| ANNALY MORTGAGE MANAGEMENT INC ITEM 1A RISK FACTORS 18 ITEM 1A 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 Form 10-K If any of the risks discussed in this Form 10-K 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 stock could decline significantly and you may lose all or part of your investment |
| Risks Related to Our Business 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 US dollars |
| - Treasury Rate |
| A monthly or weekly average yield of benchmark US Treasury securities, as published by the Federal Reserve Board |
| The weekly average of secondary market interest rates on six-month negotiable certificates of deposit, as published by the Federal Reserve Board |
| On December 31, 2005, approximately 61prca 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 December 31, 2005, our adjustable-rate investment securities had a weighted average term to next rate adjustment of 22 months, while our borrowings had a weighted average term to next rate adjustment of 79 days |
| Accordingly, in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate 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 an 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 experience 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 |
| 18 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 |
| This would adversely affect our profitability |
| On December 31, 2005, approximately 39prca 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 all or a part of the remaining unamortized portion of the premium that was prepaid at the time of the prepayment |
| This adversely affects our profitability |
| 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 the discounted securities are prepaid faster than expected |
| We also can acquire mortgage-backed securities that are less affected by prepayments |
| 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 imposes restrictions on our purchase of CMOs |
| On December 31, 2005, approximately 6prca of our mortgage-backed securities were CMOs and approximately 55prca 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 |
| Nevertheless, this leverage, which is fundamental to our investment strategy, also creates significant risks |
| 19 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 |
| 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 and our failure to qualify as a REIT will have adverse tax consequences |
| 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 |
| 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 |
| 20 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 |
| Our hedging strategies may not be successful in mitigating the risks associated with interest rates |
| 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 |
| We have used interest rate swaps to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely |
| We cannot assure you that our use of derivatives will offset the risks related to changes in interest rates |
| It is likely that there will be periods in the future during which we will incur losses on our derivative financial instruments that will not be fully offset by gains on our portfolio |
| The derivative financial instruments we select may not have the effect of reducing our interest rate risk |
| In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies |
| Poorly designed strategies or improperly executed transactions could significantly increase our risk and lead to material losses |
| In addition, hedging strategies involve transaction and other costs |
| Our hedging strategy and the derivatives that we use may not adequately offset the risk of interest rate volatility or that our hedging transactions may not result in losses |
| 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 and agency debentures which, although not rated, carry an implied "e AAA "e rating |
| Agency certificates are mortgage pass-through certificates where Freddie Mac, Fannie Mae or Ginnie Mae guarantees payments of principal or interest on the certificates |
| Agency debentures are debt instruments issued by Freddie Mac, Fannie Mae, or the FHLB Even though we have only acquired "e AAA "e securities so far, pursuant to our capital investment policy, we have the ability to acquire securities of lower credit quality |
| Under our policy: - 75prca of our investments must have a "e AA "e 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 25prca of our investments must have a "e BBB "e 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 "e BBB "e or higher are commonly referred to as "e investment grade "e securities; and - we seek to have a minimum weighted average rating for our portfolio of at least "e A "e by S&P 21 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 enables 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, our Chairman of the board of directors, Chief Executive Officer and President, Wellington J Denahan-Norris, our Vice Chairman, Chief Operating Officer and Chief Investment Officer, and Kathryn F Fagan, our Chief Financial Officer and Treasurer |
| The loss of any of their services could have an adverse effect on our operations |
| Although we have employment agreements with each of them, we cannot assure you they will remain employed with us |
| 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 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 75prca of our gross income must come from real estate sources and 95prca 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 90prca of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain) |
| 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 |
| A REIT that fails the quarterly asset tests for one or more quarters will not lose its REIT status as a result of such failure if either (i) the failure is regarded as a de minimis failure under standards set out in the Internal Revenue Code, or (ii) the failure is greater than a de minimis failure but is attributable to reasonable cause and 22 not willful neglect |
| In the case of a greater than de minimis failure, however, the REIT must pay a tax and must remedy the failure within 6 months of the close of the quarter in which the failure was identified |
| In addition, the Internal Revenue Code provides relief for failures of other tests imposed as a condition of REIT qualification, as long as the failures are attributable to reasonable cause and not willful neglect |
| A REIT would be required to pay a penalty of dlra50cmam000, however, in the case of each failure |
| o We have certain distribution requirements As a REIT, we must distribute at least 90prca of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain) |
| 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 90prca 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 |
| o Limits on ownership of our common stock could have adverse consequences to you and could limit your opportunity to receive a premium on our stock To maintain our qualification as a REIT for federal income tax purposes, not more than 50prca in value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal tax laws to include certain entities) |
| Primarily to facilitate maintenance of our qualification as a REIT for federal income tax purposes, our charter will prohibit ownership, directly or by the attribution provisions of the federal tax laws, by any person of more than 9dtta8prca of the lesser of the number or value of the issued and outstanding shares of our common stock and will prohibit ownership, directly or by the attribution provisions of the federal tax laws, by any person of more than 9dtta8prca of the lesser of the number or value of the issued and outstanding shares of any class or series of our preferred stock |
| Our board of directors, in its sole and absolute discretion, may waive or modify the ownership limit with respect to one or more persons who would not be treated as "e individuals "e for purposes of the federal tax laws if it is satisfied, based upon information required to be provided by the party seeking the waiver and upon an opinion of counsel satisfactory to the board of directors, that ownership in excess of this limit will not otherwise jeopardize our status as a REIT for federal income tax purposes |
| The ownership limit may have the effect of delaying, deferring or preventing a change in control and, therefore, could adversely affect our shareholders &apos ability to realize a premium over the then-prevailing market price for our common stock in connection with a change in control |
| 23 o A REIT cannot invest more than 20prca of its total assets in the stock or securities of one or more taxable REIT subsidiaries; therefore, FIDAC cannot constitute more than 20prca of our total assets A taxable REIT subsidiary is a corporation, other than a REIT or a qualified REIT subsidiary, in which a REIT owns stock and which elects taxable REIT subsidiary status |
| The term also includes a corporate subsidiary in which the taxable REIT subsidiary owns more than a 35prca interest |
| A REIT may own up to 100prca of the stock of one or more taxable REIT subsidiaries |
| A taxable REIT subsidiary may earn income that would not be qualifying income if earned directly by the parent REIT Overall, at the close of any calendar quarter, no more than 20prca of the value of a REITapstas assets may consist of stock or securities of one or more taxable REIT subsidiaries |
| The stock and securities of FIDAC, our only taxable REIT subsidiary, are expected to represent less than 20prca of the value of our total assets |
| Furthermore, we intend to monitor the value of our investments in the stock and securities of FIDAC (and any other taxable REIT subsidiary in which we may invest) to ensure compliance with the above-described 20prca limitation |
| We cannot assure you, however, that we will always be able to comply with the 20prca limitation so as to maintain REIT status |
| o Taxable REIT subsidiaries are subject to tax at the regular corporate rates, are not required to distribute dividends, and the amount of dividends a taxable REIT subsidiary can pay to its parent REIT may be limited by REIT gross income tests A taxable REIT subsidiary must pay income tax at regular corporate rates on any income that it earns |
| FIDAC will pay corporate income tax on its taxable income, and its after-tax net income will be available for distribution to us |
| Such income, however, is not required to be distributed |
| Moreover, the annual gross income tests that must be satisfied to ensure REIT qualification may limit the amount of dividends that we can receive from FIDAC and still maintain our REIT status |
| Generally, not more than 25prca of our gross income can be derived from non-real estate related sources, such as dividends from a taxable REIT subsidiary |
| If, for any taxable year, the dividends we received from FIDAC, when added to our other items of non-real estate related income, represented more than 25prca of our total gross income for the year, we could be denied REIT status, unless we were able to demonstrate, among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect |
| The limitations imposed by the REIT gross income tests may impede our ability to distribute assets from FIDAC to us in the form of dividends |
| Certain asset transfers may, therefore, have to be structured as purchase and sale transactions upon which FIDAC recognizes taxable gain |
| o If interest accrues on indebtedness owed by a taxable REIT subsidiary to its parent REIT at a rate in excess of a commercially reasonable rate, or if transactions between a REIT and a taxable REIT subsidiary are entered into on other than armapstas-length terms, the REIT may be subject to a penalty tax If interest accrues on an indebtedness owed by a taxable REIT subsidiary to its parent REIT at a rate in excess of a commercially reasonable rate, the REIT is subject to tax at a rate of 100prca on the excess of (i) interest payments made by a taxable REIT subsidiary to its parent REIT over (ii) the amount of interest that would have been payable had interest accrued on the indebtedness at a commercially reasonable rate |
| A tax at a rate of 100prca is also imposed on any transaction between a taxable REIT subsidiary and its parent REIT to the extent the transaction gives rise to deductions to the taxable REIT subsidiary that are in excess of the deductions that would have been allowable had the transaction been entered into on armapstas-length terms |
| We will scrutinize all of our transactions with FIDAC in an effort to ensure that we do not become subject to these taxes |
| We may not be able to avoid application of these taxes |
| Risks of Ownership of Our Common Stock o Issuances of large amounts of our stock could cause the market price of our common stock to decline 24 As of March 7, 2006, 123cmam701cmam656 shares of our common stock were outstanding |
| If we issue a significant number of shares of common stock or securities convertible into common 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 |
| o 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 |
| 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 |
| o Our governing documents and Maryland law impose limitations on the acquisition of our common stock and changes in control that could make it more difficult for a third party to acquire us Maryland Business Combination Act --------------------------------- The Maryland General Corporation Law establishes special requirements for "e business combinations "e between a Maryland corporation and "e interested stockholders "e unless exemptions are applicable |
| An interested stockholder is any person who beneficially owns 10prca 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 partyapstas 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 super majority stockholder vote for such transactions after the end of the five-year period |
| This means that the transaction must be approved by at least: o 80prca of the votes entitled to be cast by holders of outstanding voting shares; and o 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 |
| If, however, we amend our articles of incorporation 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 &apos best interests |
| Maryland Control Share Acquisition Act -------------------------------------- Maryland law provides that "e control shares "e of a Maryland corporation acquired in a "e control share acquisition "e have no voting rights except to the extent approved by a vote of the stockholders |
| Two-thirds of the shares eligible to vote must vote in favor of granting the "e control shares "e voting rights |
| "e Control shares "e are shares of stock that, taken together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: o One-tenth or more but less than one third of all voting power; o One-third or more but less than a majority of all voting power; or o 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 "e control share acquisition "e means the acquisition of control shares, subject to certain exceptions |
| 25 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 &apos 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: o the last control share acquisition; or o 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 &apos 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, there under, 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 &apos 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 &apos best interests |
| Regulatory Risks o Loss of Investment Company Act exemption would adversely affect us We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act |
| If we fail to qualify for this exemption, our ability to use leverage would be substantially reduced, and we would be unable to conduct our business as described in this Form 10-K 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 55prca 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 55prca requirement |
| Our ownership of these mortgage-backed securities, therefore, is limited by the provisions of the Investment Company Act |
| In addition, in meeting the 55prca 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 |
| o Compliance with proposed and recently enacted changes in securities laws and regulations increase our costs The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by the SEC and the New York Stock Exchange have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices |
| We believe that these rules and regulations will make it more costly for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| These rules and regulations could also make it more difficult for us to attract and retain qualified members of management and our board of directors, particularly to serve on our audit committee |
| 26 Issuances of shares to FIDAC shareholders As a result of our acquisition of FIDAC, FIDAC shareholders may receive additional shares of our common stock as an earn-out in 2007 worth up to dlra49cmam500cmam000 if FIDAC meets specific performance goals under the merger agreement |
| We cannot calculate how many shares we will issue under the earn-out provisions since that will vary depending upon whether and the extent to which FIDAC achieves specific performance goals |
| Even if FIDAC achieves specific performance goals for a fiscal year, the number of additional shares to be issued to the FIDAC shareholders will vary depending on our average share price for the first 20 trading days of the following fiscal year |
| Issuance of these shares may be dilutive to our shareholders |