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Rule 424(b)(2)
Registration Statement No. 333-26865
PROSPECTUS
CAPSTEAD MORTGAGE CORPORATION
3,840,550 SHARES
COMMON STOCK
(PAR VALUE $0.01)
1,870,200 SHARES
$1.26 CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
(PAR VALUE $0.10)
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Capstead Mortgage Corporation, a Maryland corporation (the "Company"),
directly or through agents, dealers or underwriters designated from time to
time, may issue and sell from time to time up to 3,840,550 shares of its
common stock, par value $0.01 per share ("Common Stock"), and up to 1,870,200
shares of its $1.26 Cumulative Convertible Preferred Stock, Series B, par
value $0.10 per share ("Series B Preferred Stock") (such Common Stock and
Series B Preferred Stock, collectively, the "Securities"). The Securities
offered pursuant to this Prospectus may be issued in amounts, at prices and on
terms to be determined at the time of the offering of such Securities.
The Company may sell all or a portion of the Securities through agents or to
or through underwriters or dealers, and is a party to certain Sales Agency
Agreements relating to the sale of Common Stock and Series B Preferred Stock.
See "Description of Sales Agency Agreements" and "Plan of Distribution."
The specific terms of sales of shares of Common Stock and Series B Preferred
Stock pursuant hereto will be set forth, from time to time, in a Prospectus
Supplement filed under the applicable paragraph of Rule 424(b) promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Such
Prospectus Supplements will set forth the number of shares of Common Stock and
Series B Preferred Stock sold, pricing information with respect to such sales,
if applicable, net proceeds to the Company and the amount of any compensation
payable by the Company to any sales agent(s) with respect thereto.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION AND NEITHER THE
COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1997.
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER,
AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED PURSUANT
TO THIS PROSPECTUS AND AN ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL UNDER ANY
CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION
CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THEREOF. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and proxy and information statements
filed by the Company with the Commission pursuant to the informational
requirements of the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following regional offices of
the Commission: Northeast Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048 and Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained from the Public Reference Section of the Commission at
its principal office in Washington, D.C., at prescribed rates or may be
examined without charge at such office of the Commission. The Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission at http://www.sec.gov. In addition, reports, proxy statements and
other information concerning the Company can be inspected and copied at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005-2601, on which outstanding shares of the Company's Common Stock,
Series A Preferred Stock and Series B Preferred Stock are listed.
The Company has filed with the Commission a registration statement on Form S-
3 (the "Registration Statement") under the Securities Act with respect to the
Securities offered hereby. For further information with respect to the Company
and the Securities offered hereby, reference is made to the Registration
Statement and exhibits thereto. Statements contained in this Prospectus as to
the contents of any contract or other documents are not necessarily complete,
and in each instance, reference is made to the copy of such contract or
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, heretofore filed by the Company with the Commission
pursuant to the Exchange Act, are hereby incorporated by reference, except as
superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
2
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2. The Company's Current Report on Form 8-K filed with the Commission on
March 26, 1997;
3. The Company's Quarterly Report on Form 10-Q filed with the Commission
on May 9, 1997 for the fiscal quarter ended March 31, 1997;
4. The Company's Quarterly Report on Form 10-Q filed with the Commission
on August 11, 1997 for the fiscal quarter ended June 30, 1997;
5. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A as filed with the Commission on May 14,
1985, and all amendments and reports filed for the purpose of updating that
description; and
6. The description of the Series B Preferred Stock contained in the
Company's Registration Statement on Form 8-A as filed with the Commission
on October 27, 1992, and all amendments and reports filed for the purpose
of updating that description.
Each document filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all Securities to which this Prospectus relates shall be
deemed to be incorporated by reference in this Prospectus and shall be part
hereof from the date of filing of such document.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement herein, in any
accompanying Prospectus Supplement relating to a specific offering of
Securities or in any other subsequently filed document that is also
incorporated or deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus or any accompanying Prospectus Supplement. Subject to the
foregoing, all information appearing in this Prospectus and each accompanying
Prospectus Supplement is qualified in its entirety by the information
appearing in the documents incorporated herein by reference.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and an accompanying
Prospectus Supplement is delivered, upon the written or oral request of any
such person, a copy of any document described above (other than exhibits).
Written requests for such copies should be directed to Capstead Mortgage
Corporation, 2711 North Haskell, Suite 900, Dallas, Texas 75204, Attention:
Investor Relations. The Company's telephone number is (214) 874-2323.
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THE COMPANY
The Company was incorporated on April 15, 1985 in the state of Maryland and
commenced operations in September 1985. The Company generates earnings from
investing in mortgage-backed securities, servicing mortgage loans and other
investment strategies. The Company's mortgage investment portfolio consists
primarily of adjustable-rate mortgage-backed securities issued by various
government-sponsored entities ("Agencies") and also includes investments in
AAA-rated private mortgage pass-through securities. The Company's
collateralized mortgage obligation ("CMO") collateral and investments includes
Agency-issued interest-only mortgage securities. Mortgage loan servicing
includes collection activities, accounting for principal and interest payments,
escrow administration and other responsibilities relating to the administration
of the mortgage loans. In exchange for providing this service, the Company
receives periodically a servicing fee representing an annualized percentage of
the outstanding principal balance of each such mortgage loan.
The Company, and its qualified real estate investment trust ("REIT")
subsidiaries, have elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended (the "Code"), and intend to continue to do so. As a
result of this election, the Company and such subsidiaries are not taxed at the
corporate level on taxable income distributed to stockholders, provided that
certain REIT qualification tests are met. Certain other affiliated entities
which are consolidated with the Company for financial reporting purposes, are
not consolidated for federal income tax purposes. All taxable income of these
affiliated entities are subject to federal and state income taxes, where
applicable.
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for any
offering of Securities, the net proceeds from the sale of Securities offered by
the Company will be available for the general corporate purposes of the
Company. These general corporate purposes may include, without limitation,
repayment of maturing obligations, redemption of outstanding indebtedness,
financing (in whole or part) future acquisitions (including acquisitions of
companies and/or assets and of mortgage securities, servicing rights and other
mortgage-related products), capital expenditures and working capital. Pending
any such uses, the Company may invest the net proceeds from the sale of any
Securities or may use them to reduce short-term indebtedness.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
The following table sets forth the historical ratios of earnings to combined
fixed charges and preferred stock dividends of the Company for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDING YEAR ENDING DECEMBER 31,
----------------- -----------------------------------
JUNE 30, 1997 1996 1995 1994 1993 1992(A)
----------------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends(b)........... 1.25:1 1.20:1 1.12:1 1.17:1 1.18:1 1.13:1
</TABLE>
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(a) This financial information reflects the effects of a merger between the
Company and Tyler Cabot Mortgage Securities Fund, subsequent to the
merger's consummation in December 1992.
(b) Includes fixed charges related to CMO's issued by the Company's finance
subsidiaries. Excluding interest expense on CMO debt, the ratio of earnings
to combined fixed charges and preferred stock dividends would have been
1.45:1, 1.40:1, 1.29:1, 1.48:1, 1.79:1 and 1.80:1, respectively, for the
periods indicated.
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DESCRIPTION OF SALES AGENCY AGREEMENTS
The Company may sell Common Stock and Series B Preferred Stock (1) through
arrangements with underwriters or dealers, (2) directly to one or more
purchasers, or (3) through agents. The Company has entered into separate sales
agreements with each of PaineWebber Incorporated ("PaineWebber") and Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") with respect to
sales of Common Stock and Series B Preferred Stock, and may, in the future,
enter into other sales agreements with other sales agents or underwriters.
PAINEWEBBER AGREEMENTS
With respect to the sale of Common Stock, the Company is a party to a Sales
Agency Agreement between the Company and PaineWebber dated as of December 6,
1995, as amended by Amendment No. 1 to Sales Agency Agreement dated as of
September 10, 1996 and Second Amendment to Sales Agency Agreement dated as of
March 4, 1997 (as amended, the "PaineWebber Common Agreement"). With respect
to the sale of Series B Preferred Stock, the Company is a party to a Sales
Agency Agreement between the Company and PaineWebber dated as of September 17,
1996, as amended by First Amendment to Sales Agency Agreement dated as of
March 4, 1997 (as amended, the "PaineWebber Preferred Agreement," and together
with the PaineWebber Common Agreement, the "PaineWebber Agreements").
Pursuant to the terms of the PaineWebber Common Agreement, the Company may
issue and sell up to 5,625,000 shares of the Common Stock from time to time
through PaineWebber, as sales agent for the Company; 4,214,450 of such shares
have been sold as of July 30, 1997, with up to all of the remaining 1,410,550
shares being offered under the Registration Statement of which this Prospectus
forms a part. Pursuant to the terms of the PaineWebber Preferred Agreement,
the Company may issue and sell up to 4,500,000 shares of the Company's Series
B Preferred Stock from time to time through PaineWebber, as sales agent for
the Company; 704,100 of such shares have been sold as of July 30, 1997, with
up to 1,870,200 of the remaining 3,795,900 shares being offered under the
Registration Statement of which this Prospectus forms a part. Such sales, if
any, will be made by means of ordinary brokers' transactions on the NYSE.
Sales pursuant to the PaineWebber Agreements will be effected during a series
of one or more pricing periods (each, a "Pricing Period"), each consisting of
five consecutive calendar days, unless a shorter period has otherwise been
agreed to by the Company and PaineWebber. During any Pricing Period, no more
than 60,000 shares of the Common Stock and no more than 30,000 shares of the
Series B Preferred Stock will be sold, in the manner described below, as
"Average Market Price Shares". If the Company fails to meet the exemptive
provisions set forth in Rule 101(c)(1) of Regulation M of the Exchange Act,
the number of Average Market Price Shares and Additional Shares (as defined
below) sold on any day in any Pricing Period, plus the number of shares sold
pursuant to the Merrill Lynch Agreement (described below) and any other sales
agreements on such day, shall not exceed 10% of the average daily trading
volume of the Common Stock or Series B Preferred Stock as the case may be, for
the 60 days prior to such Pricing Period. For each Pricing Period, an Average
Market Price (as hereinafter defined) will be computed. With respect to any
Pricing Period, "Average Market Price" shall equal the average of the
arithmetic mean of the high and low sales prices of the Common Stock or the
Series B Preferred Stock as the case may be, reported on the NYSE for each
trading day of such Pricing Period.
The net proceeds to the Company with respect to sales of Average Market
Price Shares will equal a fixed percentage, as will be set forth in the
applicable Prospectus Supplement, of the Average Market Price for each share
of Common Stock or Series B Preferred Stock sold during a Pricing Period, plus
Excess Proceeds (as defined below), if any. The compensation to PaineWebber
for such sales in any Pricing Period will equal the difference between the
aggregate gross sales prices at which such sales are actually effected and the
net proceeds to the Company for such sales, but in no case will exceed the
maximum amount permitted pursuant to any applicable requirements of the
National Association of Securities Dealers, Inc., as determined in good faith
by PaineWebber (the "Maximum Commission"). To the extent that such aggregate
gross sales prices are less than the Average Market Price, the compensation to
PaineWebber will be correspondingly reduced; to the extent that such aggregate
gross sales prices are greater than the Average Market Price, the compensation
to PaineWebber
5
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will be correspondingly increased. To the extent that PaineWebber's
compensation under the foregoing formula would otherwise exceed the Maximum
Commission, the excess will constitute additional net proceeds to the Company
(the "Excess Proceeds").
Any shares of Common Stock or Series B Preferred Stock sold by PaineWebber
during the Pricing Period on behalf of the Company other than Average Market
Price Shares ("Additional Shares") will be at a fixed commission rate equal to
a fixed percentage of the share price per share for the number of Additional
Shares sold in a Pricing Period, as will be set forth in the applicable
Prospectus Supplement. Unless otherwise indicated in a further Prospectus
Supplement, PaineWebber as sales agent will act on a best efforts basis.
Settlements of sales of Additional Shares and Average Market Price Shares
will occur on the third business day following the date on which any such sales
are made. Purchases of Common Stock or Series B Preferred Stock from
PaineWebber as sales agent for the Company will settle the regular way on the
national securities exchange where such purchases were executed. Compensation
to PaineWebber with respect to sales of Average Market Price Shares will be
paid out of the proceeds of the Average Market Price Shares that settle the
third business day following the last day of a Pricing Period. There is no
arrangement for funds to be received in an escrow, trust or similar
arrangement.
The offering of Common Stock pursuant to the PaineWebber Common Agreement
will terminate upon the earlier of (i) the sale of all shares of Common Stock
subject thereto or (ii) termination of the PaineWebber Common Agreement.
PaineWebber has the right to terminate the PaineWebber Common Agreement if the
Company engages another agent to sell shares under a program substantially
similar to the program covered by the PaineWebber Common Agreement, or in
certain other circumstances specified therein. PaineWebber has consented to the
sale of shares pursuant to the Merrill Lynch Agreement discussed below.
The offering of Series B Preferred Stock pursuant to the PaineWebber
Preferred Agreement will terminate upon the earlier of (i) the sale of all
shares of Series B Preferred Stock subject thereto or (ii) termination of the
PaineWebber Preferred Agreement. The PaineWebber Preferred Agreement may be
terminated by the Company in its sole discretion on September 17, 1997 and may
be terminated by PaineWebber after September 17, 1997 and in certain other
circumstances specified therein.
MERRILL LYNCH AGREEMENT
The Company will enter into a Sales Agency Agreement between the Company and
Merrill Lynch in connection with the sale of both Common Stock and Series B
Preferred Stock (the "Merrill Lynch Agreement"). Offerings of Common Stock and
Series B Preferred Stock pursuant to the Merrill Lynch Agreement may occur
concurrently with offerings under the PaineWebber Agreements.
Pursuant to the terms of the Merrill Lynch Agreement, the Company initially
may issue and sell up to 5,000,000 shares of Common Stock and up to 2,000,000
shares of Series B Preferred Stock from time to time through Merrill Lynch, as
sales agent for the Company. Such amounts may be changed from time to time by
mutual agreement of the Company and Merrill Lynch. As of the date of this
Prospectus, no shares have been sold under the Merrill Lynch Agreement, and the
Company anticipates that sales thereunder will begin as soon as practicable and
mutually agreed to by the Company and Merrill Lynch. Sales pursuant to the
Merrill Lynch Agreement may be effected on a daily basis. If the Company fails
to meet the exemptive provisions set forth in Rule 101(c)(1) of Regulation M of
the Exchange Act, with respect to the Common Stock or the Series B Preferred
Stock, the number of shares of Common Stock or Series B Preferred Stock,
respectively, that may be sold on any day, including shares sold pursuant to
the PaineWebber Agreements and any other sales agreements on such day, shall
not exceed 10% of the average daily trading volume of the Common Stock or the
Series B Preferred Stock, as the case may be, for the 60 days prior to such
date. The Merrill Lynch Agreement does not incorporate the concept of Pricing
Periods or Average Market Price Shares present in the PaineWebber Agreements,
but (except as set forth below) is substantially the same in other material
respects.
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The compensation to Merrill Lynch for sales of Common Stock and Series B
Preferred Stock will equal a fixed percentage of the gross sales price of any
shares sold, in the form of a commission, as will be set forth in the
applicable Prospectus Supplement. The remaining sales proceeds, after
deducting any transaction fees imposed by any governmental or self-regulatory
organization in respect of such sales, shall constitute the net proceeds to
the Company for the sale of such shares. Unless otherwise indicated in a
further Prospectus Supplement, Merrill Lynch as sales agent will act on a
reasonable efforts basis.
The offering of Common Stock and Series B Preferred Stock pursuant to the
Merrill Lynch Agreement will terminate upon the earlier of (i) the sale of all
shares of Common Stock and Series B Preferred Stock subject thereto or (ii)
termination of the Merrill Lynch Agreement. The Merrill Lynch Agreement may be
terminated by the Company in its sole discretion on or after the first
anniversary of the Merrill Lynch Agreement (the "First Anniversary Date"), and
may be terminated by Merrill Lynch after the First Anniversary Date and in
certain other circumstances specified therein.
DESCRIPTION OF SECURITIES
GENERAL
The Company may offer under this Prospectus up to 3,840,550 shares of its
Common Stock and up to 1,870,200 shares of its Series B Preferred Stock. The
terms of any specific offering of Securities will be set forth in a Prospectus
Supplement relating to such offering.
The authorized capital stock of the Company currently consists of
100,000,000 shares of Common Stock, par value $0.01 per share, and 100,000,000
shares of Preferred Stock, par value $0.10 per share. As of July 30, 1997 the
Company had 52,245,515 shares of its Common Stock, 425,709 shares of its $1.60
Cumulative Preferred Stock, Series A ("Series A Preferred Stock") and
19,823,122 shares of its Series B Preferred Stock issued and outstanding. The
Common Stock, Series A Preferred Stock and Series B Preferred Stock are listed
on the New York Stock Exchange. The Company intends to list any additional
shares of its Common Stock which are issued and sold hereunder.
REDEMPTION OR REPURCHASE OF CAPITAL STOCK TO MAINTAIN THE COMPANY'S STATUS AS
A REIT
The Company's charter provides that if the Board of Directors determines in
good faith that the direct or indirect ownership of stock of the Company has
or may become concentrated to an extent which would cause the Company to fail
to qualify or be qualified as a REIT under Sections 856(a)(5) or (6) of the
Internal Revenue Code of 1986, as amended (the "Code"), or similar provisions
of successor statutes, the Company may redeem or repurchase 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 the Company being unable to conform with the
requirements of the Code. In general, Code Sections 856(a)(5) and (6) provide
that, as a REIT, the Company must have at least 100 beneficial owners for 335
days of each taxable year and that the Company cannot qualify as a REIT if, at
any time during the last half of the Company's taxable year, more than 50% in
value of its outstanding stock is owned, directly or indirectly, by or for not
more than five individuals. In addition, the charter provides that the Company
may redeem or refuse to transfer any shares of capital stock of the Company
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. The redemption or purchase price for any such shares
shall be equal to the fair market value of such shares as reflected in the
closing sales price for the shares if then listed on a national securities
exchange, or the average of the closing sales prices for the shares if then
listed on more than one national securities exchange, or if the shares are not
then listed on a national securities exchange, the latest bid quotation for
the shares if then traded over-the-counter on the last business day for which
closing prices are available immediately preceding the day on which notices of
such acquisitions are sent or, if no such closing sales prices or quotations
are available, then the net asset value of such stock as determined by the
Board of Directors in accordance with the provisions of applicable law.
7
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SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
Business Combination Statute. The Maryland General Corporation Law
establishes special requirements with respect to "business combinations"
between Maryland corporations and "interested stockholders" unless exemptions
are applicable. Among other things, the law prohibits for a period of five
years a merger and other specified or similar transactions between a Maryland
corporation and an interested stockholder and requires a super-majority vote
for such transactions after the end of such five-year period.
"Interested stockholders" are all persons owning beneficially, directly or
indirectly, 10% or more of the outstanding voting stock of a Maryland
corporation after the date on which the corporation had 100 or more beneficial
owners of its stock, or is an affiliate or associate of the corporation and was
the beneficial owner, directly or indirectly, of 10% or more of the voting
power of the then outstanding stock of the corporation at any time within the
two-year period immediately prior to the date in question and after the date on
which the corporation had 100 or more beneficial owners. "Business
combinations" include any merger or similar transaction subject to a statutory
vote and additional transactions involving transfers of assets or securities in
specified amounts (other than in the ordinary course of business or pursuant to
a dividend or any other method affording substantially proportionate treatment
to the holders of voting stock) to interested stockholders or their affiliates.
Unless an exemption is available, transactions of these types may not be
consummated between a Maryland corporation and an interested stockholder or its
affiliates for a period of five years after the date on which the stockholder
first became an interested stockholder and thereafter may not be consummated
unless recommended by the board of directors of the Maryland corporation and
approved by the affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and 66 2/3% of the
votes entitled to be cast by all holders of outstanding shares of voting stock
other than the interested stockholder. A business combination with an
interested stockholder which is approved by the board of directors of a
Maryland corporation at any time before an interested stockholder first becomes
an interested stockholder is not subject to the 5-year moratorium or the
special voting requirements. An amendment to a Maryland corporation's charter
electing not to be subject to the foregoing requirements must be approved by
the affirmative vote of at least 80% of the votes entitled to be cast by all
holders of outstanding shares of voting stock and 66 2/3% of the votes entitled
to be cast by holders of outstanding shares of voting stock who are not
interested stockholders. Any such amendment is not effective until 18 months
after the vote of stockholders and does not apply to any business combination
of a corporation with a stockholder who was an interested stockholder on the
date of the stockholder vote. The Company has not adopted any such amendment to
its charter.
Control Share Acquisition Statute. The Maryland General Corporation Law
imposes limitations on the voting rights of shares acquired in a "control
shares acquisition." The Maryland statute defines a "control share acquisition"
at the 20%, 33 1/3% and 50% acquisition levels, and requires a two-thirds
stockholder vote (excluding shares owned by the acquiring person and certain
members of management) to accord voting rights to stock acquired in a control
share acquisition. The statute also requires Maryland corporations to hold a
special meeting at the request of an actual or proposed control share acquiror
generally within 50 days after a request is made with the submission of an
"acquiring person statement," but only if the acquiring person (a) posts a bond
for the cost of the meeting and (b) submits a definitive financing agreement to
the extent that financing is not provided by the acquiring person. In addition,
unless the charter or bylaws provide otherwise, the statute gives the Maryland
corporation, within certain time limitations, various redemption rights if
there is a stockholder vote on the issue and the grant of voting rights is not
approved, or if an "acquiring person statement" is not delivered to the target
within 10 days following a control share acquisition. Moreover, unless the
charter or bylaws provide otherwise, the statute provides that if, before a
control share acquisition occurs, voting rights are accorded to control shares
which results in the acquiring person having majority voting power, then
minority stockholders have appraisal rights. An acquisition of shares may be
exempted from the control share statute provided that a charter or bylaw
provision is adopted for such purpose prior to the control share acquisition.
There are no such provisions in the charter or bylaws of the Company.
Reference is made to the full text of the foregoing statutes for their entire
terms, and the partial summary contained in this Prospectus is not intended to
be complete.
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COMMON STOCK
GENERAL
Each share of Common Stock, par value $0.01 per share, is entitled to one
vote. The outstanding shares of Common Stock are fully paid and non-assessable.
Holders of shares of Common Stock do not have cumulative voting rights or
preference, conversion, exchange, subscription or preemptive rights. Subject to
the Company's obligations to pay dividends on all shares of its outstanding
Preferred Stock, including the Series A Preferred Stock and Series B Preferred
Stock, each share of Common Stock is entitled to participate equally in
dividends on the Common Stock when and as declared by the Board of Directors of
the Company and in the distribution of assets of the Company upon liquidation
after payment of liabilities and liquidation preferences with regard to the
Preferred Stock, including the Series A and Series B Preferred Stock. The
foregoing summary does not purport to be a complete description of the Common
Stock and is subject to, and qualified in its entirety by reference to, the
Company's charter and bylaws, in each case as amended and supplemented to date
and filed as exhibits to the Registration Statement.
As of the date of this Prospectus, the charter of the Company authorizes the
issuance of 100,000,000 shares of Common Stock. As of July 30, 1997, 52,245,515
shares of Common Stock were issued and outstanding.
PREFERRED STOCK
GENERAL
The Board of Directors has authority to issue authorized but unissued shares
of Preferred Stock, par value $0.10 per share, without further approval of the
stockholders, subject to certain restrictions described below, and to fix the
preferences, limitations and relative rights thereof, including voting rights,
dividend rights, conversion rights, redemption rights and liquidation rights of
each series of Preferred Stock. As of the date of this Prospectus, the charter
of the Company authorizes the issuance of 100,000,000 shares of Preferred
Stock. As of July 30, 1997, 19,823,122 shares of Series B Preferred Stock were
issued and outstanding, as described hereafter.
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK
General. In November, 1989, a wholly-owned subsidiary of the Company was
merged with and into Strategic Mortgage Investments, Inc., a Maryland
corporation ("Strategic"), and each outstanding share of Strategic common stock
was converted into one share of Series A Preferred Stock of the Company. In
December, 1992, Tyler Cabot Mortgage Securities Fund, Inc., a Maryland
corporation ("Tyler Cabot"), was merged with and into the Company, and each
outstanding share of Tyler Cabot common stock was converted into one share of
Series B Preferred Stock of the Company. The Series A Preferred Stock and
Series B Preferred Stock are fully paid and non-assessable and neither has
preemptive rights. The Series A Preferred Stock ranks on a parity with the
Series B Preferred Stock, and each rank on a parity with any other series of
the Company's Preferred Stock which is not by its terms made junior or senior
to the Series A Preferred Stock or Series B Preferred Stock with respect to the
payment of dividends and distribution of assets in liquidation.
Dividends. Holders of the Series B Preferred Stock are entitled to receive,
when, as and if declared by the Board of Directors of the Company out of funds
legally available therefore, cumulative preferential cash dividends at the
annual rate of $1.26 per share, and no more, payable in equal monthly
installments on each monthly dividend payment date. Holders of the Series A
Preferred Stock are entitled to receive, when, as and if declared by the Board
of Directors of the Company out of funds legally available therefor, cumulative
preferential cash dividends at the rate of $1.60 per annum per share, and no
more, payable in equal quarterly installments on each March 31, June 30,
September 30 and December 31. Whenever dividends are in arrears and until all
accrued and unpaid dividends on shares of Series A and Series B Preferred Stock
outstanding have been paid in full and the then current dividend on each such
series shall have been paid or declared and sufficient funds set aside for
payment thereof, the Company may not declare or pay dividends on the Common
Stock or any other class or series of capital stock ranking junior to the
Series A Preferred Stock and the Series B Preferred Stock in respect of
dividends ("Junior Stock") or redeem, purchase or otherwise acquire for
consideration any shares of Common Stock or Junior Stock.
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Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, the holders of the Series
A Preferred Stock and the Series B Preferred Stock will be entitled to receive
out of the assets of the Company available for distribution to stockholders,
whether from capital, surplus or earnings, before any distribution is made to
holders of shares of Common Stock or Junior Stock (1) in the case of the Series
A Preferred Stock, an amount equal to $16.40 per share of Series A Preferred
Stock and (2) in the case of Series B Preferred Stock, an amount per share of
Series B Preferred Stock equal to $11.38 per share of Series B Preferred Stock,
in each case, plus dividends accumulated and unpaid to the date of final
distribution. A consolidation or merger of the Company with or into any other
corporation or transfer of all or any part of the Company's assets for cash,
property or securities will not be considered a liquidation, dissolution or
winding-up of the Company.
Voting Rights. Except as indicated below, as otherwise provided in the
Company's charter or as required under the Maryland General Corporation Law,
neither the holders of shares of Series A Preferred Stock or Series B Preferred
Stock will have voting rights. If at any time all or any portion of the
dividends on the Series A Preferred Stock or Series B Preferred Stock shall be
in arrears and unpaid for any two or more dividend periods (whether or not
consecutive), then the number of directors constituting the Board of Directors
of the Company shall be increased by two in case of such arrearages on one of
the Series A Preferred Stock or Series B Preferred Stock and four in the case
of arrearages on both. The holders of Series A Preferred Stock and Series B
Preferred Stock, voting separately as a class, will each be entitled to elect
two directors to fill such newly created directorships. At such time as all
dividends in default have been paid in full and dividends for the current
quarterly period have been paid or declared and a sufficient sum for payment
has been set aside, the term of any director then in office solely as a result
of the voting rights described in this paragraph will terminate.
The affirmative vote of at least two-thirds of the outstanding shares of
Series A Preferred Stock and Series B Preferred Stock, in each case voting
separately as a class, will be required to (i) create or increase the number of
authorized shares of any class of stock ranking prior to the Series A Preferred
Stock or Series B Preferred Stock as to dividends or distributions upon
liquidation, (ii) authorize any reclassification of Series A Preferred Stock or
Series B Preferred Stock, or (iii) amend, alter or repeal any provisions of the
Company's charter which would adversely affect the rights, powers or
preferences of the Series A Preferred Stock or Series B Preferred Stock.
So long as 20% or more of the aggregate number of shares of Series B
Preferred Stock issued in connection with the Tyler Cabot merger remain
outstanding, the affirmative vote of at least a majority of the outstanding
shares of such Series B Preferred Stock will be required for the sale, lease or
conveyance by the Company of all or substantially all of its property or
business, or its consolidation or merger with any other corporation unless the
corporation resulting from such consolidation or merger will have after such
consolidation or merger no class of shares either authorized or outstanding
ranking prior to or on a parity with the Series B Preferred Stock except the
same number of shares ranking prior to or on a parity with the Series B
Preferred Stock and having the same rights and preferences as the shares of the
Company authorized and outstanding immediately preceding such consolidation or
merger, and each holder of Series B Preferred Stock immediately preceding such
consolidation or merger shall receive the same number of shares, with the same
rights and preferences, of the resulting corporation.
Except as described herein or otherwise required by law, no consent of the
holders of Series B Preferred Stock will be required for (i) the creation of
any indebtedness of any kind of the Company, (ii) the creation, or increase or
decrease in the amount, of any class or series of stock of the Company ranking
on a parity with, or not ranking prior to, the Series B Preferred Stock as to
dividends or as to amounts distributable upon liquidation or (iii) any increase
or decrease in the amount of authorized Common Stock or any increase, decrease
or change in the par value thereof.
Redemption. Neither the Series A Preferred Stock nor the Series B Preferred
Stock is subject to mandatory redemption and neither is entitled to the benefit
of a sinking fund. The Company at its option may redeem the Series A Preferred
Stock, in whole or in part, for cash in an amount per share equal to $16.40
plus accumulated
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and unpaid dividends to the date of redemption, whether or not earned or
declared. At any time after December 2, 1997, the Company may at its option
redeem the Series B Preferred Stock, in whole or in part, for cash in an
amount per share equal to $12.50 plus accumulated and unpaid dividends to the
date of redemption, whether or not earned or declared.
Conversion Rights. Holders of the Series A Preferred Stock may, at their
option, convert shares of Series A Preferred Stock into shares of Common Stock
at the rate (the "Series A Conversion Rate") of 2.0421 shares of Common Stock
for each share of Series A Preferred Stock converted. Holders of Series B
Preferred Stock may, at their option, convert shares of Series B Preferred
Stock into shares of the Company's Common Stock at the rate (the "Series B
Conversion Rate") of .7246 shares of the Company's Common Stock for each share
of Series B Preferred Stock converted. The Series A and Series B Conversion
Rates are subject to adjustment in certain circumstances.
PLAN OF DISTRIBUTION
The Company may sell Common Stock and Series B Preferred Stock (1) through
arrangements with underwriters or dealers, (2) directly to one or more
purchasers, or (3) through agents. The Company is a party to the PaineWebber
Agreements and the Merrill Lynch Agreement (collectively, the "Sales Agency
Agreements"), and may from time to time enter into sales agreements with sales
agents or underwriters other than PaineWebber or Merrill Lynch. The Company
expects the sales methods under such agreements to be substantially similar to
those under the Sales Agency Agreements.
In connection with the sale of the Common Stock and the Series B Preferred
Stock on behalf of the Company, PaineWebber and Merrill Lynch may each be
deemed to be an "underwriter" within the meaning of the Act, and the
compensation of PaineWebber or Merrill Lynch may be deemed to be underwriting
commissions or discounts. The Company has separately agreed to provide
indemnification and contribution to each of PaineWebber and Merrill Lynch
against certain civil liabilities, including liabilities under the Securities
Act. PaineWebber and Merrill Lynch may engage in transactions with, or perform
services for, the Company in the ordinary course of business.
SALES PURSUANT TO THE PAINEWEBBER AGREEMENTS
Sales made pursuant to the PaineWebber Agreements will be effected during a
series of one or more Pricing Periods, each consisting of five consecutive
calendar days, unless a shorter period has otherwise been agreed to by the
Company and PaineWebber. During any Pricing Period, no more than 60,000 shares
of the Common Stock and no more than 30,000 shares of the Series B Preferred
Stock will be sold, as Average Market Price Shares. If the Company fails to
meet the exemptive provisions set forth in Rule 101(c)(1) of Regulation M of
the Exchange Act, the number of Average Market Price Shares and Additional
Shares (as defined above under "Description of Sales Agency Agreements") sold
on any day in any Pricing Period, plus the number of shares sold pursuant to
the Merrill Lynch Agreement and any other sales agreements on such day, shall
not exceed 10% of the average daily trading volume of the Common Stock or
Series B Preferred Stock as the case may be, for the 60 days prior to such
Pricing Period. For each Pricing Period, an Average Market Price will be
computed. With respect to any Pricing Period, the Average Market Price shall
equal the average of the arithmetic mean of the high and low sales prices of
the Common Stock or the Series B Preferred Stock as the case may be, reported
on the NYSE for each trading day of such Pricing Period.
The net proceeds to the Company with respect to sales of Average Market
Price Shares will equal a fixed percentage, as will be set forth in the
applicable Prospectus Supplement, of the Average Market Price for each share
of Common Stock or Series B Preferred Stock sold during a Pricing Period, plus
Excess Proceeds, if any. The compensation to PaineWebber for such sales in any
Pricing Period will equal the difference between the aggregate gross sales
prices at which such sales are actually effected and the net proceeds to the
Company for such sales, but in no case will exceed the Maximum Commission. To
the extent that such aggregate gross sales
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prices are less than the Average Market Price, the compensation to PaineWebber
will be correspondingly reduced; to the extent that such aggregate gross sales
prices are greater than the Average Market Price, the compensation to
PaineWebber will be correspondingly increased. To the extent that PaineWebber's
compensation under the foregoing formula would otherwise exceed the Maximum
Commission, the excess will constitute Excess Proceeds to the Company.
Any Additional Shares sold by PaineWebber during the Pricing Period on behalf
of the Company will be at a fixed commission rate equal to a fixed percentage
of the share price per share for the number of Additional Shares sold in a
Pricing Period, as will be set forth in the applicable Prospectus Supplement.
Unless otherwise indicated in a further Prospectus Supplement, PaineWebber as
sales agent will act on a best efforts basis.
Settlements of sales of Additional Shares and Average Market Price Shares
will occur on the third business day following the date on which any such sales
are made. Purchases of Common Stock or Series B Preferred Stock from
PaineWebber as sales agent for the Company will settle the regular way on the
national securities exchange where such purchases were executed. Compensation
to PaineWebber with respect to sales of Average Market Price Shares will be
paid out of the proceeds of the Average Market Price Shares that settle the
third business day following the last day of a Pricing Period. There is no
arrangement for funds to be received in an escrow, trust or similar
arrangement.
At the end of each Pricing Period, the Company will file a Prospectus
Supplement under the applicable paragraph of Rule 424(b) promulgated under the
Securities Act, which Prospectus Supplement will set forth the dates included
in such Pricing Period, the number of such shares of Common Stock and Series B
Preferred Stock sold through PaineWebber as sales agent (identifying separately
the number of Average Market Price Shares and any Additional Shares), the high
and low prices at which Average Market Price Shares were sold during such
Pricing Period, the net proceeds to the Company and the compensation payable by
the Company to PaineWebber with respect to such sales pursuant to the formula
set forth above therein.
The offering of Common Stock pursuant to the PaineWebber Agreement will
terminate upon the earlier of (i) the sale of all shares of Common Stock
subject thereto or (ii) termination of the PaineWebber Common Agreement.
PaineWebber has the right to terminate the PaineWebber Common Agreement if the
Company engages another agent to sell shares under a program substantially
similar to the program covered by the PaineWebber Common Agreement, or in
certain other circumstances specified. PaineWebber has consented to the sale of
shares pursuant to the Merrill Lynch Agreement discussed below.
The offering of Series B Preferred Stock pursuant to the PaineWebber
Preferred Agreement will terminate upon the earlier of (i) the sale of all
shares of Series B Preferred Stock subject thereto or (ii) termination of the
PaineWebber Preferred Agreement. The PaineWebber Preferred Agreement may be
terminated by the Company in its sole discretion on September 17, 1997 and may
be terminated by PaineWebber after September 17, 1997 and in certain other
circumstances specified therein.
SALES PURSUANT TO THE MERRILL LYNCH AGREEMENT
Sales pursuant to the Merrill Lynch Agreement may be effected on a daily
basis, and may occur concurrently with sales under the PaineWebber Agreements.
If the Company fails to meet the exemptive provisions set forth in Rule
101(c)(1) of Regulation M of the Exchange Act, with respect to the Common Stock
or the Series B Preferred Stock, the number of shares of Common Stock or Series
B Preferred Stock, respectively, that may be sold on any day, including shares
sold pursuant to the PaineWebber Agreements and any other sales agreements on
such day, shall not exceed 10% of the average daily trading volume of the
Common Stock or the Series B Preferred Stock, as the case may be, for the 60
days prior to such date. The Merrill Lynch Agreement does not incorporate the
concept of Pricing Periods or Average Market Price Shares present in the
PaineWebber Agreements, but (except as set forth below) is substantially the
same in other material respects.
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The compensation to Merrill Lynch for sales of Common Stock and Series B
Preferred Stock will equal a fixed percentage of the gross sales price of any
shares sold, in the form of a commission, as will be set forth in the
applicable Prospectus Supplement. The remaining sales proceeds, after deducting
any transaction fees imposed by any governmental or self-regulatory
organization in respect of such sales, shall constitute the net proceeds to the
Company for the sale of such shares. Unless otherwise indicated in a further
Prospectus Supplement, Merrill Lynch as sales agent will act on a reasonable
efforts basis.
Settlements of sales of shares of Common Stock and Series B Preferred Stock
will occur on the third business day following the date on which any such sales
are made. Purchases of Common Stock or Series B Preferred Stock from Merrill
Lynch as sales agent for the Company will settle the regular way on the
national securities exchange where such purchases were executed.
On or prior to the second business day after the end of each Reporting Period
(defined below), the Company will file a Prospectus Supplement under the
applicable paragraph of Rule 424(b) promulgated under the Securities Act, which
Prospectus Supplement will set forth, with regard to such Reporting Period, the
dates included within the Reporting Period, the number of shares of Common
Stock and Series B Preferred Stock, respectively, sold through Merrill Lynch as
sales agent, the net proceeds to the Company and the compensation payable by
the Company to Merrill Lynch with respect to sales of Common Stock and Series B
Preferred Stock, respectively. Unless otherwise agreed by the Company and
Merrill Lynch and set forth in the applicable Prospectus Supplement, a
"Reporting Period" consists of five consecutive calendar days.
The offering of Common Stock and Series B Preferred Stock pursuant to the
Merrill Lynch Agreement will terminate upon the earlier of (i) the sale of all
shares of Common Stock and Series B Preferred Stock subject thereto or (ii)
termination of the Merrill Lynch Agreement. The Merrill Lynch Agreement may be
terminated by the Company in its sole discretion on or after the First
Anniversary Date, and may be terminated by Merrill Lynch after the First
Anniversary Date and in certain other circumstances specified therein.
TAXATION
The applicable provisions of the Code are highly technical and complex. This
summary is not intended as a detailed discussion of all applicable provisions
of the Code, the rules and regulations promulgated thereunder, or the
administrative and judicial interpretations thereof. For the particular
provisions that govern the federal income tax treatment of the Company and its
stockholders, reference is made generally to Sections 856 and 860 of the Code
and the treasury regulations promulgated thereunder. The Company has not
obtained rulings from the Internal Revenue Service with respect to any tax
considerations relevant to its organization or operations or to an investment
in its securities. This summary is not intended to substitute for prudent tax
planning and stockholders are urged to consult their own tax advisors with
respect to these and other federal, state and local tax consequences of the
ownership and disposition of any of the Company's Securities and any potential
changes in applicable law. Nonresident aliens, foreign corporations, tax-exempt
organizations, life insurance companies, cooperatives and certain other
categories of investors may be subject to special tax rules that are not
discussed below and that could affect an investment in any of the Company's
Securities.
FEDERAL INCOME TAXATION OF CAPSTEAD MORTGAGE CORPORATION
As used herein, "Capstead REIT" refers to Capstead Mortgage Corporation and
the entities that are effectively consolidated with Capstead Mortgage
Corporation for federal income tax purposes. Certain of the Company's
subsidiaries (the "Non-REIT subsidiaries") are consolidated with the Company
for financial reporting purposes but are not consolidated for federal income
tax purposes. All of the Non-REIT subsidiaries' taxable income is subject to
federal and state income taxes. The Company may form additional Non-REIT
subsidiaries.
Capstead REIT believes that it has operated, and Capstead REIT intends to
continue to operate, in such a manner so as to qualify as a REIT under the
Code, but no assurance can be given that it will at all times so qualify.
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So long as a company such as Capstead REIT qualifies as a REIT and
distributes at least 95% of its REIT taxable income to stockholders, it will
not be subject to federal corporate income taxes on such income distributed to
stockholders, with limited exceptions discussed below. Under certain
circumstances, such a company may be subject to the corporate minimum tax or
certain other special taxes. However, Capstead REIT does not anticipate
generating material items of income or deductions that would cause it to be
subject to the minimum tax or any such special tax.
To qualify for treatment as a REIT for a taxable year, a company must have
elected to be so treated (which Capstead REIT has done) and must meet certain
organizational, asset, income, distribution and record-keeping requirements.
TAXATION OF STOCKHOLDERS
So long as a corporation qualifies as a REIT, distributions to stockholders
(other than dividends properly designated as "capital gain dividends") will
constitute ordinary income to the extent of current and accumulated earnings
and profits of the REIT. Capital gain dividends will be taxable as long-term
capital gains. Distributions in excess of the REIT's current and accumulated
earnings and profits will constitute a non-taxable return of capital, except to
the extent that the amount of such distributions received by any stockholder
exceeds the basis of the stockholder's shares, in which case such excess will
be taxable as capital gain, provided such shares are held as a capital asset.
Dividends received from a REIT are ineligible for the 70% dividends received
deduction. If a capital gain dividend is received with respect to shares which
are sold for a loss before being held for a period of six months, such loss
will be characterized as long term capital loss to the extent of the capital
gain dividend. Potential Capstead Mortgage Corporation stockholders should be
aware that for federal income tax purposes any dividend paid by a REIT in
January of any given calendar year will be deemed to have been paid during the
preceding calendar year if it was declared by the REIT in October, November or
December of such preceding year and was payable to the shareholders of record
on a specified date in the month in which it was declared.
Under the Code and the related regulations, a change in the conversion ratio
for convertible preferred stock may be treated as a taxable distribution of the
stock of such corporation with respect to any shareholder whose proportionate
interest in the earnings and profits or assets of the corporation is increased
by such change. A change in a conversion ratio or conversion price of
convertible preferred stock pursuant to a bonafide, reasonable adjustment
formula which has the effect of preventing dilution of the interest of the
holders of such stock will not be considered to result in a deemed distribution
of stock. However, generally an adjustment in the conversion ratio to
compensate for a taxable cash distribution to other shareholders will not be
considered as made pursuant to a bonafide adjustment formula. For example, in
the case of the Series B Preferred Stock, the conversion rate may be adjusted
if the Company distributes to holders of its Common Stock cash or other assets
(excluding regular quarterly cash dividends payable out of consolidated
earnings or earned surplus or dividends payable in shares of Common Stock).
Under the above described federal income tax provisions, such an adjustment may
result in a taxable distribution to the Series B Preferred stockholders.
Specific tax rules of a complex nature not summarized herein apply to foreign
investors in REITs. Accordingly, foreign stockholders should consult their own
tax advisers concerning the federal income and withholding tax consequences and
the state, local and foreign tax consequences of an investment in Capstead
REIT.
1997 TAX LEGISLATION
The recently enacted Tax Relief Act of 1997 (the "1997 Tax Act") reduces the
maximum rate of tax on net capital gains for individuals on sales of certain
assets (including stocks and securities) and increases the time period for
which an asset must be held for the gain from its sale to be eligible for the
lowest rate. The holding period is increased from 12 to 18 months with a
further rate reduction scheduled to take effect after the year 2000 for the
sale of certain assets that have been held at least five years. The Treasury
Department is to issue regulations coordinating the capital gain provisions
with other rules involving the treatment of sales and exchanges by pass-through
entities such as REITs.
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With regard to the taxation of REITs, effective for taxable years beginning
after the enactment the 1997 Tax Act, the requirement that the REIT derive
less than 30% of its gross income from gain on the sale or other disposition
of stock or securities held for less than one year, certain real property held
less than four years and property sold or disposed of in a "prohibited
transaction" is repealed. In addition, a REIT may elect to retain and pay
income tax on net long term capital gains it received during a tax year. If a
REIT makes such election, its stockholders would include in their income as
long term capital gains their proportionate share of the undistributed long
term capital gains as designated by the REIT. A stockholder would be deemed to
have paid the stockholder's share of tax, which would be credited or refunded
to the stockholder. Also, the basis of the stockholder's shares in the REIT
would be increased by the amount of the undistributed long term capital gains
(less the amount of capital gains tax paid by the REIT) included in the
stockholder's long term capital gains.
SPECIAL CONSIDERATIONS--TAX-EXEMPT AND CERTAIN OTHER INVESTORS
For CMOs issued after December 31, 1991, pursuant to regulations not yet
published, the portion of any dividend paid to stockholders attributable to
"excess inclusion income" on the retained residual interests in such CMOs
would be subject to certain rules. Such rules include (i) the characterization
of excess inclusion income as unrelated business income for tax-exempt
stockholders (including employee benefit plans and individual retirement
accounts) and (ii) the inability of a stockholder to offset excess inclusion
income with net operating losses (subject to certain exceptions applicable to
thrift institutions). Generally, tax-exempt entities are subject to federal
income tax on excess inclusion income and other unrelated business income in
excess of $1,000 per year. Excess inclusion income is generally taxable income
with respect to a residual interest in excess of a specified return on
investment in the residual interest. In some cases, all taxable income with
respect to a residual interest may be considered excess inclusion income.
Until regulations or other guidance is issued, Capstead REIT will use methods
it believes are appropriate for calculating the amount of excess inclusion
income, if any, it recognizes from CMOs issued after December 31, 1991, and
allocating any excess inclusion income to its stockholders. Excess inclusion
rules will most likely not apply to any CMO issued by any subsidiary of the
Company on or before December 31, 1991.
In addition, the Company will be taxable on the portion of any excess
inclusion income allocable to any stockholder which is a "disqualified
organization." If the ownership of any shares by a disqualified organization
would subject the Company to tax, such shares shall be immediately redeemable
at the option of the Company. See "Description of Securities--Redemption or
Repurchase of Capital Stock to Maintain the Company's Status as a REIT."
Tax-exempt and other investors are urged to consult their own tax advisors
with respect to the tax consequences arising under federal law and the law of
any state, municipality or other taxing jurisdiction. Foreign investors should
consult their own tax advisors concerning the tax consequences of an
investment in the Company, including the possibility of United States
withholding tax on Company dividends.
FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
If Capstead REIT fails to qualify for taxation as a REIT in any taxable
year, distributions to its stockholders for such year and future years would
not be deductible by Capstead REIT and Capstead REIT would be subject to tax
on its income at regular corporate rates. In such event, all distributions to
stockholders would be taxable as ordinary income to the extent of current and
accumulated earnings and profits and would be eligible for the 70% dividends
received deduction for corporations. If Capstead REIT fails to qualify as a
REIT for even one year, it could be required to incur substantial indebtedness
(to the extent borrowings are feasible) or liquidate substantial investments
in order to pay the resulting taxes. Thus, if Capstead REIT fails to qualify
for taxation as a REIT, there can be no assurance that any distribution to its
stockholders could be made. Unless entitled to relief under specific statutory
provisions, such company would also be disqualified from treatment as a REIT
for the next four taxable years. It is not possible to state whether in all
circumstances such company would be entitled to statutory relief. While the
Board of Directors of the Company presently intends to cause Capstead REIT to
operate in a manner that will enable it to qualify as a REIT in all future
taxable years, there can be no
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certainty that such intention will be realized because, among other things,
qualification hinges on the conduct of the business of Capstead REIT.
STATE AND LOCAL TAXES
State or local income tax treatment of Capstead REIT or holders of any of its
Securities may differ from the federal income tax treatment described above. As
a result, prospective stockholders should consult their own tax advisers for an
explanation of how state and local tax laws may affect their investment in
Capstead REIT.
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby will be
passed on for the Company and the Selling Stockholders by Andrews & Kurth
L.L.P., Dallas, Texas, and for the underwriters or agents by counsel to be
identified in the Prospectus Supplement. Andrews & Kurth L.L.P. will rely as to
all matters of Maryland law on Piper & Marbury L.L.P., Baltimore, Maryland.
Attorneys at Andrews & Kurth L.L.P. beneficially own approximately 45,600
shares of Common Stock of the Company and 9,700 shares of Series B Preferred
Stock of the Company.
EXPERTS
The consolidated financial statements and schedule of Capstead Mortgage
Corporation and subsidiaries incorporated by reference or appearing in Capstead
Mortgage Corporation's Annual Report on Form 10-K for the year ended December
31, 1996, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included or incorporated by reference therein
and incorporated herein by reference. Such consolidated financial statements
are incorporated herein by reference in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
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