As filed with the Securities and Exchange Commission on October 16, 2001 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K/A (Mark One) [X]ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2000; or [_]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 001-13709 ----------------- 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, California 90401 (Address of principal executive offices) Registrant's telephone number, including area code: (310) 394-0115 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered ------------------- ------------------------------------ Common stock, par value $0.01 per share American Stock Exchange ----------------- Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes [X] No [_] Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. [_] At March 21, 2001 the aggregate market value of the voting stock held by non-affiliates of the Registrant was $10,511,745, based on the closing price of the common stock on the American Stock Exchange. As of March 21, 2001, 2,359,664 shares of Common Stock, $0.01 par value per share were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement which the Company intends to issue within 120 days of the end of the fiscal year, are incorporated by reference into Part III. The Registrant amends its Form 10-K for the period ended December 31, 2000 solely to revise data in Item 6 (Selected Financial Data) and Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations). Other than the aforementioned changes, all other information included in the initial filing is unchanged. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are derived from the audited financial statements of the Company for the years ended December 31, 2000, December 31, 1999 and for the period from commencement of operations on March 17, 1998 to December 31, 1998. The selected financial data should be read in conjunction with the more detailed information contained in the Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. For the years ended December 31, 2000, December 31, 1999 and the period from March 17, 1998 (commencement of operations) through December 31, 1998 Dollars in thousands (except per share data) 2000 1999 1998 ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA Days in period...................................................... 366 365 290 Interest and dividend income........................................ $ 10,314 $ 9,501 $ 8,570 Interest expense.................................................... 8,674 7,892 7,378 Net interest income................................................. 1,640 1,609 1,192 General and administrative expenses (G&A expenses).................. 379 400 307 Net income.......................................................... $ 1,261 $ 1,209 $ 885 Basic net income per average share.................................. $ 0.54 $ 0.53 $ 0.38 Diluted net income per average share................................ $ 0.54 $ 0.53 $ 0.38 Dividends declared per average share................................ $ 0.40 $ 0.53 $ 0.37 Weighted average common shares outstanding.......................... 2,330,987 2,289,790 2,315,651 BALANCE SHEET DATA AT DECEMBER 31, Mortgage backed securities, net..................................... $ 134,889 $ 161,488 $ 184,245 Total assets........................................................ 141,834 167,144 199,458 Repurchase agreements............................................... 121,891 147,690 170,033 Total liabilities................................................... 123,633 150,612 182,216 Stockholders' equity................................................ 18,201 16,532 17,242 Number of common shares outstanding................................. 2,350,016 2,306,669 2,328,000 OTHER DATA Average earning assets.............................................. $ 152,289 $ 163,167 $ 181,445 Average borrowings.................................................. 135,631 149,372 165,496 Average equity(1)................................................... 19,154 18,931 19,060 Yield on interest earning assets for the years ended December 31, 2000 and December 31, 1999 and the period ended December 31, 1998................................................................ 6.77% 5.82% 5.94% Cost of funds on interest bearing liabilities for the years ended December 31, 2000 and December 31, 1999 and the period ended December 31, 1998................................................... 6.40% 5.28% 5.61% ANNUALIZED FINANCIAL RATIOS(1)(2) Net interest margin (net interest income/average assets)............ 1.08% 0.99% 0.83% G&A expenses as a percentage of average assets...................... 0.25% 0.24% 0.21% G&A expenses as a percentage of average equity...................... 1.98% 2.11% 2.02% Return on average assets............................................ 0.83% 0.74% 0.61% Return on average equity............................................ 6.58% 6.38% 5.84% -------- (1)Average equity excludes fair value adjustment for ARM securities (2)Each ratio for 1998 has been computed by annualizing the results for the 290-day period ended December 31, 1998 1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained in the following discussion are "forward-looking statements" within the meaning of applicable federal securities laws. Forward-looking statements which are based on various assumptions (some of which are beyond the Company's control) may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "intend," "should," "expect," "anticipate," "estimate" or "continue" or the negatives thereof or other comparable terminology. Forward-looking statements included herein regarding the actual results, performance and achievements of the Company are dependent on a number of factors. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of certain 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 such financing. The Company does not undertake, and specifically disclaims 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. GENERAL The Company is a REIT formed in October 1997 to invest in mortgage assets, including mortgage pass-through certificates, collateralized mortgage obligations, mortgage loans and other securities representing interests in, or obligations backed by, pools of mortgage loans which can be readily financed and short-term investments. The Company's principal business objective is to generate net income for distribution to stockholders from the spread between the interest income on its Mortgage Assets and the costs of borrowing to finance its acquisition of Mortgage Assets. The Company commenced operations on March 17, 1998 upon the closing of its initial public offering which raised net proceeds of $18,414,000. Since then the Company has deployed its capital and grown its balance sheet through the acquisition of mortgage assets and the financing of those assets in the credit markets. The financial statements included in this Annual Report on Form 10-K should be read in light of this growth process and are not necessarily representative of what they may be in the future. The Company will seek to generate growth in earnings and dividends per share in a variety of ways, including through (i) issuing new Common Stock and increasing the size of the balance sheet when opportunities in the market for Mortgage Assets are likely to allow growth in earnings per share, (ii) seeking to improve productivity by increasing the size of the balance sheet at a rate faster than the rate of increase in operating expenses, (iii) continually reviewing the mix of Mortgage Asset types on the balance sheet in an effort to improve risk-adjusted returns, and (iv) attempting to improve the efficiency of the Company's balance sheet structure through the issuance of uncollateralized subordinated debt, preferred stock and other forms of capital, to the extent management deems such issuances appropriate. The Company is organized for tax purposes as a REIT and therefore generally passes through substantially all of its taxable earnings to stockholders without paying federal or state income tax at the corporate level. FINANCIAL CONDITION At December 31, 2000, the Company held total assets of $142 million, consisting of $115 million of ARM securities, $20 million of fixed-rate mortgage-backed securities, $1.9 million of REIT common and preferred stock and $4.9 million of cash equivalents and other receivables. At December 31, 2000, 98% of the qualified real estate assets held by the Company were Primary assets. Of the ARM securities owned by the Company, 84% were adjustable-rate pass-through certificates which reset at least once a year. The remaining 16% were new origination 3/1 and 5/1 hybrid ARMS. Hybrid ARM securities have an initial interest rate that is fixed for a certain period, usually three to five years, and then adjust annually for the remainder of the term of the loan. 2 The following table presents a schedule of mortgage backed securities owned at December 31, 2000, 1999 and 1998 classified by type of issuer. MORTGAGE BACKED SECURITIES BY ISSUER December 31, 2000 December 31, 1999 December 31, 1998 ------------------ ------------------ ------------------ % of % of % of Carrying Mortgage Carrying Mortgage Carrying Mortgage Value Securities Value Securities Value Securities -------- ---------- -------- ---------- -------- ---------- (Dollar amounts in thousands) Agency.... FNMA...... $110,415 81.9% $131,758 81.8% $138,935 76.3% FHLMC..... 23,957 17.8% 29,405 18.2% 43,237 23.7% Private... 517 0.4% 0 0.0% 0 0.0% -------- ----- -------- ----- -------- ----- $134,889 100.0% $161,163 100.0% $182,172 100.0% ======== ===== ======== ===== ======== ===== The following table classifies the Company's portfolio of ARM securities by type of interest rate index. MORTGAGE ASSETS BY INDEX/FIXED December 31, 2000 December 31, 1999 December 31, 1998 ------------------ ------------------ ------------------ % of % of % of Carrying Mortgage Carrying Mortgage Carrying Mortgage Index/Fixed Value Securities Value Securities Value Securities ----------- -------- ---------- -------- ---------- -------- ---------- (Dollar amounts in thousands) One-month LIBOR.................... $ 1,249 0.9% Six-month LIBOR.................... 7,332 5.4% $ 9,330 5.8% $ 14,656 8.0% Six-month Certificate of Deposit... 3,692 2.7% 5,611 3.5% 8,461 4.6% One-year Constant Maturity Treasury 97,491 72.3% 120,036 74.5% 142,459 78.2% Cost of Funds Index................ 4,713 3.5% 5,615 3.5% 6,545 3.6% Fixed.............................. 20,412 15.2% 20,570 12.7% 10,051 5.6% -------- ----- -------- ----- -------- ----- $134,889 100.0% $161,162 100.0% $182,172 100.0% ======== ===== ======== ===== ======== ===== The Mortgage Assets portfolio had a weighted average coupon of 7.63%, 5.93% and 6.85% at December 31, 2000, 1999 and 1998, respectively. The weighted average three-month constant prepayment rate ("CPR") of the Company's MBS portfolio was 16.8%, 14.7% and 31.1% as of December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, 1999 and 1998, respectively, the unamortized net premium paid for the mortgage-backed securities was $2.7 million, $3.5 million and $4.6 million. The Company analyzes its mortgage-backed securities and the extent to which prepayments impact the yield of the securities. When actual prepayments exceed expectations, the Company amortizes the premiums paid on mortgage assets over a shorter time period, resulting in a reduced yield to maturity on the Company's mortgage assets. Conversely, if actual prepayments are less than the assumed constant prepayment rate, the premium would be amortized over a longer time period, resulting in a higher yield to maturity. The Company monitors its yield expectations versus its actual prepayment experience on a monthly basis in order to adjust the amortization of the net premium. The fair value of the Company's portfolio of ARM securities classified as available-for-sale was $1.2 million less than the amortized cost of the securities, resulting in a negative adjustment of 0.86% of the amortized cost of the portfolio as of December 31, 2000. This price decline reflects the possibility of increased future 3 prepayments, which would have the effect of shortening the average life of the Company's ARM securities and decreasing their yield and market value. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 For the year ended December 31, 2000, the Company's net income was $1,261,000, or $0.54 per share (basic and diluted EPS), based on an average of 2,330,987 shares outstanding. Net interest income for the period totaled $1,640,000. Net interest income is comprised of the interest income earned on mortgage investments less interest expense from borrowings. During the year ended December 31, 2000, the Company incurred general and administrative expenses of $379,000, consisting operating expense of $211,000, a base management fee of $167,000 and no incentive management fee. By comparison, the Company's net income was $1,209,000 for the year ended December 31, 1999, the Company's first full year of operation. The primary reason for the increase in the Company's profitability in 2000 over 1999 was the continued slowing of prepayments of the Company's Mortgage Assets, a trend which began in 1999. The Company's annual return on average equity was 6.58% for the year ended December 31, 2000; this compares favorably to the 1999 figure of 6.38%. The table below shows the annualized components of return on average equity. ANNUALIZED COMPONENTS OF RETURN ON AVERAGE EQUITY/(1)/ Net Interest G&A Net Income/ Expense/ Income/ Equity Equity Equity ------------ -------- ------- For the year ended December 31, 2000.. 8.56% 1.98% 6.58% For the year ended December 31, 1999.. 8.49% 2.11% 6.38% For the period ended December 31, 1998 7.86% 2.02% 5.84% -------- (1)Average equity excludes unrealized gain (loss) on available-for-sale securities. The following table shows the Company's average balances of cash equivalents and mortgage assets, the annualized yields earned on each type of earning assets, the yield on average earning assets and interest income. Annualized Yield on Average Average Annualized Amortized Yield on Amortized Yield on Dividend Average Cost of Average Average Cost of Average and Cash Mortgage Earning Cash Mortgage Earning Interest Equivalents Assets Assets Equivalents Assets Assets Income ----------- --------- -------- ----------- ---------- ---------- -------- (dollar amounts in thousands) For the year ended December 31, 2000................... $2,122 $148,703 $152,289 5.88% 6.79% 6.77% $10,314 For the year ended December 31, 1999................... $6,452 $156,715 $163,167 4.99% 5.86% 5.82% $ 9,501 For the period ended December 31, 1998.......... $6,647 $174,798 $181,445 5.65% 6.04% 5.94% $ 8,570 4 The table below shows the Company's average borrowed funds and annualized average cost of funds as compared to average one- and average three-month LIBOR. Average One- month LIBOR Average Average Relative Cost of Cost of to Funds Funds Average Average Average Relative to Relative to Average Average One- Three- Three- Average Average Borrowed Interest Cost of Month Month month One-month Three-month Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR -------- -------- ------- ------- ------- -------- ----------- ----------- (dollar amounts in thousands) For the year ended Dec. 31, 2000................. $135,631 $8,674 6.40% 6.42% 6.54% -0.12% -0.02% -0.14% For the year ended Dec. 31, 1999................. $149,372 $7,892 5.28% 5.25% 5.42% -0.17% +0.03% -0.14% For the period ended Dec. 31, 1998................. $165,496 $7,378 5.61% 5.55% 5.54% +0.01% +0.06% +0.07% For the year ended December 31, 2000, the yield on the Company's total assets, including the impact of the amortization of premiums and discounts, was 6.77%. For 1999 this figure was 5.82%. The Company's weighted average cost of funds for the year ended December 31, 2000, was 6.40% versus 5.28% for the year ended December 31, 1999. The Company pays the Manager an annual base management fee, generally based on average net invested assets, as defined in the Management Agreement, payable monthly in arrears as follows: 1.0% of the first $300 million of Average Net Invested Assets, plus 0.8% of the portion above $300 million. In order for the Manager to earn an incentive fee, the rate of return on the stockholders' investment, as defined in the Management Agreement, must exceed the average ten-year U.S. Treasury rate during the quarter plus 1%. During the year ended December 31, 2000, the Company's annualized return on common equity was 6.58%. The ten-year U.S. Treasury rate for the corresponding period was 6.03%, which would dictate a 7.03% hurdle rate. As a result, the Manager earned no incentive fee. In 1999 the Manager earned no incentive fee. Beginning in calendar year 1999, the quarterly Incentive Management Compensation will be subject to annual reconciliation so that the Incentive Management Compensation is based on the Manager's performance for a calendar year rather than a quarter-by-quarter basis. The following table shows operating expenses as a percent of total assets: ANNUALIZED OPERATING EXPENSE RATIOS Management Fee & Other Performance Total G&A Expenses/Average Fee/Average Expenses/Average Assets Assets Assets ---------------- ----------- ---------------- For the year ended December 31, 2000..... 0.25% 0.00% 0.25% For the year ended December 31, 1999..... 0.24% 0.00% 0.24% For the period ended December 31, 1998... 0.21% 0.00% 0.21% INTEREST RATE AGREEMENTS The Company has not entered into any interest rate agreements to date. As part of its asset/liability management process, the Company may enter into interest rate agreements such as interest rate caps, floors and swaps. These agreements would be entered into to reduce interest rate risk and would be designed to provide income and capital appreciation to the Company in the event of certain changes in interest rates. The Company reviews the need for interest rate agreements on a regular basis consistent with its capital investment policy. 5 The Company has not experienced credit losses on its portfolio of ARM securities to date, but losses may be experienced in the future. At December 31, 2000, the Company had limited its exposure to credit losses on its portfolio of ARM securities by purchasing primarily Agency Certificates, which, although not rated, carry an implied "AAA" rating. COMMON DIVIDEND As a REIT, the Company is required to declare dividends amounting to 85% of each year's taxable income by the end of each calendar year and to have declared dividends amounting to 95% of its taxable income for each year by the time it files its applicable tax return and, therefore, generally passes through substantially all of its earnings to stockholders without paying federal income tax at the corporate level. Since the Company, as a REIT, pays its dividends based on taxable earnings, the dividends may at times be more or less than reported earnings. On January 19, 2000 the Company declared a dividend of $0.11 per share payable on February 16, 2001 to holders of record as of February 2, 2001. In total, the Company declared $1,191,182 in dividends for the year ended December 31, 2000 and $1,212,950 in dividends during the year ended December 31, 1999. For the period ended December 31, 1998, $861,360 in dividends was distributed. The following table shows the quarterly dividends since inception. Cash Dividends Declared Per Share -------------- First quarter ended March 31, 1998.... $0.00(partial period, 15 days) Second quarter ended June 30, 1998.... $0.15 Third quarter ended September 30, 1998 $0.10 Fourth quarter ended December 31, 1998 $0.12 First quarter ended March 31, 1999.... $0.12 Second quarter ended June 30, 1999.... $0.13 Third quarter ended September 30, 1999 $0.14 Fourth quarter ended December 31, 1999 $0.14 First quarter ended March 31, 2000.... $0.15 Second quarter ended June 30, 2000.... $0.15 Third quarter ended September 30, 2000 $0.10 Fourth quarter ended December 31, 2000 $0.11(1) LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds for the year ended December 31, 2000 consisted of reverse repurchase agreements, which totaled $122 million at December 31, 2000. The Company's other significant source of funds for the period ended December 31, 2000 consisted of payments of principal and interest from its Mortgage Assets portfolio in the amount of $28.9 million. In the future, the Company expects its primary sources of funds will consist of borrowed funds under reverse repurchase agreement transactions with one to twelve-month maturities and of monthly payments of principal and interest on its ARM securities portfolio. The Company's liquid assets generally consist of unpledged ARM assets, cash and cash equivalents. The borrowings incurred during the year ended December 31, 2000 had an annual average interest cost during the period of 6.40%. As of December 31, 2000, all of the Company's reverse repurchase agreements were fixed-rate term reverse repurchase agreements with original maturities that range from one month to two months and an average maturity of 32 days. The Company has borrowing arrangements with twelve different financial institutions and on December 31, 2000, had borrowed funds under reverse repurchase agreements with eight of -------- (1)The fourth quarter of 2000 dividend was declared in January 2001 and paid in February 2001. 6 these firms. Because the Company borrows money based on the fair value of its ARM securities and because increases in short-term interest rates can negatively impact the valuation of ARM securities, the Company's borrowing ability could be limited and lenders may initiate margin calls in the event short-term interest rates increase or the value of the Company's ARM securities declines for other reasons. During the year ended December 31, 2000, the Company had adequate cash flow, liquid assets and unpledged collateral with which to meet its margin requirements during the period. Further, the Company believes it will continue to have sufficient liquidity to meet its future cash requirements from its primary sources of funds for the foreseeable future without needing to sell assets. The Company uses "available-for-sale" treatment for its Mortgage-Backed Securities. These assets are carried on the balance sheet at fair value rather than historical amortized cost. Based upon such "available-for-sale" treatment, the Company's equity base at December 31, 2000 was $18.2 million, or $7.74 per share. If the Company had used historical amortized cost accounting, the Company's equity base at December 31, 2000 would have been $19.4 million, or $8.25 per share. With the Company's "available-for-sale" accounting treatment, unrealized fluctuations in market values of assets do not impact financial reporting or taxable income but rather are reflected on the balance sheet by changing the carrying value of the asset and reflecting the change in stockholders' equity under "Other comprehensive income, unrealized gain (loss) on available for sale securities." By accounting for its assets in this manner, the Company hopes to provide useful information to stockholders and creditors and to preserve flexibility to sell assets in the future without having to change accounting methods. As a result of this mark-to-market accounting treatment, the book value and book value per share of the Company are likely to fluctuate far more than if the Company used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may be misleading. Unrealized changes in the fair value of Mortgage-Backed Securities have one direct effect on the Company's potential earnings and dividends: positive mark-to-market changes will increase the Company's equity base and allow the Company to increase its borrowing capacity while negative changes will tend to limit borrowing capacity under the Company's Capital Investment Policy. A very large negative change in the net market value of the Company's Mortgage-Backed Securities might impair the Company's liquidity position, requiring the Company to sell assets with the likely result of realized losses upon sale. "Other comprehensive income, unrealized gain (loss) on available for sale securities" was $(1.2) million, or (0.86)% of the amortized cost of mortgage assets at December 31, 2000. EFFECTS OF INTEREST RATE CHANGES The Company has invested in adjustable-rate mortgage securities and fixed rate mortgage securities. Adjustable-rate mortgage assets are typically subject to periodic and lifetime interest rate caps that limit the amount an adjustable-rate mortgage securities' interest rate can change during any given period. Adjustable-rate mortgage securities are also typically subject to a minimum interest rate payable. The Company borrowings will not be subject to similar restrictions. Hence, in a period of increasing interest rates, interest rates on its borrowings could increase without limitation by caps, while the interest rates on its mortgage assets could be so limited. This problem would be magnified to the extent the Company acquires mortgage assets that are not fully indexed. Further, some adjustable-rate mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in receipt by the Company of less cash income on its adjustable-rate mortgage assets than is required to pay interest on the related borrowings. These factors could lower the Company's net interest income or cause a net loss during periods of rising interest rates, which would negatively impact the Company's liquidity and its ability to make distributions to stockholders. Fixed rate mortgage securities pay a fixed rate of interest. Fixed rate mortgage securities are not subject to the same types of limitations as described above for adjustable rate mortgage securities but are subject to 7 prepayment risk and are more price sensitive to changes in the general level of interest rates than are adjustable rate mortgage securities. The Company intends to fund the purchase of a substantial portion of its adjustable-rate mortgage securities with borrowings that may have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of the mortgage assets. Thus, the Company anticipates that in most cases the interest rate indices and repricing terms of its mortgage assets and its funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. During periods of changing interest rates, such interest rate mismatches could negatively impact the Company's net income, dividend yield and the market price of the Common Stock. Prepayments are the full or partial repayment of principal prior to the original term to maturity of a mortgage loan and typically occur due to refinancing of mortgage loans. Prepayment rates on mortgage securities vary from time to time and may cause changes in the amount of the Company's net interest income. Prepayments of adjustable-rate mortgage loans usually can be expected to increase when mortgage interest rates fall below the then-current interest rates on such loans and decrease when mortgage interest rates exceed the then-current interest rate on such loans, although such effects are not predictable. Prepayment experience also may be affected by the conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans underlying mortgage securities. The purchase prices of mortgage securities are generally based upon assumptions regarding the expected amounts and rates of prepayments. Where slow prepayment assumptions are made, the Company may pay a premium for mortgage securities. To the extent such assumptions materially and adversely differ from the actual amounts of prepayments, the Company would experience losses. The total prepayment of any mortgage asset that had been purchased at a premium by the Company would result in the immediate write-off of any remaining capitalized premium amount and consequent reduction of the Company's net interest income by such amount. Finally in the event that the Company is unable to acquire new mortgage assets to replace the prepaid mortgage assets, its financial condition, cash flows and results of operations could be materially adversely affected. OTHER MATTERS As of December 31, 2000, the Company calculates its Qualified REIT Assets, as defined in the Code, to be greater than 90% of its total assets, as compared to the Code requirement that at least 75% of its total assets must be Qualified REIT Assets. The Company also calculates that greater than 98% of its 2000 revenue for the year ended December 31, 2000 qualifies for both the 75% source of income test and the 95% source of income test under the REIT rules. The Company also met all REIT requirements regarding the ownership of its common stock and the distributions of its net income. Therefore, as of December 31, 2000, the Company believes that it will continue to qualify as a REIT under the provisions of the Code. The Company at all times intends to conduct its business so as not to become regulated as an investment company under the Investment Company Act. If the Company were to become regulated as an investment company, then the Company's use of leverage would be substantially reduced. The Investment Company Act exempts entities that are Qualifying Interests. Under current interpretation of the staff of the Securities and Exchange Commission, in order to qualify for this exemption, the Company must maintain at least 55% of its assets directly in Qualifying Interests. In addition, unless certain mortgage securities represent all of the certificates issued with respect to an underlying pool of mortgages, such mortgage securities may be treated as securities separate from the underlying mortgage loans and, thus, may not be considered Qualifying Interests for purposes of the 55% requirement. The Company calculates that it is in compliance with this requirement. INFLATION Virtually all of the Company's assets and liabilities are financial in nature. As a result, interest rates and other factors drive the Company's performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The Company's financial statements are 8 prepared in accordance with generally accepted accounting principles (GAAP) and the Company's dividends are determined by the Company's net income as calculated for tax purposes; in each case, the Company's activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation. 9 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, Dated: October 16, 2001 ANWORTH MORTGAGE ASSET CORPORATION By: /s/ PAMELA J. WATSON __________________________________ Pamela J. Watson, Chief Financial Officer 10