-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hrl7CXZMVywEawStSc0m5+6HAbPsjZ0wBXGshYBoX1UxWrHOnJNHluPUvDLCmfzu zNIQa5QltcBKhCuvQsLOPw== 0000950134-00-001996.txt : 20000317 0000950134-00-001996.hdr.sgml : 20000317 ACCESSION NUMBER: 0000950134-00-001996 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSTEAD MORTGAGE CORP CENTRAL INDEX KEY: 0000766701 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 752027937 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08896 FILM NUMBER: 571365 BUSINESS ADDRESS: STREET 1: 8401 NORTH CENTRAL EXPRESSWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75225 BUSINESS PHONE: 2148742323 MAIL ADDRESS: STREET 1: 8401 NORTH CENTRAL EXPRESSWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75225 FORMER COMPANY: FORMER CONFORMED NAME: LOMAS MORTGAGE CORP DATE OF NAME CHANGE: 19891105 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ COMMISSION FILE NUMBER: 1-8896 CAPSTEAD MORTGAGE CORPORATION (Exact name of Registrant as specified in its Charter) MARYLAND 75-2027937 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8401 N CENTRAL EXPRESSWAY, SUITE 800, DALLAS, TX 75225 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 874-2323 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED ------------------- ------------------------------------ Common Stock ($0.01 par value) New York Stock Exchange $1.60 Cumulative Preferred Stock, Series A ($0.10 par value) New York Stock Exchange $1.26 Cumulative Convertible Preferred Stock, Series B ($0.10 par value) New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [ ] AT MARCH 13, 2000 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES WAS $163,781,520. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 13, 2000: 45,718,821 DOCUMENTS INCORPORATED BY REFERENCE: (1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1999 ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV. (2) PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT, ISSUED IN CONNECTION WITH THE 2000 ANNUAL MEETING OF STOCKHOLDERS OF THE REGISTRANT, ARE INCORPORATED BY REFERENCE INTO PART III. ================================================================================ 2 CAPSTEAD MORTGAGE CORPORATION 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
PAGE ---- ITEM 1. BUSINESS................................................... 1 ITEM 2. PROPERTIES................................................. 3 ITEM 3. LEGAL PROCEEDINGS.......................................... 3 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 3 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................... 3 ITEM 6. SELECTED FINANCIAL DATA.................................... 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 4 ITEM 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....................................... 4 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 4 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................... 4 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 4 ITEM 11. EXECUTIVE COMPENSATION..................................... 4 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................... 4 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 4 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..................................... 5
3 PART I ITEM 1. BUSINESS. Capstead Mortgage Corporation ("CMC" or the "Company") was incorporated on April 15, 1985 in Maryland and commenced operations in September 1985. The Company's business plan is to build a mortgage investment firm, earning income from investing in mortgage assets on a leveraged basis and other investment strategies. Initially, the Company structured and managed residential mortgage investments. From 1992 through 1998 the Company also operated a residential mortgage servicing operation that was sold in December 1998. During 1999 the Company's primary focus consisted of managing a portfolio of single-family residential mortgage-backed securities issued by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae ("Agency Securities"). The Company is considering modifying its investment strategy to replace a portion of its existing mortgage investments with a diversified portfolio of credit-sensitive commercial mortgage-backed securities ("CMBS") and residential mortgage-backed securities, most of which are expected to be "investment grade" at the time of purchase as determined by national rating agencies. Credit-sensitive mortgage securities generally earn higher yields than those typically earned on the Company's existing mortgage assets, due largely to a higher risk of default by the underlying borrowers and, to a lesser extent, reduced liquidity. Fully implementing this proposed modification of investment strategy could necessitate a repositioning of the Company's existing portfolio of mortgage securities, which could result in the recognition in operating results of a portion of the unrealized losses on these securities that are currently reflected in the balance sheet. For further discussion of the Company's business, see the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on pages 33 through 39. EFFECTS OF INTEREST RATE CHANGES AND INTEREST RATE SENSITIVITY For discussion of effects of interest rate changes on the Company's mortgage securities portfolios, see the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on pages 43 through 45. RISKS ASSOCIATED WITH CREDIT-SENSITIVE INVESTMENTS For discussion of risks associated with credit-sensitive investments, see the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on pages 45 through 46. OTHER INVESTMENT STRATEGIES The Company may enter into other short- or long-term investment strategies as the opportunities arise. COMPETITION In purchasing mortgage securities, the Company competes with savings banks, commercial banks, mortgage and investment bankers, conduits, insurance companies, other lenders and mutual funds. REGULATION AND RELATED MATTERS Prior to its sale December 31, 1998, the Company's mortgage banking operations were subject to the rules and regulations of Fannie Mae and Freddie Mac with respect to servicing and originating mortgage 1 4 loans. In addition, there are other federal and state statutes and regulations affecting such activities. Many of the these regulatory requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to have complied with these requirements could lead to demands for indemnification or loan repurchases from the buyers of the mortgage banking operations or Fannie Mae or Freddie Mac, class action lawsuits and administrative enforcement actions. EMPLOYEES As of December 31, 1999, the Company had 19 full-time employees. TAX STATUS As used herein, "Capstead REIT" refers to CMC and the entities that are consolidated with CMC for federal income tax purposes. Capstead REIT has elected to be taxed as a REIT for federal income tax purposes and intends to continue to do so. As a result of this election, Capstead REIT will not be taxed at the corporate level on taxable income distributed to stockholders, provided that certain requirements concerning the nature and composition of its income and assets are met and that at least 95 percent of its REIT taxable income is distributed. If Capstead REIT fails to qualify as a REIT in any taxable year, it would be subject to federal income tax at regular corporate rates and would not receive a deduction for dividends paid to stockholders. If this were the case, the amount of after-tax earnings available for distribution to stockholders would decrease substantially. As long as Capstead REIT qualifies as a REIT, it will generally be taxable only on its undistributed taxable income. Distributions out of current or accumulated earnings and profits will be taxed to stockholders as ordinary income or capital gain, as the case may be. Distributions in excess of the Company's accumulated and current earnings and profits will constitute a non-taxable return of capital to the stockholders (except insofar as such distributions exceed the cost basis of the shares of stock) resulting in a corresponding reduction in the cost basis of the shares of stock. The Company notifies its stockholders of the proportion of distributions made during the taxable year that constitutes ordinary income, return of capital or capital gains. For 1999, 100 percent of the common and preferred stock distributions were characterized as ordinary income; no distributions were characterized as capital gains due to the utilization of capital loss carryforwards. Capstead REIT realized substantial capital losses on the sale of mortgage assets in 1998. The resulting capital loss carryforwards will in all likelihood eliminate the potential for capital gain distributions through the year 2004 when these carryforwards expire. During 1998, 92.0 percent and 8.0 percent of the common stock distributions were characterized as ordinary income and nontaxable return of capital, respectively, while 100 percent of the preferred stock distributions were characterized as ordinary income. For 1997, capital gains were classified as medium-term on sold assets that were held 12 to 18 months, and long-term on sold assets that were held longer than 18 months. During 1997, 83.7 percent, 7.5 percent, 7.4 percent and 1.4 percent of the common stock distributions were characterized as ordinary income; no distributions were characterized as capital gains due to the utilization of capital loss carryforwards. Capstead REIT realized substantial capital losses on the sale of mortgage assets in 1998. The resulting capital loss carryforwards will in all likelihood eliminate the potential for capital gain distributions through the year 2004 when these carryforwards expire. During 1998, 92.0 percent and 8.0 percent of the common stock distributions were characterized as ordinary income and nontaxable return of capital, respectively, while 100 percent of the preferred stock distributions were characterized as ordinary income. For 1997, capital gains were classified as medium-term on sold assets that were held 12 to 18 months, and long-term on sold assets that were held longer than 18 months. During 1997, 83.7 percent, 7.5 percent, 7.4 percent and 1.4 percent of the common stock distributions were characterized as ordinary income, nontaxable return of capital, medium-term capital gain and long-term capital gain, respectively, while 100 percent of the preferred stock distributions were characterized as ordinary income. Distributions by the Company will not normally be eligible for the dividends received deduction for corporations. Should the Company incur losses, stockholders will not be entitled to include such losses in their individual income tax returns. All taxable income of Capstead Holdings, Inc., and its primary subsidiary Capstead Inc. (which held the mortgage banking operations prior to their sale in December 1998), is subject to federal and state income taxes, where applicable. Capstead REIT's taxable income will include earnings of these subsidiaries only upon payment to Capstead REIT by distribution of such earnings, and only if these distributions are made out of current earnings and profits. 2 5 The foregoing is general in character. Reference should be made to pertinent Internal Revenue Code sections and the Regulations issued thereunder for a comprehensive statement of applicable federal income tax consequences. ITEM 2. PROPERTIES. The Company's operations are conducted in Dallas, Texas on properties leased by the Company. ITEM 3. LEGAL PROCEEDINGS. Between July 23, 1998 and November 11, 1998, twenty-four purported class action lawsuits were filed against the Company and certain of its senior officers which allege, among other things, that the defendants violated federal securities laws by publicly issuing false and misleading statements and omitting disclosure of material adverse information regarding the Company's business during various periods between January 28, 1997 and July 24, 1998. The complaints claim that as a result of such alleged improper actions, the market price of the Company's equity securities were artificially inflated during that time period. The complaints seek monetary damages in an undetermined amount. In March 1999 these actions were consolidated. The time by which the Company is to respond has not yet run. The Company believes it has meritorious defenses to the claims and intends to vigorously defend the actions. All of the lawsuits are pending in the United States District Court for the Northern District of Texas. In 23 of the lawsuits, the individual defendants were Ronn K. Lytle, Christopher T. Gilson, Julie A. Moore, Andrew F. Jacobs and William H. Rudluff. In one of the lawsuits, the individual defendants included only Messrs. Lytle and Jacobs and Ms. Moore. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item regarding the December 1999 issuance of preferred shares in an unregistered private placement to Fortress pursuant to Section 4(2) of the Securities Act of 1933 is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on page 25 under the caption "Note 10 - Stockholders' Equity and Preferred Stock Subject to Repurchase," and page 36 under the caption "Investment by Fortress and Potential Changes in Management," and is incorporated herein by reference, pursuant to General Instruction G(2). The information required by this item regarding the market price of, dividends on, and number of holders of the Registrant's common shares is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on page 31 under the caption "Note 15 - Market and Dividend Information," and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on page 32 under the caption "Selected Financial Data," and is incorporated herein by reference, pursuant to General Instruction G(2). 3 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on pages 33 through 47 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 7.a. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on pages 33 through 47 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is included in the Registrant's Annual Report to Stockholders for the year ended December 31, 1999 on pages 7 through 31, and is incorporated herein by reference, pursuant to General Instruction G(2). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is included in the Registrant's 2000 definitive Proxy Statement on pages 4 through 18 under the captions "Election of Directors" and "Management," which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included in the Registrant's 2000 definitive Proxy Statement on pages 19 through 22 under the captions "Compensation Committee Report on Executive Compensation" and "Performance Graph," and pages 25 and 26 under the caption "Executive Compensation," all of which are incorporated herein by reference pursuant to General Instruction G(3). ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS. The information required by this item is included in the Registrant's 2000 definitive Proxy Statement on pages 23 and 24 under the caption "Security Ownership of Management and Certain Beneficial Owners," which is incorporated herein by reference pursuant to General Instruction G(3). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 4 7 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: 1. The following consolidated financial statements of the Company, included in the 1999 Annual Report to Stockholders, are incorporated herein by reference:
PAGE ---- Consolidated Statement of Operations - Three Years Ended December 31, 1999................................. * Consolidated Balance Sheet - December 31, 1999 and 1998............... * Consolidated Statement of Stockholders' Equity and Preferred Stock Subject to Repurchase - Three Years Ended December 31, 1999......... * Consolidated Statement of Cash Flows - Three Years Ended December 31, 1999................................. * Notes to Consolidated Financial Statements - December 31, 1999........ *
2. Financial Statement Schedules - All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. * Incorporated herein by reference from the Company's Annual Report to Stockholders for the year ended December 31, 1999. 3. Exhibits:
EXHIBIT NUMBER ------- 1.3 Sales Agency Agreement dated as of December 6, 1995 between Capstead Mortgage Corporation and PaineWebber Incorporated (the "Sales Agency Agreement")(6) 1.4 Amendment No. 1 to the Sales Agency Agreement dated as of September 10, 1996 between Capstead Mortgage Corporation and PaineWebber Incorporated (the "Common Stock Sales Agency Agreement")(8) 1.5 Sales Agency Agreement dated as of August 17, 1996 Capstead Mortgage Corporation and PaineWebber Incorporated (the "Series B Preferred Stock 1996 Sales Agency Agreement")(8) 1.6 The Second Amendment dated as of March 4, 1997 to the Sales Agency Agreement dated as of December 6, 1995 between the Company and PaineWebber Incorporated (the "Common Stock Sales Agency Agreement")(9) 1.7 The First Amendment dated as of March 4, 1997 to the Sales Agency Agreement dated as of September 17, 1996 between the Company and PaineWebber Incorporated (the "Series B Preferred Stock 1996 Sales Agency Agreement")(9) 1.8 The Third Amendment dated as of November 17, 1997 to the Sales Agency Agreement dated as of December 6, 1995 between the Company and PaineWebber Incorporated (the "Sales Agency Agreement")(11) 2.1 Asset Purchase Agreement dated as of December 10, 1998 by and among Capstead Mortgage Corporation, Capstead Holdings, Inc. and Capstead Inc. and Homecomings Financial Network, Inc.(12)
5 8 PART IV ITEM 14. -- CONTINUED 3. Exhibits (continued):
EXHIBIT NUMBER ------- 3.1(a) Charter of the Company, which includes Articles of Incorporation, Articles Supplementary for $1.60 Cumulative Preferred Stock, Series A, and all other amendments to such Articles of Incorporation(4) 3.1(b) Articles Supplementary ($1.26 Cumulative Convertible Preferred Stock, Series B)(3) 3.1(c) Articles Supplementary ($0.56 Cumulative Convertible Preferred Stock, Series C)(13) 3.1(d) Articles Supplementary ($0.40 Cumulative Convertible Preferred Stock, Series D)(13) 3.2 Bylaws of the Company, as amended(4) 10.21 1990 Employee Stock Option Plan(1) 10.22 1990 Directors' Stock Option Plan(2) 10.23 Employment Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(3) 10.24 Restricted Stock Grant Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(3) 10.25 1994 Flexible Long Term Incentive Plan(5) 10.26 1994 Capstead Inc. Restricted Stock Plan(5) 10.27 Capstead Mortgage Corporation Deferred Compensation Plan(5) 10.28 Summary of Employment Agreement dated December 9, 1993 between Capstead Mortgage Corporation and Christopher T. Gilson(5) 10.29 Capstead Mortgage Corporation Incentive Bonus Plan(7) 10.30 Amendment to the 1994 Flexible Long Term Incentive Plan(7) 10.31 Amendment No. 1 dated March 31, 1997 to the Employment Agreement dated August 1, 1992 between the Company and Ronn K. Lytle(10) 10.32 1997 Flexible Long Term Incentive Plan(10) 10.33 Purchase and Sale Agreement dated as of November 30, 1998 by and among Capstead Inc. and GMAC Mortgage Corporation(12) 10.34 Series C and Series D Convertible Preferred Stock Purchase Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp(13) 10.35 Supplemental Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp(13) 10.36 Registration Rights Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp(13) 10.37 Form of Amendment No. 1 dated as of January 21, 2000 to the Supplemental Agreement to the Stock Purchase Agreement by and among Capstead Mortgage Corporation and Fortress Cap LLC(14) 11 Computation of per share earnings* 12 Computation of ratio of earnings to combined fixed charges and preferred stock dividends* 13 Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1999* 21 List of subsidiaries of the Company* 23 Consent of Ernst & Young LLP, Independent Auditors* 27 Financial Data Schedule (electronic filing only)*
6 9 PART IV ITEM 14. -- CONTINUED 3. Exhibits (continued): (1) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40016) dated April 29, 1991 (2) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40017) dated April 29, 1991 (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (4) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-62212) dated May 6, 1993 (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (6) Incorporated by reference to the Company's Current Report of Form 8-K dated December 6, 1995 (7) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1996 (8) Incorporated by reference to the Company's Current Report of Form 8-K dated August 20, 1996 (9) Incorporated by reference to the Company's Current Report of Form 8-K dated March 26, 1997 (10) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1997 (11) Incorporated by reference to the Company's Current Report of Form 8-K dated December 23, 1997 (12) Incorporated by reference to the Company's Current Report of Form 8-K dated December 31, 1998 (13) Incorporated by reference to the Company's Current Report of Form 8-K dated December 15, 1999 (14) Incorporated by reference to the Company's Current Report of Form 8-K dated February 2, 2000 * Filed herewith (b) Reports on Form 8-K: Current Report on Form 8-K dated December 15, 1999 to file the following: Exhibit 3.1(c) - Articles Supplementary $0.56 Cumulative Convertible Preferred Stock, Series C. Exhibit 3.1(d) - Articles Supplementary $0.40 Cumulative Convertible Preferred Stock, Series D. Exhibit 10.34 - Series C and Series D Convertible Preferred Stock Asset Purchase Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp. Exhibit 10.35 - Supplemental Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp. Exhibit 10.36 - Registration Rights Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp. Current Report on Form 8-K dated February 2, 2000 to file the following: Exhibit 10.37 - Form of Amendment No. 1 dated as of January 21, 2000 to the Supplemental Agreement to the Stock Purchase Agreement by and among Capstead Mortgage Corporation and Fortress Cap LLC. (c) Exhibits - The response to this section of ITEM 14 is submitted as a separate section of this report. (d) Financial Statement Schedules - The response to this section of ITEM 14 is submitted as a separate section of this report. 7 10 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPSTEAD MORTGAGE CORPORATION REGISTRANT Date: March 8, 2000 By: /s/ ANDREW F. JACOBS ------------------------------------ Andrew F. Jacobs Executive Vice President - Finance Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below and on the dates indicated. /s/ RONN K. LYTLE Chairman, Chief Executive March 8, 2000 - --------------------------- Officer and Director (Ronn K. Lytle) /s/ ANDREW F. JACOBS Executive Vice President - March 8, 2000 - --------------------------- Finance (Andrew F. Jacobs) /s/ WESLEY R. EDENS Director March 10, 2000 - --------------------------- (Wesley R. Edens) /s/ ROBERT I. KAUFFMAN Director March 9, 2000 - --------------------------- (Robert I. Kauffman) /s/ BEVIS LONGSTRETH Director March 9, 2000 - --------------------------- (Bevis Longstreth) /s/ PAUL M. LOW Director March 9, 2000 - --------------------------- (Paul M. Low) /s/ HARRIET E. MIERS Director March 9, 2000 - --------------------------- (Harriet E. Miers) /s/ WILLIAM R. SMITH Director March 9, 2000 - --------------------------- (William R. Smith) /s/ JOHN C. TOLLESON Director March 9, 2000 - --------------------------- (John C. Tolleson) 8 11 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.3 Sales Agency Agreement dated as of December 6, 1995 between Capstead Mortgage Corporation and PaineWebber Incorporated (the "Sales Agency Agreement")(6) 1.4 Amendment No. 1 to the Sales Agency Agreement dated as of September 10, 1996 between Capstead Mortgage Corporation and PaineWebber Incorporated (the "Common Stock Sales Agency Agreement")(8) 1.5 Sales Agency Agreement dated as of August 17, 1996 Capstead Mortgage Corporation and PaineWebber Incorporated (the "Series B Preferred Stock 1996 Sales Agency Agreement")(8) 1.6 The Second Amendment dated as of March 4, 1997 to the Sales Agency Agreement dated as of December 6, 1995 between the Company and PaineWebber Incorporated (the "Common Stock Sales Agency Agreement")(9) 1.7 The First Amendment dated as of March 4, 1997 to the Sales Agency Agreement dated as of September 17, 1996 between the Company and PaineWebber Incorporated (the "Series B Preferred Stock 1996 Sales Agency Agreement")(9) 1.8 The Third Amendment dated as of November 17, 1997 to the Sales Agency Agreement dated as of December 6, 1995 between the Company and PaineWebber Incorporated (the "Sales Agency Agreement")(11) 2.1 Asset Purchase Agreement dated as of December 10, 1998 by and among Capstead Mortgage Corporation, Capstead Holdings, Inc. and Capstead Inc. and Homecomings Financial Network, Inc.(12) 3.1(a) Charter of the Company, which includes Articles of Incorporation, Articles Supplementary for $1.60 Cumulative Preferred Stock, Series A, and all other amendments to such Articles of Incorporation(4) 3.1(b) Articles Supplementary ($1.26 Cumulative Convertible Preferred Stock, Series B)(3) 3.1(c) Articles Supplementary ($0.56 Cumulative Convertible Preferred Stock, Series C)(13) 3.1(d) Articles Supplementary ($0.40 Cumulative Convertible Preferred Stock, Series D)(13) 3.2 Bylaws of the Company, as amended(4) 10.21 1990 Employee Stock Option Plan(1) 10.22 1990 Directors' Stock Option Plan(2) 10.23 Employment Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(3) 10.24 Restricted Stock Grant Agreement dated August 1, 1992 between Capstead Mortgage Corporation and Ronn K. Lytle(3) 10.25 1994 Flexible Long Term Incentive Plan(5) 10.26 1994 Capstead Inc. Restricted Stock Plan(5) 10.27 Capstead Mortgage Corporation Deferred Compensation Plan(5) 10.28 Summary of Employment Agreement dated December 9, 1993 between Capstead Mortgage Corporation and Christopher T. Gilson(5) 10.29 Capstead Mortgage Corporation Incentive Bonus Plan(7) 10.30 Amendment to the 1994 Flexible Long Term Incentive Plan(7) 10.31 Amendment No. 1 dated March 31, 1997 to the Employment Agreement dated August 1, 1992 between the Company and Ronn K. Lytle(10) 10.32 1997 Flexible Long Term Incentive Plan(10)
12 INDEX TO EXHIBITS (continued)
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.33 Purchase and Sale Agreement dated as of November 30, 1998 by and among Capstead Inc. and GMAC Mortgage Corporation(12) 10.34 Series C and Series D Convertible Preferred Stock Purchase Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp(13) 10.35 Supplemental Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp(13) 10.36 Registration Rights Agreement dated as of December 9, 1999 by and among Capstead Mortgage Corporation and Fortress Investment Corp(13) 10.37 Form of Amendment No. 1 dated as of January 21, 2000 to the Supplemental Agreement to the Stock Purchase Agreement by and among Capstead Mortgage Corporation and Fortress Cap LLC(14) 11 Computation of per share earnings* 12 Computation of ratio of earnings to combined fixed charges and preferred stock dividends* 13 Portions of the Company's Annual Report to Stockholders for the year ended December 31, 1999* 21 List of subsidiaries of the Company* 23 Consent of Ernst & Young LLP, Independent Auditors* 27 Financial Data Schedule (electronic filing only)*
(1) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40016) dated April 29, 1991 (2) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 33-40017) dated April 29, 1991 (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 (4) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-62212) dated May 6, 1993 (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (6) Incorporated by reference to the Company's Current Report of Form 8-K dated December 6, 1995 (7) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1996 (8) Incorporated by reference to the Company's Current Report of Form 8-K dated August 20, 1996 (9) Incorporated by reference to the Company's Current Report of Form 8-K dated March 26, 1997 (10) Incorporated by reference to the Company's 10-Q for the quarterly period ended March 31, 1997 (11) Incorporated by reference to the Company's Current Report of Form 8-K dated December 23, 1997 (12) Incorporated by reference to the Company's Current Report of Form 8-K dated December 31, 1998 (13) Incorporated by reference to the Company's Current Report of Form 8-K dated December 15, 1999 (14) Incorporated by reference to the Company's Current Report of Form 8-K dated February 2, 2000 * Filed herewith
EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 --------- --------- --------- BASIC: Average number of common shares outstanding 58,348 60,948 51,257 --------- --------- --------- Net income (loss) $ 57,909 $(234,764) $ 159,926 Less cash dividends paid on convertible preferred shares: Series A ($1.60 paid per share) (598) (610) (683) Series B ($1.26 paid per share) (21,391) (21,732) (24,774) Series C ($0.03 paid per share) (185) -- -- Series D ($0.02 paid per share) (131) -- -- Repurchase price in excess of recorded value (251) -- -- --------- --------- --------- Net income available to common stockholders $ 35,353 $(257,106) $ 134,469 --------- --------- --------- Basic net income (loss) per common share $ 0.61 $ (4.22) $ 2.62 --------- --------- --------- DILUTED:* Average number of common shares outstanding 58,348 60,948 51,257 Assumed conversion of dilutive convertible preferred shares: Series A -- -- 889 Series B -- -- 14,776 Series C 339 -- -- Series D 339 -- -- Incremental shares calculated using the treasury stock method 20 -- 1,101 59,046 60,948 68,023 --------- --------- --------- Net income (loss) $ 57,909 $(234,764) $ 159,926 Less cash dividends paid on antidilutive convertible preferred shares: Series A ($1.60 paid per share) (598) (610) -- Series B ($1.26 paid per share) (21,391) (21,732) -- Repurchase price in excess of recorded value (251) -- -- --------- --------- --------- Net income available to common stockholders $ 35,669 $(257,106) $ 159,926 --------- --------- --------- Diluted net income (loss) per common share $ 0.60 $ (4.22) $ 2.35 --------- --------- ---------
* The Series A and B shares were not considered convertible for purposes of calculating diluted net income (loss) per common share in 1999 and 1998 because the effects of conversion were antidilutive. The Series C and D shares were issued in December 1999.
EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 CAPSTEAD MORTGAGE CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED) (a) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (including CMO debt):
Year Ended December 31 ------------------------------------------------------------------ 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Fixed charges $ 502,933 $ 673,233 $ 633,845 $ 598,312 $ 584,137 Preferred stock dividends 22,556 22,342 25,457 36,356 39,334 --------- --------- --------- --------- --------- Combined fixed charges and preferred stock dividends 525,489 695,575 659,302 634,668 623,471 Net income (loss) 57,909 (234,764) 159,926 127,228 77,359 --------- --------- --------- --------- --------- Total $ 583,398 $ 460,811 $ 819,228 $ 761,896 $ 700,830 --------- --------- --------- --------- --------- Ratio of earnings to combined fixed charges and preferred stock dividends 1.11:1 0.66:1 1.24:1 1.20:1 1.12:1 --------- --------- --------- --------- ---------
(b) Computation of ratio of earnings to combined fixed charges and preferred stock dividends (excluding CMO debt):
Year Ended December 31 ------------------------------------------------------------------ 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Fixed charges $ 232,852 $ 332,985 $ 352,348 $ 283,974 $ 223,751 Preferred stock dividends 22,556 22,342 25,457 36,356 39,334 --------- --------- --------- --------- --------- Combined fixed charges and preferred stock dividends 255,408 355,327 377,805 320,330 263,085 Net income (loss) 57,909 (234,764) 159,926 127,228 77,359 --------- --------- --------- --------- --------- Total $ 313,317 $ 120,563 $ 537,731 $ 447,558 $ 340,444 --------- --------- --------- --------- --------- Ratio of earnings to combined fixed charges and preferred stock dividends 1.23:1 0.34:1 1.42:1 1.40:1 1.29:1 --------- --------- --------- --------- ---------
EX-13 4 PORTIONS OF ANNUAL REPORT YEAR END 12/31/99 1 EXHIBIT 13 CAPSTEAD MORTGAGE CORPORATION PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1999 2 EXHIBIT 13 CAPSTEAD MORTGAGE CORPORATION REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Capstead Mortgage Corporation We have audited the accompanying consolidated balance sheet of Capstead Mortgage Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and preferred stock subject to repurchase, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capstead Mortgage Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. By: /s/ ERNST & YOUNG LLP Dallas, Texas January 27, 2000 7 3 CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31 -------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- INTEREST INCOME: Mortgage securities and other investments $ 293,841 $ 311,807 $ 339,980 CMO collateral and investments 269,318 355,391 354,279 ---------- ---------- ---------- Total interest income 563,159 667,198 694,259 ========== ========== ========== INTEREST AND RELATED EXPENSE: Short-term borrowings: Mortgage securities and other investments 232,852 291,125 300,391 CMO investments -- 22,733 29,244 Collateralized mortgage obligations 270,081 340,248 281,497 Mortgage insurance and other 2,014 5,469 5,155 ---------- ---------- ---------- Total interest and related expense 504,947 659,575 616,287 ---------- ---------- ---------- Net margin on mortgage assets and other investments 58,212 7,623 77,972 ---------- ---------- ---------- NET MARGIN ON MORTGAGE BANKING OPERATIONS -- 11,821 59,422 ---------- ---------- ---------- OTHER OPERATING REVENUE (EXPENSE): Gain (loss) on sale of mortgage assets and related derivative financial instruments 1,738 (245,261) 27,737 Impairment on CMO investments -- (4,051) -- CMO administration and other 4,083 4,598 4,000 Other operating expense (6,124) (9,494) (9,205) ---------- ---------- ---------- Total other operating revenue (expense) (303) (254,208) 22,532 ---------- ---------- ---------- NET INCOME (LOSS) $ 57,909 $ (234,764) $ 159,926 ========== ========== ========== Net income (loss) $ 57,909 $ (234,764) $ 159,926 Less cash dividends on preferred stock (22,556) (22,342) (25,457) ---------- ---------- ---------- Net income (loss) available to common stockholders $ 35,353 $ (257,106) $ 134,469 ========== ========== ========== NET INCOME (LOSS) PER COMMON SHARE: Basic $ 0.61 $ (4.22) $ 2.62 Diluted 0.60 (4.22) 2.35 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 58,348 60,948 51,257 Diluted 59,046 60,948 68,023
See accompanying notes to consolidated financial statements. 8 4 CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts)
December 31 ------------------------------- 1999 1998 ------------ ------------ ASSETS Mortgage securities and other investments $ 5,408,714 $ 2,369,602 CMO collateral and investments 3,318,886 4,571,274 ------------ ------------ 8,727,600 6,940,876 Prepaids, receivables and other 48,451 59,526 Restricted cash and cash equivalents 2,500 26,500 Cash and cash equivalents 28,488 73,385 ------------ ------------ $ 8,807,039 $ 7,100,287 ============ ============ LIABILITIES Borrowings under repurchase arrangements $ 4,872,392 $ 1,839,868 Collateralized mortgage obligations 3,289,584 4,521,324 Accounts payable and accrued expenses 30,673 58,894 ------------ ------------ 8,192,649 6,420,086 ------------ ------------ PREFERRED STOCK SUBJECT TO REPURCHASE $0.10 par value; 10,756 shares authorized, issued and outstanding ($52,735 aggregate repurchase amount) 50,584 -- ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock -- $0.10 par value; 89,244 shares authorized: $1.60 Cumulative Preferred Stock, Series A, 374 and 374 shares issued and outstanding ($6,134 aggregate liquidation preference) 5,228 5,228 $1.26 Cumulative Convertible Preferred Stock, Series B, 16,673 and 17,298 shares issued and outstanding ($189,739 aggregate liquidation preference) 186,248 193,196 Common stock -- $0.01 par value; 100,000 shares authorized; 56,856 and 60,546 shares issued and outstanding 569 605 Paid-in capital 769,617 787,677 Accumulated deficit (304,568) (305,287) Accumulated other comprehensive income (loss) (93,288) (1,218) ------------ ------------ 563,806 680,201 ------------ ------------ $ 8,807,039 $ 7,100,287 ============ ============
See accompanying notes to consolidated financial statements. 9 5 CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND PREFERRED STOCK SUBJECT TO REPURCHASE (In thousands, except per share amounts)
Three Years Ended December 31, 1999 ------------------------------------------------------------------------------------------ Preferred Accumulated Stock Other Total Subject to Preferred Common Paid-in Accumulated Comprehensive Stockholders' Repurchase Stock Stock Capital Deficit Income (Loss) Equity ---------- ---------- ---------- ---------- ----------- ------------- ------------- BALANCE AT JANUARY 1, 1997 $ -- $ 266,396 $ 447 $ 461,045 $ 4,582 $ (5,601) $ 726,869 Comprehensive income: Net income -- -- -- -- 159,926 -- 159,926 Other comprehensive income (loss): Change in unrealized loss on debt securities, net of reclassification amount -- -- -- -- -- (46,845) (46,845) --------- Total comprehensive income 113,081 Cash dividends: Common ($2.40 per share) -- -- -- -- (126,375) -- (126,375) Preferred -- -- -- -- (25,457) -- (25,457) Conversion of preferred stock -- (85,097) 57 85,040 -- -- -- Additions to capital -- 14,199 81 186,210 -- -- 200,490 --------- --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1997 -- 195,498 585 732,295 12,676 (52,446) 888,608 Comprehensive loss: Net loss -- -- -- -- (234,764) -- (234,764) Other comprehensive income (loss): Change in unrealized loss on debt securities, net of reclassification amount -- -- -- -- -- 51,228 51,228 --------- Total comprehensive loss (183,536) Cash dividends: Common ($1.00 per share) -- -- -- -- (60,857) -- (60,857) Preferred -- -- -- -- (22,342) -- (22,342) Conversion of preferred stock -- (1,111) 1 1,110 -- -- -- Additions to capital -- 4,037 29 58,366 -- -- 62,432 Capital stock repurchases -- -- (10) (4,094) -- -- (4,104) --------- --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1998 -- 198,424 605 787,677 (305,287) (1,218) 680,201 Comprehensive loss: Net income -- -- -- -- 57,909 -- 57,909 Other comprehensive income (loss): Change in unrealized loss on debt securities, net of reclassification amount -- -- -- -- -- (92,070) (92,070) --------- Total comprehensive loss (34,161) Cash dividends: Common ($0.60 per share) -- -- -- -- (34,634) -- (34,634) Preferred -- -- -- -- (22,305) -- (22,305) Additions to capital 50,584 -- -- -- -- -- -- Capital stock repurchases -- (6,948) (36) (18,060) (251) -- (25,295) --------- --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1999 $ 50,584 $ 191,476 $ 569 $ 769,617 $(304,568) $ (93,288) $ 563,806 ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 10 6 CAPSTEAD MORTGAGE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Year Ended December 31, -------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 57,909 $ (234,764) $ 159,926 Noncash items: Impairment on CMO investments -- 4,051 -- Amortization and impairment of mortgage servicing rights and related costs -- 319,886 64,892 Amortization of discount and premium 40,020 134,693 114,603 Depreciation and other amortization 1,043 5,010 3,585 Gain on sale of financial instruments held to offset the effects of impairment -- (173,424) -- Gain on sale of mortgage servicing rights and mortgage banking operations -- (2,877) -- Loss (gain) on sale of mortgage assets and derivative financial instruments (1,738) 245,261 (27,737) Net change in prepaids, receivables, other assets, accounts payable and accrued expenses 10,693 112,183 (26,994) ------------ ------------ ------------ Net cash provided by operating activities 107,927 410,019 288,275 ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of mortgage securities and other investments (4,380,781) (4,797,684) (4,467,187) Purchases of CMO collateral and investments -- (1,305,865) (1,684,295) Purchases of mortgage servicing rights -- (106,498) (139,997) Purchases of derivative financial instruments -- (78,396) (112,417) Principal collections on mortgage investments 1,247,027 2,112,469 1,459,956 Proceeds from sales of mortgage assets 114,763 6,924,038 2,020,450 Proceeds from sales and settlement of derivative financial instruments 12,595 239,481 34,191 Proceeds from sale of mortgage servicing rights and mortgage banking operations -- 582,772 -- CMO collateral: Principal collections 1,079,961 1,187,988 537,817 Decrease in accrued interest receivable 7,900 8,367 4,724 Decrease (increase) in short-term investments 14,119 721 (4,546) ------------ ------------ ------------ Net cash provided (used) by investing activities (1,904,416) 4,767,393 (2,351,304) ------------ ------------ ------------ FINANCING ACTIVITIES: Increase (decrease) in short-term borrowings 3,032,524 (5,259,838) 1,636,850 Decrease in mortgage servicing acquisitions payable -- (8,363) (63,374) Collateralized mortgage obligations: Issuance of securities -- 1,494,853 1,109,411 Principal payments on securities (1,241,769) (1,299,115) (673,119) Increase (decrease) in accrued interest payable (7,513) (11,977) 2,253 Capital stock transactions 25,289 46,235 199,214 Dividends paid (56,939) (83,199) (151,832) ------------ ------------ ------------ Net cash provided (used) by financing activities 1,751,592 (5,121,404) 2,059,403 ------------ ------------ ------------ Net change in cash and cash equivalents (44,897) 56,008 (3,626) Cash and cash equivalents at beginning of year 73,385 17,377 21,003 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 28,488 $ 73,385 $ 17,377 ============ ============ ============
See accompanying notes to consolidated financial statements. 11 7 CAPSTEAD MORTGAGE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 NOTE 1 -- BUSINESS Capstead Mortgage Corporation, a mortgage investment firm, earns income from investing in mortgage assets on a leveraged basis and from other investment strategies. Declining long-term interest rates throughout much of 1998 contributed to substantial liquidity issues for the mortgage finance industry. In response to these market conditions, during 1998 the Company reduced its mortgage asset holdings and sold its mortgage banking operations (see NOTE 8). As a result, the Company entered 1999 with substantial liquidity but diminished earnings capacity. During 1999 the Company's primary focus consisted of managing a portfolio of single-family residential mortgage-backed securities issued by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae ("Agency Securities"). The Company is considering modifying its investment strategy to replace a portion of its existing mortgage investments with a diversified portfolio of credit-sensitive commercial mortgage-backed securities ("CMBS") and residential mortgage-backed securities, most of which are expected to be "investment grade" at the time of purchase as determined by national rating agencies. Credit-sensitive mortgage securities generally earn higher yields than those typically earned on the Company's existing mortgage assets, due largely to a higher risk of default by the underlying borrowers and, to a lesser extent, reduced liquidity. Fully implementing this proposed modification of investment strategy could necessitate a repositioning of the Company's existing portfolio of mortgage securities, which could result in the recognition in operating results of a portion of the unrealized losses on these securities that are currently reflected in the balance sheet. NOTE 2 -- ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Capstead Mortgage Corporation ("Capstead"), its special-purpose finance subsidiaries and certain other entities (collectively, the "Company"). Intercompany balances and transactions have been eliminated. Substantially all of the assets of the special-purpose finance subsidiaries are pledged to secure collateralized mortgage obligations ("CMOs") and are not available for the satisfaction of general claims of Capstead. Capstead has no responsibility for CMOs beyond the assets pledged as collateral. USE OF ESTIMATES The use of estimates is inherent in the preparation of financial statements in conformity with generally accepted accounting principles. The amortization of premiums and discounts on mortgage assets and CMOs is based on estimates of future movements in interest rates and 12 8 CAPSTEAD MORTGAGE CORPORATION how resulting rates will affect prepayments on underlying mortgage loans. Actual results could differ from those estimates. As was the case in 1998, prepayments could rise to levels that could adversely affect profitability. MORTGAGE ASSETS Mortgage assets held in the form of mortgage-backed securities are debt securities. Management determines the appropriate classification of debt securities at the time of purchase and periodically reevaluates such designation. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains (losses) reported as a separate component of Accumulated other comprehensive income (loss) in stockholders' equity. Mortgage loans are carried at the lower of cost or market determined on an aggregate basis. Interest is recorded as income when earned. Any premium or discount is recognized as an adjustment to interest income by the interest method over the life of the related mortgage asset. Realized gains (losses) are included in Other operating revenue (expense). The cost of assets sold is based on the specific identification method. CASH AND CASH EQUIVALENTS Cash and cash equivalents include unrestricted cash on hand and highly liquid investments with original maturities of three months or less. RESTRICTED CASH AND CASH EQUIVALENTS Restricted cash and cash equivalents represents cash and highly liquid investments held in escrow in connection with the sale of the mortgage banking operations. Remaining funds are scheduled to be released from escrow July 1, 2000 provided no claims against these funds are made pursuant to the terms of the related sale agreements. MORTGAGE SERVICING RIGHTS Prior to the December 1998 sale of the mortgage banking operations, the cost of acquiring mortgage servicing rights was capitalized and amortized in proportion to and over the period of estimated net servicing income. Included in Net margin on mortgage banking operations are amortization and impairment charges related to mortgage servicing rights. Estimated net servicing income was evaluated periodically and adjustments were made to the rate of amortization. Mortgage servicing rights were evaluated for impairment on a disaggregated basis by predominant risk characteristics. A valuation allowance was established through a charge to operating results to the extent that the recorded amount for servicing rights within an individual stratum exceeded fair value. Fair values were established through use of a discounted cash flow valuation model that incorporated assumptions the Company believed market participants used in estimating the fair value of future net servicing income including assumptions regarding prepayment speeds, discount rates and servicing costs. For impairment evaluation purposes, the Company stratified its servicing portfolio based on term, interest rate and loan type (fixed-rate versus adjustable-rate). 13 9 CAPSTEAD MORTGAGE CORPORATION DERIVATIVE FINANCIAL INSTRUMENTS The Company may acquire derivative financial instruments ("Derivatives") for risk management purposes. Derivatives acquired from time to time may include interest rate floors, swaps and caps, U.S. Treasury futures contracts and options; written options on mortgage assets or various other Derivatives available in the market place that are compatible with the Company's risk management objectives. Owners of Derivatives have credit risk associated with the counterparties to the instruments. The Company manages this risk by dealing only with large, financially sound investment banking firms. Realized and unrealized gains (losses) on Derivatives not designated as hedges are taken directly to operating results. Realized and unrealized gains (losses) on Derivatives designated as hedges reduce (increase) the carrying amount of the assets hedged. Ongoing correlation and effectiveness of such Derivatives is measured by comparing the change in value of the hedges with the change in value of the assets hedged. Should a hedge prove ineffective, hedge accounting would cease and the change in value of the hedge instruments would be reflected in operating results. The cost of acquiring Derivatives designated as hedges is reflected as a charge to operating results as a component of the related hedged item over the contractual lives of the instruments. The fair value of Derivatives, if any, is included in Prepaids, receivables and other on the balance sheet. Prior to selling nearly all of its investments in interest-only mortgage securities and its investment in mortgage servicing rights in 1998, the Company held Derivatives to help offset the effects of falling mortgage interest rates on the value of these investments. Other than remaining interest rate floors sold in January 1999, the Company did not hold any Derivatives during 1999. In June 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for Derivatives and hedging activities. It requires an entity to recognize all Derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. If certain conditions are met, a Derivative may be specifically designated as (i) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (ii) a hedge of the exposure to variable cash flows of a forecasted transaction; or (iii) in certain circumstances, a hedge of a foreign currency exposure. This statement is effective for the Company's fiscal year ending December 31, 2001. The adoption of SFAS 133 is not expected to have a material impact on the financial position or results of operations of the Company. BORROWINGS CMOs and borrowings under repurchase arrangements are carried at their unpaid principal balances, net of unamortized discount or premium. Any discount or premium is recognized as an adjustment to interest expense by the interest method over the expected term of the related borrowings. 14 10 CAPSTEAD MORTGAGE CORPORATION NET MARGIN ON MORTGAGE BANKING OPERATIONS Prior to the December 1998 sale of the mortgage banking operations, the Company earned mortgage banking revenue for servicing and, to a lesser extent, originating single-family residential mortgage loans. This revenue is included in Net margin on mortgage banking operations offset by related costs of servicing including amortization and impairment of mortgage servicing rights. Mortgage banking revenue represents fees received for servicing mortgage loans, interest earned on temporarily-held cash balances, income earned from originating and selling mortgage loans and other ancillary income customary to mortgage banking operations. Also included in Net margin on mortgage banking operations in 1998 is the gain on the sale of this operation. Servicing fees were calculated based on a contractual percentage of the outstanding monthly principal balance of mortgage loans serviced and recognized as income when collected. Other mortgage revenue was recorded on the accrual basis. INCOME TAXES Income taxes are accounted for using the liability method, and deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Capstead and its qualified real estate investment trust ("REIT") subsidiaries have elected to be taxed as a REIT and intend to continue to do so. As a result of this election, Capstead is not taxed on taxable income distributed to stockholders if certain REIT qualification tests are met. It is Capstead's policy to distribute 100 percent of taxable income of the REIT within the time limits prescribed by the Internal Revenue Code (the "Code"), which may extend into the subsequent taxable year. Accordingly, no provision has been made for income taxes for Capstead and its qualified REIT subsidiaries. Capstead's non-REIT subsidiaries file a separate consolidated federal income tax return and are subject to income taxes. STOCK-BASED COMPENSATION Compensation cost for stock-based awards is generally measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock and is recognized as compensation expense as the awards vest and restrictions lapse. NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share is computed by dividing net income (loss), after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and common stock equivalents outstanding, and assuming conversion of the $1.60 Cumulative Preferred Stock, Series A ("Series A" shares); the $1.26 Cumulative Convertible Preferred Stock, Series B ("Series B" shares); $0.56 Cumulative Convertible Preferred Stock, Series C ("Series C" shares); and $0.40 Cumulative Convertible Preferred Stock, Series D ("Series D" shares) if 15 11 CAPSTEAD MORTGAGE CORPORATION the effects of conversion are dilutive. The Series A and B shares were not considered convertible for purposes of calculating diluted net income (loss) per common share in 1999 and 1998 because the effects of conversion were antidilutive. NOTE 3 -- MORTGAGE SECURITIES AND OTHER INVESTMENTS Mortgage securities and other investments and the related average effective interest rates (calculated for the indicated year including mortgage insurance costs on non-agency securities and excluding unrealized gains and losses) were as follows (dollars in thousands):
Purchase Average Principal Premiums Carrying Average Effective Balance (Discounts) Basis Amount Coupon Rate ------------ ------------ ------------ ------------ ------------ ------------ DECEMBER 31, 1999 * ** ** Agency Securities: FNMA/FHLMC: Fixed-rate $ 1,063,822 $ (2,924) $ 1,060,898 $ 1,009,577 6.18% 6.23% Medium-term 1,123,984 4,516 1,128,500 1,103,704 6.15 5.89 ARMs: LIBOR/CMT 911,262 20,824 932,086 935,291 7.03 5.63 COFI 242,573 1,570 244,143 237,721 5.84 5.62 GNMA ARMs 1,924,659 26,083 1,950,742 1,936,032 6.29 5.65 ------------ ------------ ------------ ------------ ------------ ------------ 5,266,300 50,069 5,316,369 5,222,325 6.35 5.81 Non-agency securities 126,431 385 126,816 127,059 8.34 8.06 CMBS -- adjustable-rate 60,182 (852) 59,330 59,330 7.54 8.53 ------------ ------------ ------------ ------------ ------------ ------------ 60,182 $ 5,452,913 $ 49,602 $ 5,502,515 $ 5,408,714 6.41% 5.87% ============ ============ ============ ============ ============ ============ DECEMBER 31, 1998 Agency and U.S. Treasury Securities: U.S. Treasury notes $ $ -- $ -- $ -- --% 5.40% FNMA/FHLMC: Fixed-rate 397,648 (731) 396,917 400,345 6.50 6.51 Medium-term 313,947 3,597 317,544 318,033 6.60 5.94 LIBOR/CMT ARMs 616,274 16,350 632,624 626,356 7.49 5.20 GNMA ARMs 871,308 14,635 885,943 883,451 6.75 5.80 ------------ ------------ ------------ ------------ ------------ ------------ 2,199,177 33,851 2,233,028 2,228,185 6.89 5.77 Non-agency securities 140,718 (157) 140,561 141,417 7.22 7.02 ------------ ------------ ------------ ------------ ------------ ------------ $ 2,339,895 $ 33,694 $ 2,373,589 $ 2,369,602 6.91% 5.89% ============ ============ ============ ============ ============ ============
* Includes mark to market, if applicable (see NOTE 7). ** Average Coupon is calculated as of the indicated balance sheet date. Average Effective Rate is calculated for the year then ended. The Company classifies its mortgage securities by interest rate characteristics of the underlying single-family residential mortgage loans. Fixed-rate mortgage securities either (i) have fixed rates of interest for their entire terms, (ii) have an initial fixed-rate period of 10 years after origination and then adjust annually based on a specified margin over 1-year U.S. Treasury Securities ("1-year Treasuries"), or (iii) were previously classified as medium-term and have adjusted to a fixed rate for the remainder of their terms. Medium-term mortgage securities either (i) have an initial fixed-rate period of 3 or 5 years after origination and then adjust annually based on a specified margin over 1-year Treasuries, (ii) have initial 16 12 CAPSTEAD MORTGAGE CORPORATION interest rates that adjust one time, approximately 5 years following origination of the mortgage loan, based on a specified margin over Fannie Mae yields for 30-year, fixed-rate commitments at the time of adjustment, or (iii) are fixed-rate mortgage securities that have expected weighted average lives of 5 years or less. Adjustable-rate mortgage ("ARM") securities either (i) adjust semiannually based on a specified margin over the 6-month London Interbank Offered Rate ("LIBOR"), (ii) adjust annually based on a specified margin over 1-year Treasuries ("CMT"), (iii) adjust monthly based on a specific margin over the Cost of Funds Index as published by the Eleventh District Federal Reserve Bank ("COFI"), (iv) were previously classified as medium-term and have begun adjusting annually based on a specified margin over 1-year Treasuries, or (v) in the case of CMBS held as of December 31, 1999, adjust monthly based on a specified margin over 30-day LIBOR. Agency and U.S. Treasury securities consist of Agency Securities and U.S. government-issued fixed-rate securities, commonly referred to as U.S. Treasury notes or bonds (collectively, "Agency and U.S. Treasury Securities"). Agency Securities have no foreclosure risk. Non-agency securities consist of private mortgage pass-through securities backed primarily by single-family jumbo-sized residential mortgage loans whereby the related credit risk of the underlying loans is borne by AAA-rated private mortgage insurers, and other AAA-rated private mortgage securities (together, "Non-agency Securities"). At December 31, 1998 Non-Agency Securities also included mortgage loans held for sale in connection with curtailed mortgage production activities. Although investment grade when acquired, CMBS held by the Company at December 31, 1999 carry credit risk associated with the underlying commercial mortgage loans. Features of the related CMBS issuance, including subordinated securities held by other investors, help mitigate this risk. The maturity of mortgage-backed securities is directly affected by the rate of principal prepayments on the underlying loans. NOTE 4 -- CMO COLLATERAL AND INVESTMENTS CMO collateral consists of (i) fixed-rate, medium-term and adjustable-rate mortgage securities collateralized by single-family residential mortgage loans and (ii) related short-term investments, both pledged to secure CMO borrowings ("Pledged CMO Collateral"). CMO investments have included investments in interest-only mortgage securities and investments in other CMO securities such as principal-only mortgage securities. Interest-only mortgage securities are entitled to receive 100 percent of coupon interest stripped from pools of mortgage loans. All principal and interest on pledged mortgage securities is remitted directly to a collection account maintained by a trustee. The trustee is responsible for reinvesting those funds in short-term investments. All collections on the pledged mortgage securities and the reinvestment income earned thereon are available for the payment of principal and interest on CMO borrowings. Pledged mortgage securities are private mortgage pass-through securities whereby the related credit risk of the underlying loans is borne by AAA-rated private mortgage insurers or subordinated bonds within the related CMO series to which the collateral is pledged. The Company has retained only $1.1 million of credit risk in the form of subordinated bonds associated with these securities. The weighted average effective interest rate for total Pledged CMO Collateral was 7.16 percent and 7.27 percent during 1999 and 1998, respectively. 17 13 CAPSTEAD MORTGAGE CORPORATION The components of CMO collateral and investments are summarized as follows (in thousands):
December 31 ----------------------- 1999 1998 ---------- ---------- Pledged CMO Collateral: Pledged mortgage securities $3,283,848 $4,507,337 Short-term investments 760 14,879 Accrued interest receivable 19,461 27,361 ---------- ---------- 3,304,069 4,549,577 Unamortized premium 11,633 11,830 ---------- ---------- 3,315,702 4,561,407 CMO investments 3,184 9,867 ---------- ---------- $3,318,886 $4,571,274 ========== ==========
During 1998 the value of interest-only mortgage securities, which trade in a market with relatively few participants, was significantly depressed by increasingly high rates of current and anticipated future mortgage prepayments and sales of such securities by a number of large market participants. In 1998 the Company sold its entire $1.0 billion Agency Trust interest-only mortgage securities portfolio at a loss of $251.9 million, net of related gains on Derivatives, and wrote down to fair value remaining investments in interest-only mortgage securities through an other-than-temporary impairment charge of $4.1 million. These remaining securities were sold in early 1999. Derivatives, specifically interest rate floors, held to help offset the effects of falling mortgage interest rates on the value of interest-only mortgage securities under-performed relative to the loss in value of the assets they were intended to hedge. As a result, these Derivatives no longer met hedge accounting criteria requiring high ongoing correlation and, beginning in April 1998, changes in value of these instruments were included in operating results rather than recorded as an adjustment to the carrying amount of the hedged assets. Such changes in value totaled $28.3 million prior to the sale of this portfolio and are included in Gain (loss) on sale of mortgage assets and related derivative financial instruments. NOTE 5 -- BORROWINGS UNDER REPURCHASE ARRANGEMENTS Borrowings made under uncommitted repurchase arrangements with investment banking firms pursuant to which the Company pledges residential mortgage assets as collateral generally have maturities of less than 31 days, although in recognition of the potential for greater than normal mortgage finance market liquidity constraints on or about December 31, 1999, the Company extended the terms of a portion of its borrowings up to 4 months beyond year-end. Repurchase arrangements with CMBS pledged as collateral generally have maturities similar to the expected maturities of the related collateral. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. 18 14 CAPSTEAD MORTGAGE CORPORATION Repurchase arrangements, and the related average effective interest rates are classified by type of collateral and maturities as follows (dollars in thousands):
December 31, 1999 December 31, 1998 ----------------------- ---------------------------- Weighted Weighted Borrowings Average Borrowings Average Outstanding Rate Outstanding Rate ----------- --------- ---------- --------- Agency Securities (less than 31 days) $2,405,436 5.81% $1,839,868 5.47% Agency Securities (31 to 90 days) 2,012,810 6.38 -- -- Agency Securities (over 90 days) 280,347 6.41 -- -- Non-agency Securities (over 90 days) 124,361 6.62 -- -- CMBS (over 1 year) 49,438 7.01 -- -- ----------- ---------- $4,872,392 $1,839,868 =========== ==========
The weighted average effective interest rate on borrowings under repurchase arrangements was 5.16 percent and 5.55 percent during 1999 and 1998, respectively. Interest paid on borrowings totaled $221.4 million, $347.6 million and $339.1 million during 1999, 1998 and 1997, respectively. As of December 31, 1999, $5.1 billion of mortgage securities were pledged as collateral under repurchase arrangements. NOTE 6 -- COLLATERALIZED MORTGAGE OBLIGATIONS Each series of CMOs issued consists of various classes of bonds, most of which have fixed rates of interest. Interest is payable monthly or quarterly at specified rates for all classes. Typically, principal payments on each series are made to each class in the order of their stated maturities so that no payment of principal will be made on any class of bonds until all classes having an earlier stated maturity have been paid in full. The components of CMOs along with selected other information are summarized as follows (dollars in thousands):
December 31 ----------------------------- 1999 1998 ----------- ----------- CMOs $ 3,281,464 $ 4,513,522 Accrued interest payable 18,096 25,609 ----------- ----------- Total obligation 3,299,560 4,539,131 Unamortized discount (9,976) (17,807) ----------- ----------- $ 3,289,584 $ 4,521,324 =========== =========== Range of average inte 5.13% to 9.45% 5.22% to 9.45% Range of stated matur 2008 to 2028 2007 to 2028 Number of series 24 31
The maturity of each CMO series is directly affected by the rate of principal prepayments on the related Pledged CMO Collateral. Each series is also subject to redemption, generally at the Company's option, provided that certain requirements specified in the related indenture have been met (referred to as "Clean-up Calls"); therefore, the actual maturity of any series is likely to occur earlier than its stated maturity. The average effective interest rate for all CMOs was 7.24 percent and 7.85 percent during 1999 and 1998, respectively. Interest paid on CMOs totaled $260.2 million, $352.6 million and $263.2 million during 1999, 1998 and 1997, respectively. 19 15 CAPSTEAD MORTGAGE CORPORATION NOTE 7 -- DISCLOSURES REGARDING FAIR VALUES OF DEBT SECURITIES Estimated fair values of debt securities have been determined using available market information and appropriate valuation methodologies; however, considerable judgment is required in interpreting market data to develop these estimates. In addition, fair values fluctuate on a daily basis. Accordingly, estimates presented herein are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair values. The carrying amounts of cash and cash equivalents, receivables, payables and borrowings under repurchase arrangements approximate fair value. The fair value of Agency Securities, Non-agency Securities, CMBS and CMO investments were estimated using either (i) quoted market prices when available, including quotes made by lenders in connection with designating collateral for repurchase arrangements, or (ii) offer prices for similar assets or market positions. The fair value of Pledged CMO Collateral was based on projected cash flows, after payment on the related CMOs, determined using market discount rates and prepayment assumptions. The fair value of CMOs was based on the same method for determining fair value of Pledged CMO Collateral adjusted for credit enhancements. The maturity of mortgage assets is directly affected by the rate of principal payments on the underlying mortgage loans and, for Pledged CMO Collateral, Clean-up Calls of the remaining CMOs outstanding. The following table summarizes fair value disclosures for financial instruments (in thousands):
December 31, 1999 December 31, 1998 -------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- --------- --------- --------- ASSETS: Cash and cash equivalents $ 28,488 $ 28,488 $ 73,385 $ 73,385 Restricted cash and cash equivalents 2,500 2,500 26,500 26,500 Receivables 42,297 42,297 41,717 41,717 Mortgage investments 5,408,714 5,409,991 2,263,856 2,263,856 CMO collateral and investments 3,318,886 3,255,730 4,571,274 4,641,641 Derivatives* -- -- 12,618 12,618 LIABILITIES: Payables 30,673 30,673 58,894 58,894 Borrowings under repurchase arrangements 4,872,392 4,872,392 1,839,868 1,839,868 CMOs 3,289,584 3,242,991 4,521,324 4,614,764
* The average fair value of Derivatives held by the Company and not accorded hedge accounting treatment during 1998 was $81.1 million. Remaining Derivatives held by the Company were sold in January 1999. 20 16 CAPSTEAD MORTGAGE CORPORATION The following table summarizes fair value disclosures for available-for-sale debt securities (in thousands):
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- AS OF DECEMBER 31, 1999 Mortgage investments: Agency Securities: Fixed-rate $1,060,898 $ 268 $51,589 $1,009,577 Medium-term 1,128,500 39 24,835 1,103,704 Adjustable-rate 3,126,971 4,659 22,586 3,109,044 Non-agency Securities 28,817 249 6 29,060 CMBS -- adjustable-rate 59,330 - - 59,330 CMO collateral and investments 103,142 697 184 103,655 ---------- ------ ------- ---------- $5,507,658 $5,912 $99,200 $5,414,370 ========== ====== ======= ========== AS OF DECEMBER 31, 1998 Mortgage investments: Agency Securities: Fixed-rate $ 396,917 $3,466 $ 38 $ 400,345 Medium-term 317,544 862 373 318,033 Adjustable-rate 1,518,567 1,486 10,246 1,509,807 Non-agency Securities 34,815 856 - 35,671 CMO collateral and investments 190,916 2,927 158 193,685 ---------- ------ ------- ---------- $2,458,759 $9,597 $10,815 $2,457,541 ========== ====== ======= ==========
Given the Company's current borrowing capacity, the Company has the ability to hold mortgage assets for the foreseeable future; however, implementation of the proposed investment strategy (see NOTE 1), could necessitate the recognition in operating results of a portion of these losses. Held-to-maturity debt securities consist of Pledged CMO Collateral and collateral released from the related CMO indentures pursuant to Clean-up Calls and held as Non-agency Securities. Sales of released CMO collateral occasionally occur provided the collateral has paid down to within 15 percent of its original issuance amounts. The following table summarizes fair value disclosures for debt securities held-to-maturity (in thousands):
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ---------- AS OF DECEMBER 31, 1999 Non-agency Securities .................... $ 97,999 $ 1,277 $ -- $ 99,276 Pledged CMO Collateral ................... 3,215,231 1,620 18,183 3,198,668 ---------- ---------- ---------- ---------- $3,313,230 $ 2,897 $ 18,183 $3,297,944 ========== ========== ========== ========== AS OF DECEMBER 31, 1998 Pledged CMO Collateral ................... $4,377,589 $ 3,286 $ 26,359 $4,354,516 ========== ========== ========== ==========
21 17 CAPSTEAD MORTGAGE CORPORATION The following table summarizes disclosures related to the disposition of debt securities (in thousands):
Year Ended December 31 ------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Sale of securities held available-for-sale: Amortized cost $ 7,573 $ 6,233,622 $ 1,920,097 Gains (losses)* 1,761 (223,959) 24,043 Sale of released CMO collateral held-to-maturity: Amortized cost -- 5,022 73,324 Gains -- 471 2,986
* Represents the reclassification amounts included in other comprehensive income (loss) as a component of the change in unrealized gains (losses) on debt securities held available-for-sale. Excludes a January 1999 loss of $23,000 on the sale of remaining Derivatives held by the Company. NOTE 8 -- SALE OF MORTGAGE BANKING OPERATIONS AND MORTGAGE BANKING RELATED DISCLOSURES In December 1998 the Company sold its mortgage banking operations and its investment in mortgage servicing rights to two affiliates of General Motors Acceptance Corporation ("GMAC"). A gain of $2.9 million on these transactions was recorded as a component of Net margin on mortgage banking operations. The Company had a long-term subservicing relationship with GMAC, subservicing approximately $19 billion of GMAC's single-family mortgage loans just prior to the sale. After retiring indebtedness related to the mortgage servicing portfolio, related hedge instruments and loan production financing, and after certain transaction costs, these transactions generated net cash proceeds of approximately $500 million, including $26.5 million of Restricted cash and cash equivalents held in escrow to secure related indemnifications. In accordance with the terms of the related escrow agreement, during 1999, $3.9 million in payments were made out of escrow to GMAC for pricing adjustments and $20.1 million was released to the Company, with the remaining $2.5 million scheduled for release July 1, 2000. In addition, a prepayment protection settlement payment of $16 million was remitted to GMAC in February 1999. These payments were provided for in the determination of the gain on these transactions recorded in 1998, along with other contract settlement provisions and anticipated costs associated with exiting the mortgage banking operations, including costs associated with the acceleration of benefits of restricted stock grants to employees (see NOTE 11). As of December 31, 1999, included in Accounts payable and accrued expenses are remaining accruals of approximately $2.0 million pertaining primarily to indemnifying GMAC for costs of mortgage loan buyback requests by investors in excess of existing indemnifications by the originators of the loans. The Company is unaware of any other material indemnification-related claims that may arise prior to the release of the remaining funds held in escrow. Prior to the sale of the mortgage banking operations, the Company incurred impairment charges totaling $224.7 million reflecting the loss in value of its investment in mortgage servicing rights caused by increasingly high rates of then current and anticipated future mortgage prepayments. Derivatives, specifically interest rate floors, held to offset the effects of falling mortgage interest rates on the value of a designated portion of the servicing 22 18 CAPSTEAD MORTGAGE CORPORATION portfolio under-performed relative to the loss in value of the servicing rights they were intended to hedge. As a result, these Derivatives no longer met hedge accounting criteria requiring high ongoing correlation and, beginning in June 1998, changes in value of these instruments were included in operating results rather than recorded as an adjustment to the carrying amount of the servicing asset. In July 1998 the Company began to actively manage an expanded portfolio of U.S. Treasury-based financial instruments that included interest rate floors, U.S. Treasury note futures and 10-year U.S. Treasury notes to help mitigate the effects of further declines in mortgage interest rates on the value of the mortgage servicing rights. Substantially all of these instruments were sold by December 31, 1998, including approximately $80 million in interest rate floors and U.S. Treasury note futures positions sold to GMAC. During 1998 the Company realized gains of $119.5 million on interest rate floors and U.S. Treasury note futures, and $53.9 million on the sale of U.S. Treasury notes, net of related taxes of $1.6 million. NOTE 9 -- INCOME TAXES Capstead and its qualified REIT subsidiaries file a separate federal income tax return that does not include the operations of the non-REIT subsidiaries. Provided all taxable income of Capstead and its qualified REIT subsidiaries is distributed to stockholders within time limits prescribed by the Code, no income taxes are due on this income. Taxable income of the non-REIT subsidiaries is fully taxable. No income taxes were paid during 1999 or 1997; however, income taxes paid during 1998 totaled $1.6 million. Effective tax rates differ substantially from statutory federal income tax rates because of the effect of the following items (in thousands):
Year Ended December 31 ---------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Income taxes computed at the federal statutory rate $ 20,268 $ (82,167) $ 55,974 Nondeductible capital loss -- 83,651 -- Benefit of REIT status (20,268) (3,650) (46,893) ---------- ---------- ---------- Income taxes computed on income of non-REIT subsidiaries -- (2,166) 9,081 Benefit of previously unrecognized deferred income tax asset -- (667) (10,889) Tax effect of capital contributions to non-REIT subsidiaries -- 3,783 -- Other -- 650 1,808 ---------- ---------- ---------- $ -- $ 1,600* $ -- ========== ========== ==========
* The 1998 provision for income taxes is reflected in the statement of operations as an offset to "Net margin on mortgage banking operations." 23 19 CAPSTEAD MORTGAGE CORPORATION Significant components of deferred income tax assets and liabilities are as follows (in thousands):
December 31 ---------------------- 1999 1998 ------ ------ Deferred income tax assets: Alternative minimum tax credit $1,751 $1,915 Net operating loss carryforwards 1,235 -- Other 619 864 ------ ------ 3,605 2,779 ------ ------ Deferred income tax liabilities 344 357 ------ ------ Net deferred tax assets $3,261 $2,422 ====== ====== Valuation allowance $3,261 $2,422 ====== ======
At December 31, 1999 Capstead and its qualified REIT subsidiaries had capital loss carryforwards for tax purposes of approximately $255 million which expire in 2004. At December 31, 1999 the non-REIT subsidiaries had net operating loss carryforwards for tax purposes of approximately $7.3 million, of which $3.7 million expires in 2013, and $3.6 million expires in 2019. NOTE 10 -- STOCKHOLDERS' EQUITY AND PREFERRED STOCK SUBJECT TO REPURCHASE As of December 31, 1999, the Company had 4 series of convertible preferred stock outstanding, each entitled to cumulative fixed dividends with redemption and liquidation preferences as indicated in the table below (dollars in thousands, except per share amounts):
Per Share - ----------------------------------------------------------------------- Aggregate Preferred Annualized Conversion Redemption Liquidation Liquidation Series Dividend Rate* Price Preference Preference - --------- ---------- --------- ----------- ----------- ---------- A $ 1.60 2.1707 $ 16.40 $ 16.40 $ 6,134 B 1.26 0.7537 12.50 11.38 189,739 C 0.56 1.0000 6.56 6.89 37,054 D 0.40 1.0000 4.76 4.76 25,599
* Reflects number of common shares to be received for each preferred share converted. During 1999, 2,260 Series B shares were converted into 1,703 common shares. The preferred shares rank on a parity with each other and prior to the common shares in the event of liquidation of the Company. The Series A and B shares are nonvoting, while the Series C and D shares vote together as a single group with the common shares. The Series A and B shares are currently redeemable at the Company's option, while the Series C and D shares become redeemable at the Company's option anytime after December 9, 2004. However, the Series C and D shares may be repurchased by the Company at $4.903 per share, in certain circumstances as discussed below. Additionally, the Series C and D shares automatically convert into common shares on December 31, 2009 and December 31, 2005, respectively. Dividends are payable quarterly for the Series A, C and D shares and monthly 24 20 CAPSTEAD MORTGAGE CORPORATION for the Series B shares. The following table summarizes dividends paid for each preferred stock issue for the periods indicated (dollars in thousands, except per share amounts):
1999 1998 1997 ----------------------- ----------------------- ----------------------- Preferred Per In Per In Per In Series Share Aggregate Share Aggregate Share Aggregate ---------- ---------- ---------- ---------- ---------- ---------- A $ 1.60 $ 598 $ 1.60 $ 610 $ 1.60 $ 683 B 1.26 21,391 1.26 21,732 1.26 24,774 C 0.03 185 -- -- -- -- D 0.02 131 -- -- -- --
On December 9, 1999 the Company issued 5,378,000 of the Series C shares and 5,378,000 of the Series D shares to an affiliate of Fortress Investment Group LLC ("Fortress") at a cash price of $4.76 per share representing aggregate proceeds of $51.2 million, before offering expenses. In connection with this issuance, the Company entered into a Supplemental Agreement, as amended, which, among other things, gives Fortress and Capstead each the right to cause the repurchase by Capstead from Fortress of all, but not less than all, of the Series C and D shares, for a price equal to 103 percent of the amount which Fortress originally paid for the shares, plus all accrued and unpaid dividends on those shares, should any of the four Fortress nominees to the Board of Directors not receive a majority of the vote for election to the Board at the Company's annual meeting of stockholders in April 2000 (the "Annual Meeting"). Fortress also has the right to cause the repurchase of the Series C and D shares, plus all accrued and unpaid dividends, at a premium if (i) prior to the Annual Meeting, the Company fails to conduct business in the ordinary course or (ii) subsequent to the Annual Meeting, the Board of Directors fails to appoint a certain Fortress representative to serve as Chairman and Chief Executive Officer ("CEO") and the Company's current Chairman and CEO to serve as Vice Chairman (see NOTE 12). Should these shares be repurchased, the Company will incur a non-recurring charge of approximately $2.5 million representing the repurchase premium plus estimated offering expenses. The Supplemental Agreement also provides that within 6 months of the election of the Fortress nominees to the Board, Fortress will acquire at least 5 million common shares, through, at Fortress' option, open market purchases, conversion of a portion of the Series C or D shares, or any combination thereof. Further, the Supplemental Agreement provides that if there is a change in control within 5 years of the election of the Fortress nominees to the Board of Directors, then Fortress will have the right to cause the repurchase of the then outstanding Series C and D shares at the original per share purchase price, plus all accrued and unpaid dividends. A change in control is deemed to have occurred if (i) a person acquires 25 percent of the voting power of the Company, (ii) directors elected and qualified at the Annual Meeting cease to constitute at least a majority of the Board of Directors, or (iii) the Company is a party to a business combination not approved by certain Fortress representatives on the Board of Directors. The weighted average shares used to calculate diluted net income (loss) per common share in 1999 and 1997 differs from weighted average common shares outstanding because of the dilutive effects of stock options and the potential conversion of preferred stock into common stock in those years. In 1998 stock options and preferred share conversions were antidilutive in calculating net loss per common share; therefore, diluted net loss per common 25 21 CAPSTEAD MORTGAGE CORPORATION share was the same as basic net loss per common share. Dilutive options increased weighted average shares by 20,000 and 1,101,000 shares in 1999 and 1997, respectively. The assumed conversion of the newly issued Series C and D shares increased weighted average shares by 678,000 during 1999, while the assumed conversion of the Series A and B shares increased weighted average shares by 15,665,000 shares during 1997. In December 1998 the Company completed a previously authorized repurchase of 1 million common shares at an average price of $4.10 per share (including transaction costs). In early January 1999, in accordance with the terms of the related employee benefit plans, 85,583 formerly restricted common shares were repurchased at $4.12 per share from employees in order to assist them with meeting their federal income tax obligations resulting from the lapsing of restrictions on stock awards with the December 1998 sale of the mortgage banking operations. On February 4, 1999 the Company's Board of Directors authorized the repurchase of up to 6 million common shares and up to 2 million Series B shares. As of December 31, 1999, the Company had repurchased 3,607,500 common shares at an average price of $4.92 (including transaction costs) and 622,000 Series B shares at an average price of $11.57 (including transaction costs) pursuant to this repurchase program. On January 25, 2000 the Company repurchased 11,137,000 common shares at a price of $4.55 per share pursuant to a tender offer that commenced December 9, 1999 and closed January 14, 2000. In previous years the Company used several programs designed to raise new equity capital at favorable prices. These programs were indefinitely suspended when the prices of the Company's equity issues declined during the second quarter of 1998. The following tables summarize capital raised through these programs during 1998 and 1997 (dollars in thousands):
1998 1997 ----------------------- ----------------------- Net Net Shares Proceeds Shares Proceeds ---------- --------- ---------- ---------- Common Stock: Dividend reinvestments 149,267 $ 2,901 810,791 $ 18,195 Direct stock purchases 426,458 8,155 2,565,434 63,121 Structured equity shelf 1,751,500 33,349 4,108,900 97,938 ---------- --------- ---------- ---------- 2,327,225 44,405 7,485,125 179,254 ========== --------- ========== ---------- Series B Preferred Stock: Dividend reinvestments 74,376 1,085 185,523 3,120 Structured equity shelf 199,600 2,952 646,500 11,079 ---------- --------- ---------- ---------- 273,976 4,037 832,023 14,199 ========== --------- ========== ---------- $ 48,442 $ 193,453 ========= ==========
Dividend reinvestments allow existing stockholders to convert cash dividends into newly issued shares. Similarly, direct stock purchases allow investors the opportunity to acquire additional shares directly from the Company, subject to certain limitations. Structured equity shelf issuances represent new shares issued by the Company on a daily basis either directly into the market or in larger blocks to qualified buyers, subject to certain limitations. Option exercises by employees during 1998 and 1997 resulted in net additions to capital of $1.9 million and $5.8 million, respectively. No options were exercised in 1999. The Company's Charter provides that if the Board of Directors determines in good faith that the direct or indirect ownership of stock of Capstead has become concentrated to an extent which would cause Capstead to fail to qualify as a REIT, the Company may redeem or 26 22 CAPSTEAD MORTGAGE CORPORATION repurchase, at fair market value, any number of common and/or preferred shares sufficient to maintain or bring such ownership into conformity with the Code. In addition, the Company may refuse to transfer or issue common and/or preferred shares to any person whose acquisition would result in Capstead being unable to comply with the requirements of the Code. Finally, the Charter provides that the Company may redeem or refuse to transfer any capital shares of Capstead necessary to prevent the imposition of a penalty tax as a result of ownership of such shares by certain disqualified organizations, including governmental bodies and tax-exempt entities that are not subject to tax on unrelated business taxable income. NOTE 11 -- EMPLOYEE BENEFIT PLANS The Company sponsors stock plans for directors and employees to provide for the issuance of stock options and other incentive-based stock awards (collectively, the "Plans"). The Plans provide for the issuance of up to an aggregate of 7,512,500 common shares. Options granted have terms and vesting requirements at the grant date of up to 10 years. Prior to a restructuring of long-term incentive compensation for key officers on January 2, 1998 which eliminated this feature, most of the outstanding stock options provided for the annual granting of dividend equivalent rights ("DERs") that permitted the option holder to obtain additional common shares based upon formulas set forth in the Plans. The following table provides information regarding common stock option activity for the periods indicated:
Number of Weighted Average Shares Exercise Price --------- --------------- As of December 31, 1996 (1,716,334 exercisable) 2,370,570 $ 13.12 Granted (average fair value: $3.07 per share) 622,250 23.51 Exercised (431,568) 11.00 Canceled (1,125) 12.00 DERs granted (average fair value: $24.00 per share) 188,328 -- --------- As of December 31, 1997 (1,878,421 exercisable) 2,748,455 14.91 Granted (average fair value: $1.48 per share) 1,814,250 20.00 Exercised (161,546) 11.75 Canceled (690,127) 6.97 DERs granted (average fair value: $20.00 per share) 237,743 -- --------- As of December 31, 1998 (3,948,775 exercisable)* 3,948,775 17.87 Granted (average fair value: $0.69 per share) 11,250 4.13 Canceled* (2,462,448) 17.81 --------- As of December 31, 1999 (1,497,577 exercisable) 1,497,577 17.86 =========
* With the December 1998 sale of the mortgage banking operations, all outstanding stock option awards became 100 percent vested. On June 30, 1999 unexercised options held by former employees of Capstead Inc. were forfeited under the terms of the Plans. 27 23 CAPSTEAD MORTGAGE CORPORATION Weighted average exercise price and remaining life information for significant option grants outstanding at December 31, 1999 were as follows:
Weighted Average Options Options Exercise Remaining Outstanding Exercisable Price Life (Years) --------------------------------------- --------------- ---------------- ----------------- ------------ Options granted January 1998 648,878 648,878 $19.80 8 Options granted January 1997 245,147 245,147 23.15 7 Options granted January 1996 190,541 190,541 15.22 6 Options granted April 1994 310,087 310,087 12.83 4
In connection with the January 2, 1998 restructuring of long-term incentive compensation for key officers, the Company canceled existing DER option grants totaling 452,627 common shares and eliminated the right to receive future DER award grants in exchange for cash settlements aggregating $10.5 million and 452,627 restricted common shares. The restricted stock had a grant date fair value of $20 per share and was granted subject to certain restrictions, including continuous employment, which generally lapsed over 5 years. During 1998 and 1997 the Company also issued restricted stock grants for an aggregate of 35,000 and 201,000 common shares to employees completing their first year of employment with the Company at grant date fair values averaging $11.18 and $24.35 per share, respectively. These grants were subject to certain restrictions, including continuous employment, which generally lapsed over 10 years. Costs associated with restricted stock grants (measured by the fair value of the Company's common stock on the date of grant multiplied by the number of shares granted) have been recognized as compensation expense over the period restricted. However, with the December 1998 sale of the mortgage banking operations, all remaining restrictions lapsed under the terms of the Plans. Therefore, the gain on sale of the mortgage banking operations includes a $11.0 million charge to eliminate all deferred compensation related to restricted stock grants. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for stock awards. Accordingly, no compensation expense has been recognized for stock awards other than for DERs and restricted stock grants. Related compensation costs, excluding the charge mentioned above, totaled $2.4 million and $6.3 million in 1998 and 1997, respectively. There were no related compensation costs during 1999. The effect of determining compensation cost for stock options granted since the beginning of 1995, based upon the estimated fair value at the grant date consistent with the methodology prescribed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," would have been 3 cents per share or less on diluted net income (loss) per common share for each of the last 3 years. This effect on diluted net income (loss) per common share was determined using a Black-Scholes option pricing model and, depending upon each individual option grant during the last three years, dividend yields of 10 percent to 12 percent, volatility factors of 27.8 percent to 53.0 percent, expected life assumptions of 3 to 5 years and risk-free rates of 5 percent to over 7 percent. This effect may not be representative of the pro forma effect on future operating results. The Company also sponsors a qualified defined contribution retirement plan for all employees. The Company matches up to 50 percent of a participant's voluntary contribution 28 24 CAPSTEAD MORTGAGE CORPORATION up to a maximum of 6 percent of a participant's compensation and may make additional contributions of up to another 3 percent of a participant's compensation. All Company contributions are subject to certain vesting requirements. Contribution expenses were $113,000, $709,000 and $634,000 in 1999, 1998 and 1997, respectively. NOTE 12 -- COMMITMENTS AND CONTINGENCIES During 1998, 24 purported class action lawsuits were filed against the Company and certain of its officers alleging, among other things, that the defendants violated federal securities laws by publicly issuing false and misleading statements and omitting disclosure of material adverse information regarding the Company's business during various periods between January 28, 1997 and July 24, 1998. The complaints claim that as a result of such alleged improper actions, the market price of the Company's equity securities were artificially inflated during that time period. The complaints seek monetary damages in an undetermined amount. In March 1999 these actions were consolidated. The time by which the Company is to respond has not yet run. The Company believes it has meritorious defenses to the claims and intends to vigorously defend the actions. Based on available information, management believes the resolution of these suits will not have a material adverse effect on the financial position of the Company. If the Fortress nominees to the Board of Directors receive a majority of the vote for election to the Board at the Annual Meeting, it is expected that the current Chairman and CEO will terminate his employment with the Company, although he is expected to remain on the Board of Directors as Vice Chairman. In this event, the Company will incur a non-recurring severance charge of up to $3.7 million under the terms of an employment agreement entered into with the CEO in 1992. NOTE 13 -- NET INTEREST INCOME ANALYSIS (UNAUDITED) The following table summarizes interest income and interest expense and average effective interest rates for the periods indicated (dollars in thousands):
1999 1998 1997 --------------------- --------------------- ---------------------- Average Average Average Amount Rate Amount Rate Amount Rate ---------------------------------------- ---------- ---------- ---------- ---------- ----------- ---------- Interest income: Mortgage securities and other investments $293,841 5.87% $311,807 5.89% $339,980 6.28% CMO collateral and investments 269,318 7.16 355,391 7.28 354,279 7.84 -------- -------- -------- Total interest income 563,159 667,198 694,259 -------- -------- -------- Interest expense: Borrowings under repurchase arrangements 232,852 5.16 313,858 5.55 329,635 5.53 CMOs 270,081 7.24 340,248 7.85 281,497 7.63 -------- -------- -------- Total interest expense 502,933 654,106 611,132 -------- -------- -------- Net interest $ 60,226 $ 13,092 $ 83,127 ======== ======== =========
29 25 CAPSTEAD MORTGAGE CORPORATION The following tables summarize the changes in interest income and interest expense due to changes in interest rates versus changes in volume for the periods indicated (in thousands):
1999/1998* ------------------------------------------ Rate Volume Total - ------------------------------------------------------- -------------- ---------------- ---------- Interest income: Mortgage securities and other investments $ (793) $ (17,173) $ (17,966) CMO collateral and investments (5,673) (80,400) (86,073) ---------- ----------- ----------- Total interest income (6,466) (97,573) (104,039) ---------- ----------- ---------- Interest expense: Borrowings under repurchase arrangements (20,758) (60,248) (81,006) CMOs (25,188) (44,979) (70,167) --------- ----------- ----------- Total interest expense (45,946) (105,227) (151,173) --------- ---------- ---------- Net interest $ 39,480 $ 7,654 $ 47,134 ========= =========== ==========
1998/1997* ------------------------------------------- Rate Volume Total ------------------------------------------------ -------------- ---------------- ----------- Interest income: Mortgage securities and other investments $ (20,988) $ (7,185) $ (28,173) CMO collateral and investments (26,168) 27,280 1,112 --------- -------- -------- Total interest income (47,156) 20,095 (27,061) --------- -------- -------- Interest expense: Borrowings under repurchase arrangements 1,010 (16,787) (15,777) CMOs 8,591 50,160 58,751 --------- -------- -------- Total interest expense 9,601 33,373 42,974 --------- -------- -------- Net interest $ (56,757) $ (13,278) $(70,035) ========== =========== ========
* The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. NOTE 14 -- QUARTERLY RESULTS (UNAUDITED) The following is a summary of quarterly results of operations (in thousands, except percentages and per share amounts). See NOTES 1 and 8 for discussion of significant changes to the Company's operations during 1999 and 1998 that have impacted quarterly operating results and may impact future operations.
Year Ended December 31, 1999 -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - --------------------------------------------------------- ------------- -------------- --------------- ----------- Interest income $ 124,342 $ 146,191 $ 147,817 $ 144,809 Interest and related expenses 112,058 128,764 132,511 131,614 ------------- -------------- --------------- ----------- Net margin on mortgage assets and other investments 12,284 17,427 15,306 13,195 Other operating revenue (expense) 1,623 (744) (784) (398) ------------- -------------- --------------- ----------- Net income $ 13,907 $ 16,683 $ 14,522 $ 12,797 ============= ============== =============== =========== Net income per common share: Basic $ 0.14 $ .19 $ 0.16 $ 0.13 Diluted 0.14 0.19 0.16 0.13 Return on average stockholders' equity and preferred stock subject to repurchase 8.16% 9.88% 8.66% 7.57%
30 26 CAPSTEAD MORTGAGE CORPORATION
Year Ended December 31, 1998 -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - --------------------------------------------------------- ------------- -------------- --------------- ----------- Interest income $193,019 $ 201,871 $144,683 $127,625 Interest and related expenses 178,652 191,358 162,891 126,674 --------- --------- -------- -------- Net margin on mortgage assets and other investments 14,367 10,513 (18,208) 951 Net margin on mortgage banking operations 14,845 (27,153) 13,215 10,914 Other operating revenue (expense) 5,858 (251,492) (6,832) (1,742) --------- --------- -------- -------- Net income (loss) $ 35,070 $(268,132) $(11,825) $ 10,123 ========= ========= ======== ======== Net income (loss) per common share: Basic $0.50 $ (4.47) $ (0.28) $ 0.07 Diluted 0.48 (4.47) (0.28) 0.07 Return on average stockholders' equity 14.59% (117.53%) (7.00%) 5.97%
NOTE 15 -- MARKET AND DIVIDEND INFORMATION (UNAUDITED) The New York Stock Exchange trading symbol for the Company's common stock is CMO. There were 4,995 holders of record of the Company's common stock at December 31, 1999. In addition, depository companies held stock for 34,467 beneficial owners. The high and low stock sales prices and dividends declared on common stock for the periods indicated were as follows:
Year Ended December 31, 1999 Year Ended December 31, 1998 ------------------------------------ ---------------------------------- Stock Prices Stock Prices ---------------------- Dividends --------------------- Dividends High Low Declared High Low Declared -------------------------- --------- ------------ ------------- -------- ------------ ------------ First quarter $6 $4 $0.14 $21 11/16 $18 1/2 $0.50 Second quarter 6 3/16 5 1/8 0.18 21 1/3 7 15/16 0.50 Third quarter 5 3/4 3 7/8 0.16 8 3/8 2 3/16 -- Fourth quarter 4 3/8 3 11/16 0.12 4 5/8 2 1/8 --
31 27 CAPSTEAD MORTGAGE CORPORATION SELECTED FINANCIAL DATA (In thousands, except percentages and per share amounts)
Year Ended December 31 --------------------------------------------------------------------- 1999 1998 1997 1996 --------------------------------------------------------------------- SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA: Interest income $ 563,159 $ 667,198 $ 694,259 $ 662,964 Interest and related expense 504,947 659,575 616,287 589,606 ----------- ----------- ----------- ----------- Net margin on mortgage assets and other investments 58,212 7,623 77,972 73,358 Net margin on mortgage banking operations* -- 11,821 59,422 49,122 Other operating revenue (expense)** (303) (254,208) 22,532 4,748 ----------- ----------- ----------- ----------- Net income (loss) $ 57,909 $ (234,764) $ 159,926 $ 127,228 =========== =========== =========== =========== Net income (loss) per common share:*** Basic $ 0.61 $ (4.22) $ 2.62 $ 2.37 Diluted 0.60 (4.22) 2.35 2.07 Return on average stockholders' equity and preferred stock subject to repurchase 8.56% (28.83%) 19.12% 18.41% Cash dividends paid per share: Common $ 0.60 $ 1.00 $ 2.40 $ 2.11 1/2 $1.60 Series A Preferred 1.60 1.60 1.60 1.60 $1.26 Series B Preferred 1.26 1.26 1.26 1.26 $0.56 Series C Preferred 0.03 -- -- -- $0.40 Series D Preferred 0.02 -- -- -- Average number of common shares outstanding:*** Basic 58,348 60,948 51,257 38,317 Diluted 59,046 60,948 68,023 61,501 SELECTED CONSOLIDATED BALANCE SHEET DATA: Mortgage securities and other investments $ 5,408,714 $ 2,369,602 $ 6,114,130 $ 4,840,417 CMO collateral and investments 3,318,886 4,571,274 5,195,436 4,501,646 Mortgage servicing rights* -- -- 669,062 626,094 Total assets 8,807,039 7,100,287 12,357,515 10,157,338 Borrowings under repurchase arrangements 4,872,392 1,839,868 7,099,706 5,462,856 Collateralized mortgage obligations 3,289,584 4,521,324 4,309,455 3,861,892 Preferred stock subject to repurchase 50,584 -- -- -- Stockholders' equity 563,806 680,201 888,608 726,869 MORTGAGE BANKING DATA:* Primary servicing portfolio $ -- $ -- $42,059,027 $35,562,597 Subservicing portfolio -- -- 11,834,091 2,155,873 Year Ended December 31 --------------------- 1995 --------------------- SELECTED CONSOLIDATED STATEMENT OF OPERATIONS DATA: Interest income $ 623,160 Interest and related expense 588,421 ----------- Net margin on mortgage assets and other investments 34,739 Net margin on mortgage banking operations* 41,253 Other operating revenue (expense)** 1,367 ----------- Net income (loss) $ 77,359 =========== Net income (loss) per common share:*** Basic $ 1.10 Diluted 1.09 Return on average stockholders' equity and preferred stock subject to repurchase 11.91% Cash dividends paid per share: Common $ 1.09 1/3 $1.60 Series A Preferred 1.60 $1.26 Series B Preferred 1.26 $0.56 Series C Preferred -- $0.40 Series D Preferred -- Average number of common shares outstanding:*** Basic 34,631 Diluted 35,883 SELECTED CONSOLIDATED BALANCE SHEET DATA: Mortgage securities and other investments $ 4,556,049 CMO collateral and investments 4,796,925 Mortgage servicing rights* 418,794 Total assets 9,903,606 Borrowings under repurchase arrangements 4,628,782 Collateralized mortgage obligations 4,538,863 Preferred stock subject to repurchase -- Stockholders' equity 664,724 MORTGAGE BANKING DATA:* Primary servicing portfolio $25,557,629 Subservicing portfolio --
NOTE: See "Management's Discussion and Analysis of Financial Condition" and "Notes to Consolidated Financial Statements" for discussion of changes to the Company's operations that are expected to impact future operating results. * The mortgage banking operations, including related mortgage servicing rights, were sold in December 1998. ** Includes substantial losses incurred in 1998 from the sale of mortgage assets, principally interest-only mortgage securities. *** Net income (loss) per common share and average number of common shares outstanding amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." For further discussion of net income (loss) per common share, see "Notes to Consolidated Financial Statements." Amounts have been adjusted for 3-for-2 common stock splits effective October 30, 1995 and July 31, 1996. 32 28 CAPSTEAD MORTGAGE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION OVERVIEW Capstead Mortgage Corporation, a mortgage investment firm, earns income from investing in mortgage assets on a leveraged basis and from other investment strategies. During 1999 the Company's primary focus consisted of managing a portfolio of single-family residential mortgage-backed securities issued by government-sponsored entities, either Fannie Mae, Freddie Mac or Ginnie Mae ("Agency Securities"). In response to the lower long-term interest rate environment experienced in 1998, which contributed to liquidity issues for the mortgage finance industry, the Company significantly reduced its mortgage asset portfolios and sold its mortgage banking operations during 1998, which substantially increased the Company's liquidity but diminished its earnings capacity. After acquiring $3.3 billion of Agency Securities during the first quarter of 1999, the Company maintained a mortgage investment portfolio of approximately $5.5 billion throughout the remainder of 1999 financed by short-term borrowings and equity. In addition, since share repurchases began in December 1998, and including the January 2000 repurchase of 11,137,000 common shares pursuant a tender offer announced in December 1999, the Company has repurchased 25.7 percent of its outstanding common shares and 3.6 percent of its $1.26 Cumulative Convertible Preferred Stock, Series B ("Series B" shares). Portfolio acquisitions, combined with share repurchases, increased the Company's leverage ratio (borrowings to stockholders' equity and preferred stock subject to repurchase, before other comprehensive income (loss) adjustments) from 2.7:1 at December 31, 1998 to 7.4:1 at year-end (after adjusting for the results of the tender offer completed in January 2000). Earnings from this larger portfolio of Agency Securities allowed the first quarter 1999 reinstatement of the payment of quarterly common stock dividends that had been curtailed in mid-1998. However, earnings have declined in recent quarters primarily because of actions taken by the Federal Reserve beginning in June of 1999 to increase short-term interest rates thus reducing net interest margins. Additionally, higher long-term interest rates have contributed to declines in the Company's book value per common share because of declines in the value of these securities. In December 1999 the Company issued $51.2 million in voting preferred stock to an affiliate of Fortress Investment Group LLC ("Fortress"), a real estate investment firm with experience in investing in a variety of asset types across the credit spectrum. In addition, the Company is considering modifying its investment strategy to invest in credit-sensitive commercial mortgage-backed securities ("CMBS") and residential mortgage-backed securities (see "Investment by Fortress and Potential Changes in Management" and "Proposed Change in Investment Strategy"). MORTGAGE SECURITIES AND OTHER INVESTMENTS Mortgage securities and other investments consist primarily of single-family residential mortgage-backed securities, most of which are Agency Securities. Agency Securities have 33 29 CAPSTEAD MORTGAGE CORPORATION no foreclosure risk; however, the Company is subject to reduced net interest margins during periods of rising short-term interest rates or increasing prepayment rates (see "Effects of Interest Rate Changes"). In 1998 the Company also held investments in government-issued securities, commonly referred to as U.S. Treasury notes or bonds. Non-agency securities consist of private mortgage pass-through securities whereby the related credit risk of the underlying loans is borne by AAA-rated private mortgage insurers, and other AAA-rated private mortgage securities (together, "Non-agency Securities"). The Company classifies its mortgage securities and other investments by interest rate characteristics of the underlying loans or the securities themselves (see NOTE 3 to the 1999 consolidated financial statements). Mortgage securities and other investments are financed under repurchase arrangements with investment banking firms pursuant to which specific securities held within the portfolios are pledged as collateral (see "Liquidity and Capital Resources"). The following yield and cost analysis illustrates results achieved during the most recent quarter for each component of the Company's mortgage investment portfolio and its currently projected first quarter 2000 earnings capacity (see footnotes below regarding assumptions used to develop projected asset yield and borrowing rate information):
As of December 31, Average for the Quarter Ended 1999 December 31, 1999 -------------------- Projected --------------------------------- Purchase First Lifetime Actual Actual Premiums Quarter Prepayments Basis Yield/Cost Runoff (Discounts) Basis Yield/Cost Assumption - ------------------------- ---------- ---------- ------ ----------- ----- ---------- ----------- * * ** Agency Securities: FNMA/FHLMC: Fixed-rate $1,071,302 6.22% 7% $(2,924) $1,060,898 6.21% 8% Medium-term 1,150,170 5.96 13 4,516 1,128,500 5.93 18 ARMs: LIBOR/CMT 964,778 6.14 23 20,824 932,086 6.31 40 COFI 250,236 5.57 15 1,570 244,143 5.73 18 GNMA ARMs 2,004,103 5.84 18 26,083 1,950,742 6.03 24 ----------- ---- -- ------- ---------- ---- -- 5,440,589 5.98 16 50,069 5,316,369 6.08 22 Non-agency Securities 131,587 8.14 24 385 126,816 7.93 35 CMBS - adjustable-rate 6,914 8.53 - (852) 59,330 8.57 - ----------- ---- --- ------- ------------ ---- --- 5,579,090 6.03 17% $49,602 5,502,515 6.17 22% == ======= == Less: Mark to market 76,010 - 93,801 - Borrowings*** 5,002,276 5.54 4,872,392 5.87 ----------- ---- ---------- ---- Capital employed/ financing spread $ 500,804 0.49% $ 536,322 0.30% =========== ==== ========== ==== Return on assets**** 0.95% 0.87%
* Basis is the Company's investment including unamortized purchase premiums and discounts before the mark to market included in "Other comprehensive income (loss)." ** Projected yields reflect adjustable-rate mortgage ("ARM") security coupon resets and lifetime prepayment assumptions as adjusted for expected prepayments over the next 3 months. These projections do not reflect any changes in portfolio composition resulting from modifications to the Company's investment strategy. Actual yields realized in future periods will largely depend upon (i) changes in portfolio composition (ii) ARM security coupon resets, (iii) actual prepayments and (iv) any changes in lifetime prepayment assumptions. *** Projected borrowing rates reflect the full impact of the November 1999 Federal Reserve 25 basis point rate increase and include the 25 basis point increase in early February 2000. Borrowing rates may increase further depending largely upon future actions by the Federal Reserve to increase short-term interest rates. **** The Company uses its liquidity to pay down borrowings. Return on assets is calculated assuming the use of this liquidity to reduce borrowing costs. 34 30 CAPSTEAD MORTGAGE CORPORATION During 1999 the Company acquired approximately $4.3 billion of Agency Securities and called for redemption 7 series of collateralized mortgage obligations ("CMOs") adding $157 million to the Non-agency Securities portfolio. Consistent with the proposed modification of the Company's investment strategy, in December the Company acquired $59.3 million of adjustable-rate CMBS from a third party not affiliated with Fortress. Additional modest investments in CMBS have been made subsequent to year-end. Although these CMBS were rated investment grade when purchased, they do expose the Company to credit risk (see "Risks Associated with Credit-sensitive Investments"). Runoff on mortgage investments totaled approximately $1.2 billion. Investments in fixed-rate mortgage securities as a percent of total mortgage investments were 20.8 percent at December 31, 1999 compared to 22.9 percent at December 31, 1998. Medium-term mortgage securities increased to 20.4 percent at December 31, 1999 compared to 13.4 percent at December 31, 1998, while ARM investments declined to 57.7 percent from 63.7 percent at December 31, 1998. The Company's leverage ratio increased to 7.4:1 at December 31, 1999 (after adjusting for the results of the tender offer completed in January 2000) from 2.7:1 at December 31, 1998. The unamortized net premium paid for these portfolios (referred to as "purchase premiums (discounts)") increased to $49.6 million at December 31, 1999 from $33.7 million at December 31, 1998, while actually declining as a percentage of related unpaid principal balances to 0.91 percent this year-end from 1.44 percent December 31, 1998. Purchase premiums (discounts) are amortized to income as yield adjustments based on both actual prepayments and lifetime prepayment assumptions. Actual prepayments declined throughout 1999 as mortgage interest rates increased which has had a favorable impact on yields (see "Effects of Interest Rate Changes"). Prepayments on Fannie Mae and Freddie Mac medium-term and adjustable-rate Agency Securities declined to an annualized rate of 15.5 percent in December 1999 from 48.4 percent in December 1998. Prepayments on Ginnie Mae ARMs declined to an annualized rate of 16.9 percent in December 1999, from 37.9 percent in December 1998. Additionally, yields on ARM securities are expected to improve as interest rates on mortgage loans underlying these securities reset to levels more reflective of the current interest rate environment. In addition, yields are expected to improve somewhat as prepayments are reinvested in higher yielding investments. Overall, if interest rates stabilize at February 2000 levels, yields on the Company's ARM securities could improve as much as 71 basis points over the next 12 months. Conversely, if interest rates decline from these levels, such yield improvements will likely not be achieved (see "Effects of Interest Rate Changes"). The Company's borrowing rates are largely dependent upon actions of the Federal Reserve to change short-term interest rates. After having reduced short-term interest rates by a total of three-quarters of one percentage point late in 1998, the Federal Reserve has increased short-term interest rates by one-quarter of one percentage point at each of its June 30, August 24, November 16, 1999 and February 2, 2000 meetings and may increase rates further. If short-term borrowing rates continue to rise, improving mortgage asset yields over the next 12 months would not fully keep pace and net interest margins would further decline (see "Effects of Interest Rate Changes"). 35 31 CAPSTEAD MORTGAGE CORPORATION CMO COLLATERAL AND INVESTMENTS The Company had been an active issuer of CMOs and other securities backed by single-family jumbo-sized residential mortgage loans obtained through a mortgage loan conduit business that the Company exited in 1995. Since then, the Company has maintained finance subsidiaries with remaining capacity to issue CMOs and other securitizations ("securitization shelves"). In an effort to recover costs associated with these securitization shelves, and to potentially add to its CMO administration activities, the Company from time to time purchases mortgage loans from originators or conduits and issues CMOs or other securities backed by these loans. The Company may or may not retain a significant residual economic interest in these securitizations. In 1997 and 1998 the Company issued 4 such CMOs totaling $2.2 billion. Also in 1998, in order to enhance its liquidity, the Company issued a $345 million CMO backed by Non-agency Securities. No CMOs were issued in 1999. The related credit risk of the mortgage loans collateralizing CMOs issued by the Company is borne by AAA-rated private mortgage insurers or by subordinated bonds within the related CMO series to which the collateral is pledged. The Company has retained only $1.1 million of credit risk in the form of subordinated bonds associated with these securities. The Company also retained residual interests in certain of these securitizations primarily with the characteristics of interest-only mortgage securities. Interest-only mortgage securities are entitled to receive all or some portion of the interest stripped from the mortgage loans underlying the securities. As of December 31, 1999, the Company's CMO investments (defined as CMO collateral and investments, net of related bonds) had been reduced to $29.3 million, down from $50.0 million at December 31, 1998. Included in this net investment are $11.6 million and $10.0 million of the remaining CMO collateral premiums and bond discounts, respectively. Similar to purchase premiums on the Company's mortgage investments, CMO collateral premiums and bond discounts, along with most of remaining CMO investments, are amortized to income as CMO collateral yield or bond expense adjustments based on both actual prepayments and lifetime prepayment assumptions (see "Effects of Interest Rate Changes"). INVESTMENT BY FORTRESS AND POTENTIAL CHANGES IN MANAGEMENT In connection with the December 1999 issuance of voting preferred stock to Fortress, it was agreed that stockholders would be asked to approve a new seven member Board of Directors at the Company's annual meeting of stockholders in April 2000, four of whom have been nominated by Fortress. It is expected that if the Fortress nominees receive a majority of the voting shares cast in the election of Directors, Ronn K. Lytle, the current Chairman of the Board and Chief Executive Officer ("CEO") will resign and Wesley R. Edens, Fortress' chairman and CEO will be appointed Chairman and CEO of the Company. Mr. Lytle will remain on the Board and will be appointed Vice Chairman. Should the stockholders not approve the Fortress nominees, the Company and Fortress each have the right to cause the Company to repurchase the newly issued preferred stock at a premium of 3 percent. Should these shares be repurchased, the Company will incur a non-recurring charge of approximately $2.5 million representing the repurchase premium plus estimated offering expenses. Should the Fortress nominees be approved and Mr. Lytle terminate his employment, the Company will incur a non-recurring severance charge of up to $3.7 million under the terms of an employment agreement entered into with Mr. Lytle in 1992. 36 32 CORPORATION MORTGAGE CORPORATION PROPOSED CHANGE IN INVESTMENT STRATEGY The Company's current investment strategy of managing a portfolio of primarily Agency Securities to achieve reasonable investment returns has proven very difficult in today's environment. Earnings currently depend, in part, on the difference between the interest received on Agency Securities, and the interest paid on related short-term borrowings. Because Agency Securities are considered to have virtually no credit risk as a result of real or implied U.S. government guarantees, yields earned on such investments are relatively low compared to more credit-sensitive securities of equal maturity and, therefore, the resulting spread the Company earns over its borrowing costs can be relatively modest and the opportunity to profitably finance these investments on other than a short-term basis is generally limited. Therefore, this current strategy is relatively sensitive to changes in interest rates, which may result in earnings volatility and fluctuations in the Company's book value per common share (see "Effects of Interest Rate Changes"). The Company is considering modifying its investment strategy to replace a portion of its existing mortgage investments with a diversified portfolio of credit-sensitive CMBS and residential mortgage-backed securities, most of which are expected to be "investment grade" at the time of purchase as determined by national rating agencies. Credit-sensitive mortgage securities generally earn higher yields than those typically earned on the Company's existing mortgage assets, due largely to a higher risk of default by the underlying borrowers and, to a lesser extent, reduced liquidity (see "Risks Associated with Credit-sensitive Investments"). These types of investments may allow for the reduction of interest rate risk through the use of longer-term financing that more closely matches the interest rate adjustment features and expected life of these investments. As a result, the Company anticipates that it may be able to improve earnings prospects and provide more stability during periods of interest rate volatility. Fortress has advised the Board that its objective in investing in Capstead and taking an active role in its management is to enhance stockholder value by modifying the Company's investment strategy as discussed above. Fully implementing this proposed modification of investment strategy could necessitate a repositioning of the Company's existing portfolio of mortgage securities, which could result in the recognition in operating results of a portion of the losses currently reflected in the Company's balance sheet and book value per common share. STOCK REPURCHASES AND BOOK VALUES PER COMMON SHARE In December 1998 the Company completed a previously authorized repurchase of 1 million common shares at an average price of $4.10 per share (including transaction costs). In early January 1999, 85,583 formerly restricted common shares were repurchased at $4.12 per share from employees in order to assist them with meeting their federal income tax obligations resulting from the lapsing of restrictions on stock awards with the December 1998 sale of the mortgage banking operations. On February 4, 1999 the Board authorized the repurchase of up to 6 million common shares and up to 2 million Series B shares. As of December 31, 1999, the Company had repurchased 3,607,500 common shares at an average price of $4.92 (including transaction costs) and 622,000 Series B shares at an average price of $11.57 (including transaction costs) pursuant to this repurchase program. On January 25, 2000 the Company repurchased 11,137,000 common shares at a price of $4.55 per share pursuant to a tender offer that commenced December 9, 1999 and closed January 14, 2000. 37 33 CAPSTEAD MORTGAGE CORPORATION Since the first share repurchases in December 1998 and including the results of the tender offer, the Company has repurchased 25.7 percent of its outstanding common shares and 3.6 percent of its outstanding Series B shares. As the common shares continue to trade at prices below book value, share repurchases may continue. Upon completion of the tender offer in January 2000 the Company had 45,719,023 common shares outstanding. The following table reflects book value per common share outstanding at the respective balance sheet dates before and after adjusting for the tender offer (calculated assuming redemption of Series A and B shares and conversion of the newly issued Series C and D shares):
December 31 ---------------------- 1999 1998 ----------------------------------------------------- ----------- ---------- Actual $5.91 $7.56 Adjusted to reflect tender offer 6.17 --
The Company's book value per common share declined during 1999 primarily as a result of unrealized losses in market value of its mortgage assets that are held as available-for-sale and included in the balance sheet as a component of Other comprehensive income (loss). The market value of the Company's mortgage assets will continue to fluctuate with changes in interest rates, and such changes will largely be reflected in book value per common share. Given the Company's current borrowing capacity, the Company has the ability to hold mortgage assets for the foreseeable future; however, implementation of the proposed investment strategy, as discussed above, could necessitate the recognition in operating results of a portion of these losses. UTILIZATION OF CAPITAL AND LIQUIDITY The following table summarizes the Company's utilization of capital and potential liquidity as of December 31, 1999 (in thousands):
Capital Assets Borrowings Employed Liquidity ----------- ------------ ---------- ----------- * Agency Securities: FNMA/FHLMC: Fixed-rate $1,009,577 $ 965,095 $ 44,482 $ 19,321 Medium-term 1,103,704 1,035,923 67,781 34,670 ARMs: LIBOR/CMT 935,291 734,234 201,057 172,998 COFI 237,721 164,308 73,413 66,282 GNMA ARMs 1,936,032 1,799,033 136,999 78,918 ---------- ---------- -------- -------- 5,222,325 4,698,593 523,732 372,189 Non-agency Securities 127,059 124,361 2,698 (2,441) CMBS -- adjustable-rate 59,330 49,438 9,892 4 CMO collateral and investments 3,318,886 3,289,584 29,302 -- ---------- ---------- -------- -------- $8,727,600 $8,161,976 565,624 369,752 ========== ========== Other assets, net of other liabilities 48,766 28,488** -------- -------- $614,390 $398,240 ======== ========
* Based on maximum borrowings available under existing uncommitted repurchase arrangements considering the fair value of related collateral as of December 31, 1999 (see "Liquidity and Capital Resources"). ** Represents unrestricted cash and cash equivalents (see NOTE 2 to the 1999 consolidated financial statements). 38 34 CAPSTEAD MORTGAGE CORPORATION Liquidity, which is defined as surplus capital available for the support and acquisition of mortgage assets and other investments or activities, fluctuates with, among other things, the size and fair value of the Company's mortgage asset portfolios. Since December 31, 1998 stock repurchases, acquisitions of mortgage assets and a decline in fair value of the Company's portfolios as a result of higher interest rates have led to a decline in the Company's liquidity of approximately $137 million. However, liquidity at year-end remains substantial affording the Company the ability to maintain its mortgage asset portfolios at current levels for the foreseeable future and to make additional investments and share repurchases (see "Financial Condition -- Proposed Change in Investment Strategy"). RESULTS OF OPERATIONS Comparative net operating results by source (interest income or fee revenues, net of related interest expense and, for CMO administration and the mortgage banking operations sold in 1998, related direct and indirect operating expenses) were as follows (in thousands, except per share amounts):
Year Ended December 31 -------------------------------------------- 1999 1998 1997 --------- ---------- --------- Agency and U.S. Treasury Securities $52,514 $ 12,754 $ 31,892 Non-agency Securities 8,043 4,947 5,867 CMBS -- adjustable-rate 37 -- -- CMO collateral and investments (2,382) (10,078) 40,213 Mortgage banking operations -- 11,821 59,422 CMO administration and other 4,083 4,598 4,000 ------- ---------- --------- Contribution to income 62,295 24,042 141,394 Gain (loss) on sale of mortgage assets and related derivative financial instruments 1,738 (245,261) 27,737 Impairment on CMO investments -- (4,051) -- Other operating expense (6,124) (9,494) (9,205) ------- ---------- --------- Net income (loss) $57,909 $ (234,764) $ 159,926 ======= ========== ========= Net income (loss) per common share: Basic $0.61 $(4.22) $2.62 Diluted 0.60 (4.22) 2.35
1999 COMPARED TO 1998 Operating results for the year ended December 31, 1999 were substantially improved over 1998 results. Liquidity from restructuring the Company's mortgage asset portfolios and from the December 1998 sale of the mortgage banking operations has been employed to reduce borrowings, which has benefited net margins on the Company's mortgage asset portfolios. Margins also benefited from first quarter 1999 acquisitions of Agency Securities, slower prepayments and, earlier in 1999, lower borrowing rates. In 1998 the Company incurred losses from restructuring its mortgage asset portfolios. Also in 1998, the Company recorded impairment charges on mortgage servicing and CMO investments and write-offs of purchase premiums and CMO bond discounts attributable to high levels of prepayments and the expectation at that time that such prepayment levels would continue. The earning capacity of the Company's mortgage asset portfolios is largely dependent on the overall size and composition of the portfolios, the relationship between short- and long- 39 35 CAPSTEAD MORTGAGE CORPORATION term interest rates (the "yield curve") and the extent the Company continues to invest its liquidity in these portfolios. The Company is considering modifying its investment strategy to replace a portion of its existing mortgage investments with a diversified portfolio of credit-sensitive mortgage securities with the goal of reducing the Company's exposure to interest rate risk (see "Financial Condition - Proposed Change in Investment Strategy"). Although yields on the Company's ARM securities are expected to improve in future quarters as interest rates on underlying mortgage loans reset to levels more reflective of the current interest rate environment, first quarter 2000 earnings are expected to decline because of higher borrowing costs. If short-term borrowing rates continue to rise, improving mortgage asset yields over the next 12 months may not fully keep pace and net interest margins would likely decline (see "Effects of Interest Rate Changes"). Agency Securities contributed more to operating results during 1999 than Agency and U.S. Treasury Securities contributed during 1998 due primarily to having employed significantly more capital to this portfolio which lowered borrowing costs. In addition, during most of 1999, the Company enjoyed improved financing spreads over those achieved in 1998. On average, the Company employed $463 million of its capital to this portfolio during 1999 compared to only $108 million in 1998. Yields for this portfolio were 5.81 percent during 1999 compared to 5.77 percent in 1998, while borrowing rates, although significantly higher by year-end, averaged 5.16 percent during 1999 compared to 5.54 percent in 1998. Yields in 1999 have benefited from lower prepayments and changes in portfolio mix including the sale of relatively low-yielding U.S. Treasury notes held in 1998. In addition, during 1998 rapidly declining mortgage interest rates, particularly late in the third quarter, significantly increased prepayments and prepayment risk resulting in purchase premium amortization adjustments, which depressed yields. For further discussion on investment yields, see "Financial Condition - Mortgage Securities and Other Investments" and "Effects of Interest Rate Changes." Non-agency Securities contributed more to operating results during 1999 despite a lower average outstanding portfolio because the Company funded this portfolio entirely with its equity for most of the year. The average outstanding portfolio was $120 million during 1999, compared to $496 million in 1998 during which time significantly less capital was employed supporting this portfolio. Average yields for this portfolio (calculated including mortgage insurance costs) were 8.06 percent during 1999, compared to 6.79 percent in 1998. CMO collateral and investments operating results during 1999 were improved over 1998 results primarily because of significantly lower prepayments in 1999. In 1998, rapidly declining mortgage interest rates, particularly late in the third quarter, significantly increased prepayments and prepayment risk resulting in the third quarter 1998 write-off of $15.7 million of CMO bond discounts and an impairment charge of $4.1 million to write down to fair value remaining investments in interest-only securities. The disposition of a $1.0 billion interest-only mortgage securities portfolio in June 1998, subsequent sales of remaining purchased interest-only mortgage securities and redemptions of CMOs have significantly diminished the earning capacity of this portfolio. Without growth of this portfolio either through the issuance of CMOs in which the Company retains residual interests, or the acquisition of other CMO investments, it is likely this portfolio will not provide a positive return on capital employed in future periods. The mortgage banking operations were sold in December 1998. At December 31, 1998 the Company had established an accrual of over $23.2 million for contract settlement 40 36 CAPSTEAD MORTGAGE CORPORATION provisions and anticipated costs associated with exiting the mortgage banking operations. During 1999 the Company settled $21.2 million of this liability including a $16 million prepayment protection settlement payment and $3.9 million in pricing adjustments on mortgage servicing rights acquisition agreements assumed by the buyer. Operating expenses during 1999 were less than in 1998 reflecting lower costs of operating only the mortgage investment business after the December 1998 sale of the mortgage banking operations. Gains recorded in 1999 relate primarily to the first quarter sale of remaining purchased interest-only mortgage securities held as CMO investments. Losses recorded in 1998 reflect sales of interest-only mortgage securities and related derivative financial instruments ("Derivatives") as well as other mortgage assets as part of the restructuring of the Company's mortgage asset portfolios begun in June 1998 in response to deteriorating conditions in the mortgage finance industry experienced at that time. 1998 COMPARED TO 1997 Operating results for the year ended December 31, 1998 reflect the impact on the Company of the unfavorable interest rate environment and market conditions experienced in 1998 and steps taken by the Company in response including reducing its mortgage asset portfolios and culminating in the sale of the mortgage banking operations in December 1998 for a gain of $2.9 million. In reducing its mortgage asset portfolios, the Company incurred losses of $245.3 million. Net interest margins on the Company's mortgage asset portfolios were dramatically reduced by the effects of high prepayments which reduced yields on mortgage assets and declining earning capacity due to reduced holdings. Mortgage banking results also reflect the effects of high prepayments through higher mortgage servicing amortization expenses and impairment charges that were not totally offset by this operation's risk management strategies and limited mortgage production capacity. Agency Securities contributed less to operating results during 1998 than in 1997 due primarily to a 38-basis point decrease in financing spreads. The average outstanding portfolio peaked at $6.5 billion in May 1998 before being reduced by asset sales and runoff to an average of $2.3 billion in December 1998. Average yields for this portfolio were 5.77 percent during 1998 compared to 6.18 percent during 1997, while average borrowing rates were slightly lower at 5.54 percent during 1998 compared to 5.57 percent during 1997. Lower yields reflect increased amortization of purchase premiums and investments in relatively low coupon 10-year U.S. Treasury notes. Additionally, lower 6-month LIBOR and 1-year U.S. Treasury rates contributed to lower yields on ARM securities. Non-agency Securities contributed less to operating results during 1998 than in 1997 due primarily to a 22-basis point decrease in financing spreads. The average outstanding portfolio peaked at $705 million in March 1998 before being reduced by runoff, sales and a $345.4 million CMO issuance. Average yields for this portfolio were 6.79 percent during 1998 compared to 6.96 percent during 1997, while average borrowing rates were marginally higher at 5.80 percent during 1998 compared to 5.75 percent during 1997. CMO investments contributed substantially less to operating results in 1998 than in 1997 primarily because of the disposition of a $1.0 billion portfolio of Agency Trust interest-only mortgage securities in June 1998, which significantly diminished the earning capacity of this portfolio. With an increase in expectations for future mortgage prepayments, the Company wrote off a significant portion of remaining CMO investments through CMO bond discount 41 37 CAPSTEAD MORTGAGE CORPORATION amortization adjustments aggregating $15.7 million and recorded a $4.1 million other-than-temporary impairment charge to write down remaining investments in interest-only mortgage securities to fair value. Average yields for this portfolio declined to 6.32 percent during 1998 from 10.24 percent during 1997. Yields were negatively impacted by the downsizing of this portfolio and the effects of high prepayments. Mortgage banking revenues increased to $206.1 million in 1998 compared to $172.9 million in 1997 due to growth of the new mortgage production operation, higher earnings on temporarily-held cash balances and the $2.9 million gain on sale of this operation. Amortization expenses of $95.2 million and impairment charges of $224.7 million recorded in 1998 reflect the effects of high prepayments (including the prospect of continued high prepayments) on the value of the mortgage servicing portfolio. These impairment charges were partially offset by gains of $173.4 million on the disposition of a portfolio of U.S. Treasury-based financial investments held to protect against declines in the value of the mortgage servicing portfolio. Operating expenses during 1998 were comparable to 1997 in total. Higher general and administrative costs and lower allocations of costs to the mortgage banking operations were all but offset by lower compensation-related accruals. Excluding a $251.9 million loss on the sale of Agency Trust interest-only mortgage securities (net of related gains on Derivatives), the Company recorded a net gain of $2.3 million on the disposition of $3.8 billion of mortgage assets. In addition, the Company earned $3.8 million in 1998 from a strategy of writing call options on a portion of the Company's fixed-rate securities. During 1997 the Company sold $2.0 billion of mortgage assets for gains totaling $27.0 million. Derivatives not designated as hedges contributed $708,000 to operating results during 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds include borrowings under repurchase arrangements, monthly principal and interest payments on mortgage securities and other investments, excess cash flows on CMO collateral and investments and proceeds from sales of mortgage assets (see "Financial Condition -- Utilization of Capital and Liquidity"). The Company currently believes that these funds are sufficient for the acquisition of mortgage assets, repayments on borrowings, the payment of cash dividends as required for Capstead's continued qualification as a Real Estate Investment Trust ("REIT") and common and preferred stock repurchases as described below. It is the Company's policy to remain strongly capitalized and conservatively leveraged. Borrowings under repurchase arrangements secured by Agency Securities and Non-agency Securities generally have maturities of less than 31 days, although in recognition of the potential for greater than normal mortgage finance market liquidity constraints over this year-end, the Company extended the terms of a portion of its borrowings up to 4 months beyond year-end. The Company has uncommitted repurchase facilities with investment banking firms to finance these mortgage assets, subject to certain conditions. Interest rates on borrowings under these facilities are generally based on overnight to 30-day London Interbank Offered Rate ("LIBOR") rates. The terms and conditions of these arrangements, including interest rates, are negotiated on a transaction-by-transaction basis. Amounts available to be borrowed under these arrangements are dependent upon the fair value of the 42 38 CAPSTEAD MORTGAGE CORPORATION securities pledged as collateral, which fluctuates with changes in interest rates and the securities' credit quality. Borrowings under repurchase arrangements secured by recent purchases of adjustable-rate CMBS more closely match the interest rate adjustment features and expected life of these investments such that the Company anticipates it can earn more consistent net interest spreads on these investments and, as a result, experience less interest rate volatility than experienced with the Company's existing mortgage investments. Should the Company make significant additional investments in credit-sensitive mortgage securities, it is anticipated that the Company will attempt to lessen interest rate volatility in a similar fashion or through the use Derivatives such as interest rate swaps (see "Effects of Interest Rate Changes" and "Risks Associated with Credit-sensitive Investments"). In February 1999 the Company's Board of Directors authorized the repurchase of up to 6 million common shares and up to 2 million Series B shares. As of December 31, 1999, 2.4 million common and 1.4 million Series B shares remained available for repurchase under this program. In January 2000 the Company completed a tender offer for 11.1 million common shares at a cash price of $4.55 per share. The Company may continue to repurchase shares in open market transactions from time to time subject to the price of its securities and alternative investment opportunities. EFFECTS OF INTEREST RATE CHANGES INTEREST RATE SENSITIVITY ON OPERATING RESULTS The Company performs earnings sensitivity analysis using an income simulation model to estimate the effects that specific interest rate changes will have on future earnings. All mortgage assets and Derivatives held, if any, are included in this analysis. In addition, the sensitivity of CMO administration fee income to market interest rate levels is included as well. The model incorporates management assumptions regarding the level of prepayments on mortgage assets for a given level of market rate changes using industry estimates of prepayment speeds for various coupon segments. These assumptions are developed through a combination of historical analysis and future expected pricing behavior. Primarily because the Company significantly increased its holdings of Agency Securities early in 1999, earnings are more sensitive to changes in interest rates at December 31, 1999 than at December 31, 1998, as indicated in the following table:
Immediate Change In: (rates in basis points, dollars in thousands) -------------------------------------------------------- 30-day LIBOR rate Down 100 Down 100 Flat Up 100 10-year U.S. Treasury rate Down 100 Flat Up 100 Up 100 2000 Projected 12-month earnings change* $31,160 $36,190 $5,044 $(37,821) 1999 Projected 12-month earnings change* (424) 12,757 8,065 (4,775)
* Note that the impact of actual or planned acquisitions of mortgage assets subsequent to the indicated year-end (beyond acquisitions necessary to replace runoff) and potential new business activities (see "Financial Condition -- Proposed Change to Investment Strategy") were not factored into the simulation model for purposes of this disclosure. 43 39 CAPSTEAD MORTGAGE CORPORATION Income simulation modeling is a primary tool used to assess the direction and magnitude of changes in net margins on mortgage assets resulting from changes in interest rates. Key assumptions in the model include prepayment rates on mortgage assets, changes in market conditions, and management's capital plans. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net margins or precisely predict the impact of higher or lower interest rates on net margins. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and other changes in market conditions, management strategies and other factors. GENERAL DISCUSSION OF EFFECTS OF INTEREST RATE CHANGES Changes in interest rates may impact the Company's earnings in various ways. The Company's earnings currently depend, in part, on the difference between the interest received on mortgage securities and other investments, and the interest paid on related short-term borrowings. The resulting spread may be reduced or even turn negative in a rising short-term interest rate environment. Because a substantial portion of the Company's mortgage investments are ARM mortgage securities, the risk of rising short-term interest rates is generally offset to some extent by increases in the rates of interest earned on the underlying ARM loans, which reset periodically based on underlying indices (generally 6-month LIBOR and 1-year U.S. Treasury rates). Since ARM loans generally limit the amount of such increases during any single interest rate adjustment period and over the life of the loan, interest rates on borrowings can rise to levels that may exceed the interest rates on the underlying loans contributing to lower or even negative financing spreads. At other times, as seen in 1998, declines in these indices may be greater than declines in the Company's borrowing rates which are generally based on 30-day LIBOR, contributing to lower or even negative financing spreads. The Company may invest in Derivatives from time to time as a hedge against rising interest rates on a portion of its short-term borrowings. At December 31, 1999 the Company did not own any Derivatives as a hedge against rising interest rates. Another effect of changes in interest rates is that as long-term interest rates decrease the rate of principal prepayments on mortgage loans underlying mortgage investments generally increases. To the extent the proceeds of prepayments on mortgage investments cannot be reinvested at a rate of interest at least equal to the rate previously earned on such investments, earnings may be adversely affected. As seen in 1998 prolonged periods of high prepayments can significantly reduce the expected life of mortgage investments; therefore, the actual yields realized can be lower due to faster amortization of purchase premiums. In addition, the rates of interest earned on ARM investments generally will decline during periods of falling short-term interest rates as the underlying ARM loans reset at lower rates. Changes in interest rates also impact earnings recognized from CMO investments, which have consisted primarily of interest-only mortgage securities and fixed-rate CMO residuals (see "Financial Condition"). The amount of income that may be generated from interest-only mortgage securities is dependent upon the rate of principal prepayments on the underlying mortgage collateral. If mortgage interest rates fall significantly below interest rates on the collateral, principal prepayments may increase, reducing or even turning negative the overall return on these investments. As seen in 1998 sustained periods of high prepayments can result in losses. Conversely, if mortgage interest rates rise, interest-only mortgage securities tend to perform favorably because underlying mortgage loans will generally prepay at slower 44 40 CAPSTEAD MORTGAGE CORPORATION rates, thereby increasing overall returns. The Company sold its investments in interest-only mortgage securities in connection with the 1998 restructuring of its mortgage asset portfolios CMO residuals behave similarly to interest-only mortgage securities. As seen in 1998 if mortgage interest rates fall, prepayments on the underlying mortgage loans generally will be higher, thereby reducing or even turning negative the overall returns on these investments. This is due primarily to the acceleration of the amortization of bond discounts as bond classes are repaid more rapidly than originally anticipated. Conversely, if mortgage interest rates rise significantly above interest rates on the collateral, principal prepayments will typically diminish, improving the overall return on an investment in a fixed-rate CMO residual because of an increase in time over which the Company receives the larger positive interest spread. The Company periodically sells mortgage assets, which may increase income volatility because of the recognition of transactional gains or losses. Such sales may become attractive as values of mortgage assets fluctuate with changes in interest rates. At other times, such as in 1998, it may become prudent to significantly downsize the mortgage asset portfolios to mitigate exposure to further declines in mortgage interest rates or, as is currently being considered, to shift the Company's investment focus to credit-sensitive mortgage assets (see "Financial Condition -- Proposed Change in Investment Strategy"). RISKS ASSOCIATED WITH CREDIT-SENSITIVE INVESTMENTS CMBS are generally viewed as exposing an investor to greater risk of loss than residential mortgage-backed securities since such securities are typically secured by larger loans to fewer obligors than residential mortgage-backed securities. Commercial property values and net operating income are subject to volatility, and net operating income may be sufficient or insufficient to cover debt service on the related mortgage loan at any given time. The repayment of loans secured by income-producing properties is typically dependent upon the successful operation of the related real estate project and the ability of the applicable property to produce net operating income rather than upon the liquidation value of the underlying real estate. Even when the current net operating income is sufficient to cover debt service, there can be no assurance that this will continue to be the case in the future. Additionally, commercial properties may not readily be convertible to alternative uses if such properties were to become unprofitable due to competition, age of improvements, decreased demand, regulatory changes or other factors. The conversion of commercial properties to alternate uses generally requires substantial capital expenditures, which may or may not be available. The availability of credit for commercial mortgage loans will be significantly dependent upon economic conditions in the markets where such properties are located, as well as the willingness and ability of lenders to make such loans. The availability of funds in the credit markets fluctuates and there can be no assurance that the availability of such funds will increase above, or will not contract below current levels. In addition, the availability of similar commercial properties, and the competition for available credit, may affect the ability of potential purchasers to obtain financing for the acquisition of properties. This could effect the repayment of commercial mortgages pledged to secure CMBS. 45 41 CAPSTEAD MORTGAGE CORPORATION Credit-sensitive residential mortgage-backed securities differ from CMBS in several important ways, yet can still carry substantial credit risk. Residential mortgage securities typically are secured by smaller loans to more obligors than CMBS, thus spreading the risk of mortgagor default. However, most of the mortgages supporting these securities are made to homeowners that do not qualify for Agency loan programs for reasons including loan size, financial condition, or work or credit history that may be indicative of higher risk of default than loans qualifying for such programs. As with CMBS, in instances of default the Company may incur losses if the proceeds from the sale of the underlying collateral less related foreclosure costs, are less than the unpaid principal balance of the mortgage loan. However, with residential mortgage-backed securities, this risk may be mitigated by various forms of credit enhancements including, but not limited to, primary mortgage insurance. Through the process of securitizing both commercial and residential mortgages, credit risk can be heightened or minimized. Senior classes in multi-class securitizations generally have first priority over cash flows from a pool of mortgages and, as a result, carry the least risk, highest investment ratings and the lowest yields. Typically a securitization will also have mezzanine classes and subordinated classes. Mezzanine classes will generally have somewhat lower credit ratings and may have average lives that are longer than the senior classes. Subordinate classes are junior in the right to receive cash flow from the underlying mortgages, thus providing credit enhancement to the senior and mezzanine classes. As a result, subordinated securities will have lower credit ratings because of the elevated risk of credit loss inherent in these securities. The availability of capital from external sources to finance investments in credit-sensitive CMBS and residential mortgage-backed securities that are not financed to maturity at acquisition may be diminished during periods of mortgage finance market illiquidity, such as was experienced in 1998. Additionally, if market conditions deteriorate resulting in substantial declines in value of these securities, sufficient capital may not be available to support the continued ownership of such investments, requiring these securities to be sold at a loss. There can be no assurance as to what extent, if any, beyond the initial purchases of CMBS described previously, this proposed strategy to invest in CMBS or other credit-sensitive securities will be implemented and, if implemented, whether or not it will be successful in meeting the Company's goals. In addition, there can be no assurance that the Company will be able to successfully assess and monitor these risks. OTHER IMPACT OF THE YEAR 2000 The Company took the necessary steps to ensure that its software systems and applications would not fail or create erroneous results by or at December 31, 1999 ("Year 2000 compliant"). The Company also took steps to ensure that the vendors it utilizes and institutions that it interfaces with had also taken the necessary steps to become Year 2000 compliant. The financial costs of becoming Year 2000 compliant, including the construction a new computer network did not exceed $600,000. The Company experienced no material instances of Year 2000 compliance failures. 46 42 CAPSTEAD MORTGAGE CORPORATION FORWARD LOOKING STATEMENTS This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that inherently involve risks and uncertainties. The Company's actual results and liquidity can differ materially from those anticipated in these forward-looking statements because of changes in the level and composition of the Company's investments and unforeseen factors. These factors may include, but are not limited to, changes in general economic conditions, the availability of suitable investments, fluctuations in and market expectations for fluctuations in interest rates and levels of mortgage prepayments, deterioration in credit quality and ratings, the effectiveness of risk management strategies, the impact of leverage, liquidity of secondary markets and credit markets, increases in costs and other general competitive factors. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for Derivatives and hedging activities. It requires that an entity recognizes all Derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. If certain conditions are met, a Derivative may be specifically designated as (i) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (ii) a hedge of the exposure to variable cash flows of a forecasted transaction; or (iii) in certain circumstances, a hedge of a foreign currency exposure. This statement is effective for the Company's fiscal year ending December 31, 2001. The adoption of SFAS 133 is not expected to have a material impact on the financial position or results of operations of the Company. 47
EX-21 5 LIST OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF CAPSTEAD MORTGAGE CORPORATION At December 31, 1999 the subsidiaries of Capstead Mortgage Corporation were as follows:
STATE OF DOMICILE PARENT COMPANY SUBSIDIARY Capstead Mortgage Corporation ("CMC")......................................................... Maryland Capstead Advisers, Inc..................................................................... Nevada Capstead Capital Corporation............................................................... Delaware Capstead Select Corporation................................................................ Delaware Capstead Securities Corporation I.......................................................... Delaware Capstead Securities Corporation II......................................................... Delaware Capstead Securities Corporation III........................................................ Delaware Capstead Securities Corporation IV......................................................... Delaware CMC Securities Corporation I............................................................... Nevada CMC Securities Corporation III............................................................. Delaware CMC Securities Corporation IV.............................................................. Delaware CMC ARM Securities Corporation............................................................. Delaware Capstead Mortgage Services Corporation..................................................... Delaware Capstead Holdings, Inc.(1)................................................................. Delaware Capstead Inc.(2)........................................................................ Delaware CMC Securities Corporation II(2)........................................................ Delaware CMC Investment Partnership(3)................................................................. Texas
(1) CMC owns all of the issued and outstanding preferred stock. (2) Capstead Holdings, Inc. owns all the issued and outstanding common stock. (3) A general partnership owned by CMC and Capstead Holdings, Inc.
EX-23 6 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Capstead Mortgage Corporation of our report dated January 27, 2000, included in the 1999 Annual Report to Stockholders of Capstead Mortgage Corporation. We also consent to the incorporation by reference in the following registration statements and the related prospectuses, of our report dated January 27, 2000 with respect to the consolidated financial statements incorporated herein by reference in the Annual Report on Form 10-K of Capstead Mortgage Corporation: o Form S-8 (No. 33-40116); o Form S-8 (No. 33-40117); o Form S-3 (No. 33-62212); o Form S-3 (No. 33-52415); o Form S-8 (No. 33-53555); o Form S-3 (No. 33-57164); o Form S-3 (No. 333-03187); o Form S-8 (No. 333-12719); o Form S-3 (No. 333-26419); o Form S-3 (No. 333-26865); o A pre-effective amendment to Form S-3 (No. 333-26419); o Form S-8 (No. 333-27215); o A post-effective amendment to Form S-3 (No. 333-26865); and o Form S-3 (No. 333-43169). ERNST & YOUNG LLP Dallas, Texas March 13, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSTEAD MORTGAGE CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 28,488 0 0 0 0 0 0 0 8,807,039 4,903,065 3,289,584 0 191,476 569 422,345 8,807,039 0 568,980 0 0 8,138 0 502,933 57,909 0 57,909 0 0 0 57,909 0.61 0.60
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