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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, 1994
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.)
2711 NORTH HASKELL, DALLAS, TEXAS 75204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 874-2323
2001 BRYAN TOWER, DALLAS, TEXAS 75201
(Former name, former address and formal fiscal year, if changed from last
report)
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 FEBRUARY 10, 1995 THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES WAS $307,611,000.
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 10, 1995: 15,303,923
DOCUMENTS INCORPORATED BY REFERENCE:
(1) PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1994 ARE INCORPORATED BY REFERENCE INTO PARTS II AND IV.
(2) PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED MARCH 15,
1995, ISSUED IN CONNECTION WITH THE ANNUAL MEETING OF STOCKHOLDERS OF THE
REGISTRANT, ARE INCORPORATED BY REFERENCE INTO PART III.
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CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
1994 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
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ITEM 1. BUSINESS........................................... 1
ITEM 2. PROPERTIES......................................... 7
ITEM 3. LEGAL PROCEEDINGS.................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................... 8
ITEM 6. SELECTED FINANCIAL DATA........................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....... 8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............... 8
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 8
ITEM 11. EXECUTIVE COMPENSATION............................. 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................. 9
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..... 9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K................................... 10
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PART I
ITEM 1. BUSINESS.
ORGANIZATION
Capstead Mortgage Corporation ("CMC" or the "Company") was incorporated on April
15, 1985 in the state of Maryland and commenced operations in September 1985.
The Company operates as a mortgage conduit which purchases and securitizes
various types of single-family residential mortgage loans. In addition, the
Company has a mortgage servicing unit that functions as the primary mortgage
servicer for mortgage loans and mortgage servicing rights acquired by the
Company.
CMC, 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, CMC is not taxed at the corporate level on taxable income
distributed to stockholders, provided that certain REIT qualification tests are
met. All taxable income of certain other subsidiaries, including the mortgage
servicing unit, are subject to federal and state income taxes, where applicable.
CONDUIT OPERATIONS
The Company purchases many different types of mortgage loan products that it
classifies as fixed-rate, medium-term or adjustable-rate mortgage investments.
Fixed-rate mortgage investments (i) have fixed rates of interest for their
entire terms or (ii) have an initial fixed-rate period of ten years after
origination and then adjust annually based on a specified margin over 1-year
United States Treasury Securities ("1-year Treasuries"). Medium-term mortgage
investments (i) have an initial fixed-rate period of three or five years after
origination and then adjust annually based on a specified margin over 1-year
Treasuries or (ii) have initial interest rates that adjust one time,
approximately five years following origination of the mortgage loan, based on a
specified margin over the Federal National Mortgage Association ("FNMA") yields
for 30-year, fixed-rate commitments at the time of adjustment. Adjustable-rate
mortgage investments either (i) adjust semi-annually based on a specified margin
over the 6-month London Interbank Offered Rate ("LIBOR") or (ii) adjust annually
based on a specified margin over 1-year Treasuries.
The Company purchases mortgage loans from mortgage banking companies, savings
banks, commercial banks, credit unions, mortgage brokers and other financial
intermediaries ("Correspondents") throughout the United States. Correspondents
must meet certain financial and performance requirements before they are
approved to participate in the Company's Correspondent Program. A purchase and
sale agreement is executed with each Correspondent that provides for recourse
against the Correspondent in the event of fraud or misrepresentation in the
process by which a mortgage loan is originated.
The Company maintains purchase guidelines for the acquisition of mortgage loans
based on the anticipated requirements of its mortgage pool insurers, mortgage
investors and management's assessment of the criteria used by nationally
recognized statistical rating organizations ("Rating Agencies") to analyze the
quality of the collateral pledged to mortgage-backed securities issued by the
Company. The Company does not itself underwrite mortgage loans, but instead
relies on the credit review and analysis of its mortgage pool insurers
(primarily General Electric Mortgage Insurance Company), other Company-approved
underwriters or originators of mortgage loans where the Company has specifically
delegated underwriting responsibilities.
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The principal amount of mortgage loans acquired by the Company at the time of
origination generally range from $203,150 to $650,000 per loan. Substantially
all of the mortgage loans acquired by the Company comply with the underwriting
criteria of the mortgage securities programs sponsored by the Federal Home Loan
Mortgage Corporation ("FHLMC") and FNMA, except that original outstanding
principal amounts generally exceed the maximum permissible amount ($203,150,
effective January 1, 1993) for such programs ("Nonconforming Mortgage Loans").
The average loan purchased in 1994 had an original principal balance of
approximately $282,000.
Commitments are issued that obligate the Company to purchase mortgage loans from
the Correspondent for a specific period of time (typically 10 to 90 days), in a
specific aggregate principal amount and bearing a specified mortgage interest
rate and price. The Company issues three types of commitments: mandatory,
optional and best efforts. The Company receives a fee on optional and best
effort commitments, but not on mandatory commitments. However, if a
Correspondent fails to deliver a loan subject to a mandatory commitment, the
Correspondent is obligated to pay the Company the difference between the yield
the Company would have obtained on the mortgage loan and the yield available on
similar mortgage loans subject to mandatory commitments issued at the time of
such failure to deliver, plus a penalty.
MORTGAGE LOAN PORTFOLIO
The Company purchases mortgage loans from Correspondents on a daily basis. The
loans purchased by the Company in the past have been warehoused in the mortgage
loan portfolio until a long term investment strategy was implemented.
Periodically, mortgage loans would be pledged to secure collateralized mortgage
obligations ("CMOs"), publicly-offered, multi-class mortgage pass-through
certificates ("MPCs"), or AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs") issued by the Company's special-purpose finance
subsidiaries.
The Company utilizes repurchase agreements to finance the warehousing of
mortgage loans. A repurchase agreement is a form of short term financing
pursuant to which mortgage loans are pledged as collateral for funds borrowed at
short term interest rates, typically 30 to 60 days. Generally, mortgage
interest income earned exceeds related borrowing costs resulting in a positive
interest spread.
In response to low purchase volumes as experienced in 1994 and expected for
1995, the Company does not plan to continue assuming market risk associated with
aggregating and securitizing mortgage loans. To eliminate this risk and create
more competitive prices, mortgage loans will be held in warehouse for a very
brief period, usually about a week. Then, instead of the usual practice of
accumulating $100 million or more of loans for a securitization, mortgage loans
will be sold outright to private investors in amounts of up to $10 million.
This strategy may reduce the long term profit potential somewhat, but
substantially reduces market risk.
The Company also plans to offer a "B paper" loan program to Correspondents in
1995. B paper loans are mortgage loans to potential homeowners whose poor
credit history will not allow them to obtain traditional mortgage financing.
Interest rates on B paper are higher than traditional mortgage loans and the
resulting spreads are wider, thus creating the opportunity to generate
additional profits through the Correspondent network. The Company will not
retain any risk in this program as all loans will be purchased to specific
investor commitments.
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The Company has a commitment by a mortgage pool insurer to issue mortgage pool
insurance on most of its mortgage loan acquisitions. A mortgage pool insurance
policy will cover losses due to mortgagor default in amounts generally ranging
from 7 to 15 percent of the aggregate principal amount of the insured pool of
mortgage loans. Mortgage pool insurance policies are generally not in force
during warehousing of mortgage loans, but instead may be activated at the time
mortgage loans are pledged as collateral for a CMO, MPC or Mortgage Pass-Through
unless an investor in the former securitizations is willing to assume the credit
risk for the entire issuance (a "senior/subordinate" structure).
Senior/subordinate structures were used extensively in 1994. During the
warehousing period the Company retains the full risk that mortgage loans may
default. The Company has exposure to certain other risks during the warehousing
period. These include bankruptcy and special hazards which are not covered by
standard hazard insurance policies (e.g., earthquakes), as well as fraud or
misrepresentation in the origination of the mortgage loan. Defaults on mortgage
loans during the warehousing period, if linked to fraud or misrepresentation,
may be mitigated by the Correspondent's obligation to repurchase such mortgage
loan. However, to the extent the Correspondent does not perform on its
repurchase obligation, the Company may incur a loss.
MORTGAGE PASS-THROUGH PORTFOLIO
The Company's long term investment strategy includes the securitization of
adjustable-rate and medium-term mortgage loans into Mortgage Pass-Throughs.
This investment strategy primarily features adjustable-rate mortgage loans
which, because of their adjustable interest rates, are more likely to retain
value.
At the time mortgage loans are pledged as collateral for Mortgage Pass-Throughs,
the mortgage pool insurance policy is activated. The level of coverage under
any such mortgage pool insurance policy is determined by one or more of the
Rating Agencies, and is at a level necessary to allow the insured pool of
mortgage loans, or the securities such pools are pledged to secure, to be AAA-
rated. At such time, the Company also insures or reserves against bankruptcy
and special hazard risks.
The Company utilizes repurchase agreements to finance the Mortgage Pass-Through
portfolio. The formation of Mortgage Pass-Throughs enhances the marketability
of the underlying mortgage loans, thus enabling the Company to reduce its
borrowing costs below the level paid on non-rated loans.
AGENCY SECURITIES PORTFOLIO
The Company also invests in fixed-rate and adjustable-rate agency securities
that consist primarily of mortgage-backed securities guaranteed by government
sponsored entities such as FNMA, Government National Mortgage Association or
FHLMC. Because agency securities are the most widely traded mortgage-backed
securities, unique financing opportunities exist in the marketplace that enable
the Company to achieve attractive interest rate spreads on the financing of such
assets. The agency securities portfolio also includes investments in callable
agency notes. Callable agency notes currently held by the Company are
unsecured, 3-year fixed-rate notes issued by FHLMC, FNMA, or the Federal Home
Loan Bank Board ("FHLBB") and mature in 1997, unless redeemed earlier by FHLMC,
FNMA or FHLBB.
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CMO INVESTMENT PORTFOLIO AND RELATED SECURITIZATION ACTIVITY
The Company's long term investment strategy has included the securitization of
fixed-rate and medium-term mortgage loans, whereby such loans have been pledged
as collateral for the issuance of CMOs or MPCs. Most of the Company's CMOs are
structured as financings in which the Company recognizes economic gains or
losses over the term of the collateral. MPCs and some CMOs are structured as
sales. Such sales preserve capital because the investment retained in the
securitization is limited; however, income can be more volatile because of the
recognition of transactional gains or losses.
Each series of CMOs consist of multiple classes of bonds, each having its own
maturity. MPCs are structured in a similar fashion with the exception that
investors do not purchase bonds subject to an indenture; rather, they purchase
certificates evidencing undivided interests in a trust that owns the underlying
mortgage loans. The segmentation of CMOs into classes of bonds with varying
maturities along with mortgage pool insurance or other credit enhancements
provided to make all or most of the CMO bonds AAA-rated enables the Company to
issue CMO classes with shorter scheduled maturities and lower interest rates
than the underlying mortgage loans. Each of these factors contributes to a
positive difference between the payments received on the mortgage loans pledged
to secure such CMOs and the payments made on the CMOs issued (the "Excess Cash
Flow"). Because the shorter-term classes of CMO bonds typically bear lower
rates of interest than longer-term classes, the Excess Cash Flow on a CMO is
typically greatest in the early years of the CMO. As the mortgage loans are
repaid and the shorter-term classes of CMO bonds are retired, the average
interest cost of the CMOs outstanding increases. Thus, the Excess Cash Flow
will decline over time.
The right to receive the Excess Cash Flow, along with the noncash amortization
of collateral and bond premiums and discounts is referred to as the "CMO
Residual". CMO structures have evolved in recent years such that the Excess
Cash Flow portion of a CMO Residual has been virtually eliminated by the
formation of additional CMO securities including various forms of interest-only
and/or principal-only securities. Interest-only securities represent ownership
in an undivided interest in interest payments on the underlying collateral.
Principal-only securities represent ownership in an undivided interest in
principal payments on the underlying collateral. Since the fall of 1992 the
Company typically has sold much of the noncash portion of its CMO Residuals and
retained for its CMO investment portfolio certain of the interest-only and/or
principal-only securities formed in connection with CMO and MPC issuances.
Investments in interest-only and principal-only securities held in the CMO
investment portfolio are sensitive to changes in interest rates. In a falling
interest rate environment, prepayments on the underlying mortgage collateral
generally will be high and the Company could incur losses on investments in
interest-only securities. Conversely, in periods of rising interest rates,
interest-only securities will tend to perform favorably because the underlying
mortgage collateral will generally prepay at slower rates. Principal-only
securities react differently to changes in interest rates. Lower interest rates
result in the recovery of this investment more rapidly thus increasing yields.
During periods of rising rates, it takes longer for the Company to recover its
principal-only investments thus lowering yields. Principal-only securities
retained by the Company generally represent a much smaller investment than
interest-only investments.
At the time the loans are pledged for issuance of a CMO or MPC, the mortgage
pool insurance policy can be activated. At such time, the Company also can
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insure or reserve against bankruptcy and special hazard risks, and reduce its
exposure to losses from fraud or misrepresentation in the origination of the
mortgage loan. In late 1993 the Company began issuing CMOs in a
senior/subordinate structure (in lieu of purchasing mortgage pool insurance and
special hazard insurance) where the investor is the subordinate classes assumes
credit and special hazard risks. The Company has retained an aggregate of
approximately $2.2 million of credit and special hazard risk on certain of these
issuances. Actual losses to the Company due to this risk are dependent upon the
timing and magnitude of related collateral defaults. The Company does not
currently anticipate a need to increase its provision for possible losses for
this risk.
The issuance of CMOs typically eliminates the Company's short term financing
risk associated with mortgage loans that are pledged as collateral for such CMOs
as well as the risk that the market value of such mortgage loans will decline.
This is because each series of CMOs is structured to be fully repaid out of the
principal and interest payments on the underlying mortgage loans, including
reinvestment proceeds, regardless of fluctuations in the market value of such
mortgage loans.
For 1995 the Company expects to sell rather than securitize much of its current
production. As a result, further CMO issuances by the Company and, therefore,
additions to its CMO investment portfolio are expected to be limited. However,
the Company may from time to time invest in other issuers' CMO bonds.
SERVICING OPERATIONS
The Company formed its mortgage servicing unit early in 1993, and as of December
31, 1993, serviced a portfolio of 8,000 mortgage loans with an aggregate
principal balance of $2.4 billion. Mortgage servicing includes collecting and
accounting for payments of principal and interest from borrowers, remitting such
payments to investors, holding escrow funds for payment of mortgage-related
expenses such as taxes and insurance, making advances to cover delinquent
payments, inspecting the mortgage premises as required, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, and generally administering the loans. The Company
receives fees for servicing residential mortgage loans ranging generally from
0.25 to 0.38 percent per annum on the declining principal balances of the loans.
Servicing fees are collected by the Company out of monthly mortgage payments.
Growth during 1993 was accomplished primarily by retaining mortgage servicing
rights on mortgage loans purchased through the Company's conduit operations.
Beginning in late 1993 the Company began committing to bulk acquisitions of
mortgage servicing rights for both conforming and non-conforming mortgage loan
portfolios. During 1994 another 110,000 mortgage loans with an aggregate
principal balance of $12.5 billion were added to the portfolio. At year-end the
mortgage servicing portfolio totaled 116,000 loans with a balance of $14.4
billion, had a weighted average interest rate of 7.16 percent, and delinquencies
of 30 days and over of only 1.1 percent. The prepayment rate on mortgage loans
held in the mortgage servicing portfolio was a low 7.2 percent during 1994.
Late in 1994 the Company purchased the mortgage servicing rights for an
additional 53,000 mortgage loans with an aggregate principal balance of $5.1
billion that the Company will begin servicing by the end of the first quarter of
1995. This will bring the total mortgage servicing portfolio to
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more than $19 billion. The Company expects the mortgage servicing portfolio to
reach $25 billion before the end of 1995.
EFFECTS OF INTEREST RATE CHANGES
For a discussion of effects of interest rate changes on the Company's mortgage
investment portfolios, CMO investment portfolio and mortgage servicing
portfolio, see the Registrant's Annual Report to Stockholders for the year ended
December 31, 1994 on pages 50 and 51 under the caption "Management's Discussion
and Analysis - Effects of Interest Rate Changes."
OTHER INVESTMENT STRATEGIES
The Company may enter into other short or long term investment strategies as the
opportunities arise.
COMPETITION
In purchasing and pooling mortgage loans and in purchasing other mortgage-
related assets, the Company competes with savings banks, commercial banks,
mortgage and investment bankers, conduits, insurance companies, other lenders,
FNMA and FHLMC, many of whom may have greater financial resources than the
Company. The competition for the acquisition of mortgage servicing rights is
equally diverse. Mortgage banking companies, savings banks and commercial banks
all engage in servicing mortgage loans, some for others and some for their own
portfolio. Additionally, in issuing CMOs or other mortgage-backed securities,
the Company will face competition from other issuers of these securities and the
securities themselves will compete with other investment opportunities available
to prospective purchasers. An increase in the purchasing of long term mortgage
loans by others may reduce the Company's ability to compete in the purchase of
such loans and may reduce the yields available to the Company. In addition, if
FHLMC and FNMA were to increase the dollar amount limitation on loans they are
permitted to purchase (currently $203,150), they would be able to purchase a
greater percentage of mortgage loans in the secondary market than they currently
are permitted to acquire, and the Company's ability to maintain or increase its
current acquisition levels could be adversely affected.
REGULATION AND RELATED MATTERS
The Company's mortgage servicing unit is subject to the rules and regulations of
FNMA and FHLMC with respect to securitizing and servicing mortgage loans. In
addition, there are other Federal and state statutes and regulations affecting
such activities. Moreover, the Company is required annually to submit audited
financial statements to FNMA and FHLMC and each regulatory entity has its own
financial requirements. The Company's affairs are also subject to examination
by FNMA and FHLMC at all times to assure compliance with applicable regulations,
policies and procedures. Many of the aforementioned regulatory requirements are
designed to protect the interests of consumers, while others protect the owners
or insurers of mortgage loans. Failure to comply with these requirements can
lead to loss of approved status, termination of servicing contracts without
compensation to the servicer, demands for indemnification or loan repurchases,
class action lawsuits and administrative enforcement actions.
EMPLOYEES
As of December 31, 1994, the Company had 183 full-time employees. Until
becoming fully self-administered on October 1, 1993, the Company was managed
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by Capstead Advisers, Inc., a wholly-owned subsidiary of Lomas Mortgage USA,
Inc., who provided executive and administrative personnel required by the
Company under the terms of a management agreement.
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.
So 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, capital gain or a return of
capital. During 1993, 20 percent of distributions made were characterized as
long term capital gains. Other distributions during the last three years 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 certain other subsidiaries, including Capstead Inc., which
conduct mortgage servicing and certain securitization operations, are 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 dividend of such earnings.
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 primarily in Dallas, Texas on properties
leased by the Company.
ITEM 3. LEGAL PROCEEDINGS.
At December 31, 1994 there were no material pending legal proceedings, outside
the normal course of business, to which the Company or its subsidiaries were a
party or of which any of their property was the subject.
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ITEM 4. RESULTS OF 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 is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1994 on page 42 under the
caption "Note R - 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, 1994 on page 43 under the
caption "Selected Financial Data," and is incorporated herein by reference,
pursuant to General Instruction G(2).
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, 1994 on pages 44 through
51 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, 1994 on pages 23 through
42, 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 definitive
Proxy Statement dated March 15, 1995 on pages 3 through 6 under the captions
"Election of Directors," "Board of Directors" and "Executive Officers," 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 definitive
Proxy Statement dated March 15, 1995 on pages 7 through 14 under the captions
"Executive Compensation," "Compensation Committee Report on
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Executive Compensation," and "Performance Graph," which is 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 definitive
Proxy Statement dated March 15, 1995 on pages 15 and 16 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.
The information required by this item is included in the Registrant's Annual
Report to Stockholders for the year ended December 31, 1994 on page 40 under the
caption "Notes to Consolidated Financial Statements - Note N - Management and
Non-Competition Agreements", which is incorporated herein by reference pursuant
to General Instruction G(2).
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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 financial statements of the Company, included in the
1994 Annual Report to Stockholders, are incorporated herein by
reference:
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Consolidated Statement of Income - Years
Ended December 31, 1994, 1993 and 1992 *
Consolidated Balance Sheet -
December 31, 1994 and 1993 *
Consolidated Statement of Stockholders' Equity -
Three Years Ended December 31, 1994 *
Consolidated Statement of Cash Flows - Years
Ended December 31, 1994, 1993 and 1992 *
Notes to Consolidated Financial Statements -
December 31, 1994 *
2. Financial statement schedules:
Schedule VIII-Valuation and Qualifying Accounts 14
Schedule XII-Mortgage Loans on Real Estate 15
NOTE: All other 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.
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* Incorporated herein by reference from the Company's Annual Report to
Stockholders for the year ended December 31, 1994.
3. Exhibits:
Exhibit
Number
3.1(a) Charter of the Company, which includes Articles of
Incorporation, Articles Supplementary for each outstanding
Series of Preferred Stock and all other amendments to such
Articles of Incorporation(5)
3.1(b) Articles Supplementary ($1.26 Cumulative Convertible
Preferred Stock, Series B)(4)
3.2 Bylaws of the Company, as amended(5)
10.17 Amendment to Management Agreement dated March 31, 1993,
between the Registrant and Capstead Advisers, Inc.(5)
10.18 Second Amendment to Management Agreement dated September 3,
1993, between the Registrant and Capstead Advisers, Inc.(6)
10.19 Stock Option Agreement, dated June 16, 1992, between the
Company and Lomas Financial Corporation(5)
10.20 Form of Loan Sale Agreement(3)
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(4)
-10-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
PART IV
ITEM 14. - CONTINUED
10.24 Restricted Stock Grant Agreement dated August 1, 1992 between
Capstead Mortgage Corporation and Ronn K. Lytle(4)
10.25 1994 Flexible Long Term Incentive Plan*
10.26 1994 Capstead Inc. Restricted Stock Plan*
10.27 Capstead Mortgage Corporation Deferred Compensation Plan*
10.28 Summary of Employment Agreement dated December 9, 1993
between Capstead Mortgage Corporation and Christopher T.
Gilson*
11 Computation of per share earnings*
12 Computation of ratio of earnings to combined fixed charges
and preferred stock dividends*
13 Portions of the Annual Report to Stockholders of the Company
for the year ended December 31, 1994*
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 Amendment No. 1 on Form 8 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1991
(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1992
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-62212) dated May 6, 1993
(6) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993
* Filed herewith.
(b) Reports on Form 8-K: None.
(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.
-11-
<PAGE>
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 23, 1995 By: /s/ ANDREW F. JACOBS
------------------------------
Andrew F. Jacobs
Senior Vice President-Control,
Treasurer and Secretary
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 March 23, 1995
(Ronn K. Lytle) Executive Officer
and Director
/s/ ANDREW F. JACOBS
- ------------------------------- Senior Vice President- March 23, 1995
(Andrew F. Jacobs) Control, Treasurer
and Secretary
/s/ BEVIS LONGSTRETH
- ------------------------------- Director March 15, 1995
(Bevis Longstreth)
/s/ PAUL M. LOW
- ------------------------------- Director March 20, 1995
(Paul M. Low)
/s/ HARRIET E. MIERS
- ------------------------------- Director March 23, 1995
(Harriet E. Miers)
/s/ WILLIAM R. SMITH
- ------------------------------ Director March 16, 1995
(William R. Smith)
/s/ JOHN C. TOLLESON
- ------------------------------ Director March 20, 1995
(John C. Tolleson)
-12-
<PAGE>
PORTIONS OF THE
ANNUAL REPORT ON FORM 10-K
ITEMS 14(A)(1), (2) AND (3)
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
YEAR ENDED DECEMBER 31, 1994
CAPSTEAD MORTGAGE CORPORATION
DALLAS, TEXAS
-13-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------- ---------- ---------------------- ----------- --------------
ADDITIONS
----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING COSTS ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE * OF PERIOD
- ---------------------------------- ---------- ------------ --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Reserves and Allowances Deducted
From Mortgage Investments:
Year ended December 31, 1994
Allowance for losses........... $6,927,000 $3,500,000 - $3,073,000 $7,354,000
Year ended December 31, 1993
Allowance for losses........... $8,228,000 $2,800,000 - $4,101,000 $6,927,000
Year ended December 31, 1992
Allowance for losses........... $3,505,000 $7,750,000 - $3,027,000 $8,228,000
</TABLE>
* Loss on sale of foreclosed properties and charge-offs of other mortgage
securities.
-14-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SCHEDULE XII - MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PART 1 - MORTGAGE LOANS ON REAL ESTATE AT CLOSE OF PERIOD PART 2 INTEREST
- ------------------------------------------------------------------------------------------------------ ------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F AND COLUMN G(4)
- --------------------------- -------- ------------------ -------------------------------- ------------ ------------------------
AMOUNT OF PRINCIPAL UNPAID AT
CLOSE OF PERIOD
------------------------------ AMOUNT
SUBJECT TO MORTGAGE
PRIOR CARRYING AMOUNT DELINQUENT BEING WEIGHTED AVERAGE
DESCRIPTION LIENS OF MORTGAGES(2) TOTAL INTEREST(3) FORECLOSED(3) INTEREST RATE
- --------------------------- ----- ------------------ --------------- ----------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
$ -0- - $ 49,999( None $ 321,000 $ 321,000 $ 105,000 $ - 7.16%
51)......................
$ 50,000 - $ 99,999( None 5,615,000 4,670,000 154,000 - 6.28%
65)......................
$100,000 - $ 149,999( None 26,287,000 24,097,000 665,000 - 6.08%
203).....................
$150,000 - $ 199,999( None 58,931,000 55,915,000 389,000 - 5.90%
336).....................
$200,000 - $ None 406,506,000 398,019,000 10,889,000 4,109,000 6.32%
249,999(1,797)...........
$250,000 - $ None 296,521,000 318,147,000 6,594,000 3,324,000 6.27%
299,999(1,082)...........
$300,000 - $ 349,999( None 198,972,000 194,115,000 5,774,000 2,227,000 6.21%
615).....................
$350,000 - $ 399,999( None 133,135,000 133,135,000 5,571,000 3,363,000 6.11%
356).....................
$400,000 - $ 449,999( None 79,529,000 78,698,000 3,002,000 2,154,000 6.35%
187).....................
$450,000 - $ 499,999( None 61,106,000 61,106,000 4,348,000 2,423,000 6.14%
128).....................
$500,000 - $1,500,000( None 189,930,000 188,630,000 7,667,000 2,499,000 6.07%
316)..................... --------------- --------------- ----------- -----------
1,456,853,000 $1,456,853,000 $45,158,000 $20,099,000
============== =========== ===========
Plus premium
Less unrealized loss on mortgage 2,233,000
loans included in debt securities (33,673,000)
--------------
$1,425,413,000
==============
</TABLE>
See accompanying notes to Schedule XII.
-15-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE XII
(1) Mortgage loans at December 31, 1994 consisted of single-family,
conventional, first mortgage loans. The Company classifies its mortgage
loans by term and interest rate characteristics. Fixed-rate mortgage loans
(i) have fixed rates of interest for their entire terms or (ii) have an
initial fixed-rate period of ten years after origination and then adjust
annually based on a specified margin over 1-year United States Treasury
Securities ("1-year Treasuries"). Medium-term mortgage loans (i) have an
initial fixed-rate period of three or five years after origination and then
adjust annually based on a specified margin over 1-year Treasuries or (ii)
have initial interest rates then adjust one time, approximately five years
following origination of the mortgage loan, based on a specified margin over
the Federal National Mortgage Association ("FNMA") yields for 30-year,
fixed-rate commitments at the time of adjustment. Adjustable-rate mortgage
loans either (i) adjust semi-annually based on a specified margin over the
6-month London Interbank Offered Rate ("LIBOR") or (ii) adjust annually
based on a specified margin over 1-year Treasuries. Principal amount of
mortgage loans in the portfolio totaling $55,464,000, or 3.9 percent, were
fixed-rate loans; $481,634,000, or 33.8 percent, were medium-term loans; and
$888,315,000, or 62.3 percent, were adjustable-rate loans.
(2) Reconciliation of mortgage loans:
<TABLE>
<S> <C> <C>
Balance at December 31, 1993.......... $2,439,370,000
Additions:
Purchases of mortgage loans........ 1,935,136,000
Amortization of discount........... 58,000 1,935,194,000
------------- --------------
4,374,564,000
Deductions:
Principal collections.............. 227,117,000
Unrealized loss on mortgage loans
included in debt securities....... 33,673,000
Mortgage loans transferred to
mortgage securities collateral.... 2,688,361,000 2,949,151,000
------------- --------------
Balance at December 31, 1994.......... $1,425,413,000
==============
</TABLE>
(3) Consists of all mortgage loans delinquent 90 days or more. Note that of the
amount of principal unpaid at the close of the period that is subject to
delinquent principal, $41.1 million is covered by mortgage pool insurance
that effectively limits the Company's loss. Similarly, $19.2 million of the
amount of mortgages being foreclosed is covered by pool insurance. For a
discussion of the Company's exposure to possible loan losses, see the
Registrant's Annual Report to Stockholders for the year ended December 31,
1994 on page 36 under the caption "Note I - Allowance for Possible Losses".
(4) Interest due and accrued at the end of the period and interest income earned
applicable to the period for each of the categories presented above is not
available without unreasonable effort or expense and therefore has been
omitted in accordance with Rule 12-23 of Regulation S-X. Total accrued
interest for the above listed mortgage loans totaled $7,911,000 at December
31, 1994.
-16-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO SCHEDULE XII - CONTINUED
(5) The geographic distribution of the Company's portfolio at December 31, 1994
was as follows:
<TABLE>
<CAPTION>
NUMBER PRINCIPAL
STATE OF LOANS AMOUNT
- ------------------------------------------- ------------ --------------
<S> <C> <C>
Alabama................................. 16 $ 4,713,000
Arizona................................. 55 13,077,000
Arkansas................................ 2 548,000
California.............................. 3,430 974,241,000
Colorado................................ 91 24,549,000
Connecticut............................. 25 7,795,000
Delaware................................ 7 1,959,000
District of Columbia.................... 31 9,269,000
Florida................................. 181 54,955,000
Georgia................................. 182 50,011,000
Hawaii.................................. 8 3,035,000
Idaho................................... 2 212,000
Illinois................................ 43 11,001,000
Indiana................................. 4 438,000
Kansas.................................. 4 1,444,000
Kentucky................................ 2 358,000
Louisiana............................... 22 6,508,000
Maryland................................ 132 39,291,000
Massachusetts........................... 24 6,387,000
Michigan................................ 69 21,107,000
Minnesota............................... 3 492,000
Mississippi............................. 1 103,000
Missouri................................ 9 3,651,000
Nebraska................................ 5 1,636,000
Nevada.................................. 20 3,952,000
New Hampshire........................... 1 230,000
New Jersey.............................. 100 27,949,000
New Mexico.............................. 47 14,291,000
New York................................ 43 13,297,000
North Carolina.......................... 9 2,499,000
Ohio.................................... 11 3,070,000
Oklahoma................................ 19 5,105,000
Oregon.................................. 5 642,000
Pennsylvania............................ 49 14,609,000
South Carolina.......................... 5 1,533,000
Tennessee............................... 3 513,000
Texas................................... 216 57,937,000
Utah.................................... 19 4,561,000
Vermont................................. 4 1,333,000
Virginia................................ 176 53,208,000
Washington.............................. 56 14,462,000
West Virginia........................... 1 104,000
Wisconsin............................... 4 778,000
----------- --------------
1,456,853,000
Plus premium............................ 2,233,000
Less unrealized loss on mortgage loans
included in debt securities............ (33,673,000)
--------------
Total.......................... 5,136 $1,425,413,000
=========== ==============
</TABLE>
-17-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------- ------------
<C> <S> <C>
3.1 (a) Charter of the Company, which includes Articles of Incorporation,
Articles Supplementary for each outstanding Series of Preferred Stock and
all other amendments to such Articles of Incorporation(5)
3.1 (b) Articles Supplementary ($1.26 Cumulative Convertible Preferred Stock,
Series B)(4)
3.2 Bylaws of the Company, as amended(5)
10.17 Amendment to Management Agreement dated March 31, 1993, between the
Registrant and Capstead Advisers, Inc.(5)
10.18 Second Amendment to Management Agreement dated September 3, 1993, between
the Registrant and Capstead Advisers, Inc.(6)
10.19 Stock Option Agreement, dated June 16, 1992, between the Company and
Lomas Financial Corporation(5)
10.20 Form of Loan Sale Agreement(3)
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(4)
10.24 Restricted Stock Grant Agreement dated August 1, 1992 between Capstead
Mortgage Corporation and Ronn K. Lytle(4)
10.25 1994 Flexible Long Term Incentive Plan*
10.26 1994 Capstead Inc. Restricted Stock Plan*
10.27 Capstead Mortgage Corporation Deferred Compensation Plan*
10.28 Summary of Employment Agreement dated December 9, 1993 between Capstead
Mortgage Corporation and Christopher T. Gilson*
11 Computation of per share earnings*
12 Computation of ratio of earnings to combined fixed charges and preferred
stock dividends*
13 Portions of the Annual Report to Stockholders of the Company for the year
ended December 31, 1994*
21 List of subsidiaries of the Company*
23 Consent of Ernst & Young LLP, Independent Auditors*
27 Financial Data Schedule (electronic filing only)*
</TABLE>
- ------------------
(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 Amendment No. 1 on Form 8 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form S-
3 (No. 33-62212) dated May 6, 1993.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993.
* Filed herewith.
-18-
<PAGE>
EXHIBIT 10.25
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
1994 FLEXIBLE LONG TERM INCENTIVE PLAN
<PAGE>
EXHIBIT 10.25
CAPSTEAD MORTGAGE CORPORATION
1994 FLEXIBLE LONG TERM INCENTIVE PLAN
________________________________________________
Section 1. PURPOSE OF THE PLAN
The purposes of the Capstead Mortgage Corporation 1994 Flexible Long Term
Incentive Plan (the "Plan") are to promote the interests of Capstead Mortgage
Corporation (together with any successor thereto, the "Company") and its
stockholders by enabling the Company to attract, motivate, reward and retain key
employees and to encourage the holding of proprietary interests in the Company
by persons who occupy key positions in the Company or its Affiliates by enabling
the Company to offer such key employees performance-based stock incentives and
other equity interests in the Company and other incentive awards that recognize
the creation of value for the stockholders of the Company and promote the
Company's long-term growth and success. To achieve this purpose, eligible
persons may receive stock options, Stock Appreciation Rights, Restricted Stock,
Performance Awards, performance stock, Dividend Equivalent Rights and any other
Awards, or any combination thereof.
Section 2. DEFINITIONS
As used in this Plan, the following terms shall have the meanings set forth
below unless the content otherwise requires:
2.1 "Affiliate" shall mean (i) any corporation, partnership or
other entity that, directly or indirectly, is controlled by the Company
(ii) any entity in which the Company has a significant equity interest and
(iii) any entity that provides substantial management advisory services
for the Company, in each case as determined by the Committee.
2.2 "Award" shall mean a stock option, Stock Appreciation Right,
Restricted Stock, Performance Award, performance stock, Dividend Equivalent
Right or any other Award under the Plan.
2.3 "Board" shall mean the Board of Directors of the Company, as
the same may be constituted from time to time.
2.4 "Change in Control" shall mean, after the effective date of
this Plan, (i) the occurrence of an event of a nature that would be
required to be reported in response to Item 1 or Item 2 of a Form 8-K
Current Report of the Company promulgated pursuant to Sections 13 and
15(d) of the Securities Exchange Act of 1934, as amended; provided that,
without limitation, such a Change in Control shall be deemed to have
occurred if (a) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, any trustee or other
fiduciary holding securities under any employee benefit plan of the
Company, or any company owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership
of stock of the Company), is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act, directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more
of the combined voting power of the Company's then outstanding securities
or (b) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the election by the Board
or the nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors
<PAGE>
at the beginning of the two-year period or whose election or nomination for
election was previously so approved; (ii) the stockholders of the Company
approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation that would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than eighty
percent (80%) of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger
or consolidation; provided, however, that a merger or consolidation
effected to implement a reorganization or recapitalization of the Company,
or a similar transaction (collectively, a "Reorganization"), in which no
"person" acquires more than twenty percent (20%) of the combined voting
power of the Company's then outstanding securities shall not constitute a
Change in Control of the Company; or (iii) the stockholders of the Company
approve a plan of complete liquidation of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
2.6 "Committee" shall mean a committee of the Board, which shall
consist solely of not less than two (2) members of the Board who are
appointed by, and serve at the pleasure of, the Board and who are (i)
"disinterested" within the meaning of Rule 16b-3 of the General Rules and
Regulations of the Exchange Act and (ii) "outside directors," as required
under Section 162(m) of the Code and such Treasury Regulations as may be
promulgated thereunder. The Plan shall be administered and interpreted by
the Committee, which Committee meets the requirements for "disinterested
administration" within the requirements of Rule 16b-3 and any future rule
promulgated therefor during the duration of the Plan. The Board may amend
the Plan to modify the definition of Committee within the limits of Rule
16b-3 to assure that the Plan is administered by "disinterested" directors.
2.7 "Common Stock" shall mean the Common Stock, par value $.01 per
share, of the Company.
2.8 "Disability" shall mean permanent and total inability to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than twelve (12) months, as determined in the sole and absolute
discretion of the Committee.
2.9 "Dividend Equivalent Right" shall mean the right of the holder
thereof to receive credits based on the cash dividends that would have been
paid on the Shares specified in the Award if the Shares were held by the
holder to whom the Award is made.
2.10 "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
2.11 "Fair Market Value" shall mean with respect to the Shares, as of
any date, (i) the last reported sales price regular way on the New York
Stock Exchange or, if not reported for the New York Stock Exchange, on the
Composite Tape, or, in case no such sale takes place on such day, the
average of the reported closing bid and asked quotations on the New York
Stock Exchange; (ii) if the Shares are not listed on the New York Stock
Exchange or no such quotations are available, the closing price of the
Shares as reported by the National Market System, or similar organization,
or, if no such quotations are available, the average of the high bid and
low asked quotations in the over-the-counter market as reported by the
National Quotation Bureau Incorporated, or similar organization; or (iii)
in the event that there shall be no public market for the Shares, the fair
market value of the Shares as determined (which determination shall
-2-
<PAGE>
be conclusive) in good faith by the Committee, based upon the value of the
Company as a going concern, as if such Shares were publicly owned stock,
but without any discount with respect to minority ownership.
2.12 "Incentive Stock Option" shall meany any stock option awarded
under this Plan intended to be and designated as an "Incentive Stock
Option" under Section 422 of the Code or any successor provision.
2.13 "Non-Tandem Stock Appreciation Right" shall mean any Stock
Appreciation Right granted alone and not in connection with an Award which
is a stock option.
2.14 "Non-Qualified Stock Option" shall mean any stock option awarded
under this Plan that is not an Incentive Stock Option.
2.15 "Optionee" shall mean any person who has been granted a stock
option under this Plan and who has executed a written stock option
agreement with the Company reflecting the terms of such grant.
2.16 "Plan" shall mean the Capstead Mortgage Corporation 1994
Flexible Long Term Incentive Plan set forth herein.
2.17 "Performance Award" shall mean any Award hereunder of Shares,
units or rights based upon, payable in, or otherwise related to, Shares
(including Restricted Stock), or cash of an equivalent value, as the
Committee may determine, at the end of a specified performance period
established by the Committee.
2.18 "Reload Option" shall mean a stock option as defined in
subsection 6.7(b) herein.
2.19 "Restricted Stock" shall mean any Award of Shares under this
Plan that are subject to restrictions or risk of forfeiture.
2.20 "Retirement" shall mean termination of employment, other than
discharge for cause, after age 65 or on or before age 65 if pursuant to the
terms of any retirement plan maintained by the Company or any of its
Affiliates in which such person participates.
2.21 "Senior Officers" shall mean the Senior Officers of the Company
as set forth in subsection 6.5(e) herein.
2.22 "Shares" shall mean shares of the Company's Common Stock and any
shares of capital stock or other securities of the Company hereafter issued
or issuable upon, in respect of or in substitution or exchange for such
Shares.
2.23 "Stock Appreciation Right" shall mean the right of the holder
thereof to receive an amount in cash or Shares equal to the excess of the
Fair Market Value of a Share on the date of exercise over the Fair Market
Value of a Share on the date of the grant (or such other value as may be
specified in the agreement granting the Stock Appreciation Right).
2.24 "Tandem Stock Appreciation Right" shall mean a Stock
Appreciation Right granted in connection with an Award which is a stock
option.
-3-
<PAGE>
Section 3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Plan shall be administered and interpreted by
the Committee.
3.2 Awards. Subject to the provisions of the Plan and directions
from the Board, the Committee is authorized to:
(a) determine the persons to whom Awards are to be granted;
(b) determine the types and combinations of Awards to be
granted, the number of Shares to be covered by the Award, the pricing
of the Award, the time or times when the Award shall be granted and
may be exercised, the terms, performance criteria or other conditions,
vesting periods or any restrictions for an Award, any restrictions on
Shares acquired pursuant to the exercise of an Award and any other
terms and conditions of an Award;
(c) conclusively interpret the Plan provisions;
(d) prescribe, amend and rescind rules and regulations
relatin to the Plan or make individual decisions as questions arise,
or both;
(e) determine whether, to what extent and under what
circumstances to provide loans from the Company to participants in
order to purchase Shares subject to Awards under the Plan, and the
terms and conditions of such loans;
(f) rely upon employees of the Company for such clerical and
record-keeping duties as may be necessary in connection with the
administration of the Plan; and
(g) make all other determinations and take all other actions
necessary or advisable for the administration of the Plan.
3.3 Procedures. A majority of the Committee members shall
constitute a quorum. All determinations of the Committee shall be made by
a majority of its members. All questions of interpretation and
application of the Plan or pertaining to any question of fact or Award
granted hereunder shall be decided by the Committee, whose decision shall
be final, conclusive and binding upon the Company and each other affected
party.
Section 4. SHARES SUBJECT TO PLAN
4.1 Limitations. The maximum number of Shares that may be issued
with respect to Awards under the Plan shall not exceed 1,250,000 unless
such maximum shall be increased or decreased by reason of changes in
capitalization of the Company as hereinafter provided. The maximum number
of Shares with respect to which Awards may be granted in any fiscal year to
any participant in the Plan shall not exceed 300,000. The Shares issued
pursuant to the Plan may be authorized but unissued Shares, or may be
issued Shares which have been reacquired by the Company.
4.2 Changes. To the extent that any Award under the Plan, or any
stock option or performance award granted under any prior incentive plan of
the Company, shall be forfeited, shall expire or shall be cancelled, in
whole or in part, then the number of Shares covered by the Award or stock
option so forfeited, expired or cancelled may again be awarded pursuant to
the provisions of this Plan. In the event that Shares are delivered to the
Company in full or partial payment of the exercise price for the exercise
of a stock option granted under the Plan or any prior incentive plan of the
Company, the number
-4-
<PAGE>
of Shares available for future Awards under the Plan shall be reduced only
by the net number of Shares issued upon the exercise of the option. Awards
that may be satisfied either by the issuance of Shares or by cash or other
consideration shall be counted against the maximum number of Shares that
may be issued under the Plan, even though the Award is ultimately satisfied
by the payment of consideration other than Shares, as, for example, a stock
option granted in tandem with a Stock Appreciation Right that is settled
by a cash payment of the stock appreciation. However, Awards will not
reduce the number of Shares that may be issued pursuant to the Plan if the
settlement of the Award will not require the issuance of Shares, as, for
example, a Stock Appreciation Right that can be satisfied only by the
payment of cash.
Section 5. ELIGIBILITY
Except with respect to stock options and Stock Appreciation Rights,
eligibility for participation in the Plan shall be confined to a select number
of persons who are employed by the Company, or one or more of its Affiliates,
and who are officers of the Company or one or more of its Affiliates, or who are
in managerial or other key positions in the Company or one or more of its
Affiliates. In making any determination as to persons to whom Awards shall be
granted, the type of Award, and/or the number of Shares to be covered by the
Award, the Committee shall consider the position and responsibilities of the
person, his or her importance to the Company and its Affiliates, the duties of
such person, his or her past, present and potential contributions to the growth
and success of the Company and its Affiliates, and such other factors as the
Committee shall deem relevant in connection with accomplishing the purposes of
the Plan. With respect to stock options and Stock Appreciation Rights, all
officers and employees of the Company are eligible for participation in the
Plan.
Section 6. STOCK OPTIONS
6.1 Grants. The Committee may grant stock options alone or in
addition to other Awards granted under this Plan to any eligible officer or
employee. Each person so selected shall be offered an option to purchase
the number of Shares determined by the Committee; provided, however, that
the maximum number of shares for which stock options may be granted during
any calendar year may not exceed 300,000 Shares for any eligible officer or
employee. The Committee shall specify whether such option is an Incentive
Stock Option or Non-Qualified Stock Option and any other terms or
conditions relating to such Award. To the extent that any stock option
does not qualify as an Incentive Stock Option (whether because of its
provisions or the time or manner of its exercise or otherwise), such stock
option or the portion thereof which does not qualify, shall constitute a
separate Non-Qualified Stock Option. Each such person so selected shall
have a reasonable period of time within which to accept or reject the
offered option. Failure to accept within the period so fixed by the
Committee may be treated as a rejection. Each person who accepts an option
shall enter into a written agreement with the Company, in such form as the
Committee may prescribe, setting forth the terms and conditions of the
option, consistent with the provisions of the Plan. The Optionee and the
Company shall enter into option agreements for Incentive Stock Options and
Non-Qualified Stock Options. At any time and from time to time, the
Optionee and the Company may agree to modify an option agreement in order
that an Incentive Stock Option may be converted to a Non-Qualified Stock
Option.
The Committee may require than an Optionee meet certain conditions
before the option or a portion thereof may vest or be exercised, as, for
example, that the Optionee remain in the employ of the Company or one of
its Affiliates for a stated period or periods of time before the option, or
stated portions thereof, may vest or be exercised; provided, however, that
nothing in the Plan or in any option agreement shall confer upon any
Optionee any right to remain in the employ of the Company or one of its
Affiliates, and nothing herein shall be construed in any manner to
interfere in any way with the right of the Company or its Affiliates to
terminate such Optionee's employment at any time.
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6.2 Option Price. The option exercise price of the Shares covered by
each stock option shall be determined by the Committee; provided, however,
that the option exercise price of an Incentive Stock Option or, with
respect to the Chief Executive Officer of the Company only, a Non-Qualified
Stock Option shall not be less than one hundred percent (100%) of the Fair
Market Value of Shares on the date of the grant of such Incentive Stock
Option.
6.3 Incentive Stock Options Limitations.
(a) In no event shall any person be granted Incentive Stock
Options so that the Shares covered by any Incentive Stock Options that
may be exercised for the first time by such person in any calendar
year have an aggregate Fair Market Value in excess of $100,000. For
this purpose, the Fair Market Value of the Shares shall be determined
as of the dates on which the Incentive Stock Options are granted. It
is intended that the limitation on Incentive Stock Options provided in
this paragraph be the maximum limitation on options which may be
considered Incentive Stock Options under the Code.
(b) Notwithstanding anything herein to the contrary, in no event
shall any employee owning more than ten percent (10%) of the total
combined voting power of the Company or any Affiliate corporation be
granted an Incentive Stock Option hereunder unless: the option
exercise price shall be at least one hundred ten percent (110%) of the
Fair Market Value of the Shares at the time that the option is granted
and the term of the option shall not exceed five (5) years.
6.4 Option Term. The term of a stock option shall be for such period
of months or years from the date of its grant as may be determined by the
Committee; provided, however, that no Incentive Stock Option shall be
exercisable later than ten (10) years from the date of its grant. Each
option shall be subject to earlier termination as hereinafter provided
(unless the Committee has provided otherwise):
(a) If the Optionee ceases to be an officer or employee of the
Company or any Affiliate by reason of the Optionee's discharge for
cause, as determined solely and exclusively by the Committee, all
rights of the Optionee to exercise an option shall terminate, lapse
and be forfeited immediately at the time of the Optionee's discharge
for cause.
(b) If the Optionee ceases to be an employee of the Company or
any Affiliate by reason of the Optionee's resignation, all rights of
the Optionee to exercise an option shall terminate, lapse and be
forfeited immediately upon the date of such resignation by the
Optionee.
(c) If the Optionee ceases to be an employee of the Company or
any Affiliate by reason of death, the personal representatives, heirs,
legatees or distributees of the Optionee, as appropriate, shall have
the right up to the earlier of (i) two (2) years from the Optionee's
death or (ii) the remaining term of the option to exercise any such
option.
(d) If the Optionee ceases to be an employee of the Company or
any Affiliate by reason of the Optionee's Retirement, Disability or
for any reason other than the Optionee's discharge for cause,
resignation or death, all rights of the Optionee to exercise an option
shall terminate, lapse, and be forfeited upon the earlier of (i) two
(2) years after the date of the Optionee's termination of employment
by reason of such employee's Retirement, Disability or such other
reason or (ii) the remaining term of the option, except that in case
the Optionee shall die within two (2) years after the date of
termination of employment by reason of such employee's Retirement,
Disability or such other reason, the personal representatives, heirs,
legatees or distributees of the Optionee, as appropriate, shall have
the right up to an additional twelve (12) months from the date of the
Optionee's death to exercise any such option.
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(e) Despite the provisions of paragraphs (b), (c) and (d) of
this subsection, no Incentive Stock Option shall be exercisable
after the expiration of the earlier of: (i) the ten (10) year period
beginning on the date of its grant, (ii)the three (3) month period
beginning on the date of the Optionee's termination of employment
for any reason other than death or Disability, or (iii) the one (1)
year period beginning on the date of the Optionee's termination of
employment by reason of Disability.
6.5 Vesting of Stock Options.
(a) Each stock option granted hereunder may only be exercised to
the extent that the Optionee is vested in such option. Each stock
option shall vest separately in accordance with the option vesting
schedule, if any, determined by the Committee in its sole discretion,
which will be incorporated in the stock option agreement entered into
between the Company and each Optionee. The option vesting schedule
will be accelerated in the event the provisions of paragraphs (b),
(c), (d) or (e) of this subsection apply; or if, in the sole
discretion of the Committee, the Committee determines that
acceleration of the option vesting schedule would be desirable for the
Company.
(b) If an Optionee ceases to be an employee of the Company or
any Affiliate by reason of death, Disability or Retirement or for any
reason other than the Optionee's resignation or discharge for cause,
the Optionee or the personal representatives, heirs, legatees or
distributees of the Optionee, as appropriate, shall become fully
vested in each stock option granted to the Optionee, effective on the
date of the Optionee's death or on the date that the Optionee ceases
to be an employee, as appropriate, and shall have the immediate right
to exercise any such option to the extent not previously exercised.
(c) In the event of the dissolution or liquidation of the
Company, each stock option granted under the Plan shall terminate as
of a date to be fixed by the Board; provided, however, that not less
than thirty (30) days' written notice of the date so fixed shall be
given to each Optionee and each such Optionee shall be fully vested in
and shall have the right during such period to exercise the option,
even though such option would not otherwise be exercisable under the
option vesting schedule. At the end of such period, any unexercised
option shall terminate and be of no further effect.
(d) In the event of a Reorganization:
(1) If there is no plan or agreement respecting the
Reorganization, or if such plan or agreement does not
specifically provide for the change, conversion or exchange of
the Shares under outstanding and unexercised stock options for
other securities then the provisions of the above paragraph (c)
of this subsection shall apply as if the Company had dissolved or
been liquidated on the effective date of the Reorganization; or
(2) If there is a plan or agreement respecting the
Reorganization, and if such plan or agreement specifically
provides for the change, conversion or exchange of the Shares
under outstanding and unexercised stock options for securities of
another corporation, then the Board shall adjust the Shares under
such outstanding and unexercised stock options (and shall adjust
the Shares remaining under the Plan which are then available to
be awarded under the Plan, if such plan or agreement makes no
specific provision therefor) in a manner not inconsistent with
the provisions of such plan or agreement for the adjustment,
change, conversion or exchange of such Shares and such options.
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(e) In the event of a Change in Control of the Company, with
respect to only certain senior executive officers of the Company (the
number of which shall include no more than ten (10) persons; provided,
that a limited number of additional senior executive officers shall
also be included if each such additional person is approved by the
Committee and the Board (collectively, the ten senior executive
officers plus any additional, approved senior executive officers shall
be referred to herein as the "Senior Officers")), all stock options
and any associated Stock Appreciation Rights shall become fully vested
and immediately exercisable and the vesting of all performance-based
stock options shall be determined as if the performance period or
cycle applicable to such stock options had ended immediately upon such
Change in Control.
6.6 Exercise of Stock Options.
(a) Stock options may be exercised as to Shares only in amounts
and at intervals of time specified in the written option agreement
between the Company and the Optionee. Each exercise of a stock
option, or any part thereof, shall be evidenced by a notice in writing
to the Company. The purchase price of the Shares as to which an
option shall be exercised shall be paid in full at the time of
exercise, and may be paid to the Company either:
(1) in cash (including check, bank draft or money order);
or
(2) by the delivery of Shares having a Fair Market Value
equal to the aggregate option price; or
(3) by a combination of cash and Shares.
(b) If an Optionee delivers Shares (including Shares of
Restricted Stock) already owned by him or her in full or partial
payment of the exercise price for any stock option granted under the
Plan or any prior incentive plan of the Company, or if the Optionee
elects to have the Company retain that number of Shares out of the
Shares being acquired through the exercise of the option having a
Fair Market Value equal to the exercise price of the stock option
being exercised, the Committee may authorize the automatic grant of a
new option (a "Reload Option") for that number of Shares as shall
equal the number of already owned Shares surrendered (including Shares
of Restricted Stock) or newly acquired Shares being retained in
payment of the option exercise price of the underlying stock option
being exercised. The grant of a Reload Option will become effective
upon the exercise of the underlying stock option. The option exercise
price of the Reload Option shall be the Fair Market Value of a Share
on the effective date of the grant of the Reload Option. Each Reload
Option shall be exercisable no earlier than six (6) months from the
date of its grant and no later than the time when the underlying stock
option being exercised could be last exercised. The Committee may
also specify additional terms, conditions and restrictions for the
Reload Option and the Shares to be acquired upon the exercise thereof.
(c) The amount, as determined by the Committee, of any federal,
state or local tax required to be withheld by the Company due to the
exercise of a stock option shall be satisfied, at the election of the
Optionee, either (a) by payment by the Optionee to the Company of the
amount of such withholding obligation in cash (the "Cash Method") or
(b) through either the retention by the Company of a number of Shares
out of the Shares being acquired through the exercise of the option or
the delivery of already owned Shares having a Fair Market Value equal
to the amount of the withholding obligation (the "Share Retention
Method"). If an Optionee elects to use the Share Retention Method in
full or partial satisfaction for any tax liability resulting from the
exercise of a stock option, the Committee may authorize the grant of a
Reload Option for that
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number of Shares as shall equal the number of Shares used to satisfy
the tax liabilities of the stock option being exercised on the price
and terms set forth in subsection (b) above. The cash payment or the
amount equal to the Fair Market Value of the Shares so withheld, as
the case may be, shall be remitted by the Company to the appropriate
taxing authorities. The Committee shall determine the time and manner
in which an Optionee may elect to satisfy a withholding obligation by
either the Cash Method or the Share Retention Method.
(d) An Optionee shall not have any of the rights of a
stockholder of the Company with respect to the Shares covered by a
stock option except to the extent that one or more certificates of
such Shares shall have been delivered to the Optionee, or the Optionee
has been determined to be a stockholder of record by the Company's
Transfer Agent, upon due exercise of the option.
6.7 Date of a Stock Option Grant. The granting of a stock option
shall take place only when the Committee approves the granting of such
option. Neither any action taken by the Board nor anything contained in
the Plan or in any resolution adopted or to be adopted by the Board or the
stockholders of the Company shall constitute the granting of a stock option
under the Plan.
Section 7. STOCK APPRECIATION RIGHTS
7.1 Grants. The Committee may grant to any eligible officer or
employee either Non-Tandem Stock Appreciation Rights or Tandem Stock
Appreciation Rights. Stock Appreciation Rights shall be subject to such
terms and conditions as the Committee shall impose; provided, however, that
the maximum number of shares (or cash equivalent value) with respect to
which Stock Appreciation Rights may be granted during any calendar year may
not exceed 300,000 Shares for any eligible officer or employee. The grant
of the Stock Appreciation Right may provide that the holder may be paid for
the value of the Stock Appreciation Right either in cash or in Shares, or a
combination thereof, at the discretion of the Committee. In the event of
the exercise of a Stock Appreciation Right payable in Shares, the holder of
the Stock Appreciation Right shall receive that number of whole Shares of
stock of the Company having an aggregate Fair Market Value on the date of
exercise equal to the value obtained by multiplying (i) either (a) in the
case of a Tandem Stock Appreciation Right, the difference between the Fair
Market Value of a Share on the date of exercise over the per share exercise
price of the related option, or (b) in the case of a Non-Tandem Stock
Appreciation Right, the difference between the Fair Market Value of a Share
on the date of exercise over the Fair Market Value on the date of the grant
by (ii) the number of Shares as to which the Stock Appreciation Right is
exercised. However, notwithstanding the foregoing, the Committee, in its
sole discretion, may place a ceiling on the amount payable upon exercise of
a Stock Appreciation Right, but any such limitation shall be specified at
the time that the Stock Appreciation Right is granted.
7.2 Exercisability. A Tandem Stock Appreciation Right may be granted
at the time of the grant of the related stock option or, if the related
stock option is a Non-Qualified Stock Option, at any time thereafter during
the term of the stock option. A Tandem Stock Appreciation Right granted in
connection with an Incentive Stock Option (i) generally may be exercised
at, and only at, the times and to the extent the related stock option is
exercisable, (ii) expires upon the termination of the related stock option,
(iii) may not exceed 100% of the difference between the exercise price of
the related stock option and the market price of the Shares subject to the
related stock option at the time the Tandem Stock Appreciation Right is
exercised and (iv) may be exercised at, and only at, such times as the
market price of the Shares subject to the related stock option exceeds the
exercise price of the related stock option. The Tandem Stock Appreciation
Right may be transferred at, and only at, the times and to the extent the
related stock option is transferable. If a Tandem Stock Appreciation
Right is granted, there shall be surrendered and cancelled from the option
at the time of exercise of the Tandem Stock Appreciation Right, in lieu of
exercise under
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the option, that number of Shares as shall equal the number of Shares as to
which the Tandem Stock Appreciation Right shall have been exercised.
7.3 Certain Limitations on Non-Tandem Stock Appreciation Rights. A
Non-Tandem Stock Appreciation Right will be exercisable as provided by the
Committee and will have such other terms and conditions as the Committee
may determine. A Non-Tandem Stock Appreciation Right is subject to
acceleration of vesting or immediate termination in certain circumstances
in the same manner as stock options pursuant to subsections 6.4 and 6.5 of
this Plan.
7.4 Limited Stock Appreciation Rights. The Committee is also
authorized to grant "limited stock appreciation rights," either as Tandem
Stock Appreciation Rights or Non-Tandem Stock Appreciation Rights. Limited
stock appreciation rights would become exercisable only upon the occurrence
of a Change in Control or such other event as the Committee may designate
at the time of grant or thereafter.
Section 8. RESTRICTED STOCK
8.1 Grants. The Committee may grant Awards of Restricted Stock for
no cash consideration, for such minimum consideration as may be required by
applicable law, or for such other consideration as may be specified by the
grant. The terms and conditions of the Restricted Stock shall be specified
by the grant agreement. The Committee, in its sole discretion, shall
determine what rights, if any, the person to whom an Award of Restricted
Stock is made shall have in the Restricted Stock during the restriction
period and the restrictions applicable to the particular Award, including,
without limitation, whether the holder of the Restricted Stock shall have
the right to vote the Shares and receive Dividend Equivalent Rights and
other distributions applicable to the Shares, the vesting schedule (which
may be based on service, performance or other factors) and rights to
acceleration of vesting (including, without limitation, whether non-vested
Shares are forfeited or vested upon termination of employment). Further,
the Committee may award performance-based Restricted Stock by conditioning
the grant, or vesting or such other factors, such as the release,
expiration or lapse of restrictions upon any such Award (including the
acceleration of any such conditions or terms) of such Restricted Stock upon
the attainment of specified performance goals or such other factors as the
Committee may determine; provided, however, that notwithstanding the
foregoing, and with respect to the Senior Officers only, upon a Change in
Control, the amount of granting or vesting, as the case may be, for all
performance-based Restricted Stock, shall be determined as if the
performance period or cycle applicable to such Restricted Stock had
terminated immediately upon such Change in Control; provided, however, that
to the extent that any such performance period or cycle is shortened
adversely to the Senior Officers by virtue of the Change in Control, such
Restricted Stock shall be prorated accordingly. The Committee shall also
determine when the restrictions shall lapse or expire and the conditions,
if any, under which the Restricted Stock will be forfeited or sold back to
the Company; provided, however, that notwithstanding the foregoing, and
with respect to the Senior Officers only, upon a Change in Control, all
restrictions applicable to Restricted Stock shall lapse and expire and
Shares of Restricted Stock with vesting provisions shall become fully
vested. Each Award of Restricted Stock may have different restrictions and
conditions. The Committee, in its discretion, may prospectively change the
restriction period and the restrictions applicable to any particular Award
of Restricted Stock. Unless otherwise set forth in the Plan, Restricted
Stock may not be disposed of by the recipient until the restrictions
specified in the Award expire. Subject to certain exceptions, the
aggregate number of nonperformance-based Shares of Restricted Stock that
may be awarded is limited to three percent (3%) of the aggregate number of
outstanding Shares of the Company's Common Stock; otherwise, the Committee
is not limited in the total number of Shares of Restricted Stock that may
be awarded under the Plan.
8.2 Awards and Certificates. Any Restricted Stock issued hereunder
may be evidenced in such manner as the Committee, in its sole discretion,
shall deem appropriate including, without limitation, book-entry
registration or issuance of a stock certificate or certificates. In the
event any stock certificate
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is issued in respect of Shares of Restricted Stock awarded hereunder, such
certificate shall bear an appropriate legend with respect to the
restrictions applicable to such Award. The Company may retain, at its
option, the physical custody of any stock certificate representing any
awards of Restricted Stock during the restriction period or require that
the Restricted Stock be placed in escrow or trust, along with a stock power
endorsed in blank, until all restrictions are removed or expire.
Section 9. PERFORMANCE AWARDS
9.1 Grants. A Performance Award may consist of either or both, as
the Committee may determine, of (i) "Performance Shares" or the right to
receive Shares, Restricted Stock or cash of an equivalent value, or any
combination thereof as the Committee may determine, or (ii) "Performance
Units," or the right to receive a fixed dollar amount payable in cash,
Common Stock, Restricted Stock or any combination thereof, as the Committee
may determine. The Committee may grant Performance Awards to any eligible
employee, for no cash consideration, for such minimum consideration as may
be required by applicable law or for such other consideration as may be
specified at the time of the grant. The terms and conditions of
Performance Awards shall be specified at the time of the grant and may
include provisions establishing the performance period, the performance
criteria to be achieved during a performance period, the criteria used to
determine vesting (including the acceleration thereof), whether Performance
Awards are forfeited or vest upon termination of employment during a
performance period and the maximum or minimum settlement values; provided,
however, that notwithstanding the foregoing, and with respect to the Senior
Officers only, upon a Change in Control, the vesting, if any, and the
determination of the amount earned of a Performance Award shall be
determined as if the performance period or cycle applicable to such
Performance Award had terminated immediately upon such Change in Control;
provided, however, that to the extent that any such performance period or
cycle is shortened adversely to the Senior Officers by virtue of the Change
in Control, such Performance Award shall be prorated accordingly. Each
Performance Award shall have its own terms and conditions, which shall be
determined in the discretion of the Committee. If the Committee
determines, in its sole discretion, that the established performance
measures or objectives are no longer suitable because of a change in the
Company's business, operations, corporate structure or for other reasons
that the Committee deems satisfactory, the Committee may modify the
performance measures or objectives and/or the performance period.
9.2 Terms and Conditions. Performance Awards may be valued by
reference to the Fair Market Value of a Share or according to any formula
or method deemed appropriate by the Committee, in its sole discretion,
including, but not limited to, achievement of specific financial,
production, sales, cost or earnings performance objectives that the
Committee believes to be relevant to the Company's business and for
remaining in the employ of the Company for a specified period of time, or
the Company's performance or the performance of its Common Stock measured
against the performance of the market, the Company's industry segment or
its direct competitors. Performance Awards may be paid in cash, Shares
(including Restricted Stock) or other consideration, or any combination
thereof. If payable in Shares, the consideration for the issuance of the
Shares may be the achievement of the performance objective established at
the time of the grant of the Performance Award. Performance Awards may be
payable in a single payment or in installments and may be payable at a
specified date or dates or upon attaining the performance objective, all at
the Committee's discretion. The extent to which any applicable performance
objective has been achieved shall be conclusively determined by the
Committee.
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Section 10. DIVIDEND EQUIVALENT RIGHTS
The Committee may grant a Dividend Equivalent Right, either as a component
of another Award or as a separate Award, and, in general, each such holder of a
Dividend Equivalent Right that is outstanding on a dividend record date for the
Company's Common Stock shall be credited with an amount equal to the cash or
stock dividends or other distributions that would have been received had the
Shares covered by the Award been issued and outstanding on the dividend record
date. The terms and conditions of the Dividend Equivalent Right shall be
specified by the grant. Dividend equivalents credited to the holder of a
Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional Shares (which may thereafter accrue additional Dividend
Equivalent Rights). Any such reinvestment shall be at the Fair Market Value at
the time thereof. Dividend Equivalent Rights may be settled in cash or Shares,
or a combination thereof, in a single payment or in installments. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement or payment
for or lapse of restrictions on such other Award, and that such Dividend
Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other Award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other Award.
Section 11. OTHER AWARDS
The Committee may grant to any eligible employee other forms of Awards
based upon, payable in or otherwise related to, in whole or in part, Shares if
the Committee, in its sole discretion, determines that such other form of Award
is consistent with the purposes and restrictions of the Plan. The terms and
conditions of such other form of Award shall be specified by the grant,
including, but not limited to, the price, if any, and the vesting schedule, if
any. Such Awards may be granted for no cash consideration, for such minimum
consideration as may be required by applicable law or for such other
consideration as may be specified by the grant.
Section 12. NON-TRANSFERABILITY OF AWARDS.
A stock option shall not be transferable otherwise than by will or the laws
of descent and distribution, and a stock option may be exercised, during the
lifetime of the Optionee, only by the Optionee; provided, however, that with the
approval of the Committee, the agreement relating to any Award (including,
without limitation, a stock option) may provide that such Award may be
transferred to one or more members of the immediate family of the grantee of the
Award or to a trust for the benefit of such person or as directed under a
qualified domestic relations order. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of a stock option or other Award contrary to
the provisions hereof, or the levy of any execution, attachment or similar
process upon a stock option or other Award shall be null and void and without
effect.
Section 13. COMPLIANCE WITH SECURITIES AND OTHER LAWS
In no event shall the Company be required to sell or issue Shares under any
Award if the sale or issuance thereof would constitute a violation of applicable
federal or state securities laws or regulations or a violation of any other law
or regulation of any governmental or regulatory agency or authority or any
national securities exchange. As a condition to any sale or issuance of Shares,
the Company may place legends on Shares, issue stop transfer orders and require
such agreements or undertakings as the Company may deem necessary or advisable
to assure compliance with any such laws or regulations, including, if the
Company or its counsel deems it appropriate, representations from the person to
whom an Award is granted that he or she is acquiring the Shares solely for
investment and not with a view to distribution and that no distribution of the
Shares will be made unless registered pursuant to applicable federal and state
securities laws, or in the opinion of counsel of the Company, such registration
is unnecessary.
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Section 14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR REORGANIZATION
The value of an Award in Shares shall be adjusted from time to time as
follows:
(a) Subject to any required action by stockholders, the number of
Shares covered by each outstanding Award, and the exercise price, shall be
proportionately adjusted for any increase or decrease in the number of
issued Shares of the Company resulting from a subdivision or consolidation
of Shares or the payment of a stock dividend (but only in Shares) or any
other increase or decrease in the number of Shares effected without receipt
of consideration by the Company.
(b) Subject to any required action by stockholders, if the Company
shall be the surviving corporation in any Reorganization, merger or
consolidation, each outstanding Award shall pertain to and apply to the
securities to which a holder of the number of Shares subject to the Award
would have been entitled, and if a plan or agreement reflecting any such
event is in effect that specifically provides for the change, conversion or
exchange of Shares, then any adjustment to Shares relating to an Award
hereunder shall not be inconsistent with the terms of any such plan or
agreement.
(c) In the event of a change in the Shares of the Company as
presently constituted, which is limited to a change of par value into the
same number of Shares with a different par value or without par value, the
Shares resulting from any such change shall be deemed to be the Shares
within the meaning of the Plan.
To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board,
whose determination shall be final, binding and conclusive.
Except as hereinbefore expressly provided in the Plan, any person to
whom an Award is granted shall have no rights by reason of any subdivision
or consolidation of stock of any class or the payment of any stock dividend
or any other increase or decrease in the number of shares of stock of any
class or by reason of any dissolution, liquidation, reorganization, merger
or consolidation or spinoff of assets or stock of another corporation, and
any issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
exercise price of Shares subject to an Award.
The grant of an Award pursuant to the Plan shall not affect in any way
the right or power of the Company to make adjustments, reclassifications,
Reorganizations or changes of its capital or business structure or to merge
or to consolidate or to dissolve, liquidate or sell or transfer all or any
part of its business or assets.
Section 15. AMENDMENT OR TERMINATION OF THE PLAN
15.1 Amendment of the Plan. Notwithstanding anything contained in the
Plan to the contrary, all provisions of the Plan may at any time or from time
to time be modified or amended by the Board; provided, however, that no Award
at any time outstanding under the Plan may be modified, impaired or cancelled
adversely to the holder of the Award without the consent of such holder; and
provided, further, that the Plan may not be amended without approval by the
holders of a majority of the Shares of the Company represented and voted at a
meeting of the stockholders (a) to increase the maximum number of Shares
subject to the Plan, (b) to materially modify the requirements as to
eligibility for participation in the Plan, (c) to decrease the minimum
exercise price for options, (d) to otherwise materially increase the benefits
accruing to persons to whom Awards may be made under the Plan, as amended, or
(e) if such approval is otherwise necessary, to comply with Rule 16b-3
promulgated under the Exchange Act, as amended, or to comply with any other
applicable laws, regulations or listing requirements, or to qualify for an
exemption or characterization that is deemed desirable by the Board.
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<PAGE>
15.2 Termination of the Plan. The Board may suspend or terminate the Plan
at any time, and such suspension or termination may be retroactive or
prospective. However, no Award may be granted on or after April 22, 2004, the
tenth anniversary of the adoption of the Plan. Termination of the Plan shall
not impair or affect any Award previously granted hereunder and the rights of
the holder of the Award shall remain in effect until the Award has been
exercised in its entirety or has expired or otherwise has been terminated by the
terms of such Award.
Section 16. AMENDMENTS AND ADJUSTMENTS TO AWARDS
The Committee may amend, modify or terminate any outstanding Award with the
Participant's consent at any time prior to payment or exercise in any manner not
inconsistent with the terms of the Plan, including, without limitation, (i) to
change the date or dates as of which (A) an option becomes exercisable or (B) a
performance-based Award is deemed earned or (ii) to cancel an Award and grant a
new Award in substitution therefor under such different terms and conditions as
it determines in its sole and complete discretion to be appropriate. The
Committee is also authorized to make adjustments in the terms and conditions of,
and the criteria included in, Awards in recognition of unusual or nonrecurring
events (including, without limitation, the events described in Section 14
hereof) affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent reduction or enlargement of the benefits or
potential benefits intended to be made available under the Plan. Any provision
of the Plan or any agreement regarding an Award to the contrary notwithstanding,
the Committee may cause any Award granted to be cancelled in consideration of a
cash payment or alternative Award made to the holder of such cancelled Award
equal in value to the Fair Market Value of such cancelled Award. The
determinations of value under this Section 16 shall be made by the Committee in
its sole discretion.
Section 17. GENERAL PROVISIONS
17.1 No Limit on Other Compensation Arrangements. Nothing contained in
the Plan shall prevent the Company from adopting or continuing in effect other
compensation arrangements, and such arrangements may be either generally
applicable or applicable only in specific cases.
17.2 No Right to Employment. The grant of an Award shall not be construed
as giving the recipient thereof the right to be retained in the employ of the
Company. Further, the Company may at any time dismiss a participant in the Plan
from employment, free from any liability or any claim under the Plan, unless
otherwise expressly provided in the Plan or in any Award agreement. No
employee, participant or other person shall have any claim to be granted any
Award, and there is no obligation for uniformity or treatment of employees,
participants or holders or beneficiaries of Awards.
17.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THE PLAN AND
ANY RULES AND REGULATIONS RELATING TO THE PLAN SHALL BE DETERMINED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF MARYLAND.
17.4 Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or as to any person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall
be construed or deemed amended to conform to applicable laws, or if it cannot
be construed or deemed amended without, in the sole determination of the
Committee, materially altering the intent of the Plan or the Award, such
provision shall be stricken as to such jurisdiction, person or Award and the
remainder of the Plan and any such Award shall remain in full force and
effect.
-14-
<PAGE>
17.5 No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities or other property shall be paid or transferred in
lieu of any fractional Shares or whether such fractional Shares or any rights
thereto shall be cancelled, terminated or otherwise eliminated.
17.6 Headings. Headings are given to the subsections of the Plan solely
as a convenience to facilitate reference. Such headings shall not be deemed in
any way material or relevant to the construction or interpretation of the Plan
or any provision thereof.
17.7 Effective Date. The Plan shall be effective as of April 22, 1994,
the date of its approval by the holders of a majority of the Shares of the
Company represented and voting at the 1994 Annual Meeting of Stockholders. If
the Plan is not approved by the stockholders at the 1994 Annual Meeting, after
such date, the Plan and all Awards granted hereunder, if any, shall be void.
-15-
<PAGE>
EXHIBIT 10.26
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
1994 CAPSTEAD INC. RESTRICTED STOCK PLAN
<PAGE>
CAPSTEAD INC.
1994 RESTRICTED STOCK PLAN
Section 1. PURPOSE OF THE PLAN
The purposes of the Capstead Inc. 1994 Restricted Stock Plan (the
"Plan") are to promote the interests of Capstead Inc. (together with any
successor thereto, the "Company") and its stockholders, including Capstead
Mortgage Corporation ("CMC"), by enabling the Company and its Affiliates to
attract, motivate, reward and retain key officers and to encourage the holding
of proprietary interests in the Company by persons who occupy key positions in
the Company or its Affiliates by enabling the Company and CMC to grant such key
officers Restricted Stock in the Company as awards that recognize the creation
of value for the stockholders of the Company and, therefore, for the
stockholders of CMC and promote the Company's long-term growth and success.
Section 2. DEFINITIONS
As used in this Plan, the following terms shall have the meanings set
forth below unless the content otherwise requires:
2.1 "Affiliate" shall mean (i) (a) any corporation, partnership or
other entity that, directly or indirectly, is controlled by the Company,
(b) any entity in which the Company has a significant equity interest, (c)
any entity that provides substantial management advisory services for the
Company, (d) any corporation, partnership or other entity that, directly or
indirectly, is controlled by CMC and (e) any entity in which CMC has a
significant equity interest, in each case as determined by the Committee,
and (ii) CMC.
2.2 "Award" shall mean a grant of Restricted Stock pursuant to this
Plan.
2.3 "Board" shall mean the Board of Directors of the Company, as the
same may be constituted from time to time.
2.4 "Book Value" shall mean with respect to the Shares, as of any
date, the book value of the Shares as of the end of the most recent
calendar quarter as determined by the Committee; provided however, that on
and after December 31, 2003, "Book Value" shall mean with respect to the
Shares, as of any date, the greater of (i) the book value of the Shares as
of the end of the most recent calendar quarter as determined by the
Committee and the (ii) the amount determined as described in clause (i)
adjusted as most recently determined by the Board in its sole discretion.
2.5 "Change in Control" shall mean, after the effective date of this
Plan, (i) the occurrence of an event of a nature that would be required to
be reported in response to Item 1 or Item 2 of a Form 8-K Current Report of
CMC promulgated pursuant to Sections 13 and 15(d) of the Exchange Act;
provided that, without limitation, such a Change in Control shall be deemed
to have occurred if (a) any "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act (other than CMC, any trustee or other
fiduciary holding securities under any employee benefit plan of CMC, or any
company owned, directly or indirectly, by the stockholders of CMC in
substantially the same proportions as their ownership of stock of CMC), is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of CMC representing
twenty-five percent (25%) or more of the combined voting power of CMC's
then outstanding securities or (b) during any period of two consecutive
years, individuals who at the beginning of such period constitute the board
of directors of CMC cease for any reason to constitute at least a majority
thereof, unless the election by the board of directors of CMC or the
nomination for election by CMC's stockholders was approved by a vote of at
least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the two-year period or whose election or
nomination for election was previously so approved; (ii) the stockholders
of CMC approve a
<PAGE>
merger or consolidation of CMC with any other corporation, other than a merger
or consolidation that would result in the voting securities of CMC outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than eighty percent (80%) of the combined voting power of the
voting securities of CMC or such surviving entity outstanding immediately after
such merger or consolidation; provided, however, that a merger or consolidation
effected to implement a reorganization or recapitalization of CMC, or a similar
transaction (collectively, a "Reorganization"), in which no "person" acquires
more than twenty percent (20%) of the combined voting power of CMC's then
outstanding securities shall not constitute a Change in Control of CMC; or (iii)
the stockholders of CMC approve a plan of complete liquidation of CMC or an
agreement for the sale or disposition by CMC of all or substantially all of
CMC's assets.
2.6 "CMC" shall mean Capstead Mortgage Corporation, a Maryland
corporation, together with any successor.
2.7 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
2.8 "Committee" shall mean a committee of the Board consisting of
such number of members of the Board as the Board shall determine who are
appointed by, and serve at the pleasure of, the Board.
2.9 "Common Stock" shall mean the Class A Common Stock, par value
$.01 per share, of the Company.
2.10 "Company" shall mean Capstead Inc., a Delaware corporation,
together with any successor.
2.11 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
2.12 "Initial Public Offering" shall mean the completion of the first
sale of shares of Common Stock by the Company pursuant to an effective
registration statement under the Securities Act of 1933, as amended, other
than a registration statement on Form S-4 of Form S-8 or successor or
similar forms, or the exchange of shares of Common Stock, pursuant to a
merger, reorganization or recapitalization involving the Company, for
consideration which includes securities which have been registered under
the Securities Act of 1933, as amended, or are otherwise publicly
tradeable.
2.13 "Plan" shall mean the Capstead Inc. 1994 Restricted Stock Plan
set forth herein.
2.14 "Recipient" shall mean an officer of the Company or an Affiliate
to whom an Award has been made under the Plan, or such individual's
designated beneficiary, surviving spouse, estate or legal representative;
provided, however, any such beneficiary, spouse, estate or legal
representative shall be considered as one person with the officer.
2.15 "Restricted Stock" shall mean any Shares granted under this Plan.
2.16 "Restricted Stock Agreement" shall mean any agreement between the
Company and a Recipient or between the Company, CMC and a Recipient
providing for an Award and the terms and conditions of such Award.
2.17 "Shares" shall mean shares of the Company's Common Stock and any
shares of capital stock or other securities of the Company hereafter issued
or issuable upon, in respect of or in substitution or exchange for such
Shares and shall include shares of the Company's stock that automatically
convert to the Company's Common Stock upon transfer from CMC to any other
person.
<PAGE>
2.18 "Transfer" shall mean to offer, sell, transfer, assign, exchange,
pledge, encumber or otherwise dispose of in any manner.
Section 3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Plan shall be administered and interpreted by the
Committee.
3.2 Duties and Authority of Committee. Subject to the provisions of
the Plan and directions from the Board, the Committee is authorized to:
(a) determine, with respect to Awards made by the Company, the
persons to whom Awards are to be made;
(b) determine, with respect to Awards made by the Company, the
number of Shares to be covered by the Award, the pricing of the
Restricted Stock, the time or times when the Restricted Stock shall be
granted, the terms, performance criteria or other conditions, vesting
periods or any restrictions for an Award, any restrictions on
Restricted Stock and any other terms and conditions of an Award;
(c) conclusively interpret the Plan provisions;
(d) prescribe, amend and rescind rules and regulations relating
to the Plan and Awards or make individual decisions as questions
arise, or both;
(e) determine whether, to what extent and under what
circumstances to provide loans from the Company to Recipients in order
to purchase Restricted Stock under the Plan, and the terms and
conditions of such loans;
(f) rely upon employees of the Company for such clerical and
record-keeping duties as may be necessary in connection with the
administration of the Plan;
(g) make all other determinations and take all other actions
necessary or advisable for the administration of the Plan; and
(h) determine in good faith from time to time as required the
Book Value of Shares, which determination shall be conclusive.
3.3 Awards by CMC. Subject to the provisions of the Plan and
directions from the board of directors of CMC, including any committee of
such board as directed by such board, the Chief Executive Officer of CMC on
behalf of CMC is authorized under this Plan to:
(a) determine, with respect to Awards made by CMC, the persons to
whom Awards are to be made; and
(b) determine, with respect to Awards made by CMC, the number of
Shares to be covered by the Award, the pricing of the Restricted
Stock, the time or times when the Restricted Stock shall be made, the
terms, performance criteria or other conditions, vesting periods or
any restrictions for an Award, any restrictions on Restricted Stock
and any other terms and conditions of an Award.
Notwithstanding the foregoing, the Company shall be party to any Restricted
Stock Agreement with respect to Awards.
<PAGE>
3.4 Procedures. A majority of the Committee members shall constitute
a quorum. All determinations of the Committee shall be made by a majority
of its members. Except as otherwise provided in this Plan or any
Restricted Stock Agreement all questions of interpretation and application
of the Plan or pertaining to any question of fact or Award made hereunder
shall be decided by the Committee, whose decision shall be final,
conclusive and binding upon the Company and each other affected party.
Section 4. SHARES SUBJECT TO PLAN
4.1 Limitations. The Shares issued pursuant to the Plan may be
authorized but unissued Shares, or may be issued Shares which have been
reacquired by the Company; provided that unissued Shares may be issued
pursuant to the Plan only if such issuance is consented to by CMC. All
authorized and unissued Shares issued under Awards shall be fully paid and
non-assessable shares.
4.2 Changes. To the extent that any Restricted Stock (whether
granted by CMC or the Company) shall be forfeited or shall be cancelled, in
whole or in part, or otherwise acquired by the Company, then the Restricted
Stock so forfeited, cancelled or acquired may again be awarded pursuant to
the provisions of this Plan.
Section 5. ELIGIBILITY
Eligibility for participation in the Plan shall be confined to a select
number of persons who are officers of the Company or one or more of its
Affiliates; provided that no member of the board of directors of CMC shall be
eligible. In making any determination as to persons to whom Awards shall be
made and/or the number of Shares to be covered by the Award, the Committee and
CMC, in the case of Awards made by CMC, shall consider the position and
responsibilities of the person, his or her importance to the Company and its
Affiliates, the duties of such person, his or her past, present and potential
contributions to the growth and success of the Company and its Affiliates, and
such other factors as the Committee or CMC, in the case of Awards made by CMC,
shall deem relevant in connection with accomplishing the purposes of the Plan.
Section 6. RESTRICTED STOCK AWARDS
6.1 Awards. The Committee may make Awards of Restricted Stock for no
cash consideration, for such minimum consideration as may be required by
applicable law, or for such other consideration as may be specified by the
Award. The terms and conditions of the Restricted Stock shall be specified
by the related Restricted Stock Agreement. A Recipient of an Award
(whether or not escrowed as provided below) shall be the record owner of
the Shares under such Award and shall have all the rights of a stockholder
with respect to such Shares (unless the related Restricted Stock Agreement
specifically provides otherwise), and the Recipient shall in all events
have the right to vote and the right to receive dividends or other
distributions made or paid with respect to such Shares. Subject to the
foregoing, the Committee, in its sole discretion, shall determine what
rights, if any, the Recipient to whom an Award is made shall have in the
Restricted Stock during the restriction period and the restrictions
applicable to the particular Award, including, without limitation, the
vesting schedule (which may be based on service, performance or other
factors) and rights to acceleration of vesting (including, without
limitation, whether non-vested Shares are forfeited or vested upon
termination of employment). Further, the Committee may award performance-
based Restricted Stock by conditioning the Award, or vesting or such other
factors, such as the release, expiration or lapse of restrictions upon any
such Award (including the acceleration of any such conditions or terms)
upon the attainment of specified performance goals or such other factors as
the Committee may determine. The Committee shall also determine when the
restrictions shall lapse or expire and the conditions, if any, under which
the Restricted Stock will be forfeited or sold back to the Company. Each
Award may have different restrictions and conditions. Subject to Section
10.1 and Section 11, the Committee, in its discretion, may prospectively
change the restriction period and the restrictions applicable to any
particular Award. With respect to any Award made by CMC, CMC shall
<PAGE>
determine all matters related to such Award that is otherwise specified in
this Section 6.1 to be determined by the Committee, except as otherwise
provided in this Plan.
6.2 Awards and Certificates. Any Restricted Stock issued hereunder
may be evidenced in such manner as the Committee, in its sole discretion,
shall deem appropriate including, without limitation, book-entry
registration or issuance of a stock certificate or certificates. In the
event any stock certificate is issued in respect of Restricted Stock
awarded hereunder, such certificate shall bear an appropriate legend with
respect to the restrictions applicable to such Award. The Company may
retain, at its option, the physical custody of any stock certificate
representing any awards of Restricted Stock during the restriction period
or require that the Restricted Stock be placed in escrow or trust, along
with a stock power endorsed in blank.
6.3 Forfeitures. Any Restricted Stock forfeited under the Plan or an
Award shall in all events be acquired by the Company whether such Award was
made by CMC or the Company.
Section 7. NON-TRANSFERABILITY OF AWARDS
Restricted Stock received under an Award shall not be transferable, other
than to the Company, until the later of (a) the date such Restricted Stock is
vested and (b) the earlier of (i) the date, if any, of the Initial Public
Offering of Common Stock and (ii) with respect to Restricted Stock vested as a
result of or before a Change in Control, the date, if any, of a Change in
Control. Any attempt to Transfer Restricted Stock received under an Award
contrary to the provisions hereof, or the levy of any execution, attachment or
similar process upon the Restricted Stock received under an Award shall be null
and void and without effect.
Except as provided in Section 8, nothing in this Plan will preclude the
Transfer of Restricted Stock, on the Recipient's death, to the Recipient's legal
representatives or estate, nor preclude such representatives from Transferring
any of such Restricted Stock to the person(s) entitled thereto by will or the
laws of descent and distribution, provided, however, that any Restricted Stock
so Transferred as to which such restrictions have not lapsed will remain subject
to all restrictions and obligations imposed on them by this Plan.
Section 8. COMPLIANCE WITH SECURITIES AND OTHER LAWS
In no event shall the Company or CMC be required to sell or issue Shares
under any Award if the sale or issuance thereof would constitute a violation of
applicable federal or state securities laws or regulations or a violation of any
other law or regulation of any governmental or regulatory agency or authority or
any national securities exchange. As a condition to any sale or issuance of
Shares, the Company may place legends on Shares, issue stop transfer orders, and
require such agreements, undertakings and representations from the person to
whom an Award is granted and, if applicable, such person's prospective
transferee, in each such case as the Company may deem necessary or advisable to
assure compliance with any such laws or regulations.
Section 9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR REORGANIZATION
Restricted Stock granted pursuant to an Award shall be subject to
adjustment from time to time by reason of changes in capitalization,
reorganization or other events as provided in the related Restricted Stock
Agreement.
Except as provided in a Restricted Stock Agreement and except for rights
that all holders of Common Stock shall have, any person to whom an Award is made
shall have no rights by reason of any subdivision or consolidation of stock of
any class or the payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class or by reason of any dissolution,
liquidation, reorganization, merger or consolidation or spinoff of assets or
stock of another corporation, and any issue by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, shall
not affect, and no adjustment by reason thereof shall be made with respect to,
the number of Shares subject to an Award.
<PAGE>
A grant of Restricted Stock pursuant to the Plan shall not affect in any
way the right or power of the Company to make adjustments, reclassifications,
Reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell or transfer all or any part of
its business or assets.
Section 10. AMENDMENT OR TERMINATION OF THE PLAN
10.1 Amendment of the Plan. Notwithstanding anything contained in the
Plan to the contrary, all provisions of the Plan may at any time or from
time to time be modified or amended by the Board; provided, however, that
no Award at any time outstanding under the Plan may be modified, impaired
or cancelled adversely to the holder of the Award without the consent of
such holder; and provided, further, that the Plan may not be amended
without approval by the holders of a majority of the shares of Common Stock
of the Company represented and voted at a meeting of the stockholders if
such approval is otherwise necessary, to comply, if deemed desirable by the
Board, with Rule 16b-3 promulgated under the Exchange Act, or to comply
with any other applicable laws, regulations or listing requirements, or to
qualify for an exemption or characterization that is deemed desirable by
the Board; and provided, further, that the Plan may not be amended without
approval of CMC.
10.2 Termination of the Plan. The Board may suspend or terminate the
Plan at any time, and such suspension or termination may be retroactive or
prospective. However, no Award may be made on or after July 1, 2004, the
tenth anniversary of the adoption of the Plan. Termination of the Plan
shall not impair or affect any Award previously made hereunder and the
rights of the holder of the Award shall remain in effect until the Award
has vested in its entirety or has expired or otherwise has been terminated
by the terms of the related Restricted Stock Agreement.
Section 11. AMENDMENTS AND ADJUSTMENTS TO AWARDS
The Committee may amend, modify or terminate any outstanding Award with the
Recipient's consent at any time prior to vesting in any manner not inconsistent
with the terms of the Plan, including, without limitation, (i) to change the
date or dates as of which a performance-based Award is deemed earned or (ii) to
cancel an Award and make a new Award in substitution therefor under such
different terms and conditions as it determines in its sole and complete
discretion to be appropriate, subject to the other provisions of this Plan. The
Committee is also authorized to make adjustments in the terms and conditions of,
and the criteria included in, Awards in recognition of unusual or nonrecurring
events (including, without limitation, the events described in Section 9 hereof)
affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent reduction or enlargement of the benefits or
potential benefits intended to be made available under the Plan. Any provision
of the Plan or any agreement regarding an Award, including without limitation a
Restricted Stock Agreement, to the contrary notwithstanding, the Committee may
cause any Award made to be cancelled (to the extent not vested) in consideration
of a cash payment or alternative Award made to the holder of such cancelled
Award equal in value to the Book Value of such cancelled Award. The
determinations of value under this Section 11 shall be made by the Committee in
its sole discretion.
Section 12. GENERAL PROVISIONS
12.1 No Limit on Other Compensation Arrangements. Nothing contained
in the Plan shall prevent the Company from adopting or continuing in effect
other compensation arrangements, and such arrangements may be either
generally applicable or applicable only in specific cases.
12.2 No Right to Employment. An Award of Restricted Stock shall not
be construed as giving the Recipient the right to be retained in the employ
of the Company or any Affiliate. Further, the Company and any Affiliate
may at any time dismiss a Recipient from employment, free from any
liability or any claim under the Plan, unless otherwise expressly provided
in the Plan or in the related Restricted Stock Agreement. No employee,
participant or other person shall have any claim to be granted any
<PAGE>
Restricted Stock, and there is no obligation for uniformity or treatment of
employees, participants or holders or beneficiaries of Awards.
12.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THE PLAN
AND ANY RULES AND REGULATIONS RELATING TO THE PLAN SHALL BE DETERMINED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE.
12.4 Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or as to any person or Award, or would disqualify the Plan or
any Award under any law deemed applicable by the Committee, such provision
shall be construed or deemed amended to conform to applicable laws, or if
it cannot be construed or deemed amended without, in the sole determination
of the Committee, materially altering the intent of the Plan or the Award,
such provision shall be stricken as to such jurisdiction, person or Award
and the remainder of the Plan and any such Award shall remain in full force
and effect.
12.5 No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash, other securities or other property shall be paid or
transferred in lieu of any fractional Shares or whether such fractional
Shares or any rights thereto shall be cancelled, terminated or otherwise
eliminated.
12.6 Headings. Headings are given to the subsections of the Plan
solely as a convenience to facilitate reference. Such headings shall not
be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
12.7 Effective Date. The Plan shall be effective as of July 1, 1994.
<PAGE>
EXHIBIT 10.27
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
DEFERRED COMPENSATION PLAN
<PAGE>
CAPSTEAD MORTGAGE CORPORATION
DEFERRED COMPENSATION PLAN
WHEREAS, Capstead Mortgage Corporation, a Maryland corporation having
its headquarters at 2711 N. Haskell, Suite 900, Dallas, Texas 75204, desires to
implement the Capstead Mortgage Corporation Deferred Compensation Plan;
WHEREAS, the Company wishes to participate in Participant's capital
accumulation and is establishing this Plan to do so;
WHEREAS, the Company desires to establish a benefit restoration plan
for the exclusive benefit of a select group of its management and highly
compensated employees to restore retirement benefits on behalf of such employees
decreased due to limitations imposed by the Internal Revenue Code of 1986; and
WHEREAS, this Plan is intended to be an "employee pension benefit
plan" under Title I of ERISA, and which is unfunded and maintained by the
Company primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees, and the terms of
this Plan shall be interpreted accordingly.
ARTICLE I
PLAN DEFINITIONS
1.1 "Account Balance" means the accrued balance of all Participant
deferrals, all Company contributions, and all interest credited to the Account
of each Participant.
1.2 "Beneficiary" means the person or persons designated by the
Participant under Article VIl of this Plan who may become entitled to receive
benefits payable under Article Vl of this Plan.
1.3 "Board" means the Board of Directors of the Company.
1.4 "Company" means Capstead Mortgage Corporation, a Maryland
corporation, any subsidiary and any successor corporation or entity.
1.5 "Compensation Committee" means the Compensation Committee of the
Board. A function exercisable by such Committee may also be exercised by the
Board.
1.6 "Disability Date" means the first day of the seventh calendar
month following the date a Participant becomes totally and permanently disabled.
A Participant in active Service shall be totally and permanently disabled for
the purposes of the Plan if all of the following conditions are satisfied:
(a) he qualifies for disability benefits under the Company's
Long Term Disability Plan; and
(b) in the opinion of the Compensation Committee, it is unlikely
that the Participant will return to active Service.
<PAGE>
1.7 "Earnings" means the base salary, any compensation paid pursuant
to the Base Incentive Compensation Plan of the Company and any commissions paid
by the Company during the Plan Year.
1.8 "Eligibility Age" means the age of a Participant calculated at
the first day of the Plan Year.
1.9 "Participant" means any executive of the Company who is receiving
Earnings as an employee of the Company and who is designated as a Participant by
the Compensation Committee as provided in Article III. A Participant shall also
mean a retired or terminated Participant who continues to be entitled to
benefits under this Plan after his Termination of Service.
1.10 "Plan" means the Capstead Mortgage Corporation Deferred
Compensation Plan, and subject to Article Vll, any amendments thereto.
1.11 "Plan Year" means the twelve (12) month period which commences
January 1 and ends on December 31, or under the first Plan Year, the six (6)
month period from the effective date of the Plan until December 31 of the same
year.
1.12 "Retirement Date" means the date on which a Participant
separates from Service with the Company after the attainment of age 60 or
completion of 30 years of Service.
1.13 "Service" means the period of full time employment of a
Participant with the Company as defined in the Company's applicable policies and
procedures.
1.14 "Subsidiary" means any corporation, at least fifty percent of
the outstanding voting stock of which is beneficially owned directly or
indirectly by the Company.
1.15 "Termination of Service" means the date of termination of a
Participant's Service whether by voluntary or involuntary separation.
1.16 "Trust" means the Grantor Trust under the Capstead Mortgage
Corporation Deferred Compensation Plan.
1.17 "Vested" means the annual vesting of all Company contributions
under Article IV of the Plan. A Participant shall be credited with vesting
service and shall be vested in Company contributions under this Plan in
accordance with the vesting schedule set forth in the Company's qualified profit
sharing plan (CapSave).
ARTICLE II
EFFECTIVE DATE
2.1 This Plan shall be effective on July 1, 1994.
<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.1 Designation of Participants. Participation in the Plan shall be
made available to a select group of individuals designated by the Compensation
Committee who provide services to the Company in key positions of management and
responsibility and who are eligible to make contributions to CapSave, the amount
of which is reduced by reason of the application of the limitations set forth in
Sections 401(a)(17) or 402(g)(1) of the Code.
ARTICLE IV
DEFERRALS
4.1 Deferred Payment. Before the first day of any Plan Year (or, with
respect to individuals who first become Participants during a Plan Year, on or
before the date on which they become Participants) each Participant may elect to
have the payment of all or a portion of his Earnings for the Plan Year (or, if
later, so much of the Plan Year as commences on the day following the date on
which the individual becomes a Participant) deferred until the earliest to occur
of his retirement, death, Disability Date, or Termination of Service with the
Company. The election shall be irrevocable and shall be made on a form
prescribed by the Compensation Committee. The election shall apply only to that
Plan Year or partial Plan Year.
4.2 Company Match. The Company will match ail or a portion of
Participant deferrals during the Plan Year at an amount based upon the amount a
Participant elects to defer under the Plan. Only Participants that have
deferred the maximum pretax deferral amount under the Company's qualified profit
sharing plan ("CapSave") for the twelve (12) month period preceding the end of a
Plan Year will be eligible for the Company match. The Company match will be
credited to a Participant's Account on the last day of the corresponding Plan
Year.
The Company Match will be a portion of the contribution made by a
Participant into the Plan during the Plan Year based upon the Participant's
Eligibility Age; the Company Match will also be limited to a percentage of
Earnings based upon the Participant's Eligibility Age, in accordance with the
schedule below:
<TABLE>
<CAPTION>
MATCH RATE PER DOLLAR MAXIMUM AS A
ELIGIBILITY AGE CONTRIBUTED BY PARTICIPANT PERCENTAGE OF ELIGIBLE PAY
- ------------------------- -------------------------- ---------------------------
<S> <C> <C>
Ages 35 or younger $0.10 1%
Ages 36 to 45 $0.15 3%
Ages 46 to 50 $0.50 6%
Ages 51 to 60 $0.75 9%
Ages 61 and older $1.00 12%
</TABLE>
4.3 Supplemental Contributions. The Company shall make a contribution to
the Participants Account on the last day of the Plan Year equal to three percent
(3%) of Earnings in excess of the maximum amount of compensation which may be
recognized by a qualified plan pursuant to Section 401(a)(17) of the Internal
Revenue Code for such Plan Year. The Company contribution pursuant to Section
4.3 of the Plan will be made
<PAGE>
regardless of a Participant's amount or level of participation in any Company
sponsored qualified or nonqualified plan.
ARTICLE V
ACCOUNT EARNINGS
5.1 Interest. At the end of each calendar year, the amount of interest to
be added to the balance of the Participant's account shall equal the sum of:
(a) the Company's Return on Stockholders' Equity for such calendar
year multiplied by the Participant's account balance, if any, on the first day
of such calendar year; and
(b) the Company's Return On Stockholder's Equity (ROE) for such
calendar year multiplied by the Participant's weighted average contributions (as
defined below) made during such calendar year.
"Weighted average contributions" is determined by (i) multiplying the
contribution made in a particular month by the number of months remaining in the
calendar year, (ii) adding the results, and (iii) dividing the sum by twelve.
5.2 Interest Rate. The rate of interest credited to all Participant
deferrals and Company contributions pursuant to Article IV of the Plan and
subsequent earnings credited to the Account shall be credited with an interest
rate equal to the Company's annual ROE. ROE shall be calculated by the Company
and certified by the Compensation Committee for the Plan Year within thirty (30)
days following the end of a Plan Year.
ARTICLE VL
ACCOUNT PAYOUT
6.1 Retirement Distribution. Within sixty (60) days following the end of
the Plan Year in which occurs the Retirement Date of a Participant, the Company
shall pay any and all outstanding Account Balance to a Participant in either:
(a) a lump sum cash payment, or
(b) equal annual cash installments over a period of two (2) to fifteen
(15) years with a six percent (6%) annual interest crediting rate on any Account
Balance remaining each year of the remaining years.
A Participant must elect the form of Retirement Distribution under Section
6.1(a) or 6.1(b) no later than twenty four (24) months preceding retirement,
otherwise the Account Balance will be distributed pursuant to Section 6.1(a).
If a Participant dies while receiving a Retirement Distribution under Section
6.1(b) but before the entire Account Balance has been paid to the Participant by
the Company, the Company shall pay the remaining Account Balance within sixty
(60) days of the Participant's death in a lump sum to the beneficiary designated
by the Participant.
6.2 Other Distributions. Within sixty (60) days following the end of the
Plan Year in which Termination of Service or the Disability Date of a
Participant occurs, the Company shall pay any and all outstanding Account
Balance to a Participant in a lump sum cash
<PAGE>
payment or annual installments from two to fifteen years. If no election is made
prior to the Termination of Service or the Disability Date of a Participant, the
Company shall pay any and all outstanding Account Balance in a lump sum cash
payment. Within sixty (60) days following the death of a Participant in active
Service, the Company shall pay any and all outstanding Account Balance in a lump
sum cash payment or annual installments from two to fifteen years to the
Beneficiary designated by the Participant pursuant to Section 7.3, and shall pay
any Company contributions and interest to which the Participant would have been
entitled for the Plan Year in which his death occurs within sixty (60) days
following the end of such Plan Year.
6.3 Vesting. In no event shall any distribution made under Sections 6.1 or
6.2 of the Plan include Company contributions pursuant to Article IV that are
not Vested.
ARTICLE VLL
GENERAL PROVISIONS
7.1 Unfunded Obligation. The deferred amounts to be paid to Participants
pursuant to this Plan are unfunded obligations of the Company. The Company is
not required to segregate any monies from its general funds, to create any
trusts, or to make any special deposits with respect to this obligation. Title
to and beneficial ownership of any investments including trust investments which
the Company may make to fulfill this obligation shall at all times remain in the
Company. Any investments and the creation or maintenance of any trust or
memorandum accounts shall not create or constitute a trust or a fiduciary
relationship between the Compensation Committee or the Company and a
Participant, or otherwise create any vested or beneficial interest in any
Participant or his Beneficiary of his creditors in any assets of the Company
whatsoever,
7.2 Binding Effect. This Plan shall be binding upon and inure to the
benefit of the parties hereto and upon the successors and assigns of the
Company, and upon the heirs and legal representatives of the Participant.
7.3 Beneficiary Designation. While covered under this Plan, the Participant
may from time to time designate, in writing, any person or entity, contingently
or successively to whom the Company shall pay the Account Balance pursuant to
Article Vl in the event of the Participant's death. If the Participant fails to
designate a Beneficiary or if the Beneficiary predeceases the Participant, then
benefits shall be payable to the Participant's estate.
7.4 Assignment of Rights. None of the rights to the benefits under this
Plan are assignable by the Participant or any Beneficiary or designee of the
Participant, and any attempt to anticipate, sell, transfer, assign, pledge,
encumber, or change the Participant's right to receive any benefits of this plan
shall be void.
7.5 Plan Administration. The Compensation Committee, or its named
Administrator, shall have administration authority to control and manage the
operation and administration of this Plan.
The Administrator shall make all determinations as to rights to benefits
under this Plan. Any decision by the Administrator denying a claim made the
Participant or by a
<PAGE>
Beneficiary for benefits under this Plan shall be stated in writing and
delivered or mailed to the Participant or such Beneficiary. Such statement shall
set forth the specific reasons for the denial, written to the best of the
Administrator's ability in a manner that may be understood without legal or
actuarial counsel. In addition, the Administrator shall afford a reasonable
opportunity to the Participant or such Beneficiary for a full and fair review of
the decision denying such claim.
Subject to the foregoing, the Compensation Committee shall have full power
and authority to interpret, construe, administer and, if necessary, to modify in
limited circumstances, this Plan. No member of the Board shall, in any event,
be liable to any person for any action taken or omitted in connection with the
interpretation, construction or administration of this Plan, so long as such
action or omission to act be made in good faith.
7.6 Incapacity of Participant or Beneficiary. If the Compensation Committee
finds that any Participant or Beneficiary to whom a payment is payable under the
Plan is unable to care for his or her affairs because of illness or accident or
is under a legal disability, any payment due (unless a prior claim therefor
shall have been made by a duly appointed legal representative) at the discretion
of the Committee, may be paid to the spouse, child, parent or brother or sister
of such Participant or Beneficiary or to any person whom the committee has
determined has incurred expense for such Participant or Beneficiary. Any such
payment shall be a complete discharge of the obligations of the Company under
the provisions of the Plan.
7.7 Funding. The Company's obligations under this Plan shall be an unfunded
and unsecured promise to pay. The Company shall not be obligated under any
circumstances to fund or otherwise secure its obligations under this Plan. Under
no circumstances will the Company, without the consent of the Participant, cause
this Plan to be directly funded in whole or part through escrow, trust, or
otherwise such as to create a taxable event to the Participant or the
Participant's Beneficiary.
7.8 Amendment and Termination. The Board may at any time, or from time to
time, amend this Plan in any respect or terminate this Plan without restriction
and without consent of any Participant or beneficiary, provided that any such
amendment or termination shall not impair the right of any Participant or any
Beneficiary of any then deceased Participant to receive benefits earned and
vested hereunder prior to such amendment or termination without the consent of
such Participant or such Beneficiary.
7.9 Gender and Number. The masculine pronoun wherever used shall include
the feminine. Wherever any words are used herein in the singular, they shall be
construed as though they were also used in the plural in all cases where they
shall so apply.
7.10 Law Governing. This Plan shall be governed by the laws of the State of
Texas.
<PAGE>
EXHIBIT 10.28
SUMMARY OF EMPLOYMENT AGREEMENT
DATED DECEMBER 9, 1993
BETWEEN
CAPSTEAD MORTGAGE CORPORATION
AND
CHRISTOPHER T. GILSON
<PAGE>
EXHIBIT 10.28
SUMMARY OF EMPLOYMENT AGREEMENT
DATED DECEMBER 9, 1993
BETWEEN
CAPSTEAD MORTGAGE CORPORATION
AND
CHRISTOPHER T. GILSON
Mr. Gilson has an employment agreement for the duration of his employment with
the Company. Mr. Gilson is entitled to receive the agreed to base salary (plus
any merit increases) and incentive compensation as approved by the Compensation
Committee. In the event of involuntary termination of employment, Mr. Gilson
will be entitled to lump-sum severance pay equal to his base salary at the time
of termination plus the average of his last two year's incentive compensation.
<PAGE>
EXHIBIT 11
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<PAGE>
EXHIBIT 11
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1994 1993 1992
------------- ------------- ------------
<S> <C> <C> <C>
Primary:
Average number of common shares
outstanding 15,251,000 15,053,000 14,333,000
Incremental shares calculated
using the Treasury Stock method 27,000 93,000 61,000
------------ ------------ -----------
15,278,000 15,146,000 14,394,000
============ ============ ===========
Net income $ 85,579,000 $ 94,256,000 $53,191,000
Less cash dividends paid on
convertible preferred stock:
Series A ($1.60 paid per share) (1,042,000) (1,274,000) (1,823,000)
Series B ($1.26 paid per share
in 1994 and 1993; $0.10 paid
per share in 1992) (37,834,000) (37,318,000) (2,884,000)
------------ ------------ -----------
Net income available to common
stockholders $ 46,703,000 $ 55,664,000 $48,484,000
============ ============ ===========
Primary net income per share* $3.06 $3.68 $3.37
Fully diluted:
Average number of common shares
outstanding 15,251,000 15,053,000 14,333,000
Assumed conversion of convertible
preferred stock:
Series A 597,000 741,000 1,157,000
Series B ** ** **
Incremental shares calculated
using the Treasury Stock method 27,000 136,000 101,000
------------ ------------ -----------
15,875,000 15,930,000 15,591,000
============ ============ ===========
Net income $ 85,579,000 $ 94,256,000 $53,191,000
Less cash dividends paid on
Series B Preferred Stock (37,834,000) (37,318,000) (2,884,000)
------------ ------------ -----------
Net income $ 47,745,000 $ 56,938,000 $50,307,000
============ ============ ===========
Fully diluted net income per share $3.01 $3.57 $3.23
</TABLE>
______________
* During the year ended December 31, 1992, 1,382,551 shares of the Series A
Preferred Stock was converted into 1,244,261 shares of common stock. If this
conversion had occurred at the beginning of the 1992, primary net income per
share would have been $3.32 per share for the year ended December 31, 1992.
** The Series B Preferred Stock is not considered convertible for purposes of
calculating fully diluted net income per share as it is currently
antidilutive.
<PAGE>
EXHIBIT 12
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<PAGE>
EXHIBIT 12
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges $474,748 $491,076 $415,433 $189,840 $144,478
Preferred stock dividends 38,876 38,592 4,707 7,499 8,746
-------- -------- -------- -------- --------
Combined fixed charges and
preferred stock dividends 513,624 529,668 420,140 197,339 153,224
Net income 85,579 94,256 53,191 33,717 29,082
-------- -------- -------- -------- --------
Total $599,203 $623,924 $473,331 $231,056 $182,306
======== ======== ======== ======== ========
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.17:1 1.18:1 1.13:1 1.17:1 1.19:1
======== ======== ======== ======== ========
</TABLE>
(b) Computation of ratio of earnings to combined fixed charges and preferred
stock dividends (excluding CMO debt):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed charges $139,092 $ 80,923 $ 62,077 $31,474 $ 8,519
Preferred stock dividends 38,876 38,592 4,707 7,499 8,746
-------- -------- -------- ------- -------
Combined fixed charges and
preferred stock dividends 177,968 119,515 66,784 38,973 17,265
Net income 85,579 94,256 53,191 33,717 29,082
-------- -------- -------- ------- -------
Total $263,547 $213,771 $119,975 $72,690 $46,347
======== ======== ======== ======= =======
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.48:1 1.79:1 1.80:1 1.87:1 2.68:1
======== ======== ======== ======= =======
</TABLE>
<PAGE>
EXHIBIT 13
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
PORTIONS OF THE
ANNUAL REPORT TO STOCKHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1994
<PAGE>
REPORT OF ERNST & YOUNG LLP
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, 1994 and 1993, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31,1994. 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 generally accepted auditing
standards. 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 finacial 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Capstead Mortgage Corporation and subsidiaries at December 31, 1994 and 1993,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
January 23, 1995
1
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Mortgage securities collateral $354,603 $390,690 $383,060
Mortgage investments 202,398 184,136 117,527
-------- -------- --------
Total interest income 557,001 574,826 500,587
-------- -------- --------
Interest and related expenses:
Collateralized mortgage securities 335,656 410,153 353,356
Short term borrowings 139,092 80,923 62,077
Mortgage insurance and other 13,476 20,084 13,821
Provision for possible losses 3,500 2,800 7,750
-------- -------- --------
Total interest and related
expenses 491,724 513,960 437,004
-------- -------- --------
Net margin on mortgage assets 65,277 60,866 63,583
-------- -------- --------
Mortgage servicing revenues:
Servicing fees 28,973 1,539 -
Other 3,913 (132) -
-------- -------- --------
Total mortgage servicing revenues 32,886 1,407 -
-------- -------- --------
Mortgage servicing expenses:
Salaries and related costs 2,867 648 -
General and administrative 3,002 492 -
Amortization of purchased mortgage
servicing rights 5,998 1,323 -
-------- -------- --------
Total mortgage servicing expenses 11,867 2,463 -
-------- -------- --------
Net margin on mortgage
servicing operations 21,019 (1,056) -
-------- -------- --------
Other revenues:
Gain on sales 9,161 61,216 2,910
CMO administration 4,067 1,482 -
Other 950 1,875 952
-------- -------- --------
Total other revenues 14,178 64,573 3,862
-------- -------- --------
Other expenses:
Salaries and related costs 8,263 7,456 4,124
General and administrative 6,632 6,505 4,221
Management fees and termination
costs - 16,166 5,909
-------- -------- --------
Total other expenses 14,895 30,127 14,254
-------- -------- --------
Net income $ 85,579 $ 94,256 $ 53,191
======== ======== ========
Net income $ 85,579 $ 94,256 $ 53,191
Less cash dividends on preferred
stock (38,876) (38,592) (4,707)
-------- -------- --------
Net income available to common
stockholders $ 46,703 $ 55,664 $ 48,484
======== ======== ========
Net income per share:
Primary $ 3.06 $ 3.68 $ 3.37
Fully diluted 3.01 3.57 3.23
Average number of shares outstanding:
Primary 15,278 15,146 14,394
Fully diluted 15,875 15,930 15,591
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Assets
Mortgage securities collateral $5,270,103 $3,995,956
Mortgage investments 3,305,984 2,842,151
---------- ----------
8,576,087 6,838,107
Less allowance for possible losses (7,354) (6,927)
---------- ----------
8,568,733 6,831,180
Cash and cash equivalents 21,741 87,760
Prepaids, receivables and other 70,415 36,238
Purchased mortgage servicing rights 282,969 25,146
---------- ----------
$8,943,858 $6,980,324
========== ==========
Liabilities
Collateralized mortgage securities $5,102,145 $3,891,134
Short term borrowings 3,190,582 2,443,807
Accounts payable and accrued expenses 11,568 7,193
Mortgage servicing rights acquisitions payable 75,888 --
---------- ----------
8,380,183 6,342,134
---------- ----------
Stockholders' Equity
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock, Series A,
623 and 735 shares issued and outstanding
($10,217 aggregate liquidation preference) 8,720 10,295
$1.26 Cumulative Convertible Preferred Stock,
Series B, 30,277 shares and 29,797 shares
issued and outstanding ($344,552 aggregate
liquidation preference) 324,779 319,543
Common stock - $0.01 par value; 100,000 shares
authorized; 15,304 and 15,154 shares issued
and outstanding 153 152
Paid-in capital 310,766 308,140
Undistributed income (deficit) (2,228) 60
Unrealized loss on debt and equity securities (78,515) __
---------- ----------
563,675 638,190
---------- ----------
$8,943,858 $6,980,324
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1994
------------------------------------------------------------------------
UNREALIZED
GAIN (LOSS)
PREFERRED STOCK UNDISTRIBUTED ON DEBT
---------------------- COMMON PAID-IN INCOME AND EQUITY
SERIES A SERIES B STOCK CAPITAL (DEFICIT) SECURITIES TOTAL
---------- ---------- ------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1992 $ 32,616 $ - $116 $221,522 $ (915) $ - $253,339
Stock issuance - 315,025 20 61,623 - - 376,668
Net income - - - - 53,191 - 53,191
Cash dividends:
Common ($3.26 per share) - - - - (47,952) - (47,952)
Preferred:
Series A ($1.60 per share) - - - - (1,823) - (1,823)
Series B ($0.10 per share) - - - - (2,884) - (2,884)
Conversion of preferred stock (19,411) - 12 19,399 - - -
Other - - 1 959 - - 960
-------- -------- ---- -------- -------- -------- --------
Balance at
December 31, 1992 13,205 315,025 149 303,503 (383) - 631,499
Net income - - - 94,256 - 94,256
Cash dividends:
Common ($3.66 per share) - - - - (55,221) - (55,221)
Preferred:
Series A ($1.60 per share) - - - - (1,274) - (1,274)
Series B ($1.26 per share) - - - - (37,318) - (37,318)
Conversion of preferred stock (2,910) (144) 2 3,052 - - -
Other - 4,662 1 1,585 - - 6,248
-------- -------- ---- -------- -------- -------- --------
Balance at
December 31, 1993 10,295 319,543 152 308,140 60 - 638,190
Adjustment to beginning balance for
change in accounting method - - - - - 7,512 7,512
Net income - - - - 85,579 - 85,579
Cash dividends:
Common ($3.21 per share) - - - - (48,991) - (48,991)
Preferred:
Series A ($1.60 per share) - - - - (1,042) - (1,042)
Series B ($1.26 per share) - - - - (37,834) - (37,834)
Conversion of preferred stock (1,575) (18) 1 1,592 - - -
Other - 5,254 - 1,034 - - 6,288
Change in unrealized gain (loss) on
debt and equity securities - - - - - (86,027) (86,027)
-------- -------- ---- -------- -------- -------- --------
Balance at
December 31, 1994 $ 8,720 $324,779 $153 $310,776 $ (2,228) $(78,515) $563,675
======== ======== ==== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 85,579 $ 94,256 $ 53,191
Noncash items:
Amortization of discount and premium 6,265 47,988 7,398
Amortization of purchased mortgage servicing rights 5,998 1,323 --
Depreciation and other amortization 1,932 819 140
Provision for possible losses 3,500 2,800 7,750
Net change in prepaids, receivables, other assets and
accounts payable (46,330) (2,273) (19,821)
Net gain from investing activities (9,161) (62,216) (2,910)
----------- ----------- -----------
Net cash provided by operating activities 47,783 83,697 45,748
----------- ----------- -----------
Investing activities:
Mortgage securities collateral:
Principal collections on collateral 1,157,248 2,437,768 1,270,681
Decrease (increase) in accrued interest receivable 9,065 11,302 (13,947)
Decrease (increase) in short term investments 166,150 (25,361) (98,242)
Purchases of mortgage loans (1,935,136) (4,410,950) (5,489,456
Purchases of agency securities (1,631,294) (1,747,931) --
Purchases of mortgage servicing rights (263,821) (26,469) --
Purchase of equity securities (17,808) -- --
Principal collections on mortgage investments 349,806 266,347 99,447
Proceeds from sales of mortgage assets and equity securities 105,288 3,859,993 1,160,920
Net cash from acquisition -- -- 8,236
----------- ----------- -----------
Net cash provided (used) by investing activities (2,060,502) 364,699 (3,062,361)
----------- ----------- -----------
Financing activities:
Collateralized mortgage securities:
Issuance of securities 2,565,540 1,185,482 3,564,780
Principal payments on securities (1,352,288) (2,469,026) (1,168,581)
Increase (decrease) in accrued interest payable (7,636) (14,427) 21,396
Capital stock transactions 6,288 6,248 62,603
Dividends paid (87,867) (93,813) (52,659)
Mortgage servicing rights acquisitions payable 75,888 -- --
Increase in short term borrowings 746,775 994,598 593,637
----------- ----------- -----------
Net cash provided (used) by financing activities 1,946,700 (390,938) 3,021,176
---------- ------------ ----------
Net increase (decrease) in cash and cash equivalents (66,019) 57,458 4,563
Cash and cash equivalents at beginning of year 87,760 30,302 25,739
----------- ----------- -----------
Cash and cash equivalents at end of year $ 21,741 $ 87,760 $ 30,302
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
NOTE A - BUSINESS
Capstead Mortgage Corporation, together with certain affiliated entities,
operates as a mortgage conduit which purchases, securitizes and invests in
various types of single-family residential mortgage loans. In addition, the
Company has formed a mortgage servicing unit to function as the primary mortgage
servicer for loans and mortgage servicing rights acquired by the Company.
Note B - ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Capstead Mortgage
Corporation ("Capstead"), its mortgage servicing subsidiary ("Capstead Inc."),
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 securities and are
not available for the satisfaction of general claims of Capstead. Capstead
has no obligation for the collateralized mortgage securities beyond the assets
pledged as collateral.
Securities Held-to-Maturity and Available-for-Sale
Management determines the appropriate classification of debt securities at the
time of purchase or securitization and reevaluates such designation as of
each balance sheet date. 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. Marketable
equity securities and 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 and losses, net of tax, reported in a separate
component of stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and discounts over
the estimated life of the security. Such amortization is included in interest
income. Interest and dividends are included in interest income and other
revenues, respectively. Realized gains and losses are included in other
revenues. The cost of securities sold is based on the specific identification
method.
Mortgage Assets
Mortgage investments and mortgage securities collateral held in the form of
mortgage-backed securities are debt securities and classified as either held-to-
maturity or available-for-sale. Mortgage investments held in the form of
mortgage loans are carried at their unpaid principal balance, net of unamortized
discount or premium and adjusted for deferred hedging gains or losses, if any.
The Company may, from time to time, hold mortgage loans for sale. Mortgage loans
held for sale are carried at the lower of cost or market on an aggregate basis.
The cost of these mortgage loans is adjusted for gains or losses generated from
corresponding hedging transactions, if any, prior to the lower of cost or market
valuation. Transfers from loans held for sale to loans held for investment are
recorded at the lower of cost or market. Interest
6
<PAGE>
income, net of servicing fees, is recorded as income when earned. Any discount
or premium is recognized as an adjustment to interest income by the interest
method over the life of the related mortgage loan.
Mortgage assets are subject to changes in value because of changes in interest
rates and rates of prepayment as well as failure of the mortgagor to perform
under the mortgage agreement. The Company manages its exposure to these risks by
the issuance of collateralized mortgage securities, the acquisition of mortgage
pool and special hazard insurance, forward sale agreements and other strategies.
Hedging Activities
The Company may enter into forward sales of Federal National Mortgage
Association ("FNMA") mortgage-backed securities to reduce exposure to interest
rate risk primarily on fixed-rate mortgage loans which it has purchased or has
committed to purchase prior to either the placement of permanent financing or
sale of such loans. These forward sale agreements generally have terms of not
more than 90 days. Gains and losses on these hedging transactions are deferred
as an adjustment to the carrying value of the related mortgage loans and
amortized into interest income using the effective yield method over the
expected remaining life of the mortgage loans or taken into income on the date
of sale.
Allowance for Possible Losses
The Company provides for possible losses due to (i) mortgagor default on
mortgage loans not covered by mortgage pool insurance, (ii) fraud in the
origination of mortgage loans, (iii) special hazards on mortgage loans not
covered by special hazard insurance, and (iv) higher than anticipated
prepayments on other mortgage securities.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments
with original maturities of three months or less.
Purchased Mortgage Servicing Rights
The cost of acquiring mortgage servicing rights is capitalized and then
amortized in proportion to and over the period of estimated net servicing
income. Estimated net servicing income is evaluated periodically and adjustments
are made to the rate of amortization.
Borrowings
Collateralized mortgage securities and short term borrowings 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.
Mortgage Servicing Revenues
Mortgage servicing revenues represent fees received for servicing mortgage
loans. Servicing fees are calculated on the basis of the outstanding monthly
principal balance of mortgage loans serviced and are recognized as income when
collected.
7
<PAGE>
Income Taxes
Capstead and its qualified real estate investment trust ("REIT") subsidiaries
("qualified 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, provided that certain REIT
qualification tests are met. Currently, 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, principally Capstead Inc. and subsidiaries,
file a separate federal income tax return. The January 1, 1993 adoption of the
liability method of accounting for income taxes had no cumulative effect on the
consolidated financial statements.
Net Income Per Share
Primary net income per share is computed by dividing net income, after deduction
of preferred stock dividends, by the weighted average number of common shares
and common stock equivalents outstanding during the year. Fully diluted net
income per share is computed by dividing net income, after deducting dividends
on the $1.26 Cumulative Convertible Preferred Stock, Series B ("Series B
Preferred Stock"), by the weighted average number of common shares and common
stock equivalents outstanding during the year, assuming conversion of the $1.60
Cumulative Preferred Stock, Series A ("Series A Preferred Stock"). The Series B
Preferred Stock is not considered convertible for purposes of calculating fully
diluted net income per share as it is currently antidilutive.
Reclassification
Certain amounts for prior years have been reclassified to conform to the 1994
presentation.
NOTE C - MORTGAGE INVESTMENTS
Mortgage investments and the related average effective interest rates
(calculated excluding unrealized gains and losses) were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
As of Year Ended
December 31 December 31
------------------------- ---------------------
1994 1993 1994 1993
---------- ---------- ----- ------
<S> <C> <C> <C> <C>
Mortgage loan portfolio:
Fixed-rate mortgage loans $ 55,055 $1,427,031 6.95% 7.40%
Medium-term mortgage loans 21,760 55,280 7.01 6.92
Adjustable-rate mortgage loans 132,692 109,230 5.22 5.33
AAA-rated private mortgage pass-through
securities portfolio:
Fixed-rate mortgage securities 409 - 6.69 -
Medium-term mortgage securities 459,874 425,301 6.92 7.14
Adjustable-rate mortgage securities 755,623 422,528 5.48 5.17
Agency securities portfolio:
Fixed-rate mortgage securities 504,023 402,781 6.44 6.80
Adjustable-rate mortgage securities 1,042,861 - 4.74 -
Callable notes 333,687 - 6.96 -
---------- ----------
$3,305,984 $2,842,151
========== ==========
</TABLE>
8
<PAGE>
The Company classifies its mortgage investments by term and interest rate
characteristics of the underlying mortgage loans. Fixed-rate mortgage
investments (i) have fixed rates of interest for their entire terms or (ii) have
an initial fixed-rate period of ten years after origination and then adjust
annually based on a specified margin over 1-year United States Treasury
Securities ("1-year Treasuries"). Medium-term mortgage investments (i) have an
initial fixed-rate period of three or five years after origination and then
adjust annually based on a specified margin over 1-year Treasuries or (ii) have
initial interest rates that adjust one time, approximately five years following
origination of the mortgage loan, based on a specified margin over the FNMA
yields for 30-year, fixed-rate commitments at the time of adjustment.
Adjustable-rate mortgage investments either (i) adjust semi-annually based on a
specified margin over the 6-month London Interbank Offered Rate ("LIBOR") or
(ii) adjust annually based on a specified margin over 1-year Treasuries. Fixed-
rate and adjustable-rate mortgage agency securities consist of mortgage-backed
securities issued by government-sponsored entities, either the Federal Home Loan
Mortgage Corporation ("FHLMC"), FNMA or the Government National Mortgage
Association ("GNMA"). Callable agency notes are unsecured, 3-year, fixed-rate
notes issued by FHLMC, FNMA, or the Federal Home Loan Bank Board ("FHLBB") and
mature in 1997, unless redeemed earlier by FHLMC, FNMA or FHLBB.
At December 31, 1994 the AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs") portfolio, the agency securities portfolio, and
substantially all of the mortgage loan portfolio were pledged to secure short
term borrowings. As of December 31, 1994, outstanding commitments to purchase
mortgage loans were approximately $37 million. All mortgage loans were held for
investment at December 31, 1994.
For hedging purposes the Company had outstanding forward sales agreements with
an aggregate gross contract amount of $65 million at December 31, 1994. These
hedge positions were terminated in January 1995 at a loss of $202,000, which was
deferred as an adjustment of the carrying value of the related mortgage loans.
Included in mortgage securities collateral at December 31, 1994 was
approximately $5.6 million of net realized gains that have been deferred related
to hedging activities.
NOTE D - MORTGAGE SECURITIES COLLATERAL
Mortgage securities collateral consists primarily of collateral pledged to
secure borrowings through collateralized mortgage securities. All principal and
interest on the collateral 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 collateral and the
reinvestment income earned thereon are available for the payment of principal
and interest on the collateralized mortgage securities.
9
<PAGE>
The components of mortgage securities collateral are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31
-----------------------------
1994 1993
---------- ----------
<S> <C> <C>
Mortgage collateral $5,201,886 $3,754,533
Short term investments 29,308 195,458
Accrued interest receivable 33,221 26,953
---------- ----------
Total collateral 5,264,415 3,976,944
Unamortized premium (discount) (7,962) 6,341
---------- ----------
Net collateral 5,256,453 3,983,285
Other mortgage securities 13,650 12,671
---------- ----------
$5,270,103 $3,995,956
========== ==========
</TABLE>
Mortgage collateral consists of fixed-rate, medium-term and adjustable-rate
mortgage securities and fixed-rate agency securities. The weighted average
effective interest rate for mortgage collateral was 7.63 percent and 8.38
percent during the years ended December 31, 1994 and 1993, respectively.
NOTE E - MORTGAGE SERVICING
The following table provides information regarding the mortgage servicing
portfolio and the related investment in purchased mortgage servicing rights (in
thousands, except number of loans):
<TABLE>
<CAPTION>
Unpaid Purchased
Principal Number Mortgage
Balance of Loans Servicing Rights
------------ -------- ----------------
<S> <C> <C> <C>
Loans serviced at December 31, 1993 $ 2,393,267 7,746 $ 25,146
Additions 12,524,522 110,078 170,268
Runoff/amortizatio (525,607) (2,215) (5,998)
----------- ------- ---------
Loans serviced at December 31, 1994 14,392,182 115,609 189,416
Purchases pending transfer 5,145,421 52,775 93,553
----------- ------- ---------
Total portfolio at December 31, 1994 $19,537,603 168,384 $ 282,969
=========== ======= =========
</TABLE>
The Company services mortgage loans in all 50 states and the District of
Columbia. As of December 31, 1994, 22 percent of loans serviced and loans
pending transfer were located in California (based on the unpaid principal
balances).
In connection with mortgage servicing activities, the Company maintains
segregated escrow deposits which are held in bank trust accounts. At December
31, 1994 and 1993, escrow and fiduciary funds for loans being serviced
approximated $163 million and $41 million, respectively, and are excluded from
the accompanying balance sheet.
NOTE F - COLLATERALIZED MORTGAGE SECURITIES
Each series of collateralized mortgage securities 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.
10
<PAGE>
The components of collateralized mortgage securities along with certain
other information are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31
-------------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Collateralized mortgage securities $5,177,445 $3,857,303
Accrued interest payable 51,277 45,362
-------------- --------------
Total obligation 5,228,722 3,902,665
Less unamortized discount (126,577) (11,531)
-------------- --------------
Net obligation $5,102,145 $3,891,134
-------------- --------------
Range of average interest rates 5.87% to 10.00% 4.78% to 10.00%
Range of stated maturities 2007 to 2025 2007 to 2023
Number of series 45 43
</TABLE>
The maturity of each series of securities is directly affected by the rate of
principal prepayments on the related mortgage securities collateral. Each series
of securities is also subject to redemption at the Company's option provided
that certain requirements specified in the related indenture have been met
(referred to as "clean-up calls"). As a result, the actual maturity of any
series of securities is likely to occur earlier than its stated maturity. The
average effective interest rate for all collateralized mortgage securities was
7.49 percent and 9.05 percent during the years ended December 31, 1994 and 1993,
respectively.
NOTE G - SHORT TERM BORROWINGS
Short term borrowings are primarily made under repurchase arrangements. At
December 31, 1994 the Company had uncommitted repurchase facilities with
investment banking firms of approximately $5.5 billion to finance the mortgage
loan and Mortgage Pass-Through portfolios, subject to certain conditions.
Interest rates on borrowings under these facilities are based on overnight to
30-day LIBOR rates. The Company also enters into repurchase and dollar
repurchase arrangements with investment banking firms pursuant to which the
Company pledges agency securities and other mortgage assets. The terms and
conditions of these arrangements, including interest rates, are negotiated on a
transaction-by-transaction basis. Other arrangements the Company may use include
repurchase transactions prior to the issuance of collateralized mortgage
securities ("CMOs") or publicly-offered, multi-class mortgage pass-through
certificates ("MPCs") whereby the Company may pledge the mortgage loans that are
expected to secure the issuance as collateral for a repurchase transaction with
the managing underwriter of the related issuance.
Repurchase and dollar repurchase arrangements, which had maturities of less than
31 days, and the related average effective interest rates are classified by type
of collateral as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
--------------------- --------------------
Borrowings Average Borrowings Average
Outstanding Rate Outstanding Rate
----------- -------- ----------- -------
<S> <C> <C> <C> <C>
Mortgage loan portfolio $ 190,060 6.45% $1,220,094 4.07%
Mortgage Pass-Through portfolio 1,161,894 6.24 824,682 3.62
Agency securities portfolio 1,783,996 5.67 399,031 3.38
Other mortgage assets 44,632 6.47 - -
---------- ----------
$3,180,582 $2,443,807
========== ==========
</TABLE>
11
<PAGE>
At December 31, 1994 the Company had a $120 million committed line of credit
with an investment banking firm secured by purchased mortgage servicing rights.
Advances have separate maturities and rates of interest with interest due
monthly. Interest rates on advances under this facility are based on LIBOR rates
related to the term of the advance. As of December 31, 1994, the Company had
drawn $10 million on this line of credit at an interest rate of 7.24 percent.
Accrued interest on short term borrowings totaled $4,934,000 at December 31,
1994. The weighted average effective interest rate on all short term borrowings
was 4.64 percent and 3.40 percent during 1994 and 1993, respectively.
NOTE H - DISCLOSURES REGARDING FAIR VALUES
OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments 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,
the 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 the
estimated fair values.
The carrying amount of cash and cash equivalents, receivables and accounts
payable approximates fair value. The fair value of equity securities is based
on quoted market prices. The fair value of mortgage assets was estimated using
either (i) quoted market prices when available, including quotes made by lenders
in connection with designating collateral for repurchase arrangements, (ii)
offer prices by the Company for similar mortgage assets, or (iii) expected
securitization results. The fair value of collateralized mortgage securities is
dependent upon the characteristics of the mortgage securities collateral pledged
to secure the issuance. Therefore, fair value was based on the same method used
for determining fair value for the underlying mortgage securities collateral
adjusted for credit enhancements. The carrying amount of short term borrowings
approximates fair value. The following table summarizes fair values of
financial instruments (in thousands):
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------ ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 21,741 $ 21,741 $ 87,760 $ 87,760
Receivables and equity securities 50,558 51,545 19,044 19,044
Mortgage securities collateral 5,270,103 4,850,391 3,995,956 4,094,088
Mortgage investments 3,305,984 3,220,486 2,842,151 3,246,114
Liabilities:
Accounts payable 87,456 87,456 7,193 7,193
Collateralized mortgage securities 5,102,145 4,736,974 3,891,134 4,021,004
Short term borrowings 3,190,582 3,190,582 2,443,807 2,443,807
Off-balance sheet financial
instruments:
Forward sales agreements - 433 - (1,850)
Commitments to acquire mortgage loans - (14) - (890)
</TABLE>
12
<PAGE>
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as of January 1, 1994. In accordance with SFAS 115,
prior period financial statements have not been restated to reflect the change
in accounting principle. There was no cumulative effect as of January 1, 1994
of adopting SFAS 115 on net income. The opening balance of stockholders' equity
was increased by $7,512,000 to reflect net unrealized holding gains on
securities classified as available-for-sale that were previously carried at
amortized cost.
The following tables summarize available-for-sale and held-to-maturity
securities as of December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
Available-for-Sale Securities
-----------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Debt securities:
Mortgage Pass-Throughs:
Fixed-rate mortgage securities $ 427 $ - $ 18 $ 409
Medium-term mortgage securities (1) 9,054 - 9,054 -
Adjustable-rate mortgage securities 780,224 - 24,601 755,623
Adjustable-rate mortgage agency
securities 1,088,252 - 45,391 1,042,861
Other mortgage securities 10,369 1,734 810 11,293
---------- ----------- ---------- ----------
Total debt securities 1,888,326 1,734 79,874 1,810,186
Equity securities 1,113 - 375 738
---------- ----------- ---------- ----------
$1,889,439 $1,734 $ 80,249 $1,810,924
========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity Securities
-----------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Medium-term Mortgage Pass-Throughs (1) $ 459,874 $ - $ 12,342 $ 447,532
Agency securities:
Fixed-rate mortgage securities 504,023 - 62,586 441,437
Callable notes 333,687 - 9,690 323,997
Mortgage securities collateral (2) 5,258,810 7,159 61,700 5,204,269
---------- ----------- ---------- -----------
$6,556,394 $7,159 $146,318 $6,417,235
========== =========== ========== ===========
</TABLE>
- --------------
(1) The investment in medium-term Mortgage Pass-Throughs was transferred to the
held-to-maturity classification during the third quarter. As a result, the
unrealized loss at the transfer date remains as a component of the recorded
mark-to-market for available-for-sale securities at December 31, 1994,
which is being amortized over the remaining life of these investments.
(2) All mortgage securities collateral has been permanently financed through the
issuance of collateralized mortgage securities and, as a result, the
exposure to changes in the fair value of the underlying assets (and
liabilities) is limited. For this reason, the table above presents the fair
value of the projected net cash flows of the mortgage securities collateral
after payments on the related collateralized mortgage securities discounted
at market rates and prepayment assumptions.
The maturity of mortgage assets is directly affected by the rate of principal
prepayments by mortgagors and clean-up calls by issuers of remaining debt
securities outstanding. Included in mortgage securities collateral is $4,646,000
and $33,277,000 of collateral released from the related indentures at December
31, 1994 and 1993, respectively. During 1994, $77,087,000 of mortgage
securities collateral previously released from the related indentures pursuant
to clean-up calls was sold at gross realized gains aggregating $2,938,000.
During 1994 available-for-sale securities totaling $16,695,000 (cost basis) were
sold at gross realized gains aggregating $6,223,000.
13
<PAGE>
NOTE I - ALLOWANCE FOR POSSIBLE LOSSES
The Company has limited exposure to losses on mortgage loans. Losses due to
typical mortgagor default may be reduced by the acquisition of mortgage pool
insurance from AAA-rated mortgage pool insurers, which supplements primary
mortgage insurance, if any, and homeowner equity, if any. The amount of coverage
under mortgage pool insurance policies is the amount (typically 7 to 15 percent
of the aggregate amount in such pool of mortgage loans) determined by one or
more national statistical rating agencies necessary to allow the related
securities to be rated AAA when combined with homeowner equity or other
insurance coverage.
Certain other risks, however, are not covered by mortgage pool insurance and may
subject the Company to losses. These risks include fraud or misrepresentation
during origination of a mortgage loan and special hazards that are not covered
by standard hazard insurance policies (e.g., earthquakes). In cases of fraud,
the Company generally will not be able to recover its losses from the mortgage
insurance company, but will generally have recourse to the prior owner of a loan
based on representations and warranties made at the time the loan was purchased.
However, to the extent the prior owner does not perform its repurchase
obligation, the Company may incur a loss. Special hazards are typically
catastrophic events that are unable to be predicted. The Company limits its
exposure to special hazard losses by acquiring special hazard insurance coverage
from a AAA-rated insurer. As of December 31, 1994, 50 percent of the Company's
mortgage assets (excluding agency securities) were covered by a special hazard
insurance policy. Management does not believe that fraud or special hazard
risks pose a material exposure to the Company; however, underwriting guidelines,
correspondents selling mortgage loans to the Company, as well as the geographic
concentration of its mortgage assets are continually monitored for possible
changes in risk levels.
In late 1993 the Company began issuing CMOs in a senior/subordinate structure
(in lieu of purchasing mortgage pool insurance and special hazard insurance)
where the investor in the subordinate classes assumes credit and special hazard
risks. The Company has retained an aggregate of approximately $2.2 million of
credit and special hazard risk on certain of these issuances. Actual losses to
the Company due to this risk are dependent upon the timing and magnitude of
related collateral defaults. The Company does not currently anticipate a need to
increase its provision for possible losses for this risk.
Activity in the allowance for possible losses was as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1994 1993
------- -------
<S> <C> <C>
Beginning balance $ 6,927 $ 8,228
Provision for losses 3,500 2,800
Charge-offs due to:
Mortgagor default (572) (433)
Fraud/misrepresentation (2,294) (1,567)
Special hazard losses (207) (33)
Impairment of other mortgage
securities - (2,068)
------- --------
$ 7,354 $ 6,927
======= ========
</TABLE>
14
<PAGE>
As of December 31, 1994, approximately 49 percent of mortgage assets (excluding
agency securities) were secured by properties located in California. Exposure
arising from this geographic concentration is reduced by either the acquisition
of mortgage pool insurance and special hazard insurance or the use of the
senior/subordinate structure for securitizations.
NOTE J - ACQUISITION
On December 2, 1992 the Company acquired the net assets of Tyler Cabot Mortgage
Securities Fund, Inc. ("Tyler Cabot"), a diversified, closed-end management
investment company, in exchange for 29,429,815 shares of the Company's Series
B Preferred Stock. The acquisition has been accounted for as a purchase and,
accordingly, the assets and liabilities have been recorded based on their fair
value at the date of acquisition. The net income earned on the assets and
liabilities acquired have been included in the consolidated statement of income
from the date of the acquisition.
NOTE K - INCOME TAXES
Capstead and its qualified REIT subsidiaries file a separate federal income tax
return which 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. The Company's effective tax rate will, therefore, differ
substantially from statutory federal income tax rates as depicted in the
following reconciliation (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------
1994 1993 1992
---------- -------- ---------
<S> <C> <C> <C>
Net income at the statutory rate $ 29,097 $ 32,047 $ 18,085
Income not subject to income tax due to REIT status (27,289) (32,422) (17,700)
------- ------- ---------
Net income (loss) of non-REIT subsidiaries at the
statutory rate 1,808 (375) 385
Losses not benefited for income tax purposes - 375 -
Benefit of previously unrecognized deferred income
tax asset (1,261) - -
Other (547) - (385)
------- -------- --------
$ - $ - $ -
======= ======== ========
</TABLE>
Significant components of deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31
----------------
1994 1993
------- ------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $26,504 $260
Capital loss carryforwards 1,949 185
Securitization timing differences 370 230
------- ----
28,823 675
------- ----
Deferred tax liabilities:
Securitization timing differences 15,429 300
Other 2,185 -
------- ----
17,614 300
------- ----
Net deferred tax assets $11,209 $375
======= ====
Valuation allowance $11,209 $375
======= ====
</TABLE>
15
<PAGE>
The increase in net deferred tax assets during 1994 (before the valuation
allowance) is primarily the result of the transfer of the mortgage
servicing operation from Capstead to Capstead Inc. and the corresponding
reorganization of the non-REIT subsidiaries.
At December 31, 1994 the non-REIT subsidiaries had net operating loss
carryforwards for tax purposes of approximately $78 million, which expire
beginning in the year 2006. In addition to net operating loss carryforwards, the
non-REIT subsidiaries have capital loss carryforwards of approximately $6
million, which expire in 1996 .
NOTE L - STOCKHOLDERS' EQUITY
The Series A Preferred Stock issued in connection with a 1989 acquisition is
nonvoting. Each share is entitled to a cumulative fixed dividend at an annual
rate of $1.60 and is eligible for conversion into 9/10 of one share of common
stock. The Series A Preferred Stock has a liquidation preference of $16.40 per
share and is currently redeemable at the Company's option, in whole or in part,
at a redemption price equal to the liquidation preference. During 1994, 112,205
shares of the Series A Preferred Stock were converted into 100,983 shares of
common stock.
The Series B Preferred Stock issued in connection with the acquisition of Tyler
Cabot is nonvoting. Each share is entitled to a cumulative fixed dividend at an
annual rate of $1.26 and is eligible for conversion into 0.3196 of one share of
common stock. The Series B Preferred Stock has a liquidation preference of
$11.38 per share and is redeemable at the Company's option, in whole or in part,
at a redemption price of $12.50 after December 2, 1997. During 1994, 1,762
shares of the Series B Preferred Stock were converted into 563 shares of common
stock.
In February 1992 the Company received $61,643,000 in net proceeds from the
offering of 2,046,000 shares of common stock. Proceeds from the offering were
used to acquire mortgage assets. On July 31, 1992 the Company issued a six-year
option to Lomas Financial Corporation ("LFC"), an affiliate of the former
manager, for the purchase of 750,000 shares of common stock at a price of $32.63
per share. The option became 100 percent exercisable in 1994.
During 1994, 1993 and 1992, the Company issued 20,746, 10,362, and 17,408 shares
of common stock through its dividend reinvestment plan on which net proceeds of
$534,000, $395,000 and $526,000 were received, respectively. During 1994 and
1993 the Company also issued 481,384 and 381,473 shares of Series B Preferred
Stock through its dividend reinvestment plan for Series B stockholders on which
net proceeds were received of $5,254,000 and $4,662,000, respectively.
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 repurchase, at fair market value, any number of
shares of common stock and/or preferred stock sufficient to maintain or bring
such ownership into conformity with the Code and may refuse to transfer or issue
shares of common stock and/or preferred stock to any person whose acquisition
would result in Capstead being unable to comply with the requirements of the
Code. In addition, the
16
<PAGE>
Charter provides that the Company may redeem or refuse to transfer any shares of
capital stock 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 M - EMPLOYEE BENEFIT PLANS
The Company sponsors two stock option plans, the 1990 Directors' Stock Option
Plan (the "Directors' Plan") and the 1990 Employee Stock Option Plan. The
Company also sponsors the 1994 Flexible Long Term Incentive Plan, which provides
for the issuance of stock options and other incentive-based stock awards. These
plans provide for the issuance of up to 160,000, 240,000 and 1,250,000 shares,
respectively, of common stock. During 1994 the Company granted to employees
567,000 stock options pursuant to the 1994 Flexible Long Term Incentive Plan.
This grant, as well as options granted pursuant to the two stock option plans,
provide for the annual granting of dividend equivalent rights which permit the
option holder to obtain additional shares of common stock based upon formulas
set forth in the plans. Activity in the plans is summarized as follows:
<TABLE>
<CAPTION>
DIRECTORS' PLAN EMPLOYEE PLANS*
------------------------ ----------------------------
NUMBER NUMBER
OF PRICE OF PRICE
SHARES RANGE SHARES RANGE
------ --------------- ------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1992 35,000 $13.00 91,500 $13.00 - $25.50
Options granted 6,000 29.38 39,000 34.50
Options exercised (5,114) 13.00 (27,619) 13.00
Dividend equivalent rights earned 802 - 1,205 -
------ -------
Balance at December 31, 1992 36,688 13.00 - 29.38 104,086 13.00 - 34.50
Options granted 22,000 39.13 - 39.25 44,000 38.88
Options exercised (11,663) 13.00 - 29.38 (46,637) 13.00 - 34.50
Dividend equivalent rights earned 1,494 - 2,646 -
------- -------
Balance at December 31, 1993 48,519 13.00 - 39.25 104,095 13.00 - 38.88
Options granted 18,000 24.88 - 41.00 567,000 28.88
Options exercised (18,891) 13.00 - 39.25 (8,733) 13.00 - 25.50
Options canceled (25,418) 13.00 - 41.00 - -
Dividend equivalent rights earned 2,314 - 2,857 -
------- -------
Balance at December 31, 1994 24,524 $16.75 -$41.00 665,219 $13.00-$38.88
======= =======
</TABLE>
- --------------
* Includes stock options issued pursuant to the 1990 Employee Stock Option Plan
and the 1994 Flexible Long Term Incentive Plan (together, the "Employee
Plans").
As of December 31, 1994, options were exercisable for 287,219 shares. In
accordance with the terms of the plans, on January 1, 1995 the Company granted
dividend equivalent rights for the issuance of an additional 1,922 and 22,754
shares under the Directors' Plan and Employee Plans, respectively.
The Company also sponsors a qualified defined contribution retirement plan
created in late 1993 for all employees. The Company matches up to 50 percent of
a participant's voluntary contribution up to a maximum of 6 percent of a
participant's compensation. The Company also 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 expense
was $369,624 and $16,092 in 1994 and 1993, respectively.
17
<PAGE>
NOTE N - MANAGEMENT AND NON-COMPETITION AGREEMENTS
Since its inception in 1985 and through September 30, 1993, the Company operated
under a management agreement with a subsidiary (the "Manager") of Lomas Mortgage
USA, Inc. ("LMUSA"). The agreement provided that the Manager advise the Company
with respect to all facets of its business and administer its day-to-day
operations under the supervision of the Board of Directors. The Manager paid,
among other things, salaries and benefits of its personnel, accounting fees and
expenses, other office expenses and expenses incurred in supervising and
monitoring the Company's investments. During the period from inception through
July 31, 1992, the Manager received management and incentive fees based on
average invested assets and return on common stockholders' equity.
Effective August 1, 1992 the Company entered into a 65-month management
agreement with the Manager. Under the agreement, the management fee was limited
to an amount equal to the Manager's cost plus a fixed profit aggregating
$14,500,000 over the term of the agreement. Capstead also entered into a 65-
month non-competition agreement with LFC, the parent company of LMUSA, in return
for payments aggregating $7 million. In March, and again in September of 1993,
the Company negotiated amendments to these agreements to shorten their terms
and lower the required payments by $1,972,000. Consequently, on October 1, 1993
the Company became fully self-administered. Termination costs incurred in 1993
under the terms of the amended management agreement totaled $7,528,000. Also
included in 1993 management fees and termination costs is $4,363,000 of
unamortized amounts paid under the non-competition agreement.
NOTE O - SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides supplemental cash and noncash information (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1994 1993 1992
--------- -------- ---------
<S> <C> <C> <C>
Interest paid:
Short term borrowings $ 136,442 $ 81,722 $ 62,247
Collateralized mortgage securities 324,229 375,948 323,346
Noncash investing and financing activities:
Transfers from mortgage investments to
mortgage securities collateral 2,688,361 1,197,947 3,603,844
Charges to allowance for
possible losses 3,073 4,101 3,027
Acquisition of Tyler Cabot:
Net assets acquired - - 307,077
Net liabilities assumed - - 288
Preferred stock issued - - 315,025
</TABLE>
18
<PAGE>
NOTE P - NET INTEREST INCOME ANALYSIS (Unaudited)
The following tables summarize the amount of interest income and interest
expense and the average effective interest rate (dollars in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------------------- ------------------- -------------------
AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $354,603 7.63% $390,690 8.38% $383,060 9.32%
Mortgage investments 202,398 6.07 184,136 6.56 117,527 7.49
--------- --------- ---------
Total interest income 557,001 574,826 500,587
--------- --------- ---------
Interest expense:
Collateralized mortgage securities 335,656 7.49 410,153 9.05 353,356 8.80
Short term borrowings 139,092 4.64 80,923 3.40 62,077 4.43
--------- --------- ---------
Total interest expense 474,748 491,076 415,433
--------- --------- ---------
Net interest $ 82,253 $ 83,750 $ 85,154
========= ========= =========
</TABLE>
The following tables summarize the amount of change in interest income and
interest expense due to changes in interest rates versus changes in volume (in
thousands):
<TABLE>
<CAPTION>
1994/1993* 1993/1992*
---------------------------------- -------------------------------
Rate Volume Total Rate Volume Total
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Mortgage securities collateral $(34,775) $ (1,312) $ (36,087) $(40,878) $ 48,508 $ 7,630
Mortgage investments (14,544) 32,806 18,262 (16,008) 82,617 66,609
-------- ------- -------- -------- -------- -------
(49,319) 31,494 (17,825) (56,886) 131,125 74,239
-------- ------- -------- -------- -------- -------
Interest expense:
Collateralized mortgage securities (69,859) (4,638) (74,497) 10,057 46,740 56,797
Short term borrowings 33,440 24,729 58,169 (16,887) 35,733 18,846
-------- ------- -------- -------- -------- -------
(36,419) 20,091 (16,328) (6,830) 82,473 75,643
-------- ------- -------- -------- -------- -------
$(12,900) $11,403 $ (1,497) $(50,056) $ 48,652 $(1,404)
======== ======= ======== ======== ======== =======
</TABLE>
* 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.
19
<PAGE>
NOTE Q - QUARTERLY RESULTS (Unaudited)
The following is a summary of the quarterly results of operations (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31, 1994
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Interest income $125,734 $135,819 $144,891 $150,557
Interest and related expenses 102,666 118,227 131,208 139,623
Net margin on mortgage assets 23,068 17,592 13,683 10,934
Net margin on mortgage servicing
operations 1,182 4,315 6,494 9,028
Other revenues 3,060 1,724 6,140 3,254
Net income 23,469 20,030 22,267 19,813
Net income per share:
Primary 0.90 0.68 0.82 0.66
Fully diluted 0.88 0.67 0.81 0.65
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1993
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Interest income $149,566 $153,129 $149,683 $122,448
Interest and related expenses 127,756 130,861 125,466 129,877*
Net margin on mortgage assets 21,810 22,268 24,217 (7,429)
Net margin on mortgage servicing
operations - (168) (301) (587)
Other revenues 9,611 6,230 12,530 36,202
Net income 22,904 23,255 23,640 24,457
Net income per share:
Primary 0.88 0.90 0.92 0.97
Fully diluted 0.86 0.88 0.90 0.95
</TABLE>
- --------------
* Because of high prepayments on mortgage securities collateral during the
fourth quarter of 1993, the Company accelerated amortization of bond discount
on existing collateralized mortgage securities resulting in the recognition of
an additional $28 million in interest expense.
NOTE R - MARKET AND DIVIDEND INFORMATION (UNAUDITED)
The New York Stock Exchange trading symbol for the Company's common stock is
CMO. There were 2,825 holders of record of the Company's common stock at
December 31, 1994. In addition, depository companies held stock for 20,575
beneficial owners. During the last two years, the high and low stock sales
prices and dividends declared on common stock were:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 Year Ended December 31, 1993
--------------------------------- ------------------------------
Stock Prices Stock Prices
--------------------- Dividends ------------------ Dividends
High Low Declared High Low Declared
------- ------ ---------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
First quarter $42 1/8 $27 1/8 $0.83 $42 7/8 $36 1/2 $0.88
Second quarter 29 3/4 23 0.83 42 7/8 35 3/4 0.90
Third quarter 28 3/4 22 5/8 0.83 40 37 1/2 0.92
Fourth quarter 24 3/8 16 3/4 0.72 42 3/8 35 7/8 0.96
</TABLE>
20
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1994 1993 1992 1991 1990
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected consolidated statement
of income data:(1)
Interest income $557,001 $574,826 $500,587 $235,567 $179,702
Interest and related expenses 491,724 513,960 437,004 194,665 147,658
Net margin on mortgage
assets 65,277 60,866 63,583 40,902 32,044
Net margin on mortgage
servicing operations 21,019 (1,056) - - -
Other revenues 14,178 64,573 3,862 2,682 2,213
Net income 85,579 94,256 53,191 33,717 29,082
Net income per share:
Primary(2) 3.06 3.68 3.37 2.92 2.34
Fully diluted 3.01 3.57 3.23 2.46 2.14
Return on average total
stockholders' equity 13.27% 14.65% 16.08% 13.25% 11.50%
Cash dividends paid per share:
Common $ 3.21 $ 3.66 $ 3.26 $ 2.56 $ 2.27
Series A Preferred 1.60 1.60 1.60 1.60 1.60
Series B Preferred 1.26 1.26 0.10 - -
Average number of shares
outstanding:
Primary 15,278 15,146 14,394 8,964 8,700
Fully diluted 15,875 15,930 15,591 13,683 13,619
Selected consolidated balance
sheet data (at year-end):
Mortgage investments $3,305,984 $2,842,151 $1,904,600 $ 983,024 $ 257,537
Mortgage securities collateral 5,270,103 3,995,956 5,269,600 2,806,616 1,570,427
Total assets 8,943,858 6,980,324 7,229,608 3,824,546 1,829,376
Short term borrowings 3,190,582 2,443,807 1,449,209 855,572 108,248
Collateralized mortgage
securities 5,102,145 3,891,134 5,143,157 2,708,630 1,446,508
Stockholders' equity 563,675 638,190 631,499 253,339 251,023
Other data:
Mortgage loans acquired
during the year 1,944,507 4,393,273 5,483,602 2,171,362 279,724
Outstanding commitments
to acquire mortgage
investments (at year-end) 36,751 472,662 573,831 478,909 111,400
Mortgage servicing portfolio
(at year-end)(3) 14,392,182 2,393,267 - - -
</TABLE>
(1) On December 2, 1992 the Company acquired the common stock of Tyler Cabot
Mortgage Securities Fund, Inc. in exchange for 29,429,815 shares of the
Series B Preferred Stock. The acquisition has been accounted for as a
purchase and the net income earned on the assets and liabilities acquired
have been included in the Consolidated Statement of Income from the date of
the acquisition.
(2) During the years ended December 31, 1992 and 1991, 1,382,551 and 3,140,304
shares of the Series A Preferred Stock were converted into 1,244,261 and
2,826,256 shares of common stock, respectively. If these conversions had
occurred at the beginning of the respective years, primary net income per
share would have been $3.32 and $2.60 per share for the years ended December
31, 1992 and 1991, respectively.
(3) Excludes $5.1 billion of mortgage servicing rights acquired in 1994 that
will be transferred into the mortgage servicing portfolio by the end of the
first quarter of 1995.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
During the year ended December 31, 1994, the Company purchased 6,888 mortgage
loans totaling $1.9 billion compared to purchases of 14,089 mortgage loans
totaling $4.4 billion during 1993. Purchase and commitment volumes have fallen
significantly due to increases in mortgage interest rates and corresponding
declines in mortgage loan originations. Improvement in the overall United States
economy and resulting inflation fears have caused interest rates on 30-year
single-family jumbo mortgage loans to rise almost three percentage points during
1994. This increase in interest rates has had the effect of substantially
reducing single-family mortgage originations nationally by as much as 60 percent
from the fourth quarter of 1993.
The Company formed $909 million of AAA-rated private mortgage pass-through
securities ("Mortgage Pass-Throughs") during 1994, $460 million of which were
backed by adjustable-rate mortgage ("ARM") loans. In addition to reducing
exposure to fraud and credit risk, a primary benefit of pooling mortgage loans
into Mortgage Pass-Throughs is the improved liquidity of AAA-rated securities
over that of individual loans. As a result, when securing short term borrowings,
the Company is able to negotiate more favorable terms. In order to lower
interest rate risk on the Mortgage Pass-Through portfolio, the Company pledged
over $300 million of fixed-rate Mortgage Pass-Throughs as partial collateral for
the December 1994 issuance of approximately $351 million of collateralized
mortgage securities ("CMOs"). The Company plans to continue to retain a large
portfolio of primarily ARM Mortgage Pass-Throughs.
In order to expedite growth of the Company's ARM investments, early in 1994 the
Company acquired $1.1 billion of ARM agency securities. The Company also added
$334 million of 3-year, fixed-rate unsecured callable agency notes to its
existing portfolio of fixed rate agency securities.
During the year ended December 31, 1994, the Company issued nine CMOs totaling
$2.7 billion through special-purpose finance subsidiaries secured by fixed-rate
mortgage loans. The net investment in these financings at issuance totaled $122
million. CMO issuances in 1994 were negatively impacted by the general rise in
interest rates. During periods of rising interest rates, CMO issuances have
relatively high interest rates compared to the related collateral which was
committed for purchase when long term interest rates were lower (see "Effects of
Interest Rate Changes"). The CMO investment portfolio at December 31, 1994 was
approximately $168 million compared to a portfolio of approximately $105 million
at December 31, 1993. The December 31, 1994 portfolio includes $4.6 million of
collateral released from related indentures through redemption or pay off of the
related bonds compared to $33.3 million at December 31, 1993.
The mortgage servicing portfolio (excluding pending transfers) increased
substantially during the year to $14.4 billion with a weighted average interest
rate of only 7.16 percent and earning an
22
<PAGE>
average annual service fee excluding ancillary revenue and earnings on escrows
(the "Average Service Fee") of 29.59 basis points. The December 31, 1994 balance
of purchased mortgage servicing rights related to this portfolio was
approximately $189 million (132 basis points, or a 4.4 multiple of the Average
Service Fee). Portfolio run off, consisting of prepayments and scheduled
payments on mortgage loans serviced, was 7.22 percent for the year, due to the
low weighted average interest rate of the mortgage servicing portfolio compared
to prevailing mortgage interest rates. In addition, pending transfers as of
year-end totaled another $5.1 billion of mortgage servicing with a weighted
average interest rate of 7.30 percent and earning an Average Service Fee of 34.0
basis points. At an average cost of 182 basis points, these mortgage servicing
rights are being acquired at a 5.4 multiple of the Average Service Fee. Pending
transfers, together with normal jumbo servicing acquisitions, should allow the
Company to end the first quarter of 1995 with a mortgage servicing portfolio of
more than $19 billion. The Company currently plans to grow the mortgage
servicing portfolio to more than $25 billion by the end of 1995.
The following table summarizes the Company's utilization of capital as of
December 31, 1994 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
ASSETS BORROWINGS EMPLOYED
---------- ---------- --------
<S> <C> <C> <C>
Mortgage loan portfolio:
Fixed-rate mortgage loans $ 55,055 $ 46,537 $ 8,518
Medium-term mortgage loans 21,760 19,674 2,086
Adjustable-rate mortgage loans 132,692 123,849 8,843
Mortgage Pass-Through portfolio:
Fixed-rate mortgage securities 409 396 13
Medium-term mortgage securities 459,874 430,164 29,710
Adjustable-rate mortgage
securities 755,623 731,334 24,289
Agency securities portfolio:
Fixed-rate mortgage securities 504,023 439,635 64,388
Adjustable-rate mortgage
securities 1,042,861 1,016,148 26,713
Callable notes 333,687 328,213 5,474
CMO investment portfolio 5,270,103 5,146,777(1) 123,326
Purchased mortgage servicing
rights 282,969 85,888(2) 197,081
---------- ---------- --------
$8,859,056 $8,368,615 490,441
========== ==========
Other assets, net of other
liabilities 73,234
--------
Total stockholders' equity $563,675
========
</TABLE>
(1) Includes approximately $45 million of related short term borrowings.
(2) Includes approximately $76 million owed under contracts for bulk purchases
of mortgage servicing rights and $10 million drawn on a $120 million line of
credit secured by existing mortgage servicing rights.
As of December 31, 1994, the mortgage loan portfolio and commitments to acquire
mortgage loans ("Pipeline") approximated $243 million. Market value risk
associated with holding or acquiring these loans was reduced by entering into
forward sale agreements totaling $65 million for hedging purposes. In addition,
approximately $143 million was invested or committed for investment in ARM
loans, which are not generally as sensitive to changes in market value as are
fixed-rate investments. The remaining mortgage loan portfolio and Pipeline that
was subject to market value risk as of December 31, 1994 was approximately $30
million (adjusted for expected Pipeline fallout of 20 percent on -best efforts-
commitments).
23
<PAGE>
A significant impact of the rise in mortgage interest rates in 1994 has been a
corresponding decline in the value of most mortgage assets. As of December 31,
1994, the Company's $1.9 billion of mortgage assets held available-for-sale had
a $78.5 million net unrealized loss. This net unrealized loss has been reflected
as a separate component of stockholders' equity in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities," ("SFAS 115") which the Company adopted January 1,
1994. These losses will only be realized if the securities are sold. The Company
does not intend to sell these securities under current market conditions. In
time, as interest rates stabilize or decline, the Company believes these
unrealized losses will be recovered through improvement in the market values or
repayment of the underlying securities. Declines in value and ongoing market
value risk associated with the remaining mortgage assets will not have a direct
impact on earnings as these assets are classified as held-to-maturity and can
only be sold under very limited circumstances.
RESULTS OF OPERATIONS
Comparative net operating results (interest income or fee revenues, net of
interest and related expenses or direct operating costs) by source were as
follows (in thousands, except percentages and per share amounts):
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Mortgage loan portfolio $ 26,467 $ 49,368 $ 35,038
Mortgage Pass-Through portfolio 17,341 30,389 16,466
Agency securities portfolio 15,933 18,355 1,409
CMO investment portfolio 9,036 (34,446) 18,420
Mortgage servicing 21,019 (1,056) -
CMO administration 4,067 1,482 -
Gains from sales 9,161 61,216 2,910
Other income 950 1,875 952
-------- -------- --------
Contribution to income 103,974 127,183 75,195
Provision for possible losses (3,500) (2,800) (7,750)
General and administrative expenses (14,895) (30,127) (14,254)
-------- -------- --------
Net income $ 85,579 $ 94,256 $ 53,191
======== ======== ========
Net income per share:
Primary $ 3.06 $ 3.68 $ 3.37
Fully diluted 3.01 3.57 3.23
Return on average total stockholders'
equity 13.27% 14.65% 16.08%
</TABLE>
1994 Compared to 1993
Operating results in 1994 declined over nine percent from those achieved in 1993
primarily because of rising interest rates. Higher mortgage loan interest rates
have had the effect of substantially curtailing purchase and commitment volumes
and shifting the product mix from fixed-rate mortgage loans to relatively lower
rate ARM and medium-term mortgage products. During this period, steadily rising
yields on ARM mortgage investments have not kept pace with increases in
borrowing costs, and net interest spreads on the mortgage loan, Mortgage Pass-
Through and agency securities portfolios have declined markedly. On a more
positive note, the CMO investment portfolio and the mortgage servicing operation
have performed well in this environment.
24
<PAGE>
The mortgage loan portfolio contributed significantly less to current year net
operating results than in 1993 due to (i) a lower average mortgage loan
portfolio outstanding: $799 million in 1994 compared to $1.06 billion in 1993,
(ii) lower weighted average yields on mortgage loans: 6.68 percent in 1994
compared to 7.07 percent in 1993, (iii) higher average short term borrowing
costs: 4.50 percent in 1994 compared to 3.93 percent in 1993, and (iv) greater
use of leverage: the average ratio of short term borrowings to capital employed
increased to 2.8:1 in 1994 compared to 1.6:1 in 1993. Lower mortgage loan
purchase volume, particularly in the last three quarters of 1994, is the primary
reason for the decline in size of the mortgage loan portfolio. Average yields
have declined despite higher prevailing mortgage interest rates because of a
shift in the portfolio product mix from predominantly fixed-rate loans in 1993
to lower yielding ARM loans in 1994. Borrowing costs on the mortgage loan
portfolio have risen 238 basis points in 1994. The Company has increased the
leverage of this portfolio in order to employ more capital in the mortgage
servicing portfolio.
The Mortgage Pass-Through portfolio contributed less to net operating results in
1994 than in 1993 primarily due to higher borrowing costs offset by somewhat
higher yields. Borrowing costs for this portfolio rose 262 basis points during
1994, averaging 4.68 percent compared to an average of 3.46 percent in 1993.
Mortgage Pass-Through yields rose 39 basis points during 1994 and averaged 6.17
percent compared to an average of 6.07 percent in 1993. The increase in yields
during 1994 was due primarily to periodic rate adjustments on underlying ARM
loans (see "Effects of Interest Rate Changes") and the formation mid-year of
$310 million of fixed-rate Mortgage Pass-Throughs. The average portfolio
outstanding remained fairly constant at $1.27 billion in 1994 compared to $1.32
billion in 1993.
Despite a sizable increase in the average agency securities portfolio
outstanding to $1.27 billion in 1994 compared to $426 million in 1993, this
portfolio contributed less in 1994 to net operating results than in 1993 due to
lower average agency securities yields: 5.58 percent in 1994 compared to 6.80
percent in 1993, and higher average short term borrowing costs: 4.12 percent in
1994 compared to 2.43 percent in 1993. Lower average yields reflect the decision
in early 1994 to invest in ARM agency securities that have not yet reset to a
fully-indexed rate (i.e. "teaser-rate ARM securities"). These teaser-rate ARM
securities produced an average yield of 4.71 percent in 1994, four basis points
less than related borrowing costs. This reflects the recent period of rapidly
rising short term interest rates which increased borrowing costs more than
periodic rate adjustments on underlying ARM loans. Although yields on teaser-
rate ARM securities had improved to 5.12 percent by December of 1994, related
borrowing costs had increased to 5.77 percent (see "Effects of Interest Rate
Changes"). Additionally, 1994 borrowing rates in the dollar repurchase agreement
market have risen considerably over those experienced in 1993.
The CMO investment portfolio contributed more to net operating results in 1994
than in 1993 primarily due to the impact of the rise in mortgage interest rates
experienced in 1994 on current and expected future prepayments. In the first
quarter of 1994, prepayments began to slow considerably. As a result, estimates
of expected future prepayments were revised, which
25
<PAGE>
had the effect of lowering amortization of bond discounts and improving
operating results. During 1994 principal collections on mortgage securities
collateral totaled $1.4 billion compared to $2.4 billion in 1993.
Mortgage service revenues increased significantly during 1994 as a result of the
addition of mortgage servicing rights on $12.5 billion of mortgage loans for an
average servicing portfolio of $7.8 billion compared to the addition of $2.5
billion in 1993 for an average servicing portfolio of $864 million (operations
commenced March 1993). Direct operating costs for mortgage servicing operations
also increased, but not to the same extent as revenues, which is reflective of
efficiencies being gained in the servicing process as the servicing portfolio
continues to grow. Amortization of purchased mortgage servicing rights amounted
to $6.0 million during 1994, representing an annual rate of 6.2 percent of the
average mortgage servicing rights, compared to amortization of $1.3 million
during 1993, representing an annual rate of 15.1 percent of the average mortgage
servicing rights. The reduction in the amortization rate from 1993 to 1994 was
attributable to the decrease in mortgage refinancing activity during 1994 caused
by increased mortgage interest rates.
In 1994 the Company acquired 800,000 shares of the common stock of North
American Mortgage Corporation, a mortgage banking company, for $17.8 million.
Consolidation trends in the mortgage banking industry during 1994 allowed the
Company to realize gains aggregating $6.2 million from the sale of 750,000 of
these shares.
Due to rising interest rates in 1994, the Company has not sold mortgage assets
other than sales of mortgage securities collateral released from CMOs pursuant
to clean-up calls. In 1994, $77 million of released mortgage securities
collateral was sold for gains aggregating $2.9 million. During 1993, $3.9
billion of mortgage assets were sold for gains aggregating $61.2 million.
CMO administration revenues were higher in 1994 than in 1993 due to increased
master servicing of collateral placed into securitizations and administering of
related bonds or pass-through securities. The Company began master servicing
securitized collateral in February 1993 and receiving fees for administering
securitizations in October 1993.
The Company provided $3.5 million for possible losses during 1994 compared to
$2.8 million in 1993. The increase is primarily due to recent experience with
fraud/misrepresentation in the third-party origination of mortgage loans.
After excluding $16.2 million of non-competition and management agreement
expenses and termination costs incurred in 1993, salaries, general and
administrative expenses increased in 1994 primarily due to costs associated with
establishing the infrastructure necessary to take advantage of opportunities in
the mortgage banking industry.
1993 Compared to 1992
The Company's 1993 operating results were heavily influenced by the relatively
steady decline in long term interest rates throughout much of the year. The most
significant positive influence of the decline in long term rates on operating
results was on securitization
26
<PAGE>
activity. Gains from the securitization or sale of mortgage assets totaled $61.2
million in 1993 compared to $2.9 million in 1992. These gains more than offset
losses sustained by the CMO investment portfolio. The CMO investment portfolio
experienced a net loss of $34.5 million in 1993 compared to net income of $18.4
million in 1992 primarily because of high prepayments on the related collateral
also brought on by the decline in rates. Another important factor in producing
higher operating results in 1993 was the issuance of $315 million of Series B
Preferred Stock in December 1992, which doubled stockholders' equity and greatly
enhanced earnings potential. Throughout most of 1993 larger mortgage investment
portfolios were maintained as the Company sought to deploy this additional
capital. Lower short term borrowing rates further increased these portfolios'
contributions to net income.
The Company provided $2.8 million for possible losses during the year ended
December 31, 1993 compared to $7.8 million in 1992. A 20 percent reduction in
mortgage loan purchase volume from 1992 to 1993 along with more stringent
underwriting guidelines contributed to lower provision requirements.
Included in general and administrative expenses in 1993 were $11.9 million of
costs associated with terminating the Company's relationship with its former
manager. Effective October 1, 1993 the Company became fully self-administered.
Other increases in general and administrative expenses over 1992 were due
primarily to the formation of the mortgage servicing operation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds include monthly principal and interest
payments on mortgage loans and mortgage securities, short term borrowings,
excess cash flows on issued CMOs, proceeds from securitizations, servicing fees
and other revenue from its mortgage servicing portfolio, and equity offerings
when available. The Company currently believes that these funds are sufficient
for the acquisition of additional mortgage loans and other mortgage assets,
repayments on short term borrowings, growth of the mortgage servicing portfolio
and the payment of cash dividends as required for Capstead's continued
qualification as a Real Estate Investment Trust ("REIT"). It is the Company's
policy to remain strongly capitalized and conservatively leveraged.
The Company may, from time to time, sell a portion of its fixed-rate mortgage
loans and its investments in other mortgage assets classified as available-for-
sale. Such sales may be accomplished by issuing publicly-offered, multi-class
Mortgage Pass-Through certificates ("MPCs") and may increase quarterly income
volatility because of the recognition of transactional gains or losses. No such
sales were recorded in 1994 other than sales of collateral released from CMOs
pursuant to clean-up calls.
Short term borrowings are primarily made under repurchase arrangements. At
December 31, 1994 the Company had uncommitted repurchase facilities with
investment banking firms of approximately $5.5 billion to finance the mortgage
loan and Mortgage Pass-Through portfolios, subject to certain conditions.
Interest rates on borrowings under these facilities are based on overnight to
30-day London Interbank Offered Rate ("LIBOR") rates. The Company also
27
<PAGE>
enters into repurchase and dollar repurchase arrangements with investment
banking firms to whom the Company pledges agency securities and other mortgage
assets as collateral. The terms and conditions of these arrangements, including
interest rates, are negotiated on a transaction-by-transaction basis. Other
short term financing arrangements that the Company may use include entering into
repurchase transactions prior to the issuance of CMOs or MPCs whereby the
Company may pledge the mortgage assets that are expected to secure the issuance
as collateral for a repurchase transaction with the managing underwriter of the
related issuance.
At December 31, 1994 the Company had a $120 million committed line of credit
with an investment banking firm secured by purchased mortgage servicing rights.
Advances have separate maturities and rates of interest with interest due
monthly. Interest rates on advances under this facility are based on LIBOR
rates related to the term of the advance.
EFFECTS OF INTEREST RATE CHANGES
Changes in interest rates may impact the Company's earnings in various ways.
The Company's earnings depend, in part, on the difference between the interest
received on mortgage investments and the interest paid on related short term
borrowings (primarily repurchase arrangements). The resulting spread may be
reduced in a rising interest rate environment. For ARM loans the risk of rising
short term interest rates is offset to some extent by increases in the rates of
interest earned on these loans. Since ARM loans generally limit the amount of
such increase during any single interest rate adjustment period and over the
life of the loan, the interest rates on the repurchase arrangements can rise to
levels that may exceed the interest rates on the underlying ARM loans resulting
in a negative interest spread. This occurred in late 1994 on many of the
Company's ARM investments. The Company expects that once interest rates
stabilize or decline these spreads will recover. Rising interest rates may not
only reduce interest spreads, but also the volume of mortgage loan purchases
through our conduit operations as mortgage loan origination activity slows,
which may result in lower average mortgage loan portfolios outstanding during
these periods.
In addition, earnings are impacted if long term interest rates change during the
period after the Company has committed to purchase fixed-rate mortgage loans but
before these loans have been pledged to secure CMOs and MPCs or otherwise
committed for sale. If long term interest rates increase during this period, the
interest payable on the CMOs issued will increase while the yield on the
underlying mortgage loans pledged to collateralize the CMOs will not change; as
a consequence, the interest spread on the CMO will be lower. Conversely, if long
term interest rates decrease during this period, the interest payable on the CMO
issued will decrease, while the yield on the underlying mortgage loans pledged
to collateralize the CMO will not change; as a consequence, the interest spread
on the CMO will be higher. Similarly, proceeds received on the issuance of MPCs
and other sales, and related gains or losses, will be negatively impacted by an
increase in long term interest rates during this period due to the resulting
decline in market value of the related collateral. Conversely,
28
<PAGE>
these transactional gains or losses will be favorably impacted by a decrease in
long term interest rates during this period. The Company attempts to manage its
exposure to long term interest rate changes in part by pricing CMO and MPC
issuances prior to the purchase of, but subsequent to the commitment to
purchase, all of the mortgage loans that will collateralize the issuances and
may from time to time elect to enter into forward sale agreements for hedging
purposes. In 1995 the Company expects to hold mortgage loan acquisitions in its
mortgage portfolio for very brief periods, usually about a week, in an effort to
eliminate the market risk associated with aggregating and securitizing mortgage
loans.
Changes in interest rates also impact earnings recognized from the CMO
investment portfolio, which consists primarily of fixed-rate CMO residuals. The
amount of income that may be generated from the typical CMO residual is
dependent upon the rate of principal prepayments on the underlying collateral.
If mortgage interest rates fall significantly below the interest rate on the
collateral, principal prepayments will increase, reducing or even eliminating
the overall return on the investment in the CMO residual. This is due primarily
to the acceleration of the amortization of bond discounts, a noncash item, as
bond classes are repaid more rapidly than originally anticipated. During 1993
the Company experienced such a period of declining rates and high prepayments.
Another effect of changes in interest rates is that when interest rates
decrease, the rate of prepayment of mortgage loans generally increases. To
the extent the proceeds of prepayments on the mortgage investment portfolios
cannot be reinvested at a rate of interest at least equal to the rate previously
earned on such investments, earnings may be adversely affected. In addition,
the rates of interest earned on ARM loans generally will decline during periods
of falling interest rates.
The above discussion regarding how changes in interest rates impact investments
in mortgage assets also applies to the Company's growing investment in purchased
mortgage servicing rights. When interest rates rise, mortgage servicing rights
become more valuable since the average lives of the related mortgage loans will
tend to be longer and earnings from large, temporarily held cash balances will
be greater. Conversely, lower interest rates will spur prepayments thus
reducing the period of time the Company can service the related loans. Because
the Company began mortgage servicing in 1993, exposure to lower interest rates
is less than for other servicers that acquired servicing portfolios in previous
years when interest rates were substantially higher.
29
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF
CAPSTEAD MORTGAGE CORPORATION
<PAGE>
EXHIBIT 21
At December 31, 1994 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 ARM Securities Corporation....................... Delaware
Capstead Inc.(1)..................................... Delaware
CMC Securities Corporation II(2).................... Delaware
CMC Securities Corporation IV(2).................... Delaware
CMC Investment Partnership(3)........................ Texas
______________________
(1) CMC owns all of the issued and outstanding preferred stock.
(2) Capstead Inc. owns all of the issued and outstanding common stock.
(3) CMC Investment Partnership is a general partnership owned by CMC and
Capstead Inc.
<PAGE>
EXHIBIT 23
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Capstead Mortgage Corporation of our report dated January 23, 1995, included
in the 1994 Annual Report to Stockholders of Capstead Mortgage Corporation.
Our audit also included the financial statement schedules of Capstead Mortgage
Corporation listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-40116) pertaining to the 1990 Employee Stock Option Plan, the
Registration Statement (Form S-8 No. 33-40117) pertaining to the 1990 Directors'
Stock Option Plan, the Registration Statement (Form S-3 No. 33-62212) pertaining
to the Universal Shelf, the Registration Statement (Form S-3 No. 33-52415)
pertaining to the registration of 1,000,000 shares of common stock, the
Registration Statement (Form S-8 No. 33-53555) pertaining to the 1994 Flexible
Long Term Incentive Plan and in the related prospectuses of our report dated
January 23, 1995, with respect to the consolidated financial statements
incorporated herein by reference and our report included in the preceding
paragraph with respect to the financial statement schedules included in the
Annual Report (Form 10-K) of Capstead Mortgage Corporation.
ERNST & YOUNG LLP
Dallas, Texas
March 22, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Capstead Mortgage Corporation Annual Report on Form 10-K for the period ended
December 31, 1994 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
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<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
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<TOTAL-ASSETS> 8,943,858
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0
333,499
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