Filed Pursuant to Rule 424B3
Registration No: 333-105987
SUBJECT TO COMPLETION OCTOBER 12, 2004
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 25, 2003)
____________ SHARES
[ANNALY LOGO]
ANNALY MORTGAGE MANAGEMENT, INC.
7.875% SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK
LIQUIDATION PREFERENCE $25.00 PER SHARE
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We are offering ________ shares of our 7.875% Series A Cumulative Redeemable
Preferred Stock, par value $0.01 per share, which we refer to as our "Series A
Preferred Stock." We pay to investors cumulative dividends on the Series A
Preferred Stock in the amount of $1.96875 per share each year, which is
equivalent to 7.875% of the $25.00 liquidation preference per share. Dividends
on the Series A Preferred Stock are payable quarterly in arrears on or before
March 31, June 30, September 30 and December 31 of each year, or if not a
business day, the next succeeding business day. The shares of Series A Preferred
Stock have no stated maturity, are not subject to any sinking fund or mandatory
redemption and are not convertible into any other securities. Holders of shares
of Series A Preferred Stock generally have no voting rights, but will have
limited voting rights if we fail to pay dividends for six or more quarters and
in certain other events.
We may not redeem the Series A Preferred Stock until April 5, 2009 except in
limited circumstances to preserve our status as a real estate investment trust.
On or after April 5, 2009, we may, at our option, redeem the Series A Preferred
Stock, in whole or in part, at any time and from time to time, for cash at
$25.00 per share, plus accrued and unpaid dividends (whether or not declared),
if any, to and including the redemption date. Any partial redemption will
generally be on a pro rata basis.
The Series A Preferred Stock is currently listed on the New York Stock Exchange
under the symbol "NLY PrA." The last reported sale price of our Series A
Preferred Stock on the New York Stock Exchange on October ___, 2004 was $______
per share.
SEE "RISK FACTORS" BEGINNING ON PAGE S-8 IN THIS PROSPECTUS SUPPLEMENT AND PAGE
FOUR OF THE ACCOMPANYING PROSPECTUS FOR A DISCUSSION OF THE RISKS RELEVANT TO AN
INVESTMENT IN OUR SERIES A PREFERRED STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
PER SHARE TOTAL
------------- -------------
Public offering price(1)........................ $ $
Underwriting discounts and commissions.......... $ $
Proceeds, before expenses, to us................ $ $
(1) Plus accrued and undeclared dividends, if any, from October 1, 2004.
The underwriters have an option to purchase up to an additional __________
shares of Series A Preferred Stock from us to cover over-allotments, if any.
The underwriters expect that the shares of Series A Preferred Stock issued in
this offering will be ready for delivery in book-entry form through The
Depository Trust Company on or about __________, 2004.
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BEAR, STEARNS & CO. INC.
SOLE BOOK-RUNNING MANAGER
The date of this prospectus supplement is October ___, 2004.
The information contained in this preliminary prospectus supplement and
accompanying prospectus is not complete and may be changed. This preliminary
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
jurisdiction where the offer or sale is not permitted.
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, as amended (or the Securities
Act), and Section 21E of the Securities Exchange Act of 1934, as amended (or the
Exchange Act). 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 and
risks associated with the investment advisory business of our wholly owned
subsidiary, Fixed Income Discount Advisory Company (or FIDAC), including the
removal by FIDAC's clients of assets FIDAC manages, FIDAC's regulatory
requirements and competition in the investment advisory business. 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.
i
PROSPECTUS SUMMARY
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" BEGINNING ON PAGE
S-8 OF THIS PROSPECTUS SUPPLEMENT AND ON PAGE FOUR IN THE ACCOMPANYING
PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION TO PURCHASE SHARES OF OUR SERIES
A PREFERRED 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."
ANNALY MORTGAGE MANAGEMENT, INC.
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. 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:
- we have the necessary expertise to evaluate and
manage;
- we can readily finance;
- are consistent with our balance sheet guidelines and
risk management objectives; and
S-1
- provide attractive investment returns in a range of
scenarios.
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 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 attempting 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
S-2
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 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.
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 either
agency mortgage-backed securities which, although not rated, carry an implied
"AAA" rating, or are Federal Home Loan Bank, Federal Home Loan Mortgage
Corporation, or Federal National Mortgage Association debentures. 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, Federal National Mortgage Association or Government
National Mortgage Association, guarantees payments of principal or interest on
the securities. Similarly, the debentures issued by the Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation or Federal National Mortgage Association
are guaranteed by those respective agencies. Agency mortgage-backed securities
consist of agency pass-through certificates and CMOs issued or guaranteed by an
agency. Pass-through certificates provide for a pass-through of the monthly
interest and principal payments made by the borrowers on the underlying mortgage
loans. CMOs divide a pool of mortgage loans into multiple tranches with
different principal and interest payment characteristics.
At June 30, 2004, approximately 58% of our mortgage-backed securities
were adjustable-rate pass-through certificates, approximately 30% of our
mortgage-backed securities were fixed-
S-3
rate pass-through certificates or CMOs and approximately 12% of our
mortgage-backed securities were CMO floaters. Our adjustable-rate pass-through
certificates are backed by adjustable-rate mortgage loans and have coupon rates
which adjust over time, subject to interest rate caps and lag periods, in
conjunction with changes in short-term interest rates. CMO floaters are tranches
of mortgage-backed securities where the interest rate adjusts in conjunction
with changes in short-term interest rates. CMO floaters may be backed by
fixed-rate mortgage loans or, less often, by adjustable-rate mortgage loans. In
this prospectus supplement, except where the context indicates otherwise, we use
the term "adjustable-rate securities" or "adjustable-rate mortgage-backed
securities" to refer to adjustable-rate pass-through certificates and CMO
floaters. At June 30, 2004, the weighted average yield on our portfolio of
mortgage-backed securities was 2.94%, and the weighted average term to next rate
adjustment on adjustable-rate securities was 29 months.
We intend to continue to invest in adjustable-rate pass-through
certificates, fixed-rate mortgage-backed securities and CMO floaters. Although
we have not done so to date, we may also invest on a limited basis in mortgage
derivative securities representing the right to receive interest only or a
disproportionately large amount of interest. We have not and will not invest in
real estate mortgage investment conduit residuals, other CMO residuals or any
mortgage-backed securities, such as inverse floaters, which have imbedded
leverage as part of their structural characteristics.
BORROWINGS
We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. However, periodic rate adjustments
on our borrowings are generally more frequent than rate adjustments on our
mortgage-backed securities. At June 30, 2004, the weighted average cost of funds
for all of our borrowings was 1.51%, the weighted average original term to
maturity was 198 days and the weighted average term to next rate adjustment of
these borrowings was 101 days.
We generally expect to maintain a ratio of debt-to-equity of between
8:1 and 12:1, although the ratio may vary from time to time depending upon
market conditions and other factors that our management deems relevant. For
purposes of calculating this ratio, our equity is equal to the value of our
investment portfolio on a mark-to-market basis, less the book value of our
obligations under repurchase agreements and other collateralized borrowings. At
June 30, 2004, our ratio of debt-to-equity was 9.9:1.
DIVIDENDS ON OUTSTANDING SHARES OF SERIES A PREFERRED STOCK
Currently, there are 4,250,000 shares of our Series A Preferred Stock
outstanding pursuant to a public offering which closed on April 5, 2004. In
accordance with the terms of our charter establishing these shares, on June 30,
2004 we declared and paid a per share quarterly dividend on these shares of
$0.47 (for the period from April 5, 2004 to June 30, 2004), and on September 30,
2004 we declared and paid a per share quarterly dividend on these shares of
$0.49 (for the quarter from July 1, 2004 to September 30, 2004).
S-4
THE OFFERING
The following is a brief summary of certain terms of this offering. For
a more complete description of the terms of the Series A Preferred Stock, see
"Description of the Series A Preferred Stock" in this prospectus supplement.
Issuer...................... Annaly Mortgage Management, Inc.
Securities Offered.......... ___________ shares of 7.875% Series A
Cumulative Redeemable Preferred Stock
(_________ shares if the underwriters'
over-allotment option is exercised in full).
Outstanding Series A Currently, there are 4,250,000 shares of our
Preferred Stock ............ Series A Preferred Stock outstanding. After
this offering, assuming no exercise of the
underwriters' over-allotment option, there will
be ________________ shares of our Series A
Preferred Stock outstanding.
Dividends................... Investors are entitled to receive cumulative
cash dividends on the Series A Preferred Stock
at a rate of 7.875% per year of the $25.00
liquidation preference (equivalent to $1.96875
per year per share). Dividends on the Series A
Preferred Stock are payable quarterly in
arrears on or before March 31, June 30,
September 30 and December 31 of each year, or
if not a business day, the next succeeding
business day. Dividends paid to investors on
the Series A Preferred Stock issued in this
offering will be cumulative from October 1,
2004.
Liquidation Preference...... If we liquidate, dissolve or wind up, holders
of the Series A Preferred Stock will have the
right to receive $25.00 per share, plus accrued
and unpaid dividends (whether or not declared)
to the date of payment, before any payments are
made to the holders of our common stock and any
other of our equity securities that we may
issue ranking junior to the Series A Preferred
Stock as to liquidation rights. The rights of
the holders of the Series A Preferred Stock to
receive their liquidation preference will be
subject to the proportionate rights of each
other series or class of our equity securities
ranking on parity with the Series A Preferred
Stock that we may issue.
Maturity.................... The Series A Preferred Stock has no maturity
date and we are not required to redeem the
Series A Preferred Stock. Accordingly, the
Series A Preferred Stock will remain
outstanding indefinitely, unless we decide to
redeem it. We are not required to set aside
funds to redeem the Series A Preferred Stock.
S-5
Optional Redemption......... We may not redeem the Series A Preferred Stock
prior to April 5, 2009, except in limited
circumstances to preserve our status as a REIT.
On or after April 5, 2009, we may, at our
option, redeem the Series A Preferred Stock, in
whole or in part, at any time and from time to
time, for cash at $25.00 per share, plus
accrued and unpaid dividends, if any, to and
including the redemption date. Any partial
redemption generally will be on a pro rata
basis.
Ranking..................... The Series A Preferred Stock ranks senior to
our common stock with respect to the payment of
distributions and amounts upon liquidation,
dissolution or winding up.
Voting Rights............... Holders of the Series A Preferred Stock
generally have no voting rights. If, however,
dividends on any outstanding Series A Preferred
Stock have not been paid for six or more
quarterly periods (whether or not consecutive),
holders of the Series A Preferred Stock, voting
as a class with the holders of any other
classes or series of our equity securities
ranking on parity with the Series A Preferred
Stock which are entitled to similar voting
rights, will be entitled to elect two
additional directors to our board of directors
to serve until all unpaid dividends have been
paid or declared and set apart for payment. In
addition, certain material and adverse changes
to the terms of the Series A Preferred Stock
cannot be made and certain other actions may
not be taken without the affirmative vote of
holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock.
Listing..................... The Series A Preferred Stock is currently
listed on the New York Stock Exchange under the
symbol "NLY PrA."
Settlement Date............. Delivery of the shares of Series A Preferred
Stock issued in this offering will be made
against payment therefor on or about October
__, 2004.
Form........................ The Series A Preferred Stock is maintained in
book-entry form registered in the name of the
nominee of The Depository Trust Company, except
under limited circumstances.
No Conversion............... The Series A Preferred Stock is not convertible
into or exchangeable for any other of our
property or securities.
Restrictions on Ownership... In order to ensure that we remain a qualified
REIT for federal income tax purposes, no person
may own more than 9.8% of the number or value
of our outstanding shares of capital stock,
with some exceptions. See "Description of
Stock" in the accompanying prospectus.
S-6
Use of Proceeds............. The net proceeds from the offering, assuming no
exercise of the underwriters' over-allotment
option, will be approximately $______ million.
We intend to use the net proceeds 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.
Risk Factors................ See "Risk Factors" beginning on page S-8 of
this prospectus supplement and page four of the
accompanying prospectus, and the other
information contained herein for a discussion
of factors you should carefully consider before
deciding to invest in the Series A Preferred
Stock.
Ratio of Earnings to Fixed
Charges..................... See "Ratios of Earnings to Fixed Charges" on
page S-9 of this prospectus supplement.
S-7
RISK FACTORS
THIS SECTION DESCRIBES SOME, BUT NOT ALL, OF THE RISKS OF PURCHASING OUR SERIES
A PREFERRED STOCK IN THE OFFERING. YOU SHOULD CAREFULLY CONSIDER THESE RISKS,
AND THE RISKS DESCRIBED UNDER THE CORRESPONDING HEADING BEGINNING ON PAGE FOUR
OF THE ACCOMPANYING PROSPECTUS, BEFORE PURCHASING OUR SERIES A PREFERRED STOCK
IN THE OFFERING. IN CONNECTION WITH THE FORWARD-LOOKING STATEMENTS THAT APPEAR
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD ALSO
CAREFULLY REVIEW THE CAUTIONARY STATEMENTS REFERRED TO IN "FORWARD-LOOKING
STATEMENTS."
AN ESTABLISHED TRADING MARKET FOR SHARES OF SERIES A PREFERRED STOCK HAS ONLY
RECENTLY DEVELOPED AND THERE IS NO GUARANTEE THAT IT WILL BE SUSTAINED, WHICH
MAY NEGATIVELY AFFECT THE MARKET VALUE OR YOUR ABILITY TO TRANSFER OR SELL YOUR
SHARES; THE SERIES A PREFERRED STOCK HAS NO STATED MATURITY DATE.
Since the shares of Series A Preferred Stock have no stated maturity
date, investors seeking liquidity will be limited to selling their shares in the
secondary market. An established trading market for shares of Series A Preferred
Stock has only recently developed and it may not last, in which case the trading
price of the shares of Series A Preferred Stock could be adversely affected and
your ability to transfer your shares of Series A Preferred Stock will be
limited. We have been advised by the underwriters that they currently make a
market in and intend to continue to make a market in the Series A Preferred
Stock, but they are not obligated to do so and may discontinue market-making at
any time without notice.
NUMEROUS FACTORS AFFECT THE TRADING PRICE OF THE SERIES A PREFERRED STOCK.
The shares of Series A Preferred Stock may trade at prices higher or
lower than their initial offering price. The trading price of our Series A
Preferred Stock may depend on many factors, including:
o prevailing interest rates;
o the market for similar securities;
o additional issuances of other series or classes of preferred
stock;
o general economic conditions; and
o our financial condition, performance and prospects.
THE SERIES A PREFERRED STOCK IS SUBORDINATED TO EXISTING AND FUTURE DEBT.
As of June 30, 2004 our total indebtedness was approximately $15.69
billion, and we may incur additional debt to acquire additional mortgage-backed
securities. Payment of amounts due on our Series A Preferred Stock will be
subordinated to all of our existing and future debt and will be structurally
subordinated to the payment of dividends on preferred stock, if any,
S-8
issued by our subsidiaries. In addition, we may issue additional Series A
Preferred Stock and/or shares of another class or series of preferred stock
ranking on a parity with the Series A Preferred Stock with respect to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up. These factors may affect the trading price of the
Series A Preferred Stock.
THE SERIES A PREFERRED STOCK HAS NOT BEEN RATED.
We have not sought to obtain a rating for the Series A Preferred Stock.
No assurance can be given, however, that one or more rating agencies might not
independently determine to issue such a rating or that such a rating, if issued,
would not adversely affect the market price of our Series A Preferred Stock. In
addition, we may elect in the future to obtain a rating of our Series A
Preferred Stock which could adversely impact the market price of our Series A
Preferred Stock. Ratings only reflect the views of the rating agency or agencies
issuing the ratings and such ratings could be revised downward or withdrawn
entirely at the discretion of the issuing rating agency if in its judgment
circumstances so warrant. Any such downward revision or withdrawal of a rating
could have an adverse effect on the market price of our Series A Preferred
Stock.
USE OF PROCEEDS
The net proceeds from the offering, assuming no exercise of the
underwriters' over-allotment option, will be approximately $_____ million. We
intend to use the net proceeds 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.
RATIOS OF EARNINGS TO FIXED CHARGES
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 2004 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------
Ratio of earnings to fixed 2.16X 1.99X 2.14X 1.55X 1.18X 1.26X
charges(1)
(1) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of net income plus "fixed charges." "Fixed charges"
consist of interest incurred on all indebtedness related to continuing
operations (including amortization of original issue discount). The
ratios are based solely on historical financial information and no pro
forma adjustments have been made thereto.
S-9
SELECTED FINANCIAL DATA
The selected financial data set forth below is derived from our
unaudited financial statements for the six months ended June 30, 2004 and from
our audited financial statements for the fiscal years ended December 31, 2003,
2002, 2001, 2000, and 1999. 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" (for the three year period ended
December 31, 2003) included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 and in our Quarterly Report on Form 10-Q for the
six months ended June 30, 2004, each of which is incorporated by reference into
the accompanying prospectus.
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
(UNAUDITED)
SIX MONTHS
ENDED JUNE 30,
2004 2003 2002 2001 2000 1999
(CONSOLIDATED)
------------------------------------------------------------------------
(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Interest income ...................... $236,575 $337,433 $404,165 $263,058 $109,750 $89,812
Interest expense ..................... 105,951 182,004 191,758 168,055 92,902 69,846
------------ ------------ ------------ ------------ ------------ ------------
Net interest income .................. 130,624 155,429 212,407 95,003 16,848 19,966
Investment advisory and service fees,
net .............................. 1,260 -- -- -- -- --
Gain on sale of mortgage-backed
securities ....................... 2,721 40,907 21,063 4,586 2,025 454
General and administrative expenses .. 11,008 16,233 13,963 7,311 2,286 2,281
Income taxes ......................... 919 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net income ........................... $122,678 $180,103 $219,507 $92,278 $16,587 $18,139
============ ============ ============ ============ ============ ============
Basic net income per average share ... $1.05 $1.95 $2.68 $2.23 $1.18 $1.41
Diluted net income per average share . $1.04 $1.94 $2.67 $2.21 $1.15 $1.35
Dividends declared per share ......... -- $1.95 $2.67 $1.75 $1.15 $1.38
BALANCE SHEET DATA:
Mortgage-backed securities, net ...... $16,142,801 $11,956,512 $11,551,857 $7,575,379 $1,978,219 $1,437,793
Total assets ......................... 17,242,757 12,990,286 11,659,084 7,717,314 2,035,029 1,491,322
Repurchase agreements ................ 15,342,123 11,012,903 10,163,174 6,367,710 1,628,359 1,338,296
Total liabilities .................... 15,690,246 11,841,066 10,579,018 7,049,957 1,899,386 1,388,050
Stockholders' equity ................. 1,552,511 1,149,220 1,080,066 667,357 135,642 103,272
Number of common shares outstanding .. 120,148,709 96,074,096 84,569,206 59,826,975 14,522,978 13,581,316
OTHER DATA:
Average total assets ................. $16,190,579 $12,975,039 $10,486,423 $5,082,852 $1,652,459 $1,473,765
Average earning assets ............... 15,550,659 12,007,333 9,575,365 4,682,780 1,564,491 1,461,254
Average borrowings ................... 14,733,782 11,549,368 9,128,933 4,388,900 1,449,999 1,350,230
Average equity ....................... 1,463,440 1,122,633 978,107 437,376 117,727 117,685
Yield on average interest earning
assets ........................... 3.04% 2.81% 4.22% 5.62% 7.02% 6.15%
Cost of funds on average interest
bearing liabilities .............. 1.44% 1.58% 2.10% 3.83% 6.41% 5.17%
Interest rate spread ................. 1.60% 1.23% 2.12% 1.79% 0.61% 0.98%
ANNUALIZED FINANCIAL RATIOS:
Net interest margin (net interest
income/average total assets) ..... 1.61% 1.20% 2.03% 1.87% 1.02% 1.35%
G&A expense as a percentage of average
total assets ..................... 0.13% 0.13% 0.13% 0.14% 0.14% 0.15%
G&A expense as a percentage of average
equity ........................... 1.50% 1.45% 1.43% 1.67% 1.94% 1.94%
Return on average total assets ....... 1.52% 1.39% 2.09% 1.82% 1.00% 1.23%
Return on average equity ............. 15.80% 16.04% 22.44% 21.10% 14.09% 15.41%
S-10
DESCRIPTION OF THE SERIES A PREFERRED STOCK
This description of the particular terms of the Series A Preferred
Stock supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of our preferred stock set forth
in the accompanying prospectus, to which description reference is hereby made.
GENERAL
We are authorized to issue up to 500,000,000 shares of capital stock.
Under our charter, our board of directors may classify or reclassify any
unissued shares of our stock in one or more series, with such terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption, in each case, if any, as are permitted by Maryland law
and as our board of directors may determine by adoption of an amendment to our
charter, without any further vote or action by our stockholders. See
"Description of Stock" in the accompanying prospectus. Our board of directors
has adopted articles supplementary to our charter reclassifying 4,887,500 shares
of our common stock as 7.875% Series A Cumulative Redeemable Preferred Stock. We
will file additional articles supplementary reclassifying ______ additional
shares of common stock as 7.875% Series A Cumulative Redeemable Preferred Stock.
This offering relates to ________ shares of Series A Preferred Stock. The Series
A Preferred Stock is a series of our preferred stock, and is currently listed on
the New York Stock Exchange under the symbol "NLY PrA."
The following summary of the terms and provisions of the Series A
Preferred Stock does not purport to be complete and is qualified in its entirety
by reference to the pertinent sections of our charter and the articles
supplementary creating the Series A Preferred Stock, which are available from
us.
RANKING
The Series A Preferred Stock ranks senior to our common stock with
respect to the payment of dividends.
DIVIDENDS
Holders of shares of the Series A Preferred Stock are entitled to
receive, when and as authorized by our board of directors, out of funds legally
available for the payment of dividends, cumulative preferential cash dividends
at the rate of 7.875% per annum of the $25.00 liquidation preference (equivalent
to $1.96875 per share). Such dividends shall be cumulative from October 1, 2004
for shares issued in this offering, and shall be payable to investors quarterly
in arrears on or before March 31, June 30, September 30 and December 31 of each
year or, if not a business day, the next succeeding business day (each, a
Dividend Payment Date). The first dividend for shares issued in this offering
will be paid on December 31, 2004. Any dividend payable on the Series A
Preferred Stock for any partial dividend period will be computed on the basis of
a 360-day year consisting of twelve 30-day months. Dividends will be payable to
holders of record as
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they appear in our stock records at the close of business on the applicable
record date, which shall be the first day of the calendar month in which the
applicable Dividend Payment Date falls or on such other date designated by our
board of directors for the payment of dividends that is not more than 30 nor
less than 10 days prior to such Dividend Payment Date (each, a Dividend Record
Date).
No dividends on shares of Series A Preferred Stock shall be declared by
us or paid or set apart for payment by us at such time as the terms and
provisions of any of our agreements, including any agreement relating to our
indebtedness, prohibit such declaration, payment or setting apart for payment or
provide that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration or
payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred
Stock will accrue whether or not we have earnings, whether or not there are
funds legally available for the payment of such dividends and whether or not
such dividends are declared. Accrued but unpaid dividends on the Series A
Preferred Stock will accumulate as of the Dividend Payment Date on which they
first become payable.
Except as set forth in the next paragraph, unless full cumulative
dividends on the Series A Preferred Stock have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof is
set apart for payment for all past dividend periods and the then current
dividend period, no dividends (other than in shares of common stock or in shares
of any series of preferred stock that we may issue ranking junior to the Series
A Preferred Stock as to dividends and upon liquidation) shall be declared or
paid or set aside for payment. Nor shall any other distribution be declared or
made upon shares of our common stock or preferred stock that we may issue
ranking junior to or on a parity with the Series A Preferred Stock as to
dividends or upon liquidation. In addition, any shares of our common stock or
preferred stock that we may issue ranking junior to or on a parity with the
Series A Preferred Stock as to dividends or upon liquidation shall not be
redeemed, purchased or otherwise acquired for any consideration (or any moneys
be paid to or made available for a sinking fund for the redemption of any such
shares) by us (except by conversion into or exchange for our other capital stock
that we may issue ranking junior to the Series A Preferred Stock as to dividends
and upon liquidation and except for transfers made pursuant to the provisions of
our charter relating to restrictions on ownership and transfers of our capital
stock).
When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the Series A Preferred Stock and the shares of
any other series of preferred stock that we may issue ranking on a parity as to
dividends with the Series A Preferred Stock, all dividends declared upon the
Series A Preferred Stock and any other series of preferred stock ranking on a
parity that we may issue as to dividends with the Series A Preferred Stock shall
be declared pro rata so that the amount of dividends declared per share of
Series A Preferred Stock and such other series of preferred stock that we may
issue shall in all cases bear to each other the same ratio that accrued
dividends per share on the Series A Preferred Stock and such other series of
preferred stock that we may issue (which shall not include any accrual in
respect of unpaid dividends for prior dividend periods if such preferred stock
does not have a cumulative dividend)
S-12
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Stock which may be in arrears.
Holders of shares of the Series A Preferred Stock shall not be entitled
to any dividend, whether payable in cash, property or stock, in excess of full
cumulative dividends on the Series A Preferred Stock as provided above. Any
dividend payment made on shares of the Series A Preferred Stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
such shares which remains payable.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding
up of our affairs, the holders of shares of Series A Preferred Stock are
entitled to be paid out of our assets that are legally available for
distribution to our stockholders a liquidation preference of $25.00 per share,
plus an amount equal to any accrued and unpaid dividends (whether or not
declared) to the date of payment, before any distribution of assets is made to
holders of our common stock or any series of our preferred stock that we may
issue that ranks junior to the Series A Preferred Stock as to liquidation
rights.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, our available assets are insufficient to pay the
amount of the liquidating distributions on all outstanding shares of Series A
Preferred Stock and the corresponding amounts payable on all shares of other
classes or series of our capital stock that we may issue ranking on a parity
with the Series A Preferred Stock in the distribution of assets, then the
holders of the Series A Preferred Stock and all other such classes or series of
capital stock shall share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be respectively entitled.
Holders of Series A Preferred Stock will be entitled to written notice
of any such liquidation. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series A Preferred
Stock will have no right or claim to any of our remaining assets. The
consolidation or merger of us with or into any other corporation, trust or
entity or of any other corporation with or into us, or the sale, lease or
conveyance of all or substantially all of our assets or business, shall not be
deemed to constitute a liquidation, dissolution or winding up of us.
REDEMPTION
The Series A Preferred Stock is not redeemable prior to April 5, 2009.
However, in order to ensure that we remain a qualified REIT for federal income
tax purposes, Series A Preferred Stock will be subject to the provisions of our
charter which limit the amount of Series A Preferred Stock that may be owned by
a stockholder. See "Description of Stock" in the accompanying prospectus.
On and after April 5, 2009, we may redeem, at our option upon not less
than 30 nor more than 60 days' written notice, shares of the Series A Preferred
Stock, in whole or in part, at any
S-13
time or from time to time, for cash at a redemption price of $25.00 per share,
plus all accrued and unpaid dividends thereon to and including the date fixed
for redemption (except as provided below), without interest. Holders of Series A
Preferred Stock to be redeemed shall surrender such Series A Preferred Stock at
the place designated in such notice and shall be entitled to the redemption
price and any accrued and unpaid dividends payable upon such redemption
following such surrender. If notice of redemption of any shares of Series A
Preferred Stock has been given and if the funds necessary for such redemption
have been set aside by us in trust for the benefit of the holders of any shares
of Series A Preferred Stock so called for redemption, then from and after the
redemption date dividends will cease to accrue on such shares of Series A
Preferred Stock, such shares of Series A Preferred Stock shall no longer be
deemed outstanding and all rights of the holders of such shares will terminate,
except the right to receive the redemption price. If less than all of the
outstanding Series A Preferred Stock is to be redeemed, the Series A Preferred
Stock to be redeemed shall be selected pro rata (as nearly as may be practicable
without creating fractional shares) or by any other equitable method determined
by us.
Unless full cumulative dividends on all shares of Series A Preferred
Stock shall have been or contemporaneously are declared and paid or declared and
a sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, no shares of Series A
Preferred Stock shall be redeemed unless all outstanding shares of Series A
Preferred Stock are simultaneously redeemed and we shall not purchase or
otherwise acquire directly or indirectly any shares of Series A Preferred Stock
(except by exchange for our capital stock ranking junior to the Series A
Preferred Stock as to dividends and upon liquidation); provided, however, that
the foregoing shall not prevent the purchase or acquisition by us of shares of
Series A Preferred Stock pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding shares of Series A Preferred Stock.
Notice of redemption will be mailed by us, postage prepaid, not less
than 30 nor more than 60 days prior to the redemption date, addressed to the
respective holders of record of the Series A Preferred Stock to be redeemed at
their respective addresses as they appear on our stock transfer records. No
failure to give such notice or any defect thereto or in the mailing thereof
shall affect the validity of the proceedings for the redemption of any shares of
Series A Preferred Stock except as to the holder to whom notice was defective or
not given. Each notice shall state:
o the redemption date;
o the redemption price;
o the number of shares of Series A Preferred Stock to be
redeemed;
o the place or places where the Series A Preferred Stock is to
be surrendered for payment of the redemption price; and
o that dividends on the shares to be redeemed will cease to
accrue on such redemption date.
S-14
If less than all of the Series A Preferred Stock held by any holder is to be
redeemed, the notice mailed to such holder shall also specify the number of
shares of Series A Preferred Stock held by such holder to be redeemed.
Immediately prior to any redemption of Series A Preferred Stock, we
shall pay, in cash, any accumulated and unpaid dividends through and including
the redemption date, unless a redemption date falls after a Dividend Record Date
and prior to the corresponding Dividend Payment Date, in which case each holder
of Series A Preferred Stock at the close of business on such Dividend Record
Date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding the redemption of such
shares before such Dividend Payment Date. Except as provided above, we will make
no payment or allowance for unpaid dividends, whether or not in arrears, on
Series A Preferred Stock which is redeemed.
The Series A Preferred Stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption. However, in order to ensure
that we remain a qualified REIT for federal income tax purposes, Series A
Preferred Stock owned by a stockholder in excess of the ownership limit provided
in our charter will be subject to the provisions of the charter.
VOTING RIGHTS
Holders of the Series A Preferred Stock do not have any voting rights,
except as set forth below.
Whenever dividends on any shares of Series A Preferred Stock shall be
in arrears for six or more quarterly periods (a Preferred Dividend Default), the
holders of such shares of Series A Preferred Stock (voting separately as a class
with all other series of preferred stock that we may issue ranking on a parity
with the Series A Preferred Stock as to dividends or upon liquidation (or Parity
Preferred) upon which like voting rights have been conferred and are
exercisable) will be entitled to vote for the election of a total of two
additional members of our board of directors (or Preferred Stock Directors), and
the number of directors on the board of directors shall increase by two, at a
special meeting called by the holders of record of at least 20% of the Series A
Preferred Stock or any other series of Parity Preferred so in arrears (unless
such request is received less than 90 days before the date fixed for the next
annual or special meeting of the stockholders) or at the next annual meeting of
stockholders, and at each subsequent annual meeting until all dividends
accumulated on such shares of Series A Preferred Stock for the past dividend
periods and the dividend for the then current dividend period shall have been
fully paid or declared and a sum sufficient for the payment thereof set aside
for payment.
If and when all accumulated dividends and the dividend for the then
current dividend period on the Series A Preferred Stock shall have been paid in
full or set aside for payment in full, the holders thereof shall be divested of
the foregoing voting rights (subject to revesting in the event of each and every
subsequent Preferred Dividend Default) and, if all accumulated dividends and the
dividend for the then current dividend period have been paid in full or set
aside for payment in full on all series of Parity Preferred upon which like
voting rights have been conferred and are exercisable, the term of office of
each Preferred Stock Director so elected shall terminate and the number of
directors on the board of directors shall decrease by two. Any
S-15
Preferred Stock Director may be removed at any time with or without cause by,
and shall not be removed otherwise than by the vote of, the holders of record of
a majority of the outstanding shares of the Series A Preferred Stock when they
have the voting rights described above (voting separately as a class with all
series of Parity Preferred that we may issue upon which like voting rights have
been conferred and are exercisable). So long as a Preferred Dividend Default
shall continue, any vacancy in the office of a Preferred Stock Director may be
filled by the written consent of the Preferred Stock Directors remaining in
office, or if none remains in office, by a vote of the holders of record of a
majority of the outstanding shares of Series A Preferred Stock when they have
the voting rights described above (voting separately as a class with all series
of Parity Preferred that we may issue upon which like voting rights have been
conferred and are exercisable). The Preferred Stock Directors shall each be
entitled to one vote per director on any matter.
So long as any shares of Series A Preferred Stock remain outstanding,
we will not, without the affirmative vote or consent of the holders of at least
two-thirds of the shares of the Series A Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class with all series of Parity Preferred that we may issue upon
which like voting rights have been conferred and are exercisable), (a) authorize
or create, or increase the authorized or issued amount of, any class or series
of capital stock ranking prior to the Series A Preferred Stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up or reclassify any of our authorized capital stock into such
shares, or create, authorize or issue any obligation or security convertible
into or evidencing the right to purchase any such shares; or (b) amend, alter or
repeal the provisions of our charter, whether by merger, consolidation or
otherwise (which we refer to as an Event), so as to materially and adversely
affect any right, preference, privilege or voting power of the Series A
Preferred Stock; provided, however, with respect to the occurrence of any Event
set forth in (b) above, so long as the Series A Preferred Stock remains
outstanding with the terms thereof materially unchanged, the occurrence of any
such Event shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting power of holders of the Series A Preferred
Stock and, provided further, that any increase in the amount of the authorized
preferred stock, including the Series A Preferred Stock, or the creation or
issuance of any additional Series A Preferred Stock or other series of preferred
stock that we may issue, or any increase in the amount of authorized shares of
such series, in each case ranking on a parity with or junior to the Series A
Preferred Stock that we may issue with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, shall not be
deemed to materially and adversely affect such rights, preferences, privileges
or voting powers.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
shall be effected, all outstanding shares of Series A Preferred Stock shall have
been redeemed or called for redemption upon proper notice and sufficient funds
shall have been deposited in trust to effect such redemption.
CONVERSION
The Series A Preferred Stock is not convertible into or exchangeable
for any other of our property or securities.
S-16
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series A
Preferred Stock, see "Description of Stock " in the accompanying prospectus.
TRANSFER AGENT
The transfer agent, registrar and dividend disbursing agent for the
Series A Preferred Stock will be Mellon Investor Services LLC.
S-17
FEDERAL INCOME TAX CONSEQUENCES
The following supplements the discussion contained in the accompanying
prospectus under the heading "Federal Income Tax Consequences," which discussion
(to the extent not inconsistent with the following) is incorporated in its
entirety in this prospectus supplement. The discussions contained under the
headings herein are intended to supplement, where applicable, the discussions
contained in the corresponding headings of the accompanying prospectus.
TAXATION OF HOLDERS OF SERIES A PREFERRED STOCK
DISTRIBUTIONS
Unless you are a tax-exempt entity, distributions that we make to you
will be taxable to you to the extent those distributions are treated as having
been made out of our current and accumulated earnings and profits, as computed
for federal income tax purposes. If our aggregate distributions for a taxable
year exceed our current and accumulated earnings and profits, such current and
accumulated earnings and profits will be allocated first to the distributions we
make with respect to the Series A Preferred Stock. We anticipate, therefore,
that distributions we make with respect to the Series A Preferred stock will be
taxable to you.
Although dividends paid by "C" corporations to a non-corporate
stockholder are generally eligible for taxation at the rate applicable to net
capital gain, dividends we pay, other than those designated as capital gain
dividends, as described under "Federal Income Tax Considerations - Taxation of
U.S. Stockholders" in the prospectus, or dividends attributable to dividends we
receive from a "C" corporation, such as our taxable REIT subsidiary, will not be
eligible for this treatment.
REDEMPTIONS
If we redeem all or a portion of the Series A Preferred Stock, under
Section 302 of the Code, such redemption will be treated as a dividend,
generally taxable at ordinary income tax rates (to the extent of our current and
accumulated earnings and profits), unless the redemption satisfies one or more
of the tests set forth in Section 302(b) of the Code that enable the redemption
to be treated as a sale or exchange of the redeemed Series A Preferred Stock. A
redemption will satisfy such tests if it: (i) is "substantially
disproportionate" with respect to the stockholder; (ii) results in a "complete
termination" of the stockholder's stock interest in us; or (iii) is "not
essentially equivalent to a dividend" with respect to the stockholder, all
within the meaning of Section 302(b) of the Code. In determining whether any of
these tests have been met, shares considered to be owned by the stockholder by
reason of certain constructive ownership rules set forth in the Code, as well as
shares actually owned, must generally be taken into account. Because the
determination as to whether any of the alternative tests of Section 302(b) of
the Code is satisfied with respect to any particular holder of the Series A
Preferred Stock will depend upon the facts and circumstances as of the time the
determination is made, prospective investors are advised to consult their tax
advisors to determine such tax treatment.
S-18
If a redemption of the Series A Preferred Stock is treated as a
distribution that is taxable as a dividend, the amount of the distribution would
be measured by the amount of cash and the fair market value of any property
received by the stockholders. The stockholder's adjusted tax basis in such
redeemed Series A Preferred Stock would, in that case, be transferred to the
holder's remaining stockholdings in us. If, however, the stockholder has no
remaining stockholdings in us, such basis may, under certain circumstances, be
transferred to a related person, or it may be lost entirely. Under proposed
regulations, the stockholder's adjusted tax basis in such redeemed Series A
Preferred Stock would be recognized as a loss by such stockholder upon the
occurrence of certain subsequent events.
S-19
UNDERWRITING
We and the underwriters for this offering named below have entered into
an underwriting agreement concerning the shares of Series A Preferred 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 Series A Preferred Stock set forth opposite its name below.
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------------------
Bear, Stearns & Co. 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 shares of Series A Preferred Stock being offered if any
shares are purchased, other than those shares covered by the over-allotment
option described below.
We have granted the underwriters an option to purchase up to __________
additional shares of Series A Preferred Stock to be sold in this offering at the
public offering price, less the underwriting discounts and commissions described
on the cover page of this prospectus supplement. The underwriters may exercise
this option solely to cover over-allotments, if any. This option may be
exercised, in whole or in part, at any time within the 30-day period after the
date of this prospectus supplement. To the extent the option is exercised, the
underwriters will be severally committed, subject to certain conditions, to
purchase the additional shares of Series A Preferred Stock in proportion to
their respective commitments as indicated 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 _______ shares of Series A Preferred Stock.
S-20
TOTAL
---------------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
-------------------------------------------------------
Underwriting discounts and
commissions payable by us............................ $ $ $
We estimate that the total expenses of this offering payable by us,
excluding underwriting discounts and commissions, will be approximately
$____________.
The underwriters propose to offer the Series A Preferred Stock directly
to the public initially at the public offering price set forth on the cover page
of this prospectus supplement and to selected dealers at such price less a
concession not to exceed $___ per share. The underwriters may allow, and such
selected dealers may reallow, a concession not to exceed $___ per share. The
shares of Series A Preferred Stock will be available for delivery, when, as and
if accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject any order for purchase of the shares in whole or in
part. After the commencement of this offering, the underwriters may change the
public offering price and other selling terms.
We have agreed not to sell or transfer any shares of Series A Preferred
Stock or to engage in certain hedging transactions with respect to the Series A
Preferred Stock for a period of 30 days after the date of this prospectus
supplement without first obtaining the written consent of the underwriters,
except in certain circumstances.
We have agreed in the underwriting agreement to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, and where such indemnification is
unavailable, to contribute to payments that the underwriters may be required to
make in respect of such liabilities.
The underwriters have advised us that they currently make a market in
the Series A Preferred Stock and intend to continue to make a market in the
Series A Preferred Stock. However, the underwriters are not obligated to make a
market in the Series A Preferred Stock and may discontinue market making at any
time without notice. No assurance can be given as to the liquidity of the
trading market for the Series A Preferred Stock.
In order to facilitate this offering of the Series A Preferred Stock,
the underwriters may engage in transactions that stabilize, maintain or
otherwise affect the market price of the Series A Preferred Stock in accordance
with Regulation M under the Securities Exchange Act of 1934, as amended.
The underwriters may over-allot the Series A Preferred Stock in
connection with this offering, creating a short position for their own account.
Short sales involve the sale by the underwriters of a greater number of shares
than they are committed to purchase in this offering.
S-21
A short position may involve either "covered" short sales or "naked" short
sales. Covered short sales are sales made in an amount not greater than the
underwriters' over-allotment option to purchase additional shares of Series A
Preferred Stock as described above. The underwriters may close out any covered
short position by either exercising their over-allotment option or purchasing
shares in the open market. In determining the source of shares to close the
covered short position, the underwriters will consider, among other things, the
price of shares available for purchase in the open market as compared to the
price at which they may purchase shares from us through the over- allotment
option. Naked short sales are sales in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the Series A Preferred Stock in the open market after pricing that could
adversely affect investors who purchase in this offering.
Accordingly, to cover a short sales position or to stabilize the market
price of the Series A Preferred Stock, the underwriters may bid for, and
purchase, shares of Series A Preferred Stock in the open market. These
transactions may be effected on the NYSE or otherwise. Additionally, the
representative, on behalf of the underwriters, may also reclaim selling
concessions allowed to an underwriter or dealer. Similar to other purchase
transactions, the underwriters' purchases to cover the syndicate short sales or
to stabilize the market price of the Series A Preferred Stock may have the
effect of raising or maintaining the market price of the Series A Preferred
Stock or preventing or mitigating a decline in the market price of the Series A
Preferred Stock. As a result, the price of the Series A Preferred Stock may be
higher than the price that might otherwise exist in the open market. No
representation is made as to the magnitude or effect of any such stabilization
or other activities. The underwriters are not required to engage in these
activities and, if commenced, may discontinue any of these activities at any
time.
From time to time, the underwriters and/or their affiliates have in the
past performed, and may in the future 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.
S-22
LEGAL MATTERS
In addition to the legal opinions referred to under "Legal Matters" in
the accompanying prospectus, the legality of the shares of our Series A
Preferred 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,
2003 have been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report, which is incorporated therein
by reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
S-23
PROSPECTUS
$750,000,000
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 25, 2003
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................................................................................................. 12
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................................................................. 33
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
$750,000,000. 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 investment securities,
including mortgage pass-through certificates, collateralized mortgage
obligations (or CMOs), agency callable debentures, 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 investment
securities and the cost of borrowings to finance our acquisition of investment
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.
1
We have financed our purchases of investment 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, 2003, all of the investment securities we owned were
"agency certificates." Agency certificates are investment securities where a
government agency or federally chartered corporation, such as Federal Home Loan
Mortgage Corporation (or FHLMC), Federal National Mortgage Association (or
FNMA), Government National Mortgage Association (or GNMA), or Federal Home Loan
Bank (or FHLB), 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 securities.
Adjustable-rate investment 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, 2003, approximately 65% of our investment securities were
adjustable-rate securities and approximately 35% were fixed-rate securities.
2
BORROWINGS
We borrow money primarily through repurchase agreements using our
investment 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, 2003, our debt-to-equity ratio was 9.5:1.
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 investment securities. Nevertheless, the interest rates on our
borrowings generally adjust more frequently than the interest rates on our
investment 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 are 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 INVESTMENT SECURITIES MAY ADVERSELY AFFECT OUR PROFITABILITY
We earn money based upon the spread between the interest payments we
earn on our investment 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 investment 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 investment securities for various
reasons discussed in this section.
o DIFFERENCES IN TIMING OF INTEREST RATE ADJUSTMENTS ON OUR INVESTMENT
SECURITIES AND OUR BORROWINGS MAY ADVERSELY AFFECT OUR PROFITABILITY
We rely primarily on short-term borrowings to acquire investment
securities with long-term maturities. Accordingly, if short-term interest rates
increase, this may adversely affect our profitability.
Most of the investment 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,
2003, approximately 65% of our investment 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 investment
securities. For example, on March 31, 2003, our adjustable-rate investment
securities had a weighted average term to next rate adjustment of 13 months,
while our borrowings had a weighted average term to next rate adjustment of 111
days. Accordingly, in a period of rising interest rates, we could experience a
decrease in net income or
4
a net loss because the interest rates on our borrowings adjust faster than the
interest rates on our adjustable-rate investment securities.
o INTEREST RATE CAPS ON OUR INVESTMENT SECURITIES MAY ADVERSELY AFFECT OUR
PROFITABILITY
Our adjustable-rate investment 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
investment 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 investment 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
investment 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, 2003,
approximately 35% of our investment 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, 2003, approximately 96% 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, 2003,
approximately 4% 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, 2003, approximately 27% of our mortgage-backed securities were CMOs and
approximately 73% 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 investment 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
investment 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
investment 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 investment 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 investment
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 investment 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 investment 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 investment 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 investment
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 investment 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 DIRECTORS, OFFICERS, AND EMPLOYEES HAVE OWNERSHIP INTERESTS AND
MANAGE ASSETS FOR OTHER CLIENTS THAT CREATE POTENTIAL CONFLICTS OF INTEREST
Some of our directors, officers, and employees have potential conflicts
of interest with us. The material potential conflicts are as follows:
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, 2003 managed,
assisted in managing or supervised approximately $13 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. FIDAC may also manage other funds in the
future. These officers will continue to perform services for FIDAC, the
institutional clients, the Floating Rate Fund, and other funds managed by FIDAC,
if applicable. Mr. Farrell, Ms. Denahan, Ms. Fagan, Ms. Stephens, and other of
our officers and employees are the shareholders 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, the institutional clients, the Floating Rate Fund, and other
funds managed by FIDAC, if applicable. Our officers allocate investments among
us, the institutional clients, the Floating Rate Fund, and other funds managed
by FIDAC, if applicable, 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.
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
10
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.
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.
RECENT TAX LEGISLATION COULD AFFECT THE VALUE OF OUR STOCK
On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief
and Reconciliation Act of 2003 (the "Act"), which, among other things, reduces
the rate at which individual stockholders are subject to tax on dividends paid
by regular C corporations to a maximum rate of 15%. Generally, REITs are tax
advantaged relative to C corporations because, unlike C corporations, REITs are
allowed a deduction for dividends paid, which, in most cases, allows a REIT to
avoid paying corporate level federal income tax on its earnings. The provisions
of the Act reducing the rate at which individual stockholders pay tax on
dividend income from C corporations may serve to mitigate this tax advantage and
may cause individuals to view an investment in a C corporation as more
attractive than an investment in a REIT. This may adversely affect the value of
our common stock.
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
11
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 9, 2003, 94,025,503 shares of our common stock were
outstanding. This prospectus may be used for the issuance of additional shares
of common stock or shares of preferred stock that are convertible into common
stock. If we issue a significant number of shares of common stock or convertible
preferred stock in a short period of time, there could be a dilution of the
existing common stock and a decrease in the market price of the common stock.
WE MAY CHANGE OUR POLICIES WITHOUT STOCKHOLDER APPROVAL
Our Board of Directors and management determine all of our policies,
including our investment, financing and distribution policies. Although they
have no current plans to do so, they may amend or revise these policies at any
time without a vote of our stockholders. Policy changes could adversely affect
our financial condition, results of operations, the market price of our common
stock or our ability to pay dividends or distributions.
USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, we
intend to use the net proceeds from the sale of the securities offered by this
prospectus and the related accompanying prospectus supplement for the purchase
of mortgage-backed securities. We then intend to increase our investment assets
by borrowing against these mortgage-backed securities and using the proceeds to
acquire additional mortgage-backed securities.
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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
For the For the For the For the For the
For the Quarter Year Ended Year Ended Year Ended Year Ended Year Ended
Ended March 31 December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------------------------------
Ratio of earnings to
fixed charges 2.15X 2.14X 1.55X 1.18X 1.26X 1.20X
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 9, 2003, we had 94,025,503 shares of common
stock outstanding, not including 482,334 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, 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
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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.
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;
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- 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;
- 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.
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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 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
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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 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.
17
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 I 2 Directors Expires 2006
Class II 2 Directors Expires 2004
Class III 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 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.
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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.
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
19
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.
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.
20
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 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
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(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 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
22
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.
"Qualified REIT real estate assets" means assets of the type described
in section 856(c)(5)(B) of the Code, and generally include (among other assets)
interests in mortgages on real property, and shares in other REITs. A "Taxable
REIT subsidiary" is a corporation that may earn income that would not be
qualifying income if earned directly by the REIT. A REIT may hold up to 100% of
the stock in a Taxable REIT subsidiary. 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.
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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 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
24
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 (i) the amount by which we fail the 75%
gross income test, or (ii) the amount by which 90% of our gross
income exceeds the amount our income qualifying under 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 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.
25
- 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 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,
26
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:
- 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.
27
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.
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
28
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
- 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.
29
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 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.
30
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
Securities 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 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.
31
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 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
32
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
Securities 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, 2002 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.
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:
33
- Our Annual Report on Form 10-K for the year ended December 31,
2002 as filed on March 26, 2003;
- Our Definitive Proxy Statement filed March 31, 2003;
- Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2003 as filed on May 13, 2003;
- Our Current Report on Form 8-K filed on April 4, 2003;
- Our Current Report on Form 8-K filed on April 29, 2003; 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., 1211
Avenue of the Americas, Suite 2902, New York, New York 10036, telephone number
(212) 696-0100.
34
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
PAGE
------
PROSPECTUS SUPPLEMENT
FORWARD-LOOKING INFORMATION.......................................................................................i
PROSPECTUS SUMMARY................................................................................................1
THE OFFERING......................................................................................................5
RISK FACTORS......................................................................................................8
USE OF PROCEEDS...................................................................................................9
RATIO OF EARNINGS TO FIXED CHARGES................................................................................9
SELECTED FINANCIAL DATA..........................................................................................10
DESCRIPTION OF THE SERIES A PREFERRED STOCK......................................................................11
FEDERAL INCOME TAX CONSEQUENCES..................................................................................18
UNDERWRITING.....................................................................................................20
LEGAL MATTERS....................................................................................................23
EXPERTS..........................................................................................................23
PROSPECTUS
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..................................................................................................12
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..................................................................33
_______________ SHARES
[ANNALY LOGO]
ANNALY MORTGAGE MANAGEMENT, INC.
7.875% SERIES A CUMULATIVE
REDEEMABLE PREFERRED STOCK
LIQUIDATION PREFERENCE
$25.00 PER SHARE
---------------------
PROSPECTUS SUPPLEMENT
---------------------
BEAR, STEARNS & CO. INC.
SOLE BOOK-RUNNING MANAGER
_____________, 2004