons (determined
without reference to any rules of attribution), or (c) result in us being
"closely held" within the meaning of Section 856(h) of the Code, will be null
and void, and the intended transferee (the "purported transferee") will acquire
no rights to those shares. These restrictions on transferability and ownership
will not apply if our Board of Directors determines that it is no longer in our
best interests to continue to qualify as a REIT.
Any purported transfer of shares of capital stock that would result in
a purported transferee owning (directly or constructively) shares of capital
stock in excess of the 9.8% ownership limit due to the unenforceability of the
transfer restrictions described above will constitute "excess securities."
Excess securities will be transferred by operation of law to a trust that we
will establish for the exclusive benefit of a charitable organization, until
such time as the trustee of the trust retransfers the excess securities. The
trustee will be a banking institution designated by us that is not affiliated
with the purported transferee or us. While the excess
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securities are held in trust, the purported transferee will not be entitled to
vote or to share in any dividends or other distributions with respect to the
securities. Subject to the 9.8% ownership limit, excess securities may be
transferred by the trust to any person (if such transfer would not result in
excess securities) at a price not to exceed the price paid by the purported
transferee (or, if no consideration was paid by the purported transferee, the
fair market value of the excess securities on the date of the purported
transfer), at which point the excess securities will automatically cease to be
excess securities.
Upon a purported transfer of excess securities, the purported
transferee shall cease to be entitled to distributions, voting rights and other
benefits with respect to the shares of capital stock except the right to payment
of the purchase price for the shares of capital stock on the retransfer of
securities as provided above. Any dividend or distribution paid to a purported
transferee on excess securities prior to our discovery that shares of capital
stock have been transferred in violation of our articles of incorporation, as
amended, shall be repaid to us upon demand. If these transfer restrictions are
determined to be void, invalid or unenforceable by a court of competent
jurisdiction, then the purported transferee of any excess securities may be
deemed, at our option, to have acted as an agent on our behalf in acquiring the
excess securities and to hold the excess securities on our behalf.
All certificates representing shares of capital stock will bear a
legend referring to the restrictions described above.
Any person who acquires shares in violation of our articles of
incorporation, as amended, or any person who is a purported transferee such that
excess securities results, must immediately give written notice or, in the event
of a proposed or attempted transfer that would be void as set forth above, give
at least 15 days prior written notice to us of such event and shall provide us
such other information as we may request in order to determine the effect, if
any, of the transfer on our status as a REIT. In addition, every record owner of
5.0% or more (during any period in which the number of record stockholders is
2,000 or more) or 1.0% or more (during any period in which the number of record
stockholders is greater than 200 but less than 2,000) or 1/2% or more (during
any period in which the number of record stockholders is 200 or less) of the
number or value of our outstanding shares must send us an annual written notice
by January 30 stating the name and address of the record owner and the number of
shares held and describing how the shares are held. Further, each stockholder is
required to disclose to us in writing information with respect to the direct and
constructive ownership of shares as the Board of Directors deems reasonably
necessary to comply with the REIT provisions of the Code, to comply with the
requirements of any taxing authority or governmental agency or to determine any
such compliance.
Our Board of Directors may increase or decrease the 9.8% ownership
limit. In addition, to the extent consistent with the REIT provisions of the
Code, our Board of Directors may, pursuant to our articles of incorporation, as
amended, waive the 9.8% ownership limit for a purchaser of our stock. In
connection with any such waiver, we may require that the stockholder requesting
the waiver enter into an agreement with us providing that we may repurchase
shares from the stockholder under certain circumstances to ensure compliance
with the REIT provisions of the Code. The repurchase would be at fair market
value as set forth in the agreement between us and the stockholder. The
consideration received by the stockholder in the repurchase might
17
be characterized as the receipt by the stockholder of a dividend from us, and
any stockholder entering into an agreement with us should consult its tax
advisor. At present, we do not intend to waive the 9.8% ownership limit for any
purchaser.
The provisions described above may inhibit market activity and the
resulting opportunity for the holders of our capital stock to receive a premium
for their shares that might otherwise exist in the absence of such provisions.
Such provisions also may make us an unsuitable investment vehicle for any person
seeking to obtain ownership of more than 9.8% of the outstanding shares of our
capital stock.
CLASSIFICATION OF BOARD OF DIRECTORS, VACANCIES AND REMOVAL OF DIRECTORS
Our by-laws, as amended and restated, provide for a staggered Board of
Directors. Our by-laws, as amended and restated, provide for between three and
fifteen directors divided into three classes, with terms of three years each.
The number of directors in each class and the expiration of each class term is
as follows:
Class 1 2 Directors Expires 2003
Class 2 3 Directors Expires 2004
Class 3 3 Directors Expires 2005
At each annual meeting of our stockholders, successors of the class of
directors whose term expires at that meeting will be elected for a three-year
term and the directors in the other two classes will continue in office. A
classified Board of Directors may delay, defer or prevent a change in control or
other transaction that might involve a premium over the then prevailing market
price for our common stock or other attributes that our stockholders may
consider desirable. In addition, a classified Board of Directors could prevent
stockholders who do not agree with the policies of our Board of Directors from
replacing a majority of the Board of Directors for two years, except in the
event of removal for cause.
Our by-laws, as amended and restated, provide that any vacancy on our
Board of Directors may be filled by a majority of the remaining directors. Any
individual so elected director will hold office for the unexpired term of the
director he or she is replacing. Our by-laws, as amended and restated, provide
that a director may be removed at any time only for cause upon the affirmative
vote of at least two-thirds of the votes entitled to be cast in the election of
directors, but only by a vote taken at a stockholder meeting. These provisions
preclude stockholders form removing incumbent directors, except for cause and
upon a substantial affirmative vote, and filling the vacancies created by such
removal with their own nominees.
INDEMNIFICATION
Our articles of incorporation, as amended, obligate us to indemnify our
directors and officers and to pay or reimburse expenses for them before the
final disposition of a proceeding to the maximum extent permitted by Maryland
law. The Corporations and Associations Article of the Annotated Code of Maryland
(or the Maryland General Corporation Law) permits a corporation to indemnify its
present and former directors and officers against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or
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other capacities, unless it is established that (1) the act or omission of the
director or officer was material to the matter giving rise to the proceeding and
(a) was committed in bad faith, or (b) was the result of active and deliberate
dishonesty, or (2) the director or officer actually received an improper
personal benefit in money, property or services, or (3) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful.
LIMITATION OF LIABILITY
The Maryland General Corporation Law permits the charter of a Maryland
corporation to include a provision limiting the liability of its directors and
officers to the corporation and its stockholders for money damages, except to
the extent that (1) it is proved that the person actually received an improper
benefit or profit in money, property or services, or (2) a judgment or other
final adjudication is entered in a proceeding based on a finding that the
person's action, or failure to act, was the result of active and deliberate
dishonesty or was committed in bad faith and was material to the cause of action
adjudicated in the proceeding. Our articles of incorporation, as amended,
provide for elimination of the liability of our directors and officers to us or
our stockholders for money damages to the maximum extent permitted by Maryland
law from time to time.
MARYLAND BUSINESS COMBINATION ACT
The Maryland General Corporation Law establishes special requirements
for "business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is any
person who beneficially owns 10% or more of the voting power of our then
outstanding voting stock. Among other things, the law prohibits for a period of
five years a merger and other similar transactions between us and an interested
stockholder unless the Board of Directors approved the transaction prior to the
party becoming an interested stockholder. The five-year period runs from the
most recent date on which the interested stockholder became an interested
stockholder. The law also requires a supermajority stockholder vote for such
transactions after the end of the five-year period. This means that the
transaction must be approved by at least:
- 80% of the votes entitled to be cast by holders of outstanding
voting shares; and
- two-thirds of the votes entitled to be cast by holders of
outstanding voting shares other than shares held by the interested
stockholder or an affiliate of the interested stockholder with whom
the business combination is to be effected.
As permitted by the Maryland General Corporation Law, we have elected
not to be governed by the Maryland business combination statute. We made this
election by opting out of this statute in our articles of incorporation, as
amended. If, however, we amend our articles of incorporation, as amended, to opt
back in to the statute, the business combination statute could have the effect
of discouraging offers to acquire us and of increasing the difficulty of
consummating any such offers, even if our acquisition would be in our
stockholders' best interests.
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MARYLAND CONTROL SHARE ACQUISITION ACT
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of the other stockholders. Two-thirds of the shares
eligible to vote must vote in favor of granting the "control shares" voting
rights. "Control shares" are shares of stock that, taken together with all other
shares of stock the acquirer previously acquired, would entitle the acquirer to
exercise voting power in electing directors within one of the following ranges
of voting power:
- one-tenth or more but less than one-third of all voting power;
- one-third or more but less than a majority of all voting power; or
- a majority or more of all voting power.
Control shares do not include shares of stock the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
If a person who has made (or proposes to make) a control share
acquisition satisfies certain conditions (including agreeing to pay expenses),
he may compel our Board of Directors to call a special meeting of stockholders
to consider the voting rights of the shares. If such a person makes no request
for a meeting, we have the option to present the question at any stockholders'
meeting.
If voting rights are not approved at a meeting of stockholders then,
subject to certain conditions and limitations, we may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. We will determine the fair value of the shares,
without regard to voting rights, as of the date of either:
- the last control share acquisition; or
- the meeting where stockholders considered and did not approve
voting rights of the control shares.
If voting rights for control shares are approved at a stockholders'
meeting and the acquirer becomes entitled to vote a majority of the shares of
stock entitled to vote, all other stockholders may obtain rights as objecting
stockholders and, thereunder, exercise appraisal rights. This means that you
would be able to force us to redeem your stock for fair value. Under Maryland
law, the fair value may not be less than the highest price per share paid in the
control share acquisition. Furthermore, certain limitations otherwise applicable
to the exercise of dissenters' rights would not apply in the context of a
control share acquisition. The control share acquisition statute would not apply
to shares acquired in a merger, consolidation or share exchange if we were a
party to the transaction. The control share acquisition statute could have the
effect of discouraging offers to acquire us and of increasing the difficulty of
consummating any such offers, even if our acquisition would be in our
stockholders' best interests.
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TRANSFER AGENT AND REGISTRAR
Mellon Investor Services LLC, 44 Wall Street, 6th Floor, New York, New
York 10005, is the transfer agent and registrar for our stock. Its telephone
number is (800) 777-3694.
FEDERAL INCOME TAX CONSIDERATIONS
Based on various factual representations made by us regarding our
operations, in the opinion of McKee Nelson LLP, our counsel, commencing with our
taxable year ended December 31, 1997, we have been organized in conformity with
the requirements for qualification and taxation as a REIT under the Code, and
our method of operating has enabled us, and will enable us to meet the
requirements for qualification and taxation as a REIT. Our qualification as a
REIT depends upon our ability to meet the various requirements imposed under the
Code through actual operations. McKee Nelson LLP will not review our operations,
and no assurance can be given that actual operations will meet these
requirements. The opinion of McKee Nelson LLP is not binding on the Internal
Revenue Service (or IRS) or any court. The opinion of McKee Nelson LLP is based
upon existing law, Treasury regulations and currently published administrative
positions of the IRS and judicial decisions, all of which are subject to change
either prospectively or retroactively.
- The following discusses the material United States federal income
tax considerations that relate to our treatment as a REIT and that
apply to an investment in our stock. No assurance can be given that
the conclusions set out below would be sustained by a court if
challenged by the IRS. This summary deals only with stock that is
held as a capital asset, which generally means property that is
held for investment. In addition, except to the extent discussed
below, this summary does not address tax considerations applicable
to you if you are subject to special tax rules, such as:
- a dealer or trader in securities;
- a financial institution;
- an insurance company;
- a stockholder that holds our stock as a hedge, part of a straddle,
conversion transaction or other arrangement involving more than one
position; or
- a stockholder whose functional currency is not the United States
dollar.
The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986, as amended (or Code) and regulations, rulings and
judicial decisions interpreting the Code as of the date of this prospectus. Any
of these authorities may be repealed, revoked or modified, perhaps with
retroactive effect, so as to result in federal income tax consequences different
from those discussed below.
THE DISCUSSION SET OUT BELOW IS INTENDED ONLY AS A SUMMARY OF THE
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF OUR TREATMENT AS A
REIT AND OF AN INVESTMENT IN OUR STOCK. TAXPAYERS AND PREPARERS OF TAX RETURNS
(INCLUDING RETURNS FILED BY ANY
21
PARTNERSHIP OR OTHER ARRANGEMENT) SHOULD BE AWARE THAT UNDER TREASURY
REGULATIONS A PROVIDER OF ADVICE ON SPECIFIC ISSUES OF LAW IS NOT CONSIDERED AN
INCOME TAX RETURN PREPARER UNLESS THE ADVICE IS (i) GIVEN WITH RESPECT TO EVENTS
THAT HAVE OCCURRED AT THE TIME THE ADVICE IS RENDERED AND IS NOT GIVEN WITH
RESPECT TO THE CONSEQUENCES OF CONTEMPLATED ACTIONS, AND (ii) IS DIRECTLY
RELEVANT TO THE DETERMINATION OF AN ENTRY ON A TAX RETURN. ACCORDINGLY, WE URGE
YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF AN
INVESTMENT IN OUR STOCK, INCLUDING THE APPLICATION TO YOUR PARTICULAR SITUATION
OF THE TAX CONSIDERATIONS DISCUSSED BELOW, AS WELL AS THE APPLICATION OF STATE,
LOCAL OR FOREIGN TAX LAWS. THE STATEMENTS OF UNITED STATES TAX LAW SET OUT BELOW
ARE BASED ON THE LAWS IN FORCE AND THEIR INTERPRETATION AS OF THE DATE OF THIS
PROSPECTUS, AND ARE SUBJECT TO CHANGES OCCURRING AFTER THAT DATE.
GENERAL
We elected to become subject to tax as a REIT for federal income tax
purposes effective for our taxable year ended on December 31, 1997, and we plan
to continue to meet the requirements for qualification and taxation as a REIT.
There can be no assurance, however, that we will qualify as a REIT in any
particular taxable year given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations, and the possibility of
future changes in our circumstances. If we fail to qualify as a REIT in any
particular taxable year, we will be subject to federal income tax as a regular
domestic corporation, and you will be subject to tax in the same manner as a
stockholder of a regular domestic corporation. In that event, we may be subject
to a substantial income tax liability in respect of each taxable year that we
fail to qualify as a REIT, and the amount of earnings and cash available for
distribution to you and other stockholders could be significantly reduced or
eliminated. See "Failure to Qualify" below.
REIT QUALIFICATION REQUIREMENTS
The following is a brief summary of the material technical requirements
imposed by the Code that we must satisfy on an ongoing basis to qualify, and
remain qualified, as a REIT.
STOCK OWNERSHIP REQUIREMENTS
We must meet the following stock ownership requirements:
(1) our capital stock must be transferable;
(2) our capital stock must be held by at least 100 persons during at
least 335 days of a taxable year of 12 months (or during a
proportionate part of a taxable year of less than 12 months); and
(3) no more than 50% of the value of our capital stock may be owned,
directly or indirectly, by five or fewer individuals at any time
during the last half of the taxable year. In applying this test,
the Code treats some entities as individuals.
Tax-exempt entities, other than private foundations and certain
unemployment compensation trusts, are generally not treated as individuals for
these purposes. The requirements
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of items (2) and (3) above did not apply to the first taxable year for which we
made an election to be taxed as a REIT. However, these stock ownership
requirements must be satisfied in each subsequent taxable year. Our articles of
incorporation, as amended, impose restrictions on the transfer of our shares to
help us meet the stock ownership requirements. In addition, Treasury regulations
require us to demand from the record holders of designated percentages of our
capital stock, annual written statements disclosing actual and constructive
ownership of our stock. The same regulations require us to maintain permanent
records showing the information we have received regarding actual and
constructive stock ownership and a list of those persons failing or refusing to
comply with our demand.
ASSET REQUIREMENTS
We generally must meet the following asset requirements at the close of
each quarter of each taxable year:
(a) at least 75% of the value of our total assets must be "qualified
REIT real estate assets" (described below), government securities,
cash and cash items;
(b) no more than 25% of the value of our total assets may be securities
other than securities in the 75% asset class (for example,
government securities);
(c) no more than 20% of the value of our total assets may be securities
of one or more Taxable REIT subsidiaries (described below); and
(d) except for securities in the 75% asset class, securities in a
Taxable REIT subsidiary or "qualified REIT subsidiary," and certain
partnership interests and debt obligations--
(1) no more than 5% of the value of our total assets may be
securities of any one issuer,
(2) we may not hold securities that possess more than 10% percent
of the total voting power of the outstanding securities of any
one issuer, and
(3) we may not hold securities that have a value of more than 10
percent of the total value of the outstanding securities of any
one issuer. (Under a special transition provision , this
restriction does not apply to securities held on July 12, 1999,
provided the issuer of those securities does not engage in a
substantially new line of business or acquire substantial new
assets after that date, and provided we do not acquire
additional securities in such issuer. We believe this special
transition provision exempts our ownership of 33% of the equity
of Annaly International Mortgage Management, Inc., as operated
on July 12, 1999).
"Qualified REIT real estate assets" means assets of the type described
in section 856(c)(5)(B) of the Code, and generally include (among other assets)
interests in mortgages on real property, and shares in other REITs. A "Taxable
REIT subsidiary" is a corporation that may earn income that would not be
qualifying income if earned directly by the REIT. A REIT may
23
hold up to 100% of the stock in a Taxable REIT subsidiary. Both the subsidiary
and the REIT must jointly elect to treat the subsidiary as a Taxable REIT
subsidiary by jointly filing a Form 8875 with the IRS. A Taxable REIT subsidiary
will pay tax at the corporate rates on any income it earns. Moreover, the Code
contains rules to ensure contractual arrangements between a Taxable REIT
subsidiary and the parent REIT are at arm's length.
If we fail to meet any of the asset tests as of the close of a calendar
quarter due to the acquisition of securities or other assets, the Code allows us
a 30-day period following the close of the calendar quarter to come into
compliance with the asset tests. If we do cure a failure within the 30-day
period, we will be treated as having satisfied the asset tests at the close of
the calendar quarter.
GROSS INCOME REQUIREMENTS
We generally must meet the following gross income requirements for each
taxable year:
(a) at least 75% of our gross income must be derived from the real
estate sources specified in section 856(c)(3) of the Code,
including interest income and gain from the disposition of
qualified REIT real estate assets, and "qualified temporary
investment income" (generally, income we earn from investing new
capital, provided we received that income within one year of
acquiring such new capital); and
(b) at least 95% of our gross income for each taxable year must be
derived from sources of income specified in section 856(c)(2) of
the Code, which includes the types of gross income described just
above, as well as dividends, interest, and gains from the sale of
stock or other financial instruments (including interest rate swap
and cap agreements, options, futures contracts, forward rate
agreements or similar financial instruments entered into to hedge
debt incurred or to be incurred to acquire or to carry qualified
REIT real estate assets) not held for sale in the ordinary course
of business.
DISTRIBUTION REQUIREMENTS
We generally must distribute dividends (other than capital gain
dividends) to our stockholders in an amount at least equal to (1) the sum of (a)
90% of our REIT taxable income (computed without regard to the dividends paid
deduction and net capital gains) and (b) 90% of the net income (after tax, if
any) from foreclosure property, minus (2) the sum of certain items of non-cash
income. In addition, if we were to recognize "Built in Gain" on disposition of
any assets acquired from a C corporation in a transaction in which Built in Gain
was not recognized (as the result of acquiring such asset in a carry-over basis
transaction (as discussed below)), we would be required to distribute at least
90% of the Built in Gain recognized net of the tax we would pay on such gain.
"Built in Gain" is the excess of (a) the fair market value of an asset (measured
at the time of acquisition) over (b) the basis of the asset (measured at the
time of acquisition). We do not hold any assets with "Built in Gain."
We are not required to distribute our net capital gains. We may elect
to retain and pay the federal income tax on them, in which case our stockholders
will (1) include their
24
proportionate share of the undistributed net capital gains in income, (2)
receive a credit for their share of the federal income tax we pay and (3)
increase the bases in their stock by the difference between their share of the
capital gain and their share of the credit.
FAILURE TO QUALIFY
If we fail to qualify as a REIT in any taxable year and the relief
provisions provided in the Code do not apply, we will be subject to federal
income tax, including any applicable alternative minimum tax, on our taxable
income in that taxable year and all subsequent taxable years at the regular
corporate income tax rates. We will not be allowed to deduct distributions to
shareholders in these years, nor will the Code require us to make distributions.
Further, unless entitled to the relief provisions of the Code, we also will be
barred from re-electing REIT status for the four taxable years following the
year in which we fail to qualify. It is not possible to state in what
circumstances we would be entitled to any statutory relief.
We intend to monitor on an ongoing basis our compliance with the REIT
requirements described above. To maintain our REIT status, we will be required
to limit the types of assets that we might otherwise acquire, or hold some
assets at times when we might otherwise have determined that the sale or other
disposition of these assets would have been more prudent.
TAXATION OF ANNALY MORTGAGE MANAGEMENT
In any year in which we qualify as a REIT, we generally will not be
subject to federal income tax on that portion of our REIT taxable income or
capital gain that we distribute to our stockholders. We will, however, be
subject to federal income tax at regular corporate income tax rates on any
undistributed taxable income or capital gain.
Notwithstanding our qualification as a REIT, we may also be subject to
tax in the following other circumstances:
- If we fail to satisfy either the 75% or the 95% gross income test,
but nonetheless maintain our qualification as a REIT because we
meet other requirements, we generally will be subject to a 100% tax
on the greater of the amount by which we fail either the 75% or the
95% gross income test multiplied by a fraction intended to reflect
our profitability.
- We will be subject to a tax of 100% on net income derived from any
"prohibited transaction" which is, in general, a sale or other
disposition of property held primarily for sale to customers in the
ordinary course of business.
- If we have (1) net income from the sale or other disposition of
foreclosure property that is held primarily for sale to customers
in the ordinary course of business or (2) other non-qualifying
income from foreclosure property, it will be subject to federal
income tax at the highest corporate income tax rate.
- If we fail to distribute during each calendar year at least the sum
of (1) 85% of our REIT ordinary income for such year, (2) 95% of
our REIT capital gain net
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income for such year and (3) any amount of undistributed ordinary
income and capital gain net income from preceding taxable years, we
will be subject to a 4% federal excise tax on the excess of the
required distribution over the amounts actually distributed during
the taxable year.
- If we acquire a Built in Gain asset from a C corporation in a
transaction in which the basis of the asset is determined by
reference to the basis of the asset in the hands of the C
corporation and we recognize Built in Gain upon a disposition of
such asset occurring within 10 years of its acquisition, then we
will be subject to federal tax to the extent of any Built in Gain
at the highest corporate income tax rate.
- We may also be subject to the corporate alternative minimum tax, as
well as other taxes in situations not presently contemplated.
TAXATION OF U.S. STOCKHOLDERS
For purposes of this discussion, a "U.S. Stockholder" is a stockholder
who is a U.S. Person. A "U.S. Person" is a person who is:
- a citizen or resident of the United States;
- a corporation, partnership, or other entity classified as a
corporation or partnership for federal income tax purposes created
or organized in the United States or under the laws of the United
States or of any political subdivision thereof;
- an estate whose income is includible in gross income for United
States Federal income tax purposes regardless of its source; or
- a trust, if (1) a court within the United States is able to
exercise primary supervision over the administration of the trust
and one or more U.S. persons have authority to control all
substantial decisions of the trust, or (2) the trust was in
existence on August 26, 1996, was treated as a domestic trust prior
to such date, and has made an election to continue to be treated as
a U.S. person.
Unless you are a tax-exempt entity, distributions that we make to you,
including constructive distributions, generally will be subject to tax as
ordinary income to the extent of our current and accumulated earnings and
profits as determined for federal income tax purposes. If the amount we
distribute to you exceeds your allocable share of current and accumulated
earnings and profits, the excess will be treated as a return of capital to the
extent of your adjusted basis in your stock, which will reduce your basis in
your stock but will not be subject to tax. To the extent the amount we
distribute to you exceeds both your allocable share of current and accumulated
earnings and profits and your adjusted basis, this excess amount will be treated
as a gain from the sale or exchange of a capital asset. Distributions to our
corporate stockholders, whether characterized as ordinary income or as capital
gain, are not eligible for the corporate dividends received deduction.
Distributions that we designate as capital gain dividends generally
will be taxable in your hands as long-term capital gains, to the extent such
distributions do not exceed our actual net
26
capital gain for the taxable year. In the event that we realize a net loss for
the taxable year, you will not be permitted to deduct any share of that net
loss. Further, if we, or a portion of our assets, were to be treated as a
taxable mortgage pool, any excess inclusion income that is allocated to you
could not be offset by any losses or other deductions you may have. We do not
expect to recognize excess inclusion income. Future Treasury regulations may
require you to take into account, for purposes of computing your individual
alternative minimum tax liability, some of our tax preference items should we
have any such items.
Dividends that we declare during the last quarter of a calendar year
and actually pay to you during January of the following taxable year generally
are treated as if we had paid them, and you had received them, on December 31 of
the calendar year and not on the date actually paid. In addition, we may elect
to treat other dividends distributed after the close of the taxable year as
having been paid during the taxable year, so long as they meet the requirements
described in the Code, but you will be treated as having received these
dividends in the taxable year in which the distribution is actually made.
If you sell or otherwise dispose of our stock, you will generally
recognize a capital gain or loss in an amount equal to the difference between
the amount realized and your adjusted basis in the stock, which gain or loss
will be long-term if the stock is held for more than one year. Any loss
recognized on the sale or exchange of stock held for six months or less
generally will be treated as a long-term capital loss to the extent of (1) any
long-term capital gain dividends you receive with respect to the stock and (2)
your proportionate share of any long-term capital gains that we retain (see the
discussion under the caption Distribution Requirements).
If we fail to qualify as a REIT in any year, distributions we make to
you will be taxable in the same manner discussed above, except that:
- we will not be allowed to designate any distributions as capital
gain dividends;
- distributions (to the extent they are made out of our current and
accumulated earnings and profits) will be eligible for the
corporate dividends received deduction;
- the excess inclusion income rules will not apply to the
stockholders; and
- you will not receive any share of our tax preference items.
In this event, however, we could be subject to substantial federal
income tax liability as a C corporation, and the amount of earnings and cash
available for distribution to you and other stockholders could be significantly
reduced or eliminated.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year, we will report to our U.S. stockholders and to
the IRS the amount of distributions that we pay, and the amount of tax (if any)
that we withhold on these distributions. Under the backup withholding rules, you
may be subject to backup withholding tax with respect to distributions paid
unless you:
27
- are a corporation or come within another exempt category and
demonstrate this fact when required; or
- provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding tax and otherwise comply with the
applicable requirements of the backup withholding tax rules.
A U.S. stockholder may satisfy this requirement by providing us an
appropriately prepared Form W-9. If you do not provide us with your correct
taxpayer identification number, then you may also be subject to penalties
imposed by the IRS.
Backup withholding tax is not an additional tax. Any amounts withheld
under the backup withholding tax rules will be refunded or credited against your
United States federal income tax liability, provided you furnish the required
information to the IRS.
TAXATION OF TAX-EXEMPT ENTITIES
The discussion under this heading only applies to you if you are a
tax-exempt entity.
Subject to the discussion below regarding a pension-held REIT,
distributions received from us or gain realized on the sale of our stock will
not be taxable as unrelated business taxable income (UBTI), provided that:
- you have not incurred indebtedness to purchase or hold our stock;
- you do not otherwise use our stock in trade or business unrelated
to your exempt purpose; and
- we, consistent with our present intent, do not hold a residual
interest in a REMIC that gives rise to excess inclusion income as
defined under section 860E of the Code.
If we were to be treated as a taxable mortgage pool, however, a
substantial portion of the dividends you receive may be subject to tax as UBTI.
In addition, a substantial portion of the dividends you receive may
constitute UBTI if we are treated as a "pension-held REIT" and you are a
"qualified pension trust" that holds more than 10% by value of our interests at
any time during a taxable year. For these purposes, a "qualified pension trust"
is any pension or other retirement trust that satisfies the requirements imposed
under section 401(a) of the Code. We will be treated as a "pension-held REIT" if
(1) we would not be a REIT if we had to treat stock held in a qualified pension
trust as owned by the trust (instead of as owned by the trust's multiple
beneficiaries) and (2) (a) at least one qualified pension trust holds more than
25% of our stock by value, or (b) one or more qualified pension trusts (each
owning more than 10% of our stock by value) hold in the aggregate more than 50%
of our stock by value. Assuming compliance with the ownership limit provisions
set forth in our articles of incorporation, as amended, it is unlikely that
pension plans will accumulate sufficient stock to cause us to be treated as a
pension-held REIT.
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If you qualify for exemption under sections 501(c)(7), (c)(9), (c)(17),
and (c)(20) of the Code, then distributions received by you may also constitute
UBTI. We urge you to consult your tax advisors concerning the applicable set
aside and reserve requirements.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN
STOCKHOLDERS
The discussion under this heading only applies to you if you are not a
U.S. person (hereafter, "foreign stockholder").
This discussion is only a brief summary of the United States federal
tax consequences that apply to you, which are highly complex, and does not
consider any specific facts or circumstances that may apply to you and your
particular situation. We urge you to consult your tax advisors regarding the
United States federal tax consequences of acquiring, holding and disposing of
our stock, as well as any tax consequences that may arise under the laws of any
foreign, state, local or other taxing jurisdiction.
DISTRIBUTIONS
Except for distributions attributable to gain from the disposition of
real property interests or distributions designated as capital gains dividends,
distributions you receive from us generally will be subject, to the extent of
our earnings and profits, to federal withholding tax at the rate of 30%, unless
reduced or eliminated by an applicable tax treaty or unless the distributions
are treated as effectively connected with your United States trade or business.
If you wish to claim the benefits of an applicable tax treaty, you may need to
satisfy certification and other requirements, such as providing Form W-8BEN. If
you wish to claim distributions are effectively connected with your United
States trade or business, you may need to satisfy certification and other
requirements such as providing Form W-8ECI.
Distributions you receive that are in excess of our earnings and
profits will be treated as a tax-free return of capital to the extent of your
adjusted basis in your stock. If the amount of the distribution also exceeds
your adjusted basis, this excess amount will be treated as gain from the sale or
exchange of your stock as described below. If we cannot determine at the time we
make a distribution whether the distribution will exceed our earnings and
profits, the distribution will be subject to withholding at the same rate as
dividends. These withheld amounts, however, will be refundable or creditable
against your United States federal tax liability if it is subsequently
determined that the distribution was, in fact, in excess of our earnings and
profits. If you receive a dividend that is treated as being effectively
connected with your conduct of a trade or business within the United States, the
dividend will be subject to the United States federal income tax on net income
that applies to United States persons generally, and may be subject to the
branch profits tax if you are a corporation.
Distributions that we make to you and designate as capital gains
dividends, other than those attributable to the disposition of a United States
real property interest, generally will not be subject to United States federal
income taxation, unless:
- your investment in our stock is effectively connected with your
conduct of a trade or business within the United States; or
29
- you are a nonresident alien individual who is present in the United
States for 183 days or more in the taxable year, and other
requirements are met.
Distributions that are attributable to a disposition of United States
real property interests are subject to income and withholding taxes pursuant to
the Foreign Investment in Real Property Act of 1980 (FIRPTA), and may also be
subject to branch profits tax if you are a corporation that is not entitled to
treaty relief or exemption. However, because we do not expect to hold assets
that would be treated as United States real property interests as defined by
FIRPTA, the FIRPTA provisions should not apply to investment in our stock.
GAIN ON DISPOSITION
You generally will not be subject to United States federal income tax
on gain recognized on a sale or other disposition of our stock unless:
- the gain is effectively connected with your conduct of a trade or
business within the United States;
- you are a nonresident alien individual who holds our stock as a
capital asset and are present in the United States for 183 or more
days in the taxable year and other requirements are met; or
- you are subject to tax under the FIRPTA rules discussed below.
Gain that is effectively connected with your conduct of a trade or
business within the United States will be subject to the United States federal
income tax on net income that applies to United States persons generally and may
be subject to the branch profits tax if you are a corporation. However, these
effectively-connected gains will generally not be subject to withholding. We
urge you to consult applicable treaties, which may provide for different rules.
Under FIRPTA, you may be subject to tax on gain recognized from a sale
or other disposition of your stock if we were to both (1) hold United States
real property interests and (2) fail to qualify as a domestically-controlled
REIT. A REIT qualifies as a domestically-controlled REIT as long as less than
50% in value of its shares of beneficial interest are held by foreign persons at
all times during the shorter of (1) the previous five years and (2) the period
in which the REIT is in existence. As mentioned above, we do not expect to hold
any United States real property interests. Furthermore, we will likely qualify
as a domestically-controlled REIT, although no assurances can be provided
because our shares are publicly-traded.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
The information reporting and backup withholding tax requirements
(discussed above) will generally not apply to foreign holders in the case of
distributions treated as (1) dividends subject to the 30% (or lower treaty rate)
withholding tax (discussed above), or (2) capital gain dividends. Also, as a
general matter, backup withholding and information reporting will not apply to
the payment of proceeds from shares sold by or through a foreign office of a
foreign broker. However, in some cases (for example, a sale of shares through
the foreign office of a U.S. broker), information reporting is required unless
the foreign holder certifies under penalty
30
of perjury that it is a foreign holder, or otherwise establishes an exemption. A
foreign stockholder may satisfy this requirement by using an appropriately
prepared Form W-8 BEN.
FEDERAL ESTATE TAXES
In general, if an individual who is not a citizen or resident (as
defined in the Code) of the United States owns (or is treated as owning) our
stock at the date of death, such stock will be included in the individual's
estate for United States Federal estate tax purposes, unless an applicable
treaty provides otherwise.
STATE AND LOCAL TAXES
We and our stockholders may be subject to state or local taxation in
various jurisdictions, including those in which we or they transact business or
reside. The state and local tax treatment that applies to us and our
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, we urge you to consult your own tax advisors regarding the
effect of state and local tax laws.
PLAN OF DISTRIBUTION
We may sell the securities offered pursuant to this prospectus and any
accompanying prospectus supplements to or through one or more underwriters or
dealers or we may sell the securities to investors directly or through agents.
Each prospectus supplement, to the extent applicable, will describe the number
and terms of the securities to which such prospectus supplement relates, the
name or names of any underwriters or agents with whom we have entered into
arrangements with respect to the sale of such securities, the public offering or
purchase price of such securities and the net proceeds we will receive from such
sale. Any underwriter or agent involved in the offer and sale of the securities
will be named in the applicable prospectus supplement. Underwriters and agents
in any distribution contemplated hereby may from time to time include UBS
Warburg LLC. We may sell securities directly to investors on our own behalf in
those jurisdictions where we are authorized to do so.
Underwriters may offer and sell the securities at a fixed price or
prices, which may be changed, at market prices prevailing at the time of sale,
at prices related to the prevailing market prices or at negotiated prices. We
also may, from time to time, authorize dealers or agents to offer and sell these
securities upon such terms and conditions as may be set forth in the applicable
prospectus supplement. In connection with the sale of any of these securities,
underwriters may receive compensation from us in the form of underwriting
discounts or commissions and may also receive commissions from purchasers of the
securities for whom they may act as agent. Underwriters may sell the securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for which they may act as agents.
Shares may also be sold in one or more of the following transactions:
(a) block transactions (which may involve crosses) in which a broker-dealer may
sell all or a portion of the shares as agent but may position and resell all or
a portion of the block as principal to facilitate the transaction; (b) purchases
by a broker-dealer as principal and resale by the broker-dealer for
31
its own account pursuant to a prospectus supplement; (c) a special offering, an
exchange distribution or a secondary distribution in accordance with applicable
New York Stock Exchange or other stock exchange rules; (d) ordinary brokerage
transactions and transactions in which a broker-dealer solicits purchasers; (e)
sales "at the market" to or through a market maker or into an existing trading
market, on an exchange or otherwise, for shares; and (f) sales in other ways not
involving market makers or established trading markets, including direct sales
to purchasers. Broker-dealers may also receive compensation from purchasers of
the shares which is not expected to exceed that customary in the types of
transactions involved.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of these securities, and any discounts or
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements
entered into with us, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act of 1933.
Unless otherwise set forth in the accompanying prospectus supplement, the
obligations of any underwriters to purchase any of these securities will be
subject to certain conditions precedent.
In connection with the offering of the securities hereby, certain
underwriters, and selling group members and their respective affiliates, may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the applicable securities. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the SEC pursuant to which these persons may bid for or purchase securities for
the purpose of stabilizing their market price.
The underwriters in an offering of securities may also create a "short
position" for their account by selling more securities in connection with the
offering than they are committed to purchase from us. In that case, the
underwriters could cover all or a portion of the short position by either
purchasing securities in the open market following completion of the offering of
these securities or by exercising any over-allotment option granted to them by
us. In addition, the managing underwriter may impose "penalty bids" under
contractual arrangements with other underwriters, which means that they can
reclaim from an underwriter (or any selling group member participating in the
offering) for the account of the other underwriters, the selling concession for
the securities that are distributed in the offering but subsequently purchased
for the account of the underwriters in the open market. Any of the transactions
described in this paragraph or comparable transactions that are described in any
accompanying prospectus supplement may result in the maintenance of the price of
the securities at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph or in an
accompanying prospectus supplement are required to be taken by any underwriters
and, if they are undertaken, may be discontinued at any time.
The common stock is listed on the New York Stock Exchange under the
symbol "NLY." The preferred stock will be new issues of securities with no
established trading market and may
32
or may not be listed on a national securities exchange. Any underwriters or
agents to or through which securities are sold by us may make a market in the
securities, but these underwriters or agents will not be obligated to do so and
any of them may discontinue any market making at any time without notice. No
assurance can be given as to the liquidity of or trading market for any
securities sold by us.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us and our affiliates in the ordinary course of business.
Underwriters have from time to time in the past provided, and may from time to
time in the future provide, investment banking services to us for which they
have in the past received, and may in the future receive, customary fees. We
have a secured repurchase credit facility with UBS Warburg LLC.
EXPERTS
The financial statements incorporated in this prospectus by reference
from our Annual Report on Form 10-K for the year ended December 31, 2001 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for
us by McKee Nelson LLP. The opinion of counsel described under the heading
"Federal Income Tax Considerations" is being rendered by McKee Nelson LLP. This
opinion is subject to various assumptions and is based on current tax law.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You may inspect and copy such reports, proxy
statements and other information at the public reference facilities maintained
by the SEC at the SEC's Public Reference Room, 450 Fifth Street, N.W,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information. This material can also be obtained from the SEC's worldwide web
site at http://www.sec.gov. Our outstanding common stock is listed on the New
York Stock Exchange under the symbol "NLY," and all such reports, proxy
statements and other information filed by us with the New York Stock Exchange
may be inspected at the New York Stock Exchange's offices at 20 Broad Street,
New York, New York 10005.
We have filed a registration statement, of which this prospectus is a
part, covering the securities offered hereby. As allowed by SEC rules, this
prospectus does not contain all the information set forth in the registration
statement and the exhibits, financial statements and schedules thereto. We refer
you to the registration statement, the exhibits, financial statements and
schedules thereto for further information. This prospectus is qualified in its
entirety by such other information.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by information in this prospectus. We have filed the
documents listed below with the SEC (File No. 1-13447) under the Securities
Exchange Act of 1934 (or Exchange Act), and these documents are incorporated
herein by reference:
- Our Annual Report on Form 10-K for the year ended December 31, 2001
as filed on March 29, 2002 and as amended on April 5, 2002;
- Our Preliminary Proxy Statement filed March 28, 2002;
- Our Definitive Proxy Statement filed April 10, 2002;
- Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 as filed on May 13, 2002;
- Our Current Report on Form 8-K dated January 25, 2002; and
- The description of our common stock included in our registration
statement on Form 8-A, as amended.
Any documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this prospectus and prior to the termination
of the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference in this prospectus and
to be part hereof from the date of filing those documents. Any documents we file
pursuant to these sections of the Exchange Act after the date of the initial
registration statement that contains this prospectus and prior to the
effectiveness of the registration statement will automatically be deemed to be
incorporated by reference in this prospectus and to be part hereof from the date
of filing those documents.
Any statement contained in this prospectus or in a document
incorporated by reference shall be deemed to be modified or superseded for all
purposes to the extent that a statement contained in this prospectus or in any
other document which is also incorporated by reference modifies or supersedes
that statement.
You may obtain copies of all documents which are incorporated in this
prospectus by reference (other than the exhibits to such documents which are not
specifically incorporated by reference herein) without charge upon written or
oral request to Investor Relations, at Annaly Mortgage Management, Inc., whose
address as of June 24, 2002 will be 1211 Avenue of the Americas, Suite 2902, New
York, New York 10036, telephone number (212) 696-0100.
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ANNALY MORTGAGE MANAGEMENT, INC.
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