<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
_____ EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1996
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: 1-8996
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
The Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) for Form 10-Q and is therefore filing this Form under the reduced disclosure
format.
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
_____ _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock ($0.01 par value) 24,260,125 as of May 8, 1996
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<PAGE>
CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
PAGE
----
PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet - March 31, 1996 and December 31, 1995.. 3
Consolidated Statement of Income - Quarter Ended
March 31, 1996 and 1995........................................... 4
Consolidated Statement of Cash Flows - Quarter Ended
March 31, 1996 and 1995........................................... 5
Notes to Consolidated Financial Statements......................... 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 11
ITEM 4. Submission of Matters to a Vote of Security Holders......... 17
PART II. - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES.......................................................... 18
-2-
<PAGE>
PART I. - FINANCIAL INFORMATION
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Mortgage securities collateral $ 4,689,530 $4,830,020
Mortgage investments 4,967,373 4,522,954
----------- ----------
9,656,903 9,352,974
Cash and cash equivalents 17,822 18,702
Prepaids, receivables and other 118,287 108,570
Mortgage servicing rights 480,693 423,360
----------- ----------
$10,273,705 $9,903,606
=========== ==========
LIABILITIES
Collateralized mortgage securities $ 4,396,904 $4,538,863
Short-term borrowings 5,148,592 4,628,782
Accounts payable and accrued expenses 23,445 23,339
Mortgage servicing rights
acquisitions payable 57,831 47,898
----------- ----------
9,626,772 9,238,882
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock,
Series A, 531 and 550 shares
issued and outstanding ($8,708
aggregate liquidation preference) 7,419 7,685
$1.26 Cumulative Convertible
Preferred Stock, Series B, 30,749
and 30,686 shares issued and
outstanding ($349,924 aggregate
liquidation preference) 331,242 330,065
Common stock - $0.01 par value; 100,000
shares authorized; 24,105 and 23,521
shares issued and outstanding 241 235
Paid-in capital 331,433 321,207
Undistributed income (deficit) (2,268) (2,370)
Unrealized gain (loss) on debt securities (21,134) 7,902
----------- ----------
646,933 664,724
----------- ----------
$10,273,705 $9,903,606
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
------------------------
1996 1995
-------- --------
<S> <C> <C>
INTEREST INCOME:
Mortgage securities collateral $ 90,456 $ 98,352
Mortgage investments 75,595 53,747
-------- --------
Total interest income 166,051 152,099
-------- --------
INTEREST AND RELATED EXPENSES:
Collateralized mortgage securities 83,083 94,185
Short-term borrowings 65,212 48,214
Mortgage insurance and other 2,378 2,928
-------- --------
Total interest and related expenses 150,673 145,327
-------- --------
Net margin on mortgage assets 15,378 6,772
-------- --------
MORTGAGE SERVICING REVENUES:
Servicing fees 22,575 14,415
Other 5,396 2,775
-------- --------
Total mortgage servicing revenues 27,971 17,190
-------- --------
MORTGAGE SERVICING EXPENSES:
Direct servicing expenses 3,157 2,261
Indirect servicing expenses 1,473 575
Amortization of mortgage servicing rights 10,087 4,251
Interest 3,299 633
-------- --------
Total mortgage servicing expenses 18,016 7,720
-------- --------
Net margin on mortgage servicing operations 9,955 9,470
-------- --------
OTHER REVENUES:
Gain on sales and other 3,921 1,619
CMO administration 833 983
-------- --------
Total other revenues 4,754 2,602
-------- --------
OTHER OPERATING EXPENSES 3,259 3,478
-------- --------
NET INCOME $ 26,828 $ 15,366
======== ========
Net income $ 26,828 $ 15,366
Less cash dividends on preferred stock (9,890) (9,798)
-------- --------
Net income available to common stockholders $ 16,938 $ 5,568
======== ========
NET INCOME PER SHARE:
Primary $ 0.70 $0.24
Fully diluted 0.67 *
CASH DIVIDENDS PAID PER SHARE:
Common $ 0.70 $0.24
Series A Preferred 0.40 0.40
Series B Preferred 0.32 0.32
</TABLE>
* FULLY DILUTED EARNINGS PER SHARE IS NOT PRESENTED FOR THE QUARTER ENDED MARCH
31, 1995 BECAUSE THE EFFECT OF CONVERTING POTENTIALLY DILUTIVE SECURITIES WAS
ANTIDILUTIVE.
See accompanying notes to consolidated financial statements.
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<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 26,828 $ 15,366
Noncash items:
Amortization of discount and premium 10,389 2,355
Amortization of mortgage servicing rights 10,087 4,251
Depreciation and other amortization 1,271 616
Net change in prepaids, receivables, other assets,
accounts payable and accrued expenses (2,366) 6,085
Net gain from investing activities (4,036) (1,300)
--------- ---------
Net cash provided by operating activities 42,173 27,373
--------- ---------
INVESTING ACTIVITIES:
Mortgage securities collateral:
Principal collections on collateral 147,341 82,949
Decrease in accrued interest receivable 1,067 998
Increase in short-term investments (1,170) (8,415)
Purchases and originations of mortgage loans (9,731) (34,776)
Purchases of agency securities (936,309) (131,778)
Purchases of other mortgage securities (25,887) (75,365)
Purchases of mortgage servicing rights (68,078) (29,111)
Principal collections on mortgage investments 283,639 82,829
Proceeds from sales and redemptions of mortgage assets 203,447 100,937
Purchases of hedge instruments (7,536) -
--------- ---------
Net cash used by investing activities (413,217) (11,732)
--------- ---------
FINANCING ACTIVITIES:
Collateralized mortgage securities:
Principal payments on securities (144,252) (108,973)
Increase in accrued interest payable 256 1,072
Capital stock transactions 11,143 1,272
Dividends paid (26,726) (15,309)
Increase (decrease) in mortgage servicing
acquisitions payable 9,933 (48,048)
Increase in short-term borrowings 519,810 160,324
--------- ---------
Net cash provided (used) by financing activities 370,164 (9,662)
--------- ---------
Net increase (decrease) in cash and cash equivalents (880) 5,979
Cash and cash equivalents at beginning of period 18,702 21,741
--------- ---------
Cash and cash equivalents at end of period $ 17,822 $ 27,720
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1996. For further information refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995. Certain amounts for
prior periods have been reclassified to conform to the 1996 presentation.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122"), which the Company adopted January 1, 1996. SFAS 122 sets
forth new accounting principles for capitalizing mortgage servicing rights and
recording impairment of existing mortgage servicing rights. Because the Company
originates mortgage loans on only a small scale in its telephone origination
unit and the fair value of its mortgage servicing portfolio exceeded recorded
amounts for the periods presented, the adoption of SFAS 122 has had an
immaterial impact on the accounting results for the quarter ended March 31, 1996
and would not have had a material impact on previous periods. Therefore,
although the new accounting principles have been applied on a prospective basis
only as required by SFAS 122, the accounting results for the quarter ended March
31, 1996 are comparable to prior periods.
NOTE B - 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 QUARTER ENDED
MARCH 31 MARCH 31
---------------------- ----------------
1996 1995 1996 1995
---------- ---------- ------ --------
<S> <C> <C> <C> <C>
MORTGAGE LOANS $ 10,010 $ 13,784 8.72% 6.84%
AAA-RATED MORTGAGE PASS-
THROUGH SECURITIES:
Fixed-rate 1,357 1,914 10.47 8.58
Medium-term 366,912 467,562 7.08 6.97
Adjustable-rate 435,564 882,633 7.56 6.48
AGENCY SECURITIES:
Fixed-rate 471,527 503,011 6.37 6.35
Adjustable-rate 3,682,003 1,142,001 6.12 5.67
Callable notes - 366,544 7.05 6.90
---------- ---------- ----- ----
$4,967,373 $3,377,449 6.35% 6.33%
========== ========== ===== ====
</TABLE>
-6-
<PAGE>
The Company classifies its mortgage investments by term and interest rate
characteristics of the underlying mortgage loans. Fixed-rate mortgage
investments have (i) fixed rates of interest for their entire terms, or (ii) an
initial fixed rate period of 10 years after origination and then adjust annually
based on a specified margin over 1-year U.S. Treasury Securities ("1-year
Treasuries"). Medium-term mortgage investments have (i) an initial fixed-rate
period of 3 or 5 years after origination and then adjust annually based on a
specified margin over 1-year Treasuries or (ii) initial interest rates that
adjust one time, approximately 5 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 adjust (i) semiannually based on a
specified margin over the 6-month London Interbank Offered Rate ("LIBOR"), or
(ii) annually based on a specified margin over 1-year Treasuries. Fixed- 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, fixed-rate notes issued by FNMA,
FHLMC, or the Federal Home Loan Bank Board ("FHLBB") and mature in 1997, unless
redeemed earlier. Collectively, mortgage-backed securities and callable notes
issued by government-sponsored entities are referred to as "Agency Securities."
At March 31, 1996 the AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs") and the Agency Securities were pledged to secure
short-term borrowings.
NOTE C - NET INTEREST INCOME ANALYSIS
The following table summarizes interest income and interest expense and average
effective interest rates for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
---------------------------------------
1996 1995
------------------- ------------------
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
--------- -------- -------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage securities collateral $ 90,456 7.63% $ 98,352 7.57%
Mortgage investments 75,595 6.35 53,747 6.33
-------- --------
Total interest income 166,051 152,099
-------- --------
INTEREST EXPENSE:
Collateralized mortgage securities 83,083 7.52 94,185 7.57
Short-term borrowings 65,212 5.54 48,214 5.96
-------- --------
Total interest expense 148,295 142,399
-------- --------
Net interest $ 17,756 $ 9,700
======== ========
</TABLE>
-7-
<PAGE>
The following table summarizes changes in interest income and interest expense
due to changes in interest rates versus changes in volume for the quarter ended
March 31, 1996 compared to the same period in 1995 (in thousands):
<TABLE>
<CAPTION>
RATE* VOLUME* TOTAL
-------- --------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Mortgage securities collateral $ 787 $ (8,683) $ (7,896)
Mortgage investments 239 21,609 21,848
------- -------- --------
Total interest income 1,026 12,926 13,952
------- -------- --------
INTEREST EXPENSE:
Collateralized mortgage securities (557) (10,545) (11,102)
Short-term borrowings (3,595) 20,593 16,998
------- -------- --------
Total interest expense (4,152) 10,048 5,896
------- -------- --------
Net interest $ 5,178 $ 2,878 $ 8,056
======= ======== ========
</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.
NOTE D - DISCLOSURES REGARDING FAIR VALUES OF DEBT SECURITIES
The estimated fair values of debt securities were 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 following tables summarize fair value
disclosures for available-for-sale debt securities for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage Pass-Throughs:
Fixed-rate $ 1,320 $ 37 $ - $ 1,357
Medium-term 368,116 615 1,819 366,912
Adjustable-rate 429,899 5,665 - 435,564
Agency Securities:
Fixed-rate 496,560 - 25,033 471,527
Adjustable-rate 3,690,225 2,234 10,456 3,682,003
Mortgage securities collateral 344,568 7,941 318 352,191
---------- ------- ------- ----------
$5,330,688 $16,492 $37,626 $5,309,554
========== ======= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage Pass-Throughs:
Fixed-rate $ 1,723 $ 48 $ - $ 1,771
Medium-term 420,910 3,455 36 424,329
Adjustable-rate 555,944 7,259 - 563,203
Agency Securities:
Fixed-rate 497,785 - 8,096 489,689
Adjustable-rate 2,977,794 6,657 - 2,984,451
Callable notes 48,974` 118 - 49,092
Mortgage securities collateral 356,159 9,063 10,566 354,656
---------- ------- ------- ----------
$4,859,289 $26,600 $18,698 $4,867,191
========== ======= ======= ==========
</TABLE>
-8-
<PAGE>
The fair value of debt securities held available-for-sale was estimated using
quoted market prices when available, including quotes made by lenders in
connection with designating collateral for repurchase arrangements. Mortgage
securities collateral classified as held-to-maturity has been permanently
financed through the issuance of collateralized mortgage securities. Gross
unrealized gains and losses are based on projected net cash flows of the
mortgage securities collateral after payment on the related collateralized
mortgage securities determined using market discount rates and prepayment
assumptions; however, because the Company intends to hold these assets to
maturity, it does not anticipate realizing such gains or losses and instead
expects these assets will continue to make a positive contribution to income in
future periods. The following table summarizes fair value disclosures for
mortgage securities collateral held-to-maturity for the periods indicated (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of March 31, 1996 $4,337,339 $4,835 $58,917 $4,283,257
========== ====== ======= ==========
As of December 31, 1995 $4,475,364 $5,042 $60,920 $4,419,486
========== ====== ======= ==========
</TABLE>
During the quarter ended March 31, 1996, $115,498,000 and $24,756,000 of
Mortgage Pass-Throughs and interest-only securities included in mortgage
securities collateral held available-for-sale were sold at gross realized gains
of $989,000 and $2,962,000, respectively. Additionally, $48,977,000 of callable
agency notes were redeemed by the issuer. During the quarter ended March 31,
1995, $35,893,000 of mortgage securities collateral previously released from the
related indentures pursuant to clean-up calls was sold at gross realized gains
aggregating $966,000. No other sales of debt securities occurred during this
period in 1995. Net adjustments to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of stockholders'
equity were $(29,036,000) and $51,738,000 during the quarters ended March 31,
1996 and 1995, respectively.
NOTE E - MORTGAGE SERVICING
The following table provides information regarding the mortgage servicing
portfolio and the related investment in mortgage servicing rights (dollars in
thousands):
<TABLE>
<CAPTION>
UNPAID MORTGAGE
PRINCIPAL NUMBER SERVICING
BALANCE OF LOANS RIGHTS
------------ --------- ----------
<S> <C> <C> <C>
Loans serviced at December 31, 1995 $25,557,629 246,885 $369,600
Additions 3,003,522 30,043 53,192
Run-off/amortization (833,637) (5,877) (10,087)
----------- ------- --------
Loans serviced at March 31, 1996 27,727,514 271,051 412,705
Purchases pending transfer 4,820,252 52,968 67,988
----------- ------- --------
Total portfolio at March 31, 1996 $32,547,766 324,019 $480,693
=========== ======= ========
</TABLE>
SFAS 122 requires that mortgage servicing rights be evaluated for impairment on
a disaggregated basis by predominant risk characteristics. A valuation
allowance is established through a charge to income to the extent that the
recorded amount for servicing rights within an individual stratum exceeds fair
value. This valuation allowance may be adjusted in the future, again through a
charge or benefit to income, as the fair value of the servicing rights changes.
Fair values are established through use of a discounted cash flow valuation
model that incorporates assumptions the Company believes market
-9-
<PAGE>
participants would use in estimating the fair value of future net servicing
income including assumptions regarding prepayment speeds, discount rates,
servicing costs, etc. Results of the valuation model are compared to recent
market prices for bulk servicing acquisitions when available. For impairment
evaluation purposes, the Company stratifies its servicing portfolio on the basis
of term, interest rate and loan type (fixed-rate versus adjustable-rate).
Because the fair value of the mortgage servicing rights for each stratum of the
servicing portfolio exceeded recorded amounts at the adoption date and at March
31, 1996, no impairment charges or direct writedowns of mortgage servicing
rights were recorded.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
- -------------------
The Company's business plan is to build a mortgage banking operation with
investments in mortgage servicing and mortgage securities with the goal of
producing reasonably balanced results in a rising or falling interest rate
environment.
The Company formed its mortgage servicing operation in 1993, and through steady
growth (primarily through the bulk acquisition of servicing rights), it has
become one of the 25 largest mortgage servicers in the country. By the end of
May 1996, the mortgage servicing portfolio is expected to exceed $32 billion.
The mortgage servicing portfolio (excluding pending transfers) increased a net
$2.2 billion during the current quarter to $27.7 billion with a weighted average
interest rate of 7.39 percent earned an average annual service fee excluding
ancillary revenue earned on escrows (the "Average Service Fee") of 30.6 basis
points. The March 31, 1996 balance of mortgage servicing rights related to this
portfolio was $412.7 million (149 basis points, or a 4.87 multiple of the
Average Service Fee). An additional $4.8 billion of mortgage servicing that was
acquired during the quarter is pending transfer into the portfolio and is being
subserviced by the seller. This portfolio has a weighted average interest rate
of 7.31 percent earning an Average Service Fee of 27.0 basis points. At an
average cost of 141 basis points, this portfolio is being acquired at a 5.22
multiple.
Annualized portfolio run-off, consisting of prepayments and scheduled payments
on mortgage loans serviced, was 12.58 percent in the current quarter, up from
6.15 percent during the first quarter of 1995. The increase in prepayments
experienced in the current quarter was prompted by lower mortgage rates. Rising
interest rates since February 1996 are expected to significantly lower
prepayment rates during the second quarter. Derivative financial instruments,
specifically 10-year U.S. Treasury and 3-month London Interbank Offered Rate
("LIBOR") interest rate floors, are held from time to time as partial hedges
against prepayment risk (see "Effects of Interest Rate Changes"). Certain of
these hedge positions were closed out during 1995 at gains aggregating $17.8
million which were deferred, lowering the basis of the servicing rights hedged.
Open hedge positions with a $5.2 billion notional amount carried a $5.6 million
unrealized loss at March 31, 1996. In the second quarter of 1996, the Company
undesignated these derivatives as hedges and applied the unrealized loses at
that date to the basis of the servicing rights hedged. Subsequent changes in
value of these derivatives will be recorded in income as they occur.
The Company's mortgage investments increased $444.4 million to nearly $5.0
billion during the current quarter. The Company acquired $936.3 million of
adjustable-rate mortgage ("ARM") mortgage-backed securities issued by
government-sponsored entities, either the Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA") or the Government
National Mortgage Association ("GNMA") (collectively, "Agency Securities") and
sold $115.5 million of AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs"). In addition, $49.0 million of callable agency notes
were redeemed by the issuer. After considering sales and run-off of existing
portfolio, holdings of ARM securities increased $569.9 million during the
current quarter to $4.1 billion.
-11-
<PAGE>
Prior to 1995 the Company had been an active issuer of collateralized mortgage
obligations ("CMOs") and other securities backed by jumbo mortgage loans. The
Company generally retained residual interests in CMOs issued consisting
primarily of interest-only and principal-only strips. During 1995 and year-to-
date, the Company has not issued any CMOs but instead increased its CMO
investments by acquiring agency-issued, interest-only securities. Interest-only
securities have characteristics similar to investments in mortgage servicing in
that the mortgage loans underlying these securities are subject to prepayment
risk. During the current quarter, the Company acquired $25.9 million of agency-
issued, interest-only securities while selling other positions. After
considering sales, run-off and changes in market value, holdings of agency-
issued, interest-only securities increased $7.7 million during the current
quarter to $121.2 million, while total CMO investments (defined as CMO
collateral, net of related bonds, plus similar mortgage securities such as
interest-only strips) increased $1.5 million to $292.6 million.
Derivative financial instruments, specifically 10-year U.S. Treasury interest
rate floor agreements, are held from time to time as partial hedges against
prepayment risk on CMO investments (see "Effects of Interest Rate Changes").
Certain of these hedge positions were closed out during 1995 at gains
aggregating $5.0 million which were deferred, lowering the basis of the CMO
investments hedged. Open hedge positions, with a $2.0 billion notional amount,
carried a $1.0 million unrealized loss at March 31, 1996. In the second quarter
of 1996, the Company undesignated these derivatives as hedges and applied the
unrealized loses at that date to the basis of the CMO investments hedged.
Subsequent changes in value of these derivatives will be recorded in income as
they occur.
The following table summarizes the Company's utilization of capital as of March
31, 1996 (in thousands):
<TABLE>
<CAPTION>
CAPITAL
ASSETS BORROWINGS EMPLOYED
----------- ----------- ---------
<S> <C> <C> <C>
Mortgage loans $ 10,010 $ - $ 10,010
Mortgage Pass-Throughs:
Fixed-rate 1,357 1,704 (347)
Medium-term 366,912 357,068 9,844
Adjustable-rate 435,564 429,208 6,356
Agency Securities:
Fixed-rate 471,527 482,626 (11,099)
Adjustable-rate 3,682,003 3,603,192 78,811
CMO investments 4,689,530 4,573,698* 115,832
Mortgage servicing rights 480,693 155,831** 324,862
----------- ----------- --------
$10,137,596 $ 9,603,327 534,269
=========== ===========
Other assets, net of other liabilities 112,664
--------
Total stockholders' equity $646,933
========
</TABLE>
* INCLUDES $176.8 MILLION OF RELATED SHORT-TERM BORROWINGS.
** REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE
SERVICING RIGHTS AND $98.0 MILLION DRAWN ON A $300.0 MILLION LINE OF CREDIT
SECURED BY EXISTING SERVICING RIGHTS.
Rising interest rates in February and March 1996 and selected sales resulted in
a $29.0 million net decline in value of securities held available-for-sale
during the quarter. At December 31, 1995 securities held available-for-sale
were carried at a net unrealized gain of $7.9 million, which declined to a net
unrealized loss of $21.1 million at March 31, 1996. This unrealized loss will
be realized only if the securities are sold. The Company has the ability to
hold these securities for the foreseeable future and therefore does not expect
to realize losses on security sales.
-12-
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Comparative net operating results (interest income or fee revenues, net of
related interest expense or direct operating costs), by source, were as follows
(in thousands, except percentages and per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
------------------------
1996 1995
-------- --------
<S> <C> <C>
Mortgage loans $ 175 $ 715
Mortgage Pass-Throughs 2,656 1,525
Agency Securities 7,171 2,925
CMO investments 5,376 1,607
Mortgage servicing 9,955 9,470
CMO administration 833 983
Gain on sales and other 3,921 1,619
------- -------
Contribution to income 30,087 18,844
Other operating expenses 3,259 3,478
------- -------
Net income $26,828 $15,366
======= =======
Net income per share:
Primary $ 0.70 $ 0.24
Fully diluted 0.67 *
Return on average stockholders' equity 16.12% 9.54%
</TABLE>
* FULLY DILUTED EARNINGS PER SHARE IS NOT PRESENTED FOR THE QUARTER ENDED MARCH
31, 1995 BECAUSE THE EFFECT OF CONVERTING POTENTIALLY DILUTIVE SECURITIES WAS
ANTIDILUTIVE.
Operating results for the quarter ended March 31, 1996 improved substantially
over those achieved in the first quarter of 1995. Improved interest spreads on
mortgage investments, together with gains on sales of certain of these
securities, contributed to the significant improvement in net income. Record
quarterly net income of $26.8 million represents an increase of nearly 75
percent over the first quarter of 1995, while net income per common share
increased 192 percent. Return on average stockholders' equity increased 69
percent over returns achieved the first quarter of 1995.
The net interest spread earned from mortgage loans contributed significantly
less to current quarter operating results than in 1995 due to lower average
holdings of mortgage loans. This reflects the Company's efforts to reduce
market risk associated with aggregating and securitizing jumbo mortgage loans
culminating in the decision in November 1995 to exit the jumbo mortgage loan
conduit business. The Company now only warehouses, prior to sale, first and
second lien mortgage loans originated by its telephone origination unit.
Mortgage Pass-Throughs contributed more to current quarter operating results
compared to the same period in 1995 despite a lower average portfolio
outstanding primarily due to a 116 basis point increase in net interest spread
to 161 basis points. Yields for this portfolio averaged 7.35 percent during the
current quarter compared to 6.66 percent in the same period in 1995, while
average borrowing costs were lower at 5.74 percent during the current quarter
compared to 6.21 percent in the same period in 1995. The rise in yields is
primarily due to the periodic resetting of coupon rates on underlying ARM loans
(see "Effects of Interest Rate Changes"). Lower borrowing costs reflect lower
prevailing short-term interest rates. The average portfolio outstanding was
$869 million during the current quarter compared to nearly $1.3 billion during
the same period in 1995.
-13-
<PAGE>
Agency Securities contributed substantially more to current quarter operating
results compared to the same period in 1995 due to a sizable increase in average
portfolio outstanding and a 43 basis point increase in net interest spread to 69
basis points over the same period in 1995. Yields averaged 6.16 percent during
the current quarter compared to 6.07 percent in the same period in 1995, while
borrowing costs averaged 5.47 percent and 5.81 percent, respectively. The rise
in yields is due primarily to the periodic resetting of coupon rates on
underlying ARM loans and the acquisition of higher yielding ARM securities
offset somewhat by continued high prepayments that increased purchase premium
amortization (see "Effects of Interest Rate Changes"). Lower borrowing costs
reflect lower prevailing interest rates. The average Agency Securities
portfolio outstanding was $3.9 billion for the current quarter compared to $2.0
billion during the same period in 1995.
CMO investments contributed substantially more to current quarter net operating
results compared to the same period in 1995 due primarily to investments made
during 1995 and 1996 in agency-issued, interest-only securities (see above,
"Financial Condition").
Higher mortgage servicing results reflect continued growth in this operation.
Revenues increased to $28.0 million during the current quarter compared to $17.2
million during the same period in 1995. Operating costs also increased, but not
to the same extent as revenues, which reflects efficiencies gained in the
servicing process as the servicing portfolio continues to grow. Amortization of
mortgage servicing rights of $10.1 million during the current quarter was
significantly higher than the $4.3 million recorded in the same period in 1995
due to portfolio growth and higher levels of prepayments caused by lower
interest rates. Because the Company originates mortgage loans on only a small
scale in its telephone origination unit and the fair value of its mortgage
servicing portfolio exceeds recorded amounts by a large margin, the adoption of
SFAS 122 has had an immaterial impact on servicing results for the quarter ended
March 31, 1996 (see Notes A and E to the financial statements).
During the current quarter the Company sold $115.5 million and $24.8 million of
Mortgage Pass-Throughs and interest-only securities recognizing gains of $1.0
million and $3.0 million, respectively. This compares to sales of $99.6 million
of mortgage loans and securities for gains aggregating $1.3 million in the same
period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary sources of funds include monthly principal and interest
payments on mortgage investments, short-term borrowings, excess cash flows on
CMO investments, servicing fees and other revenue from mortgage servicing,
proceeds from sales of mortgage assets, and equity offerings, when available.
The Company currently believes that these funds are sufficient for growth of the
mortgage servicing portfolio, the acquisition of mortgage assets, repayments on
short-term borrowings 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.
Short-term borrowings are primarily made under repurchase arrangements. The
Company has uncommitted repurchase facilities with investment banking firms to
finance mortgage assets, subject to certain conditions. Interest rates on
borrowings under these facilities are based on overnight to 30-day LIBOR rates.
The terms and conditions of these arrangements, including interest rates, are
negotiated on a transaction-by-transaction basis.
-14-
<PAGE>
At March 31, 1996 the mortgage servicing operation had available $202 million of
a $300 million revolving line of credit agreement with an investment banking
firm that matures in October 1997, of which $120 million is committed. The line
is to be used primarily to finance acquisitions of mortgage servicing rights and
will be collateralized by those rights, as well as certain existing servicing
rights. The agreement requires, among other things, that the mortgage servicing
operation maintain certain financial ratios and specified levels of unencumbered
servicing rights, as defined. The mortgage servicing operation is in compliance
with all requirements. Interest rates on borrowings under this facility are
based on LIBOR with interest due monthly.
During the quarter ended March 31, 1996, the Company raised approximately $11.1
million through its stockholder dividend reinvestment and stock purchase plans,
modest open market sales of common stock and stock option exercises. The
Company anticipates continuing to raise equity through these channels as market
conditions allow.
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. The resulting spread may be reduced in a rising interest rate
environment. For most of the Company's mortgage investments, the risk of rising
short-term interest rates is offset to some extent by increases in the rates of
interest earned on underlying ARM 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, interest rates on borrowings can rise to levels that
may exceed the interest rates on the underlying ARM loans resulting in a
negative interest spread. The Company may from time to time invest in derivative
financial instruments, specifically interest rate cap agreements, as a hedge
against rising interest rates on a portion of its short-term borrowings.
Interest rate caps increase in value as interest rates rise and decline in value
when rates fall.
Another effect of changes in interest rates is that as interest rates decrease,
the rate of prepayment of mortgage loans underlying mortgage investments
generally increases. To the extent the proceeds of prepayments on mortgage
investments cannot be reinvested at a rate of interest at least equal to the
rate previously earned on such investments, earnings may be adversely affected.
Because prolonged periods of high prepayments can significantly reduce the
expected life of mortgage investments, the actual yields realized can be lower
due to faster amortization of purchase premiums. In addition, the rates of
interest earned on ARM investments generally will decline during periods of
falling interest rates as the underlying ARM loans reset at lower rates. The
Company may, from time to time, sell mortgage assets which may increase income
volatility because of the recognition of transactional gains or losses. Such
sales may become attractive as values of mortgage assets fluctuate with changes
in interest rates.
Changes in interest rates also impact earnings recognized from CMO investments,
which consist primarily of fixed-rate CMO residuals and interest-only and
principal-only securities. The amount of income that may be generated from the
typical CMO residual is dependent upon the rate of principal prepayments on the
underlying mortgage collateral. If mortgage interest rates fall significantly
below interest rates on the collateral, principal prepayments 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. Conversely, if mortgage interest rates rise
significantly above interest rates on the collateral, principal prepayments will
typically diminish, resulting in a greater overall return on an investment in a
fixed-rate CMO residual because
-15-
<PAGE>
of an increase in the period of time over which the Company receives the larger
positive interest spread.
Similarly, in a falling interest rate environment, prepayments on mortgage loans
underlying the Company's growing investment in interest-only securities
generally will be high and the Company could incur losses on these securities.
Conversely, in periods of rising interest rates, interest-only securities will
tend to perform favorably because underlying mortgage loans will generally
prepay at slower rates. Principal-only securities react differently to changes
in interest rates. Lower interest rates result in the recovery of these
investments more rapidly thus increasing yields. During periods of rising
rates, it takes longer for the Company to recover its investments thus lowering
yields. Principal-only securities owned by the Company represent a much smaller
investment than interest-only investments.
The above discussion regarding how changes in interest rates impact mortgage
assets also applies to the Company's investment in mortgage servicing rights.
When interest rates rise, mortgage servicing rights become more valuable since
the average lives of the related mortgage loans 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. Sustained periods of high prepayments
can result in losses on the Company's investment in mortgage servicing rights,
particularly now that the Company has adopted SFAS 122 and must evaluate its
investment in servicing rights for impairment on a disaggregated basis and
record impairment charges if the recorded amount for an individual servicing
stratum is more than its fair value.
The Company's business plan is to build a mortgage servicing operation with
investments in mortgage servicing and mortgage securities with the goal of
producing reasonably balanced results in a rising or falling interest rate
environment. The Company supplements its business plan from time to time with
derivative financial instruments, specifically interest rate floors, which may
be used to hedge certain assets, such as mortgage servicing rights or interest-
only strips or may be held for investment. Interest rate floors decrease in
value when interest rates rise and increase in value when rates decline. In
instances where floors are designated as hedges, any changes in value will
adjust the basis of the assets hedged. In instances where floors are held for
investment, changes in value will be recorded in income as they occur, which
could increase income volatility.
-16-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held April 19, 1996.
(b) The following directors were elected to Board of Directors (constituting
the entire Board of Directors):
Bevis Longstreth Harriet E. Miers
Paul M. Low William R. Smith
Ronn K. Lytle John C. Tolleson
(c) The following items were voted on at the annual meeting:
<TABLE>
<CAPTION>
VOTES
----------------------------------------------
WITHHELD/ BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
---------- --------- ----------- ---------
Election of Board Members:
<S> <C> <C> <C> <C>
Bevis Longstreth................ 21,173,513 - 134,792 -
Paul M. Low..................... 21,173,266 - 135,039 -
Ronn K. Lytle................... 21,181,008 - 127,297 -
Harriet E. Miers................ 21,176,347 - 131,958 -
William R. Smith................ 21,176,585 - 131,720 -
John C. Tolleson................ 21,175,851 - 132,454 -
Adoption of the Incentive
Bonus Plan...................... 19,178,922 933,723 293,261 902,399
Authorize an amendment to
the 1994 Flexible Long
Term Incentive Plan............. 10,121,489 4,031,200 354,662 6,800,954
Other matters (no other matters) 17,486,409 2,479,999 1,341,897 -
</TABLE>
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
The following Exhibits are presented herewith:
Exhibit 10.29 - Capstead Mortgage Corporation Incentive Bonus Plan.
Exhibit 10.30 - Amendment to the 1994 Flexible Long Term Incentive Plan.
Exhibit 11 - Computation of Earnings Per Share for the quarter ended March
31, 1996 and 1995.
Exhibit 27 - Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: None.
-------------------
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSTEAD MORTGAGE CORPORATION
Date: May 9, 1996 By /s/ RONN K. LYTLE
------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: May 9, 1996 By /s/ ANDREW F. JACOBS
------------------------------------
Andrew F. Jacobs
Senior Vice President - Control
and Treasurer
-18-
<PAGE>
EXHIBIT 10.29
CAPSTEAD MORTGAGE CORPORATION
INCENTIVE BONUS PLAN
1. PURPOSES.
The purposes of the Capstead Mortgage Corporation Incentive Bonus Plan (the
"Plan") are to attract and retain highly-qualified employees by providing
appropriate performance-based incentive awards and to align employee and
stockholder interests by creating a direct link between employee compensation
and the success of Capstead Mortgage Corporation. An additional purpose of the
Plan is to serve as a qualified performance-based compensation program under
Section 162(m) of the Internal Revenue Code of 1986, as amended, in order to
maximize the Capstead Mortgage Corporation's tax deduction for compensation paid
under the Plan to Covered Employees.
2. DEFINITIONS.
The following terms, as used herein, shall have the following meanings:
(a) "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.
(b) "Annual Base Salary" shall mean the annual rate of base salary of a
Participant in effect on the first day of the Plan Year, without regard to any
optional or mandatory deferral of base salary pursuant to a salary deferral
arrangement.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Bonus" shall mean any annual incentive bonus award granted pursuant
to the Plan; the payment of any such award shall be contingent upon the
attainment of Performance Goals with respect to a Plan Year.
(e) "Change in Control" shall mean the occurrence of an event described in
Section 5(e) hereof.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Compensation Committee of the Board.
(h) "Company" shall mean Capstead Mortgage Corporation, a Maryland
corporation.
(i) "Covered Employee" shall have the meaning set forth in Section 162(m)
of the Code (or any successor provision).
(j) "Participant" shall mean an employee of the Company or one of its
Affiliates who is eligible to participate herein pursuant to Section 3 of the
Plan and for whom a target Bonus is established with respect to the relevant
Plan Year.
(k) "Performance Goal(s)" shall mean the criteria and objectives which
must be met during the Plan Year as a condition of the Participant's receipt of
payment with respect to a Bonus, as described in Section 4 hereof.
<PAGE>
(l) "Plan" shall mean the Capstead Mortgage Corporation Incentive Bonus
Plan.
(m) "Plan Year" shall mean each fiscal year of the Company, commencing
with the Company's fiscal year beginning on January 1, 1996.
3. ELIGIBILITY.
Certain key employees of the Company and its Affiliates, as determined by
Committee, shall be eligible to participate in the Plan.
4. PERFORMANCE GOALS.
The Committee shall establish Performance Goals expressed in terms of the
achievement of any of one or more of the following performance measures:
earnings, earnings per share, earnings from operations, return on equity, return
on assets, the extent of increase of any one or more of the foregoing over a
specified period, or the Company's ranking against a peer group of companies
with respect to any one or more of the foregoing. To the extent applicable,
such Performance Goals shall be determined in accordance with generally accepted
accounting principles and reported upon by the Company's independent
accountants. Performance Goals shall include a threshold level of performance
below which no Bonus payment shall be made, and may include levels of
performance at which specified percentages of the target Bonus shall be paid and
a maximum level of performance above which no additional Bonus shall be paid.
The performance measure or measures and the Performance Goals established by the
Committee with respect thereto may be (but need not be) different each Plan Year
and different goals may be applicable to different Participants.
5. BONUSES.
(a) In General. For each Plan Year, the Committee shall specify the
Performance Goals applicable to each Participant for such Plan Year and the
amount of, or the formula for determining, the target Bonus for each Participant
with respect to such Plan Year. A Participant's target Bonus for each Plan Year
shall be expressed as a percentage of the Participant's Annual Base Salary.
Except as set forth in Section 5(e) hereof, payment of a Bonus for a particular
Plan Year shall be made only if and to the extent the Performance Goals with
respect to such Plan Year are attained and only if the Participant is employed
by the Company on the last day of the Plan Year. The actual amount of Bonus
payable under the Plan shall be determined as a percentage of the Participant's
target Bonus, which percentage shall vary depending upon the extent to which the
Performance Goals have been attained. The Committee may, in its discretion,
reduce or eliminate the amount payable to any Participant (including a Covered
Employee), in each case based upon such factors as the Committee may deem
relevant, but shall not increase the amount payable to any Covered Employee.
(b) Special Limitation on Certain Bonuses. Notwithstanding anything to
the contrary contained in this Section 5, the Bonus for each Covered Employee
under the Plan in any Plan Year may not exceed $2,000,000.
(c) Time of Payment. Unless otherwise determined by the Committee at the
time of grant, or except as provided herein, all payments in respect of Bonuses
granted under this Section 5 shall be made within a reasonable period after the
end of the Plan Year. In the case of Participants who are Covered Employees,
except as provided in Section 5(e) hereof, such payments shall be
-2-
<PAGE>
made only after achievement of the Performance Goals has been certified by the
Committee.
(d) Form of Payment. Payment of a Participant's Bonus for any Plan Year
shall be made in cash.
(e) Change in Control. Notwithstanding any other provision of the Plan to
the contrary, (i) if a "Change in Control" of the Company (as defined in this
Section 5(e)) shall occur following a Plan Year as to which the Committee has
determined the actual Bonuses to be paid (but such Bonuses have not yet been
paid), such Bonuses shall be paid immediately in cash, (ii) if a Change in
Control shall occur following a Plan Year as to which the Committee has not yet
determined the actual Bonuses to be paid, such Bonuses shall be immediately
determined and paid in cash, and (iii) if a Change in Control shall occur during
a Plan Year as to which target Bonuses have been established (but the actual
Bonuses to be paid have not yet been determined), such Plan Year shall be deemed
to have been completed, the target levels of performance set forth under the
respective Performance Goals shall be deemed to have been attained and a pro
rata portion of the Bonus so determined for each Participant for such partial
Plan Year (based on the number of full and partial months which have elapsed
with respect to such Plan Year) shall be paid immediately in cash to each
Participant for whom a target Bonus for such Plan Year was established.
For the purposes of this Section 5, a Change in Control of the Company
shall occur upon the first to occur of the following:
(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 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
-3-
<PAGE>
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.
6. ADMINISTRATION.
The Plan shall be administered by the Committee. The Committee shall have
the authority in its sole discretion, subject to and not inconsistent with the
express provisions of the Plan, to administer the Plan and to exercise all the
powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including without
limitation, the authority to grant Bonuses; to determine the persons to whom and
the time or times at which Bonuses shall be granted; to determine the terms,
conditions, restrictions and performance criteria relating to any Bonus; to make
adjustments in the Performance Goals in response to changes in applicable law,
regulations, or accounting principles, except as otherwise provided herein; to
reduce or eliminate compensation payable upon attainment of Performance Goals;
to construe and interpret the Plan and any Bonus; to prescribe, amend and
rescind rules and regulations relating to the Plan; and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
The Committee shall consist of two or more persons each of whom is an
"outside director" within the meaning of Section 162(m) of the Code. The
Committee may appoint a chairperson and a secretary and may make such rules and
regulations for the conduct of its business as it shall deem advisable, and
shall keep minutes of its meetings. All determinations of the Committee shall
be made by a majority of its members either present in person or participating
by conference telephone at a meeting or by unanimous written consent. The
Committee may delegate to one or more of its members or to one or more agents
such ministerial duties as it may deem advisable, and the Committee or any
person to whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the Committee or
such person may have under the Plan. All decisions, determinations and
interpretations of the Committee shall be final and binding on all persons,
including the Company, the Participant (or any person claiming any rights under
the Plan from or through any Participant) and any stockholder.
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any Bonus
granted hereunder.
7. GENERAL PROVISIONS.
(a) Compliance with Legal Requirements. The Plan and the granting of
Bonuses, and the other obligations of the Company under the Plan shall be
subject to all applicable federal and state laws, rules and regulations, and to
such approvals by any regulatory or governmental agency as may be required.
-4-
<PAGE>
(b) No Right To Continued Employment. Nothing in the Plan or in any Bonus
granted shall confer upon any Participant the right to continue in the employ of
the Company or an Affiliate or to be entitled to any remuneration or benefits
not set forth in the Plan or to interfere with or limit in any way the right of
the Company or an Affiliate to terminate such Participant's employment.
(c) Withholding Taxes. The Company or its Affiliate shall deduct from all
payments and distributions under the Plan any taxes required to be withheld by
federal, state or local governments.
(d) Amendment and Termination of the Plan. The Board may at any time and
from time to time alter, amend, suspend, or terminate the Plan in whole or in
part; provided, however, that no amendment which requires stockholder approval
in order for the Plan to continue to comply with Code Section 162(m) shall be
effective unless the same shall be approved by the requisite vote of the
stockholders of the Company. Additionally, the Committee may make such
amendments as it deems necessary to comply with other applicable laws, rules and
regulations. Notwithstanding the foregoing, no amendment shall affect adversely
any of the rights of any Participant, without such Participant's consent, under
any Bonus theretofore granted under the Plan.
(e) Participant Rights. No Participant shall have any claim to be granted
any Bonus under the Plan, and there is no obligation for uniformity of treatment
for Participants.
(f) Unfunded Status of Bonuses. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments which
at any time are not yet made to a Participant pursuant to a Bonus, nothing
contained in the Plan or any Bonus shall give any such Participant any rights
that are greater than those of a general unsecured creditor of the Company or an
Affiliate.
(g) Governing Law. The Plan and the rights of all persons claiming
hereunder shall be construed and determined in accordance with the laws of the
State of Maryland without giving effect to the choice of law principles thereof,
except to the extent that such law is preempted by federal law.
(h) Effective Date. The Plan shall take effect upon its adoption by the
Board, but the Plan (and any grants of Bonuses made prior to the stockholder
approval) shall be subject to the requisite approval of the stockholders of the
Company. In the absence of such approval, such Bonuses shall be null and void.
(i) Interpretation. The Plan is designed and intended to comply with
Section 162(m) of the Code, to the extent applicable, and all provisions hereof
shall be construed in a manner to so comply.
-5-
<PAGE>
EXHIBIT 10.30
AMENDMENT EFFECTIVE APRIL 19, 1996
TO 1994 FLEXIBLE LONG TERM INCENTIVE PLAN
TO (1) INCREASE THE NUMBER OF SHARES THAT MAY BE GRANTED
THEREUNDER AND (2) EXPAND THE ELIGIBILITY FOR AWARDS
----------------------------------------------------
The Capstead Mortgage Corporation 1994 Flexible Long Term Incentive Plan
(the "Plan") is amended in the following respects:
The Plan is amended to increase the number of shares issuable thereunder by
1,200,000; and
The Plan be amended by replacing the text of Section 5, Eligibility, in its
entirety with the following:
"Except with respect to Awards that are to be qualified under Section
422, Section 423 or other relevant Section of the Code ("Qualified
Awards"), eligibility for participation under the Plan shall be open to all
officers, employees and consultants of the Company and its Affiliates.
With respect to Qualified Awards, eligibility for participation in the Plan
shall be confined to employees of the Company and its Subsidiaries, as such
term is defined under Section 424 of the Code."
<PAGE>
EXHIBIT 11
CAPSTEAD MORTGAGE CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
----------------------------
1996 1995
--------- --------
PRIMARY:
<S> <C> <C>
Average number of common shares outstanding 23,833 22,956
Incremental shares calculated using the
Treasury Stock method 340 6
------- -------
24,173 22,962
======= =======
Net income $26,828 $15,366
Less cash dividends paid on convertible
preferred stock:
Series A paid ($0.40 paid per share) (214) (248)
Series B paid ($0.315 paid per share) (9,676) (9,550)
------- -------
Net income available to common stockholders $16,938 $ 5,568
======= =======
Primary net income per share $0.70 $0.24
======= =======
FULLY DILUTED:
Average number of common shares outstanding 23,833 22,956
Assumed conversion of convertible
preferred stock:
Series A 730 840
Series B 14,725 *
Incremental shares calculated using the
Treasury Stock method 480 6
------- -------
39,768 23,802
======= =======
Net income $26,828 $15,366
Less cash dividends paid on the Series B
Preferred Stock - (9,550)
------- -------
Net income $26,828 $ 5,816
======= =======
Fully diluted net income per share $0.67 **
</TABLE>
* THE SERIES B PREFERRED STOCK IS NOT CONSIDERED CONVERTIBLE FOR PURPOSES OF
CALCULATING FULLY DILUTED NET INCOME PER SHARE WAS ANTIDILUTIVE.
** FULLY DILUTED EARNINGS PER SHARE IS NOT PRESENTED FOR THE QUARTER ENDED
MARCH 31, 1995 BECAUSE THE EFFECT OF CONVERTING POTENTIALLY DILUTIVE
SECURITIES WAS ANTIDILUTIVE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSTEAD
MORTGAGE CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 17,822
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,273,705
<CURRENT-LIABILITIES> 5,229,868
<BONDS> 4,396,904
0
338,661
<COMMON> 241
<OTHER-SE> 308,031
<TOTAL-LIABILITY-AND-EQUITY> 10,273,705
<SALES> 0
<TOTAL-REVENUES> 198,776
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,653
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,295
<INCOME-PRETAX> 26,828
<INCOME-TAX> 0
<INCOME-CONTINUING> 26,828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,828
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0
</TABLE>
