-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sg5QuAsL9EiSkugIdDl8iy8zrBrUgUpyRtcuEkJeoO5oj7O612kfKA8dBKdfknhe WuKP1IO6OQpUcniGT0pv4Q== 0000944209-98-001038.txt : 19980518 0000944209-98-001038.hdr.sgml : 19980518 ACCESSION NUMBER: 0000944209-98-001038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANWORTH MORTGAGE ASSET CORP CENTRAL INDEX KEY: 0001047884 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 522059785 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13709 FILM NUMBER: 98623802 BUSINESS ADDRESS: STREET 1: 1299 OCEAN AVENUE STREET 2: SUITE 210 CITY: SANTA MONICA STATE: CA ZIP: 90401 BUSINESS PHONE: 3103931428 MAIL ADDRESS: STREET 1: 1299 OCEAN AVENUE STREET 2: SUITE 210 CITY: SANTA MONICA STATE: CA ZIP: 90401 10-Q 1 FORM 10-Q ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ---------------------- (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO ______________ Commission File No. 333-38641 ______________________ ANWORTH MORTGAGE ASSET CORPORATION (Exact name of Registrant as specified in its charter) MARYLAND 52-2059785 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1299 Ocean Avenue, #200 Santa Monica, CA 90401 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 394-0115 ______________________ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of March 31, 1998, 2,200,100 shares of Common Stock, $0.01 par value per share were issued and outstanding. ______________________ ================================================================================ INDEX -----
Part I. Financial Information Page - ------- --------------------- ---- Item 1. Financial Statements Balance sheet............................................................................ 3 Statement of Operations (unaudited) for the period March 17, 1998 (Commencement of Operations) to March 31, 1998.......................................... 4 Statement of Cash Flows (unaudited) for the period March 17, 1998 (Commencement of Operations) to March 31, 1998.......................................... 5 Notes to Financial Statements............................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 12 Part II. Other Information - -------- ----------------- Item 1. Legal Proceedings........................................................................ 15 Item 2. Changes in Securities.................................................................... 15 Item 3. Defaults upon Senior Securities.......................................................... 15 Item 4. Submission of Matters to a Vote of Security Holders...................................... 15 Item 5. Other Information........................................................................ 15 Item 6. Exhibits and Reports on Form 8-K......................................................... 15 Signatures.......................................................................................... 16 - ----------
2 PART 1. FINANCIAL INFORMATION Item 1. Financial Statements ANWORTH MORTGAGE ASSET CORPORATION Balance Sheet
March 31, 1998 Assets Cash and cash equivalents $12,591,200 Mortgage backed securities 112,533,613 Accrued interest receivable 695,525 Deferred organization expenses 11,889 --------------- $125,832,226 =============== Liabilities and Stockholders Equity Liabilities Reverse repurchase agreements $83,506,641 Payable for purchase of ARM securities 23,858,863 Accrued interest payable 41,679 Accrued expenses and other 27,061 Estimated offering expenses payable 466,500 --------------- 107,900,744 --------------- STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share; authorized 20,000,000 shares; no shares issued and outstanding - Common stock; par value $.01 per share; 22,001 authorized 100,000,000 shares; 2,200,100 shares issued and outstanding Additional paid in capital 17,892,999 Retained Earnings 16,482 --------------- 17,931,482 --------------- $125,832,226 ===============
See notes to financial statements. 3 ANWORTH MORTGAGE ASSET CORPORATION Statement of Operations
Period from March 17, 1998 (Commencement of of Operations) to March 31, 1998 Interest income from ARMS, net of amortization of premium $35,171 Interest income from short-term investments $38,229 --------------- $73,400 --------------- Expenses: Interest expense $41,679 Management fee $6,928 Other expense $8,311 --------------- $56,918 --------------- Net Income $16,482 ============== Earnings per share $0.01 ============== Average number of shares outstanding 2,200,100 ==============
See notes to financial statements. 4 ANWORTH MORTGAGE ASSET CORPORATION Statement of Cash Flows
Period from March 17, 1998 (Commencement of of Operations) to March 31, 1998 Operating Activities: Net income $16,482 Adjustments to reconcile net income to net cash provided by operating activites: Amortization 5,349 Decrease (increase) in accrued interest receivable (695,525) Decrease (increase) in deferred organization expense (11,889) Increase (decrease) in accrued interest payable 41,679 Increase (decrease) in accrued expenses and other 27,061 and accrued expenses - --------------- Net cash provided by operating activities (616,842) Investing Activities: Purchases of available for sale securities (88,680,099) --------------- Net cash (used in) for investing activities (88,680,099) Financing Activities: Net borrowings from reverse repurchase agreements 83,506,641 Proceeds from common stock issued, net 18,380,500 --------------- Net cash provided by financing activities 101,887,141 --------------- Net increase (decrease) in cash and cash equivalents 12,590,200 Cash and cash equivalents at beginning of period 1,000 --------------- Cash and cash equivalents at end of period $12,591,200 ===============
See notes to financial statements. 5 ANWORTH MORTGAGE ASSET CORPORATION NOTES TO FINANCIAL STATEMENTS March 31, 1998 NOTE 1. Organization and Significant Accounting Policies Anworth Mortgage Asset Corporation (the "Company") was incorporated in Maryland on October 20, 1997. The Company commenced its operations of purchasing and managing an investment portfolio of primarily adjustable-rate Mortgage-Backed Securities on March 17, 1998, upon completion of its initial public offering of the Company's common stock. A summary of the company's significant accounting policies follows: Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The condensed Balance Sheet as of March 31, 1998 and the condensed Statements of Operations and Cash Flows for the period ended March 31, 1998 and related notes are unaudited. The operating results for the fifteen-day period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1998. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of twelve months or less. 6 The carrying amount of cash equivalents approximates their fair market value. Mortgage Backed Securities The Company's mortgage backed securities (MBS) are adjustable-rate mortgage ("ARM") securities and fixed-rate mortgage backed securities. Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"), requires the Company to classify its investments as either trading investments, available-for-sale investments or held-to-maturity investments. It is the Company's policy to classify each of its MBS securities as available-for-sale and then to monitor the security's performance over time before making a final determination as to the permanent classification. At this time all of the Company's MBS securities are classified as available-for-sale. All assets that are classified as available-for-sale are recorded at fair market value. Interest income is accrued based on the outstanding principal amount of the MBS securities and their contractual terms. Premiums associated with the purchase of MBS securities are amortized into interest income over the estimated lives of the asset using the effective yield method. MBS transactions are recorded on the date the securities are purchased or sold. Credit Risk At March 31, 1998 the Company has limited its exposure to credit losses on its portfolio of ARM securities by purchasing primarily securities from Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA"). The payment of principal and interest on the FHLMC and FNMA ARM securities are guaranteed by those respective agencies. Only one security in the portfolio, representing $714,396 in market value, was not issued by one of these agencies and it is rated "AAA". At March 31, 1998, all of the Company's ARM securities have an implied "AAA" rating. 7 Deferred Organization Expenses With the completion of the public offering of common stock, the Company became liable for estimated organization expenses in the amount of $11,889, which will be charged against current income during fiscal 1998. Income Taxes The Company intends to elect to be taxed as a Real Estate Investment Trust and to comply with the provisions of the Internal Revenue Code with respect thereto. Accordingly, the Company will not be subject to Federal income tax to the extent that its distributions to stockholders satisfy the REIT requirements. Earnings per Share Earnings per share is computed by dividing net income by the average number of common shares and common share equivalents (e.g., stock options), if dilutive, outstanding during the period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 8 NOTE 2. Mortgage Backed Securities The following table pertains to the Company's MBS classified as available-for- sale as of March 31, 1998, which are carried at their fair value:
Federal Federal Home Loan National Other Total Mortgage Mortgage Mortgage Mortgage Corporation Association Assets Assets - ------------------------------------------------------------------------------ Amortized Cost 9,926 101,893 714 112,533 ($000's) Unrealized gains 0 0 0 0 (losses) --------------------------------------------------------- Estimated fair value 9,926 101,893 714 112,533 ---------------------------------------------------------
The Company's MBS were held for a brief period during which market levels remained stable. NOTE 3. Reverse Repurchase Agreements The Company has entered into reverse repurchase agreements to finance most of its MBS assets. The reverse repurchase agreements are short-term borrowings that are secured by the market value of the Company's MBS assets and bear interest rates that have historically moved in close relationship to LIBOR. At March 31, 1998, the repurchase agreements had the following remaining maturities: - ----------------------------------------------------------------------- Within 59 days $ 0 60 to 89 days 31,698,000 90 to 119 days 11,264,000 Over 120 days 40,544,641 ----------- $83,506,641 -----------
NOTE 4. Initial Public Offering On March 12, 1998 the Company completed its initial public offering of common stock, $0.01 par value. The Company issued 2,200,000 shares of common stock at a price of $9 per share and received net proceeds of $18,414,000, net of underwriting discount of $0.63 per share. Offering costs in connection with the public offering, including the underwriting discount and other expenses, which are estimated to be $500,000, have been charged against the proceeds of the offering. Prior to March 17, 1998, the Company had no operations other than activities relating to its organization, registration under the Securities Act of 1933 and the issuance of 100 shares of its common stock to its initial shareholder. 9 The company granted the underwriters of the initial public offering of the Company's common stock a 30-day option to purchase additional shares of common stock solely to cover over-allotments, if any at the public offering price of $9 per share. On April 8,1998, the underwriters informed the Company that they had decided to purchase an additional 127,900 shares under the terms of this option. As a result, the Company received additional net proceeds of $1,070,523, net of the underwriting discount of $0.63 per share, on April 14, 1998 which is not reflected in the accompanying financial statements. NOTE 5. Transactions with Affiliates The Company entered into a Management Agreement (the "Agreement") with Anworth Mortgage Advisory Corporation (the "Manager"), effective March 12, 1998. Under the terms of the Agreement, the Manager, subject to the supervision of the Company's Board of Directors, is responsible for the management of the day-to- day operations of the Company and provides all personnel and office space. The Company pays the Manager an annual base management fee equal to 1% of the first $300 million of Average Net Invested Assets (as defined in the Agreement), plus 0.8% of the portion above $300 million (the "Base Management Compensation"). In addition to the Base Management Compensation, the Manager shall receive as incentive compensation for each fiscal quarter an amount equal to 20% of the Net Income of the Company, before incentive compensation, for such fiscal quarter in excess of the amount that would produce an annualized Return on Equity (calculated by multiplying the Return on Equity for such fiscal quarter by four) equal to the Ten-Year U.S. Treasury Rate for such fiscal quarter plus 1% (the "Incentive Management Compensation"). For the period ended March 31, 1998, the Company paid the Manager $6,927 in base management fee in accordance with this Management Agreement. No amount was paid for incentive management fee. 10 The Company has adopted a Stock Option and Awards Plan which authorizes the grant of options to purchase an aggregate of up to 300,000 of the outstanding shares of the company's Common Stock. The plan authorizes the Board of Directors, or a committee of the Board of Directors, to grant Incentive Stock Options ("ISOs") as defined under section 422 of the Internal Revenue Code of 1986, as amended, options not so qualified ("NQSOs"), Dividend Equivalent Rights ("DERs") and Stock Appreciation Rights ("SARs"). The exercise price for any option granted under the Stock Option Plan may not be less than 100% of the fair market value of the shares of Common Stock at the time the option is granted. As of March 31, 1998, the Company had granted 148,000 options at an exercise price of $9 per share and 136,000 DERs. Options granted to officers become exercisable at a rate of 33.3% each year following their date of grant. Options granted to directors become exercisable six months after their date of grant. These options will expire on March 11, 2008. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The Company commenced operations upon completion of its initial public offering on March 17, 1998. As of March 31, 1998, the Company had purchased mortgage backed securities in the amount of $88,617,961 and entered into a firm commitment to purchase an additional $23,858,863 of adjustable rate mortgage securities for April 23 delivery. The securities purchased were placed as collateral in reverse repurchase agreements according to the Company's investment strategy. In addition, the Company purchased $719,435 of a fixed rate security. The Company had invested the remaining net offering proceeds in short term securities pending further investment actions. As of April 24, 1998 the Company had purchased a total of $181,812,064 of adjustable rate mortgage-backed securities. As of that time the Company had taken delivery of all of the securities purchased. $180,601,787 of these securities were placed as collateral in reverse repurchase agreements according to the Company's investment strategy. The investment strategy currently being pursued by the Company is emphasizing the accumulation of mortgage-backed securities that are guaranteed by agencies of the U.S. government. As of April 24, 1998 the Company had acquired $132,683,913 of FNMA issued adjustable rate mortgage backed securities, representing 73% of total adjustable rate mortgage-backed securities purchases. The remaining $49,128,151 of total adjustable rate mortgage-backed securities purchases were in FHLMC issued securities. The Company is pursuing this strategy because it believes that the yields currently available on non-agency issued securities are not sufficient to compensate for the additional credit and prepayment risks. FNMA and FHLMC issued securities, because they are guaranteed by an agency of the U.S. government, are of higher credit quality, and can be financed at lower cost than privately issued securities, which is expected to result in higher overall interest spreads than would be available from privately issued adjustable rate mortgage-backed securities. 12 Of the purchases made to date, $144,606,026, or 80% of purchases, are indexed to the One Year Constant Maturity Treasury Bill Rate and have coupons that adjust annually. Generally, the remaining investment purchases have coupons that adjust semi-annually and are indexed to the six month LIBOR (London Interbank Offered Rate), the 6 month Certificate of Deposit rate and the Cost of Funds Index. The Company believes that in the current market environment the One Year Constant Maturity Treasury sector of the ARM market offers the best risk reward profile. As of April 24,1998, the Company's adjustable rate mortgage investment portfolio consisting of all investments purchased had an estimated current yield of 7.27%. The Company emphasized investments in seasoned adjustable rate mortgage-backed securities that offer an improved prepayment profile versus newly originated securities. The flatness of the yield curve over the past several months has created an environment of increased ARM prepayments as homeowners take advantage of the low fixed rate mortgage rates to refinance their adjustable rate mortgages and fix their payments for the long run. In this environment the Company does not intend to pay high premiums for ARM securities, unless it believes that the profile of the underlying borrowers is such that will produce relatively stable prepayments. The Company will commit to purchasing ARMs only on a case by case basis and only if the security has a risk-reward profile that fits the Company's investment objective. As of April 24, 1998 the Company was able to acquire assets that it believes will produce attractive long term rates of return. Results of Operations For the fifteen days of operations ending March 31, 1998, the Company's net income for the quarter was $16,482, or $0.01 per share based on 2,200,100 average shares outstanding. Net income for the quarter was generally comprised of the interest income earned on ARM assets and on the remaining net offering proceeds less reverse repurchase agreement expense and a pro rata portion of the monthly management fee based on being in operation for a partial month. Since the company just recently commenced 13 operations, it has no prior period results for purposes of comparison. Liquidity and Capital Resources The Company's primary source of funds for the quarter ended March 31, 1998 consisted of the net proceeds from its initial public offering and borrowings using reverse repurchase agreements. In the future, the Company expects that its primary sources of funds will consist of monthly payments of principal and interest on its mortgage investment portfolio and from borrowings under reverse repurchase agreement transactions. The Company currently believes that the availability of these funds will be sufficient for the acquisitions of additional adjustable rate mortgage assets, repayments of short-term borrowings and the payment of such dividends as required for the Company's continued qualification as a real estate investment trust. As of April 24, 1998 the Company had invested the net offering proceeds in adjustable rate mortgage-backed securities and had incurred borrowings of $173,949,840 to finance existing and additional purchases of adjustable rate mortgage-backed securities. The borrowings incurred to date have been in the form of reverse repurchase agreements with a weighted average cost of 5.61% and a weighted average term to maturity of approximately five months. The Company expects to continue to borrow funds in the form of reverse repurchase agreements to finance its additional mortgage asset purchases. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- None. Item 2. Changes in Securities - ------- --------------------- None. Item 3. Defaults upon Senior Securities - ------- ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- None. Item 5. Other Information - ------- ----------------- None. Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) Exhibits. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K. None. 15 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Registrant: ANWORTH MORTGAGE ASSET CORPORATION By: /s/ Lloyd McAdams ----------------- Lloyd McAdams, Chairman of the Board and President By: /s/ Pamela J. Watson -------------------- Pamela J. Watson, Chief Financial Officer, Secretary and Treasurer Date: May 10, 1998 ------------ 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1998 MAR-17-1998 MAR-31-1998 12,591,200 112,533,613 695,525 0 0 13,286,725 0 0 125,832,226 107,900,744 0 0 0 22,001 17,909,481 125,832,226 0 73,400 0 0 15,239 0 41,679 16,482 0 16,482 0 0 0 16,482 0.01 0.01
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