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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, 1997
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) 48,564,836 as of April 28, 1996
<PAGE>
CAPSTEAD MORTGAGE CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
PAGE
----
PART I. - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheet - March 31, 1997 and December 31, 1996.. 3
Consolidated Statement of Income - Quarter Ended
March 31, 1997 and 1996........................................... 4
Consolidated Statement of Cash Flows - Quarter Ended
March 31, 1997 and 1996........................................... 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
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<PAGE>
PART I. -- FINANCIAL INFORMATION
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ITEM 1. FINANCIAL STATEMENTS
MARCH 31, 1997 DECEMBER 31, 1996
--------------- ------------------
(UNAUDITED)
ASSETS
Mortgage investments $ 4,789,745 $ 4,840,417
CMO collateral and investments 4,471,131 4,501,646
----------- -----------
9,260,876 9,342,063
Mortgage servicing rights 662,472 637,979
Prepaids, receivables and other 143,097 156,293
Cash and cash equivalents 18,598 21,003
----------- -----------
$10,085,043 $10,157,338
=========== ===========
LIABILITIES
Short-term borrowings $ 5,485,414 $ 5,462,856
Collateralized mortgage obligations 3,753,694 3,861,892
Accounts payable and accrued expenses 34,673 33,924
Mortgage servicing rights
acquisitions payable 32,253 71,797
----------- -----------
9,306,034 9,430,469
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock - $0.10 par value;
100,000 shares authorized:
$1.60 Cumulative Preferred Stock,
Series A, 451 and 470 shares
issued and outstanding ($7,396
aggregate liquidation preference) 6,304 6,567
$1.26 Cumulative Convertible
Preferred Stock, Series B, 22,094
and 23,932 shares issued and
outstanding ($251,430 aggregate
liquidation preference) 241,180 259,829
Common stock - $0.01 par value; 100,000
shares authorized; 47,836 and 44,743
shares issued and outstanding 478 447
Paid-in capital 515,985 461,045
Undistributed income 7,428 4,582
Unrealized gain (loss) on debt 7,634 (5,601)
securities ----------- -----------
779,009 726,869
----------- -----------
$10,085,043 $10,157,338
=========== ===========
See accompanying notes to consolidated financial statements.
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<PAGE>
CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
QUARTER ENDED
MARCH 31
--------------------
1997 1996
--------- ---------
INTEREST INCOME:
Mortgage investments $ 77,904 $ 76,682
CMO collateral and investments 87,377 89,702
-------- --------
Total interest income 165,281 166,384
-------- --------
INTEREST AND RELATED EXPENSES:
Short-term borrowings:
Mortgage investments 64,855 65,385
CMO investments 6,235 160
Collateralized mortgage obligations 70,499 83,177
Mortgage insurance and other 1,426 2,284
-------- --------
Total interest and related expenses 143,015 151,006
-------- --------
Net margin on mortgage assets 22,266 15,378
-------- --------
MORTGAGE SERVICING REVENUES:
Servicing fees 30,132 22,575
Other 8,606 5,396
-------- --------
Total mortgage servicing revenues 38,738 27,971
-------- --------
MORTGAGE SERVICING EXPENSES:
Direct servicing expenses 4,016 3,157
Indirect servicing expenses 1,725 1,473
Amortization of mortgage servicing
rights 14,026 10,087
Interest 4,929 3,299
-------- --------
Total mortgage servicing expenses 24,696 18,016
-------- --------
Net margin on mortgage servicing 14,042 9,955
-------- --------
OTHER REVENUES:
Gain on sales and other 2,600 3,921
CMO administration 820 833
-------- --------
Total other revenues 3,420 4,754
-------- --------
OTHER OPERATING EXPENSES 2,340 3,259
-------- --------
NET INCOME $ 37,388 $ 26,828
======== ========
Net income $ 37,388 $ 26,828
Less cash dividends on preferred stock (7,198) (9,890)
-------- --------
Net income available to common
stockholders $ 30,190 $ 16,938
======== ========
NET INCOME PER SHARE:
Primary $ 0.64 $ 0.47
Fully diluted 0.58 0.45
CASH DIVIDENDS PAID PER SHARE:
Common $ 0.580 $ 0.467
Series A Preferred 0.400 0.400
Series B Preferred 0.315 0.315
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)
QUARTER ENDED
MARCH 31
----------------------
1997 1996
---------- ----------
OPERATING ACTIVITIES:
Net income $ 37,388 $ 26,828
Noncash items:
Amortization of discount and premium 23,352 10,389
Amortization of mortgage servicing
rights 14,028 10,087
Depreciation and other amortization 1,016 1,271
Net change in prepaids, receivables,
other assets, accounts payable and
accrued expenses 2,211 (2,366)
Net gain from investing activities (2,453) (4,036)
--------- ---------
Net cash provided by operating
activities 75,542 42,173
--------- ---------
INVESTING ACTIVITIES:
Purchases of mortgage investments (405,272) (946,040)
Purchases of CMO investments (52,058) (25,887)
Purchases of mortgage servicing rights (31,656) (68,078)
Purchases of derivative financial
instruments (10,937) (7,536)
Principal collections on mortgage
investments 258,983 283,639
Proceeds from sales and redemptions of
mortgage assets 178,605 203,447
CMO collateral:
Principal collections 111,157 147,341
Decrease in accrued interest
receivable 723 1,067
Increase in short-term investments (1,910) (1,170)
--------- ---------
Net cash provided (used) by
investing activities 47,635 (413,217)
--------- ---------
FINANCING ACTIVITIES:
Increase in short-term borrowings 22,558 519,810
Increase (decrease) in mortgage
servicing acquisitions payable (39,544) 9,933
Collateralized mortgage obligations:
Principal payments on securities (110,792) (144,252)
Increase in accrued interest payable 962 256
Capital stock transactions 35,776 11,143
Dividends paid (34,542) (26,726)
--------- ---------
Net cash provided (used) by
financing activities (125,582) 370,164
--------- ---------
Net decrease in cash and cash
equivalents (2,405) (880)
Cash and cash equivalents at beginning
of period 21,003 18,702
--------- ---------
Cash and cash equivalents at end of
period $ 18,598 $ 17,822
========= =========
See accompanying notes to consolidated financial statements.
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CAPSTEAD MORTGAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1 - BUSINESS
Capstead Mortgage Corporation, a national mortgage banking firm, earns income
from investing in mortgage-backed securities, servicing mortgage loans and other
investment strategies. The Company's business plan is to build a mortgage
banking operation with investments in mortgage securities and mortgage servicing
with the goal of producing reasonably balanced operating results in a variety of
interest rate environments.
NOTE 2 - 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, 1997 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1997. 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, 1996.
On January 1, 1997 the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting
and reporting standards for all types of securitization transactions involving
the transfer of financial assets including repurchase agreements and
collateralized borrowing arrangements. Under SFAS 125 most securitizations of
financial assets other than repurchase arrangements are recorded as sales. The
adoption of SFAS 125 has not had a material impact on the results of operations
or financial position of the Company.
Certain amounts for prior periods have been reclassified to conform to the 1997
presentation.
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NOTE 3 - MORTGAGE SERVICING
The following table provides information regarding the primary mortgage
servicing portfolio (which excludes subservicing) and the related investment in
mortgage servicing rights (dollars in thousands):
UNPAID MORTGAGE
PRINCIPAL NUMBER SERVICING
BALANCE OF LOANS RIGHTS
------------ --------- ----------
Loans serviced at December 31, 1996 $35,562,597 366,373 $559,857
Additions 4,152,971 42,769 77,727
Run-off/amortization (896,224) (6,280) (12,968)
Results of hedging activity - - 5,805
----------- ------- --------
Loans serviced at March 31, 1997 38,819,344 402,862 630,421
Purchases pending transfer* 1,887,925 19,030 32,051
----------- ------- --------
Total portfolio at March 31, 1997 $40,707,269 421,892 $662,472
=========== ======= ========
* IN ADDITION, IN APRIL 1997 THE COMPANY COMMITTED TO PURCHASE THE RIGHT TO
SERVICE ANOTHER 6,775 LOANS WITH AN UNPAID PRINCIPAL BALANCE OF $623 MILLION.
In addition, as of March 31, 1997 the Company subserviced $5.1 billion of
single-family mortgage loans under a subservicing arrangement with a large
national mortgage conduit.
NOTE 4 - MORTGAGE INVESTMENTS
Mortgage investments and the related average effective interest rates
(calculated including mortgage insurance costs and excluding unrealized gains
and losses) were as follows (dollars in thousands):
AS OF QUARTER ENDED
MARCH 31 MARCH 31
---------------------- ---------------
1997 1996 1997 1996
---------- ---------- ------- ------
Agency securities:
Fixed-rate $ 455,512 $ 471,527 6.38% 6.37%
Adjustable-rate 3,945,105 3,682,003 6.28 6.12
Callable notes - - - 7.05
AAA-rated private mortgage pass-
through securities:
Fixed-rate 3,952 47,722 8.82 9.18
Medium-term 261,188 366,912 6.69 6.66
Adjustable-rate 123,988 435,564 7.16 7.14
---------- ---------- ---- ----
$4,789,745 $5,003,728 6.37% 6.32%
========== ========== ==== ====
The Company classifies its mortgage investments by 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 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
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<PAGE>
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, FNMA or the
Government National Mortgage Association (collectively, "Agency Securities").
At March 31, 1997 the AAA-rated private mortgage pass-through securities
("Mortgage Pass-Throughs") and Agency Securities were pledged to secure short-
term borrowings.
NOTE 5 - CMO COLLATERAL AND INVESTMENTS
CMO collateral consists of mortgage securities and related investments pledged
to secure CMO borrowings ("Pledged CMO Collateral"). CMO investments include
investments in FNMA Trust interest-only mortgage securities and investments in
other CMO securities such as other agency and private-issue interest-only and
principal-only mortgage securities. The components of CMO collateral and
investments are summarized as follows (in thousands):
MARCH 31, 1997 DECEMBER 31, 1996
--------------- ------------------
Pledged mortgage securities $3,797,063 $3,908,623
Short-term investments 12,964 11,055
Accrued interest receivable 23,289 24,012
---------- ----------
Total Pledged CMO Collateral 3,833,316 3,943,690
Unamortized discount (7,018) (7,166)
---------- ----------
3,826,298 3,936,524
FNMA Trust interest-only mortgage
securities 627,039 546,539
Other CMO investments 17,794 18,583
---------- ----------
$4,471,131 $4,501,646
========== ==========
Pledged mortgage securities consist of fixed-rate, medium-term and adjustable-
rate mortgage-backed securities. All principal and interest on pledged mortgage
securities is remitted directly to a collection account maintained by a trustee.
The trustee is responsible for reinvesting those funds in short-term
investments. All collections on pledged mortgage securities and reinvestment
income earned thereon are available for the payment of principal and interest on
CMOs issued by the Company. The weighted average effective interest rate for
total Pledged CMO Collateral was 7.34 percent during the quarter ended March 31,
1997.
FNMA Trust interest-only mortgage securities are entitled to receive 100 percent
of coupon interest stripped from pools of FNMA mortgage-backed securities. At
March 31, 1997 the Company's investment in FNMA Trust interest-only mortgage
securities, after certain hedging costs, yielded 10.81 percent with related
notional amounts aggregating $1.8 billion. These and certain other CMO
investments were pledged to secure short-term borrowings as of March 31, 1997.
NOTE 6 - DISCLOSURES REGARDING FAIR VALUES OF DEBT SECURITIES
Estimated fair values of debt securities have been determined using available
market information and appropriate valuation methodologies; however,
considerable judgment is required in interpreting market data to develop these
estimates. In addition, fair values fluctuate on a daily basis. Accordingly,
estimates presented herein are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
-8-
<PAGE>
assumptions and/or estimation methodologies may have a material effect on
estimated fair values.
The fair values of debt securities were estimated using quoted market prices
when available, including quotes made by lenders in connection with designating
collateral for repurchase arrangements. Pledged CMO Collateral has been
permanently financed through the issuance of CMOs. Gross unrealized gains and
losses are based on projected net cash flows of the Pledged CMO Collateral after
payment on the related CMOs determined using market discount rates and
prepayment assumptions. The maturity of Pledged CMO Collateral is directly
affected by the rate of principal payments by mortgagors and clean-up calls of
the remaining CMOs outstanding.
The following table summarizes fair value disclosures for available-for-sale
debt securities for the periods indicated (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
MARCH 31, 1997
- --------------
Mortgage investments:
Agency Securities:
Fixed-rate $ 489,429 $ - $33,917 $ 455,512
Adjustable-rate 3,929,624 17,660 2,179 3,945,105
Mortgage Pass-Throughs:
Fixed-rate 3,913 39 - 3,952
Medium-term 262,284 259 1,355 261,188
Adjustable-rate 121,468 2,520 - 123,988
CMO collateral and investments 698,495 24,994 387 723,102
---------- ------- ------- ----------
$5,505,213 $45,472 $37,838 $5,512,847
========== ======= ======= ==========
DECEMBER 31, 1996
- -----------------
Mortgage investments:
Agency Securities:
Fixed-rate $ 490,893 $ - $23,006 $ 467,887
Adjustable-rate 3,858,339 20,977 489 3,878,827
Mortgage Pass-Throughs:
Fixed-rate 4,144 44 - 4,188
Medium-term 278,473 283 569 278,187
Adjustable-rate 128,110 2,691 - 130,801
CMO collateral and investments 653,748 2,119 7,651 648,216
---------- ------- ------- ----------
$5,413,707 $26,114 $31,715 $5,408,106
========== ======= ======= ==========
</TABLE>
Held-to-maturity debt securities consist of Pledged CMO Collateral and
collateral released from the related CMO indentures pursuant to clean-up calls
and held as Mortgage Pass-Throughs. The following table summarizes fair value
disclosures for debt securities held-to-maturity for the periods indicated (in
thousands):
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
MARCH 31, 1997
- --------------
Pledged CMO Collateral $3,748,028 $3,238 $54,097 $3,697,169
DECEMBER 31, 1996
- -----------------
Pledged CMO Collateral 3,853,430 3,150 54,889 3,801,691
Mortgage Pass-Throughs 80,527 2,314 94 82,747
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Sales of released CMO collateral occasionally occur provided the collateral has
paid down to within 15 percent of its original issuance amounts. The following
table summarizes disclosures related to the disposition of debt securities held
available-for-sale and held-to-maturity (in thousands):
QUARTER ENDED MARCH 31
----------------------
1997 1996
---------- ----------
Sale of securities held
available-for-sale:
Cost basis $101,418 $150,434
Gains 877 4,036
Redemption of callable agency notes and
sale of Released CMO Collateral
held-to-maturity:
Cost basis 73,324 48,977
Gains 2,986 -
NOTE 7 - 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):
QUARTER ENDED MARCH 31
--------------------------------------
1997 1996
------------------ ------------------
AMOUNT AVERAGE AMOUNT AVERAGE
-------- -------- -------- --------
Interest income:
Mortgage investments $ 77,904 6.37% $ 76,682 6.32%
CMO collateral and investments 87,377 7.83 89,702 7.62
-------- --------
Total interest income 165,281 166,384
-------- --------
Interest expense:
Short-term borrowings 71,090 5.43 65,545 5.51
CMOs 70,499 7.51 83,177 7.53
-------- --------
Total interest expense 141,589 148,722
-------- --------
Net interest $ 23,692 $ 17,662
======== ========
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, 1997 compared to the same period in 1996 (in thousands):
RATE* VOLUME* TOTAL
-------- --------- ---------
Interest income:
Mortgage investments $ 579 $ 643 $ 1,222
CMO collateral and investments 2,441 (4,766) (2,325)
------- -------- --------
Total interest income 3,020 (4,123) (1,103)
------- -------- --------
Interest expense:
Short-term borrowings (869) 6,414 5,545
CMOs (209) (12,469) (12,678)
------- -------- --------
Total interest expense (1,078) (6,055) (7,133)
------- -------- --------
Net interest $ 4,098 $ 1,932 $ 6,030
======= ======== ========
* 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.
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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 securities and mortgage servicing with the goal of
producing reasonably balanced operating results in a variety of interest rate
environments.
The Company commenced mortgage servicing operations in 1993 and through steady
growth has become one of the 20 largest mortgage servicers in the country with a
total mortgage servicing portfolio of $44.0 billion (including primary servicing
and subservicing). The primary mortgage servicing portfolio (which excludes
pending transfers and subservicing) increased a net $3.3 billion during the
quarter ended March 31, 1997 to $38.8 billion with a weighted average interest
rate of 7.42 percent and earning an average annual service fee, excluding
ancillary revenue and earnings on escrows, (the "Average Service Fee"), of 30.3
basis points. The March 31, 1997 balance of mortgage servicing rights related
to this portfolio was $630 million (162 basis points, or a 5.36 multiple of the
Average Service Fee). An additional $1.9 billion of mortgage servicing acquired
during the current quarter is pending transfer into the portfolio and is being
subserviced by the sellers. These pending acquisitions have a weighted average
interest rate of 7.69 percent earning an Average Service Fee of 30.5 basis
points. At an average cost of 170 basis points, these acquisitions are being
acquired at a 5.57 multiple.
Primary mortgage servicing portfolio run-off, consisting of prepayments and
scheduled payments on mortgage loans serviced, was 9.70 percent during the
quarter, down from 12.58 percent in the first quarter of 1996 and 10.87 percent
in the fourth quarter of 1996. The decrease in prepayments experienced in the
first quarter of 1997 was prompted by higher mortgage interest rates and
seasonal factors. Derivative financial instruments, specifically interest rate
floors, are held from time to time as partial hedges against prepayment risk
(see "Effects of Interest Rate Changes"). Outstanding hedge positions, with a
$8.4 billion notional amount, carried a $6.4 million unrealized loss at March
31, 1997.
During the second quarter of 1996, the Company entered into a subservicing
arrangement with a large national mortgage conduit. As of March 31, 1997 the
subservicing portfolio totaled $5.1 billion. An advantage of subservicing
arrangements is that further growth and enhanced efficiencies can be achieved
without the cost of acquiring additional mortgage servicing rights. This
arrangement is viewed by the Company as a confirmation of the quality and cost
effectiveness of the mortgage servicing operation and could lead to other such
relationships in the future.
As of March 31, 1997, holdings of mortgage investments totaled $4.8 billion with
adjustable-rate mortgage ("ARM") mortgage-backed securities representing nearly
$4.1 billion of the total. During the current quarter the Company acquired $405
million of ARM 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"). Sales of ARM Agency Securities and AAA-
rated private mortgage pass-through securities ("Mortgage Pass-Throughs")
totaled $175 million during the quarter.
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<PAGE>
Prior to 1995 the Company had been an active issuer of collateralized mortgage
obligations ("CMOs") and other CMO securities backed by jumbo mortgage loans.
In lieu of issuing CMOs, the Company has increased its net CMO investments
(defined as CMO collateral, net of related bonds, plus other CMO investments) by
acquiring interest-only mortgage securities. During 1996 and the quarter ended
March 31, 1997, the Company acquired $522 million and $52 million of interest-
only mortgage securities, respectively. Most of these securities have been FNMA
Trust interest-only mortgage securities, which represent the right to receive
100 percent of coupon interest stripped from pools of FNMA mortgage-backed
securities. After considering these acquisitions, run-off and changes in market
value (see below), net CMO investments increased $78 million during the quarter
to $717 million. Derivative financial instruments, specifically interest rate
floors, are held from time to time as partial hedges against prepayment risk on
interest-only mortgage securities (see "Effects of Interest Rate Changes").
Outstanding hedge positions, with a $3.7 billion notional amount, carried a $6.0
million unrealized loss at March 31, 1997.
The following table summarizes the Company's utilization of capital as of March
31, 1997 (in thousands):
CAPITAL
ASSETS BORROWINGS EMPLOYED
---------- ----------- ---------
Agency Securities:
Fixed-rate $ 455,512 $ 462,073 $ (6,561)
Adjustable-rate 3,945,105 3,803,895 141,210
Mortgage Pass-Throughs:
Fixed-rate 3,952 3,744 208
Medium-term 261,188 216,988 44,200
Adjustable-rate 123,988 113,341 10,647
CMO collateral and investments 4,471,131 4,388,067* 83,064
Mortgage servicing rights 662,472 283,253** 379,219
---------- ----------- --------
$9,923,348 $ 9,271,361 651,987
========== ===========
Other assets, net of other liabilities 127,022
--------
Total stockholders' equity $779,009
========
* INCLUDES APPROXIMATELY $634 MILLION OF RELATED SHORT-TERM BORROWINGS.
** REPRESENTS AMOUNTS OWED UNDER CONTRACTS FOR BULK PURCHASES OF MORTGAGE
SERVICING RIGHTS AND $251 MILLION DRAWN ON A $450 MILLION LINE OF CREDIT
SECURED BY EXISTING MORTGAGE SERVICING RIGHTS.
Securities held available-for-sale were carried at a net unrealized gain of $7.6
million at March 31, 1997, a $13.2 million improvement in value from December
31, 1996. Higher prevailing interest rates resulted in a $30.1 million
improvement in value of CMO investments carried available-for-sale, which was
partially offset by a $16.9 million decline in value of mortgage investments.
The Company has the ability to hold mortgage assets for the foreseeable future
and, therefore does not expect to realize losses on security sales.
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<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):
QUARTER ENDED
MARCH 31
------------------
1997 1996
-------- --------
Agency securities $10,644 $ 7,171
Mortgage pass-through securities 1,946 3,186
CMO investments 9,676 5,021
Mortgage servicing 14,042 9,955
CMO administration 820 833
Gain on sales and other 2,600 3,921
------- -------
Contribution to income 39,728 30,087
Other operating expenses 2,340 3,259
------- -------
Net income $37,388 $26,828
======= =======
Net income per share:
Primary $ 0.64 $ 0.47
Fully diluted 0.58 0.45
Return on average stockholders' equity 19.76% 16.12%
Operating results for the quarter ended March 31, 1997 improved substantially
over those achieved in the first quarter of 1996. Improved net interest margins
on mortgage investments, a larger portfolio of CMO investments, together with
improved mortgage servicing results, contributed to significantly higher net
income compared to the same period in 1996. Record quarterly net income of
$37.4 million represents an increase of over 39 percent over the first quarter
of 1996, while primary net income per common share increased over 36 percent.
Return on average stockholders' equity increased nearly 23 percent over the
return achieved in the first quarter of 1996.
Agency Securities contributed significantly more to income in the first quarter
of 1997 than in the same period in 1996 due primarily to a 16 basis point
increase in net interest margins and a $503 million increase in average holdings
of these securities. Spreads improved primarily due to improvements in pass-
through rates resulting from the periodic resetting of coupon interest rates on
underlying ARM loans (see "Effects of Interest Rate Changes"). Agency Security
yields averaged 6.29 percent during the quarter compared to 6.16 percent during
the same period of 1996, while borrowing rates were 5.44 percent compared to
5.47 percent in the first quarter of 1996.
Mortgage Pass-Throughs contributed less to income during the current quarter
than in the same period in 1996 despite a 24 basis point increase in net
interest margins because of a $436 million reduction in the average outstanding
portfolio. As a result of asset sales and run-off, the average outstanding
portfolio was $473 million during the current quarter compared to nearly $909
million in the same period of 1996. Average yields for this portfolio
(calculated including mortgage insurance costs) were higher at 7.11 percent
during the current quarter compared to 7.03 percent in the same period in 1996
while average borrowing rates were lower at 5.60 percent compared to 5.76
percent. Yields were impacted by sales of ARM Mortgage Pass-Throughs and the
periodic resetting of coupon interest rates on underlying ARM and medium-term
loans (see "Effects of Interest Rate Changes"). Lower borrowing rates reflect
lower prevailing short-term interest rates.
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<PAGE>
Net CMO investments contributed significantly more to income during the current
quarter than in the same period in 1996 due primarily to substantial investments
made during the past 12 months in interest-only mortgage securities (see above,
"Financial Condition").
Higher mortgage servicing results reflect continued growth in this operation
(see above "Financial Condition"). Revenues increased to $38.7 million during
the current quarter, compared to $28.0 million in the same period in 1996.
Servicing expenses also increased, but not to the same extent as revenues, which
reflects efficiencies gained in the servicing process primarily due to improved
economies of scale. Amortization of mortgage servicing rights of $14.0 million
during the current quarter was higher than the $10.1 million recorded in the
same period in 1996 due primarily to portfolio growth. Greater use of external
borrowings secured by the mortgage servicing portfolio to finance growth
contributed to higher borrowing costs in 1997 compared to 1996.
Operating expenses during the current quarter were lower than in same period in
1996 primarily because of lower compensation-related accruals due in part to the
closure of the telephone origination unit during the second quarter of 1996.
This decision, along with the closure of the mortgage conduit unit in 1995,
eliminated the requirement for a loan loss provision.
During the quarter the Company sold $175 million of mortgage assets consisting
of Agency Securities and Mortgage Pass-Throughs for gains totaling $3.9 million
which were partially offset by $1.4 million in losses on derivative financial
instruments held for trading purposes. This compares to sales of mortgage
assets totaling $150 million in the same period in 1996. Losses during the
current quarter on derivative financial instruments held for trading purposes
reflect increases in interest rates since December 31, 1996. These instruments
(primarily interest-rate floors) tend to decrease in value under these
conditions (see "Effects of Interest Rate Changes").
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 (see below). 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, the payment of cash dividends as required for Capstead's
continued qualification as a Real Estate Investment Trust ("REIT") and common
stock repurchases, if any, as described below. 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 London
Interbank Offered Rate ("LIBOR") rates. The terms and conditions of these
arrangements, including interest rates, are negotiated on a transaction-by-
transaction basis.
At March 31, 1997 the mortgage servicing operation had available $199 million of
a $450 million revolving line of credit agreement with an investment banking
firm that matures September 30, 1998. The line is to be used primarily to
finance acquisitions of mortgage servicing rights on a collateralized basis.
The agreement requires, among other things, that the
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<PAGE>
mortgage servicing operation maintain certain financial ratios and specified
levels of unencumbered servicing rights. The mortgage servicing operation is in
compliance with all requirements. Interest rates on borrowings under this
facility are based on LIBOR.
During the quarter ended March 31, 1997, the Company raised $35.8 million
through its dividend reinvestment and stock purchase plans, stock option
exercises and open market sales. The Company anticipates continuing to raise
equity through these channels as market conditions allow. In 1996 the board of
directors approved the repurchase of up to 1 million shares of common stock to
fund employee stock option and stock grant programs. As of March 31, 1997 no
such share repurchases had occurred.
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. Because most of the Company's mortgage investments are ARM
mortgage securities, 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
invest in derivative financial instruments from time to time, specifically
interest rate caps, 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. This 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 net CMO
investments, which consist primarily of fixed-rate CMO residuals and interest-
only mortgage 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 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, improving the overall return on an
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<PAGE>
investment in a fixed-rate CMO residual because of an increase in time over
which the Company receives the net interest spread.
Interest-only mortgage securities behave similarly to CMO residuals. In a
falling interest rate environment, prepayments on the underlying mortgage loans
generally will be higher thereby reducing or even eliminating overall returns on
these securities. Sustained periods of high prepayments can result in losses.
Conversely, in periods of rising interest rates, interest-only mortgage
securities tend to perform favorably because underlying mortgage loans will
generally prepay at slower rates thereby increasing overall returns.
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, periodic amortization of amounts paid for mortgage
servicing rights is less since the average lives of the related mortgage loans
tend to be longer and earnings from large, temporarily held cash balances will
be greater. Additionally, mortgage servicing rights become more valuable under
these conditions. Conversely, lower interest rates will spur prepayments thus
reducing the 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, because this investment is evaluated for impairment on a
disaggregated basis and impairment charges are necessary if the amount for an
individual servicing stratum exceeds its fair value.
The Company's business plan is to build a mortgage banking operation with
investments in mortgage securities and mortgage servicing with the goal of
producing reasonably balanced operating results in a variety of interest rate
environments. The Company supplements its business plan from time to time with
derivative financial instruments, primarily interest rate floors, which may be
used to hedge certain assets, such as mortgage servicing rights or interest-only
mortgage securities or may be held for trading purposes. 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 trading purposes, changes in value will be recorded in income as they
occur, which could increase income volatility.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 establishes simplified standards for computing and presenting earnings per
share ("EPS"). Under SFAS 128 the presentation of primary EPS will be replaced
with a presentation of basic EPS. Basic EPS is computed excluding dilution
caused by common stock equivalents such as stock options and, therefore, will
tend to be slightly higher than primary EPS. The presentation of fully diluted
EPS is replaced with a presentation of diluted EPS. Diluted EPS is computed in
a similar fashion to how fully diluted EPS is computed. The Company will adopt
this pronouncement to report results of operations for the fourth quarter of
1997 and for the year ended December 31, 1997. Previously reported EPS will be
restated at that time to conform to SFAS 128. This adoption is not expected to
have a material impact on EPS as currently presented by the Company.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held April 18, 1997.
(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................ 43,013,326 - 187,399 -
Paul M. Low..................... 43,005,729 - 194,996 -
Ronn K. Lytle................... 43,015,379 - 185,346 -
Harriet E. Miers................ 43,011,233 - 189,492 -
William R. Smith................ 43,019,024 - 181,701 -
John C. Tolleson................ 43,008,846 - 191,879 -
Other matters (no other matters) 38,953,352 3,344,238 899,656 2,201
</TABLE>
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following Exhibits are presented herewith:
Exhibit 10.31 - Amendment No. 1 dated March 3, 1997 to the Employment
Agreement dated August 1, 1992 between the Company and Ronn K. Lytle.
Exhibit 10.32 - 1997 Flexible Long Term Incentive Plan
Exhibit 11 - Computation of Earnings Per Share for the quarter ended March
31, 1997 and 1996.
Exhibit 27 - Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K:
Current Report on Form 8-K dated March 26, 1997 to file the following:
Exhibit 1.6 - The Second Amendment dated as of March 4, 1997 to the Sales
Agency Agreement dated as of December 6, 1995 between the Company and
PaineWebber Incorporated (the "Sales Agency Agreement").
Exhibit 1.7 - The First Amendment dated as of March 4, 1997 to the Sales
Agency Agreement dated as of September 17, 1996 between the Company and
PaineWebber Incorporated (the "Series B Preferred Stock 1996 Sales Agency
Agreement").
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<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: April 28, 1997 By /s/ RONN K. LYTLE
------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
Date: April 28, 1997 By /s/ ANDREW F. JACOBS
------------------------------------
Andrew F. Jacobs
Senior Vice President - Control
and Treasurer
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<PAGE>
EXHIBIT 10.31
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
Amendment No. 1 to Employment Agreement (this "Amendment") is entered into and
effective as of the 3rd day of March, 1997, by and between CAPSTEAD MORTGAGE
CORPORATION, a Maryland corporation (the "Company") and RONN K. LYTLE, an
individual resident of the State of Texas (the "Executive").
WITNESSETH:
-----------
WHEREAS, the Company and the Executive have entered into an Employment
Agreement dated and effective as of August 1, 1992 (the "Employment Agreement")
setting forth the terms and conditions of employment for the Executive;
WHEREAS, the Company and the Executive have agreed to enter into this
Amendment to amend certain terms and provisions of the Employment Agreement as
more specifically set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Executive
hereby agree to amend the Employment Agreement as follows:
1. Section 4(b)(2) of the Employment Agreement is hereby amended and restated
in its entirety to read as follows:
It is intended that prior to December 31, 1992, the Board shall develop and
adopt an incentive compensation plan for its executives (the "Plan").
Beginning with calendar 1993 and ending with calendar 1996, the Executive
will be paid the amount of incentive compensation determined pursuant to
the Plan or, if no such Plan has been adopted, at the discretion of the
Board.
2. Section 4(b)(3) of the Employment Agreement is hereby redesignated as
Section 4(b)(4) and a new Section 4(b)(3) is added to read as follows:
Beginning with calendar 1997, the Executive will be paid the amount of
incentive compensation determined at the discretion of the Compensation
Committee of the Board (the "Compensation Committee") or pursuant to
certain incentive compensation, incentive bonus or other plans administered
by the Compensation Committee.
3. In the event of any conflict between the terms of this Amendment and the
terms of the Employment Agreement, the terms of this Amendment shall control.
<PAGE>
4. Except as otherwise amended hereby, all of the other terms and provisions of
the Employment Agreement shall remain in full force and effect and are hereby
ratified by the parties hereto.
5. This Amendment may be executed in any number of counterparts; each of which
shall be an original and all of which together shall constitute but one and the
same instrument. The delivery of counterpart signatures by facsimile
transmission shall have the same force and effect as the delivery of a signed
hard copy.
IN WITNESS WHEREOF, the parties have executed this Amendment effective as of
the day and year first written above.
COMPANY:
CAPSTEAD MORTGAGE CORPORATION
By /s/ ANDREW F. JACOBS
--------------------
Andrew F. Jacobs,
Senior Vice President - Control
EXECUTIVE:
By /s/ RONN K. LYTLE
-----------------
Ronn K. Lytle
<PAGE>
EXHIBIT 10.32
CAPSTEAD MORTGAGE CORPORATION
1997 FLEXIBLE LONG TERM INCENTIVE PLAN
----------------------------------------------------
Section 1. PURPOSE OF THE PLAN
The purposes of the Capstead Mortgage Corporation 1997 Flexible Long Term
Incentive Plan (the "Plan") are to promote the interests of Capstead Mortgage
Corporation (together with any successor thereto, the "Company") and its
stockholders by enabling the Company to attract, motivate, reward and retain
employees and to encourage the holding of proprietary interests in the Company
by employees of the Company or its Affiliates by enabling the Company to offer
such key employees performance-based stock incentives and other equity interests
in the Company and other incentive awards that recognize the creation of value
for the stockholders of the Company and promote the Company's long-term growth
and success. To achieve this purpose, eligible persons may receive stock
options, Stock Appreciation Rights, Restricted Stock, Performance Awards,
performance stock, Dividend Equivalent Rights and any other Awards, or any
combination thereof.
Section 2. DEFINITIONS
As used in this Plan, the following terms shall have the meanings set forth
below unless the content otherwise requires:
2.1 "Affiliate" shall mean (i) any corporation, partnership or other
entity that, directly or indirectly, is controlled by the Company (ii) any
entity in which the Company has a significant equity interest and (iii) any
entity that provides substantial management advisory services for the
Company, in each case as determined by the Committee.
2.2 "Award" shall mean a stock option, Stock Appreciation Right,
Restricted Stock, Performance Award, performance stock, Dividend Equivalent
Right or any other Award under the Plan.
2.3 "Board" shall mean the Board of Directors of the Company, as the
same may be constituted from time to time.
2.4 "Change in Control" shall mean, after the effective date of this
Plan, (i) the occurrence of an event of a nature that would be required to
be reported in response to Item 1 or Item 2 of a Form 8-K Current Report of
the Company promulgated pursuant to Sections 13 and 15(d) of the Securities
Exchange Act of 1934, as amended; provided that, without limitation, such a
Change in Control shall be deemed to have occurred if (a) any "person," as
such term is used in Sections 13(d) and 14(d) of the Exchange Act (other
than the Company, any trustee or other fiduciary holding securities under
any employee benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing twenty-
five percent (25%) or more of the combined voting power of the Company's
then outstanding securities or (b) during any period of two consecutive
years, individuals who at the beginning of such period constitute the
<PAGE>
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 consolidation
effected to implement a reorganization or recapitalization of the Company,
or a similar transaction (collectively, a "Reorganization"), in which no
"person" acquires more than twenty percent (20%) of the combined voting
power of the Company's then outstanding securities shall not constitute a
Change in Control of the Company; or (iii) the stockholders of the Company
approve a plan of complete liquidation of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
2.6 "Committee" shall mean a committee of the Board, which shall
consist solely of not less than two (2) members of the Board who are
appointed by, and serve at the pleasure of, the Board and who are (i) "Non-
Employee Directors" within the meaning of Rule 16b-3 of the General Rules
and Regulations of the Exchange Act and (ii) "outside directors," as
required under Section 162(m) of the Code and such Treasury Regulations as
may be promulgated thereunder.
2.7 "Common Stock" shall mean the Common Stock, par value $.01 per
share, of the Company.
2.8 "Disability" shall mean permanent and total inability to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not
less than twelve (12) months, as determined in the sole and absolute
discretion of the Committee.
2.9 "Dividend Equivalent Right" shall mean the right of the holder
thereof to receive credits based on the cash dividends that would have been
paid on the Shares specified in the Award if the Shares were held by the
holder to whom the Award is made.
2.10 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
2.11 "Fair Market Value" shall mean with respect to the Shares, as of
any date, (i) the last reported sales price regular way on the New York
Stock Exchange or, if not reported for the New York Stock Exchange, on the
Composite Tape, or, in case no such sale takes place on such day, the
average of the reported closing bid and asked quotations on the New York
Stock Exchange; (ii) if the Shares are not listed on the New York Stock
Exchange or no such quotations are available, the closing price of the
Shares as reported by the National Market System, or similar
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<PAGE>
organization, or, if no such quotations are available, the average of the
high bid and low asked quotations in the over-the-counter market as
reported by the National Quotation Bureau Incorporated, or similar
organization; or (iii) in the event that there shall be no public market
for the Shares, the fair market value of the Shares as determined (which
determination shall be conclusive) in good faith by the Committee, based
upon the value of the Company as a going concern, as if such Shares were
publicly owned stock, but without any discount with respect to minority
ownership.
2.12 "Non-Tandem Stock Appreciation Right" shall mean any Stock
Appreciation Right granted alone and not in connection with an Award which
is a stock option.
2.13 "Non-Qualified Stock Option" shall mean any stock option awarded
under this Plan (and no such stock option shall be designated as an
"Incentive Stock Option" under Section 422 of the Code or any successor
provision).
2.14 "Optionee" shall mean any person who has been granted a stock
option under this Plan and who has executed a written stock option
agreement with the Company reflecting the terms of such grant.
2.15 "Plan" shall mean the Capstead Mortgage Corporation 1997 Flexible
Long Term Incentive Plan set forth herein.
2.16 "Performance Award" shall mean any Award hereunder of Shares,
units or rights based upon, payable in, or otherwise related to, Shares
(including Restricted Stock), or cash of an equivalent value, as the
Committee may determine, at the end of a specified performance period
established by the Committee.
2.17 "Reload Option" shall mean a stock option as defined in
subsection 6.6(b) herein.
2.18 "Restricted Stock" shall mean any Award of Shares under this Plan
that are subject to restrictions or risk of forfeiture.
2.19 "Retirement" shall mean termination of employment, other than
discharge for cause, after age 65 or on or before age 65 with the consent
of the Committee.
2.20 "Shares" shall mean shares of the Company's Common Stock and any
shares of capital stock or other securities of the Company hereafter issued
or issuable upon, in respect of or in substitution or exchange for such
Shares.
2.21 "Stock Appreciation Right" shall mean the right of the holder
thereof to receive an amount in cash or Shares equal to the excess of the
Fair Market Value of a Share on the date of exercise over the Fair Market
Value of a Share on the date of the grant (or such other value as may be
specified in the agreement granting the Stock Appreciation Right).
2.22 "Tandem Stock Appreciation Right" shall mean a Stock Appreciation
Right granted in connection with an Award which is a stock option.
-3-
<PAGE>
Section 3. ADMINISTRATION OF THE PLAN
3.1 Committee. The Plan shall be administered and interpreted by the
Committee.
3.2 Awards. Subject to the provisions of the Plan and directions
from the Board, the Committee is authorized to:
(a) determine the persons to whom Awards are to be granted;
(b) determine the types and combinations of Awards to be
granted, the number of Shares to be covered by the Award, the pricing
of the Award, the time or times when the Award shall be granted and
may be exercised, the terms, performance criteria or other conditions,
vesting periods or any restrictions for an Award, any restrictions on
Shares acquired pursuant to the exercise of an Award and any other
terms and conditions of an Award;
(c) conclusively interpret the Plan provisions;
(d) prescribe, amend and rescind rules and regulations relating
to the Plan or make individual decisions as questions arise, or both;
(e) determine whether, to what extent and under what
circumstances to provide loans from the Company to participants in
order to purchase Shares subject to Awards under the Plan, and the
terms and conditions of such loans;
(f) rely upon employees of the Company for such clerical and
record-keeping duties as may be necessary in connection with the
administration of the Plan; and
(g) make all other determinations and take all other actions
necessary or advisable for the administration of the Plan.
3.3 Procedures. A majority of the Committee members shall constitute
a quorum. All determinations of the Committee shall be made by a majority
of its members. All questions of interpretation and application of the
Plan or pertaining to any question of fact or Award granted hereunder shall
be decided by the Committee, whose decision shall be final, conclusive and
binding upon the Company and each other affected party.
Section 4. SHARES SUBJECT TO PLAN
4.1 Limitations. The maximum number of Shares that may be issued
with respect to Awards under the Plan shall not exceed 2,000,000 unless
such maximum shall be increased or decreased by reasons of changes in
capitalization of the Company as hereinafter provided. The maximum number
of Shares with respect to which Awards may be granted in any fiscal year to
any participant in the Plan shall not exceed 50,000. The Shares issued
pursuant to the Plan may be authorized but unissued Shares, or may be
issued Shares which have been reacquired by the Company.
4.2 Changes. To the extent that any Award under the Plan, or any
stock option or performance award granted under any prior incentive plan of
the Company, shall be forfeited, shall expire or shall be canceled, in
whole or in part, then the number of Shares covered by the
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<PAGE>
Award or stock option so forfeited, expired or canceled may again be
awarded pursuant to the provisions of this Plan. In the event that Shares
are delivered to the Company in full or partial payment of the exercise
price for the exercise of a stock option granted under the Plan or any
prior incentive plan of the Company, the number of Shares available for
future Awards under the Plan shall be reduced only by the net number of
Shares issued upon the exercise of the option. Awards that may be satisfied
either by the issuance of Shares or by cash or other consideration shall be
counted against the maximum number of Shares that may be issued under the
Plan, even though the Award is ultimately satisfied by the payment of
consideration other than Shares, as, for example, a stock option granted in
tandem with a Stock Appreciation Right that is settled by a cash payment of
the stock appreciation. However, Awards will not reduce the number of
Shares that may be issued pursuant to the Plan if the settlement of the
Award will not require the issuance of Shares, as, for example, a Stock
Appreciation Right that can be satisfied only by the payment of cash.
Section 5. ELIGIBILITY
Eligibility for participation under the Plan shall be open to all officers
and employees of the Company and its Affiliates.
Section 6. STOCK OPTIONS
6.1 Grants. The Committee may grant stock options alone or in
addition to other Awards granted under this Plan to any eligible officer or
employee. Such option shall be a Non-Qualified Stock Option, and the
Committee shall specify any terms or conditions relating to such Award.
Each such person so selected shall have a reasonable period of time within
which to accept or reject the offered option. Failure to accept within the
period so fixed by the Committee may be treated as a rejection. Each
person who accepts an option shall enter into a written agreement with the
Company, in such form as the Committee may prescribe, setting forth the
terms and conditions of the option, consistent with the provisions of the
Plan.
The Committee may require than an Optionee meet certain conditions
before the option or a portion thereof may vest or be exercised, as, for
example, that the Optionee remain in the employ of the Company or one of
its Affiliates for a stated period or periods of time before the option, or
stated portions thereof, may vest or be exercised; provided, however, that
nothing in the Plan or in any option agreement shall confer upon any
Optionee any right to remain in the employ of the Company or one of its
Affiliates, and nothing herein shall be construed in any manner to
interfere in any way with the right of the Company or its Affiliates to
terminate such Optionee's employment at any time.
6.2 Option Price. The option exercise price of the Shares covered by
each stock option shall be determined by the Committee.
6.3 Option Term. The term of a stock option shall be for such period
of months or years from the date of its grant as may be determined by the
Committee. Each option shall be subject to earlier termination as
hereinafter provided (unless the Committee has provided otherwise):
(a) If the Optionee ceases to be an officer or employee of the
Company or any Affiliate by reason of the Optionee's discharge for
cause, as determined solely and exclusively by the Committee, all
rights of the Optionee to exercise an option shall terminate,
-5-
<PAGE>
lapse and be forfeited immediately at the time of the Optionee's
discharge for cause.
(b) If the Optionee ceases to be an employee of the Company or
any Affiliate by reason of death, the personal representatives, heirs,
legatees or distributees of the Optionee, as appropriate, shall have
the right up to the earlier of (i) six (6) months from the Optionee's
death or (ii) the remaining term of the option to exercise any such
option.
(c) If the Optionee ceases to be an employee of the Company or
any Affiliate by reason of the Optionee's resignation, Retirement,
Disability or for any reason other than the Optionee's discharge for
cause or death, all rights of the Optionee to exercise an option shall
terminate, lapse, and be forfeited upon the earlier of (i) six (6)
months after the date of the Optionee's termination of employment by
reason of such employee's resignation, Retirement, Disability or such
other reason or (ii) the remaining term of the option, except that in
case the Optionee shall die within six (6) months after the date of
termination of employment by reason of such employee's resignation,
Retirement, Disability or such other reason, the personal
representatives, heirs, legatees or distributees of the Optionee, as
appropriate, shall have the right up to an additional three (3) months
from the date of the Optionee's death to exercise any such option .
6.4 Vesting of Stock Options.
(a) Each stock option granted hereunder may only be exercised to
the extent that the Optionee is vested in such option. Each stock
option shall vest separately in accordance with the option vesting
schedule, if any, determined by the Committee in its sole discretion,
which will be incorporated in the stock option agreement entered into
between the Company and each Optionee. The option vesting schedule
will be accelerated in the event the provisions of paragraphs (b),
(c), (d) or (e) of this subsection apply; or if, in the sole
discretion of the Committee, the Committee determines that
acceleration of the option vesting schedule would be desirable for the
Company.
(b) If an Optionee ceases to be an employee of the Company or
any Affiliate by reason of death, the personal representatives, heirs,
legatees or distributees of the Optionee, as appropriate, shall become
fully vested in each stock option granted to the Optionee, effective
on the date of the Optionee's death or on the date that the Optionee
ceases to be an employee, as appropriate, and shall have the immediate
right to exercise any such option to the extent not previously
exercised.
(c) In the event of the dissolution or liquidation of the
Company, each stock option granted under the Plan shall terminate as
of a date to be fixed by the Board; provided, however, that not less
than thirty (30) days' written notice of the date so fixed shall be
given to each Optionee and each such Optionee shall be fully vested in
and shall have the right during such period to exercise the option,
even though such option would not otherwise be exercisable under the
option vesting schedule. At the end of such period, any unexercised
option shall terminate and be of no further effect.
(d) In the event of a Reorganization:
-6-
<PAGE>
(1) If there is no plan or agreement respecting the
Reorganization, or if such plan or agreement does not
specifically provide for the change, conversion or exchange of
the Shares under outstanding and unexercised stock options for
other securities then the provisions of the above paragraph (c)
of this subsection shall apply as if the Company had dissolved or
been liquidated on the effective date of the Reorganization; or
(2) If there is a plan or agreement respecting the
Reorganization, and if such plan or agreement specifically
provides for the change, conversion or exchange of the Shares
under outstanding and unexercised stock options for securities of
another corporation, then the Board shall adjust the Shares under
such outstanding and unexercised stock options (and shall adjust
the Shares remaining under the Plan which are then available to
be awarded under the Plan, if such plan or agreement makes no
specific provision therefor) in a manner not inconsistent with
the provisions of such plan or agreement for the adjustment,
change, conversion or exchange of such Shares and such options.
(e) In the event of a Change in Control of the Company, all
stock options and any associated Stock Appreciation Rights shall
become fully vested and immediately exercisable and the vesting of all
performance-based stock options shall be determined as if the
performance period or cycle applicable to such stock options had ended
immediately upon such Change in Control.
6.5 Exercise of Stock Options.
(a) Stock options may be exercised as to Shares only in amounts
and at intervals of time specified in the written option agreement
between the Company and the Optionee. Each exercise of a stock option,
or any part thereof, shall be evidenced by a notice in writing to the
Company. The purchase price of the Shares as to which an option shall
be exercised shall be paid in full at the time of exercise, and may be
paid to the Company either:
(1) in cash (including check, bank draft or money order);
(2) by the delivery (constructive or otherwise) of Shares
having a Fair Market Value equal to the aggregate option price;
(3) by a combination of cash and Shares; or
(4) by arrangement with a broker acceptable to the
Committee in which payment of the exercise price is made pursuant
to an irrevocable direction from the Optionee to the broker to
deliver the Company proceeds from the sale of the option Shares
in an amount equal to the exercise price of the Shares.
(b) If an Optionee delivers Shares (including Shares of
Restricted Stock) already owned by him or her in full or partial
payment of the exercise price for any stock option granted under the
Plan or any prior incentive plan of the Company, the Committee may
authorize the automatic grant of a new option (a "Reload Option") for
that number of Shares as shall equal the number of
-7-
<PAGE>
already owned Shares surrendered (including Shares of Restricted
Stock). The grant of a Reload Option will become effective upon the
exercise of the underlying stock option. The option exercise price of
the Reload Option shall be the Fair Market Value of a Share on the
effective date of the grant of the Reload Option. Each Reload Option
shall be exercisable no earlier than six (6) months from the date of
its grant and no later than the time when the underlying stock option
being exercised could be last exercised. The Committee may also
specify additional terms, conditions and restrictions for the Reload
Option and the Shares to be acquired upon the exercise thereof.
(c) The amount, as determined by the Committee, of any federal,
state or local tax required to be withheld by the Company due to the
exercise of a stock option shall be satisfied, at the election of the
Optionee, either (a) by payment by the Optionee to the Company of the
amount of such withholding obligation in cash (the "Cash Method") or
(b) through either the retention by the Company of a number of Shares
out of the Shares being acquired through the exercise of the option or
the delivery of already owned Shares having a Fair Market Value equal
to the amount of the withholding obligation (the "Share Retention
Method"). If an Optionee elects to use the Share Retention Method in
full or partial satisfaction for any tax liability resulting from the
exercise of a stock option, the Committee may authorize the grant of a
Reload Option for that number of Shares as shall equal the number of
Shares used to satisfy the tax liabilities of the stock option being
exercised on the price and terms set forth in subsection (b) above.
The cash payment or the amount equal to the Fair Market Value of the
Shares so withheld, as the case may be, shall be remitted by the
Company to the appropriate taxing authorities. The Committee shall
determine the time and manner in which an Optionee may elect to
satisfy a withholding obligation by either the Cash Method or the
Share Retention Method.
(d) An Optionee shall not have any of the rights of a
stockholder of the Company with respect to the Shares covered by a
stock option except to the extent that one or more certificates of
such Shares shall have been delivered to the Optionee, or the Optionee
has been determined to be a stockholder of record by the Company's
Transfer Agent, upon due exercise of the option.
6.6 Date of a Stock Option Grant. The granting of a stock option
shall take place only when the Committee approves the granting of such
option. Neither any action taken by the Board nor anything contained in the
Plan or in any resolution adopted or to be adopted by the Board or the
stockholders of the Company shall constitute the granting of a stock option
under the Plan.
Section 7. STOCK APPRECIATION RIGHTS
7.1 Grants. The Committee may grant to any eligible officer or
employee either Non-Tandem Stock Appreciation Rights or Tandem Stock
Appreciation Rights. Stock Appreciation Rights shall be subject to such
terms and conditions as the Committee shall impose. The grant of the Stock
Appreciation Right may provide that the holder may be paid for the value of
the Stock Appreciation Right either in cash or in Shares, or a combination
thereof, at the discretion of the Committee. In the event of the exercise
of a Stock Appreciation Right payable in Shares, the holder of the Stock
Appreciation Right shall receive that number of whole Shares of stock of
the Company having an aggregate Fair Market Value on the date of exercise
equal to the value obtained by multiplying
-8-
<PAGE>
(i) either (a) in the case of a Tandem Stock Appreciation Right, the
difference between the Fair Market Value of a Share on the date of exercise
over the per share exercise price of the related option, or (b) in the case
of a Non-Tandem Stock Appreciation Right, the difference between the Fair
Market Value of a Share on the date of exercise over the Fair Market Value
on the date of the grant by (ii) the number of Shares as to which the Stock
Appreciation Right is exercised. However, notwithstanding the foregoing,
the Committee, in its sole discretion, may place a ceiling on the amount
payable upon exercise of a Stock Appreciation Right, but any such
limitation shall be specified at the time that the Stock Appreciation Right
is granted.
7.2 Exercisability. A Tandem Stock Appreciation Right may be granted
at the time of the grant of the related stock option or at any time
thereafter during the term of the stock option. The Tandem Stock
Appreciation Right may be transferred at, and only at, the times and to the
extent the related stock option is transferable. If a Tandem Stock
Appreciation Right is granted, there shall be surrendered and canceled from
the option at the time of exercise of the Tandem Stock Appreciation Right,
in lieu of exercise under the option, that number of Shares as shall equal
the number of Shares as to which the Tandem Stock Appreciation Right shall
have been exercised.
7.3 Certain Limitations on Non-Tandem Stock Appreciation Rights. A
Non-Tandem Stock Appreciation Right will be exercisable as provided by the
Committee and will have such other terms and conditions as the Committee
may determine. A Non-Tandem Stock Appreciation Right is subject to
acceleration of vesting or immediate termination in certain circumstances
in the same manner as stock options pursuant to subsections 6.3 and 6.4 of
this Plan.
7.4 Limited Stock Appreciation Rights. The Committee is also
authorized to grant "limited stock appreciation rights," either as Tandem
Stock Appreciation Rights or Non-Tandem Stock Appreciation Rights. Limited
stock appreciation rights would become exercisable only upon the occurrence
of a Change in Control or such other event as the Committee may designate
at the time of grant or thereafter.
Section 8. RESTRICTED STOCK
8.1 Grants. The Committee may grant Awards of Restricted Stock for
no cash consideration, for such minimum consideration as may be required by
applicable law, or for such other consideration as may be specified by the
grant. The terms and conditions of the Restricted Stock shall be specified
by the grant agreement. The Committee, in its sole discretion, shall
determine what rights, if any, the person to whom an Award of Restricted
Stock is made shall have in the Restricted Stock during the restriction
period and the restrictions applicable to the particular Award, including,
without limitation, whether the holder of the Restricted Stock shall have
the right to vote the Shares and receive dividends and other distributions
applicable to the Shares, the vesting schedule (which may be based on
service, performance or other factors) and rights to acceleration of
vesting (including, without limitation, whether non-vested Shares are
forfeited or vested upon termination of employment). Further, the
Committee may award performance-based Restricted Stock by conditioning the
grant, or vesting or such other factors, such as the release, expiration or
lapse of restrictions upon any such Award (including the acceleration of
any such conditions or terms) of such Restricted Stock upon the attainment
of specified performance goals or such other factors as the Committee may
determine; provided, however, that notwithstanding the foregoing, upon a
Change in Control, the amount of granting or vesting, as the case may be,
for all
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<PAGE>
performance-based Restricted Stock, shall be determined as if the
performance period or cycle applicable to such Restricted Stock had
terminated immediately upon such Change in Control; provided, however, that
to the extent that any such performance period or cycle is shortened
adversely by virtue of the Change in Control, such Restricted Stock shall
be prorated accordingly. The Committee shall also determine when the
restrictions shall lapse or expire and the conditions, if any, under which
the Restricted Stock will be forfeited or sold back to the Company,
provided, however, that notwithstanding the foregoing, upon a Change in
Control, all restrictions applicable to Restricted Stock shall lapse and
expire and Shares of Restricted Stock with vesting provisions shall become
fully vested. Each Award of Restricted Stock may have different
restrictions and conditions. The Committee, in its discretion, may
prospectively change the restriction period and the restrictions applicable
to any particular Award of Restricted Stock. Unless otherwise set forth in
the Plan, Restricted Stock may not be disposed of by the recipient until
the restrictions specified in the Award expire.
8.2 Awards and Certificates. Any Restricted Stock issued hereunder
may be evidenced in such manner as the Committee, in its sole discretion,
shall deem appropriate including, without limitation, book-entry
registration or issuance of a stock certificate or certificates. In the
event any stock certificate is issued in respect of Shares of Restricted
Stock awarded hereunder, such certificate shall bear an appropriate legend
with respect to the restrictions applicable to such Award. The Company may
retain, at its option, the physical custody of any stock certificate
representing any awards of Restricted Stock during the restriction period
or require that the Restricted Stock be placed in escrow or trust, along
with a stock power endorsed in blank, until all restrictions are removed or
expire.
Section 9. PERFORMANCE AWARDS
9.1 Grants. A Performance Award may consist of either or both, as the
Committee may determine, of (i) "Performance Shares," or the right to
receive Shares, Restricted Stock or cash of an equivalent value, or any
combination thereof as the Committee may determine, or (ii) "Performance
Units," or the right to receive a fixed dollar amount payable in cash,
Common Stock, Restricted Stock or any combination thereof, as the Committee
may determine. The Committee may grant Performance Awards to any eligible
employee, for no cash consideration, for such minimum consideration as may
be required by applicable law or for such other consideration as may be
specified at the time of the grant. The terms and conditions of Performance
Awards shall be specified at the time of the grant and may include
provisions establishing the performance period, the performance criteria to
be achieved during a performance period, the criteria used to determine
vesting (including the acceleration thereof), whether Performance Awards
are forfeited or vest upon termination of employment during a performance
period and the maximum or minimum settlement values; provided, however,
that notwithstanding the foregoing, upon a Change in Control, the vesting,
if any, and the determination of the amount earned of a Performance Award
shall be determined as if the performance period or cycle applicable to
such Performance Award had terminated immediately upon such Change in
Control; provided, however, that to the extent that any such performance
period or cycle is shortened adversely by virtue of the Change in Control,
such Performance Award shall be prorated accordingly. Each Performance
Award shall have its own terms and conditions, which shall be determined in
the discretion of the Committee. If the Committee determines, in its sole
discretion, that the established performance measures or objectives are no
longer
-10-
<PAGE>
suitable because of a change in the Company's business, operations,
corporate structure or for other reasons that the Committee deems
satisfactory, the Committee may modify the performance measures or
objectives and/or the performance period.
9.2 Terms and Conditions. Performance Awards may be valued by
reference to the Fair Market Value of a Share or according to any formula
or method deemed appropriate by the Committee, in its sole discretion,
including, but not limited to, achievement of specific financial,
production, sales, cost or earnings performance objectives that the
Committee believes to be relevant to the Company's business and for
remaining in the employ of the Company for a specified period of time, or
the Company's performance or the performance of its Common Stock measured
against the performance of the market, the Company's industry segment or
its direct competitors. Performance Awards may be paid in cash, Shares
(including Restricted Stock) or other consideration, or any combination
thereof. If payable in Shares, the consideration for the issuance of the
Shares may be the achievement of the performance objective established at
the time of the grant of the Performance Award. Performance Awards may be
payable in a single payment or in installments and may be payable at a
specified date or dates or upon attaining the performance objective, all at
the Committee's discretion. The extent to which any applicable performance
objective has been achieved shall be conclusively determined by the
Committee.
Section 10. DIVIDEND EQUIVALENT RIGHTS
The Committee may grant a Dividend Equivalent Right, either as a component
of another Award or as a separate Award, and, in general, each such holder of a
Dividend Equivalent Right that is outstanding on a dividend record date for the
Company's Common Stock shall be credited with an amount equal to the cash or
stock dividends or other distributions that would have been received had the
Shares covered by the Award been issued and outstanding on the dividend record
date. The terms and conditions of the Dividend Equivalent Right shall be
specified by the grant. Dividend equivalents credited to the holder of a
Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional Shares (which may thereafter accrue additional Dividend
Equivalent Rights). Any such reinvestment shall be at the Fair Market Value at
the time thereof. Dividend Equivalent Rights may be settled in cash or Shares,
or a combination thereof, in a single payment or in installments. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement or payment
for or lapse of restrictions on such other Award, and that such Dividend
Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other Award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other Award.
Section 11. OTHER AWARDS
The Committee may grant to any eligible employee other forms of Awards
based upon, payable in or otherwise related to, in whole or in part, Shares if
the Committee, in its sole discretion. determines that such other form of Award
is consistent with the purposes and restrictions of the Plan. The terms and
conditions of such other form of Award shall be specified by the grant,
including, but not limited to, the price, if any, and the vesting schedule, if
any. Such Awards may be granted for no cash consideration, for such minimum
consideration as may be required by applicable law or for such other
consideration as may be specified by the grant.
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<PAGE>
Section 12. NON-TRANSFERABILITY OF AWARDS.
A stock option shall not be transferable otherwise than by will or the laws
of descent and distribution, and a stock option may be exercised, during the
lifetime of the Optionee, only by the Optionee; provided, however, that with the
approval of the Committee, the agreement relating to any Award (including,
without limitation, a stock option) may provide that such Award may be
transferred to one or more members of the immediate family of the grantee of the
Award or to a trust for the benefit of such person or as directed under a
qualified domestic relations order. Any attempted assignment, transfer, pledge,
hypothecation or other disposition of a stock option or other Award contrary to
the provisions hereof, or the levy of any execution, attachment or similar
process upon a stock option or other Award shall be null and void and without
effect.
Section 13. COMPLIANCE WITH SECURITIES AND OTHER LAWS
In no event shall the Company be required to sell or issue Shares under any
Award if the sale or issuance thereof would constitute a violation of applicable
federal or state securities laws or regulations or a violation of any other law
or regulation of any governmental or regulatory agency or authority or any
national securities exchange. As a condition to any sale or issuance of Shares,
the Company may place legends on Shares, issue stop transfer orders and require
such agreements or undertakings as the Company may deem necessary or advisable
to assure compliance with any such laws or regulations, including, if the
Company or its counsel deems it appropriate, representations from the person to
whom an Award is granted that he or she is acquiring the Shares solely for
investment and not with a view to distribution and that no distribution of the
Shares will be made unless registered pursuant to applicable federal and state
securities laws, or in the opinion of counsel of the Company, such registration
is unnecessary.
Section 14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR REORGANIZATION
The value of an Award in Shares shall be adjusted from time to time as
follows:
(a) Subject to any required action by stockholders, the number
of Shares covered by each outstanding Award, and the exercise price,
shall be proportionately adjusted for any increase or decrease in the
number of issued Shares of the Company resulting from a subdivision or
consolidation of Shares or the payment of a stock dividend (but only
in Shares) or any other increase or decrease in the number of Shares
effected without receipt of consideration by the Company.
(b) Subject to any required action by stockholders, if the
Company shall be the surviving corporation in any Reorganization,
merger or consolidation, each outstanding Award shall pertain to and
apply to the securities to which a holder of the number of Shares
subject to the Award would have been entitled, and if a plan or
agreement reflecting any such event is in effect that specifically
provides for the change, conversion or exchange of Shares, then any
adjustment to Shares relating to an Award hereunder shall not be
inconsistent with the terms of any such plan or agreement.
(c) In the event of a change in the Shares of the Company as
presently constituted, which is limited to a change of par value into
the same number of Shares with a different par value or without par
value, the Shares resulting from any such change shall be deemed to be
the Shares within the meaning of the Plan.
-12-
<PAGE>
To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the
Board, whose determination shall be final, binding and conclusive.
Except as hereinbefore expressly provided in the Plan, any person
to whom an Award is granted shall have no rights by reason of any
subdivision or consolidation of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of
shares of stock of any class or by reason of any dissolution,
liquidation, reorganization, merger or consolidation or spinoff of
assets or stock of another corporation, and any issue by the Company
of shares of stock of any class, or securities convertible into shares
of stock of any class, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number or exercise price of
Shares subject to an Award.
The grant of an Award pursuant to the Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, Reorganizations or changes of its capital or
business structure or to merge or to consolidate or to dissolve,
liquidate or sell or transfer all or any part of its business or
assets.
Section 15. AMENDMENT OR TERMINATION OF THE PLAN
15.1 Amendment of the Plan. Notwithstanding anything contained in
the Plan to the contrary, all provisions of the Plan may at any time or
from time to time be modified or amended by the Board; provided, however,
that no Award at any time outstanding under the Plan may be modified,
impaired or canceled adversely to the holder of the Award without the
consent of such holder.
15.2 Termination of the Plan. The Board may suspend or terminate the
Plan at any time, and such suspension or termination may be retroactive or
prospective. However, no Award may be granted on or after April 18, 2007,
the tenth anniversary of the adoption of the Plan. Termination of the Plan
shall not impair or affect any Award previously granted hereunder and the
rights of the holder of the Award shall remain in effect until the Award
has been exercised in its entirety or has expired or otherwise has been
terminated by the terms of such Award.
Section 16. AMENDMENTS AND ADJUSTMENTS TO AWARDS
The Committee may amend, modify or terminate any outstanding Award with the
Participant's consent at any time prior to payment or exercise in any manner not
inconsistent with the terms of the Plan, including, without limitation, (i) to
change the date or dates as of which (A) an option becomes exercisable or (B) a
performance-based Award is deemed earned or (ii) to cancel an Award and grant a
new Award in substitution therefor under such different terms and conditions as
it determines in its sole and complete discretion to be appropriate. The
Committee is also authorized to make adjustments in the terms and conditions of,
and the criteria included in, Awards in recognition of unusual or nonrecurring
events (including, without limitation, the events described in Section 14
hereof) affecting the Company, or the financial statements of the Company or any
Affiliate, or of changes in applicable laws, regulations or accounting
principles, whenever the Committee determines that such adjustments are
appropriate in order to prevent reduction or enlargement of the benefits or
potential benefits intended to be made available under the Plan. Any provision
of the Plan or any agreement regarding an Award to the contrary notwithstanding,
the Committee may cause
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<PAGE>
any Award granted to be canceled in consideration of a cash payment or
alternative Award made to the holder of such canceled Award equal in value to
the Fair Market Value of such canceled Award. The determinations of value under
this Section 16 shall be made by the Committee in its sole discretion.
Section 17. GENERAL PROVISIONS
17.1 No Limit on Other Compensation Arrangements. Nothing contained
in the Plan shall prevent the Company from adopting or continuing in effect
other compensation arrangements, and such arrangements may be either
generally applicable or applicable only in specific cases.
17.2 No Right to Employment. The grant of an Award shall not be
construed as giving the recipient thereof the right to be retained in the
employ of the Company. Further, the Company may at any time dismiss a
participant in the Plan from employment, free from any liability or any
claim under the Plan, unless otherwise expressly provided in the Plan or in
any Award agreement. No employee, participant or other person shall have
any claim to be granted any Award, and there is no obligation for
uniformity or treatment of employees, participants or holders or
beneficiaries of Awards.
17.3 GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND EFFECT OF THE
PLAN AND ANY RULES AND REGULATIONS RELATING TO THE PLAN SHALL BE DETERMINED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND.
17.4 Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or as to any person or Award, or would disqualify the Plan or
any Award under any law deemed applicable by the Committee, such provision
shall be construed or deemed amended to conform to applicable laws, or if
it cannot be construed or deemed amended without, in the sole determination
of the Committee, materially altering the intent of the Plan or the Award,
such provision shall be stricken as to such jurisdiction, person or Award
and the remainder of the Plan and any such Award shall remain in full force
and effect.
17.5 No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall
determine whether cash, other securities or other property shall be paid or
transferred in lieu of any fractional Shares or whether such fractional
Shares or any rights thereto shall be canceled, terminated or otherwise
eliminated.
17.6 Headings. Headings are given to the subsections of the Plan
solely as a convenience to facilitate reference. Such headings shall not
be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
17.7 Effective Date. The Plan shall be effective as of April 18,
1997, the date of its approval by the Board.
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<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
MARCH 31
------------------
1997 1996
-------- --------
PRIMARY:
Average number of common shares outstanding 46,225 35,750
Incremental shares calculated using the
Treasury Stock method 1,131 510
------- -------
47,356 36,260
======= =======
Net income $37,388 $26,828
Less cash dividends paid on convertible
preferred stock:
Series A ($0.40 per share) (180) (214)
Series B ($0.315 per share) (7,018) (9,676)
------- -------
Net income available to common stockholders $30,190 $16,938
======= =======
Primary net income per share $0.64 $0.47
======= =======
FULLY DILUTED:
Average number of common shares outstanding 46,225 35,750
Assumed conversion of convertible
preferred stock:
Series A 940 1,095
Series B 16,640 22,088
Incremental shares calculated using the
Treasury Stock method 1,132 720
------- -------
64,937 59,653
======= =======
Net income $37,388 $26,828
======= =======
Fully diluted net income per share $0.58 $0.45
======= =======
<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, 1997 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,598
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,085,043
<CURRENT-LIABILITIES> 5,552,340
<BONDS> 3,753,694
0
247,484
<COMMON> 478
<OTHER-SE> 531,047
<TOTAL-LIABILITY-AND-EQUITY> 10,085,043
<SALES> 0
<TOTAL-REVENUES> 207,439
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 27,036
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143,015
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