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The information in this preliminary prospectus supplement and accompanying prospectus is not complete and may be changed. A registration statement relating to these securities has been declared effective by the Securities and Exchange Commission. This preliminary prospectus supplement and accompanying prospectus are not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION DATED MAY 5, 2003

PRELIMINARY PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED DECEMBER 30, 2002

 

3,500,000 Shares

 

 

Anworth Mortgage Asset Corporation

 

Common Stock

 

Our common stock is traded on the American Stock Exchange under the symbol “ANH.” The last reported sale price of our common stock on May 2, 2003 was $14.02 per share. In April 2003 we received approval to list our common stock for trading on the New York Stock Exchange and we anticipate that on May 9, 2003, our common stock will begin trading on the New York Stock Exchange and we will de-list our common stock from the American Stock Exchange.

 

We have granted the underwriters a 30-day option to purchase up to 525,000 additional shares to cover over-allotments of shares.

 

Investing in our common stock involves risks. See “Risk Factors” on page S-1.

 

		Price to Public			Underwriting Discounts and Commissions			Proceeds to Anworth Mortgage Asset
Per Share		$			$			$
Total		$			$			$

 

Delivery of the shares of common stock will be made on or about May        2003.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

FRIEDMAN BILLINGS RAMSEY

ADVEST, INC.

STIFEL, NICOLAUS  &  COMPANY

INCORPORATED

FLAGSTONE SECURITIES

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TABLE OF CONTENTS

 

PROSPECTUS SUPPLEMENT
Risk Factors		S-1
Forward-Looking Statements		S-1
Market Price and Dividends On Our Common Stock		S-2
Capitalization		S-3
Selected Financial Data		S-4
Our Company		S-6
The Offering		S-13
Use of Proceeds		S-13
Recent Developments		S-13
Underwriting		S-14
Legal Matters		S-15
Experts		S-15
PROSPECTUS
About This Prospectus		1
Our Company		1
Risk Factors		3
Forward-Looking Statements		13
Use of Proceeds		14
Ratio of Earnings to Fixed Charges		14
Description of Securities		14
Certain Federal Income Tax Considerations		21
Plan of Distribution		32
Experts		34
Legal Matters		34
Where You Can Find More Information		34
Information Incorporated by Reference		35

 

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RISK FACTORS

 

An investment in our common stock involves various risks. You should carefully consider the risk factors described on pages 3 to 12 of the prospectus accompanying this prospectus supplement, together with the other information contained and incorporated by reference in this prospectus supplement and the accompanying prospectus, before purchasing our common stock. If any of the risks discussed in the accompanying prospectus actually occur, our business, operating results, prospects and financial condition could be harmed. This could cause the market price of our common stock to decline and could cause you to lose all or part of your investment.

 

FORWARD-LOOKING STATEMENTS

 

This prospectus supplement and the accompanying prospectus contain or incorporate by reference certain forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “will,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume” or other similar expressions. You should not rely on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Statements regarding the following subjects are forward-looking by their nature:

 

•

our business strategy;

 

•

market trends and risks;

 

•

assumptions regarding interest rates; and

 

•

assumptions regarding prepayment rates on the mortgage loans securing our mortgage-backed securities.

 

These forward-looking statements are subject to various risks and uncertainties, including those relating to:

 

•

increases in the prepayment rates on the mortgage loans securing our mortgage-backed securities;

 

•

our ability to use borrowings to finance our assets;

 

•

risks associated with investing in mortgage-related assets, including changes in business conditions and the general economy;

 

•

our ability to maintain our qualification as a real estate investment trust for federal income tax purposes; and

 

•

management’s ability to manage our growth and planned expansion.

 

Other risks, uncertainties and factors, including those discussed under “Risk Factors” in the accompanying prospectus or described in reports that we file from time to time with the Securities and Exchange Commission, such as our quarterly and annual reports, could cause our actual results to differ materially from those projected in any forward-looking statements we make. We are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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MARKET PRICE AND DIVIDENDS ON OUR COMMON STOCK

 

Market Information

 

Our common stock began trading under the symbol ANH on the American Stock Exchange on March 17, 1998. As of May 1, 2003, we had 27,444,688 shares of common stock outstanding which were held by 485 holders of record. The last reported sale price of our common stock on May 2, 2003 was $14.02 per share. The high and low sale prices for our common stock as reported by the American Stock Exchange for the periods indicated are as follows:

 

		2000						2001						2002						2003(1)
		High			Low			High			Low			High			Low			High			Low
First Quarter		$	4.69		$	4.00		$	5.35		$	3.94		$	10.10		$	8.10		$	13.23		$	11.10
Second Quarter		$	4.50		$	4.13		$	6.90		$	4.60		$	14.50		$	9.60		$	15.01		$	12.91
Third Quarter		$	5.06		$	4.13		$	8.08		$	6.35		$	14.00		$	8.75			N/A			N/A
Fourth Quarter		$	5.00		$	3.88		$	9.85		$	6.60		$	13.60		$	10.15			N/A			N/A

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(1)	Information for the second quarter of 2003 is for April 1, 2003 through May 2, 2003.

 

In April 2003, we received approval to list our common stock for trading on the New York Stock Exchange, and we anticipate that on May 9, 2003, our common stock will begin trading on the New York Stock Exchange and we will de-list our common stock from the American Stock Exchange.

 

Dividends

 

We pay cash dividends on a quarterly basis. The following table lists the cash dividends declared on each share of our common stock for our most recent two fiscal years and our most recent fiscal quarter. The dividends listed below were based primarily on the board of directors’ evaluation of earnings for each listed quarter and were declared on the date indicated.

 

		Cash Dividends Per Share			Date Dividend Declared
2001
First Quarter ended March 31, 2001		$	0.20		April 20, 2001
Second Quarter ended June 30, 2001		$	0.24		July 23, 2001
Third Quarter ended September 30, 2001(1)		$	0.54		October 15, 2001
Fourth Quarter ended December 31, 2001(2)		$	0.25		October 15, 2001
Fourth Quarter ended December 31, 2001(3)		$	0.30		December 17, 2001
2002
First Quarter ended March 31, 2002		$	0.50		April 18, 2002
Second Quarter ended June 30, 2002		$	0.50		June 11, 2002
Third Quarter ended September 30, 2002		$	0.50		September 12, 2002
Fourth Quarter ended December 31, 2002		$	0.50		December 18, 2002
2003
First Quarter ended March 31, 2003(4)		$	0.45		April 17, 2003

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(1)

The dividend of $0.54 was based on our retained earnings as of September 30, 2001, of which $0.42 was earned in the third quarter of 2001 and the remaining $0.12 was earned in prior quarters.

(2)

On October 15, 2001, our board of directors declared a dividend of $0.25, paid on January 15, 2002, for purposes of year-end REIT compliance requirements.

(3)

The dividend was paid on January 22, 2002 to holders of record as of the close of business on December 20, 2001.

(4)

The dividend is payable on May 15, 2003 to holders of record as of the close of business on May 1, 2003.

 

 

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CAPITALIZATION

 

The following table sets forth our actual capitalization as of December 31, 2002, and our capitalization as adjusted to give effect to the issuance of 3,500,000 shares of our common stock in this offering at an assumed offering price of $14.02 per share, assuming the underwriters do not exercise their over-allotment option.

 

The information set forth in the following table should be read in conjunction with, and is qualified in its entirety by, the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002, which is incorporated by reference into the accompanying prospectus.

 

		As of December 31, 2002
		Historical				As Adjusted(1)
		(in thousands)
Stockholders’ Equity:
Preferred stock, par value $0.01 per share; 20,000,000 shares authorized; no shares outstanding		$	—			$	—
Common stock, par value $0.01 per share, 100,000,000 authorized; 25,396 shares issued and 25,346 outstanding; 28,896 shares issued and 28,846 outstanding, as adjusted			253				288
Additional paid-in capital			256,610				302,697
Retained earnings (deficit)			(5,218	)			(5,218	)
Unearned restricted stock			(754	)			(754	)
Accumulated other comprehensive income (loss)(2)			14,860				14,860
Treasury Stock			(229	)			(229	)
Total stockholders’ equity		$	265,522			$	311,644

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(1)

After deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and assuming no exercise of the underwriters’ over-allotment option to purchase up to an additional 525,000 shares of our common stock. Does not include 2,098,665 shares of our common stock issued subsequent to December 31, 2002 consisting of 1,355,840 shares issued pursuant to our Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co., 31,009 shares issued pursuant to option exercises under our 1997 Stock Option and Awards Plan and 711,816 shares issued pursuant to our Dividend Reinvestment and Stock Purchase Plan.

 

(2)	Represents unrealized gains (losses) resulting from mark-to-market adjustments on our available for sale securities.

 

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SELECTED FINANCIAL DATA

 

The selected financial data as of December 31, 2001 and 2002 and the three years in the period ended December 31, 2002 are derived from our audited financial statements incorporated by reference in the accompanying prospectus. The selected financial data as of December 31, 1998, 1999 and 2000 and for the year ended December 31, 1999 and for the period from commencement of operations on March 17, 1998 to December 31, 1998 are derived from audited financial statements not included in this prospectus supplement or the accompanying prospectus. You should read these selected financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2002, which is incorporated by reference into the accompanying prospectus.

 

		Period from March 17 to December 31,				Year Ended December 31,
		1998				1999				2000				2001				2002
		(amounts in thousands, except per share data)
Statement of Operations Data:
Days in period			290				365				366				365				365
Interest and dividend income		$	8,570			$	9,501			$	10,314			$	10,768			$	66,855
Interest expense			(7,378	)			(7,892	)			(8,674	)			(6,363	)			(29,576	)
Net interest income			1,192				1,609				1,640				4,405				37,279
Gain on sales			—				—				—				430				4,709
Expenses			(307	)			(400	)			(379	)			(1,129	)			(10,318	)
Net income		$	885			$	1,209			$	1,261			$	3,706			$	31,670
Basic net income per average share		$	0.38			$	0.53			$	0.54			$	1.52			$	1.81
Diluted net income per average share		$	0.38			$	0.53			$	0.54			$	1.50			$	1.80
Dividends declared per share (1)		$	0.37			$	0.53			$	0.40			$	1.64			$	2.00
Weighted average shares outstanding			2,316				2,290				2,331				2,467				17,591

 

		At December 31,
		1998			1999			2000			2001			2002
		(amounts in thousands, except per share data)
Balance Sheet Data:
Mortgage-backed securities, net		$	184,245		$	161,488		$	134,889		$	420,214		$	2,430,103
Total assets		$	199,458		$	167,144		$	141,834		$	424,610		$	2,443,884
Repurchase agreements		$	170,033		$	147,690		$	121,891		$	325,307		$	2,153,870
Total liabilities		$	182,216		$	150,612		$	123,633		$	369,613		$	2,178,362
Stockholders’ equity		$	17,242		$	16,532		$	18,201		$	54,997		$	265,522
Number of common shares outstanding			2,328			2,307			2,350			6,951			25,346
Book value per share		$	7.41		$	7.17		$	7.75		$	7.91		$	10.48

 

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		Period from March 17 to December 31,				Year Ended December 31,
		1998				1999				2000				2001				2002
		(dollar amounts in thousands)
Other Data (unaudited):
Average earnings assets		$	181,445			$	163,167			$	152,289			$	167,890			$	1,504,350
Average borrowings		$	165,496			$	149,372			$	135,631			$	152,870			$	1,384,887
Average equity(2)		$	19,060			$	18,931			$	19,154			$	20,279			$	160,052
Yield on interest earning assets(3)			5.94	%			5.82	%			6.77	%			6.41	%			4.44	%
Cost of funds on interest bearing liabilities			5.61	%			5.28	%			6.40	%			4.16	%			2.14	%
Annualized Financial Ratios (unaudited)(2)(4):
Net interest margin (net interest income/average assets)			0.83	%			0.99	%			1.08	%			2.62	%			2.48	%
G&A expenses as a percentage of average assets(5)			0.21	%			0.24	%			0.25	%			0.32	%			0.14	%
Return on average assets(5)			0.61	%			0.74	%			0.83	%			2.56	%			2.66	%
Return on average equity(5)			5.84	%			6.38	%			6.58	%			18.28	%			25.20	%

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(1)	On September 26, 2000, our board of directors announced that, beginning with the third quarter of 2000, dividends would generally be declared after each quarter-end rather than during the applicable quarter.

(2)	Average equity excludes fair value adjustment for mortgage-backed securities.

(3)	Excludes gain on sale of securities.

(4)	Each ratio for 1998 has been computed by annualizing the results for the 290-day period ended December 31, 1998.

(5)	Excludes management and incentive fees paid to the manager, incentive compensation paid to our employees and the acquisition costs of $3,475,000 paid for the acquisition of our external manager.

 

RECENT DEVELOPMENTS

 

We declared a dividend of $0.45 per share on April 17, 2003. This dividend is payable on May 15, 2003 to holders of record as of the close of business on May 1, 2003. Consequently, purchasers in this offering will not participate in this dividend.

 

On April 17, 2003, we reported our preliminary unaudited results of operations for the quarter ended March 31, 2003. For the quarter ended March 31, 2003, we reported earnings of $11,822,000, or $0.46 per share based on 25,926,399 weighted average common shares outstanding, on a fully diluted basis.

 

At March 31, 2003, we held mortgage assets of approximately $2.8 billion and our mortgage assets included 31% in adjustable-rate mortgage-backed securities, 55% in hybrid adjustable-rate mortgage-backed securities, 12% in fixed-rate mortgage-backed securities and 2% in collateralized mortgage obligations. The weighted average maturity of our outstanding repurchase agreements increased from 166 days as of December 31, 2002 to 209 days as of March 31, 2003.

 

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OUR COMPANY

 

Overview

 

We are in the business of investing primarily in United States agency and other highly rated single-family adjustable-rate and fixed-rate mortgage-backed securities that we acquire in the secondary market. United States agency securities are securities that are obligations guaranteed by the United States government or its agencies, such as Fannie Mae or Freddie Mac. We seek attractive long-term investment returns by investing our equity capital and borrowed funds in such securities. Our returns are earned on the spread between the yield on our earning assets and the interest cost of the funds we borrow. We have elected to be taxed as a real estate investment trust, or REIT, under the United States Internal Revenue Code. As a REIT, we routinely distribute substantially all of the income generated from our operations to our stockholders. As long as we retain our REIT status, we generally will not be subject to federal or state taxes on our income to the extent that we distribute our net income to our stockholders.

 

At December 31, 2002, we had total assets of $2,443.9 million and equity of $265.5 million, or $10.48 book value per share. As of that date, approximately 100% of our assets consisted of mortgage-backed securities guaranteed by an agency of the United States government such as Fannie Mae, Freddie Mac and Ginnie Mae. For the year ended December 31, 2002, we reported net income of $31.7 million, or $1.80 per diluted share.

 

We were incorporated in Maryland on October 20, 1997 and commenced our operations on March 17, 1998. From the time of our inception through June 13, 2002, we were externally managed pursuant to a management agreement with Anworth Mortgage Advisory Corporation, or the manager. As an externally managed company, we had no employees of our own and relied on the manager to conduct our business and operations.

 

On June 13, 2002, the manager merged with and into our company. The merger was approved by a special committee consisting solely of our independent directors, our full board of directors and the vote of a majority of our stockholders. The stockholder of the manager, a trust controlled by Lloyd McAdams, our President, Chairman and Chief Executive Officer, and Heather U. Baines, one of our Executive Vice Presidents, received 240,000 shares of our common stock as merger consideration, which was worth approximately $3.2 million based on the closing price of our common stock on June 13, 2002. As a result of the merger, we are now an internally managed company, and certain of the manager’s employees have become our employees. As a condition to the merger, we entered into direct employment contracts with Lloyd McAdams, Heather U. Baines and Joseph McAdams, adopted an incentive compensation plan for key employees, increased the size of our 1997 Stock Option and Awards Plan and provided for future automatic increases in the size of that plan. Upon the closing of the merger, the management agreement terminated.

 

Our Executive Officers

 

Our executive officers are as follows:

 

Lloyd McAdams.    Mr. McAdams is our Chairman of the Board, President and Chief Executive Officer. Mr. McAdams is also the Chairman of the Board, Chief Investment Officer and co-founder of Pacific Income Advisers, an investment advisory firm, and is the President of Syndicated Capital, Inc., a registered broker-dealer. Mr. McAdams also serves as a director of PIA Mutual Fund. Before joining Pacific Income Advisers, Mr. McAdams was President of Security Pacific Investment Managers, Inc. and served as Senior Vice President of Trust Company of the West. Mr. McAdams is a Chartered Financial Analyst charterholder, Chartered Investment Counselor and a Certified Employee Benefit Specialist.

 

Thad M. Brown.    Mr. Brown is our Chief Financial Officer and Secretary. Mr. Brown is also the Chief Operating Officer, Corporate Secretary and Treasurer of Pacific Income Advisers. He began his career with Touche Ross & Co., Certified Public Accountants, and in 1987 associated with Provident Investment Counsel, Pasadena, California, becoming its Chief Operating Officer and Senior Vice President, where he served in those

 

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capacities until 1999. Mr. Brown holds a master’s degree in tax law, is a Certified Public Accountant and received the Personal Financial Specialist designation from the American Institute of Certified Public Accountants.

 

Joseph E. McAdams.    Mr. McAdams is our Chief Investment Officer, and an Executive Vice President and Director of our company. Mr. McAdams is also Vice President of Pacific Income Advisers where he serves as Fixed Income Portfolio Manager with a specialty in mortgage securities and is responsible for Pacific Income Advisers’ fixed income trading. Prior to joining Pacific Income Advisers, Mr. McAdams was a mortgage-backed security trader and analyst at Donaldson, Lufkin & Jenrette Securities Corp. in New York. Mr. McAdams is also a Chartered Financial Analyst charterholder.

 

Heather U. Baines.    Ms. Baines is an Executive Vice President of our company. Ms. Baines is also the President, Chief Executive Officer and co-founder of Pacific Income Advisers. Prior to joining Pacific Income Advisers, Ms. Baines was employed by Security Pacific Investment Managers, Inc., ultimately holding the position of Senior Vice President and Director.

 

Evangelos Karagiannis.    Mr. Karagiannis is a Vice President of our company with responsibility for managing our portfolio. Mr. Karagiannis is also Vice President of Pacific Income Advisers where he serves as Fixed Income Portfolio Manager with a specialty in mortgage securities and is responsible for Pacific Income Advisers’ quantitative research. Mr. Karagiannis is a Chartered Financial Analyst charterholder and holds a Ph.D. in physics.

 

Our Strategy

 

Investment Strategy

 

Our strategy is to invest primarily in United States agency and other highly rated single-family adjustable-rate and fixed-rate mortgage-backed securities that we acquire in the secondary market. We seek to acquire assets that will produce competitive returns after considering the amount and nature of the anticipated returns from the investment, our ability to pledge the investment to secure collateralized borrowings and the costs associated with financing, managing, securitizing and reserving for these investments. We do not currently originate mortgage loans or provide other types of financing to the owners of real estate.

 

Financing Strategy

 

We finance the acquisition of mortgage-backed securities with short-term borrowings and, to a lesser extent, equity capital. The amount of short-term borrowings we employ depends on, among other factors, the amount of our equity capital. We use leverage to attempt to increase potential returns to our stockholders. Pursuant to our capital and leverage policy, we seek to strike a balance between the under-utilization of leverage, which reduces potential returns to stockholders, and the over-utilization of leverage, which could reduce our ability to meet our obligations during adverse market conditions.

 

We usually borrow at short-term rates using reverse repurchase agreements, or “repurchase agreements.” Repurchase agreements are generally short-term in nature. We actively manage the adjustment periods and the selection of the interest rate indices of our borrowings against the adjustment periods and the selection of indices on our mortgage-related assets in order to limit our liquidity and interest rate related risks. We generally seek to diversify our exposure by entering into repurchase agreements with multiple lenders. In addition, we enter into repurchase agreements with institutions we believe are financially sound and which meet credit standards approved by our board of directors.

 

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Growth Strategy

 

In addition to the strategies described above, we intend to pursue other strategies to further grow our earnings and our dividends per share, which may include the following:

 

•

increasing the size of our balance sheet at a rate faster than the rate of increase in our operating expenses;

 

•

issuing new common stock when market opportunities exist to profitably increase the size of our balance sheet through the use of leverage; and

 

•

lowering our effective borrowing costs over time by seeking direct funding with collateralized lenders, rather than using financial intermediaries, and possibly using commercial paper, medium term note programs, preferred stock and other forms of capital.

 

Our Operating Policies and Programs

 

We have established the following four primary operating policies to implement our business strategies:

 

•

our Asset Acquisition Policy;

 

•

our Capital and Leverage Policy;

 

•

our Credit Risk Management Policy; and

 

•

our Asset/Liability Management Policy.

 

Asset Acquisition Policy

 

Our asset acquisition policy provides guidelines for acquiring investments and contemplates that we will acquire a portfolio of investments that can be grouped into specific categories. Each category and our respective investment guidelines are as follows:

 

•

Category I—At least 60% of our total assets will generally be adjustable or fixed-rate mortgage securities and short-term investments. Assets in this category will be rated within one of the two highest rating categories by at least one nationally recognized statistical rating organization, or if not rated, will be obligations guaranteed by the United States government or its agencies, Fannie Mae or Freddie Mac.

 

•

Category II—At least 90% of our total assets will generally consist of Category I investments plus unrated mortgage loans, mortgage securities rated at least investment grade by at least one nationally recognized statistical rating organization, or shares of other REITs or mortgage-related companies.

 

•

Category III—No more than 10% of our total assets may be of a type not meeting any of the above criteria. Among the types of assets generally assigned to this category are mortgage securities rated below investment grade and leveraged mortgage derivative securities.

 

Under our Category III investment criteria, we may acquire other types of mortgage derivative securities, including, but not limited to, interest only, principal only or other mortgage-backed securities that receive a disproportionate share of interest income or principal.

 

Capital and Leverage Policy

 

We employ a leverage strategy to increase our investment assets by borrowing against existing mortgage-related assets and using the proceeds to acquire additional mortgage-related assets. We generally borrow between eight to twelve times the amount of our equity, although our borrowings may vary from time to time depending on market conditions and other factors deemed relevant by our management company and our board of directors. We believe that this will leave an adequate capital base to protect against interest rate environments in which our borrowing costs might exceed our interest income from mortgage-related assets. We enter into collateralized borrowings with institutions which meet credit standards approved by our board of directors.

 

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Depending on the different cost of borrowing funds at different maturities, we may vary the maturities of our borrowed funds in an attempt to produce lower borrowing costs. Our borrowings are short-term and we manage actively, on an aggregate basis, both the interest rate indices and interest rate adjustment periods of our borrowings against the interest rate indices and interest rate adjustment periods on our mortgage-related assets.

 

Our mortgage-related assets are financed primarily at short-term borrowing rates through repurchase agreements and dollar-roll agreements. In the future we may also employ borrowings under lines of credit and other collateralized financings that we may establish with approved institutional lenders.

 

Credit Risk Management Policy

 

We review credit risk and other risks of loss associated with each of our potential investments. In addition, we may diversify our portfolio of mortgage-related assets to avoid undue geographic, insurer, industry and certain other types of concentrations. We may reduce certain risks from sellers and servicers through representations and warranties. We monitor the overall portfolio risk and determine appropriate levels of provision for loss.

 

Compliance with our credit risk management policy guidelines is determined at the time of purchase of mortgage assets, based upon the most recent valuation utilized by us. Such compliance is not affected by events subsequent to such purchase, including, without limitation, changes in characterization, value or rating of any specific mortgage assets or economic conditions or events generally affecting any mortgage-related assets of the type held by us.

 

Asset/Liability Management Policy

 

Interest-Rate Risk Management.    To the extent consistent with our election to qualify as a REIT, we follow an interest rate risk management program intended to protect our portfolio of mortgage-related assets and related debt against the effects of major interest rate changes. Specifically, our interest rate management program is formulated with the intent to offset to some extent the potential adverse effects resulting from rate adjustment limitations on our mortgage-related assets and the differences between interest rate adjustment indices and interest rate adjustment periods of our adjustable-rate mortgage-related assets and related borrowings.

 

Our interest rate risk management program encompasses a number of procedures, including the following:

 

•

monitoring and adjusting, if necessary, the interest rate sensitivity of our mortgage-related assets compared with the interest rate sensitivities of our borrowings;

 

•

attempting to structure our borrowing agreements relating to adjustable-rate mortgage-related assets to have a range of different maturities and interest rate adjustment periods (although substantially all will be less than a year); and

 

•

actively managing, on an aggregate basis, the interest rate indices and interest rate adjustment periods of our mortgage-related assets compared to the interest rate indices and adjustment periods of our borrowings.

 

As a result, we expect to be able to adjust the average maturity/adjustment period of our borrowings on an ongoing basis by changing the mix of maturities and interest rate adjustment periods as borrowings come due or are renewed. Through the use of these procedures, we attempt to reduce the risk of differences between interest rate adjustment periods of our adjustable-rate mortgage-related assets and our related borrowings.

 

Depending on market conditions and the cost of the transactions, we may conduct certain hedging activities in connection with the management of our portfolio, including periodically entering into derivative transaction with the objective of reducing interest rate risk. To the extent consistent with our election to qualify as a REIT, we may adopt a hedging strategy intended to lessen the effects of interest rate changes and to enable us to earn

 

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net interest income in periods of generally rising, as well as declining or static, interest rates. Specifically, hedging programs are formulated with the intent to offset some of the potential adverse effects of changes in interest rate levels relative to the interest rates on the mortgage-related assets held in our investment portfolio, and differences between the interest rate adjustment indices and periods of our mortgage-related assets and our borrowings. We monitor carefully, and may have to limit, our asset/liability management program to assure that we do not realize excessive hedging income, or hold hedges having excess value in relation to mortgage-related assets, which would result in our disqualification as a REIT or, in the case of excess hedging income, if the excess is due to reasonable cause and not willful neglect, the payment of a penalty tax for failure to satisfy certain REIT income tests under the tax code. In addition, asset/liability management involves transaction costs that increase dramatically as the period covered by hedging protection increases and that may increase during periods of fluctuating interest rates.

 

Prepayment Risk Management.    We also seek to lessen the effects of prepayment of mortgage loans underlying our securities at a faster or slower rate than anticipated. We accomplish this by structuring a diversified portfolio with a variety of prepayment characteristics, investing in mortgage-related assets with prepayment prohibitions and penalties, investing in certain mortgage security structures that have prepayment protections, and purchasing mortgage-related assets at a premium and at a discount. We invest in mortgage-related assets that on a portfolio basis do not have significant purchase price premiums. Under normal market conditions, we seek to maintain the aggregate capitalized purchase premium of the portfolio at 3% or less. In addition, we can purchase principal only derivatives to a limited extent as a hedge against prepayment risks. We monitor prepayment risk through periodic review of the impact of a variety of prepayment scenarios on our revenues, net earnings, dividends, cash flow and net balance sheet market value.

 

We believe that we have developed cost-effective asset/liability management policies to mitigate prepayment risks. However, no strategy can completely insulate us from prepayment risks. Further, as noted above, certain of the federal income tax requirements that we must satisfy to qualify as a REIT limit our ability to fully hedge our prepayment risks. Therefore, we could be prevented from effectively hedging our interest rate and prepayment risks.

 

Our Investments

 

Mortgage-Backed Securities

 

Pass-Through Certificates.    We principally invest in pass-through certificates, which are securities representing interests in pools of mortgage loans secured by residential real property in which payments of both interest and principal on the securities are generally made monthly, in effect, passing through monthly payments made by the individual borrowers on the mortgage loans which underlie the securities, net of fees paid to the issuer or guarantor of the securities. Early repayment of principal on some mortgage-backed securities, arising from prepayments of principal due to sale of the underlying property, refinancing or foreclosure, net of fees and costs which may be incurred, may expose us to a lower rate of return upon reinvestment of principal. This is generally referred to as prepayment risk. Additionally, if a security subject to prepayment has been purchased at a premium, the value of the premium would be lost in the event of prepayment. Like other fixed-income securities, when interest rates rise, the value of a mortgage-backed security generally will decline.

 

When interest rates are declining, however, the value of mortgage-backed securities with prepayment features may not increase as much as other fixed-income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-backed securities and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of purchase. When interest rates rise, our holdings of mortgage-backed securities may experience reduced returns if the owners of the underlying mortgages pay off their mortgages later than anticipated. This is generally referred to as extension risk.

 

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Payment of principal and interest on some mortgage pass-through securities, although not the market value of the securities themselves, may be guaranteed by the full faith and credit of the federal government, including securities backed by Ginnie Mae, or by agencies or instrumentalities of the federal government, including Fannie Mae and Freddie Mac. Mortgage-backed securities created by non-governmental issuers, including commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers, may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities, private insurers or the mortgage poolers.

 

Collateralized Mortgage Obligations.    Collateralized mortgage obligations, or CMOs, are mortgage-backed securities. Interest and principal on a CMO are paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage loans, but are more typically collateralized by portfolios of mortgage pass-through securities. CMOs are structured into multiple classes, with each class bearing a different stated maturity. Monthly payments of principal, including prepayments, are first returned to investors holding the shortest maturity class; investors holding the longer maturity classes receive principal only after the first class has been retired. We will typically consider CMOs that are issued or guaranteed by the federal government or by any of its agencies or instrumentalities to be United States government securities.

 

Other Mortgage-Backed Securities

 

Mortgage Derivative Securities.    We may acquire mortgage derivative securities in an amount not to exceed 10% of our total assets. Mortgage derivative securities provide for the holder to receive interest only, principal only, or interest and principal in amounts that are disproportionate to those payable on the underlying mortgage loans. Payments on mortgage derivative securities are highly sensitive to the rate of prepayments on the underlying mortgage loans. In the event of faster or slower than anticipated prepayments on these mortgage loans, the rates of return on interests in mortgage derivative securities representing the right to receive interest only or a disproportionately large amount of interest, or interest only derivatives, would be likely to decline or increase, respectively. Conversely, the rates of return on mortgage derivative securities representing the right to receive principal only or a disproportionate amount of principal, or principal only derivatives, would be likely to increase or decrease in the event of faster or slower prepayments, respectively.

 

We may also invest in inverse floaters, a class of CMOs with a coupon rate that resets in the opposite direction from the market rate of interest to which it is indexed, including LIBOR or the 11^th District Cost of Funds Index, or COFI. Any rise in the index rate, which can be caused by an increase in interest rates, causes a drop in the coupon rate of an inverse floater while any drop in the index rate causes an increase in the coupon of an inverse floater. An inverse floater may behave like a leveraged security since its interest rate usually varies by a magnitude much greater than the magnitude of the index rate of interest. The leverage-like characteristics inherent in inverse floaters are associated with greater volatility in their market prices.

 

We may also invest in other mortgage derivative securities that may be developed in the future.

 

Subordinated Interests.    We may also acquire subordinated interests, which are classes of mortgage-backed securities that are junior to other classes of the same series of mortgage-backed securities in the right to receive payments from the underlying mortgage loans. The subordination may be for all payment failures on the mortgage loans securing or underlying such series of mortgage securities. The subordination will not be limited to those resulting from particular types of risks, including those resulting from war, earthquake or flood, or the bankruptcy of a borrower. The subordination may be for the entire amount of the series of mortgage-related securities or may be limited in amount.

 

Mortgage Warehouse Participations.    We may also occasionally acquire mortgage warehouse participations as an additional means of diversifying our sources of income. We anticipate that these investments, together with our investments in other Category III assets, will not in the aggregate exceed 10% of our total

 

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mortgage-related assets. These investments are participations in lines of credit to mortgage loan originators that are secured by recently originated mortgage loans that are in the process of being sold to investors. Our investments in mortgage warehouse participations are limited because they are not qualified REIT assets under the tax code.

 

Other Mortgage-Related Assets

 

Mortgage Loans.    We may acquire and accumulate mortgage loans as part of our investment strategy until a sufficient quantity has been accumulated for securitization into high-quality mortgage-backed securities in order to enhance their value and liquidity. We anticipate that any mortgage loans that we acquire and do not immediately securitize, together with our investments in other mortgage-related assets that are not Category I assets, will not constitute more than 30% of our total mortgage-related assets at any time. All mortgage loans, if any, will be acquired with the intention of securitizing them into high-credit quality mortgage securities. Despite our intentions, however, we may not be successful in securitizing these mortgage loans. To meet our investment criteria, mortgage loans acquired by us will generally conform to the underwriting guidelines established by Fannie Mae, Freddie Mac or other credit insurers. Applicable banking laws generally require that an appraisal be obtained in connection with the original issuance of mortgage loans by the lending institution. We do not intend to obtain additional appraisals at the time of acquiring mortgage loans.

 

Mortgage loans may be originated by or purchased from various suppliers of mortgage-related assets throughout the United States, including savings and loans associations, banks, mortgage bankers and other mortgage lenders. We may acquire mortgage loans directly from originators and from entities holding mortgage loans originated by others. Our board of directors has not established any limits upon the geographic concentration of mortgage loans that we may acquire or the credit quality of suppliers of the mortgage-related assets that we acquire.

 

Other Investments.    We may acquire other investments that include equity and debt securities issued by other primarily mortgage-related finance companies, interests in mortgage-related collateralized bond obligations, other subordinated interests in pools of mortgage-related assets, commercial mortgage loans and securities, and residential mortgage loans other than high-credit quality mortgage loans. Although we expect that our other investments will be limited to less than 10% of total assets, we have no limit on how much of our stockholders’ equity will be allocated to other investments. There may be periods in which other investments represent a large portion of our stockholders’ equity.

 

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THE OFFERING

 

Common stock offered by us		3,500,000 shares(1)
Common stock to be outstanding after this offering		30,944,688 shares(2)
American Stock Exchange trading symbol		ANH(3)

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(1)	4,025,000 shares of common stock if the underwriters exercise their over-allotment option in full.

 

(2)

31,469,688 shares of common stock if the underwriters exercise their over-allotment option in full. Does not include 1,031,640 shares of common stock that may be issued upon the exercise of outstanding options granted under our 1997 Stock Option and Awards Plan at exercise prices ranging from $4.60 to $13.80 per share or 19,830 shares of common stock that may be acquired pursuant to outstanding dividend equivalent rights. A total of 1,800,000 shares of our common stock are currently authorized for issuance under our 1997 Stock Option and Awards Plan.

 

(3)	In April 2003 we received approval to list our common stock for trading on the New York Stock Exchange and we anticipate that on May 9, 2003, our common stock will begin trading on the New York Stock Exchange and we will de-list our common stock from the American Stock Exchange.

 

USE OF PROCEEDS

 

We are conducting this offering to increase our equity capital base which will allow us to grow our balance sheet through the deployment of the equity and the use of leverage. We will use the net proceeds from this offering to acquire mortgage-related assets consistent with our investment policy. We then intend to increase our investment assets by borrowing against these mortgage-related assets and using the proceeds of such borrowings to acquire additional mortgage-related assets. The net proceeds from the sale of 3,500,000 shares of our common stock, based on an assumed offering price of $14.02 per share, will be approximately $46.1 million after deducting underwriting discounts and commissions and estimated expenses of the offering. Pending such investment, we will place the net proceeds in interest-bearing bank accounts or in readily marketable, interest-bearing securities.

 

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UNDERWRITING

 

Friedman, Billings, Ramsey & Co., Inc. (“FBR”), Advest, Inc., Stifel, Nicolaus & Company, Incorporated and Flagstone Securities, LLC are acting as representatives of the underwriters named below. Subject to the terms and conditions contained in the underwriting agreement, we have agreed to sell to each underwriter, and each underwriter has agreed to purchase from us, the number of shares set forth opposite its name below. The underwriting agreement provides that the obligation of the underwriters to pay for and accept delivery of our common stock is subject to approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all shares of our common stock offered (other than those covered by the over-allotment option described below) if any of the shares are taken.

 

Underwriter		Number of Shares
Friedman, Billings, Ramsey & Co., Inc.
Advest, Inc.
Stifel, Nicolaus & Company, Incorporated
Flagstone Securities, LLC
Total		3,500,000

 

We have granted the underwriters an option exercisable for 30 days after the date of this prospectus to purchase up to 525,000 additional shares of common stock to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. If the underwriters exercise this option, the underwriters will have a firm commitment, subject to certain conditions, to purchase all of the shares for which the option is exercised.

 

The following table shows the amount per share and total underwriting discounts and commissions we will pay to the underwriters. The amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to 525,000 additional shares of our common stock to cover over-allotments.

 

		Total
		Per Share			No Exercise			Full Exercise
Public offering price		$			$			$
Underwriting discounts and commissions to be paid to us		$			$			$
Proceeds, before expenses, to us		$			$			$

 

Each of our officers and directors has agreed with FBR, for a period of 30 days after the date of this prospectus supplement, subject to certain exceptions, not to sell any shares of common stock or any securities convertible into or exchangeable for shares of common stock owned by them, without the prior written consent of FBR. However, FBR may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these agreements.

 

The underwriters offered our common stock directly to the public at $         per share and to certain dealers at this price less a concession not in excess of $         per share. The underwriters may allow, and the dealers may reallow, a concession not in excess of $         per share to certain dealers. We expect to incur expenses of approximately $             in connection with this offering.

 

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the underwriters may be required to make in respect thereof.

 

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In connection with this offering, the underwriters are permitted to engage in certain transactions that stabilize the price of our common stock. These transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with this offering by selling more than 3,500,000 shares of common stock, the underwriters may reduce that short position by purchasing our common stock in the open market. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of those purchases. Neither the underwriters nor we make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither the underwriters nor we make any representation that the underwriters will engage in those transactions or that those transactions, once commenced, will not be discontinued without notice.

 

The underwriters or their affiliates may provide us with investment banking, financial advisory, or commercial banking services in the future, for which they may receive customary compensation.

 

The underwriters have informed us that they do not intend to confirm sales of the common stock offered by this prospectus to any accounts over which they exercise discretionary authority.

 

Although we have entered into a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. pursuant to which we may sell up to 4,800,000 shares, we will not offer or sell any shares of common stock pursuant to that agreement or in any other transaction (subject to customary exceptions including issuances in connection with our 1997 Stock Option and Awards Plan and pursuant to our Dividend Reinvestment and Stock Purchase Plan) while this offering is pending or for 30 days after the completion of this offering.

 

LEGAL MATTERS

 

The validity of our securities offered in this prospectus supplement and accompanying prospectus will be passed upon for us by Allen Matkins Leck Gamble & Mallory LLP, Century City, California. Selected legal matters related to Maryland law will be passed upon for us by Piper Rudnick LLP. Certain legal matters relating to this offering will be passed upon for the underwriters by Morrison & Foerster LLP, Los Angeles, California.

 

EXPERTS

 

The financial statements as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, incorporated in the accompanying prospectus by reference to our Annual Report on Form 10-K for the year ended December 31, 2002, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

 

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PROSPECTUS

 

$350,000,000

 

 

 

Anworth Mortgage Asset Corporation

 

Common Stock and Preferred Stock

 

By this prospectus, we may offer, from time to time, shares of our:

 

•

common stock;

 

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preferred stock; or

 

•

any combination of the foregoing.

 

We will provide specific terms of each issuance of these securities in supplements to this prospectus. You should read this prospectus and any supplement carefully before you decide to invest.

 

This prospectus may not be used to consummate sales of these securities unless it is accompanied by a prospectus supplement.

 

Our common stock is traded on the American Stock Exchange under the ticker symbol “ANH.”

 

We may sell these securities to or through underwriters, dealers or agents, or we may sell the securities directly to investors on our own behalf.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the information under the heading “ Risk Factors” beginning on page 3 of this prospectus before buying shares of our common stock.

 

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Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is December 30, 2002

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Category I—At least 60% of our total assets will generally be adjustable or fixed-rate mortgage securities and short-term investments. Assets in this category will be rated within one of the two highest rating categories by at least one nationally recognized statistical rating organization, or if not rated, will be obligations guaranteed by the United States government or its agencies, Fannie Mae or Freddie Mac.

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Category II—At least 90% of our total assets will generally consist of Category I investments plus unrated mortgage loans, mortgage securities rated at least investment grade by at least one nationally recognized statistical rating organization, or shares of other REITs or mortgage-related companies.

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Category III—No more than 10% of our total assets may be of a type not meeting any of the above criteria. Among the types of assets generally assigned to this category are mortgage securities rated below investment grade and leveraged mortgage derivative securities.

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increasing the size of our balance sheet at a rate faster than the rate of increase in our operating expenses;

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issuing new stock when market opportunities exist to profitably increase the size of our balance sheet through the use of leverage; and

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lowering our effective borrowing costs over time by seeking direct funding with collateralized lenders, rather than using financial intermediaries, possibly using commercial paper, medium term note programs, preferred stock and other forms of capital.

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We usually 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 pay a premium over the par value to

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We anticipate that a substantial portion of our adjustable-rate mortgage-backed securities may bear interest rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If an adjustable-rate mortgage-backed security is prepaid prior to or soon after the time of adjustment to a fully indexed rate, we will have held that mortgage-backed security while it was less profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.

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If we are unable to acquire new mortgage-backed securities similar to the prepaid mortgage-backed securities, our financial condition, results of operation and cash flow would suffer.

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the movement of interest rates;

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the availability of financing in the market; and

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the value and liquidity of our mortgage-backed securities.

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The use of leverage increases our risk of loss resulting from various factors, including rising interest rates, increased interest rate volatility, downturns in the economy, reductions in the availability of financing or deteriorations in the conditions of any of our mortgage-related assets.

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A majority of our borrowings are secured by our mortgage-backed securities, generally under repurchase agreements. A decline in the market value of the mortgage-backed securities used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell mortgage-backed securities under adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the mortgage-backed securities, we would experience losses.

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A default of a mortgage-related asset that constitutes collateral for a loan could also result in an involuntary liquidation of the mortgage-related asset, including any cross-collateralized mortgage-backed securities. This would result in a loss to us of the difference between the value of the mortgage-related asset upon liquidation and the amount borrowed against the mortgage-related asset.

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To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of income could be negatively affected, which would jeopardize our status as a REIT. Losing our REIT status would cause us to lose tax advantages applicable to REITs and may decrease our overall profitability and distributions to our stockholders.

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we would be taxed as a regular domestic corporation, which, among other things, means being unable to deduct distributions to stockholders in computing taxable income and being subject to federal income tax on our taxable income at regular corporate rates;

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any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and

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unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year during which we lost our qualification, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we do not qualify as a REIT.

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Ownership limit.    The ownership limit in our charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our common stock without our permission.

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Preferred stock.    Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of preferred stock issued. These actions can be taken without soliciting stockholder approval.

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Maryland business combination statute.    Maryland law restricts the ability of holders of more than 10% of the voting power of a corporation’s shares to engage in a business combination with the corporation. See page 18 for a description of these provisions.

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Maryland control share acquisition statute.    Maryland law limits the voting rights of “control shares” of a corporation in the event of a “control share acquisition.” See page 19 for a description of these provisions.

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our business strategy;

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market trends and risks;

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assumptions regarding interest rates; and

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assumptions regarding prepayment rates on the mortgage loans securing our mortgage-backed securities.

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increases in the prepayment rates on the mortgage loans securing our mortgage-backed securities;

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our ability to use borrowings to finance our assets;

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risks associated with investing in mortgage-related assets, including changes in business conditions and the general economy;

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our ability to maintain our qualification as a real estate investment trust for federal income tax purposes; and

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management’s ability to manage our growth and planned expansion.

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the title and stated value of the preferred stock;

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the voting rights of the preferred stock, if applicable;

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the preemptive rights of the preferred stock, if applicable;

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the restrictions on transfer of the preferred stock, if applicable;

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the number of shares offered, the liquidation preference per share and the offering price of the shares;

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liability to further calls or assessment of the preferred stock, if applicable;

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the dividend rate(s), period(s) and payment date(s) or method(s) of calculation applicable to the preferred stock;

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the date from which dividends on the preferred stock will accumulate, if applicable;

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the procedures for any auction and remarketing for the preferred stock;

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the provision for a sinking fund, if any, for the preferred stock;

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the provision for and any restriction on redemption, if applicable, of the preferred stock;

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the provision for and any restriction on repurchase, if applicable, of the preferred stock;

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any listing of the preferred stock on any securities exchange;

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the terms and provisions, if any, upon which the preferred stock will be convertible into common stock, including the conversion price (or manner of calculation) and conversion period;

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the terms under which the rights of the preferred stock may be modified, if applicable;

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any other specific terms, preferences, rights, limitations or restrictions of the preferred stock;

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a discussion of certain material federal income tax considerations applicable to the preferred stock;

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the relative ranking and preferences of the preferred stock as to dividend rights and rights upon the liquidation, dissolution or winding-up of our affairs;

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any limitation on issuance of any series of preferred stock ranking senior to or on a parity with the series of preferred stock as to dividend rights and rights upon the liquidation, dissolution or winding-up of our affairs; and

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any limitations on direct or beneficial ownership and restrictions on transfer of the preferred stock, in each case as may be appropriate to preserve our status as REIT.

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the act or omission of the director or officer was material to the matter giving rise to such proceeding and was committed in bad faith or was the result of active and deliberate dishonesty;

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the director or officer actually received an improper personal benefit in money, property or services;

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in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful; or

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the proceeding, other than a proceeding brought to enforce indemnification, is brought by the director or officer against us.

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the person actually received an improper benefit or profit in money, property or services; or

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a judgment or other final adjudication is entered in a proceeding based on a finding that the person’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.

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anyone who beneficially owns 10% or more of the voting power of the corporation’s shares; or

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an affiliate or associate of the corporation who was an interested stockholder or an affiliate or an associate of the interested stockholder at any time within the two-year period prior to the date in question.

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at least 80% of the votes entitled to be cast by all holders of voting shares of the corporation’s voting shares; and

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at least 66 2/3% of the votes entitled to be cast by all holders of the corporation’s voting other than voting shares held by the interested stockholder or an affiliate or associate of the interested stockholder.

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10% or more but less than 33 1/3%;

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33 1/3% or more but less than a majority; or

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a majority of all voting power.

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we will be required to pay tax at regular corporate rates on any undistributed real estate investment trust taxable income, including undistributed net capital gain;

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we may be required to pay the “alternative minimum tax” on our items of tax preference; and

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if we have (a) net income from the sale or other disposition of foreclosure property which is held primarily for sale to customers in the ordinary course of business, or (b) other nonqualifying income from foreclosure property, we will be required to pay tax at the highest corporate rate on this income. Foreclosure property is generally defined as property acquired through foreclosure or after a default on a loan secured by the property or on a lease of the property.

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the greater of (i) the amount by which 75% of our gross income exceeds the amount qualifying under the 75% gross income test described below, and (ii) the amount by which 90% of our gross income exceeds the amount qualifying under the 95% gross income test described below, multiplied by

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a fraction intended to reflect our profitability.

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85% of our real estate investment trust ordinary income for the year;

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95% of our real estate investment trust capital gain net income for the year; and

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any undistributed taxable income from prior periods.

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the fair market value of the asset, over

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our adjusted basis in the asset, in each case determined as of the date on which we acquired the asset.

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that is managed by one or more trustees or directors;

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that issues transferable shares or transferable certificates to evidence beneficial ownership;

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that would be taxable as a domestic corporation but for Code Sections 856 through 859;

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that is not a financial institution or an insurance company within the meaning of the Code;

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that is beneficially owned by 100 or more persons;

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not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals, including specified entities, during the last half of each taxable year; and

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that meets other tests, described below, regarding the nature of its income and assets and the amount of its distributions.

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We must derive directly or indirectly at least 75% of our gross income, excluding gross income from prohibited transactions, from specified real estate sources, including rental income, interest on obligations secured by mortgages on real property or on interests in real property, gain from the disposition of “qualified real estate assets,” i.e., interests in real property, mortgages secured by real property or interests in real property, and some other assets, and income from certain types of temporary investments (the “75% gross income test”); and

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We must derive at least 95% of our gross income, excluding gross income from prohibited transactions, from (a) the sources of income that satisfy the 75% gross income test, (b) dividends, interest and gain from the sale or disposition of stock or securities, including some interest rate swap and cap agreements, options, futures and forward contracts entered into to hedge variable rate debt incurred to acquire qualified real estate assets, or (c) any combination of the foregoing (the “95% gross income test”).

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our failure to meet these tests was due to reasonable cause and not due to willful neglect;

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we attach a schedule of the sources of our income to our federal income tax return; and

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any incorrect information on the schedule was not due to fraud with intent to evade tax.

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at least 75% of the value of our total assets must be represented by qualified real estate assets (including mortgage loans), cash, cash items and government securities;

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not more than 25% of our total assets may be represented by securities, other than those securities included in the 75% asset test;

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of the investments included in the 25% asset class, the value of any one issuer’s securities may not exceed 5% of the value of our total assets, and we generally may not own more than 10% by vote or value of any one issuer’s outstanding securities, in each case except with respect to stock of any “taxable REIT subsidiaries”; and

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the value of the securities we own in any taxable REIT subsidiaries may not exceed 20% of the value of our total assets.

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90% of our “REIT taxable income,” and

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90% of our after tax net income, if any, from foreclosure property, minus

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the excess of the sum of specified items of our non-cash income items over 5% of “REIT taxable income,” as described below.

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the fair market value of the asset on the date we acquired the asset, over

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our adjusted basis in the asset on the date we acquired the asset.

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a citizen or resident of the United States;

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a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless Treasury regulations provide otherwise;

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an estate the income of which is subject to United States federal income taxation regardless of its source; or

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a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust.

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include their proportionate share of our undistributed net capital gains in their taxable income;

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receive a credit for their proportionate share of the tax paid by us in respect of such net capital gain; and

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increase the adjusted basis of their stock by the difference between the amount of their share of our undistributed net capital gain and their share of the tax paid by us.

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is described in Section 401(a) of the Code; and

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holds more than 10%, by value, of the interests in the REIT.

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it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code provides that stock owned by a qualified trust shall be treated, for purposes of the 5/50 Rule, described above, as owned by the beneficiaries of the trust, rather than by the trust itself; and

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either at least one qualified trust holds more than 25%, by value, of the interests in the REIT, or one or more qualified trusts, each of which owns more than 10%, by value, of the interests in the REIT, holds in the aggregate more than 50%, by value, of the interests in the REIT.

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the unrelated business taxable income earned by the REIT, less directly related expenses, treating the REIT as if it were a qualified trust and therefore subject to tax on unrelated business taxable income, to

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the total gross income, less directly related expenses, of the REIT.

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a lower treaty rate applies and any required form, for example IRS Form W-8BEN, evidencing eligibility for that reduced rate is filed by the non-United States stockholder with us; or

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the non-United States stockholder files an IRS Form W-8ECI with us claiming that the distribution is effectively connected income.

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the non-United States stockholder’s investment in the stock is effectively connected with a trade or business in the United States, in which case the non-United States stockholder will be subject to the same treatment as United States stockholders with respect to that gain; or

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the non-United States stockholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and other conditions are met, in which case the nonresident alien individual will be subject to a 30% tax on the individual’s capital gains.

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•

our annual report on Form 10-K for the fiscal year ended December 31, 2001;

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our quarterly report on Form 10-Q for the quarter ended March 31, 2002;

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our quarterly report on Form 10-Q for the quarter ended June 30, 2002;

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our quarterly report on Form 10-Q for the quarter ended September 30, 2002; and

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the description of our common stock included in our registration statement on Form 8-A.

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3,500,000 Shares

 

 

Anworth Mortgage Asset Corporation

 

Common Stock

 

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PROSPECTUS SUPPLEMENT

 

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FRIEDMAN BILLINGS RAMSEY

 

ADVEST, INC.

 

STIFEL, NICOLAUS  &  COMPANY,

INCORPORATED

 

FLAGSTONE SECURITIES

 

May         , 2003

 

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